Court Opinion

ID: 4064841
Source: CourtListenerOpinion
Date Created: 2016-09-29 21:38:39.767055+00
Date Added: 2024-06-11T14:27:39.632412
License: Public Domain

ACCEPTED
                                                                                   03-14-00735-CV
                                                                                           5109682
                                                                        THIRD COURT OF APPEALS
                                                                                   AUSTIN, TEXAS
                                                                              4/30/2015 5:15:27 PM
                                                                                 JEFFREY D. KYLE
                                                                                            CLERK
                        NO. 03-14-00735-CV

                                                   FILED IN
                 IN THE COURT OF APPEALS    3rd COURT OF APPEALS
                                                AUSTIN, TEXAS
             FOR THE THIRD DISTRICT OF TEXAS4/30/2015 5:15:27 PM
                      AUSTIN, TEXAS           JEFFREY D. KYLE
                                                    Clerk

                        ENTERGY TEXAS, INC.
                                         Appellants,

                                  v.

               PUBLIC UTILITY COMMISSION OF TEXAS
                                        Appellee.

  Appeal from the 353rd Judicial District Court, Travis County, Texas
            The Honorable John K. Dietz, Judge Presiding

APPELLEE TEXAS INDUSTRIAL ENERGY CONSUMERS’ BRIEF

                           APRIL 30, 2015

                                   Rex D. VanMiddlesworth
                                   rex.vanmiddlesworth@tklaw.com
                                   State Bar No. 20449400
                                   Benjamin Hallmark
                                   benjamin.hallmark@tklaw.com
                                   State Bar No. 24069865
                                   THOMPSON & KNIGHT LLP
                                   98 San Jacinto Blvd., Suite 1900
                                   Austin, TX 78701
                                   Telephone: (512) 469-6100
                                   Facsimile: (512) 469-6180
                                   ATTORNEYS FOR APPELLEE TEXAS
                                   INDUSTRIAL ENERGY CONSUMERS

                ORAL ARGUMENT REQUESTED
                                           TABLE OF CONTENTS
                                                                                                                            PAGE
TABLE OF AUTHORITIES .............................................................................................. iii

STATEMENT OF THE CASE .......................................................................................... iv

STATEMENT ON ORAL ARGUMENT ........................................................................... v

RESTATED ISSUES PRESENTED ................................................................................... v

STATEMENT OF FACTS .................................................................................................. 1

SUMMARY OF ARGUMENT ........................................................................................... 6

ARGUMENT AND AUTHORITIES ................................................................................. 9

         I.       The PUC properly applied its longstanding historical-test-year
                  standard. ........................................................................................................ 9

                  A.        The known and measurable standard. .............................................. 11

                  B.        ETI’s true complaint is with the PUC’s cost-of-service rules,
                            not the PUC’s application of them. .................................................. 14

         II.      Substantial evidence supports the PUC’s determination of ETI’s
                  purchased-capacity costs. ............................................................................ 15

                  A.        The PUC properly found that ETI’s forecasted purchased-
                            capacity costs were not known and measurable. .............................. 16

                            1.         ETI’s projected third-party contract costs were not reasonably
                                       certain. ................................................................................... 20

                            2.         ETI’s projected affiliate-contract costs were not reasonably
                                       certain. ................................................................................... 25

                            3.         ETI’s projected MSS-1 costs were not reasonably certain. .. 28

                            4.         ETI’s proposal failed to account for revenues from load
                                       growth. .................................................................................. 30

                  B.        Having failed to meet its burden of proof, ETI is not entitled
                            to its proposed post-test-year adjustments. ...................................... 34

                                                                 i
        III.     The PUC properly rejected ETI’s proposal to base transmission
                 equalization expense on projections of future costs. ................................... 36

                 A.       Substantial evidence supports the PUC’s decision. ......................... 38

                          1.       ETI’s transmission-equalization costs are variable and
                                   uncertain. ............................................................................... 39

                          2.       ETI’s projections were based on projects that were not yet in-
                                   service. .................................................................................. 40

CONCLUSION AND PRAYER ....................................................................................... 42

CERTIFICATE OF COMPLIANCE ................................................................................ 43

CERTIFICATE OF SERVICE .......................................................................................... 44

                                                            ii
                                   TABLE OF AUTHORITIES

                                                                                                         PAGE
                                                   CASES
Amarillo Indep. Sch. Dist. v. Meno,
  854 S.W.2d 950 (Tex. App.—Austin 1993, writ denied) ...................................16
Cent. Power & Light Co. v. Pub. Util. Comm’n of Texas,
  36 S.W.3d 547 (Tex. App.—Austin 2001, pet. denied).............................. passim
City of El Paso v. Pub. Util. Comm’n of Texas,
   883 S.W.2d 179 (Tex. 1994) ....................................................................... passim
City of El Paso v. Pub. Util. Comm’n,
   344 S.W.3d 609 (Tex. App.—Austin 2011, no pet.) ............................................2

Gerst v. Guardian Sav. & Loan Ass’n,
  434 S.W.2d 113 (Tex. 1968) ...............................................................................16

Lewis v. Metropolitan Sav. & Loan Ass’n,
  550 S.W.2d 11 (Tex. 1977) .................................................................................16
Suburban Util. Corp. v. Pub. Util. Comm’n of Texas,
  652 S.W.2d 358 (Tex. 1983) .................................................................... 2, 10, 12

Rodriguez v. Serv. Lloyds Ins. Co.,
  997 S.W.2d 248 (Tex. 1999) ...............................................................................16
Texas Health Facilities Comm’n v. Charter Medical-Dallas, Inc.,
  665 S.W.2d 446 (Tex. 1984) ...............................................................................16

                 STATUTORY AND REGULATORY AUTHORITIES

16 Tex. Admin. Code § 23.21...................................................................................13
16 Tex. Admin. Code § 25.5......................................................................................3

16 Tex. Admin. Code § 25.231 ....................................................................... passim

16 Tex. Admin. Code § 25.234.................................................................................13

                                                       iii
Tex. Util. Code §§ 11.001 .........................................................................................1

Tex. Util. Code § 11.003...........................................................................................10
Tex. Util. Code § 15.001 .........................................................................................16

Tex. Util. Code § 31.001 ...........................................................................................1

Tex. Util. Code § 36.003 ...........................................................................................1
Tex. Util. Code § 36.006. ................................................................................. 35, 36

Tex. Util. Code § 36.051. ..........................................................................................2

                                                         iv
                           STATEMENT OF THE CASE
       This is an administrative appeal of a final order of the Public Utility

Commission of Texas (the PUC) in a contested-case proceeding. Entergy Texas,

Inc. (ETI) initiated the underlying proceeding, Docket No. 39896, seeking

authority to raise its electric rates and reconcile its fuel costs.

                      STATEMENT ON ORAL ARGUMENT
       To the extent the Court grants any request for oral argument, TIEC requests

the opportunity to be heard.

                        RESTATED ISSUES PRESENTED
       (1)    Should the Court invalidate the PUC’s longstanding, rule-based

practice of setting future rates based on historical costs?

       (2)    Does substantial evidence support the PUC’s determination that ETI’s

projections of its future purchased-capacity costs were not known and measurable

changes to its historical-test-year costs?

       (3)    Does substantial evidence support the PUC’s determination that ETI’s

projections of its future transmission-equalization expense were not known and

measurable changes to its historical-test-year costs?

                                             v
                               STATEMENT OF FACTS
       Appellee Texas Industrial Energy Consumers (TIEC) is an association of

industrial consumers whose principal purpose is to address electricity matters at the

PUC. 1 TIEC, an intervenor in the underlying administrative proceeding, files this

brief in support of the PUC’s determination of ETI’s purchased-capacity and

transmission-equalization expenses.2

Regulatory background

       Because ETI is a government-sanctioned monopoly in its service area, the

PUC regulates its rates, operations, and services as a substitute for competition. 3

As part of that system of regulation, the Public Utility Regulatory Act (PURA) 4

directs the PUC to ensure that utility rates are “just and reasonable.” 5 PURA does

not define “just and reasonable” rates, but provides that the PUC “shall establish

the utility’s overall revenues at an amount that will permit the utility a reasonable

opportunity to earn a reasonable return on the utility’s invested capital used and

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

1
  AR Part I, Binder 1, Item 1 (Motion to Intervene of Texas Industrial Energy Consumers).
References to the administrative record are to the revised index submitted with the supplemental
administrative record on March 25, 2015. The administrative record (AR) is organized by
binders, exhibits, and transcripts.
2
  TIEC thus responds to ETI’s second and third issues on appeal. See ETI Appellant’s Brief at x-
xi.
3
  AR Part II, Binder 31, ETI Ex. 4 (Domino Direct at 1). Tex. Util. Code § 31.001(b).
4
  PURA is codified at Tex. Util. Code §§ 11.001 et seq.
5
  PURA § 36.003(a).
                                               1
necessary operating revenues.” 6 In Texas, “future rates are made on the basis of

past costs,” and the PUC has long relied on a utility’s historical costs to meet the

objective of setting just and reasonable rates. 7 Thus, to calculate a utility’s revenue

requirement, the PUC’s rules provide that “rates are to be based upon an electric

utility’s cost of rendering service to the public during a historical test year,

adjusted for known and measurable changes.” 8

The PUC proceeding

       ETI initiated the underlying proceeding at the PUC seeking authority to raise

its rates.9 One of the major issues in the case was the amount of purchased-

capacity costs to be included in ETI’s base rates. A utility’s purchased-capacity

costs are expenses recovered through base rates. 10 The record evidence established

that ETI had incurred approximately $246 million in purchased-capacity costs

during the historical test year for the case.11 ETI proposed to disregard this figure

in setting rates.

6
  PURA § 36.051.
7
  Suburban Util. Corp. v. Pub. Util. Comm’n of Texas, 652 S.W.2d 358, 366 (Tex. 1983).
8
  16 Tex. Admin. Code § 25.231(a).
9
  AR Part II, Binder 31, ETI Ex. 4 (Domino Direct at 7).
10
   City of El Paso v. Pub. Util. Comm’n, 344 S.W.3d 609, 614 (Tex. App.—Austin 2011, no
pet.).
11
   AR Part I, Binder 7, Item 244 (Order on Rehearing at 7); Tr. at 652-53; AR Part II, Binder 41
(TIEC Ex. 1B, Confidential Exhibits and Workpapers to Direct Testimony of Jeffry Pollock
(CONFIDENTIAL 62) Workpapers, Filename: “Exhibits JP-1 and JP-2 HS.xlsx,”
                                               2
       ETI’s primary position at the PUC was that the PUC should adopt a first-of-

its-kind rider that would treat purchased-capacity costs not as a component of base

rates but on a pass-through basis, much like the PUC treats fuel costs. 12 ETI also

submitted an alternative proposal under which the PUC would use ETI’s

projections of what its purchased-capacity costs would be during a future “rate

year” in setting rates. 13 ETI estimated its future purchased-capacity costs during

the “rate year” would be approximately $31 million higher than the actual costs it

incurred during the test year. 14

       Typically, the term “rate year” is used to refer to the first year that new rates

would be in effect.15 ETI’s proposed effective date for its rates was June 30,

2012, 16 but the “rate year” it used in its proposal was not the 12 months following

that date, but instead June 1, 2012 through May 31, 2013. 17 Thus, ETI proposed to

spreadsheet/tab: “PPC Summary (Test Year)”).“PPC Summary (Test Year)” was also
Attachment A to TIEC’s Initial Brief at the District Court, AR Part II, Binder 4, Item 160
(Highly Sensitive Portions of Initial Brief of Texas Industrial Energy Consumers
(CONFIDENTIAL 2).
12
   AR Part IV, Binder 43, Vol. L (Tr. at 1954, May 3, 2012).
13
   AR Part IV, Binder 43, Vol. F (Tr. at 761, Apr. 27, 2012); AR Part II, Binder 35, ETI Ex. 34A
(Confidential Direct Testimony of Robert R. Cooper, Exhibit RRC-1).
14
   Id.
15
   16 Tex. Admin. Code § 25.5(102).
16
   AR Part IV, Binder 43, Vol. K (Tr. at 1540, May 2, 2012).
17
   AR Part IV, Binder 43, Vol. F (Tr. at 761, Apr. 27, 2012); AR Part II, Binder 35 ETI Ex. 34A
(Confidential Direct Testimony of Robert R. Cooper, Exhibit RRC-1).
                                               3
set rates based on neither its historical-test-year costs nor its projected costs for the

first 12 months after its new rates were implemented.

       ETI’s primary proposal of a purchased-capacity rider was presented in 17

pages of ETI witness Robert May’s testimony, while its fallback proposal to use

projected costs from what it termed “the rate year” was presented in a single

sentence.18     The PUC rejected ETI’s rider proposal in a prehearing order, from

which ETI does not appeal,19 and ETI proceeded with its fallback proposal.

       While ETI’s actual test-year purchased-capacity costs were undisputed, the

PUC Staff and multiple intervenors, including TIEC, challenged ETI’s proposal to

use estimates of future costs in setting rates. 20 The PUC found that there was

substantial uncertainty regarding the accuracy of ETI’s cost projections and that

ETI had not met its burden of proof to show that its projections constituted known

and measurable changes to the test-year costs. 21 The PUC also rejected ETI’s

proposed adjustments for an additional reason. To set rates, ETI proposed to

compare its projected expenses for a future year (June 1, 2012 through May 31,

2013) with its sales revenue from the historical test year (July 1, 2010 through June

18
   AR Part II, Binder 31, ETI Ex. 7 (Direct Testimony of Phillip May at 5-23).
19
   AR Part I, Binder 1, Item 52 (Supplemental Preliminary Order at 2) (“The PUC finds that
Entergy’s proposed purchased-power recovery rider should not be considered in this docket due
to the related rulemaking that is pending in Project No. 39246.”).
20
   AR Part I, Binder 5, Item 185 (Proposal for Decision at 101).
21
   AR Part I, Binder 7, Item 244 (Order on Rehearing at Findings of Facts (“FoFs”) 72-85).
                                             4
30, 2011). 22 The PUC found that this mismatch between the period for calculating

costs and the period for calculating revenues was a violation of fundamental

ratemaking principles. 23 For these reasons, the PUC rejected ETI’s proposal to use

its forecasted purchased-power costs and instead set ETI’s rates based on the costs

it actually incurred during the test year. 24

       The PUC reached a similar result with respect to ETI’s transmission-

equalization expense. 25 As with its purchased-capacity costs, ETI proposed to

disregard the transmission-equalization expense it actually incurred during the test

year in favor of its projected expense during the future rate year. 26 The PUC found

that ETI failed to meet its burden of demonstrating that its proposed adjustments to

the actual test-year data were known and measurable. 27                  The PUC therefore

rejected ETI’s forecasted transmission-equalization costs and used ETI’s historical

expense from the test year in setting rates.28

22
   AR Part I, Binder 5, Item 185 (Proposal for Decision at 109) (discussing mismatch of rate-year
costs with test-year billing determinants).
23
   AR Part I, Binder 5, Item 185 (Proposal for Decision at 109); AR Part I, Binder 7, Item 244
(Order on Rehearing at 7).
24
   AR Part I, Binder 7, Item 244 (Order on Rehearing at FoFs 72, 86).
25
   Id. at FoF 88-93.
26
   AR Part II, Binders 21-30 (ETI Ex. 3, Schedule P Workpapers at AJ23).
27
   AR Part I, Binder 5, Item 185 (Proposal for Decision at 116).
28
   AR Part I, Binder 7, Item 244 (Order on Rehearing at FoFs FoF 87, 94).
                                                5
       ETI appealed the PUC’s decision on both purchased-capacity costs and

transmission-equalization expense.          The district court, Judge John K. Dietz

presiding, affirmed the PUC on both points. 29 ETI now appeals that decision to

this Court.

                            SUMMARY OF ARGUMENT
       Texas is a historical-test-year state. For many years, the PUC has set future

rates based on past costs. Under its cost-of-service rule, the PUC determines the

utility’s reasonable and necessary expenses during a historical test year. The PUC

may make adjustments to the test-year data to account for known and measurable

changes in the utility’s expenses, but, as both the Texas Supreme Court 30 and this

Court31 have acknowledged, the decision of whether to do so is within the PUC’s

discretion.

       Calling it an “anachronism,” ETI asked the PUC to abandon this regulatory

construct and provide for ETI’s purchased-capacity cost recovery through a rider.32

As a fallback proposal, ETI argued that the PUC should make an “adjustment” to

its test-year data for these costs by substituting in their place ETI’s projected levels

29
   CR 2118.
30
   City of El Paso v. Pub. Util. Comm’n of Texas, 883 S.W.2d 179, 188 (Tex. 1994).
31
   Cent. Power & Light Co. v. Pub. Util. Comm’n of Texas, 36 S.W.3d 547, 563 (Tex. App.—
Austin 2001, pet. denied).
32
   AR Part IV, Binder 43, Vol. B (Tr. at 35, Apr. 24, 2012); see also AR Part I, Binder 3, Item
157 (Initial Brief of ETI at 86).
                                              6
of expense for a future year. The PUC rejected the rider proposal and determined

that ETI had not met its burden of proving that its future projections were known

and measurable changes to the test-year costs. ETI appeals the latter point only.

      While ETI is careful to couch its appeal in terms of “substantial evidence”

and legal standards, it is evident that its true complaint is with the PUC’s practice

of setting rates based on historical data rather than future projections. Indeed,

ETI’s appeal on these points is premised on the notion that the PUC was required

to make a post-test-year adjustment despite the fact that such adjustments are

within the discretion of the PUC and despite the fact that ETI’s proposed

“adjustment” to test-year expenses was to disregard them entirely and use

projections of future costs. Were the Court to grant ETI’s appeal and hold that the

PUC had no choice but to use ETI’s projections, it would be effectively

invalidating the PUC’s practice of setting rates based on past costs and revenues

and mandating that Texas become a future-test-year state.              Such policy

determinations are for the Legislature and PUC, not the judiciary.

      Once ETI’s misdirected attempts to overhaul longstanding Texas policy are

rejected, what is left is a straightforward substantial-evidence inquiry.        The

historical-test-year costs ETI actually incurred for purchased capacity were

established in the record and undisputed.       The evidence showed that ETI’s

                                         7
projected future costs, on the other hand, were mere estimates based on numerous

interrelated variables that cannot be known with certainty ahead of time. For

example, ETI’s third-party contracts do not contain fixed price or quantity terms,

and the price ETI will ultimately pay will be based on the availability and

performance of its suppliers’ power-plants. Further, the evidence showed that ETI

did not take into account all the attendant impacts of its proposed changes to the

test-year data, as is required under the PUC’s rules. Among other things, ETI

failed to account for increased sales revenue from increased demand, i.e., “load

growth,” when calculating its estimated increase over test-year costs. Substantial

evidence supports the PUC’s finding that ETI’s projected future purchased-

capacity costs were not known and measurable changes to the test year.

      Similarly, ETI’s transmission-equalization expense projections were not

reasonably certain. The evidence showed that the level of this expense that ETI

would actually incur in the rate year is based on numerous variables that would not

be known until the future. Indeed, projecting future transmission-equalization

expense requires making estimates regarding not only ETI’s future operations and

demand, but also about those of every other Entergy affiliate on the Entergy

system. Additionally, ETI’s transmission-equalization expense projections were

based in large part on transmission projects that had not yet been completed, even

though ETI will not incur any expense as a result of such projects until they

                                        8
actually go into service. Substantial evidence supports the PUC’s finding that

ETI’s projected future transmission-equalization expenses were not a known and

measurable change to the test year.

                          ARGUMENT AND AUTHORITIES

I.     The PUC properly applied its longstanding historical-test-year
       standard.
       Under its cost-of-service rule, the PUC sets rates based on a historical test

year, adjusted for known and measurable changes. 33 With respect to expenses, the

rule provides that “only the electric utility’s historical test year expenses as

adjusted for known and measurable changes will be considered . . . .”34 As the

Texas Supreme Court has acknowledged, “PURA requires utilities to file for a rate

increase by presenting revenue and expense data from the same 12-month period

using a historical test year.” 35 PURA defines “test year” as “the most recent 12

months, beginning on the first day of a calendar or fiscal year quarter, for which

operating data for a public utility are available.” 36

       The use of a historical test year in ratemaking is important for at least two

reasons. First, it allows the PUC to look at a utility’s actual costs, rather than

various competing predictions about what its costs will be in some future period.

33
   16 Tex. Admin. Code § 25.231(a).
34
   16 Tex. Admin. Code § 25.231(b) (emphasis added).
35
   City of El Paso, 883 S.W.2d at 188 (citations omitted).
36
   PURA § 11.003(20).
                                                9
Rates are set for “an indefinite period into the future.” 37 And, as ETI

acknowledges, there is no true-up or reconciliation for expenses recovered in a

utility’s base rates.38 Consequently, the use of a utility’s unreliable projections of

future expenses could result in captive ratepayers being overcharged for years with

no possibility of a refund even if the projections turn out to be inflated.

      Second, test-year ratemaking allows for an accurate matching of a utility’s

costs in a particular period with its sales in the same period. 39 This is important

because a utility recovers its non-fuel costs through the base rates it charges its

customers. Specifically, each kilowatt hour (kWh) billed to customers recovers a

certain amount of expenses.40 Accordingly, any change in the number of kWh a

utility sells also changes the amount of expenses it recovers. In other words, when

a utility sells more kWh, it recovers more expenses in its base rates, without any

change to its rates. Utilities experiencing load growth will generally experience an

increase over time in their total costs, even if their per-unit costs remain the same,

simply because they are serving more load. But they will also receive more

revenues from additional sales to cover these costs. Thus, in setting rates, the time

37
   Suburban Util. Corp., 652 S.W.2d at 366.
38
   ETI Appellant’s Brief at 20.
39
   See, e.g., Cent. Power & Light Co., 36 S.W.3d at 563-64 (upholding the PUC’s decision to
deny a post-test-year adjustment that failed to take into account the attendant impacts of
increased electricity sales from load growth).
40
   For some customers, costs are recovered through a kilowatt charge in addition to a kWh
charge.
                                            10
period used for expenses must match the time period used for revenues. This

fundamental tenet of ratemaking, called the “matching principle,” 41 was

acknowledged in the PUC’s order when it found that ETI’s proposal to establish its

purchased power costs based on estimates in the future while simultaneously using

historical test year sales level to develop the per-unit rates was “logically

inconsistent.” 42

       A.     The known and measurable standard.
       While ratemaking in Texas is based on a historical test year, the PUC has

discretion to adjust the test year for known and measurable changes if (i) the

proposed changes can be identified with reasonable certainty, and (ii) all attendant

impacts can be accurately identified with reasonable certainty and taken into

account.43 ETI’s brief cites to several cases where the PUC’s adoption of known

and measurable changes has been approved on appeal. But ETI ignores the fact

that changes to the test year are within the discretion of the PUC. For instance,

ETI’s quote from the City of El Paso case leaves out the Supreme Court’s explicit

statement that “it is within the discretion of the PUC to consider expenditures that

occur outside the test year . . . .” 44 The Suburban Utility case similarly states that

41
   AR Part I, Binder 5, Item 185 (Proposal for Decision at 105).
42
   AR Part I, Binder 5, Item 185 (Proposal for Decision at 109), adopted by AR Part I, Binder 7,
Item 244 (Order on Rehearing at 1).
43
   See 16 Tex. Admin. Code § 25.231(a); Cen. Power & Light Co., 36 S.W.3d at 564.
44
   City of El Paso, 883 S.W.2d at 188 (emphasis added).
                                              11
changes occurring after the test year if known, may be taken into account.45

Notably, the Supreme Court explicitly upheld the PUC’s use of a historical test

year in that case, overruling a challenge to the use of past data instead of future

projections in setting rates.46 The Central Power & Light case recognizes the

same, holding that “the [PUC’s] authority to allow post-test-year adjustments for

‘known and measurable changes to the historical test year data’ is discretionary,

and its own substantive rules permit such changes only where ‘the attendant

impacts on all aspects of a utility’s operations can be with reasonable certainty

identified, quantified, and matched.’” 47

       There is good reason for the broad discretion given to the PUC in deciding

when to deviate from a historical test year. Prospective increases in one cost may

be offset with decreases in other costs. Or prospective changes in costs may be

due to the prospective increases in sales revenues, which may more than offset

those costs.     For these reasons, the PUC’s rules reflect that adjustments to

historical test year costs are appropriate only when the proposed changes are

45
   Suburban Util. Corp., 652 SW.2d at 366 (emphasis added).
46
   Id.
47
   Cent. Power & Light Co., 36 S.W.3d at 563 (citing 16 Tex. Admin. Code § 23.21(b). In a
1998 reorganization of the PUC’s rules, the referenced language was moved to what is now 16
Tex. Admin Code § 25.231(c)(2)(F)(IV), the portion of the cost-of-service rule related to
invested capital. The Texas Register states: “The post test year language currently appearing in
§23.21(b) will be modified and moved to §23.21(d)(2)(G)(i)(IV) and thus apply only to invested
capital items. The post test year adjustment language is superfluous in §23.21(b) because the
‘test year, adjusted for known and measurable changes’ language already allows for such
adjustments.” 23 Tex. Reg. 11515 (proposed Nov. 13, 1998), adopted 24 Tex. Reg. 1377 (Feb.
26, 1999).
                                              12
known and measurable with reasonable certainty and where the attendant impacts

on the utility’s revenues, expense, and invested capital can be quantified and

matched with reasonable certainty. 48

       In this case, ETI argues that the PUC misapplied the known-and-measurable

standard by requiring that changes to test year costs be proven with “absolute

certainty,” rather than reasonable certainty. 49 ETI offers no cite to the PUC’s order

to support its extraordinary claim that the PUC applied such a standard, nor is there

anything in the record that indicates that the PUC did so. To the contrary, a review

of the PUC’s order demonstrates that the PUC properly applied the same

“reasonable certainty” standard it has applied in numerous other cases and that ETI

acknowledges is the proper standard. 50 The PUC explained at length that there was

“substantial uncertainty” in ETI’s purchased capacity projections, and the PUC so

found as to each of the elements of ETI’s request.51 ETI ignores the actual

language of the PUC’s order in asserting that the PUC must have secretly applied

an unachievable standard of absolute certainty.

48
   16 Tex. Admin. Code §§ 25.231(b), 25.234(b).
49
   ETI Appellant’s Brief at 26.
50
   Id.
51
   AR Part I, Binder 7, Item 244 (Order on Rehearing at FoFs at 72-85).
                                              13
       B.      ETI’s true complaint is with the PUC’s cost-of-service rules, not
               the PUC’s application of them.
       It is apparent that ETI’s goal is the invalidation of the PUC’s longstanding

practice of setting rates based on historical data. Indeed, ETI argued throughout

the administrative hearing that the PUC’s historical-test-year approach was a

“regulatory model that’s an anachronism” that the PUC should abandon.52 And

ETI’s primary position, which the Commission rejected, was that its purchased-

capacity expenses should be recovered through a rider without reference to

historical data.53     ETI’s fallback proposal also would have disregarded the

historical-test-year data by completely displacing it with ETI’s speculative future

projections. ETI admitted that its proposal to apply purchased-capacity projections

from a future period to test year sales was without precedent. 54

       Setting aside the evidentiary problems with ETI’s request, which are

explained in greater detail below, its appeal suffers from an additional fatal flaw.

ETI contends that the PUC was required to make the proposed post-test-year

adjustments.     But as set forth above, the decision of whether to make such

adjustments is a matter that is within the discretion of the PUC. ETI cannot cite a

52
   AR Part IV, Binder 43, Vol. B (Tr. at 35, Apr. 24, 2012). See also AR Part I, Binder 3, Item
157 (Initial Brief of ETI at 86).
53
   AR Part I, Binder 1, Item 52 (Supplemental Preliminary Order of Public Utility PUC of Texas
at 2) (“The PUC finds that Entergy’s proposed purchased-power recovery rider should not be
considered in this docket due to the related rulemaking that is pending in Project No. 39246.”).
54
   AR Part IV, Binder 43, Vol. L (Tr. at 1957-58, May 3, 2012).
                                              14
singe case in which a court held that the PUC was required to make a post-test-year

adjustment. Nor can ETI point to any statutory requirement that the PUC make

such adjustments, though the Legislature could certainly enact one. ETI’s appeal

fails for this reason alone.

       The PUC and the district court saw ETI’s arguments for what they are—a

thinly veiled attack on the PUC’s longstanding practice of making future rates

based on past costs. What ETI actually sought at the PUC, and now seeks here, is

to change Texas from a historical-test-year state to a future-test-year state (at least

as to expenses). Whatever the policy merits of such an argument, it should be

addressed in an agency rulemaking or directed to the Legislature, not to the

courts. 55

II.    Substantial evidence supports the PUC’s determination of ETI’s
       purchased-capacity costs.
       Substantial evidence supports the amount of ETI’s purchased-capacity costs

the PUC included in ETI’s rates. The scope of review under the substantial-

55
   Rodriguez v. Serv. Lloyds Ins. Co., 997 S.W.2d 248, 255 (Tex. 1999) (citations omitted) (“A
presumption favors adopting rules of general applicability through the formal rulemaking
procedures as opposed to administrative adjudication. Allowing an agency to create broad
amendments to its rules through administrative adjudication rather than through its rulemaking
authority undercuts the Administrative Procedure Act (APA).”); Amarillo Indep. Sch. Dist. v.
Meno, 854 S.W.2d 950, 957 (Tex. App.—Austin 1993, writ denied) (“When an administrative
agency implements new requirements of general applicability, it ordinarily does so through
formal rule-making procedures . . . .”).
                                             15
evidence rule is limited.56 The issue for the reviewing court is not whether the

agency reached the correct conclusion, but whether there is some reasonable basis

in the record for the action taken by the agency. 57 A court may not substitute its

judgment for that of the agency. 58 Substantial evidence requires only more than a

mere scintilla, and “the evidence in the record actually may preponderate against

the decision of the agency and nonetheless amount to substantial evidence.” 59 “At

its core, the substantial evidence rule is a reasonableness test or a rational basis

test.”60

       A.     The PUC properly found that ETI’s forecasted purchased-
              capacity costs were not known and measurable.
       The historical test year in this proceeding was July 1, 2010 through June 30,

2011. 61    During this test year, ETI had purchased-capacity costs of $246 million.

This amount consists of purchases from third parties, purchases from affiliates, and

56
   PURA § 15.001; Tex. Gov’t Code §§ 2001.174, 2001.176.
57
   See City of El Paso, 883 S.W.2d at 185.
58
   Texas Health Facilities Comm’n v. Charter Medical-Dallas, Inc., 665 S.W.2d 446, 452 (Tex.
1984) (citing Gerst v. Guardian Sav. & Loan Ass’n, 434 S.W.2d 113, 115 (Tex. 1968)).
59
   Id. at 452 (citing Lewis v. Metropolitan Sav. & Loan Ass’n, 550 S.W.2d 11, 13 (Tex. 1977)).
60
   City of El Paso, 883 S.W.2d at 185.
61
   AR Part II, Binder 31 (ETI Ex. 4, Direct Testimony of Joseph F. Domino at 8).
                                             16
reserve-equalization payments. 62      ETI’s test year costs were actually incurred

during the historical test year, were established in the record, and were undisputed.

        Nevertheless, ETI sought to ignore them. In the place of its actual historical

test year costs, ETI proposed to use its forecast of the purchased-capacity costs it

would incur in what it called a future “rate year,” June 1, 2012 through May 31,

2013. 63 Thus, ETI did not truly seek to include in rates its “historical test year

expenses as adjusted for known and measurable changes.” 64                  Rather, ETI’s

proposal was to discard its actual test-year expenses altogether and substitute

speculative projections of future costs, based on a number of estimates about future

usage and contracts. Based on a vast administrative record, the PUC determined

that ETI’s projections were not “known and measurable” changes to the historical

test year costs. The PUC set forth its determination in the following findings of

fact:

        72.   ETI's test-year        purchased      capacity     expenses      were
              $245,965,886.

62
    AR Part II, Binder 41 (TIEC Ex. 1B, Confidential Exhibits and Workpapers to Direct
Testimony of Jeffry Pollock (CONFIDENTIAL 62) Workpapers, Filename: “Exhibits JP-1 and
JP-2 HS.xlsx,” spreadsheet/tab: “PPC Summary (Test Year)”).
63
   AR Part IV, Binder 43, Vol. F (Tr. at 761, Apr. 27, 2012); AR Part II, Binder 35 (ETI Ex.
34A, Confidential Direct Testimony of Robert R. Cooper, Exhibit RRC-1). As noted above, the
period ETI chose did not actually correspond to the rate year as that term is commonly
understood. See supra, p. 3-4.
64
   See 16 Tex. Admin. Code § 25.231(b) (emphasis added).
                                            17
73.   ETI requested an upward adjustment of $30,809,355 as a post-
      test-year adjustment to its purchased capacity costs. This
      request was based on ETI's projections of its purchased capacity
      expenses during a period beginning June 1, 2012 and ending
      May 31, 2013 (the rate-year).

74.   ETI's purchased capacity expense projections were based on
      estimates of rate-year expenses for: (a) reserve equalization
      payments under Schedule MSS-1; (b) payments under third-
      party capacity contracts; and (c) payments under affiliate
      contracts.

75.   ETI's projection of its rate-year reserve equalization payments
      under Schedule MSS-1 is based on numerous assumptions,
      including load growths for ETI and its affiliates, future capacity
      contracts for ETI and its affiliates, and future values of the
      generation assets of ETI and its affiliates.

76.   There is substantial uncertainty with regard to ETI's projection
      of its rate-year reserve equalization payments under Schedule
      MSS-1.

77.   ETI’s projection of its rate-year third-party capacity contract
      payments includes numerous assumptions, one of which is that
      every single third-party supplier will perform at the maximum
      level under the contract, even though that assumption is
      inconsistent with ETI's historical experience.

78.   There is substantial uncertainty with regard to ETI's projection
      of its rate-year third-party capacity-contract payments.

79.   ETI's estimates of its rate-year purchases under affiliate
      contracts are based on a mathematical formula set out in
      Schedule MSS-4.

80.   The MSS-4 formula for rate-year affiliate capacity payments
      reflects that these payments will be based on ratios and costs
      that cannot be determined until the month that the payments are
      to be made.

                                  18
       81.    Over $11 million of ETI's affiliate transactions were based on a
              2013 contract (the EAI WBL Contract) that was not signed
              until April 11, 2012.

       82.    There is uncertainty about whether the EAI WBL Contract will
              ever go into effect.

       83.    ETI projects purchasing over 300 megawatts (MW) more in
              purchased capacity in the rate-year than it purchased in the test-
              year.

       84.    ETI experienced substantial load growth in the two years before
              the test-year, and it continues to project similar load growth in
              the future.

       85.    ETI did not meet its burden of proof to demonstrate that a
              known and measurable adjustment of $30,809,355 should be
              made to its test-year purchased capacity expenses.

       86.    ETI's purchased capacity expense in this case should be based
              on the test-year level of $245,965,886.

       In an effort to detract from the PUC’s detailed and thoroughly supported

factual findings, ETI focuses in its brief on three new third-party contracts totaling

618 MW. 65 But ETI fails to acknowledge that all elements of its purchased-

capacity projections are interrelated, such that when one component increases, the

others will decrease.66 In fact, ETI’s proposal to the PUC consisted of estimating

its costs under three new third-party contracts, recalculating the costs of three other

third-party contracts based on these estimates, making concomitant changes to the

65
 ETI Appellant’s Brief at 38.
66
 AR Part I, Binder 5, Item 185 (Proposal for Decision at 101). See also AR Part IV, Binder 43,
Vol. L (Tr. at 1946-47, May 3, 2012).
                                             19
amounts of the payments under seven different affiliate contracts, and adjusting the

amount of its reserve-equalization payments based on its forecasted capacity

purchases.67 All told, ETI’s forecast of its rate year purchased-capacity costs

involves fourteen separate and interrelated sources of purchased capacity.

      ETI’s brief highlights three of the fourteen moving parts and asserts that

ETI’s projections under each of those contracts were known with reasonable

certainty. That was not the case, as the PUC found. But even if it were true, ETI

would still not have met its burden to show an increase in its overall purchased

capacity, because a post-test-year-adjustment may only be made if all of the

attendant impacts can be identified and accounted for with reasonable certainty. 68

                 1. ETI’s projected third-party contract costs were not
                    reasonably certain.
      The evidence showed that ETI’s third-party contracts do not contain fixed

price terms and that the amount ETI will ultimately pay is subject to fluctuation

based on a variety of factors.69 Indeed, ETI admits in its brief that there is

uncertainty concerning the payments it will make under the third-party contracts in

67
   AR Part II, Binder 35, ETI Ex. 34A (Direct Testimony of Robert R. Cooper, Exhibit RRC-1
(HS)); AR Part II, Binder 41 (TIEC Ex. 1B, Confidential Exhibits and Workpapers to Direct
Testimony of Jeffry Pollock (CONFIDENTIAL 62) Workpapers, Filename: “Exhibits JP-1 and
JP-2 HS.xlsx,” spreadsheet/tab: “PPC Summary (Test Year)”).
68
   16 Tex. Admin. Code § 25.231(c)(2)(F)(i)(IV); See Cent. Power & Light Co., 36 S.W.3d at
564.
69
   AR Part I, Binder 5, Item 185 (Proposal for Decision at 108).
                                           20
the future. 70 Nevertheless, ETI asked the PUC—and now asks the Court—to

simply trust that any differences between its forecasted rate year costs and the costs

it will actually incur will be “very, very small.” 71 The record, however, supports

the PUC’s finding that ETI’s predictions were unreliable.

       ETI’s third-party contracts are associated with generation units from specific

suppliers. As such, each contract contains numerous provisions that will affect

whatever payments ETI will eventually make when the time comes, based in part

on the supplier’s actual availability and future performance. 72             ETI witness

Richard Cooper acknowledged that historically there have been adjustments to the

payments ETI makes under third-party contracts due to availability. 73 Despite this

real-world experience, ETI made no attempt whatsoever to adjust its third-party

contract projections to reflect the availability and performance of the plants in

question. Instead, ETI simply assumed that the performance and the availability of

70
   ETI Appellant’s Brief at 32.
71
   AR Part I, Binder 5, Item 185 (Proposal for Decision at 108); ETI Appellant’s Brief at 32
(arguing that the deviations from the contract will be “very, very small”).
72
   AR Part IV, Binder 43, Vol. D (Tr. at 682, 704-05, Apr. 26, 2012).
73
   AR Part IV, Binder 43, Vol. D (Tr. at 704, Apr. 26, 2012); see also AR Part II, Binder 41
(TIEC Ex. 1B, Confidential Exhibits and Workpapers to Direct Testimony of Jeffry Pollock
(CONFIDENTIAL 62) Workpapers, Filename: “Exhibits JP-1 and JP-2 HS.xlsx,”
spreadsheet/tab: “PPC Summary (Test Year)”).
                                            21
the supplier power plants would be at their maximum, with no disallowances

whatsoever. 74

       Accordingly, ETI’s projections assumed consistent numbers, generally an

even number, for each month of the contracts, subject to the weighting for seasonal

differentials.75 ETI’s actual historical payments for third-party contracts, however,

show wide month-to-month variations in purchased power costs, and the round

numbers reflecting the maximum contractual payments are largely absent.76

       Mr. Cooper admitted that, with respect to these third-party contracts, ETI

would not know the amount of the actual payments made until the rate year comes

and goes. 77     Moreover, ETI made no effort to take historical performance

characteristics into account when making its projections of future costs. 78 Indeed,

when cross-examined about the variability in purchased-capacity contracts in the

past, ETI’s witness admitted that he was not familiar with the variance in the test-

year purchased-capacity contracts. 79           Thus, not only were ETI’s proposed

74
   AR Part IV, Binder 43, Vol. D (Tr. at 705, Apr. 26, 2012); AR Part I, Binder 5, Item 185
(Proposal for Decision at 108).
75
   AR Part II, Binder 35 (ETI Ex. 34A, Confidential Direct Testimony of Robert. R. Cooper
Exhibit, RRC-1 at lines 1-7).
76
   AR Part II, Binder 41 (TIEC Ex. 1B, Confidential Exhibits and Workpapers to Direct
Testimony of Jeffry Pollock (CONFIDENTIAL 62) Workpapers, Filename: “Exhibits JP-1 and
JP-2 HS.xlsx,” spreadsheet/tab: “PPC Summary (Test Year)”).
77
   AR Binder 43, Vol. E (Tr. at 607-09, April 26, 2012) (Confidential).
78
   ETI Initial Br at 33, 35; AR Binder 43, Vol. F (Tr. at 705, Apr. 26, 2012); AR Binder 43, Vol.
L Tr. at 1942, May 3, 1942).
79
   AR Binder 43, Vol. L (Tr. at 1960-62, May 3, 2012).
                                               22
purchased-capacity costs mere projections, they were projections that ignored

ETI”s historical experience.

       Mindful of its burden to establish that its proposed post-test-year

adjustments were known and measurable, ETI implies that its projected future

costs are somehow fixed simply because the contracts were in place. 80 However,

the signed contracts provide for variations in costs based on future performance.81

Indeed, at the administrative hearing, ETI counsel’s attempted to draw a dichotomy

between (1) projections and (2) a fixed contractual payment in questioning Mr.

Cooper. Unfortunately for ETI, Mr. Cooper confirmed that the purchased-capacity

estimates fall on the “projections” side of that dichotomy:

              Q.     (by Mr. Westerburg) Now, are the costs that we’re
                     looking at here projections or are they contractually
                     based?

              A.     Well, they are contractually based projections . . . 82

       No matter how ETI tries spin it, the third-party purchased-capacity

projections for the future are just that—projections. They are based on numerous

assumptions, including that, contrary to history, every supplier performs at the

80
   ETI Appellant’s Brief at 28.
81
   AR Item IV, Binder 43, Vol. D (Tr. at 682, 704-05, Apr. 26, 2012).
82
   AR Item IV, Binder 43, Vol. D (Tr. at 682, Apr. 26, 2012) (emphasis added).
                                              23
maximum level throughout every month of the future period. The PUC properly

found that the projections were not reasonably certain.

       Multiple times in its brief, ETI asserts, in italics, that “no witness”

challenged ETI’s calculations of projected costs under a particular contract. 83 As

an initial matter, ETI itself scarcely addressed these issues in its direct testimony,

because its primary proposal was to recover these costs under a rider. 84 Further, it

cannot be disputed that intervenor witnesses opposed the use of ETI’s proposed

test-year adjustment for purchased-capacity costs.85 For example, TIEC witness

Jeffry Pollock explicitly asserted that ETI’s substitution of projected “rate year”

costs for actual test-year costs violated the PUC’s rules, “which require that rates

be set using an historical Test Year adjusted for known and measurable changes.” 86

       Moreover, the record does not consist merely of the prefiled testimony of

intervenor or PUC Staff witnesses. The administrative hearing in this case lasted

two weeks, and much of the examination and cross-examination concerned ETI’s

proposed purchased-capacity projections. The record as a whole demonstrates that

ETI’s projections were substantially uncertain. As set out above, this was shown

by: (i) the admissions of ETI’s own witnesses that the actual costs could not be

83
   ETI Appellant’s Brief at 29, 30, 32.
84
   AR Part II, Binder 31, ETI Ex. 7 (Direct Testimony of Phillip May at 23).
85
   AR Part I, Binder 5, Item 185 (Proposal for Decision at 106-107).
86
   AR Part II, Binder 41, TIEC Ex. 1 (Direct Testimony of Jeffry Pollock at 8).
                                               24
known, (ii) the dramatic contrast between the highly variable purchased capacity

costs that ETI’s has actually incurred in the past and the round number future

projections, and (iii) the absence of anything other than conclusory assertions

about what the future purchased capacity costs would be. Substantial evidence

supports the PUC’s finding that ETI’s projected rate-year costs for third-party

contracts were not reasonably certain.

                  2. ETI’s projected affiliate-contract costs were not reasonably
                     certain.
       ETI’s projections of its purchases from affiliates under schedule MSS-4

make up the largest component of its projected $276 million in future purchased

capacity costs.87 As with ETI’s third-party contracts, ETI’s projected future costs

under its agreements with its affiliates were substantially uncertain. The affiliate

contracts do not set fixed price or quantity terms, and their costs will fluctuate

based on the operational conditions that will be experienced in the future.88

Accordingly, ETI made assumptions about unknown variables to come up with its

projected MSS-4 costs for the rate year. 89 Notably, ETI’s brief offers no response

87
   AR Part II, Binder 35, ETI Ex. 34A (Confidential Direct Testimony of Robert R. Cooper,
Exhibit RRC-1).
88
   AR Part I, Binder 5, Item 185 (Proposal for Decision at 102), AR Part IV, Binder 43, Vol. D.
(Tr. at 606, Apr. 26, 2012).
89
   Id.
                                              25
to the PUC’s finding that the future costs for these affiliate contracts will fluctuate

based on numerous operational conditions that cannot be predicted. 90

       The evidence showed that ETI’s projections were unreliable. The witness

that ETI offered in support of its projected MSS-4 cost calculations, Mr. Cooper,

admitted that he was not familiar with how capacity charges are calculated under

MSS-4.91 In fact, he had never even dealt with how capacity charges under MSS-4

were calculated.92 Yet ETI asked the PUC to accept the projections given to Mr.

Cooper without any support whatsoever for that calculation.

       Further, the MSS-4 formula contains complicated and interrelated variables

for calculating affiliate-capacity costs that are dependent on numerous inputs that

cannot be determined until some future time. 93 The determination of the monthly

per-unit capacity charge is only part of the equation.                   There are similar

complexities involved in any attempt to project the actual amount of capacity in

kW that ETI would purchase in the future.94 Given the complicated nature of the

formula and the fact that numerous inputs are based on events in the future, it is

90
   AR Part I, Binder 5, Item 185 (Proposal for Decision at 108), adopted by AR Part I, Binder 7,
Item 244 (Order on Rehearing at 1).
91
   AR Part IV, Binder 43, Vol. D (Tr. at 634-36, Apr. 26, 2012).
92
   Id.
93
   AR Part II, Binder 42, TIEC Ex. 22 (“Service Schedule MSS-4 Unit Power Purchase, Exhibit
PJC-1, 2011 TX Rate Case” at 68-69).
94
   AR Part II, Binder 42, TIEC Ex. 22 (“Service Schedule MSS-4 Unit Power Purchase, Exhibit
PJC-1, 2011 TX Rate Case” at 62-63); AR Part IV, Binder 43, Vol. E (Tr. at 628-29, Apr. 26,
2012) (Confidential).
                                              26
little wonder that Mr. Cooper could offer no support or explanation for the

projection he was given. 95 ETI’s evidence in support of the MSS-4 projections

amounts to little more than Mr. Cooper’s statement that someone else at ETI had

made these calculations and that, even though he could not support them, the PUC

should accept them. 96

       ETI’s brief asserts that the uncertainty about the affiliate purchases can be

ignored because the amounts were not that much different than the test year

amounts for this particular source of purchased capacity. 97 ETI ignores the fact,

however, that the various sources of purchased capacity are interrelated so that, as

the amount of capacity from one source increases, the amount from other sources

will decrease. ETI’s test-year affiliate-purchased-capacity costs were incurred in a

world without the additional third-party purchased-capacity contracts that ETI

projected for the future period. ETI offered nothing but conclusory assertions for

how its affiliate-purchased-capacity costs would be affected by the new third-party

contracts. 98

       ETI’s contract with Entergy Arkansas (the EA WBL contract), which

accounts for more than one-third of ETI’s projected $31 million increase in

purchased-capacity costs over the test year, highlights the problems with ETI’s
95
   AR Part IV, Binder 43, Vol. D (Tr. at 634-36, Apr. 26, 2012) (Confidential).
96
   AR Part IV, Binder 43, Vol. D (Tr. at 634-36, Apr. 26, 2012).
97
   AR Part I, Binder 3, Item 157 (ETI Initial Br. at 39).
98
   See, e.g., AR Part IV, Binder 43, Vol. E (Tr. at 607-609, Apr. 26, 2012) (Confidential).
                                                27
projected affiliate-contract expenses. The evidence showed that ETI’s costs under

this contract, which ETI executed only days before the administrative hearing and

months after it initiated the underlying proceeding, were substantially uncertain.

Pricing under the contract was not determined at the time of the PUC proceeding,

but would instead be set based on the MSS-4 schedule in 2013. 99 The quantity of

capacity ETI ultimately purchases under the EA WBL contract was also unknown;

it would be based on a yet-to-be-determined allocation percentage between ETI

and its Entergy affiliates.100 In fact, it was not clear that the contract would ever go

into effect, because it was contingent on ETI receiving regulatory approvals that it

had not yet received at the time of the PUC proceeding. 101 And even if it did go

into effect, it would be subject to two further revisions before ETI ever received

any power.102 The EAI contract is a prime example of why the PUC properly

found that ETI’s affiliate-cost projections were not reasonably certain.

                  3. ETI’s projected MSS-1 costs were not reasonably certain.
       The third component of ETI’s purchased-capacity cost projections was for

MSS-1 payments, also known as reserve-equalization payments.                           Reserve-

equalization payments are payments among various ETI affiliates relating to each

99
   AR Part I, Binder 5, Item 185 (Proposal for Decision at 102) (citing AR Part II, Binder 37, ETI
Ex. 47 (Rebuttal Testimony of Robert R. Cooper at RRC-R-1), and AR Part IV, Binder 43 (Tr. at
628-9, Apr. 26, 2012)).
100
    Id.
101
    Id.
102
    Id.
                                               28
affiliate’s proportionate share of the Entergy System capacity. 103 MSS-1 payments

reflect that some affiliates are “long” on capacity while others are “short” on

capacity. 104 As a utility purchases capacity from third parties or affiliates, its MSS-

1 payments will decrease, all other things equal. Reserve equalization payments

are based on a complex formula in the Entergy System Agreement. 105 In order to

make an estimate of future costs, ETI was required to project not only its own load

growth, but also the load growth of every other Entergy affiliate. 106

       ETI acknowledges that if the load of even one Entergy affiliate is less than

predicted, ETI’s projected MSS-1 payments would change. 107 MSS-1 payments

would also change if there was increased load growth for ETI or any affiliate.108

Or if any one of the other Entergy affiliates signed a new purchased-capacity

contract.109 Or if the future book value of the generation assets of any Entergy

affiliate was not identical to projections. 110 ETI admitted at the hearing that there

was “some uncertainty” in its MSS-1 projections.111 In fact, ETI’s projections

were so uncertain that ETI proposed to change them by $4.5 million in a brief after
103
    AR Part II, Binder 36, ETI Ex. 39 (Direct Testimony of Patrick J. Cicio at 11-12).
104
    Id.
105
    AR Part II, Binder 36, ETI Ex. 39 (Direct Testimony of Patrick J. Cicio at Exhibit PJC-1 at
30-37).
106
    AR Part IV, Binder 43, Vol. D (Tr. at 651-52, Apr. 26, 2012).
107
    AR Part IV, Binder 43, Vol. D (Tr. at 651-52, Apr. 26, 2012).
108
    Id.
109
    Id.
110
    AR Part IV, Binder 43, Vol. L (Tr. at 1915, May 3, 2012).
111
    Id. at 1918-19.
                                              29
the administrative hearing on the merits had concluded. 112 It is easy to see why

the PUC did not find ETI’s cost projections to be reasonably certain. As with the

other components of its $276 million purchased capacity projections, the projected

MSS-1 costs were cobbled together from a host of unexplained assumptions and

prognostications. Substantial evidence supported the PUC’s decision to reject

them.

                  4. ETI’s proposal failed to account for revenues from load
                     growth.
        In addition to ETI’s cost estimates being uncertain, the evidence also

showed that ETI failed to take into account attendant impacts related to its

proposed adjustment and failed to comply with the matching principle. As the

PUC found, ETI based its projections of future capacity costs on the assumption

that it will experience higher sales in that future period. 113 But ETI’s proposal

would set rates by applying its higher projected purchased-capacity costs for the

future period to its sales (i.e., billing determinants) from the past test year. 114

        ETI’s proposal ignores the fact that utilities purchase or build capacity in

order to meet their projected demands, and that increased demands bring higher

revenues. Any utility experiencing growth in the amount of electricity it sells will

necessarily have to build or buy additional capacity to meet that growth. For such

112
    AR Part I, Binder 3, Item 157 (ETI Initial Br. at 77).
113
    AR Part I, Binder 5, Item 185 (Proposal for Decision at 109).
114
    Id.
                                               30
a utility, the total cost of capacity in the future will almost always be higher than

the total cost of capacity in a prior period (unless the unit cost of capacity is falling

at a faster rate than the sales are increasing). Critically, however, the revenues that

the utility receives in the future period will also increase as its load grows. Thus,

assuming the per-unit cost of capacity remains constant, any increase in total

capacity costs will be paid for by the increase in total capacity-related revenues.

And even if the per-unit cost of capacity increases, the increase in capacity-related

revenues will still partially offset the increased capacity costs. 115 Accordingly, in

accordance with the matching principle, 116 the PUC sets rates based on a

concurrent review of costs and sales in the same year.

       It is undisputed that ETI was experiencing load growth. For the two-year

period preceding the test year, ETI’s retail sales (measured in kW) grew by over

7%. 117 For the two years beyond the test year, ETI projected an overall increase in

ETI’s capacity of about 7.8%.118 In fact, at the time of the administrative hearing,

ETI had already contracted for 6% more load in the rate year. 119 The evidence thus

showed that ETI projected load growth, and the PUC properly found that ETI’s

115
    The Proposal for Decision contains a hypothetical illustrating this point. AR Part I, Binder 5,
Item 185 (Proposal for Decision at 105).
116
    AR Part II, Binder 41, TIEC Ex. 1 (Direct Testimony of Jeffry Pollock at 18-19).
117
    AR Part IV, Binder 43, Vol. B (Tr. at 128-30, Apr. 24, 2012).
118
    Id. at 1540.
119
    AR Part I, Binder 5, Item 185 (Proposal for Decision at 109) (citing AR Part II, Binder 37,
ETI Ex. 47 (Rebuttal Testimony of Robert R. Cooper at 4); AR Part IV, Binder 43, Vol. D (Tr. at
667-68, Apr. 26, 2012).
                                                31
proposal to mix test-year billing determinants and projected future costs was

“logically inconsistent” and a violation of the matching principle. 120

       Indeed, ETI does not deny that load growth increases its revenues and can

thus offset increased costs, such as purchased-capacity costs. Instead, ETI argues

that the PUC is simply not allowed to consider load growth when making post-test-

year adjustments.121 Specifically, ETI argues that if it the PUC were supposed to

consider future load growth in setting base rates, the Legislature would have said

so.122 ETI fails to mention, however, that the Legislature has not directed the PUC

to consider projected future expenses in setting base rates either. ETI nonetheless

proposed that future expenses should be considered, but that future revenues

should be ignored. The PUC properly rejected this illogical request.123 Moreover,

while ETI has cited no authority for the proposition that the PUC may not consider

load growth in determining post-test-year adjustments, this Court has come to the

opposite conclusion. In Central Power & Light Co., the Court upheld the PUC’s

decision to deny a post-test-year adjustment that failed to take into account the

attendant impacts of increased electricity sales from load growth. 124               If ETI

120
    AR Binder 5, Item 185 (Proposal for Decision at 109).
121
    ETI’s appellant’s brief at 32-33.
122
    Id.
123
    AR Part I, Binder 7, Item 244 (Order on Rehearing at 7).
124
    E.g., Cent. Power & Light Co., 36 S.W.3d at 564 (upholding the PUC’s decision to deny a
post-test-year adjustment that failed to take into account the attendant impacts of increased
electricity sales from load growth).
                                             32
believes that the PUC should stop considering load growth when evaluating post-

test-year adjustments, it should take that policy matter up with the Legislature, not

the courts.

       ETI also argues that the load growth would not materialize for two years and

complains that the intervenor witnesses failed to quantify the effect of load growth

or, in the case of the Cities’ witness, got it wrong.125 Initially, ETI had the burden

of proof, not intervenors. It was not intervenors’ job to fix ETI’s proposed test-

year adjustment. Further, the evidence showed that ETI would experience load

growth during its proposed rate year, and that this would offset at least some of

ETI’s future expenses. 126 Moreover, multiple intervenor witnesses testified that

when all the proper attendant impacts were taken into account, ETI’s future

purchased-capacity costs would be lower than its test-year costs, not higher.127

ETI did not meet its burden of identifying with reasonable certainty its future

purchased-capacity costs net of increased revenues due to load growth.

       In summary, there was substantial evidence to support the PUC’s findings

that ETI’s speculative rate-year projections were not known and measurable, that

ETI failed to identify, quantify, and match all attendant impacts of its proposed

125
    ETI Appellant’s Brief at 33.
126
    AR Part I, Binder 5, Item 185 (Proposal for Decision at 109), AR Part I, Binder 7, Item 244
(Order on Rehearing at FoF 84).
127
    AR Part II, Binder 9, Cities Ex. 6C (Confidential Direct Testimony and Exhibits of Karl J.
Nalepa at 17); AR Part II, Binder 8, Cities Ex. 4 (Direct Testimony of Dr. Dennis W. Goins at
19); AR Part II, Binder 41, TIEC Ex. 1 (Direct Testimony and Exhibits of Jeffry Pollock at 27).
                                              33
adjustment with reasonable certainty, and that its proposal violated the matching

principle.

         B.     Having failed to meet its burden of proof, ETI is not entitled to its
                proposed post-test-year adjustments.
         ETI repeatedly argues that the PUC must have erred because it did not allow

ETI to recover at least some of its projected increase to its test-year expenses for

purchased capacity. 128 This contention ignores the fact that ETI had the burden of

proving that its changes to its historical-test-year costs were known and

measurable. 129       ETI could have relied on the test-year costs, which were

established in the record. But instead it elected to seek recovery of its forecasted

expenses for a future year. For the reasons discussed above, the PUC properly

found that ETI did not meet its burden of proving that its projected costs were

known and measurable. Accordingly, ETI’s contention that it was entitled to at

least some of it its proposed $31 million increase over the actual test-year costs

makes little sense. Indeed, it would have been arbitrary and capricious for the

PUC to determine that ETI’s forecast was unreliable because its costs were

substantially uncertain, but to nevertheless award ETI some fraction of its

estimated increase anyway.           The PUC’s decision to reject ETI’s speculative

projections was supported by substantial evidence.

128
      ETI Appellant’s Brief at 27, 39.
129
      PURA § 36.006; Central Power & Light Co., 36 S.W.3d at 564.
                                              34
        Further, ETI’s complaint that a “wholesale disallowance” 130 of its projected

purchased-capacity increases was unwarranted is belied by the evidence. During

the course of the PUC proceeding, three intervenor witnesses produced their own

analyses of what ETI’s purchased-capacity costs would look like if the test-year

data were adjusted. Notably, all three concluded that ETI’s costs would be lower

than what it actually incurred in the test year by estimates ranging from $3 million

to $8 million.131 Thus, even if the PUC had decided to descend into the rabbit hole

and engage in ratemaking by prognostication, it had evidence before it that ETI

was not entitled to any increase over test-year costs whatsoever. ETI’s contention

that it proved entitlement to at least some increase over its test-year costs is

without merit.

        For all of the foregoing reasons, a reasonable basis exists in the record for

the PUC’s decision that ETI did not meet its burden of proving that its projected

future purchased-capacity costs were known and measurable changes to the test

year. 132

130
    ETI’s appellant’s brief at 27.
131
    AR Part I, Binder 5, Item 185 (Proposal for Decision at 106-7); AR Part II, Binder 9, Cities
Ex. 6C (Confidential Direct Testimony and Exhibits of Karl J. Nalepa at 17); AR Part II, Binder
8, Cities Ex. 4 (Direct Testimony of Dr. Dennis W. Goins at 19); AR Part II, Binder 41, TIEC
Ex. 1 (Direct Testimony and Exhibits of Jeffry Pollock at 27).
132
    City of El Paso, 883 S.W.2d at 185; PURA § 36.006.
                                              35
III.   The PUC properly rejected ETI’s proposal to base transmission
       equalization expense on projections of future costs.
       The analysis is the same for the PUC’s rejection of ETI’s proposed post-test-

year adjustment to its transmission-equalization expense. During the test year, ETI

incurred $1.754 million of actual transmission-equalization expense. 133 Instead of

relying on this number, ETI proposed that its rates be set based upon a future

projection of $10.697 million in transmission equalization expense, which ETI

asserted was a forecast of its rate-year (i.e., June 2012 through May 2013)

expense.134    The evidence showed that ETI’s projection was speculative and

unreliable. ETI’s rate-year expense would be driven by uncertain future costs and

loads of each of the Entergy Operating Companies (“EOCs”). 135 Moreover, ETI’s

$8.9 million upward adjustment was premised on costs for transmission projects

that were in varying stages of design and construction and would not actually

impact its equalization costs until they were completed and in service.        Based on

the evidence, the PUC made the following findings of fact:

       87.    ETI incurred $1,753,797 of transmission equalization expense
              during the test-year.

133
    AR Part II, Binder 9, Cities Ex. 28 (ETI Response to Cities 3-3(g)).
134
    AR Part II, Binders 21-30, ETI Ex. 3 (Schedule P Workpapers at AJ23).
135
    At the time of the hearing, the EOCs were Entergy Arkansas, Inc. (“EAI”), Entergy Gulf
States Louisiana, LLC (“EGSL”), Entergy Louisiana, LLC (“ELL”), Entergy Mississippi, Inc.
(“EMI”), Entergy New Orleans, Inc. (“ENOI”), and Entergy Texas, Inc. (“ETI”). AR Part IV,
Binder 43, Vol. F (Tr. at 734-37, Apr. 27, 2012).
                                           36
88.   ETI proposed an upward adjustment of $8,942,785 for its
      transmission equalization expense. This request was based on
      ETI's projections of its transmission equalization expenses
      during the rate-year.

89.   The transmission equalization expense that ETI will pay in the
      rate-year will depend on future costs and loads for each of the
      Entergy operating companies.

90.   ETI's projection of its rate-year transmission equalization
      expenses is uncertain and speculative because it depends on a
      number of variables, including future transmission investments,
      deferred taxes, depreciation reserves, costs of capital, tax rates,
      operating expenses, and loads of each of the Entergy operating
      companies.

91.   ETI seeks increased transmission equalization expenses for
      transmission projects that are not currently used and useful in
      providing electric service. ETI's post-test-year adjustment is
      based on the assumption that certain planned transmission
      projects will go into service after the test-year. At the close of
      the hearing, none of the planned transmission projects had been
      fully completed and some were still in the planning phase.

92.   It is not reasonable for ETI to charge its retail ratepayers for
      transmission equalization expenses related to projects that are
      not yet in-service.

93.   ETI's request for a post-test-year adjustment of $8,942,785 for
      rate-year transmission equalization expenses should be denied
      because those expenses are not known and measurable. ETI's
      post-test-year adjustment does not with reasonable certainty
      reflect what ETI's transmission equalization expense will be
      when rates are in effect.

94.   ETI's transmission equalization expense in this case should be
      based on the test-year level of $1,753,797.

                                  37
       As set forth below, the record is replete with evidence to support these

findings and the PUC’s holding that “ETI’s post-test-year adjustment does not

with reasonable certainty reflect what ETI’s transmission equalization expense will

be when rates are in effect.” 136

       A.     Substantial evidence supports the PUC’s decision.
       The Entergy System Agreement (“ESA”) requires that the various EOCs

equalize the ownership and operating costs of certain transmission investment

across the system. 137 Transmission-equalization expense accordingly relates to

monthly payments that ETI makes (or receives) based upon the obligation to share

the costs of transmission capacity on the Entergy System. In some years, ETI

makes transmission equalization payments; in other years, it is a recipient of

payments. As explained below, there are a host of variables that drive an EOC’s

monthly transmission equalization obligation, including the loads of the various

operating companies vis-à-vis the Entergy System and the in-service dates of

transmission investment.

136
   AR Part I, Binder 7, Item 244 (Order on Rehearing at 21).
137
   Inter-transmission investment is defined in Service Schedule MSS-2 of the ESA and generally
includes transmission line investment at 230 kV and above, as well as certain investment in
transmission substations and certain lines 115 kV and higher from an owning company’s last
substations to the connecting point of another company. See AR Part II, Binder 36, ETI Ex. 39
(Direct Testimony of Patrick J. Cicio at Exhibit PJC-1 at 38).
                                             38
                  1. ETI’s transmission-equalization costs are variable and
                     uncertain.
       Entergy performs “transmission equalization” based upon a complex six-

page formula set out in Service Schedule MSS-2 (“MSS-2”) of the ESA.138 At the

hearing, ETI witness Patrick Cicio testified that ETI’s forecast of transmission

equalization expense was based upon a number of variables from each of the six

EOCs that are inter-dependent and that would affect ETI’s ultimate transmission

equalization expense during the rate year. These variables include:

          • Future transmission investment for each EOC; 139
          • Future deferred taxes for each EOC; 140
          • Future depreciation reserves for each EOC; 141
          • Future costs of capital for each EOC (including capital structure and
              cost of debt and preferred and common equity); 142
          • Future tax rates for each EOC; 143
          • Future operating expenses for each EOC (including depreciation
              factors, insurance expense, property tax, franchise tax, and operations
              and maintenance expense); and 144

138
    AR Part II, Binder 36, ETI Ex. 39 (Direct Testimony of Patrick J. Cicio at Exhibit PJC-1 at
38-43).
139
    AR Part IV, Binder 43, Vol. F (Tr. at 738, Apr. 27, 2012).
140
    Id. at 740.
141
     Id. at 741.
142
     Id.
143
     Id. at 742.
144
     Id. at 742-43.
                                              39
          • Future responsibility ratios for each EOC, which are based upon a
               rolling 12-month average of each EOC’s peak usage coincident with
               the Entergy System peak usage.145

       The steps of the complicated calculation that Entergy performs each month

to calculate transmission expense are in the record in this case. 146 The calculation

shows that ETI’s transmission-equalization expense will change should there be a

change in any one of the EOC’s forecasted amounts of transmission investment,

sales, or operating costs, or a change to the cost of capital. ETI’s post-test-year

adjustment was therefore predicated on a calculation that required numerous

predictions about uncertain future capital costs, expenses, and load for each of the

EOCs. The assertion that ETI would incur $10.7 million in MSS-2 expense in its

rate year was therefore dubious and did not meet the known and measurable

standard set forth by 16 Tex. Admin. Code § 25.231(a).

                  2. ETI’s projections were based on projects that were not yet
                     in-service.
       ETI’s    projected    transmission-equalization      expenses     are   particularly

speculative because they are premised on investment related to transmission

projects that were not yet in-service and were in varying stages of design and

145
    Id. at 746-48.
146
    AR Part II, Binder 9, Cities Ex. 39 (“Attachment 3, Summary of Monthly MSS-2
Calculation”) and AR Part II, Binder 41, TIEC Ex. 1 (Direct Testimony and Exhibits of Jeffry
Pollock at JP-3).
                                            40
construction.147 ETI witness Mark McCulla explained that the primary driver of

the $10.697 million forecasted increase over test-year costs was based on an

anticipated $184.9 million of additional transmission investment on the Entergy

System for the period June 2012 through May 2013. 148                        However, at the

administrative hearing, he conceded that the majority of the projects driving the

investments were still in the design and construction phase and had not yet been

completed.149 Indeed, some of the projects had projected completion dates as far

out as December 2012, six months after the new rates in the case were to go into

effect on June 30, 2012.150 It was therefore unclear when these projects would

actually go into service. As ETI witness Mr. Cicio admitted: “In-service dates can

change. They could go forward. They could go backward. I’ve seen it both

ways.” 151

       Investment is not counted for MSS-2 calculation purposes until the

transmission is actually in service and providing electric service to customers.152

147
    See AR Part II, Binder 36, ETI Ex. 39 (Direct Testimony of Patrick J. Cicio at Ex. PJC-1 at
39). See also AR Part IV, Binder 43, Vol. F (Tr. at 770, Apr. 27, 2012).
148
    AR Part II, Binder 37, ETI Ex. 59 (Rebuttal Testimony of Mark F. McCulla at 2 and Exhibit
MFM-R-1).
149
    AR Part II, Binder 37, ETI Ex. 59 (Rebuttal Testimony of Mark F. McCulla at 2 and Exhibit
MFM-R-1); AR Part IV, Binder 43, Vol. C (Tr. at 457-58, Apr. 25, 2012).
150
     See AR Part II, Binder 37, ETI Ex. 59 (Rebuttal Testimony of Mark F. McCulla at Exhibit
MFM-R-1).
151
    AR Part IV, Binder 43, Vol. F (Tr. at 773, Apr. 26, 2012).
152
    AR Part IV, Binder 43, Vol. F (Tr. at 769, Apr. 27, 2012). See also AR Part II, Binder 36, ETI
Ex. 39 (Direct Testimony of Patrick J. Cicio at Exhibit PJC-1 at 39).
                                               41
Thus, there is no impact to ETI’s transmission-equalization expense until these

projects actually go into service. For this reason alone, ETI’s future transmission-

equalization expense was not reasonably certain.

          Given the lack of certainty regarding ETI’s estimates of its transmission

investment in-service dates, as well as the numerous other variables that affect the

MSS-2 calculation, the PUC had considerable evidence upon which to base its

determination that ETI has not met its burden of proving its post-test-year

adjustment was known and measurable.153 The PUC’s decision on transmission-

equalization expense should be upheld.

                               CONCLUSION AND PRAYER
          For the foregoing reasons, TIEC prays that the Court affirm the district

court’s judgment upholding the PUC’s determination of the amount of ETI’s

purchased-capacity and transmission-equalization expenses that should be included

in rates and grant TIEC any and all other relief to which it is entitled.

153
      AR Part I, Binder 7, Item 244 (Order on Rehearing at 21).
                                                 42
                                        Respectfully submitted,

                                        /s/ Rex D. VanMiddlesworth
                                        Rex D. VanMiddlesworth
                                        rex.vanmiddlesworth@tklaw.com
                                        State Bar No. 20449400
                                        Benjamin Hallmark
                                        benjamin.hallmark@tklaw.com
                                        State Bar No. 24069865
                                        THOMPSON & KNIGHT LLP
                                        98 San Jacinto Blvd., Suite 1900
                                        Austin, TX 78701
                                        Telephone: (512) 469-6100
                                        Facsimile: (512) 469-6180

                                        ATTORNEYS FOR APPELLEE TEXAS
                                        INDUSTRIAL ENERGY CONSUMERS

                     CERTIFICATE OF COMPLIANCE
      I certify that this document contains 10,486 words in the portions of the

document that are subject to the word limits of Texas Rule of Appellate Procedure

9.4(i), including the Glossary of Abbreviations, as measured by the undersigned’s

word-processing software.

                                     /s/ Benjamin Hallmark

                                       43
                         CERTIFICATE OF SERVICE
      As required by Texas Rule of Appellate Procedure 9.5, I certify that on the

30th day of April, 2015, the foregoing document was electronically filed with the

Clerk of the Court using the electronic case filing system of the Court, and that a

true and correct copy was served on the following lead counsel for all parties listed

below via electronic service:

Counsel for Entergy Texas, Inc.        Marnie A. McCormick
                                       Patrick J. Pearsall
                                       Duggins Wren Mann & Romero, LLP
                                       600 Congress Ave., Ste. 1900
                                       Austin, Texas 78701
                                       512.744.9300
                                       512.744.9399 (fax)
                                       mmccormick@dwmrlaw.com
                                       ppearsall@dwmrlaw.com

Counsel for the Public Utility         Elizabeth R. B. Sterling
Commission of Texas                    Megan M. Neal
                                       Environmental Protection Division
                                       Office of the Attorney General
                                       P.O. Box 12548
                                       Austin, Texas 78711-2548
                                       512.463.2012
                                       512.457.4616 (fax)
                                       elizabeth.sterling@texasattorneygeneral.gov

Counsel for Office of Public Utility   Sara J. Ferris
Counsel                                Office of Public Utility Counsel
                                       1701 N. Congress Ave., Ste. 9-180
                                       P.O. Box 12397
                                       Austin, Texas 78711-2397
                                       512.936.7500
                                       512.936.7520 (fax)

                                         44
                             Sara.ferris@opuc.texas.gov

Counsel for State Agencies   Katherine H. Farrell
                             Assistant Attorney General
                             Administrative Law Division
                             Energy Rates Section
                             Office of the Attorney General
                             P.O. Box 12548, MC 018-12
                             Austin, Texas 78711-2548
                             512.475.4237
                             512.320.0167 (fax)
                             katherine.farrell@texasattorneygeneral.gov

Counsel for Cities           Daniel J. Lawton
                             The Lawton Law Firm, P.C.
                             12600 Hill Country Blvd.,
                             Ste. R-275
                             Austin, TX 78738
                             512.322.0019
                             855.298.7978 (fax)
                             dlawton@ecpi.com

                             /s/ Benjamin Hallmark

                              45