Court Opinion

ID: 4052563
Source: CourtListenerOpinion
Date Created: 2016-09-29 02:03:54.469158+00
Date Added: 2024-06-11T13:58:15.891838
License: Public Domain

ACCEPTED
                                                                                       03-14-00706-CV
                                                                                              4408166
                                                                             THIRD COURT OF APPEALS
                                                                                        AUSTIN, TEXAS
                                                                                   3/6/2015 4:23:10 PM
                                                                                     JEFFREY D. KYLE
                                                                                                CLERK
                              No. 03-14-00706-CV
__________________________________________________________________
                                                         FILED IN
                                                  3rd COURT OF APPEALS
                      IN THE COURT OF APPEALS         AUSTIN, TEXAS
                  FOR THE THIRD DISTRICT OF TEXAS 3/6/2015 4:23:10 PM
                           AUSTIN, TEXAS            JEFFREY D. KYLE
                                                          Clerk
__________________________________________________________________
                              ENTERGY TEXAS, INC.,
                                   Appellant,
                                       v.
              PUBLIC UTILITY COMMISSION OF TEXAS, ET AL.,
                              Appellees.
__________________________________________________________________

    Appealed from the 345th Judicial District Court of Travis County, Texas
            The Honorable Amy Clark Meachum, Judge Presiding
                 Trial Court Cause No. D-1-GN-13-002623
__________________________________________________________________

              BRIEF OF APPELLEE STATE AGENCIES
__________________________________________________________________

  KEN PAXTON                                KATHERINE H. FARRELL
  Attorney General of Texas                 State Bar No. 24032396

  CHARLES E. ROY                            SARA R. HAMMOND
  First Assistant Attorney General          State Bar No. 24081003

  JAMES E. DAVIS                            Assistant Attorneys General
  Deputy Attorney General for Civil         Office of the Attorney General
  Litigation                                Energy Rates Section
                                            Administrative Law Division
  DAVID A. TALBOT, JR.                      P. O. Box 12548
  Chief, Administrative Law Division        Austin, Texas 78711-2548
                                            Telephone: (512) 475-4173
                                            Facsimile: (512) 320-0167

                                 March 6, 2015
                                         TABLE OF CONTENTS

TABLE OF CONTENTS .................................................................................................... ii

INDEX OF AUTHORITIES .............................................................................................. iv

ISSUES PRESENTED ...................................................................................................... vii

STATEMENT REGARDING ORAL ARGUMENT ...................................................... viii

BRIEF OF APPELLEE STATE AGENCIES ..................................................................... 1

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

SUMMARY OF THE ARGUMENT .................................................................................. 4

STANDARD OF REVIEW ................................................................................................. 6

ARGUMENT AND AUTHORITIES ................................................................................. 8

    1. The Commission’s disallowance of expenses incurred advocating for
       financial-based incentive compensation was reasonable and supported by
       substantial evidence. (Addresses ETI’s Issues 1 and 2) ........................................... 8

         A. The Commission has broad discretion to disallow expenses that it
            determines are unreasonable. .............................................................................. 8

         B. The Commission’s finding that ETI was unreasonable to expend
            resources on the incentive compensation issue was reasonable and
            supported by substantial evidence. ................................................................... 10

         C. Having properly determined ETI’s argument was unreasonable, the
            Commission’s disallowance of expenses arising therefrom was proper. ......... 14

              i. Disallowance of expenses unreasonably incurred is consistent with
                 previous Commission actions...................................................................... 15

              ii. No new standard was applied ...................................................................... 17

              iii. The Commission properly took action in a contested case hearing. No
                   new policy was created; no rulemaking occurred ....................................... 19

                                                            ii
     2. The Issue-Specific Method of determining disallowance amounts is
        reasonable and did not require a rulemaking proceeding. (Addresses ETI’s
        Issue 3).................................................................................................................... 24

          A. ETI’s evidence did not allow for an exact accounting of actual costs.............. 25

          B. Quantification by proportion is neither novel nor outside Commission
             discretion ........................................................................................................... 26

          C. No new standard was imposed; no rulemaking was required........................... 29

     3. The Commission properly disallowed depreciation expenses of an ETI
        affiliate company. (Addresses ETI’s Issue 4) ........................................................ 30

PRAYER ........................................................................................................................... 34

CERTIFICATE OF COMPLIANCE ................................................................................ 36

CERTIFICATE OF SERVICE .......................................................................................... 36

APPENDICES ................................................................................................................... 38

                                                                 iii
                                         INDEX OF AUTHORITIES

Cases

Butnaru v. Ford Motor Co., 84 S.W.3d 198 (Tex. 2002)................................................ 6, 7

Cent. Power & Light Co. v. Pub. Util. Comm’n, 36 S.W.3d 547
  (Tex. App.—Austin 2000, pet. denied). ........................................................................ 32

City of Amarillo v. R.R. Comm’n, 894 S.W.2d 491 (Tex. App.—
  Austin 1995, writ denied). ....................................................................................... 25, 32

City of El Paso v. Pub. Util. Comm’n, 344 S.W.3d 609 (Tex. App.—
  Austin 2011, no pet.)........................................................................................................ 2

City of El Paso v. Pub. Util. Comm’n, 883 S.W.2d 179 (Tex. 1994)......................... passim

City of El Paso v. Pub. Util. Comm’n, 916 S.W.2d 515 (Tex. App.—
  Austin 1995, writ dism’d by agr.) .................................................................................... 9

El Paso Hosp. Dist. v. Tex. Health & Human Servs. Comm’n,
  247 S.W.3d 709 (Tex. 2008) ......................................................................................... 20

Entergy Gulf States, Inc. v. Public Utility Comm’n, 173 S.W.3d 199
  (Tex. App.—Austin 2005, pet. denied) ................................................................... 23, 30

Entergy Tex., Inc. v. Pub. Util. Comm’n, No. D-1-GN-13-002623
  (345th Dist. Ct., Travis County, Tex. Oct. 10, 2014) .................................................... vii

Gerst v. Nixon, 411 S.W.2d 350 (Tex. 1966) ...................................................................... 7

Hinkley v. Tex. State Bd. Of Med. Exam’rs, 140 S.W.3d 737
  (Tex. App.—Austin 2004, pet. denied) ........................................................................... 7

Indus. Utils. Serv., Inc., et al., v. Tex. Natural Res. Conservation Comm’n,
  947 S.W.2d 712 (Tex. App.—Austin 1997, writ denied) ........................................ 10, 15

Nucor Steel v. Pub. Util. Comm’n, 168 S.W.3d 260
  (Tex. App.—Austin 2005, no pet.) ............................................................................ 7, 28

Oncor Electric Delivery Co., LLC v. Pub. Util. Comm’n,
 406 S.W.3d 253 (Tex. App.—Austin 2013, no pet.) ............................................... 18, 19

                                                               iv
Pedernales Elec. Coop. v. Pub. Util. Comm’n, 809 S.W.2d 332
  (Tex.App.—Austin 1991, no writ).). ............................................................................. 28

Pioneer Natural Res. USA, Inc. v. Pub. Util. Comm’n, 303 S.W.3d 363
  (Tex. App.— Austin 2009, no pet.). .......................................................................... 9, 27

Pub. Util. Comm’n v. Gulf State Utils. Co., 809 S.W.2d 201 (Tex. 1991) ......................... 7

R.R. Comm’n v. Rio Grande Valley Gas Co., 683 S.W.2d 783
  (Tex. App.—Austin 1984, no writ). .............................................................................. 32

R.R. Comm’n v. WBD Oil & Gas Co., 104 S.W.3d 69 (Tex. 2003) .................................. 20

Reliant Energy, Inc. v. Pub. Util. Comm’n, 153 S.W.3d 174
  (Tex. App.—Austin 2004, pet. denied) ..................................................................... 7, 16

Sec. & Exch. Comm’n v. Chenery Corp., 332 U.S. 194 (1947) .................................. 24, 30

State Bd. of Ins. v. Deffebach, 631 S.W.2d 794
  (Tex. App.—Austin 1982, writ ref’d n.r.e.)............................................................. 24, 30

State v. Thomas, 766 S.W.2d 217 (Tex. 1989) .................................................................... 1

Tex. Health Facilities Comm’n v. Charter Med.-Dall., Inc.,
  665 S.W.2d 446 (Tex. 1984) ........................................................................................... 7

Tex. State Bd. of Pharmacy v. Witcher, 447 S.W.3d 520
  (Tex. App.—Austin 2014, pet. filed) ....................................................................... 21, 22

Statutes

PURA § 36.006 .............................................................................................................. 8, 25

PURA § 36.051 ........................................................................................................ 8, 22, 31

PURA § 36.058.................................................................................................................. 32

PURA § 36.061(b)(2) ........................................................................................ 8, 17, 22, 31

Tex. Gov’t Code § 2001.174 (West 2008) ...................................................................... 6, 7

Tex. Gov’t Code. § 2001.003(6)(A) (West 2008) ............................................................. 20

                                                                v
Tex. Util. Code §§ 11.001–66.016 (West 2007 & Supp. 2014) .......................................... 8

Other Authorities

Application of AEP Texas Central Company for Authority to Change Rates, PUC
  Docket No. 28840 (2003) .............................................................................................. 12

Application of Entergy Texas, Inc. for Authority to Change Rates, Reconcile Fuel
  Costs, and Obtain Deferred Accounting Treatment, Docket No. 39896 ....................... 11

Proceeding to Consider Rate Case Expenses Severed from Docket No. 28840
  (Application of AEP Texas Central Company for Authority to Change Rates),
  Docket No. 31433, Order at 3 (March 3, 2006)............................................................. 15

Rules

16 Tex. Admin. Code § 25.231 ........................................................................................... 2

16 Tex. Admin. Code § 25.231(a) ..................................................................................... 31

16 Tex. Admin. Code § 25.245 ......................................................................................... 22

                                                            vi
                                 ISSUES PRESENTED
        The Public Utility Commission of Texas (PUC or Commission) denied

recovery of some of the rate case expenses sought by Entergy Texas, Inc. (ETI or

Entergy) in PUC Docket No. 40295. The Travis County District Court affirmed the

PUC’s decision in all respects.1 ETI appeals the District Court’s decision, giving

rise to the following issues:

    1) Did the Commission act within its discretion when it ordered that ETI
       could not recover from its ratepayers the cost of its unsuccessful attempt to
       reverse well-established Commission precedent regarding recovery of
       incentive compensation based on financial measures? (Addresses ETI’s
       Issues 1 and 2.)

    2) In the absence of evidence showing all of ETI’s expenses related to the
       incentive compensation issue, did the Commission act reasonably in using
       an alternative method (an issue-specific reduction) to calculate the
       appropriate reduction of ETI’s requested rate case expenses? (Addresses
       ETI’s Issue 3.)

    3) Did the Commission act reasonably and within its discretion when it
       determined that it was not reasonable for ETI to recover from its ratepayers
       an internal cost generally described as “depreciation and amortization”?
       (Addresses ETI’s Issue 4.)

1
     Entergy Tex., Inc. v. Pub. Util. Comm’n, No. D-1-GN-13-002623 (345th Dist. Ct., Travis
     County, Tex. (Oct. 10, 2014); Final Judgment attached hereto as Appendix A.

                                            vii
              STATEMENT REGARDING ORAL ARGUMENT
      State Agencies believe that the issues in this appeal are sufficiently

straightforward and can be decided on the briefs alone. However, ETI seeks oral

argument. If oral argument is granted, State Agencies request that its counsel be

afforded a full opportunity to respond to oral arguments made to the tribunal by

any or all parties who seek to overturn the district court’s decision.

                                          viii
                                   No. 03-14-00706-CV
__________________________________________________________________
                    IN THE COURT OF APPEALS
                FOR THE THIRD DISTRICT OF TEXAS
                          AUSTIN, TEXAS
__________________________________________________________________
                                  ENTERGY TEXAS, INC.,
                                       Appellant,
                                              v.
              PUBLIC UTILITY COMMISSION OF TEXAS, ET AL.,
                              Appellees.
__________________________________________________________________

    Appealed from the 345th Judicial District Court of Travis County, Texas
            The Honorable Amy Clark Meachum, Judge Presiding
                 Trial Court Cause No. D-1-GN-13-002623
__________________________________________________________________

                    BRIEF OF APPELLEE STATE AGENCIES

       Appellee State of Texas Agencies and Institutions of Higher Education

(State Agencies)2 provide this Brief on the Merits. Pursuant to Tex. R. App. Proc.

38.6(b), this Brief is timely filed. Herein, State Agencies respond to arguments

made by Entergy Texas, Inc. (ETI or Entergy) regarding recovery of electricity

ratemaking proceeding expenses (rate case expenses) from ratepayers. The Public

2
    State Agencies as customers of ETI and the PUC as a regulatory authority are each
    represented in this appeal by the Office of the Attorney General (OAG). State Agencies are
    represented by the OAG’s Administrative Law Division, Energy Rates Section, while the
    Commission is represented by the Environmental Protection Division. See State v. Thomas,
    766 S.W.2d 217 (Tex. 1989).

                                              1
Utility Commission of Texas (Commission or PUC) properly disallowed recovery

of certain rate case expenses requested by ETI. Appellant ETI opposes the

Commission’s disallowance; State Agencies support the Commission’s decision in

its entirety. State Agencies respectfully request that this Court affirm the judgment

of the district court dated October 10, 2014.

                             STATEMENT OF FACTS
       The Statement of Facts provided by Appellant is generally accurate. State

Agencies agree, for example, that ETI is an investor-owned electric utility, subject

to traditional rate regulation. ETI’s description of a utility’s revenue requirement

is accurate, but incomplete: revenue requirement, or cost of service, is comprised

of the sum of the utility’s reasonable expenses and a reasonable return on

investment.3 These modifiers, omitted in ETI’s statement, are essential to the

issues in this case.

       Additionally, State Agencies agree with ETI’s procedural history of the

underlying rate case, Docket No. 39896, and the severance of rate case expenses

into Docket No. 40295, the final order of which is being appealed here.

       Facts Omitted. ETI’s statement of facts provides ample information about

Docket No. 39896, ETI’s rate case, but omits pertinent details about the rate case

3
    City of El Paso v. Pub. Util. Comm’n, 344 S.W.3d 609, 613 (Tex. App.—Austin 2011, no
    pet.); 16 Tex. Admin. Code § 25.231.

                                           2
expenses proceeding underlying this appeal, Docket No. 40295. In its rate case,

ETI requested a $104.8 million annual base rate increase; the Commission

approved $27.7 million of that request, a reduction of nearly 75%. 4 In the severed

expenses case, ETI sought to recover $8,752,545 in rate case costs associated with

Docket No. 39896, plus carrying charges. Of that total, $7,635,236 was incurred by

ETI and $1,117,309 was incurred by cities in Entergy’s service area (Cities).5

Thus, the $7.6 million in rate case expenses sought by ETI, exclusive of the Cities’

share, is more than one-fourth of the $28 million ETI was awarded as an annual

base rate increase. As the Commission noted in its final order, “[t]he 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 No. 39896

($27.7 million).” 6

       Incorrect Statements. The Commission’s final order was based on a Proposal

for Decision (PFD) issued by the Administrative Law Judge (ALJ) who presided

over the hearing on the merits in Docket No. 40295. 7 With respect to quantification

4
    AR Vol. I, Binder 2, Item 55 (Final Order) at Findings of Fact (FOF) No. 10 and 12
    (Appendix B).
5
    Cities of Anahuac, Beaumont, Bridge City, Cleveland, Conroe, Dayton, Groves, Houston,
    Huntsville, Montgomery, Navasota, Nederland, Oak Ridge North, Orange, Pine Forest,
    Pinehurst, Port Arthur, Port Neches, Rose City, Shenandoah, Silsbee, Sour Lake, Splendora,
    Vidor, and West Orange.
6
    AR Vol. I, Binder 2, Item 55 (Final Order) at 5, FOF No. 17.
7
    AR Vol. I, Binder 2, Item 32 (Proposal for Decision) (Appendix C).

                                               3
of disallowance, ETI states, “The ALJ did not attempt to quantify the actual

expenses ETI incurred in its effort to recover this compensation, but instead used a

proxy for that amount.”8 State Agencies disagree. In fact, the ALJ was not

provided with enough data to quantify actual amounts spent on the incentive

compensation issue, because none of ETI’s internal costs was associated with a

specific issue in the case.9 Therefore, it is incorrect to state, “the ALJ did not

attempt to quantify.”

                         SUMMARY OF THE ARGUMENT
       ETI is seeking to overturn the Commission’s reasoned decision to disallow

ETI’s recovery of certain rate case expenses. The Commission’s disallowance of

incentive compensation based on financial measures was reasonable and supported

by substantial evidence. The Commission has broad discretion to disallow rate case

expenses it deems were unreasonably incurred. Commission precedent that

financial-based incentive compensation is not recoverable from ratepayers is

unambiguous, and ETI was aware of that precedent. As such, ETI’s arguments

against long-standing Commission policy were rightfully deemed unreasonable.

       The Commission’s disallowance of expenditures to propound ETI’s

unreasonable argument was also reasonable and within its discretion. The

8
    Appellant’s Br. 8.
9
    AR Vol. III, Transcript at 35 and 49; AR Vol. II, Binder 3, State’s Ex. No. 4 (ETI Response
    to Request for Information).

                                               4
Commission has previously disallowed rate case expenses for unreasonable rate

case arguments. Previous cases in which utilities recovered rate case expenses for

unsuccessfully arguing the same issue actually show the pattern that should have

alerted ETI to the futility of repeatedly asserting the argument. No new standard

was applied; the Commission’s conventional reasonableness standard was the basis

for disallowance of the expenses.

      The       Commission’s   quantification   of   the   disallowance   for   ETI’s

unreasonable pursuit of a foregone issue was also well within reason. ETI failed to

provide sufficient evidence documenting its expenses for the Commission to

determine exact costs spent on the issue. With such evidence lacking, the

Commission was forced to utilize an alternate method to determine the appropriate

amount to disallow. The use of a proportional calculation to determine expenses

was not unprecedented and resulted from reasoned consideration of relevant facts

and factors. Use of the quantification method does not amount to imposition of a

new standard, either. As such, the issue was properly addressed in the contested

case setting.

      Lastly, the Commission’s denial of ETI’s request to recover depreciation

expenses of its affiliate company was proper. ETI did not provide sufficient

evidence to prove that the expenses were recoverable pursuant to Commission

                                          5
precedent or that the expenses were reasonably incurred to participate in the

ratemaking proceeding.

        In all respects, the Commission’s decision was within its discretion,

reasoned, and supported by substantial evidence. The district court correctly

affirmed the Commission’s decision and its judgment should be affirmed in its

entirety.

                               STANDARD OF REVIEW
        ETI challenges the district court’s decision on the basis that the

Commission’s decision was arbitrary and capricious and an abuse of discretion.10

        The Texas Supreme Court has articulated indicators of agency actions that

are arbitrary and capricious or constitute an abuse of discretion. An administrative

agency’s decision “is arbitrary or results from an abuse of discretion if the agency:

(1) failed to consider a factor the legislature directs it to consider; (2) considers an

irrelevant factor; or (3) weighs only relevant factors that the legislature directs it to

consider but still reaches a completely unreasonable result.”11 Similarly, an abuse

of discretion is characterized by unreasonable or arbitrary actions without

reference to guiding rules or principles.12

10
     Appellant’s Br. 10-12; Tex. Gov’t Code § 2001.174 (West 2008).
11
     City of El Paso v. Pub. Util. Comm’n, 883 S.W.2d 179, 184 (Tex. 1994).
12
     Butnaru v. Ford Motor Co., 84 S.W.3d 198, 211 (Tex. 2002).

                                               6
        This Court has recognized an agency’s decision will be deemed arbitrary if

its “order denies parties due process of law or when it fails to follow the clear,

unambiguous language of its own regulations.”13

        Substantial evidence review is utilized to analyze both arbitrary and

capricious and abuse of discretion challenges.14 “An administrative decision is

generally not arbitrary and capricious if it is supported by substantial evidence.”15

Where some evidence supports a decision, no abuse of discretion occurred.16

        Substantial evidence review “affords great deference to the Commission’s

decisions on topics that the legislature has determined are within the agency’s

discretion,”17 such as rate case expenses. In an appeal concerning the propriety of

an order issued by the Public Utility Commission, “findings, inferences,

conclusions, and decisions . . . are presumed to be supported by substantial

evidence, and the burden is on the contestant to prove otherwise.” 18

13
     Reliant Energy, Inc. v. Pub. Util. Comm’n, 153 S.W.3d 174, 199 (Tex. App.—Austin 2004,
     pet. denied) (citation omitted) (citing Pub. Util. Comm’n v. Gulf State Utils. Co., 809 S.W.2d
201, 207 (Tex. 1991)).
14
     Tex. Gov’t Code § 2001.174 (West 2008).
15
     Hinkley v. Tex. State Bd. of Med. Exam’rs, 140 S.W.3d 737, 743 (Tex. App.—Austin 2004,
     pet. denied) (citing Gerst v. Nixon, 411 S.W.2d 350, 354 (Tex. 1966)).
16
     Butnaru, 84 S.W.3d at 211.
17
     Nucor Steel v. Pub. Util. Comm’n, 168 S.W.3d 260, 267 (Tex. App.—Austin 2005, no pet.).
18
     City of El Paso, 883 S.W.2d at 185 (citing Tex. Health Facilities Comm’n v. Charter Med.-
     Dall., Inc., 665 S.W.2d 446, 453 (Tex. 1984)).

                                                 7
                         ARGUMENT AND AUTHORITIES
        The district court correctly ruled that ETI’s challenges are unsubstantiated.

Rather than arbitrary and capricious, the Commission’s decision is supported by

substantial evidence and reasoned consideration of all relevant facts and factors.

No action taken by the Commission in this matter overstepped the reasonable

bounds of the discretion granted to it by the legislature.

1. The Commission’s disallowance of expenses incurred advocating for
   financial-based incentive compensation was reasonable and supported by
   substantial evidence. (Addresses ETI’s Issues 1 and 2)

        A. The Commission has broad discretion to disallow expenses that it
           determines are unreasonable.
        The Public Utility Regulatory Act (PURA) 19 requires that the Commission

set a utility’s rates based on a reasonable return on invested capital plus “the

utility’s reasonable and necessary operating expenses.”20 The Commission may

include a utility’s reasonable costs of participating in a ratemaking proceeding in

its recoverable operating expenses. 21 The utility bears the burden of proving that

requested costs are reasonable. 22 This Court has recognized that “[t]he Commission

19
     Tex. Util. Code §§ 11.001–66.016 (West 2007 & Supp. 2014).
20
     PURA § 36.051.
21
     PURA § 36.061(b)(2).
22
     PURA § 36.006.

                                              8
. . . has broad discretion to determine which requested expenses should be

allowed.” 23

        In pertinent part, the Commission is tasked with disallowing costs not

proved to have been reasonably incurred within rate cases themselves. If the

“Commission determines that a utility failed to prove the reasonableness of certain

expenses incurred during the rate-making proceeding, the Commission may deny

reimbursement of those rate case expenses.”24 This Court has agreed that even

though there is no statutory or case law definition of “reasonable” as used in the

rate case expenses statute, the Commission’s discretion to approve fees should be

upheld when there is substantial evidence in the record to support its

determination.25

        This Court has also held that the manner or substance of an argument

pursued in a utility rate case, if unreasonable, can render expenses arising from that

dispute unrecoverable. For example, “[t]he Commission has not only the

discretion, but the duty, to ensure that rates charged to public utility customers do

not include expenses incurred in seeking [recovery] that the utility’s own evidence

23
     City of El Paso v. Pub. Util. Comm’n, 916 S.W.2d 515, 522 (Tex. App.—Austin 1995, writ
     dism’d by agr.)
24
     Pioneer Natural Res. USA, Inc. v. Pub. Util. Comm’n, 303 S.W.3d 363, 376 (Tex. App.—
     Austin 2009, no pet.).
25
     City of El Paso, 916 S.W.2d at 522-23.

                                              9
disfavors.”26 Senseless behavior in rate cases wastes resources and is not necessary

to provide service or to participate in ratemaking proceedings.27

           Thus, the Commission’s decisions that: (1) ETI acted unreasonably in

pursuing an argument contrary to long-standing precedent; and (2) ratepayers

should not have to foot the bill for that unreasonable behavior, were entirely within

the Commission’s discretion.

           B. The Commission’s finding that ETI was unreasonable to expend
              resources on the incentive compensation issue was reasonable and
              supported by substantial evidence.
           The Commission found that ETI was unreasonable to argue in Docket No.

39896 that ratepayers should pay for Entergy’s financial-based incentive

compensation expenses. ETI claims that this decision is arbitrary and capricious

because the Commission’s previous decisions were unclear on the differentiation

between financial-based and operational-based incentive compensation.28

           Commission precedent is unequivocal. The Commission has been clear and

consistent with its policy that incentive compensation tied to financial measures

cannot be recovered, but incentive compensation tied to operational measures

26
     Indus. Utils. Serv., Inc., v. Tex. Natural Res. Conservation Comm’n, 947 S.W.2d 712, 716
     (Tex. App.—Austin 1997, writ denied) (TNRCC, predecessor to the Texas Commission on
     Environmental Quality, is a sister agency of the PUC’s that also regulates public utilities.).
27
     Id.
28
     Appellant’s Br. 14.

                                                10
can.29 Further, when deciding whether incentive compensation is recoverable

through a utility’s rate base, Commission decisions consistently articulate that the

“proper question to be asked is whether they provide benefits most immediately or

predominantly to shareholders.”30

        ETI claims it was reasonable to seek recovery of financial-based incentive

compensation expenses in spite of the unequivocal Commission precedent because

Entergy perceived a lack of clarity in previous PUC decisions about how to

differentiate between financial- and operational-based incentive compensation.

However, in Docket No. 39896, ETI did not seek to clarify this alleged mystery.

Rather, Entergy requested that it be allowed to recover all of its incentive

compensation costs, regardless of type. 31 Its arguments centered on the ways in

which financial-based incentive compensation benefits customers. 32 ETI’s

29
     AR Vol. I, Binder 2, Item 55 (Final Order) at 2.
30
     Application of Entergy Texas, Inc. for Authority to Change Rates, Reconcile Fuel Costs, and
     Obtain Deferred Accounting Treatment, Docket No. 39896, Proposal for Decision at 171
     (July 6, 2012) and Final Order at 17, FOF 61 (Sept. 14, 2012). In Appellant’s Brief, page 4,
     footnote 10, ETI noted that the ALJ in the docket underlying this appeal took official notice
     of the record in Docket No. 39896. ETI then referred the court to the Commission’s
     interchange to access all “public filings in Docket No. 39896 and other Commission
     dockets.” This reference is inappropriate, as the interchange includes documents and
     information beyond what was ultimately entered into each docket’s administrative record.
     The ALJ in Docket No. 40295 took official notice of the record in Docket No. 39896, not
     the entire docket. See AR Vol. III, Trans. of Hearing on the Merits at 16). Proper reference
     should have been made only to the administrative record as finalized by SOAH in Docket
     No. 39896.
31
     Appellant’s Br. 6 (Statement of Facts).
32
     Appellant’s Br. 5 (Statement of Facts).

                                                11
witnesses discussed incentive compensation as an undivided category; 33 they did

not attempt to elucidate “the division between the two types.” 34 ETI’s arguments

indicate it was not confused about the Commission’s precedent so much as it was

dismissive of it.

        Similarly, ETI asserts that determining whether a certain program is

financial- or operational-based is a fact issue. Again, ETI presented no facts

regarding how its incentive compensation programs should be categorized. Instead,

it presented testimony of a general nature addressing how all financial-based

incentive compensation should be recoverable.

        In an attempt to prove Commission inconsistency, ETI points to the fact that

ETI persuaded the Commission to include incentive compensation based on cost-

control in Entergy’s rate base, which the PUC had previously denied another

utility. 35 This example is not on point. The Commission did not have long-standing

policy to disallow cost-control incentive compensation, as it does with financial-

based incentive compensation. ETI refers to a single proceeding in which cost-

control incentive compensation was denied, Commission Docket No. 28840.36 In

33
     Docket No. 39896, ETI Ex. 36 (Gardner Direct at 31) and ETI Ex. 15 (Hartzell Direct at 3-4,
     6, 9-10).
34
     Appellant’s Br. 14.
35
     Appellant’s Br. 14.
36
     Application of AEP Texas Central Company for Authority to Change Rates, PUC Docket No.
     28840 (2003).

                                               12
that docket, the Commission denied AEP Texas Central Company recovery of its

cost-control incentive compensation because the utility lumped its cost-control

measures in with its financial-based measures, which were unrecoverable pursuant

to long-standing PUC policy. 37 Recovering incentive compensation based on cost-

control measures in Docket No. 39896 does not equate to challenging well-

established Commission precedent, and it does not render reasonable a litigation

practice of tilting at windmills.

        ETI’s argument that it was reasonable to argue the incentive compensation

issue because of inconsistent Commission decisions on the issue fails. The record

shows that Commission precedent on this issue is clear.38 Evidence also shows that

ETI was fully aware of this precedent,39 despite its recent claims of uncertainty.

This was the third rate case in a row in which ETI itself sought recovery of

financial-based incentive compensation and lost the issue,40 and all parties agreed

that precedent mandated that recovery be denied.41

37
     Id. Final Order (Aug. 15, 2005).
38
     AR Vol. I, Binder 2, Item 55 (Final Order) at 2 n.6, which cites multiple PUC proceedings
     denying recovery of financial-based incentive compensation expenses since 2005.
39
     AR Vol. I, Binder 2, Item 32 (Proposal for Decision) at 21 (“In Docket 39896, all parties,
     including ETI, agreed that Commission precedent mandated that financially-based incentive
     compensation is not recoverable.”); Docket No. 39896, ETI Ex. 36, Gardner Direct at 29-30.
40
     AR Vol. I, Binder 1, Item 23 (Initial Br. of State Agencies) at 7 (referring to Docket Nos.
     34800 and 37744).
41
     AR Vol. I, Binder 2, Item 32 (Proposal for Decision) at 21.

                                                13
         Based on this evidence, the ALJ stated, “ETI did not act reasonably when it

incurred expenses litigating for recovery of its financially-based incentive costs in

the face of clear and consistent precedent to the contrary on the issue.” 42 Affirming

the ALJ, the Commission stated: “reductions should be made to Entergy’s

recoverable rate-case expenses for Entergy attempting to recover financially-based

incentive compensation in base rates.” 43

         The Commission’s finding that ETI acted unreasonably in presenting

argument about financial-based incentive compensation resulted from a thorough

consideration of relevant facts and factors, was not patently unreasonable and was

supported by substantial evidence.

         On this issue the lower court should be affirmed.

         C. Having properly determined ETI’s argument was unreasonable, the
            Commission’s disallowance of expenses arising therefrom was
            proper.
         ETI contends that the disallowance for the expenses associated with

litigating the foregone financial-based incentive compensation issue was arbitrary

and capricious and an abuse of discretion.

42
     Id. at 24.
43
     AR Vol. I, Binder 2, Item 55 (Final Order) at 2.

                                                14
             i.    Disallowance of expenses unreasonably incurred is consistent
                   with previous Commission actions
         Entergy’s complaint that the Commission has never before made such a

disallowance is only accurate where an incredibly narrow category of “such a

disallowance” is drawn. The Commission disallowed recovery of ETI’s expenses

“due to an unreasonable position pursued by Entergy in the rate case.” 44 The PUC

has disallowed rate case expenses for unreasonable litigation strategies before. For

example, in Docket No. 31433, the Commission disallowed expenses for a utility’s

use of an expert witness whose work product was “seriously flawed.” 45

         This court has upheld the disallowance of such costs in a similar situation

faced by a sister agency of the PUC, the Texas Natural Resources Conservation

Commission (TNRCC). In Industrial Utilities Service, Inc. v. Texas Natural

Resources Conservation Commission, 46 a utility challenged a TNRCC decision

disallowing costs incurred when the utility took an unreasonable litigation position

in a surcharge matter.47 Though the fact situations were not identical, TNRCC did,

as the PUC did in Docket No. 31433 and here, assess the propriety of legal

44
     AR, Vol. I, Binder 2, Item 55 (Final Order at 2).
45
     Proceeding to Consider Rate Case Expenses Severed from Docket No. 28840 (Application of
     AEP Texas Central Company for Authority to Change Rates), Docket No. 31433, Order at 3
     (March 3, 2006) (Appendix D).
46
     947 S.W.2d 712 (Tex. App.—Austin 1997, pet. denied).
47
     Id. at 716.

                                                 15
arguments made and determine those arguments were not reasonably propounded.

In all cases, the associated costs were properly disallowed.

           ETI further argues that because it and other utilities have previously

recovered        expenses    incurred     advocating   for   financial-based   incentive

compensation recovery, it is arbitrary and capricious to deny ETI that same

recovery. However, the premise that the Commission’s different treatment of other

utilities in other cases necessarily means ETI’s treatment here has been arbitrary

and capricious is inaccurate.48 “In short, regardless of the Commissions actions in

other cases . . . we must assess the reasonableness of the treatment of [the utility] . .

. in this case.”49

           Moreover, in each case cited by ETI to show it was treated differently, the

Commission disallowed recovery of financial-based incentive compensation from

ratepayers. With each successive decision denying companies’ attempts to recover

the requested expenses in rate bases, the relitigation of the issue with expectations

of different results became less reasonable. So, the Commission’s decisions in

other rate cases actually show how ETI, rather than the Commission, acted

unreasonably on this issue.

48
     Reliant Energy, 153 S.W.3d at 200.
49
     Id.

                                              16
            ii. No new standard was applied.
        Entergy also claims that the disallowance was arbitrary and capricious

because it imposed a new standard at the end of an administrative proceeding. No

new standard was created here. The standard is and has always been that rate case

expenses are only recoverable through the rate base if they were reasonably

incurred to participate in the proceeding.50

        The fact that no new standard was created is evident in the fact that ETI has

not been able to articulate a clear and consistent statement of the “new policy.”

ETI first states that the Commission declared it unreasonable to incur expenses to

litigate financial-based incentive compensation. 51 Alternatively, and more

generally, it defines the new policy as precluding a utility from “recovering

expenses of arguing against a decision in a prior Commission proceeding.” 52 ETI

also suggests that the Commission’s “new policy” addressed “rate case expenses

related to advocacy of long-shot positions.” 53 However, the Commission’s

declaration was in fact more specific: it reduced ETI’s recoverable expenses “due

50
     PURA § 36.061(b)(2).
51
     Appellant’s Br. 19.
52
     Appellant’s Br. 24
53
     Appellant’s Br. 18 (quoting Chairman Nelson).

                                              17
to an unreasonable position pursued by Entergy in the rate case.”54 The

Commission’s findings of fact also specifically addressed ETI’s behavior:

“unreasonable and overly aggressive arguments pursued by ETI.” 55 Thus, rather

than creating a new standard, the Commission applied the facts of this case to the

same standard it has been using for rate case expenses all along.

         ETI relies heavily on Oncor Electric Delivery Company, LLC v. Public

Utility Commission 56 to establish fundamental unfairness of applying a new

standard retroactively. 57 In Oncor, the Commission denied recovery of rate case

expenses not because they were unreasonable, but because prior authorization had

not been obtained.58 The reasonableness of the expenses was never challenged.59

Instead, the Commission attempted to retroactively require prior Commission

authorization to recover certain expenses that were otherwise reasonable. This

Court ruled that the Commission was arbitrary and capricious when it implemented

54
     AR, Vol. I, Binder 2, Item 55 (Final Order) at 2 (emphasis added. This mirrored the ALJ’s
     determination that “ETI did not act reasonably….”AR, Vol. I, Binder 2, Item 32 (Proposal
     for Decision) at 24.
55
     AR, Vol. I, Binder 2, Item 55 (Final Order) at 6, FOF 18.f and Item 32 (Proposal for
     Decision) at 38, FOF 18.f. (emphasis added).
56
     406 S.W.3d 253 (Tex. App.—Austin 2013, no pet.)
57
     Appellant’s Br. 19-21.
58
     Oncor, 406 S.W.3d at 258, 264.
59
     Id. at 271.

                                              18
this “new requirement that would have required Oncor to take action years before

the hearing.”60

         In contrast, the Commission has not added a condition to recovery of rate

case expenses in this case; rather, the Commission applied its tried and true

reasonableness standard to the fact situation before it, and found the rate case

expenses unreasonably incurred. Oncor actually highlights the difference between

imposition of a new standard and the Commission’s action in its Docket No. 40295

Final Order. No fundamental unfairness arose from the Commission’s application

of a statutory reasonableness standard.

         iii. The Commission properly took action in a contested case hearing. No
              new policy was created; no rulemaking occurred.
         ETI avers that the Commission’s adoption of this “new policy” constitutes

the promulgation of a rule and should have been completed through a rulemaking

proceeding rather than in a contested case.

         The PUC did not adopt a new rule in Docket No. 40295. ETI states that “it is

indisputable that the Commission adopted a rule of general applicability in this

case.”61      State Agencies disagree. “Rule” is defined in the Administrative

Procedure Act (APA) as “a state agency statement of general applicability that: (i)

implements, interprets, or prescribes law or policy; or (ii) describes the procedure

60
     Id. at 269.
61
     Appellant’s Br. 21.

                                          19
or practice requirements of a state agency.” 62 “General applicability” is paramount:

it “references ‘statements that affect the interest of the public at large such that

they cannot be given the effect of law without public input.’” 63 The Commission’s

order in Docket No. 40295 constituted a fact-based decision, rather than a

generally applicable rule.

         Entergy claims that no facts cited in the decision suggest this “new policy”

applies only to this case.64 However, the PFD, as adopted by the Commission,

discusses exactly the facts that make this application of the reasonableness

standard particular to this case.65 For example, the ALJ explained, “all parties,

including ETI, agreed that Commission precedent mandated that financially-based

incentive compensation is not recoverable. Nevertheless, in its application, ETI

asked the Commission to reconsider its precedents on the issue.” 66 Additionally,

“[i]t was obvious throughout the hearing in Docket No. 39896 that ETI was taking

an aggressive position and making a ‘long-shot’ argument in seeking recovery for

its financially-based incentive compensation.” 67 The PFD also recounts the

62
     Tex. Gov’t Code. § 2001.003(6)(A) (West 2008).
63
     El Paso Hosp. Dist. v. Tex. Health & Human Servs. Comm’n, 247 S.W.3d 709, 714 (Tex.
     2008) (citing R.R. Comm’n v. WBD Oil & Gas Co., 104 S.W.3d 69, 79 (Tex. 2003)).
64
     Appellant’s Br. 21.
65
     AR Vol. I, Binder 2, Item 32 (Proposal for Decision) at 21-24.
66
     Id. at 21.
67
     Id. at 23.

                                                20
insufficiency of ETI’s evidence and argument on the issue.68 It was these elements

that made ETI’s actions unreasonable and associated expenses unrecoverable. It is

the same facts that point to the case-specific nature of the Commission’s decision.

           Witcher does not support ETI’s case. ETI relies heavily on Texas State

Board of Pharmacy v. Witcher 69 to bolster its improper rulemaking arguments.

           In Witcher, this court addressed the issue of whether a certain statement of

agency policy that formed the basis of a contested case decision was a rule or not.70

In that case, the Pharmacy Board imposed a disciplinary action that was impossible

for the plaintiff pharmacist, Witcher, to fulfill. The Board based the sanction on

what it called a “‘non-binding’ policy, practice, or precedent,” 71 but claimed it

could not discipline Witcher in a manner inconsistent with the policy. Witcher

challenged the disciplinary action, claiming that in deciding her case, the Board

relied on the policy as it would rely on a rule, despite the fact situation presented.72

If the policy were so immutable, irrespective of case-specific facts, the plaintiff

argued, the policy was actually a rule that should have been promulgated through

68
     Id. at 23-24 (“ETI cites to a number of cases…[that] hurt ETI’s cause more than they
     help….” ETI selectively quoted Commissioner statements that appeared to support its
     argument, which the ALJ pointed out “overstates and distorts the facts.”).
69
     447 S.W.3d 520 (Tex. App.—Austin 2014, pet. filed).
70
     Id. at 527.
71
     Id.
72
     Id. at 525.

                                              21
formal rulemaking.73 This Court agreed, based on a finding that the agency’s

policy was being applied generally, without consideration of the circumstances in

an individual case.74

           The agency action alleged to be a rule here is a fact-specific decision in a

contested case hearing, whereas in Witcher, it was an agency policy on which the

Board based a contested case decision. The agency in Witcher created the policy

underlying its disciplinary decision without a proper rulemaking process; here, in

contrast, the “policy” on which the Commission’s decision is based is the

reasonableness standard found in PURA. 75 The PUC’s decision in Docket No.

40295 is not ad hoc rulemaking, but an application of the statute to specific facts.

This threshold distinction precludes inquiry into exceptions allowing ad hoc

rulemaking. Therefore, Witcher supports the fact that the Commission did not

create a rule when it issued its Final Order in Docket No. 40295.

           Subsequent rulemaking is neither probative nor persuasive. Entergy asserts

that the fact that a rulemaking project on rate case expenses was initiated soon after

issuance of the decision in this matter 76 proves that the subject was appropriate for

73
     Id.
74
     Id. at 529-30.
75
     PURA §§ 36.051, .061(b)(2).
76
     Project No. 41622 was initiated by the Commission to address rate case expenses on June 27,
     2013. This project resulted in a new substantive rule: 16 Tex. Admin. Code § 25.245,
     effective August 26, 2014.

                                               22
rulemaking, and so the Docket No. 40295 final order promulgated a new rule. In

fact, the opposite is true: the fact that a rulemaking occurred after the decision in

this case means that the decision in this case did not constitute the creation of a

new rule at all.

         The fact that a rulemaking is initiated following a contested case also does

not mean the question should not have been addressed in the contested case. ETI

should know this well. Entergy Gulf States, Inc. v. Public Utility Commission77

concerned section 36.203 of the Utility Code, addressing Fuel Cost Recovery (“the

fuel rule”). In that case, the Commission applied the fuel rule in a manner that

Entergy Gulf States claimed departed from its previous decisions. 78 Thereafter, the

Commission initiated a rulemaking and solicited comments from the public on the

application of the fuel rule. Entergy Gulf States argued that the subsequent request

for public comment was “tantamount to the Commission admitting that it must

engage the formal rulemaking process to modify the fuel rule” as it did. 79 This

Court disagreed, stating, “the Commission may consider a matter in a contested

case before adopting a rule later.”80 This Court has further affirmed such agency

77
     173 S.W.3d 199 (Tex. App.—Austin 2005, pet. denied).
78
     Id. at 211.
79
     Entergy Gulf States, 173 S.W.3d at 212.

                                               23
discretion: “[u]nless mandated by statute, the choice by an agency to proceed by

general rule or by ad hoc adjudication is one that lies primarily in the informed

discretion of the agency.” 81

        The Commission’s decision in Docket No. 40295 did not promulgate a new

standard. Instead, it was a fact-specific application of the law in effect at that time.

It was within the Commission’s discretion and supported by substantial evidence.

The disallowance based on ETI’s pursuit of an unreasonable argument was

appropriately addressed in a contested case hearing, and it was supported by

substantial evidence. Therefore, the district court judgment on this issue should be

affirmed.

2. The Issue-Specific Method of determining disallowance amounts is
   reasonable and did not require a rulemaking proceeding. (Addresses ETI’s
   Issue 3)
        ETI challenges the Commission’s quantification of the expenses disallowed

as a result of Entergy’s unreasonable rate case actions as arbitrary and capricious

and an abuse of discretion. Entergy claims that the Commission has never before

used issue-specific measures to quantify a disallowance, and that the Commission

80
     Id. at 212; see also City of El Paso, 883 S.W.2d at 189 (“ad hoc adjudication may be
     preferable to a formal rulemaking proceeding where ‘the agency may not have had sufficient
     experience with a particular problem to warrant rigidifying its tentative judgment into a hard
     and fast rule.”).
81
     State Bd. of Ins. v. Deffebach, 631 S.W.2d 794, 799 (Tex. App.—Austin 1982, writ ref’d
     n.r.e.) (citing Sec. & Exch. Comm’n v. Chenery Corp., 332 U.S. 194 (1947)).

                                                24
engaged in improper ad hoc rulemaking when it imposed a new standard at the end

of a contested case.

        A. ETI’s evidence did not allow for an exact accounting of actual costs.
        While some of ETI’s expenses specific to the financial-based incentive

compensation issue were documented, ETI did not provide adequate evidence to

determine the exact total cost of litigating that topic.82 It is ETI’s burden to prove

its rate case expenses were reasonable.83 ETI’s failure to adequately quantify its

exact expenses does not lead to a partial disallowance consisting of only the

calculable amounts, as ETI would suggest. Instead, the ALJ and the Commission

were forced to find an alternative way of calculating the appropriate disallowance.

A commission’s “function as the ultimate arbiter of ‘reasonableness’ would be

nugatory if it were unable to exact a satisfactory accounting from those seeking

reimbursement for rate case expenses.”84 In the absence of satisfactory accounting,

quantification by an alternate method was well within the Commission’s discretion

as the ultimate arbiter.

82
     AR Vol. I, Binder 2, Item 32 (Proposal for Decision) at 24.
83
     PURA § 36.006.
84
     City of Amarillo v. R.R. Comm’n, 894 S.W.2d 491, 497 (Tex. App.—Austin 1995, writ
     denied).

                                                25
        B. Quantification by proportion                 is   neither      novel    nor     outside
           Commission discretion.
        In testimony, parties offered and provided recommendations on three

methods for calculating the amount that should be disallowed on the financial-

based incentive compensation issue.85 After consideration of all three methods, the

ALJ chose,86 and the Commission adopted, 87 what is referred to as the “Issue-

Specific” Method of quantifying disallowance.88 Under this approach, requested

rate case expenses were reduced by the ratio of the amounts unsuccessfully sought

by ETI for financially-based incentive payments to the entire rate increase sought

by ETI. 89 The resulting disallowance of rate case expenses on this issue was

$522,244.66. 90

        This utilization of a proportion calculation was also well within the

Commission’s discretion. The Commission has previously used similar methods

for calculating amounts that are not explicitly addressed in a statute.91 “[E]ven

85
     AR, Vol. II, Binder 3 OPUC Ex. 1 (Direct Testimony of Nathan Benedict) at 10-11; Vol. I,
     Binder 1, Item 23 (Init. Br. of State Agencies) at 3, 22; Vol. I, Binder 1, Item 22 (OPUC Init.
     Br.) at 11; Vol. I, Binder 2, Item 24 (Comm’n Staff Init. Br.) at 12.
86
     AR Vol. I, Binder 2, Item 32 (Proposal for Decision) at 29-30.
87
     AR Vol. I, Binder 2, Item 55 (Final Order) at 3.
88
     ETI refers to this as the “proxy method.”
89
     AR Vol. I, Binder 2, Item 32 (Proposal for Decision) at 29.
90
     AR Vol. I, Binder 2, Item 55 (Final Order) at 3 and 6 (FOF 18.f.).
91
     Docket No. 31433, Order (March 3, 2006).

                                                 26
when no evidence suggests a specific figure explicitly, the Commission may infer

the figure if it is supported by the body of evidence as to that issue.”92 Expert

testimony provided a range of disallowance amounts that were reasonably

calculated.93 Where, as here, the record contains substantial evidence to support

such a range and valuation of a disallowance is inherently complex, “there is a

reasonable basis for the Commission to, in its discretion, select an amount within

the range of figures provided by the expert testimony of the parties.” 94 Thus, the

chosen method of disallowance calculation was well within the Commission’s

discretion and reasonably decided.

           In addition, quantification of the disallowance through the issue-specific

method was anything but arbitrary and capricious. “The findings, inferences,

conclusions, and decisions of an administrative agency are presumed to be

supported by substantial evidence, and the burden is on the contestant to prove

otherwise.”95 ETI has not carried this burden. The record shows that the

Commission engaged in a “process of discussion, careful consideration, and

92
     Pioneer Natural Res., 303 S.W.3d at 369.
93
     AR Vol. II, Binder 3, OPUC Ex. 1 (Direct Testimony and Workpapers of Nathan Benedict)
     at 10-11.
94
     City of El Paso, 883 S.W.2d at 186.
95
     Id.

                                                 27
compromise,” 96 when it chose this method, which was supported by expert

testimony. 97

         ETI claims the method is arbitrary because there is no relationship between

the issue-specific method and the rate case expenses associated with the issue.98

However, in its next sentence, Entergy explains that the relationship lies in the

issues’ values rather than their costs. This is a reasonable and logical relationship.

It is sensible to assume that ETI would manage its expenditures, at least in part,

based on the potential value that the outcome of each argument holds for it.

Certainly, good business practices would not prescribe payment of exorbitant legal

fees to defend a position that would result in a minimal amount of recovery. A

disallowance calculation method that employs similar logic is reasonable.

         Entergy claims that the Commission illogically applied the PURA provision

that authorizes the Commission to entitle a utility to recover reasonably incurred

rate case expenses.99 However, “[t]he Commission is not required to grant recovery

of every reasonable expense.”100 And, ETI has not proffered an explanation as to

96
      Nucor Steel v. Pub. Util. Comm'n, 168 S.W.3d 260, 269 (Tex.App.—Austin 2005, no pet.)
      (referencing earlier cite to Pedernales Elec. Coop. v. Pub. Util. Comm'n, 809 S.W.2d 332,
      341 (Tex.App.—Austin 1991, no writ).).
97
      AR Vol. I, Binder 2, Item 32 (Proposal for Decision) at 21-24.
98
      Appellant’s Br. 28.
99
      Appellant’s Br. 29 (citing PURA § 36.061(b)).
100
      AR Vol. II, Binder 3, OPUC Ex. 1 at 4.

                                                 28
why any one amount within the suggested range is more reasonable or better

supported than the amount chosen by the Commission. 101 Thus, ETI has failed to

meet its burden showing that the issue-specific quantification method is arbitrary

and capricious or an abuse of the Commission’s discretion.

         C. No new standard was imposed; no rulemaking was required.
         Lastly, ETI claims that imposing this “new standard” at the end of an

administrative proceeding constitutes ad hoc rulemaking, and thus was arbitrary

and capricious and an abuse of discretion.

         Again, no new standard was imposed. There is no indication that the ALJ or

the Commission intended for this decision to become generally applicable law.

“The ALJ recommends adoption of the Issue-Specific Reduction Approach in this

case.” 102 In its order, the Commission affirmed “the use of the ‘issue-specific

reduction approach’ to determine how to calculate an appropriate reduction,” in

this case. 103 The Commission did not adopt this approach as the only way to

calculate appropriate reduction for all subsequent cases. The Commission only

decided the particular issue at hand supported by the facts in this case.

         The initiation of a rate case expenses rulemaking proceeding does not

discredit the contested case decision. As explained above, the fact that a subject is
101
      See City of El Paso, 883 S.W.2d at 186.
102
      AR Vol. I, Binder 2, Item 32 (Proposal for Decision) at 32 (emphasis added).
103
      AR Vol. I, Binder 2, Item 55 (Final Order) at 2.

                                                 29
appropriate for rulemaking does not prohibit an agency from taking it up in the

context of a contested case. It is within an agency’s discretion to decide whether to

take action through a rulemaking or directly in a contested case.104 The district

court judgment affirming the Commission’s decision on this issue should be

affirmed.

3. The Commission properly disallowed depreciation expenses of an ETI
   affiliate company. (Addresses ETI’s Issue 4)
         PURA allows a utility to recover depreciation of its capital investment

property, if used to provide service, as an expense in calculating the utility’s

revenue requirement. In a curious and atypical application of this allowance, ETI

seeks to include depreciation of assets (capital investments) belonging to its

affiliate, Entergy Services, Inc. (ESI), in ETI’s rate base as a rate case expense.

The Commission disallowed $207,683 in these affiliate depreciation expenses,

which ETI presented as “Depreciation & Amort” costs. The Commission’s

disallowance was based on the fact that ETI failed to: (1) cite to any precedent that

would justify the recovery; (2) prove the reasonableness of the expenses under the

more stringent affiliate standards; and (3) establish that it would similarly recover

such an expense in an arms-length transaction with a non-affiliate. 105

104
      Entergy Gulf States, 173 S.W.3d at 211-12; Deffebach, 631 S.W.2d at 799 (citing Sec. &
      Exch. Comm’n v. Chenery Corp., 332 U.S. 194 (1947)).
105
      AR Vol. I, Binder 2, Item 32 (Proposal for Decision) at 12 and Item 55 (Final Order) at 2.

                                                 30
         The Commission’s disallowance of ESI’s depreciation expenses was

supported by substantial evidence and was not arbitrary and capricious. Contrary to

ETI’s assertions, the record shows both rational, consistent reasoning and

evidentiary support for this disallowance.

         ETI first argues the disallowance was unreasonable because similar expenses

were deemed reasonable and necessary for inclusion in the rate base in the

underlying rate case. The statutory standard for reasonable and necessary expenses

is different in rate cases than it is in rate case expense cases.106 Depreciation

expense was included in ETI’s revenue requirement only to the extent that it was

based upon the “cost of rendering service to the public during a historical test

year.” 107 That is a different standard than what may be allowed as a rate case

expense, which is tied by statute to what is reasonable to participate in a

proceeding. 108

         ETI also asserts that the ALJ’s statement that ETI “would not similarly

recover such an expense in an arms-length transaction with an affiliated

company,” 109 is completely unsupported by evidence in the record. However,

106
      PURA 36.051, compare with 36.061(b)(2).
107
      16 Tex. Admin. Code § 25.231(a).
108
      PURA § 36.061(b)(2).
109
      AR Vol. I, Binder 2, Item 32 (Proposal for Decision) at 12.

                                                 31
ETI’s omission of the first part of the referenced sentence is informative. The

entire sentence reads:

         Simply put, ETI has failed to establish that it is entitled to recover a
         depreciation expense related to an affiliate transaction because it
         would not similarly recover such an expense in an arms-length
         transaction with an affiliated company. 110

The burden of proof, again, was ETI’s. As this court has previously recognized,

“because of the possibility for self-dealing between affiliated companies, PURA

regards affiliate transactions with some skepticism and requires the utility to meet

a high burden of proof before costs paid to affiliated companies may be allowed as

an expense.”111 Under the affiliate transaction standard, payments to affiliated

companies are presumptively excluded from a utility’s rate base or operating

expenses unless the utility presents evidence supporting Commission findings that

(1) each item or class of items is reasonable and necessary, and (2) the price

charged is no higher than that charged to other affiliates, divisions, or unaffiliated

entities.112 Under this protective heightened scrutiny, ETI’s evidence falls short of

110
      Id. (emphasis added).
111
      Cent. Power & Light Co. v. Pub. Util. Comm’n, 36 S.W.3d 547, 568-69 (Tex. App.—Austin
      2000, pet. denied).
112
      PURA § 36.058; see also City of Amarillo, 894 S.W.2d at 498 (“Affiliate transactions are
      subject to this heightened scrutiny because when a utility and its suppliers are both owned
      and controlled by the same holding company, the safeguards provided by arm’s-length
      bargaining are absent, and ever present is the danger that the utility will be charged
      exorbitant prices which will, by inclusion in its operating costs, become the predicate for
      excessive rates.”) (citing PURA § 36.058 and R.R. Comm’n v. Rio Grande Valley Gas
      Co., 683 S.W.2d 783, 786 (Tex. App.—Austin 1984, no writ).

                                                32
meeting its burden of proof. This disallowance was not based on an unsupported

assumption made by the ALJ, but instead on a reasoned analysis of ETI’s evidence.

         The evidence ETI offered on this issue is attached hereto as Appendix E. It

consists of pages 1, 7, and 8 of ETI’s Exhibit MPC-R-1 from Docket No. 40295.

Pages 7 and 8 contain the sum total of documentation supporting the $207,863 in

internal “Depreciation & Amort Expenses” summarized on page 1. The “detail”

does not identify what assets depreciated, those assets’ original cost, or how

depreciation was calculated. No employees or assets were identified in ETI’s

exhibits or testimony, and underlying journal entries were not supplied.                       The

“amortization” portion of the expense was never explained in either testimony or

exhibits. Whether the claimed expense relates to assets used by ETI, ESI, or both

is not detailed. A description of the assets’ use with respect to the rate case is also

lacking. In short, ETI simply failed to provide evidence to support its expenses,

much less to determine if those expenses were reasonable.

         Although ETI argues that this generalized cost relates in some fashion to ESI

labor charges, there is no supporting calculation in this record that makes that

connection.       ETI presented no evidence that any outside contractors included

depreciation in the rates billed to ETI. Actually, a standard outside vendor contract

used by ETI’s outside law firm indicates that the contrary is true. 113 It expressly

113
      AR Vol. III, Transcript at 55-56, concerning AR Vol. II, Binder 3, State’s Ex. No. 15.

                                                 33
provides that charges related to computers, office facilities, word processing,

which charges analogous to “desks, computers, copiers, office buildings, etc.” are

considered “unreimbursable overhead.”114 The contract also states that copies are

reimbursed at a set copy charge, and fees for word or document processing are not

reimbursable. 115

          The ALJ determined that ETI did not present sufficient evidence of

precedent or reasonableness to justify the recovery. 116 This determination is

supported by substantial evidence in the record. As such, the district court’s

judgment affirming the Commission on this issue should be affirmed.

                                             PRAYER
          The Commission’s decisions to disallow expenses for financial-based

incentive compensation, to quantify that disallowance using an issue-specific

proportion method, and to disallow an affiliate’s depreciation expenses were:

          • within Commission discretion;

          • reasonable results of logical consideration of all relevant facts and
            factors;

          • supported by substantial evidence in the record; and

          • properly addressed in a contested case rather than a rulemaking.

114
      AR Vol. II, Binder 3, State’s Ex. No. 15 at 3.
115
      Id. at 4-5.
116
      AR Vol. I, Binder 2, Item 32 (Proposal for Decision) at 12.

                                                  34
      For these reasons and others set out above, the district court’s final judgment

was correct in affirming the Commission’s decision. State Agencies pray that the

judgment be in all respects AFFIRMED.

Dated: March 6, 2015

                             Respectfully submitted,

                             KEN PAXTON
                             Attorney General of Texas

                             CHARLES E. ROY
                             First Assistant Attorney General

                             JAMES E. DAVIS
                             Deputy Attorney General for Civil Litigation

                             DAVID A. TALBOT, JR.
                             Chief, Administrative Law Division

                             /s/ Sara R. Hammond
                             Katherine H. Farrell
                             State Bar No. 24032396
                             Sara R. Hammond
                             State Bar No. 24081003
                             Assistant Attorneys General
                             OFFICE OF THE TEXAS ATTORNEY GENERAL
                             Administrative Law Division
                             P.O. Box 12548
                             Austin, Texas 78711
                             Telephone: (512) 475-4173
                             Facsimile: (512) 320-0167
                             E-mail: katherine.farrell@texasattorneygeneral.gov
                                       sara.hammond@texasattorneygeneral.gov

                             Counsel for Appellee State Agencies

                                         35
                      CERTIFICATE OF COMPLIANCE

      I certify that this document contains 7,572 words in the portions of the
documents that are subject to the word limits of Texas Rules of Appellate
Procedure 9.4(i), as measured by the undersigned’s word processing software.

                                       /s/ Sara R. Hammond
                                       Sara R. Hammond
                                       Assistant Attorney General

                         CERTIFICATE OF SERVICE
      I certify that a true and correct copy of the Brief of Appellee State Agencies
was transmitted by electronic filing on the 6th day of March, to the parties of record
as listed below:

ENTERGY TEXAS, INC.,                   John F. Williams
                                       Marnie A. McCormick
Appellant                              DUGGINS WREN MANN & ROMERO, LLP
                                       One American Center
                                       600 Congress Suite 1900
                                       Austin, Texas 78767
                                       Telephone: (512) 744-9300
                                       Facsimile: (512) 744-9399
                                       jwilliams@dwmrlaw.com
                                       mmccormick@dwmrlaw.com

                                         36
OFFICE OF PUBLIC UTILITY     Ross Henderson
COUNSEL,                     Assistant Public Counsel
                             OFFICE OF PUBLIC UTILITY COUNSEL
Appellee                     1701 N. Congress Avenue
                             Suite 9-180
                             P.O. Box 12397
                             Austin, Texas 78711-2397
                             Telephone: (512) 936-7500
                             Facsimile: (512) 936-7525 or 936-7520
                             ross.henderson@opuc.texas.gov

PUBLIC UTILITY               Elizabeth Sterling
COMMISSION                   Assistant Attorney General
OF TEXAS,                    OFFICE OF THE ATTORNEY GENERAL
                             Environmental Protection Division
Appellee                     P.O. Box 12548, Capitol Station
                             Austin, Texas 78711-2548
                             Telephone: (512) 475-4152
                             Facsimile: (512) 320-0911
                             Elizabeth.Sterling@texasattorneygeneral.gov

TEXAS INDUSTRIAL ENERGY Rex D. Van Middlesworth
CONSUMERS,              Benjamin Hallmark
                        THOMPSON KNIGHT, LLP
Appellee                98 San Jacinto Blvd, Ste. 1900
                        Austin, Texas 78701
                        Telephone: (512) 469.6100
                        Facsimile: (512) 469.6180
                        rex.vanm@tklaw.com
                        benjamin.hallmark@tklaw.com

                             /s/ Sara R. Hammond
                             Sara R. Hammond
                             Assistant Attorney General

                               37
                  APPENDICES

A   District Court’s Final Judgment and Letter from Judge Meachum

B   Commission’s Final Order, PUC Docket No. 40295

C   ALJ’s Proposal for Decision, PUC Docket No. 40295

D   Commission’s Final Order, PUC Docket No. 31433

E   Excerpts of Entergy’s Exhibit MPC-R-1, PUC Docket No. 40295

                         38
APPENDIX A
APPENDIX B
Control Number : 40295

Item Number: 90

Addendum StartPage : 0
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                                                                                    1©!^
                                         PUC DOCKET NO. 40295                          VVV

                                   SOAEI DOCKET NO. XXX-XX-XXXX                  pt/8,t1c              Plf 3:
                                                                                                    CL4^ `

APPLICATION OF ENTER(^Y                                    §   PUBLIC UTILITY COMMISSI(^N
TEXAS, INC. FOR RATE CASE                                  §
EXPENSES PERTAINING TO PUC                                 §                OFTEXAS
DOCKET NO. 39896                                           §

                                                     ORDER

       This Order addresses the rate-case expenses pertaining to Docket No. 39896,1 Entergy
Texas, Inc.'s last rate case. Entergy requested $8.8 million in rate-case expenses associated with
Docket No. 39896-$7.6 million for Entergy's own rate-case expenses and $1.2 million for
Cities' rate-case expenses. The proposal for decision in this docket was issued on February 19,
2013. In the proposal for decision, the ALJ recommended allowing Cities' rate-case expenses
incurred through August 31, 2012, plus up to $75,800 in rate-case expenses as they are incurred
after August 31, 2012. The ALJ also recommended that Entergy's rate-case expenses be reduced
to account for Entergy taking certain positions in the rate case regarding financially-based
incentive compensation and transmission equalization expenses.             The Commission considered
the proposal for decision at the April 11 and April 25, 2013 open meetings. The Commission
adopts in part and reverses in part the proposal for decision, including findings of fact and

conclusions of law.

                                    1.      Estimated Rate-Case Expenses
        The Commission reverses the proposal for decision regarding Cities' $75,800 in
estimated rate-case expenses to be incurred after August 31, 2012.2 In Docket No. 37772, the
Commission found that approving estimated rate-case expenses for two different parties

representing Cities is not in the public interest and disallowed their recovery in the rate-case
expense surcharge, but did not prohibit the Cities from seeking recovery of actual rate-case

           pplication oJ'Entergy Texas, Inc. for A uthority to Change Rates, Reconcile Fuel Costs, and Obtain
        1 Application
Deferred Accounting Treatment, Order on Rehearing, Docket No. 39896 (Nov. 2, 2012).
        2 Proposal for Decision at 4-8 ( Feb. 19, 2013).

                                                                                                                         90
PUC Docket No. 40295                                 Order                                           Page 2 of 8
SOAH Docket No. XXX-XX-XXXX

expenses in the utility's next rate case.3         The Commission affirms that holding here: Cities
cannot recover for estimated rate-case expenses in this docket, but may seek recovery in
Entergy's next rate case. To reflect its determination on this issue, the Commission adds new
finding of fact 16A, modifies conclusion of law 7, and adds new conclusion of law 10.

                                        II.    Proportional Reduction
         The Commission affirms the proposal for decision regarding the need to reduce Entergy's
recoverable expenses due to an unreasonable position pursued by Entergy in the rate case4 and
also affirms the use of the "issue-specific reduction approach" to determine how to calculate an
appropriate reduction in rate-case expenses when the utility takes positions that are in conflict
with Commission precedent.5

         Specifically, the Commission agrees with the AU that reductions should be made to
Entergy's recoverable rate-case expenses for Entergy attempting to recover financially-based
incentive compensation in base rates. The Commission has repeatedly ruled that a utility cannot
recover the cost of financially-based incentive compensation because financial measures are of
more immediate benefit to shareholders and financial measures are not necessary or reasonable
to provide utility services.6 The Commission concludes that it should follow its well-established
policy here.

         However, the AU did not include all of the impacts attendant to the disallowance for
incentive compensation.7 To calculate the amount of the reduction in rate-case expenses related
to financially-based incentive compensation, the Commission starts with Entergy's initial rate-

        3 Application qf Southwestern Electric Power Company for Rate Case Expenses Pertaining to Docket No.
37364, Order at 1-2, Docket No. 37772 (Oct. 21, 2010).
        4 Proposal for Decision at 29-30.
        5 Id. at 32-34.
         b Application of AEP Texas Central Company for Authority to Change Rates, Docket No. 28840, Proposal
for Decision at 92-97, Findings of Fact Nos. 164-170, Order at 35 (Aug. 15, 2005); Application of AEP Texas
Central Company for Authority to Change Rates, Docket No. 33309, Proposal for Decision at 116-12 1, Finding of
Fact No. 82, Order on Rehearing at 12 (March 4, 2008); Application of Oncor Electric Delivery Company, LLC, for
Authority to Change Rates, Docket No. 35717, Proposal for Decision at 96-100, Finding of Fact No. 93, Order on
Rehearing at 22 (Nov. 30, 2009); and Application of'CenterPoint Electric Delivery Company, LLC, for Authority to
Change Rates, Docket No. 38339, Proposal for Decision at 66-67, Findings of Fact Nos. 81-83, Order on Rehearing
at 22 (June 23, 2011).
         7
           Docket No. 39896, Order on Rehearing at 5-6, 7-8 (Nov. 2, 2012).
PUC Docket No. 40295                                Order                                 Page 3 of 8
Sf)AH Docket No. XXX-XX-XXXX

case expense request, reduced by $208,494 in disallowances made by the ALJ' and affirmed by
the Commission. The Commission further reduces this amount by an additional $522,244.66,

which is the amount of rate-case expenses related to financially-based incentive compensation
using the issue-specific reduction approach.

        The Commission disagrees with the AU that Entergy's rate-case expenses should be

reduced due to Entergy's request for transmission equalization (MSS-2 expenses).`' Even though
Entergy did not meet the burden of proof that the requested expenses were known and
measureable changes to test-year expenses, the request for the MSS-2 expenses did not conflict
with clear Commission precedent.

        Accounting for these reductions, the Commission finds that rate-case expenses for ETI in
the amount of $6,896,037.73 are reasonable and necessary. Consequently, the Commission is
approving a total amount of $8,021,806.34 in allowable rate-case expenses in this docket.

        To reflect its determinations on the proportional reduction issue, the Commission
modifies finding of fact 18 and conclusion of law 9.

                                           1[I.   Affiliate Payments
        The Commission also finds that the price for Entergy's affiliate payments is not higher
than the prices charged by the supplying affiliate for the same item or class of items to its other
affiliates or divisions or a nonaffiliated person within the same market area or having the same
market conditions. The Commission adds new finding of fact 19 and new conclusion of law 11
to reflect that Entergy met the requirements in PURA § 36.058 regarding payments to its
affiliates for its rate-case expenses.

        The Commission also makes minor corrections to conclusions of law 6 and 8 to
incorporate the statutory reference into the language of the conclusion of law. Consistent with
the discussion above, the Commission adopts the following findings of fact and conclusions of
law:

         Proposal for Decision at 33-34.
        ' /ct at 25-27.
PUC Docket No. 40295                            Order                                 Page 4 of 8
SOAII Docket No. XXX-XX-XXXX

                                      IV.      Findings of Fact
I.     Entergy Texas, Inc. (ETI or the Company) is an investor-owned electric utility with a
       retail service area located in southeastern "I'exas.

2.     On November 28, 2011, ETI filed an application (the ETI Application) requesting,
       among other things, approval of a proposed increase in annual base rate revenues of
       approximately $111.8 million over adjusted test year revenues, and a new rider for
       recovery of costs related to purchased power capacity.

3.     On November 29, 2011, the Public Utility Commission of Texas (Commission or PUC)
       referred the ETI Application to the State Office of Administrative Hearings (SOAH) for a
       hearing and the matter was assigned docket number 39896 (Docket 39896).

4.     On April 4, 2012, in Docket 39896, the ALJs issued SOAH Order No. 13 severing rate-
       case expense issues into a new docket, the case at issue here, Application of Entergy
       Texas, Inc. for Rate Case Expenses Severed from PUC Docket No. 39896, Docket
       No. 40295.

5.     The hearing on the merits in Docket 39896 was held in April-May 2012.

6.     The Proposal for Decision (PFD) in Docket 39896 was issued July 6, 2012.

7.     The Commission issued its final order in Docket 39896 on November 2, 2012.

8.     The hearing on the merits in the present docket, Docket 40295, was held on
       November 28, 2012. The record closed on December 21, 2012, following the filing of
       post-hearing briefs.

9.     The following parties were granted intervenor status in this docket:    Office of Public
       Utility Counsel (OPUC); the cities of Anahuac, Beaumont, Bridge City, Cleveland,
       Conroe, Dayton, Groves, Houston, Huntsville, Montgomery, Navasota, Nederland, Oak
       Ridge North, Orange, Pine Forest, Rose City, Pinehurst, Port Arthur, Port Neches,
       Shenandoah, Silsbee, Sour Lake, Splendora, Vidor, and West Orange (Cities); State
       Agencies; and Texas Industrial Energy Consumers (TIEC). The staff (Staff) of the
       Commission was also a participant in this docket.
PUC Docket No. 40295                            Order                                    Page 5 of'8
SOAH Docket No. XXX-XX-XXXX

10.    In Docket 39896, ETI adjusted its request for a proposed increase in annual base rate

       revenues to approximately $104.8 million over adjusted Test Year revenues.

11.    In the PFD in Docket 39896, the ALJs recommended an overall rate increase of
       $28.3 million.

12.    In   its    final   order in   Docket 39896, the Commission largely followed the
       recommendations contained in the PFD, but reduced ETI's overall rate increase to $27.7
       million.

13.    In this docket, ETI seeks to recover $8.8 million in rate-case expenses associated with
       Docket 39896.

14.    Of that total, $7.6 million was incurred by ETI and $1.2 million was incurred by Cities.

15.    Cities proved that, through August 31, 2012, they reasonably incurred rate-case expenses
       of $1,125,768.61 in Docket 39896 and this docket.

16.    Cities reasonably estimated that their total rate-case expenses in Docket 39896 and this
       docket after August 31, 2012 will total $75,800.

16A.   The Commission finds that Cities' estimated expenses are not recoverable as rate-case
       expenses in this docket.

17.    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).

18.    Rate-case expenses for ETI in the amount of $6,896,037.73 are reasonable and necessary
       and should be allowed as a cost or expense by the Company. This amount is calculated
       by reducing the requested amount by the amounts listed and for the reasons stated below:

       a.         $207,683 in depreciation of office equipment owned by Entergy Services, Inc.
                  (ESI) (an affiliated company of ETI) and used by ESI employees for their work in
                  Docket 39896 is not reasonable and is properly disallowed.
       b.         $281 for meals over $25 was erroneously sought by ETI, is not reasonable, and is
                  properly disallowed.
PUC Docket No. 40295                           Order                                        Page 6 of 8
SOAN Docket No. XXX-XX-XXXX

       c.      $10 for clothing purchased by an attorney for ETl is not reasonable and is
              properly disallowed.
       d.     $40 for laundry charges by an attorney for ETI is not reasonable and is properly
              disallowed.
       e.     $480 for a lodging charge unsupported by receipts is not reasonable and is
              properly disallowed.
       f.     $522,244.66 attributable to unreasonable and overly aggressive arguments
              pursued by ETI in Docket 39896 related to tinancially-based incentive
              compensation is properly disallowed.
19.    The price for Entergy's affiliate payments is not higher than the prices charged by the
       supplying affiliate for the same item or class of items to its other affiliates or divisions or
       a nonaffiliated person within the same market area or having the same market conditions.

                                      V. Conclusions of Law
1      ETI is a "public utility" as that term is defined in the Public Utility Regulatory Act
       (PURA) § 11.004(1) and an "electric utility" as that term is defined in PURA
       § 31.002(6).

2.     The Commission exercises regulatory authority over ETI and jurisdiction over the subject
       matter of this application pursuant to PURA §§ 32.001, 32.101, 33.002, 33.051, and
       36.101-111.

3.     SOAH has jurisdiction over matters related to the conduct of the hearing and the
       preparation of a proposal for decision in this docket, pursuant to PURA § 14.053 and
       Tex. Gov't Code § 2003.049.

4.     This docket was processed in accordance with the requirements of PURA and the Texas
       Administrative Procedure Act, Tex. Gov't Code Chapter 2001.

5.     Pursuant to PURA § 33.051, the Commission has jurisdiction over an appeal from a
       municipality's rate proceeding.

6.     Pursuant to PURA § 33.023, Cities bore the burden to prove that the rate-case expenses
       they incurred were reasonable.
PUC Docket No. 40295                           Order                                        Page 7 of 8
SOAH Docket No. XXX-XX-XXXX

7.     Cities are entitled to reimbursement by ETI for rate-case expenses of $1,125,768.61
       incurred in Docket 39896 and this docket through August 31, 2012.

8.     Pursuant to PURA § 36.061(b), ETI bore the burden of proving that the rate-case
       expenses it incurred in Docket No. 39896 were reasonable.

9.     ET I proved the reasonableness of its rate-case expenses in the amount of $6,896,037.73,
       and is entitled to claim that amount as a cost.

10.    Consistent with Commission precedent, it is not in the public interest to permit recovery
       of estimated rate-case expenses.

11.    Entergy met the requirements of PURA § 36.058 regarding payments to its affiliate for its
       rate-case expenses.

                                     VI. Ordering Paragraphs
       In accordance with these findings of fact and conclusions of law, the Commission issues
the following orders:

l.     The Proposal for Decision prepared by the SOAH ALJs is adopted to the extent
       consistent with this Order.

2.     All other motions, requests 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.

3.     Cities' and ETI's requests to recover rate-case expenses are granted to the extent
       consistent with this Order.
PUC Docket No. 40295                                 Order                            Page 8 of 8
SOAFi Docket No. XXX-XX-XXXX

                                                         S"1
          SIGNED AT AUSTIN, TEXAS the % day of May 2013

                                           PUBLIC UTILITY COMMISSION OF TEXAS

                                           DONNA L. NELSON, CHAIRMAN

                                           KENNETH W. ANDER,40+; J"lT, COMMISSIONER

y-\cadm\orders\tinal\40000\402951'o.docz
APPENDIX C
Control Number : 40295

Item N umber: 67

Addendum StartPage : 0
    State Office of Administrative Hearings

                                                                    2DI3 FEB 19 PH 3: 24

                                 Cathleen Parsley
                          Chief Administrative Law Judge

                                      February 19, 2013

TO:     Stephen Journeay, Director                                            Courier Pick-up
        Commission Advising and Docket Management
        William B. Travis State Office Building
        1701 N. Congress, 7th Floor
        Austin, Texas 78701

RE:     SOAH Docket No. XXX-XX-XXXX
        PUC Docket No. 40295

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

       Enclosed is the Proposal for Decision (PFD) in the above-referenced case. By
copy of this letter, the parties to this proceeding are being served with the PFD.

       Please place this case on an open meeting agenda for the Commissioners'
consideration. There is no deadline in this case. Please notify me and the parties of the
open meeting date, as well as the deadlines for filing exceptions to the PFD, replies to the
exceptions, and requests for oral argument.

                                                    Sincerely,

                                                     unt
                                                    Administrative Law Judge

HB/mle
Enclosure
xc:     All Parties of Record

  300 W. 15th Street, Suite 502, Austin, Texas 78701/ P.O. Box 13025, Austin, Texas 78711-3025
                 512.475.4993 (Main) 512.475.3445 (Docketing) 512.322.2061 (Fax)
                                                                                                 6o7
                                      www.soah.state.tx.us
                                            SOAH DOCKET NO. XXX-XX-XXXX
                                               PUC DOCKET NO. 40295
                                                                                                        2 I1 F E B 19 P P', 3: 24

APPLICATION OF ENTERGY                                                   §§          BEFORE THt STATE OFFICE tf F ti
TEXAS, INC. FOR RATE CASE
EXPENSES PERTAINING TO PUC                                               §                                   OF
DOCKET NO. 39896                                                         §
                                                                         §          ADMINISTRATIVE HEARINGS

                                                   TABLE OF CONTENTS

I. BACKGROUND ....................................................................................................................... 1

II. JURISDICTION, NOTICE, AND PROCEDURAL HISTORY ........................................ 2

III. PARTIES ............................................................................................................................... 2

IV. DISCUSSION ........................................................................................................................ 3

      A.         Overview .................................................................................................................... 3

      B.          Cities' Rate Case Expenses ....................................................................................... 4

      C.         ETI's Rate Case Expenses ........................................................................................ 8

                  1.        Challenges to Specific ETI Rate Case Expenses That are
                            Relatively Quantifiable ... .............................................................................. 8

                              a.         Costs Associated with Gerald Tucker, ETI's
                                         Consulting Expert ............................................................................ 8
                              b.         Costs Associated with "Lessons Learned" .................................. 10
                              c.         ESI Depreciation Costs .................................................................. 11
                              d.         Miscellaneous Internal Rate Case Expenses ............................... 13
                              e.         Costs Associated with the Calpine-Carville PPA ........................ 13
                              f.         Specific Items That State Agencies Contend Cast Doubt on
                                         ETI's Overall Scrutiny of Its Expenses ....................................... 15

                                         (1)         External Legal Fees ..........................................................          16
                                         (2)         Meals and Snacks .............................................................          17
                                         (3)         Courier and Taxi Services ...............................................               18
                                         (4)         Meals Over $25 .................................................................        19
                                         (5)         Clothing and Laundry Service ........................................                   20
                                         (6)         Airfare and Lodging ........................................................            20
SOAH DOCKET NO. XXX-XX-XXXX                                    TABLE OF CONTENTS                                                   PAGE 2
PUC DOCKET NO. 40295

                 2.        Challenges to Specific ETI Rate Case Expenses That are Difficult to
                           Quantify ....................................................................................................... 21

                             a.        Financially-Based Incentive Compensation ................................ 21
                             b.        Transmission Equalization (MSS-2) Expenses ........................... 25
                             c.        Purchased Power Capacity Rider ................................................. 27

                 3.        Proportional Reduction .............................................................................. 28

      D.         Recovery Method ..................................................................................................... 34

                 1.        Rate Case Expense Allocation and the Recovery Mechanism ................ 34
                 2.        ETI's Request to Earn a Return on the Unpaid Balance of Rate
                           Case Expenses .............................................................................................. 35

V. CONCLUSION ..................................................................................................................... 36

VI. PROPOSED FINDINGS OF FACT, CONCLUSIONS OF LAW, AND
    ORDERING PARAGRAPHS .. .......................................................................................... 36

      A.        Findings of Fact ....................................................................................................... 36

      B.        Conclusions of Law ................................................................................................. 38

      C.        Proposed Ordering Paragraphs ............................................................................. 39
                                    SOAH DOCKET NO. XXX-XX-XXXX
                                       PUC DOCKET NO. 40295

APPLICATION OF ENTERGY                                     §         BEFORE THE STATE OFFICE
TEXAS, INC. FOR RATE CASE                                  §
EXPENSES PERTAINING TO PUC                                 §                            OF
DOCKET NO. 39896                                           §
                                                           §        ADMINISTRATIVE HEARINGS

                                       PROPOSAL FOR DECISION

                                            1.   BACKGROUND

         Entergy Texas, Inc. (ETI) is an investor-owned electric utility with a retail service area
located in southeastern Texas. ETI serves retail and wholesale electric customers in Texas. On
November 28, 2011, ETI filed an application requesting approval of an increase in annual base rate
revenues, a reconciliation of fuel costs, and authority to defer costs for the transition to the Midwest
Independent System Operator (the ETI Application). On November 29, 2011, the Commission
referred the ETI Application, PUC Docket No. 39896, to SOAH (Docket 39896). On April 4, 2012,
the Administrative Law Judges (ALJs) presiding over pocket 39896 issued an order severing from
Docket 39896 the issues relating to ETI's request to recover its rate case expenses and creating this
docket, Docket 40295, for consideration of the rate case expenses.

         In this Proposal for Decision (PFD), the ALJ recommends as follows:

         That Cities' be allowed to recover from ETI a total of $1,201,569 in rate case expenses
         (representing $1,125,769 in rate case expenses incurred through August 31, 2012, plus up to
         $75,800 in rate case expenses as they are incurred after August 31, 2012); and

    •    That ETI be allowed to recover a total of $7,344,113 in rate case expenses.

` The Cities are: the Cities of Anahuac, Beaumont, Bridge City, Cleveland, Conroe, Dayton, Groves, Houston,
Huntsville, Montgomery, Navasota, Nederland, Oak Ridge North, Orange, Pine Forest, Rose City, Pinehurst, Port Arthur,
Port Neches, Shenandoah, Silsbee, Sour Lake, Splendora, Vidor, and West Orange.
 SOAH DOCKET NO. XXX-XX-XXXX                      PROPOSAL FOR DECISION                        PAGE 2
 PUC DOCKET NO. 40295

              II.   JURISDICTION, NOTICE, AND PROCEDURAL HISTORY

         The Public Utility Commission of Texas (Commission or PUC) has jurisdiction over ETI and
this rate case expenses hearing pursuant to Texas Utility Code, Public Utility Regulatory Act
(PURA) §§ 32.001, 33.002, and 35.004. The State Office of Administrative Hearings (SOAH) has
jurisdiction over the contested case hearing, including the preparation of the proposal for decision
(PFD) pursuant to PURA § 14.053 and Texas Government Code § 2003.049(b). ETI's notice of its
application and notice of the hearing were not contested and, therefore, do not require further
discussion here but will be addressed in the proposed findings of fact and conclusions of law.

         The hearing on the merits in Docket 39896 was held in April-May, 2012. The PFD was
issued on July 6, 2012. A Final Order in Docket 39896 was issued by the Commission on September
14, 2012. In response to motions for rehearing submitted by multiple parties, the Commission issued
an Order on Rehearing on November 2, 2012, in Docket 39896.2

         The hearing on the merits in the present docket, Docket 40295, was held on
November 28, 2012. The record remained open for the filing of post-hearing briefs. The record
closed on December 21, 2012.

                                           III.    PARTIES

         In addition to ETI, the following entities were granted party status in this case: Texas
Industrial Energy Consumers (TIEC); State of Texas agencies and institutions of higher education
(State Agencies); Office of Public Utility Counsel (OPUC); Cities; and the staff of the Public Utility
Commission (Staff).

2 Multiple second motions for rehearing were denied by the Commission on December 4, 2012.
SOAH DOCKET NO. XXX-XX-XXXX                     PROPOSAL FOR DECISION                                PAGE 3
PUC DOCKET NO. 40295

         The following is a list of the parties who participated in the hearing and their counsel:

      PARTIES                        REPRESENTATIVES
     ETI                             Steven H. Neinast, Wajiha Rizvi, and George Hoyt
     Cities                          Stephen Mack
     TIEC                            Meghan Griffiths
     State Agencies                  Susan Kelley
     OPC                             Sarah Ferris
     Staff                           Brennan Foley

                                        IV.     DISCUSSION

A.      Overview

        In the ETI Application, ETI requested, among other things, approval of an increase in annual
revenues of approximately $104.8 million, proposed tariff schedules including new riders to recover
costs related to purchased-power capacity and renewable-energy credit requirements, and final
reconciliation of its fuel costs. Prior to the hearing, the Commission effectively denied ETI's request
for a purchased-power capacity rider by removing it as an issue to be addressed in the hearing on the
ETI Application. In their PFD, the ALJs recommended an overall rate increase for ETI of
$28.3 million, did not recommend approving the renewable-energy credit rider sought by ETI, and
recommended approving ETI's request to reconcile fuel and purchased power costs during the
Reconciliation Period.3      Ultimately, the Commission largely followed the recommendations
contained in the PFD, but reduced the overall rate increase to $27.7 million.4

        In this docket, Michael P. Considine, a Manager in the Regulatory Accounting Department of
Entergy Services, Inc. (ESI), ETI's service company affiliate, testified in support of the company's
claim for recovery of rate case expenses. He explained that ETI is seeking authority to recover its

3 Application of Entergy Texas, Inc. for Authority to Change Rates, Reconcile Fuel Costs, and Obtain Deferred
Accounting Treatment, Docket 39896, Proposal for Decision (July 6, 2012).
4 Application of Entergy Texas, Inc. for Authority to Change Rates, Reconcile Fuel Costs, and Obtain Deferred
Accounting Treatment, Docket 39896, Order on Rehearing (November 1, 2012).
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PUC DOCKET NO. 40295

rate case expenses over a three-year period, while earning a return on the unamortized balance.' ETI
seeks to recover $8,752,5456 in rate case expenses associated with Docket 39896 that were incurred
and paid as of September 30, 2012.7 Of that total, $7,635,236 was incurred by ETI and $1,117,309
was incurred by Cities. Of the total amount, ETI classifies $3,908,214 as "external" rate case
expenses (i.e., those expenses paid to outside accounting services, outside counsel, and outside
consultants), and $4,844,362 as "internal" rate case expenses (i.e., those expenses related to direct
expenses, payroll, benefits, and taxes of ETI and Entergy Services, Inc. (ESI), an affiliated company
of ETI).8 Mr. Considine offered the opinion that all of ETI's internal rate case expenses were
reasonable and necessary.9 Another ETI witness, Stephen F. Morris, offered his opinion that all of
ETI's external rate case expenses were reasonable and necessary.10 Mr. Morris is an attorney and
certified public accountant who was retained by ETI to review the company's external rate case
expenses.' l ETI also seeks authority to defer until its next rate case all rate case expenses incurred in
Docket 39896 after September 30, 2012.12

B.       Cities' Rate Case Expenses

         Pursuant to PURA § 33.023, any municipality participating in a ratemaking proceeding may
engage attorneys, consultants, and others to assist it, and the electric utility "shall" reimburse the
municipality for its "reasonable cost" of participating in the ratemaking proceeding "to the extent the
[Commission] determines is reasonable."

5 ETI Ex. 1 (Considine Direct) at 62.
6 Initially, ETI sought recovery of $8,752,576. In its briefing, however, ETI explains that it is reducing the amount it
seeks to $8,752,545 (a reduction of $31) to account for two excessive charges for meals. ETI Init. Br. at 1 n. 1.
7 ETI Ex. 6 (Considine Supp.) at 1.
8 ETI Ex. 6 (Considine Supp.) at 3, 5, and attachment MPC-SD-5. The $1,117,309 in expenses incurred by Cities is
included as part of ETI's "internal" expenses.

9 ETI Ex. 6 (Considine Supp.) at 7.
10 ETI Ex. 8 (Morris Direct) at 18.
11
   ETI Ex. 8 (Morris Direct) at 1-2.
12 Transcript from Hearing on the Merits (Tr.) at 17.
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PUC DOCKET NO. 40295

            In this case, Cities seek reimbursement for rate case expenses totaling $1,201,568.61. Cities
identify this amount as the "total actual and estimated rate case expenses" incurred by Cities in four
forums: (1) ETI's base rate cases before the municipalities; (2) participation in Docket 39896;
(3) participation in any appeals of Docket 39896; and (4) participation in the present case,
Docket 40295.13 Of the $1,201,568.61 total, $1,125,768.61 represents actual expenses incurred by
Cities through August 31, 2012, while $75,800 represents Cities' estimated expenses through
completion of Dockets 39896 and 40295, and any appeal. 14 Cities offered the expert testimony of
Amalija "Amy" Hodgins, a former ALJ, who opined that these expenses were reasonable and should
be reimbursed. 15

            No party challenged the reasonableness of Cities' expenditures through August 31, 2012
(i.e., $1,125,768.61), and the AU can find no reason to do so either.

            Staff challenges, however, Cities' attempt to recover their estimated expenses after that date
(i.e., $75,800). Cities seek to be reimbursed for these estimated expenses only "if and when they

occur," up to the maximum of $75,800.16 Ms. Hodgins offered her opinion that the amount of the
estimated expenses is reasonable. 17           In reliance upon Commission precedent from 2005,
Ms. Hodgins argued that estimated rate case expenses are reimbursable. Ms. Hodgins testified as
follows:

            Projected rate case expenses can be, and routinely have been, found reasonable and
            reimbursable by this Commission. The fact that a municipality's rate case expenses
            have not all been incurred, as of the date of the determination of the reasonableness
            of rate case expenses, does not render them unreasonable. Expenses need only be
            reasonable and incurred to be recoverable.

13
     Cities Init. Br. at 2.
14
     Cities Init. Br. at 5.

15 See Cities Ex. No. 1(Hodgins Direct) and Ex. No. 2 (Hodgins Supp.).
16
   Cities Ex. 2 (Hodgins Supp.) at n. 6.
17 Cities Ex. 2 (Hodgins Supp.) at 13-14.
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          The future activities and corresponding costs, that are the subject of estimation, are
          necessary to complete a proceeding before the Commission. The Commission in
          CenterPoint's CTC case found estimated costs to complete a case were recoverable
          once the estimated expenses were incurred and known and measurable. ...
          Accordingly, it is reasonable for the Commission, in this proceeding, to consider and
          allow the Cities to recover the estimated costs to complete this proceeding, including
          possible judicial appeals, if and when those expenses are incurred.18

          Staff argues, based upon Commission precedent, that Cities are not entitled to reimbursement
for estimated future rate case expenses.19 Staff does not challenge the reasonableness of the amount
of estimated expenses, nor does any other party. Rather, Staff asserts that the Commission precedent
relied upon by Ms. Hodgins has been superseded by more recent precedent. Specifically, in 2010,
the Commission decided a case in which it disallowed estimated rate case expenses. In
Docket 37772, the Commission disallowed recovery of estimated expenses, holding that "approving
estimated rate-case expenses is not in the public interest," but allowed the cities involved in that case
to seek "recovery of actual rate-case expenses included in the estimates in [the utility's] next rate
case."20 Thus, Staff argues that Cities' attempt to obtain its estimated expenses should be disallowed.

          Staff further argues that Cities should not be entitled to recover the expenses associated with
the preparation of the portion of Ms. Hodgins' testimony in which she advocates in support of the
recovery of Cities' estimated expenses. By Staffs calculation, this reduction amounts to $1,208.42
(representing Cities' actual costs for Ms. Hodgins' testimony related to the recovery of estimated
expenses).21 No other party joins Staff in its opposition to Cities' estimated expenses.

          The ALJ recommends that Cities' request with regard to its estimated expenses be granted.
Pursuant to Section 33.023 of PURA, Cities are entitled to reimbursement for their expenses

18 Cities Ex. 1(Hodgins Direct) at 6-7; citing Application of CenterPoint Energy Houston Electric, LLCfor Competition
Transition Charge, Docket No. 30706, Order at 31 and FOFs 72-74 (Jul. 14, 2005)(Docket 30706).
19 Staff Init. Br. at 6.
20 Application of Southwestern Electric Power Company for Rate Case Expenses Pertaining to Docket No. 37364,
Docket 37772, Order at 1-2 (Oct. 21, 2010)(emphasis in original)(Docket 37772).
21
   Staff Init. Br. at 7.
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PUC DOCKET NO. 40295

reasonably incurred in this case. As noted above, no party challenged the reasonableness of Cities'
estimation that its expenses after August 2012 would total $75,800. The ALJ concludes that the
estimate is reasonable.22 Most importantly, the ALJ notes that Cities are not actually seeking
reimbursement of estimated rate case expenses. Rather, Cities asks for: (1) approval now of the
reasonableness of its estimated expenses; but (2) reimbursement of those expenses only after they are
incurred, and only up to the estimated amount of $75,800. Cities argue that, from a policy
standpoint, it is more economical and efficient for Cities to request reimbursement of reasonable
estimated rate case expenses to the extent they are incurred in this case, rather than requiring Cities
to wait and ask for reimbursement of those expenses when ETI files a new rate case at some point in
the future, a contingency which might not occur for many years. The ALJ agrees. The ALJ further
believes that it would be unfair if Cities were obligated to wait until ETI files a new rate case in order
to recover its estimated expenses from the present case.                    Any such arrangement would delay,
potentially for years, Cities' recovery of its actual expenses in the present rate case, a result which
seems contrary to the clear intent expressed in PURA § 33.023 that municipalities are entitled to
reimbursement for their reasonable rate cases expenses. Moreover, such an arrangement would
obligate Cities to participate in a future ETI rate case that they might otherwise have no interest in
becoming a party to.

         For these reasons, the ALJ recommends:

         (1)       that Cities' rate case expenses be found to be reasonable in the amount of
                   $1,201,568.61 (consisting of $1,125,768.61 in actual expenses incurred by Cities
                   through August 31, 2012, and $75,800 in estimated expenses to be incurred by Cities
                   after August 31, 2012 through completion of Dockets 39896 and 40295, and any
                   appeal);

         (2)       that ETI be ordered to reimburse Cities for $1,125,768.61 in actual expenses incurred
                   by Cities through August 31, 2012; and

22 Indeed, the ALJ notes that Cities attached to their Reply Brief an affidavit from Ms. Hodgins attesting to the fact that,
from September through November 2012, Cities actually incurred expenses of $43,525.45 (or 57% of the estimated
$75,800). Cities Reply Br. at 4-5, and attached affidavit.
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PUC DOCKET NO. 40295

           (3)      that ETI be ordered to reimburse Cities for actual expenses incurred by Cities after
                    August 31, 2012, through completion of Dockets 39896 and 40295 and any appeal up
                    to a maximum possible amount of $75,800.

C.         ETI's Rate Case Expenses

           Pursuant to PURA Section 36.061(b), the Commission "may" allow a utility to recover its
"reasonable costs of participating in a [ratemaking proceeding] not to exceed that amount approved"
by the Commission.

           ETI seeks recovery of $8,752,545 in rate case expenses associated with Docket 39896 that
were incurred and paid as of September 30, 2012.               However, that total includes only the
$1,125,768.61 in expenses incurred by Cities through August 31, 2012, but does not also include the
$75,800 in expenses estimated for Cities as discussed above. Because the ALJ is recommending that

Cities' estimated expenses be approved as outlined above, the ALJ deems ETI's overall request to
have been increased by $75,800 to a total amount of $8,828,345.

           The parties other than ETI challenged various components of ETI's rate case expenses.
Those challenges are discussed as follows.

           1.       Challenges to Specific ETI Rate Case Expenses That are Relatively Quantifiable

                    a.       Costs Associated with Gerald Tucker, ETI's Consulting Expert

           In Docket 39896, ETI retained Gerald Tucker as a consulting expert to assist in the
preparation of the utility's case dealing with affiliate transactions. Mr. Tucker is an accountant who
has experience regarding affiliate costs in Commission rate cases and who has commonly assisted
ETI in its rate cases.23

23
     ETI Ex. 8 (Morris Direct) at 29-30.
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PUC DOCKET NO. 40295

           State Agencies contend that Mr. Tucker's fees should be disallowed. No party other than
State Agencies challenged Mr. Tucker's expenses. State Agencies complain that Mr. Tucker: (1) did
not testify; (2) provided services that were described by ETI in only "the most general terms;" and
(3) provided services (such as reviewing witness testimony, reviewing discovery responses,
benchmarking, and assisting in preparing witnesses for deposition) that were duplicative of services
provided by ETI's legal counsel or other consultants. Accordingly, State Agencies argue that the
$116,119 representing Mr. Tucker's fees should be excluded from rate case expenses.24

           ETI responds by contending that, over the last 20 years or so, the Commission has, at times,
disallowed large percentages of utility companies' affiliate expenses, based upon the fact that ALJs
and the Commissioners have had difficulty understanding the complex information supplied by
utilities concerning affiliate transactions. In light of that history, ETI contends that it reasonably
relied upon the expertise and accounting experience of Mr. Tucker to assist it in preparing and
presenting information about the company's affiliate transactions in order to assure that it was
understandable. According to ETI, Mr. Tucker has been involved in all rate cases of ETI and its

predecessor since in 1997. ETI contends that Mr. Tucker's participation in Docket 39896 enabled
the company to present clearer and more accurate information about its affiliate transactions.
Moreover, ETI disputes that Mr. Tucker's work was duplicative of the work performed by the
company's attorneys, pointing out that Mr. Tucker provided expertise from the accounting
perspective, rather than from the legal perspective.25

           The AU recommends that Mr. Tucker's fees be included in the rate case expenses. State
Agencies are essentially arguing that it was solely the job of ETI's attorneys and its testifying experts
to prepare the case regarding affiliate transactions and, therefore, any work performed by Mr. Tucker
with regard to affiliate transactions was purely duplicative. The AU disagrees. As pointed out by
ETI, the notion that multiple people with varied expertise cannot provide valuable input on a
complex issue like affiliate transactions is overly simplistic. ETI demonstrated that Mr. Tucker

24
     State Agencies Init. Br. at 18-19.
25
     ETI Init. Br. at 10-11; ETI Ex. 7 (Considine Supp.) at 9-10.
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PUC DOCKET NO. 40295

provided real expertise that benefited the company in the presentation of its case. In other words,
ETI proved the reasonableness of Mr. Tucker's expenses.

                    b.       Costs Associated with "Lessons Learned"

           In Docket 39896, ETI included several charges from its law firm, Duggins, Wren, Mann &
Romero (Duggins Wren), for "lessons learned," as shown in a July 26, 2011 invoice from the law
firm. The charges total $5,743.50.26 According to ETI, the charges relate to a memo provided to
ETI by the firm which contained a "detailed analysis of developments in ETI's last rate case as well
as developments in four recent pertinent cases at the PUCT that had taken place since the last ETI
rate case."27 The memo identified procedural and substantive issues for ETI to consider while
preparing its rate case in Docket 39896.28

           State Agencies contend that any "lessons learned" should have already been learned in the
prior rate case and, therefore, any "refreshing [ofJ the learning curve ... should be a shareholder, not
ratepayer, expense. Bringing one's attorneys `up to speed' for the third rate case filed in five years
ought to be regarded as the legal equivalent of a`luxury item. `29 No party other than State Agencies
challenged the "lessons learned" expenses.

           ETI responds by contending that State Agencies are essentially seeking to punish the
company for its efforts to learn from the past. ETI also contends that State Agencies' argument
would have the perverse effect of increasing, rather than decreasing rate case expenses. According to
ETI:

26
     ETI Ex. 8 (Morris Direct) at 29-30.
27 ETI Ex. 12 (Morris Rebuttal) at 28-29 (Attachment SFM-R-3).
28 ETI Ex. 12 (Morris Rebuttal) at 28-29 (Attachment SFM-R-3).
29 State Agencies Init. Br. at 19.
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PUC DOCKET NO. 40295

         Incurring these costs to analyze lessons learned from litigating prior rate cases and
         important aspects of non-ETI Commission rate cases, if anything, reduces overall rate
         case expenses by supporting a more efficient case presentation and avoiding prior
         issues that lead to contention among the parties.30

         The ALJ agrees and recommends that the "lessons learned" expenses be included in the rate
case expenses. ETI demonstrated that the expenses were reasonable because they benefited the
company in the presentation of its case.

                  c.       ESI Depreciation Costs

         ETI identified, as part of its "internal" rate case expenses, $207,683 in "Depreciation &
Amort" expenses. 31 As explained by ETI witness Considine, the expenses are for the depreciation of
assets (apparently office equipment) used by ESI employees who participated in the rate case.32
Mr. Considine further testified that the costs were a reasonable and necessary part of ESI providing
services for the rate case.33

         State Agencies contend that recovery of such depreciation expenses should be denied
because: (1) such a recovery is unprecedented; (2) ETI has failed to prove that the expenses were
reasonable and necessary; and (3) the expenses were not "incurred" for the rate case. As to the last
point, State Agencies explains: "ESI's depreciable property exists, and is presumably depreciated,
whether or not proceedings in Texas take place. As such, this `cost' was not necessary for ETI's
participation in the rate case and should be disallowed."34 No party other than State Agencies
challenged the depreciation expenses.

30 ETI Init. Br. at 13.
31
   ETI Ex. 7(Considine Rebuttal) at 9-11 and Attachment MPC-R-1.
32 ETI Ex. 7 (Considine Rebuttal) at 11.
33 ETI Ex. 7 (Considine
                         Rebuttal) at 11.
34 State Agencies Init. Br. at 20.
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PUC DOCKET NO. 40295

           ETI responds by explaining that the costs at issue are "a loader to ESI labor costs covering
depreciation on office expenses and capital." Notably, however, ETI also concedes that such costs
would "typically [be] embedded in a vendor's labor costs billed to the Company. ,35

           The AU recommends that the depreciation expenses be disallowed. ETI has not cited to any
precedent which would justify the recovery of these apparently unusual rate case expenses.
Moreover, ETI has failed to prove the reasonableness of the expenses under the more stringent
standards that are applicable to affiliate expenses. As explained in Railroad Comm 'n v. Rio Grande
Valley Gas Company, unlike arms-length transactions, affiliate transactions "are clearly tainted with
the possibility of self-dealing."36 The Commission and the courts have consistently placed a greater
burden of proof upon a utility company to prove the reasonableness of transactions with its affiliated
companies because of the potential for self-dealing.

           In this case, ETI is seeking reimbursement of $2.9 million for payments it made to its
affiliate, ESI, for work done by ESI employees relevant to Docket 39896, plus $207,683 for
depreciation of the assets used by the ESI employees in their work. 37 This is in stark contrast to its
arms-length dealings with outside consultants. For example, ETI is seeking reimbursement for
$2.4 million in expenses from Duggins Wren, but it is not also seeking to recover depreciation
expenses for Duggins Wren's equipment. If the work done by ESI employees had, instead, been
done by outside consultants, it is very doubtful that the outside consultants would also have expected
an ETI payment for the depreciation of their equipment. Thus, the very nature of ETI's depreciation
request calls its validity into question. Simply put, ETI has failed to establish that it is entitled to
recover a depreciation expense related to an affiliate transaction because it would not similarly
recover such an expense in an arms-length transaction with an unaffiliated company.

3s
     ETI Init. Br. at 12.
36
     683 S.W.2d 783, 786 (Tex. App.-Austin 1985, no pet.).
37 ETI Ex. 7 (Considine Rebuttal) at Attachment MPC-R-1.
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 PUC DOCKET NO. 40295

                  d.      Miscellaneous Internal Rate Case Expenses

         Under the heading of "Internal Rate Case Expenses (Non-Payroll)," ETI seeks recovery of a
number of categories of expenses. State Agencies challenge the following four categories:

         •       "business meals/entertainment" in the amount of $3,852;
         •        "other employee expenses" in the amount of $3,423;
         •       "employee mtgs/functions" in the amount of $7,762; and
         •       "utility bills" in the amount of $2,518.38

According to State Agencies, the justification for these charges has not been explained, nor are they
reasonable and necessary. No other party challenged these expenses.

         ETI responds by explaining, in great detail, where the supporting documentation can be
found, within the company's exhibits, to justify each of the expenses.39 Without repeating that
discussion here, the ALJ is convinced that the evidence in the record supports the conclusion that the
expenses are reasonable and should be recovered by ETI.

                 e.      Costs Associated with the Calpine-Carville PPA

        In a "Recommendation" filed prior to the hearing in this matter, OPUC argued that the
Commission should disallow the recovery of any rate case expenses associated with the regulatory
approval of the Calpine-Carville Purchased Power Agreement (the Calpine-Carville PPA). In
Docket 39896, ETI sought, and obtained, regulatory approval of the Calpine-Carville PPA.
The affiliate expenses related to the contract were assigned to Project F3PPWET308.                      The
Project F3PPWET308 costs were approved for recovery in Docket 39896.40 As a result, OPUC

38 ETI Ex. 7 (Considine Rebuttal) at Attachment MPC-R-1; see also State Agencies Init. Br. at 21.
39
   ETI Reply Br. at 23-24.
40
   Application of Entergy Texas, Inc. for Authority to Change Rates, Reconcile Fuel Costs, and Obtain Deferred
Accounting Treatment, Docket 39896, Proposal for Decision at 236 (July 6, 2012).
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 PUC DOCKET NO. 40295

 contends that ETI has already recovered its expenses associated with the Calpine-Carville PPA and,
 if it were allowed to recovery those expenses again, it would be receiving a double recovery.a'
 OPUC did not identify a specific dollar amount that it believes should be disallowed. Moreover,
 OPUC did not discuss this issue in any of its post-hearing briefing. In their post-hearing briefing,
 State Agencies "concurred" with OPUC's recommendation, but provided no discussion of the
issue.42

           ETI did discuss this issue in its post-hearing briefing. The company points out, correctly, that
the Commission has already specifically rejected OPUC's double recovery argument. In

Docket 39896, OPUC argued that the costs ETI sought related to the Calpine-Carville PPA should
have been denied in that docket because they were, among other things, rate case expenses. The
Commission specifically disagreed and allowed recovery of the costs in that docket.43 In other
words, because the Commission has already concluded that ETI did not recover any rate case
expenses associated with the Calpine-Carville PPA in Docket 39896, the company will not be
receiving a double recovery if it recovers such expenses in this docket.

           Further, as explained by ETI witness Considine, costs were charged to Project F3PPWET308

(the internal project code for the Calpine-Carville PPA development costs) as the contract was being
developed. Those costs were recovered in Docket 39896. On the other hand, costs were charged to
Project F5PPETX011 (the internal project code for the rate case in Docket 39896) as testimony or
other hearing-related work was performed for pocket 39896. According to ETI, it is only the latter
costs, associated with Project F5PPETX011, that are being sought here. As a result, no double
recovery will occur.44 The ALJ concludes that ETI has the better argument on this issue, and

41
   Application of Entergy Texas, Inc. for Rate Case Expenses Pertaining to PUC Docket No. 39896, Docket 40295,
OPUC's Recommendation and Request for Hearing at 2-3 (November 6, 2012).
42
   State Agencies Reply Br. at 20.
43
   Application of Entergy Texas, Inc. for Authority to Change Rates, Reconcile Fuel Costs, and Obtain Deferred
Accounting Treatment, Docket 39896, Proposal for Decision at 236 (July 6, 2012).
44 ETI Ex. 7 (Considine Rebuttal) at 7-9.
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PUC DOCKET NO. 40295

recommends that ETI be allowed to recover its rate case expenses associated with the
Calpine-Carville PPA.

                     f.        Specific Items That State Agencies Contend Cast Doubt on ETI's
                               Overall Scrutiny of Its Expenses

            State Agencies performed what they described as a number of "spot check" reviews of ETI's
costs and identified several errors or items that they contend should be disallowed. Moreover, State
Agencies contend that it is not only these specific items which should be disallowed. Rather, they
argue that the flaws they have identified should cast doubt on the overall adequacy of the internal
review process utilized by ETI in quantifying its rate case expenses. According to State Agencies,
"[i]dentification of these questionable costs underscores the need for conservative, rather than
liberal, standards for allowing rate case expenses.s45 Similarly, State Agencies argue that these items
demonstrate ETI's "lack of diligence in exercising basic economic restraint. ,46

           Staff agrees that State Agencies' examination of these issues "call[s] into question the
thoroughness of ETI's review of its rate case expenses."47 Staff further points out that, because the

testimony of ETI witness Considine (who was the company's prime witness supporting the
reasonableness of its internal rate case expenses) contained "mistakes that he was engaged to
identify," his testimony "is of limited value."48 In its Reply Brief, Staff reiterates: "Staff shares the
concerns raised by State Agencies regarding the adequacy of ETI's review of its rate case
expenses."49 Similarly, OPUC agrees that State Agencies' examples illustrate that, as to rate case
expenses, ETI did not act as a prudent gatekeeper.so

45
     State Agencies Init. Br. at 7.
46
     State Agencies Reply Br. at 9.
47 Staff Init. Br. at 12.
48 Staff Init. Br. at 12.
49
   Staff Reply Br. at 9.
so
   OPUC Init. Br. at 1.
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PUC DOCKET NO. 40295

                             (1)     External Legal Fees

          ETI seeks to recover roughly $2.4 million in legal fees paid to the Duggins Wren law firm.s 1
State Agencies argue that this amount should be reduced. ETI witness Stephen Morris was hired to
review ETI's external legal expenses and testify about the reasonableness of those expenses.52 State
Agencies question the objectivity, quality, and extent of Mr. Morris' review. For example, State
Agencies point out that, rather than being retained by ETI, he was retained by Duggins Wren, the
firm whose fees he was to review.53 Staff agrees that this arrangement "likely undermined
Mr. Morri s' objectivity. ,54

          State Agencies also contend that, based upon his invoices, Mr. Morris spent only a "minimal"
amount of time reviewing Duggins Wren's bills.55           Yet, by State Agencies' own reckoning,
Mr. Morris and his associate spent roughly 21 hours reviewing Duggins Wren bills.56 Mr. Morris
testified as to the reasonableness of the hourly rates charged by Duggins Wren. State Agencies
argue, however, that Mr. Morris' focus was too narrow and he should have, instead, been critical of
the fact that too many Duggins Wren attorneys, twelve, were involved in the case.57 State Agencies
are also critical of the fact that Mr. Morris apparently did not scrutinize Duggins Wren's bills for
duplicative legal work. For example, State Agencies point out that on April 25, 2012, a day from the
hearing in Docket 39896, five Duggins Wren attorneys billed a total of 26.3 hours for a hearing day
that lasted less than seven hours and in which in-house ETI lawyers defended many of the witnesses.
On the next day, April 26, six Duggins Wren attorneys billed a total of 24.4 hours for a hearing day
that lasted less than eight hours and in which only three Duggins Wren attorneys participated .51 State

51 ETI Ex. 7 (Considine Rebuttal) at Attachment MPC-R-1.
52
   ETI Ex. 8 (Morris Direct) at 2.
53
   State Agencies Init. Br. at 10.
54
   Staff Reply Br. at 9.
55
   State Agencies Init. Br. at 10.
56
   State Agencies Init. Br. at 12.
57 State Agencies Init. Br. at 9.
58 State Agencies Init. Br. at 13.
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PUC DOCKET NO. 40295

Agencies contend that "a reduction is in order" for the Duggins Wren costs, but do not suggest what
size the reduction should be.

           ETI responds by defending the reasonableness of the Duggins Wren costs. For one thing, ETI
points out that the $2.4 million in legal fees paid to Duggins Wren includes fees and expenses for
five consultants billed through Duggins Wren without mark-up.59 Additionally, ETI explains that the
huge scope of the hearing necessitated substantial legal work. ETI presented 39 witnesses who
discussed hundreds of categories of costs.               ETI points out that while it used the services of
12 attorneys, they were opposed by 15 attorneys: four for Staff; three for TIEC; three for Cities; and
one each for State Agencies, OPUC, U.S. Department of Energy, Kroger, and Wal-Mart .60

           The ALJ is unswayed by State Agencies' arguments. Given the size and complexity of
Docket 39896, the legal costs involved do not appear to be inordinate. Mr. Morris testified, credibly,
that the fees and expenses charged by Duggins Wren were reasonable and necessary. The ALJ does

not recommend any reduction of the fees in response to State Agencies' arguments.

                             (2)        Meals and Snacks

           State Agencies identified 19 entries in Duggins Wren invoices whereby the firm charged ETI
for meals or snacks. According to State Agencies, most of these purchases occurred during business
hours and involved only law firm personnel. ETI personnel were only occasionally involved in these
purchases. Almost all of the charges were for meals or snacks delivered to Duggins Wren's offices.
The purchases total $2,723.54.61 State Agencies contend that these costs were not necessary for
participation in Docket 39896 and should be disallowed.

59
     ETI Reply Br. at 19; ETI Ex. 6 (Considine Supp.) at 8.
60 ETI Reply Br. at 19.
61
   State Agencies Init. Br. at 14-15.
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 PUC DOCKET NO. 40295

            Moreover, State Agencies point out that Duggins Wren is applying a different standard to
 itself than it applies to its own contractors. Pursuant to the contract by which Duggins Wren hired
 Mr. Morris, meals while he or his staff are located at his office are not reimbursable.62 Thus, State
 Agencies conclude that Duggins Wren should be held to the same standard when passing on rate case
 expenses for office meals, beverages, and snacks.63

            ETI responds by pointing out that the charges were not done routinely, but only when
necessary to enable personnel "to work over lunch and dinner to meet certain deadlines ... and as an
alternative to purchasing reimbursable meals at restaurants when out-of-town members of the rate
case team worked in Austin."64 ETI describes the expenses as a reasonable part of prosecuting a
laborious rate case. The AU agrees and does not recommend any disallowance of these costs.

                               (3)        Courier and Taxi Services

           State Agencies identified 20 dates in Duggins Wren invoices whereby the firm charged ETI
for courier, taxi, or Federal Express charges for delivery of documents that State Agencies argue
could have been delivered electronically. The charges total $1,004.52.65 State Agencies contend
that these costs were not necessary for participation in Docket 39896 and should be disallowed.
State Agencies again point out that Duggins Wren is applying a different standard to itself than it
applies to its own contractors. The contract by which Duggins Wren hired Mr. Morris states that
"advances in technology, specifically transmission of information and documentation by e-mail,
scanning, . . . etc. have made routine ... delivery of hard copy documents less critical and, in many

62
     State Agencies Ex. 15 at. 3.
63
     State Agencies Init. Br. at 14.
64
     ETI Reply Br. at 20.
65
     State Agencies Init. Br. at 16-17.
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 PUC DOCKET NO. 40295

 cases, unnecessary."66 Thus, State Agencies conclude that Duggins Wren should be held to the same
 standard when passing on rate case expenses for document delivery.67

            ETI responds by explaining the context of many of the charges. For example, two of the
 three cab fares were for a paralegal to attend and transport voluminous documents to the hearing, and
 the third was to transport the same paralegal to the Commission for legal research.68         As to the
 courier and FedEx charges, ETI points out that Commission rules require some types of documents

 to be physically delivered for filing, and that the use of couriers and FedEx is sometimes entirely
 appropriate. ETI argues that it was "completely reasonable" for ETI to have incurred roughly $1,000
in courier and FedEx charges over the course of a rate case of the size and scope of Docket 39896.
The AU agrees and recommends no disallowance of these charges.

                              (4)    Meals Over $25

           ETI asserts that its intent was to exclude from its rate case expenses any meals above $25 per
person.69       State Agencies have, however, identified at least six meals above $25 that were

erroneously included as a part of ETI's rate case expenses.70 ETI admits that at least some of these
charges were included in error.71 ETI disputes, however, the notion that these errors should call into
question the overall reliability of its rate case expenses.

           The AU agrees with ETI. This was a large case with a large number of expenses. The

relatively few errors with respect to meals uncovered by State Agencies do not lead the ALJ to doubt
the overall accuracy of ETI's accounting. Nevertheless, by the AU's reckoning, the total amount

66
     State Agencies Ex. 15 at 4.
67 State Agencies Init. Br. at 16.
68 ETI Reply Br. at 20.
69 State Agencies Ex. 5.
70 State Agencies Exs. 1, 12; State Agencies Reply Br. at Atts. 3, 6.
7' Tr. at 40.
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 PUC DOCKET NO. 40295

 that should be disallowed for meals over $25 (i.e., the amount by which the meals exceeded
 $25/meal) is $281.04.

                            (5)     Clothing and Laundry Service

          State Agencies identified, as part of ETI's requested rate case expenses, a $10.44 invoice
from a Duggins Wren attorney for the purchase of a shirt and socks "due to unexpected extended
stay. ,72 Similarly, OPUC contests a $40.33 laundry charge incurred by the same attorney for the

same reason.73 ETI witness Considine generally agreed that clothing charges by attorneys working
on the rate case should not be passed through to ratepayers as a rate case expense.74

          ETI argues that the expenses were reasonable because they were brought about by an
unplanned, but necessary, extension of the attorney's business tri p.75 Mr. Morris testified that such
expenses can be considered reasonable.76        Nevertheless, ETI has agreed to no longer request
reimbursement for the $10.44 clothing charge. Because laundry has to be done regardless of where
one finds oneself, the AU recommends that the $40.33 laundry charge likewise be disallowed.

                            (6)     Airfare and Lodging

          State Agencies identify several charges for airfare by ETI employees or consultants that were
in the $500 to $650 range. State Agencies fault ETI for not controlling costs by securing discount, or
at least more economical, fares.77 Similarly, State Agencies complain that, too often, ETI employees
or consultants "went `first class' on accommodations," incurring charges of more than $200 per night

72 State Agencies Ex. 17 at 20.
73 OPUC Init. Br. at 1-2.
74 Tr. at 43.
75 ETI Reply Br. at 22.
76 Tr. at 67-68.
77
   State Agencies Reply Br. at 11-12.
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 PUC DOCKET NO. 40295

 and, on occasion, $300 per night. State Agencies also complain of inadequate documentation of
lodging charges, pointing to a $479.55 lodging charge without any underlying receipts.78 ETI makes
no response to these complaints.

         The ALJ acknowledges that these complaints raise a legitimate concern. It is human nature
to be more carefree with "other people's money" than with one's own. The complaints raised by
State Agencies suggest that ETI may have been more lax with its spending because it believed that
airfare and lodging expenses would ultimately be borne by its ratepayers. Nevertheless, other than
for the $479.55 lodging charge, State Agencies' complaints are too vague and unproven to justify any
specific disallowance recommendations by the ALJ. For example, although it might not always cost
$600 to get from Point A to Point B, such a fare might be unavoidable under certain circumstances.
Without evidence in the record demonstrating that ETI paid $600 for an airfare when a cheaper fare
was available, the AU cannot conclude that the fare was unreasonable. The same logic applies to
the lodging complaints. Accordingly, the AU recommends no large disallowances related to airfare
and lodging charges, but does recommend disallowing the $479.55 lodging charge that is
unsupported by receipts.

         2.       Challenges to Specific ETI Rate Case Expenses That are Difficult to Quantify

                  a.       Financially-Based Incentive Compensation

         One of the hotly contested issues in Docket 39896 concerned ETI's request to recover,
through its rates, incentive compensation paid to its employees that was tied to the company's
financial goals (financially-based incentive compensation). In Docket 39896, all parties, including
ETI, agreed that Commission precedent mandated that financially-based incentive compensation is
not recoverable. Nevertheless, in its application, ETI asked the Commission to reconsider its
precedents on this issue. ETI contended that the reason why cost recovery had been denied for
financially-based incentive compensation in prior rates cases was that, in those prior cases, there was

78 State Agencies Reply Br. at 13-14.
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 PUC DOCKET NO. 40295

 a lack of evidence showing sufficient benefits to ratepayers. ETI asserted that it assembled evidence
 not previously considered by the Commission showing the benefits to ratepayers of using financial
 measures in incentive compensation programs.

          All of the other parties in Docket 39896 opposed ETI's efforts to recover the costs of its
 financially-based incentive compensation, uniformly agreeing that the Commission has a well-
 established and straightforward policy that incentive compensation tied to financial goals is not
recoverable. In the PFD in Docket 39896, the ALJs concluded that ETI should not be entitled to
recover its financially-based incentive compensation costs:

           Simply put, the ALJs conclude that ETI has failed to establish a sufficient
          justification for overturning the well-established Commission policy that financially
          based incentive compensation is not recoverable.79

The Commission agreed and ordered that $6,196,037 plus associated FICA taxes (representing ETI's
financially-based incentive compensation payments) should be removed from ETI's Operating and
Maintenance (O&M) expenses, and $335,752.96 (representing ETI's capitalized incentive
compensation that was financially-based) should be excluded from ETI's rate base.80

          In this docket, Staff, State Agencies, and OPUC contend that ETI should not be entitled to
recover any rate case expenses it incurred in attempting to recover its financially-based incentive
costs in Docket 39896. For example, Staff argues that, by challenging "overwhelming Commission
precedent," ETI did not act reasonably when it incurred expenses litigating for recovery of its
financially-based incentive costs.81 Staff contends that the Commission has such an "unequivocal"
history of denying recovery for financially-based incentive payments that "ETI should have known

79 Application of Entergy Texas, Inc. for Authority to Change Rates, Reconcile Fuel Costs, and Obtain Deferred
Accounting Treatment, Docket 39896, Proposal for Decision at 236 (July 6, 2012).
80 Application of Entergy Texas, Inc. for Authority to Change Rates, Reconcile Fuel Costs, and Obtain Deferred
Accounting Treatment, Docket 39896, Order on Rehearing at 17-18, 24-25 (November 1, 2012)
81 Staff Reply Br. at 5; see also Staff Init. Br. at 7-10.
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PUC DOCKET NO. 40295

that litigating a position opposed to [it] was not a reasonable use of resources."82 State Agencies
point out that Docket 39896 was merely the latest of three recent cases in which ETI sought, but
failed to obtain, authority to charge ratepayers for its financially-based incentive costs (the others
being Dockets 34800 and 37744).83

          ETI defends its decision to seek to recover financially-based incentive costs in Docket 39896
by contending that the issue of the compensability of such costs is undergoing "continuing
clarification" at the Commission.84                  Moreover, ETI suggests that, in open meetings,
"Commissioners" have expressed some concern with the Commission's precedents on this issue and
suggested recovery might be allowed in a "properly organized and evidenced" case.85 Finally, ETI
points to a recent SOAH order in an on-going SWEPCO rate case in which the ALJs denied State
Agencies' attempt to have stricken testimony proffered by SWEPCO regarding financially-based
incentive compensation.86

          The AU agrees with Staff, State Agencies, and OPUC. It was obvious throughout the
hearing in Docket 39896 that ETI was taking an aggressive position and making a "long-shot"
argument in seeking recovery for its financially-based incentive compensation.87 In its briefing in the
present case, ETI cites to a number of cases in which, over the years, other utilities have requested
recovery of financially-based incentive compensation. These examples, however, hurt ETI's cause
more than they help it because all of the requests were unanimously denied by the Commission. This
hardly suggests that the issue is undergoing "continuing clarification." Likewise, ETI's suggestion
that "Commissioners" have expressed some concern with the Commission precedent overstates and
distorts the facts.        The statements relied upon by ETI came from a single Commissioner,

82 Staff Init. Br. at 8.
83 State Agencies Init. Br. at 7-8.
84 ETI Init. Br. at 7.
85 ETI Init. Br. at 7; ETI Ex. 12 (Morris Rebuttal) at 5-6.

86 Application of Southwestern Electric Power Company for Authority to Change Rates and Reconcile Fuel Costs,
Docket No. 40443, SOAH Order No. 17 (Dec. 13, 2012).
87 The AU in the present case was also one of the presiding ALJs in Docket 39896.
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PUC DOCKET NO. 40295

Mr. Anderson, not multiple Commissioners. Moreover, in that statement, Commissioner Anderson
only obliquely implied that he might prefer to allow recovery for financially-based incentive costs,
but he agreed that Commission precedent mandates otherwise, and the Commission voted
unanimously to disallow such costs in the case before them. Additionally, Commissioner Anderson
has stated that, if the Commission were to ever discontinue "such a long and accepted precedent," it
should do so through "rulemaking" rather than "do it in a particular case. ,88

         Finally, ETI's reliance on the recent SOAH order in the SWEPCO case is similarly
misplaced. In that order, the ALJs effectively held that SWEPCO was not legally precluded from
seeking recovery for its financially-based incentive compensation. It is one thing to acknowledge
that a utility has a legal right to pursue a long-shot theory. It is another thing entirely, however, to
hold that the ratepayers must pay the costs of the utility's pursuit of that long-shot.

         Simply put, the AU concludes that ETI did not act reasonably when it incurred expenses
litigating for recovery of its financially-based incentive costs in the face of clear and consistent
precedent to the contrary on the issue. As such, the AU recommends that ETI's expenses be cut by
some amount to account for this issue. The problem then becomes how to quantify the size of the
disallowance. A few of ETI's expenses relating to the pursuit of its financially-based incentive

compensation are clear. ETI utilized the services of Dr. Jay Hartzell as an expert witness on this
issue. In total, ETI paid Dr. Hartzell at least $12,825 in consulting fees, plus $13,680 in legal fees
related to the preparation of his testimony.89 This, however, does not capture ETI's entire cost of
litigating the issue of financially-based incentive compensation. Substantial costs were incurred, for
example, in discussing the issue at the hearing and in post-hearing briefing. These additional
amounts are not in the record. In Section N.C.3 of this PFD, below, the AU discusses various
possible approaches for reducing the amount of rate case expenses recovered by ETI to account for
the financially-based incentive compensation issue.

88 Staff Reply Br. at 6; OPUC Ex. 3; Open Meeting Tr. at 190 (July 30, 2009).
89 ETI Ex. 10 (Morris Supp. Direct) at 15-16; State Agencies Ex. 3.
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 PUC DOCKET NO. 40295

                  b.      Transmission Equalization (MSS-2) Expenses

         Another of the hotly contested issues in Docket 39896 concerned ETI's request to recover,
 through its rates, roughly $9 million more for transmission equalization payments than it actually
 paid in the Test Year. ETI is one of several "Entergy Operating Companies" that shares usage of an
 Entergy transmission grid. Payments for use of the grid (the transmission equalization payments) are
 made among the Entergy Operating Companies based upon a highly complex formula set out in the
 "MSS-2" agreement.

         In the Test Year at issue in Docket 39896, ETI made transmission equalization payments
 totaling roughly $1.7 million. Rather than seeking to recover only $1.7 million, however, ETI sought
to recover roughly $10.7 million, which it claimed represented its anticipated transmission
equalization payments in the Rate Year. ETI claimed the additional $9 million was based on the
company's estimates of transmission construction projects that were expected to have been
completed by or during the Rate Year.

         All other parties in Docket 39896 opposed ETI's effort to recover more than its Test Year
expenses. The ALJs concluded that ETI failed to meet its burden to prove that its proposed Rate
Year MSS-2 costs were known and measurable.90 The Commission agreed and ordered that only
ETI's Test Year costs should be counted.91 The Commission described ETI's projection of its Rate
Year expenses as "uncertain and speculative."92

        In this docket, Staff, OPUC, and State Agencies contend that ETI should not be entitled to

recover any rate case expenses it incurred in attempting to recover the additional $9 million in

9' Application of Entergy Texas, Inc. for Authority to Change Rates, Reconcile Fuel Costs, and Obtain Deferred
Accounting Treatment, Docket 39896, Proposal for Decision at 116 (July 6, 2012).
91
   Application of Entergy Texas, Inc. for Authority to Change Rates, Reconcile Fuel Costs, and Obtain Deferred
Accounting Treatment, Docket 39896, Order on Rehearing at 20-2 1, FOFs 87-94 (November 1, 2012).
92
   Application of Entergy Texas, Inc. for Authority to Change Rates, Reconcile Fuel Costs, and Obtain Deferred
Accounting Treatment, Docket 39896, Order on Rehearing at 20, FOF 90 (November 1, 2012).
 SOAH DOCKET NO. XXX-XX-XXXX                             PROPOSAL FOR DECISION                      PAGE 26
 PUC DOCKET NO. 40295

 projected transmission equalization payments.93 As explained by Staff: "It was clearly unreasonable
 for ETI to have sought recovery for [its projected Rate Year costs] due to the exceedingly speculative
 nature of those costs, and therefore a disallowance to its requested rate case expense amount should
 be imposed."94 OPUC witness Nathan Benedict testified that, by seeking the additional $9 million,
 ETI was, in effect, challenging the precedent that post-Test Year adjustments must be known and
 measurable. 95

            ETI responds by first disputing the notion that it was "challenging precedent" by seeking the
 additional $9 million.

            ETI did not incur rate case expenses in pursuit of a position contrary to the well-
            established `known and measurable' standard for PTYAs [post Test Year
            adjustments]. Rather, the Commission disagreed that the evidence put forth by ETI
            met that standard. This is a very important distinction. Finding that evidence put
            forth by a utility did not meet an established standard does not equate to a finding that
            the utility unreasonably contested the applicability of such standard.96

ETI further points out that the evidence in the record supported its contention that its actual post-Test

Year transmission equalization payments were on an upward trend.97

            The ALJ recommends that ETI's rate case expenses associated with its pursuit of the
additional $9 million for post-Test Year transmission equalization payments be disallowed. The AU
acknowledges the distinction made by ETI: It sought not to challenge the "known and measurable"
precedent, but merely failed to meet the standard. In this regard, ETI's position as to transmission
equalization payments was perhaps less controversial than its position as to financially-based
incentive compensation. Nevertheless, ETI took another "long-shot" position as to its transmission
equalization payments. Its claim was based on future transmission construction projects that might

93
     OPUC Init. Br. at 9-10, 12; Staff Init. Br. at 13; State Agencies Reply Br. at 17.
94
     Staff Init. Br. at 13.
95
     OPUC Ex. 1 (Benedict Direct) at 7-8.
96
     ETI Init. Br. at 8 (emphasis in original, footnotes omitted).
97 ETI Reply Br. at 16.
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 PUC DOCKET NO. 40295

 never be undertaken and that were found by the Commission to have been speculative. Accordingly,
 the AU concludes that ETI did not act reasonably when it litigated the issue, and recommends that
 ETI's expenses related to this issue not be passed on to the ratepayers.

         Having concluded that these rate case expenses should not be paid by the ratepayers, the
 problem again becomes how to quantify the expenses. ETI did not structure its rate case expenses in
 such a manner as to make it possible to determine how much of the expenses were incurred in
pursuing the additional $9 million in transmission equalization payments.98 In Section IV.C.3 of this
PFD, below, the AU discusses various possible approaches for reducing the amount of rate case
expenses recovered by ETI to account for the transmission equalization payments issue.

                   c.     Purchased Power Capacity Rider

         In Docket 39896, ETI initially requested a Purchased Power Capacity Rider (PPCR), instead
of including purchased capacity costs in base rates. The Commission, however, rejected the PPCR
request in a Supplemental Preliminary Order on the grounds that the Commission already had a
then-pending rulemaking effort underway to determine the structure of such a rider for all generating
utilities.99

         In this docket, Staff, OPUC, and State Agencies argue that ETI should not be entitled to

recover any rate case expenses it incurred in attempting to secure a PPCR because it was too
speculative in light of the pending rulemaking effort. 100

         ETI responds by contending that the mere fact that there was a rulemaking effort underway
with respect to PPCRs did not mean that ETI was somehow precluded from seeking a PPCR through
its application.    Moreover, ETI notes that, in briefing during Docket 39896, Staff, State Agencies,

98 Tr. at 45-46.
99
    Application of Entergy Texas, Inc. for Authority to Change Rates, Reconcile Fuel Costs, and Obtain Deferred
Accounting Treatment, Docket 39896, Supplemental Preliminary Order at 2 (Jan. 9, 2012).
ioo
     OPUC Init. Br. at 10; Staff Init. Br. at 14 and Reply Br. at 8-9; State Agencies Reply Br. at 17.
    SOAH DOCKET NO. XXX-XX-XXXX                  PROPOSAL FOR DECISION                           PAGE 28
    PUC DOCKET NO. 40295

    and TIEC all took the position that there was no legal impediment to ETI's seeking a PPCR in the
    rate case.lol

            The ALJ agrees with ETI and does not recommend any disallowances in relation to the PPCR
    request. The fact that there was a pending proposed rule at the time ETI asked for the rider should
    not be viewed as precluding ETI's request. Indeed, the very uncertainty inherent in the rulemaking
    process suggested that the accepted practices with regard to purchased capacity costs were in a state
    of flux and, therefore, it was reasonable for ETI to pursue the rider.

            3.      Proportional Reduction

            In addition to the above challenges to specific items of expense incurred by ETI, a number of
    parties raised more generic concerns about the company's rate case expenses. State Agencies
    expressed concern that, as a general matter, rate case expenses in cases before the Commission
    appear to be "getting out of hand." 102 Staff "firmly agrees" with this concern. 103 State Agencies
worry that utilities have no incentive to minimize the number of rate case proceedings or the
efficiency of rate case presentation because they assume their costs will simply be passed on to
ratepayers. loa State Agencies urge the Commission to allocate rate case expenses in such a way that
incentivizes utilities to more productively and efficiently use their time in rate cases. 105 OPUC
agrees that the standard for evaluating the amount of rate cases expenses to be reimbursed ought to
be structured so as to give a utility pause before deciding to pursue overly aggressive or novel
arguments. 106

lol
      ETI Reply Br. at 16-17.
I
 02 State Agencies Init. Br. at 1-2.
103
    Staff Reply Br. at 13.
104
    State Agencies Init. Br. at 1-2.
105
    State Agencies Init. Br. at 5.
116
    OPUC Init. Br. at 8.
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PUC DOCKET NO. 40295

          Along these same lines, Staff and OPUC expressed concern about the frequency of ETI rate
cases over recent years. Docket 39896 was the third ETI rate case in four years. Each case resulted
in a rate increase and an obligation for the ratepayers to pay ETI's rate case expenses.107 Staff and
OPUC also expressed concern about the overall size of the rate case expenses in relation to the
outcome of the underlying rate case. Total rate case expenses ($8.8 million) equal roughly one-third
of the total approved rate increase ($27.7 million).108 Staff, State Agencies, and OPUC all expressed
the concern that ETI did not provide good stewardship in incurring rate case expenses.109

          In order to address these concerns, the parties have suggested a number of methodologies for
reducing the rate case expenses.

                    The 50/50 approach. State Agencies advocate two approaches for reducing the level
                    of recovery of rate case expenses. State Agencies' primary recommendation is that
                    ratepayers be charged for only 50% of total rate case expenses. State Agencies argue
                    that this approach would recognize that shareholders, who reap benefits from a rate
                    increase, ought to also share in the cost of obtaining that rate increase.' 10

                    The Results-Obtained Approach. Alternatively, State Agencies advocate allowing
                    ETI to recover only 26.4% of its rate case expenses, which is the ratio between the
                    rate increase obtained in Docket 39896 ( $27.7 million) and the increase sought by
                    ETI ($104.8 million). In other words, because ETI obtained only 26.4% of the rate
                    increase it sought, State Agencies contend that ETI similarly ought to be reimbursed
                    for only 26.4% of its rate case expenses.' 11 OPUC also advocates this approach.' 12

          •        The Issue-Specific Reduction Approach. Alternatively, OPUC and Staff advocate
                   an approach whereby ETI's recovery of rate case expenses is reduced by the ratio
                   between the amounts unsuccessfully sought by ETI for financially-based incentive
                   payments and transmission equalization payments and the rate increase sought by
                   ETI. ETI unsuccessfully sought financially-based incentive payments of $6.5

107 Stafflnit. Br. at 3; OPUC Init. Br. at 2-3, 7-8.
108
     Staff Init. Br. at 4; OPUC Init. Br. at 7.
1 °9
     See, e.g., Staff Reply Br. at 13.
I10
     State Agencies Init. Br. at 3,
1 11 State Agencies Init. Br. at 3, 22.
112
     OPUC Init. Br. at 11.
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 PUC DOCKET NO. 40295

                   million, and transmission equalization payments of $9 million, for a total of
                   $15.5 million. ETI sought a total rate increase of $104.8 million. Under this
                   approach, $15.5 million would be divided by $104.8 million to arrive at a reduction
                   factor of 14.8%. Thus, ETI's rate case expenses would be reduced by 14.8%.113

Not surprisingly, ETI vigorously opposes all of these approaches.

          The ALJ agrees with the general concerns raised by Staff, State Agencies, and OPUC, and

believes that a substantial cut to ETI's rate case expenses is warranted. Before evaluating the merits
of the various approaches, however, it is helpful to revisit the applicable law relative to rate case
expenses.

         As noted previously, pursuant to PURA Section 36.061(b), the Commission "may" allow a
utility to recover its "reasonable costs of participating in a [ratemaking proceeding] not to exceed the
amount approved" by the Commission. This verbiage indicates that the Commission can approve
some amount that is less than the reasonable costs. Section 36.061(b) vests the Commission with

"broad discretion" to determine the amount of rate cases expenses that should be recovered,' 14 and its
determination can be set aside only if it acts without reference to guiding rules or principles.lls
There is precedent, albeit from a different agency, suggesting that it is within the agency's discretion
to find overall rate case expenses to be unreasonable even if the underlying individual cost items are
found to be reasonable.' 16 Because Section 36.061(b) states that rate case expenses "may" be
recovered, OPUC contends (and the ALJ agrees) that the Commission is not required to grant

"3 OPUC Init. Br. at 12; Staff Reply Br. at 3. OPUC identifies the reduction factor as 14.5%. However, the ALJ
believes this is in error. OPUC witness Benedict testified that the financially-based incentive payments were $6.2 million
and the transmission equalization payments were $9 million, for a total of $15.2 million. Tr. at 85-86. By dividing
$15.2 million by $104.8 million, one arrives at a reduction factor of 14.5%. However, the Commission disallowed
$6.2 million in financially-based incentive compensation, plus $336,000 of ETI's capitalized financially-based incentive
compensation, for a total of $6.5 million in disallowances related to financially-based incentive payments. Application of
Entergy Texas, Inc. for Authority to Change Rates, Reconcile Fuel Costs, and Obtain Deferred Accounting Treatment,
Docket 39896, Order on Rehearing at 17-18, 24-25 (November 1, 2012).
lia
    City ofEl Paso v. Public Util. Comm'n, 916 S.W.2d 515, 522 (Tex. App.-Austin 1995, writ dism'd by agr.).
115
    City ofAmarillo v. Railroad Comm 'n of Texas, 894 S.W.2d 491, 495 (Tex. App.-Austin 1995, writ den.).
116
    City ofPort Neches v. Railroad Comm 'n of Texas, 212 S.W.3d 565, 581 (Tex. App.-Austin 2006, no pet.)
 SOAH DOCKET NO. XXX-XX-XXXX                        PROPOSAL FOR DECISION                       PAGE 31
 PUC DOCKET NO. 40295

 recovery of every reasonable expense and can take into account other considerations. As explained
 by OPUC, "[w]ithout this discretion, rate case expense proceedings would be rendered into mere
 accounting exercises."117 A number of factors--such as the time and labor required; the nature of the
 case; the size of the interest at stake; and the benefits to the client--have been deemed relevant to
 determining the reasonableness of rate case expenses.118           Moreover, the parties agree that
 Rule 1.04(b) of the Texas Disciplinary Rules of Professional Conduct also provides a number of
 factors that can be considered when determining reasonableness of rate case expenses.' 19

           With these basic parameters in mind, the AU turns to evaluating the three approaches
outlined above. The ALJ begins by rejecting the 50/50 Approach.           ETI and Staff argue that the
approach is contrary to Commission precedent.120 The AU agrees. Given that there are clear
Commission precedents rejecting this approach, the AU recommends that it be rejected here.

           The AU also recommends rejection of the Results-Obtained Approach, while acknowledging
that it has some strong arguments in its favor.           ETI argues that the approach is counter to
Commission precedent. 12 1 However, according to Staff, the approach has been neither adopted nor
rejected by the Commission. In other words, it is an issue of first impression.122 OPUC and State
Agencies support the use of this approach. It is unclear whether Staff explicitly supports this
approach. However, Staff describes it as an "appealing" methodology "because it would provide a
utility an incentive not to overreach in its rate increase request. ,123 Moreover, Staff argues that the

methodology is akin to the performance-based standards regarding generation plant performance that

11^
      OPUC Init. Br. at 11.
1's
      City ofEl Paso, 916 S.W.2d at 522.
119 ETI Ex. 8 (Morris Direct) at 18-19.

120 Staff Init. Br. at 10; ETI Init. Br. at 19-20
121
    ETI Init. Br. at 14.
122
    Staff Init. Br. at 10.
123
    Staff Init. Br. at 12.
 SOAH DOCKET NO. XXX-XX-XXXX                     PROPOSAL FOR DECISION                            PAGE 32
 PUC DOCKET NO. 40295

 the Commission has approved in the past. For these reasons, Staff concludes that the Commission
 has the legal authority to apply the Results-Obtained Approach in this case. 124

             ETI complains, however, that it is a punitive and hindsight-driven approach to cost recovery,
 rather than basing cost recovery on whether a utility acted reasonably at the time it incurred such
 Costs. 125
            This is the primary reason why the AU recommends against the Results-Obtained
 Approach. Because it is an issue of first impression, ETI had no prior notice that its rate case

 expenses might be subject to such a standard. The AU simply believes it would be unacceptably
 draconian to slash ETI's rate case expenses by 73.6% based upon a standard that ETI could not have
known, beforehand, would be applied to it.

            The AU recommends adoption of the Issue-Specific Reduction Approach in this case. Staff,
OPUC, and State Agencies all support its use.                ETI argues that use of the approach is
unprecedented.126 Staff counters (and the AU agrees) that, far from being unprecedented, the

approach is entirely consistent with Commission precedent because the disallowance is a result of
specific, unreasonable actions by ETI.127

            ETI argues that the Issue-Specific Reduction Approach is improper because there is no
evidence that the 14.8% reduction equals the amount of expenses it incurred pursuing financially-
based incentive costs and transmission equalization payments.128 Staff counters (and the ALJ agrees)
that ETI bore the burden of proving its reasonable expenses, and that burden necessarily requires that
it separate out any unreasonable expenses. Having failed to do so with respect to financially-based

124
      Staff Init. Br. at 11.
12s
      ETI Init. Br. at 17.
126 ETI Init. Br. at 19.
127
    Staff Init. Br. at 14.
128
    ETI Init. Br. at 18.
 SOAH DOCKET NO. XXX-XX-XXXX                          PROPOSAL FOR DECISION                     PAGE 33
 PUC DOCKET NO. 40295

 incentives and transmission equalization payments, it is reasonable for the Commission to use the
 Issue-Specific Reduction Approach as a proxy for calculating those expenses.129

             There is also a point of disagreement as to the proper application of the Issue-Specific
 Reduction Approach.            ETI argues that the proponents of the approach are using the wrong
 denominator in its formulation. Rather than dividing $15.5 million by $104.8 million (the size of the
 rate increase sought by ETI), ETI asserts that $15.5 million ought to be divided by $2.1 billion (the
 size of all of ETI's costs). ETI explains that, in Docket 39896, it was obligated to prove all of its

 costs, not just the amount of the increase it sought. Under such a formula, the reduction factor would
be less than 1%.130 As pointed out by Staff and OPUC,131 ETI's reasoning is flawed. The entire
purpose of this proceeding was for ETI to obtain a rate increase, not to preserve its preexisting rates.
Indeed, the petition is styled "Application ... for Authority to Change Rates ...."132 There would

have been no need for a rate case if ETI merely sought approval of the same level of revenue
approved in the last rate case. Because a revenue increase was the driving factor for this case, the
amount of revenue increase requested is the appropriate benchmark to compare against
disallowances.

            Having concluded that the Issue-Specific Reduction Approach should be utilized in this case,
the ALJ now discusses the application of the formula to the rate case expenses. As explained in the
second paragraph of Section IV.C of this PFD, in order to take into account the $75,800 of estimated
expenses for Cities, the ALJ recommends increasing ETI's overall rate case expenses request to
$8,828,345.           From that amount, the ALJ subtracts the specific disallowances discussed in
Section IV.C.1 of this PFD:

121
      Staff Init. Br. at 15.
13o
      ETI Init. Br. at 18.
131
      Staff Reply Br. at 12; OPUC Reply Br. at 4-5.
132
      Emphasis added.
 SOAH DOCKET NO. XXX-XX-XXXX                             PROPOSAL FOR DECISION                   PAGE 34
 PUC DOCKET NO. 40295

            •         $207,683 for depreciation;
            •         $281 meals over $25;
            •         $10 for clothing;
            •         $40 for laundry service; and
            •         $480 lodging.

 This leaves a balance of $8,619,851. When that balance is reduced by 14.8%, the remainder is
 $7,344,113. It is this amount of rate case expenses that the AU recommends ETI be allowed to
 recover.

 D.         Recovery Method

            1.       Rate Case Expense Allocation and the Recovery Mechanism

            ETI proposes to allocate the approved rate case expenses among its retail classes using a
revenue allocator based upon ETI's pro forma Test Year revenues. Staff proposes, instead, that the
allocation be based on each retail rate classes's revenue requirement as approved by the Commission.
Staff argues that its approach would be more consistent with recent Commission precedent.133
Staff's specific recommendation is as follows:

                 [T]hat ETI's Schedule RCE-2 rates be set in the compliance phase of this
                 proceeding by multiplying the approved total amount by Staffs recommended
                 class allocator and dividing the resulting class share both by ETI's proposed
                 three-year amortization period and also by ETI's proposed class billing
                 determinants. 134

133
      Staff Init. Br. at 17; Staff Ex. 1(Murphy Direct) at 4-5.
134
      Staff Ex. 1(Murphy Direct) at 5.
 SOAH DOCKET NO. XXX-XX-XXXX                     PROPOSAL FOR DECISION                           PAGE 35
 PUC DOCKET NO. 40295

            Staff further recommends that ETI be required to track its collections on Rider RCE and

 terminate billing in the month in which the approved amount has been billed. 13s ETI does not object
 to Staff's approach to allocation, so long as the Commission's final order includes standard language
 allowing the company to seek recovery of any additional rate case expenses incurred after September
 30, 2012, in its subsequent rate case.136 Staff does not object to this request by ETL137 No other

 party objects to this approach, and the ALJ can find no reason to do so either.

            2.       ETI's Request to Earn a Return on the Unpaid Balance of Rate Case
                     Expenses

            ETI asks that it be allowed to recover its rate case expenses over three years, and that it be

allowed to recover a return on the unpaid balance of the expenses during that time.138 No party
objects to the three-year duration, but Staff opposes ETI's request to earn interest on its rate case
expenses, contending that the Commission has consistently refused the recovery of a return on
unamortized rate case expenses. 139 State Agencies agree with Staff. 141

           ETI responds by arguing that it is simply seeking to recover a necessary component of a cost
that is amortized over a period of time. According to ETI, the request for a return on the unpaid
balance merely represents the time value of money and the cost of the company's lost opportunity to
use the funds elsewhere.141 ETI cites to several Commission precedents in which a utility was
allowed to recover interest on various cost-of-service items, including Docket 39896, in which ETI
was allowed to earn a return on the unamortized balance of its Hurricane Rita Regulatory Asset over

'3s
      Staff Ex. 1(Murphy Direct) at 5.
136
      ETI Ex. 7 (Considine Rebuttal) at 5.
137 Staff Init. Br. at 18.
138 ETI Ex. 5 (Considine Rebuttal) at 7.
139
    Staff's Init. Br., pp. 5-6.
140
    State Agencies' Reply Br., pp. 3, 16.
141
    ETI's Reply Br., pp. 23-24.
 SOAH DOCKET NO. XXX-XX-XXXX                      PROPOSAL FOR DECISION                                 PAGE 36
 PUC DOCKET NO. 40295

 five years.'42 ETI does not, however, cite to any Commission precedent specifically authorizing a
 return on unpaid rate case expenses.

         Staff has the better argument. In Docket 30706, CenterPoint Energy Houston Electric
 (CenterPoint) sought to recover its rate case expenses over three years with a return on the unpaid
balance. The Commission rejected CenterPoint's request for a return, explicitly noting its "practice
of not permitting utilities to receive interest on unpaid rate-case expenses."143 Consistent with this
clear Commission precedent, the ALJ recommends that ETI's request to recover a return on the
unpaid balance of its rate case expenses during the three-year payoff period be denied.

                                          V.     CONCLUSION

         The ALJ recommends that the Commission implement the findings of the ALJ set forth in the
discussion above by adopting the following proposed findings of fact and conclusions of law in the
Commission's final order.

       VI.     PROPOSED FINDINGS OF FACT, CONCLUSIONS OF LAW, AND
                             ORDERING PARAGRAPHS

A.       Findings of Fact

1.       Entergy Texas, Inc. (ETI or the Company) is an investor-owned electric utility with a retail
         service area located in southeastern Texas.

2.      On November 28, 2011, ETI filed an application (the ETI Application) requesting, among
        other things, approval of a proposed increase in annual base rate revenues of approximately
        $111.8 million over adjusted test year revenues, and a new rider for recovery of costs related
        to purchased power capacity.

112
    Docket 39896, Proposal for Decision at 17-23; see also, Petition ofTexas-New Mexico Power CompanyforApproval
of Regulatory Asset Treatment of Expenses Related to System Benefit Fund Payments, Docket No. 26942, Order at 4
(Findings of Fact 26-29)(Aug. 22, 2003).
143
    Application of CenterPoint Energy Houston Electric, LLCfor a Competition Transition Charge, Docket No. 30706,
Order at 32 (Jul. 14, 2005).
SOAH DOCKET NO. XXX-XX-XXXX               PROPOSAL FOR DECISION                           PAGE 37
PUC DOCKET NO. 40295

3.    On November 29, 2011, the Public Utility Commission of Texas (Commission or PUC)
      referred the ETI Application to the State Office of Administrative Hearings (SOAH) for a
      hearing and the matter was assigned docket number 39896 (Docket 39896).

4.     On April 4, 2012, in Docket 39896, the ALJs issued SOAH Order No. 13 severing rate case
       expense issues into a new docket, the case at issue here, Application ofEntergy Texas, Inc.
      for Rate Case Expenses Severed from PUC Docket No. 39896, Docket No. 40295.

5.    The hearing on the merits in Docket 39896 was held in April-May 2012.

6.    The Proposal for Decision ( PFD) in Docket 39896 was issued July 6, 2012.

7.    The Commission issued its final order in Docket 39896 on November 2, 2012.

8.    The hearing on the merits in the present docket, Docket 40295, was held on November 28,
      2012. The record closed on December 21, 2012, following the filing of post-hearing briefs.

9.    The following parties were granted intervenor status in this docket: Office of Public Utility
      Counsel (OPUC); the cities of Anahuac, Beaumont, Bridge City, Cleveland, Conroe, Dayton,
      Groves, Houston, Huntsville, Montgomery, Navasota, Nederland, Oak Ridge North, Orange,
      Pine Forest, Rose City, Pinehurst, Port Arthur, Port Neches, Shenandoah, Silsbee, Sour Lake,
      Splendora, Vidor, and West Orange (Cities); State Agencies (State Agencies); and Texas
      Industrial Energy Consumers (TIEC). The staff (Staff) of the Commission was also a
      participant in this docket.

10.   In Docket 39896, ETI adjusted its request for a proposed increase in annual base rate
      revenues to approximately $104.8 million over adjusted Test Year revenues.

11.   In the PFD in Docket 39896, the ALJs recommended an overall rate increase of
      $28.3 million.

12.   In its final order in Docket 39896, the Commission largely followed the recommendations
      contained in the PFD, but reduced ETI's overall rate increase to $27.7 million.

13.   In this docket, ETI seeks to recover $8.8 million in rate case expenses associated with
      Docket 39896.

14.   Of that total, $7.6 million was incurred by ETI and $1.2 million was incurred by Cities.

15.   Cities proved that, through August 31, 2012, they reasonably incurred rate case expenses of
      $1,125,768.61 in Docket 39896 and this docket.

16.   Cities reasonably estimated that their total rate case expenses in Docket 39896 and this
      docket after August 31, 2012 will total $75,800.
SOAH DOCKET NO. XXX-XX-XXXX               PROPOSAL FOR DECISION                            PAGE 38
PUC DOCKET NO. 40295

17.   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).

18.   Rate case expenses for ETI in the amount of $7,344,113 are reasonable and necessary and
      should be allowed as a cost or expense by the Company. This amount is calculated by
      reducing the requested amount by the amounts listed and for the reasons stated below:

      a.      $207,683 in depreciation of office equipment owned by Entergy Services, Inc. (ESI)
              (an affiliated company of ETI) and used by ESI employees for their work in
              Docket 39896 is not reasonable and is properly disallowed.

      b.     $281 for meals over $25 was erroneously sought by ETI, is not reasonable, and is
             properly disallowed.

      c.      $10 for clothing purchased by an attorney for ETI is not reasonable and is properly
             disallowed.

      d.     $40 for laundry charges by an attorney for ETI is not reasonable and is properly
             disallowed.

      e.     $480 for a lodging charge unsupported by receipts is not reasonable and is properly
             disallowed.

      f.     $1,275,738 attributable to unreasonable and overly aggressive arguments pursued by
             ETI in Docket 39896 related to financially-based incentive compensation and
             transmission equalization payments is properly disallowed.

B.    Conclusions of Law

      ETI is a "public utility" as that term is defined in the Public Utility Regulatory Act (PURA)
      § 11.004(1) and an "electric utility" as that term is defined in PURA § 31.002(6).

2.    The Commission exercises regulatory authority over ETI and jurisdiction over the subject
      matter of this application pursuant to PURA §§ 32.001, 32.101, 33.002, 33.051, and
      36.101-111.

3.    SOAH has jurisdiction over matters related to the conduct of the hearing and the preparation
      of a proposal for decision in this docket, pursuant to PURA § 14.053 and Tex. Gov't Code
      § 2003.049.

4.    This docket was processed in accordance with the requirements of PURA and the Texas
      Administrative Procedure Act, Tex. Gov't Code Chapter 2001.
SOAH DOCKET NO. XXX-XX-XXXX                 PROPOSAL FOR DECISION                            PAGE 39
PUC DOCKET NO. 40295

5.     Pursuant to PURA § 33.051, the Commission has jurisdiction over an appeal from a
       municipality's rate proceeding.

6.     Cities bore the burden to prove that the rate case expenses they incurred were reasonable.
       PURA § 33.023.

7.     Cities are entitled to reimbursement by ETI for:

       a.      rate case expenses of $1,125,768.61 incurred in Docket 39896 and this docket
               through August 31, 2012; and

       b.      actual expenses incurred by Cities in Docket 39896 and this docket after August 31,
               2012, including any appeals, up to a maximum possible amount of $75,800.

8.     ETI bore the burden of proving that the rate case expenses it incurred in Docket 39896 were
       reasonable. PURA § 36.061(b).

9.     ETI proved the reasonableness of its rate case expenses in the amount of $7,344.113, and
       is entitled to claim that amount as a cost.

C.     Proposed Ordering Paragraphs

       In accordance with these findings of fact and conclusions of law, the Commission issues the
following orders:

1.     The Proposal for Decision prepared by the SOAH ALJs is adopted to the extent consistent
       with this Order.

2.     All other motions, requests 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.

3.     Cities' and ETI's requests to recover rate case expenses are granted to the extent consistent
       with this Order.

      SIGNED February 19, 2013.

                                        ,17^- 9--,
                                        HHUNTE11 BURI   TER
                                        ADMINISTRATIVE LAW JUDGE
                                         STATE OFFICE OF ADMINISTRATIVE HEARINGS
APPENDIX D
Control Number: 31433

l l I Ill IIll IIl
Item Number: 32

Addendum StartPage: 0
                                                  DOCKET NO. 31433

    PROCEEDING TO CONSIDER RATE                               §
    CASE EXPENSES SEVERED FROM                                §
    DOCKET NO. 28840 (APPLICATION OF
    AEP TEXAS CENTRAL COMPANY FOR
    AUTHORITY TO CHANGE RATES)                                0
                                                              8
                                                         ORDER

            This Order addresses the recoverable rate-case expenses of AEP Texas Central Company
    (AEP Central) and of Cities’ in connection with their participation in Docket No. 28840:                    As set
I

    forth in this Order, the Public Utility Commission of Texas (Commission) determines that AEP
    Central’s recoverable rate case expenses through June 2005 are $2,938,130 and that Cities’
    recoverable rate case expenses are $1,350,149. As discussed herein, the Cities’ expenses relating to
    Witness Sarah Goodfriend have been reduced by one-half as recommended by the State Office of
    Administrative Hearings (SOAH) Administrative Law Judges in their Proposal for Decision (PFD)
    in Docket No. 28840:          This Order finds that $4,288,429 in rate-case expenses incurred by AEP
    Central and Cities is reasonable and necessary and authorizes AEP Central to implement a
    surcharge over three years to recover this amount.

                                                 I. Procedural History

            On November 3,2003, AEP Central filed an application seeking a change in its rates. This
    application was assigned Docket No. 28840, and the Commission referred the case to SOAH on
    November 4, 2003. SOAH issued its initial PFD in Docket No. 28840 on July 1,2004, which
    contained certain findings on rate case expenses. In July and August 2004, the Commission issued
    two orders on remand in Docket No 28840 directing SOAH to consider further and provide further
    evaluation of certain specified issues, none of which involved rate case expenses. On November

            I
               Alice, Aransas Pass, Carrizo Springs, Dilley, Donna, Eagle Lake, Freer, Ganado, George West, Ingleside,
    Kingsville, LaFena, Laguna Vista, La Joya, Leakey, Los Fresnos, Lyford, Lytle, McAllen, Mercedes, Mission,
    Nordheim, Odem, Pharr, Port Aransas, Portland, Port Lavaca, Poteet, Rancho Viejo, Refugio, Rio Hondo, Runge, San
    Benito, San Juan, Sinton, Uvalde, and Weslaco (collectively, Cities).
            2
                Application ofAEP Texas Central Company for Authority to Change Rates, Docket No. 28840, Order (Aug.
    15,2005).
            3
                Docket No. 28840, Proposal for Decision at 121-127,205 (FOF 210-216), 209 (FOF 256) (Jul. 1,2004).
DOCKET NO.31433                                       ORDER                                 PAGE 2

16, 2004, SOAH issued its Remand PFD. In addition, the Commission held hearings on certain
matters relating to merger savings and affiliated expenses on March 3, 4, and 7. The Commission
issued its final order in Docket No. 28840 on August 15, 2005. In that order, the Commission
severed the determination of the reasonableness and necessity of rate case expenses to this
proceeding, Docket No. 31433.4 While rate-case expenses were not addressed on the remand
SOAH hearing and the Commission-held hearing, Cities and AEP incurred additional expenses as a
result of these hearings, and submitted updated information on these additional expenses. Based on
the submission, the Commission decided to sever the determination on rate-case expenses to
examine this additional e~idence.~

        By Order No. 1 in this proceeding, AEP Central and Cities were directed to file detailed
supporting documentation of their requested rate case expenses. On September 9, 2005, AEP
Central and Cities filed such supporting documentation. On September 16 and October 10,2005,
AEP Central made supplemental filings that furnished additional supporting documentation with
respect to certain of its requested expenses.

        On October 14, 2005, the parties filed statements of position and on October 28,2005, AEP
Central filed its Motion for Ruling on Disputed Issue and Conditional Request for a Hearing. On
December 12, 2005, the presiding officer issued Order No. 4, which requested clarification
regarding contested issues. On December 22,2005, the parties filed responses to Order No. 4.

       The parties’ filings established that there are no contested factual issues in Docket
No. 31433 that have not been l l l y litigated in Docket No. 28840. To the extent AEP Central had
previously conditionally requested a hearing, that request was withdrawn by AEP Central’s
December 22,2005 filing. The sole disputed issue is the recoverability of one-half of Cities’ witness
Sarah Goodfriend’s expenses, which the SOAH ALJs had recommended be disallowed in their PFD
in Docket No. 28840 issued on July 1, 2004. Since there are no contested factual issues that have
not already been hlly litigated, an evidentiary hearing on the merits is not necessary or appropriate.
The disposition of the sole contested issue is discussed in the subsequent section of this Order.

        Docket No. 28840, Order at 60 (Ordering 7 5) (Aug. 15,2005).

       ’Open Meeting Tr. at 54-62 (July 29,2005).
DOCKET NO.31433                                           ORDER                                   PAGE 3

                          11. Recoverability of One-Half of Dr. Goodfriend’s Expenses

       In Docket No. 28840, AEP Central submitted testimony challenging the quality of a survey
that formed the basis of testimony submitted by Cities witness, Dr. Sarah Goodfriend.6 Following a
full evidentiary hearing and briefing on this and other issues, the SOAH ALJs recommended that
one-half of Dr. Goodfriend’s expenses be disallowed because they found that the methodology of
the survey she conducted was “seriously flawed.”’

       In severing the issue of rate case expenses from Docket No. 28840 to this proceeding, the
Commission intended that the entire evidentiary record in Docket No. 28840 on rate case expenses
as well as the Commission’s initial decisions be carried over to this case. Thus, the evidentiary
record on the quality of Dr. Goodfriend’s work underlying her testimony in Docket No. 28840 and
the SOAH ALJs’ findings regarding the recoverability of one-half of her expenses are before the
Commission for decision in this proceeding. The purpose of the severance, however, was to
evaluate the detailed supporting documentation on updated rate-case expenses submitted by AEP
Central and Cities? This proceeding was not initiated as a forum for Cities to re-litigate Dr.
Goodfriend’s expenses.

       The Commission had previously found that the ALJs correctly determined that one-half of
Dr. Goodfriend’s expenses should be disallowedg because the survey she conducted “was seriously
flawed and that conclusions drawn from the data cannot be reasonably supported under current legal
standards.”’o The Commission reaffirms this determination, and therefore, the Commission adopts
the SOAH ALJs’ finding that one-half of Dr. Goodfriend’s expenses should be disallowed. In
addition, as there are no other outstanding contested issues related to the rate-case expense
information submitted in Docket No. 28840 or the additional rate-case expense information

       6
            See Docket No. 28840, Proposal for Decision at 121-127,205 (FOF 212) (Jul. 1,2004).
            Id. at 125.
            See Open Meeting Tr. at 62 (Jul. 29,2005).
            Open Meeting Tr. at 196-198 (January 13,2005).

       lo   Docket No. 28840, Proposal for Decision at 125 (Jul. 1,2004).
    DOCKET NO. 31433                                       ORDER                                         PAGE 4

    submitted in this docket, the Commission finds that the rate-case expenses of $2,938,130 for AEP
    Central and $1,350,299 for Cities are reasonable and necessary.

                   111. The SOAH ALJs’ Findings and Conclusions in Docket No. 28840

I           In the PFD issued on July 1,2004, in Docket No. 28840, the SOAH ALJs included Finding
    of Fact Nos. 210 through 216 and Conclusion of Law No. 58 addressing rate case expenses. The
    SOAH ALJs’ findings were issued prior to the updating by AEP Central and Cities of their rate case
    expenses in their filings described in Finding of Fact No. 15. Thus, in order to reflect the updated
    factual evidence filed in Docket No. 31433 and certain other corrections described below, the
    Commission modifies the SOAH ALJs’ Finding of Fact Nos. 210 through 216 as follows.

            Finding of Fact Nos. 22 through 25 of this Order modify the SOAH ALJs’ Finding of Fact
    No. 210 to reflect the updated amounts of rate case expenses found reasonable and necessary for
    AEP Central after reflecting the disallowance recommended by Staff. Finding of Fact No. 27 of
    this Order modifies the SOAH ALJs’ Finding of Fact No. 211 to reflect the updated amount of
    Cities’ requested rate case expenses. Finding of Fact Nos. 28 and 29 of this Order modify the
    SOAH ALJs’ Finding of Fact No. 212 to reflect the updating of Dr. Goodfiiend’s portion of Cities’
    requested rate case expenses. Finding of Fact Nos. 3 1 and 32 of this Order adopt the SOAH ALJs’
    Finding of Fact Nos. 214 and 215. Finding of Fact No. 33 of this Order modifies the SOAH ALJs’
    Finding of Fact No. 216 to reflect the amounts found reasonable and necessary by the Commission
    based on the updated information in this proceeding and corrects it to reflect that the rate case
    expenses will be collected through a three-year surcharge and not through cost of service. Finding
    of Fact No. 34 of this Order supplements the SOAH ALJs’ Finding of Fact No. 256 to reflect the
    updated amounts for AEP Central’s and Cities’ rate case expenses found reasonable and necessary
    by this Order. Finding of Fact No. 35 reflects the Commission’s policy decision, in accordance
    with its decision in Docket No. 30706,” that AEP Central not be permitted to recover estimated
    appeal costs in this proceeding, but that AEP Central be afforded the opportunity to recover in its
    next rate case any reasonable and necessary expenses for Docket Nos. 28840 and 31433 that it

            11
              Application of Centerpoint Energy Houston Electric, LLC for a Competition Transition Charge, Docket No.
    30706, Order at 28-29,47 (COL28) (Jul. 14,2005).
DOCKET NO. 31433                                ORDER                                      PAGE 5

subsequently incurs that exceed the amounts found reasonable and necessary by this Order. Finally,
Conclusion of Law No. 6 in this Order incorporates the SOAH ALJs’ Conclusion of Law No. 58.

       The Commission adopts the following findings of fact and conclusions of law:

                                      IV. Findings of Fact

A. Backmound and Procedural Matters
1.     AEP Central is an electric utility providing transmission and distribution (T&D) services in
       a 44,000 square-mile area of South Texas that includes the portion of Texas from just south
       of San Antonio to the Mexican border and from Bay City west to Eagle Pass. AEP Central’s
       service area is located within the Electric Reliability Council of Texas (ERCOT).

2.     On November 3,2003, AEP Central filed an application with the Commission to change its
       T&D rates. The Commission assigned AEP Central’s application to Docket No. 28840.

3.     Concurrent with filing its application with the Commission, AEP Central filed a similar
       petition and statement of intent with each incorporated city in its certificated service area
       that retains jurisdiction over its retail rates. Eighty-six (86) cities denied AEP Central’s
       petition and statement of intent. AEP Central filed petitions for review of those denials and
       filed motions to consolidate those petitions for review into Docket No. 28840.

4.     On November 4, 2003, the Commission referred AEP Central’s application in Docket
       No. 28840 to SOAH to conduct an evidentiary hearing on the merits and issue a PFD.

5.     The following parties intervened and participated in the hearing in Docket No. 28840:
       Cities; Texas Industrial Energy Consumers (TIEC); CPL Retail Energy (CPL Retail);
       Coalition of Commercial Ratepayers (CCR); City of Garland, Alliance for Retail Markets
       (ARM); TXU Business Services (TXU); Texas Legal Services Center and Texas
       Ratepayers’ Organization to Save Energy (TLSCROSE); South Texas Electric Cooperative,
       Inc. (STEC); State of Texas; Office of Public Utility Counsel (OPC); and Commission Staff
       (Staff).
DOCKET NO.31433                                 ORDER                                   PAGE 6

6.    In Docket No. 28840, AEP Central requested approval of a revenue requirement of $519.9
      million, based on an historical test year of July 1, 2002, through June 30, 2003. Of that
      amount, $426.6 million was for providing retail T&D service (including the portion of the
      ERCOT-wide transmission costs) and $93.3 million for providing wholesale transmission
      service.

7.    The evidentiary hearing on the merits in Docket No. 28840 was held on March 2 through
      March 18,2004.

8.    On July 1,2004, the SOAH ALJs assigned to hear Docket No. 28840 issued their PFD. The
      PFD contained certain findings with respect to rate case expenses.

9.    The Commission issued orders on July 28 and August 25, 2004, remanding portions of
      Docket No. 28840 to SOAH, none of which involved rate case expenses.

10.   On November 16,2004, the SOAH ALJs issued their Remand PFD in Docket No; 28840.

11.   On March 3,4, and 7, 2005, the Commission held hearings on merger savings and affiliate
      expenses.

12.   On August 15, 2005, the Commission issued its final order in Docket No. 28840. In
      Ordering Paragraph 5 of that order, the Commission severed the determination of the
      reasonableness and necessity of rate case expenses into this proceeding, Docket No. 31433.
      All portions of the evidentiary record in Docket No. 28840 relevant to rate case expenses are
      part of the evidentiary record in this Docket No. 3 1433.

13.   On August 26,2005, the presiding officer issued Order No. 1, which required the parties to
      file evidence of rate case expenses and directed AEP Central and Cities to file supporting
      detailed documentation for their requested rate case expenses. Order No. 1 also made all
      parties to Docket No. 28840 parties to this proceeding.
DOCKET NO.31433                                 ORDER                                    PAGE 7

14.   On August 29, 2005, Cities requested clarification fiom the presiding officer regarding the
      extent of the supporting documentation the Cities were required to submit under Order
      No. 1.

15.   On August 30,2005, Order No. 2: Clarification of Order NO. 1, was issued informing Cities
      that:

               The entirety of the rate case expenses will be considered in this proceeding.
               To the extent supporting documentation for expenses prior to September
               2004 is in the record of Docket No. 28840, Cities may simply provide the
               relevant cite to the record. If the supporting documentation for expenses is
               not in the Docket No. 28840 record, that information should be submitted in
               this proceeding.

16.   On September 9, 2005, AEP Central and Cities filed supporting documentation for their
      requested rate case expenses, consisting of invoices, timesheets, receipts, etc. On September
      16 and October 10, 2005, AEP Central filed supplemental information related to certain of
      its requested rate case expenses.

17.   On September 19, 2005, the presiding officer established a procedural schedule for this
      docket. In accordance with the procedural schedule, statements of position were due on
      October 14,2005, and requests for hearing were due on October 28,2005.

18.   On October 14, 2005, AEP Central, Cities, and Staff filed statements of position. In its
      statement of position, Staff questioned certain items of AEP Central’s rate case expenses as
      lacking adequate supporting documentation. In its statement of position, AEP Central stated
      that the SOAH ALJs had recommended that one-half of Dr. Goodfriend’s expenses be
      disallowed and noted that Cities’ requested rate case expenses included the entire amount
      billed by Dr. Goodfriend to Cities, and not one-half of that amount. In its statement of
      position, Cities indicated that they did not contest any of AEP Central’s rate case expenses,
      but indicated that if Cities’ request associated with Dr. Goodfiiend’s work was contested,
      then Cities would urge that the standard applied to Dr. Goodfriend be applied to AEP
      Central’s experts.
DOCKET NO.31433                                 ORDER                                     PAGE 8

19.   On October 28, 2005, AEP Central filed a motion for ruling on a disputed issue and
      conditionally requested a hearing seeking a Commission ruling on whether, by severing rate
      case expenses from Docket No. 28840, it intended to reopen for litigation the issue of Dr.
      Goodfiiend‘s expenses which had been fully litigated in Docket No. 28840. AEP Central’s
      pleading also included an identification of the portions of the record in Docket No. 28840
      that addressed the issue of the quality of Dr.Goodfiiend’s work and the recovery of her rate
      case expenses.

20.   On December 12, 2005, the presiding officer issued Order No. 4, which requested a
      clarification regarding a contested issue and directed Staff to file a list of disputed factual .
      issues and a list of threshold legal and policy issues that must be addressed before this
      proceeding can be resolved, and permitting AEP Central and Cities to make similar filings.

21.   On December 22,2005, AEP Central and Cities filed their responses to Order No. 4. In its
      response, AEP Central withdrew its conditional request for a hearing.

22.   Based on the filings of the parties set forth in Finding of Fact Nos. 16, 18, 19, and 21, the
      Commission finds that no factual matters that have not already been fully litigated in Docket
      No. 28840 are at issue or disputed. The only disputed issue in this proceeding involves the
      recoverability of one-half of Cities’ witness Goodfriend’s expenses, which has been
      subjected to a full contested case evidentiary hearing, briefing, and the issuance by the
      SOAH ALJs of a PFD in Docket No. 28840.

B.    AEP Central’s Rate Case Expenses
23.   Based on its filing of September 9,2005, as supplemented by its filings of September 16 and
      October 10, 2005, AEP Central sought recovery of $2,962,734 in recoverable rate case
      expenses for Docket No. 28840 through June 2005.

24.   In its statement of position filed on October 14, 2005, Staff questioned whether $24,604 of
      AEP Central’s requested rate case expenses were supported by adequate underlying
      documentation and recommended disallowance of these expenses.
DOCKET NO.31433                                 ORDER                                        PAGE 9

25.   In its filing of October 28, 2005, AEP Central indicated that it did not contest Staffs
      recommendation to disallow $24,604 of AEP Central’s requested rate case expenses.

26.   AEP Central’s reasonable and necessary rate case expenses for Docket No. 28840 as of June
      2005 are $2,938,130.

C.    Cities’ Rate Case Expenses
27.   In its filing of September 9,2005, Cities requested rate case expenses for Docket No. 28840
      of $1,39 1,925. This mount consisted of $1,166,925 in expenses actually incurred through
      July 2005 and $225,000 in estimated expenses including appeals.

28.   Cities’ actual expenses of $1,166,925 through July 2005 included $83,253 billed by Cities’
      witness Sarah Goodfriend.

29.   The Commission adopts the SOAH ALJs’ finding regarding disallowance of one-half of Dr.
      Goodfriend’s expenses from Docket No. 28840 because of the inadequacies in the survey
      she performed. The record indicates that Dr. Goodfriend has billed the Cities $83,253;
      therefore a disallowance of one-half of her fees is $41,626.

30.   Based on Findings of Fact Nos. 27 through 29, Cities’ recoverable rate case expenses are
      $1,350,299.

31.   AEP Central’s proposal to disallow Cities’ witness Starnes expenses is not appropriate
      because the principal rate design issues raised by Cities benefit other rate payers.

32.   Cities’ rate case expenses are system costs that should be borne by all ratepayers because
      other ratepayers benefit from the Cities’ participation.

D.    Rate Case ExDense SurcharPe
33.   Based on Finding of Fact Nos. 26 and 30, the aggregate amount of rate case expenses found
      reasonable and necessary for AEP Central and Cities are $4,288,429.
DOCKET NO. 31433                                 ORDER                                     PAGE 10

34.   It is appropriate for AEP Central to surcharge the aggregate rate case expenses found
      reasonable and necessary in Finding of Fact No. 33 to be collected fiom all customers over
      three years.

E.    Subseauent Rate Case Expenses
35.   To the extent AEP Central incurs rate case expenses for Docket Nos. 28840 and 31433 after
      June 2005, it is reasonable for it to recover such expenses in its next rate case to the extent it
      demonstrates that such additional expenses are reasonable and necessary. Also, to the extent
      that Cities incur rate case expenses for Docket Nos. 28840 and 31433 after July 2005 that
      cause Cities’ aggregate rate case expenses to exceed the amount found recoverable by this
      Order, it is reasonable for AEP Central to recover such expenses in its next rate case to the
      extent found reasonable and necessary.

                                      V. Conclusions of Law

1.    AEP Central is an electric utility as defined by   $6 3 1.002 of the Public Utility Regulatory
      Act, TEX.UTIL.CODEANN. $0 11.001-66.017 (Vernon 1998 & Supp. 2005) (PURA) and is
      therefore subject to the Commission’s jurisdiction under PURA           $0 32.001,   33.051, and
      36.102.

2.    AEP Central is a T&D utility as defined in PURA $ 3 1.002(19).

3.    SOAH had jurisdiction over all matters relating to the conduct of the hearing in Docket No.
      28840, including the preparation of a Proposal for Decision pursuant to PURA $ 14.053 and
              CODEANN. $ 2003.049(b).
      TEX.GOV’T

4.    AEP Central met its burden of proof regarding the amount of its rate case expenses for
      Docket No. 28840 through June 2005 found reasonable and necessary in Finding of Fact No.
      26.
DOCKET NO.31433                                  ORDER                                   PAGE 11

5.     With the exception of the Cities’ rate case expenses disallowed in Finding of Fact No. 29,
       Cities met their burden of proof that their rate case expenses for Docket No. 28840 are
       reasonable and necessary.

6.     Cities are entitled to reimbursement for their rate case expenses as customers, as well as for
       being regulatory authorities.

7.     The evidentiary record in Docket No. 28840 on rate case expenses, including the portion
       related to the quality of work performed by Dr. Goodfriend underlying her testimony
       submitted in Docket No. 28840 identified in AEP Central‘s pleading described in Finding of
       Fact No. 19, is part of the evidentiary record in this case together with the additional
       supporting documentation filed by AEP Central and Cities in this proceeding as discussed in
       Finding of Fact No. 16.

8.     No contested issues of fact beyond those that were fully litigated, argued, and heard by the
       SOAH ALJs in Docket No. 28840 have be.en raised in this proceeding; therefore, there is no
       need for any M e r evidentiary hearing on the merits on recoverable rate case expenses in
       addition to those already held in Docket No. 28840.

9.     When the issue of the quality of the work underlying Dr. Goodfiend’s testimony in Docket
       No. 28840 was litigated before and the issue of the recoverability of her rate case expenses
       was briefed to the SOAH ALJs, Cities had the opportunity to challenge the quality of AEP
       Central’s experts’ substantive work and the recovery of their rate case expenses under the
       standard applied by the SOAH ALJs to Dr. Goodfriend’s expenses. Cities failed to take
       advantage of that opportunity and no additional evidentiary hearing on the merits is
       appropriate in this proceeding as to that matter.

                                       VI. Ordering Paragraphs

       In accordance with these findings of fact and conclusions of law, the Commission issues the
following Order:
DOCKET NO. 31433                                ORDER                                    PAGE 12

1.    The additional supporting documentation filed by AEP Central and Cities on
      September 9,2005, and by AEP Central on September 16 and October 10, 2005, as
      discussed in Finding of Fact No. 16 above, is admitted into the evidentiary record of this
      Docket No. 31433.

2.    To the extent provided in this order, the requests by AEP Central and Cities for
      determination of their reasonable and necessary rate case expenses for Docket No. 28840 are
      granted.

3.    As set forth in Finding of Fact No, 34, AEP Central is authorized to surcharge, over a three-
      year period, the aggregate rate case expenses for Docket No. 28840 found reasonable and
      necessary in Finding of Fact No. 33.

4.    AEP Central shall file tariff sheets consistent with this Order (compliance tarim no later
      than 20 days after receipt of this Order. The Compliance tariff, and all filings related to it,
      shall be filed in Tariff Control Number 32385 and shall be styled: Compliance T a n g of
      AEP Texas Central Company Pursuant to Final Order in Docket No. 31433 Severedfiom
      Docket No. 28840. The Filing shall include a transmittal letter stating that the tariffs
      attached are in compliance with this Order, giving the docket number, date of this Order, a
      list of tariff sheets filed, and any other necessary information. The timetable for review of
      the compliance tariff shall be established by the Commission’s ALJ assigned to the tariff. In
      the event any sheets are modified or rejected, AEP Central shall file proposed revisions to
      those sheets in accordance with the Commission’s ALJ.             All subsequent filings in
      connection with the compliance tariff (i.e., requests for extensions, textual corrections,
      revisions) shall be filed in the Tariff Control Number provided above, and styled as set forth
      above. After issuance of the final order, no further filings other than those pertaining to a
      motion for rehearing shall be made in this docket. .

5.    As set forth in Finding of Fact No. 35, AEP Central may seek to recover in its next rate case
      expenses in connection with Docket Nos. 28840 and 3 1433 that it incurs after June 2005 and
      Cities’ rate case expenses incurred in connection with Docket No. 28840 and 31433 that
DOCKET NO. 31433                                    ORDER                                     PAGE 13

         exceed the amounts authorized to be recovered herein, to the extent such additional expenses
         are found reasonable and necessary.

6.       All other motions, requests for entry of specific findings of fact and conclusions of law, and
         any other requests for general or specific relief, if not expressly granted herein, are denied.

         SIGNED AT AUSTIN, TEXAS the             %a          day of   flh&                2006.

                                        PUBLIC UTILITY COMMISSION OF TEXAS

                                          /,-&TS.
                                                L
                                        B A R R ~ h W f H E R M A NCOMMISSIONER
                                                                   ,

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APPENDIX E