Document:

Exhibit 10.91

 

SOAH DOCKET NO. 473-04-3554

PUC DOCKET NO. 28813

 

	
  PETITION
  TO INQUIRE INTO THE 

  	
   

  	
  §

  	
   

  	
  BEFORE THE STATE OFFICE

  
	
  REASONABLENESS
  OF THE RATES

  	
   

  	
  §

  	
   

  	
   

  
	
  AND
  SERVICES OF CAP ROCK

  	
   

  	
  §

  	
   

  	
  OF

  
	
  ENERGY
  CORPORATION

  	
   

  	
  §

  	
   

  	
   

  
	
   

  	
   

  	
  §

  	
   

  	
  ADMINISTRATIVE HEARINGS

  

 

TABLE OF CONTENTS

 

	
  I.

  	
  INTRODUCTION

  	
   

  
	
   

  	
   

  	
   

  
	
  II.

  	
  OVERVIEW AND
  PROCEDURAL HISTORY

  	
   

  
	
   

  	
   

  	
   

  
	
  III.

  	
  QUALITY OF MANAGEMENT

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  A.

  	
  Intervenors’ Arguments

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  B.

  	
  Cap Rock’s Arguments

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  C.

  	
  ALJs’ Analysis

  	
   

  
	
   

  	
   

  	
   

  
	
  IV.

  	
  INVESTED CAPITAL
  AND RATE BASE

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  A.

  	
  Intangible Plant (Computer)

  	
   

  
	
   

  	
   

  	
  1.

  	
  Background and Summary

  	
   

  
	
   

  	
   

  	
  2.

  	
  The Parties’ Arguments

  	
   

  
	
   

  	
   

  	
  3.

  	
  Discussion and Analysis

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  B.

  	
  Transfer of Assets

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  C.

  	
  Reclassification of Plant
  to O&M

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  D.

  	
  Accumulated
  Provisions for Depreciation and Amortization

  	
   

  
	
   

  	
   

  	
  1.

  	
  Software

  	
   

  
	
   

  	
   

  	
  2.

  	
  Self
  Insurance/Catastrophe Reserve

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  E.

  	
  Construction Work in
  Progress

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  F.

  	
  Materials and Supplies

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  G.

  	
  Prepayments

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  H.

  	
  Short Term Investments

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  I.

  	
  Working Cash Allowance

  	
   

  

 

 

	
   

  	
  J.

  	
  Customer Deposits

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  K.

  	
  Accumulated
  Deferred Income Taxes

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  L.

  	
  Patronage Capital

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  V.

  	
  RATE OF RETURN

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  A.

  	
  Capital Structure

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  B.

  	
  Cost of Debt

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  C.

  	
  Return on Equity

  	
   

  
	
   

  	
   

  	
  1.

  	
  Parties’ Arguments

  	
   

  
	
   

  	
   

  	
  2.

  	
  ALJs’ Analysis

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  D.

  	
  Financial Integrity

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  E.

  	
  PURA § 36.052
  Considerations

  	
   

  
	
   

  	
   

  	
   

  
	
  VI.

  	
  REVENUES

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  A

  	
  Total Sales Revenue

  	
   

  
	
   

  	
   

  	
  1.

  	
  Regulatory Surcharge

  	
   

  
	
   

  	
   

  	
  2.

  	
  PCRF Revenues

  	
   

  
	
   

  	
   

  	
  3.

  	
  Weather Normalization

  	
   

  
	
   

  	
   

  	
  4.

  	
  Unbilled
  Revenues (Billing Reconciliation)

  	
   

  
	
   

  	
   

  	
  5.

  	
  Change in Accounting
  Principle

  	
   

  
	
   

  	
   

  	
  6.

  	
  Cotton Gins

  	
   

  
	
   

  	
   

  	
  7.

  	
  Unbilled Meters

  	
   

  
	
   

  	
   

  	
  8.

  	
  Negotiated Rates

  	
   

  
	
   

  	
   

  	
  9.

  	
  Other Imputation of
  Revenues

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  B.

  	
  Other Revenue

  	
   

  
	
   

  	
   

  	
  1.

  	
  2001 NewCorp True-up

  	
   

  
	
   

  	
   

  	
  2.

  	
  Change in Accounting
  Principle

  	
   

  
	
   

  	
   

  	
  3.

  	
  Reclassification
  of Other Revenues

  	
   

  
	
   

  	
   

  	
   

  	
  a.

  	
  Street Lighting
  Rental Revenues

  	
   

  
	
   

  	
   

  	
   

  	
  b.

  	
  Late Payment
  Fees/Connection Fees

  	
   

  
	
   

  	
  C.

  	
  Other Operating Revenues

  	
   

  
	
   

  	
   

  	
  1.

  	
  Reconnection and
  Late Payment Fees

  	
   

  
	
   

  	
   

  	
  2.

  	
  Street Lighting

  	
   

  
	
   

  	
   

  	
  3.

  	
  Discontinued Late
  Payment Fees

  	
   

  
	
   

  	
   

  	
  4.

  	
  Capital Credits

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  VII.

  	
  PURCHASED POWER EXPENSES

  	
   

  
							

 

 

	
  VIII.

  	
  OPERATING AND
  MAINTENANCE EXPENSES

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  A.

  	
  Acquisition and
  Expansion Costs

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  B.

  	
  Outside
  Services and Other Disputed Costs

  	
   

  
	
   

  	
   

  	
  1.

  	
  Lobbying expenses

  	
   

  
	
   

  	
   

  	
  2.

  	
  Intervention Costs

  	
   

  
	
   

  	
   

  	
  3.

  	
  Mike McGregor Expenses

  	
   

  
	
   

  	
   

  	
  4.

  	
  Cook Yancey Firm

  	
   

  
	
   

  	
   

  	
  5.

  	
  New York Hotel Expenses

  	
   

  
	
   

  	
   

  	
  6.

  	
  Trips for Mr. Pruitt

  	
   

  
	
   

  	
   

  	
  7.

  	
  Rick Terrill Expenses

  	
   

  
	
   

  	
   

  	
  8.

  	
  Membership Dues

  	
   

  
	
   

  	
   

  	
  9.

  	
  Apartment and
  Furniture Rental

  	
   

  
	
   

  	
   

  	
  10.

  	
  Private Plane Expense

  	
   

  
	
   

  	
   

  	
  11.

  	
  Vision Consulting

  	
   

  
	
   

  	
   

  	
  12.

  	
  Overhead Allocation
  Factor

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  C.

  	
  Delinea
  Computer Support and Maintenance Expenses

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  D.

  	
  Compensation and Benefits

  	
   

  
	
   

  	
   

  	
  1.

  	
  Labor and Benefits
  Increases

  	
   

  
	
   

  	
   

  	
  2.

  	
  Stock Awards

  	
   

  
	
   

  	
   

  	
  3.

  	
  Sick
  Leave/Vacation/Longevity Buyback

  	
   

  
	
   

  	
   

  	
  4.

  	
  General Counsel
  Salary Expense

  	
   

  
	
   

  	
   

  	
  5.

  	
  Executive Compensation

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  E.

  	
  Reclassification of Plant to
  O&M

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  F.

  	
  Expense
  of Operation as a Publicly-Traded Company

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  G.

  	
  Right-of-way Fees

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  H.

  	
  Materials and Supplies

  	
   

  
	
  IX.

  	
  AFFILIATE TRANSACTIONS

  	
   

  
						

 

 

	
  X.

  	
  DEPRECIATION
  AND AMORTIZATION EXPENSE

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  A.

  	
  Self
  Insurance/Catastrophe Reserve

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  B.

  	
  Intangible Plant

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  XI.

  	
  TAXES OTHER THAN
  INCOME TAXES

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  A.

  	
  Ad Valorem Taxes

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  B.

  	
  Franchise Taxes

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  XII.

  	
  INCOME TAXES

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  XIII.

  	
  INTEREST ON
  CUSTOMER DEPOSITS

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  XIV.

  	
  RATE DESIGN

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  A.

  	
  Overview

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  B.

  	
  Designation of
  Customer Classes

  	
   

  
	
   

  	
   

  	
  1.

  	
  General
  Service-City Limit (Rate Code 119)

  	
   

  
	
   

  	
   

  	
  2.

  	
  General Service II

  	
   

  
	
   

  	
   

  	
  3.

  	
  Dual
  Fuel Customers and Rates; Oil-Well Pumping Rate Element

  	
   

  
	
   

  	
   

  	
  4.

  	
  Irrigation
  Line Use Fee-Rate Code 450

  	
   

  
	
   

  	
   

  	
  5.

  	
  Special Rates

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  C.

  	
  Allocation of Cost of
  Service

  	
   

  
	
   

  	
   

  	
  1.

  	
  Costs to be Allocated

  	
   

  
	
   

  	
   

  	
  2.

  	
  Allocation Factors

  	
   

  
	
   

  	
   

  	
   

  	
  a.

  	
  Demand Data

  	
   

  
	
   

  	
   

  	
   

  	
  b.

  	
  Loss Factors

  	
   

  
	
   

  	
   

  	
   

  	
  c.

  	
  Allocation
  of Capacity-Related Distribution Plant

  	
   

  
	
   

  	
   

  	
   

  	
  d.

  	
  Allocation
  of Transmission Plant, Substations, Depreciation Reserve and Expense

  	
   

  
	
   

  	
   

  	
   

  	
  e.

  	
  Allocation
  of Poles, Towers, Fixtures, Overhead and Underground Lines

  	
   

  
	
   

  	
   

  	
   

  	
  f.

  	
  Purchased Power Expense

  	
   

  
	
   

  	
   

  	
   

  	
  g.

  	
  Density Weighting Factors

  	
   

  
	
   

  	
   

  	
   

  	
  h.

  	
  Allocation
  of Administrative and General Expense

  	
   

  

 

 

 

	
   

  	
   

  	
   

  	
  i.

  	
  Weighted
  Allocation Factors for Transformer, Meters, Service Drops

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  3.

  	
  Change in Allocation
  Methods

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  D.

  	
  Impact on
  Customers and Gradualism

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  E.

  	
  Rate Elements

  	
   

  
	
   

  	
   

  	
  1.

  	
  Irrigation-Demand
  Metering/Horsepower Charge

  	
   

  
	
   

  	
   

  	
  2.

  	
  Load Management Rider

  	
   

  
	
   

  	
   

  	
  3.

  	
  Irrigation Line Use Fee

  	
   

  
	
   

  	
   

  	
  4.

  	
  Commercial
  Service-Competitive Rider

  	
   

  
	
   

  	
   

  	
  5.

  	
  Oil Well Customers

  	
   

  
	
   

  	
   

  	
  6.

  	
  Commercial
  Service at Primary Voltage

  	
   

  
	
   

  	
   

  	
  7.

  	
  Primary Meter

  	
   

  
	
   

  	
   

  	
  8.

  	
  Aggregated Billing
  Service Option

  	
   

  
	
   

  	
   

  	
  9.

  	
  Required
  Facilities Lease or Sale

  	
   

  
	
   

  	
   

  	
  10.

  	
  Rate Code 119 (City)

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  F.

  	
  PCRF

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  G.

  	
  System Wide Rates

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  H.

  	
  Line Extension
  Policies and Rates

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  I.

  	
  Consolidation
  and Reorganization of Existing Rate Schedules

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  J.

  	
  Notice

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  XV.

  	
  OTHER ISSUES

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  A.

  	
  Relationship with NewCorp

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  B.

  	
  Management Audit

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  C.

  	
  Load Research

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  D.

  	
  Tariff Language

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  E.

  	
  Integrated
  Transmission Credit Under SPS’s OATT

  	
   

  
	
  XVI.

  	
  RATE CASE EXPENSES

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  A.

  	
  Cap Rock’s Rate Case
  Expenses

  	
   

  
							

 

 

 

	
   

  	
   

  	
  1.

  	
  Larry
  Crowley’s Work and Subsequent Corrections

  	
   

  
	
   

  	
   

  	
  2.

  	
  Rate Design Consultants

  	
   

  
	
   

  	
   

  	
  3.

  	
  Zinder
  and Management Applications Consulting Mark-ups

  	
   

  
	
   

  	
   

  	
  4.

  	
  Travel Time

  	
   

  
	
   

  	
   

  	
  5.

  	
  Estimated Appeal Expenses

  	
   

  
	
   

  	
   

  	
  6.

  	
  Griggs & Adler
  Expenses

  	
   

  
	
   

  	
   

  	
  7.

  	
  Lloyd Gosselink Expenses

  	
   

  
	
   

  	
   

  	
   

  	
  a.

  	
  Paralegal Assistant Time

  	
   

  
	
   

  	
   

  	
   

  	
  b.

  	
  On-Site Audit Dispute

  	
   

  
	
   

  	
   

  	
   

  	
  c.

  	
  Paralegal Litigation
  Support

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  8.

  	
  Sifuentes, Drummond
  &Smith

  	
   

  
	
   

  	
   

  	
  9.

  	
  Covington Consulting

  	
   

  
	
   

  	
   

  	
  10.

  	
  KPMG Costs

  	
   

  
	
   

  	
   

  	
  11.

  	
  Utilipoint International

  	
   

  
	
   

  	
   

  	
  12.

  	
  Meals and Personal
  Expenses

  	
   

  
	
   

  	
   

  	
  13.

  	
  Unsupported Expenses

  	
   

  
	
   

  	
   

  	
  14.

  	
  Ronnie Lyon Expenses

  	
   

  
	
   

  	
   

  	
  15.

  	
  September
  2003 Meetings with Commissioners

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  B.

  	
  Greenville’s Expenses

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  C.

  	
  Recovery Method

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  XVII.

  	
  CONCLUSION

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  XVIII. 

  	
  FINDINGS OF FACT

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  XIX.

  	
  CONCLUSIONS OF LAW

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  XX.

  	
  PROPOSED ORDERING
  PARAGRAPHS

  	
   

  
	
   

  	
   

  	
   

  
	
  ATTACHMENT A

  	
   

  

 

 

 

SOAH DOCKET NO. 473-04-3554

PUC DOCKET NO. 28813

 

	
  PETITION
  TO INQUIRE INTO THE 

  	
   

  	
  §

  	
   

  	
  BEFORE THE STATE OFFICE

  
	
  REASONABLENESS
  OF THE RATES

  	
   

  	
  §

  	
   

  	
   

  
	
  AND
  SERVICES OF CAP ROCK

  	
   

  	
  §

  	
   

  	
  OF

  
	
  ENERGY
  CORPORATION

  	
   

  	
  §

  	
   

  	
   

  
	
   

  	
   

  	
  §

  	
   

  	
  ADMINISTRATIVE HEARINGS

  

 

PROPOSAL
FOR DECISION

 

I.  INTRODUCTION

 

On October 24, 2003, the Staff
of the Public Utility Commission (Commission) filed a petition inquiring into
the reasonableness of the rates and services of Cap Rock Energy Corporation
(Cap Rock).  Pursuant to that inquiry,
Cap Rock was ordered by the Commission to file a full rate-filing package.  Cap Rock submitted the rate-filing package
and its statement of intent to change rates on February 24, 2004.  Under Cap Rock’s rate-filing package, its
customers’ rates were to increase by over 14% on average, although certain
customer classes faced much more significant increases.  Cap Rock’s proposed rates were suspended and,
pursuant to an agreement by Cap Rock, the suspension of such rates was extended
until July 18, 2005.  Therefore, the
Commission must take final action on Cap Rock’s rates prior to that date.

 

The following were
designated as parties to this proceeding: (1) Cap Rock; (2) Staff of the
Commission; (3) St. Lawrence Cotton Growers Association (St. Lawrence); (4) the
City of Greenville (Greenville); (5) Texas Farm Bureau (Farm Bureau); (6)
Pioneer Natural Resources, USA, Inc. (Pioneer); (7) Apache Corporation
(Apache); (8) Texas Cotton Ginners’ Association (TCGA); (9) Texas Mining, L.P.
(Texas Mining); (10) the Office of Public Utility Counsel (OPC); (11) Citizens
United for Fair Energy Costs (CUFEC); and (12) numerous individual
intervenors.(1)

 

(1)           There
are a large number of individual ratepayers who intervened in this
proceeding.  All individual ratepayers
were aligned and are collectively referred to as the “individual intervenors.”  They were further aligned with St. Lawrence
for purposes of this proceeding.  None of
the individual intervenors actively participated in the hearing or filed post-hearing
briefs.

 

 

After considering the issues
and evidence presented, the Administrative Law Judges (ALJs) recommend that the
Commission establish Cap Rock’s rates in accordance with the recommendations
set forth in this Proposal for Decision (PFD). 
To assist the Commission in this process, the ALJs have worked with
Commission Staff to run numbers and determine the final rates based upon the
ALJs’ recommendations contained in this PFD. 
Those rates are contained in an attachment to this PFD.  The specific recommendations on the contested
issues involved in this case are set forth and discussed in more detail below.

 

II.  OVERVIEW AND PROCEDURAL HISTORY

 

Cap Rock has operated since
1939, providing electric utility service to areas in the western, northern, and
northeastern parts of Texas.  Up until
2003, Cap Rock operated as an electric cooperative; in September 2003, upon the
Commission’s final order granting the transfer of the necessary Certificates of
Convenience and Necessity (CCNs) from the electric cooperative to the
shareholder-owned corporation, Cap Rock converted to an investor-owned utility
(IOU).(2)  Currently, Cap Rock provides
service to approximately 34,000 meters.(3) 
More than ten years ago, while still an electric cooperative, Cap Rock began
implementing a strategic growth plan that involved the acquisition of other
types of utility and non-utility operations. 
In 1991, Cap Rock combined with Lone Wolf Electric Cooperative; in 1992,
it combined with Hunt-Collin Electric Cooperative; and in 1999, it completed a
combination with McCulloch Electric Cooperative.

 

(2)           The conversion process began in 1998 and involved (1)
creating a successor corporation that would be investor-owned, (2) dissolving
the cooperative, and (3) transferring the cooperative’s assets to the successor
corporation.  As a result of a vote by
its membership, Cap Rock’s management began the process of converting the
cooperative into an IOU in 1998 and the conversion culminated in 2003 with the
Commission’s final order approving the transfer of the electric cooperative’s
CCNs to the IOU.

 

(3)           Many
customers have more than one meter.  Cap
Rock considers each meter a “customer,” while other parties consider only
separate individuals or entities taking service as customers.

 

 

In the process
of implementing its expansion strategy, Cap Rock has also experienced a
number of failed acquisition attempts, resulting in significant losses.  In 2001, Cap Rock terminated its acquisition
attempt of Citizens Communications Company’s utility operations in Arizona and
Vermont, resulting in loss write-offs of at least $2.8 million.  Additionally, Cap Rock terminated its attempt
to acquire Multimedia Development Corporation, a wireless telecommunication
company, resulting in a loss write-off of over $1 million.  All told, in 2001 and 2002, Cap Rock wrote
off $7.2 million in losses in three investments.  During the test year, Cap Rock was in the
process of attempting to acquire Lamar County Electric Cooperative but such
acquisition has been unsuccessful, and Cap Rock has incurred losses of $1.357
million in relation to this acquisition attempt.

 

Despite suffering operating losses during the period from 1996 through 2001, and incurring significant
losses for failed acquisition attempts, the officers and directors of Cap Rock
earned more than $1 million in bonuses during that same time period.  To pay its officers and directors and cover
its other operating expenses and investment losses during this time frame, Cap
Rock used its full line of credit with its lender, National Rural Utilities
Cooperative Finance Corporation (CFC). 
In March 2001, CFC informed Cap Rock that it would not guarantee or
offer any additional loans.  Since that
time, Cap Rock has negotiated other loans and raised funds through the issuance
of equity related to its conversion to an IOU.

 

As noted above, this case
was initiated on October 24, 2003, with the filing of Staff’s petition
inquiring into the reasonableness of Cap Rock’s rates and services.  Cap Rock filed its rate-filing package (RFP)
on February 24, 2004.  Two days later, on
February 26, 2004, the Commission referred the matter to the State Office of
Administrative Hearings (SOAH) for a contested case hearing.  The assigned ALJ suspended Cap Rock’s
proposed rates on March 1, 2004.

 

A prehearing conference was conducted on March 15, 2004, and a procedural
schedule was adopted at that time. 
Notice was published and mailed in compliance with the

 

3

 

Commission’s requirements and
was completed on April 14, 2004.  On June
22, 2004, the City of Greenville denied Cap Rock’s request to change rates in
the area in which Greenville has original rate-making jurisdiction.  Cap Rock appealed Greenville’s determination
and that appeal was consolidated with Cap Rock’s rate case over which the
Commission already had jurisdiction.  The
two matters are considered jointly in this docket.  The procedural schedule in this docket was
later continued and Cap Rock agreed to extend the effective date of its
proposed rates and agreed to allow the suspension of proposed rates to be
extended until July 18, 2005.

 

The hearing on the merits
convened on October 5-14, 2004, at SOAH’s hearing facility in the William P.
Clements State Office Building, 300 West 15th Street, Austin,
Texas.  An additional evidentiary hearing
was convened on December 13-15, 2004, to address some parties’ requests to
recover rate-case expenses.  The parties’
final written arguments were filed by January 19, 2005.  After the ALJs completed their draft of the
PFD, they submitted their recommendations to Staff on February 8, 2005.  Staff then developed schedules and a rate
structure that implemented the ALJs’ recommendations.  Staff’s schedules and rate structure were
completed on March 10, 2005, and are attached to this PFD.

 

At issue in this proceeding
is whether Cap Rock’s rates are just and reasonable.  Under PURA § 36.006, Cap Rock has the burden
of proving its rates are just and reasonable, regardless of whether the case
was initiated through a rate-filing by Cap Rock or through a Commission inquiry
and request to lower rates.  Although the
burden of proof is placed on Cap Rock either way, the fact that this case began
with a Commission inquiry has a significant impact on this case because of the
nature of Cap Rock’s evidence. 
Specifically, as is discussed in more detail throughout this PFD, the
ALJs have serious concerns about the overall reliability of Cap Rock’s evidence
and its experts’ calculations.  Because
of Cap Rock’s unusual history and existence as a cooperative, it has not been
subject to continuous regulation by the Commission and, therefore, has not
necessarily followed standard utility accounting procedures or kept many of its
records in a manner required by the Commission’s rules for regulated
utilities.  Also, Cap Rock was given a
short period of time in which to prepare its RFP after the Commission initiated
its rate review of

 

4

 

the company.

 

Under its initial RFP, Cap
Rock sought an annual increase in revenues of $10.2 million.  However, after extensive discovery in this
case and after the intervenors presented expert testimony disputing Cap Rock’s
requested increase, Cap Rock reduced its total requested revenue increase to
$4.331 million—a decrease of nearly 58% from its initial RFP request of $10.2
million.  During the hearing, it raised
its request to a total revenue increase of $5.02 million, which is still less than half of what it originally sought in its
RFP.  At the hearing, the accuracy of
much of the underlying financial and other data presented by Cap Rock could not
be verified by any particular witness. 
There was no independent audit performed of Cap Rock’s books and
records, no Schedule S was filed by Cap Rock,(4) and Cap Rock’s financial
experts all testified that they relied on the data Cap Rock presented to them
and did not fully analyze it to ensure that it was reliable.  At the hearing, Cap Rock did not present any
company witnesses who oversaw the collection of the data and who could verify
its accuracy.  Throughout the hearing,
the intervenors pointed out many problems with the data and with Cap Rock’s
past accounting and billing practices sufficient to raise serious doubts about
the overall reliability of the data.

 

For example, among other
things:

 

•                                          Cap Rock included improper lobbying expenses
and annual meeting costs in a regulatory surcharge that was designed to recover
costs from a CCN proceeding;

 

•                                          Cap Rock double-billed $4.36 million for a
Power Cost Recovery Factor (PCRF) surcharge between January 2002 and December
2003;

 

(4)           In
place of a Schedule S, Cap Rock filed a statement of agreed procedures, which
reflects a limited review conducted by Cap Rock’s outside auditor of the data
upon which Cap Rock’s RFP is based.  The
agreed procedures were limited in nature and do little to give the ALJs
confidence as to the reliability of Cap Rock’s data.  In fact, Cap Rock’s auditor, KPMG, refused to
provide any opinion on the elements, accounts, or items in Cap Rock’s RFP, and
indicated that it was “not engaged to, and did not, conduct an examination, the
objective of which would be the expression of an opinion on the
Schedules.”  Pioneer
Ex. 91; Cap Rock.  Ex.9, Schedule V, Attachment A.  Moreover, despite having KPMG check the
calculations regarding federal income taxes in Schedule G-15, these numbers
were still incorrectly determined and were caught only during the hearing.

 

5

 

•                                          Cap Rock failed to use the correct income tax
rate in calculating federal income taxes;

 

•                                          Cap Rock identified many work orders,
included in Construction Work In Progress (CWIP), as closed when in fact they
were not;

 

•                                          Cap Rock initially attempted to include
customer deposits in rate base;

 

•                                          Cap Rock initially failed to synchronize many
adjustments to make them accurate (including adjusting purchased power expenses
to synchronize with the PCRF accounts receivable balance, adjusting for changes
in accounting principle and correctly calculating deferred income taxes based
on timing differences); and

 

•                                          Cap Rock initially failed to remove from
salary and benefit calculations those portions that would be charged to other
related companies and not specifically attributable to Cap Rock.

 

These are just a few
examples of the many errors in Cap Rock’s data or calculations.  Although many of the errors were corrected on
rebuttal, the number of errors is still troubling.  Because of the many errors in Cap Rock’s
data, the lack of a Schedule S (Comfort Letter), and the failure of any witness
to be able to verify under oath the data underlying Cap Rock’s RFP, some of the
intervenors moved for summary disposition at the hearing.  They argued that Cap Rock’s requested rate
increase should be denied in its entirety because Cap Rock had not met its
burden of proof.  The ALJs denied the
request at that time, and some parties have reurged the request in their
closing briefs.  If this were simply a
proceeding in which Cap Rock had filed for a rate increase of its own
initiative, the ALJs might be inclined to grant the motion and recommend that
Cap Rock’s requested rate increase be denied simply because Cap Rock has not
presented evidence that is reliable and persuasive enough to support its
requested increase.  In such a scenario,
the status quo of the prior existing rates would remain.  However, because the Commission initiated
this case by inquiring into Cap Rock’s rates, the ALJs do not believe it would
be appropriate to recommend a resolution based simply on a failure of Cap Rock
to meet its burden of proof.  Under such
a situation, it would be as if the Commission had not even inquired into Cap
Rock’s rates and this entire action by the Commission would, for the most part,
be a nullity.

 

6

 

Rather, the ALJs believe
they have a responsibility, under the procedural posture of this case, to
attempt to determine from the most reliable evidence in the record the just and
reasonable rates for Cap Rock’s ratepayers—particularly in light of the other
parties’ requests to lower rates.  Given
this context, the ALJs are constrained to use Cap Rock’s data in many
instances.(5)  When the evidence shows
that such data or calculations are clearly unreliable, the ALJs indicate this
and attempt to resolve the issue with the best data available otherwise.  However, in other instances where there is
not a clear indication that Cap Rock’s data is unreliable, and no other parties
have presented reliable contrary data, the ALJs rely upon Cap Rock’s data out
of necessity.  This is not to say that the
ALJs are entirely confident in the reliability of the data, though, and the
Commission should be aware of these concerns of the ALJs when considering the
recommendations contained in this PFD.

 

III.  QUALITY OF MANAGEMENT

 

A.                                    Intervenors’ Arguments(6)

 

Throughout the process of
converting from a cooperative to an IOU, Cap Rock has faced significant
opposition from certain groups, oftentimes from those who have intervened in
this case.  As a result, Cap Rock has been
in numerous lawsuits with some of the intervenors, leading to protracted
regulatory and legal battles.  At the
heart of many of the intervenors’ complaints are the actions of Cap Rock’s
management over the last ten years.  In
this case, the quality of Cap Rock’s management is a key issue that is
intertwined with, and affects, many other issues to be decided by the
Commission.  Therefore, to lay a
groundwork for the multitude of issues

 

(5)                                  The ALJs do not feel so constrained in regard to their analysis of
rate design because they understand the Commission’s inquiry to be concerned
primarily with Cap Rock’s overall rates, not the present rate design. 

 

(6)           In
general, all intervenors contest Cap Rock’s rate filing and offer many similar
arguments.  For convenience, when
numerous intervening parties make the same argument, the ALJs simply refer to
it as intervenors’ argument.  This does
not necessarily mean that all intervenors support that argument, and different
positions taken by intervenors will be discussed accordingly.  Further, the ALJs group OPC with intervenors
when discussing party positions.

 

7

 

discussed
in this PFD, the ALJs find it appropriate to discuss some of the “quality of
management” concerns raised by the parties at the outset.

One of the first areas where
the intervenors fault Cap Rock’s management is in regard to its failed
acquisition attempts and business ventures over the past ten years.  In Cap Rock’s CCN proceeding, the Commission
found that in 2001 and 2002, Cap Rock had $7.2 million in losses in three
failed business ventures.(7)  Since then,
Cap Rock has incurred another $1.357 million in expenses due to its failed
attempt to acquire Lamar County Electric Cooperative.(8)  Cap Rock has lost significant amounts of
money from business operations over the last seven or eight years, and the
Commission found in the prior CCN proceeding that Cap Rock’s overall financial
performance was well below that of comparable peer entities.

 

Concurrent with—and
despite—its poor performance, the intervenors allege that Cap Rock’s management
has continuously engaged in actions of self-enrichment at the expense of
customers and shareholders.  These
allegations are supported by findings from Cap Rock’s prior CCN proceeding,
wherein the Commission found that:(9)

 

•                                          Achievement Based Contracts [special
contracts that awarded bonuses to Cap Rock’s management for mergers and
acquisitions] were used to provide significant incentives for executives to
pursue mergers and acquisitions because of the potential bonuses to themselves,
without regard for the potentially significant losses that could be faced by
the cooperative members if the mergers or acquisitions fail.

 

•                                          Between 1999 and 2001, the three top
executives of Cap Rock received total compensation of $2,273,974 (an average of
$252,000 per year in total compensation each), while Cap Rock had operating
losses in excess of $12 million and increased its debt.

 

(7)           Application of Cap Rock Electric Cooperative, Inc. to
Transfer its Certificates of Convenience and Necessity to Cap Rock Energy
Corporation, Docket No. 24577, Final Order at 7-8 (Aug. 27, 2003).

 

(8)           Cap
Rock Ex. 13, Revised WP/G-14c/2.

 

(9)           Docket
No. 24577, Final Order (Aug. 27, 2003).

 

8

 

•                                          Between 1999 and 2001, the President of Cap
Rock received total compensation that was more than double that paid to the
President of Central Power & Light (CP&L), even though CP&L was
roughly 33 times the size of Cap Rock in total utility plant and generated at
least 27 times more operating revenue than Cap Rock.

Since the Commission made
these findings, the intervenors assert that management’s self-serving actions
have not stopped.  For example, Farm Bureau points out that six of Cap Rock’s
executives were paid $1.7 million in compensation during the test year and
approximately $4.4 million during calendar year 2003.(10)  Farm Bureau argues that this is inappropriate
for such a small utility and reveals management’s intention of enriching
themselves at the expense of Cap Rock’s ratepayers.  Farm Bureau also notes that, during the test
year, Cap Rock:

 

•                                          paid bonuses to executives
at the same time the company was losing money;

 

•                                          paid rent for two apartments
in Midland for executives who lived in Dallas;

 

•                                          leased a private jet for the
convenience of management;

 

•                                          paid for trips by CEO David
Pruitt and his wife to Bermuda, the Caribbean, Arizona, and Colorado; and

 

•                                          conducted its annual meeting
in New York City and paid exorbitant amounts for food, lodging, and
entertainment of Cap Rock executives during that trip.

 

At the same time Cap Rock management was allegedly enriching
itself in these ways, the intervenors charge that it was improperly billing
customers in many respects.  Among other
things, the intervenors allege that Cap Rock double-billed customers more than
$4 million in purchased power surcharges, improperly charged for a $14 million
loan for capital costs that were already paid by customers, and continued to
charge customers approximately $750,000 per month for capital lease payments
that were no longer being

 

(10)         Pioneer
Ex. 1, at 18 and 37-38. Stock grants accounted for slightly more than 70% of
the compensation, and such stock grants are “below the line” and not directly
charged to customers or included as an expense when determining revenue
requirements.

 

9

 

made.(11)  Because these issues are very involved, they
are  addressed in more detail in related
sections below and will not be discussed in detail here.

 

(11)         Many
of the allegedly improper actions related to transactions between Cap Rock and
NewCorp Resources Electric Cooperative (NewCorp), an electric cooperative
wholly-owned by Cap Rock.  Many of the
disputed billings were charges by NewCorp to Cap Rock, which were then passed
through to Cap Rock customers.  Because
Cap Rock is the sole member in NewCorp and the two have virtually the same
management, the intervenors assert that NewCorp’s actions are generally
attributable to and reflective of Cap Rock’s quality of management.

 

10

 

Staff also points out different areas where it alleges that
Cap Rock’s management has continued to demonstrate poor decision-making and
questionable operational practices despite the Commission’s concerns in the
prior CCN docket.  Among other things,
Staff points out that Cap Rock (1) continued to collect a regulatory surcharge
after learning it had already over-collected the amount of the surcharge; and
(2) despite previously incurring over $7 million in losses related to
acquisitions, paid $4.1 million dollars to Delinea Corporation for the
selection and implementation of a software system that is designed to assist
Cap Rock in achieving its business goal of “rapidly growing the business
through acquisitions.”

 

The intervenors also cite to Cap Rock’s relationship and
transactions with NewCorp as indicative of improper management.  NewCorp is an electric cooperative whose sole
member is Cap Rock.  NewCorp owns Cap Rock’s
former transmission assets and serves as the transmission provider and power
supplier to Cap Rock.  NewCorp
essentially is a company on paper only, because it has no employees but rather
contracts for all of its services. 
Primarily, it contracts with Cap Rock for its administrative and
maintenance services and it shares office space with Cap Rock.  Many of Cap Rock’s officers and directors
also serve as officers and directors of NewCorp.  Further, because Cap Rock is the sole member
of NewCorp, Cap Rock essentially runs NewCorp.

 

Because NewCorp is legally recognized as a separate utility
with separate tariffs, the intervenors argue that Cap Rock is able to use
NewCorp as a front to pass through improper charges to Cap Rock customers.  They argue that Cap Rock frequently runs
transactions through NewCorp, which then bills Cap Rock for the transactions,
and such costs are passed along to Cap Rock’s customers.  Then, in proceedings such as this, Cap Rock’s
management contends that such charges are not within the jurisdiction of the
Commission to review because they are billed pursuant to a Federal Energy
Regulatory Commission (FERC) tariff.  The
intervenors contend that this system has been abused by Cap Rock’s management,
resulting in many overcharges to Cap Rock’s customers, and is a

 

11

 

further reflection of management’s
attitude of self-enrichment and lack of integrity.  The specific instances of alleged overbilling
and other improper affiliate transactions are discussed under separate sections
later in this PFD.

 

Finally, the intervenors fault Cap Rock for initiating and
pursuing numerous lawsuits against customers and intervenors in Cap Rock’s
various regulatory proceedings.  The
intervenors contend that these actions reflect poor and inefficient management
that is more concerned with its own interests than those of its customers or
the public.  Given these actions and
others, most of the intervenors assert that Cap Rock’s operations are not run
efficiently and that its quality of management is poor.

 

B.                                    Cap Rock’s Arguments

 

Cap Rock concedes that it has made some mistakes but argues
that it has attempted to correct them. 
Moreover, Cap Rock asserts that intervenors rely on a few isolated
instances that appear egregious but which are not improper at all.  For example, Cap Rock asserts that the
various trips taken by its management involved just a few thousand dollars each
and were taken for legitimate business purposes, such as the initial listing of
Cap Rock’s stock or industry group meetings. 
Cap Rock points out that it has agreed to remove approximately $1.1
million from its requested cost of service for stock awards and bonuses.  Regardless, Cap Rock contends that its
executive compensation is reasonable in comparison to other publicly-traded
utilities and that a recent analysis shows that Cap Rock’s executives earn less
than the median executive compensation for a comparable peer group of
companies.(12)

 

Furthermore, Cap Rock contends that many of its business
decisions and acquisitions have been successful and brought value to the
company, but argues the intervenors ignore the totality of management decisions
and focus only on a few isolated

 

(12)         Cap
Rock Ex. 2, at 13; also Cap Rock Ex. 304, at 31.

 

12

 

failures.  Cap Rock points out that it has successfully
transitioned the company through the conversion process and reduced its
debt-to-equity ratio from 99-to-1 in 2001 to 84-to-16 currently.

 

Cap Rock argues that the actions of NewCorp are not to be
attributed to Cap Rock and, regardless, such actions are beyond the scope of
the Commission’s jurisdiction in this case because they concern matters
regulated by FERC under a FERC tariff. 
Cap Rock asserts that NewCorp has acted appropriately pursuant to its
relevant tariffs and that, absent a finding of imprudence by the appropriate
regulatory authority (namely FERC), it is not proper for the Commission to
review NewCorp’s actions in this proceeding and attribute them to Cap
Rock.  Cap Rock concedes that some
over-collections have occurred, but states that it is simply awaiting
Commission determinations on relevant issues before providing refunds.

 

In regard to its business strategy of engaging in acquisitions,
Cap Rock contends that it is in a no-win situation.  On one hand, the intervenors criticize its
financial situation, but on the other hand they want to handcuff its efforts
(including appropriate acquisitions) to improve its financial situation and positioning
for competition.

 

C.                                    ALJs’ Analysis

 

There are many issues regarding Cap Rock’s management that
are discussed below in greater detail in regard to the specific matters and how
they directly relate to setting Cap Rock’s rates.  However, a number of things are clear and
relate generally to the quality of Cap Rock’s management.  First, it is undisputed that over the last
ten years Cap Rock has suffered significant financial losses as a result of
failed business ventures.  During this
same time, Cap Rock’s executives have been 
paid handsomely–even being given large bonuses for failed ventures and
receiving bonuses in years in which Cap Rock was losing significant amounts of
money and had a deteriorating financial condition.  Cap Rock

 

13

 

asserts that this compensation is
independently and impartially set by its Board of Directors and is in line with
the compensation of other small utilities. 
However, the evidence in the record reflects a “cozy” relationship
between management and Cap Rock’s Board of Directors, to the point that Cap
Rock’s directors have received “incentive” stock grants themselves valued at
more than $2,000,000.(13)  Moreover, in the past, Cap Rock directors
have also been eligible for incentive bonuses for the same ventures for which
Cap Rock’s management received bonuses. 
This type of relationship calls into question the objectivity and
independence of the Board of Directors.

 

Moreover, there is little persuasive evidence in the record
to support Cap Rock’s assertion that its management is under-compensated in
comparison to other small public utilities. 
The ALJs find the testimony of Cap Rock witness Gerald Tucker to be
unreliable because all of the other utilities to which he drew a comparison
serve significantly larger customer bases and have a much larger number of
employees (oftentimes the customer base and number of employees for these other
“small utilities” are at least 600 to 700% larger than Cap Rock’s).(14)  Cap Rock witness Lee Atkins testified in a
rather conclusory fashion regarding a separate executive compensation analysis,
but he did not provide enough information for the ALJs to determine the
reliability of such analysis.  Also problematic
is the fact that the financial performance of the other utilities to which Cap
Rock was compared is unknown.  Clearly,
compensation is justifiably higher with good performance.  However, Cap Rock’s financial performance
over the last five-year and ten-year periods has been poor and would not appear
to warrant the significant bonuses paid to Cap Rock’s management during those
time periods.

 

(13)         Cap
Rock Ex. 13, at WP/G-1.5/4; Greenville Ex. 2, at 18; TCGA/SL Ex. 21.

 

(14)         The
evidence related to the size of the other “comparable” utilities was admitted for the limited purpose of impeaching Mr.
Tucker’s testimony on this issue and is being considered by the ALJs solely for
that purpose.  See Tr. Vol. 7, at 1454-1467; Pioneer Exs. 94-103.

 

14

 

Further, the imbalance in Cap Rock’s executive compensation
has been noted previously by the Commission when it found that, between 1999 and 2001, the president of Cap
Rock received total compensation that was more than double that paid to the
president of CP&L, even though CP&L was roughly 33 times the size of
Cap Rock in total utility plant and generated at least 27 times more operating
revenue than Cap Rock.  Also in that
proceeding, the Commission stated that it “shares the concerns about Cap Rock’s
financial condition and instances of mismanagement that led the ALJs to
recommend imposing conditions on the CCN transfer” from the cooperative to the
IOU.(15)

 

Also troubling are other
instances of apparent self-enrichment or poor management by Cap Rock executives.  While the ALJs agree that the trips taken by
Cap Rock President David Pruitt and his wife involved relatively small amounts
of money (usually just a few thousand dollars per trip), such expenditures are
reflective of an attitude of entitlement and self-enrichment.  Another example is Cap Rock’s decision to conduct its 2002 annual meeting in New York City,
where it spent over $16,000 on hotel expenses for its officers and employees.(16)  It is inconsistent for Cap Rock to, on one
hand, suffer losses and request a rate increase, while on the other hand pay
for trips by the president and his wife to Bermuda,
the Caribbean, Arizona, and Colorado, to pay for the use of a private jet for
other executives, and to spend more than $16,000 on hotel expenses for an
annual meeting in New York City.  A small
utility such as Cap Rock, which has taken on well over $100 million in loans
and has a capital structure that consists of 84% debt and only 16% equity, must
be operated efficiently in every manner. 
Yet, Cap Rock’s management has not done this, as evidenced by its
initiation of many lawsuits against intervenors and other persons and its
actions of spending liberally on the compensation and perks it gives to
management.

 

Moreover, the affiliate transactions and actions of
over-collecting from customers

 

(15)         Docket
No. 24577, Final Order at 1-2.

 

(16)         TCGA/St.
Lawrence Ex. 184, at 4, 16,18-39.

 

15

 

(which are discussed in more detail below) also reflect
poorly on Cap Rock’s quality of management. 
And, Cap Rock’s actions of aggressively pursuing acquisitions with
little relationship to Cap Rock’s core business have been questionable
management decisions at best and have certainly contributed to Cap Rock’s losses
over the past ten years.  Ultimately,
after considering the evidence, the ALJs agree with the intervenors that Cap
Rock’s quality of management has been poor in recent years and has included
many actions of self-enrichment by Cap Rock’s executives.  Having made this general conclusion, the ALJs
now turn to the specific, disputed issues relevant to setting rates.

 

IV.  INVESTED CAPITAL AND RATE BASE

 

Cap Rock requests that its
total electric rate base be determined at $127,326,900.  Staff, OPC, and Intervenors recommend several
adjustments to Cap Rock’s request.(17)  As discussed in detail below, the ALJs find
that many items should be disallowed and/or adjusted.  The specific items are discussed in each
subsection below.

 

A.                                    Intangible Plant (Computer)

 

1.                                      Background and Summary

 

In 2002, Cap Rock retained Delinea Corporation (Delinea) to
investigate its options for updating or changing its information technology
(IT) systems.  In determining the type of system that would
be appropriate for Cap Rock, on August 20, 2002, Delinea prepared a report
entitled the “Envision Phase.”  The
opening remarks in that report state:

 

Rapidly growing the business
through acquisitions is one of Cap Rock Energy’s stated business goals.  To achieve this objective, Cap Rock Energy’s
senior management shared several key business tactics.  They are:

 

(17)         TCGA,
St. Lawrence, Farm Bureau, and Apache did not brief the issue of rate base in
their initial briefs.

 

16

 

Prepare
for entry into deregulated markets

Increase
ability to handle diverse product lines

Improve
system integration

Strengthen
internal controls

Improve
reporting abilities

 

With these drivers in mind,
Cap Rock Energy’s steering committee and the Delinea industry project team, in
a combined effort, is [sic] recommending an orderly plan to migrate to a new
suite of systems that will provide accurate and integrated information flows
across the company, as well as support the expected increased operational
demands on the information technology infrastructure as this business growth
occurs.  This Envision phase report is
another step of the proprietary Delinea Smart-to-MarketÔ methodology moving Cap Rock Energy closer to
the necessary infrastructure as this business growth occurs.(18)

 

The Delinea Envision report noted that Cap
Rock’s current system is “insufficient to support the aggressive growth plans
of the company.”(19)

 

Based on Delinea’s
recommendations, Cap Rock ultimately acquired from Delinea a new computer
system (Delinea System) intended to replace Cap Rock’s prior IT systems.  The Delinea System was designed to be a fully
outsourced system, consisting of software, hardware, installation, maintenance,
and ongoing operational services provided by Delinea.  The Delinea System was partially installed
during the test year, but was not completely operational during that time.  In fact, as of the hearing, not all portions
of the Delinea System were implemented and operational.

 

In this proceeding, Cap Rock
seeks to include various amounts, in both its rate base and its cost of
service, associated with the Delinea System. 
These include:

 

•                                          $3,139,558 in invested intangible plant to
reflect the amount on Cap Rock’s books at the end of the test year and an
additional $1,244,214 in invested intangible

 

(18)         Pioneer
Ex. 32, at Bates 9338.

 

(19)         Pioneer
Ex. 32, at Bates 9348.

17

 

plant for post-test year adjustments.  This includes the purchase and final payments
for the Delinea System.(20)

 

•                                          An increase in amortization expense in the
amount of $876,755 per year based on a five-year amortization of the investment
in the Delinea System.  This also results
in a corresponding adjustment of $876,755 for accumulated depreciation during
the test year.(21)

 

(20)                            Cap Rock Ex. 8, Schedule C-3.2.

 

(21)                            Cap Rock Ex. 4, at 19.

 

18

•                                          An increase in annual operation and
maintenance expenses in the amount of $1,648,320 to account for annual costs
associated with the installation, implementation, and maintenance of the
Delinea System and related support services.(22)

 

After considering the
evidence and arguments in the record, the ALJs find that the Delinea System
should not be included in rate base because Cap Rock did not demonstrate that
the specific costs involved were reasonable and necessary to provide service to
Cap Rock’s customer base.  Moreover, the
system was not fully in operation during the test year.(23)  Given the ALJs’ recommendation, the ALJs also
conclude that the costs associated with Cap Rock’s older computer system should
remain in the rate base.  The parties
arguments on this issue and the ALJs’ basis for these recommendations is
explained below.

 

2.                                      The Parties’ Arguments

 

Cap Rock asserts that the
Delinea System is essential to its ability to maintain its records and to
prepare regulatory documents and other filings, and argues that its prior
systems were not adequate to allow it to operate under the Commission’s
regulatory authority.  Cap Rock contends
that the evidence in the record supports this conclusion and that the other
parties have presented only speculation—and no persuasive evidence—to show why
the purchase of the Delinea System was not reasonable and necessary.

 

(22)         Cap Rock Ex. 4, at 19.

 

(23)         For the same reasons that the ALJs find the cost of the
Delinea System should not be included in rate base, the ALJs further find that
the financial effects of the Delinea System should not be included in Cap Rock’s
rate case, such as the adjustment to depreciation and amortization, etc. 
The various impacts of the disallowance of the Delinea System are
addressed in separate sections of this PFD.

 

19

 

The other parties raise
numerous arguments why the costs of the Delinea System should not be recovered
by Cap Rock.  OPC contends that the
Delinea System was not used and useful during the test year, and therefore
should not be allowed to be recovered as part of rate base.  Accordingly, OPC argues that the entire cost
of the Delinea System (including depreciation and amortization) and the related
Operation and Maintenance (O&M) expenses should be removed, resulting in a
total reduction of rate base by $3,507,000 and a total reduction of revenue
requirement by $2,881,000.(24)  Pioneer
argues that the Delinea System costs should be disallowed because the system
was designed for expansion purposes, which should not be financed by current
ratepayers.(25)  Greenville proposes
removing the Delinea System costs from Cap Rock’s rate base because the Delinea
System was still not completed at the time of the hearing and the costs have
not been adequately explained and shown to be reasonable.(26)

 

Staff also has several
concerns about the Delinea System, including (1) that Cap Rock paid an
excessive amount for the system, (2) that Cap Rock is seeking to recover 100%
of the Delinea System costs even though 30% of the costs were allocated to
NewCorp, and (3) that Cap Rock is also seeking to recover amounts for its old
computer systems that are lower than those it allocated to NewCorp.(27)

 

(24)         OPC’s Post-Hearing
Initial Brief, at 4-5.  OPC’s
recommended reduction to rate base is not the same amount Cap Rock is
requesting be included (3,507,000 compared to 3,139,558).  Cap Rock’s request for inclusion of the
Delinea System includes its actual balance as of September 30, 2003.  Thus, the ALJs will use Cap Rock’s number,
which is the actual cost shown on Cap Rock’s books.

 

(25)         Pioneer’s Brief on the
Merits, at 15-16.

 

(26)         Greenville’s Post-Hearing
Brief, at 38-44.

 

(27)         Staff’s Initial Brief,
at 9-10.

 

20

 

3.                                      Discussion and Analysis

 

There is no doubt that the
overall costs of the Delinea System are significant.  For equipment and software, Cap Rock spent
$131,600.  This, in itself, does not
appear to be overly expensive.(28) 
However, to install the software and for outsourced IT services related
to the Delinea System, Cap Rock spent an additional $3,764,100.(29)  Cap Rock also spent $337,900 in expense
reimbursements for the Delinea consultants. 
These expenses included lodging, transportation, and meals.(30)  In exchange for these amounts, Cap Rock
acquired a license to use the Oracle software provided by Delinea, professional
services for installation and maintenance of the Delinea System, and ongoing IT
services related to it.  Cap Rock did not
obtain a separate computer system that it keeps and maintains, but instead
simply purchased $131,000 of software and equipment and spent over three
million dollars to have the entire system installed and maintained.(31)  It also anticipates paying nearly $1.6
million per year to Delinea for the ongoing operation of Cap Rock’s IT
functions.

 

(28)         Greenville Ex. 164.

 

(29)         Greenville Ex. 164.

 

(30)         Greenville Ex. 164.

 

(31)         Pioneer Ex. 109 at 16; 
Tr. Vol. 7, at 1421-1422.

 

 

21

 

Cap Rock initially hired
Delinea as a consultant to assess its current and future needs for an IT
system.(32)  Cap Rock asserts that it
received competitive bids to provide its computer system but in actuality,
Delinea was the only company to filter and provide Cap Rock with bids.  Although Delinea presented Cap Rock with bids
for software from eight different vendors, Delinea also proposed to act as the
IT installer, operator, and consultant for the various options.  In other words, Cap Rock did not seek
competitive bids itself, but instead relied on Delinea to price separate
software and outsourcing options.(33) 
This is an extremely important fact, especially when one considers that
the equipment and software license fees account for less than 5% of the total
cost, while Delinea’s installation, consulting, and service fees account for
the other 95% of the cost.  Under the
circumstances, there is little doubt that Delinea—the entity that Cap Rock was
trusting to provide it with objective IT advice—had a significant financial
self-interest in the matter.  It appears
that Cap Rock did not investigate whether it would have been less expensive to
create and employ an IT department, rather than outsource it.(34)  Instead, Cap Rock merely relied on the
information and representations from a vendor that had a financial interest in
the matter—hardly a prudent way to spend millions of dollars.

 

The Commission requires that
capital investment expenditures be prudent.(35) 
In this case, there is little underlying information establishing that
Cap Rock’s investment in the Delinea System was prudent.  Cap Rock presented the testimony of Jon
Brock, who indicated that for a utility of Cap Rock’s size: (1) the decision to
outsource IT functions entirely is reasonable, (2) the system obtained by Cap
Rock does not appear inappropriate or too large for Cap Rock’s intended use,
and (3) the amount spent by Cap Rock for the Delinea System was
reasonable.  Cap Rock asserts that Mr.
Brock’s testimony shows the prudence of Cap Rock’s purchase.

 

(32)         Tr. Vol. 1, at 183.

 

(33)         See Cap Rock
Ex. 304, at 8.

 

(34)         Tr. Vol. 7, at 1443-1444.

 

(35)         Application of Texas-New
Mexico Power Company for Authority to Change Rates and Application of Texas-New
Mexico Power Company for Deferred Accounting Treatment for TNP One-Unit Two,
Docket Nos. 10200 and 10034, 19 P.U.C. Bull. 89 (March 18, 1993).

 

22

 

The ALJs disagree, however,
because Mr. Brock’s testimony is conclusory, general, and not based on a review
of the specifics of Cap Rock’s situation, including a review of its existing
system.  Mr. Brock admitted that he was
retained just a few weeks prior to the hearing and reviewed testimony to
determine if there were matters that he needed to rebut.(36)  While he familiarized himself with what the
Delinea System entailed, he did not review any contracts or the process used to
retain Delinea, nor did he conduct any actual inspections of any of the
equipment or systems in issue.(37)  He
did not investigate any of the actual amounts spent by Cap Rock for the Delinea
System to ensure the money was justifiably and reasonably spent.(38)  Nor did he review Cap Rock’s prior systems to
determine if they were adequate for Cap Rock’s needs; in fact, he admitted he
was not familiar with either of Cap Rock’s prior systems and did not know if
they provided the same functions as the Delinea System.(39)  Mr. Brock did not even discuss Cap Rock’s
system needs with anyone from Cap Rock. 
Rather, he had a conversation with a Delinea employee who basically
informed him that his (the Delinea employee’s) “understanding was that Cap Rock
was in need of outsourcing its IT back office function for investor-owned
utility.”(40)  Even in that conversation,
there was no discussion of the necessary scale of the outsourcing based on Cap
Rock’s specific needs.

 

Given the limited scope of
Mr. Brock’s review, all the ALJs can take from his testimony is that Cap Rock’s
decisions and the costs involved may not be unreasonable on their face for a
utility of that size.  But, Mr. Brock’s
testimony does not establish that the purchase was actually reasonable and
necessary for Cap Rock, given its specific circumstances and existing IT
systems.

 

(36)         Pioneer Ex. 109, at depo. pp. 12-13.

 

(37)         Pioneer Ex. 109, at depo. pp. 18-19.

 

(38)         Pioneer Ex. 109, at depo. pp. 23-24. Rather, Mr. Brock
called someone with Delinea to confirm that the amounts discussed in the
testimony were correct, and he concluded the figures were not “out of the
ballpark” for what he understood the Delinea System encompassed.  Pioneer Ex. 109, at depo. p. 25.

 

(39)         Pioneer Ex. 109, at depo. pp. 17-18, 30-31, and 35.

 

(40)         Pioneer Ex. 109, at depo. p. 50.

 

23

 

In fact, other than vague and
general assertions about the inadequacy of Cap Rock’s prior systems, the record
is really devoid of persuasive evidence establishing the actual need for a new
IT system to enable Cap Rock to serve its customer base.(41)

 

(41)         Cap Rock witness Gerald Tucker testified to some reasons why
Cap Rock’s old systems were inadequate, but his testimony is vague and without
supporting detail.  For example, his
reasons included, among other things, “the [existing] software was not user
friendly,” “lack of usable detail in the service order form,” “lack of
capability to manage assets,” and “inability to produce corrected customer
billing with ease.”  Cap Rock Ex. 304, at
9-10.  These reasons are vague and
entirely lacking in the detail necessary to allow the ALJs to determine their
legitimacy.

 

24

 

Given the size of the
expenditure, prudence dictates that Cap Rock should have investigated its
options more fully and obtained truly impartial determinations of its
options.  It did not.  Ultimately, there is no objective evidence
that the investment in the Delinea system was a reasonable investment compared
to the possibility of hiring another company to provide outsourcing and
software, the cost of creating an internal IT department, or the cost of
continuing to operate with the older systems. 
This is particularly important in light of the evidence showing that a
primary reason Cap Rock purchased the Delinea System was to allow for expansion
and not simply to serve existing customers or to meet Commission reporting
requirements.

 

As noted in the background
section above, the opening remarks to Delinea’s Envision Report  indicate that “Rapidly growing the business
through acquisitions is one of Cap Rock Energy’s stated business goals.”  The report further outlined the business
tactics used to achieve this goal.  The
report went to state that, with those tactics in mind:

 

Cap Rock Energy’s steering
committee and the Delinea industry project team, in a combined effort, is
recommending an orderly plan to migrate to a new suite of systems that will
provide accurate and integrated information flows across the company, as well
as support the expected increased operational demands on the information technology
infrastructure as this business growth occurs. 
This Envision phase report is another step of the proprietary Delinea
Smart-to-MarketÔ methodology moving Cap Rock Energy closer to
the necessary infrastructure as this business growth occurs.(42)

 

The Delinea Envision report
noted that Cap Rock’s current system was “insufficient to support the
aggressive growth plans of the company.”(43) 
This evidence belies Cap Rock’s assertion that the Delinea System was
needed to maintain records and prepare regulatory documents, and instead
supports the conclusion that the Delinea System actually was purchased to allow
Cap Rock to further its aggressive expansion objectives.  Moreover, Cap Rock actually obtained and
implemented part of the Delinea System before it was subject to PUC regulation
as

 

(42)         Pioneer Ex. 32, at Bates 9338.

 

(43)         Pioneer Ex. 32, at Bates 9348.

 

25

 

an IOU.  Despite this, Cap Rock still was not able to
compile its test year data in formats consistent with generally-accepted
Commission reporting requirements.(44)

 

(44)         See Cap Rock
Ex. 304, at 6-7.

 

26

 

A utility is allowed to
recover the costs of an item in its rate base when that item is “used and
useful in rendering service to the public.”(45) 
The Delinea System, during the test year, was not used and useful in
rendering service to the public.  Rather,
it appears that Cap Rock purchased the Delinea System for use in the future if
Cap Rock’s expansion goals are met.  This
is not a legitimate basis for an IOU to pass along such costs to its existing
ratepayers.  Rather, this type of risk
should be borne by shareholders, or by ratepayers only at the time it is shown
that the cost was reasonable and necessary for providing service to them.  In this case, Cap Rock has not shown this.

 

In addition to the evidence
above, the conclusion that the Delinea System is not necessary for providing
service to existing ratepayers is also supported by the fact that the Delinea
System was not entirely in operation during the test year and was still not
fully in operation at the time of the hearing. 
Rather, Cap Rock continued to use its old systems to perform billing and
work orders.(46)  Even though the first portion
of the Delinea System was placed in service in January 2003,(47) nearly 18
months later (as of July 30, 2004) only 50% of the Delinea System had been
installed.(48)  Thus, during the test
year, the Delinea System was not even completely operational (and it appears it
was not necessary).  This presents
another reason why the costs incurred for the Delinea System were not used and
useful in rendering service to Cap Rock’s customers.  Because the Delinea System was only partially
in operation, Cap Rock would not be able to recover the cost of the entire Delinea System even if it could
show the purchase was reasonable and necessary. 
Rather, even if the system were reasonable and necessary for providing
service to ratepayers, only 50% (that portion of the system installed in the
test year) of the costs would be recoverable.

 

(45)         P.U.C. SUBST. R. 25.231(c)(2).

 

(46)         Greenville Ex. 114.

 

(47)         OPC Ex. 2, at 8.

 

(48)         TCGA/St. Lawrence Ex. 3, at 141.

 

27

 

For the reasons stated
above, the ALJs find that Cap Rock failed to prove that the Delinea System was
reasonable and necessary and conclude that the cost of the system should not be
included in Cap Rock’s rate base.  With
respect to Cap Rock’s filing, this recommendation results in a reduction of
$3,139,558 to rate base, $876,755 to depreciation and amortization, $1,648,000
to O&M expenses, and $1,244,214 in invested intangible plant for
post-test-year adjustments.(49)  The
costs of the Daffron and Cameo software systems in the respective amounts of
$20,862 and $3,109 should be included and remain in Cap Rock’s rate base
calculation because both the Daffron and the Cameo systems were used and useful
during the test year.(50)

 

If the Commission disagrees
with the ALJs’ recommendations and determines that some costs of the Delinea
System are recoverable, then the included costs should be no more than 50% of
the total cost of the Delinea System because during the test year only 50% of
the Delinea System was used and useful.

 

B.                                    Transfer of Assets

 

Cap Rock proposes an
adjustment to its transmission plant assets to remove $3,359,500 from rate base
relating to the anticipated transfer of transmission assets, land, and land
rights from Cap Rock to NewCorp.  No party
contests this adjustment and the ALJs find it to be reasonable.  Therefore, the ALJs recommend the removal of
$3,359,500 from Cap Rock’s rate base for the transfer of transmission assets to
New Corp.

 

(49)         While the ALJs recognize that some amount of expense for Cap Rock’s IT functions (which
have been outsourced to Delinea) would be reasonable, the ALJs cannot make a
specific recommendation because the evidence in the record does not support any
specific amount.  Cap Rock has not attempted
to show a specific amount of reasonable expenses that have been avoided by outsourcing IT functions to
Delinea.  Rather, Cap Rock attempted to
prove that all of its Delinea expenses are reasonable–a proposition with which
the ALJs do not agree.  Upon rejecting
Cap Rock’s argument, the law is clear that the ALJs may not arbitrarily choose
a lesser amount that might be reasonable in the absence of evidence to support
such.

 

(50)         Greenville Ex. 114.

 

28

 

C.                                    Reclassification of Plant to O&M

 

Cap Rock seeks to reduce its
distribution plant accounts in two ways: (1) by $43,121 to establish normal
inventory levels for its service personnel; and (2) by $432,190 for
reclassifying work orders from distribution plant accounts to maintenance
accounts.(51)  The first adjustment—the
inventory request for $43,121—is addressed in the Materials and Supplies
section below.  Therefore, the ALJs focus
their discussion now solely on the second, larger adjustment for
reclassification of work orders.  Cap
Rock argues that this reclassification is necessary because work orders had
been incorrectly booked into plant accounts instead of O&M.  Cap Rock relies on the testimony of Mr.
Rainey who reviewed the work orders and concluded they were improperly booked.  The impact of the reclassification of these
work orders is to reduce rate base, but increase expenses by the same
amount.  The net effect is a higher
revenue requirement for Cap Rock and, thus, higher customer rates than would
exist if the amounts are not reclassified.

 

Staff and intervenors
contend that Cap Rock failed to support the basis for its reclassification
adjustment and presented no evidence that the types of expenses it seeks to
reclassify are normal, recurring expenses. 
They argue that the testimony of Mr. Rainey is inadequate to justify the
reclassification without more detailed evidence as to what the work orders
actually represent.  Thus, Staff and
intervenors assert that the amount of $432,190 should not be reclassified.  After considering the evidence presented, the
ALJs find that Cap Rock appropriately reclassified and booked the expense as
O&M.  In reaching this conclusion,
the ALJs rely on the testimony of Mr. Rainey, whom they found to be a
credible witness.

 

(51)         In its direct case, Cap Rock sought $598,329 for
reclassifying work orders, of which $95,053 was booked as part of the increase
in materials supplies inventory.  In its
rebuttal case, Cap Rock corrected the request to $432,190 with a separate
$43,121 as an increase in the materials supplies inventory. (Compare Cap Rock Ex. 4, at 18 and 26, to
Cap Rock Ex. 303, at 37-38.)

 

29

 

As Mr. Rainey testified, he
reviewed work orders during the test year and determined that certain work
orders were related to O&M and not distribution plant.(52)  Although Staff and intervenors contend that
Cap Rock was unable to show any underlying detail that the work orders it seeks
to reclassify were for appropriate O&M expenses, the ALJs do not find that
this level of detail is required. 
Rather, Mr. Rainey’s testimony regarding his review of the work orders
and their proper classification is adequate. 
In the RFP, much of the reclassification is specifically for “maintenance
of underground lines” and “maintenance of line transformers.”(53)  Mr. Rainey explained in his testimony that no
additional detail was necessary because the problem was simply one of miscoding
and did not involve a substantive change in Cap Rock’s treatment of the
items.  Cap Rock closed, to plant
accounts, certain work orders identified as “maintenance” during the test
year.  This was a misclassification that
was first detected in September 2002 and was corrected then and also in
December 2002.  But, the miscoding
continued without correction through parts of 2003.(54)

 

When Mr. Rainey reviewed the
work orders, he determined that $432,190 of them were for maintenance work that
had been improperly booked to plant, and this amount is the basis for the
reclassification.(55)  The ALJs find that
Mr. Rainey’s testimony adequately establishes that the reclassification is
appropriate.  Accordingly, $432,190
should be reclassified from rate base to O&M.

 

D.                                    Accumulated Provisions for Depreciation and
Amortization

 

1.                                      Software

 

The issue of depreciation
and amortization for software is analyzed above in the Intangible Plant
(Computer) section.  Because the ALJs
recommend disallowance of the cost of

 

(52)         Cap Rock Ex. 303, at 35-37.

 

(53)         Cap Rock Ex. 8, at Schedule G-14c.

 

(54)         Cap Rock Ex. 303, at 36-37.

 

(55)         Cap Rock Ex. 303, at 37.

 

30

 

the Delinea System in rate
base, the depreciation and amortization expense should also be reduced by
$876,755.

 

2.                                      Self Insurance/Catastrophe
Reserve

 

Cap Rock seeks to establish
a catastrophe reserve fund in the total amount of $1,127,800, accrued over
three years.  Cap Rock contends that a
catastrophe reserve is necessary and reasonable for the provision of electric service
and for the protection of its customers because there is currently no reserve
that would be available in the event of a catastrophe.(56)  Cap Rock’s stated goal for creating the fund
is to provide Cap Rock with funding so that if there were a severe,
catastrophic storm it would have funds available to respond to the emergency.(57)

 

All intervenors and Staff
oppose Cap Rock’s request to fund a catastrophe reserve.  They argue that (1) Cap Rock has not complied
with the requirements necessary under the Commission’s rules for establishing a
catastrophe reserve, (2) Cap Rock’s historical storm information does not
support a finding that the proposed level of funding is reasonable, and (3) Cap
Rock’s insurance evaluation is not independent or reliable.

 

(56)         Cap Rock’s Post-Hearing
Brief, at 26.

 

(57)         Cap Rock Ex. 4, at 19.

 

31

 

Electric utilities are
permitted by statute to self-insure for potential liability or catastrophic
property loss.(58)  The Commission shall
approve a self-insurance plan if it finds that the coverage is in the public
interest, the plan is a lower cost alternative to commercial insurance, and
ratepayers receive the benefit of the savings.(59)  To determine whether a self-insurance plan is
in the public interest, the Commission requires the utility to present a
cost-benefit analysis performed by a qualified independent insurance consultant
that demonstrates that the cost of self-insurance is less than commercial
insurance and that the ratepayers will receive the savings.  Furthermore, the cost-benefit analysis must
provide a detailed analysis of the appropriate limits of self insurance, an
analysis of the appropriate annual accruals to build a reserve account for self
insurance, and the level at which further accruals should be decreased or
terminated.(60)

 

After considering the
requirements stated above, the ALJs conclude that Cap Rock has not shown the
necessary prerequisites for a catastrophe reserve.  First and foremost, Cap Rock presented an
insufficient cost-benefit analysis.  In
its effort to comply with the requirement for a cost-benefit analysis performed
by a qualified independent insurance consultant, Cap Rock simply provided an
email from the company’s insurance agent indicating that insurance coverage for
transmission lines is extremely difficult or impossible to obtain.(61)  Further, the agent opined, based on previous
inquiries to insurers, that premiums for such coverage would be in the range of
$500,000 annually, with a $1,000,000 deductible.(62)  This email was not prepared prior to the
filing of Cap Rock’s RFP, but instead was prepared immediately before the
contested case hearing in response to challenges raised in the prefiled
testimony of the other parties to this case. 
In its rebuttal brief, Cap Rock admits that this email is not a formal
cost-benefit analysis, but it asserts that absent a reasonable alternative to
self-insurance, there is no need to perform a 

 

(58)         PURA § 36.064(a).

 

(59)         PURA § 36.064(b).

 

(60)         P.U.C. SUBST. R 25.231(b)(1)(G).

 

(61)         Cap Rock Ex. 303, at 41 and attachment JWR-R-6.

 

(62)         Cap Rock Ex. 303, at 41 and attachment JWR-R-6.

 

32

 

cost-benefit analysis.(63)

 

(63)         Cap Rock’s Reply Brief,
at 27.

 

33

 

Cap Rock asserts that it
should not have to comply with the Commission Rule requiring an independent
cost-benefit analysis because there are no reasonable alternatives for
insurance in the marketplace.  The ALJs
disagree.  Cap Rock has failed to show
through a cost-benefit analysis that there are, in fact, no reasonable
commercial insurance alternatives.  If
Cap Rock had hired an independent consultant to review the available insurance
and that consultant had demonstrated that the only reasonable option was
self-insurance, then Cap Rock might be able to show that a catastrophe reserve
would be appropriate.  However, Cap Rock
did not do that.  Instead, it appears
that Cap Rock’s executives decided, upon reading the rate filing package
elements, that a catastrophe reserve was something that could be requested in
the rates.  As a result, Cap Rock
requested the inclusion of a catastrophe reserve without the proper supporting
documentation.(64)  This is evidenced by
the fact that the only alleged “analysis” of insurance costs was prepared
immediately before the hearing, and not prior to the time that a catastrophe
reserve was initially requested. 
Ultimately, without the proper independent insurance analysis, Cap Rock’s
request fails to comply with Commission Rule and should be denied.

 

Moreover, Cap Rock’s history
does not support the establishment of a large catastrophe reserve.  Cap Rock provided some data for the actual
cost of storms that have occurred since 2002. 
One storm caused damage in the amount of $352,250, while the other two
storms caused damage of approximately $40,000 and $80,000.(65)  Although those storms caused Cap Rock to
incur significant costs to repair damage, the total cost was nowhere near the
large catastrophe reserve the company seeks in this case.  Cap Rock also included hypothetical storm
scenarios that could occur in its service area.(66)  But, these hypothetical scenarios are
speculative, unsupported, and insufficient to support Cap Rock’s request.  Ultimately, Cap Rock has simply not provided
reliable data, consistent with the Commission’s rules, justifying its request
for a catastrophe reserve for its operations. 
For the reasons stated above, the ALJs recommend that

 

(64)         Greenville Ex. 5, at 135-136.

 

(65)         Staff Ex. 10.

 

(66)         Tr. Vol. 2, at 367-369.

 

34

 

Cap Rock not be entitled to
create a catastrophe reserve and the proposed adjustments to create and account
for the catastrophe reserve should not be allowed.(67)

 

(67)         The adjustments proposed by Cap Rock include an increase of
$375,900 in expenses and related rate base reductions over a period of three
years to allow for the creation of the catastrophe reserve.

 

35

 

E.                                      Construction Work in
Progress

 

In its direct case, Cap Rock
included $1,250,516 of construction work in progress (CWIP) in its rate base.(68)  Cap Rock has subsequently decided that the
costs should have been excluded, and it is no longer requesting any amount of
CWIP in its rate base.(69)  No parties
dispute this removal of CWIP by Cap Rock and the ALJs find that this adjustment
is appropriate.  Thus, CWIP costs should
not be included in Cap Rock’s rate base.

 

F.                                      Materials and Supplies

 

Cap Rock is requesting a
total of approximately $164,700 in rate base for materials and supplies.  This total consists of (1) the $43,121
reduction to plant in service mentioned in the Reclassification of Plant to
O&M in the section above, (2) $26,500 in actual recorded investment in
materials and supplies during the test year, and (3) another $95,053 that Cap
Rock proposes to remove from O&M and include in inventory.(70)  Pioneer is the only intervenor who has
challenged the request.  Pioneer
recommends that inventory only in the amount of $26,513 be included in Cap Rock’s
rate base.(71)

 

(68)         Cap Rock Ex. 8, Schedule A-1; Cap Rock Ex. 4, at 10.

 

(69)         Cap Rock Ex. 303, at 38.

 

(70)         Cap Rock Ex. 8, Schedule A-2, at 3.

 

(71)         Pioneer Ex. 1, at 95.

 

36

 

Cap Rock asserts that it
performed a physical review of the materials and supplies it maintains in its
vehicles and yard to determine the value of the materials currently
available.  As a result of the inventory,
Cap Rock adjusted its test year actual inventory of $26,500 by $138,200 to
reach its total $164,700.(72)  Cap Rock
argues that its physical review provided a more accurate accounting of the
items and that its requested inventory level is more accurate than previously
recorded.

 

In response, Pioneer argues
that the adjustment is more than five times the historic test year 13-month
average and has not been adequately justified. 
In particular, Pioneer points out that there has been no showing of any
efficiency or cost-saving benefit of including additional inventory nor has
there been a detailed showing of what the underlying inventory additions
include.(73)  Without a more detailed
showing, Pioneer argues that Cap Rock has not justified such a large adjustment
to inventory levels.

 

The ALJs find that Cap Rock
has failed to meet its burden to show that the increase in its inventory level
from $26,513 (the test year average) to $164,700 is justified.  Cap Rock increased its inventory request because,
after a survey, it purportedly found additional inventory in its service yards
and on its trucks.  However, this
assertion by Cap Rock is not supported by persuasive evidence detailing, or
even summarizing, the items that supposedly should be reclassified from O&M
to materials and supplies inventory.  Mr.
Rainey testified to this adjustment, but he did not conduct the review himself
nor did he provide any detail about the adjustments sufficient to allow the
ALJs to conclude that the adjustments are correct.  Rather, Mr. Rainey simply relied on the
inventory determinations provided to him by other Cap Rock employees.  While such a method may  be reasonable in most circumstances, it is
questionable when the outcome is to increase inventory levels more than
five-fold over historic 13-month averages. 
For such a significant adjustment above normal averages, Cap Rock should
provide

 

(72)         Cap Rock Ex. 8, Schedule A-3, at 2.

 

(73)         Pioneer Ex. 1, at 94-95.

 

37

 

enough detail to justify the
adjustment.  In this case, it simply did
not.

 

Moreover, Cap Rock did not
provide any reasonable explanation as to why it would be appropriate to have a
significantly larger amount of inventory available.  Because Cap Rock has not adequately shown
that its inventory calculations are supported nor has it provided a reasonable
basis for maintaining an inventory level significantly higher that the historic
test year average, the ALJs find that the test year actual investment in
inventory, in the amount of $26,513, should be included in rate base, but that
Cap Rock’s request for an additional $138,200 should not be included.

 

G.                                    Prepayments

 

Cap Rock is requesting
$333,000 in prepayments related to prepaid insurance, prepaid taxes, and other
items.(74)  Greenville witness Michael
Arndt testified that these payments should not be included in the rate base
because Cap Rock failed to perform a cash working capital study (also referred
to as a lead-lag study).  Further, in its
briefing, Greenville asserts that Cap Rock failed to provide any evidence as to
why the prepayments are reasonable.(75) 
Other than these general assertions, the parties present very little
argument on this issue.

 

The ALJs note that, pursuant
to Commission rules, prepayments are permitted as a “working capital allowance”
apart from that permitted as “cash working capital.”  This point is seemingly misunderstood by Mr.
Arndt, who apparently considers prepayments in the same category as cash
working capital, when in fact prepayments are not grouped into cash working
capital under the Commission’s rules. 
While a lead-lag study is required for those amounts included as cash
working capital (but only when seeking an amount other than the standard 1/8
cash working capital allowance) pursuant to P.U.C. SUBST. R.
25.231(c)(2)(B)(iii), Cap Rock is 

 

(74)         Cap Rock Ex. 8, at Schedule E.

 

(75)         Greenville Initial Brief at 54.

 

38

 

not suggesting that the
prepayments be included as cash working
capital.  Rather, Cap Rock is
simply suggesting that prepayments be included as working capital pursuant to P.U.C. SUBST. R.
25.231(c)(2)(B)(ii).  Therefore, the
lead-lag study suggested by Mr. Arndt is clearly unnecessary.

 

Greenville’s argument that
the prepayments were not shown to be reasonable, however, does give the ALJs
pause.  But no parties contend that the
prepayments were not legitimately made for taxes, insurance, etc.  Nor have any parties asserted any specific
impropriety regarding the prepayments. 
Rather, Greenville simply asserts that Cap Rock has not shown the
prepayments were actually necessary. 
This assertion is true, in that Cap Rock has not fully explained why it
made the prepayments.

 

Ultimately, the Commission
could decide this issue either way.  Cap
Rock submitted schedules indicating the amount of prepayments made and relied
on the average of its 13-month prepayment balance for inclusion in its rate
base.  The Commission has used a 13-month
average as an acceptable method to calculate prepayments in the past.  Because no parties have disputed that the
payments were made, and there is no indication of any impropriety in the
payments, the ALJs find that Cap Rock should be able to include these
prepayments of $333,000 in the rate base.

 

H.                                    Short-Term Investments

 

Cap Rock originally included
a 13-month average of its short-term investments in the amount of $9,736,860 in
its proposed rate base.  Cap Rock has
subsequently eliminated this amount from its rate base.(76)  No parties disagree with Cap Rock’s removal of
this amount and, therefore, the amount is properly excluded.

 

(76)         Cap Rock Ex. 303, at 39.

 

39

 

I.                                         Working Cash Allowance

 

The Commission’s rules set
out two methodologies for calculating a working cash allowance.(77)  One method is a calculation of 1/8 of
O&M, excluding amounts charged to O&M expense for materials, supplies,
fuel, and prepayments.(78)  This is the
method adopted by Cap Rock and no parties dispute its use.  However, because Cap Rock, Staff, and
intervenors request different O&M items, the total amount of working cash
allowance differs among the parties.  The
ALJs agree that the methodology specified in 
P.U.C. SUBST. R. 25.231(c)(2)(B)(iii)(II) should be followed once final
O&M is determined by the Commission. 
Although the final working cash allowance amount will not be determined
until the Commission’s final order deciding what is included in Cap Rock’s
O&M expenses, a proposed working cash allowance amount (based on the ALJs’
recommendations in this PFD) is included in the number-running figures
attached.

 

J.                                      Customer Deposits

 

In its initial RFP, Cap Rock
included customer deposits in its rate base. 
Cap Rock subsequently agreed with Staff and intervenors to remove the
customer deposit amounts from its rate base. 
Cap Rock proposes to reduce its rate base by $610,350 based on the
13-month average of customer deposits on its books.(79)  Staff and Pioneer assert that the total
amount of $651,929 should be reduced from rate base.  This was the amount on Cap Rock’s books at
the end of the test year in September 2003.(80) 
Staff asserts that the Commission has a long-standing policy of using
the test year end balance of customer deposits and not a 13-month average.(81)  The ALJs

 

(77)         P.U.C. SUBST. R. 25.231(c)(2)(B).

 

(78)         P.U.C. SUBST. R. 25.231(c)(2)(B)(iii)(II).

 

(79)         Cap Rock Ex. 303, at 39.

 

(80)         Cap Rock Ex. 8, at Schedule E-3.

 

(81)         Staff Initial Brief at 32, citing Application of Lamb County Electric Cooperative, Inc. for Authority to
Increase Rates within Castro, Hale, Lamb, Hockley, Cochran, and Bailey counties,
Docket No. 3270, 6 PUC BULL. 273 (Oct. 1, 1980).

 

40

 

agree that it is more
appropriate to use the test year end balance rather than a 13-month
average.  Thus, the ALJs conclude that
Cap Rock’s rate base should be reduced by $651,929 for the removal of customer
deposits on Cap Rock’s books at the end of the test year.

 

K.                                    Accumulated Deferred Income
Taxes

 

 There is some lack of clarity regarding Cap
Rock’s calculation of accumulated deferred income taxes and the evidence and
the parties’ arguments do little to make the issue clearer.  In its initial RFP, Cap Rock calculated its
accumulated deferred income taxes to be $2,681,700.(82)  In its rebuttal case, Cap Rock reduced its
calculation to $2,274,728,(83) although some schedules show an additional
adjustment reducing it further to $2,266,000.(84)  Mr. Tucker explained that there was a mistake
on Schedule G-15, which accounted for the difference between the original RFP
and the rebuttal amount of $2,274,728.(85) 
Pioneer and Greenville assert that Cap Rock has not given an adequate
explanation or underlying support for the change from the amount requested in
the RFP and the amount requested in the rebuttal case.  It is unclear from its brief whether Staff
actually challenges the reduction from the RFP amount, or simply challenges the
unexplained additional reduction to $2,266,000 shown on some of the schedules.

 

(82)         Cap Rock Ex. 8, at Schedule G-15.

 

(83)         Cap Rock Ex. 303, at 38.

 

(84)         Cap Rock. Ex. 303, at schedule JWR-R-2.

 

(85)         Cap Rock Ex. 304, at 38.

 

41

 

After considering the sparse
record on this, the ALJs conclude that $2,274,728 is the most appropriate
calculation of accumulated deferred income taxes.  Cap Rock adequately explained that its
changes were due to the fact that the original calculation did not include the
total amount of test year change in timing differences.  Once Mr. Tucker included these amounts, he
determined that accumulated deferred income taxes would be $2,274,728.  No parties presented evidence directly
controverting this determination.  At
most, some of the parties allege that Mr. Tucker’s explanation is
inadequate.  The ALJs do not agree and
find that Mr. Tucker’s explanation is adequate to support the change.  However, the ALJs do agree that the reduction
to $2,266,000 shown on some of the schedules has not been supported by any
explanation and should not be included. 
Therefore, the ALJs find that $2,274,728 is the best calculation of
accumulated deferred income taxes and should be used in determining rate base.

 

L.                                     Patronage Capital

 

Numerous parties contend that Cap Rock owes its former
cooperative members (most of whom are still customers) a minimum of $4.7
million for patronage capital that Cap Rock had in NewCorp at the time that Cap
Rock was converted to an IOU.(86)  Greenville contends that this
amount should be amortized as a cost of service adjustment over a period of two
years and that a corresponding reduction in rate base be made at the end of the
two-year period.  Other parties argue
that the patronage capital be treated as imputed revenue for a two-year
period.  Either way, most of the intervenors
argue for some adjustment to reflect the patronage capital that Cap Rock had in
NewCorp at the time of Cap Rock’s conversion from a cooperative to an IOU.(87)

 

(86)         The evidence is conflicting on whether there was $4.7
million or $7.9 million in patronage capital. 
For our purposes, the ALJs assume the undisputed minimum amount of $4.7
million.

 

(87)         To be clear, at issue is the patronage capital Cap Rock had
in NewCorp, not the patronage capital that Cap Rock’s members had in Cap
Rock.  Ultimately, however, Cap Rock’s
patronage capital in NewCorp would naturally have flowed through to Cap Rock’s
members.

 

42

 

To understand this issue more fully, it is important to look
at the history of Cap Rock and NewCorp. 
Cap Rock formed NewCorp as an electric cooperative in 1996, while Cap
Rock itself was still a cooperative.  Cap
Rock transferred various assets to, and was the sole member in, NewCorp.  Under its bylaws, NewCorp was supposed to
account for and maintain a record of membership patronage equity at the end of
each fiscal year.  It is undisputed that
NewCorp did not do this and, therefore, there was not a clear annual accounting
record of the amount of equity that Cap Rock had in NewCorp.

 

In 2001, Cap Rock converted from a cooperative to an
IOU.  As part of that conversion process,
cooperative members were given three options for distribution of their
patronage capital in Cap Rock.  They
could accept (1) stock in the newly-created IOU; (2) monetary credits to future
bills; or (3) cash payments.  In
accepting one of these options, the cooperative members were purportedly giving
up their interest in the cooperative’s assets. 
The conversion process was completed and Cap Rock is now operating as an
IOU.

 

During the conversion, though, there was no formal notice,
other accounting of, or disclosure to the cooperative members of the value of
Cap Rock’s patronage capital in NewCorp. 
The intervenors argue that this violated NewCorp’s bylaws.  Further, they argue that notice and an
accounting of the patronage capital in NewCorp was a necessary prerequisite for
Cap Rock’s cooperative members to vote on the conversion process and/or to make
their election as to how they wished to receive the return of their patronage
capital in Cap Rock.  Greenville also
presents a detailed analysis of why Cap Rock, when it was a cooperative, could
not lawfully transfer its cooperative membership in NewCorp to the Cap Rock
IOU.  Instead, Greenville argues that the
transfer of the cooperative’s CCN to the Cap Rock IOU resulted in the
dissolution of the cooperative and required a distribution of the cooperative’s
assets (including the patronage capital in NewCorp) to the cooperative’s
members.  This distribution did not occur
and the intervenors argue that Cap Rock simply kept for its shareholders the
$4.7 million in patronage capital in NewCorp. 
Therefore, they argue, Cap Rock should now be required to account for
this amount to its customers.

 

43

 

Cap Rock responds by arguing that the law does not require
NewCorp to distribute any  patronage
capital to Cap Rock and, as such, Cap Rock’s customers or former cooperative
members currently have no legal entitlement to it.  Further, Cap Rock asserts the value of the
capital is like any other asset of Cap Rock and the cooperative members’ rights
in it ended at the conversion when the cooperative members received either
stock, cash, or bill credits for their equity. 
Cap Rock disagrees with Greenville’s assertion that the cooperative’s
membership in NewCorp could not be transferred to the IOU, arguing that this is
simply a collateral attack on the conversion process that has already been
finalized.

 

The ALJs do not discuss the parties’ positions in greater
detail at this time because such is not essential to the ALJs’ ultimate
recommendation.  The ALJs agree that, at
first blush, NewCorp and Cap Rock’s actions appear to have been improper and
may have violated their own bylaws and/or the utility laws of Texas, resulting
in potential benefits to Cap Rock’s shareholders at the expense of its former
cooperative members.  However, the ALJs
conclude that none of these matters are relevant to the issues before the
Commission in this rate-making proceeding. 
Essentially, the intervenors are attempting to turn this rate-making
case into a “catch-all proceeding” to address many of the intervenors’ other
disputes with Cap Rock.  That is not
proper, and the ALJs do not believe that notice or jurisdiction are sufficient
in this case to encompass all of these issues. 
Rather, the intervenors need to avail themselves of other forums and/or
separate proceedings to resolve many of these disputes—particularly those
relating to patronage capital in NewCorp.

 

Specifically, to the extent that Greenville claims that Cap
Rock’s members were not notified of the patronage capital in NewCorp, that is
essentially a challenge to the conversion vote process and should be addressed
in such a manner, not through this rate proceeding.  Similarly, if Greenville contends that
NewCorp has not been following the Electric Cooperative Corporation Act  and is not lawfully operating as a
cooperative, that

 

44

 

is properly
the subject matter of a complaint with the Commission or a legal proceeding
initiated in the courts of this state. 
If Greenville asserts that Cap Rock’s cooperative membership interest in
NewCorp could not be transferred as part of the conversion process, then
essentially that asset remains in NewCorp and the parties who believe they have
an interest in it (i.e., Cap Rock’s
former cooperative members) should bring an action against NewCorp to recover
it.  The law is clear that NewCorp is not
required to distribute patronage capital to its members and has not distributed
any such capital to Cap Rock.  Even if
the patronage capital had been improperly distributed to Cap Rock, the remedy
is not necessarily to give current customers the benefit of such asset, but
arguably rather for the rightful owners (i.e.,
Cap Rock’s former cooperative members at the time of the conversion) to bring
an action to recover the asset.

 

45

In all respects, the ALJs conclude that the intervenors’
arguments regarding Cap Rock’s patronage capital in NewCorp—regardless of
whatever merit such claims may have—are not properly a matter that can be
addressed as an offset to rate base or a revenue imputation in this rate-making
proceeding.  Therefore, the ALJs decline
to recommend any adjustments to revenues or rate base in regard to such
patronage capital.

 

V.  RATE OF
RETURN

 

Cap Rock requests that the
Commission allow it to earn an overall weighted rate of return of 7.286%, which
is based upon (1) a hypothetical capital structure consisting of 60% debt and
40% equity; (2) a cost of debt of 4.31%; and (3) a return on common equity of
11.75%.  All other parties oppose Cap
Rock’s request and argue that a lower weighted rate of return is
appropriate.  The other parties’ proposed
rates of return are different, generally ranging between 5% and 6%.  After considering the evidence and arguments
of the parties, the ALJs recommend that the Commission allow Cap Rock to earn
an overall weighted rate of return of 5.54%.

 

The proper method for
determining Cap Rock’s overall weighted rate of return involves combining and
averaging Cap Rock’s cost of debt (i.e.,
the interest it pays on its debt) and the rate of return shareholders are
entitled to earn on common equity in the company.  In reaching different proposed rates of
return, the parties mainly differ on the appropriate capital structure to be
used for Cap Rock and on the proper rate of return on common equity.  These issues and other matters related to the
rate of return determination are discussed below.

 

A.                                    Capital Structure

 

One of the key components used to determine Cap Rock’s
overall weighted rate of return is its capital structure.  Cap Rock’s capital structure during the test
year consisted of approximately 83% debt and 17% equity.  As of March 2004 it was approximately 84%
debt and 16% equity.  Staff and most of
the intervenors argue for using one of these two

 

46

 

actual
capital structures in calculating an appropriate rate of return.

 

On the other hand, Cap Rock asserts that neither of these
capital structures is reasonable nor would they allow Cap Rock to attract new
equity investment.  So, to calculate its
requested rate of return, Cap Rock proposes using a capital structure of 60%
debt and 40% equity.  This “60/40”
proposed capital structure is the same as that used by the Commission in Docket
No. 22344 in establishing a generic hypothetical capital structure for all
Texas transmission and distribution utilities (TDUs) during the unbundling
process and transition to electric competition.(88)  Cap Rock argues that the Commission’s
precedent and policy from that docket should apply to this case because one of
the Commission’s goals was to simplify rate-making proceedings by setting a
statewide capital structure.  Cap Rock
asserts that it will not be able to attract new capital if its actual capital
structure is utilized, rather than the Commission’s 60/40 model structure,
because the resulting lower rate of return would not account for the higher
risk level associated with Cap Rock’s smaller size and ongoing regulatory
risks.

 

(88)         Generic Issues Associated
with Applications for Approval of Unbundled Cost of Service Rate Pursuant to
PURA § 39.201 and P.U.C. SUBST. R. 25.344, Docket No. 22344, Order No. 42 (Dec. 18,
2000).

 

47

 

In response, the intervenors argue that Cap Rock should not
be allowed to reap the benefit of increased returns when its existing capital
structure does not justify it.  They note
that using Cap Rock’s proposed capital structure would result in an additional
$3 to $5 million that ratepayers will have to pay in rates above what they would
pay if the actual capital structure were used. 
This would result in granting Cap Rock an “excessive return on equity.”  The intervenors point out that the 60/40
capital structure used by the Commission in Docket No. 22344 was solely for the
issues raised in that docket and has not been adopted as a rule to be applied
in all other dockets.  Staff points out
that even if the order in Docket No. 22344 applied to Cap Rock, it would do so
only if Cap Rock were actually going through an unbundled cost of service
proceeding (UCOS) because the order adopting the 60/40 capital structure
indicated it was limited to use in UCOS proceedings.  This is not a UCOS proceeding.  Further, Staff notes that PURA requires an
individualized determination of a company’s capital structure in rate-making
proceedings.  Staff points out that the
circumstances of the TDU unbundling docket were unique and disputes that the
Commission’s action in using a hypothetical capital structure to simplify that
process is applicable in this case—where there are no unbundling issues and
there is an existing capital structure that can be used in rate-setting.

 

The ALJs agree that it is improper to use a hypothetical
60/40 capital structure in determining Cap Rock’s appropriate overall rate of
return.  First, the ALJs conclude that
Commission precedent does not require it. 
Although the Commission set a 60/40 capital structure for the generic
UCOS cases, that capital structure was to be used solely for unbundled TDUs.(89)  Moreover, the Commission was attempting to
assign a capital structure to previously regulated utilities, with the
recognition that the newly deregulated and unbundled entities were unique.  Cap Rock is entirely distinguishable from the
TDUs involved in the UCOS proceedings in that it has gone from being
unregulated to regulated, has an existing capital structure that can be used,
and is not an unbundled TDU, but rather 

 

(89)         Docket No. 22344, Order No. 42 at 8-9
(Dec. 18, 2000)(“First, these decisions are made for ratemaking purposes for
the newly unbundled TDUs during the transition period . . .”).

 

48

 

simply
provides retail electric service.  For
these reasons, the ALJs find that the Commission’s adoption of a 60/40 capital
structure in the UCOS cases does not apply to this case.

 

Having determined that Commission precedent does not require
the use of a hypothetical 60/40 capital structure, the ALJs now turn to whether
it would otherwise be appropriate to adopt such a capital structure for Cap
Rock.  The ALJs conclude it would
not.  Such an action would unfairly grant
Cap Rock an excessive rate of return on its actual equity.  For example, if Cap Rock’s proposed 60/40
capital structure were used, its requested return on equity of 11.75%
would  actually be in excess of 20% for
its existing equity,(90) clearly an excessive rate
of return for Cap Rock’s shareholders. 
Interestingly enough, with the significant stock grants given to Cap
Rock’s management, they would stand to disproportionately benefit from a higher
rate of return on their stock (equity).(91)  This would be inappropriate.

 

While Cap Rock argues that it needs a higher rate of return
to attract investors and obtain new equity investment, Cap Rock’s existing
capital structure is of its own making. 
Cap Rock has incurred significant amounts of debt to pay for failed
business ventures, inappropriately high executive compensation, and poor
management.  Cap Rock’s management
decided to convert from an electric cooperative to an IOU and, in so doing,
returned more than $18 million in equity to former cooperative members through
cash or cash equivalents, further incurring debt and/or reducing equity.  Moreover, the conversion process itself was
expensive, resulting in significant costs that the company had to bear.

 

(90)         Cap Rock seeks a total return of
7.286%.  To get to this overall weighted
rate of return using Cap Rock’s actual capital structure at the end of the test
year of 16.52% equity, the return on equity would have to be nearly 23%.
Greenville Ex. 3, at 24 (Greenville witness David Parcell used a capital
structure consisting of 15.8% equity—Cap Rock’s structure at the time of the
hearing—but the result is nearly the same using the 16.52% equity figure).   

 

(91)         In fact, Cap Rock insiders control
approximately 40% of all outstanding Cap Rock stock.  TCGA Ex. 3, at depo. p. 48.  (Some of this stock is in the shareholder
trust controlled by Cap Rock management, who would not receive any direct
financial benefits from the stock held by the trust.)   

 

49

 

The ALJs agree that it would be better for Cap Rock, as an
IOU, to obtain a more balanced capital structure.  And, a lower rate of return does hamper that
to some degree.  Under other
circumstances, where company management had demonstrated good decision-making
and efficient and prudent management decisions and operations in the past, it
might be warranted to assign the company a more beneficial capital structure
with the understanding that such was necessary to attract new equity
investment.  In this case, though, much
of Cap Rock’s weak financial condition is due to poor quality of management and
Cap Rock has lost significant amounts of money as a result of either the
conversion process or numerous failed ventures. 
As such, it would be contradictory to essentially “reward” management
with an actual return on equity of over 20%, with the hope that this will allow
Cap Rock to attract new equity investors. 
The answer to Cap Rock’s difficult financial situation is not to simply
give Cap Rock’s management more money, but rather to design a rate structure
that is fair under the circumstances with the understanding that Cap Rock’s
management will have to act prudently and operate more efficiently to improve
Cap Rock’s financial situation.

 

Therefore, in determining Cap Rock’s overall weighted rate of
return, the ALJs see no reason to use a hypothetical capital structure when Cap
Rock’s actual capital structure is known and may be used.  Any resulting financial hardship borne by
that capital structure may mean that Cap Rock has to operate more efficiently,
avoid unnecessary expansion efforts, and reduce overhead expenditures, such as
executive compensation, but it should not threaten its ability to operate as an
ongoing electric utility, and it will result in a fair rate of return.  Accordingly, the ALJs recommend that the
Commission use Cap Rock’s capital structure at the end of the test year of
83.48% debt and 16.52% equity in determining an appropriate overall weighted
rate of return.(92)

 

(92)         This is Cap Rock’s actual capital
structure at the end of the test year and is the capital structure recommended
by Staff expert Slade Cutter.  Staff Ex.
3A, at 5.

 

50

 

B.                                    Cost of Debt

 

Cap Rock’s actual cost of debt is 4.31%.  No parties dispute this nor do any parties
disagree that this is the appropriate figure to use in calculating Cap Rock’s
weighted rate of return.  Therefore, the
ALJs agree that, in determining Cap Rock’s overall weighted rate of return, the
cost of debt rate is 4.31%.

 

C.                                    Return on Equity

 

1.                                      Parties’ Arguments

 

As noted previously, the overall weighted rate of return
consists of two components: the cost of debt and the rate of return on equity.(93)  The parties differ on the appropriate method
for determining the interest rate that should be allowed as a return on
equity.  To come up with a recommended
return on equity, Cap Rock’s expert, Dr. Olson, applied a discounted cash flow
(DCF) analysis to a group of combination gas and electric utilities (proxy
group) that he deemed most comparable to Cap Rock.  His DCF analysis involved determining the
dividend yields and the growth rates for the proxy group.  The divided yield for the proxy group ranged
between 3.27% and 5.42%, with a median of 4.65%.  The median growth rate for the proxy group
was 3.8%, and Dr. Olson expanded this to encompass a range from 3.50% to
4.00%.  Then, Dr. Olson took the 4.65%
median dividend yield, added the 3.50% to 4.00% growth rate, factored in a
yield adjustment factor, and concluded that the required investor return for
these comparable companies would be between 8.23% and 8.74%.(94)

 

Next, Dr. Olson conducted a risk premium analysis, which
measures how much 

 

(93)         The phrases “cost of equity” and
“return on equity” are used interchangeably by the ALJs in this PFD.  This is consistent with the usage by the
parties and their experts throughout this proceeding.

 

(94)         See
Cap Rock Ex. 3, at 22-23 for a more detailed explanation and a chart showing
Dr. Olson’s calculations.

 

51

 

higher the
rate of return on stocks should be in comparison to bonds to account for the
greater risks associated with equity investment versus debt investment.  From conducting this analysis, Dr. Olson
concluded that the appropriate equity return would be 12.6%, but Dr. Olson
expanded it to encompass a range between 12.25% and 12.75%.(95)  After comparing the DCF numbers to the credit
risk premium calculations, and accounting for risk factors associated with Cap
Rock, Dr. Olson concluded that the proper return on equity for Cap Rock was in
the range of 11.50% and 12.00%.  For
purposes of a specific recommendation, he settled on 11.75% as the proper rate
of return on equity to use in calculating the overall weighted rate of return.

 

(95)         Cap Rock Ex. 3, at 23-24.

 

52

 

Staff used two methods for determining an appropriate return
on equity: the DCF method and the capital asset pricing model (CAPM).  Staff’s expert, Slade Cutter, concluded that
the DCF method resulted in a required return of between 8.46% and 11.16%, with
a mean of 9.57%.  The CAPM analysis
produced a range of 9.01% to 10.33%, with a mean of 10.00%.  Because Mr. Cutter concluded that Cap Rock
would not be given an investment-grade rating, he agreed that a credit risk
premium should be added to the estimated cost of equity.  Adding the risk premium to his DCF and CAPM
calculations resulted in an expected cost of equity of between 11.57% and
12.40%.  Because Cap Rock’s proposed
return on equity of 11.75% fell within this range, he found Cap Rock’s proposed
figure to be reasonable.

 

The various intervenors disagree with Cap Rock and Staff’s
proposed return on equity of 11.75%, and instead propose a rate of return on
equity between 9.50% and 10.50%. 
Greenville witness Parcell used three methods to determine an
appropriate return on equity: (1) a DCF method that resulted in an 8.5% return;
(2) a CAPM method that resulted in a 9.7% to 10.5% return; and (3) a  comparable earning analysis that resulted in
a 10% return.  Ultimately, Mr. Parcell
recommended a return on equity in the range of 9.5% to 10.5% (at the higher end
of his calculations) in recognition of Cap Rock’s lower equity ratio.

 

OPC’s expert witness, Dr. Carol Szerszen, also used a DCF
analysis and a risk premium analysis. 
Her DCF calculations produced a cost of equity of 8.91% to 9.24%,(96) and her risk premium
analysis resulted in a 9.51% cost of equity. 
Ultimately, she recommended that a 9.5% return on equity be used in
calculating Cap Rock’s overall weighted rate of return.

 

(96)         Her initial DCF calculations showed a
return on equity of 8.88% to 9.21%; however, she updated her calculations to
utilize more recent data and revised her calculations slightly upward
accordingly.  OPC Ex. 3, at 17. 

 

53

 

When using comparable methods, the parties generally reached
similar results.  For example, under a
DCF analysis, Cap Rock’s expert calculated return on equity at 8.23% to 8.74%;
Greenville’s expert calculated it at 8.50%; OPC’s expert calculated it at 8.91%
to 9.24%; and Staff’s expert calculated it at 
8.46% to 11.16%.  Using a CAPM
analysis, Staff’s expert produced a range of 9.01% to 10.33% while Greenville’s
expert calculated it at 9.70% to 10.50%. 
Ultimately, the main difference arose when making risk premium
adjustments to account for the risk associated with Cap Rock.

 

Cap Rock’s expert conducted a full risk premium analysis that
resulted in a return on equity of between 12.25% and 12.75%, far above his DCF
calculations of between 8.23% and 8.74%. 
Dr. Olson concluded that it would be appropriate to use a figure
between his DCF calculations and the risk premium analysis range, conceding
that his ultimate selection of 11.75% was purely a judgment call based on
considerations such as the size of the company, the effect of possible takeover
considerations of comparable companies on their DCF figures, and the Commission’s
use of 11.25% as the appropriate rate of return on equity in Docket No.
22344.  He conceded that different
experts would reach different conclusions and that it was impossible to fully
quantify these calculations.(97)

 

Although they got there by a different means, Staff also made
a special risk adjustment that raised the proposed return on equity above what
it otherwise would be through a straightforward DCF or CAPM analysis.  Specifically, Staff’s expert found it
appropriate to add between 2.00% and 2.40% to its DCF and CAPM calculations as
a risk adjustment, because of Cap Rock’s more risky financial situation (as
evidenced in part by its high debt-to-equity ratio).  It was only by doing this that Mr. Cutter got
to the 11.75% figure requested by Cap Rock.(98)

 

(97)         Tr. Vol. 2, at 235-36.

 

(98)         Tr. Vol. 5, at 835-38.

 

54

 

The intervenors point out numerous alleged flaws in the risk
adjustments made by Cap Rock and Staff. 
First, they assert that Dr. Olson could not quantify and objectively
justify his decision to use 11.75% as a recommended cost of equity.  They argue that his risk premium analysis was
so far above his DCF calculations as to raise serious questions as to the
reliability of his risk premium figures. 
Further, Greenville expert Parcell identified numerous problems with Dr.
Olson’s use of data from 1996-2002 as proxy for current risks and costs of
capital.

 

As for Staff’s expert, intervenors disagree with the
assumption underlying his risk premium adjustment.  Mr. Cutter’s adjustment was based on Cap Rock’s
poor financial situation (as evidenced by its high debt)—a situation caused by
Cap Rock’s management and for which, the intervenors argue, Cap Rock should not
now benefit.  Rather, intervenors assert
that no special risk adjustment should be made to the DCF or CAPM calculations
for Cap Rock’s financial condition because it would reward poor past
management.

 

2.                                      ALJs’ Analysis

 

After considering the arguments presented, the ALJs recommend
that the Commission apply Staff’s recommended rate of return on equity of
11.75%.  Most parties agree with Staff’s
expert’s calculations, but disagree with his application of a credit-risk
premium adjustment.  Although the
credit-risk premium adjustment is due, to some degree, to Cap Rock’s heavy debt
load—which was caused, in part, by Cap Rock’s past management decisions—the
ALJs do not agree that the use of a credit-risk premium adjustment unfairly
rewards poor past management.  In
calculating a rate of return on equity, the Commission is trying to approximate
what comparable equity investments would earn and what rate of return is
sufficient to match going market rates. 
This analysis should first be done in a straightforward manner using
sound financial principles, without regard for other non-financial factors—such
as the quality of management—because 

 

55

 

PURA §
36.052 provides the means to review those considerations separately in
ultimately adjusting an overall rate of return upward or downward.(99)  So, in trying to determine what the proper
return on equity would be, the ALJs limit their focus solely on attempting to
discern what companies comparable to Cap Rock achieve in return on equity.

 

In conducting this analysis, it is a sound financial practice
to make an adjustment for credit-risk factors if such adjustments are warranted
by Cap Rock’s financial situation.  In
this case, the ALJs conclude they are and also conclude that Staff’s
methodology adequately accounts for such credit-risk factors, while the
intervenors’ various calculations do not.

 

(99)         This issue is different than the
capital structure issue.  In regard to
the capital structure, Cap Rock seeks to use something other than the actual
capital structure of the company.  So, in
analyzing Cap Rock’s request, the ALJs determined whether equitable and other
considerations justified Cap Rock’s request. 
By necessity, this involved some discussion of Cap Rock’s past
management practices.  In regard to
determining a return on equity, though, the analysis should be based simply on
the financial factors utilized in determining the rate of return a comparable
company would earn.

 

56

 

In making his credit-risk premium adjustment, Staff expert
Slade Cutter first determined that Cap Rock would not warrant an
investment-grade rating if it were to issue bonds.(100)  In his opinion, Cap Rock’s bond rating would
likely be close to BB.  Next, Mr. Cutter
attempted to approximate the difference in yields between investment-grade
bonds and below-investment-grade bonds. He reviewed the S&P Bond Guide and
determined that the yield difference between BBB-rated bonds (investment-grade)
and BB+-rated bonds (below-investment-grade) in 2003 was approximately 2%.(101)  Finally, he looked at the yields of
comparable utilities in the investment-grade and below-investment-grade
categories and used a linear regression analysis to account for differences in
maturity dates.  In conducting this
analysis, he concluded the average yield difference between investment-grade
bonds and below-investment grade bonds (closest to what Cap Rock’s rating was
estimated to be) was 2.2%.  From this,
then, he developed a range of 2.0% to 2.4% for his credit-risk premium,
concluding that this accurately reflected the additional return an investor
would require to invest in Cap Rock, given its credit-quality risk.(102)  The ALJs find his testimony to be credible and
his analysis to be reliable.

 

On the other hand, OPC witness Dr. Carol Szerszen testified
that she conducted an analysis that accounted for risk factors by reviewing the
time period from 1998-2003 to determine the difference between the industry
average return on equity and the average yield on BBB-rated utility bonds.  But, Dr. Szerszen’s “risk” analysis really
measured something entirely different than Mr. Cutter’s analysis.  Dr. Szerszen focused on the difference in
risk between stocks and bonds, while Mr. Cutter focused on the specific risk
associated with Cap Rock’s financial position in comparison to peer
companies.  Dr. Szerzsen’s failure to
account for Cap Rock’s specific risks makes her calculations less reliable 

 

(100)       Using the S&P Rating System, a rating
of BBB- is the lowest rating usually considered “investment-grade.”  After that, the ratings for bonds that are
below investment-grade go in the following descending order: BB+, BB, BB-, B+,
B, B-, CCC+, etc. 

 

(101)       Staff Ex. 3A, at 26.

 

(102)       See
Staff Ex. 3A, at 22-26 and Schedule SC-6, for a full discussion of Mr. Cutter’s
methods and calculations.

 

57

 

than Mr. Cutter’s.

 

This difference in
reliability is further evidenced by her methodology. In conducting her
analysis, Dr. Szerzsen concluded that the
average difference between the industry average return on equity and the
BBB-rated bond yield was 2.91% over the period 1998-2003.  When this 2.91% difference was added to the
average 6.6% BBB-rated bond yield used by Dr. Olson, it resulted in an overall
return on equity of 9.51%.  Therefore,
Dr. Szerszen concluded that a return on equity of less than 10% was
appropriate. However, when making this adjustment, Dr. Szerszen’s analysis is
based on bonds rated as investment-grade (BBB-rated), whereas Mr. Cutter
concluded that Cap Rock would not warrant an investment-grade rating.  The ALJs agree with Mr. Cutter’s conclusion
on this and, therefore, find that Dr. Szerszen’s recommendation is not persuasive
in determining a return on equity for Cap Rock. 
Rather, to be more helpful, Dr. Szerszen’s analysis should have been
focused on the yields and equity returns of other companies with
below-investment-grade ratings.

 

Similarly, no other intervenor experts properly accounted for
Cap Rock’s unique financial situation in attempting to determine what a
comparable return on equity would be for Cap Rock.  Such an adjustment is appropriate given Cap
Rock’s high debt and other financial circumstances.  Therefore, because only Mr. Cutter fully
accounted for this in calculating an appropriate return on equity and because
the ALJs find his method reasonable, they conclude that his recommendation of
an 11.75% return on equity is appropriate. 
Moreover, it is not out-of-line with past Commission precedent, which
has allowed an 11.25% return on equity in other recent utility proceedings.

 

D.                                    Financial Integrity

 

Cap Rock argues that one of the principal goals of
determining an appropriate rate of return is to maintain the financial
integrity of the company, which includes helping the company to be creditworthy
and have access to capital on reasonable terms. 
Cap Rock 

 

58

 

asserts
that, in order for it to have financial integrity, it is imperative for the
Commission to adopt Cap Rock’s proposed capital structure and requested rate of
return.  Cap Rock asserts that the
regulatory uncertainty that has been hanging over Cap Rock for some time—first
in relation to the conversion from a cooperative and now in regard to this
rate-making proceeding—has harmed Cap Rock’s ability to attract capital.  If Cap Rock’s recommended capital structure
and rate of return are not adopted, then Cap Rock will allegedly not be able to
reach the optimal 60/40 capital structure, will have its financial condition
worsen, and will not achieve financial integrity.

 

In response, Staff notes that the Commission has previously
rejected requests to increase a utility’s rate of return in order to protect its
financial integrity because “any such adjustment would appear to be a reward
for inefficiency and imprudence” by the utility’s management.(103)  Further, Staff points out that PURA only
requires that the Commission set rates that allow a company “a reasonable
opportunity” to earn a reasonable return. 
Staff contends that it is up to the company’s management to engage in
sound business practices to actually ensure that the return earned is
reasonable.  So, Staff argues, it is not
appropriate for the Commission to grant Cap Rock an excessive return on equity
simply to allow it to better attract equity investment and improve its
financial position, particularly when its weak financial position is due, in
part, to poor and inefficient past management actions.

 

The intervenors assert that Cap Rock should remain solvent
and be able to slowly build up its equity and financial integrity over time
even without a rate increase.  Cap Rock’s
2004 business plan shows that, even with its heavy debt load, the company is currently
financially stable even without a rate increase.  As Greenville points out in its closing
brief, Cap Rock has relatively modest financial needs for its core business,
has no major construction projects planned at the present time, and has more than
$20 million in 

 

(103)       Application
of Texas Util. Elec. Co. for Authority to Change Rates, Docket No.
9300, P.U.C. BULL. 2057 (Sept. 27, 1991).

 

59

 

cash
reserves.(104)

 

(104)       OPC Ex. 1, at 25; OPC Ex. 1A, at 28
(confidential).

 

60

 

While the ALJs are concerned with Cap Rock’s heavy debt load
and recognize that unusual, non-recurring events could certainly impact Cap
Rock’s financial stability, the ALJs also conclude that it is financially
stable enough to continue to provide reliable electric service and earn a
reasonable rate of return even if the Commission does not adopt Cap Rock’s
proposed capital structure and requested rate of return.  Moreover, Commission precedent leans against
increasing a utility’s rate of return simply to protect its financial integrity
when it is not otherwise justified.  For
these reasons, the ALJs disagree that Cap Rock’s financial condition alone
should impact or alter the Commission’s determination of the appropriate
overall weighted rate of return.

 

E.                                      PURA § 36.052 Considerations

 

Under PURA § 36.052, when the Commission determines an
appropriate rate of return it should consider various factors, including (1)
the efforts and achievements of the utility in conserving resources; (2) the
quality of the utility’s services; (3) the efficiency of the utility’s
operations; and (4) the quality of the utility’s management.  Cap Rock has not argued that any of these
specific factors would justify a rate increase beyond what its calculations
show would otherwise be reasonable. 
However, some parties claim that these factors warrant a downward
adjustment to Cap Rock’s rate of return.

 

Specifically, numerous parties assert that Cap Rock’s poor
past management practices and actions of self-enrichment justify reducing Cap
Rock’s allowed rate of return or at least keeping it at the lower end of the
range of reasonable rates of return proposed by the various intervenors.(105)  Staff agrees with the intervenors that past
management has been poor, but argues that such concerns are more properly
addressed through a management audit or other remedial steps rather than
through a downward adjustment to the rate of return.

 

(105)       Because Cap Rock’s management practices
have been discussed previously, the specific allegations of poor management
will not be discussed again here.

 

61

 

As observed previously, the ALJs agree that Cap Rock has had
a poor quality of management.  However,
the ALJs do not believe that a reduction in the overall rate of return is
necessary or appropriate.  Cap Rock’s
financial condition is still far from ideal and the ALJs have already
recommended that Cap Rock’s actual capital structure be used, instead of Cap
Rock’s proposed structure, and this recommendation significantly affects Cap
Rock’s overall rate of return.  Because
Cap Rock’s current cost of debt is so low (at 4.31%), the ALJs’ overall
recommended rate of return (which is based on a capital structure consisting of
83% debt) is also relatively low, at only 5.54%.  As such, additional reductions become
unfairly punitive.  Also, throughout
various portions of this PFD, the ALJs make recommendations for disallowances
based on management actions and Cap Rock would essentially be doubly-punished
if both the disallowances and a reduction to the rate of return are
allowed.  Therefore, the ALJs conclude
that the overall weighted rate of return for Cap Rock should be 5.54%, which is
the rate recommended by Staff.

 

VI.  REVENUES

 

After making adjustments for
various items challenged by the other parties, Cap Rock currently has
calculated test year operating revenues of $65,990,300.  This is determined by taking the corrected
actual test year revenues of $79,429,800 minus the company’s proposed
adjustments of $13,439,500.  Except as
otherwise noted below, the ALJs agree with Cap Rock’s revenue calculations.

 

A.                                    Total Sales Revenue

 

During the test year, Cap
Rock had total sales revenues of $74,280,200. 
After making adjustments, this amount was reduced to $65,293,400 by Cap
Rock.

 

62

 

1.                                      Regulatory Surcharge

 

During the hearing, Cap Rock
reduced its revenues by $1,842,834 to reflect the end of a non-recurring
surcharge.  In closing arguments, no
parties have challenged this adjustment. 
After considering the evidence in the record, the ALJs conclude that
this adjustment is appropriate and Cap Rock’s revenues should be revised
accordingly.

 

2.                                      PCRF Revenues

 

During the hearing, Cap Rock
reduced its revenues by $6,351,772 to reflect PCRF revenues that will not be
collected going forward.  In closing
arguments, no parties have challenged this adjustment.  After considering the evidence in the record,
the ALJs conclude that this adjustment is appropriate and Cap Rock’s revenues
should be revised accordingly.

 

3.                                      Weather Normalization

 

Cap Rock has included an adjustment to reduce revenues by
$516,046 to reflect reduced sales for weather normalization.  The adjustment for weather normalization is
set forth in Cap Rock’s Schedules O-1.1 and O-1.2.(106)  Cap Rock included this adjustment to
recognize sales based upon a weather-normalized method, which compares the test
year weather data to a normalized weather data model and calculates a variance
of the actual test year sales to the sales that would occur in a normal
year.  For the test year, Cap Rock
calculated that normalized sales would be lower than actual sales (i.e., weather patterns during the test
year were such that sales were higher than they would normally be expected to
be).  Therefore, an adjustment was made
to account for the anticipated lower revenues going forward.  This weather normalization adjustment also
requires a corresponding adjustment to show the reduced purchased power
expenses because, if sales are predicted to be less, then Cap Rock would not
need to purchase as much power. 
Therefore, Cap Rock made a corresponding adjustment to reduce purchased
power expense by $409,110.  

 

(106)       Cap Rock Ex. 9. 

 

63

 

This
purchased power adjustment is addressed elsewhere in this PFD.

 

64

 

OPC disagrees with Cap Rock’s weather normalization adjustment,
claiming that Cap Rock has not met the requisite burden of proof to justify
it.  OPC argues that a weather
normalization adjustment can be applied only if the requirements of a known and
measurable change are satisfied. 
Specifically, OPC urges that the abnormal weather must be known with
certainty and the impact upon revenues must be measured with accuracy and
reliability.  In past proceedings, the
Commission has relied on the following criteria for deciding whether to apply a
weather normalization adjustment:

 

1.                                       whether the Company consistently and
typically adjusts for weather in setting rates;

 

2.                                       given that normal weather is a range of
values, whether the test year temperatures fall sufficiently outside that range
as to be abnormal; and,

 

3.                                       whether the relationship between weather and
electricity demand can be measured accurately.(107)

 

In this instance, OPC argues
that Cap Rock has not specifically demonstrated that test year weather was so
far outside the ranges of normal values that it should be considered
abnormal.  OPC also argues that Cap Rock
has not demonstrated that it has consistently normalized sales for weather when
rates have been set in the past. 
Finally, OPC argues that Cap Rock has not demonstrated that its model
for estimating the impact of weather upon sales is accurate and reliable.

 

After considering the
evidence, the ALJs conclude that Cap Rock has not adequately supported its
weather normalization adjustments to revenues and purchased power
expenses.  Therefore, the ALJs recommend
removal of these adjustments.

 

(107)       Application
of El Paso Electric Company to Change Rates, Docket No. 5700, 10 PUC
Bull. 1071, 1139 (1984). The hearing examiners relied on these factors in
making their recommendation and the Commission adopted the hearing examiners’
determination.  In this case, the ALJs
find the factors appropriate for use in determining a weather normalization
adjustment.

 

65

 

Cap Rock’s expert witness
concedes that he did not perform a multiple regression analysis and did not
take into account the impact of price elasticity or household income on
consumption, but instead examined the
relationship of only two variables: 
weather (cooling and heating degree days) and per customer usage.(108)  As Dr. Gaske indicated, his was a “fairly
simple study.”(109)  Dr. Gaske has no idea whether the penetration
of space heaters and air conditioning had changed in Cap Rock’s service
territory over the thirty year period of weather data he used, nor has he
performed an analysis to determine whether recognizing changes in the
prevalence of air conditioning and space heaters over time would have altered
the correlation results he calculated in his study.(110)  While
it may not be necessary to conduct a detailed analysis of these or other
factors, it is incumbent on the party seeking to implement the weather
normalization adjustment to show that the analysis adequately accounts for all
necessary factors.  This may be shown by
an analysis that includes factors that may impact electric usage in different
weather conditions or by persuasive evidence indicating why additional factors
would not impact the analysis.(111)  In this case, Cap Rock’s witness,
Dr. Gaske, provided neither.

 

(108)       Tr. Vol. 3, at 598.

 

(109)       Tr. Vol. 3, at 600.

 

(110)       Tr. Vol. 3, at 599-600.

 

(111)       In the El
Paso Electric case, cited above, a weather adjustment was not
implemented based, in part, on evidence that the modeling the relationship
between weather and electricity use “requires an examination through time of
all the factors which determine electricity use,” which in turn requires a
sufficient historical record “to statistically determine that relationship not
only with respect to weather but also with respect to prices, income, and
industrial development and other causally related factors.” Application
of El Paso Electric Co., supra. 
As noted there, the omission of relevant factors from the analysis could
bias the coefficients upon which any adjustment is based.  In other cases, the Commission has rejected
the application of a weather normalization adjustment if the methodology was
insufficient to accurately measure causality.  Application of Texas Power & Light Co., Docket
No. 3006, 5 PUC Bull. 609 (1980); Application
of McDade Estates Water Dept., Docket No. 3742, 7 PUC Bull. 396
(1981).

 

66

 

Cap Rock argues that its method is the best available and, in
the absence of a more reliable model, is more accurate than simply removing the
weather normalization adjustment.  The
ALJs disagree with this approach.  First,
the ALJs do not believe that a weather normalization adjustment is necessary in
every case.  Rather, it should be used
only if the weather pattern in the test year is genuinely outside of a normal
range.  Second, it is the burden of the
party seeking the weather normalization adjustment to establish that the
adjustment is warranted by the evidence. 
As noted above, Dr. Gaske’s analysis is simple and does not adequately account
for other factors that may impact electric usage due to weather differences.

 

Further, Dr. Gaske’s analysis results in some apparently
inconsistent results.  Dr. Gaske conceded
that he used the same weather information for the entire Cap Rock system and
did not perform separate a separate weather normalization analysis for the
McCulloch division.  Despite this,
utilizing the exact same weather data, Dr. Gaske’s model showed that in the
test year months of July, August, and September, weather caused McCulloch
residential customers to use less electricity than normal while other Cap Rock
residential customers used more electricity than normal.(112)  In other words, the adjustment was positive
for the McCulloch residential sales at the same time that the adjustment for
the remaining majority of residential customers’ sales was negative.  There is no evidence to indicate that the
usage characteristics of the two groups of residential customers are
dissimilar—and, in fact, Cap Rock has presumed a similarity in usage
characteristics between these customer groups in the development of its load
data for cost allocation purposes.  Dr.
Gaske had no explanation for this inconsistency in his model results.(113)

 

Cap Rock argues that the results are different for the two
groups because different weather normalization factors were used for them (i.e., McCulloch residential customers 

 

(112)       Tr. Vol. 3, at 601-603.  

 

(113)       Tr. Vol. 3, at 603. 

 

67

 

versus all
other Cap Rock residential customers). 
It is true that Dr. Gaske’s workpapers show different weather
normalization factors being used,(114) but there is no explanation for why the factors are different,
particularly given that Dr. Gaske used the same weather data and conducted no
separate analysis for the McCulloch division. 
On the witness stand, Dr. Gaske could not explain these
differences.  This discrepancy raises
doubts about the validity of Cap Rock’s weather normalization adjustments.

 

(114)       Cap Rock Ex. 12, schedules WP/O-1.2/0.5
and WP/O-1.2/0.6.  

 

68

 

Further, the evidence is not clear in showing that Cap Rock
has uniformly applied weather normalization adjustments in establishing rates
in the past, nor that the weather during the test year is sufficiently beyond a
normal range of weather values so as to be “abnormal” and to justify a weather
normalization adjustment.  For all of the
reasons identified above, the ALJs conclude that Cap Rock has not sufficiently
supported its request to make a weather normalization adjustment.  Accordingly, its reduction of revenues by
$516,046 and its reduction of purchased power expenses by $409,110 should be
removed from the calculations (i.e.,
those amounts should be added back in to the respective categories).

 

4.                                      Unbilled Revenues (Billing
Reconciliation)

 

During the hearing, Cap Rock
agreed that adjustments were necessary to remove the impact of unbilled
revenues that were included in the PCRF calculation.  Accordingly, Cap Rock removed ($463,857) from
the corrected test year revenues to remove the impact of the PCRF in the test
year (i.e., Cap Rock made a
positive adjustment to revenues in the amount of $463,857 to offset the
existing negative entry for unbilled revenues). 
In closing arguments, no parties have challenged this adjustment.  After considering the evidence in the record,
the ALJs conclude that this adjustment is appropriate and Cap Rock’s revenues
should be revised accordingly.

 

5.                                      Change in Accounting Principle

 

Cap Rock began recognizing sales revenues on an accrual basis
in March 2003.  As part of the journal
entries to recognize this change in accounting principle, Cap Rock made an
entry to the PCRF balance.(115)  The journal entry to recognize
this accounting change resulted in increasing purchased power expense and
recording a liability for the power cost 

 

(115)       Cap Rock Ex. 303, at 26.  

 

69

 

recovery
amount.(116)  Because the PCRF calculation is determined on
a calendar month basis, it is necessary to remove the effect of this one-time
accounting change.  The purpose of making
this unbilled adjustment is to synchronize the booked revenues with the booked
expenses.  This adjustment reduces
purchased power expenses and the power cost recovery balance by $1,289,553.(117)  In closing arguments, no parties have challenged this adjustment.  After considering the evidence in the record,
the ALJs conclude that this adjustment is appropriate and Cap Rock’s revenues
should be revised accordingly.

 

6.                                      Cotton Gins

 

During the hearing, Cap Rock
reduced its revenues by $239,203 to reflect the loss of load associated with
the loss of two cotton gin customers.  In
closing arguments, no parties have challenged this adjustment.  After considering the evidence in the record,
the ALJs conclude that this adjustment is appropriate and Cap Rock’s revenues
should be revised accordingly.

 

(116)       Cap Rock Ex. 303, at 26.

 

(117)       Cap Rock Ex. 303, at 26.  It is not entirely clear to the ALJs, but the
parties’ agreement that the PCRF balance be set to zero, discussed under the
rate design portion of this PFD, may nullify the need for the portion of this
adjustment related to the power cost recovery balance.

 

70

 

7.                                      Unbilled Meters

 

Greenville’s expert witness, Mr. Arndt, identified more
than 200 unbilled meters served by Cap Rock. 
In his prefiled testimony, he did not make a direct recommendation for
an adjustment for these unbilled meters. 
However, he indicated that if Cap Rock did not adequately address these
unbilled meters in its rebuttal testimony, he would recommend an imputed
revenue adjustment of $3,037,010.  Cap
Rock’s witness, Mr. Rainey, discussed in his rebuttal testimony what the
unbilled meters represent and provided an explanation as to why it is not
necessary to include any revenues from these meters.  Specifically, Mr. Rainey explained that Cap Rock read the individual meters of
certain oil-pumping loads, entered these in Revenue Class 9, and then
transferred the total consumption of these meters to rate code 679 for billing
purposes.(118)  So,
in actuality, the services were billed. 
In closing arguments, Greenville did not include any recommendation for
an adjustment and, therefore, it is assumed that the city is not making such a
request at this time.  The ALJs have
considered Mr. Rainey’s explanation of the unbilled meters, find it adequate,
and make no recommendation for an adjustment for unbilled meters.

 

8.                                      Negotiated Rates

 

Greenville challenges Cap
Rock’s use of negotiated rates for certain customers.  Specifically, Greenville asserts that Cap
Rock has improperly negotiated special rates for certain commercial or
industrial consumers (identified in Greenville Ex. 1, confidential attachment
MLA-9) and that such rates are not the subject of a written contract or filed
tariff, allegedly in violation of the Commission’s rules.  Because of this, Greenville asserts that the
Commission should impute to Cap Rock additional revenues of $263,000 (which
represents the difference between the negotiated rates and the standard rates
the customers allegedly would have paid otherwise).

 

Cap Rock responds by
pointing out that it is not seeking to include any negotiated rates in 

 

(118)       Cap Rock Ex. 303, at 28-29. 

 

71

 

this rate case and notes that its expert
witness, Dr. Gaske, made the appropriate adjustments to remove the effects of
the discounted rates from the relevant rate codes going forward.  Cap Rock argues that, because it is not
proposing any negotiated or discounted rates for the future, imputing revenues
going forward would be inequitable. 
Greenville disagrees and asserts that Cap Rock is missing the
point.  Because Cap Rock is going to
discontinue its existing negotiated or discounted rates in the future, its
revenues will be higher from those customers who were formerly paying
discounted rates.(119)  As such, to
correctly show this revenue increase going forward, the test-year revenues need
to be adjusted upward through the use of imputed revenues designed to show what
revenues would have been if discounted rates not been used during the test
year.  Only through the use of such imputed
revenues will the effect of the discounted rates during the test year be
corrected.

 

(119)       As seen later in this PFD, the ALJs are
recommending that Cap Rock’s proposed rates to one of its rate classes be
treated as a discounted rate going forward. 
However, the ALJs recommendation is forward-looking and requires no
imputation for past revenues.

 

72

The
ALJs agree with Greenville and conclude that an adjustment should be made for
revenues lost through improper negotiated or discounted rates during the test
year.  As Greenville correctly points
out, by not using discounted rates going forward, Cap Rock will have higher
revenues regardless of any overall rate increase.  An adjustment must be made to test year
revenues to show the positive effect that removing negotiated or discount rates
will have.  Otherwise, the projection of
revenues will be under-calculated. 
Therefore, the ALJs recommend that Mr. Arndt’s calculation of $263,000
in imputed revenues be used,(120) and that this
imputed amount be added to Cap Rock’s revenues during the test year.

 

9.                                      Other Imputation of Revenues

 

In
addition to the imputation of revenues discussed above, OPC also argues that an
additional $743,670 should be imputed in revenues in regard to rate codes 665
and 597.  Cap Rock has proposed to
replace these two interruptible rates with a Load Management Rider, which will
result in a credit to certain customers who qualify.  OPC indicated that it could not initially
determine to which rate schedules these customers had been shifted and whether
they would be paying full standard rates. 
OPC argues that, if such customers are not paying full standard rates
without any credits, then there should be a revenue imputation of
$743,670.  OPC argues that this is
required under PURA § 36.007, which allows discounted rates but also requires
that the Commission “ensure that the electric utility’s allocable costs of
serving customers paying discounted rates under this section are not borne by
the utility’s other customers.”(121) 
Therefore, to ensure that other customers do not pay the costs
associated with providing service to these possibly discounted interruptible
customers, OPC asserts that revenues 

 

(120)       OPC
witness Clarence Johnson calculated an adjustment of $283,000 related to
negotiated and discounted rates.  Neither
he nor Mr. Arndt were questioned about the difference
between their numbers and the ALJs are uncertain as to the reason for their
different calculations, which do not appear to be merely a typographical error. 
Because Mr. Johnson’s testimony regarding this calculation focused
significantly on the discounts given to inside-city customers, it is possible
that he included in his calculations some customers who were not considered by
Mr. Arndt.  Absent a clear explanation by
the parties, the ALJs rely on Mr. Arndt’s calculations.

 

(121)       PURA § 36.007(d).

 

73

 

should be imputed for any discounts or credits
given to them.

 

Cap
Rock responds by asserting the Load Management Rider is not a discounted rate,
but simply a pass-through of a discount that Cap Rock receives from Southwestern
Public Service Company (SPS) in relation to interruptible loads.  As such, Cap Rock asserts there is no basis
to impute revenues for this pass-through. 
Cap Rock argues that it would be improper for other customers to benefit
from the Load Management Rider credit when it is directly attributable to
interruptible loads and the customers with those interruptible loads can be
determined.  As such, only those
interruptible customers should get the benefit of the discount and Cap Rock has
calculated the Load Management Rider in such a way as to simply pass the
discount through to them.  Therefore, Cap
Rock asserts it is inappropriate and inequitable to impute revenues for the
benefit of other customers for this credit.

 

The
ALJs recommend that no revenues be imputed for the former rate codes 665 and
597, which are being replaced with a Load Management Rider.  Even OPC’s expert witness indicated that he
would not recommend at this time that the Load Management Rider be deemed a
discounted rate.  Rather, he thought that
the matter could be reviewed in a later proceeding when it could be determined
whether it was actually a discounted rate.(122)  As it is designed—as a $1.85 per kW credit
for interruptible loads—the Load Management Rider credit is simply a pass-through
of the credit given by Cap Rock’s power supplier, SPS.  It is not a discount that Cap Rock elects to
give to a select group based on competitive concerns, etc.  Rather, it is simply a direct attribution of
a benefit achieved by the interruptible customers’ choice to accept
interruptible loads.  Those customers who
generate the credit should also receive the credit, and a decision to impute
revenues for the credit would benefit non-interruptible customers, which the ALJs
conclude is not the most appropriate resolution.  Therefore, the ALJs do not recommend the
imputation of $743,670 in revenues as requested by OPC.

 

(122)       OPC Ex. 3, at 13-14.

 

74

 

B.                                    Other Revenue

 

During
the test year, Cap Rock had other test year
revenues of $4,854,400.  It has made
adjustments to reduce these revenues by $4,531,700 for the reasons discussed
below.(123)    In closing arguments, no parties
have challenged these adjustments.  After
considering the evidence in the record, the ALJs conclude that these
adjustments are appropriate and Cap Rock’s revenues should be revised
accordingly.

 

1.                                      2001 NewCorp True-up

 

Cap Rock has made certain adjustments reflecting the
end of non-recurring surcharges related to transactions between Cap Rock and
NewCorp.  In total, Cap Rock removed
$2,184,118 from other revenues to recognize the end of amortizing the deferred
revenues associated with three non-recurring surcharges that were collected
over a 24-month period beginning in January 2002:(124)

 

•                                          The first surcharge was for
collection of NewCorp’s under-recovery from Cap Rock for costs during the
period from 1995 through 2000.  Although
NewCorp’s Wholesale Power (WP) tariff permitted
implementation of a surcharge/refund for the under/over-collection of charges,
NewCorp had not trued-up its charges prior to January 2002.  At that time, NewCorp proposed to include a
true-up based on the balance as of the year 2000.  The one-time true-up charge for that time
period was $1,251,913.(125)  Half of this amount was amortized during the
test year and is reflected on Cap Rock’s books as other revenue.

 

•                                          The second surcharge was for
the true-up of under-recovered costs of $1,604,970 for the calendar year 2001.

 

(123)       Cap Rock Ex. 303, Schedule JWR-R-2,
page 3.  

 

(124)       Cap
Rock Ex. 4, at 22.

 

(125)       Cap
Rock Ex. 303, at 23-24.

 

75

 

•                                          The final surcharge was
associated with the billing of hedging losses sustained by NewCorp during
2001.  These losses amounted to
$1,506,910.

 

Thus, a total of $4,363,793 was amortized over a 24-month
period beginning in January 2002 and ending in December 2003.  Approximately $2,184,100 was amortized during
the test year.  This amount is
non-recurring and should not be included in Cap Rock’s revenues for the purpose
of setting its prospective rates.  Thus,
Cap Rock removed that amount from test year revenues.(126)

 

2.                                      Change in Accounting
Principle

 

Cap Rock proposes to remove $2,335,000 as Accrued
Utility Revenues, as shown on Schedule JWR-R-5.(127)  As discussed above, in 2003, Cap Rock changed
from an as-billed to an accrual-based accounting method as required by
Generally Accepted Accounting Principles.(128)  Because of this, an adjustment to
Cap Rock’s books was necessary to synchronize the difference between per-book
expenses and per-book revenues after implementation of the new accounting
method.(129)  Cap Rock made this one-time entry in March
2003, and thereafter has been making monthly entries to reverse the prior month’s
accrual and record the current month’s accrual. 
This appropriately recognizes revenues as earned, not billed.

 

For ratemaking purposes, it is necessary to recognize
the net change between the accrual included in the first month of the test
period with the accrual made in the last month of the test period.(130)  Thus, Cap Rock calculated an accrual for
September 2002 that represents the impact of unbilled sales, which would have
been recognized if the accrual 

 

(126)       Cap Rock Ex. 303, Schedule JWR-R-4.

 

(127)       Cap Rock Ex. 303, Schedule
JWR-R-5.

 

(128)       Cap Rock Ex. 8, Schedule A-3, at
5.

 

(129)       Cap
Rock Ex. 303, at 33. 

 

(130)       Cap
Rock Ex. 303, at 33.

 

76

 

method had been in place.  In this manner, the revenues for the test
year will reflect one year’s worth of revenues on an accrual basis.(131)

 

(131)       Cap
Rock Ex. 303, at 33.

 

77

 

No parties disputed Cap Rock’s adjustment in their
closing briefing, although Greenville’s expert witness Michael Arndt suggested
in prefiled testimony that the amount should be amortized over two years
instead of having the adjustment made all at once.(132)  He asserted that this is necessary “so that
ratepayers receive some benefit from the change to unbilled revenue accounting.”(133)  As Cap Rock points
out in its closing briefing, Mr. Arndt’s proposal reflects a basic
misunderstanding of the adjustment that was made.  Mr. Arndt’s testimony presumes that Cap Rock
had an increase in revenues in the amount of $2,657,659, resulting from the
change in accounting principles.  This is
incorrect.  Rather, the adjustment is
simply an accounting entry designed to reflect the correct actual revenue
amount for the test year in light of the change in accounting method.  It would be inappropriate to amortize an
accounting adjustment like this and there is no logical basis for doing
so.  No parties raised any other challenges
to Cap Rock’s adjustment and, therefore, the ALJs find it appropriate to make
this adjustment to ensure that test year revenues are not overstated.

 

3.                                      Reclassification of Other
Revenues

 

Cap
Rock made two additional adjustments in
regard to other sales revenues. 
Specifically, for two items Cap Rock found it appropriate to reclassify
revenues shown as “Other Sales Revenues” to “Other Operating Revenues.”  The net result for these two adjustments is
that other sales revenues are reduced by $12,600.  In closing arguments, no parties
have challenged these adjustments.  After
considering the evidence in the record, the ALJs conclude that these
adjustments are appropriate and Cap Rock’s revenues should be revised
accordingly.  The two adjustments are
identified below.

 

(132)       Greenville Ex. 1, at 43.  

 

(133)       Greenville Ex. 1, at 43.

 

78

 

a.                                       Street Lighting Rental
Revenues

 

Cap Rock removed $24,651 in street lighting rental
fees from other sales revenues and reclassified these revenues as Other
Operating Revenues, Account 454.

 

b.                                       Late Payment Fees/Connection
Fees

 

Cap Rock also took late payment and connection fee
entries that were booked under sales revenues and reclassified them to “Other
Operating Revenues.”  Specifically, Cap
Rock reduced revenues by ($12,045) for adjustments (refunds) to customers’
bills for late payment penalties and/or connection fees that should be booked
in Account 451.  The net result of this
adjustment and the adjustment to street lighting rental revenues discussed
immediately above is $12,600, which is removed from “Other Sales Revenues” and
booked to “Other Operating Revenues.”

 

C.                                    Other Operating Revenues

 

1.                                      Reconnection and Late
Payment Fees

 

This
is the adjustment discussed under Section VI.B.4.b above.  Cap Rock reclassified
revenues associated with reconnection and late payment fees from “Other Sales
Revenues” and placed those revenues under “Other Operating Revenues.”  This is an addition to test year revenues in
Account 451 of ($12,045).  This
adjustment/reclassification amounts to a non-recurring reduction in Other
Operating Revenues of $12,045.

 

2.                                      Street Lighting

 

This
is the adjustment discussed under Section VI.B.4.a above.  Cap Rock reclassified
revenues associated with street lighting rental fees from “Other Sales Revenues”
and placed those revenues under “Other Operating Revenues.”  This is an addition of $24,651 to test year
revenues in Account 456.

 

79

 

3.                                      Discontinued Late Payment
Fees

 

Cap
Rock has made an adjustment resulting in a
reduction to Account 451, Late Payment Fees, in the amount of $397,500 to
reflect the discontinuance of late payment fees.  Pursuant to Commission rules, late payment
fees imposed on residential customers are prohibited.  As a result, Cap Rock proposes to discontinue
imposing such fees and makes a corresponding adjustment to its revenues.(134)  In closing
arguments, no parties have challenged this adjustment.  After considering the evidence in the record,
the ALJs conclude that this adjustment is appropriate and Cap Rock’s revenues
should be revised accordingly.

 

4.                                      Capital Credits

 

As
discussed previously, OPC argues that the Commission should impute revenues to
Cap Rock for its capital credits in NewCorp. 
The ALJs reject this request and decline to recommend such an adjustment
to the Commission.  For a more detailed
discussion of this issue, see Section IV.L of this PFD.

 

(134)       Late
payment penalties are the subject of a separate PUC docket, Docket No.
30215.  Thus, only issues concerning the
appropriateness of Cap Rock’s adjustment to remove these from revenues should
be addressed here.  

 

80

 

VII.  PURCHASED
POWER EXPENSES

 

As
revised at the hearing, Cap Rock calculated purchased power expenses of
$44,459,618 during the test year.  Cap
Rock further calculated numerous adjustments which reduced overall purchased
power expenses to $37,812,500.  Many of
these adjustments are not disputed and, therefore, are not addressed here.  Based on the ALJs’ earlier determination that
Cap Rock has not sufficiently justified a weather normalization adjustment, the
ALJs recommend that Cap Rock’s proposed reduction of $409,110 for weather
normalization not be made, so this amount should be
added back into purchased power expenses. 
The other disputed matters regarding purchased power expenses are
discussed in detail below.

 

The
bulk of Cap Rock’s purchased power expenses during the test year are
attributable to its purchases from NewCorp. 
During the test year, NewCorp purchased power from SPS and resold it
along with NewCorp’s transmission services to Cap Rock.  NewCorp has since assigned to Cap Rock its
purchased power contract with SPS, so Cap Rock now acquires much of its
purchased power directly from SPS.  Cap
Rock still pays NewCorp $9 million per year, though, for transmission services
under NewCorp’s Open Access Transmission Tariff (OATT).  The intervenors note that this $9 million
figure is the same amount that Cap Rock paid annually for unbundled
transmission services under NewCorp’s former WP tariff.  That $9 million figure was paid in the amount
of $750,000 per month.  During the test
year when such payments were being made under the former WP tariff, NewCorp was
making monthly capital lease payments in the amount of $620,000 for its
transmission system.  Therefore, of the
$750,000 received per month by NewCorp from Cap Rock for transmission services,
NewCorp turned around and paid out $620,000 to a third party for lease payments
on its transmission system.

 

Because
the debt for the transmission system has been refinanced, NewCorp no longer
makes those capital lease payments. 
Therefore, the intervenors argue that Cap Rock should not still be
paying $750,000 per month for transmission service when more than $620,000 of
NewCorp’s underlying costs for the transmission service have
gone away.  Given this fact, the
intervenors assert that it is imprudent for Cap Rock to not challenge the
transmission rates it is paying to NewCorp.

 

Also,
because NewCorp is now providing unbundled transmission service to Cap Rock 

 

81

 

and
not reselling purchased power from SPS, Greenville points out that the
transmission costs paid to NewCorp should not be booked under purchased power
but should rather be booked into FERC Account 565, which includes amounts
payable to others for transmission of the utility’s electricity over
transmission facilities owned by others.(135) 
Therefore, Greenville asserts that purchased power costs should be
reduced by $9 million and this amount (or whatever lesser amount is deemed
appropriate in response to the intervenors challenge to the $9 million annual
payment) should be included elsewhere under transmission costs.(136)

 

Cap
Rock responds by pointing out that the $9 million paid annually to NewCorp for
transmission service is paid pursuant to the OATT, a FERC-approved tariff.  Cap Rock contends that the transmission
charges in issue are regulated by and under the exclusive jurisdiction of
FERC.  Under principles of federal
preemption and the filed rate doctrine, Cap Rock asserts that the Commission
cannot review or disallow transmission charges under the OATT.  Cap Rock cites to language from a recent
decision where the United States Supreme Court stated “[t]he filed rate
doctrine requires ‘that interstate power rates filed with FERC or fixed by FERC
must be given binding effect by state utility commissions determining
intrastate rates.’”(137)

 

Cap
Rock notes that there is no dispute that NewCorp provides transmission service
to Cap Rock and that such service is necessary for delivery of the essential
power that Cap Rock purchases now from SPS. 
The only dispute is the amount of the charges for such service.  But, because such charges are set by the
FERC-approved tariff, Cap Rock contends that the Commission has no authority to
adjust that amount.

 

(135)       18
C.F.R. Part 101, Account No. 565 (April 1, 2004).

 

(136)       This change is essentially an accounting issue and does not
directly impact Cap Rock’s ability to recover the costs.

 

(137)       Entergy
Louisiana, Inc. v. Louisiana Pub. Serv.
Comm’n, 539 U.S. 39, 40 (2003).

 

82

 

The
evidence clearly establishes certain facts. 
First, under both the WP tariff and the current OATT, Cap Rock has
consistently paid NewCorp approximately $750,000 per month for transmission
service.  Since the test year, NewCorp
has refinanced a loan which previously required it to pay $620,000 per month as
a capital lease payment for its transmission system.  It paid off the original loan by taking out
another loan, in the amount of approximately $14 million, from a different
lender.  It secured this second loan
using collateral consisting of $8.2 million from a sinking fund designed for
the purpose of paying off the transmission lease and a $6 million loan from Cap
Rock.(138)

 

At
first blush, then, it would appear that Cap Rock’s continued transmission
payments in the amount of $750,000 per month (when NewCorp is no longer making
$620,000 capital lease payments) may be excessive and might provide NewCorp
with a windfall.  However, what is not
clear is the amount of expenses incurred by NewCorp for providing transmission
service to Cap Rock.  There is some
evidence in the record indicating that the annual $9 million payments may not
have been sufficient to cover the actual transmission expenses in the past,
which may have reached $12 million per year.(139)  Cap Rock and NewCorp had agreed upon the $9
million as a proxy for actual costs, with the understanding that actual costs
would later be reconciled.  Further,
although the original capital lease payments are no longer being made, the debt
underlying them has not actually disappeared but has simply been refinanced.  So, although the original loan was retired,
NewCorp continues to owe millions for the underlying transmission system and
presumably is required to make some amount in monthly payments servicing this
loan.  Ultimately, the record simply does
not clearly establish that NewCorp is currently receiving a windfall from the
$9 million annual transmission payments. 
Even if it did, the Commission is still confronted with the clear
precedent of the filed rate doctrine, which limits the Commission’s authority
to modify rates that have been previously approved by FERC and are contained in
a lawfully-approved tariff.

 

(138)       The loan process and structure can be difficult to follow
and understand.  Essentially, NewCorp has
$14 million in cash or cash equivalents in short term investments earning
approximately 1% per year.  This money is
comprised of $8.2 million in cash taken from a sinking fund and a $6 million
loan from Cap Rock.  This combined $14
million is used as collateral for a $14 million loan (with an interest rate of
approximately 10.75%) from Beal Bank, which was used to pay off the final
balloon payment on the original transmission system loan.  One could dispute the prudence of paying
10.75% interest on $14 million while holding $14 million in cash or cash
equivalents earning 1%, but that is not the issue here.  Further, the $14 million in collateral is
ultimately intended to secure a larger loan from Beal Bank.

 

(139)       Tr. Vol. 1, at 118 and 120.

 

83

 

In
this case, the filed rate doctrine entitles Cap Rock, at a minimum, to a
presumption of reasonableness on the rates charged under the OATT.  Even if the Commission has discretion to
disregard these rates and limit Cap Rock’s recovery for the transmission
charges it pays to NewCorp, the evidence in the record is not sufficient to
justify such an action.(140)

 

Some
intervenors have requested an alternative remedy, suggesting that the
Commission has authority to require either its Staff or Cap Rock to initiate an
action at FERC to review the transmission rates charged by NewCorp to Cap
Rock.  Cap Rock argues that the
Commission has no such authority.  To the
extent the Commission’s Staff has legal authority to initiate a review with
FERC of NewCorp’s rates, then it would be appropriate
for the Commission to have them do so to ensure that NewCorp is not obtaining a
windfall at the expense of Cap Rock’s ratepayers.

 

However,
the ALJs have concerns about the Commission’s ability to practically and
effectively require Cap Rock to initiate a review at FERC.  The ALJs are unaware of a process that would
ensure that Cap Rock actually pursued such a proceeding in good faith after it
was initiated.  Moreover, if Cap Rock
initiated such a proceeding and did not pursue it in good faith, there exists
the possibility (as exists generally in non-adversarial proceedings) that a
FERC decision could be unfairly favorable toward NewCorp’s rates if Cap Rock
did not pursue the matter as diligently as would a truly adverse party.  Moreover, a FERC proceeding initiated by Cap
Rock would also likely result in additional legal expenses by Cap Rock that
would be borne by ratepayers.

 

(140)       The
ALJs are inclined to agree with Cap Rock that the filed rate doctrine precludes
the Commission from disregarding the rates established by the FERC-approved
tariff.  At a minimum, the filed rate
doctrine creates a presumption of reasonableness of the tariff rates and the
record evidence is not sufficient to overcome such a presumption and show that
the rates are unreasonable and, therefore, imprudent for Cap Rock to pay.

 

84

 

On
the other hand, a review initiated by Staff or other third parties should not
require Cap Rock to participate in any meaningful way and would save ratepayers
unneeded expense.(141)  If Cap Rock chose
to participate and acted contrary to its ratepayers’ interests by supporting
NewCorp’s rates, then Cap Rock’s legal expenses could be disallowed later as
imprudent.  Further, if the Commission
requires a management audit of Cap Rock, as requested by Staff and addressed
separately in this PFD, then such an audit can include a review of Cap Rock’s
purchased power expenses and a more detailed determination of the
reasonableness of such costs.  But, at
this time, the ALJs do not recommend that the payments to NewCorp under the
OATT be disallowed or reduced.  However,
the ALJs agree with Greenville’s assertion that, under the existing
circumstances where Cap Rock purchases power directly from SPS and obtains only
transmission service from NewCorp, the charges by NewCorp should be booked not
under purchased power but as transmission costs under FERC Account No. 565.

 

VIII.  OPERATING AND MAINTENANCE EXPENSES

 

At
issue in this case are O&M expenses that Cap Rock seeks for outside
services, the Delinea computer support and maintenance contract, compensation
and benefits, plant reclassification, expenses incurred as a result of
operating as a publicly-traded company, right-of-way fees, and materials and
supplies.  These items are addressed
below.

 

A.                                    Acquisition and Expansion
Costs

 

Cap
Rock removed expenses associated with the proposed acquisition of Lamar
Electric Cooperative from its test year cost of service.(142)  This resulted in a reduction of $1,357,000 to
O&M expenses.  In closing arguments, none
of the other parties have contested Cap Rock’s 

 

(141)       The
ALJs are not aware of federal law on this issue and do not know whether Cap
Rock’s customers have standing to initiate a complaint at FERC.  If they do, then they are the parties that
should be pursuing a FERC challenge to NewCorp’s rates. The ALJs are aware that
an action brought By Staff ultimately involves a cost to taxpayers, but still
believe it to be better than simply requiring Cap Rock to initiate such a
proceeding. 

 

(142)       Cap
Rock Ex. 4, at 24.

 

85

 

adjustment. 
Therefore, the ALJs find that Cap Rock’s adjustment to O&M expenses
to remove the Lamar acquisition costs is appropriate.

 

B.                                    Outside Services and Other
Disputed Costs

 

1.                                      Lobbying expenses

 

In
its direct case, Cap Rock reported it paid $194,000 to lobbyists.  Of that $194,000, Cap Rock removed $42,500 of
costs related to legislative advocacy.(143) 
Various expert witnesses for Staff and intervenors have recommended
disallowing the remaining $151,500 paid to lobbyists because of the Commission’s
rule prohibiting lobbying costs from being recovered from ratepayers.(144)  In its rebuttal case, Cap Rock removed the
remaining lobbying expenses from its request.(145)   Cap Rock removed the expenses because it
concluded that the costs had been recovered previously through a regulatory
surcharge, and if not removed would be double-recovered.  Although Staff and intervenors agree the
payments to lobbyists should be removed, they contend they should be removed
because legislative advocacy expenses may not be recovered in rates.(146)  Although the
parties cite different reasons for removing the total amount of lobbying
expenses from O&M expenses, the parties agree the expenses should be removed
and the ALJs support that conclusion.

 

(143)       Cap
Rock Ex. 4, at 24.  The Commission’s
rules prohibit the inclusion of legislative advocacy in rates.  P.U.C. SUBST. R. 25.23(b)(2).

 

(144)       Staff
Ex. 4, Luna Dir., at 6-9; Pioneer Ex. 1, Blumenthal Dir., at 49-53; TCGA Ex. 1,
Evans Dir. at 18.

 

(145)       Cap
Rock Ex. 303, at 47-48.

 

(146)       See P.U.C. Subst. R. 25.231(b)(2).

 

86

 

Greenville
asserts that a larger amount should be removed for lobbying costs: $198,304.25.(147)  The difference
between Cap Rock and Greenville’s number is the charge for Jill Warren at
Bracewell Patterson.  Greenville asserts
that Cap Rock paid more to Ms. Warren than Cap Rock claims. Greenville’s
evidence of a higher amount is a discovery response indicating total amounts
paid to different law firms.(148) 
However, Cap Rock’s exhibit indicates, and Mr. Rainey credibly
testified, that the total test year amount paid to Ms. Warren was the lesser
amount claimed by Cap Rock.(149)  The
ALJs decline to rely on the ambiguous discovery response and instead find that
the amount Cap Rock claims it paid Ms. Warren is accurate.(150)  Staff and Pioneer concur with Cap Rock that
$194,000 should be removed from Cap Rock’s O&M expenses, which is the total
amount Cap Rock removed in its rebuttal case. 
Therefore, the ALJs conclude that lobbying expenses in the total amount
of $194,000 should not be included in Cap Rock’s O&M expenses.

 

(147)                      Greenville’s Post-Hearing
Brief, at 90.

 

(148)                      Greenville Ex. 504, at Bates No. 009683.

 

(149)                      Cap Rock Ex. 8, at Schedule G-5.1a; Cap Rock
Ex. 303, at Schedule JWR-R-9.

 

(150)                      The reason for the discrepancy between the
$39,000 and $40,304.25 is unclear.

 

87

 

2.                                      Intervention Costs

 

In
addition to the $194,000 in lobbying expenses, Cap Rock removed $95,428 in
expenses for intervention costs.(151)  Mr. Rainey determined during an on-site
review that these expenses needed to be removed from O&M expenses because
they were already recovered through the regulatory surcharge.(152)  Cap Rock had booked some of the expenses to
Account No. 426.4 and some to 923.  Mr.
Rainey testified that the 426.4 account is below-the-line, so it does not
impact the revenue requirements and no adjustment is required.(153)  However, the amount included in the 923
account for outside expenses is $271,777. 
This amount needs to be removed in its entirety.(154)  Because Cap Rock only removed $176,349 in its
direct case, which included the $42,500 removed for lobbying,  Mr. Rainey removed another $95,428 to remove
the entire $271,777.  The $95,428 plus
the removal of an additional $151,500 for lobbying costs discussed above, totals
a reduction in O&M in the rebuttal case of $246,928 from the amount
originally excluded in the direct case. 
Staff concurs with Cap Rock.(155)

 

Pioneer
and Greenville assert that even with the removal of the additional $95,428, Cap
Rock has not removed all intervention costs from its O&M expenses.  Pioneer asserts that Cap Rock should further
remove $223,817 to include the total outside expenses.  Pioneer’s recommended adjustment is based on
Pioneer’s contention that the 43.705% allocation factor assigned for these
specific costs is not supported.  As
discussed below, the ALJs have found that the allocation factor is supported in
the record.

 

Greenville
requests an even larger adjustment than that requested by Pioneer.  Specifically, Greenville seeks an adjustment
in the amount of $311,605 to remove additional 

 

(151)       Cap
Rock Ex. 303, at 48.

 

(152)       Cap
Rock Ex. 303, at 38.

 

(153)       Cap
Rock Ex. 303, at 48.

 

(154)       Cap
Rock Ex. 303, at 48.

 

(155)       Staff Initial Brief, at 58. 
Staff’s concurrence is conditioned on the $95,428 actually reflecting
all intervention costs.

 

88

 

intervention expenses. 
Greenville’s proposed additional reduction includes the total amounts
booked in Account No. 426.4.(156)  As Mr.
Rainey testified, amounts in Account No. 426.4 do not need to be deducted from
O&M expenses because they are below-the-line and do not impact revenue
requirement.  Thus, Greenville’s proposed
reduction would result in deducting amounts that are not included in O&M
expenses.  Therefore, the ALJs find that
such an adjustment is not warranted. Rather, the ALJs conclude that Cap Rock’s
proposed reduction of $246,928 from the amount in the direct case is the amount
that should be removed from Cap Rock’s O&M expenses for intervention costs.

 

(156)       Greenville
Reply Brief, at 48-49.

 

89

 

3.                                       Mike McGregor Expenses

 

In
its rebuttal case, Cap Rock removed $21,911 from its cost of service for
expenses associated with services provided to Cap Rock by Mike
McGregor.(157)  Cap Rock proposes to
remove these because the services provided were non-recurring in nature.  Intervenors agree with this removal.  Therefore, the ALJs find that the removal of
$21,911 from Cap Rock’s cost of service for Mike McGregor’s expenses is
reasonable and that amount should be removed.

 

4.                                       Cook Yancey Firm

 

Farm
Bureau specifically objects to the inclusion of any Cook Yancey expenses in
cost of service.  Cap Rock removed the
Cook Yancey expenses from its cost of service in its rebuttal case.(158)  Therefore, an
additional adjustment is not needed for these expenses.

 

5.                                       New York Hotel Expenses

 

Cap
Rock spent $16,311 in hotel expenses for its 2002 annual meeting in New York.(159)  Greenville and
Pioneer specifically object to these costs in their briefs and assert that they
should not be included in cost of service. 
The ALJs agree.  This hotel bill
was for 19 rooms for three days in New York City during the time Cap Rock was
initially listed on a public stock exchange and occurred concurrent with its
annual shareholders’ meeting.  Cap Rock
is a small utility with its headquarters in Midland, Texas, far-removed from
New York.  Cap Rock has not had a
practice of having its annual meetings in New York, nor is there any
justifiable reason to have them there. 
Furthermore, the expense for the hotel is non-recurring.  As discussed above, the ALJs conclude that
Cap Rock’s management has made many poor decisions about how ratepayers’ money
should be spent, and this includes a boondoggle trip to New York for a large
number of people.  Because the hotel
expenses involved were neither reasonable, necessary, nor 

 

(157)       Cap
Rock Ex. 303, at 46.

 

(158)       Cap Rock Ex. 303, at 48, referring to
Schedule JWR-R-10.

 

(159)       TCGA/St.
Lawrence Ex. 184, at 4, 16,18-39.

 

90

 

recurring, the ALJs find that the cost of $16,311
should not be included in Cap Rock’s O&M expenses.

 

6.                                       Trips for Mr. Pruitt

 

Greenville
requests removal for the cost of trips for Cap Rock’s CEO, Mr. Pruitt, in the
total amount of $12,247.(160)  Mr. Pruitt
and his wife traveled to Bermuda; Scottsdale, Arizona; the Turks and Caicos
Islands; and Aspen, Colorado for “CEO Super PAC Meetings.”(161)  Cap Rock presented no persuasive evidence
that Mr. Pruitt’s trips to these meetings were either necessary or reasonable
for providing electric service to ratepayers. 
Therefore, the ALJs find that Cap Rock’s O&M expenses should be
reduced by $12,247 for the cost of these trips by Mr. Pruitt and his wife.

 

7.                                       Rick Terrill Expenses

 

Greenville
contends that Cap Rock’s legal expenses associated with work performed by Rick
Terrill should be disallowed.  Greenville
points out that Cap Rock’s invoices for Mr. Terrill’s time add up to only
$50,137.50, but Cap Rock has included $69,443 for test year expenses.  Greenville further contends that Cap Rock
failed to show whether Mr. Terrill’s services are reasonable and necessary for
the provision of electric service. 
Therefore, Greenville argues the entire amount should be excluded.

 

(160)       Greenville Ex. 147, at Bates Nos.
003130-003131, 003197-003198, 003283-003284, 003301.

 

(161)       Greenville Ex. 147.

 

91

 

Cap
Rock argues that only $30,680 is included in Cap Rock’s cost of service because
of the allocation of a portion of Mr. Terrill’s expenses to NewCorp.  There is no evidence in the record indicating
what Mr. Terrill’s services were during the test year.  Although Cap Rock asserts in its reply brief
that Mr. Terrill provides SEC advice to Cap Rock, that fact does not appear in
the record.(162) 
Mr. Terrill’s invoices do not indicate the type of legal work he
performed for the company; the invoices simply show the number of hours
multiplied by the hourly rate, plus expenses.(163)  Without any evidence supporting Mr. Terrill’s
expenses, the ALJs find that his expenses should be disallowed in their
entirety.  On Schedule JWR-R-10, Mr.
Terrill’s expenses are listed as $69,443.(164) 
When that number is multiplied by the allocation factor of .44179, as
was done for those expenses, it results in a total of $30,679.(165)  This is the amount that was allocated to Cap
Rock and the amount the ALJs find should be disallowed.

 

8.                                       Membership Dues

 

Greenville
contests the inclusion of $6,600 of dues for CEO memberships.(166)  Cap Rock argues this amount is allowed under
the Commission’s rules.  Cap Rock is
correct that up to .3% of the gross receipts of the utility may be spent on
advertising, contributions, and donations.(167) 
However, the expenses have to be reasonable and necessary, and must be
for services rendered to the public.(168) 
Cap Rock presented no evidence that the CEO’s club membership dues are 

 

(162)       Cap Rock’s Reply Brief, at 47.

 

(163)       Farm
Bureau Ex. 49.

 

(164)       Although
Greenville argues that the amount in the invoices from Rick Terrill shown in
Farm Bureau Ex. 49 total a number less than the $69,443, there is no evidence
in the record that Farm Bureau Ex. 49 is a complete copy of all of Mr.
Terrill’s invoices.

 

(165)       Cap
Rock Ex. 303, at Schedule JWR-R-10.

 

(166)       Greenville
Ex. 1, at 51; Cap Rock Ex. 8, at Schedule G-4.3b.

 

(167)       P.U.C.
SUBST. R. 25.231(b)(1)(E).

 

(168)       P.U.C.
SUBST. R. 25.231(b)(1)(E).

 

92

 

necessary to provide services to the public.  Furthermore, PURA and Commission rules
anticipate including advertising, charitable and civic contributions, not club
dues, which appear to benefit company executives rather than the
ratepayers.(169)  Therefore, the ALJs
find that $6,600 in CEO club dues should not be included in the cost of
service.(170)

 

(169)       PURA § 36.061(b)(1);
P.U.C. SUBST R. 25.231(b)(1)(E).

 

(170)       This is in addition to $16,060 in membership dues already
eliminated. Cap Rock Ex. 8, at Schedule G-4.3d.

 

93

 

9.                                      Apartment and Furniture
Rental

 

Pioneer
and Greenville contest $13,346 in apartment and furniture rental for Mr. Atkins
and Will West.  Cap Rock explains that
the cost is part of a recruiting package for those employees.(171)  The ALJs agree with Pioneer and Greenville
that the cost is not reasonable and should not be passed on to ratepayers.  If the cost is used as a one-time recruiting
incentive, it is a non-recurring expense, which cannot be recovered.  If the cost is intended as an ongoing part of
compensation (in the case of Mr. Atkins, for example) Cap Rock has not shown it
is a reasonable and necessary expense, and that Cap Rock could not recruit
qualified individuals as employees without this added incentive.  Nor did Cap Rock show that no qualified
individuals live in the Midland area. 
Therefore, the ALJs find that the cost for apartment and furniture
rental is not reasonable and should not be included in O&M expenses.

 

10.                               Private Plane Expense

 

Pioneer
and Greenville contest the $5,565 cost of leasing a private airplane to fly
from Midland to Austin twice.  Cap Rock
asserts that time constraints and limited air travel options from Midland made
the cost of leasing private aircraft reasonable and necessary.(172)  The ALJs disagree and find that this cost
should not be included in O&M expenses. 
Cap Rock leased the aircraft to fly people from Midland to Austin.  Both cities have commercial airports.  Cap Rock presented no evidence showing that
the cost to lease the private plane was less expensive than flying commercially
on one of the airlines that provide numerous daily flights between Midland and
Austin, or that commercial flights were simply unavailable at the time that the
trips were necessary.  The ALJs are
unconvinced by Mr. Atkins’ very conclusory statement that the expenses were
necessary because of time constraints and limited air travel options.  Therefore, the ALJs conclude that the private
plane cost should not be included in O&M expenses.

 

(171)       Cap
Rock Ex. 304, at 35.

 

(172)       Cap
Rock Ex. 300 at 25.

 

94

 

11.                               Vision Consulting

 

Pioneer
argues that the expenses related to Vision Consulting should be disallowed
because Vision Consulting provides consulting services related to purchased
power.  Since Cap Rock has transferred
its purchased power contracts to NewCorp, Pioneer contends that Cap Rock will
not incur Vision Energy consulting charges in the future.(173)  Cap Rock asserts that Vision Energy helps Cap
Rock (1) procure power contracts, (2) attend industry, Electric Reliability
Council of Texas (ERCOT), and SPP meetings, and (3) provides other
services.(174)  The ALJs find that Vision
Energy’s consultants’ fees are legitimate, recurring expenses for Cap
Rock.  Cap Rock uses Vision Energy
consultants not only for its purchased power contracts, but also for other
services.(175)  Furthermore, the expenses
for Vision Energy are on-going and will be incurred in subsequent years as well
as the test year.(176)  Thus, the ALJs
conclude that Vision Energy’s fees should be included in Cap Rock’s O&M
expenses.

 

(173)       Pioneer
Ex. 1, at 54-55.

 

(174)       Cap
Rock Ex. 303, at 45. 

 

(175)       Cap
Rock Ex. 303, at 45.

 

(176)       Cap
Rock Ex. 303, at 46.

 

95

 

12.                               Overhead Allocation Factor

 

Pioneer
contests Cap Rock’s decision to use 43.705% as the allocation factor in
allocating overhead, operations, maintenance and capital between Cap Rock and
NewCorp at the bottom of Schedule G-7.(177)  In that schedule, Cap Rock reviewed all of
its costs and determined which portion of the overall total was attributable to
Cap Rock and which portion was attributable to NewCorp.  It concluded that 43.705% of the total was
attributable to Cap Rock.  Then, it
removed non-recurring costs and multiplied the remaining balance by 43.705% to
determine the amount of recurring costs attributable to Cap Rock.(178)  Pioneer argues that Cap Rock has not
adequately explained why it determined that 43.705% of costs were attributable
to Cap Rock, whereas in other places Cap Rock has attributed 70% of the costs
to itself.  Because the allocation factor
used on Schedule G-7 is inconsistent with the allocation factor used to
allocate other costs, Pioneer argues that the entire amount reflected on
Schedule G-7 should be disallowed.  The
ALJs disagree and find that the use of a different allocation factor does not
make the data unreliable for inclusion in O&M expenses.

 

While
it is true that in regard to some overhead costs, Cap Rock attributed 70% of
costs to itself and 30% to NewCorp, that allocation was
based on a survey conducted by Cap Rock personnel in relation to the specific
costs in issue.  In regard to the items
on Schedule G-7, Cap Rock was able to perform a more precise analysis and allocation
of the expenses.  As Mr. Rainey
explained, Schedule G-7 has two columns of numbers.  The second column includes numbers for
recurring expenses only.  Those items
were included in the O&M expenses requested, and the non-recurring expenses
were not included.  After the recurring
expenses were totaled, Cap Rock reviewed the specific expenses and was able to
allocate them between NewCorp and Cap Rock. 
As a result of the allocation, 43.705% was apportioned to Cap Rock and
this factor was deemed appropriate to apply to the recurring
expenses.(179)  Based on Schedule G-7 and
Mr. Rainey’s additional adjustments, the total adjustment recommended by Mr.
Rainey is a reduction of 

 

(177)       Cap
Rock Ex. 8, Schedule G-7.

 

(178)       Cap
Rock Ex. 303, at 52-54.

 

(179)       Cap
Rock Ex. 303, at 53.

 

96

 

$271,777,
instead of the reduction included in the direct case.(180)  There is no indication in the record that the
43.705% allocation factor is inaccurate or improperly calculated.  Therefore, the ALJs find that Cap Rock met
its burden of proof to show that the allocation factor used in the schedule is
appropriate.  Thus, the ALJs do not agree
that the data is unreliable or that the entire amount on Schedule G-7 should be
disallowed.

 

(180)       Cap
Rock Ex. 303, at 54.

 

97

C.                                    Delinea Computer Support and
Maintenance Expenses

 

As analyzed in the
Intangible Plant (Computer) section under Invested Capital and Rate Base, the
ALJs recommend the disallowance of $1,648,320 for the annual costs associated
with the installation, implementation, and maintenance of the software and
support services for the Delinea System.

 

D.                                    Compensation and Benefits

 

1.                                      Labor and Benefits Increases

 

In its RFP, Cap Rock sought
a $752,907 increase over test year payroll costs.(181)  The proposed increase consisted of a $235,753
increase in life, long-term disability, and medical insurance costs and a
$517,154 increase in labor costs for a new employee and a cost of living
increase for all employees.  In its
rebuttal filing, the Company reduced the request by $175,000 to reflect the
capitalization of a portion of the request and allocation of a portion to
NewCorp.(182)  These adjustments reduced
the Company’s request from a total proposed increase of $752,907 to an increase
of $577,887.(183)  Pioneer asserts that the proposed adjustment is not
supported.(184) 
Greenville objects to the adjustment because Cap Rock allegedly has not
shown in Mr. Tucker’s rebuttal testimony that Cap Rock’s Board of Directors
have adopted the pay increase.(185)  Greenville also objects that the
proposed adjustment violates the matching

 

(181)       Cap Rock Ex. 4, at 25-26, Schedule A-3,
Adjustment 9.6; Pioneer Ex. 1, at 42; Staff Ex. 20, at 8.

 

(182)       Cap Rock Ex. 304, at 29, Schedule
GWT-R-2.

 

(183)       Cap Rock Ex. 304, at 29, Schedule
GWT-R-2.

 

(184)       Pioneer’s Brief on Merits, at 49.

 

(185)       Cap Rock’s Compensation Committee has
recommended the pay increase, but it may be predicated on whether Cap Rock
ultimately obtains additional financing through Beal Bank.

 

98

 

principle
by not considering all other post-test-period changes.(186)  Staff supports Cap Rock’s proposed adjustment.(187)  The ALJs find that Cap Rock’s requested
increase over test year payroll costs should be approved as requested in its
rebuttal case, except that the cost of living increase should be reduced from
the 7% proposed by Cap Rock and should be based instead on the cost of living
adjustment used by Social Security.

 

Cap Rock included a 7% cost
of living increase because its employees had not received cost of living
increases since 2001.(188)  This is significantly higher than the cost of
living adjustment used by Social Security, which was 1.4% in 2002 and 2.1% in
2003.  Cap Rock provided no support for
an increase in cost of living substantially greater than that provided by
Social Security.  Therefore, the ALJs
find that a 1.4% adjustment to cost of living for 2002 and a 2.1% adjustment to
cost of living for 2003 should be included as a post-test-year adjustment for
salaries.

 

With respect to the other
increases, such as insurance cost increases and new employee expenses, the ALJs
find that Cap Rock has met its burden to show that the increases are reasonable
post-test-year adjustments.  Cap Rock
showed that since the test year its expenses are known and measurable.(189)  Therefore, the ALJs conclude that the
post-test-year adjustments made to insurance costs and for the new employee
should be included in Cap Rock’s O&M expenses as outlined in Cap Rock’s
rebuttal case.

 

(186)       Greenville’s Post-Hearing Brief, at 98.

 

(187)       Staff’s Initial
Brief, at 51.

 

(188)       Cap Rock Ex. 304, at 28.

 

(189)       Cap
Rock Ex. 304, at Attachment GWT-R-3.

 

99

 

2.                                    Stock Awards

 

In its direct case, Cap Rock
proposed removing $1,085,200 in costs of stock awards and merit bonuses from
its requested cost of service.   The
parties agree that all of the stock awards and bonuses should be removed from
the cost of service.(190)   Cap Rock, in
its rebuttal case, submitted a corrected calculation of the adjustment in the
amount of $1,146,782 for stock
awards, plus $220,099 for merit bonuses. 
The correction was calculated by using the information provided in the
workpapers for Schedule G-1.5.(191)  The workpapers include the information for
the costs of stock awards to officers and directors who were not also
employees.  The original adjustment was
calculated using only the amount related to company employees but, on rebuttal,
Mr. Tucker revised the proposed adjustment to include the costs of the
stock awards to officers and directors who were not also employees.(192)

 

In addition, Greenville
contests two $39,001 bonuses paid to Mr. Pruitt and Mr. North during the test
year and argues that such amounts should also be excluded from the requested
cost of service.(193)  Cap Rock asserts
that no witness sponsored Greenville’s proposed adjustment and further asserts
that the first time Greenville raised the proposed adjustment was in its
brief.  Thus, Cap Rock contends that it
had no opportunity to rebut the proposed adjustment and, therefore, it should
not be adopted.  The ALJs agree with
Greenville and conclude that the additional $78,002 in bonuses paid to Mr.
North and Mr. Pruitt should be excluded. 
Cap Rock admitted that it intended to remove 100% of the costs of stock
awards and bonuses.(194)  The bonuses paid to Mr. Pruitt and Mr. North
should be included in the bonuses Cap Rock agrees should be removed from its
cost of service.  Therefore, the ALJs
find that the correct reduction in expenses for stock awards and merit bonuses
is $1,444,883 ($1,146,782 for stock awards, plus 

 

(190)       TCGA Ex. 1, at 21; Greenville Ex. 1, at
50-51; Staff Ex. 4, at 22-23.

 

(191)       Cap Rock Ex. 13, at WP/G-1.5/4.

 

(192)       Cap Rock Ex. 304, at 34.

 

(193)       Greenville’s Post-Hearing Brief, at 101

 

(194)       Cap Rock’s Post-Hearing Brief, at 69.

 

100

 

$220,099
for merit bonuses, plus $78,002 for bonuses to Mr. North and Mr. Pruitt).(195)

 

(195)       Cap Rock Ex. 303, at Schedule JWR-R-8;
Greenville Ex. 145.  As discussed above, the
ALJs again note that the numbers provided by Cap Rock have not been
audited.  However, since those numbers
are the best available data, the ALJs are relying on Cap Rock’s statement that
the amount of stock awards and bonuses is accurate.

 

 

101

 

3.                                    Sick
Leave/Vacation/Longevity Buyback

 

The test year included expenses for longevity bonuses and the
buyback of unused sick leave and vacation.  During the test year, Cap Rock paid $127,934 to buy
back unused employee vacation and sick leave, and $104,817 to buy back employee
longevity.(196)  The costs were routinely included in its cost
of service when the Company’s predecessor was subject to the Commission’s
jurisdiction and they were never challenged.(197)    In reviewing the Company’s information,
Mr. Rainey found that Cap Rock had discontinued the policy of longevity
payments in 2003.  As a result, he
proposed an adjustment of $100,456 to remove those payments from the cost of
service.  The revised requested test year
amount for Sick Leave/Vacation Buyback recommended by Mr. Rainey is
$132,294.(198)  Staff supports this request.(199)

 

Pioneer recommended exclusion of the entirety of Cap Rock’s
buy back of unused vacation and sick leave.(200)  Pioneer contends that repurchase of unused
vacation and sick leave is
not a good policy for employee morale and is an unusual business practice.(201)  Although Pioneer argues that Cap Rock’s
buyback policy may not be good for employee morale or may be unusual, the ALJs
decline to second-guess Cap Rock’s decision to provide this benefit to its
employees.  Certainly, there is nothing
improper about buying back employee sick leave or vacation time.  Therefore, the ALJs conclude that the revised
requested test year amount for sick leave and vacation buyback of $132,294
should be included in O&M expenses.

 

(196)       Staff Ex. 20 at 8. 

 

(197)       Cap Rock Ex. 303, at 44.

 

(198)       Cap Rock Ex. 303, at 45.

 

(199)       Staff’s Initial
Brief, at 52.

 

(200)       Greenville supports Pioneer’s request.
Greenville’s Post-Hearing Brief,
at 93.

 

(201)       Pioneer Ex. 1, at 41-42.

 

102

 

4.                                    General Counsel Salary
Expense

 

Pioneer and Farm Bureau
challenge the inclusion of Cap Rock General Counsel Ronnie Lyon’s salary in
O&M expenses.  Mr. Lyon’s base salary
is $174,000.  He earns other income
through bonuses and executive compensation, which are addressed in other
sections of this PFD.(202)  Pioneer
argues that Mr. Lyon’s salary should not be included in O&M expenses
because it is not appropriate for a company the size of Cap Rock to have a full
time general counsel.  Also, Pioneer
asserts that Mr. Lyon’s services are not required for the Company to provide
the kind of service it has provided consistently over the years before it
converted to an investor-owned utility.  
Pioneer also contends that Mr. Lyon provides services unrelated to Cap
Rock’s utility business (such as advice regarding FERC matters, which relate to
NewCorp and not to Cap Rock; SEC matters; and litigation that is not related to
Cap Rock’s provision of electric service). 
Pioneer further asserts that Mr. Lyon is one of the contributing factors
to the utility’s poor quality of management referred to earlier in this PFD.

 

Farm Bureau requests
disallowance of Mr. Lyon’s time because it asserts that he spent time on
matters such as lobbying and litigation not directly related to the provision
of electric service.  Because Farm Bureau
could not calculate the amount that should be deducted from his salary to
account for those expenses, it recommends disallowance of his entire salary.(203)

 

(202)       In making the recommendation to remove
Mr. Lyon’s salary, Ms. Blumenthal’s $704,284 reduction to officers’
compensation and her proposed $174,000 reduction for Mr. Lyon’s base salary in
Exhibit EB-1 resulted in a double exclusion of Mr. Lyon’s compensation, because
Mr. Lyon’s $174,000 base salary was already included in the $704,284
figure.  This section of the PFD
addresses only the $174,000 base salary.

 

(203)       Farm Bureau’s Initial Brief, at 23-24.

 

103

 

After considering the
evidence and arguments, the ALJs find that Mr. Lyon’s base salary of $174,000
should be included in Cap Rock’s O&M expenses.  Mr.
Lyon has served as the Company’s full time general counsel since 1993.(204)  He handles many routine litigation matters
for the company and supervises all outside legal counsel.(205)  He
performs routine corporate, contract, right-of-way, and real estate work, and
provides counsel on FERC and PUC matters.(206)  Although Cap Rock is a small utility, it does
have a need for legal advice and in-house legal work.  The ALJs find that, although  the base salary paid to Mr. Lyon is
quite high, it is not unreasonable and excessive for the work he provides as
legal counsel.  Although it is quite
possible that some of Mr. Lyon’s advice has led to poor management decisions,
there is no evidence in the record to establish such a finding.  While Pioneer and Farm Bureau may not agree
with the advice Mr. Lyon’s provides to Cap Rock, he is providing a service the
utility needs to continue to operate in a regulated environment.  Therefore, the ALJs conclude that Mr. Lyon’s
base salary of $174,000 should be included in Cap Rock’s O&M expenses.

 

5.                                      Executive Compensation

 

Pioneer and Greenville
challenge the level of Cap Rock’s executive compensation.  Pioneer supports a downward adjustment of
$530,284.(207)  Greenville contests the 30% allocation factor
given to the salaries, which places 70% of the cost of salaries in Cap Rock’s
cost of service, with the remaining 30% allocated to NewCorp.  Neither Staff nor OPC took a position on this
issue.  The ALJs find that the amount of
executive salaries included in Cap Rock’s O&M expenses should be reduced as
recommended by Pioneer.  The ALJs will,
however, use the 30% 

 

(204)       Cap Rock Ex. 300, at 21-23.

 

(205)       Cap Rock Ex. 300, at 21-23.

 

(206)       Cap Rock Ex. 300, at 21-23.

 

(207)       Pioneer’s
original recommended downward adjustment was $704,284, which double counted Mr.
Lyon’s salary of $174,000.  At the
hearing, Ms. Blumenthal revised her testimony to remove the effect of Mr.
Lyon’s salary, bringing the total requested reduction to $530,284.  Tr. Vol. 4, at 673; Pioneer Ex. 1, attached
Ex. EB-1, line 13.

 

104

 

allocation factor. 
Although we reiterate our doubts about the reliability
of Cap Rock’s data, including the 30% allocation factor.  Without reliable data indicating that the
allocation factor is incorrect, the ALJs rely upon Cap Rock’s allocation factor
out of necessity.

 

During the test year,
compensation for the six executive officers was over $1.7 million, which includes
over $800,00 in stock awards that are not included for purposes of calculating
revenue requirement.(208)  Actual cash
salaries to executives (excluding general counsel Ronnie Lyon) total $700,140
during the test year.  For calendar year
2003, including both stock awards and salaries, total executive compensation
was over $4.4 million.(209)  Mr. Pruitt’s
total compensation alone for that year was over $2.1 million.(210)  Although the total calendar year amounts for
2003 (as opposed to the test year that went only to September 2003) and the
stock awards are not directly relevant to the discussion of test year salary
levels to be included in revenue requirement, they are important to understand
the entire compensation picture and the backdrop against which salaries are
discussed.

 

Ms. Blumenthal testified
that she believes Cap Rock’s officers have been using the utility as a means to
enrich themselves to the detriment of ratepayers.(211)  She pointed out that, with the addition of
Will West to the Company’s executive staff, Cap Rock has seven highly-paid
executive officers.  She noted that Cap
Rock’s executive compensation was 23% of the Company’s total compensation
during the test year and 54% of total compensation during calendar year
2003.  She concluded that this
concentration at the top is excessive for a company with 114 employees and
17,000 customers.

 

(208)       Pioneer Ex. 1, at 38.

 

(209)       Pioneer Ex. 1, at 38.

 

(210)       Pioneer Ex. 1, at 38; Tr. Vol. 1, at 149.

 

(211)       Pioneer
Ex. 1, at 16.

 

105

 

Ms. Blumenthal recommended that Cap Rock’s
executive compensation be significantly reduced.(212)   She testified that total executive
compensation for other Texas utilities of Cap Rock’s size does not exceed $200,000
annually.(213)   She pointed out that Cap
Rock is a small electric utility that is no different from an electric
cooperative in size, geographic coverage, operating characteristics, and
complexity.(214)  She recommended an
adjustment of $530,284 to bring executive compensation down to $200,000.

 

In its rebuttal case, Cap
Rock disputed Ms. Blumenthal’s recommendations. 
Mr. Tucker claimed that Ms. Blumenthal had provided no support for her
recommended $200,000 limit on executive compensation.(215)   Mr. Tucker also asserted that his review of
salaries and bonuses of other small utility companies indicated that Cap Rock’s
compensation was not excessive, but was in fact 32% below the nearest-sized
small utility he reviewed.

 

(212)       Pioneer Ex. 1, at 40.

 

(213)       Pioneer Ex. 1, at 37-40.

 

(214)       Pioneer Ex. 1, at Illustration EB-1.

 

(215)       Cap
Rock Ex. 304, at 30-31, and Schedule GWT-R-3.

 

106

 

Ultimately, the ALJs
conclude that there is little evidence in the record to establish the propriety
of Cap Rock’s executive compensation. 
Ms. Blumenthal’s testimony that total executive compensation should be
set at no more than $200,000 is based only on her “familiarity with” the
executive compensation of other Texas utilities of Cap Rock’s size, and is not
based on any study nor did she provide any underlying data to support her
conclusory testimony.(216)  Similarly, the ALJs give very little weight
to Mr. Tucker’s review of executive compensation of other companies.  In cross-examination, Mr. Tucker acknowledged
that the companies in Cap Rock’s analysis were not actually comparable,(217) but were much larger than Cap Rock, were engaged in
other lines of business, and had many times more employees.(218)  Further, it is unclear whether the executives
at such companies received significant stock awards as compensation, or whether
their salaries and bonuses really comprised the totality of their
compensation.  If they did not receive
stock awards, then it would not be reasonable to compare their compensation to
Cap Rock’s executives who receive more than half of their compensation in stock
awards which were not included in Mr. Tucker’s calculations.

 

Clearly, when stock awards
are considered, Cap Rock’s executives are paid handsomely and, as the ALJs have
noted, this high level of compensation seems excessive for a utility with only
114 employees and 17,000 customers.  But,
at the same time, total executive compensation of $200,000 for five executives
(i.e., an average of $40,000 per
executive) seems unreasonably low if stock awards are not considered.  The most reasonable level of compensation is
probably somewhere between Pioneer’s proposed $200,000 amount and Cap Rock’s
actual payments of $730,284 (exclusive of Ronnie Lyon’s salary), but the ALJs
cannot arbitrarily decide a figure. 
Ultimately, it is Cap Rock’s burden to justify its expenses and show
they are reasonable and necessary.  Cap
Rock has not done this.  Therefore, the
ALJs find it appropriate to adopt

 

(216)       Pioneer Ex. 1, at 40, 44.

 

(217)       Tr. Vol. 7, at 1455-67.

 

(218)       Tr.
Vol. 7, at 1455-67.

 

107

 

Ms. Blumenthal’s testimony
as establishing at least a minimum figure for executive compensation.  When
coupled with the significant stock grants given, this amount would appear to
provide a reasonable total compensation to Cap Rock’s executives.  Therefore, the ALJs conclude that Ms.
Blumenthal’s recommendation to reduce executive compensation by $530,284 should
be approved.

 

E.                                    Reclassification of Plant to O&M

 

As discussed above under
Invested Capital and Rate Base, the ALJs find that Cap Rock should be permitted
to reclassify certain work orders to O&M from distribution plant, resulting
in an increase to O&M expense in the amount of $432,190.

 

F.                                    Expense of Operation as a Publicly-Traded Company

 

Pioneer asserts that Cap
Rock should not be able to recover the costs of operating as a publicly-traded
company.  The ALJs disagree with Pioneer
and find that Cap Rock should recover, as part of its O&M expenses, the
costs associated with being a publicly-traded company.

 

Cap Rock’s cost of service includes substantial costs related
to its operation as a publicly-traded company. 
These costs total approximately $766,000, which include $441,600 in
accounting costs related to Cap Rock’s status as a publicly-traded entity,
American Stock Exchange annual fees of $15,000, stock transfer agent fees of
$150,000, printing fees of approximately $97,500, seminar fees totaling
$46,300, and shareholder services costs of approximately $15,250.(219)  The
ALJs will not second guess the decision of Cap Rock’s members to convert to a
publicly-traded company.  This is not the
proper forum to determine whether that was an appropriate business decision.  Thus, the ALJs conclude that the costs
associated with operating as a publicly-traded company should be included in
O&M expenses as part of Cap Rock’s cost of service.

 

(219)       Pioneer
Ex. 1, at 46-47.

 

108

 

G.                                  Right-of-Way Fees

 

During its review of Cap Rock’s books and records, Pioneer
found that Cap Rock charged filing fees for rights-of-way to operations and
maintenance.  Pioneer claims that this
treatment is incorrect, and proposed that the expense be disallowed and the
cost capitalized.(220) Mr. Rainey testified
that the expenses are correctly described and recorded as the costs of the
filing of right-of-way easements needed for Cap Rock’s access to its
distribution system.  These are
right-of-way easements needed for Cap Rock’s personnel to cross over another
person’s real property to perform work on its distribution facilities.(221)  Therefore, the ALJs find that no adjustment
should be made to Cap Rock’s request because these are appropriate expenses for
Cap Rock to include in O&M expenses.

 

(220)       Pioneer Ex. 1, at 24.

 

(221)       Cap
Rock Ex. 303, at 50.

 

109

 

H.                                  Materials and Supplies

 

As discussed under the
Materials and Supplies section of Invested Capital and Rate Base, the ALJs find
that Cap Rock should not be permitted to include additional costs in materials
and supplies inventory.  Accordingly, the
amount of $95,053 should remain classified as O&M expenses.  Pioneer goes even further and argues that
this amount should also be left out of O&M because Cap Rock has not shown
that it properly adjusted its O&M expenses downward by the amount of its
test year inventory purchases of $26,500. 
Essentially, Pioneer argues that the $95,053 should be a “surrogate” for
the actual test year inventory amounts that should have been removed from
O&M but allegedly were not.  The ALJs
disagree with this.  It is undisputed
that Cap Rock proposes to adjust the $95,053 from O&M expenses and move it
to inventory, but the ALJs have recommended against this.  Therefore, the amount should remain in
O&M expenses.  If Pioneer argues that
some amounts have not properly been accounted for from test year inventory,
then it needs to address those amounts and not make “surrogate” adjustments.  Accordingly, the ALJs conclude that the
amount of $95,053 should be removed from Cap Rock’s proposed inventory amount
and should be included in O&M expenses.

 

IX.  AFFILIATE TRANSACTIONS

 

Numerous parties allege that
Cap Rock and NewCorp are affiliates and that the transactions between the two
entities are subject to review under the affiliate transaction rule found in
PURA § 36.058.  In applying this
review, various intervenors assert that some of Cap Rock’s expenses associated
with payments to NewCorp must be disallowed because they are not
reasonable nor prudent.

 

Cap Rock disputes that
NewCorp is its affiliate.  PURA § 11.003
and 11.006 define who may be found to be an affiliate under PURA.  Specifically, both of those provisions
provide that only a “person” may be found to be an affiliate of a utility.  In PURA, a “person” is defined as 

 

110

 

“an
individual, a partnership of two or more persons having a joint or common
interest, a mutual or cooperative association, and a corporation, but does
not include an electric cooperative.”(222)  Cap Rock points out that NewCorp is an
electric cooperative and, therefore, is excluded from the definition of “person”
in PURA and is excluded from being considered its affiliate under PURA
§ 11.003 or 11.006.

 

The intervenors argue that
NewCorp cannot lawfully be considered an electric cooperative under PURA.  In PURA § 11.003(9), an “electric cooperative”
is defined as:

 

(A) a
corporation organized under Chapter 161 or a predecessor statute to Chapter 161
and operating under that chapter; or

 

(B) a
corporation organized as an electric cooperative in a state other than Texas
that has obtained a certificate of authority to conduct affairs in the State of
Texas.

 

(222)       PURA
§ 11.003(14) (emphasis added).

 

111

 

NewCorp is organized as a
cooperative in the State of Texas, so subpart B does not apply.  The intervenors contend that NewCorp is not
properly “operating under” chapter 161 of the Utilities Code and, thus, does
not qualify as an electric cooperative under PURA § 11.003(9)(A).  The intervenors allege that, to operate under
Chapter 161, all the members of the board of directors of the cooperative must
be members of the cooperative.(223)  The
intervenors point out that none of the members of NewCorp’s board are members
of the cooperative.(224)  Furthermore,
the intervenors note that the secretary and treasurer for a cooperative
operating under Chapter 161 can come only from 
the members of the board.(225) 
Yet, Lee Atkins is the Secretary/Treasurer for NewCorp, and he is not a
member of the board of directors.(226) 
In light of the fact that none of the directors nor the
secretary/treasurer are members of NewCorp, nor is the secretary/treasurer a
member of NewCorp’s board, the intervenors assert NewCorp is not operating
under Chapter 161.

 

TCGA also alleges that
NewCorp earns profits in violation of 
Section 161.059(a) of the Utilities Code.(227)  TCGA further argues that
Section 161.059(d) requires a cooperative to return revenues to its
members and contends that, because NewCorp has not done that, it is not
operating as an electric cooperative under chapter 161.  Finally, TCGA argues that NewCorp does not
hold annual meetings and, therefore, does not comply with Section
161.067(b).  For all of these reasons,
the intervenors assert that NewCorp is not properly operating under chapter 161
of the Utilities Code and is not an “electric cooperative” for purposes of that
code.  As such, they contend that NewCorp
is a “person” under Section 11.006 and meets the requirements for being treated
as an affiliate of Cap Rock.

 

(223)       TEX. UTIL.
CODE ANN. § 161.071.

 

(224)       Tr. Vol. 7, at 1244

 

(225)       TEX. UTIL.
CODE ANN. § 161.076(a).

 

(226)       Greenville Ex. 15.

 

(227)       TCGA’s Initial
Brief on the Merits, at 8.

 

112

 

In response, Cap Rock
contends that the Commission does not have the authority or jurisdiction to
determine the legal status of NewCorp. 
Cap Rock alleges that the claim by intervenors that NewCorp is not
operating under Chapter 161 can only be interpreted as a claim that NewCorp is
not a valid electric cooperative corporation. 
Such a claim, Cap Rock argues, is not properly raised here and can only
be pursued by the Attorney General of the State of Texas in a quo warranto proceeding.  Under provisions of the Texas Civil Practice
& Remedies Code, a quo warranto action is available if:  (1) an association of persons acts as a
corporation without being legally incorporated; (2) a corporation does or
omits an act that requires a surrender or causes a forfeiture of its rights and
privileges as a corporation; or (3) a corporation exercises power not
granted by law.(228)  Because the intervenors
have not alleged any irregularity in the incorporation of NewCorp or in the
filing of its articles of incorporation—but rather complain only of the manner
in which NewCorp has been operating—Cap Rock argues their claims can be raised
and determined only in a direct quo warranto
proceeding brought by the Attorney General of Texas.(229)  Absent such a challenge, the Commission
purportedly must accept NewCorp’s status as an electric cooperative.

 

(228)       TEX. CIV. PRAC. & REM.
CODE ANN. § 66.001.

 

(229)       Lea County Elec. Co-op., Inc. v. City of Plains,
373 S.W.2d 90 (Tex.Civ.App.—Amarillo 1963, writ ref’d. n.r.e.); Southwestern Gas & Elec. Co. v. City of Gilmer,
123 F. Supp. 11 (E.D.Tex. 1954), aff’d
224 F.2d 794 (5th Cir. 1955).

 

113

 

                Moreover, Cap Rock disputes the various
contentions that NewCorp is not properly operating under Chapter 161 and,
therefore, it does not meet the definition of “electric cooperative” under PURA
§ 11.003(9).  In regard to the
assertion that NewCorp’s directors and secretary/treasurer are not members, Cap
Rock points out that non-individual members can (and must) designate
representatives to act on their behalf. 
Under the provisions of Chapter 161, a corporation such as Cap Rock is
considered a person.  As the sole member
of NewCorp, Cap Rock had the ability to designate its representatives to sit on
the board of directors and to serve as the secretary/treasurer.

 

Also, Cap Rock disagrees
that NewCorp has earned profits in violation of Section 161.059 of the
Utilities Code.  Cap Rock points out
that, although an electric cooperative is to operate without profit to its
members, it is required to create and maintain reserves.(230)  Cap Rock points out that no profits have been
distributed by NewCorp to its members and any alleged “profits” are simply
reserves held in compliance with § 161.059. 
Cap Rock argues that a cooperative cannot be required to create reserves
and then be in violation of the same section of the statute because these
reserves are prohibited as “profits.” 
Thus, Cap Rock states that NewCorp is operating without profit to its
members as required by § 161.059(a).

 

(230)       TEX. UTIL. CODE § 161.059(b)(3) and
(c)(2).

 

114

 

Finally, Cap Rock asserts
that TCGA is simply wrong when it alleges that NewCorp does not hold annual
meetings.  Cap Rock points out that the
evidence shows that annual meetings took place and that it has made available
in discovery the minutes of NewCorp’s annual meetings.  Cap Rock further contends that the testimony
of Lee Atkins makes this clear.(231) 
Further, Cap Rock notes that the statute itself states that a “[f]ailure
to hold the annual meeting at the designated time does not result in forfeiture
or dissolution of the cooperative.”(232)

 

After considering the
arguments and evidence presented, the ALJs conclude that NewCorp is not an
affiliate of Cap Rock within the meaning of PURA § 11.006.  Therefore, Cap Rock’s transactions with it
are not subject to review under the affiliate transaction rule found at PURA
§ 36.058.

 

First, it is clear that only
“persons” may be considered affiliates.(233)  Under PURA § 11.003, person is defined
broadly to include individuals, partnerships, and corporations.  But, electric cooperatives are specifically
excluded.  So, the question presented is
whether NewCorp qualifies as an electric cooperative.  There is no dispute that it has been
organized under the laws of Texas as an electric cooperative, with Cap Rock as
its sole member.  The intervenors allege,
however, that it has not complied with the various requirements for electric
cooperatives under Chapter 161 of the Utilities Code and, thus, is not
operating under that chapter.  Because of
this, they contend that it does not meet the definition of electric cooperative
found in PURA § 11.003(9).

 

(231)       Tr. Vol. 1, at 90-91.

 

(232)       TEX. UTIL.
CODE ANN. § 161.067(b).

 

(233)       PURA § 11.006.

 

115

 

The ALJs conclude that such
challenges are not properly raised through this proceeding.  While the ALJs believe it is within the
province of the Commission to determine whether NewCorp is acting as an
electric cooperative, in a rate case like this such a
determination should be more akin to a prima facie review.  In this case, the intervenors really seek a
forfeiture of NewCorp’s right to act as an electric cooperative and that goes
beyond the scope of this proceeding. 
NewCorp is organized as an electric cooperative under Chapter 161 of the
Utilities Code and purports to operate as such. 
If, in conducting its operations, NewCorp has violated certain
requirements of Chapter 161, the ALJs do 
not believe that this alone would result in it not being considered an
electric cooperative under PURA § 11.003(9).

 

Furthermore, the ALJs
disagree that NewCorp has not been operating under Chapter 161.  First, the evidence shows that NewCorp has
properly held meetings annually.  In
fact, the evidence indicates that it holds meetings each quarter.(234)  Even if it had
not, the statute is clear that this would not result in a forfeiture or
dissolution of the cooperative nor otherwise jeopardize its cooperative
status.  Second, NewCorp has not
improperly earned profits in violation of Section 161.059.  As Cap Rock points out, electric cooperatives
are expected to develop and maintain reserves. 
While it may be true that NewCorp has not formally designated and
calculated the need for such reserves in a manner ordinarily expected, this is
more indicative of poor management and administration and does not reflect that
NewCorp has been earning profits per se.  Rather, the excess funds that NewCorp has
received from operations would qualify as reserves, and such funds have not
been paid out as profits.

 

(234)       Tr.
Vol. 1, at 90-91.

 

116

 

Finally, the ALJs conclude that it is appropriate for a
corporation such as Cap Rock to appoint representatives to carry out its
functions.  Being duly appointed, the representatives
are representing the corporation in the functions they carry out.  As such, the board of directors and
secretary/treasurer that were designated by Cap Rock are appropriately acting
on its behalf, as the sole member in NewCorp.(235)  In a situation such as this, where a
cooperative has only one member and that member is a corporate entity, it seems
appropriate to allow that member to appoint representatives to the Board.  If such is not allowed, then it would be
impossible for the cooperative to comply with the requirements of the
chapter.  The intervenors may argue that
this is precisely the point and that there should not be cooperatives with only
one member, but that is essentially a challenge to NewCorp’s legal status that
should be raised in a quo warranto
action and is beyond the reasonable scope of this rate-making proceeding.

 

For all of the reasons discussed above, the ALJs conclude
that NewCorp is an electric cooperative operating under chapter 161 of the
Utilities Code and, as such, is not a person under  PURA § 11.003.  Because it is not a person under PURA §
11.003, NewCorp also cannot be an affiliate of Cap Rock under PURA § 11.006 and
the affiliate transaction rules do not apply to Cap Rock’s transactions with
NewCorp.(236)

 

(235)       Further, given
the unique structure of NewCorp, with Cap Rock as its sole member, the ALJs
find that Cap Rock could properly appoint a representative as
secretary/treasurer who is not serving as Cap Rock’s representative on the
Board of Directors.

 

(236)       Given the nature of the two entities, Cap Rock and NewCorp
certainly would be affiliates in any common understanding of the terms and for
the underlying purposes of the statute. 
However, the Legislature has chosen to specifically exempt electric
cooperatives for whatever reason and the ALJs are constrained to follow the
statute in making their recommendation in this case.

 

117

 

X.  DEPRECIATION AND
AMORTIZATION EXPENSE

 

A.                                  Self Insurance/Catastrophe
Reserve

 

As discussed under Invested
Capital and Rate Base, the ALJs find that Cap Rock should not be permitted to
recover through rate base, any monies for a catastrophe reserve.  Therefore, Cap Rock should also not adjust its
depreciation and amortization expense to show the existence of the reserve.

 

B.                                  Intangible Plant

 

As discussed under Invested
Capital and Rate Base, the ALJs find that Cap Rock should not be permitted to
recover the costs of the Delinea System in its rate base.(237)  Therefore, Cap Rock should not make a
corresponding adjustment to its depreciation and amortization expense.

 

(237)       As discussed above, another alternative to disallowing all
costs for the Delinea System is to disallow 50% of the costs.  If the Commission determines that 50% of the
Delinea System costs are appropriately recovered through rate base, then a
corresponding adjustment should be made to depreciation and amortization
expense.

 

118

 

XI.  TAXES OTHER THAN INCOME TAXES

 

A.                                  Ad Valorem Taxes

 

Staff, OPC, and Pioneer
assert that Cap Rock should recover its test year property taxes and not the
estimated increase to property taxes Cap Rock seeks.(238)  The ALJs agree.  Commission rules provide for the historic
test year costs, plus known and measurable changes.(239)  The ALJs conclude that the property tax
increases are estimates at this time, thus they are not known and measurable
and should not be allowed.

 

In its direct case, Cap Rock
stated that Rash & Associates had prepared an independent analysis
indicating that property taxes were expected to increase to $2,700,000 per year
from Cap Rock’s test year tax level of approximately $900,000 per year.(240)  Rash & Associates initially used an
estimated tax assessment of $110,000 with an estimated tax rate of $2.47 per
$100 of value.(241)  However, in
rebuttal, Cap Rock stated that property taxes will only increase by $473,700 to
a projected total of $1,373,300.(242)

 

Pursuant to P.U.C. SUBST. R. 25.231(b), a utility’s
historical test year expenses can only be adjusted for “known and measurable”
changes.  As late as August 18, 2004, Cap
Rock supplemented its response to Pioneer’s request for a description and
explanation of the Rash & Associates independent analysis as follows:

 

(238)       Pioneer suggests a smaller estimate for
property tax increases than the increase Cap Rock proposed.

 

(239)       P.U.C. SUBST.
R. 25.231(b).

 

(240)       Cap Rock Ex. 4, at 28.

 

(241)       Cap Rock Ex. 13, at WP/G-/8.3.

 

(242)       Cap
Rock Ex. 304, at 37 and Attachment GWT-R-10.

 

119

 

The
independent analysis performed by Rash & Associates is not yet
finalized.  As a result, there is little
or no detail or explanation available.(243)

 

This response was never
further supplemented.  Cap Rock failed to
provide evidence to support a request for a “known and measurable” adjustment
to its ad valorem tax request.  As stated
in the rebuttal testimony of Mr. Tucker, the rebuttal request of $1,373,300 is
based on the negotiated market value of Cap Rock property and assuming an
increase in tax rates of 3%.(244)  Once
again, Cap Rock’s request is based on an assumption that rates will
change.  It is not a known and measurable
change, and such assumptions have not been proven to be reasonable.

 

Furthermore, the county
appraisal notices contain estimates of future tax obligations.  Cap Rock has indicated that it expects that
Rash & Associates will “take all necessary steps to reduce its property
taxes as much as possible.”(245)  The
appraisal district notices produced by Cap Rock set out a protest deadline by
which Cap Rock can protest its estimated ad valorem taxes.(246)  Thus, there is a possibility that Cap Rock’s
estimate will change again if the protests are successful.  Therefore, the ALJs conclude that Cap Rock’s
request for an increase in property taxes is not a known and measurable change
at this time and should be disallowed.

 

(243)       Greenville Ex. 118.

 

(244)       Cap Rock Ex. 304, at 37.

 

(245)       TCGA/SL Ex. 155.

 

(246)       Staff Ex. 9.

 

120

 

B.                                  Franchise Taxes

 

In
the test year, Cap Rock paid .045% of its taxable income as state franchise
taxes (Cap Rock’s franchise tax liability is calculated as 1% of 4.5% of its
taxable income by virtue of its 1% ownership in Petra One Energy, L.P.).(247)  Cap Rock proposes to recover $4,400 for its
annual payment of franchise taxes, based on its test year payments. Greenville
and Staff propose that $1,000 be included for franchise taxes, instead of the
$4,400 offered by Cap Rock.  Although
Greenville and Staff recognize that Cap Rock continues to be liable for some
state franchise taxes, they maintain that Cap Rock will pay only $1,000 in
franchise taxes.(248)

 

Cap
Rock will continue to be liable for state franchise taxes in ensuing years
(unless the tax laws change) in the amount of 1% of 4.5% (i.e., .045%) of its taxable income.(249)  Until Cap Rock’s
rates and its income are established in this proceeding, the exact amount of
its franchise tax liability will not be known, but will be calculable as .045%
of such taxable income.  Therefore, the
ALJs find that Cap Rock’s franchise tax should be calculated as .045% of its
taxable income.(250)

 

(247)       Tr. Vol. 8, at 1519-1520.

 

(248)       Greenville’s Post-Hearing Brief, at 65-66; Staff’s Initial Brief, at 58-59.

 

(249)       Tr. Vol. 8, at 1519-1520.

 

(250)       The final calculation of franchise tax will be determined
after the final order in this case.

 

121

 

XII.  INCOME TAXES

 

All
parties agree that the appropriate federal income tax rate to be applied to Cap
Rock is 34%, and the ALJs concur that 34% is the appropriate rate.   The actual calculation of federal income tax
cannot be performed until adjustments are made to Cap Rock’s rebuttal case
based on this PFD and the Commission’s final order.  The parties disagree on Cap Rock’s inclusion
of true-up charges prior to 2001 in its income tax calculation.  In its rebuttal case, Cap Rock made
corrections to the test year timing differences and deferred taxes included in
its calculations in its direct case.(251) 
Staff agrees with the corrections.(252) 
In her discussion of federal income taxes, Pioneer witness Ms.
Blumenthal noted her concern regarding the Company’s calculation of permanent
timing differences in the tax calculation. 
Ms. Blumenthal was unable to determine the source of the Company’s
inclusion of $469,467 for “true-up charges prior to 2001” in the calculation of
test year permanent differences.(253) 
Because she could not find any justification for this item, Ms.
Blumenthal recommended removal of the $469,500 from test year permanent
differences of $488,015.

 

The
ALJs find that Cap Rock, in its rebuttal case, correctly calculated its federal
income tax rate, and the ALJs conclude that Staff’s
recommendation, which agrees with Cap Rock’s corrections, should be
followed.  Although Pioneer asserts that some of the test year timing
differences should be adjusted, Staff agrees with Cap Rock that Cap Rock made
the appropriate corrections.  The ALJs
find that Staff’s expert has the better qualifications to review the federal
income tax calculations.  Thus, the ALJs
conclude that Staff’s recommendation should be followed.

 

(251)       Cap Rock Ex. 304, at 38.

 

(252)       Staff’s Initial
Brief, at 59.

 

(253)       Pioneer
Ex. 1, at 84.

 

122

 

XIII.  INTEREST ON CUSTOMER DEPOSITS

 

In
its initial RFP, Cap Rock included customer deposits in rate base.  As discussed previously in this PFD, Cap Rock
has agreed with the intervenors and removed customer deposit amounts from its
rate base.  However, Cap Rock
contends—and the intervenors generally agree—that it is entitled to include in
its cost of service the interest expense it must pay to customers for those
deposits.  In its rebuttal case, Cap Rock
calculated this interest amount as being $36,800, which is the actual amount of
interest paid during the test year.(254)

 

(254)       Cap Rock Ex. 303, at 40 and Schedule
JWR-R-7.

 

123

There
are two contested issues related to calculating the amount of interest on
customer deposits.  First, Pioneer
disagrees that Cap Rock has adequately shown the correct amount of interest on
customer deposits to be included in cost of service. Pioneer asserts that Cap
Rock’s proposed amount is supported only by John Rainey’s conclusory testimony,
without adequate evidentiary support. 
Second, Cap Rock argues that the amount of interest will change based
upon the amount of customer deposits that are removed from rate base.  It has proposed removing $610,350 from rate
base to reflect the 13-month average balance of customer deposits and has
calculated the interest on customer deposits during the test year to be $36,800.  On the other hand, Staff has proposed that
$651,929 be removed from rate base for customer deposits.  Cap Rock argues that, if Staff’s proposed
amount is removed from rate base, then the interest calculation should also be
based on that amount.  Specifically, Cap
Rock asserts that, using Staff’s proposed customer deposit amount, interest on
customer deposits should be revised upward to $39,115. (255)

 

There
is no dispute that interest paid on customer deposits is a legitimate cost of
service expense.  The Commission’s rules
mandate the payment of such interest and the Commission establishes the
appropriate interest rate.  As applied to
this case, the Commission-mandated interest on customer deposits is 6%.  Therefore, to the extent that the evidence
establishes customer deposits entitled to interest, Cap Rock is required to pay
6% in annual interest on such deposits and the resulting interest payments are
a legitimate cost of service.

 

The
ALJs have previously recommended that Staff’s proposed amount of $651,929 be
removed from rate base to reflect customer deposits held by Cap Rock at the end
of the test year.  In light of this
recommendation, the ALJs also conclude that this is the appropriate figure on
which to base interest expenses paid on customer deposits.  Accordingly, the ALJs recommend that Cap Rock’s
cost of service include an upward adjustment of $39,115 to reflect the interest

 

(255)          
The calculation is shown as $651,929 x 6% = 39,115.

 

124

 

required
to be paid on $651,929 in customer deposits held by Cap Rock at the end of the
test year.

 

The
ALJs disagree with Pioneer’s contention that Cap Rock has not adequately
established in the record the amount of interest on customer deposits that it
is obligated to pay.  The unrebutted
evidence shows that Cap Rock paid $36,800 in interest on customer deposits
during the test year. (256)  However, the
ALJs do not recommend that this amount be used by the Commission.  From reviewing the evidence, the amount of
customer deposits held by Cap Rock increased significantly from the beginning
of the test year to the end of the test year. 
Therefore, Cap Rock’s actual interest expenses going forward (based on
the amount of customer deposits held at the end of the test year) will be more
than the interest expense during the test year. 
The evidence shows that the total amount of customer deposits held by
Cap Rock at the end of the test year was $651,929.  The Commission’s rules mandate the payment of
interest on such deposits at the interest rate set by the Commission.  The ALJs do not find that any additional
evidence is necessary to determine the appropriate amount of interest due on
customer deposits.  Rather, the interest
expense may be determined by multiplying the customer deposit amount by the
Commission-mandated interest rate, resulting in the interest expense of $39,115
proposed by Cap Rock. (257)  This is the
amount recommended by the ALJs.

 

XIV.  RATE
DESIGN

 

A.                                    Overview

 

In general, all of the intervenors find that Cap Rock’s
proposed rates are contrary 

 

(256)       Cap Rock Ex. 303, at 40 and Schedule
JWR-R-7. 

 

(257)       The
ALJs recognize that the actual interest paid will vary from the recommended
amount, as the total amount of customer deposits will fluctuate throughout the
year.  Given the removal from rate base
of actual customer deposits held by Cap Rock at the end of the test year, for
consistency the ALJs find it appropriate to use that same amount to calculate
interest expenses on customer deposits.

 

125

 

to PURA because they are not fair and equitable, but are
instead discriminatory, insufficient, and inequitable in their application for
all customers.  The intervenors argue the
proposed rates favor certain customers without any apparent basis, punish other
customers for participating in past regulatory or legal proceedings against Cap
Rock, and ignore the particular characteristics of certain classes of customers
in order to assess them higher rates.

 

The fundamental rate design issue for many intervenors
is whether Cap Rock’s  demand data is
incomplete and unreliable.  They conclude
that it is and, thus, argue it should not be used for designing rates.  Perhaps TCGA’s Reply Brief best sums up the
position of these parties:

 

If there is one thing that is clear after wading
through the fog of witness substitutions, erratas, RFP waivers,
on-the-witness-stand changes, handwritten corrections to rebuttal schedules,
and other attendant obfuscation in this case, it is that Cap Rock has
absolutely no clue about its true current costs or how to allocate them.(258)

 

TCGA takes the lead in arguing that the underlying
data in Cap Rock’s demand allocator study is so flawed and indefensible that,
as a matter of law, the study may not form the basis for findings of fact.(259)  Due to the flawed study, and because three of
the four peak months for the cotton gin class are off-peak for the utility,
TCGA strongly objects to the 400% increase in demand rates for the cotton gin
class proposed by Cap Rock.  TCGA takes
the position that this increase is an example of Cap Rock’s efforts to punish
the cotton gin class for its past and present regulatory involvement and
insists that the only fair approach is to apply whatever revenue requirement
results from this case to the existing rate structure.

 

(258)       TCGA’s
Reply Brief On The Merits, at 13. 

 

(259)       St.
Lawrence adopted the position of TCGA on the rate design issue.

 

126

 

Pioneer is primarily concerned with Cap Rock’s proposal
to discontinue the dual-fuel customer class in favor of serving the
oil-well-pumping load in the same class as commercial customers.  While offering separate classes for other
customers, Cap Rock no longer desires to do so for oil well customers (whom
Pioneer calls the most cohesive and identifiable class on the Cap Rock
system).  Because oil well customers are
unique in their consistent, flat load and because much of the class is
interruptible, Pioneer argues for a continuation of the dual-fuel customer
classes until such time that a separate oil-well-pumping class may be created.

 

Farm Bureau argues that irrigation customers have
borne more than their fair share of rate increases over the past few
years.  Irrigation customers received
rate increases of 13 and 27% in 2001 and 2002, respectively.  In its direct case, Cap Rock proposed another
36% increase for irrigation customers, far higher than the proposed overall
system increase of approximately 14%. 
Farm Bureau submits that these increases are not justified and that
discriminatory rates such as the general service-city limit rate must be
stopped.  Further, Farm Bureau argues
that, if any rate increase is allowed, the principles of gradualism must apply.

 

OPC submits that Cap Rock and Staff rely upon fatally
flawed data for their cost-allocation study. 
OPC contends the demand data derived by Cap Rock is based upon
subjective judgments and assumptions which cannot be verified or understood by
third parties.  Moreover, the data was
prepared in an inconsistent manner across classes and is available only in a
form that cannot satisfy the definition of non-coincident peak load (NCP).  Accordingly, OPC argues that the most fair
development of rates is by existing class revenues.  That is, rates should be adjusted by an equal
percentage to all classes.

 

The Texas Legislature’s directive to begin the
transition from a heavily regulated 

 

127

 

electric utility system to a competitive market is important
to Staff, even though the standard tariffs for competitive utilities are not
yet applicable to Cap Rock and other non-ERCOT utilities.(260)  Staff asserts that this proceeding should be
used as a means to move Cap Rock closer to conformance with the standard
tariff, avoiding the creation of new customer classes and sub-classes as well
as other changes that would unnecessarily complicate Cap Rock’s eventual
transition to competition.(261)  To this end, Staff opposes the creation of
two separate rate classes for residential service, opposes the creation of a
General Service II rate for non-residential general service, and supports
system-wide rates with one tariff and a single set of rates for all customers
in all divisions.

 

(260)       Cap Rock’s certificated area is in both
ERCOT and the Southwest Power Pool (SPP).

 

(261)       The
“standard tariff” is that implemented for IOUs that have entered into SB7
competition.

 

128

 

Regarding the major issues of rate design, the ALJs
recommend the general service- city limit rate be included as a discount rate
pursuant to PURA § 36.007; that steps be taken to mitigate the impact of
elimination of the dual-fuel-rate class; and that rates be designed based on
the existing cost-allocation structure, except for the integration of
system-wide rates with one tariff.(262)  These and other issues regarding
rate design are discussed below.

 

B.                                    Designation of Customer
Classes

 

1.                                      General Service-City Limit
(Rate Code 119)

 

Cap Rock has implemented two separate general service
rates: a general service-city limit rate (city rate) for customers who are
taking service in dually-certified areas and a standard general service rate
for all other general service customers (rural rate).  Customers presently receiving service from
the city rate are found only within the municipal limits of Midland,
Texas.  Rural rate customers are charged
more than 200% of the city rate for the same service (customer and energy-based
distribution charges).(263) Cap Rock asserts that
cost-of-service issues make this an appropriate rate that should not be offered
as a discount.

 

(262)       Specifically, as discussed below, the
ALJs recommend that the McCulloch division be integrated into Cap Rock’s entire
system and that a consistent tariff be utilized going forward.

 

(263)       Cap
Rock Ex. 9, at 2 of 6 (comparing Rate Code 110, rural rate, to Rate Code 119,
city rate).

 

129

 

According to Cap Rock’s witness, J. Stephen Gaske,
separate rates were necessary in order for Cap Rock to compete in
dually-certified areas and as a means to recognize the additional costs
associated with providing service to rural customers.(264) Cap Rock fears that,
without this rate, competing electric companies will “cherry pick” the city
customers (with their low cost of service), leaving Cap Rock to serve only the
high-cost, rural customers.  Because of
this, Dr. Gaske argues that the end result from losing the low-cost, city
customers would be much higher rates for the rural customers.  He therefore concludes that the city rates
are beneficial to city and rural customers alike.  Neither Staff nor OPC object to the city rate
so long as it is treated as a discount rate under PURA § 36.007.  If treated as a discount rate, Cap Rock’s
shareholders—and not the utility’s other customers—would bear the costs
associated with offering the rate. 
However, if the city rate is not treated as a discount rate, Staff and
OPC argue that it must be eliminated from Cap Rock’s tariff.

 

Cap Rock urges that its second ground for providing
the rate—differences between the costs of providing service—establishes that
the proposed rate is cost-based and is not a discounted rate.  Dr. Gaske conducted a cost-of-service
study where he allocated the costs associated with the lines, poles, and
conduits to the rural or city sub-classes in recognition of the differences in
customer density.  He found approximately
48.4 meters per mile of distribution line in the city and 2.6 meters per mile
in rural areas.(265)  Dr. Gaske also determined that the typical
service line in the city is 60 feet as compared to 150 feet in rural
areas.  Applying these differences to the
weighted costs used for allocation of costs to the city and rural sub-classes,
Dr. Gaske concluded the city rate is appropriate.

 

Staff disagrees, arguing that such a distinction
between urban and rural areas has traditionally been rejected by the courts,
with the disapproval now codified in PURA 

 

(264)       Cap Rock Ex. 7, at 27-28.

 

(265)       Cap
Rock Ex. 7, at 18.

 

130

 

§36.005.(266)   This section provides that a
utility’s rates for an area outside a municipality may not exceed 115% of the
rate for similar service within the municipality, absent specific Commission
approval.  In order to gain Commission
approval, Staff insinuates Cap Rock disguised its urban and rural rates as
separate residential customer classes based on cost of service.

 

The courts have recognized broad discretion for the
Commission to classify customers  based
upon numerous factors, including “... the cost of service, the purpose for which
the service or product is received, the different character of the service
furnished, the time of its use or any other matter which presents a substantial
difference as a grounds of distinction.”(267)

 

(266)       City
of Texarkana v. Wiggins, 246 S.W.2d 622, 626 (Tex. 1952). 

 

(267)       Texas Alarm & Signal Association v. Public
Utility Commission, 603 S.W.2d 766, 772 (Tex. 1980), citing Caldwell v. City of Abilene, 260 S.W.2d
712 (Tex.Civ.App.–Eastland 1953, writ ref’d).

 

131

 

The burden is on Cap Rock to justify the city rate in
accordance with these factors.  In this
case, Staff argues Cap Rock failed to provide any underlying data or other
relevant information to support its allegations.  Rather, a review of the evidence in light of
the above guidance suggests to Staff that there is no substantial basis to
distinguish between city and rural customers. 
More specifically, Staff notes they both receive residential service;
therefore, the purpose for which the service is received and the character of
the service is the same.  Peak loading (i.e., time of use issues) also does not
appear to provide any distinction.  So,
the only difference offered by Cap Rock is the density of customers.  Staff does not find evidence that the
difference in costs for density alone is substantial enough to justify the
creation of separate customer classes.

 

Even if a significant cost difference were proven
between the proposed rural and city customer classes, Staff asserts the
financial inequities are already addressed by the standard allowance charged
for line extensions.  The standard
allowance covers costs associated with extending the service line from the
distribution facilities for 150 feet, the typical length needed for service to
rural customers.(268) If additional line is
necessary, that in excess of 150 feet is charged to the customer in the form of
a non-refundable contribution in aid of construction (CIAC).  Staff thus 
maintains that also charging higher rates for lines in excess of 150
feet results in a double recovery for Cap Rock and discriminatory rates for
rural customers.

 

Staff and OPC suggest that the only proper way for the
city rate to continue is as a discounted rate under PURA § 36.007.  As such, Cap Rock’s shareholders would bear
the costs associated with the loss in revenues from city customers, and other
ratepayers would not be affected.  Absent
treatment as a discounted rate, both Staff and OPC argue that the 

 

(268)       Cap
Rock Ex. 7, at 19.  The typical length
for city customers is 60 feet.

 

132

 

city rate must be eliminated from the tariff.

 

Joining Staff and OPC in opposition to the city rate,
Farm Bureau insists that it is unreasonably preferential, prejudicial, and
discriminatory in violation of PURA § 36.005(a).  Farm Bureau argues that the rate was
developed to provide special treatment to a few customers in four affluent
Midland subdivisions and is not necessary to meet competition.  Absent evidence that another utility had
facilities or was otherwise capable of serving customers within these
subdivisions, Farm Bureau maintains that dual certification does not mean that
competition necessarily exists.(269)

 

Nor does Farm Bureau find credibility in Cap Rock’s
argument that the cost differential in providing service supports the city
rate.  Rather, Farm Bureau rejects the
density weighting factors used in Dr. Gaske’s cost of service as unsupported
and unproven.  Dr. Gaske allocated costs
based on a number of weighted allocators thereby assigning fewer costs to city
customers than to rural customers.  He
used weighted NCP allocators to determine costs associated with poles, towers,
fixtures, and overhead and underground conductors.  Likewise, Dr. Gaske relied on weighted demand
and customer allocators for determining costs associated with line transformers
and service drops.  In agreement with
Staff, Farm Bureau finds these weighted allocators were inappropriately used
primarily because they were all based on the density of customers without
consideration of other relevant factors.

 

(269)       Tr.
Vol. 8, at 1618-1619.

 

133

 

Moreover, Farm Bureau suggests that even the factors
considered were inappropriately calculated. 
For instance, Farm Bureau witness Kit Pevoto testified that when
determining the distribution line density for Midland, Cap Rock used the length
of the distribution lines for several customer classes, not just for the
residential class.(270)  Then, Cap Rock compared the Midland density
distribution line to that of the entire system, when the comparison should have
been limited to that of distribution line cost between city and rural rate
customers.  Ms. Pevoto further noted that
the distribution lines examined in Cap Rock’s comparison contained both
overhead and underground lines, yet no adjustment was made for the added costs
associated with the underground lines which were used primarily for city
customers.  Because of these factors,
Farm Bureau finds Cap Rock’s approach to be overly simplified, unreasonable,
and not based on cost-causation principles.

 

The ALJs conclude Cap Rock failed to meet its burden of
proving any significant difference in costs associated with rural and city
customers, much less a 200% difference as suggested by the city and rural
rates.  Dr. Gaske suggested the
difference resulted from his allocation of costs associated with distribution
lines, poles and conduits, and service-line extensions.  But nowhere in the record do the ALJs find
support for his conclusions.  There are
no calculations or analyses that the ALJs can find determining the true costs
associated with these services and the impact these differences have on costs
of service to rural and city customers. 
Furthermore, as noted by OPC witness Clarence Johnson, if such analyses
were made, all factors must be considered—including those increasing the cost
of service to city customers, such as more expensive land, municipal franchise
fees, and underground lines.(271) There is no indication these factors were considered in this instance.

 

(270)       Farm Bureau Ex. 2, at 17.

 

(271)       OPC
Ex. 3, at 32.

 

134

 

Moreover, the ALJs are unconvinced that cost of
service is the driving factor for the discounted city rate.  This rate was proposed only for Midland
customers where dual certification 
exists.  At least initially,
residents in other municipalities served by Cap Rock were not included in the
analysis or offered the discounted rate. 
Cap Rock also failed to distinguish between rural and city customers
when it developed the standard service-line allowance.  If the cost disparity in running lines to
city and rural customers  was as dramatic
as that suggested by Cap Rock, it should have been reflected in the
service-line allowance.  And, in
instances where customers have exceeded the standard service-line allowance,
they have paid for the additional line in CIAC.

 

135

 

Most persuasive to the ALJs is Dr. Gaske’s admission
that competition is the primary factor driving the need for the city rate and,
absent competition, it would be viable to roll together the costs of serving
city and rural customers.(272)  Given these factors and the lack of
calculations and analyses provided by Cap Rock to support its density weighing
factors, the ALJs conclude that competition, 
not cost of service, is Cap Rock’s real motivation for offering the city
rate.  As such, the rate should be
included only as a discount rate under PURA § 36.007.

 

2.                                      General Service II(273)

 

Cap Rock has proposed offering two general service
rate designs to replace the one presently available.  Cost allocation would remain the same,
generally applicable to the entire general service class.  For rate design only, General Service I (GS
I) would apply to all residential use, except that qualifying for the city
rate.  General Service II (GS II) would
apply to non-residential use, such as barns, shops, electric fences and water
wells.(274)

 

(272)       Cap Rock Ex. 7, at 27.

 

(273)       Below, the ALJs recommend that rates be
designed on Cap Rock’s existing rate design. 
The ALJs understand that their determination on rate design may render
issues such as this moot.  In any event,
the discussion is included to provide the Commission with a comprehensive
analysis of the issues presented. 

 

(274)       Cap Rock Ex. 7, at 25.

 

136

 

According to Cap Rock’s cost-of-service study, the
customer charge will not recover all of the fixed costs associated with the
general-service class.  Therefore, Cap
Rock proposes to recover a portion of these costs through energy-usage rates.  However, residential customers use an average
of 11,200 kWh annually, while GS II customers use only 3,200 kWh.(275)  This disparity suggests that GS II customers
will fail to pay a significant portion of their fixed costs.  To remedy this situation, Cap Rock proposes
to charge GS II customers a monthly customer-service charge of $20.00, while GS
I customers pay only $12.50.  Even so,
Dr. Gaske determined that GS II customers would contribute only $368 per customer
to the annual recovery of fixed costs while GS I customers continue to
contribute $597 per customer.(276)  Cap Rock concludes that the higher customer
charge for GS II customers will offset some of the inequities associated with
recovering a portion of the fixed costs through the energy charge and should
therefore be approved.

 

On behalf of Staff, Matthew Troxle testified that Cap
Rock’s proposal is wholly unnecessary and contradictory to the Commission’s
preference for consolidating customer classes in preparation for future
competition.(277)  While Mr. Troxle did not expand on why Cap
Rock’s proposal is unnecessary, he opined that once Cap Rock became an IOU in
September 2003, PURA Chapter 39 and its mandate to unbundle, deregulate, and
enter into a competitive market became effective.  In this vein, Mr. Troxle found it important
for utilities, even those not yet subject to competition, to begin
consolidating customer classes in order to make it easier for customers to
compare competitive rates.  He added that
ignoring this important step by creating new rate classifications or
sub-classifications would needlessly complicate and lengthen the transition to
competition.  In Staff’s opinion, Cap
Rock’s proposal is inconsistent with PURA.

 

(275)       Cap Rock Ex. 7, at 25.

 

(276)       Cap Rock Ex. 7, at 26.

 

(277)       Staff
Ex. 5, at 18.

 

137

 

After reviewing the evidence and arguments presented,
the ALJs find that Cap Rock met its burden of proving the GS II customer charge
is just and reasonable, both to Cap Rock and its customers.  Cap Rock should be able to recover its fixed
costs from the general-service class, but doing so by imposing an extremely
high demand charge is undesirable given the potential impact on low-income
customers.  Adding some of the fixed costs
to the energy-usage rate is a reasonable alternative, as is charging a higher
demand charge to non-residential customers who generally will not contribute as
much to fixed costs through their usage rates. 
For this reason, the ALJs recommend the Commission approve the GS II
customer service charge of $20.00, applicable to non-residential users, such as
barns, shops, electric fences and water wells.

 

Staff failed to show that Chapter 39 of PURA, relating
to competition, should prevent the creation of this charge.   The current Investor Owned Utilities-Rate
Filing Package (IOU-RFP) is not applicable to Cap Rock.  Even Mr. Troxle acknowledged that Cap Rock’s
RFP and model are very different from those used in rate cases for other IOUs
in ERCOT.(278)  Moreover, the Commission has not even
established a schedule for Cap Rock to begin the transition to IOU competition.(279)  According to Dr. Gaske, a majority of Cap
Rock’s business is in the Southwest Power Pool (SPP) which expands beyond the
Texas boundary; therefore, it is unclear when, if ever, the SPP will be
unbundled.(280) Where this leaves Cap Rock
is uncertain.  For these reasons the ALJs
conclude that the anticipated future transition to competition should not bar
the creation of the GS II rate at this time.

 

(278)       Staff Ex. 5, at 8.

 

(279)       Chapter 39 of PURA became applicable to
Cap Rock on September 1, 2003.  Staff Ex.
5, at page 8.

 

(280)       Cap
Rock Ex. 305, at 58.

 

138

 

3.                                      Dual-Fuel Customers and
Rates; Oil-Well-Pumping Rate Element(281)

 

(281)       Below,
the ALJs recommend that rates be designed on Cap Rock’s existing rate
design.  The ALJs understand that their
determination on rate design may render issues such as this moot.  In any event, the discussion is included to
provide the Commission with a comprehensive analysis of the issues presented.

 

139

 

Cap Rock proposes to eliminate the dual fuel rate
class (dual fuel) that includes some, but not all, oil-well customers.(282)  Although Dr. Gaske admitted that one of the
characteristics of the oil-well customers is that they tend to have a
relatively high load factor, he testified that they are not fundamentally
different from other commercial or industrial customers and may be
appropriately integrated into those classes.(283)  Pioneer responds that elimination
of dual fuel is discriminatory unless a separate oil-well rate is created.  Because the issues of dual fuel and the
proposed oil-well rate are intertwined, the ALJs discuss both in this section.

 

Pioneer maintains that the elimination of dual fuel is
an effort by Cap Rock to retaliate for Pioneer’s intervention in this and other
regulatory and legal proceedings. 
Pioneer understands that similar, non-intervening customers, such as
Texaco, may be served at special rates and that other identifiable and cohesive
customers are served in specific customer classes that recognize the proper
allocation and rate designs suggested by the special characteristics of each
class load.  For instance, classes are
designed for irrigation, cotton gins, street lighting, and residential
customers.  Pioneer suggests the same
should be performed for Cap Rock’s largest class: oil-well pumping customers.

 

James Daniel testified on behalf of Pioneer that the
aggregated oil-well load is very flat and results in a high load factor.(284)   For this reason, he surmises that, if the
oil-well load is grouped in a customer class that includes primarily low load
factor customers, the oil-well load may subsidize other customers in the
class.  Mr. Daniel explained that
customers with high load factors can be served more efficiently and cheaply
than 

 

(282)       Currently, some oil-well customers are in
the dual fuel class, while many others are in the commercial class.  As discussed herein, Cap Rock is proposing to
combine dual fuel with the large power primary class.  This will affect only those customers
currently in the dual fuel class and will not result in a change to oil-well
pumpers currently in the commercial class.

 

(283)       Cap Rock Ex. 305, at 69.

 

(284)       Pioneer
Ex. 3, at 32.

 

140

 

customers with low loads; therefore, customers with similar
loads should be grouped together in classes. 
As a practical matter, he noted that many utilities in Texas recognize
the special characteristics of oil-well loads and have special oil-well-pumping
rates.(285)

 

(285)       Id. at 34.

 

141

 

Further, Pioneer primarily objects to the inclusion of
any oil-well customers in the commercial service rate class (commercial).  Here, Pioneer finds the high-load, oil-well
customers combined with other low-load customers, resulting in the inequities
discussed above.  In order to completely
eliminate this discrimination, Pioneer requests that the Commission order Cap
Rock to include all oil-well pumping accounts in a separate rate class in its
next rate case.  Until that time, Pioneer
would like to see the dual fuel class continued and certain actions taken to
alleviate some of the subsidies occurring within the commercial class.  The particular actions proposed by Pioneer
are discussed further below under rate elements.

 

After reviewing the record, the ALJs recommend that
dual fuel be eliminated.(286)  The ALJs conclude that Pioneer’s two primary
concerns regarding the elimination of dual fuel are unfounded.  First, Pioneer is concerned that dual-fuel
customers will be moved into the commercial class where they will be
subsidizing other customers.  To the
contrary, the ALJs understand Cap Rock’s proposal is to move dual fuel
customers into the large power primary class, where they will be able to take
power under the load management rider.(287)  Mr. Daniel identified only the
commercial class as including customers with both high and low load factors,
and there has been no assertion that similar concerns exist within the large
power primary class where Cap Rock proposes to move dual fuel customers.(288)  Therefore, Pioneer’s concern about oil-well
customers subsidizing other customers in the commercial class simply is not
justified in regard to dual fuel customers and has no bearing on whether a dual
fuel rate should be continued.

 

(286)       In the rate element section below, the
ALJs separately address the changes suggested by Pioneer to reduce intra-class
subsidies in the commercial class.

 

(287)       Tr. Vol. 8, at 1563.  The load-management rider provides for a
reduction in the demand charge for interruptible loads with an annual load factor
of at least 70%.  Pioneer Ex. 3, at 40.

 

(288)       Pioneer
Ex. 3, at 34.

 

142

 

Next, Pioneer takes issue with Cap Rock’s alleged
proposal to allow some non-intervening oil customers to continue service at special
rates.  But again, the evidence does not
support Pioneer’s premise.  Cap Rock is
proposing to eliminate all special
rates for oil-well customers and to place them in other classes.(289)  In accordance with these two determinations,
the ALJs conclude that the elimination of dual fuel is appropriate.

 

(289)       Pioneer
Ex. 3, at 31.

 

143

 

Finally, the ALJs do not find Pioneer’s request for an
oil-well class compelling.  Rate design
is as much an art as it is a science, and oftentimes there is a range of
acceptable rates and class structures. 
While an oil-well class might be acceptable, it has not been shown
necessary for fair and reasonable rates. 
Therefore, the ALJs decline to recommend the Commission order Cap Rock
to propose an oil-well class.

 

4.                                      Irrigation Line Use Fee-Rate
Code 450

 

This issue has been resolved by Cap Rock’s agreement
to not include Irrigation Line Use Fee-Rate Code 450 in its tariff.(290)  Thus, the ALJs do not address this issue.

 

5.                                      Special Rates(291)

 

Elimination of all special rates appears to be without
controversy, except as related to the city rate discussion above.  Therefore, the ALJs include no discussion on
this issue.

 

C.                                    Allocation of Cost of
Service

 

1.                                      Costs to be Allocated

 

(290)       Cap Rock’s Reply Brief, at 68.

 

(291)       Below,
the ALJs recommend that rates be designed on Cap Rock’s existing rate
design.  The ALJs understand that their
determination on rate design may render issues such as this moot.  In any event, the discussion is included to
provide the Commission with a comprehensive analysis of the issues presented.

 

144

 

The costs to be allocated are derived from Cap Rock’s
total revenue requirement and were separated by Dr. Gaske into three broad
categories: customer, energy, and demand. 
Dr. Gaske began with the categories of costs associated with the
distribution plant and facilities.  Then,
he reviewed the plant-related accounts and the operation and maintenance cost categories
to determine what factors led to significant cost variations.  He found that the number of customers on the
system and the peak demand of those customers significantly impacted the plant
and equipment costs.  Other factors that
significantly impacted the costs include the phase of the current (single-phase
or three-phase), the density of customers, and the type of meters required.(292)  Dr. Gaske then applied the functionalization
and classification(293) of plant-related costs to
the amount of plant investment in the rate base and the amount of plant
depreciation.(294)  The final major factor considered by Dr.
Gaske was the total energy consumed by a customer, which greatly determined the
purchased power costs.  These three
categories (customer, energy, and demand), and the allocators related thereto,
were then used as bases to establish rates. 
More specifically, the primary allocators were the amount of energy (in
kWh) consumed, the estimated non-coincidental peak demand (in kW) of each
class, and the number of customers on a particular rate schedule.(295)

 

2.                                      Allocation Factors

 

a.                                       Demand Data

 

(292)       Cap Rock Ex. 7, at 14.

 

(293)       Dr. Gaske developed 27 sets of allocation
factors that were used to allocate the various costs to individual services or
rate schedules relative to the cost responsibility of each customer class.  The most important of these were the number
of customers on a rate schedule, the amount of energy (kWh) consumed by the
customers, and the estimated NCP demand (kW) of each class.  Cap Rock Ex. 7, at 15.   

 

(294)       Implicitly,
the costs were also applied to property taxes, income taxes, and return on
investment associated with the plant. 
Cap Rock Ex. 7, at 14.

 

(295)       Cap Rock Ex. 7, at 13.

 

145

 

One of the primary issues in dispute concerning rate
design is whether Cap Rock’s demand study used to prepare its cost of service
is reliable.  OPC, TCGA, and Farm Bureau
all argue that the demand study is so seriously flawed that it may not be used
as a basis for determining the cost of service and rate design.  Cap Rock disagrees, maintaining that while
the methods undertaken may not have been the most desirable, the study is the
best data available and, regardless of how the data was obtained, the results
are reasonable.  After considering the
evidence presented, the ALJs conclude that Cap Rock’s cost of service study is
based upon many layers of estimations and assumptions that are deduced from
undefined and unverified data. 
Accordingly, the ALJs do not find the cost of service study to be a
reliable basis for developing a reasonable rate design.  So, instead of relying on Cap Rock’s proposed
rate design, the ALJs determine that the revenue requirement should be applied
on an across-the-board basis using the existing rate structure as a baseline.(296)

 

According to Cap Rock, its demand data is based on the
best information it had available.  While
it does not have load profile data, Cap Rock asserts that reasonable estimates
of class loads were developed from the available operating information.  Dr. Gaske estimated class demands from the
data available concerning demands on each circuit at most of the substations
where power is received from Cap Rock’s suppliers.(297)  This data provided the level of demand on
each circuit for the entire year, in 15 minute intervals.  From this data, Dr. Gaske took information
regarding the customers, classes, and individual loads on each circuit and
estimated the demands put on the circuits by each class.  While conceding that this method was not
ideal, Dr. Gaske testified that it produced reasonable estimates of relative levels of demand from each
customer class.  He 

 

(296)       As noted below, the ALJs recommend that
an exception be made for integrating the McCulloch customers into system-wide
rates.

 

(297)       Cap
Rock Ex. 305, at 39.

 

146

 

emphasized that for rate-case purposes, it is only necessary
to develop relative percentages of demand used to apportion costs between
classes in a reasonable manner.  While
his methods may not accurately estimate absolute levels of demand—this is what
a load-profile study would produce—he does not find that this limitation
renders his conclusions unreasonable.

 

According to Dr. Gaske, this is a significant issue in
this proceeding because the concerns raised by OPC, TCGA, and Farm Bureau are
directed at the absolute levels of demand, not the relative levels.  Because the absolute levels are inaccurate—a
point conceded by Dr. Gaske—OPC, TCGA, and Farm Bureau presume that the
relative levels of demand are also inaccurate. 
Dr. Gaske disagrees with this presumption and asserts that no party has
shown any systematic bias in the relative demand estimates.(298)  Rather, he argues that the estimates produce
a fair and reasonable allocation of costs.

 

As an example, Dr. Gaske offered the following charts
concerning a company with three customers and $1,000 in demand-related costs.(299)  The first allocation is based on load profile
studies:

 

	
  Class

  	
   

  	
  NCP Demand

  	
   

  	
  Relative Demand

  	
   

  	
  Allocated Costs

  	
   

  
	
  A

  	
   

  	
  300

  	
   

  	
  25

  	
  %

  	
  $

  	
  250

  	
   

  
	
  B

  	
   

  	
  400

  	
   

  	
  33.4

  	
  %

  	
  $

  	
  333

  	
   

  
	
  C

  	
   

  	
  500

  	
   

  	
  41.7

  	
  %

  	
  $

  	
  417

  	
   

  
	
  Total

  	
   

  	
  1,200

  	
   

  	
  100

  	
  %

  	
  $

  	
  1,000

  	
   

  

 

(298)       Cap Rock Ex. 305, at 41.

 

(299)       Cap
Rock Ex. 305, at 40.

 

147

 

The second allocation is based on estimated non-coincident
peak demands, like that performed by Dr. Gaske for Cap Rock:

 

	
  Class

  	
   

  	
  NCP Demand

  	
   

  	
  Relative Demand

  	
   

  	
  Allocated Costs

  	
   

  
	
  A

  	
   

  	
  360

  	
   

  	
  25

  	
  %

  	
  $

  	
  250

  	
   

  
	
  B

  	
   

  	
  480

  	
   

  	
  33.3

  	
  %

  	
  $

  	
  333

  	
   

  
	
  C

  	
   

  	
  600

  	
   

  	
  41.7

  	
  %

  	
  $

  	
  417

  	
   

  
	
  Total

  	
   

  	
  1,440

  	
   

  	
  100

  	
  %

  	
  $

  	
  1,000

  	
   

  

 

148

 

Dr. Gaske argues that these charts are demonstrative
of the Cap Rock facts, that while the absolute demand amounts may differ from
his determinations, the relative demands remain the same.  Since only relative demands are important in
rate design, Dr. Gaske contends that his estimated class demands from NCP
are both reasonable and appropriate.

 

TCGA responds that Dr. Gaske’s data is untrustworthy
and his methodology unreliable; 
therefore, as a matter of law, his rate design cannot be relied
upon.  Identifying past case law, TCGA
points out that the data underlying an expert’s testimony must be independently
evaluated to determine whether the testimony itself is reliable.(300)  In this case, TCGA finds that the data used
by Dr. Gaske to develop his demand allocators were unreliable, that the demand
allocators were responsible for the allocation of nearly three-fourths of the
rate base, and that the entire cost-of-service study must thus be rejected as a
means for rate design.

 

Specifically, TCGA contends the following regarding
the specific items below:

 

	
  Billing month data

  	
   

  	
  •           Without actual usage data,
  billing data was used to determine usage. However, no billing month to
  calendar month adjustments were made. It was demonstrated that for Book 191,
  in the months of November 2002, January 2003, and February 2003, all usage in
  the month was actually recorded before the month began, suggesting the data
  is not reliable.(301)

  
	
   

  	
   

  	
   

  
	
  Service drops

  	
   

  	
  •           Primary service extensions
  were improperly characterized as service drops for cost-allocation purposes.(302)

  
	
   

  	
   

  	
   

  
	
  Coincidence factor

  	
   

  	
  •           Actual data for developing
  the coincidence factor (CF) was not available, so Dr. Gaske had to estimate
  the CF based

  

 

(300)       Merrell
Dow Pharmaceuticals, Inc. v. Havner, 953 S.W.2d, 706, 713 (Tex.
1997).

 

(301)       Tr. Vol. 3, at 540

 

(302)       Tr.
Vol. 3, at 595-597.

 

149

 

	
   

  	
   

  	
  on input from Cap Rock employees which was not proven to be
  reliable.(303)

  

 

(303)                      Tr. Vol. 3, at 494.

 

150

 

	
  Substation NCP by class

  	
   

  	
  •              Actual
  data for developing the substation NCP by class was not Available, so it had
  to be estimated based upon a system planning model which was not proven to be
  reliable.(304)

  
	
   

  	
   

  	
   

  
	
  Substation NCP for cotton gins

  	
   

  	
  •           Even the estimations
  performed for substation NCP by class did not break out the cotton gins which
  were included in large power, so Dr. Gaske used his judgement to
  separate out cotton gins, adding another degree of estimation.(305)

  
	
   

  	
   

  	
   

  
	
  Cotton gins and reliance on NCP peak

  	
   

  	
  •           Five of the seven
  substations serving gins peak in July and August, when the gins are not
  running, suggesting that Dr. Gaske’s reliance on NCP for the allocation of
  substation costs was not a valid factor.(306)

  
	
   

  	
   

  	
   

  
	
  Assumption that NCP equals CP

  	
   

  	
  •           Because he had limited
  data, Dr. Gaske assumed that NCP would equal CP for the cotton gin class (CF
  of 1.0), but admitted that he knew this was incorrect.(307)

  

 

(304)       Tr. Vol. 3, at 498.

 

(305)       Tr. Vol. 3, at 498.

 

(306)       Tr. Vol. 3, at 517-519.

 

(307)          
Tr. Vol. 3, at 504.

 

151

TCGA further claims that Dr. Gaske’s demand allocators were
driven to a large extent by data that resulted in factors that Dr. Gaske
admitted were impossible.(308)  For instance, Dr. Gaske admitted that a CF
over 1.0, as indicated in his study, was obviously wrong.(309)  TCGA submits that the problem with such
inaccuracies is that they tend to be captured in the monthly calculations,
resulting in impossible load factors. 
For instance, TCGA noted there were five months where Dr. Gaske
reported two impossible cotton gin load factors and that, in four of those
months, the inaccurate CF was input into the calculations.  This suggests to TCGA that the effect of Dr.
Gaske’s incorrect CF assumptions for cotton gins went well beyond that
particular class and impacted the reliability of much of the data used for cost
allocation.  TCGA’s assumption was
supported by the load factors reported for large power primary and large power
secondary classes which, in Dr. Gaske’s calculations, were over 100% and
clearly incorrect.(310)   Because Dr. Gaske’s data and methodologies
are unreliable, TCGA urges that an across-the-board approach is the only
acceptable methodology for rate design in this case.

 

Farm Bureau raises similar concerns, insisting that Cap Rock’s
methods and assumptions used to develop its demand study are erroneous.  Rejecting Cap Rock’s argument that its demand
allocation factor is the best available data in this proceeding, Farm Bureau
maintains Cap Rock’s data was shown to be unreliable and observes that even Dr.
Gaske admitted no other utility in the country has used his method to develop
demand data for cost allocation.(311)

 

(308)                      The demand allocators were
driven by the data found in Schedule O-1.4.1, which Dr. Gaske said was
responsible for the allocation of 71.28% of Cap Rock’s rate base.  He later admitted that he did not adjust this
data for results he admitted were impossible. 
Tr. Vol. 3, at 510 and 512.

 

(309)                      Tr. Vol. 3, at 505.

 

(310)                      Tr. Vol. 3, at 506.

 

(311)                      Farm Bureau’s
Reply Brief, at 39. 

 

152

 

Farm Bureau witness Kit Pevoto testified to her understanding
of how Cap Rock determined NCP for each class.(312)  Cap Rock reviewed the peak demands from 70
circuits at substations in the Stanton and Hunt-Collin divisions at different
times.  Milsoft, a software program, was
used to designate and estimate a share of the peak demand from each circuit to
one of four major classes (residential, irrigation, small commercial, and large
commercial).  The sum of each class’s
share from the 70 circuits provided a demand number that Cap Rock used to
develop its NCP allocator.

 

(312)                      Farm Bureau Ex. 2, at 25.

 

153

 

Ms. Pevoto expressed concern with this process and maintained
that the demand number relied upon by Cap Rock was not the maximum peak demand
for the class, as NCP should indicate. 
Rather, Cap Rock used the sum of 70 peak-demand numbers recorded at
different times from the 70 circuits. 
Since NCP occurs when all customers from a class use the highest demand
for each month and not all customers hit their highest peak demand at the same
time for the month, Ms. Pevoto insists NCP does not equal the sum of all the
customers’ individual peak demands, as assumed by Cap Rock.(313)

 

Further, Farm Bureau points out that in using the Milsoft
model, Cap Rock relied on numerous assumptions provided by its employees.  These included the class composition for each
circuit, as well as the allocation of peak demand in the circuits.(314)  Yet, these employees did not testify and
their assumptions were not verified. 
Moreover, Farm Bureau argues that numerous erroneous assumptions were
made by Dr. Gaske.  In particular, he
testified that NCP demand allocators were formulated based on data that he
later admitted to be inaccurate.(315)  Because of these concerns, Farm Bureau
concludes that the underlying data relied upon by Cap Rock to develop its cost
allocators are not reliable, that the allocators themselves are not reliable,
and that Cap Rock’s cost-of-service study may not be used to perform the cost
allocation in this case.

 

OPC acknowledges that a cost-of-service study is, at best, a
tool for evaluating a range of reasonable estimates and that numerous
judgements and subjectivity are required in identifying and measuring cost
causation.  OPC also recognizes that Cap
Rock is a very small utility, which may somewhat limit the data it has
available to develop a cost-of-service study. 
Nevertheless, OPC asserts that rarely, if ever, has an electric utility

 

(313)                      Farm Bureau Ex. 2, at 26.

 

(314)                      Tr. Vol. 3, at 495-496.

 

(315)                      This data related to cotton gins and is
discussed more thoroughly above in the arguments presented by TCGA.  Tr. Vol. 3, at 500, 515, and 519.

 

154

 

presented demand data with as little assurance of reliability
as that presented by Cap Rock in this case. 
Underlying OPC’s concerns are Cap Rock’s demand data which OPC’s
witness, Clarence Johnson, found to be seriously defective.(316)  OPC suggests that when unreliable data are
input into the cost study, the results reported are equally unreliable.  In essence, “garbage in, garbage out.”(317)

 

(316)                      OPC Ex. 3, at 27.

 

(317)                      OPC’s Post-Hearing
Initial Brief, at 29.

 

155

 

OPC explains that the bulk of Cap Rock’s base rate is
allocated on NCP demand, which requires hourly data measured by an interval
data recorder (IDR) meter.  Cap Rock’s
IDR meters are located at its substations and report information from circuits
generally connected to numerous customers. 
The challenge then is to break down the information gathered by the IDR
meters into particular customers and customer classes.  OPC asserts that most utilities resolve this
through load research, where statistical samples of customers are relied upon
to infer demand for the classes.  This
load research analysis is designed to provide statistical confidence levels of
90-95%.(318)

 

Cap Rock did not base its cost study on load research.  Instead, Cap Rock took the IDR data  and input it into a software program,
Milsoft, which measured the usage on distribution line segments and allocated
the demand to various customers on the lines.(319)  Mr. Johnson explained that each line
generally serves several classes of customers, so Milsoft used algorithms to
apportion demands on each particular line to the classes of customers served by
that line.  He suggested that this
process can only produce estimates of class demands and that the accuracy of
those estimates depends on the accuracy of the assumptions and data input into
the software program.  Mr. Johnson added
that, in this instance, the accuracy of the estimates was further limited by
the fact that the customer classes included in Milsoft were not the same as the
classes used in Cap Rock’s cost-of-service study.(320) Accordingly, another level
of assumptions was layered into the estimates in order to separate some of the
estimated classes produced by Milsoft into the classes used in Cap Rock’s
cost-of-service study.

 

(318)                      OPC Ex. 3, at 27.

 

(319)                      OPC Ex. 3, at 26.

 

(320)                      OPC Ex. 3, at 26.

 

156

 

With all of these estimates and assumptions, Mr. Johnson is
skeptical that Cap Rock’s demand estimates could meet any statistical
confidence test.  His concern is
increased by anomalies found in the output data, such as the existence of a
monthly class load factors in excess of 100% for some classes.  Mr. Johnson attributes these anomalies to
incorrect demand data input into the software program.(321)

 

OPC expresses additional concerns that Cap Rock “mixed and
matched” data for the various classes. 
For cotton gins, Dr. Gaske relied on billing demands to establish peak
demands on particular circuits.  Since
billing demand provides customer NCP
data, not the class NCP data used
to predict demand for other classes, Mr. Johnson asserted that cotton gins were
treated differently and that the inconsistent treatment may cause incompatible
data across classes.(322)  Mr. Johnson was also troubled by Cap Rock’s
extrapolation of data to the McCulloch division from circuits on other parts of
the Cap Rock system.  He is generally
skeptical of obtaining acceptable results when demand characteristics from one
geographic area are transposed into another area.  In this instance, the differential impact of
the weather adjustment on the McCulloch division, relative to the rest of the
system, gives him particular reason for concern.(323)  OPC urges that the number of
unjustified assumptions and estimations, as well as inconsistent treatment
across classes, render Cap Rock’s cost-of-service study unreliable and
inadequate for rate design.

 

Therefore, OPC recommends that rates be developed based upon
the relationships among existing class revenues.  While not an ideal result, OPC believes this
is the logical

 

(321)                      OPC Ex. 3, at 26.

 

(322)                      OPC Ex. 3, at 27.

 

(323)                      Cap Rock’s weather normalization model
indicated different consumption patterns for McCulloch residential users than
the rest of the system.  The ALJs have
rejected Cap Rock’s weather normalization adjustment, but the concerns still
exist because there is no reasonable explanation in the record as to whether
McCulloch division customers actually have different usage patterns from other
Cap Rock customers or whether Cap Rock’s weather normalization modeling was
simply inaccurate. 

 

157

 

outcome of unreliable load data. Without reliable data, OPC
maintains there is no basis upon which to change the existing revenue
relationships among classes.

 

158

 

After considering the evidence presented, the ALJs conclude
that Cap Rock has failed to meet its burden of offering sufficient, credible
evidence to support the change in rate design it is seeking.  Instead, the cost-of-service study prepared
by Cap Rock is either contradicted by other reliable evidence or unsupported on
numerous grounds.  Thus, the ALJs conclude
that any revenue changes should be apportioned pursuant to the existing rate
structure.

 

As an initial matter, the ALJs address the criteria by which
they are reviewing Cap Rock’s rate design. 
Staff appropriately described rate design as both science and art.  The cost-of-service study is to some extent
science, while the revenue spread (consideration of non-cost factors in making
a reasonable distribution of an overall revenue increase or decrease) is art.  However, the ALJs recognize that the cost-of-service
study is not an exact science and will oftentimes have reasonable estimates and
approximations factored into it.  The
primary question for rate design in this case is whether Cap Rock’s demand
study, upon which its cost-of-service recommendation is based, is both
reasonable and trustworthy.

 

As indicated above, the ALJs find Cap Rock’s demand study
neither reasonable nor trustworthy.  In
reaching this conclusion, the ALJs identify three areas of concern: (1) Dr.
Gaske relied on data not proven to be reliable; (2) Dr. Gaske made unsupported
and incorrect assumptions; and (3) some of the results offered by Dr. Gaske are
unquestionably invalid.

 

First, it has not been shown that the data upon which Dr.
Gaske relied is sufficiently trustworthy. 
The most accurate way to conduct a demand study is through load
research, relying on statistical samples of actual usage.  When load data is unavailable, a utility may
rely on the load data from a similar utility, as long as the data is “matched
up” to make sure the classes and other factors are appropriately considered.

 

159

 

In this instance, Cap Rock did not have load data so it
attempted to develop this information from billing data in order to determine
NCP by class.  While perhaps this method
could  provide data that is reasonably
accurate, this was not affirmatively shown in this case.  As an initial concern, the billing data was
not separated by customer class, so the calculations and conversions required
the following estimations and assumptions:

 

•                                          a Cap Rock system engineer
estimated the percentage load for each customer on each circuit and provided
that data to be input into Milsoft;

 

•                                          Milsoft was used to estimate
each class’s share from all the circuits;

 

•                                          the estimate provided by
Milsoft, approximating the sum of peak demand numbers recorded at different
times from the 70 circuits, was assumed to be NCP;(324) and

 

•                                          the customer classes in
Milsoft did not correspond with those needed for the rate design, so Dr. Gaske
estimated the percentage of use between cotton gins, large power primary and
large power secondary based upon information provided by Cap Rock employees.(325)

 

With each layer of estimation, the cost allocations became
more subjective and less trustworthy. 
Certainly, estimates drawn from reliable data can be acceptable.  However, when conclusions are based upon
estimates that are made from other estimates, which are themselves based upon
assumptions and unproven data, then the reliability of the conclusions becomes
very suspect.  Analyzing the methods and
underlying data used to make the percentage of load estimates input into
Milsoft might have alleviated some concern, but the Cap Rock personnel who provided
the estimates were not presented as witnesses. 
Morever, Dr. Gaske was unable to support the estimations, testifying
that he

 

(324)                      Mr. Gaske testified that in he did not use NARUC’s recommended NCP,
which is the maximum demand in one hour for a class.  Rather, he used demands on individual
circuits. 

 

(325)                      Tr. Vol 3, at 495-498.

 

160

 

was unsure how the estimates were developed.(326)  Absent additional information, the ALJs are
unable to evaluate the validity of the estimations made and are left with
little choice but to conclude that Cap Rock failed to prove up their accuracy.

 

(326)                      Farm Bureau Ex. 52, at 42.  To be clear, the ALJs do not find the
testimony of those who made the estimates necessary.  However, in the absence of such testimony,
they do expect that Dr. Gaske, as the project manager, should be able to
testify as to how the estimates were made with some certainty.

 

161

 

Second, the ALJs are concerned by certain calculations  and assumptions made by Dr. Gaske.  The most troubling of these is that Dr. Gaske
assumed the CP for the cotton gin class was equal to NCP, resulting in a
coincidence factor of 1.0.(327)  Dr. Gaske wrongly presumed the
circuits were designed around the capacity demand of the gins.  He later found out that five of the seven
substations serving gins peaked in July and August, when the gins were not
even running.(328)  Clearly, the gins do not drive capacity, so
the cotton gin CP does not equal NCP.  On
cross-examination, Dr. Gaske admitted that he simply did not have enough
information to determine the coincident factor for the cotton gin class.(329)

 

(327)                      Tr. Vol. 3, at 503.

 

(328)                      Tr. Vol. 3, at 499 and 517.

 

(329)                      Tr. Vol. 3, at 504.

 

162

 

Third, the evidence supports claims made by OPC, TCGA, and
Farm Bureau that a significant amount of the data and factors must be “wrong.”(330)  For example, the lighting class is noted to
have a coincidence factor of 1.94, when any factor over 1.0 is clearly
erroneous.(331)  And, two load factors for large power primary
and large power secondary are in excess of 100%, again clearly incorrect.  Dr. Gaske admitted as much, but would have
the ALJs believe the inaccurate data is inconsequential because it is not “wrong”
for the purposes for which it was intended.(332)  He argued that only relative
demand is important and that while the absolute demand levels may be
inaccurate, they are of no consequence. 
But Dr. Gaske ignores the fact that whether the information is “wrong”
for the purposes for which it is intended depends on whether any bias in the
data is uniform (i.e., it has the
same impact on all classes) or actually impacts one class differently than
another.  When asked if he knew whether
the bias in his demand data was uniform, Dr. Gaske conceded, “I don’t know if
it’s biased in one way or another.”(333)  Thus, the ALJs conclude that Cap
Rock’s argument—that inaccurate data on absolute demand should be ignored—is
not well founded.  If the absolute demand
data for one class is biased in a way that the data for other classes is not,
then the relative demand data will be skewed.

 

Ultimately, Cap Rock argued that the concerns mentioned above
were corrected as Dr. Gaske made adjustments to the data in his rebuttal
testimony so that more reasonable estimates were reflected.  But simply adjusting data to make it
plausible does not make the data itself reliable.  The problem that Cap Rock cannot overcome is
that the fundamental assumptions and estimations relied upon to develop its
demand study are oftentimes unsubstantiated and other times simply wrong.

 

(330)                      See, e.g., Tr. Vol. 3, at 505.

 

(331)                      Tr. Vol. 3, at 505.

 

(332)                      Tr. Vol. 3, at 556.

 

(333)                      Tr. Vol. 3, at 557.

 

163

 

Finally, in his rebuttal testimony, Dr. Gaske attempted to
bolster his demand study by comparing the resulting demand allocations to the
load data from AEP-Texas North Company (AEP, formerly known as West Texas Utilities).(334)  He concluded from this comparison that Cap
Rock’s demand estimates do not produce “ridiculous or impossible” allocation
factors.(335)  Rather, in his opinion they allocate
demand-related costs in a much more reasonable manner than that suggested by
OPC, TCGA, and Farm Bureau, who favor maintaining the present cost allocations.

 

(334)                      Cap Rock Ex. 305, at 43-45.  

 

(335)                      Cap Rock Ex. 305, at 46.

 

164

 

The ALJs acknowledge that relying on load data and ultimately
cost allocation factors from another, similar utility is certainly acceptable
and even preferred to the methodology employed in Cap Rock’s demand study.  But when relying on such data, the
comparisons must be made following certain protocols to assure
reliability.  One such protocol is to
make certain that the classes from the two entities in comparison either
directly match up or, alternatively, that appropriate adjustments are made to
account for the differences.  Dr. Gaske
failed to ensure this correlation.  He
did not review the AEP tariffs,(336) and the evidence at the hearing showed a lack of clear correlation
between his allegedly “comparable” classes. 
For example, Dr. Gaske correlated AEP’s general service basic class to
Cap Rock’s commercial class, but he admitted that AEP’s general service was
available to customers with a maximum metered load of not more than 1,000 kW
while Cap Rock’s commercial class was available only for demand less than or
equal to 50 kW.(337)  Similar concerns were raised about the
mapping of other classes.  Further, there
is another Cap Rock cost-of-service study prepared by Dr. Gaske in 2002 to
which the present study may also be compared. 
It is telling that the base cost to be recovered from the cotton gin
class from 2002 to 2004 increased over 400%, from $244,412 in the 2002 study to
over $1,000,000 with the present study. 
Again, Dr. Gaske was unclear as to an explanation for this significant
difference.  On one hand, he stated that
some of the differences resulted from changes in allocation factors, while he
later opined that a change in technique drove the difference.(338)  Either way, such a significant difference (in
a span of only two years) in a study conducted by the same person raises
serious concerns about the reliability of one, if not both, of the studies.

 

Ultimately then, the ALJs conclude Cap Rock’s attempt to rely
on AEP’s data to

 

(336)                      Tr. Vol 8, at 1581.

 

(337)                      Tr. Vol. 8, at 1583-1585.

 

(338)                      Tr. Vol. 3, at 528, 532.

 

165

 

bolster its rate design fails.  Once again, the methodology offered by Cap
Rock was not shown to be reliable.  Dr.
Gaske insists that the AEP data proved that Cap Rock’s allocation factors were
not “ridiculous or impossible.”  The ALJs
do not necessarily disagree, but the standard is not one of ridiculousness or
impossibility.  Rather, the issue is
whether the evidence proves that Cap Rock’s cost of service study is reliable
and that the rate design based upon such study results in rates that are just,
reasonable, and not unreasonably preferential or discriminatory.  Given the clear problems with Cap Rock’s cost
of service study, the ALJs simply cannot conclude that Cap Rock’s proposed rate
design ensures this standard is met.

 

Turning to Staff’s rate design, Matthew Troxle offered
several significant changes to Cap Rock’s rate design.  The recommendations offered by Mr. Troxle
included the use of a 4CP demand allocator rather than the NCP loads suggested
by Cap Rock.  Mr. Troxle reasoned that
the transmission grid was built to serve customers’ peak load; therefore,
classes should be charged only on their share of contribution to that load.(339)  He noted that Commission Substantive Rule § 25.192
requires the use of the ERCOT 4CP for transmission rates and believes it should
be extended into the rates of the distribution utility.  A true ERCOT 4CP was not provided by Cap
Rock, but Mr. Troxle found it acceptable to use the Cap Rock 4CP based on
peaks in January, February, July and August.  Mr. Troxle concluded this 4CP allocator,
rather than NCP, should have been used as the allocator relating to
transmission.  He further suggested that
FERC Account 555 be split into three components: energy, demand, and
transmission.  In addition to the 4CP
allocator for transmission, Mr. Troxle recommended a 12CP allocator for demand,
which he believes will more accurately reflect the proportionate demands of the
different customer classes.(340)

 

(339)                      Staff Ex. 5, at 12.

 

(340)                      Staff Ex. 5, at 14. Dr. Gaske agreed to these changes.

 

166

 

Although Mr. Troxle made significant revisions, he still
relied on Cap Rock’s underlying data.  In
closing arguments, Staff admits that it did not have the resources to
independently analyze Cap Rock’s proposed billing determinants and to develop
its own demand data, so it had to rely on that provided by Cap Rock.(341)  Accordingly, Staff agreed that an
across-the-board reduction was an acceptable method for cost allocation if Cap
Rock’s underlying data was found to be unreliable.

 

(341)                      Staff’s Reply
Brief, at 33.

 

167

 

While agreeing that Mr. Troxle’s suggested changes are an
improvement, the ALJs do not find Cap Rock’s underlying data, relied upon by
Staff to make its proposals, to be trustworthy. 
Therefore, the ALJs find Staff’s proposal to be unreliable, flawed with
the same estimates and assumptions offered by Cap Rock.  Staff contemplated such an outcome, noting in
its reply brief that an across-the-board allocation (based on the current rate
design) was an acceptable approach, with two important exceptions: (1) in order
to implement system-wide rates, the rates of customers in the McCulloch
division should be raised to the same level as those charged other customers,(342) and (2) the general
service-city customer rate (Rate Code 119) be treated as a discounted rate.(343)  The ALJs find these exceptions appropriate
and recommend that the rates be designed based on the existing cost-allocation
structure but for the two exceptions noted by Staff which the ALJs recommend be
adopted.(344)

 

To
summarize, then, the ALJs find that neither Cap Rock’s proposed rate design nor
Staff’s proposed rate design should be used. 
Rather, the Commission should continue to use Cap Rock’s existing rate
design, with the application of the two exceptions noted above.  If the
Commission adopts this recommendation, then much of the following discussion
under the rate design section (and any resulting recommendations) becomes
moot, because many of the issues relate to the application of Cap Rock’s
proposed rate design.  However, the ALJs address and discuss these
matters so that the Commission will have a comprehensive analysis of the issues
presented.  Then, if the Commission
declines to apply the ALJs’ primary recommendation to continue to use Cap Rock’s
existing rate design, it will have the necessary information to properly
structure a new rate design.

 

(342)                      This issue is addressed further below.

 

(343)                      Elsewhere, the ALJs discuss in more detail
the reasons for treating Rate Code 119 as a discounted rate, and recommend such
treatment. 

 

(344)                      The ALJs acknowledge that there may be
problems with the existing rate design. 
But, in the absence of reliable evidence sufficient to establish a
different rate design, the ALJs are unable to recommend changes to it.  Moreover, it appears that most of the
intervenors find the existing rate design to be the best option available for
structuring rates.  

 

168

 

b.                                       Loss Factors

 

TCGA witness Mr. Evans testified that the loss factors noted
by Cap Rock are very high in comparison with other utilities, both by class and
system, particularly since they reflect only distribution system losses.(345)  He is concerned that Cap Rock incurred losses
only through the substations for power supplied by SPS, and he objects to the
inclusion of losses for power purchased for the City of Farmersville in Cap
Rock’s loss calculations.

 

Dr. Gaske agreed with Mr. Evans in that the purchased power
attributable to Farmersville should not have been included in the loss
calculations.  He also found that energy
recorded as “unbilled energy” was counted twice.  After making the appropriate changes, Dr.
Gaske opined that the correct losses are 13.14%.(346)  Dr. Gaske added that Mr. Evans’ concern about
losses only incurred through the substations for power supplied by SPS is
misplaced.  NewCorp owns the substations
through which power is supplied by SPS, while Cap Rock owns the substations in
the remaining portions of its service area. 
Therefore, losses attributable to transmission are only those incurred
by NewCorp (the transmission company) and its substations.  Losses through substations owned by Cap Rock
were not included in distribution system losses.

 

The ALJs conclude that the final loss calculation as supplied
by Cap Rock is appropriate.  While Mr.
Evans claimed that Cap Rock’s losses were high as compared to other entities,
he did not provide any data supporting his conclusion or even supporting a
finding that the entities he offered for comparison were sufficiently
similar.  Dr. Gaske has appropriately
made adjustments to the loss calculations in areas where Mr. Evans made a valid
point, and he provided a reasonable explanation for why transmission losses
were

 

(345)                      TCGA Ex. 1, at 41.

 

(346)                      Cap Rock Ex. 305, at 37. 

 

169

 

only incurred through the substations for power supplied by
SPS.

 

c.                                       Allocation of
Capacity-Related Distribution Plant

 

Cap Rock has proposed to use NCP by class when allocating
local distribution system demand-related costs such as poles, towers, and
fixtures.  No other party separately
addressed this issue and the ALJs do not recommend any changes to Cap Rock’s
proposal.

 

d.                                       Allocation of Transmission
Plant, Substations, Depreciation Reserve and Expense

 

Staff proposed allocation of transmission costs using the
relative demands of each class during Cap Rock’s four highest monthly
coincident peaks (4CP) and to recover transmission costs in the energy costs
for general service customers and in  the
demand charge for other classes.(347)  Cap Rock agreed and no other
party briefed this issue.  Therefore, the
ALJs do not recommend any changes to Staff’s proposal.

 

e.                                       Allocation of Poles, Towers,
Fixtures, Overhead and Underground Lines

 

Dr. Gaske recommended NCP be used to allocate these cost
items.  He reasoned that NCP was the best
way to allocate these costs because all customer classes share in the usage of
poles, towers, fixtures, and lines.(348)  Ms. Pevoto disagreed with this
proposal, instead preferring to allocate half of the costs based on CP and the
other half on energy.(349)  She opined that Cap Rock built its
distribution system to meet two customer needs: 
transporting customer peak demand at the system peak and  providing basic energy service for customers
at all times.  Cap Rock’s NCP methodology
only considers contribution to peak demand, so Ms. Pevoto argues it is not
reasonable.

 

(347)                      Staff Ex. 5, at 12.

 

(348)                      Cap Rock Ex. 7, at 18.

 

(349)                      Farm Bureau Ex. 2, at 26.

 

170

 

Mr. Evans also objected to Dr. Gaske’s proposed allocation,
recommending that substation costs be separated from plant accounts and
allocated based upon a 4CP allocator and the months of January, February, July,
and August.(350) He further recommended that
the remaining distribution plant costs be allocated on the average circuit NCPs
for the same four months, except for underground distribution lines for which
he recommended removing the NCP demands for the cotton gin, irrigation, and
large power primary classes.  Mr. Evans
reasoned that, for most electric utilities, the vast majority of underground
distribution facilities are located in subdivisions, commercial and industrial
parks, or in other urban locations.(351)

 

The ALJs find that allocation of the distribution plant
should be limited to demand and customer components, excluding an energy
component.  As noted by Cap Rock, the
NARUC Electric Utility Cost Allocation
Manual states:

 

When the utility installs distribution plant to provide
service to a customer and to meet the individual customer’s peak demand
requirements, the utility must classify distribution plant data separately into
demand- and customer-related costs.(352)

 

Costs associated with the distribution plant are fixed and
should not vary with the amount of energy transported over the lines.  These costs are local in nature, as the size
and the costs of the installed facilities are determined by the local demand
that will be placed on the equipment.(353)  Once installed for a local
feeder, the investment does not vary based on energy usage or on demand for
other feeders.  Thus, the ALJs agree with
Dr. Gaske and Cap Rock that the use of an energy factor in this instance is
inappropriate.

 

(350)                      TCGA Ex. 1, at 49; TCGA’s Reply Brief on the Merits, at 12. 

 

(351)                      TCGA Ex. 1, at 50.

 

(352)                      Electric Utility Cost
Allocation Manual, NARUC, January 1992,
at 90. 

 

(353)                      Cap Rock Ex 305, at 14.

 

171

 

Equally inappropriate is Mr. Evans’ proposal which would
prevent a fair allocation of distribution line costs to cotton gins.  For three of the four months relied upon in
his allocation, cotton gins were not operating. 
However, cotton gins continued to have service on demand and Cap Rock
continued to have the costs associated with these services.  Accordingly, the ALJs determine that cotton
gins should be allocated costs associated with the distribution plant for the
entire year.

 

Finally, Mr Evans’ suggested that substation plant costs be
allocated on 4CP rather than NCP.  But
due to load diversity and substations peaking at different times, Dr. Gaske
stated that the CP is not the primary cost driver for substation
investment.  Rather, the primary cost
driver is a less diversified measure of demand, such as NCP.  The ALJs agree and conclude that the
allocations suggested by Dr. Gaske in his rebuttal testimony are appropriate.

 

f.                                         Purchased Power Expense

 

Initially, Cap Rock proposed allocating purchased power
expenses using only an energy allocator. 
Pioneer and Staff suggested that purchased power expenses should be
allocated using both energy and demand allocators.  On rebuttal, Cap Rock agreed.

 

However, Staff failed to create distinct purchased power
recovery rates for each class, thus failing to appropriately recognize the
demand allocation.  The ALJs find that
the 12CP demand allocator suggested by Staff is appropriate, but agree with
Pioneer and Cap Rock that distinct purchased power charges should be designed
for each class.  The ALJs believe Dr.
Gaske implemented these changes in his final COS proposal.

 

172

 

g.                                      Density Weighting Factors

 

This issue was sufficiently addressed above in the section concerning
the proposed general service-city limit rate. 
As concluded in that section, the ALJs agree with OPC, Staff, TCGA, and
Farm Bureau that Cap Rock failed to justify its density weighting factors.

 

173

 

h.                                      Allocation of Administrative
and General Expense

 

In its study, Cap Rock allocated Administrative and General
(A&G) expenses(354) based on an allocation
factor derived from total transmission and distribution O&M expenses.  Staff, Farm Bureau, and TCGA each suggest
that customer-related expenses such as those associated with customer
information, customer service, and sales activities conducted by Cap Rock be
included in this allocation.  Cap Rock
rejects their suggestion, maintaining that the inclusion of customer-related
expenses would bias the results of the allocation too much toward the customer
component of costs.

 

The ALJs agree with Staff, Farm Bureau, and TCGA.    Dr. Gaske admitted there is no single “correct”
way to allocate A&G costs, which he described as true common costs in that
they are necessary regardless of the level of customers, demands, energy sales,
revenues, or plant investment of the system.(355) Costs related to customer
service and sales activities are also true common costs and are appropriately
included in the calculations leading to the allocation factor for A&G.

 

i.                                         Weighted Allocation Factors
for Transformer, Meters, and Service Drops

 

Cap Rock contends that when attaching a customer to the
distribution system it incurs non-energy-related, fixed costs that vary
according to customer class.  For
example, Cap Rock suggests that a general service meter costs $142 while a
meter for a commercial customer costs $220. 
In order to account for these differences, Dr. Gaske developed weighted
allocation factors which were used for meters, service lines, billing, and
meter

 

(354)                      Dr. Gaske detailed that A&G expenses include
salaries of management who oversee the entire distribution system, outside
services, property insurance, injuries and damages, and other general expenses
that relate to the operation and maintenance of the system.  Cap Rock Ex. 305, at 33.

 

(355)                      Cap Rock Ex. 305, at 33.

 

174

 

reading.(356)

 

(356)                      Cap Rock Ex. 7, at 15.

 

175

Transformer costs are similar but vary with both the number
of customers and the level of demand, so they were categorized into customer
and demand components.(357)  Costs associated with the customer component
of transformers for a typical general service customer were established as the
base, with costs in excess of the base classified as demand-related.  Allocation to the customer classes occurred
both for customer-related costs, on the basis of a weighted number of
customers, and demand-related costs, on class demand data.

 

Staff objected, noting that the Commission prefers
system-wide average rates and allocations and because Cap Rock failed to
adequately support its allocation factors. 
Mr. Troxle testified that,  while the use of weighted allocation factors
makes sense in theory, he is concerned with their use in this instance, where
the factors themselves have not been shown to be correct.  Mr. Troxle noted that Cap Rock’s weighted
factors are deficient in that they (1) contain only two different density
levels, (2) inappropriately exclude non-Midland data and other (potentially
higher) cost factors associated with serving urban customers (such as land
costs and underground service), (3) rely on average replacement cost data, and
(4) fail to account for amounts paid through contributions in aid of
construction.(358)  Because of his lack of confidence in Cap Rock’s
weighted allocation factors, Mr. Troxle recommends that unadjusted
allocation factors be used.

 

In Cap Rock’s rebuttal case, Dr. Gaske did not attempt to
address the issues raised by Staff, opining that developing the factors as
suggested by Staff would be needlessly complex. 
Cap Rock also disputed Staff’s suggestion that a booked investment
allocation should be used, preferring instead to rely on replacement cost.  Staff responded that, in Texas, rates are
based upon “original cost” and not on “replacement costs,” adding that if Cap
Rock’s books are insufficient to determine original costs, it should address
this shortcoming in order to comply with the Commission’s rate and
record-keeping

 

(357)                      Cap Rock Ex. 7, at 17.

 

(358)                      Staff Ex. 5, at 15.

 

176

 

requirements.

 

Farm Bureau contends that the weighting factors used by Cap
Rock to allocate the service-line-drop costs were arbitrarily developed.  Second, Farm Bureau maintains that because of
Cap Rock’s history as a cooperative, it charged all customers the average cost
associated with service-drop lines unless the drop was more than the average,
where it required the customer to pay the additional cost as CIAC.  According to Farm Bureau, this practice is
still reflected in Cap Rock’s proposed tariff, even though it is now an
IOU.  Because Cap Rock does not place the
CIAC on its books as plant in service and because the CIAC is not part of the
cost recovery from the rates, each customer–regardless of the class–should
continue to pay only the average cost for service drop lines.  As a result, Farm Bureau insists there is no
need to apply any weighting factor in this instance.

 

OPC agrees with Cap Rock that unweighted customer allocators
produce results biased against residential customers, whose meters and services
are not as costly as those for other classes. 
However, OPC finds the unreliability of the data developed by Cap Rock
to be yet another reason to abandon the use of Cap Rock’s cost-of-service study
in this case and instead to implement an “equal percentage change in revenues.”

 

The ALJs recognize that costs associated with meters and services
will vary by customer class.  However, in
this instance, Cap Rock failed to appropriately analyze the costs associated
with each class.  Accordingly, even if
the Commission were to use Cap Rock’s cost-of-service study, its proposed
weighted factors should not be used in this instance.  Rather, the ALJs find the unweighted customer
allocators suggested by Staff to be more appropriate.

 

177

 

3.                                      Change in Allocation Methods

 

OPC, TCGA, and Farm Bureau all object to the new allocation
methods.  A 2002 cost-of-service study
differed with the present one in that NCP was not used.  Instead, in 2002, Cap Rock relied primarily
on CP and an energy allocator.  Cap Rock
perceives the intervenors’ objection as related to the change itself and argues
that the existence of an earlier study does not preclude the use of an updated
analysis in this proceeding.

 

To the extent that intervenors’ objection is to any change
from the 2002 study, the ALJs agree with Cap Rock.  It is not bound by a previous study when the
rates at issue are prospective.  However,
the ALJs understand OPC, TCGA, and Farm Bureau to object more to the new
allocations themselves rather than to any
change from the 2002 methods.  These
intervenors repeatedly argue that the new allocation methods and data are not
proven up with supporting data or  other evidence by Cap Rock.  As noted above, the ALJs agree that the new
study is unreliable.

 

D.                                    Impact on Customers and
Gradualism

 

Cap Rock maintains that it has designed rates using the cost
of providing service to each class of customer. 
It asserts that simply allocating changes in revenue requirement based
on current allocations of cost is unfair to those classes who currently
subsidize other classes of service.  Cap
Rock defends its cost-of-service study as far better than the alternative of
simply ignoring the present data altogether.

 

Cap Rock further urges that gradualism prevents or delays the
ultimate goal of moving the overall rate design to a relative rate of return of
one for all classes.(359)  The gradualism factors proposed by Mr.
Daniel, Mr. Johnson, and Ms. Pevoto (ranging from 1.75 to 1.25) are so low, in
Cap Rock’s opinion, that the “result is glacial, not gradual.”  The proposed gradualism factors create a
permanent subsidy of some classes by others, leading Cap Rock to call it the “gradualism
penalty.”  Cap Rock prefers to apply no

 

(359)                      A relative rate of return index of one
suggests that the revenue obtained from this class is equal to its cost of
service.  Farm Bureau
Ex. 2, at 35. 

 

178

 

gradualism factor, but instead to
mitigate the impact of a rate increase on particular classes.  Cap Rock proposes to limit the rate increase
on the general service class to approximately half of the average percentage
required of other classes, to freeze the revenue responsibility of the lighting
class, and to provide  a rate increase
for the large power-secondary class of approximately two-thirds of the average
rate increase for all classes.(360)  Cap Rock justifies the mitigation of
increases for the general service class, primarily consisting of rural
customers, as a means to offset any additional rates these customers would pay
as a  result of establishing the general
service-city customers as a separate class.(361)

 

OPC describes Cap Rock’s concern over gradualism as
misguided.  OPC argues that  gradualism is more the rule, rather than the
exception, and that a gradualism range of 1.25 to 1.75 times the system average
is consistent with Commission precedent.(362)  Given the Commission’s past
practice of implementing gradualism similar to that recommended in this case,
OPC asserts Cap Rock’s fear of permanent subsidies is misplaced.  Mr. Johnson recommended the use of a 1.25
gradualism ceiling if the Commission decides to rely upon Cap Rock’s class cost
study.  He believes this lower boundary
of the traditional range for gradualism is appropriate in this case because Cap
Rock’s cost-of-service study is quite speculative and because the impacts
encountered by the customers during the transition from a cooperative to an IOU
should be moderated.

 

(360)                      Cap Rock Ex.7, at 19. 

 

(361)                      Cap Rock Ex. 305, at 56.  

 

(362)                      See OPC’s Post-Hearing
Reply Brief, at 17, citing Application of Gulf States Utilities for Rate Increase,
Docket No. 7195/6755, 14 P.U.C. Bull. 1943, 2285 (1988) [1.25
times]; Application of Texas Utilities
Electric Company for Rate Increase, Docket No. 9300, 17 P.U.C. Bull.
2057 (1991) [1.45 times]; Application of
Houston Lighting &Power Co., Docket No. 6765/6766, 13 P.U.C.
Bull. 1 (1986) [1.5 ceiling, 0.5 floor]; Application of Texas Utilities Electric Co.,
Docket No. 11735, 20 P.U.C. Bull.  1029 (1995) [1.75
ceiling, 0.5 floor]; Application of Gulf
States Utilities Co. Docket No. 5560, 10 P.U.C. Bull.  405 (1984) [1.5 ceiling, 0.5 floor].

 

179

 

Farm Bureau insists that Cap Rock’s proposed assignment of
revenues would create rate shock for many customer classes.  For instance, the cotton gin and irrigation
classes would receive increases of 130% and 36%, respectively.  To lessen the impact on these classes, Ms. Pevoto  proposed the
following: a gradualism ceiling of 1.3 times the system increase, no decreases
to classes which experience a decrease as a result of the uniform rate of
return cost-of-service study,(363) and setting the remaining classes’ revenue increases based on the
relative ranking of their percentage revenue increases in the cost-of-service
study.(364)

 

Pioneer witness Mr. Daniel presumed an overall revenue
decrease and proposed a 
gradualism rate of 1.75 time the system average, while leaving
the cotton gins at their current level.(365)

 

As an initial matter, the ALJs note that they do not have
sufficient evidence to agree or disagree with Cap Rock’s argument that its
present cost-of-service study is at least better than the present allocation of
costs.(366)  First, as noted above, Cap Rock failed to
present supporting evidence sufficient to establish the reliability of its
present cost study.  Second, the ALJs
have not analyzed the 2002 cost study or current class allocations.  This

 

(363)                      A cost-of-service study at a uniform rate of
return determines the cost of service and revenue adjustment for each class
based on a comparison with all other rate classes.  Ms. Pevoto suggested that, because the
overall system would experience a substantial increase, it is reasonable to
assign some small increase to all classes, even those that otherwise might
receive a decrease per the cost-of-service study.  This is one way she mitigates
against rate shock for classes receiving a substantial increase per the cost
study.  Farm Bureau Ex. 2, at 34-36. 

 

(364)                      The class with the highest percentage rate increase
in the cost-of-service study would maintain that relative ranking in Ms. Pevoto’s
recommendations.  Farm
Bureau Ex. 2, at 34.

 

(365)                      According to the cost study, the Cotton Gin
class is below unity.  Pioneer
Ex. 3, at 30.

 

(366)                      In its written arguments, Cap Rock states: “It
(allocating changes in revenue requirement based on current allocations of
cost) also implies that there is no information for a current cost-of-service
study.  That is clearly incorrect,
particularly if Cap Rock’s cost study is revised to incorporate the suggestions
of the other parties that have merit. 
Cap Rock’s cost study is far better than ignoring the available, current
cost information concerning differences in the costs of serving the various
classes.  Cap Rock’s Post-Hearing Brief, at 98.  

 

180

 

aside, Cap Rock misses the
point.  Cap Rock is attempting to change
the present cost allocations between classes so the question is not whether the
present allocations are simply better than those identified in prior studies,
but rather whether the proposed
class allocations are supported and substantiated by evidence and law.  Again, Cap Rock failed to meet its burden of
proof on this issue and the ALJs disagree with its proposed cost allocation
method.

 

Should the Commission decide differently though, and find it
necessary to address gradualism, then the ALJs recommend adoption of the
proposal presented by Staff. 
Essentially, Staff suggests that no class receive a decrease if an overall
increase is granted, and that no class be given an increase if an overall
decrease is ordered.(367)  To the extent that a revenue  increase
is adopted by the Commission, in implementing Staff’s proposal the ALJs would
recommend a gradualism ceiling of 1.5 times the system average.  If a revenue
decrease is granted, then no gradualism ceiling is necessary, as the
potential for “rate shock” is nullified in that instance.

 

E.                                      Rate Elements

 

1.                                      Irrigation-Demand
Metering/Horsepower Charge

 

Some commercial and irrigation customers do not have meters
that measure their peak demand during a month. 
Cap Rock proposes to install demand meters for all of these customers
and to charge them a demand charge.  Dr.
Gaske explained that presently there are two different rate designs for
commercial customers: one for customers with demand meters who pay a demand
charge based on their peak demand during a month and another for customers
without demand meters who pay their demand-related costs through a

 

(367)                      Staff Ex. 5, at 26-30.  Similarly, the
additional exceptions proposed by Staff and discussed above, concerning
system-wide rates and general-services city rates, are also adopted by the
ALJs.

 

181

 

distribution facilities margin that is
added to their energy charge.(368)  All irrigation customers pay demand-related
costs based on increased charges for the first 100 kWh used each year.  The increased amount paid by each customer is
determined by the horsepower of the pump used.

 

(368)                      Cap Rock Ex. 7, at 22.

 

182

 

Cap Rock has been, and proposes to continue, installing
demand meters for all irrigation and commercial customers.  To recover the outlay for this program, Cap
Rock proposes to increase the Customer Charge to reflect the actual costs
associated with meter installation.  This
includes $757,715 for the purchase of additional meters and $76,140 per year
for the incremental costs associated with reading those meters.(369)  Dr. Gaske calculated that an increase of
$1.50 per customer in the monthly Customer Charge is necessary to recover these
amounts.  Cap Rock requested that this
increase be approved or, in the alternative, that a procedure be established
allowing Cap Rock to submit and obtain approval for a rate adjustment
reflecting the actual costs of the meter installation program once they are
known.

 

Staff, TCGA, and Farm Bureau all oppose Cap Rock’s proposal,
arguing at a minimum that the timing is inappropriate.  Most irrigation customers do not have meters
in place; thus, there is insufficient historical data upon which to calculate a
demand charge.(370) And, until the meters are
in place, there is no way to accurately calculate the proposed rate.  These parties argue that only after the
demand meters are in place, might it be appropriate to implement a
demand-meter-rate structure instead of the current Horsepower Charge.

 

Related to Cap Rock’s request for a demand charge is its
proposed increase in rates from these customers in order to pay for demand
meter installation.  Cap Rock argues that
the $1.50 per month customer charge would provide it with the capital necessary
to install the meters.  While no party
contested the meter installation, Staff and Farm Bureau strongly oppose having
Cap Rock’s customers pay up-front for the meters, noting that such a plan is
against the very tenets of utility ratemaking. 
PURA §36.051 allows a return only

 

(369)                      Cap Rock Ex. 7, at 23.

 

(370)                      84% of the irrigation customers (1706 out of
2043) do not have demand meters in place. 
Farm Bureau Ex. 2, at 57.  

 

183

 

on a utility’s invested capital that is used and useful in providing service to
the public.  Moreover, PURA §36.053 establishes
that the components of invested capital must be
used by and useful to the utility in providing service while adding
that the value of the capital shall be calculated on its original cost at the time the property is dedicated to public use.  Because the meters will be installed in the
future, Staff, Farm Bureau, and TCGA all insist that they are not “used and
useful” and may not be included in Cap Rock’s rate base until some time after
they are installed.

 

184

 

These parties further urge that Cap Rock’s desire to recover
future costs related to the demand meters, such as meter reading, must also be
rejected.  For support, Staff and TCB
cite a Commission rule indicating that only those historical expenses occurring
in the utility’s test year, as adjusted for known and measurable changes, may
be recovered.(371)  Because these expenditures did not occur
during Cap Rock’s test year and because they are not known and measurable at
this time, Staff, Farm Bureau and TCGA assert they may not be included in this
ratemaking proceeding.

 

These parties also do not agree with Cap Rock’s alternative
proposal for a future rate adjustment mechanism.  Staff contends that Cap Rock’s proposal is in
conflict with PURA § 36.201, which generally prohibits the Commission from
establishing automatic rate adjustments for changes in a utility’s costs.  Staff also asserts Cap Rock’s proposal
amounts to “piecemeal” or single issue ratemaking which is disfavored.(372)  More specifically, Cap Rock seeks an increase
in return for the investment it will make in meters.  However, Staff points out this investment
could be offset by lower maintenance costs as old meters are replaced.  If an increase in return is recognized while
the reduction in operation and maintenance expense is not, Cap Rock’s overall
revenue requirement would not be appropriately calculated.  Staff calls this inappropriate, piecemeal
ratemaking.

 

(371)                      P.U.C. SUBST. R. §25.231(b)

 

(372)                      Staff cites to PURA §36.051 and notes that
reasons for this disfavor were explained by the Nevada Public Service
Commission:

 

One of the main reasons claimed by the company to justify an increase
in rates was to offset increasing expenses. 
It cannot be denied that the cost of doing business has been
increasing.  It does not follow, however,
that an increase in rates is in order. 
Increased expenses can be more than offset by other factors such as
additional subscribers, increased consumption, and operating efficiencies.

Re Nevada Power Company, 42 PUR 3d 511, 514 (May 9, 1962).

 

185

 

As to the irrigation class, Farm Bureau points out that its
members’ horsepower charge would increase by 350%, while their total bill would
increase approximately 48%.(373)  Ms. Pevoto testified that
requiring irrigation customers to pay the majority of their base-rate costs up
front, in the first month, is unreasonable and would create financial hardship
for the average customer whose business is just starting for the new
season.  Farm Bureau is equally concerned
about the number of overall rate increases imposed on this class over the past
four years.  If Cap Rock’s current
request is approved, the irrigation class will have suffered a 65-percent
increase in rates in just four years.

 

Moreover, Ms. Pevoto insisted that the proposed rate design
would reallocate costs among customers within the irrigation class, putting too
much burden on the low-load customers. 
By her calculations, Cap Rock’s proposal would shift approximately 84%
of overall costs to the Horsepower Charge for irrigation farmers.  Those customers with low usage, relative to
the size of their horsepower capacity, would be penalized unfairly, while those
customers with high usage would experience less rate impact.  Ms. Pevoto suggested that Cap Rock not be
allowed to collect more than 23% of the costs through the customer and
horsepower charges, thus generally maintaining the status quo in the class rate
relationships.

 

The ALJs agree with Staff, Farm Bureau, and TCGA that there
is no legitimate basis upon which to require ratepayers to pay for expenses in
Cap Rock’s rate base that are not used and useful, are unknown and
unmeasurable, and that circumvent the Commission’s practice of prohibiting
piecemeal ratemaking.  Post-test-year
adjustments may be made only if attendant impacts can reasonably be identified
and included, which is not the case in this instance.(374)  As such, the ALJs find that Cap Rock should
not be

 

(373)                      Farm Bureau Ex. 2, at 41- 45.

 

(374)                      P.U.C. SUBST. R. §25.231(c)(2)(F).

 

186

 

allowed to recover any amounts
related to its demand-metering program, except for those proven used and useful
during the test year (where demand meters already existed).  Rather, Cap Rock may consider seeking a rate
change to recover demand meter costs and related costs after such time as the
meters have been installed and are used and useful.

 

187

 

2.                                      Load Management Rider

 

This issue was discussed in Sections XIV.B.3 and VI. A.9 of
this PFD and no further analysis is provided at this time.

 

3.                                      Irrigation Line Use Fee

 

This issue has been settled with Cap Rock agreeing not to
include this offering in its tariff.(375)

 

4.                                      Commercial
Service-Competitive Rider

 

This new rider is proposed to replace the existing Economic
Development tariff provision.(376)  No party opposed this change and the ALJs
recommend its adoption.

 

5.                                      Oil Well Customers

 

(375)                      Cap Rock’s Reply Brief, at 68.  

 

(376)                      Cap Rock Ex. 7, at 26.

 

188

 

Mr. Daniel suggested three actions that would help eliminate
the commercial intra-class subsidies that were mentioned above in the
dual-fuel-rate section.(377)  Briefly, Mr Daniel expressed  concern that the high-load customers,
generally oil-well customers, would subsidize the low-load customers in that
class.  As an alternative to creating a
separate oil-well class, or at least until such a class can be established, he
suggested three actions to mitigate the impacts.  First, eliminate or reduce recovery of
allocated fixed or demand-related costs through the energy charge, referred to
as “tilt.”  Second, implement a demand
ratchet which will increase the billing demand units for low-load factor
customers and lower the demand rate. 
This would shift more of the demand cost to the low-load customers.   And third, establish a rate discount for
oil-well customers.  While these actions
would not totally eliminate the intra-class subsidization, Pioneer contends
they would alleviate it some, at least until an oil well rate can be
implemented during Cap Rock’s next rate case.

 

The ALJs agree with two of the three changes proposed.  Oil-well customers are a very significant
portion of Cap Rock’s load, comprising 
approximately 85% of the commercial load and up to 50% of Cap Rock’s
total load.(378) Oil-well customers, with
loads that are flat and high, may subsidize other loads if the energy rate is
weighted greater than the demand rate. 
By reviewing the unit costs for the commercial class, Mr. Daniel
identified the tilt, noting that the proposed energy rate is twice the unit
cost while the demand rate is only about one-half the unit cost:(379)

 

	
  Cost
  Component

  	
   

  	
  Unit Cost

  	
   

  	
  Proposed Rate

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Customer
  Cost

  	
   

  	
  $

  	
  31.45 /bill

  	
   

  	
  $

  	
  33.50/bill

  	
   

  
	
  Energy
  Costs

  	
   

  	
  $

  	
  0.085/kWh

  	
   

  	
  $

  	
  0.163 /kWh

  	
   

  
	
  Demand
  Costs

  	
   

  	
  $

  	
  20.603/kW

  	
   

  	
  $

  	
  10.50/kW

  	
   

  

 

(377)                      Pioneer Ex. 3, at 35-40.

 

(378)                      Tr. Vol. 8, at 1562-3.

 

(379)                      Pioneer Ex. 3, at 36.

 

189

 

In its response, Cap Rock failed to adequately challenge Mr.
Daniel’s analysis, instead offering only conclusory assertions that “oil well
pumps receive rates that reasonably reflect the efficiency characteristics of
their load factors by recovering most of the fixed costs in the Customer Charge
and Demand Charge components of the commercial and industrial rates.”(380)  The ALJs are not persuaded by Cap Rock’s
limited response, and conclude that the proposed rates for oil well customers
include a significant tilt and that adjustments should be made limiting the
energy rate to $ 0.12 per kWh.

 

(380)                      Cap Rock’s Post Hearing Brief, at 101.

 

190

 

Second, Mr. Daniel suggested increasing the billing demand
units for low-load factor customers and lowering the demand rate by
implementing a demand ratchet.(381) Cap Rock did not directly
respond to this issue.  Nevertheless, the
ALJs do not recommend the implementation of a demand ratchet.  Cap Rock is proposing to eliminate its
all-energy rate which was offered in the past.(382)  Adding these customers to the
demand rate will, at least to some extent, have the same outcome as a demand
ratchet (lower demand rate).  Mr. Daniel
did not have the information necessary to develop ratcheted kW billing demands
for commercial customers.  Without
further analysis on how a demand ratchet and the elimination of the all-energy
rate would impact customers in the commercial class, the ALJs do not recommend
that a demand ratchet be implemented.

 

Third, Mr. Daniel testified that, in order to further
eliminate the intra-class subsidies within the commercial class, a  rate discount for
oil-well customers was necessary.  With
the limitations imposed on the energy rate suggested above, Mr. Daniel proposed
a rate discount of 0.004 per kWh.(383) Cap Rock did not respond
specifically to this proposal.  The ALJs
find that Mr. Daniel’s testimony substantiates the need for a rate discount of
$0.004 per kWh.  The rider he proposed
should be applied only to oil-well customers with multiple accounts who operate
their oil wells on cycles, presenting a flat load.

 

(381)                      A demand ratchet is a floor placed on demand
for billing purposes.

 

(382)                      Pioneer Ex. 3, at 37.

 

(383)                      Pioneer Ex. 3, at 38.

 

191

 

6.                                      Commercial Service at
Primary Voltage

 

Mr. Daniel testified that Pioneer has some accounts that are
on the commercial rate but receive service at a primary voltage.(384)  He opined that these primary-voltage
customers should receive a discount reflecting that fewer facilities are
needed, losses may be reduced, and operating and maintenance expenses are lower
when commercial class service is received at a primary voltage.  According to Mr. Daniel, a discount in this
instance is typical.  The discount he
suggested is $2.44 per kW, the difference in the demand charges for the
large-power-primary and large-power-secondary rates.  In response, Cap Rock argued that it is
unaware of any Pioneer account that receives commercial service at primary
voltage and is opposed to the discount.

 

Cap Rock’s statement that it is unaware of accounts receiving
commercial service at primary voltage was made in arguments, not offered as
evidence.  The only evidence cited on
this issue was that offered by Mr. Daniel. 
The ALJs find such evidence to be persuasive and uncontroverted, and
Pioneer’s argument to have merit. 
Therefore, the ALJs recommend that commercial customers receiving service
at a  primary
voltage receive the discount suggested by Pioneer.

 

7.                                      Primary Meter

 

Pioneer urged that it be allowed the billing-service option
of primary meter entrance (PME).  PME may
be offered when a customer has numerous delivery points in an area that is
served by distribution feeder lines, down from a primary voltage line or
substation.  Mr. Daniel explained that
when a customer owns or leases the distribution feeder lines and any
transformers, then the service may be metered on an aggregate basis at the “primary
entrance” to the customer-owned or leased distribution system.(385) The

 

(384)                      Pioneer Ex. 3, at 38.

 

(385)                      Pioneer Ex. 3, at 42.

 

192

 

PME must be at primary voltage and is possible only when few
customers are served by the same distribution feeder lines.

 

Mr. Daniel testified that Cap Rock
provides PME to several customers on a discretionary basis and without regard
to any set rules, terms, or conditions.  Pioneer seeks to formalize this process by
requiring Cap Rock to include a standard lease agreement in its tariff for
instances where PME would be appropriate. 
Pioneer also asserts that, in many instances, it has paid for 100% of
the distribution lines from Cap Rock’s primary distribution facilities to its
oil wells through CIAC.  In these
instances, Pioneer believes it should be able to lease the distribution lines
and any related facilities at a charge based only on O&M expenses.

 

Cap Rock opposes PME service to Pioneer, arguing that there
are no efficiency gains or cost savings to justify it.  Instead, it would amount to a discount rate
and lead to Cap Rock not recovering its full revenue requirement unless
adjustments were made elsewhere to ensure fully compensatory rates.  Dr. Gaske opined that merely adding together
accounts does not provide Cap Rock with any additional load diversity or
reduced costs that would warrant a discount to the customers.(386)  Rather, he argued that PME service would
simply allow those customers to avoid paying fully compensatory and equitable
rates for their service.  Therefore, he
concluded that the PME service proposed by Pioneer was inappropriate.  He suggested that if PME was to be
implemented, the only way to avoid the above concern is to include a provision
allowing for the reconciliation of any difference between the demand charges
that should be assessed on the individual accounts and the PME’s aggregate
demand charge.

 

(386)                      Cap Rock Ex. 305, at 71.

 

193

 

Without further information, the ALJs cannot recommend
implementation of Pioneer’s PME  proposal.  In this instance, Pioneer has the burden of
proving that the PME service it requests is reasonable and appropriate and
should be made part of the tariff. 
Pioneer failed to do this.  The
vague description and generalities offered by Mr. Daniel do not assure the ALJs
that Pioneer’s distribution system is appropriately configured for PME service
and that Cap Rock would receive sufficient cost savings to pass along to its
PME customers.  Dr. Gaske testified that,
in many situations, Pioneer’s facilities are not located in areas were PME
service could readily be provided.(387)  Moreover, he opined that PME would actually
increase Cap Rock’s costs as well as the rates charged to other customers.  While this may or may not be true, Pioneer
has not persuasively shown that it should be entitled to a PME service under
Cap Rock’s tariff, and that any PME rates would be reasonable.(388)  For these reasons, the ALJs decline to
recommend that PME service be added to Cap Rock’s tariff.

 

8.                                      Aggregated Billing Service
Option

 

As an alternative to PME, Pioneer proposes the use of an
aggregated-billing-service option (which is quite similar to PME service).  Essentially, Pioneer proposes that numerous
individually-metered facilities be grouped together for billing purposes, thus
reducing the facilities’ customer or meter charges.  Pioneer even refers to it as virtual PME
service.(389)  According to Mr. Daniel, Cap Rock partially
acknowledges this billing benefit to approximately 50% of Pioneer’s accounts
through Rate Code 697, where only one

 

(387)                      Cap Rock Ex. 305, at 71. 

 

(388)                      Moreover, to the extent that Pioneer believes
that PME service is offered discriminatorily by Cap Rock to other customers
similarly situated to Pioneer, then it has the remedy of filing a complaint
with the Commission.  But, the ALJs do
not find that the scant record evidence supports Pioneer’s request in this
proceeding.  

 

(389)                      In general, PME involves using a primary
meter, treating it as a single customer, and measuring and charging for all
power to that meter as if it were a single customer.  In contrast, aggregated billing simply
consists of aggregating the bills for numerous related customers and charging
them as if they were one customer. 

 

194

 

customer charge is billed for 670
accounts.  However, Cap Rock has proposed
to eliminate Rate Code 697 and to bill each customer charge under the proposed
large-power-primary rate.  This change
alone would increase Cap Rock’s customer charge to Pioneer by $600,000 per
year.

 

As with PME service, Pioneer did not prove its entitlement to
such rate treatment, as it has not established its right to receive such a
billing benefit nor has it shown that any such action would result in cost
savings that should be passed on to it. 
Therefore, the ALJs decline to recommend that the Commission adopt
Pioneer’s aggregate-billing-service option.(390)

 

(390)                      If the Commission retains Cap Rock’s existing
rate design, including rate code 679, then Pioneer’s concerns will be
addressed. 

 

195

 

9.                                      Required Facilities Lease or
Sale

 

As a part of its request for PME service, Pioneer has
requested the Commission to require Cap Rock to lease or sell some of its
distribution facilities.  Cap Rock
objects, alleging the Commission lacks the authority to order this.  As with PME service, the ALJs do not
recommend the Commission order Cap Rock to lease or sell some of its
facilities.

 

10.                               Rate Code 119 (City)

 

As previously discussed, the ALJs recommend this rate code be
included as a discount rate under PURA § 36.007.

 

F.                                      PCRF

 

Pursuant to P.U.C. SUBST. R. 25.238(a)(1),
Cap Rock proposed a power cost recovery factor (PCRF) clause in its tariff that
would include all fuel and transmission costs.(391)  Staff objected, arguing that the PCRF should
be set to zero at the conclusion of the rate case as all reasonable purchased
power costs are included in the revenue requirement used to set the base rates.                                              Pioneer also objected,
arguing that Cap Rock’s PCRF, as initially drafted, allowed recovery of
impermissible miscellaneous charges and adjustments.  In the past, Cap Rock allegedly recovered
consulting fees, hedging costs, and certain affiliate costs through its PCRF as
miscellaneous charges and adjustments but has failed to flow through wholesale
purchase power refunds.  Pioneer and Farm
Bureau want to make sure these practices are curtailed.

 

(391)                      P.U.C. SUBST. R. 25.238(a)(1): “An electric utility . . . may be allowed to include
within its tariff a PCRF clause which authorizes the electric utility to charge
or credit its customer for the cost of power and energy purchased to the extent
that such costs vary from the purchased power cost utilized to fix the base
rates of the electric utility.  Purchased electricity costs includes all amounts chargeable
for electricity under the wholesale tariffs pursuant to which the electricity
is purchased and amounts paid to qualifying facilities for the purchase of
capacity and/or energy. . . .”  

 

196

 

As best the ALJs can tell, all issues relevant to this case
regarding the PCRF have been resolved. 
Cap Rock has agreed to set its PCRF to zero, to recover the
objectionable miscellaneous costs in its base rates, and to include only
changes in transmission costs as part of the overall cost of purchase power in
its PCRF.  In its reply brief, Pioneer
has agreed with Cap Rock’s proposed treatment of these items.  Accordingly, the ALJs make no specific
recommendations at this time regarding the PCRF.

 

G.                                    System-Wide Rates

 

Pursuant to its acquisition agreement with McCulloch Electric
Cooperative, Inc., Cap Rock  has maintained a separate tariff for
its McCulloch Division (McCulloch).  When
it acquired McCulloch Electric Cooperative, Cap Rock agreed not to change the
McCulloch rates prior to September 1, 2004.  Whether this agreement included a ban on
surcharge increases is an issue in dispute. 
In its RFP, Cap Rock proposed to eliminate the McCulloch tariff and to
charge system-wide rates.  By so doing,
McCulloch’s rates would be raised considerably.

 

Cap Rock argues that the requested rates are based on a
system-wide cost-of-service study and that, accordingly, system-wide rates
should be approved.  Cap Rock insists
that McCulloch customers have had five years of artificially lower rates as
mandated by the acquisition agreement and that it is now time for them to begin
paying an unsubsidized share.  To do
otherwise is unfair to Cap Rock’s other customers.

 

Farm Bureau maintains that system-wide rates are suggested by
Commission precedent and are appropriate in this instance.  Because Farm Bureau expects a rate reduction
in this case, it argues that this is a good time to apply system-wide rates as
the rate reduction will help ease rate shock.

 

197

 

Staff supports the establishment of system-wide rates and
finds rate distinctions based solely on geographic regions inappropriate.  The rates charged McCulloch customers have
not kept pace with those charged other Cap Rock customers because of the
five-year ban on rate increases found in the acquisition agreement.  Staff believes McCulloch customers have
received the full benefit of the agreement and that it is now time to place the
McCulloch rates into parity with the rates charged to other Cap Rock customers.

 

OPC objects to system-wide rates, arguing that rate
moderation must be applied to lessen the impact of system-wide rates on
McCulloch.  OPC disagrees with the
determination by Cap Rock and Staff that McCulloch customers received the full
benefit of a five-year rate freeze, because Cap Rock interpreted rate freeze
not to include surcharges.  Greenville
witness Howard Stone testified that Cap Rock allegedly violated the acquisition
agreement and did not keep its word to freeze rates for five years, because of
its use of surcharges.(392)  OPC agrees with Mr. Stone’s determination
that regulatory surcharges imposed on McCulloch customers, amounting to
$263,416, were actually increases in the Energy Charge and, in reality, an
increase in the overall rate.(393)  Mr. Stone further testified that the
regulatory surcharge was totally unrelated to any increase in the wholesale
power cost for McCulloch.

 

OPC witness Clarence Johnson testified that equalizing
McCulloch’s rates in 2003 would have resulted in an increase of $21 per month
for each McCulloch customer.(394)  OPC asserts that this is too high
an increase and that such an increase, combined with the failure of Cap Rock to
adhere to the acquisition agreement, suggests rate modification is in
order.  Mr. Johnson recommends that if an
overall rate decrease is ordered, then the percentage

 

(392)                      Greenville Ex. 2, at 19.

 

(393)                      Greenville Ex. 2, at Schedule HSS-8.

 

(394)                      OPC Ex. 3, at 33.

 

198

 

reduction for McCulloch customers
should be set at 95% of the reduction applied to the general-service rate.  Similarly, if an overall rate increase is
ordered, McCulloch customers should receive a 105% increase.

 

As an initial matter, the ALJs note they have not recommended
rates be based on the cost-of-service study presented during this proceeding.  Given this determination, the ALJs do not
base their recommendation regarding this issue on the performance of a
system-wide cost-of-service study as suggested by Cap Rock.  Nevertheless, the ALJs conclude that
system-wide rates should be imposed.

 

The ALJs note that the five-year time frame established in
the acquisition agreement has passed. 
Whether Cap Rock complied with that agreement is not appropriately
before the ALJs.  Presumably, McCulloch
customers maintain standing to seek remuneration for any violation of that
agreement in an appropriate court of law.

 

From a rate-making perspective only then, the ALJs agree with
Staff that McCulloch customers’ rates should be in parity with the rates of
other Cap Rock customers.  System-wide
rates are preferred by the Commission and should create efficiencies in the
system.  Only because of the acquisition
agreement were the rates not phased in over the past five years.  To allow the McCulloch customers further rate
subsidy, in addition to the five years they negotiated, would be unfair to Cap
Rock’s other ratepayers.  Thus, the ALJs
recommend that the McCulloch tariff be eliminated and that system-wide rates be
implemented.

 

H.                                    Line Extension Policies and
Rates

 

Cap Rock proposes to have each customer pay 100% of the costs
related to extending facilities to his or her location.  Staff, Pioneer, and TCGA object.  Staff asserts

 

199

 

that Commission policy generally
supports a requirement that the utility bear a portion of the costs associated
with line extensions.  Staff explains
that this policy balances the utility’s duty to provide service to all
customers in its certificated area with the recognition that it may not be
equitable to require all ratepayers to bear the costs of extraordinary
extensions.  Cap Rock has responded by
developing a standard allowance with costs over and above this amount to be
paid by the new customer as CIAC.  Staff
agrees with Cap Rock’s latest proposal.

 

The ALJs also agree with the standard allowance proposed by
Cap Rock and agreed to by Staff.  TCGA
objects, noting that no standard allowance was prepared for cotton gins, but
does not offer a resolution.  Pioneer states that in the past Cap Rock has charged it full
CIAC without any credit and urges a careful review of the situation and
implementation of an appropriate credit. 
Absent more information or proposals from TCGA and Pioneer, the ALJs
decline to address this issue beyond finding Cap Rock’s proposed standard
allowance and CIAC structure to be appropriate.

 

I.                                         Consolidation and
Reorganization of Existing Rate Schedules

 

Other than the consolidation and reorganization issues
previously addressed, Pioneer asks that Cap Rock’s tariff explicitly recognize
that customers currently served in the dual fuel tariff  will be moved to the Large Power Primary
class and take under the load-management rider. 
Cap Rock objects to such a change to its tariff, even though it agrees
that is how the dual fuel customers will be treated.  The ALJs agree that Cap Rock should be
required to comply with its representations on the record in this case that all
current dual fuel customers will be moved to either the Large Power Primary or
Secondary class.  However, the ALJs do
not believe that adding tariff language to this effect is necessary.  Rather, the ALJs are recommending findings
that reflect Cap Rock’s representations, and the Commission can add ordering
provisions, if it believes such are necessary. 
Otherwise, dual fuel customers can file complaint actions if they
believe they are later wrongly classified and charged incorrect rates
inconsistent with Cap Rock’s

 

200

 

representations and the findings made in
this case.

 

J.                                      Notice

 

Mr. Daniel argued that Pioneer’s notice concerning proposed
rate changes was inadequate.(395)

 

(395)                      Pioneer Ex. 3, at 8.

 

201

He suggested that Cap Rock failed to provide the
percent increase in base rates or the specific impact on each rate class in its
published notice.  Further, Pioneer
argued that the notice failed to give customers notice of the “massive
increases” proposed.  Cap Rock responds
that it fully complied with all applicable notice requirements and that the
matters noted by Mr. Daniel are not required by P.U.C. PROC. R. 22.51(a)(1).  Early in this case, the presiding ALJ
addressed challenges to notice, and found that notice had been properly
provided.  The ALJs maintain that
finding, and disagree with Pioneer’s various assertions that notice was
inadequate.

 

XV.  OTHER
ISSUES

 

A.                                    Relationship with NewCorp

 

The ALJs have discussed Cap Rock’s
relationship with NewCorp in detail throughout this PFD and do not find it
necessary to provide any further information in this section.

 

B.                                    Management Audit

 

Under PURA §§ 14.201 and
14.202, the Commission has authority to inquire into the management and affairs
of each public utility under its jurisdiction. 
This includes conducting or requiring independent management
audits.  Staff and various intervenors
request that Cap Rock be ordered to commission and pay for such an audit. They
argue this is necessary given the poor quality of management of Cap Rock in the
past, the fact that its own staff and consultants have shown little knowledge
of regulatory accounting (as evidenced by numerous improper charges and
double-billings that were ongoing for two years), and the conflicts of interest
that Cap Rock’s management has in regard to its transactions with NewCorp,
among other things.

 

202

 

In response, Cap Rock argues that a
management audit is unnecessary because it has been, and continues to be,
subjected to numerous regulatory proceedings before the Commission which have
involved a review of Cap Rock’s affairs. 
These proceedings have required Cap Rock to expend significant resources
and have given the Commission and other parties the opportunity to review Cap
Rock’s management and operations.  Cap
Rock argues it would be unnecessary and expensive (costing as much as $300,000)
for Cap Rock to undergo a management audit at this time.  Cap Rock argues that service quality has been
good, and the majority of problems have related not to its management, but to
the rapid change in its regulatory status and the limited amount of time in
which it had to prepare for such a change.

 

The ALJs believe that a management
audit would be highly beneficial and, therefore, recommend that the Commission
require such an audit.  As noted
throughout much of this PFD, Cap Rock’s quality of management has been poor,
its collection of data for this rate proceeding has been substandard, and its
relationship with NewCorp raises serious concerns that its management has
significant potential conflicts of interest that have impacted their operation
of the utility.  Even if many of the
problems are simply caused by ignorance or lack of resources, rather than
intentional misconduct, the ratepayers deserve a truly independent inquiry into
the operations of Cap Rock.  Given the
extensive challenges Cap Rock has faced from many of its customers, Cap Rock
should welcome such an audit as an opportunity to vindicate itself if it
believes that many of the issues raised by its customers have been unfounded.

 

While the potential cost of
$300,000 or more may be significant, it is a small sum compared to the amount
of money that Cap Rock has spent in this and other regulatory proceedings
before the Commission.  Moreover, the
information provided in this proceeding has done little to give the ALJs
confidence that the regulatory proceedings to 

 

203

 

which Cap Rock has been subjected have resulted in
adequate disclosure of Cap Rock’s operations and have given the Commission a
sufficient opportunity to review its operations.  For this reason, the ALJs conclude that a
management audit is entirely appropriate and should be conducted to help the
Commission to ensure efficient and prudent operation of the utility in the
future.  The Commission’s Staff should be
given authority to choose the independent auditor and should continue to work
with, and provide oversight to, the auditor during the audit process.

 

C.                                    Load Research

 

Pioneer requests that Cap Rock be
ordered to conduct load research and provide the resulting data to the
Commission and the parties in this case prior to any future rate filing.  Cap Rock opposes this request, arguing that
it already conducts load research and that Pioneer has not shown any reason why
a different process should be used.  The
ALJs do not believe it is necessary to require additional load research.  The ALJs are already recommending a
management audit that should help Cap Rock identify the areas where
improvements and changes need to be made. 
That process is better designed to determine whether Cap Rock needs to
make changes to its operations, collect additional data, or modify its load
research, than this rate-making proceeding. 
Accordingly, the ALJs do not support Pioneer’s request.

 

D.                                    Tariff Language

 

Pioneer has requested that
provisions be included in the tariff to recognize certain treatment for oil
well customers.  The ALJs have concluded
that Pioneer’s requested tariff changes should not be adopted, as discussed in
various sections above (including those related to the elimination of the dual
fuel class, PME, and aggregate billing). 
Therefore, the ALJs do not provide any additional discussion at this
time.

 

204

 

E.                                      Integrated Transmission
Credit Under SPS’s OATT

 

Cap Rock currently purchases most
of its power from SPS, whose OATT contains a provision that gives operators of
transmission systems that are integrated into SPS’s transmission system a
significant credit for integrated operation of the recipient’s system.  NewCorp provides transmission to Cap Rock of
the power purchased from SPS.  Neither
NewCorp nor Cap Rock have ever requested that SPS provide them with the
integrated transmission credit.  Pioneer
argues that Cap Rock’s management, which has actual control over NewCorp,
should have requested and obtained the benefits of the credit provided under
SPS’s OATT, because NewCorp’s system is allegedly integrated with SPS’s system
and would qualify for the credit. 
Pioneer alleges that the credit would offset a substantial portion of
the $9 million annual transmission charge that NewCorp imposes on Cap Rock and
that Cap Rock passes on to its retail customers. Pioneer recommends that Cap
Rock’s management should be required to request the credit.

 

In response, Cap Rock claims
NewCorp is not entitled to the credit because the physical nature of its looped
system does not qualify under SPS’s OATT. 
Cap Rock describes the NewCorp system has functionally equivalent to a
distribution system, with SPS having no ability to flow through power on
NewCorp’s system without obtaining prior approval.  For this reason, Cap Rock asserts that
NewCorp’s system is not integrated in the sense required by SPS’s OATT.  Further, Cap Rock asserts that this is a
matter related to NewCorp’s transmission tariff and is thus regulated by FERC.(396)

 

Based on the evidence presented,
the ALJs cannot determine whether or not NewCorp would qualify for the
credit.  But, it ultimately does not
matter because the ALJs do not believe that this matter is properly addressed
in this proceeding.  Pioneer is asking 

 

(396)                      For a more detailed discussion of Cap Rock’
arguments and evidence on this issue see Cap Rock’s Reply Brief, at 80-81; Cap Rock Ex. 303, at 21-23.

 

205

 

the Commission to order Cap Rock’s management to
request the credit for NewCorp.  In other
words, Pioneer is really asking the Commission to order NewCorp to take some
action, when NewCorp is not even a party to this proceeding.  While Cap Rock does have ultimate control
over NewCorp (as its sole member), NewCorp is still an entirely separate entity
subject to transmission regulation by FERC. 
Understandably, Pioneer and other intervenors wish to address the
actions of both Cap Rock and NewCorp in this proceeding.  However, the ALJs do not find this appropriate.  As discussed previously in regard to
purchased power issues, the ALJs do not believe that this rate-making
proceeding is the forum in which to address allegedly improper or imprudent
actions by NewCorp, even though NewCorp is ultimately controlled by Cap Rock.

 

Certainly, the Commission has some
authority to investigate the prudence of Cap Rock’s management, through an
audit, and any imprudent actions that may relate to Cap Rock’s relationship and
dealings with NewCorp can be more fully explored in such a proceeding and
appropriate remedial relief may be ordered at that time.  As set out above, the ALJs are recommending
that the Commission undertake such an audit. 
But, the purpose of this proceeding is to review Cap Rock’s expenses and
revenues and to determine appropriate rates going forward.  NewCorp’s transmission rates that are sought
to be recovered in this proceeding are set by FERC tariff and any such
challenges to them should be addressed in a proceeding before FERC or through
the management audit.  In fact, if such
an audit were to reveal that Cap Rock was paying unreasonable rates to NewCorp,
the Commission could put Cap Rock on notice that similar future dealings with
NewCorp may be ruled imprudent and disallowed. 
Such forward-looking action by the Commission would likely not run afoul
of the filed rate doctrine nor run the risk of “trapped costs.”  For the reasons discussed above, then, the
ALJs do not recommend that the Commission require any action at this time in
regard to the integrated transmission credit under SPS’s OATT, other than to
include such as a matter for investigation in a management audit.

 

206

 

XVI.     RATE
CASE EXPENSES

 

A.                                   Cap Rock’s Rate Case Expenses

 

Staff, OPC, and certain intervenors contest Cap Rock’s
rate case expenses.(397)  The parties’ main
concerns about Cap Rock’s rate case expenses are: (1) the costs Cap Rock
incurred to file its RFP, which contained many errors and required additional
work and review resulting in numerous corrections; (2) the cost of rate design
work by Dr. Gaske and other rate design consultants; (3) the mark-ups charged
by Zinder and Management Applications Consulting (MAC); (4) travel time; and
(5) Cap Rock’s estimated expenses for the completion of this case through
appeals.  The parties raise several
smaller issues as well, all of which are addressed below.

 

A utility is entitled to collect its reasonable
expenses incurred in presenting a rate case.(398)  Although the Commission has not adopted any
rules establishing specific standards for rate case expenses, courts have
outlined guidelines for the recovery of rate case expenses.  Those guidelines include consideration of:

 

•                                          Time and labor required;

•                                          Nature and complexity of the case;

•                                          Amount of money or value of property or
interest at stake;

•                                          Extent of responsibilities the attorney
assumes;

•                                          Whether the attorney loses other employment
because of the undertaking; and

•                                          Benefits to the client from the services.(399)

 

(397)                      Greenville does not take a position on Cap
Rock’s rate case expenses.  Pioneer,
TCGA, St. Lawrence, Apache, and Farm Bureau jointly sponsored Katherine Mudge’s
testimony in opposition to Cap Rock’s rate case expenses.

 

(398)                      PURA § 36.061.

 

(399)                      City of El Paso v. Public
Util. Comm’n of Tex., 916
S.W.2d 515 (Tex.App.– Austin 1995, judgment vacated and writ dism’d by agr).

 

207

 

Staff and the intervenors contend that this case is
not complex, nor was the time and labor that was actually spent on the case
required.  They further argue that,
because of the extensive changes to the RFP made during rebuttal, the benefits
from consultants’ services to prepare the RFP were minimal.  Finally, because Cap Rock is seeking a rate
increase of approximately $5 million, they contend that Cap Rock’s request for rate
case expenses in the amount of $3,634,739 (equal to more than 70% of the amount
of the total proposed rate increase) is inherently unreasonable.

 

Cap Rock disagrees that this case was simple,
asserting that it actually was a very difficult case.  First, Cap Rock notes that the Commission
ordered it to file a RFP.  Thus, Cap Rock
was not able to choose its test year and it had to prepare its filing under a
tight deadline.  It had not prepared a
RFP in some time, so it had to prepare one from scratch.  Furthermore, Cap Rock had not maintained its
books and records in a form that was consistent with the Commission’s RFP
requirements, and thus had to retrieve data from different sources.  Finally, Cap Rock argues that the costs for
this case were significant because Cap Rock received thousands of RFIs, and had
to respond to the testimony of 17 witnesses. 
Therefore, Cap Rock asserts that this case was unusual and required a
significant amount of work.

 

The ALJs agree that this was a difficult case for
Cap Rock.  It involved a large number of
parties, generated a large amount of discovery, and resulted in a large number
of witnesses and exhibits being presented. 
Also, Cap Rock did have a Commission-imposed deadline to meet and,
because it had not been regulated for some time, had to prepare a rate case
from scratch.  However, the ALJs are also
aware that Cap Rock’s initial RFP contained numerous errors that were corrected
during Cap Rock’s rebuttal case, resulting in a reduction of nearly 50% to Cap
Rock’s requested rate increase request. 
The ALJs do not find that the corrections were unreasonable or the
initial mistakes so egregious as to warrant a disallowance of the expenses for
creating the initial RFP.  As discussed
below, for the most part the ALJs recommend that Cap 

 

208

 

Rock
be allowed to recover the majority of its expenses that are not related to rate
design.  The ALJs have, however, also
noted where reductions could be made if the Commission finds that Cap Rock’s
errors in its initial filing were so significant that the Commission finds a
reduction is warranted.(400)

 

(400)                      The ALJs believe that some of the time and
expense spent by the parties on this case could have been avoided either by a
management audit before the rate case was filed, or simply by Cap Rock and
Staff working together for a longer period of time to determine Cap Rock’s
costs to provide service before Cap Rock was required to file a rate case.
Unfortunately, once Cap Rock was required to file a rate case, that triggered
requests for a contested case hearing and transformed this from a more informal
inquiry by the Commission into a more formal, and more costly, rate case
proceeding.

 

209

 

1.                                      Larry Crowley’s Work and
Subsequent Corrections

 

Cap Rock incurred $215,857 in fees and expenses for
Mr. Crowley’s work.(401)  Mr. Crowley
assisted Cap Rock with its RFP, including developing the model Cap Rock used to
determine its revenue requirement and its rates.  After his deposition, Mr. Crowley withdrew
and could not participate in the hearing as a witness due to a family
illness.(402)  He was replaced with Mr.
Tucker and Mr. Rainey, each of whom adopted portions of his testimony.  When Mr. Tucker and Mr. Rainey reviewed Mr.
Crowley’s work, they made numerous corrections. 
These corrections resulted in new numbers being provided in Cap Rock’s
rebuttal case.  As a result of their
review and corrections, Cap Rock’s rate increase request was reduced in half,
from approximately $10 million to approximately $5 million.  Staff and intervenors argue that Cap Rock
should not recover the costs of Mr. Crowley’s work because it contained so many
errors that required correction.  In
addition, the intervenors argue that the time spent by Cap Rock’s other
witnesses to correct Mr. Crowley’s work should be disallowed.  After considering the evidence and arguments,
the ALJs find that Cap Rock should recover its incurred costs for Mr. Crowley’s
work and the costs associated with the corrections to his work.

 

Although Mr. Crowley’s work contained numerous
errors, Mr. Tucker and Mr. Rainey used his model and analysis to perform their
calculations.  Specifically, Mr. Tucker
acknowledged that because of the lack of an electronic version of the 1995 RFP,
Mr. Crowley had to essentially develop the schedules and the RFP from
scratch.(403)  In general, Mr. Crowley’s
schedules worked fairly well.(404)  Mr.
Tucker further indicated that the work he performed after he was retained to
adopt a portion of Mr. Crowley’s testimony was not duplicative of Mr. Crowley’s
work.(405)  Thus, Mr. Crowley’s work
provided benefit to Cap Rock in preparing its 

 

(401)                      Pioneer Ex. 200, at 66.

 

(402)                      Cap Rock’s Notice
of Witness Substitution, at 1 (filing no. 1508 on PUC Interchange,
filed September 16, 2004).

 

(403)                      Tr. Vol. 11, at 2191-2192.

 

(404)                      Tr. Vol. 11, at 2190-2191.

 

(405)                      Tr. Vol. 11, at 2196.

 

210

 

rate case.

 

211

 

Intervenors contend that the costs associated with
correcting Mr. Crowley’s work and the work associated with other corrections
made to the RFP should also be disallowed. 
The ALJs disagree.  Preventing Cap
Rock from recovering the costs of correcting the incorrect work would set a bad
precedent.  Utilities might be
discouraged from correcting mistakes in RFPs for fear that any costs associated
with the corrections would not be recoverable. 
Moreover, given the short time period that Cap Rock was given to prepare
its RFP, it is not unusual that some mistakes occurred. Certainly, the mistakes
were more significant than would be expected, but that alone does not warrant a
disallowance of the expenses of preparing the RFP.  Thus, the ALJs conclude that Cap Rock should
recover those costs.

 

Although the ALJs have found that Cap Rock should
recover the costs for Mr. Crowley’s work and for corrections to the RFP, if the
Commission finds that the errors in the RFP were so egregious that Cap Rock
should not recover the rate case expenses for a portion of its case, the ALJs
recommend that the Commission disallow the costs of Mr. Crowley’s work, rather
than the costs of the corrections.  As
discussed above, disallowing the work for the corrections would create a
disincentive for utilities to uncover mistakes and correct them if the
Commission disallowed those costs.

 

2.                                      Rate Design Consultants

 

Staff and the other parties request disallowance of
the costs Cap Rock incurred for rate design consultants, including Dr.
Gaske.(406)  The ALJs reject the argument
that Cap Rock should not recover the rate design expenses simply because its
proposed rate design may not be adopted. 
The ALJs are unaware of any Commission precedent (and the parties have
not provided any) requiring a party to prevail on an issue to recover rate case
expenses.  If the Commission were to
disallow rate design expenses simply because the rate design was not adopted,
such a ruling 

 

(406)                      Other rate design contributors include B&B
Consulting International, Management Applications Consulting, Al Kleinschmidt,
Robert Paolillo, and John Jeter.

 

212

 

would
fundamentally change the rate case expense recovery system.  It would require a party to  prevail on a particular issue to recover its
expenses.  Furthermore, if the costs were
broken down by issue, it would result in a time-consuming process where the
costs for each issue would have to be accounted for and then disallowed if the
party did not prevail on that particular issue. 
This would increase the cost of cases dramatically, at the expense of
the ratepayers.

 

Having said that, the ALJs also agree that a poorly
performed cost analysis and poorly designed rate structure may justify a
disallowance of the costs associated with their preparation.  In this case, the intervenors are correct
that Cap Rock’s rate design was poorly developed and unsupported.  Its initial presentation required so many
significant changes between direct and rebuttal testimony that intervenors were
“shooting at a moving target” and had to spend significant, additional
resources to address the revisions.  As
noted above, the ALJs found so many problems with Cap Rock’s cost of service
study and resulting rate design that they deemed it entirely unreliable, either
because Dr. Gaske did not conduct a proper analysis or because the data he was
given by Cap Rock was inherently flawed. 
It is difficult to say exactly where the problems lie, but either way
they are attributable to Cap Rock.

 

Therefore, while the ALJs do not agree that rate
design costs should be disallowed simply because Cap Rock’s rate design was not
adopted, the ALJs do believe that, in this case, Cap Rock should not be allowed
to recover the rate design portion of its rate case expenses.  In making this recommendation, the ALJs rely
on the same reasons the ALJs relied on for rejecting Cap Rock’s proposed rate
design.  Those reasons are discussed in
detail under the rate design section above and will not be repeated
here.  Suffice to say that the ALJs find
Cap Rock’s rate design work to be so flawed and unreliable as to be useless for
structuring rates in this case. 
Therefore, the ALJs recommend the Commission deny the rate case expenses
associated with rate design in the total amount of $311,370.(407)

 

(407)                      A complete breakdown of Cap Rock’s rate
design costs can be fount in Staff’s Initial
Brief on Rate Case Expenses, at 17-18.

 

213

 

3.                                      Zinder and Management
Applications Consulting Mark-ups

 

Staff and intervenors contest the mark-up Zinder
charges for its consultants.  Zinder
provided Dr. Olson, Dr. Gaske, and Mr. Crowley as experts for Cap Rock.  Those consultants charged Zinder a rate for
their work, and Zinder billed a higher rate to Cap Rock.  Staff and intervenors contend that Cap Rock
could have hired each consultant individually and paid the consultant’s hourly
rate that did not include the Zinder mark-up. 
Cap Rock asserts that the issue is whether the fees Cap Rock paid are
reasonable.  Cap Rock further argues that
the Commission should not look at the fees beyond whether they are reasonable
to determine the actual cost of the work. 
The ALJs find that Cap Rock should be allowed to recover its actual
costs paid to Zinder, not the rates the consultants charge to Zinder.

 

The rates that Zinder charges are reasonable.  The rates are within the range of rates
charged by other, similar consultants. 
For example, in 1998, Dr. Olson billed at $235 per hour.(408)  It is not surprising that in six years his
rates have increased to $325 per hour.(409) 
There is no record evidence that Dr. Olson may be hired for less than
$325 per hour today.  Other experts with
similar experience also bill in the same range.(410)  There is no record evidence that consultants
with similar experience levels bill significantly less than Dr. Olson.

 

(408)                      Cap Rock Ex. 310, at Ex. JWD-9 at 6.

 

(409)                      Pioneer argues that based on Dr. Olson’s
rates in 1998, it is apparent that he can be hired for less than $325 per
hour.  The record does not support
Pioneer’s contention.  Rather, the
evidence shows that Dr. Olson’s fee in 1998 was between $210 and $235 per hour.

 

(410)                      Tr. Vol. 11, at 2201-2203.

 

214

 

Furthermore, if Zinder’s rates are reduced to the
rates actually paid to the consultants, to consistently apply this analysis to
the case, other fees would have to be reduced as well.  For example, Ms. Melissa Ramirez, an
associate at Lloyd Gosselink, is billed at $170 per hour.(411)  While her salary is not in evidence, no party
would dispute that the amount of money she is actually paid is substantially
less than what it would be if she received every penny of her hourly rate.  Yet, no party has recommended a reduction of
her rate to a level that matches her salary. 
Mr. Lambeth Townsend, who is a partner in Lloyd Gosselink, also does not
take home his hourly rate.  Ms. Kay
Trostle testified that with overhead and other expenses, she does not take home
what she bills.(412)  Because it is
common practice for the costs of professionals to be billed at a higher rate
than what the professional actually takes home, the ALJs conclude that Cap Rock
should recover the full amount it paid to Zinder for the witnesses provided by
Zinder (subject to specific disallowance as otherwise noted herein).

 

The ALJs have already recommended disallowance of
MAC’s time in its entirety because it was time spent on rate design.  However, should the Commission decide to
allow the rate design expenses, intervenors contend that MAC’s overhead charges
should be disallowed.  MAC charges a flat
rate overhead charge of 5% on its bills.(413) 
Intervenors request disallowance of this overhead charge because it is
not supported by data showing what overhead expenses are actually covered by
the charge.(414)  A review of MAC
invoices indicates that MAC does not bill directly for many of the overhead
expenses that most law firms bill, such as copies, faxes, and phone calls.  No evidence was presented that MAC is
over-recovering its overhead.  Nor was
any evidence presented that a flat overhead charge is unreasonable.  Without any evidence that the 

 

(411)                      Pioneer Ex. 200, at Attachment KKM-2, at 3.

 

(412)                      Tr. Vol. 9, at 1788.

 

(413)                      Cap Rock Ex. 312, at Bates 700000, et seq.

 

(414)                      Intervenors also request disallowance of MAC’s
charges for travel time, estimated expenses, and corrections to the initial
RFP.  Those issues are addressed below
under the global headings of “travel time,” “estimated expenses,” and “corrections.”

 

215

 

charge
is unreasonable, the ALJs find that, if the Commission allows Cap Rock to
recover its rate design expenses, then MAC’s overhead charge should be included.

 

216

 

4.                                      Travel Time

 

Intervenors assert that Cap Rock should not recover
costs billed by attorneys and consultants for travel time.  Intervenors contend that Cap Rock must prove
that the travel time is reasonable and that the person traveling is not
performing personal business or work for other clients while
traveling.(415)   Intervenors did not,
however, assert that anything about Cap Rock’s proposed travel time was
inherently unreasonable.  The ALJs find
that Cap Rock should be allowed to recover the cost of its attorneys’ and
consultants’ travel time.  Professionals
bill for their travel time unless they are working for another client while
traveling.(416)  The ALJs find no
evidence that indicates Cap Rock’s attorneys and consultants were
double-billing their travel time.  The
ALJs further find that the travel time billed was reasonable.  Therefore, Cap Rock should be allowed to recover
the costs for its attorneys and consultants’ travel time.(417)

 

5.                                      Estimated Appeal Expenses

 

Cap Rock is requesting $718,075.74 in additional
expenses it estimates it will incur through the resolution of this
case.(418)  The itemized request is:

 

(415)                      Pioneer’s Brief
on Rate Case Expenses, at 3.

 

(416)                      See Tr. Vol. 9, at 1866.

 

(417)                      The costs of travel time are included in Cap
Rock’s request as part of each consultant’s costs.  Thus, travel time for Dr. Gaske and other
rate design consultants has already been removed from rate case expenses.  A breakdown of travel time versus other time
was performed by Ms. Mudge, which can be found at Pioneer Ex. 300, at
Attachment KKM-6.

 

(418)                      Cap Rock Ex. 310A.

 

217

 

	
   

  	
   

  	
  FEES

  	
   

  	
  EXPENSES

  	
   

  	
  TOTAL

  	
   

  
	
  Cap Rock

  	
   

  	
   

  	
   

  	
  28,700

  	
   

  	
  28,700

  	
   

  
	
  Zinder

  	
   

  	
  35,200

  	
   

  	
   

  	
   

  	
  35,200

  	
   

  
	
  Lloyd
  Gosselink

  	
   

  	
  467,031

  	
   

  	
  79,515

  	
   

  	
  546,547

  	
   

  
	
  Sifuentes,
  Drummond

  	
   

  	
  10,000

  	
   

  	
   

  	
   

  	
  10,000

  	
   

  
	
  Covington

  	
   

  	
  76,500

  	
   

  	
  7,500

  	
   

  	
  84,000

  	
   

  
	
  MAC

  	
   

  	
  12,980

  	
   

  	
  649

  	
   

  	
  13,629

  	
   

  
	
  Total

  	
   

  	
  601,712

  	
   

  	
  116,364

  	
   

  	
  718,076

  	
   

  

 

Staff asserts that the estimates are unreasonable.  First, Staff argues that since the record has
closed, Cap Rock’s experts will not have to answer discovery or develop new
facts or analysis.  Staff also asserts
that Cap Rock will not incur an additional $28,700 in expenses because filing
fees and copying costs will be incurred by Lloyd Gosselink, and are included in
its expenses.  Staff also compares Cap
Rock’s request for $467,032 in attorneys’ fees to Greenville’s request of
$136,000 and contends that Cap Rock’s request is unreasonable.

 

Intervenors concur with Staff that all estimated
consultants’ fees should be disallowed. 
Intervenors assert that there is no documentation supporting the request
for those fees, and without documentation, they should not be allowed.  With respect to estimated attorneys’ fees,
intervenors assert that the number of hours in the estimate is in excess of the
number of hours required to prosecute the appeal.  Intervenors propose that Cap Rock’s estimated
hours needed be reduced to match the number of hours in Greenville’s estimate
or simply be reduced by half.  The ALJs
find that Cap Rock’s estimated expenses should be allowed.

 

As discussed below, the ALJs are recommending that
Cap Rock be required to submit quarterly invoices to show its expenses as they
accrue.  Thus, Cap Rock will be
responsible for demonstrating that it has in fact incurred any further fees and
expenses.  If Cap Rock does not 

 

218

 

incur
fees and expenses in the amount of its estimates, those amounts will not be
recoverable.  Therefore, there is a
safeguard to ensure that Cap Rock will not recover more expenses than it
actually incurs.  Although Cap Rock’s
estimates are higher than Greenville’s, Cap Rock will likely file exceptions to
a majority of the PFD, unlike Greenville which has previously chosen to limit
the scope of its involvement in this case. 
Furthermore, Cap Rock will likely have to reply to exceptions filed by
all parties in this case, while Greenville will most likely only reply to Cap
Rock’s exceptions.  On appeal, Cap Rock
will have the responsibility to address all the issues in this case, while
Greenville’s appeal will not include rate design.

 

And, if the Commission adopts the ALJs’ proposals,
Greenville will be a prevailing party on a majority of the issues and, thus,
would likely be a responding party on appeal, not a prosecuting party.  In addition, Greenville can rely on other
parties’ briefs on appeal and may choose not to file briefs if other parties
cover all the issues.  Thus, it is not
surprising that Cap Rock’s estimated expenses are significantly higher than
Greenville’s expenses.  As Ms. Trostle
testified, the estimates are reasonable.(419) 
The ALJs find her testimony to be credible, as she has a significant
amount of experience practicing utility law.(420)

 

Staff and intervenors assert that the in-house
expenses for Cap Rock appear to be high. 
However, Cap Rock will presumably fly representatives to Austin for the
Commission open meeting and for any appeals. 
Cap Rock will also fly its general counsel to Austin as well.  Expenses for those individuals are
reimbursable and should be included in Cap Rock’s rate case expenses.  The consultants will need time to review the
PFD and assist in exceptions and replies. 
Cap Rock should recover its costs for their time as well.  Because the ALJs recommend a safeguard for
the collection of costs eventually incurred, they recommend that Cap Rock
receive 

 

(419)                      Tr. Vol. 10, at 2149.

 

(420)                      If Cap Rock were to file another rate case in
the near future, it might be easier to permit Cap Rock to recover its estimated
expenses from this case during the second rate case once the expenses were
known.  The ALJs would not be surprised
if Cap Rock were to file a rate case in fairly short order, but as of the date
of this PFD, no rate case has been filed.

 

219

 

its
rate case expenses incurred in the future, not to exceed its estimates.

 

220

 

6.                                      Griggs & Adler Expenses

 

Cap Rock has requested $11,247.50 in expenses for
the law firm of Griggs & Adler.(421) 
Intervenors contend that $2,310 of that amount should be disallowed
because it was work performed at the FERC, not on this rate case.  The ALJs agree with intervenors.  In a rate case, Cap Rock may recover only
those expenses incurred in pursuing the case, not expenses from other
cases.  Thus, the ALJs conclude that
$2,310 of the Griggs & Adler expenses should be disallowed from Cap Rock’s
requested rate case expenses.

 

7.                                      Lloyd Gosselink Expenses

 

a.                                       Paralegal Assistant Time

 

Intervenors argue that paralegal assistant time
should be disallowed because Cap Rock provided no description of the work.  Intervenors contend that Cap Rock’s support
documentation appears to have been created at a much later dater after the work
was performed and also does not show that the work was approved by a
supervisor.(422)  The ALJs find that Cap
Rock provided appropriate documentation to support the paralegal assistant time. 
The time sheets in the record indicate the date and number of hours worked,
plus the task the paralegal assistant performed.  Therefore, these charges should be included
in Cap Rock’s rate case expense reimbursement.

 

(421)                      Cap Rock Ex. 310A.

 

(422)                      Cap Rock Ex. 323 is Cap Rock’s supporting
documentation for paralegal assistant time.

 

221

 

b.                                       On-Site Audit Dispute

 

Intervenors request disallowance of Lloyd Gosselink
time associated with Cap Rock’s objections to Pioneer’s request for an on-site
audit of Cap Rock’s books and records because an on-site review is permitted by
rule and routinely granted in Commission proceedings.  Although the ALJ finally ordered the on-site
inspection over Cap Rock’s objection, the ALJs do not find that these expenses
should be disallowed.  Rate case expenses
are reimbursable even when the utility does not prevail on a particular
issue.  Cap Rock’s objections to the
on-site audit were not unreasonable. 
Thus, the ALJs conclude that the legal fees and expenses for the on-site
audit should be included in the reimbursed rate case expenses.

 

Intervenors also request disallowance of $378 in
expenses for Haley Whiteside, who copied records to provide to Intervenors
during the on-site inspection. 
Intervenors allege that they had a right to inspect the original
documents, and that Cap Rock should have provided the originals, rather than
charging someone to make copies.  While
the ALJs generally agree, given the number of parties involved in this case and
the ongoing antagonistic nature of the proceedings, the ALJs do not find it
unreasonable for Cap Rock to have had copies of originals made and available
during the onsite inspection.  Therefore,
the ALJs conclude that the cost of Ms. Whiteside’s services are reimbursable.

 

c.                                       Paralegal Litigation Support

 

Intervenors contest the costs of paralegal
litigation support because there was no justification for a contract legal
assistant when three paralegals and two paralegal assistants were already
working on the case.  Also, intervenors
contend that Cap Rock did not provide a description of the work performed.  The ALJs find that Cap Rock’s request for
reimbursement of a contract paralegal should be allowed.  Cap Rock was required to respond to
voluminous discovery requests from many different parties, and all of the
responses had to be organized. 
Furthermore, at the hearing, a large number of exhibits were introduced
by the parties.   All of this work
required experienced litigation support. 
The parties opposing Cap Rock had a total 

 

222

 

combined
legal staff of at least ten attorneys and/or support personnel.  So, it was not unreasonable for Cap Rock to
retain contract paralegal litigation support to assist it in this case, and Cap
Rock should be reimbursed for these expenses.

 

8.                                      Sifuentes, Drummond &
Smith

 

Intervenors challenge the estimated expenses for
Sifuentes, Drummond & Smith in the amount of $10,000 related to the work of
Cap Rock witness Kay Trostle.  The ALJs
find that the estimated costs should be included in Cap Rock’s
reimbursement.  Ms. Trostle testified
that her costs included her time during the rate case expense portion of the
hearing.  No party challenged the
reasonableness of her fee.  The rate case
expense phase of the hearing lasted longer than expected and involved
significant numbers of exhibits.  Ms.
Trostle attended the hearing and assisted with the cross-examination of Ms.
Mudge.  Ms. Trostle also testified on
direct and rebuttal.  Based on the amount
of time she spent, the $10,000 estimate is reasonable.  Therefore, Cap Rock should be able to recover
charges from Sifuentes, Drummond & Smith, not to exceed the $10,000
estimate.

 

9.                                      Covington Consulting

 

Intervenors contend that certain expenses for
Covington Consulting should be disallowed because Covington created a duplicate
database, had to perform work to correct Mr. Crowley’s work, billed for travel
time, billed for administrative support services, and did not support its
estimated expenses.  The issues of
correcting Mr. Crowley’s work, billing for travel time, and estimated expenses
have been addressed above, and the ALJs find that this work is
reimbursable.  The database Covington
created, intervenors speculate, was a duplication of Lloyd Gosselink’s legal
assistant’s database.  Cap Rock contends
that the database served a different purpose than the law firm’s database, and
that Covington’s database permitted searches of individual words.  The ALJs find nothing in the record to
support intervenors’ contention that the database 

 

223

 

unnecessarily
duplicated Lloyd Gosselink’s work. 
Therefore, the ALJs conclude that the cost of creating the discovery
database should be included in Cap Rock’s rate case expense reimbursement.

 

However, the ALJs agree with intervenors that the
charges for administrative support services should be disallowed.  There is no documentation in the record
indicating what services were performed, who performed them, or the hourly rate
of the person performing the work. 
Therefore, without sufficient documentation, the ALJs find the charges
for administrative support should be disallowed.  This results in a reduction to Cap Rock’s
rate case expenses in the amount of $1,044.(423)

 

10.                               KPMG Costs

 

Intervenors argue for disallowance of $64,700 for
the entire amount that KPMG billed Cap Rock.(424)  Intervenors contend that KPMG’s invoices do
not show the actual work performed, the persons performing the work, or the
basis for a flat-fee arrangement.  The
invoices from KPMG state that they are billing for “professional services
rendered in connection with the Agreed-Upon Procedures related to Cap Rock
Energy Corporation’s schedules included in the company’s Rate Filing Package
with the PUC.”(425)  There is no
itemization of charges, rather only the total amount due is listed.  The ALJs agree with the Intervenors that the
KPMG costs should be disallowed.  It is
impossible to determine from the invoices whether KPMG’s rates were reasonable,
because there is no indication of the number of hours spent or the hourly rates
of the consultants.  Without this
information, the ALJs can only speculate on whether the time invested or the rates
were reasonable.  Therefore, the ALJs
find that $64,700 of Cap Rock’s 

 

(423)                      Cap Rock Ex. 312, at Bates 800752, 800758,
800832; Pioneer Ex. 200, at Attachment KKM-6.

 

(424)                      Cap Rock Ex. 312, at Bates 500216,
800873-800875.

 

(425)                      Cap Rock Ex. 312, at Bates 800873-800874.

 

224

 

rate
case expenses should be disallowed.

 

11.                               Utilipoint International

 

Cap Rock incurred $11,704 in expenses for Utilipoint
International (Utilipoint) in relation to defending its decision to purchase
the Delinea System.(426)  Intervenors
contend the entire amount should be disallowed because it was not necessary for
Cap Rock to hire Utilipoint.  Rather,
Intervenors suggest that Cap Rock should have used employees to present
rebuttal evidence on the benefits of the Delinea System.  Although the ALJs have found that the Delinea
System was purchased primarily for expansion plans and that the ratepayers
should not shoulder the economic costs at this time, the ALJs find that Cap
Rock should recover the costs for retaining Utilipoint.  Although Cap Rock did not prevail on this
issue, and the ALJs did not rely on Mr. Brock’s testimony, the ALJs decline to
recommend disallowance of the expenses for the testimony simply on that
basis.  Mr. Brock’s testimony, while not
relied on heavily by the ALJs, was not patently unreasonable or
unnecessary.  Nor is there any showing
that the specific expenses were not actually incurred or were otherwise
unreasonable.  In the context of a
contested case hearing, it was appropriate for Cap Rock to attempt to rebut
testimony challenging its purchase of the Delinea System, and retaining an
outside expert is a reasonable means to do this.  Thus, the ALJs conclude that Cap Rock should
recover its costs for Utilipoint.

 

12.                               Meals and Personal Expenses

 

Staff recommends disallowance of $3,750.29 in meal
expenses for Cap Rock employees in Midland, which were billed as rate case
expenses.  These meals were all taken in
Midland by employees who work in Midland at Cap Rock.  The ALJs agree that those meal expenses
should be disallowed.  While working in
Midland, those employees should be responsible for the costs 

 

(426)                      Cap Rock Ex. 312, at Bates 500218.

 

225

 

of
their own meals whether they are working on the rate case or on other Cap Rock
business.

 

Intervenors recommend disallowance of expenses for
meals not related to the rate case and other personal expenses such as
laundry.  The ALJs agree that these costs
should be disallowed.  Meals for Mr.
Atkins in Dallas should be disallowed in the amount of $28.34, for Ms. Zinn in
the amount of $7.47, and a balance forward from the Petroleum Club in the
amount of $413.50.(427)

 

(427)                      Cap Rock Ex. 311, at Bates 800254, 800255,
800326, 800329.

 

226

 

Finally, an expense for a FedEx package in the
amount of $10.31 should be disallowed.(428) 
The ALJs also agree that laundry expenses should be disallowed because
they are personal expenses that should not be the responsibility of the
ratepayers.  Those expenses total a
rounded amount of $248.(429)

 

13.                               Unsupported Expenses

 

Staff contends that certain invoices failed to
provide documentation describing the work performed or how the work was related
to this proceeding.(430)  Staff argues
that the expenses should, therefore, be disallowed.  Cap Rock did not respond to this argument in
its reply brief.  The specific time
entries for which Staff requests disallowance are:

 

	
  Date of Invoice(431) 

  (Bates Number)

  	
   

  	
  Consultant

  	
   

  	
  Hours billed

  	
   

  	
  Amount Billed

  	
   

  
	
  July 2003
  

  (800911, 800913)

  	
   

  	
  Gaske

  	
   

  	
  13 hours 

  $250/hour

  	
   

  	
  $

  	
  3,250

  	
   

  
	
  July 2003

  (800912)

  	
   

  	
  Olson

  	
   

  	
  6 hours 

  $325/hour

  	
   

  	
  $

  	
  1,950

  	
   

  
	
  July 2003

  (800914, 800915)

  	
   

  	
  Lee

  	
   

  	
  21 hours 

  $75/hour

  	
   

  	
  $

  	
  1,575

  	
   

  
	
  August 2003

  (800917)

  	
   

  	
  Gaske

  	
   

  	
  12.5 hours 

  $250/hour

  	
   

  	
  $

  	
  3,250

  	
   

  
	
  December 2003
  

  (800947)

  	
   

  	
  Olson

  	
   

  	
  13 hours 

  $325/hour

  	
   

  	
  $

  	
  4,225

  	
   

  
	
  January 2004

  (800987)

  	
   

  	
  Olson

  	
   

  	
  19
  hours

  $325/hour

  	
   

  	
  $

  	
  6,175

  	
   

  
	
  February 2004

  (801012)

  	
   

  	
  Olson

  	
   

  	
  47
  hours

  $325/hour

  	
   

  	
  $

  	
  15,275

  	
   

  
	
  March 2004

  (801046)

  	
   

  	
  Olson

  	
   

  	
  3
  hours

  $325/hour

  	
   

  	
  $

  	
  975

  	
   

  
	
  October 2004

  (801206)

  	
   

  	
  Gaske

  	
   

  	
  165.5
  hours

  $250/hour

  	
   

  	
  $

  	
  41,375

  	
   

  
	
  Staff’s proposed disallowance

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  $

  	
  78,050

  	
   

  

 

(428)                      Cap Rock Ex. 311, at 800483.

 

(429)                      Cap Rock Ex. 311, at Bates 800291-800292,
800627, 800669, 800670, 800701, 800704.

 

(430)                      Staff’s Brief on Rate Case Expenses at 11.

 

(431)                      These invoices are contained within Cap Rock
Ex. 312.

 

227

After
reviewing the invoices, the ALJs agree with Staff and recommend disallowance of
the above-listed rate case expenses.  As
with the KPMG charges, there is no indication of the work the consultants
performed and no detail of the charges. 
Cap Rock’s rate case expense reimbursement should be reduced by the
amount of the unsupported expenses, not including Dr. Gaske’s expenses,
because the ALJs have already disallowed all of his expenses and they should
not be double-counted.  Therefore, the
ALJs recommend disallowing $30,175 in unsupported expenses.(432)

 

The
intervenors also challenge expenses for Danny Thompson as being unsupported,
and contend they should be disallowed.  Mr. Thompson
billed $825.(433)  The ALJs agree with
intervenors.  Nothing on the invoice from
Mr. Thompson indicates the type of work performed.  The invoice simply states, “The following is
to invoice Cap Rock Energy Corporation for the project with Jim Rammage.”(434)  The ALJs find this description is
insufficient to support recovering this cost. 
Therefore, the ALJs conclude that $825 should be disallowed from Cap

 

(432)       If the Commission decides that rate design
expenses should be recovered, the ALJs would recommend that Dr. Gaske’s
unsupported expenses be disallowed.

 

(433)       Cap Rock Ex. 311, at 800206.

 

(434)       Id.

 

228

 

Rock’s
rate case expenses.

 

14.          Ronnie Lyon Expenses

 

OPC
recommends disallowance of Mr. Lyon’s expenses in the total amount of
$24,699, which includes expenses incurred during this case for meals, travel,
hotels, office supplies, copying, parking, and cab fare.  As discussed below, the ALJs recommend
disallowance of the mileage charges.  However,
the ALJs do not recommend disallowance of Mr. Lyon’s other expenses.  Mr. Lyon acts as general counsel for Cap
Rock.  He receives a retainer for his
services.  During this case, he traveled
to Midland and Austin to assist his client with its case preparation.  OPC asserts that Mr. Lyon spent only 2
hours total in cross-examination of a witness during the hearing on the
merits.  Because of his apparent lack of
involvement in the rate case, OPC requests disallowance of his expenses.  The ALJs disagree and find that his expenses
are reimbursable.  Although Mr. Lyon
cross-examined only one witness during the hearing on the merits, the ALJs
observed him to be actively involved with Cap Rock’s outside legal counsel at
all stages of the hearing in directing and prosecuting Cap Rock’s case.  The ALJs conclude that Mr. Lyon
significantly participated in the hearing and assisted his client, Cap
Rock.  Therefore, the ALJs find that his
expenses (other than certain mileage charges discussed below) should be
included in Cap Rock’s rate case expenses.

 

Intervenors
recommend disallowance of Mr. Lyon’s mileage expenses to travel from his
office to the Dallas airport. 
Intervenors contend that the only reason these charges occur is because Mr. Lyon
does not live in Midland, at Cap Rock’s headquarters, but lives in
Sherman.  The ALJs agree with Intervenors
that these mileage charges should not be included in rate case expenses.  Disallowing these charges results in a
reduction of $578 to Cap Rock’s requested rate case expenses.(435)

 

(435)       Pioneer Ex. 200, at Attachment KKM-5.

 

229

 

15.          September 2003 Meetings
with Commissioners

 

Intervenors
contend that the costs associated with Cap Rock’s employees travel to Austin to
meet with the Commissioners during September 2003 should be
disallowed.  Intervenors assert that the
costs are expenses for regulatory advocacy and not recoverable as rate case
expenses.  They also contend that the
cost of the employees’ time is already included in base rates, thus to recover
the costs a second time would result in double recovery.  Cap Rock argues that it is common to have
meetings with the Commissioners prior to filing a rate case.  The ALJs agree with the Intervenors.  Although Cap Rock employees may have met with
the Commissioners to inform them of the upcoming rate case, at the time they
met with the Commissioners, the rate case was not pending.  Furthermore, the Commissioners—unlike Cap
Rock’s experts and attorneys—could not assist Cap Rock in the preparation of
its case prior to the filing.  Thus, the
ALJs conclude that Cap Rock should not recover its expenses in the amount of
$2,288 for its meetings with the Commissioners in September 2003.(436)

 

B.            Greenville’s Expenses

 

Greenville
requests rate case expenses in the amount of $494,336, plus $136,000 for the
estimated costs of appeal.  Cap Rock
initially contested Greenville’s requested expenses but subsequently withdrew
its opposition, stating it was taking no position.  The ALJs find that Greenville is entitled to
recover its rate case expenses, including estimated costs, and that the costs
should be paid by all of Cap Rock’s ratepayers, not just the residents of the
City of Greenville who are Cap Rock customers.

 

(436)       Pioneer Ex. 200, at 74 and at Attachment KKM-12
shows the total charges for the meetings with the Commissioners.

 

230

 

During
the hearing on rate case expenses, Cap Rock alleged that Greenville’s attorney,
Jim Boyle, has a conflict of interest and is representing the interests of TCGA
in this proceeding.  The alleged conflict
of interest is that Mr. Boyle represents Greenville in this case, but in
other cases involving Cap Rock he represents TCGA.  While representing TCGA, Mr. Boyle has
allegedly argued that Cap Rock’s inside city rate should be rejected, which
would result in higher rates for customers within the City of Greenville.  In this case, Mr. Boyle did not
represent Greenville with respect to rate design issues, rather Greenville’s
case focused on the quality of Cap Rock’s management and the issue of revenue
requirement.(437)

 

Cap
Rock had ample opportunity to object to Mr. Boyle’s representation of
Greenville in this matter.  Cap Rock had
some concerns about Mr. Boyle’s representation as early as April 13,
2004, when it filed its Response to Greenville’s Motion for Monthly
Reimbursement and Spreading of Rate Case Expense.  In that pleading, Cap Rock expressed its
concerns about Mr. Boyle’s representing Greenville in this docket while
representing TCGA in Cap Rock’s tariff filing. 
Cap Rock also indicated that it was not suggesting any
impropriety.(438)  Cap Rock could have
filed a motion to disqualify Mr. Boyle at any time prior to the hearing on
the merits.  Cap Rock chose not to file a
motion or to object to Mr. Boyle’s representation until the rate case
expense phase of this hearing.  Thus, the
ALJs find that any concerns Cap Rock had with Mr. Boyle’s representation
of Greenville have been waived.  The only
issues remaining are whether Greenville’s fees are reasonable, and whether any
of Greenville’s charges were incurred for the benefit of TCGA, rather than
Greenville.(439)

 

(437)       Greenville’s briefs on the merits in this
case discuss Greenville’s position on these issues in detail.  The briefs do not address the issues of rate
design.

 

(438)       Cap Rock’s Response to Greenville’s Motion
for Monthly Reimbursement and Spreading of Rate Case Expense, at 5 n. 2.

 

(439)       Although Cap Rock states in its brief that
PURA § 33.023 is unconstitutional under the Texas and United States
Constitutions, the ALJs are not addressing that argument.  Instead, if Cap Rock wishes to pursue a claim
that the statute is unconstitutional, jurisdiction for that claim lies in the
civil courts of this state and not with the ALJs or the Commission.

 

231

 

Greenville
is entitled to its fees if they are reasonable.(440)  Greenville requests $494,336 in fees and
costs, with additional estimated expenses in the amount of $136,000.  Greenville presented expert testimony from
Norman Gordon, an attorney specializing in utility law.  Mr. Gordon testified that he reviewed
Greenville’s rate case expenses and found them to be reasonable.  He further found that the hourly rates
charged to Greenville for the attorneys and consultants were reasonable.(441)  He did not find that any work was performed
for the benefit of TCGA or any other intervenor.  The ALJs find that Mr. Gordon’s
testimony was credible.

 

Cap
Rock did not present any evidence that Greenville’s fees were
unreasonable.  Cap Rock also did not show
from the billing records that Greenville’s attorneys or consultants spent time
on matters that were for the benefit of other parties.(442)  Therefore, the ALJs conclude that Greenville
is entitled to reimbursement of its expenses in the amount of $494,336, plus
estimated expenses not to exceed $136,000. 
Those expenses shall be recovered from all of Cap Rock’s ratepayers, and
not just the ratepayers within the City of Greenville.  The mechanism for recovery of the expenses is
addressed below.

 

(440)       PURA § 33.023.

 

(441)       Greenville Ex. 511, at 6-7.

 

(442)       While some of Greenville’s work may have
provided an incidental benefit to other parties, this is not
impermissible.  In this case, with the
intervenors and Staff maintaining similar positions, the work of each party
surely benefitted the other parties’ cases. 
This does not, however, preclude the recovery of rate case expenses.

 

232

 

C.            Recovery Method

 

Staff
requests that Cap Rock recover its rate case expenses through a monthly
surcharge over a three-year period to reduce rate shock to its customers.  Furthermore, Staff asserts that Cap Rock
should be required to make quarterly reports of the actual expenses it incurs
as this case proceeds through appeals. 
Finally, Staff requests a final true-up to ensure that Cap Rock does not
over-recover its rate case expenses in this docket.(443)  The ALJs agree with Staff.  To ensure that Cap Rock recovers the correct
amount and does not over-recover, the ALJs support Staff’s recommendation.

 

XVII.  CONCLUSION

 

In
referring this case to SOAH, the Commission identified six issues to be
addressed by the ALJs.  Because the ALJs
believe that the six issues are addressed and answered in the body of this PFD,
they do not separately state those issues or provide an individual analysis of
each issue.  If the Commission has
questions or requires clarification regarding any of the six issues listed in
the Preliminary Order, the ALJs will 
provide such.

 

In
conclusion, then, the ALJs recommend that the Commission adopt the revenue
requirement adjustments contained herein, set Cap Rock’s rates accordingly
based on Cap Rock’s existing rate structure (with the minor adjustments noted
in this PFD), and implement a surcharge for recovery of the regulatory expenses
involved in this proceeding.  To assist
the Commission in this endeavor, the ALJs have provided a memorandum to Staff
regarding the ALJs’ proposed adjustments, and Staff has prepared schedules and
a rate structure implementing the ALJs’ recommendations.  Because of the ALJs’ lack of technical
expertise, the ALJs are unable to completely determine whether the schedules
and rate structure correctly implement the ALJs’ recommendations.  Thus, there may be errors or corrections that
need to be made to match the schedules and rate structure to the ALJs’ actual
recommendations in this PFD.  The parties

 

(443)       Cap Rock over-recovered its regulatory
surcharge from its CCN transfer case and its true-up surcharge.

 

233

 

can
address in their exceptions whether Staff’s number-running schedules and rate
structure correctly implement the ALJs’ recommendations, and the ALJs  will comment on those exceptions and provide
clarification after reviewing and considering them.

 

234

 

In
completing this PFD and including specific dollar amounts in findings of fact
and conclusions of law, though, the ALJs rely on Staff’s number-running schedules.  If errors are discovered in the exception
process and findings of fact or conclusions of law need to be revised, the ALJs
will notify the Commission.  At this
time, though, the findings of fact and conclusions of law supporting the ALJs’
recommendations are set out below, along with proposed ordering language for
the Commission to consider in preparation of its final order in this case.

 

XVIII.  FINDINGS OF
FACT

 

Procedural History

 

2.             On October 24, 2003, Staff filed a
petition, pursuant to Subchapter D of Chapter 36 of the Public Utility
Regulatory Act (PURA),(444) alleging that the rates of Cap Rock Energy
Corporation, Inc. (Cap Rock) were unreasonable and in violation of law and
requesting that the Public Utility Commission (Commission) establish reasonable
rates for Cap Rock’s services pursuant to its authority under PURA § 36.151.

 

3.             On November 3, 2003, the Commission
issued Order No. 1, requiring that Cap Rock file its rate filing package
(RFP) by February 24, 2004, pursuant to PURA § 36.153.

 

4.             On February 24, 2004, Cap Rock filed its
RFP and also submitted a statement of intent to change rates as allowed by PURA
§ 36.102.

 

5.             Cap
Rock provided notice of this docket and notice of its statement of intent to
change rates by publication once each week for four weeks in newspapers having
general circulation in Cap Rock’s service territory, as required by PURA
§36.103; P.U.C. PROC. R. §22.51(b) and
(c); and Order No. 3.

 

6.             On March 1, 2004, Cap Rock’s proposed
rates were suspended, pending final action by the Commission.

 

7.             The following
were admitted as parties to this proceeding: Office of Public Utility Counsel
(OPC), City of Greenville (Greenville), Texas Farm Bureau (TFB), Texas Cotton
Ginners’ Association (TCGA), St. Lawrence Cotton Growers Association (St.
Lawrence), Pioneer Natural Resources, USA, Inc. (Pioneer), Texas Mining,
L.P., Apache Corporation, and Citizens United for Fair Energy Costs. Numerous
individuals were also admitted as intervenors and were aligned with St.
Lawrence.

 

(444)       TEX. UTIL. CODE ANN. §§11.001 – 64.158
(Vernon 1998 and Supp. 2005) (PURA).

 

235

 

8.             Greenville
denied Cap Rock’s request to change rates on June 22, 2004.  Cap Rock filed an appeal and motion to
consolidate on July 12, 2004.  Cap
Rock’s request for consolidation was granted on August 5, 2004.

 

9.             The hearing on the merits in the consolidated
docket was conducted on October 5, 2004 through October 14,
2004.  A separate hearing on rate case
expenses was held on December 13, 2004 through December 15, 2004.

 

10.           Final written arguments were filed on January 19,
2005.

 

11.           After completing a draft of the PFD, the ALJs
submitted their recommendations to Staff on 
February 8, 2005.

 

12.          Staff’s
schedules and rate structure were completed on March 10, 2005.

 

Overview

 

13.           Cap Rock is an investor owned utility (IOU)
providing retail electric service and transmission and distribution service to
approximately 33,000 meters in 28 counties in Texas.

 

14.          Cap
Rock was created in December 1998, as
the successor organization to Cap Rock Electric Cooperative, Inc.
(Cooperative), which was originally formed in 1939.

 

15.          Prior
to September 1, 2003, Cap Rock was regulated as an electric cooperative.

 

16.           The Commission last reviewed the rates of the
Cooperative in Docket No. 12535, Application
of Cap Rock Electric Cooperative, Inc. for Authority to Change Rates,
19 P.U.C. BULL. 2140 (July 5, 1994); this review was based upon a test
year ending September 30, 1992.

 

17.           The Commission has jurisdiction to review the
rates charged by Cap Rock as a result of the passage of S.B. 1280 by the 78th
Texas Legislature [Act of June 21, 2003, 78th Leg., R.S., ch.
1327 (effective September 1, 2003) codified, in part, at PURA § 39.102(d) and
(e)].

 

18.           The rates that were in effect on September 1,
2003, were established by Cap Rock without any review or approval by the
Commission.

 

19.          Cap
Rock maintains four divisions: the Stanton
Division, the Lone Wolf Division, the Hunt-Collin Division, and the McCulloch
Division.

 

236

 

20.           Cap Rock is the sole member of NewCorp
Resources Electric Cooperative, Inc. (NewCorp).

 

21.           NewCorp owns and operates a 305-mile
transmission system in West Texas (Stanton and Lone Wolf Divisions) connected
to the Southwest Power Pool (SPP).

 

22.           Cap Rock’s current rates for residential
service in rural areas are 200 % more than the rates charged for residential
service in the City of Midland.

 

23.           Cap Rock’s rates for service in its McCulloch
Division are less than the rates charged for similar service in other Cap Rock
Divisions.

 

Quality of Management

 

24.           Cap Rock’s management is not
under-compensated:

 

a.             the testimony of Gerald Tucker is
unpersuasive as he drew improper comparisons with utilities that have a much
larger customer base and significantly more employees;

b.             Mr. Atkins’ testimony was conclusory and
lacking in sufficient information to determine its reliability;

c.             the financial performance of the utilities
offered in comparison is unknown;

d.             between 1999 and 2001, the president of Cap
Rock received total compensation that was more than double that paid to the
president of Central Power and Light (CP&L), even though CP&L was
roughly 33 times the size of Cap Rock in total utility plant and generated more
than 27 times more operating revenue;

e.             Cap Rock’s president has taken lavish trips
with his wife to Bermuda, the Caribbean, Arizona and Colorado; and

f.              Cap Rock has used a private jet for other
executives.

 

25.           Cap Rock’s quality of management is poor:

 

a.             Over the last ten years, Cap Rock has
suffered significant financial losses as a result of failed business ventures
and management’s actions of aggressively pursuing acquisitions with little
relationship to Cap Rock’s core business;

b.             Over the last ten years, Cap Rock’s
executives were paid large bonuses for failed ventures and received bonuses in
years in which Cap Rock was losing significant amounts of money and its
financial condition was deteriorating;

c.             Cap Rock has not been operated in an
efficient manner but instead management has demonstrated an attitude of
entitlement and self enrichment;

d.             Affiliated transactions and actions of
over-collecting from customers reflect poorly on Cap Rock’s quality of management.

 

237

 

Invested Capital and Rate Base

 

A. Intangible Plant (Computer)

 

26.           In 2002, Cap Rock retained Delinea
Corporation (Delinea) to investigate its options for updating or changing Cap
Rock’s information technology (IT) systems.

 

27.           Based on Delinea’s recommendations, Cap Rock
acquired a new computer system (Delinea System) from Delinea to replace Cap
Rock’s prior IT systems.

 

28.           The Delinea System was designed to be a fully
outsourced system, consisting of software (by Oracle), hardware, installation,
maintenance, and ongoing operational services.

 

29.           Among other things, the costs of the Delinea
System included $131,600 for equipment and software, $3,764,100 in fees, and
$337,900 on lodging, transportation and meals for Delinea consultants.  Of these amounts, Cap Rock sought to recover
$3,139,558 as capital costs during the test year and $1,244,214 as
post-test-year adjustments.

 

30.           Delinea was the only company retained by Cap
Rock to provide bids for a computer system.

 

31.           Cap Rock did not seek competitive bids
itself, but instead relied on Delinea to price separate software and
outsourcing options.

 

32.           Although Delinea presented Cap Rock with bids
from eight different vendors, Delinea also proposed to act as the installer,
operator, and consultant for the various options.

 

33.           Cap Rock’s primary reason for purchasing the
Delinea System was to fulfill Cap Rock’s expansion goals, not to serve its
existing customers.

 

34.           Cap Rock failed to prove that purchasing the
Delinea System was reasonable and necessary.

 

35.           As of July 30, 2004, only 50% of the
Delinea System was installed, so it was not used and useful during the test
year, nor was it fully used and useful as of the date of the evidentiary
hearing in this case.

 

36.           The costs associated with the Delinea System,
a total of $3,139,558 which Cap Rock seeks to include in rate base as capital
costs during the test year and $1,244,214 as post-test year adjustments, are
not reasonable.

 

37.          Cap
Rock has also included costs for license fees
for its Daffron and Cameo

 

238

 

computer systems in its test year rate base.  These were $20,862 for Daffron and $3,109 for
Cameo.  Both of these systems were used
during the test year and are still being used by Cap Rock, and the costs
associated with these systems are reasonable and necessary.

B.  Transfer
of Assets

 

38.          Cap
Rock’s anticipated transfer of transmission assets, land, and land rights (in
the total amount of $3,359,000) from Cap Rock to NewCorp is reasonable.

 

39.           It is reasonable and appropriate for Cap Rock’s
rate base to be reduced by $3,359,000 to reflect the transfer of transmission
assets, land, and land rights to NewCorp.

 

C. 
Reclassification of Plant to Operations and Maintenance (O&M)

 

40.           Cap Rock miscoded work orders in the amount
of $432,190 to plant accounts rather than to maintenance during the test year.

 

41.           It is not reasonable to include the $432,190
in miscoded work orders in Cap Rock’s rate base, but this amount may reasonably
be reclassified to operations and maintenance (O&M).

 

D. 
Accumulated Provisions for Depreciation and Amortization

 

42.           It is not reasonable to include depreciation
and amortization expenses of $876,755 for Cap Rock’s Delinea System.

 

43.           Cap Rock presented an email from the company’s
insurance agent as its only cost-benefit analysis to support a catastrophe
reserve.  This email was prepared shortly
before the evidentiary hearing–long after Cap Rock had submitted its RFP–and
does not qualify as a cost-benefit analysis as described under the Commission’s
rules.

 

44.           Cap Rock presented an insufficient
cost-benefit analysis to support a catastrophe reserve.

 

45.           Cap Rock’s prior history of storm damage does
not support the establishment of a large catastrophe reserve.

 

46.           Cap Rock’s proposed adjustments to the
Self-insurance/Catastrophe Reserve—$375,900 in expenses and related rate base
reductions over a period of three years—were not proven to be reasonable.

 

239

 

E. 
Construction Work in Progress (CWIP)

 

47.           Cap Rock is not currently requesting the
inclusion of any amount of construction work in progress (CWIP) in its rate
base.  Therefore, the CWIP amount of
$1,250,516 previously included in Cap Rock’s RFP is properly removed.

 

F.  Materials
and Supplies

 

48.           Cap Rock’s test-year investment in inventory
was $26,513.

 

49.           Cap Rock seeks to increase its inventory
level by $138,187 for a total adjusted inventory of $164,000.

 

50.           Cap Rock presented insufficient detail about
the adjustments and failed to prove that an increase in its inventory from the
test-year amount of $26,513 is reasonable.

 

51.           Only test year actual inventory in the amount
of $26,513 was proven to be reasonable.

 

G. 
Prepayments

 

52.           Cap Rock’s 13-month average prepayment
balance is $333,000 and is reasonably included in Cap Rock’s rate base.

 

H.  Short-Term
Investments

 

53.           Cap Rock is not currently requesting the
inclusion of any amount of short term investment costs in its rate base.  Therefore, the short term investments amount
of $9,736,860 previously included in Cap Rock’s RFP is properly removed.

 

I.  Working
Cash Allowance

 

54.           The reasonable amount of working cash
allowance is an amount equal to one-eighth of Cap Rock’s O&M, excluding
amounts charged to O&M expense for materials and supplies, fuel, and
prepayments.

 

J.  Customer
Deposits

 

55.           Cap Rock had customer deposits in the amount
of $651,929 at the end of its test-year, and this amount is reasonably excluded
from rate base.

 

K. 
Accumulated Deferred Income Taxes

 

56.           Cap Rock included accumulated deferred income
taxes in the amount of $2,681,700 in its

 

240

 

initial RFP but this calculation did not include the total amount of
test year change in timing difference.

 

57.           The correct amount of accumulated deferred
income taxes to be used in establishing rates for Cap Rock is $2,274,728.

L.  Patronage
Capital

 

58.           NewCorp has not paid any capital credits to
its sole member, Cap Rock.

 

59.           It is not reasonable at this time to deduct
any unpaid patronage capital in NewCorp from Cap Rock’s rate base.

 

Rate of Return

 

60.           The reasonable overall weighted rate of
return that Cap Rock should be allowed to earn is 5.54%:

 

a.             a reduction to the overall weighted rate of
return is not necessary as Cap Rock’s actual capital structure is used
resulting in a relatively low weighted rate of return;

b.             numerous disallowances have been made to
account for Cap Rock’s poor management practices so to also reduce Cap Rock’s
rate of return for these same practices would be duplicative and unfairly
punitive.

 

A.  Capital
Structure

 

61.           Cap Rock’s actual capital structure at the
end of the test year was 83.48% debt and 16.52% equity.

 

62.           A hypothetical structure of 60% debt and 40%
equity is not reasonable for Cap Rock’s capital structure:

 

a.             Cap Rock is entirely distinguishable from the
transmission and distribution  utilities
(TDU) docket wherein the Commission set a 60/40 capital structure in that Cap
Rock has gone from unregulated to regulated; has an existing capital structure
that may be used; and is not an unbundled TDU, but rather simply provides
retail electric service.  See Generic Issues Associated with Applications for
Approval of Unbundled Cost of Service Rate Pursuant to PURA § 39.201
and  P.U.C. SUBST. R. 25.344, Docket
No 22344, Order No. 42 (Dec. 18, 2000).

b.             A 60/40 capital structure would grant Cap
Rock an excessive rate of return on its actual equity;

c.             With the significant stock grants given to
Cap Rock’s management, they would stand to disproportionally benefit from a
higher rate of return on their stock;

 

241

 

d.             Cap Rock’s existing capital structure situation
is of its own making; and

e.             Much of Cap Rock’s weak financial condition
is due to poor quality of management and Cap Rock has lost significant amounts
of money as a result of both the conversion to an IOU and on numerous failed
ventures.

 

63.           Cap Rock’s reasonable capital structure to be
used in setting rates is its actual capital structure of 83.48% debt and 16.52%
equity, as noted at the end of the test year.

 

B.  Cost of
Debt

 

64.           Cap Rock’s actual cost of debt is 4.31% and
that amount is reasonable in calculating Cap Rock’s overall weighted rate of
return.

 

C.  Return on
Equity

 

65.           It is reasonable for Cap Rock to earn a rate
of return on equity of 11.75%:

 

a.             The return on equity should include a risk
adjustment, because of Cap Rock’s more tenuous financial situation, to
approximate what comparable equity investments would earn;

b.             Cap Rock’s bond rating would be below
investment grade and the yield difference between investment grade and below
investment grade bonds (2% in 2003) is properly considered when calculating a
credit risk premium; and

c.             A return on equity of 11.75% is not
out-of-line with past Commission precedent.

 

D.  Financial
Integrity

 

66.           Cap Rock is financially stable enough to
continue to provide reliable electric service and earn a reasonable rate of
return using its actual capital structure and a rate of return on equity of
11.75%.

 

Revenues

 

A.  Regulatory
Surcharge

 

67.           To reflect the end of a non-recurring
regulatory surcharge, it is reasonable to exclude $1,842,834 from Cap Rock’s
revenues.

 

B.  PCRF
Revenues

 

68.           To reflect PCRF revenues that will not be
collected going forward, it is reasonable to reduce

 

242

 

Cap
Rock’s revenues by $6,351,772.

 

C.  Weather
Normalization

 

69.           Cap Rock did not perform a multiple
regression analysis and did not account for the impact of price elasticity,
household income, space heaters, and air conditioners in determining whether it
should implement a weather normalization adjustment.

70.           Cap Rock did not show that weather during the
test year was beyond a normal range of weather to justify a weather
normalization adjustment.

 

71.           Cap Rock’s proposed weather normalization
revenue reduction of $516,046 is not reasonable:

 

a.             Cap Rock failed to consider relevant factors
when it determined this adjustment;

b.             a weather normalization adjustment should
only be used if the weather pattern in the test year is proven to be outside of
a normal range;

c.             Cap Rock failed to prove the weather pattern
in the test year was sufficiently outside a normal range;

d.             Cap Rock’s modeling results contained
unexplained inconsistent results;

e.            Cap Rock did not establish that it has
uniformly applied weather normalization adjustments in establishing rates in
the past.

 

72.           Because Cap Rock’s reduction of purchased
power expenses for weather normalization is unreasonable, the corresponding
reduction in Cap Rock’s RFP to purchased power expense should be negated (the
amount of $409,100 should be included in purchased power expenses).

 

D.  Unbilled
Revenues (Billing Reconciliation)

 

73.           In order to offset the existing negative
entry for unbilled revenues, it is reasonable to make a positive adjustment of
$463,857 to Cap Rock’s revenues.

 

E.  Change in
Accounting Principal

 

74.           It is reasonable to reduce Cap Rock’s
revenues by $1,289,553 to reflect a change in accounting principle which
occurred in March 2003.

 

F.  Loss of
Cotton Gin Load

 

75.           After the test year, two cotton gin customers
served by Cap Rock left Cap Rock’s system to take power from a different
supplier.

 

243

 

76.           It is reasonable to reduce Cap Rock’s
revenues by $239,203 to reflect the loss of load associated with the loss of
these two cotton gin customers.

 

G.  Unbilled
Meters

 

77.           No adjustment is necessary for Cap Rock’s
unbilled meters.

 

H.  Negotiated
Rates

 

78.           During the test year, Cap Rock charged
certain negotiated and discounted rates that reduced the revenues it otherwise
would have received.

 

79.           Cap Rock is going to discontinue the use of
those discounted rates and, therefore, its revenues will be higher from those
customers who will no longer pay the discounted rates.

 

80.           Revenues of $263,000 are reasonably imputed
to Cap Rock’s test-year revenues to account for the discontinuation of certain
negotiated and discount rates.

 

I.  Imputation
of Revenues

 

81.           Cap Rock proposed to replace rate codes 665
and 597 with a Load Management Rider, which, if approved, would result in a
credit to customers who qualify.

 

82.           The Load Management Rider is a $1.85 per kW
credit for interruptible loads, which is a pass-through of Cap Rock’s credit
from Southwestern Public Service Company (SPS).

 

83.           As designed, the Load Management Rider is not
a discounted rate.

 

84.           It is not reasonable to impute $743,670 in
revenues for the Load Management Rider as this would benefit non-interruptible
customers who should not benefit from this pass-through credit.

 

J. 2001 NewCorp True-up

 

85.           Cap Rock has removed $2,184,118 from other
revenues to recognize the end of amortizing the deferred revenues associated
with three non-recurring surcharges collected over a 24-month period
beginning in January 2002:

 

a.             The first surcharge was for
collection of NewCorp’s under-recovery from Cap Rock for costs during the
period from 1995 through 2000.  Although
NewCorp’s Wholesale Power (WP) tariff permitted implementation of a

 

244

 

surcharge/refund for the under/over-collection of
charges, NewCorp had not trued-up its charges prior to January 2002.  At that time, NewCorp proposed to include a
true-up based on the balance as of the year 2000.  The one-time true-up charge for that time
period was $1,251,913.  Half of this
amount was amortized during the test year and is reflected on Cap Rock’s books
as other revenue.

 

b.             The second surcharge was for
the true-up of under-recovered costs of $1,604,970 for the calendar year 2001,
of which $802,485 was collected during the test year.

 

c.             The final surcharge was
associated with the billing of hedging losses sustained by NewCorp during
2001.  These losses amounted to
$1,506,910, of which $753,455 was collected during the test year.

 

86.           Of the total amounts amortized and collected,
$2,184,118 was amortized and collected during the test year.

 

87.           The $2,184,118 was non-recurring; and
therefore, it is not reasonable to include it in Cap Rock’s revenue for the
purpose of setting rates.

 

K. Change in Accounting Principle

 

88.           In 2003, Cap Rock changed
from an as-billed to an accrual-based accounting method as required by
Generally Accepted Accounting Principles.

 

89.           For ratemaking purposes, it
is necessary to recognize the net change between the accrual included in the
first month of the test period with the accrual made in the last month of the
test period.

 

90.           Cap Rock calculated an
accrual for September 2002 that represents the impact of unbilled sales,
which would have been recognized if the accrual method had been in place; in
this manner, the revenues for the test year properly reflect one year’s worth
of revenues on an accrual basis.

 

91.           It is reasonable to remove $2,335,000 from
revenues as Accrued Utility Revenues.

 

L. Street Lighting Rental Revenues

 

92.           Revenue in the amount of
$24,651 for street lighting rental fees is reasonably reclassified from sales
revenues to Other Operating Revenues, Account 454.

 

245

 

M. Late Payment Fees/Connection Fees

 

93.           Revenues of $12,045 may reasonably be
reclassified from other operating revenues for adjustments (refunds) to
customers’ bills for late payment penalties and/or connection fees and booked
to Account 451 for sales revenue.

 

94.          Cap Rock will discontinue imposing late fees on residential
customers.

 

95.           An adjustment resulting in a
reduction to Account 451, Late Payment Fees, in the amount of $397,500 is
reasonable to reflect the discontinuance of late payment fees.

 

N. Capital Credits

 

96.           It is not reasonable to impute revenues to
Cap Rock for its capital credits in NewCorp.

 

Purchased Power Expenses

 

97.           Under both the WP tariff and the current
OATT, Cap Rock has consistently paid NewCorp approximately $750,000 per month
for transmission service.

 

98.           Since the test year, NewCorp refinanced a
loan which previously required it to pay $620,000 per month as a capital lease
payment for its transmission system.

 

99.           NewCorp paid off the original loan by taking
out another loan, in the amount of approximately $14 million, from a different
lender.

 

100.         NewCorp secured this second loan using
collateral consisting of $8.2 million from a sinking fund designed for the
purpose of paying off the transmission lease and a $6 million loan from Cap
Rock.

 

101.         In agreeing to amounts paid for transmission
service, Cap Rock and NewCorp agreed upon $9 million as a proxy for actual
costs, with the understanding that actual costs would later be reconciled.

 

102.         The record does not establish that NewCorp is
currently receiving a windfall from the $9 million annual transmission
payments.

 

103.         Except as set forth below, it is not
reasonable to reduce or disallow the payments to NewCorp under the OATT.

 

104.         Effective April 1, 2004, NewCorp was
authorized to charge its OATT and Cap Rock began buying purchased power
directly from Southwestern Public Service.

 

105.         Cap Rock has reduced purchased power expenses
by $3,494,835 to reflect the change in

 

246

 

NewCorp’s tariff and in regard to the elimination of NewCorp’s 2003
true-up credit.  Cap Rock’s reduction is
reasonable and this amount is properly excluded from Cap Rock’s purchased power
expenses.

 

106.         Cap Rock’s purchased power expenses are
reasonably reduced by $176,086 to reflect the decreased power costs attributed
to the loss of two cotton gin customers.

 

107.         Because Cap Rock now purchases power directly
from SPS and obtains only transmission service from NewCorp, the charges by
NewCorp are appropriately booked as transmission costs under FERC Account No. 565.

 

Operation and Maintenance (O&M) Expenses

 

A. 
Acquisition and Expansion Costs

 

108.         It is not reasonable to include Lamar
acquisition expenses in the amount of $1,357,000 in O&M expenses.

 

B.  Outside
Services and Other Disputed Costs

 

109.         Cap Rock paid a total of $194,000 to lobbyists
for legislative advocacy services and for membership dues.

 

110.         Legislative advocacy expenses may not be
included in setting a utility’s rate; therefore, lobbying expenses in the
amount of $194,000 are not reasonably included in Cap Rock’s O&M expenses.

 

111.         Total intervention costs in the amount of
$246,928 are not reasonably included in Cap Rock’s O&M expenses.

 

112.         Cap Rock has not shown that Mike McGregor’s
expenses in the amount of $21,911 were reasonable and necessary; thus, that
amount may not reasonably be included in Cap Rock’s cost of service.

 

113.         New York hotel expenses in the amount of
$16,311  were neither reasonable,
necessary, nor recurring; thus, that amount may not reasonably be included in
Cap Rock’s cost of service.

 

114.         At a cost of $12,247, David Pruitt, Cap Rock’s
CEO, traveled with his wife to Bermuda; Scottsdale, Arizona; the Turks and
Caicos Islands; and Aspen, Colorado for “CEO Super PAC Meetings.”

 

115.         The $12,247 for the cost of Mr. and Mrs. Pruitt’s
trips are not reasonably included in Cap Rock’s O&M expenses.

 

247

 

116.         Cap Rock failed to prove the legal expenses
in the amount of $30,679 provided by Rick Terrill were reasonable and
necessary; thus, that amount may not reasonably be included in Cap Rock’s cost
of service.

 

117.         Cap Rock failed to prove that CEO club
membership dues in the amount of $6,600 were reasonable and necessary; thus,
that amount may not reasonably be included in Cap Rock’s cost of service.

 

118.         Cap Rock failed to prove that apartment and
furniture rental for Lee Atkins and Will West were reasonable and necessary;
thus, the amount of $13,346 spent on those items may not reasonably be included
in Cap Rock’s cost of service.

 

119.         Cap Rock failed to prove that $5,566 for
private plane expenses incurred while leasing a plane to travel between Midland
and Austin on two separate occasions were reasonable and necessary; thus, that
amount may not reasonably be included in Cap Rock’s cost of service.

 

120.         Vision Energy’s consultation fees are
reasonably included in Cap Rock’s O&M expenses.

 

121.         The allocation factor of 43.705% used to
allocate overhead, operations, maintenance and capital between Cap Rock and
NewCorp is reasonable.

 

C.  Delinea
Computer Support and Maintenance

 

122.         The annual costs associated with the
installation, implementation, and maintenance of the software and support
services of Delinea System, $1,648,320 are not reasonably included in O&M
expenses.

 

D. 
Compensation and Benefits

 

123.         O&M expenses in the amount of $577,887
(minus adjustments for reducing cost of living increases from a total of 7%, to
1.4% in 2002 and 2.1% in 2003) for incurred costs above the test year
associated with life, long-term disability, and medical insurance as well as
for new employee labor costs and a cost of living increase for all employees
are reasonable and necessary.

 

124.         Cost of living increases to employee
compensation of 1.4% in 2002 and 2.1% in 2003 are reasonable and necessary.

 

125.         None of the stock awards and bonuses—a total
of $1,444,883—may reasonably be included in Cap Rock’s cost of service.

 

248

 

126.         The revised requested test year amount for
sick leave and vacation buyback of $132,294 is reasonably included in O&M
expenses. (the revised amount requested reflects a $100,456 reduction for
discontinuation of longevity payments).

 

127.         The base salary of $174,000 paid to Cap Rock’s
General Counsel, Ronnie Lyon, is reasonable and necessary and is properly
included in the cost of service.

 

128.         Cap Rock failed to prove its executive
compensation of $730,284 was reasonable and necessary.

 

129.         A minimum of $200,000 is reasonable executive
compensation for inclusion in O&M expenses.

 

130.         Reclassification of plant to O&M in the
amount of $432,190 is reasonable and necessary.

 

131.         The costs associated with operating as a
publicly-traded company are reasonable and necessary.

 

132.         The costs associated with right-of-way fees
are reasonable and necessary.

 

133.         $95,053 associated with materials and
supplies are reasonably included in O&M expenses.

 

Affiliate Transactions

 

134.         NewCorp is organized under the laws of Texas
as an electric cooperative and has been operating under Chapter 161 of the
Texas Utilities Code:

 

a.             NewCorp holds meetings each quarter;

b.             NewCorp has not improperly earned profits;
and

c.             Cap Rock appropriately appointed
representatives to carry out its functions as the only member of the NewCorp
Electric Cooperative.

 

135.         The purchased power contract between Cap Rock
and NewCorp is on file with and has been accepted by the Federal Energy
Regulatory Commission (FERC), and Cap Rock makes payments to NewCorp pursuant
to a FERC-approved tariff.

 

Depreciation and Amortization Expense

 

136.         Because Cap Rock is not allowed to recover
any monies for a catastrophe reserve, Cap Rock’s proposed adjustment to
depreciation is not reasonable.

 

249

 

137.         Because Cap Rock is not allowed to recover
the costs of the Delinea System in its rate base, Cap Rock’s proposed
adjustment to depreciation for the Delinea System is not reasonable.

 

Taxes other than Income Taxes

 

138.         Cap Rock failed to prove any increase in
property taxes above those in the test year ($899,597) were known and
measurable.

 

139.         It is reasonable to calculate Cap Rock’s
franchise tax as .045% (1% of 4.5%) of its taxable income.

140.         The corrected test year amount for state
franchise taxes is $4,400.

 

Income Taxes

 

141.         Cap Rock’s federal income tax rate is 34%.

 

Interest on Customer Deposits

 

142.         Cap Rock paid $36,800 in interest on customer
deposits during the test year, but since the test year an increase in the
amount of interest paid on customer deposits is known and measurable with a total
of $39,115 reasonably included in cost of service.

 

Rate Design

 

143.         The general service-city limit (Rate Code
119) is a discount rate:

a.             no significant difference in costs associated
with providing service to city and rural customers was proven; and

b.             competition is the primary factor driving the
need for the city limit rate.

 

144.         Cap Rock failed to offer sufficient, credible
evidence to support its rate design as reasonable and trustworthy.

 

145.         Data in Cap Rock’s demand study was not
proven to be reliable, as unsupported and incorrect assumptions were made and
some of the results were proven to be invalid.

 

146.         If the absolute demand data for one class is
biased in a way that the data for other classes is not, then the relative
demand data will be skewed.

 

147.         Cap Rock’s reliance on the load data and cost
allocation factors from AEP-Texas North Company is not reasonable, as
differences in classes were not sufficiently addressed.

 

250

 

148.         The rate design proposed by Staff depends on
Cap Rock’s underlying data, so it is not reasonable.

 

149.         It is reasonable and fair for system-wide
rates to be implemented with the McCulloch division customers paying the same
rates as other Cap Rock customers.

 

150.         An across-the-board cost allocation based on
the current rate design is reasonable, with two exceptions:

a.             system-wide rate should be implemented with
the McCulloch division customers paying the same rates as other Cap Rock
customers; and

b.             the general service-city customer rate (Rate
Code 119) is a discounted rate.

151.         Only those demand meters in service during
the test year are used and useful.

 

152.         It is reasonable for commercial service
customers who receive service at primary voltage to receive a discount of $2.44
per kW.

 

153.         It is fair and reasonable for Cap Rock to
implement a standard allowance for line extensions with costs over and above
this amount to be paid by the new customer as contribution in aid of
construction.

 

Other Issues

 

154.         Given Cap Rock’s poor quality of management
and the potential conflicts of interest by management, a truly independent
inquiry into Cap Rock’s operations in the form of a management audit would be
reasonable and beneficial.

 

Rate Case Expenses

 

155.         Rate case expenses for Cap Rock in the amount
of $3,220,105 are reasonable and necessary:

 

a.             $311,370 in expenses associated with rate
design are properly disallowed, because the rate design is so flawed and
unreliable as to be useless.

b.             $2,310 in expenses associated with work
performed by the law firm of Griggs & Adler is associated with matters
related to the Federal Energy Regulatory Commission and not this case, and are
properly disallowed.

c .            $1,044 in expenses associated with Covington
Consulting are not supported by documentation, showing who performed the work
and for what purpose; thus, those expenses are properly disallowed.

d.             $64,700 in expenses associated with KPMG is
not supported by sufficient documentation; thus, that amount is properly
disallowed.

 

251

 

e.             $4,457 in expenses for meals and other
personal expenses were for Cap Rock 
employees in Midland while they remained in Midland; such expenses are
not reasonable and necessary, and are properly disallowed.

f.              $30,175 in other expenses are unsupported by
proper documentation, and are properly disallowed.

g.             $578 in mileage expense by Ronnie Lyon for
travel from his office in Sherman to the Dallas airport was not shown to be
reasonable and necessary, and is properly disallowed.

 

156.         Rate case expense for Greenville in the
amount of $630,355.77 are reasonable and necessary.

 

252

 

XIX.  CONCLUSIONS OF
LAW

 

1.             Cap Rock is an electric utility as defined in
PURA §31.002, and a public utility as defined in PURA § 11.004.

 

2.             The Commission has jurisdiction over the
parties and subject matter of this proceeding pursuant to PURA §§ 14.001,
32.001, 36.105, and 36.151.

 

3.             SOAH has jurisdiction over all matters relating
to the conduct of the hearing in this case, including the preparation of a
Proposal for Decision pursuant to PURA §14.053 and TEX. GOV’T CODE ANN. § 2003.049(b).

 

4.             Each municipality in Cap Rock’s service area that has
not ceded jurisdiction to the Commission has jurisdiction over Cap Rock’s
application to the extent that the application seeks to change rates within the
municipality pursuant to PURA § 33.001.

 

5.             This proceeding was processed in accordance
with the requirements of PURA and the Administrative Procedure Act (APA), TEX. GOV’T
CODE ANN. §§ 2001.001, et seq.

 

6.             Appropriate notice of this proceeding was provided in
compliance with P.U.C. PROC. R. §§ 22.51(a)-(b) and/or 22.55, and TEX. GOV’T CODE ANN. §§ 2001.051 and 2001.052.

 

7.             The
effective date of any change approved in this
case was extended pursuant to P.U.C. PROC. R. 22.33 § (a)(6) and P.U.C. PROC. R.
§ 25.41(I).

 

8.             Cap
Rock has the burden of proof in this proceeding pursuant to PURA § 36.006.

 

9.             Cap Rock has failed to meet its burden of
proof to support its proposed rate increase and proposed rate design.

 

10.           Cap Rock has failed to meet its burden of
proof to show that its existing rates are just and reasonable in response to
Staff’s petition to reduce Cap Rock’s rates.

 

11.           Cap Rock’s current rates are unreasonably
discriminatory and preferential in violation of PURA § 36.003 by applying
different rates for the same service provided to similarly situated customers.

 

12.           Cap Rock’s current rates for residential
service in rural areas are more than 200% higher than residential rates in
municipalities in violation of PURA § 36.005.

 

253

 

13.           The city rate (Rate Code 119) may continue as
a discounted rate pursuant to PURA § 36.007.

 

14.           Cap Rock’s current rates are unreasonable and
excessive by producing overall revenue that exceeds the standard established in
PURA § 36.051.

 

15.           Because Cap Rock’s current rates are
unreasonable and in violation of law, the Commission must establish just and
reasonable rates to be charged by Cap Rock pursuant to PURA § 36.151.

 

16.          NewCorp
is not an affiliate of Cap Rock under PURA §§ 11.003(2) and 11.006
and, thus, there are no affiliate transactions for review in this proceeding.

 

17.           As required by PURA § 36.053, Cap Rock’s
invested capital is $124,323,000, as set forth in Attachment A (Staff’s
Number-Running Memorandum and Schedules), and is based upon the original cost
of property used and useful in providing service to the public.

 

18.           The overall rate of return of 5.54%, the
components of rate of return, and the capital structure of 83.48% debt and
16.52% equity comply with the requirements of PURA § 36.052, and result in
an overall return on invested capital of $6,887,490 (as shown in Attachment A).

 

19.           The overall revenue calculated in accordance
with this Order will permit Cap Rock a reasonable opportunity to earn a
reasonable return over and above its reasonable and necessary operating
expenses, in accordance with PURA § 36.051.

 

20.           The approved expenses set forth in Attachment
A comply with the requirements of PURA Chapter 36 and P.U.C. SUBST. R.
Subchapter J.

 

21.           The rates and rate design calculated in
accordance with the terms of this Order, and set forth in Attachment A, are
just and reasonable and are not unreasonably preferential, prejudicial, or
discriminatory within the meaning of PURA § 36.003.

 

XX.  PROPOSED
ORDERING PARAGRAPHS

 

1.             The proposal for decision prepared by the
SOAH Administrative Law Judges is adopted to the extent consistent with this
Order.

 

2.             Cap Rock’s application for a rate increase is denied.

 

3.             Staff’s petition for an inquiry into Cap Rock’s
rates is granted and new just and

 

254

 

reasonable rates are established for Cap Rock as set forth in this
Order.  The new rates are effective on
the date of this Order.

 

4.             Cap Rock shall make a compliance filing
containing a “clean” version of its tariff reflecting the rates and any revised
tariff language contained in this Order. 
The filing shall be made not later than 30 days after the date of this
Order.  The effective date of the tariff
shall be the date of this Order rather than the date the tariff is filed.

 

5.             Cap Rock shall cooperate with Staff in
establishing and conducting a management audit as required in this Order.  Cap Rock shall pay the costs of the audit in
accordance with the terms of the agreement with the auditor.

 

6.             All other motions, request for entry of
specific findings of fact and conclusions of law, and any other requests for
general or specific relief, if not expressly granted, are denied.

 

 

	
  SIGNED March 16, 2005.

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  CRAIG R. BENNETT

  
	
   

  	
  ADMINISTRATIVE LAW JUDGE

  
	
   

  	
  STATE OFFICE OF ADMINISTRATIVE HEARINGS

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  WENDY K. L. HARVEL

  
	
   

  	
  ADMINISTRATIVE LAW JUDGE

  
	
   

  	
  STATE OFFICE OF ADMINISTRATIVE HEARINGS

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  TOMMY L. BROYLES

  
	
   

  	
  ADMINISTRATIVE LAW JUDGE

  
	
   

  	
  STATE OFFICE OF ADMINISTRATIVE HEARINGS

  

 

255EXHIBIT 10.1

 

Option:           

 

GRANITE
CITY FOOD & BREWERY LTD.

NONQUALIFIED
STOCK OPTION AGREEMENT

PURSUANT
TO 1997 STOCK OPTION PLAN

 

This AGREEMENT is dated
this          day of                           ,
        , and is entered into by and
between Granite City Food & Brewery Ltd., a Minnesota corporation (the
“Company”), and                                     
(the “Optionee”).  Unless otherwise
defined herein, certain capitalized terms shall have the meaning set forth in
the Company’s 1997 Stock Option Plan.

 

W I T N E S S E T H :

 

1.                                       Nature
of the Option.  This Option does not
constitute an Incentive Stock Option as defined in Section 422 of the
Code.

 

2.                                       Grant
of Option.  Pursuant to the
provisions of the Plan, the Company has granted to the Optionee on                                  ,
        , subject to the terms and
conditions of the Plan and subject further to the terms and conditions herein
set forth, the right and option to purchase from the Company all or a part of
an aggregate of                 
shares of Stock (the “Shares”) at the purchase price of $       
per share, such option to be exercised as hereinafter provided.

 

3.                                       Terms
and Conditions.  It is understood and
agreed that the option evidenced hereby is subject to the following terms and
conditions:

 

(a)                                  Expiration
Date.  The option shall expire ten
years after the date of grant specified in Section 2.

 

(b)                                 Exercise
of Option.  Subject to the other
terms of this Agreement regarding the exercisability of this option, this
Option shall be exercisable                                  ,
all as more completely described in Exhibit A; provided, however, that the
partial exercise of the option shall, in no event, be for less than 25% of the
number of shares for which options have been granted to the Optionee, unless
such purchase would entirely exhaust the outstanding options then held by such
Optionee.

 

Any exercise shall be
accompanied by a written notice to the Company specifying the number of shares
of Stock as to which the option is being exercised.  Notation of any partial exercise shall be
made by the Company on Schedule I hereto.

 

(c)                                  Payment
of Purchase Price Upon Exercise.  At
the time of any exercise, the purchase price of the Shares as to which this
option is exercised shall be paid in cash to the Company, unless the Board
shall permit payment of the purchase price in another manner permitted by Section 7.4
of the Plan.

 

 

(d)                                 Transferability.  This option shall not be transferable other
than by will or by the laws of descent and distribution or pursuant to a
qualified domestic relations order. 
During the lifetime of the Optionee, this option shall be exercisable
only by the Optionee or by the Optionee’s guardian or legal representative.

 

(e)                                  No
Rights as Shareholder.  The Optionee
shall have no rights as a shareholder of the Company with respect to any shares
of Stock subject to this option prior to the date of issuance to him of a
certificate for such shares.

 

(f)                                    Compliance
with Law and Regulations.  This
option and the obligation of the Company to sell and deliver shares hereunder
shall be subject to all applicable federal and state laws, rules and
regulations and to such approvals by any government or regulatory agency as may
be required.  The Company shall not be
required to issue or deliver any certificates for shares of Stock prior to (i) the
listing of such shares on any stock exchange on which the Stock may then be
listed, and (ii) the completion of any registration or qualification of
such shares under any federal or state law, or any rule or regulation of
any government body which the Company shall, in its sole discretion, determine
to be necessary or advisable.  Moreover,
this option may not be exercised if its exercise or the receipt of shares of Stock
pursuant thereto would be contrary to applicable law.

 

(g)                                 Provision
for Payment of Withholding Taxes. 
Optionee understands that, upon exercise of this Option, Optionee will
recognize income for tax purposes in an amount equal to the excess of the then
fair market value of the shares over the exercise price.  The Company may be required to withhold tax
from Optionee’s current compensation with respect to such income; to the extent
that Optionee’s current compensation is insufficient to satisfy the withholding
tax liability, the Company will require the Optionee to make a cash payment to
cover such liability as a condition of exercise of this Option.

 

4.                                       Termination
of Relationship for Misconduct.  If
the Board reasonably believes that the Optionee has committed an act of
misconduct, it may suspend the Optionee’s right to exercise this option pending
a determination by the Board.  If the
Board determines that the Optionee has committed an act of embezzlement, fraud,
dishonesty, nonpayment of an obligation owed to the Company, breach of
fiduciary duty or deliberate disregard of the Company’s rules resulting in
loss, damage or injury to the Company, or if the Optionee makes an unauthorized
disclosure of any Company trade secret or confidential information, engages in
any conduct constituting unfair competition with respect to the Company, or
induces any party to breach a contract with the Company, neither the Optionee
nor the Optionee’s estate shall be entitled to exercise any option
whatsoever.  In making such
determination, the Board shall act fairly and shall give the Optionee an
opportunity to appear and present evidence on the Optionee’s behalf at a
hearing before the Board.

 

5.                                       Investment
Representation.  The Board may
require the Optionee to furnish to the Company, prior to the issuance of any
shares upon the exercise of all or any part of this option, an agreement (in
the form attached hereto as Exhibit B) in which the Optionee represents
that the shares acquired by him upon exercise are being acquired for investment
and not with a view to the sale or distribution thereof.

 

 

6.                                       Optionee
Bound by Plan.  The Optionee hereby
acknowledges receipt of a copy of the Plan and agrees to be bound by all the
terms and provisions thereof.

 

7.                                       Notices.  Any notice hereunder to the Company shall be
addressed to it at its principal executive offices, located at 5831 Cedar Lake
Road, St. Louis Park, Minnesota 55416, Attention: Chief Executive Officer; and
any notice hereunder to the Optionee shall be addressed to him at the address
set forth below; subject to the right of either party to designate at any time
hereunder in writing some other address.

 

8.                                       Counterparts.  This Agreement may be executed in two
counterparts each of which shall constitute one and the same instrument.

 

IN WITNESS WHEREOF,
Granite City Food & Brewery Ltd. has caused this Agreement to be
executed by its Chief Executive Officer and the Optionee has executed this
Agreement, both as of the day and year first above written.

 

 

	
   

  	
  GRANITE CITY
  FOOD & BREWERY LTD.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Steven J. Wagenheim

  
	
   

  	
   

  	
  Chief Executive Officer

  
	
   

  
	
   

  
	
   

  	
   

  
	
  Optionee
  (signature)

  
	
   

  
	
  Name and address
  of Optionee

  
	
  (type or print):

  
	
   

  
	
   

  	
   

  
	
   

  
	
   

  	
   

  
	
   

  
	
   

  	
   

  
					

 

 

EXHIBIT
A

 

OPTION
AND VESTING DATA

 

	
  Name of Optionee

  	
  :

  	
   

  
	
  Number of Shares
  Subject to Option

  	
  :

  	
   

  
	
  Date of Grant

  	
  :

  	
   

  

 

OPTION
VESTING SCHEDULE

 

	
   

  	
   

  	
  NO. OF SHARES

  
	
  DATE

  	
   

  	
  EXERCISABLE

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  

 

The above vesting schedule assumes
a ongoing relationship with the Company. 
Your rights to exercise the unvested portion of your option will cease
upon termination of relationship with the Company.  Reference is made to the Plan and to relevant
sections of the Agreement between you and the Company for your rights to
exercise the vested portion of your option in the event of termination of your
relationship with the Company during lifetime or upon death.  The above vesting schedule is in all
respects subject to the terms of those documents.

 

 

EXHIBIT
B

 

INVESTMENT
REPRESENTATION STATEMENT

 

	
  PURCHASER:

  	
   

  	
   

  
	
  ISSUER

  	
  :

  	
  Granite City
  Food & Brewery Ltd.

  
	
  SECURITY

  	
  :

  	
  Common Stock

  
	
  AMOUNT

  	
  :

  	
                           Shares

  
	
  DATE

  	
  :

  	
   

  

 

In connection with the
purchase of the common stock (“Securities”) of Granite City Food &
Brewery Ltd. (the “Company”), the undersigned represents to the Company the
following:

 

(a)                                  I
am aware of the Company’s business affairs and financial condition, and have
acquired sufficient information about the Company to reach an informed and
knowledgeable decision to acquire the Securities.  I am purchasing the Securities for my own
account for investment purposes only and not with a view to, or for the resale
in connection with, any “distribution” thereof for purposes of the Securities
Act of 1933, as amended (the “Securities Act”).

 

(b)                                 I
understand that the Securities have not been registered under the Securities
Act in reliance upon a specific exemption therefrom, which exemption depends
upon, among other things, the bona fide nature of my investment intent as
expressed herein.  In this connection, I
understand that, in the view of the Securities and Exchange Commission (the “SEC”),
the statutory basis for such exemption may be unavailable if my representation
was predicated solely upon a present intention to hold the Securities for the
minimum capital gains period specified under tax statutes, for a deferred sale,
for or until an increase or decrease in the market price of the Securities, or
for a period of one year or any other fixed period in the future.

 

(c)                                  I
further understand that the Securities must be held indefinitely unless
subsequently registered under the Securities Act or unless an exemption from
registration is otherwise available. 
Moreover, I understand that the Company is under no obligation to
register the Securities.  In addition, I
understand that the certificate evidencing the Securities will be imprinted
with a legend which prohibits the transfer of the Securities unless they are
registered or such registration is not required in the opinion of counsel for
the Company.

 

(d)                                 I
am familiar with the provisions of Rule 701 and Rule 144, each promulgated
under the Securities Act by the SEC, which, in substance, permit limited public
resale of “restricted securities” acquired, directly or indirectly, from the
issuer thereof, in a non-public offering subject to the satisfaction of certain
conditions.  Rule 701 provides that
if the issuer qualifies under Rule 701 at the time of issuance of the
Securities, such issuance will be exempt from registration under the Securities
Act.  In the event the Company later
becomes subject to the reporting requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, as amended, ninety (90) days thereafter
the securities exempt under Rule 701 may be resold, subject to the
satisfaction of certain of the conditions specified by Rule 144, including
among other things:  (1) the sale
being made through a broker in an unsolicited “broker’s transaction” or in
transactions directly with a market maker (as said term is defined under the

 

 

Securities Exchange Act
of 1934, as amended); and, in the case of an affiliate of the Company, (2) the
availability of certain public information about the Company, and the amount of
securities being sold during any three month period not exceeding the
limitations specified in paragraph (e) of Rule 144, if
applicable.  Notwithstanding this
paragraph (d), I acknowledge and agree to the restrictions set forth in
paragraph (e) hereof.

 

In the event that the
Company does not qualify under Rule 701 at the time of issuance of the
Securities, then the Securities may be resold in certain limited circumstances
subject to the provisions of Rule 144, which requires among other
things:  (1) the availability of
certain public information about the Company, (2) the resale occurring not
less than one year after the party has purchased, and made full payment for,
within the meaning of Rule 144, the securities to be sold; and, in the
case of an affiliate, or of a non-affiliate who has held the securities less
than two years, (3) the sale being made through a broker in an unsolicited
“broker’s transaction” or in transactions directly with a market maker (as said
term is defined under the Securities Exchange Act of 1934, as amended) and the
amount of securities being sold during any three month period not exceeding the
specified limitations stated therein, if applicable.

 

(e)                                  I
further understand that in the event all of the applicable requirements of Rule 144
or Rule 701 are not satisfied, registration under the Securities Act,
compliance with Regulation A, or some other registration exemption will be required;
and that, notwithstanding the fact that Rule 144 and Rule 701 are not
exclusive, the Staff of the SEC has expressed its opinion that persons
proposing to sell private placement securities other than in a registered
offering and otherwise than pursuant to Rule 144 or Rule 701 will
have a substantial burden of proof in establishing that an exemption from
registration is available for such offers or sales, and that such persons and
their respective brokers who participate in such transactions do so at their
own risk.

 

 

	
  Dated:

  	
   

  	
   

  	
  Signature of
  Purchaser:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
   

  

 

 

SCHEDULE I - NOTATIONS AS TO PARTIAL EXERCISE

 

	
  Date of

  Exercise

  	
   

  	
  Number of

  Purchased

  Shares

  	
   

  	
  Balance of

  Shares on

  Option

  	
   

  	
  Authorized

  Signature

  	
   

  	
  Notation

  Date

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00081-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00081-of-00352.parquet"}]]