Opinion
NO. 03-14-00706-CV
03-24-2016
Entergy Texas, Inc., Appellant v. Public Utility Commission of Texas, Office of Public Utility Counsel, and State of Texas Agencies and Institutions of Higher Education, Appellees
FROM THE DISTRICT COURT OF TRAVIS COUNTY, 345TH JUDICIAL DISTRICT
NO. D-1-GN-13-002623, HONORABLE AMY CLARK MEACHUM, JUDGE PRESIDINGMEMORANDUM OPINION
Entergy Texas, Inc. appeals the district court's final judgment upholding the Public Utility Commission's final order in Docket Number 40295, a proceeding to determine the expenses that Entergy may recover for prosecuting its 2011 base-rate case. Entergy complains of the Commission's disallowance of two categories of expenses: (1) the costs of litigating whether financially based incentive compensation is recoverable as a cost of service and (2) depreciation expenses for office equipment charged by its affiliate, Entergy Services, Inc. (ESI), in assisting Entergy in its base-rate case. Entergy also complains about the method the Commission used to quantify the disallowance for litigation of the incentive-compensation issue. We will affirm the judgment of the district court upholding the Commission's final order.
BACKGROUND
In 2011, Entergy, an electric utility that remains subject to traditional cost-of-service rate regulation, see Tex. Util. Code § 39.452(a) (until date that Commission authorizes non-ERCOT utility to implement customer choice, utility's rates shall be regulated under traditional cost-of-service regulation), initiated a general base-rate case seeking an annual increase of over $100 million to cover its increased cost of service, including the recovery of its expenses in preparing the rate-case filing and participating in the rate case (Docket Number 39896).See id. § 36.061 (Commission may allow as cost or expense "reasonable costs of participating in a proceeding under this title not to exceed an amount approved by the [Commission]"). The Commission ultimately severed Entergy's request for recovery of rate-case expenses from the general rate case and established new Docket Number 40295 to address those expenses.
The Commission's order in the rate case is not challenged in this appeal but has been challenged by various parties in a separate appeal.
One issue in the rate-case docket—whether employee incentive compensation for financially based goals should be recovered through rates as a reasonable and necessary expense—is especially relevant to the amount of rate-case expenses awarded in this case. An amount for payroll costs is usually included among the utility's reasonable and necessary expenses. See Reliant Energy, Inc. v. Public Util. Comm'n, 153 S.W.3d 174, 183 (Tex. App.—Austin 2004, pet. denied) (operating expenses include employee wages). However, in a 2003 rate case, the Commission began disallowing expenses for employee incentives paid to achieve financial-performance measures because it determined that they are not necessary and reasonable to provide utility services. See Tex. Pub. Util. Comm'n, Application of AEP Tex. Cent. Co. for Auth. to Change Rates, Docket No. 28840, 2005 WL 6472784, *23 (Jan. 1, 2005) (order). The Commission contrasted such incentives with those paid to achieve operational-performance measures, which it determined provide immediate benefit to ratepayers and are, therefore, recoverable. Id.; see also State of Tex. Agencies & Insts. of Higher Learning v. Public Util. Comm'n, 450 S.W.3d 615, 660 n.34 (Tex. App.—Austin 2014, pet. granted) (noting that Commission has historically allowed recovery of incentive compensation tied to operational performance but not that tied to financial performance). In its briefing to this Court, Entergy refers to these different incentive-compensation measures (operational versus financial) as two "buckets."
In subsequent rate cases, other utilities (as well as Entergy in two rate cases preceding the one here), presented similar requests to the Commission for allowance of financially based incentive compensation, but the Commission consistently maintained the distinction between the operational-goal and financial-goal "buckets," allowing the former and disallowing the latter. See State of Tex. Agencies & Insts. of Higher Learning, 450 S.W.3d at 660 & n.34. While there is often a fact question about whether a particular type of incentive compensation goes into one bucket or the other, the basic policy that incentive compensation tied to financial goals is not recoverable has remained constant. See id.
In the rate case from which this case was severed, Docket Number 39896, Entergy openly acknowledged the Commission's long-standing policy about the two buckets but, nonetheless, asked the Commission to abandon the distinction between the buckets and allow not only the operationally tied incentive compensation but also all of its financially tied incentive compensation. Entergy enlisted two different witnesses to testify in support of the argument, responded to discovery on the issue, and filed five separate briefs in support of it. The Administrative Law Judge's (ALJ) Proposal for Decision (PFD) stated: "All parties, including [Entergy], agreed that Commission precedent mandated that financially-based incentive compensation is not recoverable. Nevertheless, in its application, [Entergy] asked the Commission to reconsider its precedents on this issue . . . . contend[ing] that the reason why cost recovery had been denied for financially-based incentive compensation in prior rate cases was that, in those prior cases, there was a lack of evidence showing sufficient benefits to ratepayers." The Commission followed the recommendation of the ALJ in the rate case and disallowed about $520,000 of Entergy's requested rate-case expenses, based on its finding that the amount was "attributable to unreasonable and overly aggressive arguments pursued by [Entergy] in Docket 39896 related to financially [] based incentive compensation."
In the instant rate-case-expense docket, Entergy additionally sought recovery of the fees it was charged by its affiliate, ESI, for depreciation of the office equipment its employees used in assisting Entergy in the underlying ratemaking proceeding. Besides adding one new finding of fact and conclusion of law related to the issue, the Commission adopted the ALJ's findings and conclusions in the expenses case, including the finding that Entergy's requested rate-case expenses should be reduced because "$207,683 in depreciation of office equipment owned by [ESI] and used by [ESI] employees for their work in Docket 39896 is not reasonable and is properly disallowed."
The Commission added the following finding of fact: "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," and the following conclusion of law: "Entergy met the requirements of PURA [Public Utility Regulatory Act] § 36.058 regarding payments to its affiliate for its rate-case expenses."
STANDARD OF REVIEW
Our review is governed by the "substantial evidence" rule. See Tex. Util. Code § 15.001; Tex. Gov't Code § 2001.174; Anderson v. Railroad Comm'n, 963 S.W.2d 217, 219 (Tex. App.—Austin 1998, pet. denied). When an appellant contends that an agency's order is not supported by substantial evidence, we determine whether substantial evidence supports the challenged finding or conclusion, that is, not whether the agency reached the "correct" conclusion but whether some reasonable basis exists in the record for the agency's action. Texas Health Facilities Comm'n v. Charter Med.-Dall., Inc., 665 S.W.2d 446, 452 (Tex. 1984); see also City of El Paso v. Public Util. Comm'n, 883 S.W.2d 179, 185 (Tex. 1994) (in conducting substantial-evidence review, we determine whether evidence as whole is such that reasonable minds could have reached conclusion agency must have reached in order to take disputed action). A reviewing court is not bound by the reasons given in an agency order, provided there is a valid basis for the action taken by the agency. Charter Med.-Dall., 665 S.W.2d at 452.
When an appellant complains that an agency decision is arbitrary and capricious, we consider whether an appellant's rights have been prejudiced by a denial of due process, see id. at 454, or the agency has abused its discretion such as by failing to follow the clear, unambiguous language of its own regulations, see Reliant Energy, 153 S.W.3d at 199. Examples of agency actions that have been held to be arbitrary and capricious are: when the agency has failed totally to make findings of fact and has relied, instead, on findings in another case; when it bases its decision on non-statutory criteria; and when it excludes competent and material evidence. Charter Med.-Dall., 665 S.W.2d at 454; see City of El Paso, 883 S.W.2d at184 (agency decision is arbitrary and capricious if agency (1) failed to consider factor that Legislature directs it to consider; (2) considers irrelevant factor; or (3) weighs only relevant factors as directed by Legislature but reaches completely unreasonable result); Texas Dep't of Ins. v. State Farm Lloyds, 260 S.W.3d 233, 245 (Tex. App.—Austin 2008, no pet.) (agency decision may be found to be arbitrary and capricious when it is based on legally irrelevant factors or if agency reaches completely unreasonable result after weighing legally relevant factors).
DISCUSSION
In its first three issues, Entergy complains about various aspects of the Commission's disallowance of its requested costs to litigate the issue of financially based incentive compensation. We will address its first two issues together because they challenge the propriety of the disallowance, and we cannot discern any substantive difference between the two issues that would affect our review, in light of the limited errors that Entergy preserved in its motion for rehearing.See BFI Waste Sys. of N. Am., Inc. v. Martinez Envtl. Grp., 93 S.W.3d 570, 578 (Tex. App.—Austin 2002, pet. denied) (to preserve error in appeal of contested case, motion for rehearing filed with agency must set forth (1) particular finding of fact, conclusion of law, ruling, or other action by agency that complaining party asserts was error and (2) legal basis upon which claim of error rests). Entergy's third issue, which we will address separately, challenges the method by which the Commission quantified the amount of disallowance. In its fourth issue, Entergy complains about the Commission's disallowance of depreciation expenses that Entergy was charged by its affiliate for work performed in the rate case.
Entergy raised three issues in its motion for rehearing, arguing that: (1) the Commission engaged in ad hoc rulemaking by retroactively applying to Entergy a new policy of disallowing rate-case expenses incurred in pursuit of the recovery of financially based incentive compensation; (2) the Commission's use of the "proxy" method to quantify the amount of disallowance for financially based incentive compensation was a significant departure from precedent, and there was no logical relationship between the method and the evidence of actual expenses; and (3) the Commission's disallowance of depreciation expenses was based on an "erroneous conclusion" without "logical rationale," in light of the fact that other nonaffiliated vendors presumably "embedded" depreciation costs in their invoices instead of itemizing them as Entergy's affiliate did.
Disallowance of expenses to litigate issue of financially based incentive compensation
Entergy contends that the Commission acted arbitrarily by disallowing it to recover litigation expenses incurred in pursuit of the recovery of financially based incentive compensation. Specifically, Entergy contends that the Commission previously allowed the recovery of such expenses but "changed its policy" about their recovery, without notice, at the end of Entergy's ratemaking proceedings to its detriment, which amounted to ad hoc rulemaking. Entergy submits that the Commission should have engaged in formal rulemaking and applied such new policy prospectively only. Appellees respond that Entergy's argument mischaracterizes the Commission's previous "policy" and that, in any case, the Commission's determination here was fact-specific and supported by the evidence in this proceeding and fell within its broad statutory discretion to permit the recovery of only reasonable and necessary rate-case expenses.See Tex. Util. Code § 36.061(b)(2). We agree with appellees.
Appellees also note that after this docket, in 2014, the Commission did engage in formal rulemaking and adopt a rule regarding rate-case expenses, see 16 Tex. Admin. Code § 25.245 (Pub. Util. Comm'n, Rate-Case Expenses) (among other matters, listing criteria for "review and determination of reasonableness" of rate-case expenses, including whether utility's "proposal on an issue in the rate case had no reasonable basis in law, policy, or fact and was not warranted by any reasonable argument for the extension, modification, or reversal of commission precedent"), and that this is further indication that the Commission was not adopting a rule in this case.
Entergy has not cited any Commission rule or established policy requiring the recovery of rate-case expenses incurred in litigating the type of arguments that the ALJ and Commission found Entergy had unreasonably made on this issue. While Entergy cites a few previous dockets in which the Commission purportedly allowed some form of recovery for rate-case expenses incurred in seeking to include financially based incentive compensation in base rates, we cannot conclude based on those dockets that the Commission had an established policy requiring the recovery of rate-case expenses to litigate the issue, as the determination about expense recovery in any case is a fact-specific inquiry into the expenses and their reasonableness.See Tex. Util. Code § 36.061(b)(2) (Commission "may allow as a cost or expense . . . reasonable costs of participating in a [ratemaking] proceeding" (emphases added)). Entergy's argument that it had no prior notice that the Commission would cease allowing recovery of rate-case expenses to litigate the issue of financially based incentive compensation is at odds with its being on notice that not only will the Commission, in its discretion, allow only reasonable costs of participating in a ratemaking proceeding but also that the utility bears the burden of proving the reasonableness of any requested such costs.
Moreover, Entergy overstates the Commission's "allowance" of expenses to litigate similar arguments in prior dockets. The first of the three dockets it cites was resolved by settlement, wherein the parties stipulated to recoverable rate-case expenses; the second docket indicates that no parties opposed the utility's requested rate-case expenses, so the reasonableness of the request was not specifically at issue (while in the present docket, several parties, including Commission staff, strongly opposed Entergy's request and the reasonableness of its litigation position); and the third docket was the first case in which the Commission determined that financially based incentive compensation may not be recovered in rates, so there was no long-standing policy against which the utility was arguing, opposite to the circumstances here.
Entergy cites this Court's opinion in Oncor Electric Delivery Company LLC v. Public Utility Commission, 406 S.W.3d 253 (Tex. App.—Austin 2013, no pet.), in support of its argument that the Commission acted arbitrarily in imposing a new policy on Entergy at the end of a proceeding without prior notice. However, that case is distinguishable in several ways, and its holding does not mandate the remedy that Entergy seeks. First, the challenged agency action in Oncor was the Commission's failure to previously announce its requirement—imposed on Oncor for the first time after the ratemaking hearings—that a utility obtain Commission pre-authorization to recover rate-case expenses that were incurred outside of the test year and are unrelated to the rate-case proceeding in which they are sought. Id. at 264. The Court found that this was a non-fact-specific requirement and, therefore, that it was proper to consider how the Commission had treated other utilities with respect to this same issue. Id. at 267. In contrast, the determination of whether litigation expenses are "reasonable" is fact-specific, making the value of prior dockets allowing or disallowing certain expenses relatively low.
Secondly, the Oncor Court found troubling the fact that the Commission had not articulated any rational connection between the facts of the case and its cursory finding that Oncor's requested recovery would "not be in the public interest." Id. at 268. In contrast, here the ALJ and Commissioner both explained their reasoning on the issue, including their determinations based on the evidence that Entergy's total rate-case expenses were very high and that it took unreasonable positions in litigating the incentive-compensation issue in light of clear and consistent precedent to the contrary. Granted discretion to allow the recovery of only "reasonable expenses," the Commission considered the evidence before it and determined that Entergy's "long shot" attempts to recover its rate-case expenses attributable to this issue were not a reasonable expenditure.
We cannot agree with Entergy that the Commission "changed its policy" or engaged in ad hoc rulemaking with respect to the disallowance of costs to litigate the financially based incentive-compensation issue because Entergy has not established that the Commission had such established policy or, in this docket, created a new rule of general applicability. Cf. Tex. Gov't Code § 2001.003(6) (defining "rule" as "state agency statement of general applicability"); Texas Dep't of Transp. v. Sunset Transp., Inc., 357 S.W.3d 691, 703 (Tex. App.—Austin 2011, no pet.) (for agency statement to be rule, it must "bind the agency or otherwise represent its authoritative position in matters that impact personal rights"); see Texas State Bd. of Pharmacy v. Witcher, 447 S.W.3d 520, 529-31, 535 (Tex. App.—Austin 2014, pet. granted) (holding that Board's decision to suspend pharmacist's license, due solely to policy announced in previous adjudicative matter and without any consideration of differences in factual circumstances between two matters, constituted illegal rulemaking).
Furthermore, even though Entergy did not make a substantial-evidence challenge to the Commission's findings or conclusions on this issue in its motion for rehearing and did not preserve that issue for our review, we conclude that there is substantial evidence in the record to support the disallowance. See Reliant Energy, 153 S.W.3d at 184 (we presume Commission's findings are supported by substantial evidence, and contestant bears burden of proving otherwise). The record demonstrates that Entergy was fully cognizant of Commission precedent disallowing the recovery of financially based incentive compensation, and that this was the third consecutive docket in four years in which Entergy sought, but failed, to obtain authority to charge ratepayers for this type of financially based incentive cost. Nonetheless, Entergy hired two experts to testify on the matter, filed five separate briefs supporting the argument, and responded to discovery concerning the matter. The ALJ found that the amount of rate-case expenses that Entergy sought was high, both in absolute terms and in relation to the increase ultimately obtained in the underlying docket, and noted that the size of the granted rate increase was only about 25% of that requested.
In its two previous dockets and the docket on appeal, Entergy employed the same expert witness on this issue, Dr. Jay Hartzell. The two prior dockets were resolved by settlement agreement and, therefore, cannot serve to establish Commission "precedent" about recovery of rate-case expenses to litigate the issue.
While Entergy argues on appeal that its litigation on this issue was an attempt to show, factually, that certain incentive compensation should actually have been included in the operational-based incentive compensation "bucket" instead of the financial-based incentive compensation "bucket," evidence in the record supports appellee's contention that Entergy was, in fact, advocating for the elimination of the two "buckets" entirely, arguing that financially based incentive compensation actually benefits customers and should, therefore, be recovered as a general rule. In more than three pages of its PFD, the ALJ expressed concern that—while all parties, including Entergy, "agreed that Commission precedent mandated that financially [] based incentive compensation is not recoverable"—Entergy "nevertheless . . . asked the Commission to reconsider its precedents on this issue" and noted that it "was obvious throughout the hearing in [the underlying docket] that [Entergy] was taking an aggressive position and making a 'long-shot' argument in seeking recovery for its financially [] based incentive compensation."
The ALJ in the rate-case expense proceeding was also one of the presiding ALJs in the underlying ratemaking docket.
The Commission did not act arbitrarily or engage in ad hoc rulemaking or "establish a new policy" in this case, and the record contains substantial evidence supporting the Commission's disallowance of expenses to litigate the financially based incentive-compensation issue. Accordingly, we overrule Entergy's first and second issues.
Quantification of disallowance for expenses to litigate long-shot argument
In its third issue, Entergy claims that the Commission acted arbitrarily and capriciously and again engaged in ad hoc rulemaking with its "unexplained departure from Commission precedent" in the method it used to quantify the "long-shot argument" disallowance. The Commission used a so-called "issue-specific approach" (or "proxy" method) to quantify the disallowance (whereby Entergy's rate-case expenses were reduced proportionally to the amount of specific "overreaching" it was deemed to have committed in litigating the issue of financially based incentive compensation). Appellees respond that the Commission's decision was rationally based upon evidence in the record, was not arbitrary and capricious, and was well within its broad discretion under section 36.061(b)(2). See Tex. Util. Code § 36.061(b)(2) (Commission may allow reasonable costs of participating in proceeding under PURA); City of Amarillo v. Railroad Comm'n, 894 S.W.2d 491, 496-97 (Tex. App.—Austin 1995, writ denied) (approving of Commission's reduction of rate-case expenses by 20% when record showed that applicant failed to adequately support or explain fees charged); see also City of Port Neches v. Railroad Comm'n, 212 S.W.3d 565, 579-82 (Tex. App.—Austin 2006, no pet.) (holding that even if Commission relied on some of expert's testimony, it was not required as matter of law to allow recovery of expert's fees as rate-case expense, as Commission's allowance is discretionary and there was evidence in record to show that some of expert's work was necessary for other purposes and not for rate-case proceedings).
The Commission followed the recommendation of the ALJ to employ a proxy for the amount of expenses that Entergy incurred to litigate the issue based on his findings that the complete costs were not clearly identified in the record. The ALJ recommended reducing the balance of Entergy's otherwise reasonably incurred rate-case expenses by the ratio of the disallowed incentive compensation to the total requested rate increase in underlying Docket Number 39896. The Commission followed the ALJ's recommendation and found that over $500,000 of Entergy's rate-case expenses—about 6% of its total requested rate-case expenses— were "related to" the financially based-incentive-compensation argument.
The ALJ had actually suggested a 14.8% reduction in Entergy's requested expenses, based on the fact that Entergy had also unsuccessfully sought transmission-equalization payments of $9 million in the underlying rate case. The Commission "disagree[d] with the ALJ that Entergy's rate-case expenses should be reduced due to Entergy's request for transmission equalization (MSS-2 expenses) . . . [because] the request for the MSS-2 expenses did not conflict with clear Commission precedent."
Entergy complains that use of the proxy method was improper because there was uncontroverted evidence of the amount that Entergy paid to outside expert witnesses to support its incentive-compensation argument. However, the Commission found that Entergy incurred additional expenses on this issue: the cost of its staff, ESI staff, and outside counsel with respect to the various filings and discovery responses related to the issue. Furthermore, the record indicates that Entergy did not record and track its rate-case expenses performed by this personnel on an issue-by-issue basis. Therefore, there was no direct method for the Commission to quantify the total expenses related to litigation of the issue. Yet, the Commission was required to quantify the rate-case expenses associated with the issue so as to ensure that it allowed recovery only for Entergy's "reasonable" expenses, and it was Entergy's burden to prove which of its expenses were "reasonable." See City of Amarillo, 894 S.W.2d at 496-97 ("The 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.").
The Commission relied on expert testimony from the parties offering various options and rationales for calculating the amount of rate-case expenses to reject due to Entergy's unreasonable overreaching and in the absence of other evidence separating out the expenses on an issue-by-issue basis. The ALJ's PFD discussed the merits of the three approaches offered by the parties based on the evidence presented. Based on the record, we cannot say that there was no reasonable basis for the Commission to use the proxy method to quantify the amount of disallowance attributable to Entergy's "unreasonable" litigation of the financially based incentive-compensation issue. See City of El Paso, 883 S.W.2d at 186 (holding that substantial evidence supported Commission's disallowance for imprudent expenditures where testimony before Commission ranged from expert opinion that no imprudence disallowance should be imposed, to opinion that 50% disallowance should be imposed, to opinion that there is no known theory to quantify the disallowance, because Commission has discretion to select amount within range of figures provided by expert testimony); Pioneer Nat. Res. USA, Inc. v. Public Util. Comm'n, 303 S.W.3d 363, 369 (Tex. App.—Austin 2009, no pet.) (when no evidence suggests a specific figure explicitly, Commission may infer the figure if it is supported by body of evidence as to that issue).
The other two approaches offered were the "50/50 approach" (whereby Entergy would receive only 50% of its rate-case expenses) and the "results-obtained approach" (whereby Entergy's rate-case expenses would be reduced in proportion to the ratio of their rate-case recovery—in this case, receiving only 26.4% of its rate-case expenses).
Also, while Entergy cites a few Commission dockets in support of its contention that Commission "precedent" required a different method of quantification, our review of those dockets reveals that they simply do not support Entergy's contention. Rather, they merely indicate the unremarkable fact that the Commission has in some other dockets disallowed expenses in the amount of actual expenses associated with the testimony tied to the contested issue. Because the Commission was unable, from the evidence that Entergy produced, to determine the full amount of rate-case expenses associated with the financially based incentive-compensation issue, the Commission was in a position of determining another reasonable method to quantify the disallowance and did not, in choosing one of the methods testified to by various parties, abuse its discretion or act arbitrarily.
Based on this record and the Commission's statutory discretion to allow only reasonable expenses, we conclude that the Commission's method to quantify the disallowed expenses was not arbitrary and capricious and did not amount to ad hoc rulemaking. We overrule Entergy's third issue.
Disallowance of affiliate's depreciation of office equipment as rate-case expense
In its fourth issue, Entergy contends that the Commission's disallowance of the depreciation expense that its affiliate ESI used in the work it performed in the rate case was arbitrary and capricious and not supported by substantial evidence. Appellees respond that Entergy failed to meet its burden to prove that the depreciation was reasonable. See Tex. Util. Code § 36.061(b)(2) (Commission may allow as cost or expense reasonable costs of participating in proceeding under PURA); see also id. § 36.058(b), (c) (Commission may allow payment to affiliate only upon specific findings (1) of reasonableness and necessity of each item or class of items allowed and (2) that price to utility is not higher than prices charged by affiliate for same item or class of items to other of its affiliates or divisions or to unaffiliated entities within same market area or having same market conditions).
In this issue, Entergy also complains that the Commission's ultimate finding of fact on the reasonableness of the expenses was not supported by any underlying findings and therefore is reversible on this basis. See Tex. Gov't Code § 2001.141(d) ("Findings of fact, if set forth in statutory language, must be accompanied by a concise and explicit statement of the underlying facts supporting the findings."); Texas Health Facilities Comm'n v. Charter Med.-Dall., Inc., 665 S.W.2d 446, 451-52 (Tex. 1984). However, Entergy waived this alleged error by not raising it in its motion for rehearing before the Commission. See BFI Waste Sys. of N. Am., Inc. v. Martinez Envtl. Grp., 93 S.W.3d 570, 578 (Tex. App.—Austin 2002, pet. denied) (party's complaints in motion for rehearing that "overwhelming evidence" supported finding in favor of party on permit-duration issue and that agency improperly shifted burden of proof on issue are insufficient to preserve error about lack of fact findings and conclusions of law on same issue); United Savs. Ass'n of Tex. v. Vandygriff, 594 S.W.2d 163, 167-70 (Tex. Civ. App.—Austin 1980, writ ref'd n.r.e.) (where motion for rehearing did not sufficiently specify legal basis of error but only cited generally to statute imposing several requirements upon agency, appellant waived error on appeal complaining that agency order did not contain requisite underlying findings of fact supporting ultimate findings and conclusions).
We initially note that the Commission has broad discretion to determine recovery of expenses in a ratemaking proceeding. City of Port Neches, 212 S.W.3d at 579. Regarding the evidence presented about the reasonableness and necessity of a rate-case expense, the Commission is the sole judge of the weight of the evidence and the credibility of the witnesses. Id. As long as there is a reasonable basis in the record—including in the PFD—for the Commission's determination on the evidence pertaining to a requested rate-case expense, the determination is supported by substantial evidence and is not arbitrary. See id. at 580-81.
Our review of the evidence cited by all parties leads us to conclude that there is a reasonable basis in the record for the disallowance of ESI's depreciation rate-case expenses. For instance, the Commission could have found that the primary evidence submitted by Entergy in this docket on the issue—a spreadsheet that does not identify which assets were depreciated or their original costs, how the depreciation was calculated, which employees used the assets, or how the assets were amortized—was not sufficiently specific for Entergy to meet its burden of proof on its depreciation expenses attributable to rate-case services.Cf. Tex. Util. Code § 36.058(b) (Commission may allow payment to affiliate only upon specific finding of reasonableness of each item or class of items allowed). While Entergy cites evidence in the underlying ratemaking proceeding in support of its argument that it met its burden of proof on this issue, the Commission was free to weigh that evidence's credibility or relevance against that submitted by Entergy in the present docket, and we may not substitute our judgment for the Commission's on this question of reasonableness.See City of Port Neches, 212 S.W.3d at 571.
Entergy's evidence included summary sheets showing depreciation and amortization expenses and referenced an "attached detail page," but there was no such page attached.
The ALJ took judicial notice of the administrative record in the underlying ratemaking proceeding (Docket Number 39896).
For example, the Commission argues that the testimony in the underlying docket on which Entergy relies as providing some of the missing depreciation detail is not relevant because it refers to expenses incurred during the test year rather than rate-case expenses, many of which occurred after the test year, and is unclear about whether the same assets were being depreciated in both time frames.
Entergy rejoins that we may not affirm the Commission's order on the basis of the evidence being insufficiently detailed and vague because that is not the "stated reason" for the disallowance in the order or PFD. The PFD, which the Commission incorporated into its final order with respect to this issue, specifically noted that Entergy had "failed to prove the reasonableness of the expenses under the more stringent standards that are applicable to affiliate expenses" and made a dispositive fact finding: "$207,683 in depreciation of office equipment owned by [ESI] and used by [ESI] employees for their work in Docket 398896 is not reasonable and is properly disallowed." Thus, the Commission found that Entergy had not met its burden of proving that the depreciation expenses were reasonable, and we must affirm its order on this issue if it is valid under any legal theory. See AEP Tex. Commercial & Indus. Retail Ltd. P'ship v. Public Util. Comm'n, 436 S.W.3d 890, 914 (Tex. App.—Austin 2014, no pet.) (we must affirm agency's order if factual bases on which it relied support its decision under any valid legal theory); Public Util. Comm'n v. Southwestern Bell Tel. Co., 960 S.W.2d 116, 121 (Tex. App.—Austin 1997, no pet.) (appellate court must affirm on any legal basis shown in record); cf. City of El Paso v. El Paso Elec. Co., 851 S.W.2d 896, 899-900 (Tex. App.—Austin 1993, writ denied) (refusing to uphold agency order on factual basis different from that relied on by agency). The Commission's determination on this depreciation-expense issue is valid on the legal basis of evidentiary insufficiency—i.e., that Entergy did not meet its burden of proof—even though the Commission did not state how exactly Entergy did not meet its burden. On this record, we conclude that there was a reasonable basis for the Commission to conclude that allowing Entergy to recover depreciation on ESI's office equipment used to provide services for the underlying rate case would be unreasonable. Accordingly, we overrule Entergy's fourth issue.
The Commission and ALJ both also noted that there was no Commission precedent allowing for depreciation expenses of the type that Entergy was seeking here. While Entergy argued in its motion for rehearing that other, nonaffiliated vendors presumably "embedded" their depreciation costs within their invoices rather than separating them out as line-items (to meet Commission regulations) as Entergy did here, Entergy does not identify any evidence in the record supporting this speculation. Even were such evidence in the record, the Commission was free to weigh it against the cursory evidence that Entergy submitted summarizing ESI's depreciation.
We also reject Entergy's argument that the Commission's disallowance was unreasonable because similar expenses were deemed reasonable and necessary for inclusion in the rate base in the underlying rate case. The statutory standards for recovery of reasonable and necessary expenses for rate cases and rate-case-expense cases are different. Compare Tex. Util. Code § 36.051 (in establishing utility's rates, Commission shall establish overall revenues at amount that will permit utility reasonable opportunity to earn reasonable return on utility's invested capital in excess of its reasonable and necessary operating expenses) and 16 Tex. Admin. Code § 25.231(a) (Pub. Util. Comm'n, Cost of Service) (expense may be included to extent that it is based upon "cost of rendering service to the public during a historical test year"), with Tex. Util. Code § 36.061(b)(2) (Commission may allow as cost or expense reasonable costs of participating in proceeding under PURA not to exceed amount approved by Commission). Furthermore, this Court has previously rejected the very same argument, in which a utility made "a subtle, yet impermissible leap" in arguing that because a utility may recover an expense as a payment to an affiliate as an expense or cost of service in a ratemaking proceeding, it is thereby entitled to those same expenses as "rate case expenses." City of Port Neches v. Railroad Comm'n, 212 S.W.3d 565, 581 (Tex. App.—Austin 2006, no pet.). --------
CONCLUSION
Having overruled all of Entergy's issues and holding that the trial court did not err in upholding the Commission's final order, we affirm the district court's order.
/s/_________
David Puryear, Justice Before Justices Puryear, Pemberton, and Bourland Affirmed Filed: March 24, 2016