Court Opinion

ID: 4052483
Source: CourtListenerOpinion
Date Created: 2016-09-29 02:01:51.139472+00
Date Added: 2024-06-11T13:56:20.313166
License: Public Domain

ACCEPTED
                                                                       03-14-00706-CV
                                                                              4425431
                                                             THIRD COURT OF APPEALS
                                                                        AUSTIN, TEXAS
                                                                   3/9/2015 3:33:37 PM
                                                                     JEFFREY D. KYLE
                                                                                CLERK
                NO. 03-14-00706-CV

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

              ENTERGY TEXAS, INC.,
                                APPELLANT,
                      V.

       PUBLIC UTILITY COMMISSION OF TEXAS,
                               APPELLEE

        ON APPEAL FROM THE FINAL JUDGMENT
           IN CAUSE NO. D-1-GN-13-002623
345TH JUDICIAL DISTRICT COURT, TRAVIS COUNTY, TEXAS,
  HONORABLE AMY CLARK MEACHUM, JUDGE PRESIDING

           APPELLEE BRIEF OF THE
      OFFICE OF PUBLIC UTILITY COUNSEL

                       OFFICE OF PUBLIC UTILITY COUNSEL
                       Tonya Baer
                       Public Counsel
                       State Bar No. 24026771

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

                   March 9, 2015
                                       TABLE OF CONTENTS

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

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

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

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

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

SUMMARY OF THE ARGUMENTS ...................................................................... 4

ARGUMENT AND AUTHORITIES ........................................................................ 6

I.      There is substantial evidence in the record to support the Commission’s
        decision to reject ETI’s rate case expenses related to Appellant’s
        advocacy for financially-based employee incentive compensation.. ............... 7

        A. Substantial evidence standard of review. ................................................... 8

        B. There is substantial evidence to support the Commission’s
           determination that ETI’s advocacy regarding financial-based
           incentive compensation was “unreasonable” and “overly
           aggressive.”. ............................................................................................ 10

        C. The Commission’s decision to disallow a portion of ETI’s rate-case
           expense is also supported by the totality of the record... ......................... 14

II.     The Commission acted well within its broad discretion when it
        disallowed ETI’s rate case expenses related to Appellant’s advocacy for
        financially-based employee incentive compensation. The Commission did
        not act arbitrarily or capriciously nor abuse its discretion. ............................ 18

                                                          i
        A. The Commission was not bound by any policy to allow rate case
           expenses for efforts to recover impermissible financially-based
           incentive compensation. .......................................................................... 19

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

        C. The Commission’s decision was a case-by-case determination and
           was not impermissible adjudicative rulemaking...................................... 24

III.    The Commission’s method of quantifying the amount of disallowed rate
        case expenses is supported by substantial evidence in the record and was
        not arbitrary, capricious, or an abuse of its discretion. .................................. 29

        A. The Commission’s quantification of the unreasonable rate case
           expenses is supported by substantial evidence in the record.................. 30

        B.     The Commission’s quantification of the unreasonable rate case
               expenses was not arbitrary, capricious, or an abuse of its discretion ..... 33

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

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

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

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

                                                       ii
                              TABLE OF AUTHORITIES

CASES

Burke v. Central Educ. Agency
   725 S.W.2d 393 (Tex. App. – Austin 1987, writ ref’d n.r.e.)................ 16-17, 19

Cities of Corpus Christi v. Public Utility Commission
    188 S.W.3d 681 (Tex. App. – Austin 2005, pet. denied) .................................. 35

City of Amarillo v. Railroad Commission
    894 S.W.2d 491 (Tex. App. – Austin 1995, writ denied) ................ 14-15, 18, 32

City of El Paso v. Public Utility Commission
    609 S.W.2d 574 (Tex. App. – Austin 1980, writ ref’d n.r.e.)............................ 16

City of Port Neches v. Railroad Commission
    212 S.W.3d 565 (Tex. App. – Austin 2006, no pet.) ....... 6, 13, 14, 15-16, 32, 34

Industrial Utilities Service v. Tex. Natural Resource Conservation Commission
    947 S.W.2d 712 (Tex. App. – Austin 1997, writ denied) .................................. 18

McHaney v. Tex. Comm’n on Environmental Quality
  No. 03-13-00280, 2015 WL 869197 *8 (Tex. App. – Austin mem. op.). ......... 28

Oncor Electric Delivery Company, LLC v. Public Utility Commission
   406 S.W.3d 253 (Tex. App. – Austin 2013, no pet.). .........................21-23, 33, 34

Pedernales Electric Cooperative, Inc. v. Public Utility Commission
   809 S.W.2d 332 (Tex. App. – Austin 1991, no pet.). ........................................ 18

Pioneer Natural Resources USA, Inc. v. Public Utility Commission
   303 S.W.3d 363 (Tex. App. – Austin 2009, no pet.) ............. 9, 13, 15, 32, 34-35

Reliant Energy, Inc. v. Public Utility Commission
    153 S.W.3d 174 (Tex. App. – Austin 2004, pet. denied). ........................... 20, 33

                                               iii
Richards v. Comm’n for Lawyer Discipline
    35 S.W.3d 243 (Tex. App. Houston 2000). ....................................................... 19

State of Texas’ Agencies and Institutions of Higher Learning v.
    Public Util. Comm’n of Tex., No. 03-11-00072-CV, 2014 WL 6893871
    (Tex. App. – Austin Dec. 4, 2014, no pet.)........................................................ 12

Texas Dep't of Transp. v. Sunset Transp., Inc.
    357 S.W.3d 691 (Tex. App. – Austin 2011, no pet.) .................................. 26-27

Texas State Board of Pharmacy v. Witcher
   447 S.W.3d 520 (Tex.App. – Austin 2014, pet. filed)............................. 25, 26, 27

Trinity Settlement Services, LLC v. Texas State Securities Board
    417 S.W.3d 494 (Tex.App. – Austin 2013, pet. denied) ................... 26, 27, 29, 34

STATUTES

Administrative Procedure Act (APA), TEX. GOV’T CODE §§ 2001.001-.902
(Vernon 2008 & Supp. 2013) ................................................................................... 26

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

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

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

Public Utility Regulatory Act (PURA), TEX. UTIL. CODE §§ 11.001-66.017
(Vernon 2007 & Supp. 2013) ................................................................... 4, 19, 25, 32

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

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

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

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

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

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

                                                        v
      GLOSSARY OF ABBREVIATIONS AND TECHNICAL TERMS

APA – Administrative Procedure Act, Tex. Gov’t Code §§ 2001.001-.902 (Vernon
    2008 & Supp. 2013)

AR – Administrative Record

Commission – Public Utility Commission of Texas, Defendant in this appeal

Docket No. 39896 – Application of Entergy Texas, Inc. for Authority to Change Rates,
     Reconcile Fuel Costs, and Obtain Deferred Accounting Treatment. The Public
     Utility Commission of Texas rate case proceeding in which the rate case
     expenses at issue were incurred.

Docket No. 40295 – Application of Entergy Texas, Inc. for Rate Case Expenses
     Pertaining to PUC Docket No. 39896. The Public Utility Commission of Texas
     proceeding from which this appeal is taken.

OPUC – Office of Public Utility Counsel, an Intervenor in this appeal

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

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

PFD – Proposal for Decision

PURA – Public Utility Regulatory Act, TEX. UTIL. CODE ANN. §§ 11.001-66.017
    (Vernon 2007 & Supp. 2013)

                                          vi
                          BRIEF OF APPELLEE,
                   OFFICE OF PUBLIC UTILITY COUNSEL

TO THE HONORABLE COURT OF APPEALS:

      The Office of Public Utility Counsel (OPUC), Appellee, submits this brief in

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

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

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

                               ISSUES PRESENTED

1.    In Commission Docket No. 39896, Appellant failed to prove that certain

      financially-based employee incentive compensation expenses were just and

      reasonable. The Commission had rejected those, or similar, expenses in

      previous dockets. In Docket No. 40295, the rate case expense hearing that is the

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

      incurred while attempting to include the financially-based employee incentive

      compensation expenses in its rates in Docket No. 39896.                  Was the

      Commission’s case-by-case determination within the Commission’s broad

      authority and discretion to grant or disallow rate case expenses?

2.    Was the Commission’s case-by-case determination, after notice and hearing, to

      reject rate case expenses associated with Appellant’s request for financially-

      based employee incentive compensation expenses in the related rate case a

                                           1
       violation of Appellant’s due process rights or an improper ad hoc rulemaking –

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

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

       the financially-based employee incentive compensation expenses was supported

       by the record and a reasonable exercise of its discretion, was the Commission’s

       method of quantifying those rate case expenses, after notice and hearing, within

       the Commission’s broad authority and discretion and supported by substantial

       evidence in the record?

                                STATEMENT OF FACTS

       Appellant Entergy Texas, Inc. (ETI) appeals the District Court’s Judgment

which affirmed the Commission’s Final Order in Docket No. 40295. 1 This docket

(Docket No. 40295) was a rate case expense hearing that was severed from a previous

rate application (Docket No. 39896). In Docket No. 39896, ETI filed an application

seeking a $111.8 million increase in base rates. 2 Docket No. 39896 was ETI’s third

rate case application in only four years. 3 ETI subsequently reduced its requested

increase to $104.8 million. 4

1
  Appellant ETI’s Initial Brief.
2
  AR Volume I, Binder 2, Item 55 (Final Order at 4, FOF No. 2).
3
  AR Volume I, Binder 2, Item 32 (PFD at 23).
4
  AR Volume I, Binder 2, Item 55 (Final Order at 5, FOF No. 10).

                                              2
        In its final order for Docket No. 39896, the Commission substantially reduced

ETI’s overall increase to $27.7 million – a fraction of the original $111.8 million

increase requested. 5 Approximately $6.5 million of the $84.1 million reduction from

the original request in Docket No. 39896 was for financially-based employee incentive

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

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

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

        During the underlying rate case, SOAH granted ETI’s unopposed motion to

sever rate case expenses and the PUC docketed the severed proceeding as Docket No.

40295. In Docket No. 40295, which is the subject of this appeal, ETI sought recovery

of $8,752,576 in rate case expenses related to Docket No. 39896. 8 Of that total, $7.6

million was incurred by ETI with the remainder being incurred by the intervening

Cities. 9

        The Administrative Law Judge (ALJ) held that, based upon the general concerns

raised by PUC Commission Staff and Intervenors, “a substantial cut to ETI’s rate case

expenses is warranted.”10 In the Final Order, the Commission agreed with the ALJ,

5
  AR Volume I, Binder 2, Item 55 (Final Order at 5, FOF No. 12).
6
  AR Volume I, Binder 2, Item 32 (PFD at 29, third bullet point).
7
  AR Volume I, Binder 2, Item 32 (PFD at 23).
8
  AR Volume I, Binder 2, Item 55 (Final Order at 5, FOF No. 13).
9
  AR Volume I, Binder 2, Item 55 (Final Order at 5, FOF No. 14).
10
   AR Volume I, Binder 2, Item 32 (PFD at 30).

                                               3
adopting the relevant portions of the Proposal for Decision (PFD) and finding that “the

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

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

($27.7 million). 11

       The Commission reduced the amount of recoverable rate case expenses to

$6,896,037.73. 12 Of the reduced amount of rate case expenses, the Commission

determined that $522,244.66 should be disallowed because this amount of expense was

“attributable to unreasonable and overly aggressive arguments” pursued by ETI in

Docket No. 39896 related to the financially-based incentive compensation.13

                        SUMMARY OF THE ARGUMENTS

       Under the Public Utility Regulatory Act (PURA), 14 the Commission has broad

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

particular, in determining what reasonable costs of participating in a proceeding a

utility may be allowed to recover as a cost or expense.15 The Commission found in the

underlying ETI rate case16 that ETI failed to meet its burden to prove that certain

financially-based employee incentive compensation expenses were just and reasonable.

11
   AR Volume I, Binder 2, Item 55 (Final Order at 5, FOF No. 17).
12
   AR Volume I, Binder 2, Item 55 (Final Order at 5, FOF No. 18).
13
   AR Volume I, Binder 2, Item 55 (Final Order at 6, FOF No. 18.f).
14
   Public Utility Regulatory Act (PURA), TEX. UTIL. CODE ANN. §§ 11.001-66.017 (Vernon 2007 &
Supp. 2013).
15
   PURA §§ 36.003, 36.051 and 36.061(b)(2).

                                             4
In this appeal from the rate case expense hearing, Appellant maintains that the

Commission acted outside of its broad authority when the Commission decided to

reject rate case expenses associated with Appellant’s fruitless efforts to obtain approval

for the financially-based incentive compensation expenses in Docket No. 39896.

Appellant also argues that the Commission should be required to conduct a rulemaking

prior to rejecting such rate case expenses. Additionally, Appellant similarly argues that

the Commission’s method of determining the amount of the rate case expenses

attributable to the Company’s financially-based incentive compensation request is in

error. However, Appellant fails to provide support under the law for its positions and

the District Court’s Judgment affirming the Commission’s Order should be affirmed.

         Appellant, as the public utility, had the burden to provide evidentiary support for

the rate case expenses rejected by the Commission and under PURA § 36.006 retained

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

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

further had the opportunity to provide rebuttal evidence and argument in response to

the direct cases of the intervening parties and Commission Staff, including the Direct

Testimony and Workpapers of Nathan A. Benedict.17 The Commission considered the

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

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

                                               5
Ultimately, the Commission adopted the PFD with some changes. The Commission’s

decisions were a reasonable exercise of its statutory authority and are supported by

substantial evidence. The Commission did not act in an arbitrary and capricious

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

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

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

contested case process. The Court should decline Appellant’s request to substitute its

own judgment for that of the Commission.

                      ARGUMENT AND AUTHORITIES

      The Commission has broad discretion to determine recovery of expenses in a

ratemaking proceeding. City of Port Neches v. Railroad Commission, 212 S.W.3d 565,

579 (Tex. App. – Austin 2006, no pet.). PURA § 36.061 reflects this authority and

states that the regulatory authority (here, the Commission) “may allow” as a cost or

expense the “reasonable costs of participating in a proceeding under this title not to

exceed the amount approved by the regulatory authority.”

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

No. 40295, the Commission disallowed Appellant’s rate case expenses associated with

financially-based employee compensation expenses in the associated rate case.

Appellant’s request to include the financially-based employee incentive compensation

                                          6
expenses ran contrary to longstanding Commission precedent. In seeming contrast to

Appellant’s arguments, the issue presented in this appeal is not the Commission’s

rejection of the financially-based employee incentive compensation expenses in the

underlying rate case, but instead, the Commission’s decision to reject ETI’s rate case

expense associated with pursuing the financially-based incentive compensation

expense request. Appellant argues in its brief that the Commission’s Order was

arbitrary and capricious and was an abuse of the Commission’s broad discretion.

Appellant’s argument is without merit. The Commission’s Order is supported by the

record and was a proper exercise of its broad grant of authority under PURA and

should be affirmed.

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

      No party to this proceeding argues that the Commission’s decision to deny the

financially-based employee incentive compensation in the underlying rate case (Docket

No. 39896) was unreasonable.        Instead, Appellant disputes the Commission’s

determination that it was “unreasonable” and “overly aggressive” for ETI to expend the

litigation costs associated with seeking the incentive compensation expense. Appellant

contends this, despite the fact that the Commission has repeatedly rejected the same

financially-based incentive compensation expenses in prior dockets. Appellant cites to

                                          7
past Commission orders in an attempt to persuade the Court that the Commission’s

policy on such expenses was unclear or evolving. However, Appellant’s argument is

incorrect. While it is certainly a fact question for the Commission to decide whether

certain incentive compensation may be disallowed if it is tied to financial-based

incentives (versus allowable if it is tied to operational performance), the record

demonstrates that the rejection of this type of financially-based incentive compensation

was settled Commission precedent.

       More importantly, Appellant’s argument ignores the larger context by which the

Commission made its determination. The totality of the record demonstrates that the

Commission’s decision to disallow the specific rate case expenses in question was

simply the means by which the Commission accomplished its ultimate objective of

trimming ETI’s excessive overall rate case expense. In sum, there is substantial

evidence in the record to support the Commission’s partial disallowance of ETI’s rate

case expenses.

   A. Substantial evidence standard of review

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

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

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

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

                                           8
section, the Third Court has found that the Commission has a broad grant of discretion

to determine the recovery of expenses in utility rates – including the reasonable costs

of participating in the rate-making proceeding (i.e., rate case expenses). Pioneer

Natural Resources USA, Inc. v. Public Utility Commission, 303 S.W.3d 363, 376 (Tex.

App. – Austin 2009, no pet.).

      With regard to the substantial evidence review standard in rate making, the

Third Court has said, “we are prohibited from substituting our judgment for the

Commission’s . . ..” Pioneer, 303 S.W.3d at 367. The Commission is the sole judge of

the weight of the evidence on questions committed to agency discretion. Id. The

Court described its role as determining whether there is some reasonable basis in the

record to support the agency decision even “if the evidence actually preponderates

against the Commission’s finding . . . as long as there is enough evidence to suggest

that the Commission’s determination was within the bounds of reasonableness.” Id.

      The substantial evidence standard of review requires the court to reverse the

Commission if the substantial rights of the appellant have been prejudiced because the

Commission’s “administrative findings, inferences, conclusions, or decisions are not

reasonably supported by substantial evidence considering the reliable and probative

evidence in the record as a whole.” TEX. GOV’T CODE § 2001.174(2)(e). Appellant

fails to meet this standard of review and the Commission’s Order should be affirmed.

                                          9
     B. There is substantial evidence to support the Commission’s determination
        that ETI’s advocacy regarding financial-based incentive compensation was
        “unreasonable” and “overly aggressive.”

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

not reasonable for the customers to bear the costs of ETI’s “unreasonable and overly

aggressive arguments.”18 OPUC provided evidence in the form of direct testimony by

its expert witness, Nathan A. Benedict, who testified about the propriety of the rate

case expense request as well as how to quantify disallowances for issues such as the

financially-based incentive compensation request. 19 Further, official notice was taken

of the record in the underlying rate case, Docket No. 39896.20 The record in Docket

No. 39896 includes evidence related to the Commission’s established precedent and

policy with regard to financially-based incentive compensation. Intervening Cities and

Commission Staff each presented testimony addressing the issue in Docket No. 39896.

When seeking the inclusion of the financially-based incentive compensation expenses

in rates, the Appellant’s own witnesses admitted in their pre-filed direct testimony that

their respective recommendations were contrary to Commission precedent and policy,

but they hoped to provide new evidence that financial incentive measures benefit

customers. See Appendix A. 21

18
   AR Volume I, Binder 2, Item 55 (Final Order at 6, FOF No. 18.f).
19
   AR Volume II, Binder 3, OPUC 1, Direct Testimony and Workpapers of Nathan A. Benedict.
20
   AR Volume III, Binder 3, Vol. A, Hearing on the Merits Transcript, p. 16, l. 14 to 24.
21
   AR Volume I, Binder 2, Item 32 (PFD at 21); See also Appendix A, Application of Entergy Texas,

                                               10
       In the PFD, the ALJ outlined what contributed to his reasoned determination to

disallow the rate case expenses associated with the financially-based incentive

compensation expenses. First, the PFD states: “In Docket 39896 [the underlying rate

case], all parties, including ETI, agreed that the Commission precedent mandated that

financially-based incentive compensation is not recoverable.22                 The PFD also

recognized other pertinent considerations, including the fact that the underlying rate

case docket was the third consecutive rate case in which Appellant sought, but failed to

obtain, authority to charge ratepayers for this type of financially-based incentive

costs. 23 The ALJ also recognized that Appellant would have been aware that other

utilities have sought recovery of this type of financially-based incentive compensation,

and been uniformly denied by the Commission. 24 In the Court below, ETI stated that it

“does not disagree that past Commission decisions weigh against including financially-

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

reconsider its long-standing precedent on this issue and demands that the customers to

pay for its fruitless efforts. 26

       Appellant concedes that this Court recently upheld the Commission’s

Inc., Docket No. 39896, Direct Testimony of Kevin G. Gardner (ETI Application at Bates p. 3155 to
3159) (Nov. 1, 2012) (Interchange item No. 142)
22
   AR Volume I, Binder 2, Item 32 (PFD at 21).
23
   AR Volume I, Binder 2, Item 32 (PFD at 23).
24
   AR Volume I, Binder 2, Item 32 (PFD at 24).
25
   Appellant ETI’s Initial Brief at13.

                                               11
disallowance of “compensation payments that are tied to financial performance

measures rather than those tied to strictly operational measures such as reliability and

safety.” Appellants Brief citing State of Texas’ Agencies and Institutions of Higher

Learning v. Public Util. Comm’n of Tex., No. 03-11-00072-CV, 2014 WL 6893871

(Tex. App.—Austin Dec. 4, 2014, no pet.). Appellant correctly notes that the question

of which expenses are disallowable financial measures versus allowable operational

measures is a fact question for the Commission to decide based upon the record. Id.

However, Appellant attempts to stretch the holding of State of Texas’ Agencies to

argue that it was not unreasonable for ETI to seek the rejected financial-based

incentive compensation when such a question turns on facts. 27

       In support of its argument, Appellant paints a picture of a murky question before

the Commission regarding the disallowed expense.           Appellant argues that the

Commission’s precedent on the recovery of financially-based incentive compensation

is evolving, and that the door was open for Appellant to seek such expenses. 28

Appellant cites orders in which, it argues, applicants have made inroads into recovery

of certain financially-based incentive compensation. 29

       However, ETI has not cited to a single case where the Commission granted the

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

                                              12
particular financial-based incentive compensation ETI was seeking. Appellant cannot

change the fact that the Commission’s precedent was clear with respect to the

financial-based incentive compensation.        It was uniformly disallowed.      Even

Appellant’s own witnesses admitted that the precedent was clear-cut with respect to the

rejected expense. Appendix A.

      The record demonstrates that ETI expended litigation efforts in a failed attempt

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

to overturn its long-standing precedent and determined that ETI’s rate case expenses

“attributable to [ETI’s] unreasonable and overly aggressive arguments . . .is properly

disallowed.” 30

      When determining the reasonableness and necessity of rate case expenses, the

agency is the sole judge of the weight of the evidence and the credibility of the

witnesses.   City of Port Neches, 212 S.W.3d at 579.          The record before the

Commission and now the Court demonstrates that there is more than “enough evidence

to suggest that the Commission’s determination was within the bounds of

reasonableness.” Pioneer, 303 S.W.3d at 367.

      However, even if ETI could demonstrate that its litigation efforts were not

unreasonable and overly aggressive, the Commission’s decision must be examined in

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

                                          13
expenses were excessive and sought a reasonable means to trim them.

      C. The Commission’s decision to disallow a portion of ETI’s rate-case expense
         is also supported by the totality of the record.

          Appellant’s single-minded reliance on the Commission’s determination that ETI

made “unreasonable and overly aggressive arguments”31 is misplaced.                The

Commission’s specific disallowance of rate case expense related to financial-based

incentive compensation does not exist in a vacuum. Even if ETI could demonstrate

that it was reasonable to advocate for those specific expenses in the underlying rate

case, the totality of the record demonstrates that the Commission was still well within

its allowed discretion to reduce ETI’s overall rate case expenses.

          The Commission has broad discretion to determine recovery of expenses in a

ratemaking proceeding. City of Port Neches, 212 S.W.3d at 579. PURA § 36.061

reflects this authority and states that the regulatory authority (here, the Commission)

“may allow” as a cost or expense the “reasonable costs of participating in a proceeding

under this title not to exceed the amount approved by the regulatory authority.”

          The Commission may draw inferences and conclusions based on its experience,

and to make its own determination of what expenses are reasonable, so long as the

Commission includes a reason or explanation in its order. Further, the reasonableness

of the Commission’s determination is looked at in light of the whole record. See City

30
     AR Volume I, Binder 2, Item 55 (Final Order at 6, FOF No. 18.f).

                                                 14
of Amarillo v. Railroad Commission, 894 S.W.2d 491 (Tex. App. – Austin 1995, writ

denied).

          The Commission’s discretion includes the authority to consider the context of

the rate proceeding for which the expenses were incurred and the authority to disallow

rate case expenses based upon the propriety of bringing the proceeding. See Pioneer,
303 S.W.3d at 377 (“The Commission was entitled to take into consideration the fact

that Cap Rock's rates had not been regulated by the Commission for a substantial

period of time and, therefore, that Cap Rock had to create much of its rate-filing

package from scratch.”).

          Further, the Commission’s authority is not limited to line-item disallowances or

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

upheld the Railroad Commission’s decision to reduce the uncontested rate case

expenses related to one analyst’s charges by 20% due to insufficiency of support. City

of Amarillo, 894 S.W.2d at 496-97. In addition, the Third Court of Appeals in another

opinion also confirmed that it is within the agency’s discretion to find rate case

expenses to be unreasonable even if the underlying cost item in the rate case is found to

be reasonable. The court stated in its opinion in City of Port Neches that:

          It is true that, in order to include . . . costs as an “expense or cost of
          service” in TGS’s rate calculation, TGS was required to demonstrate that
          those costs were reasonable and necessary. But the leap cannot be made
31
     AR Volume I, Binder 2, Item 55 (Final Order at 6, FOF No. 18.f).

                                                 15
       from this fact to TGS’s conclusion that any fee incurred by TGS in
       presenting its “cost of service” argument is automatically recoverable as a
       rate case expense. This is where the Commission’s discretion . . . plays
       an integral role.

City of Port Neches, 212 S.W.3d at 581 (emphasis added).

       In this case, Appellant’s argument focuses solely on the specific reduction in rate

case expense and ignores the larger context by which the Commission made its

decision. However, the Commission’s decision was not as narrow as Appellant would

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

expenses were too high and sought a reasonable means to reduce them.

       In Finding of Fact No. 17 of the Commission’s Final Order, the Commission

determined that “the amount of rate-case expenses sought by ETI ($8.8 million is high,

both in absolute terms, and in relation to the increase ultimately obtained by ETI in

Docket 39896 ($27.7 million).” 32 ETI has waived any error with respect to this finding

because ETI was required to have presented this point of error to the Commission in its

Motion for Rehearing. 33 A motion for rehearing must be specific enough to put an

agency on notice of an alleged error and give the agency the opportunity to correct the

error or prepare to defend it. 34

32
   AR Volume I, Binder 2, Item 55 (Final Order at 5, FOF No. 17).
33
   City of El Paso v. Public Utility Commission of Texas, 609 S.W.2d 574, 577-578 (Tex. App.—
Austin 1980, writ ref’d n.r.e.) (Appellant could not raise potential problems with a PUC Order,
including substantial evidence questions, which it failed to raise in its motion for rehearing).
34
   Burke v. Central Educ. Agency, 725 S.W.2d 393, 396-97 (Tex. App.—Austin 1987, writ ref’d

                                              16
        This uncontroverted finding of fact, and relevant portions of the PFD,

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

rate case expense request not just the reasonableness of the specific disallowed

expense. The record shows that the ALJ considered (in portions of the PFD specifically

adopted by the Commission,) 35 the frequency in which ETI had filed for rate cases

(three in four years); 36 the size of the increase granted relative to the increase requested

(only roughly 25% granted); 37 and the disproportionally large amount of rate case

expenses relative to the approved underlying rate increase (roughly one third). 38 After

considering these general concerns, the ALJ found that “a substantial cut to ETI’s rate

case expense is warranted.”39

        Only after reaching this general conclusion did the ALJ evaluate the methods by

which a substantial cut could be accomplished. 40 After considering the methods

proffered by the parties, the ALJ’s disallowance of the specific expenses related to

ETI’s aggressive long-shot argument (the “issue-specific” approach) 41 was simply the

means by which the reduction was accomplished. Thus, even if the record did not

n.r.e.) (Appellant must provide “(1) identification of the particular finding of fact, conclusion of law,
ruling, or other action by the agency which the complaining party asserts was error; and (2) the legal
basis upon which the claim of error rests.”).
35
   AR Volume I, Binder 2, Item 32 (PFD at 29).
36
   AR Volume I, Binder 2, Item 32 (PFD at 29).
37
   AR Volume I, Binder 2, Item 32 (PFD at 29).
38
   AR Volume I, Binder 2, Item 32 (PFD at 29).
39
   AR Volume I, Binder 2, Item 32 (PFD at 30).
40
   AR Volume I, Binder 2, Item 32 (PFD at 31).

                                                   17
conclusively show that ETI’s advocacy for certain expenses was “unreasonable and

overly aggressive,” the Commission’s reduction in rate case expenses was supported

by the whole record and the overall context of the record. City of Amarillo, 894 S.W.2d

at 496-97. Industrial Utilities Service v. Tex. Natural Resource Conservation

Commission, 947 S.W.2d 712 (Tex. App.—Austin 1997, writ denied). This is because

the Commission has the discretion to reject even reasonably accrued rate case expenses

if the record supports such a decision. Id.

          In sum, there is ample support in the record for the Commission’s disallowance

of a portion of Appellant’s rate case expenses.

          II.    The Commission acted well within its broad discretion when it
                 disallowed ETI’s rate case expenses related to Appellant’s
                 advocacy for financially-based employee incentive
                 compensation. The Commission did not act arbitrarily or
                 capriciously nor abuse its discretion.

          Appellant complains that the Commission imposed a new standard upon it when

it rejected the rate case expenses associated with the financially-based incentive

compensation expenses, and that its purported dissimilar treatment was arbitrary and an

abuse of discretion.

          The Third Court has described its review under the ‘arbitrary and capricious’

standard as being “limited and deferential.” Pedernales Electric Cooperative, Inc. v.

Public Utility Commission, 809 S.W.2d 332, 338 (Tex. App.—Austin 1991, no pet.).

41
     AR Volume I, Binder 2, Item 32 (PFD at 29).
                                               18
As discussed above, PURA confers considerable discretion on the Commission in

deciding the reasonable and necessary expenses to be recovered in rates. The

Commission’s determination in this case to disallow rate case expenses associated with

fruitless efforts to recover financially-based incentive compensation is supported by the

record.

      A. The Commission was not bound by any policy to allow rate case expenses
         for efforts to recover impermissible financially-based incentive
         compensation.

          To support its position that the Commission treated ETI disparately, Appellant

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

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

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

recover the incentive costs.”43

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

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

the orders are not part of the record, they should not be given any consideration.

Richards v. Comm’n for Lawyer Discipline, 35 S.W.3d 243, 250-51 (Tex. App.

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

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

42
     Appellant’s Brief, P. 17 and (Appellant’s Appendix D).
43
     Appellant’s Brief, P. 17.

                                                 19
Commission orders here, the orders are irrelevant and do not show the Commission

policy that ETI contends.

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

agreements or the case was not contested at all. The Commission had never

specifically addressed the question of whether a utility should recover rate case

expenses associated with disallowed financially-based incentive compensation

expenses in a fully litigated contested case - until now. The Commission cannot have

created binding policy when it never previously addressed this issue. There was no

such policy. However, even if the policy or precedent existed as Appellant alleges, the

Commission is not bound to follow its past decisions so long as the divergence is

justified and explained. Reliant Energy, Inc. v. Public Utility Commission, 153 S.W.3d
174, 200 (Tex. App.—Austin 2004, pet. denied).

          Even assuming there was a Commission precedent relating to recovery of rate

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

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

held that even when the Commission has treated utilities dissimilarly, the

Commission’s decision was not arbitrary and capricious where substantial evidence

supported the decision and the record did not show that divergence was unjustified.

Reliant, 153 S.W.3d at 200. Appellant’s own brief cites this proposition: “the

44
     Appellant’s Brief, P. 17 and (Appellant’s Appendix D).
                                                 20
Commission is not absolutely bound by its previous decisions and may change its

policy on a given issue when relevant circumstances change.”45

          As demonstrated in the substantial evidence review above (Section I), the

Commission’s use of its broad discretion to reject some of Appellant’s rate case

expenses was fact specific and supported by substantial evidence in the record.

Further, divergence from past practice (if there was any) was not unjustified due to the

totality of the record before the Commission. In complete contradiction to the

principal that the Commission is not bound by precedent in a case-by-case

determination, Appellant argues that the Commission may only exercise its discretion

on a prospective basis. Appellant’s implausible theory would impermissibly bind the

Commission’s hands from exercising its statutory grant of authority each time the

Commission made a determination.

      B. ETI was afforded due process.

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

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

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

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

Commission, 406 S.W.3d 253 (Tex. App.—Austin 2013, no pet.). Appellant asserts

that the Commission was required to develop new policies regarding the collection of

45
     Appellant’s Brief at 16.
                                          21
rate case expenses prospectively only, and within the context of a rulemaking.46 In

actuality, it is Appellant that is attempting to foist a new standard of discretion on the

agency. The Commission made a case-by-case determination based upon the record

before it. The Commission’s decision was well within the bounds of its broad

discretion to award rate case expenses.

          In Oncor, the Third Court held the Commission failed to provide any support in

the record for a conclusion of law. The court also held that the Commission’s decision to

require a new procedure after the fact (a new procedure that the Applicant was now

foreclosed from availing itself of) was a violation of due process and fundamental

fairness. Oncor, 406 S.W.3d 253. Appellant argues that Docket No. 40295 was

identical to the scenario presented in Oncor. Appellant states that the Commission’s

decision in this case was similar because the “post-hearing imposition of a new policy

was fundamentally unfair because by that time, it was too late for Oncor to comply with

the new rule”47 Appellant is incorrect, the Oncor decision is not instructive in this case.

          The Third Court’s ruling in Oncor is inapplicable to the current rate appeal for

two reasons. First, unlike in Oncor, the Commission’s decision to deny rate case

expenses was fact- specific to this record and thoroughly explained in the PFD and

Commission Order. Oncor, 406 S.W.3d 253, 268. In Oncor “the Commission failed to

46
     Appellant’s Brief at 19.
47
     Appellant’s Brief at 19.

                                             22
articulate any rational connection between the facts of this case and its decision.” As

detailed above, the Commission’s determination in this case was based upon substantial

evidence showing that ETI’s rate case expenses were generally too high and that the

company took unreasonable positions in the rate case.

      Second, the holding in Oncor was primarily that the Commission’s announcement

of a new policy was a departure from past precedent that precluded the utility from

receiving notice and opportunity to be heard and, therefore, was a violation of due

process. Oncor, 406 S.W.3d 253, 268. The Third Court states in Oncor, “to achieve the

meaningful hearing that due process requires, the parties must be able to present

evidence on the issues to be decided.” Oncor, 406 S.W.3d 253, 269.

      Unlike the applicant in Oncor, Appellant was afforded notice and an opportunity

to be heard. In Oncor, the utility was not allowed to present any evidence on its rate case

expenses, whereas in this case, ETI had two full hearings to present evidence and meet

its burden to prove the reasonableness of including financially-based employee incentive

compensation expenses in its cost of service and the reasonableness of expenses related

to advocating for them.

      In addition, in the underlying rate case (Docket 39896) ETI was aware that all of

the other parties opposed its request to recover financially-based incentive

compensation. Indeed, as outlined above, even ETI knew it was attempting to overturn

                                            23
Commission precedent. ETI cannot complain about the disallowance of the rate case

expenses associated with a position ETI knew was unlikely to prevail on. Furthermore,

it was ETI who filed the unopposed request to sever the rate case expense issue from

Docket 39896 in the first place, which prevented the other parties from stating their

positions on rate case expenses in the underlying rate case.

         In this case, (Docket 40295) the issue of disallowing rate case expense associated

with ETI’s unreasonable positions in the rate case was raised early in the proceeding.

OPUC provided direct testimony on the issue which Appellant then had the opportunity

to rebut through rebuttal testimony. 48 Appellant also had multiple opportunities to brief

the issue and provide argument before the Commission’s decision. The Commission

simply used its broad grant of discretion to reject Appellant’s request based upon the

totality of the record. Appellant’s due process rights were satisfied in the proceeding and

the Commission’s Order should be affirmed.

      C. The Commission’s decision was a case-by-case determination and was not
         impermissible adjudicative rulemaking.

         Similarly, Appellant’s characterization of the Commission’s decision to deny

these rate case expenses as being impermissible adjudicative rulemaking also misses the

mark. The Commission’s decision to deny these rate case expenses was not, as Appellant

claims, a broad amendment to the Commission’s rules. The Commission had no rule and

48
     AR Volume II, Binder 3, OPUC 1, Direct Testimony and Workpapers of Nathan A. Benedict.

                                              24
created no new rule. The only rule that guided the Commission’s decision was its

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

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

particular to the totality of the facts of this particular case.

       Appellant relies heavily upon the Third Court’s opinion in Texas State Board of

Pharmacy v. Witcher to support its position that the Commission’s use of discretion in

this case was an impermissible adjudicative rulemaking. Texas State Board of Pharmacy

v. Witcher, 447 S.W.3d 520 (Tex.App. – Austin 2014, pet. filed). The court in Witcher

held that the Board of Pharmacy’s decision to suspend a pharmacist’s license, due solely

to a policy annunciated in a previous adjudicative matter and without any consideration

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

rulemaking. Id.

       This matter is distinguishable from the Witcher decision on the most crucial

threshold question: The Commission in Docket No. 40295 did not create a ‘rule’ when it

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

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

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

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

circumstances. The Commission was simply exercising its statutory discretion to

                                              25
determine the reasonableness of rate case expenses on a case-by-case basis.

          The most distinguishing fact that separates the matter at hand from Witcher is that

the Appellant in this case was not prejudiced by a previously announced Commission

policy or rule. Trinity Settlement Services, LLC v. Texas State Securities Board, 417
S.W.3d 494, 501 (Tex.App. – Austin 2013, pet. denied) (TSSB did not express an intent

to apply its decision in all future cases regardless of the factual circumstances). The

Commission’s exercise of its discretion on a case-by-case basis does not constitute a rule

under the Administrative Procedure Act (APA).49

         The APA provides a definition for ‘Rule’:
                (A) means a state agency statement of general applicability
                    that:
                    i. implements, interprets, or prescribes law or policy; or
                      ii. describes the procedure or practice requirements of a
                          state agency;

                (B) includes the amendment or repeal of a prior rule; and

                (C) does not include a statement regarding only the internal
                    management or organization of a state agency and not
                    affecting private rights or procedures.

TEX. GOV'T CODE § 2001.003(6). In order to constitute a ‘rule’ under this definition,

“an agency statement interpreting law must bind the agency or otherwise represent its

authoritative position in matters that impact personal rights.” Texas Dep't of Transp.

49
     Administrative Procedure Act (APA), Tex. Gov’t Code §§ 2001.001-.902.

                                               26
v. Sunset Transp., Inc., 357 S.W.3d 691, 703 (Tex.App.— Austin 2011, no pet.); See

Trinity Settlement Services, LLC v. Texas State Securities Board, 417 S.W.3d 494, 501

(Tex.App. – Austin 2013, pet. denied). The court in Trinity specifically distinguished

Witcher saying, “[i]n order to be considered a statement of ‘general applicability’ under

the APA, agency pronouncements must ‘affect the interest of the public at large such

that they cannot be given the effect of law without public input.’” Trinity, 417 S.W.3d

at 502 (no intent for interpretation of suit to apply in all future cases, regardless the

factual circumstances).

       Appellant’s argument is incorrect because there was no binding policy on the

Commission other than unreasonable and unnecessary expenses shall be disallowed

pursuant to PURA §§ 36.003 and 36.051. The Commission’s decision in this matter

does not meet the APA definition of a rule because Appellant failed to show that the

decision was “a statement of general applicability.” Id; TEX. GOV’T. CODE §

2001.003(6). As has been discussed previously, the Commission based its decision on

the particular set of facts to the record before it.

       Appellant’s argument rests solely on a statement made by one Commissioner.

Chairman Nelson is quoted by Appellant as saying: “I think just the issue of rate case

expenses, whether it’s a utility or the cities, I think it’s something we’ve needed to look

at for a while, and this is the type of issue that would be appropriate to include in that

                                             27
type of rulemaking.” 50 A single statement by one Commissioner in this context does

not create or express the Commission’s policies nor does it serve as a statement of the

Commission’s intention in adopting a final order. The fact that the Commission

mentioned adopting a rulemaking on the issue, “strongly implies that rulemaking is not

occurring at that hearing.” McHaney v. Tex. Comm’n on Environmental Quality, No.

03-13-00280, 2015 WL 869197 *8 (Tex.App.-Austin mem. op.).

          In McHaney, the Third Court considered a strikingly similar fact pattern and

argument by a waste handling facility (McHaney) that the TCEQ had engaged in

improper ad hoc rulemaking. Id. There, McHaney argued that the Commission

“improperly announce[d] new, clarified record-keeping rules” relating to his record-

keeping for universal waste. Id. The Third Court held that the Commission’s actions

were taken pursuant to the Commission’s general discretion to assess penalties and that

the actions were supported by substantial evidence. In McHaney, the TCEQ

Commission made a similar comment to what Chairman Nelson made in this matter:

“if there is a need for clarity in our rules, I would encourage our staff to look at that

and see if we need to go through the rulemaking or provide some other guidance.” Id.

Contrary to what McHaney argued, and what Appellant argues here, the Third Court

stated that the Commissioner’s statement about rulemaking “strongly implies that

rulemaking is not occurring at that hearing.” Id.

50
     Appellant’s Brief at 22.
                                           28
          Appellant has failed the threshold question of whether a rule was created. Trinity,
417 S.W.3d at 502. Appellant has not shown any evidence that the Commission

expressed or intended its decision in this matter to be generally applicable or binding

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

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

certain rate case expenses based upon the totality of the record before the Commission.

Therefore, the Commission’s decision is not shown to be arbitrary and capricious or an

abuse of its broad discretion.

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

          Appellant argues that even if the Commission’s decision to reject the rate case

expense associated with the financially-based incentive compensation is not reversible,

then the Commission’s method of quantifying the amount of rate case expenses to

reject was “an unexplained departure from Commission precedent and should be

imposed, if at all, prospectively after a rulemaking.”51            Appellant’s arguments

regarding the method of disallowance are incorrect for virtually the same reasons as the

arguments discussed above regarding whether the Commission should make the

disallowance at all. The Commission’s decision was rationally based upon evidence in

51
     Appellant’s Brief at 27.

                                              29
the record, was not arbitrary and capricious, and was well within its broad discretion

under TEX. UTIL. CODE § 36.061(b)(2).

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

          There is a rational basis in the evidentiary record to support the Commission’s

method of quantifying the amount of rate case expenses to reject. As was discussed in

detail in Section II above, the Commission decided that some amount of reduction in

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

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

Commission precedent. The Commission thoroughly explained how its determination

in this matter was particular to the facts of this case and that the totality of the record

showed that awarding the financially-based incentive compensation to ETI in this case

would be unreasonable. The Commission found that the total amount of rate case

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

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

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

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

evidence and testimony presented by the parties giving various options as to the

52
     AR Volume I, Binder 2, Item 55 (Final Order at 5, FOF No. 17).

                                                30
amount of rate case expenses to reject due to Appellant’s unreasonable overreaching.53

       In fact, the PFD discusses the merits of three approaches provided by the parties

based on the evidence presented. The approaches discussed are: the ‘50/50 approach’

(whereby Appellant receives only 50% of its rate case expenses); the ‘results-obtained

approach’ (whereby Appellant’s rate case expenses are reduced in proportion to the

ratio of their rate case recovery – in this case ETI would only receive 26.4% of its rate

case expenses); and the ‘issue-specific approach’ (whereby Appellant’s rate case

expenses are reduced proportionately to the amount of specific overreaching - in this

case financially-based incentive compensation).54

       Each of the above approaches is based upon evidence in the record that was

adduced at the hearing. The ALJ ultimately recommended, and the Commission

adopted, an issue-specific reduction of rate case expenses based upon the amount of

rate case expenses that were clearly overreaching, because they were based on the a

position that ran counter to clear Commission precedent.55 The Commission’s decision

to adopt the issue-specific approach was a middle-ground position. As the ALJ noted

in the PFD “the Commission is not required to grant recovery of every reasonable

expense and can take into account other considerations.”56 The Commission could

53
   AR Volume I, Binder 2, Item 32 (PFD at 29-30).
54
   AR Volume I, Binder 2, Item 32 (PFD at 29-30).
55
   AR Volume I, Binder 2, Item 55 (Final Order at 2).
56
   AR Volume I, Binder 2, Item 32 (PFD at 30-31).

                                               31
have taken a more punitive approach and its decision still would have been supported

by the record.

          As discussed earlier, the Commission’s authority with regard to rate case

expenses is not limited to line-item disallowances or charges related to underlying

unreasonable costs. See City of Amarillo 894 S.W.2d at 496-97; City of Port Neches,
212 S.W.3d at 579-582. The PFD and the Commission’s Order in Docket No. 40295

recognized this.

          Appellant argues that the record does not support the Commission’s

determination because Appellant had put forth unrebutted evidence of actual expenses

associated with the issue-specific reduction. The ALJ considered Appellant’s evidence

and concluded that the expenses put forth by Appellant captured only a fraction of the

rate case expenses associated with Appellant’s unreasonable position. 57 In other

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

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

Appellant’s suggestion to flip the burden of proof set forth in PURA from the utility to

the Commission. 59 The Court should likewise resist Appellant’s request for the Court

to re-weigh the evidence and substitute its judgment for that of the Commission.

Pioneer, 303 S.W.3d at 367.

57
     AR Volume I, Binder 2, Item 32 (PFD at 24).
58
     AR Volume I, Binder 2, Item 32 (PFD at 24).

                                               32
         Simply put, there is substantial evidence in the record to support the

Commission’s reasoned decision and its Order should be affirmed.

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

         Appellant contends that the Commission’s method of quantification is flawed

because “it is an unexplained departure from Commission precedent, and should be

imposed, if it all, prospectively in the context of a rulemaking proceeding.” 60 This

contention is virtually identical to the contention addressed in Section II above and

fails for all of the same reasons. OPUC adopts the responses from Section II for the

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

         (1)     The Commission’s use of its broad discretion to reject certain of

                 Appellant’s rate case expenses was fact specific and supported by the

                 record. Further, the record does not show that divergence from past

                 practice (if there was any) was unjustified. Reliant, 153 S.W.3d at 200.

         (2)     The Third Court’s ruling in Oncor is inapplicable to the current rate

                 appeal for two reasons. First, the Commission’s decision to deny rate

                 case expenses was fact specific to this record and not generally applicable

                 to all utilities. Reliant, 153 S.W.3d at 200. Second, Appellant’s due

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

59
     TEX. UTIL. CODE § 36.006.

                                              33
                  was afforded notice and an opportunity to be heard. Appellant had two

                  full hearings in which to present evidence and meet its burden to prove

                  the reasonableness of its rate case expenses, and multiple opportunities to

                  brief the issues and provide argument to the Commission. Oncor, 406
S.W.3d at 253.

          (3)     The threshold question in determining whether adjudicative rulemaking has

                  occurred is whether a rule has been announced. Appellant has failed to

                  show there was a rule. Trinity, 417 S.W.3d at 502. There is no evidence

                  in the record that the Commission intended its decision in this matter

                  regarding methodology to have any general applicability to future

                  applicants. In other words, the Commission’s decision did not meet the

                  APA definition of a “rule.” TEX. GOV'T CODE § 2001.003(6).

          In addition to the responses summarized above, OPUC notes the Commission’s

authority is not tied to any specific methodology or accounting treatment. The

Commission has broad discretion to determine recovery of expenses in a ratemaking

proceeding. City of Port Neches, 212 S.W.3d at 579. Further, the Third Court has

specifically upheld the Commission’s discretion to make percentage inferences from

the evidence in the record as it has done in this matter. Pioneer, 303 S.W.3d at

369-370. The Court in Pioneer held that in calculating the accounting treatment of a

60
     Appellant ETI’s Initial Brief at 21.
                                               34
computer expense, the Commission had discretion to infer a 35% multiplier where the

35% figure was within the range of evidence supported by substantial evidence even

when there was no presentation of that particular figure:

                 [E]ven when no evidence suggests a specific figure
                 explicitly, the Commission may infer the figure if it is
                 supported by the body of evidence. . . . Moreover, the
                 Commission may ‘accept or reject in whole or in part the
                 testimony of various witnesses who testify.’

Pioneer, 303 S.W.3d at 369, quoting Cities of Corpus Christi v. Public Utility

Commission, 188 S.W.3d 681, 695 Tex. App.—Austin 2005, pet. denied) (emphasis

added by citing court). Indeed, the Commission makes allocations based upon

inferences in the record regularly. The Commission’s decision in this case is even

stronger because there was expert testimony and evidence in the record which

supported the exact figure that the Commission chose to adopt.61

           For the forgoing reasons, the Commission’s Order should be affirmed.

                                  PRAYER FOR RELIEF

          WHEREFORE, PREMISES CONSIDERED, Intervenor OPUC prays that

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

deny Appellant Entergy Texas, Inc.’s Issues Presented, and affirm the Commission’s

Order. OPUC further prays for any other relief to which it may be justly entitled.

61
     AR Volume II, Binder 3, OPUC 1, Direct Testimony and Workpapers of Nathan A. Benedict; and

                                               35
                                          Respectfully submitted,

                                          Tonya Baer
                                          Public Counsel
                                          State Bar No. 24026771

                                           /s/ Ross W. Henderson
                                          ___________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

                                          Ross W. Henderson
                                          Assistant Public Counsel
                                          State Bar No. 24046055

                                          OFFICE OF PUBLIC UTILITY COUNSEL
                                          1701 N. Congress Avenue, Suite 9-180
                                          P.O. Box 12397
                                          Austin, Texas 78711-2397
                                          512/936-7500 (Telephone)
                                          512/936-7525 (Facsimile)
                                          ross.henderson@opuc.texas.gov

AR Volume I, Binder 2, Item 32 (PFD at 29-31).

                                                                  36
                                Certificate of Service

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

Marnie A. McCormick                                                                                                                Katherine H. Farrell
John F. Williams                                                                                                                   Administrative Law Division – Energy
Duggins, Wren, Mann & Romero, LLP                                                                                                  Rates Section
P.O. Box 1149                                                                                                                      Office of the Attorney General
Austin, Texas 78767-1149                                                                                                           P.O. Box 12548 – Mail Code 018-12
(512) 744-9300                                                                                                                     Austin, Texas 78711-2548
(512) 744-9399 (fax)                                                                                                               (512) 475-4237
mmcormick@dwmrlaw.com                                                                                                              (512) 936-0674 (fax)
jwilliams@dwmrlaw.com                                                                                                              katherine.farrell@texasattorneygeneral.gov
Counsel for Entergy Texas, Inc.                                                                                                    Counsel for State Agencies

Elizabeth R. B. Sterling                                                                                                           Rex VanMiddlesworth
Environmental Protection Division                                                                                                  Benjamin Hallmark
Office of the Attorney General                                                                                                     Thompson & Knight, LLP
P. O. Box 12548, Capitol Station                                                                                                   98 San Jacinto Blvd, Ste. 1900
Austin, Texas 78711-2548                                                                                                           Austin, Texas 78701
(512) 475-4152                                                                                                                     (512) 469-6100
(512) 320-0911 (fax)                                                                                                               (512) 469-6180 (fax)
elizabeth.sterling@texasattorneygeneral.gov                                                                                        rex.vanm@tklaw.com
Counsel for the Public Utility Commission                                                                                          benjamin.hallmark@tklaw.com
of Texas                                                                                                                           Counsel for Texas Industrial Energy
                                                                                                                                   Consumers

                                         /s/ Ross W. Henderson
                                        ___________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

                                        Ross W. Henderson

                                                                37
                             Certificate of Compliance

       I certify that the Appellee Brief of the Office of Public Utility Counsel contains
7,938 words, as measured by the undersigned counsel’s word-processing software, and
therefore complies with the word limit found in Tex. R. App. P. 9.4(i)(2)(B).

                                                 /s/ Ross W. Henderson
                                                ___________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

                                                Ross W. Henderson

                                           38
              APPENDIX A

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