Entergy Texas, Inc.// Office of Public Utility Counsel and Public Utility Commission of Texas v. Public Utility Commission of Texas and Texas Industrial Energy Consumers// Office of Public Utility Counsel and Entergy Texas, Inc.

Opinion

ACCEPTED 03-14-00735-CV 5514413 THIRD COURT OF APPEALS AUSTIN, TEXAS 6/2/2015 3:37:34 PM JEFFREY D. KYLE CLERK NO. 03-14-00735-CV IN THE FILED IN TEXAS COURT OF APPEALS 3rd COURT OF APPEALS AUSTIN, TEXAS THIRD COURT OF APPEALS DISTRICT 6/2/2015 3:37:34 PM AT AUSTIN JEFFREY D. KYLE Clerk ENTERGY TEXAS, INC., ET AL., APPELLANTS, V. PUBLIC UTILITY COMMISSION OF TEXAS, ET AL., APPELLEES

ON APPEAL FROM THE FINAL JUDGMENT IN CAUSE NO. D-1-GN-13-000121 (CONSOLIDATED), 353RD JUDICIAL DISTRICT COURT, TRAVIS COUNTY, TEXAS, HONORABLE JOHN K. DIETZ, JUDGE PRESIDING

APPELLANT’S REPLY BRIEF AND APPENDIX OF THE OFFICE OF PUBLIC UTILITY COUNSEL

OFFICE OF PUBLIC UTILITY COUNSEL Tonya Baer Public Counsel State Bar No. 24026771 Sara J. Ferris Senior Assistant Public Counsel State Bar No. 50511915 P.O. Box 12397 Austin, Texas 78711-2397 512/936-7500 512/936-7525 (Fax) Sara.Ferris@opuc.texas.gov ORAL ARGUMENT REQUESTED June 2, 2015 TABLE OF CONTENTS

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

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

ARGUMENT AND AUTHORITIES ...................................................................................... 1 A. Standards of Review .......................................................................................................... 1 B. Either the Commission weighed the evidence and concluded that it was not sufficient to allow a determination as to what portion of the storm expenses were due to the negligent state of the Company’s system, or the Commission did not weigh the evidence and decided not to address the issue based upon the irrelevant factor of the passage of time. Either way, the Commission committed reversible error by failing to hold ETI to its burden of proof under PURA § 36.006 and allowing one hundred percent of the $13,014,379 1997 storm restoration expenses to be included in the storm reserve and reflected in rates. .................. 4 C. Indisputably, the issue of determining what amount of 1997 storm restoration expenses was prudent, appropriate, and includable in the storm reserve and rates was an issue to be decided in Docket No. 39896. That fact does not render the Commission’s Orders in Docket Nos. 18249 and 16705 irrelevant or properly disregarded........................................ 8 D. The Commission inappropriately focused on only one aspect of the prudence question and ignored the genesis of the expenses. ................................. 11 E. The 60-basis-point reduction to the Company’s return on equity assessed in Docket No. 18249 was not intended to be in lieu of identifying and accounting for the portion of the cost of cleaning up and repairing the damage caused by the Company’s imprudent vegetation management. The Commission acted arbitrarily and capriciously by considering this irrelevant factor and including the entirety of the $13,014,379 in ETI’s storm reserve reflected in rates. .................... 13 F. The Commission erred in approving the recovery of imprudent costs. ............... 16

i G. Some of ETI’s storm costs were “reasonably anticipated,” and it was reversible error for the Commission to fail to consider this statutorily required criterion. The Commission’s Order violates PURA § 36.064 and is the result of the Commission acting arbitrarily and through unlawful procedure. ........................................................................................................ 20 H. ETI’s 420-page spreadsheet was properly excluded from the evidentiary record. (Response to ETI’s Conditional Cross-Point). ................... 25

PRAYER ....................................................................................................................................... 29

CERTIFICATE OF COMPLIANCE ..................................................................................... 30

CERTIFICATE OF SERVICE ................................................................................................ 30

1. PURA, Chapter 36, Subchapters A and B 2. APA, Tex. Gov’t Code § 2001.174 3. PUC Substantive Rule on Cost of Service-Allowable Expenses: 16 Tex. Admin. Code § 25.231(b) 4. PUC Docket No. 18249, Order on Rehearing 5. Excerpts from PUC Docket No. 16705, Second Order on Rehearing 6. PUC Docket No. 39896, Hearing on the Merits Transcript: Excerpts of Direct and Cross-Examination of ETI Witness Shawn Corkran 7. PUC Docket No. 39896 Hearing on the Merits Transcript: Excerpts re. Optional Completeness 8. Tex. Health Facilities Comm’n v. Charter Medical-Dallas, 665 S.W.2d 446 (Tex. 1984) 9. City of El Paso v. Public Util. Comm’n, 839 S.W.2d 895 (Tex. App.— Austin 1992) aff’d in part, rev’d in part on other grounds, 883 S.W.2d 179 (Tex. 1994).

ii 10. City of El Paso v. Public Util. Comm’n, 883 S.W.2d 179 (Tex. 1994) 11. Helena Chemical Co. v. Wilkins, 47 S.W.3d 486 (Tex. 2001) 12. Texas Utilities Electric Company v. Public Utility Commission, 881 S.W.2d 387 (Tex. App. – Austin 1994) aff’d in part, rev’d in part on other grounds, 935 S.W.2d 109 (Tex. 1997) 13. Gilmore v. State, 744 S.W.2d 630 (Tex. App.—Dallas 1987, pet. ref’d) 14. Crosby v. Minyard Food Stores, 122 S.W.3d 899 (Tex. App. – Dallas 2003, no pet.)

iii INDEX OF AUTHORITIES

CASES

City of El Paso v. Public Util. Commission, 839 S.W.2d 895 (Tex. App.—Austin 1992) aff’d in part, rev’d in part on other grounds, 883 S.W.2d 179 (Tex. 1994). ........................................... 17, 18

City of El Paso v. Public Util. Commission, 883 S.W.2d 179 (Tex. 1994). ................................................................................ 3, 23

Crosby v. Minyard Food Stores, 122 S.W.3d 899 (Tex. App.—Dallas 2003, no pet.) .............................. 27-28, 28

Entergy Gulf States, Inc. v. Public Utility Commission, 112 S.W.3d 208 (Tex. App.—Austin 2003, pet. denied). ................................. 17

Finder v. Texas Medical Board, 2010 WL 4670510 (Tex. App.—Austin, pet denied) ........................................ 23

General Motors Corp. v. Bray, 243 S.W.3d 678 (Tex. App.—Austin 2007, no pet.) ................................... 23-24

Gilmore v. State, 744 S.W.2d 630 (Tex. App.—Dallas 1987, pet. ref’d.) ......................... 25, 26, 27

Helena Chem. Co. v. Wilkins, 47 S.W.3d 486 (Tex. 2001). ...................................................................................... 15

Mentis v. Barnard, 870 S.W.2d 14 (Tex. 1994) ....................................................................................... 25

Office of Public Utility Counsel v. Public Utility Commission, 185 S.W.3d 555 (Tex. App.—Austin 2006, pet. denied) .................................. 25

Public Utility Commission v. Gulf States Utilities, 809 S.W.2d 201 (Tex. 1991). ................................................................................ 3, 24 iv Roman v. State, 503 S.W.2d 252 (Tex. Crim. App. 1974) .............................................................. 27

Texas Health Facilities Comm’n v. Charter Medical-Dallas, 665 S.W.2d 446, 452 (Tex. 1984). ............................................................ 1-2, 22, 23

Texas Utilities Electric Company v. Public Utility Commission, 881 S.W.2d 387 (Tex. App.—Austin 1994) aff’d in part, rev’d in part on other grounds, 935 S.W.2d 109 (Tex. 1997). ............................................ 17, 18, 19

ADMINISTRATIVE PROCEEDINGS

Application of Entergy Texas for Approval of its Transition to Competition Plan and the Tariffs Implementing the Plan, and for the Authority to Reconcile Fuel Costs, Docket No. 16705, Second Order on Rehearing (Oct. 14, 1998). ........................................................................................ 8, 9, 10, 14, 16

Entergy Gulf States, Inc. Service Quality Issues (Severed from Docket No. 16705), Docket No. 18249, Order on Rehearing (Apr. 22, 1998). ........................................................ 4-5, 6, 8, 9, 10, 13, 14, 19, 20, 21

TEXAS STATUTES

TEX. GOV’T CODE § 311.021 (2), (3) ..................................................................................... 1, 15 Administrative Procedure Act, APA, TEX. GOV’T CODE ANN. §§ 2001.001-.902 ................. 1 APA § 2001.141(b) ................................................................................................................... 23 APA § 2001.141(d) ................................................................................................................... 23 APA § 2001.174......................................................................................................................... 1, 3 APA § 2001.174(2) ...................................................................................................................... 1 APA § 2001.174(2)(A),(B),(D),(E) AND (F) ................................................................. 23, 25 APA § 2001.174(2)(C) ............................................................................................. 13-14, 15, 27 Public Utility Regulatory Act PURA, TEX. UTIL. CODE §§ 11.001-66.017 ............................. 2 PURA § 36.006 .................................................................................................. 4, 5, 7, 12, 16-17 PURA § 36.051...........................................................................................................15, 16-17, 19

v PURA § 36.052 ........................................................................................................................... 15 PURA § 36.062 ..................................................................................................................... 13, 15 PURA § 36.064............................................................................................ 15, 16-17, 19, 20, 23 PURA § 36.064(a) .............................................................................................................. 20-21 PURA § 36.064(c) .....................................................................................................................16

TEXAS RULES OF COURT

Tex. R. Civ. P. 197.3 ................................................................................................................. 25 Tex. R. Evid. 107 ...................................................................................................................... 26

PUBLIC UTILITY COMMISSION OF TEXAS RULES

16 Tex. Admin. Code § 22.202(c) ........................................................................................ 26 16 Tex. Admin. Code § 22.207 ............................................................................................. 26 16 Tex. Admin. Code § 25.231(b)(1)(G)........................................................................ 21, 23 16 Tex. Admin. Code § 25.231(b)(2)(J).......................................................................... 15, 19

vi REPLY BRIEF OF APPELLANT, OFFICE OF PUBLIC UTILITY COUNSEL

TO THE HONORABLE THIRD COURT OF APPEALS:

The Office of Public Utility Counsel (OPUC), Appellant, submits this reply

to the briefs of the Public Utility Commission (Commission or PUC), and Entergy

Texas, Inc. (ETI).

ARGUMENT AND AUTHORITIES

A. Standards of Review

Several standards of review are implicated by the Commission’s Order and

each, standing on its own, provides a sufficient basis for reversal. Contrary to the

PUC’s and ETI’s focus on the substantial evidence standard, the Commission’s

Order is subject to reversal under additional standards of review listed under

Section 2001.174 of the Administrative Procedure Act.1 The six standards of

review listed in Subsection 2001.174(2) offer independent grounds for reversal as

evidenced by the use of the word “or” in the subsection. Texas law is clear that

these standards of review are separate and distinct. For instance, the Supreme

Court has expressly stated that “instances may arise in which the agency’s action

is supported by substantial evidence, but is arbitrary and capricious nonetheless”

and that the Legislature intended to “distinguish between agency action that is 1 Administrative Procedure Act (APA), Tex. Gov’t Code §§ 2001.001-.902. 1 not supported by substantial evidence and agency action that is arbitrary and

capricious.” Texas Health Facilities Comm’n v. Charter Medical-Dallas, 665 S.W.2d 446,

452 (Tex. 1984).

In addition to the substantial evidence standard, and the arbitrary and

capricious standard acknowledged by the Commission as having been invoked in

this appeal, Appellant OPUC’s substantial rights have been prejudiced because the

administrative findings, inferences, conclusions, or decisions violate statutory

provisions, are made through unlawful procedure, and are affected by other error

of law.2 The Commission has violated PURA and the APA by failing to consider

and set forth findings on statutory criteria for the inclusion of storm costs in the

self-insurance reserve and rates.3 The Commission also committed reversible error

in making its decision through unlawful procedure by failing to include underlying

findings of fact in support of statutorily required criteria.4 Additionally, the

Commission’s Order is affected by other error of law in that it failed to give effect

to the plain, unambiguous language of the Commission’s rules.

The arbitrary and capricious standard applies as well; however, in its

Appellee’s brief, the Commission improperly mixes the arbitrary and capricious

2 APA § 2001.174(2)(A)(D)(E) and (F). APA Section 2001.174 is submitted as Appendix 2. 3 Public Utility Regulatory Act, PURA, TEX. UTIL. CODE ANN. §§ 11.001-66.017. PURA Chapter 36, Subchapters A and B are submitted as Appendix 1. 4 OPUC also notes that this standard of review is applicable to ETI’s “conditional cross point” because ETI’s challenge is procedural in nature, i.e., the exclusion from evidence of an exhibit. 2 standard with the substantial evidence standard of review. The Commission

contends that under the arbitrary and capricious standard, “Courts must uphold a

Commission decision if ‘some reasonable basis exists in the record for the action

taken by the agency.’”5 However, the quoted language from City of El Paso comes

from the Court’s discussion of the substantial evidence standard, not the arbitrary

and capricious standard of review. OPUC’s Appellant brief includes a discussion

on pages 37-39 as to how the Commission’s Order was arbitrary and capricious or

resulting from an abuse of discretion in three of the four ways possible under the

arbitrary and capricious standard of review.6 Under the standards articulated in

APA § 2001.174, the Commission’s Order should be reversed and the case

remanded for determination based upon the existing evidentiary record to

determine rates consistent with the Court’s decision.

5 PUC’s Brief of Appellee at 11, quoting City of El Paso v. Public Util. Comm’n, 883 S.W.2d 179, 186 (Tex. 1994) (City of El Paso is submitted as Appendix 10). 6 An administrative agency’s decision is arbitrary or results from an abuse of discretion if the agency: (1) failed to consider a factor the legislature directs it to consider; (2) considers an irrelevant factor; or (3) weighs only relevant factors that the legislature directs it to consider but still reaches a completely unreasonable result. City of El Paso v. Public Util. Comm’n, 883 S.W.2d 179, 184 (Tex. 1994). Also, when an agency fails to “follow the clear, unambiguous language of its own regulation,” it acts arbitrarily and capriciously. Public Util. Comm’n v. Gulf States Utilities, 809 S.W.2d 201, 207 (Tex. 1991). 3 B. Either the Commission weighed the evidence and concluded that it was not sufficient to allow a determination as to what portion of the storm expenses were due to the negligent state of the Company’s system, or the Commission did not weigh the evidence and decided not to address the issue based upon the irrelevant factor of the passage of time. Either way, the Commission committed reversible error by failing to hold ETI to its burden of proof under PURA § 36.006 and allowing one hundred percent of the $13,014,379 1997 storm restoration expenses to be included in the storm reserve and reflected in rates.

In their respective Appellee’s briefs, ETI and the PUC focus on the evidence

presented in the Commission proceeding related to the processes ETI went

through in repairing damage and restoring service following the 1997 ice storm.

Their arguments focus on the “substantial evidence” supporting the Commission’s

decision to include one hundred percent of the 1997 storm restoration expenses

into the storm reserve reflected in rates, and assert that OPUC seeks to have the

Court reweigh the evidence to reach a different result. Their contention misses

the mark. The weighing of the evidence was indisputably done during the

contested case by the Commission and the Administrative Law Judges (ALJs) who

authored the Proposal for Decision (PFD) adopted by the Commission. The result

of their weighing of the evidence on the issue of what costs were caused by ETI’s

negligent, imprudent or deficient quality of service,7 is encapsulated in the

7 The service quality deficiencies related to the costs at issue in this appeal included inadequate distribution maintenance policies, inadequate vegetation management practices, distribution poles in poor condition or in need of comprehensive vegetation clearing, and inadequate pole inspection and repair work cycles. See Docket No. 18249, Entergy Gulf States, Inc. Service Quality Issues (Severed from Docket No. 16705), Order on Rehearing at 8-19 (Apr. 22, 1998); OPUC’s 4 Commission-adopted PFD’s statement that, “[i]t is not feasible to accurately

determine now what portion of ice storm damage that occurred 15 years ago was

caused by preventative maintenance issues.”8 With this statement, the

Commission, through its adopted PFD, acknowledged the issue of what part of the

storm damage was caused by ETI, not solely by an Act of God, and not caused by

ratepayers. With this statement, the Commission also concluded its weighing of

evidence on the issue, and found that with the evidence presented, it was not

“feasible” to determine what portion was caused by the negligent state of the

Company’s preventative maintenance, including vegetation management.

Upon arriving at this conclusion, after having weighed the evidence on the

issue, the Commission had to then decide what to do with the proposed

$13,014,379 in 1997 ice storm costs. The Commission had several options, but one

option it did not legally have was to allow the inclusion of the entire requested

$13,014,379 in the storm reserve reflected in rates. When faced with no feasible

way of determining what part was due to the Company’s action or inaction, the

Commission had a duty under PURA § 36.006 to disallow the expenses. ETI had

the burden of proof on the issue and the Commission expressly stated that it could

not determine what portion was caused by the Company’s “preventative

Appellant’s Brief at 5-7 (Submitted as Appendix 5). 8 AR, Binder 5, Item No. 185, PFD at 56. 5 maintenance issues” that the Commission earlier had found to be a “major factor”

in the outages and to have “greatly exacerbated” the extent of the damage.9 If the

evidence cannot be shown to support the Company’s case, ETI fails to meet its

burden of proof necessary to include the entirety of the 1997 storm expenses. The

Commission committed reversible error by approving the inclusion of one

hundred percent of the 1997 storm costs.

Alternatively, if the quoted passage from the Commission-adopted PFD is

not a determination based upon the weight of the evidence, then it should be

interpreted as discussed in OPUC’s Appellant’s Brief10 as a refusal, based on an

irrelevant factor - the passage of time, to hold ETI to its burden to prove that

either one hundred percent of the costs would have been incurred, regardless of

the state of the Company’s system at the time of the storm, or provide evidence on

what portion should be disallowed. Contrary to the PUC’s implied argument,

OPUC does not argue that the Company was required to break out, line by line,

each imprudent cost. Rather, as noted in OPUC’s Appellant’s Brief, there were a

variety of ways available to the Company in which to propose an appropriate

division between the costs that would have occurred regardless of the state of its

9 Entergy Gulf States, Inc. Service Quality Issues (Severed from Docket No. 16705), Docket No. 18249, Order on Rehearing at 18-19 and 47, FoF No. 97 (Apr. 22, 1998) (Submitted as Appendix 4) (Hereinafter, “Docket No. 18249 Order on Rehearing”). 10 OPUC’s Appellant’s Brief at 25-27, 31-32, 38. 6 system, and what was actually incurred. The Company did not, and it was error to

allow the entirety of the $13,014,379 in the storm reserve and rates. Likewise,

OPUC does not contend that the Company had to disallow all or require a line by

line accounting. Instead, as discussed in OPUC’s Appellant’s Brief,11 if the

Commission wished to grant the inclusion of the prudent portion of the costs, the

Commission had multiple options available to it, including but not limited to

using a third party review and basing a disallowance on the third party report, or

remanding the case back to SOAH for further evidence in a supplemental hearing

phase. However, the one option not legally available to the Commission was the

path the Commission chose to take. If, as argued in the PUC’s Appellee’s Brief,

the Commission did weigh the evidence, it concluded that there was not sufficient

evidence to allow a determination as to what portion of the storm expenses were

due to the negligent state of the Company’s system. On the other hand, if the

Commission did not weigh the evidence and refused to address the issue based

upon the passage of time, Commission considered an irrelevant factor. Either way,

the Commission committed reversible error by failing to hold ETI to its burden of

proof under PURA § 36.006 by including unreasonable, unnecessary and

imprudent costs in the storm reserve reflected in rates.

11 Id. at 18-19. 7 C. Indisputably, the issue of determining what amount of 1997 storm restoration expenses was prudent, appropriate, and includable in the storm reserve and rates was an issue to be decided in Docket No. 39896. That fact does not render the Commission’s Orders in Docket Nos. 18249 and 16705 irrelevant or properly disregarded.

At various points in their respective briefs, Appellees ETI and PUC allege

that OPUC contends that the prudence of these storm restoration expenses was

decided in Docket No. 18249. The Appellees’ briefs minimized what the

Commission stated in Docket No. 18249; however, the Commission in its Order in

that docket does not mince words. The Commission expressly stated that a

“major cause of the outages during the storm” were trees overhanging wires.12 The

Commission also stated “[t]ree limbs in ROW overhanging distribution lines pose

a threat to system reliability, and are largely within EGS’ control.”13 The

Commission continued and stated that the “Company’s failure to clear the limbs

before the storm was a major factor in the number and duration of outages

experienced by customers” and that “vegetation management failures greatly

aggravated the situation.”14 The Commission wasn’t done discussing how ETI’s

negligent or poor quality of service impacted the extent of the storm damage. The

Commission found that the “impact of the January 1997 ice storm was greatly

exacerbated by the Company’s failure to maintain its ROW clear of excessive 12 Docket No. 18249 Order on Rehearing at 18-19. 13 Id. at 18-19 (emphasis added). “EGS” is Entergy Gulf States, Inc., the predecessor to ETI and was the name the Company operated under during Docket Nos. 16705 and 18249. 14 Id. at 18-19 (emphasis added). 8 vegetation.”15 These statements very clearly address the cause of a portion of the

damages which ETI was obligated to repair and restore. ETI presented testimony

through its witness Shawn Corkran on the processes ETI used in repairing and

restoring the system. While the issue of the prudence of the $13,014,379 in

restoration costs and the question of their inclusion in the storm reserve was not at

issue in Docket No. 18249, the Commission did make a determination that impacts

the prudence review of those costs in this case; the Commission in Docket

No. 39896 was not free to disregard the finding in its prior order that a portion of

the storm damage for which the restoration expenses were incurred was caused by

the Company’s unacceptable actions or inactions. Likewise, once the Commission

made its findings that the Company was responsible for greatly exacerbating the

damage, ETI knew or should have known that it must address the issue when

presenting its storm restoration costs for inclusion in the storm reserve and rates.

The Commission’s Order in Docket No. 16705 also made it clear that the

issue of what amount of 1997 storm restoration costs are properly includable in the

storm reserve and reflected in rates remained in Docket No. 16705 and was not

severed into the separate quality of service docket, Docket No. 18249. The final

order (Second Order on Rehearing) in Docket No. 16705 very plainly shows that

the Commission considered the Company’s proposal to include a post-test-year 15 Id. at FoF No. 97. 9 adjustment for the January 1997 ice storm expenses. The Docket No. 16705 final

order, which was issued after Docket No. 18249’s final order, stated in pertinent

part in Finding of Fact No. 147 that, “EGS did not prove a reasonable post-test

year level for its existing reserve fund or that the amount expended in 1997 to

reduce the fund was prudent or appropriate.”16 The Commission continued and

expressed its intent for the issue to be addressed in the Company’s next rate case:

“Reserve fund levels following the test year in this case can be addressed in EGS’

November 1998 rate filing when all parties will have the opportunity to evaluate

the reasonableness of changes to the reserve fund.” Clearly, the Commission’s

Docket No. 16705 final order anticipated that the issue of what amount of 1997 ice

storm costs was prudent and appropriate and includable in the storm reserve fund

would be addressed in the next rate case. Docket No. 39896 was the next fully

litigated rate case and the first opportunity to give effect to Docket No. 16705’s

expectation and address the prudence of including the 1997 storm costs in the

Company’s storm reserve reflected in rates. On this issue, the parties in Docket

No. 39896 effectively stood in the same position as if it was November 1998, and it

was error for the Commission to treat the issue, and the parties, as if it were

otherwise.

16 Application of Entergy Texas for Approval of its Transition to Competition Plan and the Tariffs Implementing the Plan, and for the Authority to Reconcile Fuel Costs, Docket No. 16705, Second Order on Rehearing (Oct. 14, 1998) (An excerpt of this order is submitted as Appendix 5). 10 D. The Commission inappropriately focused on only one aspect of the prudence question and ignored the genesis of the expenses.

ETI did not address the issue of what amount of 1997 ice storm costs was

prudent and appropriate and includable in the storm reserve fund, despite the

Commission’s prior findings that the Company caused much of the damage.

Instead, ETI presented its case on the 1997 storm restoration costs as if the damage

and the resulting restoration costs were incurred in a business as usual manner.

ETI presented testimony on its storm preparation and processes in general to

support its requested storm costs for the entire period of 1996-2011, including

testimony about practices that were put into place in 1998 and thereafter; ETI also

offered the rebuttal testimony of Shawn Corkran to specifically address how the

1997 ice storm restoration process was carried out, including what damage was

repaired and restored. However, none of this evidence went to the issue of what

amount of the damage and resulting costs were due to the “preventative

maintenance” issues or negligent state of the Company’s system.17

17 The PUC asserts on pages 27-29 of its Appellee’s Brief that substantial evidence supports the inclusion of the expenses. However, the evidence cited by the PUC goes to the undisputed fact that once the system was damaged and down, it needed to be restored and repaired. OPUC does not dispute that the clean-up process was done properly; however, it is not the sole issue to be considered when determining what amount of the 1997 ice storm restoration costs are includable in the storm reserve and rates. Nor can the evidence cited by the PUC in its brief be construed to be evidence on the question at issue, given Mr. Corkran’s statement that he was unaware of any attempt by the Company to identify or quantify the portion of damage and expenses related to the poor vegetation management. AR, Binder 43, Vol. D, Transcript at 579:15-19. The transcript of Mr. Corkran’s cross-examination is submitted as Appendix 6. 11 Proof that ETI did not present evidence on the issue is found in the

admission by ETI’s expert witness, Shawn Corkran during cross-examination

during the hearing on the merits in Docket No. 39896. Asked if the Company had

identified or quantified the level of expenses attributable to ETI’s negligence, Mr.

Corkran stated that he is not aware of any attempt by the Company to try and

quantify which costs or how much were attributable to the Company’s poor

vegetation management.18 Under PURA § 36.006, the Company holds the burden

of proof and it was error for the Commission to include the entirety of the

$13,014,379 in 1997 Storm Restoration costs in the storm reserve based upon the

existing evidentiary record. It was not feasible, based upon the case presented by

the Company, to determine what portion of the $13,014,379 was due to the

exacerbated level of damage and what portion would have been incurred

regardless. The Company failed to carry its burden of proof that would allow the

Commission to legally find that the entire amount is properly included in the

storm reserves and rates.

18 AR, Binder 53, Vol. D, Transcript at 579:15-19. 12 E. The 60-basis-point reduction to the Company’s return on equity assessed in Docket No. 18249 was not intended to be in lieu of identifying and accounting for the portion of the cost of cleaning up and repairing the damage caused by the Company’s imprudent vegetation management. The Commission acted arbitrarily and capriciously by considering this irrelevant factor and including the entirety of the $13,014,379 in ETI’s storm reserve reflected in rates.

As noted in OPUC’s Appellant’s brief, the Commission imposed a 60-basis-

point reduction in Docket No. 18249 pursuant to PURA § 36.062 expressly

intended to reflect the poor level of service provided by the Company, to

incentivize the Company to improve its service quality, and to provide the

ratepayers a remedy for such things as billing rate error and call center response

time.19 As acknowledged by ETI during the hearing on the merits in Docket No.

39896, the 60 basis point reduction levied in Docket No. 18249 was used by the

Commission as part of an incentive plan created to help the Company achieve

much needed service quality improvements.20

Moreover, the Company’s quality of service was a statutorily required

consideration under PURA § 36.062 when determining the Company’s return on

equity (ROE). The 60-basis-point reduction was more of a penalty in nature and

was not intended to be a cure-all for the attendant impacts of the poor service. 19 See Docket No. 18249 Order on Rehearing at 1-2; See also Id. at 28-29, 35 and Ordering Paragraph 8. 20 AR, Vol. D, Transcript at 570:22-572:2; See Docket No. 18249 Order on Rehearing at 28 and 28-31. The plan also allowed the Company the opportunity to “earn back” some of its basis point reduction going forward, if it met certain specific performance targets. Id. at 29. 13 Specifically, contrary to the statement on page 57 of the Commission-adopted PFD

and the Appellees’ argument, the 60 basis point reduction was not intended as a

remedy in whole or in part for the extra restoration costs the Company expended

in cleaning up the exacerbated damage caused by the imprudent state of its

system.

First, the issue of the recovery of the 1997 storm restoration costs through

the storm reserve was not one of the issued severed out of Docket No. 16705 into

Docket No. 18249.21 Therefore, the issue was not before the Commission at the

time it assessed the 60 basis point penalty. Second, the Order in Docket No. 16705

was issued six months after the Order in Docket 18249 in which the Commission

ordered the 60-basis-point reduction. The Commission was clearly aware of its

own order reducing the Company’s ROE and yet, the above-quoted Finding of

Fact No. 147 from the later order clearly indicates that the Commission anticipated

that the prudence, propriety and reasonableness of the 1997 storm costs and their

inclusion in the storm reserve would be litigated in a future rate case. The

Commission would not have made such a finding if it considered any imprudence

to have been remedied by the 60-basis-point reduction.

The PUC and ETI seem to be arguing that the 60-basis-point reduction

21 Id. at 2-3. 14 trumps the regulatory and statutory requirements that storm costs included in the

plan be “reasonable and necessary” and “not reasonably anticipated.”22 Such an

argument is without merit and contrary to law. Reducing the Company’s ROE

under PURA § 36.062 does not absolve the Company or the Commission from

PURA’s requirements that imprudent costs not be charged to ratepayers. Nor

does the reduction to the ROE convert unreasonable costs into reasonable costs,

and anticipated costs into unanticipated costs. The requirement in

PURA § 36.062 that the Commission address the Company’s service quality when

setting its ROE does not negate the statutory requirement that only reasonable

and necessary expenses be charged to ratepayers under PURA § 36.051 and

36.064.23 Courts “should not give one provision a meaning out of harmony or

inconsistent with other provisions, although it might be susceptible to such a

construction standing alone.”24 Courts must “presume that the Legislature

intends an entire statute to be effective and that a just and reasonable result is

intended.”25

Although PURA § 36.052 authorizes the Commission to take the quality

of a utility's services into account in establishing a reasonable return, the

22 PURA §§ 36.051 and 36.064; 16 Tex. Admin. Code § 25.231(b)(2)(J). Rule 25.231(b) is submitted as Appendix 3. 23 See 16 Tex. Admin. Code § 25.231(b)(2)(J). 24 Helena Chem. Co. v. Wilkins, 47 S.W.3d 486, 493 (Tex. 2001) (Submitted as Appendix 11). 25 Id. citing Tex. Gov't Code § 311.021(2), (3). 15 provision should not be interpreted to negate the requirements of PURA §§ 36.051

and 36.064(c) that only reasonable and necessary expenses are permitted for

recovery through rates. In other words, a penalty imposed upon a utility's

authorized return for poor service quality should not be viewed as a license to

permit the utility to now charge customers for the portion of the damages

resulting from the Company's poor service quality.26 The end result of the

Commission's decision is that unreasonable and unnecessary expenses are being

charged to customers through the storm reserve and rates. The Commission’s

Order violates PURA, is arbitrary and capricious and is affected by other error of

law.

F. The Commission erred in approving the recovery of imprudent costs.

The PUC in its Appellee’s Brief asserts that a utility is not obligated to carve

out imprudence from its request, and specifically, that ETI was not obligated to

identify the portion of its requested storm expenses that were due to the

exacerbated damage caused by its imprudent system management. These

contentions are incorrect. First, it is indisputably the Company’s burden to prove

each element of its case, including the reasonableness and necessity of including

26 Application of Entergy Texas for Approval of its Transition to Competition Plan and the Tariff Implementing the Plan, and for the Authority to Reconcile Fuel Costs, Docket No. 16705, Second Order on Rehearing at FoF No. 147.

16 restoration costs into the storm reserve.27 Imprudent costs are neither reasonable

nor necessary; imprudently incurred costs may not be recovered in the utility’s

base rates.28 Moreover, prudence is a statutorily required criterion.29 The utility

bears the burden of proving the prudence of costs it seeks to recover, and if some

but not all of the requested costs are imprudent, the imprudent costs must be

removed either by separating them out, adopting another reasonable method to

account for the imprudence, or disallowing the intermingled requested costs.30 In

the 1992 City of El Paso decision, the court addressed a case in which imprudence

had been found. The court stated that the Commission should “generally disallow

project costs to the extent of the imprudence.”31 The court continued, stating that

a “determination that an expenditure is imprudent carries the legal consequence of

its exclusion from rate base” and that prudence question “embodies one of the

27 PURA §§ 36.006, 36.051 and 36.064. 28 See Entergy Gulf States, Inc. v. Public Utility Commission, 112 S.W.3d 208, 214 (Tex. App.—Austin 2003, pet. denied) (“[I]n order to raise the price of its product, the utility must . . . bear the burden of proving that each dollar of cost incurred was reasonably and prudently invested.”). 29 See Texas Utilities Electric Company v. Public Utility Commission, 881 S.W.2d 387, 406 (Tex. App.— Austin 1994) aff’d in part, rev’d in part on other grounds, 935 S.W.2d 109 (Tex. 1997) (Imprudence finding “must be supported by underlying findings because it embodies one of the criteria the Commission must consider in deciding whether to include the particular expenditure in rate base.”) (emphasis added). 30 Adopting another reasonable method to account for the imprudent costs intermingled with prudent costs is precisely what the Commission did in the case underlying Texas Utilities Electric Company v. Public Utility Commission, 881 S.W.2d 387. 31 City of El Paso v Public Utility Commission, 839 S.W.2d 895, 908 (Tex. App.—Austin 1992) aff’d in part, rev’d in part on other grounds, 883 S.W.2d 179 (Tex. 1994) (Submitted as Appendix 9). 17 criteria the PUC must consider.”32 The City of El Paso case was relied upon by the

court in Texas Utilities Electric Company which dealt with a nuclear power plant. In

Texas Utilities Electric Company, the Texas Third Court of Appeals found that, where

a portion of the utility’s $537.90 million in costs for the Comanche Peak nuclear

project were imprudently incurred, the Commission acted properly in disallowing

some but not all of the costs due to imprudence.33 In the originating Commission

docket, the utility had argued that all of its Comanche Peak costs were prudently

incurred, while intervening parties had argued that the costs should be disallowed

entirely, line by line.34 The Commission had then brought in a third party to

evaluate the prudence of the costs. The court rejected the contention that if the

Commission were to disallow some but not all of the costs, it must require a

detailed breakdown. Instead of doing so, based upon the third party

recommendation, the Commission disallowed part of the costs because they were

imprudent but allowed other costs.35 In particular, the Commission made a $90.5

million disallowance for the response team, a $79.9 million disallowance related to

the corrective action program, plus other disallowances due to delays in licensing,

32 Id. 33 Texas Utilities Electric Company v. Public Utility Commission, 881 S.W.2d 387, 405-406 (Tex. App.— Austin 1994) aff’d in part, rev’d in part on other grounds, 935 S.W.2d 109 (Tex. 1997) (Submitted as Appendix 12). 34 Id. at 404. 35 Id. at 403-406. 18 including 54.1 million for “time-driven” indirect costs and $167.3 million in

AFUDC.36 The Austin court reviewed the Commission’s decision to reject an all-

or-nothing approach and disallow the imprudent portion of expenses as just

described; the Court stated that “it is the Commission that is charged with sifting

through the evidence and deciding whether imprudent conduct caused certain

expenditures.”37 While recognizing the Commission’s role in weighing evidence

(and recognizing the need to determine whether imprudent conduct caused

certain expenditures), nowhere in the Texas Utilities Electric Company case does the

court hold that the Commission may allow unreasonable or imprudently incurred

expenses to be included in rates in contravention of PURA §§ 36.051 and 36.064,

and the PUC’s substantive rule, 16 Tex. Admin. Code § 25.231(b)(2)(J), based on

the inability to segregate imprudent costs.

As discussed on pages 17-20 of OPUC’s Appellant’s Brief, the instant case is

distinguishable from Texas Utilities Electric Company because it was already

established as a matter of fact that imprudent conduct caused much of the storm

damage. Finding of Fact 97 from PUC Docket No. 18249 provided the

Commission with the starting point in its decision-making process, and it was the

Commission’s job at that point to either deny ETI’s requested 1997 storm expenses 36 Id. at 404-405. In total, the Commission disallowed $316.5 million as imprudent expenses. Id. at 405-406 n. 34. 37 Id. at 404. 19 in their entirety, determine what portion was imprudently caused by the

exacerbated damages (by a variety of possible methods, or find that one hundred

percent of the expenses would have been incurred, regardless of the imprudent

system management and exacerbated level of damage.38 The Commission instead

chose to focus solely on the prudence of how the storm restoration was carried out

and erroneously failed to take any reasonable approach to considering what

expenses were related to the exacerbated damages. Consequently, the imprudent

costs became part of the approved rates through their inclusion in the storm

reserve.

G. Some of ETI’s storm costs were “reasonably anticipated,” and it was reversible error for the Commission to fail to consider this statutorily required criterion. The Commission’s Order violates PURA § 36.064 and is the result of the Commission acting arbitrarily and through unlawful procedure.

PURA Section 36.064 allows storm costs to be included in a self-insurance

plan to the extent they are “not reasonably anticipated.” PURA Subsection

36.064(a) states that, an electric utility “may self-insure all or part of the utility's

potential liability or catastrophic property loss, including windstorm, fire, and

explosion losses, that could not have been reasonably anticipated and included

under operating and maintenance expenses.”39 In a prior Commission Order in

38 Docket No. 18249 Order on Rehearing at 47, FoF No. 97. 39 The Commission’s substantive rule on self-insurance plans, 16 Tex. Admin. Code § 25.231(b)(1)(G), states in pertinent part: “The reserve accounts are to be charged with 20 Docket No. 18249, the Commission found that the damage resulting from the 1997

ice storm was much greater than it would otherwise have been due to the

Company’s imprudent vegetation management. Vegetation management is a

program designed to keep the rights of way surrounding power lines clear; the

very purpose of vegetation management is to anticipate and prevent or mitigate

storm damage and outages in bad weather.40 The Commission’s Order in Docket

No. 39896 fails to demonstrate that the Commission considered the imprudent

genesis of the storm damage and the fact that much of the damage and

corresponding expenses were reasonably anticipated and preventable.

Both the PUC and ETI defend the Commission’s order by claiming that the

“not reasonably anticipated” requirement for inclusion of storm costs in the self-

insurance reserve and rates was considered by the Commission either because the

PFD mentioned a witness’s discussion of the severity of the storm or because a

single Q&A that appeared in another witness’s rebuttal testimony said so (despite

not being cited in the PFD or Order). Neither contention even if read in the best

light would be sufficient. The “not reasonably anticipated” requirement is a

statutorily required consideration that requires support by underlying findings of

property and liability losses which occur, and which could not have been reasonably anticipated and included in operating and maintenance expenses, and are not paid or reimbursed by commercial insurance.” 40 Docket No. 18249 Order on Rehearing at 14. 21 fact in order to show that the Commission properly gave consideration to the

statutorily required criterion.41 It is not enough to merely infer consideration

through other findings of fact or statements; clear, specific findings are required in

order to prove that the Commission fulfilled its duty under the statute.42 The

Court in Charter Medical explained that underlying findings of fact have

“substantial statutory purpose” and serve to “restrain any disposition on the part

of the agency to grant [a certificate] without a full consideration of the evidence

and a serious appraisal of the facts.”43 Such findings of fact also serve to inform the

parties and the courts of the basis for the agency's decision so that the parties may

intelligently prepare an appeal and so that the courts may properly exercise their

function of review.44

The Commission’s Order fails to show the statutorily required

consideration that storm costs included in the self-insurance plan only be those

“that could not have been reasonably anticipated,” and further fails to provide

underlying findings, either in the findings of fact or in the body of the Order, that

constitute material basic facts that relate to the statutory finding of “not

reasonably anticipated.” The failure to include underlying findings of fact to

41 See Texas Health Facilities Comm’n v. Charter Medical-Dallas, 665 S.W.2d at 451-452 (Submitted as Appendix 8). 42 Id. 43 Id. at 452. 44 Id. 22 support the “not reasonably anticipated” finding violates APA § 2001.141(d), but is

also procedural and a violation of APA § 2001.174(2)(C). Texas courts will reverse

an agency order when underlying fact findings are legally insufficient.45

Additionally, the omission of an ultimate finding (or statutorily required criteria)

when underlying findings are absent violates PURA § 36.064, APA § 2001.141(b), is

arbitrary and capricious, and the resulting order is made through unlawful

procedure. An expressly stated factor in determining whether the agency’s

decision is arbitrary or results from an abuse of discretion is whether the agency

“failed to consider a factor the Legislature directs it to consider.”46

Finally, the Commission’s own regulation, 16 Tex. Admin. Code

§ 25.231(b)(1)(G), requires that only those property and liability losses which

could not have been reasonably anticipated may be included in the self-insurance

plan. Failing to give effect to its own unambiguous regulation is reversible as

other error of law and is also arbitrary and capricious. This Court has stated that

an agency decision is arbitrary when its final order “fails to demonstrate a

connection between the agency decision and the factors that are made relevant to

45 See Texas Health Facilities Comm’n v. Presbyterian Hospital North, 690 S.W.2d 564, 566 (Tex. 1985); See also Finder v. Texas Medical Bd., 2010 WL 4670510 *6 (Tex. App.—Austin, pet. denied) (“The findings of fact in Dr. Finder's case do not require the inferential leap necessary in Presbyterian Hospital.”). 46 City of El Paso v. Public Util. Comm’n, 883 S.W.2d 179, 184 (Tex. 1994). 23 that decision by the applicable statutes and regulations.”47 More directly, our

Supreme Court has stated that “if the Commission has failed to follow the clear,

unambiguous language of its own regulation, we must reverse its action as

arbitrary and capricious.”48

Pages 20-22 of OPUC’s Appellant’s brief discusses why costs related to the

1997 ice storm were in fact reasonably anticipated, including that much of the

damage was found by the Commission to have been caused by imprudent

vegetation management. As noted in OPUC’s Appellant’s brief, the very purpose

of vegetation management requirements is to prevent or mitigate foreseeable

damage after storms due to vegetation in the rights of way coming into contact

with conductors and wires, causing wire breakage or ground faults. The Order is

legally deficient to support the inclusion of the entirety of 1997 ice storm costs in

the storm reserve as “not reasonably anticipated” costs; to the contrary, the record

shows that the 1997 storm costs were in fact reasonably anticipated. It was

reversible error to include these costs in the storm reserve and rates.

47 General Motors Corp. v. Bray, 243 S.W.3d 678, 684 (Tex. App.—Austin 2007, no pet.) 48 Public Util. Comm’n v. Gulf States Utilities, 809 S.W.2d 201, 207 (Tex. 1991).

24 H. ETI’s 420-page spreadsheet was properly excluded from the evidentiary record. (Response to ETI’s Conditional Cross-Point) ETI offers as a conditional cross-point that the Commission erred by

excluding from evidence a 420-page spreadsheet ETI produced in discovery. ETI’s

complaint is procedural in nature and falls under the “made through unlawful

procedure” standard of review.49 ETI’s conditional cross-point is meritless. First,

the excluded spreadsheet was not controlling on a material issue but was instead

merely cumulative and thus, its exclusion from evidence, if error, was harmless and

does not warrant reversal under APA § 2001.174(2)(c).50 Here, the spreadsheet

only shows that expenditures were made. Five pages are in evidence as part of

OPUC’s Exhibit No. 6; these pages show the nature of the information provided

and, because the accounting itself is not challenged, the remaining 415 pages are

unnecessary to the rendition of a proper order.51

ETI contends it was error to deny the admission the 420-page spreadsheet

on the basis that ETI failed to reserve its right to exercise optional completeness.52

ETI attempts to support its contention by citing to Gilmore v. State, which was a

49 APA § 2001.174(2)(c). 50 Mentis v. Barnard, 870 S.W.2d 14, 16 (Tex. 1994); Office of Public Utility Counsel v. Public Utility Comm’n, 185 S.W.3d 555, 576-77 (Tex. App.—Austin 2006, pet. denied). 51 ETI also presented rebuttal testimony explaining the processes it went through in the storm restoration. 52 It appears from ETI’s pleadings that it does not contest the validity of the other basis for the ALJ’s ruling which was that the document violates Tex. R. Civ. P. 197.3. See AR, Binder 43, Vol. K, Transcript at 1705-1706. 25 criminal case wherein the Dallas Court of Appeals held that a party does not have

to exercise optional completeness at the time the document being “completed” is

admitted; a party can wait until “cross-examination, or during the development of

[its] own case.”53 However, there is a difference between having the right to

exercise optional completeness later in the proceeding rather than

contemporaneously with the document being completed, and failing to reserve the

right to do so later. The “permissive grant” language quoted by ETI deals with the

fact that Appellant in Gilmore had argued that the language of Rule 107 of the Texas

Rules of Evidence required the court to admit the complete document

immediately.54

SOAH ALJs have been charged with the duty to conduct the contested case

hearing on the merits when referred from the Commission.55 When the SOAH

ALJ acts as the presiding officer, he has “broad discretion in conducting the course,

conduct, and scope of the hearing,” including the power to “rule upon the

admissibility of evidence and amendments to pleadings.”56 When conducting

hearings referred from the Commission, it is the established practice that parties

are required to reserve the right of optional completeness if not exercising it

53 Gilmore v. State, 744 S.W.2d 630, 631(Tex. App.- Dallas 1987, pet. ref’d) (Submitted as Appendix 13). 54 Id. 55 16 Tex. Admin. Code § 22.207. 56 16 Tex. Admin. § 22.202(c). 26 contemporaneously with the admission of the document being completed. In the

case below, Docket No. 39896, ETI itself “reserved” optional completeness nine

times over the course of the hearing on the merits and exercised that right once.57

Notably, seven of the times the Company reserved optional completeness for later

admission occurred prior to the ALJ’s ruling on the spreadsheet. ETI knew what

was required to exercise optional completeness in a PUC case at SOAH and

cannot properly complain now that the spreadsheet’s exclusion from evidence was

error.

Further, the purpose behind optional completeness would not apply to the

spreadsheet and OPUC Exhibit No. 6. The purpose behind the rule of optional

completeness is “to reduce the possibility of the fact finder receiving a false

impression from hearing the evidence of only a part of a writing.”58 There are two

threshold requirements to invoke the rule of optional completeness: (1) an

incomplete statement was introduced into evidence, and (2) the party offering the

57 ETI reserved optional completeness on the following exhibits: Cities Exhibit No. 7 (Transcript (Tr.) at 69, ll. 1-2); TIEC Exhibit No. 9 (Tr. at 183, ll. 17-21); OPUC Exhibit No. 10 (Tr. at 282, l. 21-283, l. 1); Cities Exhibit No. 41 (Tr. at 968, ll.14-17); Cities Exhibit No. 43A (Tr. at 1456, ll. 4-5 and 15-20); Cities Exhibit No. 43B (Tr. at 1456, l. 21-1457, l.4); Cities Exhibit No. 48 (Tr. at 2082, ll. 19-22); and OPUC Exhibit No. 35 (Tr. at 2095, ll. 1-25). ETI exercised its reserved right to optional completeness as ETI Exhibit No. 98 (Tr. at 1505, l. 16- 1507, l. 15). Cities also reserved optional completeness on one ETI Exhibit (ETI Exhibit No. 83, Tr. at 1190, l. 22-1191, l. 5) and exercised that reservation as Cities Exhibit No. 49 (Tr. at 1686, l. 15-1687, l. 7). These transcripts are found in the Administrative Record in Binder 43, Volumes B, C, F, G, I, K, and M, and the cited excerpts are submitted here as Appendix 7. 58 Gilmore v. State, 744 S.W.2d at 631; See Roman v. State, 503 S.W.2d 252, 253 (Tex. Crim. App. 1974). 27 remainder must show that the remainder is on the same matter and “is necessary

to fully understand or explain the matter.”59 In Crosby v. Minyard Foods, the Dallas

Court of Appeals found that the Defendant, Minyard Food Stores, may have

satisfied the first requirement but failed to meet the second. The court concluded

that, “Minyard clearly failed to meet the second requirement. . . . Minyard has

made no attempt to show how Rayshell's testimony could have confused or misled

the jury regarding the contents of Kern's affidavit or its meaning. . . . [T]he trial

court erred in admitting the document.”60 Like in Crosby, admitting the remainder

of the writing (here, the spreadsheet) would not serve to correct any false

impression or otherwise add to the Commission’s understanding. The five-page

excerpt was included as part of OPUC’s testimony to illustrate the naked

granularity of the data. Five pages of line-by-line accounting entries paint the

picture with sufficient clarity. Since the accuracy of the entries was not in

dispute, “completing” the spreadsheet with the remaining 415 pages would not

serve the purpose for which the optional completeness rule was intended to

address.

59 Crosby v. Minyard Food Stores, 122 S.W.3d 899, 903 (Tex. App.—Dallas 2003, no pet.) (Submitted as Appendix 14). 60 Id. 28 PRAYER

For the reasons stated in this brief and in OPUC’s Appellant’s Brief, the

Office of Public Utility Counsel respectfully prays that the Court reverse the

district court’s judgment insofar as it upholds the Commission’s decision in the

respects discussed above. OPUC further prays that the Court remand the case to

the Commission for further proceedings, based upon the existing evidentiary

record, to determine rates consistent with the Court’s decision. Finally, OPUC

respectfully prays that this Court grant the OPUC such other and further relief to

which it may be justly entitled.

Respectfully submitted,

Tonya Baer Public Counsel State Bar No. 24026771

/s/ Sara J. Ferris___________________________ Sara J. Ferris Senior Assistant Public Counsel State Bar No. 50511915

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

29 CERTIFICATE OF COMPLIANCE

I certify that the Appellant’s Reply Brief of the Office of Public Utility Counsel contains 5,805 words, as measured by the undersigned counsel’s word- processing software, and therefore complies with the word limit found in Tex. R. App. P. 9.4(i)(2)(B).

__ /s/ Sara J. Ferris_________________ Sara J. Ferris

CERTIFICATE OF SERVICE

I certify that the Appellant’s Reply Brief and Appendix of the Office of Public Utility Counsel was electronically filed with the Clerk of the Court using the electronic case filing system of the Court, and that a true and correct copy of the Appellant’s Reply Brief and Appendix of the Office of Public Utility Counsel was served upon counsel for each party of record, listed below, by electronic service or 1st Class U.S. Mail, on this 2nd day of June, 2015.

ENTERGY TEXAS, INC. CITIES OF ANAHUAC, Marnie A. McCormick BEAUMONT, ET. AL John F. Williams Daniel J. Lawton Duggins, Wren, Mann & Romero, LLP Lawton Law Firm PC P.O. Box 1149 12600 Hill Country Blvd, Suite R275 Austin, Texas 78767-1149 Austin, Texas 78738 (512) 744-9300 (512) 322-0019 mmcormick@dwmrlaw.com dlawton@ecpi.com jwilliams@dwmrlaw.com

30 PUBLIC UTILITY COMMISSION TEXAS INDUSTRIAL ENERGY OF TEXAS CONSUMERS Elizabeth R. B. Sterling Rex VanMiddlesworth Assistant Attorney General Benjamin Hallmark Environmental Protection Division Thompson Knight LLP Office of the Attorney General 98 San Jacinto Blvd, Suite 1900 P. O. Box 12548, Capitol Station Austin, Texas 78701 Austin, Texas 78711-2548 (512) 320-9200 (512) 475-4152 rex.vanm@tklaw.com elizabeth.sterling@texasattorneygeneral.gov benjamin.hallmark@tklaw.com

STATE AGENCIES OF TEXAS Katherine H. Farrell Assistant Attorney General Admin Law Div. – Energy Rates Section Office of the Attorney General P. O. Box 12548 Austin, Texas 78711-2548 (512) 475-4173 katherine.farrell@texasattorneygeneral.gov

_ /s/ Sara J. Ferris_________________ Sara J. Ferris

31 Appendix to the Appellant's Reply Brief of the Office of Public Utility Counsel

l. PURA, Chapter 36, Subchapters A and B 2. APA, Tex. Gov't Code§ 2001.174 3. PUC Substantive Rule on Cost of Service~Allowable Expenses: 16 Tex. Admin. Code§ 25.231(b) 4. PUC Docket No. 18249, Order on Rehearing 5. Excerpts from PUC Docket No. 16705, Second Order on Rehearing 6. PUC Docket No. 39896, Hearing on the Merits Transcript: Excerpts of Direct and Cross~ Examination of ETI Witness Shawn Corkran 7. PUC Docket No. 39896 Hearing on the Merits Transcript: Excerpts re. Optional Completeness 8. Tex. Health Facilities Comm'n v. Charter Medical~Dallas, 665 S.W.2d 446 (Tex. 1984) 9. City ofEl Paso v. Public Util. Comm'n, 839 S.W.2d 895 (Tex. App.- Austin 1992) aff'd in part, rev'd in part on other grounds, 883 S.W.2d 179 (Tex.1994). 10. City of El Paso v. Public Util. Comm'n, 883 S.W.2d 179 (Tex. 1994) 11. Helena Chemical Co. v. Wilkins, 47 S.W.3d 486 (Tex. 2001) 12. Texas Utilities Electric Company v. Public Utility Commission, 881 S.W.2d 387 (Tex. App.- Austin 1994) aff'd in part, rev'd in part on other grounds, 935 S.W.2d 109 (Tex. 1997) 13. Gilmorev. State, 744 S.W.2d 630 (Tex. App.-Dallas 1987, pet. ref'd) 14. Crosby v. Minyard Food Stores, 122 S.W.3d 899 (Tex. App.- Dallas 2003, no pet.) Appendix 1

PURA, Chapter 36, Subchapters A and B PUBLIC UTILITY REGULATORY ACT Title II, Texas Utilities Code (As Amended)

Effective as of September 1, 2013

PUBLIC UTILITY COMMISSION OF TEXAS FOREWORD

The Public Utility Code was enacted by Acts 1997, 75th Leg., R.S., ch. 166, § 1 as a new and separate code effective September 1, 2007. Title 2 of the code is properly cited as the Public Utility Regulatory Act.

This edition of the Public Utility Regulatory Act contains amendments adopted through the 83rd Legislature, Third Called Session.

In general, the effect of amendments has been clear and the resulting text changes were straightforward and did not require any editorial discretion. Except as explained below, editorial discretion was exercised in reconciling multiple amendments to the same section. In the majority of these cases, there was no irreconcilable conflict and all of the amendments could be given effect. In some cases, an act expressly amended a provision as added or amended by another act. In the few cases where an irreconcilable conflict was found, the act with the later date of enactment was given effect, with the other provisions italicized below. In addition, a note explaining the conflict is provided following the section annotation.

The annotations following each section have two components. The first annotation shows the derivation of the section, either citing to the Public Utility Regulatory Act of 1995 (V.A.C.S. Art. 1446c-O), Acts 1997, ch. 166, or showing the section as added to the code and citing the relevant act. The second component identifies subsequent amendments, cites the amending act (and originating bill), provides a brief summary of each of the amendments, and, where appropriate, provides a reference to related provisions or material.

This publication is maintained by the Commission Advising and Docket Management Division of the Public Utility Commission of Texas. Suggestions or corrections may be submitted to that division. CHAPTER 36. RATES

SUBCHAPTER A. GENERAL PROVISIONS

Sec. 36.001. AUTHORIZATION TO ESTABLISH AND REGULATE RATES. (a) The regulatory authority may establish and regulate rates of an electric utility and may adopt rules for determining: ( 1) the classification of customers and services; and (2) the applicability of rates. (b) A rule or order of the regulatory authority may not conflict with a ruling of a federal regulatory body. (V.A.C.S. art. 1446c-0, Sec. 2.201.) Sec. 36.002. COMPLIANCE WITH TITLE. An electric utility may not charge or receive a rate for utility service except as provided by this title. (V.A.C.S. art. 1446c-O, Sec. 2.153 (part).) Sec. 36.003. JUST AND REASONABLE RATES. (a) The regulatory authority shall ensure that each rate an electric utility or two or more electric utilities jointly make, demand, or receive is just and reasonable. (b) A rate may not be unreasonably preferential, prejudicial, or discriminatory but must be sufficient, equitable, and consistent in application to each class of consumer. (c) An electric utility may not: (1) grant an unreasonable preference or advantage concerning rates to a person in a classification; (2) subject a person in a classification to an unreasonable prejudice or disadvantage concerning rates; or (3) establish or maintain an unreasonable difference concerning rates between localities or between classes of service. (d) In establishing an electric utility's rates, the commission may treat as a single class two or more municipalities that an electric utility serves if the commission considers that treatment to be appropriate. (e) A charge to an individual customer for retail or wholesale electric service that is less than the rate approved by the regulatory authority does not constitute an impermissible difference, preference, or advantage. (V.A.C.S. art. 1446c-0, Sees. 2.202, 2.214 (part).) Sec. 36.004. EQUALITY OF RATES AND SERVICES. (a) An electric utility may not directly or indirectly charge, demand, or receive from a person a greater or lesser compensation for a service provided or to be provided by the utility than the compensation prescribed by the applicable tariff filed under Section 32.101. (b) A person may not knowingly receive or accept a service from an electric utility for a compensation greater or less than the compensation prescribed by the tariff. (c) Notwithstanding Subsections (a) and (b), an electric utility may charge an individual customer for wholesale or retail electric service in accordance with Section 36.007.

79 (d) This title does not prevent a cooperative corporation from returning to its members net earnings resulting from its operations in proportion to the members' purchases from or through the corporation. (V.A.C.S. art. 1446c-O, Sees. 2.215(a), (b).) Sec. 36.005. RATES FOR AREA NOT IN MUNICIPALITY. Without the approval of the commission, an electric utility's rates for an area not in a municipality may not exceed 115 percent of the average of all rates for similar services for all municipalities served by the same utility in the same county as that area. (V.A.C.S. art. 1446c-O, Sec. 2.213.) Sec. 36.006. BURDEN OF PROOF .. In a proceeding involving a proposed rate change, the electric utility has the burden of proving that: (1) the rate change is just and reasonable, if the utility proposes the change; or (2) an existing rate is just and reasonable, if the proposal is to reduce the rate. (V.A.C.S. art. 1446c-O, Sec. 2.204.) Sec. 36.007. DISCOUNTED WHOLESALE OR RETAIL RATES. (a) On application by an electric utility, a regulatory authority may approve wholesale or retail tariffs or contracts containing charges that are less than rates approved by the regulatory authority but not less than the utility's marginal cost. The charges must be in accordance with the principles of this title and may not be unreasonably preferential, prejudicial, discriminatory, predatory, or anticompetitive. (b) The method for computing the marginal cost of the electric utility consists of energy and capacity components. The energy component includes variable operation and maintenance expense and marginal fuel or the energy component of purchased power. The capacity component is based on the annual economic value of deferring, accelerating, or avoiding the next increment of needed capacity, without regard to whether the capacity is purchased or built. (c) The commission shall ensure that the method for determining marginal cost is consistently applied among utilities but may recognize the individual load and resource requirements of the electric utility. (d) Notwithstanding any other provision of this title, the commission shall ensure that the electric utility's allocable costs of serving customers paying discounted rates under this section are not borne by the utility's other customers. (V.A.C.S. art. 1446c-O, Sees. 2.001(b), (c), (d) (part), 2.052(b), (c).) Sec. 36.008. STATE TRANSMISSION SYSTEM. In establishing rates for an electric utility, the commission may review the state's transmission system and make recommendations to the utility on the need to build new power lines, upgrade power lines, and make other necessary improvements and additions. (V.A.C.S. art. 1446c-O, Sec. 2.051(w) (part).) (Amended by Acts 1999, 76th Leg., R.S., ch. 405 (SB 7), § 23.) Sec. 36.009. BILLING DEMAND FOR CERTAIN UTILITY CUSTOMERS. Notwithstanding any other provision of this code, the commission by rule shall require a transmission and distribution utility to: (1) waive the application of demand ratchet provisions for each nonresidential secondary service customer that has a maximum load factor equal to or below a factor set by commission rule; (2) implement procedures to verify annually whether each nonresidential secondary service customer has a maximum load factor that qualifies the customer for the waiver described by Subdivision (1); 80 (3) specify in the utility's tariff whether the utility's nonresidential secondary service customers that qualify for the waiver described by Subdivision ( 1) are to be billed for distribution service charges on the basis of: (A) kilowatts; (B) kilowatt-hours; or (C) kilovolt-amperes; and (4) modify the utility's tariff in the utility's next base rate case to implement the waiver described by Subdivision (1) and make the specification required by Subdivision (3). (Added by Acts 2011, 82nd Leg., R.S., ch. 150 (HB 1064), § 1.)

SUBCHAPTER B. COMPUTATION OF RATES

Sec. 36.051. ESTABLISHING OVERALL REVENUES. In establishing an electric utility's rates, the regulatory authority 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 necessary operating expenses. (V.A.C.S. art. 1446c-O, Sec. 2.203(a).) Sec. 36.052. ESTABLISHING REASONABLE RETURN. In establishing a reasonable return on invested capital, the regulatory authority shall consider applicable factors, including: (1) the efforts and achievements ofthe utility in conserving resources; (2) the quality of the utility's services; (3) the efficiency of the utility's operations; and (4) the quality of the utility's management. (V.A.C.S. art. 1446c-0, Sec. 2.203(b).) (Amended by Acts 1999, 76th Leg., R.S., ch. 405 (SB 7), § 24 (repealed former subd. (1) and renumbered former subds. (2) to (5) as subds. (1) to (4)).) Sec. 36.053. COMPONENTS OF INVESTED CAPITAL. (a) Electric utility rates shall be based on the original cost, less depreciation, of property used by and useful to the utility in providing service. (b) The original cost of property shall be determined at the time the property is dedicated to public use, whether by the utility that is the present owner or by a predecessor. (c) In this section, the term "original cost" means the actual money cost or the actual money value of consideration paid other than money. · (d) If the commission issues a certificate of convenience and necessity or, acting under Section 39.203(e), orders an electric utility or a transmission and distribution utility to construct or enlarge transmission or transmission-related facilities to facilitate meeting the goal for generating capacity from renewable energy technologies under Section 39.904(a), the commission shall find that the facilities are used and useful to the utility in providing service for purposes of this section and are prudent and includable in the rate base, regardless of the extent ofthe utility's actual use ofthe facilities. (V.A.C.S. art. 1446c-O, Sees. 2.206(a) (part), (c).) (Amended by Acts 2005, 79th Leg., 1st C.S., ch. 1 (SB 20), § 1 (added subsec. (d)).)

81 Sec. 36.054. CONSTRUCTION WORK IN PROGRESS. (a) Construction work in progress, at cost as recorded on the electric utility's books, may be included in the utility's rate base. The inclusion of construction work in progress is an exceptional form of rate relief that the regulatory authority may grant only if the utility demonstrates that inclusion is necessary to the utility's financial integrity. (b) Construction work in progress may not be included in the rate base for a major project under construction to the extent that the project has been inefficiently or imprudently planned or managed. (V.A.C.S. art. 1446c-0, Sees. 2.206(a) (part), (b).) Sec. 36.055. SEPARATIONS AND ALLOCATIONS. Costs of facilities, revenues, expenses, taxes, and reserves shall be separated or allocated as prescribed by the regulatory authority. (V.A.C.S. art. 1446c-O, Sec. 2.207.) Sec. 36.056. DEPRECIATION, AMORTIZATION, AND DEPLETION. (a) The commission shall establish proper and adequate rates and methods of depreciation, amortization, or depletion for each class of property of an electric or municipally owned utility. (b) The rates and methods established under this section and the depreciation account required by Section 32.102 shall be used uniformly and consistently throughout rate-setting and appeal proceedings. (V.A.C.S. art. 1446c-O, Sees. 2.15l(a) (part), (d).) Sec. 36.057. NET INCOME; DETERMINATION OF REVENUES AND EXPENSES. (a) An electric utility's net income is the total revenues of the utility less all reasonable and necessary expenses as determined by the regulatory authority. (b) The regulatory authority shall determine revenues and expenses in a manner consistent with this subchapter. (c) The regulatory authority may adopt reasonable rules with respect to whether an expense is allowed for ratemaking purposes. (V.A.C.S. art. 1446c-O, Sees. 2.208(a), (e).) Sec. 36.058. CONSIDERATION OF PAYMENT TO AFFILIATE. (a) Except as provided by Subsection (b), the regulatory authority may not allow as capital cost or as expense a payment to an affiliate for: (1) the cost of a service, property, right, or other item; or (2) interest expense. (b) The regulatory authority may allow a payment described by Subsection (a) only to the extent that the regulatory authority finds the payment is reasonable and necessary for each item or class of items as determined by the commission. (c) A finding under Subsection (b) must include: (1) a specific finding of the reasonableness and necessity of each item or class of items allowed; and (2) a finding that the price to the electric utility is not higher than the prices charged by the supplying affiliate for the same item or class of items to: (A) its other affiliates or divisions; or (B) a nonaffiliated person within the same market area or having the same market conditions.

82 (d) In making a finding regarding an affiliate transaction, the regulatory authority shall: (1) determine the extent to which the conditions and circumstances of that transaction are reasonably comparable relative to quantity, terms, date of contract, and place of delivery; and (2) allow for appropriate differences based on that determination. (e) This section does not require a finding to be made before payments made by an electric utility to an affiliate are included in the utility's charges to consumers if there is a mechanism for making the charges subject to refund pending the making of the finding. (f) If the regulatory authority finds that an affiliate expense for the test period is unreasonable, the regulatory authority shall: ( 1) determine the reasonable level of the expense; and (2) include that expense in determining the electric utility's cost of service. (V.A.C.S. art. I446c-O, Sec. 2.208(b).) (Amended by Acts I999, 76th Leg., R.S., ch. 405 (SB 7), § 25 (amended subsec. (d)); Acts 2005, 79th Leg., R.S., ch. 4I3 (SB I668), § I (amended subd. (c)(2)).) Sec. 36.059. TREATMENT OF CERTAIN TAX BENEFITS. (a) In determining the allocation of tax savings derived from liberalized depreciation and amortization, the investment tax credit, and the application of similar methods, the regulatory authority shall: (1) balance equitably the interests of present and future customers; and (2) apportion accordingly the benefits between consumers and the electric or municipally owned utility. (b) If an electric utility or a municipally owned utility retains a portion of the investment tax credit, that portion shall be deducted from the original cost of the facilities or other addition to the rate base to which the credit applied to the extent allowed by the Internal Revenue Code. (V.A.C.S. art. l446c-O, Sees. 2.I5I(c), (d).) Sec. 36.060. CONSOLIDATED INCOME TAX RETURNS. (a) If an expense is allowed to be included in utility rates or an investment is included in the utility rate base, the related income tax benefit must be included in the computation of income tax expense to reduce the rates. If an expense is not allowed to be included in utility rates or an investment is not included in the utility rate base, the related income tax benefit may not be included in the computation of income tax expense to reduce the rates. The income tax expense shall be computed using the statutory income tax rates. (b) The amount of income tax that a consolidated group of which an electric utility is a member saves, because the consolidated return eliminates the intercompany profit on purchases by the utility from an affiliate, shall be applied to reduce the cost of the property or service purchased from the affiliate. (c) The investment tax credit allowed against federal income taxes, to the extent retained by the electric utility, shall be applied as a reduction in the rate-based contribution of the assets to which the credit applies, to the extent and at the rate allowed by the Internal Revenue Code. (V.A.C.S. art. I446c-O, Sec. 2.208(c).) (Amended by Acts 2013, 83rd Leg., R.S., ch. 787 (SB I364), § I (amended subsec. (a)).) Sec. 36.061. ALLOWANCE OF CERTAIN EXPENSES. (a) The regulatory authority may not allow as a cost or expense for ratemaking purposes: (1) an expenditure for legislative advocacy; or

83 (2) an expenditure described by Section 32.104 that the regulatory authority determines to be not in the public interest. (b) The regulatory authority may allow as a cost or expense: (l) reasonable charitable or civic contributions not to exceed the amount approved by the regulatory authority; and (2) reasonable costs of participating in a proceeding under this title not to exceed the amount approved by the regulatory authority. (c) An electric utility located in a portion ofthis state not subject to retail competition may establish a bill payment assistance program for a customer who is a military veteran who a medical doctor certifies has a significantly decreased ability to regulate the individual's body temperature because of severe burns received in combat. A regulatory authority shall allow as a cost or expense a cost or expense of the bill payment assistance program. The electric utility is entitled to: (1) fully recover all costs and expenses related to the bill payment assistance program; (2) defer each cost or expense related to the bill payment assistance program not explicitly included in base rates; and (3) apply carrying charges at the utility's weighted average cost of capital to the extent related to the bill payment assistance program. (V.A.C.S. art. 1446c-0, Sees. 2.152(b), (c), (d), (e).) (Amended by Acts 2013, 83rd Leg., R.S., ch. 597 (SB 981), § 1 (added subsec. (c)).) Sec. 36.062. CONSIDERATION OF CERTAIN EXPENSES. The regulatory authority may not consider for ratemaking purposes: (1) an expenditure for legislative advocacy, made directly or indirectly, including legislative advocacy expenses included in trade association dues; (2) a payment made to cover costs of an accident, equipment failure, or negligence at a utility facility owned by a person or governmental entity not selling power in this state, other than a payment made under an insurance or risk-sharing arrangement executed before the date of loss; (3) an expenditure for costs of processing a refund or credit under Section 36.11 0; or (4) any other expenditure, including an executive salary, advertising expense, legal expense, or civil penalty or fine, the regulatory authority finds to be unreasonable, unnecessary, or not in the public interest. (V.A.C.S. art. 1446c-O, Sec. 2.208(d).) Sec. 36.063. CONSIDERATION OF PROFIT OR LOSS FROM SALE OR LEASE OF MERCHANDISE. In establishing an electric or municipally owned utility's rates, the regulatory authority may not consider any profit or loss that results from the sale or lease of merchandise, including appliances, fixtures, or equipment, to the extent that merchandise is not integral to providing utility service. (V.A.C.S. art. 1446c-O, Sees. 2.151(b) (part), (d).) Sec. 36.064. SELF-INSURANCE. (a) An electric utility may self-insure all or part of the utility's potential liability or catastrophic property loss, including windstorm, fire, and explosion losses, that could not have been reasonably anticipated and included under operating and maintenance expenses. (b) The commission shall approve a self-insurance plan under this section if the commission finds that:

84 (1) the coverage is in the public interest; (2) the plan, considering all costs, is a lower cost alternative to purchasing commercial insurance; and (3) ratepayers will receive the benefits of the savings. (c) In computing an electric utility's reasonable and necessary expenses under this subchapter, the regulatory authority, to the extent the regulatory authority finds is in the public interest, shall allow as a necessary expense the money credited to a reserve account for self-insurance. The regulatory authority shall determine reasonableness under this subsection: (1) from information provided at the time the self-insurance plan and reserve account are established; and (2) on the filing of a rate case by an electric utility that has a reserve account. (d) After a reserve account for self-insurance is established, the regulatory authority shall: (1) determine whether the reserve account has a surplus or shortage under Subsection (e); and (2) subtract any surplus from or add any shortage to the utility's rate base. (e) A surplus in the reserve account exists if the charges against the account are less than the money credited to the account. A shortage in the reserve account exists if the charges against the account are greater than the money credited to the account. (f) The allowance for self-insurance under this title for ratemaking purposes is not applicable to nuclear plant investment. (g) The commission shall adopt rules governing self-insurance under this section. (V.A.C.S. art. 1446c-O, Sec. 2.210.) Sec. 36.065. PENSION AND OTHER POSTEMPLOYMENT BENEFITS. (a) The regulatory authority shall include in the rates of an electric utility expenses for pension and other postemployment benefits, as determined by actuarial or other similar studies in accordance with generally accepted accounting principles, in an amount the regulatory authority finds reasonable. Expenses for pension and other postemployment benefits include, in an amount found reasonable by the regulatory authority, the benefits attributable to the service of employees who were employed by the predecessor integrated electric utility of an electric utility before the utility's unbundling under Chapter 39 irrespective of the business activity performed by the employee or the affiliate to which the employee was transferred on or after the unbundling. (b) Effective January 1, 2005, an electric utility may establish one or more reserve accounts for expenses for pension and other postemployment benefits. An electric utility shall periodically record in the reserve account any difference between: (1) the annual amount of pension and other postemployment benefits approved as an operating expense in the electric utility's last general rate proceeding or, if that amount cannot be determined from the regulatory authority's order, the amount recorded for pension and other postemployment benefits under generally accepted accounting principles during the first year that rates from the electric utility's last general rate proceeding are in effect; and (2) the annual amount of pension and other postemployment benefits as determined by actuarial or other similar studies that are chargeable to the electric utility's operating expense. (c) A surplus in the reserve account exists if the amount of pension and other postemployment benefits under Subsection (b )(1) is greater than the amount determined under Subsection (b )(2). A shortage in the reserve account exists if the amount of pension and other postemployment benefits under Subsection (b )(1) is less than the amount determined under Subsection (b )(2).

85 (d) If a reserve account for pension and other postemployment benefits is established, the regulatory authority at a subsequent general rate proceeding shall: (1) review the amounts recorded to the reserve account to determine whether the amounts are reasonable expenses; (2) determine whether the reserve account has a surplus or shortage under Subsection (c); and (3) subtract any surplus from or add any shortage to the electric utility's rate base with the surplus or shortage amortized over a reasonable time. (Added by Acts 2005, 79th Leg., R.S., ch. 385 (SB 1447), § 1.)

SUBCHAPTER C. GENERAL PROCEDURES FOR RATE CHANGES PROPOSED BY UTILITY

Sec. 36.101. DEFINITION. In this subchapter, "major change" means an increase in rates that would increase the aggregate revenues of the applicant more than the greater of $100,000 or 2-112 percent. The term does not include an increase in rates that the regulatory authority allows to go into effect or the electric utility makes under an order of the regulatory authority after hearings held with public notice. (V.A.C.S. art. 1446c-O, Sec. 2.212(b) (part).)

Sec. 36.102. STATEMENT OF INTENT TO CHANGE RATES. (a) Except as provided by Section 33.024, an electric utility may not change its rates unless the utility files a statement of its intent with the regulatory authority that has original jurisdiction over those rates at least 35 days before the effective date of the proposed change. (b) The electric utility shall also mail or deliver a copy of the statement of intent to the appropriate officer of each affected municipality. (c) The statement of intent must include: (1) proposed revisions oftariffs; and (2) a detailed statement of: (A) each proposed change; (B) the effect the proposed change is expected to have on the revenues of the utility; (C) each class and number of utility consumers affected; and (D) any other information required by the regulatory authority's rules. (V.A.C.S. art. 1446c-O, Sec. 2.212(a) (part).)

Sec. 36.103. NOTICE OF INTENT TO CHANGE RATES. (a) The electric utility shall: (1) publish, in conspicuous form and place, notice to the public of the proposed change once each week for four successive weeks before the effective date of the proposed change in a newspaper having general circulation in each county containing territory affected by the proposed change; and (2) mail notice of the proposed change to any other affected person as required by the regulatory authority's rules. (b) The regulatory authority may waive the publication of notice requirement prescribed by Subsection (a) in a proceeding that involves only a rate reduction for each affected ratepayer. The applicant shall give notice of the proposed rate change by mail to each affected utility customer.

86 Appendix2

APA, Tex. Gov't Code§ 2001.174 west law. V.T.C.A., Government Code§ 2001.174 Page 1

c Effective:[See Text Amendments]

Vernon's Texas Statutes and Codes Annotated Currentness Government Code (Refs & Annos) Title 10. General Government (Refs & Annos) Subtitle A. Administrative Procedure and Practice "!51 Chapter 2001. Administrative Procedure (Refs & Annos) "!51 Subchapter G. Contested Cases: Judicial Review -+-+ § 2001.174. Review Under Substantial Evidence Rule or Undefined Scope of Review

If the law authorizes review of a decision in a contested case under the substantial evidence rule or if the law does not define the scope of judicial review, a court may not substitute its judgment for the judgment of the state agency on the weight of the evidence on questions committed to agency discretion but:

(1) may affirm the agency decision in whole or in part; and

(2) shall reverse or remand the case for further proceedings if substantial rights of the appellant have been pre- judiced because the administrative findings, inferences, conclusions, or decisions are:

(A) in violation of a constitutional or statutory provision;

(B) in excess of the agency's statutory authority;

(C) made through unlawful procedure;

(D) affected by other error of law;

(E) not reasonably supported by substantial evidence considering the reliable and probative evidence in the record as a whole; or

(F) arbitrary or capricious or characterized by abuse of discretion or clearly unwarranted exercise of discre- tion.

CREDIT(S)

© 2015 Thomson Reuters. No Claim to Orig. US Gov. Works. V.T.C.A., Government Code§ 2001.174 Page 2

Added by Acts 1993, 73rd Leg., ch. 268, § 1, eff. Sept. 1, 1993.

HISTORICAL AND STATUTORY NOTES

2008 Main Volume

Prior Laws:

Acts 1975, 64th Leg., p. 136, ch. 61.

Vernon's Ann.Civ.St. art. 6252-13a, § 19(e).

CROSS REFERENCES

Groundwater management trial of suit, see V.T.C.A., Water Code§ 36.253.

LAW REVIEW COMMENT ARIES

Administrative law 2004 update and analysis. Ron Beal, 57 Baylor L.Rev. 359 (Spring 2005).

Due process and local administrative hearings regulating public nuisances: Analysis and reform. Alex Cameron, 43 St. Mary's L..T. 619 (2012).

Mixing oil and gas with Texas water law. Edmond R. McCarthy, 44 Tex. Tech L. Rev. 883 (2012).

A shift in power: Why increased urban drilling necessitates a change in regulatory authority. Riley W. Vanham, 43 St. Mary's L.J. 229 (Nov. 2011).

LIBRARY REFERENCES

2008 Main Volume

Administrative Law and Procedure~ 763, 791. Westlaw Topic No. 15A. C.J.S. Public Administrative Law and Procedure§§ 213, 394, 418 to 420, 433 to 435, 444 to 450.

RESEARCH REFERENCES

2015 Electronic Update

ALR Library

80 ALR 6th 1, Special Commentary: Recovery of "Stranded Costs" by Utilities.

30 ALR 6th 483, Validity, Construction, and Application of State Statutes Providing for Revocation of Driver's License for Failure to Pay Child Support.

© 2015 Thomson Reuters. No Claim to Orig. US Gov. Works. Appendix3

PUC Substantive Rule on Cost of Service, Allowable Expenses: 16 Tex. Admin. Code§ 25.23l(b) 16 TAC § 25.231 Page 1

Tex. Admin. Code tit. 16, § 25.231

c plant used by and useful to the electric utility in providing such service to the public. Payments to affiliated interests for costs of Texas Administrative Code Cunentness service, or any property, right or thing, or for Title 16. Economic Regulation interest expense shall not be allowed as an Part 2. Public Utility Commission of Texas expense for cost of service except as pro- Chapter 25. Substantive Rules Applicable to vided in the Public Utility Regulatory Act § Electric Service Providers 36.058. Subchapter J. Costs, Rates and Tariffs "~!! Division 1. Retail Rates -+-+ § 25.231. Cost of Service (B) Depreciation expense based on original cost and computed on a straight line basis as approved by the commission. Other methods (a) Components of cost of service. Except as provided of depreciation may be used when it is de- for in subsection (c)(2) of this section, relating to termined that such depreciation methodology invested capital; rate base, and § 23.23(b) of this title, is a more equitable means of recovering the (relating to Rate Design), rates are to be based upon an cost of the plant. electric utility's cost of rendering service to the public during a historical test year, adjusted for known and measurable changes. The two components of cost of (C) Assessments and taxes other than income service are allowable expenses and return on invested taxes. capital. (D) Federal income taxes on a normalized (b) Allowable expenses. Only those expenses which basis. Federal income taxes shall be com- are reasonable and necessary to provide service to the puted according to the provisions of the public shall be included in allowable expenses. In Public Utility Regulatory Act§ 36.060. computing an electric utility's allowable expenses, only the electric utility's historical test year expenses (E) Advertising, contributions and donations. as adjusted for known and measurable changes will be The actual expenditures for ordinary adver- considered, except as provided for in any section of tising, contributions, and donations may be these rules dealing with fuel expenses. allowed as a cost of service provided that the total sum of all such items allowed in the cost (1) Components of allowable expenses. Allowa- of service shall not exceed three-tenths of ble expenses, to the extent they are reasonable and 1.0% (0.3%) of the gross receipts of the necessary, and subject to this section, may in- electric utility for services rendered to the clude, but are not limited to the following general public. The following expenses shall be in- categories: cluded in the calculation of the three-tenths of 1.0% (0.3%) maximum:

(A) Operations and maintenance expense incurred in furnishing normal electric utility (i) funds expended advertising methods service and in maintaining electric utility of conserving energy;

© 2015 Thomson Reuters. No Claim to Orig. US Gov. Works. 16 TAC § 25.231 Page2

Tex. Admin. Code tit. 16, § 25.231

the preceding sentence shall be ex- (ii) funds expended advertising methods pressly included in the cost of service by which the consumer can effect a established by the commission's order. savings in total electric utility bills; (ii) In the event that an electric utility (iii) funds expended advertising methods implements an interim rate increase in- ' to shift usage off of system peak; and eluding an increase filed under bond, an incremental change in decommissioning funding shall be included in the increase. (iv) funds expended promoting renewa- ble energy. (iii) An electric utility's decommission- ing fund and trust balances will be re- (F) Nuclear decommissioning expense. The viewed in general rate cases. In the event following restrictions shall apply to the in- that an electric utility does not have a clusion of nuclear decommissioning costs rate case within a five-year period, the that are placed in an electric utility's cost of commission, on its own motion or on the service. motion of the commission's Office of Regulatory Affairs, the Office of Public (i) An electric utility owning or leasing Utility Counsel, or any affected person, an interest in a nuclear-fueled generating may initiate a proceeding to review the unit shall include its cost of nuclear de- electric utility's decommissioning cost commissioning in its cost of service. study and plan, and the balance of the Funds collected from ratepayers for de- trust. commissioning shall be deposited monthly in irrevocable trusts external to (iv) An electric utility shall perform, or the electric utility, in accordance with § cause to be performed, a study of the 25.301 of this title (relating to Nuclear decommissioning costs of each nuclear Decommissioning Trusts). All funds generating unit that it owns or in which it held in short-term investments must bear leases an interest. A study or a redeter- interest. The level of the annual cost of mination of the previous study shall be decommissioning for ratemaking pur- performed at least every five years. The poses will be determined in each rate study or redetermination should consider case based on an allowance for contin- the most current information reasonably gencies of I 0% of the cost of decom- available on the cost of decommission- missioning, the most current information ing. A copy of the study or redetermina- reasonably available regarding the cost tion shall be filed with the commission of decommissioning, the balance of and copies provided to the commission's funds in the decommissioning trust, an- Office of Regulatory Affairs and the ticipated escalation rates, the anticipated Office of Public Utility Counsel. An return on the funds in the decommis- electric utility's most recent decommis- sioning trust, and other relevant factors. sioning study or redeterminations shall The annual amount for the cost of de- be filed with the commission within 30 commissioning determined pursuant to days of the effective date ofthis subsec-

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Tex. Admin. Code tit. 16, § 25.231

tion. The five year requirement for a new study or redetermination shall begin (i) OPEB expense shall be included in an from the date of the last study or rede- electric utility's cost of service for rate- termination. making purposes based on actual pay- ments made. (G) Accruals credited to reserve accounts for self-insurance under a plan requested by an (ii) An electric utility may request a electric utility and approved by the commis- one-time conversion to inclusion of sion. The commission shall consider ap- current OPEB expense in cost of service proval of a self insurance plan in a rate case for ratemaking purposes on an accrual in which expenses or rate base treatment are basis in accordance with generally ac- requested for a such a plan. For the purposes cepted accounting principles (GAAP). of this section, a self insurance plan is a plan Rate recognition ofOPEB expense on an providing for accruals to be credited to re- accrual basis shall be made only in the serve accounts. The reserve accounts are to context of a full rate case. be charged with property and liability losses which occur, and which could not have been (iii) An electric utility shall not be al- reasonably anticipated and included in oper- lowed to recover current OPEB expense ating and maintenance expenses, and are not on an accrual basis until GAAP requires paid or reimbursed by commercial insurance. that electric utility to report OPEB ex- The commission will approve a self insur- pense on an accrual basis. ance plan to the extent it fmds it to be in the public interest. In order to establish that the (iv) For ratemaking purposes, the tran- plan is in the public interest, the electric util- sition obligation shall be amortized over ity must present a cost benefit analysis per- 20 years. formed by a qualified independent insurance consultant who demonstrates that, with con- sideration of all costs, self-insurance is a (v) OPEB amounts included in rates lower-cost alternative than commercial in- shall be placed in an irrevocable external surance and the ratepayers will receive the trust fund dedicated to the payment of benefits of the self insurance plan. The cost OPEB expenses. The trust shall be es- benefit analysis shall present a detailed tablished no later than six months after analysis ofthe appropriate limits of self in- the order establishing the OPEB expense surance, an analysis of the appropriate annual amount included in rates. The electric accruals to build a reserve account for self utility shall make deposits to the fund at insurance, and the level at which further ac- least once per year. Deposits on the fund cruals should be decreased or terminated. shall include, in addition to the amount included in rates, an amount equal to fund earnings that would have accrued if (H) Postretirement benefits other than pen- deposits had been made monthly. The sions (known in the electric utility industry as funding requirement can be met with "OPEB"). For ratemaking purposes, expense deposits made in advance of the recog- associated postretirement benefits other than nition of the expense for ratemaking pensions (OPEB) shall be treated as follows:

© 2015 Thomson Reuters. No Claim to Orig. US Gov. Works. 16 TAC § 25.231 Page4

Tex. Admin. Code tit. 16, § 25.231

purposes. The electric utility shall, to the bership in social, recreational, fraternal, or extent permitted by the Internal Revenue religious clubs or organizations; Code, establish a postretirement benefit plan that allows for current federal in- (F) funds promoting increased consumption come tax deductions for contributions of electricity; and allows earnings on the trust funds to accumulate tax free. (G) additional funds expended to mail any parcel or letter containing any of the items (vi) When an electric utility terminates mentioned in subparagraphs (A)-(F) ofthis an OPEB trust fund established pursuant paragraph; to clause (v) of this subparagraph, it shall notify the commission in writing. If (H) payments, except those made under an excess assets remain after the OPEB insurance or risk-sharing arrangement exe- trust fund is terminated and all trust re- cuted before the date of the loss, made to lated liabilities are satisfied, the electric cover costs of an accident, equipment failure, utility shall file, for commission ap- or negligence at an electric utility facility proval, a proposed plan for the distribu- owned by a person or governmental body not tion of the excess assets. The electric selling power within the State of Texas; utility shall not distribute any excess assets until the commission approves the (I) costs, including, but not limited to, inter- disbursement plan. est expense, of processing a refund or credit of sums collected in excess of the rate finally (2) Expenses not allowed. The following ex- ordered by the commission in a case where penses shall never be allowed as a component of the electric utility has put bonded rates into cost of service: effect, or when the electric utility has other- wise been ordered to make refunds; (A) legislative advocacy expenses, whether made directly or indirectly, including, but not (J) any expenditure found by the commission limited to, legislative advocacy expenses in- to be unreasonable, unnecessary, or not in the cluded in professional or trade association public interest, including but not limited to dues; executive salaries, advertising expenses, le- gal expenses, penalties and interest on (B) funds expended in support of political overdue taxes, criminal penalties or fmes, candidates; and civil penalties or fmes.

(C) funds expended in support of any politi- (c) Return on invested capital. The return on invested cal movement; capital is the rate of return times invested capital.

(D) funds expended promoting political or (1) Rate of return. The commission shall allow religious causes; each electric utility a reasonable opportunity to earn a reasonable rate of return, which is ex- (E) funds expended in support of or mem- pressed as a percentage of invested capital, and

© 2015 Thomson Reuters. No Claim to Orig. US Gov. Works. Appendix4

PUC Docket No. 18249, Order on Rehearing I ' "• .. ~-

PUC DOCKET NO. 18249

ENTERGY GULF STATES, INC. § SERVICE QUALITY ISSUES § (SEVERED FROM DOCKET NO. 16705) § OF TEXAS

ORDER ON REHEARING

This Order addresses electric service quality issues relating to Entergy Gulf States, Inc. (EGS or the Company). The Commission concludes that the quality of EGS' electric service to its customers in Texas has been less than adequate, specifically sin9e Entergy Corporation acquired Gulf States Utilities, Inc., in 1993. The record evidence reveals a lack of effective and prudent maintenance policies, uneven spending in the area of operations and maintenance (O&M), cuts in experienced personnel, and consequent deterioration in the quality of service. The management of EGS is structured in a way that fails to link resource availability with appropriate performance accountability.

The Commission further concludes that the difficulties EGS has experienced with its quality of service are not simply "customer perception" problems, as claimed by the Company. 1 The problems are real and must be addressed by the Company in a timely and serious manner. To motivate the Company to revise its current approach and promote long-term commitment toward service quality and reliability, the Commission orders a two-part solution designed both to deal with past problems and implement remedies for the future. First, the Company's authorized return on equity (ROE) that otherwise would be adopted in Docket No. 16705 2 will be reduced by 60-basis points and initially refunded to distribution-level customers. Second, going forward, the Company

1 EGS Initial Brief (IB) at 4 (Dec. 2, 1997); see also, Tr. at 231.

2 Application of Entergy Texas for Approval of Its Transition to Competition Plan and the Tariffs Implementing the Plan, and for the Auth~rity to Reconcile Fuel Costs, to Set Revised Fuel Costs, to Set Revised Fuel Factors, and to Recover a Surcharge for Underrecovered Fuel Costs, Docket No. 16705 (pending). PUC DOCKET NO. 18249 ORDER ON REHEARING Page2

will have an opportunity to earn back a portion of the ROE reduction, depending on whether its service quality meets specified benchmarks. These benchmarks will establish service reliability standards (outage frequency and duration) and customer service standards (billing errors, call-center performance, service installation, line extension, and street light replacement). The margin achieved above the benchmarks will reflect the level of improvement (or, if below, a lack thereof) and will be used to determine whether the Company is entitled to recoup a portion of the ROE reduction.

I. Procedural History

EGS filed its transition/rate case in Docket No. 16705 on November 27, 1996. The Commission referred the case to the State Office of Administrative Hearings (SOAH) on December 5, 1996. On January 24, 1997, the Commission issued a preliminary order in Docket No. 16705 directing parties, among other things, to "address specific service quality standards that will apply after the transition [proposed by EGS]."3

On March 7, 1997, the Commission issued a supplemental preliminary order in Docket No. 16705 that dealt specifically with service quality issues. This order required that Docket No. 16705 address, in addition to others, the following issues: (1) Does EGS have an effective and prudent management policy in place that devotes sufficient resources to ensure adequate and reliable service to its ratepayers? (2) Are there patterns of variable service quality in EGS' service territory, and if so, what is the cause and potential resolution of these variations? and (3) What procedures can and should the Commission implement to monitor service quality on EGS' system, and to respond to situations in which EGS' service quality falls below the service quality benchmark levels?

3 Preliminary Order at 12 (January 24, 1997). PUC DOCKET NO. 18249 ORDER ON REHEARING Page3

Proceeding with EGS' rate case, SOAH established a four-phased hearing schedule to address the numerous transition and rate issues in Docket No. 16705. The service quality issues were to be dealt with in the "Competitive Issues" phase, scheduled to begin in early November 1997.

After EGS and interested parties had filed written testimony and exhibits, 4 but before the Competitive Issues phase commenced at SOAH, the Commission determined that it would itselfhear and resolve the service quality issues. Accordingly, on November 4, 1997, the Commission issued an order severing the pending service quality issues from Docket No. 16705, establishing Docket No. 18249 to deal with those issues, and establishing procedures by which the Commission would hear and rule on the case.

The Commission convened a hearing on the merits of EGS' service quality on November 20 and 21, 1997. Chairman Pat Wood and Commissioner Judy Walsh presided over the hearing. The participating parties included the Company, the Cities, the High Load Factor Commercial Customer Group (HLFCCG), and the General Counsel, all of whom presented their direct cases and conducted cross-examinations. Chairman Wood and Commissioner Walsh also directed questions to the witnesses. Observers from the Office of Public Utility Counsel (OPUC) and the Attorney General's Office attended the hearing. The active parties filed initial and reply briefs on December 2 and 9, 1997, respectively. OPUC filed a statement on December 2, 1997, supporting the briefs of the Cities and HLFCCG, and the Attorney General's Office filed a statement on December 9, 1997, in support of the same briefs.

The Commission issued the final order in this docket on February 13, 1998. On March 5, 1998, EGS and General Counsel filed motions for rehearing. The replies to the motions were due on March 16, 1998, but based on parties' request, the Commission

4 Some of the testimony, particularly from the Company's witnesses, was originally pre-filed for the Revenue Requirement phase. PUC DOCKET NO. 18249 ORDER ON REHEARING Page4

granted an extension for filing of replies until March 25, 1998. On March 19, 1998, the Commission ratified the extension of deadline to file replies and also extended until May 14, 1998, the time to rule on the motions for rehearing pursuant to Gov'T CODE 2001.146(e).

On March 25, 1998, the parties filed a joint reply to motions for rehearing and motion for entry of order consistent with the parties' stipulation and agreement (the Stipulation). General Counsel, EGS, OPUC, and lll.-FCCG signed the Stipulation. At the April 1, 1998 open meeting, the Commission granted rehearing and approved the Stipulation. The provisions of the Stipulation are reflected in this Order.

II. Background

Entergy Gulf States, Inc., is a public utility subject to the jurisdiction of this Commission in accordance with Public Utility Regulatory Act (PURA) §§ 14.001, 31.001, 32.001, 33.122, and 36.001 through 36.156. 5 EGS is a wholly-owned subsidiary of Entergy Corporation (Entergy), a holding company incorporated in Delaware and registered with the federal Securities and Exchange Commission in accordance with the Public Utility Holding Company Act. Entergy acquired Gulf States Utilities, Inc., to create EGS, effective on December 31, 1993. 6

EGS operates in Louisiana and Texas, and is affiliated through its holding company with investor-owned electric utilities located in Louisiana, Mississippi, and

5 Public Utility Regulatory Act, TEX. UTIL. CODE ANN. 11.001-63.063 (Vernon 1998). 6 Application of Entergy Corporation and Gulf States Utilities Company for Sale, Transfer, or Merger, Docket No. 11292 (Mar. 25, 1994). PUC DOCKET NO. 18249 ORDER ON REHEARING PageS

7 Arkansas. The EGS service territory in Texas is located in the southeastern part of the state, and contains industrialized areas in the vicinity of Beaumont and Port Arthur, as well as a coastal zone. The differing geographic and climatic characteristics of the Company's service territory have led to the creation of three distinct sectors: Western I (suburban with dense trees), Western II (rural with fewer trees), and Gulf (both rural and urban).

Entergy's headquarters is in New Orleans; EGS' principal office in Texas is located in Beaumont. In Texas, the Company serves approximately 318,279 customers8 9 and has 11,472 miles of distribution lines. There are 394,865 poles in its system, with 431 feeders. 10 The transmission system--built as early as 1924, with approximately half of the lines added in the 1950's and 1960's and only 12 percent of lines built or rehabilitated after 1977--has shown generally good performance. ll This Order is concerned predominantly with the state of the Company's distribution system.

lll. Discussion and Analysis of Issues

A. General Concept of Reliability

Electricity plays a vital role in our lives. Most, if not all, aspects of our society, including industrial production, commerce, and individual lifestyles, are built around a reliable and adequate supply of electrical energy. People have come to depend on

7 Entergy Arkansas (including the Arklahoma Corporation), Inc., Entergy Louisiana, Inc., Entergy Mississippi, Inc., and Entergy New Orleans, Inc. These companies, together with EGS, form the "Operating Companies." 8 Ice Storm '97 Field Investigations, Project No. 16301, at V-25 (June 24, 1997). 9 General Counsel Ex. 5, Burrows Direct Testimony at 33, Attachment JDB-2. 10 General Counsel Ex. 24. 11 General Counsel Ex. 1, Ethridge Direct Testimony at 6. PUC DOCKET NO. 18249 ORDER ON REHEARING Page6

el<~ctricity being available when they need it. In fact, for most customers, delivery of electrical power and reliability of its delivery have become two inseparable expectations. Electric utilities generally recognize and accept this dependence and have responded to it by constructing and operating generation and delivery systems of superior reliability. 12 State law formalizes the utilities' obligation to provide reliable service in PURA § 37.151. Reliability, however, is not a static concept. As customer bases grow and systems age, utilities face new challenges that must be acknowledged and resolved to maintain reliable service.

In addition to sufficient generating capacity, transmission and distribution facilities are built so that a specified degree of reliability is achieved. The goal is to provide required amounts of energy with no, or few, interruptions, while maintaining a reasonable cost of the overall system. Smooth and continuous interaction of the various elements of the electrical system results in reliable performance of the overall system. For consumers, this reliability is reflected in uninterrupted power supply, the degree of which may be measured by the frequency, duration, and magnitude of adverse effects on consumer service.

B. Legal Standards

PURA imposes various obligations on utilities and the Co:mrtlission regarding the provision of electric service to Texas consumers. Specifically, PURA § 37.151 requires that a regulated utility provide continuous and adequate service in its certificated service territory. PURA § 38.001 directs utilities to furnish service, instrumentalities, and facilities that are safe, adequate, efficient, and reasonable. Parallel responsibilities rest with the Commission. In accordance with PURA § 36.052(3), the Commission must consider the quality of a utility's services in establishing a reasonable return on invested

12 NORTH AMERICAN ELECTRIC RELIABILI1Y COUNCIL, RELIABILITY CONCEPTS 1-2 (Feb. 1985). PUC DOCKET NO. 18249 ORDER ON REHEARING Page7

13 capital. This same section of PURA directs the Commission to consider the quality of the utility's management and the efficiency of its operations when establishing a reasonable return. Moreover, PURA § 38.071 authorizes the Commission to order an electric utility to provide "specified" improvements in its service.

C. Analysis of Issues

The Commission's analysis of the issues in this case is divided into five general topics: (1) physical facil,ities, maintenance, and monitoring; (2) vegetation management; (3) emergency preparedness, response, outage restoration, and treatment of storm data; (4) personnel levels, management practices, and spending levels; and (5) pockets of unreliable service and overall customer service. The following narrative lays out essential points of the relevant issues; with additional, specific information contained in the Findings of Fact in Section IV.

1. Physical Facilities, Maintenance, and Monitoring

a. Condition of Poles As stated above, EGS' transmission system does not pose serious concerns since it has performed adequately over the last few years, during which only a minimal number of transmission-related outages or circuit-breaker operations occurred. EGS' inspection and treatment programs relating to its transmission system seem to be working

13 There are several precedent cases in which the Commission reduced ROE to address inadequate quality of service. See, e.g., Application of General Telephone Company of the Southwest for Authority to Increase Rates, Docket No. 3094, Final Order, 6 P.U.C. BULL. 92, 123 (Aug. 8, 1980) (imposing penalty on company for inadequate service quality); Application of General Telephone Company of the Southwest for Authority to Increase Rates, Docket No. 3690, Final Order, 7 P.U.C. BULL. 11, 39 (June 18, 1981) (sustaining penalty due to persistence of poor service); Application of General Telephone Company of the Southwest for Authority to Increase Rates, Docket No. 4132, Final Order, 7 P.U.C. BULL. 646, 648 (Jan. 14, 1982) (lifting penalty after service was shown to improve for a sufficient period of time); Application ofHouston Lighting and Power Company, Docket No. 4540, Final Order, 8 P.U.C. BULL 75 (Dec. 6, 1982) (reducing company's ROE because of service quality and reliability concerns). PUC DOCKET NO. 18249 ORDER ON REHEARING PageS

satisfactorily, with transmission line rights-of-way (ROW) appearing generally clear. 14 For these reasons, the Commission concludes that the physical state of the Company's transmission system is adequate. The remainder of this Order will address the Company's distribution system and related services.

Primary evidence for the condition of EGS' distribution system, including wires, poles, pole appurtenances, and transformers, comes from the Osmose Wood Preserving Company (Osmose) inspections conducted in 1995 and 1996, a report filed by Drash Consulting Engineering, Inc. (Drash), and limited Staff surveys. 15 In general, most of the poles in the Texas portion of the Company's distribution system are in good condition. There are, however, numerous poles with physical deficiencies or in need of extensive and comprehensive vegetation clearing. 16

The Osmose inspectors, contracted by EGS in 1995 and 1996, examined approximat~ly 37,000, or 10 percent, of the poles and crossarms and found that on 17 average 17.9 percent of poles in eight different areas showed structural decay. The actual percentages, however, varied greatly, with one area having more than 37 percent of the poles with some decay, a condition clearly impermissible for any transmission and distributi~n (T&D) system. 18 While the Osmose inspections were not random, and in fact, as the Company asserts, focused on particularly troubled spots, the results show that there are many poles in unsatisfactory condition.

14 General Counsel Ex. 1, Ethridge Direct Testimony at 6-8, 41-43. 15 General Counsel Ex. 1, Ethridge Direct Testimony at 15; General Counsel Ex. 4; General Counsel Ex. 5, Burrows Direct Testimony, Attachment JDB-3. 16 /d. at 5. 17 General Counsel Ex. 5, Burrows Direct Testimony at 17. 18 Id, Appendix Workpapers at 2. PUC DOCKET NO. 18249 ORDER ON REHEARING Page9

The purpose of the Drash report, contracted for by the Commission, was to collect data regarding the condition of EGS' overhead distribution system. The survey was based on a sample of33 uniformly distributed substations from the Texas portion of EGS distribution system. 19 The Drash inspectors examined 582 poles on various feeders originating at these su'Qstations. 20 The Drash survey found 59 poles with structural deficiencies and 72 poles with ROW encroachments? 1 During the hearing, EGS raised questions about the accuracy and statistical reliability of the Drash report. The Commission concludes that the Drash study lacked specific evaluation criteria and necessary randomness to draw conclusions about the entire EGS Texas system. The Commission, however, does not reject the Drash report, as requested by the Company;22 rather, the Commission relies on the report to the extent that its findings have been confirmed by the Osmose inspections and Staff surveys. Considered together, the collected data persuasively indicate that numerous poles show decay, are in need of repair or replacement, and that vegetation growth poses a serious problem on some ROW.

b. Pole Inspection Program The Company conceded that it does not have a traditional pole inspection progr~ in place.23 Since the Osmose inspections in 1996, there have been no pole or crossarm inspections on Texas territory. 24 Post-merger, EGS reduced the number of inspections; for example, in 1995, 29,294 poles and 43,941 crossarms were inspected, but 25 in 1996, only 7,939 poles and 11,908 crossarms underwent inspections. The Company

19 Id. at 19. 20 ld. at 20. 21 Id. at 21-22. 22 Tr. at 552-60, 606-15. 23 Tr. at 176,751-52. 24 Tr. at 170, 177-78. 25 General Counsel Ex. 19 at Bates Stamp 0194741. PUC DOCKET NO. 18249 ORDER ON REHEARING Page 10

is now planning to hire Osmose to carry out a ten-year inspection program that will cover the entire system (35,000 poles inspected annually). 26 Evidence presented in the case makes it clear that EGS' pole inspection and repair work cycles have not been sufficiently rigorous, continuous, or frequent to maintain all of its facilities in the condition required to meet its reliability and service obligations under PURA.

c. Maintenance Practices A review of maintenance records shows that line maintenance and vegetation control are reactive in nature;27 there is a lack of written, specific, and preventive maintenance policies;28 and priority is given to capital additions to the detriment of adequate maintenance practices. 29 For example, total line-miles actively maintained by the Company's employees dropped 30 percent from 1994 to 1996?0 The Company's internal risk assessment study points to an absence of a strategic plan, and consequent inadequacies in resource sharing and work planning. 31 Based on the evidence, the Commission concludes that EGS has failed to establish and carry out distribution maintenance policies in a manner sufficient to ensure adequate and reliable delivery of electric service.

d. Data Collection The Company presented a variety of data to support its claim of good performance; however, the accuracy of its data collection practices came under a great deal of scrutiny during the hearing, bringing into question the ability of the Company to

26 Tr. at 751-52. 27 General Counsel Ex. 4, Gonzalez Direst Testimony at 6-8, Drash Report at 45-46. 28 Tr. at 59; HLFCCG Ex. I, Patton Direct Testimony, Entergy Internal Audit and Risk Assessment. 29 General Counsel Ex. I, Ethridge Direct Testimony at 19-20; General Counsel Ex. 8; General Counsel Ex. 19. 30 Tr. at 737. 31 General Counsel Ex. 30 at 2. PUC DOCKET NO. 18249 ORDER ON REHEARING Page 11

monitor its performance fairly. The parties debated at length the merits and mechanics of various system monitoring tools and reporting standards. These include: (1) System Average Interruption Frequency Index (SAIFI), a measure of the number of interruptions per year for the average customer;32 (2) System Average Interruption Duration Index (SAIDI), a measure of the total interruption time experienced by the average customer; 33 (3) Customer Average Interruption Duration Index (CAIDI), defined as the ratio of SAIDIISAIFI; 34 ( 4) Distribution Interruption System (DIS), a database to capture reliability performance and indices for individual feeders; 35 (5) Average System Availability Index (ASAI)/ 6 a measure of the total time of service availability to the average customer; and (6) TACTICS, which captures data on every device ~own to the transformer level to measure each device's operational performance and impact on customers. 37 In addition, the Company utilizes a System Control and Data Acquisition device (SCADA) to measure data for large interruptions such as feeder breaker outages/ 8 and the new Automatic Mapping and Facilities Management System (AMJFM), developed in order to determine where an outage occurred and what device caused it, which will be completed by the year 2000. 39

General Counsel, Cities, and HLFCCG argued that the number of customers affected by outages and the duration of such outages are difficult to determine because

32 HLFCCG Ex. 1, Patton Direct Testimony at 9-12. 33 Id. at 10.

34 !d. 3S . !d. at 11. 36 General Counsel Ex. 3, Eckhoff Direct Testimony at 20. 37 Tr. at 448-450. 38 Tr. at 238, 443. 39 Tr. at 429-30. PUC DOCKET NO. 18249 ORDER ON REHEARING Page 12

EGS excluded relevant information between 1994 and 1996.4° For example, for the first six months of 1996, the Company reported 35 to 40 percent fewer outages than were reported on average during the first six months of the years 1991-94.41 In trying to explain the discrepancies in the data, Company officials described changing data collection standards applied to the various outage-causing events. At different times, the Company excluded outages caused by equipment failures; outages affecting feeders with fewer than 500 customers; storms, generation or transmission outages; or trees falling into the ROW ("non-preventable" trees). 42 The Company data is generally confusing and comparisons over a period of several years are difficult to make because of changing standards; 43 in addition, the inaccuracies are further compounded because, for example, outages on feeders with fewer than 500 customers can nevertheless result in very long outage durations, especially when those feeders are energized last. 44

The evidence shows that Company linemen sometimes made subjective determinations as to the cause, duration, or effect of an outage, thus causing the Company's SAIFI and SAID! numbers to be unreliable. 45 The evidence also revealed 46 that most historically deficient feeders serve rural customers. This observation is supported by EGS' testimony that it prioritizes restoration of feeders serving the greatest numbers of customers, thus leaving those in lower-density areas (most likely rural) to 47 experience recurring and longer service reliability problems.

40 See HLFCCG Ex. 2, Entergy Southwest Reliability Report 1.994-1996; Tr. at 41-43. 41 HLFCCG Ex. 3 at slide 9. 42 Tr. at 41-44, 54, 62-66. 43 Id; HLFCCG Ex. 2 at Bates Stamp 0232514. 44 Tr. at 67. 45 Tr. at 47-48. 46 Tr. at 707, 821 47 The Rebuttal (redacted) Testimony of Dereck Hasbrouck on behalf of the Company contains this quote: "One important fact to keep in mind when considering a customer or group of customers who consistently PUC DOCKET NO. 18249 ORDER ON REHEARING Page 13

General Counsel, Cities, and HLFCCG asserted that the Company has manipulated information to show better performance. 48 A significant problem with the Company's use of performance and reliability indices is that they reflect outage frequency and duration on a system-wide rather than feeder-by-feeder basis which can mask poor performance of individual.feeders. 49 For example, EGS reported a syst_em- wide SAIDI of 133 minutes for 1996,50 but this measure failed to reveal that 83 feeders or primary circuits experienced outage times in excess of 200 minutes. 51 The average customer on these circuits experienced an outage duration of 3.3 hours. 52 More notably, customers on feeder Tamina encountered 41.3 hours of outage time in one year. 53 It is apparent that system-wide averages used by the Company cannot be relied on to disclose many of the localized service difficulties.

The historic data presented by the Company is not accurate and consistent as the Company itself admitted to not collecting all relevant data, 54 changing the standards for 55 data collection, and submitting inconsistent data for ASAI and SAIFI. Even the

receive less reliable service than the average customer is that there are geographic and environmental conditions beyond the utility's control. These conditions, in combination with the construction cost considerations may effectively limit the realistic reliability expectations for customers in certain areas. In EGS Texas' service territory, the Bolivar Peninsula and Sabine Pass may be examples where these constraints come into play." EGS Ex. II, Hasbrouck Rebuttal Testimony at 39. 48 Tr. at 278-79, General Counsel Ex. 3, Eckhoff Direct Testimony at 54. 49 General Counsel Ex. 3, Eckhoff Direct Testimony at I8, Appendix Hand I; Tr. at 4I-67; HLFCCG Ex. I, Patton Direct Testimony at I2-I4. 50 General Counsel says SAIDI in 1996 was I57 m~utes. General Counsel Ex. 22; HLFCCG Ex. I, Patton Direct Testimony at 13. 51 HLFCCG Ex. I, Patton Direct Testimony at Exhibit ADP-3.

52 /d.

53 General Counsel Ex. 3, Eckhoff Direct Testimony, Appendix H.. 54 Tr. at 706. 55 General Counsel Ex. 3, Eckhoff Direct Testimony at 54. PUC DOCKET NO. 18249 ORDER ON REHEARING Page 14

Company's internal audit revealed that reporting of outages has not been consistent. 56 EGS cannot correctly measure how many individual customers lose service because of an outage affecting parts of a feeder. 57

The Commission concludes that the types of information monitoring and reporting tools relied on by the Company are useful, but they must be employed uniformly and consistently to be meaningful measures of service quality. The Commission finds that the level of EGS' service quality and reliability, as documented through the Company data, is unreliable because the data fail to record and report all events accurately and consistently. Pockets of inadequate service are ignored by system- wide measures, and such measures do not identify recurring individual-feeder problems.

2. Vegetation Management

Vegetation management is the catch-all description for programs involving the removal of trees, bushes, or vines that overhang, grow into, or toward conductors strung along the Company's ROW. The purpose of vegetation management is to ensure, to the greatest extent possible, that vegetation in, or near, the ROW does not come into contact with the conductors and thereby cause wire breakage or ground faults. 58 During the hearing, Company witnesses referred to scheduled tree trimming, carried out on a three- year cycle in urban. areas and a six-year cycle in rural areas. The evidence presented, however, was not clear on whether EGS actually followed the stated cycles. 59 Nonetheless, the Company argued that its vegetation management has been adequate and

56 Cities Ex. I, Lawton Direct Testiniony at 12. 51 Tr. at 445-46. 58 Tr. at 176-178. 59 Tr. at 602, 728. PUC DOCKET NO. 18249 ORDER ON REHEARING Page 15

consistent with industry practice. 60 In fact, EGS asserted that it had improved vegetation management and introduced efficiencies when compared to the pre-merger period. 61

General Counsel, Cities, and HLFCCG presented extensive evidence to document serious neglect of vegetation management and consequent heightened risk to the distribution system. The majority of incidents included in the evidence involve three types of vegetation-related damage: wires expanding down into vegetation due to increased load or lack of under-clearance; overhanging limbs breaking or growing into wires in non-inclement weather; and limbs or trees bending or breaking onto wires due to wind, ice build-up, or other adverse weather conditions. These parties also argued that the ROW surveyed were in need of extensive clearing and that vegetation encroachments posed unacceptable risks. 62 Cities claimed that neglected vegetation management multiplied the severity of the ice storm in January 1997. 63 The number and duration of 64 vegetation-caused service interruptions almost doubled in the last four years, and 65 vegetation-related SAIDI and SAIFI have worsened since the merger.

The author of a vegetation management study, commissioned by the Company, observed that there were areas where maintenance clearing had been deferred until brush reached the conductors. 66 The study proposed specific and comprehensive ways for

60 EGS Ex. 10, Ervin Rebuttal Testimony at 55, 59. EGS states that more than 80 percent of the Company's vegetation management expenditures are allocated to trimming, which is above the industry norm. 61 EGS Ex. 8, Ervin Supplemental Direct at 22. 62 General Counsel Ex. 4, Gonzalez Direct Testimony at 6-8; General Counsel Ex. I, Ethridge Direct Testimony at 8-11. 63 Tr. at 305-08. 64 HLFCCG Ex. I, Patton Direct Testimony, Exhibits ADP-10, ADP-13 (illustrating values for system- wide SAID! for Texas increased from 21.17 in 1994 to 40.36 in 1997, and SAIFI doubled, from .31 in 1994 to .63 in 1997). 65 General Counsel Ex. 37. PUC DOCKET NO. 18249 ORDER ON REHEARING Page 16

ROW maintenance, but the Company presented no evidence that the study's findings had been implemented. An e-mail sent in August of 1997 by an EGS network manager in Beaumont identified trees touching· conductors as one of the preventable root causes of several recent outages. 67

The Commission concludes that the level of the Company's vegetation management is unacceptable and has significantly affected the reliability of the distribution system in recent years. While such a deficiency may not in itself impact a typical system severely, this deficiency is magnified when the inadequacy of the infrastructure and the nature of the weather in the Company's service area are taken into account. 68 The lack of preventive vegetation control efforts, by the Company and neglect of regular vegetation clearing have led to the creation of unnecessary risks. The Commission does not suggest that "ground-to-sky" tree trimming is necessary, but the Company clearly has significant room for improvement. The recent hiring of 30 new vegetation clearance crews, while welcome, confirms the existence of an unacceptable backlog in vegetation control. 69 As will be discussed below, the Commission is also concerned that managers in Texas have no clear line of authority or resources necessary to implement effective vegetation management policies.

66 General Counsel Ex. 27, Environmental Consultants, Inc., Report on Distribution Line Clearance Program (Jul. 1994) at 1-2-3. 67 HLFCCG Ex. 6. 68 Tr. at 308. 69 Tr. at 730-31, 787. PUC DOCKET NO. 18249 ORDER ON REHEARING Page 17

3. Emergency Preparedness, Response, Outage Restoration, and Treatment of Storm Data

a. January 1997 Ice Storm In mid-January 1997, many parts of Texas experienced a severe ice storm; 70 disruptions of electric service were sustained by most utilities in the state. The impact on EGS' territory was particularly hard. At one time, up to 120,000 of EGS' customers were without power and it took seven days to complete the restoration process. 71 Utilizing help from other utilities and contract workers, EGS had more than 2,700 personnel working to restore service. 72 In assessing the Company's performance, EGS officials compared it to that of other utilities and concluded that its efforts were not only adequate, but even "very good.'m They blamed most of the damage on excessive ice.74

This view was not shared by the other parties. 75 HLFCCG played excerpts from taped conversations conducted by the Company's dispatchers during the storm, which highlighted insufficient numbers of personnel and initially inadequate efforts to repair the damage.76 The Cities asserted that they had to use their own employees for repairs, including the handling of live wires, 77 and that in some instances they were unable to reach Company employees at a11. 78 One of the Cities' exhibits was a letter, dated August

70 General Counsel Ex. 2B, Hughes Workpapers, Ice Storm '97 Field Investigations Project 16301 at 11-1.

71 EGS Ex. 8, Ervin Supplemental Direct Testimony at 53.

72 Jd.

73 Jd. at 74. 74 Id. at 74-75. 15 Tr. at 379; Cities Ex. 1, Lawton Direct Testimony at 12. 76 Tr. at 87-92. 77 Tr. at 376. 78 Cities Ex. 2, Kimler Direct Testimony at 2. PUC DOCKET NO. 18249 ORDER ON REHEARING Page 18

17, 1995, from several fire chiefs in EGS' service territory to the Company describing various problems with emergency procedures, such as not being able to reach the Company's 1-800 telephone number, and, apparently, this problem persisted. 79 Some other cities' representatives testified, however, that the Company's restoration efforts were good. 80 The significant disparities in the Company's response to the qamage caused by the ice storm suggest a need for greater and clearer communication between the Company and all cities, including development of contacts before an emergency occurs.

The Company has an emergency plan on file with the Commission; the plan contains no obvious deficiencies. 81 As is industry practice, EGS also has agreements with other utilities for emergency cooperation; those agreements, however, are not in writing. 82

The January 1997 ice storm was certainly a severe storm that would have adversely affected even the best-maintained distribution system. EGS' distribution system, however, is not the best-maintained. A major cause of the outages during the storm were broken or bowed ice-laden tree limbs overhanging the wires. Tree limbs in ROW overhanging distribution lines pose a threat to system reliability, and are largely within EGS' control. The Company's failure to clear the limbs before the storm was a 83 major factor in the number and duration of outages experienced by customers. While Company's initial efforts to mobilize and deploy additional non-EGS personnel were slow and cause concern, 84 vegetation management failures greatly aggravated the

79 Cities Ex. 2, Kimler Direct Testimony at 7. 80 Tr. at 377, 381, 391. 81 General Counsel Ex. 2, Hughes Direct Testimony at 21. 82 Tr. at 676-77. 83 General Counsel Ex. 2, Hughes Direct Testimony at 17. 84 Tr. at 379. PUC DOCKET NO. 18249 ORDER ON REHEARING Page 19

situation. The Company has experienced major storms in 1994, 1995, and 1997. 85 The weather, however, cannot be an excuse for poor service. While the Commission does not expect 100 percent reliability, the system must be built and maintained taking the local geographic and weather conditions into account.

b. Treatment of Storm Data The Commission has required utilities to report the causes of interruptions, including the extreme storms. EGS, however, excludes outage duration and frequency data from its SAIDI and SAIFI reports if the data are attributable to a "major storm."86 As defined currently by the Commission, major storms include situations in which there is a loss of power to 10 percent or more of customers in a region over a 24-hour period and full restoration is not achieved within 24 hours. 87 EGS' definition of a major storm counts any event in which 10 percent or more of a region's customers are interrupted for 88 24 hours or more, and is similar to the Commission's definition.

HLFCCG argued that interruptions associated with major storms should be included in the computation of reliability indices. HLFCCG maintains that the design and maintenance of lines, and therefore their condition under the stress of severe weather, is within the control of the utility. 89 Exclusion of major-storm interruptions from reliability indices could encourage reduced preventive maintenance, including vegetation 90 management, and reductions in force needed for restoration efforts.

8S Tr. at214, 377. 86 Tr. at 54. 87 EGS Ex. 10, Ervin Rebuttal Testimony at 30.

88 /d.

89 HLFCCG Ex. 1, Patton Direct Testimony at 14. 90 /d. at 15. PUC DOCKET NO. 18249 ORDER ON REHEARING Page20

The Commission is reluctant to allow the Company to exclude major-storm data from its overall reports because such reports may be incorrectly perceived as an indication that overall service quality is better than it actually is. Also, leaving major- storm data out may obscure the fact that poor management and maintenance, and not just the severity of the weather, contribute to or cause a weather event to become serious enough to be classified as a "major storm." Despite a great deal of controverting testimony by customer groups, the Company continues to assert that the acknowledged problems during the 1997 ice storm were a "storm-of-the-century" aberration. 91 Allowing the Company to carve out major storms from its outage-reporting data would mask the seriousness of service quality problems that occur on its system under all conditions.

The Commission understands that if a truly major storm affects the system, the Company cannot be expected to restore power and respond to increased customer calls as I

fast as it would in a more "normal" or day-to-day situations. Therefore, the Commission will allow the segregation of major from non-major storm data in outage frequency and duration reports. The major storms, defined by the severity of the weather conditions, rather than by the outage duration, will be reported and evaluated separately, as discussed in the "Remedies" section below.

4. Personnel Levels and Management Practices; Spending Levels

a. Personnel Levels All parties agreed that post-merger personnel cuts were executed, ostensibly, in order to save costs. The Company asserted that cuts were possible because of increased efficiencies and that the permanent employees were simply replaced with contract workers. 92 The other parties maintained that cuts were not only too extensive, but

91 Tr. at 225; EGS Ex. 10, Ervin Rebuttal Testimony at 32-35. 92 Tr. at 160, 236; EGS Ex. 8, Ervin Supplemental Direct at 19; EGS Ex. 10, Ervin Rebuttal Testimony at 51. PUC DOCKET NO. 18249 ORDER ON REHEARING Page21

resulted in a loss of many years of worker experience that could not be compensated for by contract workers who may lack knowledge of the system or loyalty to the Company. For example, General Counsel witness Ethridge cited the forced departure of 66 employees with an average of 18 years of experience each. 93 A precise number of lost employees was not conclusively proven: the Company maintained that total net loss was only 23,94 but HLFCCG, for instance, asserted that in the space of three years, the jobs of 671inemen were eliminated. 95

A related issue concerned the Company's ability to evaluate contract workers' performance: while the Company felt confident about increased efficiency of its hiring practices, it did admit to not having performance measures for contract workers. 96 General Counsel presented Company documents showing that controls over contract worker management were not effective.97 An internal risk assessment audit, conducted by the Company, also concluded that no formal and consistent process existed to monitor contractor performance, that management employees did not generate necessary reports to allow proper monitoring, and that distribution contracts were not competitively bid. 98 An additional concern presented by Cities dealt with the decrease in the number of operational staff while regulatory staff increased; this led Cities to conclude that the 99 Company had insufficient focus on system maintenance matters.

93 General Counsel Ex. 1, Ethridge Direct Testimony at 37. 94 Tr. at 236; EGS Ex. 10, Ervin Rebuttal Testimony at 52. 95 HLFCCG m at 6 (referring to General Counsel Ex. 16 at 2, and Ex. 17 at 2). 96 Tr. at 249-50. 97 General Counsel IB at 14 (referring to HLFCCG Ex. 13, Entergy Internal Audit and Risk Assessment). 98 HLFCCG Ex. 1, Patton Direct Testimony, Risk Assessment Attachment at 3-4, 6. 99 Cities Ex. 1, Lawton Direct Testimony at 12; Tr. at 164. PUC DOCKET NO. 18249 ORDER ON REHEARING Page22

The Commission concludes that, post-merger, EGS cut many experienced employees, some of whom were consequently replaced by contract workers. The Commission, however, will not prescribe what personnel levels the Company should maintain. It is up to EGS to make sure it has enough workers to carry out proper maintenance and necessary emergency responses, along with having well-defined performance measures for both regular and contract employees.

b. Management Practices Because the various operational entities under the holding company are split both along functional and geographic lines, tracing management structure poses some difficulties. According to Company witness Johnny Ervin, a network manager is located in Beaumont, along with a reliability supervisor. 100 There are two levels of customer serVice managers located in Beaumont; the vice president of customer service is located in Jackson, Mississippi. During the hearing, however, the Company presented its director of performance measurement, located in Little Rock, Arkansas, to speak on customer service issues. The network manager and reliability supervisor report to a franchise director (in Beaumont) and reliability director (in New Orleans, Louisiana), respectively. Both of these directors report to a senior vice president of distribution operations, who is located in New Orleans and is actually employed by Entergy Services, Inc. The senior vice president answers to a utility group president, who has above him the chief operating officer and, fmally, the chief executive officer of Entergy. According to Mr. Ervin, this reflects a new and "flatter" organizational structure, designed to promote better communication. 101 None of the managers in Beaumont reports to the EGS president, who has offices in Beaumont and Austin, Texas.

100 Tr. at 789-794; the entire description of the management structure is taken from these pages of the transcript.

101 !d. PUC DOCKET NO. 18249 ORDER ON REHEARING Page23

The Commission has concerns regarding the Company's management structure. It is not clear from the evidence that managers actually have the authority and matching resources to supervise their specific areas. 102 Those responsible for system reliability have little control over the vegetation management area, even though vegetation management has a major impact on how well the T&D system functions. The Company's internal audit concluded that there was no overall strategic plan in place to set performance strategies, and that hindered management in accomplishing business objectives and goals. 103 While EGS' representatives explained that recent changes in management structure were aimed at increasing communication, they also revealed that there was no structured way for the management to track and resolve problems reported 104 by the employees. In addition, managers' bonuses are tied in part to cost-cutting which may confl1ct · . Wl.th e f~.tOrts to 1mprove _c. system penormance. lOS

The Commission concludes that those who are responsible for the reliable performance of the Company's distribution system in Texas must also have the necessary . authority and resources at their full disposal to maintain the system. The managers in the Texas territory must have clearly delineated powers and should be accountable to a unified higher management. The current, bifurcated management structure, under which local Texas supervisors report to multiple supervisors, is an obstacle to effective and reliable operation ofEGS' Texas system .

.c. Spending Levels An issue addressed at length in this docket involved the Company's record of investment in the T &D system, particularly in maintenance. While there is hardly a

102 Tr. at 791-92. 103 ID..FCCG Ex. I, Patton Direct Testimony, Internal Audit and Risk Assessment at 4. 104 Tr. at 204-05. 105 Tr. at 475, 847. General Counsel Ex. 20. Also, EGS internal risk assessment studies for vegetation management and distribution maintenance list cost-cutting as a major business goal. PUC DOCKET NO. 18249 ORDER ON REHEARING Page24

substitute for sufficient O&M expenditures, the Commission will not prescribe a specific level of spending that may guarantee adequate service quality, and, at present, is not keenly interested in past expenditure levels. The Commission is primarily interested in results. As noted in the March 7, 1997 Supplemental Preliminary Order in Docket No. 16705, the Commission recognizes "that there may be a point of diminishing returns above which the dollars or resources allocated to service quality become unreasonable 106 and fail to be cost effective." That crossover point is not set in this docket, and it is not intended to be set. EGS is responsible for determining sufficient spending levels and for the appropriate allocation of resources to O&M, distribution capital additions, and other categories in order to meet its obligation to provide adequate service quality.

In the hearing, EGS witnesses maintained that the Company had increased T&D spending since the 1993 merger; that inspection and measurement standards had improved; and that its spending on service quality programs equaled or even exceeded that of other utilities. 107 It is not certain, however, that EGS actually increased spending because expenses were not categorized clearly. Increased spending, if any, shows just that--increased spending; it does not measure how the quality of service has improved, or whether the service is adequate in accordance with PURA. Nonetheless, EGS is required to provide continuous and adequate service in accordance with traditional reasonable and necessary cost standards. 108

In a memo dated October 31, 1995, a Company official discusses vegetation maintenance spending in the Southern Region and points to a recently implemented 20 percent reduction in allocations which, he expresses, cannot be sustained by any region

106 Supplemental Preliminary Order at 2, Docket No. 16705 (Mar. 7, 1997). 107 Tr. at 760; EGS IB at 7-10. 108 The Commission would expect some increases in spending since the 1993 merger because GSU, facing bankruptcy, would have presumably reduced even the necessary expenses. PUC DOCKET NO. 18249 ORDER ON REHEARING Page25

without an adverse effect on customer service. 109 The parties generally agreed that spending on O&M decreased, while distribution capital additions slightly increased. 110 The Internal Audit department of the Company in its distribution risk assessment study identified the budget process which allocated dollars to the regions based on past history rather than system needs as one of the problems that needed to be resolved. 111

After evaluating the record evidence, the Commission concludes that expenditure levels for O&M are confusing and unclear, and pose a problem regarding tracking and accountability. While the Commission declines to state specific amounts to be spent, proper tracking and accounting of expenditures, both by type and jurisdiction, are essential. For example, the Company was unable to explain a 50 percent increase in the 112 miscellaneous Federal Energy Regulatory Commission (FERC) Account 588. It is virtually impossible to ascertain how much of the O&M budget is actually spent in the Texas jurisdiction or for distribution capital additions as compared to system maintenance.

The Commission concludes that expenditures for O&M must be readily available and verifiable. The same applies to the oft-mentioned, but never specified or quantified, "increased efficiencies" used to justify cutting costs. 113 For such claims to have any weight, the Company must have a ready and reasonable explanation together with supporting documentation.

109 General Counsel Ex. 28 at 2. 110 Tr. at 134, 248; 353-54; General Counsel Ex. 1, Ethridge Direct Testimony at 20, 27; Cities Ex. 1, Lawton Direct Testimony at 8. 111 General Counsel Ex. 30 at 7. 112 Jd. at 9; Tr. at 153-54. 113 EGS Ex. 8, Ervin Supplemental Direct at 16, 19-20. PUC DOCKET NO. 18249 ORDER ON REHEARING Page 26

5. Pockets of Unreliability; Customer Service

a. Pockets ofUnreliability One of the issues identified in the Supplemental Preliminary Order in Docket No. 16705 involves pockets of particularly unreliable service, 114 such as the feeder Tamina, which had 41.3 hours of outage time in one year. 115 Rural customers are more likely to experience outages and wait longer for restoration. The Company admits to areas of lower reliability 116 and agrees that "outliers" must be improved. 117 The Company's practice--seemingly logical--of first restoring and clearing areas with most customers has led to the same customers experiencing repeated lower-quality service. In addition, the Company maintains a list of "politically sensitive" accounts, which suggests that some customers may receive preferential treatment. 118

The Commission concludes that there should be a high standard of service for all customers, including a set minimum standard below which no customer would fall, and that the Company needs to bring all of its worst performing poles and feeders into compliance with that minimum standard.

b. Customer Service The Company has maintained, from the outset of this case, that its service is not deficient, but that it simply faces a "customer perception" problem. The Company knows that it has a large number of customers who are not satisfied with their electric service. 119

114 Supplemental Preliminary Order at 3, Docket No. 16705 (March 7, 1997); see also, General Counsel Ex. 7 at36. 115 General Counsel Ex. 3, EckhoffDirect Testimony, Appendix H. 116 Tr.at122,223,652. 117 Tr. at 223-24. 118 Tr. at 396-97. 119 Tr. at 219. The Company's internal customer survey showed declining satisfaction levels from 1995 to 1996, Tr. at 198-200. PUC DOCKET NO. 18249 ORDER ON REHEARING Page 27

Based on the record, the Commission concludes that EGS customers' perceptions are justified. The same concerns were reflected in the testimony of city officials chatged with protecting the health and safety of their citizens. Of particular note was the evidence that a municipality was compelled to call upon its volunteer firefighters to disconnect live electric wires because the Company's personnel were not available to perform this highly dangerous task. 120

The Company's inadequate service quality is not necessarily an outgrowth of a lack of "money" or "expenditures." The Company has available funds that should be sufficient to provide higher-quality service, as may be gathered from the fact that the entire O&M budget was not spent. 121 It should be noted that the internal risk assessment study on distribution line construction and service restoration lists as the first priority improvement in customer perception of energy delivery and improvement in reliability only as a secop.d priority. 122

EGS' customers and the Commission believe that the Company has an obligation to provide continuous and adequate service, and that significant improvements in EGS' performance are needed. Section D, below, outlines the outcomes EGS must attain for the Commission to be satisfied that those improvements have been made. An improvement in EGS performance will eventually lead to more favorable perceptions and evaluations by the Company's customers.

120 Tr. at 376. 121 Tr. at 468-70. 122 General Counsel Ex. 30 at 1. PUC DOCKET NO. 18249 ORDER ON REHEARING Page28

D. Remedies

Based on the foregoing analysis, the Commission concludes that the Company's service quality must be improved. The following incentive plan lays out remedies to help EGS achieve such improvements. The five essential components of the plan are as follows:

1. A reduction in the return on equity divided into two parts: an adjustment component that recognizes EGS' current service quality is not adequate, with amounts to be refunded to customers, and an incentive-pool component to encourage future improvements in service quality; 2. Adoption of minimum and target levels for SAIDI and SAIFI as recommended in General Counsel's testimony, including improvement in the worst- feeder performance; establishment of standards for major-storm data; and reporting requirements; 3. Partial adoption of customer service performance benchmarks as recommended in General Counsel's testimony; 4. Establishment of a quality assurance requirement to ensure improved performance through the hiring of an independent consultant consistent with the amended, non-unanimous stipulation; and, to guarantee the accuracy of all data, hiring by the Company of an independent auditor to review all reports. 123 5. A customer information and notification requirement.

1. Reduction in the Return on Equity and Incentive Pool

Drawing from the recommendation in the testimony of Cities' witness Lawton, the Company will be assessed a 60-basis point reduction in its ROE adopted in Phase II of Docket No. 16705. This reduction shall be implemented in recognition of the historically inadequate performance of EGS' distribution system. The Company will be required to refund current overcollections, including all appropriate taxes, for the period

123 EGS had filed an amended, non-unanimous stipulation regarding the hiring of an independent consultant to assess Company's distribution system, including a review of the service quality processes. The Commission approved the stipulation with modifications on January 15, 1998. PUC DOCKET NO. 18249 ORDER ON REHEARING Page 29

starting with June 1, 1996, the effective date of any rate reductions ordered in Docket No. 16705, up to the effective date of this order. 124

Going forward, the Company will collect the amount equal to one-half of the 60- basis point reduction, plus appropriate taxes, and deposit that amount in an interest- bearing escrow account to create an incentive pool. The Company may earn this escrowed amount back by achieving specific performance targets. The other one-half of the 60-basis point reduction, plus appropriate taxes, will be retained by the ratepayers. The performance evaluation year will be a 12-month period, commencing on November 1, and ending on October 31. For SAIDI and SAIFI minimum level compliance, SAIDI and SAIFI target level compliance, and compliance with the billing-error rate and call center performance targets, the initial evaluation period shall commence on November 1, 1997, and end on October 31, 1998. For service installation, line extension, and light replacement customer service performance measures, the initial evaluation period shall commence on May 1, 1998, and end on October 31, 1998. Thus, EGS' performance during the initial measurement year for these three performance measures shall be based on only six months of customer service performance. During subsequent years, EGS' performance shall be based on twelve months of customer service performance. At the end of each performance evaluation period, if the Company fails to achieve stated performance benchmarks in any of the three areas (SAIDI and SAIFI minimum levels, SAIDI and SAIFI target levels, and customer service), a corresponding portion of the incentive pool will be refunded to distribution-level customers, divided on a pro-rata basis within each customer class, except as noted below. If the Company successfully reaches all of the benchmarks, the full amount of the incentive pool will revert back to EGS.

124 The effective date of this order for the purposes of the requirements set forth herein is the date on which this Order is no longer subject to rehearing. PUC DOCKET NO. 18249 ORDER ON REHEARING Page30

The performance evaluation year is intended to coincide with the filing requirements of the Commission's Electric System Service Quality Report (ESSQR) forms. If the Commission were to change the ESSQR form time periods to a calendar- year basis, the performance evaluation periods discussed above for EGS shall change to be consistent with the Report form periods.

Performance will be evaluated, and the incentive pool will be divided, according to three measures: (1) improvement in the minimum performance levels for SAIDI and SAIFI for worst feeders; (2) improvement in the target performance levels for SAIDI and SAIFI for average feeders; and (3) improvement in customer service performance, which has five components: (a) billing-error rate, (b) connection rate at the call center, (c) timeliness in completing service and meter installations, (d) timeliness in completing line extensions, and (e) timeliness in replacing and/or repairing service and street lights.

For the purposes of determining what amount, if any, the Company will earn back, the portions of the incentive pool will be represented by the following benchmarks: SAIDI and SAIFI minimum value improvements for the "worst" feeders (described below) will count as one-third of the pool; SAIDI and SAIFI target value improvements will count as one-third of the pool; and customer service improvements will count as one- third. Failure to achieve a measure will result in refunds to the affected customers based on the requirements for that specific measure. SAIDI and SAIFI will be calculated on a feeder-specific basis.

The Company has stated it does not have the ability to measure customer-specific feeder performance, and thus cannot calculate customer-specific refunds. For the first measure, however, refunds shall be provided to all customers taking service from a feeder that fails to meet the SAIDI and SAIFI minimum acceptable levels as recorded over a one-year period. These refunds are more customer-specific than currently contemplated by the Company, but because only a small number of feeders is expected to fall into this PUC DOCKET NO. 18249 ORDER ON REHEARING Page 31

category, the refund calculations should not pose an insurmountable problem. 125 For the second measure, if the Company fails to achieve the specified SAID I and SAIFI target level improvements, refunds shall be made to all Texas, distribution-level customers. For the third measure, failure to meet the standard for any of the customer service components will result in pro-rata refunds to each of the distribution-level customers. Distribution-level customers are meant to be those Texas, retail residential and small commercial ratepayers whose contract demands are less than or equal to 100 k W.

Feeder-specific refunds shall be distributed in a single billing period in proportion to and limited by each customer's total annual electric usage (i.e., no customer shall receive a refund greater than the total amount paid by that customer for the service in that year). If any money remains in the pool, the amount shall be refunded to all distribution- level customers on a pro-rata basis. All refunds shall be labeled "Service Quality Refund" on the customer's bill and shall be directed to the current customer receiving . service at a given premise.

2. Minimum and Target Performance Levels

a. Frequency and Duration of Interruptions

The performance benchmarks are drawn from General Counsel's testimony with some adjustments. General Counsel proposed that the Company measure the duration of interruptions using the Average System Availability Index (ASAI). The ASAI index and the SAIDI index are closely related. Since the Company is required to report SAIDI under the Commission's service quality rules, that index will be used as the duration measure. General Counsel, HLFCCG, and Cities agree that performance should be measured feeder-by-feeder rather than through a system average. EGS has accepted a feeder-by-feeder approach for outage frequency. 126 General Counsel's proposal for

125 The Company states that it does not have the ability to tie specific feeders to specific customers; it is expected, however, that the number of feeders involved is such that manual calculations will be possible or the Company can use its TACTICS program. Tr. at 445-46. 126 Tr. at 228. PUC DOCKET NO. 18249 ORDER ON REHEARING Page 32

feeder-by-feeder SAIFI and SAIDI targets is presented in Table 1, where the SAIDI 127 targets are converted from the ASAI values recommended by General Counsel. The Commission adopts the following performance targets for use by EGS as its reliability performance standards.

Table 1: General Counsel's Proposal for Interruption Performance Measures

Index Value Minimum Acceptable Value Target Value (annual) (annual) SAIFI 3 .8 interruptions 2.6 interruptions SAIDI 315 minutes (5.25 hours) 158 minutes (2.63 hours) Source: Eckhoff Direct Testimony at 7.

General Counsel's testimony indicates that distribution feeders serving approximately 90 percent of EGS' Texas customer meters met the minimum acceptable values for SAIDI and SAIFI in 1996. 128 Distribution feeders serving approximately 75 129 percent ofEGS' Texas customer meters met the target values in 1996.

b. Minimum Performance Benchmark General Counsel presented testimony to show that a certain percentage of EGS' feeders fall below the minimum acceptable values for SAIDI and SAIFI. As part of the remedial plan, the Company must achieve 95 percent compliance with the minimum acceptable values in 1998, so that no more than 5 percent of distribution feeders serving EGS' Texas customer fail to meet the minimum acceptable values for SAID! and SAIFI.

127 General Counsel Ex. 3, Eckhoff Direct Testimony at 7. HLFCCG recommends an annual feeder-by- feeder standard for SAIFI of 3 interruptions and for SAID I of 200 minutes. HLFCCG Ex. 1, Patton Direct Testimony at 29. 128 General Counsel reported that feeders serving 89.97 percent ~f EGS' Texas customer meters met the SAIFI minimum value, and 90.84 percent met the ASAI minimum value. General Counsel Ex. 3, Eckhoff Direct Testimony at 33-34. 129 General Counsel reported that feeders serving 75.6 percent of EGS' Texas customers met the SAIFI target value, and 76.86 percent met the ASAI target value. Id PUC DOCKET NO. 18249 ORDER ON REHEARING Page 33

For the following year, the compliance level will be raised to 98.5 percent. In addition, in year 2 and thereafter, EGS must also meet the following conditions: (1) two or more feeders served by the same substation may not fail to attain any minimum acceptable value; (2) no feeder may fail to attain the minimum acceptable value for two or more consecutive years; and (3) 98.5 percent of all meters must receive service at a level meeting or exceeding both minimum acceptable values. Feeders with 5 or fewer meters shall not be considered in determining whether EGS has met these compliance standards. The Company will maintain or exceed the 98.5 percent compliance with these standards in the subsequent years.

To document and track this improvement, the Company shall identify the worst- performing feeders as discussed herein. EGS shall file SAIDI and SAIFI performance data for all feeders in the following way: (1) exclusive of storm effects and using the SAIDI and SAIFI definitions of major events as contained in the Commission's Electric System Service Quality Report filing (PUC Project No. 15013), and (2) inclusive of all such storm effects and defining major weather events as an ice accumulation of at least one inch of ice within the period of 24 hours, or winds greater than 80 miles-per-hour. Further, EGS shall rank all of its 431 Texas distribution feeders from best to worst according to SAIFI numbers calculated as described above. A list of the worst I 0 percent shall be submitted as a part of the June 15, 1998 ESSQR filing. Because the report asks for data on the worst 5 percent of the feeders, the Company shall supplement its filing for the purposes of this docket. If the Company fails to meet the minimum acceptable value benchmark or the major-storm restoration measure for that year, as described below, one- third of the incentive pool amount, plus appropriate taxes, will be refunded to customers served by all non-complying feeders.

c. Target Performance Benchmark In 1998, for all feeders, the Company must achieve 85 percent compliance with General Counsel's recommended target levels for SAIDI and SAIFI to retain the corresponding portion of the incentive pool (i.e., the Company must improve up to the PUC DOCKET NO. 18249 ORDER ON REHEARING Page34

target levels an additional 10 percent of its feeders, from 75 to 85 percent). In the following year, SAIDI and SAIFI compliance with the target levels will be raised to 90 percent of feeders, and this level will be maintained or exceeded in the future. If the Company fails to meet the target performance benchmark, one-third of the incentive pool, plus appropriate taxes, will be refunded to all Texas distribution-level customers.

d. Treatment of Major-Storm Data The record shows that extreme weather events can cause major outages. For the purposes of record-keeping and performance evaluation, it is necessary to define extreme events according to actual weather conditions rather than the effect weather has on the T&D system. For the purposes of its supplemental filing, EGS shall define extreme weather as an ice accumulation of at least one inch of ice within the period of24 hours, or winds greater than 80 miles-per-hour. The Company shall keep its records in a way that includes all weather events, and a separate set that includes only the major-weather events. The determination of the Company's performance regarding SAIDI and SAIFI benchmarks shall be calculated based on the all-inclusive data. In addition, the Commission adopts as the performance measure for major-weather events the complete restoration of all customers' electric service no later than 120 hours after the initiation of such an event (i.e., when an accumulation of one inch of ice or 80 mph wind have been recorded). Failure to achieve this measure will preclude the Company's recovery of the one-third of the incentive pool, plus appropriate taxes, associated with the SAID! and SAIFI minimum acceptable level compliance for that year.

If an extreme-weather event occurs on the system, and the Company believes it has a detrimental effect on the overall performance for that year, the Company may submit a good cause exception filing for the Commission's consideration on whether to include such an event in the annual evaluation of compliance with set benchmarks. PUC DOCKET NO. 18249 ORDER ON REHEARING Page35

e. Reporting Requirements As discussed above, the Company shall file collected data regarding performance measures on a semi-annual basis, which filings shall coincide with the filing dates of the Commission's ESSQR form. In addition to that filing, on March 1 of each year beginning in 1999, the Company shall file a proposed reconciliation statement showing the level of achievement with the established benchmarks to qualify for any part of the incentive pool. The filing shall be audited by an independent auditor prior to filing, and the auditor's report shall be filed with the proposed reconciliation statement. If and when the Commission approves the filing, the Company shall retain the appropriate portion of the pool or refund the corresponding portion, plus appropriate taxes, to its Texas distribution-level customers, as directed by the Commission. SAID! and SAIFI performance data shall be reported according to the following schedule: May through October data due on December 15; November through April data due on June 15 of each year.

3. Customer Service Performance Benchmarks

The performance measures listed below in Table 2 are drawn from General Counsel's recommendations, with the exception of security and street light replacement, which is based on a recommendation made by the Company . 130 In its reply brief, EGS adopted many of the components of General Counsel's recommended performance measures for customer service. 131 For the purposes of this remedial plan, each customer service measure will be computed for the time interval noted in Table 2, and reported to the Commission every six months, consistent with the filing dates for the service quality reports, as a separate Customer Service Report. If all five targets are achieved by EGS in one given year, the customer service portion of the incentive pool will be retained by the

130 General Counsel Ex. 7, Goodman Direct Testimony; General Counsel Ex. 5, Burrows Direct Testimony, Attachment JBG-8. 131 EGS Reply Brief at 17-21. PUC DOCKET NO. 18249 ORDER ON REHEARING Page36

Company for that year; otherwise, that portion of the incentive pool, plus appropriate taxes, will be refunded to distribution-level customers on a pro-rata basis.

Table 2: Performance Targets for Customer Service Measures Customer Performance Target Service Measure Billing-error rate The Texas system average monthly rate of actual customer over-billing errors per 1000 customers shall not exceed five. Call center Seven days a week, 24 hours per day, on a monthly basis, in every EGS call performance center, 85 percent of the time, calls shall be answered within 30 seconds. Service In any distribution substation service area, 90 percent of applications for new installation electric service and meters not involving line extensions or new facilities shall be filled within five working days, excluding those orders in which a later date is specifically requested by the customer. Service installation compliance will be measured on a quarterly basis. Line extensions In any distribution substation service area, 85 percent of requests for line extensions or new facilities shall be completed within 60 working days, excluding those orders in which a later date is specifically requested by the customer. This standard includes orders for new service and other services, installations, moves, or changes, but not complex services. Line installation compliance will be measured on a quarterly basis. Light In any distribution substation service area, 90 percent of all customer reports of replacements security and streetlight outages shall be corrected within 48 hours. Light replacement compliance will be measured on a quarterly basis. Note: Definitions of specific terms are adopted from J.B. Goodman Direct Testimony, Attachment JBG-8.

After EGS files its first annual customer service report on December 15, 1998, the Commission Staff will work cooperatively with any party who requests it to review performance data collected by EGS relevant to the performance targets, established in Table 2 for new service installations, line extensions, and street lights, in order to determine whether the targets should be adjusted and, if so, in what manner. No earlier than April 1, 1999, any party may petition the Commission to revise these three customer service measures and targets. In its December filing each year, EGS shall, for the purposes of this docket, provide an annual, audited summary of customer service performance data. PUC DOCKET NO. 18249 ORDER ON REHEARING Page37

4. Quality Assurance Proposal; Independent Consultant; and Independent Auditor

According to the terms of the amended, non-unanimous stipulation, the Company shall hire an independent consultant to assess the distribution system, develop strategies for improvement, revise data collection practices, and set up evaluation criteria 132 procedures spelled out in the order approving that stipulation as modified. Testimony in this docket exposed inconsistencies in EGS' collection, recording, and reporting of service quality indices, including SAID! and SAIFL The Company shall develop a quality assurance program that guarantees accurate and consistent reporting of all collected data. The Company shall file its quality assurance proposal no later than August 16, 1998. 133 The deadline shall be extended one day for every day the consultant's report addressing the EGS distribution system is filed beyond July 16, 1998. This proposal shall be developed with the input and in conjunction with the work done by the independent consultant hired under the terms of the amended, non-unanimous stipulation. To guarantee that all data and reports collected by EGS and filed with the Commission are accurate and consistent, the Company shall hire annually an independent auditor to review such data and reports.

5. Customer Information/Notification

The final component of the incentive plan is the information and notification requirement. Following its annual reconciliation statement filed with the Commission, the Company shall include an insert in bills to its customers that explains the service quality requirements, the Company's performance during the preceding annual period, and the amount· of the refund to distribution-level customers. The insert shall contain

132 On December 17, 1997, EGS, OPUC, HLFCCG, Cities, and General Counsel, jointly filed a supplementary motion for entry of an order consistent with proposed amendments to a previously filed non-unanimous stipulation. 133 The quality assurance requirement appears consistent with the amended non-unanimous stipulation related to hiring a service quality consultant filed by EGS and other signing parties, on December 17, 1997. PUC DOCKET NO. 18249 ORDER ON REHEARING Page38

instructions to customers on who to contact to report broken or malfunctioning street lights. The proposal for the scope and content of the bill inserts shall be included in the Company's annual reconciliation filing.

IV. Findings of Fact and Conclusions of Law

The preceding discussion explains the Commission's factual and legal conclusions with regard to the issues presented in this docket. In accordance with TEx. Gov'T CoDE ANN. § 2001.141, the Commission separately states the following findings of fact and conclusions of law.

A. Findings of Fact

Procedural History

1. On November 27, 1996, EGS filed with the Commission its transition/rate case in Docket No. 16705.

2. The Commission referred the case to SOAH on December 5, 1996. The preliminary order issued by the Commission on January 24, 1997, in Docket No. 16705 directed that the docket "address specific service quality standards that will apply after the transition [proposed by EGS]."

3. On March 7, 1997, the Commission issued a supplemental preliminary order in Docket No. 16705 that focused specifically on service quality issues. That order delineated three questions which must be addressed: (1) Whether EGS has an effective and prudent management policy in place that devotes sufficient resources to ensure adequate and reliable service to its ratepayers; (2) Whether there appear patterns of variable service quality in EGS' service territory, and if so, what is the cause and potential resolution of these variations; (3) Whether the Commission should implement procedures, and if so, what procedures can it implement, to monitor service quality on EGS' system, and to respond to situations in which EGS' service quality falls below the benchmark levels.

4. SOAH segmented the hearings in Docket No. 16705 (SOAH Docket No. 473-96- 2285) into four phases to address numerous transition and rate issues separately. The service quality issues were scheduled for hearing in early November 1997, in the "Competitive Issues" phase of the case. PUC DOCKET NO. 18249 ORDER ON REHEARING Page39

5. At the November 4, 1997 Open Meeting, Chairman Pat Wood, III, and Commissioner Judy Walsh voted to sever the service quality issues from Docket No. 16705 and determined that the Commission itselfwould hear and resolve these issues.

6. An order issued on November 4, 1997, established Docket No. 18249 to address the service quality issues. The order also established procedures by which the Commission would hear and rule on the service quality issues directly.

7. Chairman Wood and Commissioner Walsh convened and presided over a public hearing on the merits on November 20 and 21, 1997, to address EGS' service quality issues. EGS, Cities, HLFCCG, and General Counsel submitted their testimony and exhibits into evidence and conducted cross-examination. The Chairman and Commissioner Walsh also directed questions to the witnesses.

8. EGS, Cities, HLFCCG, and General Counsel filed post-hearing briefs in this docket on December 2, 1997. Reply briefs were filed by these same parties on December 9, 1997. The Office of Public Utility Counsel and the Attorney General's Office filed statements on December 2 and 9, 1997, respectively, supporting the briefs of the Cities andHLFCCG.

9. The Commission issued its Final Order in this docket on February 13, 1998.

10. On March 5, 1998, General Counsel and EGS filed motions for rehearing.

11. At the March 19, 1998 open meeting, the Commission granted extensions to rule on the motions for rehearing until May 14, 1998, and to file replies until March 25, 1998.

12. On March 25, 1998, a joint reply to motions for rehearing and motion for entry of order consistent with the parties' stipulation and agreement (the Stipulation) was filed and signed by General Counsel, EGS, HLFCCG, and OPUC.

13. The Commission granted rehearing at the April 1, 1998 open meeting and also approved the Stipulation.

Notice

14. Hearings held on November 20 and 21, 1997, were properly noticed in accordance with TEX. Gov'T CODE ANN.§§ 551.041, 551.043,2001.051, and 2001.052.

15. This matter was scheduled for discussion in open meetings convened on December 17, 1997, January 14, 1998, and April 1, 1998, for which notice ~as given pursuant to TEx. Gov'TCODEANN. §§ 551.041 and 551.043. PUC DOCKET NO. 18249 ORDER ON REHEARING Page40

16. EGS is a public utility subject to the jurisdiction of this Commission in accordance with PURA §§ 14.001, 31.001, 32.001, 33.122, and 36.001 through 36.156.

17. EGS is a wholly-owned subsidiary of Entergy, a holding company incorporated in Delaware and registered with the federal Securities and Exchange Commission in accordance with the Public Utility Holding Company Act.

18. Entergy acquired Gulf States Utilities, Inc., to create EGS, effective as of December 31, 1993.

19. EGS operates in Louisiana and Texas, and through its parent holding company is affiliated with investor-owned electric utilities located in Louisiana, Mississippi, and Arkansas. Entergy's headquarters is located in New Orleans, Louisiana.

20. EGS' Texas service territory covers the southeastern part of the state. EGS' principal office in Texas is located in Beaumont.

Management Structure

21. In Beaumont, EGS employs, among others, a network manager and a reliability supervisor. These managers report to a franchise director, also located in Beaumont.

22. The network manager's and reliability supervisor's responsibilities include managing and dealing with system reliability, outages, restoration, and vegetation management.

23. The network managers report to the franchise director located in Beaumont, who reports to the senior vice president of distribution operations, employed by Entergy Services, Inc., and located in New Orleans.

24. In New Orleans, the vice president of distribution operations answers to a utility group president, who reports to a chief operating officer, and ultimately the chief operating officer of Entergy.

25. The network manager, reliability supervisor, and franchise director do not report to the EGS president, who has offices both in Austin and Beaumont.

26. The Company management structure is ill-suited to assure best supervision of the T&D system in the Texas territory. The supervisors in Texas answer to multiple directors in Louisiana, do not have all the necessary resources at their disposal, and their bonus incentives are tied in part to successful cost-cutting. PUC DOCKET NO. 18249 ORDER ON REHEARING Page 41

Transmission System

27. · The construction of EGS' transmission system started in 1924. Half of the transmission lines currently in service were added in the 1950's and 1960's. Since 1977, 12 percent of the lines have been newly built or rehabilitated.

28. The Commission finds that the physical state of EGS' transmission system is adequate; few transmission-related outages or circuit breaker operations occurred.

29. Transmission line ROW appear to be clear.

30. The EGS transmission system appears to provide adequate, continuous, and reliable service.

Physical Condition of Distribution System and Pole Inspection Program

31. EGS serves approximately 318,279 customers in Texas. The distribution system in the state is comprised of 11,472 miles of electric lines; 394,865 poles; and approximately 431 feeders.

32. EGS contracted with Osmose Wood Preserving Company to perform inspections ofEGS poles and crossarms in Texas for the years 1995 and 1996.

33. In 1995 and 1996, Osmose field inspectors inspected a total of37,233 wood poles in eight different areas. The poles reviewed account for 9.4 percent of the total number of poles in EGS' Texas system.

34. Although the Osmose inspections focused on particularly troubled spots of the distribution system in Texas, certain areas revealed a number of deficient poles that was excessive by any measure.

35. Osmose survey results show wide fluctuations in percentages of poles with decay, from 8 to 37 percent, with the average percentage being 17.9 percent.

36. EGS proposes to implement a new pole inspection program, through which approximately 35,000 poles will be inspected annually, so that all poles in the Texas jurisdiction will be inspected by the end ofthe lOth year.

37. General Counsel selected Drash Consulting Engineering Inc. to survey 33 uniformly distributed substations from the Texas portion of the EGS distribution system.

38. General Counsel recommended that Drash inspect a representative sample of 591 poles on feeders originating from these 33 substations, of which Drash visually surveyed 582, or 98.42 percent, of poles. PUC DOCKET NO. 18249 ORDER ON REHEARING Page 42

39. The Drash report picked for inspection approximately every 5th, lOth, or 15th pole from the substation. The age of the poles was determined by visual inspection.

40. Drash filed its report on August 11, 1997, in which it identified 59 of 582 poles with structural deficiencies, such as rot,· decay, or leaning, and 72 poles with encroachments by tree limbs and vegetation build-up.

41. The Drash survey did not use specific criteria by which to evaluate the condition of the poles, but relied on the inspectors' experience.

42. Beginning on May 12, 1997, the Commission Staff performed limited, random inspections of EGS' poles in the Vidor, Orange, Bridge City, Port Arthur, and Port Neches areas. The Staff inspections also encompassed the northern portion of the system to the western limits of EGS' service area.

43. By August 1997, the Commission Staff surveyed 60 poles, and found that 6.7 percent had equipment deficiencies and 63 percent had ROW problems.

44. In general, the distribution system is in adequate condition; however, there are numerous poles with decay, in need of repair or replacement, and many lines and poles that need vegetation clearing.

45. The inspection program carried out by the Company has not been sufficiently extensive or adequate to fulfill its purpose of securing reliable service.

46. The Company's distribution system maintenance practices have failed to assure continuous and adequate service to EGS' customers.

Reliability Indices and Performance Standards

47. EGS uses the following standards and systems to collect and record performance measures: System Average Interruption Frequency Index (SAIFI); System Average Interruption Duration Index (SAIDI); Distribution Interruption System (DIS); TACTICS; and a System Control and Data Acquisition devise (SCADA). General Counsel also used the Average System Availability Index (ASAI) as an outage measure.

48. EGS begins to record a specific outage only after a customer calls in to the Company to complain. Timing of the outage duration starts after the customer alerts the Company.

49. System-wide, the average customer in EGS' Texas territory experienced outages totaling 133 minutes (as recorded in SAIDI) in 1996. The system-wide SAIFI in Texas for 1996 was 2.648 interruptions. PUC DOCKET NO. 18249 ORDER ON REHEARING Page 43

50. Fifty of 431 feeders (11.6 percent) in the EGS' Texas system were below the minimum ASAI standard recommended by General Counsel (99.94 percent or 157 minutes), while 37 (8.58 percent) feeders missed the minimum SAIFI standard of 3.8 interruptions per year.

51. Eighty-three feeders or primary circuits experienced outage times in excess of 200 minutes during 1996. 134 52. Eighteen feeders, serving 9,457 meters, are "historically deficient" for SAIFI, and seventeen feeders, serving 10,835 meters, are "historically deficient" for ASAI.

53. Nine percent of the meters did not meet minimum ASAI standards. Similarly, 10 percent of the meters fell below minimum SAIFI benchmarks.

54. Customers on several feeders suffered significantly more interruptions than the average customer, and with lengthier outages: feeders Tamina and China recorded SAIDI scores of 2,477 minutes and 934 minutes, respectively, while feeder Dobbin reached a SAIDI value of 699 minutes. Feeder Pleasure scored 10.2 interruptions, feeder Crystal had a SAIFI of 8 interruptions, and Cordrey scored 7.56 interruptions.

55. Sixty-five feeders with approximately 58,000 customers have a SAIFI rating less than the 10-year Company average.

56. EGS testified that it restores first those feeders with the highest numbers of customers. Likewise, it clears vegetation first on the feeders with the most customers.

57. EGS excluded certain data in calculating its reliability indices. In 1994, the Company ceased counting outages in areas with less than 500 customers. For the first six months of 1996, the Company reported 35 to 40 percent fewer outages than were reported on average during the first six months ofthe 1991-94 time-frame.

58. The average outage duration during the first three years after the merger went up to 2.4105 hours, from the average of 1.8220 hours during the seven years preceding the merger.

59. By September 1996, the number of outages reported increased by 80 percent from 1995, due to a greater number of small outages recorded.

60. EGS prepared a Reliability Report for the Southwest Region, issued in May 1994, that summarized reliability performance for the year, compared actual performance with Company goals, identified problem areas, and reported corrective actions.

134 Historically deficient feeders are those with consistently poor performance over a period of several years. PUC DOCKET NO. 18249 ORDER ON REHEARING Page44

61. Equipment failures were excluded from the May 1994 Reliability Index, as were outages attributed to public damage, non-preventable trees, load curtailment, transmission line outages, instantaneous outages, and planned outages. EGS began reporting these types of outages again in September 1995. ·

62. EGS excluded from its performance measures and reliability indices data collected during episodes of extreme weather conditions in February 1994 and January 1997. 63. The measure of outage duration does not take into account either the number of customers who fail to alert the Company to an outage, or the length of time a customer has suffered an outage prior to notifying the Company.

64. Linemen working for or on behalf of EGS make subjective determinations as to the cause, duration, or effect of an outage, which may hinder true and accurate reporting of the outage causes.

65. EGS records and reports its reliability and performance data based on system- wide measures. This method of reporting overlooks recurring individual feeder problems and pockets of disproportionately low service quality.

66. EGS is not technically equipped at the present time to measure SAIDI and SAIFI performances at the individual customer level. The Company, however is able to calculate performance indices on a feeder-by-feeder basis.

67. The Company's data and compiled indices are unreliable because of changing data collection standards, failure to report all relevant information, and manipulation of the data.

Vegetation Management

68. The purpose of vegetation management is to ensure to the extent possible that vegetation in or near ROW does not come into contact with the conductors and either break the wires or cause ground faults.

69. Many of the outages in EGS' service territory result from trees or tree limbs falling into EGS' ROWs or distribution lines.

70. EGS stated that it has a six-year, rural tree-trimming cycle; it calls for a 20-foot clearance. Trees in urban areas, according to the Company, are trimmed on a three-year cycle. The Company did not offer persuasive evidence that these cycles were actually followed.

71. The Company stated that 80 percent of EGS' vegetation management expenditures are allocated to cyclical tree trimming. PUC DOCKET NO. 18249 ORDER ON REHEARING Page45

72. Texas vegetation management expenses in the post-merger period were $4.99 million in 1994, $5.09 million in 1995, and $4.735 million in 1996. The decrease in spending between 1995 and 1996 is attributed by the Company to unexplained efficiency gains.

73. The total line-miles actively maintained by the Company dropped approximately 30 percent in 1996 from the 1994-1995 levels; EGS witnesses did not explain this decrease.

74. Vegetation management spending increased by 34 percent in 1997, a significant part of which went towards the January 1997 ice storm cleanup costs.

75. Vegetation-related SAIDI and SAIFI values have worsened since the merger. System-wide SAIDI values for Texas have increased from 21.17 in 1994 to 40.36 in 1997. SAIFI values have also increased from 0.31 in 1994 to 0.63 in 1997. As·of September 1997, the SAIDI level for 1997 exceeded the SAIDI value for the entire year in 1996.

76. Network managers in EGS' Texas territory have the responsibility to ensure adequate service reliability. Network managers, however, do not directly supervise or fully control the vegetation management program.

77. A 1994 study by Environmental Consultants, Inc., (ECI) proposed specific recommendations for EGS' vegetation management to include herbicide and tree trimming based on plant species, equipment scheduling in the planning process, aggressive pursuit of tree removals, and performance measures for contractors. EGS has not implemented the recommendations proposed by ECI.

78. Entergy's Internal Audit department conducted a comprehensive risk assessment study of the vegetation management program in 1996, and concluded that sufficient strategic planning had not occurred to ensure that Entergy met its objectives. The study also found that the Alliance Agreement between Entergy and vegetation management contractors was not being consistently applied in the various regions, and did not meet business objectives.

79. Power lines cannot be shielded 100 percent from all contact with vegetation; however, the Company's inability to develop and carry out prudent vegetation management policies has resulted in major service disruptions.

80. EGS' management structure does not provide those responsible for ensuring service reliability with direct authority to address or prevent vegetation-related outages.

81. The Company does not have a strategic plan to guide vegetation management efforts. PUC DOCKET NO. 18249 ORDER ON REHEARING Page 46

82. Neglect and backlog of vegetation management projects has posed unacceptable risks of increasing and recurrent service outages, especially during major storms.

83. The Commission finds that the Company's vegetation management efforts have not been adequate, have led to a backlog in vegetation clearing, and have resulted in an unacceptably high risk to the system.

Emergency Preparedness, Response, and Outage Restoration

84. In June 1996, EGS conducted a drill simulating an emergency situation in order to test its emergency response and restoration plans.

85. EGS' emergency plan and procedures are on file with the Commission, and were reviewed by the Commission Staff after the ice storm in January 1997.

86. In Docket No. 16301, Ice Storm '97 Field Investigations Project, the Commission Staff concluded that EGS had a good emergency plan in place before the ice storm of January 1997.

87. The Commission defines "major storm" as a weather-related event in which there is a loss of power to 10 percent or more of the customers in a region over a 24 hour period and with all customers not restored within 24 hours.

88. EGS defines major storm as any event in which 10 percent or more of a region's customers are interrupted for 24 hours or more.

89. Many parts of Texas experienced an ice storm of significant magnitude that began early on January 12, 1997, and lasted through the afternoon of January 13, 1997.

90. Most utilities in Texas experienced disruptions in service during the January 1997 ice storm.

91. EGS should have been better prepared to deal with the January 1997 ice storm, given that it had experienced major weather events in 1994 and 1995, and that it had successfully conducted emergency drills in 1996.

92. During the ice storm in January 1997, up to 120,000 of EGS' Texas customers were without power. Restoration took seven days to complete, with temporary emergency crews mobilized from Louisiana, Mississippi, and Arkansas.

93. By January 16, 1997, EGS had more than 2,700 personnel deployed to restore service on various parts of its Texas system.

94. At the public hearing on November 20, 1997, city officials from the towns of Port Neches, Orange, and Nederland described numerous episodes in which the numbers of PUC DOCKET NO. 18249 ORDER ON REHEARING Page 47

EGS workers, equipment, and materials were insufficient to deal adequately with emergency situations. Other officials from Cleveland, Dayton, and Port Arthur gave favorable reports ofEGS' performance during the January 1997 ice storm.

95. Mr. Dick Nugent, representing the city of Nederland, testified that after several attempts to reach EGS personnel, city officials had to retrieve an EGS supervisor from his house in Nederland to help them with power restoration efforts.

96. Mr. A.R. Kimler, from the city of Port Neches, testified that local firefighters were deployed to cut down live power lines because EGS stated there were not enough employees to respond at the time.

97. The impact of the January 1997 ice storm was greatly exacerbated by the Company's failure to maintain its ROW clear of excessive vegetation.

98. While the Company has emergency plans in place, not all personnel are familiar with the plans, a fact that may have accounted for the Company's uneven and delayed restoration efforts during the January 1997 ice storm.

· 99. It may be uneconomic for EGS to build, operate, or maintain a 100 percent storm- proof system. The January 1997 ice storm, however, revealed that EGS must implement a better preventive maintenance program and faster customer response initiatives.

100. Segregation of major-storm data from non-major storm data in outage duration and frequency reports provides a more accurate method to evaluate EGS' performance on a day-to-day basis, as well as during crisis events.

101. The standard for classifying major storms is to be defined in terms ofthe severity of the weather-related event, rather than in terms of the impact on the T&D system. Feeders subject to major storms can be defined as those experiencing an accumulation of one inch of ice or more within a 24-hour period, or those exposed to winds of at least 80 mph.

102. EGS' outage restoration efforts during the January 1997 ice storm would have been more effective if: (1) EGS had been more diligent in its preventive vegetation management practices; and (2) it had a better communication and management program in place to deal with emergency situations.

103. The effect and incidence of lightning strikes did not matet;ially affect the quality of service offered by the Company.

Spending Levels

104. System-wide transmission spending followed a generally increasing trend since 1992. No data was presented for transmission O&M expenditures on the Texas portion PUC DOCKET NO. 18249 ORDER ON REHEARING Page 48

of the system.

105. Between 1994 and 1996, distribution maintenance spending decreased by $4 million each year. Half of these cuts ($2 million each year) came from the overhead line maintenance spending.

106. Miscellaneous distribution expenses recorded in Federal Energy Regulatory Commission (FERC) Account 588 increased from just under $3 million in 1991-1993, to $10.3 million in 1995, and $12.4 million in 1996, an increase EGS could not explain.

107. FERC has designated Account 588 for mapping, records, communications, and other miscellaneous expenses such as clerical, stenographic, and janitorial work at buildings.

108. EGS decreased its level of spending for pole and appurtenance replacements by 50 percent during the years 1995 and 1996.

109. EGS' O&M spending has been uneven, lacks clear accounting, and proportionately more is spent on distribution capital additions than on distribution system maintenance.

110. In 1995, most of the spending for distribution capital additions was in the Louisiana area.

111. Efficiency savings have not been identified nor proven in areas where spending levels had been reduced.

112. The Company witness could not explain whether any of the savings from the unspent T&D budget were credited according to the Entergy/GSU merger agreement (PUC Docket No. 11292).

Personnel Levels

113. The Company has carried out substantial cuts in the number of employees assigned to T&D operations: 95 distribution employees in 1995-1996 and 26 in 1997. EGS has increased its use of contract workers during the same periods for a total net decrease of 42 permanent linemen and servicemen since the merger.

114. Since the merger, most the terminated T&D employees were replaced with contract workers. Sixty-six of the terminated T&D employees had on average of 18 years experience with the Company.

115. The Company has no performance measures to evaluate contract-worker efficiency. PUC DOCKET NO. 18249 ORDER ON REHEARING Page 49

116. The ratio of contract employees to permanent linemen and servicemen is now 2:1. The Commission does not oppose the use of contract employees. The present ratio of contract employees to permanent staff, however, is high, particularly in light of the extensive experience lost when many of the permanent employees were laid-off.

11 7. EGS is expected to structure its line maintenance and vegetation management programs in such a way that adequate numbers of properly trained and supervised employees are promptly available.

118. EGS hired 30 additional contract crews in October 1997, specifically to remedy a backlog of vegetation management projects.

119. The Company lacks a clearly stated strategic plan for vegetation management, and priorities are driven primarily by budget considerations.

Customer Service

120. An EGS customer survey reveals that satisfaction results decreased among all classes of ratepayers and for all components of service from 1995 to 1996, as more customers classified EGS service as "fair" or "bad" than "very good" or "helpful."

121: EGS did not track customer complaints prior to 1995, nor did it track customer service performance standards. EGS began a complaint management system in January 1997 to document every complaint called in to the Company.

122. The Company's automated voice response unit, substituted for live employees, has not led to increased customer satisfaction.

123. EGS has failed to implement sufficient customer service procedures and has a high number of dissatisfied customers.

124. The Company also has, by its own admission, pockets of particularly inadequate servtce.

125. In a letter dated September 19, 1997, State Representative Mark Stiles wrote to the Commission expressing concern over an increase in the number of EGS customers who contacted him to complain of poor service by EGS.

126. EGS acknowledges that it has a large number of customers who remain unsatisfied with their customer service.

127. EGS' customer service quality is clearly deficient based on the numerous complaints to the Commission and Texas Legislature, and as indicated in the Company's own survey data. PUC DOCKET NO. 18249 ORDER ON REHEARING Page 50

Stipulation

128. In the Stipulation, filed by parties on March 25, 1998, and approved by the Commission at the April 1, 1998 open meeting, the parties, among other provisions, agreed to: (1) lower the compliance level for SAIDI and SAIFI minimum acceptable level to 98.5 percent; (2) make the reporting and evaluation periods consistent with the Electric System Service Quality Report form; (3) provide for a possible review of customer service targets; (4) change the selection process of the auditor; and (5) change the due date of the quality assurance proposal to August 16, 1998.

129. The Stipulation addressed only some of the issues raised by the parties in the motions for rehearing. However, at the April 1, 1998 open meeting, the EGS representative indicated that if the Commission adopted the Stipulation as drafted, the parties would not appeal the Order.

B. Conclusions ofLaw

1. Entergy Gulf States, Inc., (EGS) 1s a public utility as defmed in PURA '§ 31.002(1).

2. The Commission has jurisdiction over issues addressed in this Order in accordance with PURA §§ 14.001, 31.001, 32.001, 33.122, 36.001-36.151, and 38.071.

3. The Commission has jurisdiction over all matters relating to the conduct of a hearing in this case, in accordance with PURA § 14.051.

4. This Order is issued in accordance with TEX. Gov'TCODEANN. § 2001.141.

5. PURA § 37.151(2) requires that EGS provide continuous and adequate service in its certificated service territory.

6. EGS is obligated, pursuant to PURA § 38.001, to furnish service, instrumentalities, and facilities that are safe, adequate, efficient; and reasonable.

7. EGS has failed to provide continuous and adequate service to many of its customers, as required by PURA §§ 37.151(2) and 38.001.

8. In establishing a reasonable return on invested capital, the Commission is required, among other things, to consider the quality of the utility's service. PURA § 36.052(3).

9. The Commission, after notice and hearing, may order an electric. utility to provide · specified improvements in its service and in a specified area if (a) service in the area is PUC DOCKET NO. 18249 ORDER ON REHEARING Page 51

inadequate or substantially inferior to service in a comparable area; and (b) requiring the company to provide the improved service is reasonable. PURA § 38.071.

10. The remedies proposed in the Stipulation are tailored to achieve the desired result as contemplated in the Final Order; implementation of such remedies is in the public interest.

V. Ordering Paragraphs

1. Upon issuance of a final order in EGS' pending rate case in Docket No. 16705, the Company shall calculate the revenues equal to 60~basis points, and appropriate taxes, of the ROE established in Docket No. 16705.

2. Within 30 days after issuance of the final order in Docket No. 16705, the Company shall submit to the Commission its calculation of the revenues equal to 60~basis points, and appropriate taxes, for Commission review and approval.

3. If a rate reduction is ordered in Docket No. 16705, the Company shall refund to its customers an amount equal to 60-basis points of its ROE authorized in Docket No. 16705, plus appropriate taxes, for the period from June 1, 1996, through the effective date of this Order. 135

4. As of the effective date of this Order, the Company shall reduce collections from customers by an amount equal to 30-basis points, and appropriate taxes, of the ROE authorized in Docket No. 16705.

5. As of the effective date of this Order, the Company shall establish an interest~bearing escrow account into which it shall deposit, on an on~going basis, the amount equal to 30~basis points, and appropriate taxes, of its ROE authorized in Docket No. 16705.

6. The Company shall hire an independent consultant, according to the conditions set out in the amended, non~unanimous stipulation regarding the hiring of consultants, as approved with modifications by the Commission in this docket. The consultant shall assess the distribution system, develop strategies for improvement, revise data~collection practices, establish evaluation criteria, and perform any additional work as set out in the amended, non~unanimous stipulation.

135 If the fmal order in Docket No. 16705 does not mandate any refunds to customers, there will not be a refund of 60-basis points to customers based on this Order for the period from June 1, 1996, up to the effective date of this Order. PUC DOCKET NO. 18249 ORDER ON REHEARING Page 52

7. The Company shall file a quality assurance proposal governing the collection, recording, and reporting of SAID! and SAIFI, and any other relevant service quality measures by August 16, 1998. This filing deadline shall be extended one day for every day the consultant's report addressing the EGS distribution system is filed beyond July 16, 1998.

8. Twice annually, and starting on June 15, 1998, the Company shall file the Electric System Service Quality Report, including its supplemental filing, to document SAID! and SAIFI feeder-by-feeder data for each six-month period, calculated in the manner discussed in this Order. The Company shall also submit a listing of the worst performing 10 percent of the Company's feeders, twice annually along with their performance data. Beginning on December 15, 1998, and twice annually thereafter, at the same time as the Electric System Service Quality Reports, the Company shall file its Customer Service Reports, relating to service installations, line extensions, and light replacements. Initial Customer Service Reports related to the remaining customer service measures (billing-error rate and call center performance) shall be· due on June 15, 1998. In its December filing each year, the Company shall provide an annual, audited summary of customer performance data.

9. Beginning in 1999, and no later than March 1 of that and each subsequent year, the Company shall file with the Commission its reconciliation proposal for the funds held in escrow according to this Order for the prior calendar year. The Company's annual filing shall be audited by an independent auditor, and the audit shall be filed with the reconciliation proposal.

10. If the Commission determines that the Company has achieved the performance s~dards set out in this Order for a minimum acceptable level of improvement for SAIDI and SAIFI for the 10 percent of worst feeders and, if applicable, major-storm restoration process, the Company may retain one-third of the amount in escrow for that year; otherwise, the Company shall refund that amount, plus appropriate taxes, to its Texas distribution- level customers taking service from the non-complying feeders, as explained in section D(1) and D(2)(b) of this Order. If the Commission determines that the Company has achieved the performance standards set out in this Order for the target level improvement for SAID! and SAIFI, the Company may retain one-third of the amount in escrow for that year, otherwise, the Company shall refund that amount, plus appropriate taxes, to all its Texas distribution-level customers, divided on a pro-rata basis within each customer class. If the Commission determines that the Company has achieved the performance standards set out in this Order for customer service, the Company may retain one-third of the amount in escrow for that year; otherwise, the Company shall refund that amount, plus appropriate PUC DOCKET NO. 18249 ORDER ON REHEARING Page 53

taxes, to its Texas distribution-level customers divided on a pro-rata basis within each customer class.

11. In conjunction with its annual reconciliation filing, the Company shall submit a proposal for customer notification. At a minimum, the proposal shall include the content and format for a billing insert that explains the service quality requirements, the Company's performance for the preceding year, street light reporting instructions and telephone number, and the amount of the escrow pool retained by the Company and/or refunded to customers.

12. The Company shall develop and implement, within the six months of the effective date of this Order, a media campaign to inform and educate customers in its Texas service territory about the importance and proper procedure for reporting to the Company malfunctioning or broken street lights.

13. The provisions of the Stipulation are approved as reflected in this Order.

14. The entry of an order consistent with the Stipulation of the parties does not indicate the Commission's endorsement of approval of any principle or methodology that may underlie the Stipulation of the parties. Neither should entry of an Order consistent with the full settlement of the parties be regarded as a binding holding or precedent as to the appropriateness of any principle or methodology underlying the Stipulation of the parties.

15. All other motions, requests for entry of specific fmdings of fact and conclusions of law, and any other requests for general or specific relief, if not expressly granted herein, are hereby denied for want of merit. PUC DOCKET NO. 18249 ORDER ON REHEARING Page 54

This Order reflects the opinion of Chairman Wood and Commissioner Walsh. Commissioner Curran was not present at the adjudicatory hearing conducted in this I

docket, and did not participate. in the final order and order on rehearing deliberations.

SIGNED AT AUSTIN, TEXAS, the ~~~ay of April1998. PUBLIC ILITY COMMISSION OF TEXAS

q/share/finaV18249rhr.doc Appendix5

Excerpts from PUC Docket No.l6705, Second Order on Rehearing , PUC DOCKET NO. 16705 R£CE:/V£o SOAR DOCKET NO. XXX-XX-XXXX 98 OCT /4 AH • APPLICATION OF ENTERGY TEXAS § PUB! tn 9. 02 .. u U11Ltr··· . :.· FOR APPROVAL OF ITS TRANSITION § FILING CL~~~kHISSION TO COMPETITION PLAN AND THE § PUBLIC UTILITY COMMISSION TARIFFS IMPLEMENTING THE PLAN, § ANDFORTHEAUTHOIDTYTO § OF TEXAS RECONCILE FUEL COSTS, TO SET § REVISED FUEL FACTORS, AND TO § RECOVERASURCHARGEFOR § UNDER-RECOVERED FUEL COSTS §

SECOND ORDER ON REHEARING

This Second Order on Rehearing (Order) addresses the application filed by Entergy Gulf States, Inc. (EGS_or the Company) on November 27, 1996, in accordance with Paragraph 9b of 1 the Stipulation and Agreement approved by the Commission in Docket No. 11292. 1brough this Order, the Commission adopts in part and modifies in part the Proposal for Decision (PFD) as corrected and the Supplemental Proposal for Decision (SPFD) issued by the State Office of Administrative Hearings (SOAH) Administrative Law Judges (ALJs) in late March 1998.2

I. Introduction

The SOAH ALJs conducted separate evidentiary hearings on the four component parts of this docket: fuel, revenue requirement, cost allocation/rate design, and competitive issues. After completion of the hearings and review of the record evidence, the ALJs recommended that the Commission order EGS to reduce its current Texas retail base rates by $137 million, which

1 Application of Entergy Corporation and Gulf States Utilities Company for Sale, Transfer or Merger, DocketNo.11292, 19 P.U.C. BULL. 2040,2041 (Ordering Paragraph 5) (Dec. 29, 1993). 2 The ALJs issued the PFD on March 25, 1998, as revised by clarifications, revised text, and revised schedules filed on June 4, 12, and 16, 1998. The ALJs issued the SPFD, which addresses supplemental fuel-related issues, on March 27, 1998. The Commission considered the matters addressed in this Order at its open meetings convened on June 30, July 8 through 10, July 13, July 16, and July 22, 1998. The Commission issued its "fmal" order in this docket on July 22, 1998. The Commission considered motions for rehearing at its open meetings convened on August 26, and October 8, 1998. A more detailed procedural history of this case is contained in Attachment A to the PFD and the Findings of Fact (FoF) and Conclusions of Law (CoL), as modified, contained in this Order. PUC DOCKET NO. 16705 Second Order on Rehearing Page2 oflSS SOAH DOCKET NO. XXX-XX-XXXX

represents a 29% reduction from current base rates. The rationale for this recommended reduction is set forth in detail in the PFD and SPFD which, together, total over 800 pages.

In this Order, the Commission directs EGS to reduce its Texas retail base rates in conformance with the attached schedules (approximately $111 million, or $26 million less than the reduction recommended by the ALJs). This base rate reduction, and the Commission's rationale for modifying portions of the PFD and SPFD, are explained in detail in the Discussion section of this Order. In this Introduction, the Commission focuses primarily on the three most contentious issues in this docket: (1) treatment of EGS' claimed affiliate expenses; (2) the treatment of EGS' "excess costs over market" (referred to either as "ECOM'' or "potentially stranded investment"); and (3) interruptible service.

A. Affiliate Expenses

The ALJs concluded in the PFD that EGS failed to meet its statutory burden of proof to justify recovery of approximately $86 million in Texas retail affiliate expenses. The ALJs therefore recommended that the Commission disallow all of these claimed costs.3 This $86 million in recommended disallowed expenses is comprised of $49 million billed to EGS by its corporate service affiliate, Entergy Services, Inc. (ESI), or allocated to EGS by its nuclear service affiliate, Entergy Operations, Inc. (EOI), plus an additional $37 million direct-billed to-EGS by EOI. 4 In the alternative to a full disallowance, the ALJs recommended that the Commission could potentially justify allowing EGS to recover the direct-billed EOI affiliate expenses ($37 million), but that the record clearly required disallowance of the $49 million in ESI and EOI allocated expenses. (To avoid confusion, this Order refers to the ESI billed and EOI allocated expenses as the $49 million in disallowed "ESI" expenses; the $37 million in EOI direct billed expenses are referred to as the "EOI'' expenses.) In this Order, the Commission adopts the ALJs'

3 For convenience, this Introduction refers only to the Texas retail affiliate expenses claimed by EGS. The Company's application and the PFD actually refer primarily to "system-wide" affiliate expenses in the range of $200 million. The system-wide expenses include affiliate expenses allocable to EGS' services in Louisiana, services in the Texas wholesale market, and services in the Texas retail market. 4 The complexity· of the affiliate transactions affecting EGS (previously Gulf States Utilities, Inc. (GSU)) significantly increased when Entergy Corporation purchased GSU in 1993, thereby creating EGS. PUC DOCKET NO. 16705 Second Order on Rehearing Page t 1 nf 155 SOAH DOCKET NO. XXX-XX-XXXX

are now declining. By allowing the Company to surcharge the AOD expense over a three-year period, the Commission moves closer to intergenerational equity than would occur if future customers are required to pay the AOD over the remaining life of River Bend. Thus, the Commission's treatment both mitigates EGS' ECOM and better matches the recovery period for the AOD to the time period in which the AOD would normally have been expensed.

C. Interruptible Service

The Commission concludes that the current demand charge credits provided to the interruptible service (IS) customers will not be subject to partial imputation as recommended by the ALJs. The current IS demand and energy charges also will not be reduced in tandem with the base rate reductions applicable to firm customers. Instead, the demand and energy charges to IS customers, under the IS rider, will be frozen at current levels. This treatment results in the IS customers continuing to receive interruptible service at rates below firm service, but narrows the demand charge credit as base rates for finn customers are reduced. Also, by freezing the energy charges billed to IS customers under the IS rider, the Commission is ensuring that IS customers are allocated their fair share of transmission costs and, where applicable, distribution costs.

D. Overall Effect of this Order

The Commission affirms the majority ofthe PFD, but concludes that the record evidence requires modification to a number of findings and conclusions reached by the ALJs. In addition to the modification summarized above, the Commission modifies the ALJs' recommendations to conclude that (1) EGS' wheeling expenses and revenues should be subject to base rate treatment, rather than fuel reconciliation and fuel surcharges; (2) in recognition of the remedies established in EGS service quality case,45 the Company's rate ofreturn on equity (ROE) will be set at 11.1% for the period June 1, 1996 through May 12, 1998, and at 11.4% from May 13, 1998 through the 26 remainder of the effective period of the rates in this docket; and (3) the Company is also

25 Entergy GUlf States, Inc. Service Quality Issues (Severed From Docket No. 16705), Docket No. 18249, Order on Rehearing (April22, 1998) (EGS Service Quality). 26 The remedies established in EGS Service Quality will remain in place for some period beyond the rate period subject to this docket. Thus, the ROE reduction remedy will also apply in at least some portion ofEGS' next effective rate period. PUC DOCKET NO. 16705 Second Order on Rehearing Page 12 of 155 SOAH DOCKET NO. XXX-XX-XXXX

entitled to recover approximately $1 0 million more in fuel expense than recommended by the ALJs.

The following discussion addresses each of the Commission's modifications to the PFD and SPFD. The discussion does not track the sequence of the SOAH recommendations, but begins with the larger transition items arising in the competitive issues and revenue requirement phases. Discussion of the cost allocation/rate design and fuel issues follows in that sequence. This Order also includes a separate section addressing how refunds will be treated in this docket, including refunds resulting from a companion order on rehearing issued on September 2, 1998 in GulfStates Utilities Company Remand ofActual Taxes Paid Issues, Docket No. 18290.

Also attached to this Order are schedules detailing (1) the Company-wide Revenue Requirement and Invested Capital (Commission Schedules I through VI); (2) the Revenue Requirement and Revenue Deficiency (Commission Schedule KS-Jl); (3) the Texas Retail Class Revenue Requirement Assignment, the Texas Retail Class Revenue Requirement Allocation, and the Texas Retail Class Rate Base Allocation (Commission Schedules KS-TX/1 through KS- TX/3, respectively); and (4) the Calculation of the Fixed Fuel Factor and the Allocation of Fuel Over/Under Recovery by Rate Class (Commission Schedules KP-Fuel/1 and KP-Fuel/2, respectively).

To the extent not addressed below, the Commission affirms the ALJs' discussions and proposed findings of fact (FoFs) and conclusions of law (CoLs) without substantive modification. PUC DOCKET NO. 16705 Second Order on Rehearing Page 29 of 155 SOAH DOCKET NO. XXX-XX-XXXX

the ALJs in effect are recommending an improper double disallowance because, in the SPFD, the ALJs recommend disallowance of certain natural gas expenses related to fuel burns in February of 1996. As stated by General Counsel, "[t]he Commission therefore should not disallow imprudent fuel costs related to EGS's failure to burn fuel oil, on the one hand, and refuse to include the fuel oil in inventory, on the other."60

The Commission agrees with General Counsel and EGS; if the February 1996 natural gas expenses are to be disallowed as imprudent (which they are, as discussed below), the Company should be permitted to recover the costs of the No.6 fuel oil that it should have burned in lieu of the disallowed high cost natural gas. Accordingly, to reflect the preponderance of evidence in the record, FoF 117 is modified and F oF 117A is added to fmd that the fuel oil working capital in rate base is $5,110,085, rather than $2,085,630.

5. Return on Equity

The Commission affirms the ALJs' recommendation to set the Company's ROE at 11.7% in this docket with the following modifications. First, the Commission acknowledges that an appropriate range for EGS' ROE is 9.65% to 13.94%. This range is based on both the constant growth and the multi-stage non-constant growth discounted cash flow (DCF) analyses. As the ALJs recognized, using both of these models more closely resembles the balance employed by the Commission in Docket No. 14965. Accordingly, FoFs 128 and 129 are modified, New FoF 128A is added, and FoFs 130-132 are deleted. Additionally, the Commission modifies FoF 134 to reflect that, although adjustments to EGS' ROE were not modified in this case for poor demand-side management and affiliate transactions, the Conunission retains full discretion to make such adjustments in a future case.

Second, a new FoF 128B is added to reduce the 11.7% ROE by 60 basis points to 11.1% for the period June 1, 1996 through May 12, 1998, and by 30 basis points to 11.4% from May 13, 1998 through the remainder of the period in which the rates subject to this docket are in effect. This bifurcated ROE reduction is required by the Commission's determinations in the related

60 See General Counsel's Brief on Exceptions at 18. PUC DOCKET NO. 16705 Second Order on Rehearing Page 30 oft 55 SOAH DOCKET NO. XXX-XX-XXXX

EGS Service Quality proceeding (Docket No. 18249), which concluded that the ROE ultimately authorized in this docket (Docket No. 16705) would be reduced permanently by 60 basis points from the date refunds become effective in this docket "through the effective date of [the final order in Docket No. 18249]."61 After the effective date of the fmal order in Docket No. 18249 (that is, May 12, 1998), the authorized ROE in Docket No. Hi705 is increased by 30 basis points to 11.4%, but the Company must escrow that 30 basis points of ROE. As provided in EGS Service Quality, the Company will be pennitted to retain up to the full amount of the escrowed 30 basis points if it meets certain service quality benchmarks established in that proceeding. 62 If it does not meet those benchmarks, some portion or all of the escrowed amount will be refunded to customers, thus effectively resulting in a minimum ROE of 11.1 %. These ROE reductions are not predicated on a finding that the ALJs erred in recommending the 11.7% ROE. Rather, they are based on the Commission's rulings in EGS Service Quality. Accordingly, new FoF 128B is not a modification to the ALJs' ROE recommendation subject to APA § 2003.049(g), but rather is made to conform the ROE in this docket to the rulings in Docket No. 18249.

Third, the reduction to the Company's authorized ROE also results in a reduction to the ALJs' recommended return on invested capita1. 63 This authorized overall return dollar amount is therefore reduced as reflected on the attached Commission Schedules I and IV. In addition, FoFs 134 and 135 are modified respectively to clarify that only the direct-billed EOI expenses are approved in this docket, and to reflect the adjustment to the overall cost of capital as a result of the Commission's decisions in EGS Service Quality.

6. Amortization Expense

The amortization expense reflected on Schedule I must be decreased to reflect the removal of $9 million in annual amortization expenses related to the AOD discussed in the

61 EGS Service Quality Order on Rehearing at 51 (Ordering Paragraph 3). 62 Id at Ord~ring Paragraph 5. 63 This figure is the corrected amount reflected in Schedules I and IV of the ALJs' June 12, 1998 clarification. The original PFD recommends a slightly higher figure. PFD at 317. PUC DOCKET NO. 16705 Second Order on Rehearing Page 54 of 155 SOAH DOCKET NO. XXX-XX-XXXX

before the next fuel reconciliation. Therefore, EGS is not required to file a fuel reconciliation with the November 1998 rate case, and a good cause exception to the rate case filing requirement is granted accordingly. The SOAR ALJs assigned to the next case will address the procedural issues raised by EGS. Otherwise, EGS- should be prepared to address any other revenue requirement and major rate design issues in the November 1998 rate case. Accordingly, FoFs 96R through 96U are added to clarify this issue.

Finally, EGS has not proposed to recover its rate case expenses or the Cities' rate case expenses in this docket. The question remained whether the Company might attempt to recover these expenses in a future docket. At the Commission's open meeting on July 10, 1998, representatives of EGS committed orally on the record that the Company will not seek to recover Cities' or its own rate case expenses in this proceeding or any future proceeding. Accordingly, a FoF 164 is modified and a new FoF 164A is added to reflect this commitment.

IV. Findings ofFact and Conclusions ofLaw

The section consolidates the FoFs and CoLs contained in both the PFD and SPFD, as modified in accordance with the foregoing discussion. The numbering sequence contained in the PFD is retained; the SPFD FoFs and CoLs are integrated into this sequence by placing them in the proper location and changing the SPFD number to a corresponding numbered and lettered designation. The designation "SFoF" refers to the fmdings in the Supplemental PFD. The references to "Revised PFD" refer to the corrected pages to the PFD filed by the ALJs on June 4, 1998. A. Findings of Fact

1. Entergy Gulf States, Inc. (EGS) is an electric utility serving southeast Texas and south central Louisiana and is one of five wholly-owned operating companies of the Entergy Corporation, an investor-owned public utility holding company headquartered in New Orleans, Louisiana. PUC DOCKET NO. 16705 Second Order on Rehearing Page 79 of 155 SOAH DOCKET NO. XXX-XX-XXXX

Property Insurance Reserve Balance 120. The reasonable and necessary reserve balance in rate base for property insurance should be ($15,572,000).

Other Adjustments to Invested Capital 121. Based on an amortization period ending January 31, 2000, the test year amortization expense for deferred fmancing costs would increase by $5,903,700, and amortization expense for property cancellation loss for River Bend 2 would decrease by $1,365,396, for a net increase in test year amortization of$4,538,304.

122. No expenditures necessary to produce cost savings related to the merger between EGS and Entergy Corporation should be reflected in rate base consistent with the decision to disallow all such costs.

123. From April 1994 through the end of the test year, June 30, 1996, EGS collected $36,205,679 on a total Company basis for post-retirement expenses other than pensions (OPEBs). This amount should not be reduced by EGS' OPEB trust funds, as EGS has not had access to the funds with which to fund rate base.

124. The following are appropriate adjustments to EGS' requested level of invested capital: Accmmt 13 Mo. Ayg. Adjustment Total Level Injuries and Damages ($5,543,000) $643,000 ($4,899,000) Coal Car Maint. Reserve ($4,071 ,000) ($91,000) ($4,162,000) Customer Deposits ($21,510,000) ($g60,000) ($22,370,000) Contractor Retainage ($455,000) 11,000 ($444,000)

Cost of Capital 125. EGS' cost of capital should be based on a capital structure consisting of 48.06% long- term debt, 2.16% QUIPS, 6.52% preferred stock, and 43.26% common equity. PUC DOCKET NO. 16705 Second Order on Rehearing Page 83 of 155 SOAH DOCKET NO. XXX-XX-XXXX

Employee Pensions and Benefits 142. Total electric pension expense should reflect a 3.5% assumed salary escalation factor, an eight percent discount rate, and an adjustment to reflect the declining employee levels through January 1997.

143. EGS' reasonable and necessary pension expense through January 1997 is ($3,161,011). (See Revised PFD.)

144. Post-retirement benefits other than pension should be $8,800,267 for total electric. This includes a medical cost trend rate of 7.9%, an eight percent discount rate, and employee levels through January 1997. It is not reasonable to permit a utility to recover estimated costs that exceed by any large degree the actual costs experienced in the test year. The $8.8 million level of expense reasonably approximates EGS' test year OPEB expense.

Production Operation and Maintenance Expense

145. EGS included $136,327,381 in production O&M expense, of which $51,491,665 relates to fossil plants. Production O&M expense for its Big Cajun II Unit 3 plant should be $6,428,935, which amounts to a $5,921,024 reduction from EGS' requested O&M expense for this plant. Using EGS' revised figures based on the FERC Form 1 methodology achieves a reasonable total fossil plant O&M expense of$45,570,641.

Insurance Expense 146. EGS' reasonable insurance expense is $1,651,321 per year for current losses. With regard to current losses, EGS should accrue only enough each year to cover typical storm damage. (See Revised PFD.) PUC DOCKET NO. 16705 Second Order on Rehearing Page 84 of 155 SOAH DOCKET NO. XXX-XX-XXXX

147. Any reduction to the reserve fund occurring after the test year should not be considered in this case because EGS did not prove a reasonable post-test-year level for its existing reserve fund or that the amount expended in 1997 to reduce the fund was prudent or appropriate. Reserve fund levels following the test year in this case can be addressed in EGS' November 1998 rate filing when all parties will have the opportunity to evaluate the reasonableness of changes to the insurance reserve fund.

Mfiliate Expenses 148. Under PURA § 11.003(2), a utility's affiliates include any entity owning five percent or more of a utility and any entity in which the holding company has a five percent ownership interest. Accordingly, Entergy Service, Inc. (ESI) and Entergy Operations, Inc. (EOI), subsidiaries of Entergy Corporation, are EGS' affiliates. Entergy Services, Inc. provides numerous services ranging from administrative functions to providing fuel supplies to Entergy's various affiliates. Entergy Operations, Inc. is responsible for the management, operation, and support of the five nuclear generating units owned by the Entergy operating companies.

149. EGS provided evidence of ESI expenses based on the total of all expenses charged. Neither proof by an aggregate finding as to total expenses nor total expenses for that affiliate is viable in this docket--because so many services are provided by ESI, the quantity and diversity of these costs is enormous and involve thousands of items billed during the test-year period. For this reason, EGS must provide evidence of the reasonableness and necessity of its affiliate expense in strict compliance with Section 36.058 of PURA. That is, it must provide evidence supporting the reasonableness and necessity of these expenses by class of costs. It failed to do this. Appendix6

PUC Docket No. 39896, Hearing on the Merits Transcript: Excerpts of Direct and Cross---Examination of ETI Witness Shawn Corkran SOAH DOCKET NO. XXX-XX-XXXX PUC DOCKET NO. 39896

APPLICATION OF ENTERGY ) STATE OFFICE OF TEXAS, INC., FOR AUTHORITY) TO CHANGE RATES ) AND RECONCILE FUEL COSTS, ) AND OBTAIN DEF~~RED ) ACCOUNTING TREATMENT ) ADMINISTRATIVE HEARINGS

HEARING ON THE MERITS Thursday, April 26, 2012

BE IT REMEMBERED THAT at 9:00a.m., on Thursday, the 26th day of April 2012, the above-entitled matter came on for hearing at the State Office of Administrative Hearings, William P. Clements, Jr. Building, 300 West 15th Street, Room 404, Austin, Texas, before THOMAS H. WALSTON, STEVEN D. ARNOLD AND HUNTER BURKHALTER, Administrative Law Judges, and the following proceedings were reported by Lou Ray, Kim Pence and Aloma Kennedy, Certified Shorthand Reporters.

Volume 3 Pages 472 - 718 Page 567

2 THURSDAY, APRIL 26, 2012 3 (1:00 p.m.) 4 JUDGE BURKHALTER: Okay. We're back on 5 the record after our lunch break. 6 Mr. Neinast, Mr. Olson? 7 MR. OLSON: Yes, sir. The Company 8 calls -- 9 JUDGE BURKHALTER: Call your next witness. 10 MR. OLSON: -- Shawn Corkran. 11 JUDGE BURKHALTER: Hello, Mr. Corkran. 12 How are you? 13 MR. CORKRAN: Good. 14 JUDGE BURKHALTER: Would you raise your 15 right hand, please? 16 (Witness Corkran sworn) 18 (CONTINUED) 20 having been first duly sworn, testified as follows: 22 BY MR. OLSON: 23 Q Mr. Corkran, please state your name and title. 24 A My name is Shawn Burr Corkran, and my title is 25 director of transmission and distribution operations for

KENNEDY REPORTING SERVICE, INC. 512.474.2233 Page 568

2 Q Okay. Do you have in front of you a stack of 3 paper entitled ETI Exhibit No. 25? 4 A I do.

5 Q And can you identify that for the record?

6 A Yes, this is the direct testimony and exhibits 7 as filed. 8 Q Okay. And do you also have in front of you ETI 9 Exhibit 48?

10 A Yes, I do.

11 Q And can you identify that for the record,

12 please?

13 A Yes, this is rebuttal testimony and exhibits

14 that I filed.

15 Q Okay. Was the direct and rebuttal testimony 16 and exhibits prepared by you or under your supervision?

17 A Yes, sir.

18 Q Do you have any corrections to the testimony or 19 exhibits at this time?

20 A I do not.

21 Q If I were to ask you the same questions today, 22 would your answers be the same?

23 A Yes, sir. 24 MR. OLSON: Your Honor, at this time, I 25 move to admit ETI 25 and 48.

KENNEDY REPORTING SERVICE, INC. 512.474.2233 Page 569

1 JUDGE BURKHALTER: Any objection? 2 (No response) 3 JUDGE BURKHALTER: They're admitted. 4 (Exhibit ETI Nos. 25 and 48 admitted) 5 MR. OLSON: I pass the witness. 6 JUDGE BURKHALTER: Mr. Mack? 7 MR. MACK: Yes, Your Honor. Thank you. 9 BY MR. MACK: 10 Q Good afternoon, Mr. Corkran. My name is 11 Stephen Mack. I have a few questions for you about the 12 1997 ice storm that Entergy is requesting recovery from 13 customers. Okay? 14 A Okay. 15 Q But before we get to that, I want to talk a 16 little bit about an order you reference in your rebuttal 17 testimony, and that's the order in Docket 18249. Do you 18 recall referencing that order? 19 A Yes, I do. 20 Q And Docket 18249 was a case established by the 21 Commission to address the service quality issues of 22 Entergy Gulf States. Isn't that right? 23 A That's my understanding. 24 Q And in that case, the Commission ultimately 25 determined that the quality of Entergy's electric

KENNEDY REPORTING SERVICE, INC. 512.474.2233 Page 570

1 service to its customers was poor. Isn't that right? 2 A Yes; I understand they identified deficiencies. 3 Q Okay. So in order to remedy the Company's 4 service quality issues, the Commission ordered an 5 incentive program to encourage the Company to fix its 6 problems. Isn't that right? 7 A By "incentive program," are you referring to 8 the 60 bases point reduction and then the ability to 9 limit some of that? 10 Q There was -- yeah, we'll get to that, but there 11 was an incentive plan, wasn't there, ordered as part of 12 that case? And if it helps you, I can bring you a copy 13 of the order and point you to the page, if you'd like. 14 A Okay. Yes, sir, I'd like to see that just to 15 remind me and refresh me. 16 JUDGE BURKHALTER: And, Mr. Corkran, I'm 17 having a hard time hearing you. 18 WITNESS CORKRAN: Okay. 19 JUDGE BURKHALTER: Thank you. 20 MR. MACK: May I approach the witness? 21 JUDGE BURKHALTER: Yes. 22 Q (BY MR. MACK) And I'm directing you to Page 28 23 of the Final Order on Rehearing in Docket No. 18249. 24 Okay? 25 A Okay.

KENNEDY REPORTING SERVICE, INC. 512.474.2233 Page 571

1 Q And could you just -- and basically what it 2 says is, 11 The Commission concludes that the Company's 3 service quality must be improved. The following 4 incentive plan lays out the remedies to help EGS achieve 5 such improvements. 11 Isn't that correct? 6 A Yes, that's correct.

7 Q And that's the incentive plan I'm referring to. 8 A Okay. And I'm familiar with that, yes, sir.

9 Q Okay. And I think you just mentioned as part 10 of that incentive plan the Commission ordered a 11 reduction to Entergy's ROE. Is that right? 12 A That's my understanding. 13 Q And if Entergy met some of its some of the 14 goals in this order, it could earn some of that back. 15 Isn't that right? 16 A Yes, sir. That's what I understand. 17 Q All right. But you understand that this 18 incentive program was only meant to fix the problem of 19 Entergy's service quality. Is that right?

20 A Yes. As I understand, it was focused on a 21 number of areas of service quality that touched into the 22 reliability areas, call center performance. There were 23 several areas in that service quality area.

24 Q And nothing in this order determined who should 25 be responsible for paying for the damage and outages

KENNEDY REPORTING SERVICE, INC. 512.474.2233 Page 572

1 caused by the service quality issues. Isn•t that right? 2 A I•m not aware, no. 3 Q Are you aware whether the order addressed the 4 1997 ice storm?

5 A I•m aware that it was referenced in some of the 6 findings, but I don•t know specifically when you say 7 11 addressed 11 what you mean by 11 addressed. 11 I mean, I 8 understand it was referenced in the order and in the 9 project. 10 Q And you said you read the order and you•re 11 familiar with it? 12 A I have read it, yes. 13 Q Well, one issue that the ALJs and the 14 Commission will have to address in this case is who 15 should be responsible for paying for the damage caused 16 by the 1997 ice storm. Isn•t that right?

17 A Yes, I believe so.

18 Q And in this order that you reference in your 19 rebuttal testimony, I believe the Commission found that 20 the damage caused was greatly exacerbated by the 21 Company•s service quality issues. Isn•t that right? 22 A That•s -- I understand that finding, yes. 23 Q And the expense we•re talking about for this 24 1997 ice storm in this case is 13 million?

25 A That•s correct.

KENNEDY REPORTING SERVICE, INC. 512.474.2233 Page 573

1 Q And that's what the Company is requesting 2 recovery for from its customers? 3 A Yes. 4 Q And I believe it's your position in the 5 rebuttal that even though the Company's service quality 6 issues was a major factor in the number and duration of 7 outages, it's the customers that should have to pay 8 100 percent of these costs. Is that right?

9 A That's my position, yes. 10 Q Now, since this case, has Entergy improved its 11 quality of service? 12 A Yes, sir, we have. 13 Q So would it be true that the expenses incurred 14 ln the 1997 ice storm, if that same storm were to happen 15 today, would not be as great? 16 A I'm not certain. I mean, you know, the finding 17 of fact that was in the docket indicated that probably 18 would be the case. 19 Q Okay. And if we can rely on that finding of 20 fact of the Commission to be accurate, if the same storm 21 were to occur now or in the future, the expense level 22 wouldn't be as great. Is that right? 23 A I mean, it's difficult to say. You know, there 24 was a lot of information given with respect to 25 vegetation in particular exacerbating the issue, but I'm

KENNEDY REPORTING SERVICE, INC. 512.474.2233 Page 574

1 also aware that we had icing in the range of one to 2 three inches, which was very significant and exceeded 3 our design criteria and also exceeded the design 4 criteria of the NESC, the National Electric Safety Code. 5 So, yes, while there were things that did 6 exacerbate the damage, it's difficult for me to say 7 that, you know, it would be -- you know, I can't tell 8 you how much worse. I understand it exacerbated it and 9 made it somewhat worse, but it's difficult to say.

10 Q But it's your testimony that Entergy has 11 greatly improved its quality of service issues since

12 that case? 13 A We have.

14 Q All right. Are you aware of a Company witness

15 named Gregory Wilson?

16 A Yes, I'm aware of the name.

17 Q And in this case, I'll submit to you he 18 performs a study to estimate an annual level of expense 19 for projected storms. Are you aware of that?

20 A Yes.

21 Q Okay. And to the extent he were to include the 22 full amount of the 1997 ice storm in his analysis, that 23 would not be correct, would it, since the Company has 24 improved its service quality issues -- quality of 25 service issues? I'm sorry.

KENNEDY REPORTING SERVICE, INC. 512.474.2233 Page 575

1 A I'm not sure I understand your question. Help 2 me understand the question. 3 Q All right. 4 A Are you saying that his analysis is based on 5 the performance from the early --

6 Q Do you know whether he has included in his 7 analysis for estimating future storms the full amount of 8 the 1997 ice storm?

9 A I really do not know. I'm aware that he 10 testified in this case, but I'm not familiar with his 11 testimony. I mean, you know, particularly I was focused 12 on the costs associated with the recovery and, you know, 13 how they -- how they really tied to what we saw in the 14 field. I'm not real familiar with Mr. Wilson's 15 testimony -- 16 Q All right. I think I put ln 17 A -- in what he proposed.

18 Q I think I put in front of you an excerpt of his 19 testimony. 20 A Okay. 21 Q Do you have that? 22 A I do. 23 MR. MACK: And this has not been admitted 24 into evidence yet, but I expect it will be tomorrow by 25 Entergy.

KENNEDY REPORTING SERVICE, INC. 512.474.2233 Page 576

1 JUDGE BURKHALTER: So you're just offering 2 this as a demonstrative? 3 MR. MACK: Yes. 4 Q (BY MR. MACK) And on Page 7 of his testimony, 5 Lines 15 and 16, he recommends an amount for annual 6 expected losses of 4.89 million. Is that right? 7 A Yes. On Lines 15 and 16? 8 Q Yes. 9 A Yes, that's the number I see. 10 Q Okay. And on Lines 19 through 21, he says he 11 calculates that number "using a Monte Carlo simulation 12 run on the loss history," which he references as being 13 on Exhibit GSW~3. Do you see that? 14 A Yes, I see the statement. 15 Q Okay. And can you turn the page to Exhibit 16 GSW-3? And can you verify for us that the 1997 ice 17 storm was included in his analysis? 18 A I can't verify it. I see a large number there 19 of similar magnitude to the 13 million. 20 Q And that large number has been trended to 21 increase quite a bit, hasn't it? 22 A Yes, it has. 23 MR. MACK: I pass the witness. 24 JUDGE BURKHALTER: Mr. Nortey? 25 MR. NORTEY: No questions, Your Honor.

KENNEDY REPORTING SERVICE, INC. 512.474.2233 Page 577

1 JUDGE BURKHALTER: Ms. Ferris? 2 MS. FERRIS: Yes, Your Honor. Thank you. 3 Can I have a moment? Because Mr. Mack covered my 4 questions. 6 BY MS. FERRIS: 7 Q Good afternoon, Mr. Corkran. 8 A Good afternoon. 9 Q I'm going to try not to duplicate Mr. Mack's 10 efforts. 11 Does a successful restoration effort for a 12 given storm mean that all costs related to the storm 13 restoration effort were necessarily prudent? 14 A Let's see. You're asking if a successful 15 restoration means that the costs were prudent, 16 necessary? 17 Q Does a successful restoration effort for a 18 given storm mean that all the -- all the costs related 19 to that storm were prudent necessarily? 20 A I mean, I'm not sure. I can't speak to the 21 definition of "prudency," where it would fall. 22 Q Fair enough. 23 I wanted to ask you a little bit about 24 that order from the Docket 18249 that Mr. Mack asked you 25 about.

KENNEDY REPORTING SERVICE, INC. 512.474.2233 Page 578

1 MS. FERRIS: May I approach, Your Honor? 2 JUDGE BURKHALTER: Yes. 3 MS. FERRIS: I have an excerpt from the 4 hearing, and I will not be offering this as evidence 5 because it will speak for itself. It's merely a 6 demonstrative. 7 A Okay. Thank you. 8 Q (BY MS. FERRIS) Could you turn to Page 18 of 9 the order on.rehearing for Docket 18249? 10 A Okay. 11 Q There is a sentence that begins at the very end 12 of the third line from the bottom, and it continues to 13 the top of the next page. Could you read that sentence 14 for us, please? It begins with the word "While." 15 A The sentence reads, "While Company's initial 16 efforts to mobilize and deploy additional nonEGS 17 personnel were slow and caused concern, vegetation 18 management failures greatly aggravated the situation." 19 Q Thank you. And just above, I guess this would 20 be three lines down in the middle of the line. There's 21 another sentence that begins with the word "A major," 22 could you read that sentence? 23 A Yes. The sentence reads, "A major cause of the 24 outages during the storm were broken or bowed ice-laden 25 tree limbs overhanging the wires."

KENNEDY REPORTING SERVICE, INC. 512.474.2233 Page 579

1 Q Further down the order states that "The 2 Company's failure to clear the limbs before the storm 3 was a major factor in the number and duration of the 4 outages experienced by customers." Is that right? 5 A Yes 1 that's correct. That's what it says. 6 Q Thank you. Did the cost to restore the system 7 after the 1997 ice storm 1 was it increased as a result 8 of EGI's imprudence? 9 A Imprudence? 10 Q Or was it -- let me rephrase. Were the costs 11 of the 1997 ice storm 1 to recovery it 1 were those costs 12 increased due to the state of the vegetation management? 13 A My understanding is that was a finding 1 was 14 that it did exacerbate the storm damage.

15 Q Did the Company or excuse me -- has the 16 Company made any attempt to quantify the extent to which 17 restoration costs were increased as a result of the 18 state of their vegetation management?

19 A Not that I'm aware of. 20 Q Okay. I want to shift gears a little bit for 21 you. Let's turn to Page 12 and 13 of your rebuttal 22 testimony/ please. Are you there? 23 A Let's see. Okay. Yes 1 I'm there. 24 Q Okay. On this section of your testimony/ you 25 address Dr. Szerszen's recommendations with regard to

KENNEDY REPORTING SERVICE, INC. 512.474.2233 Page 579

1 Q Further down the order states that ''The 2 Company's failure to clear the limbs before the storm 3 was a major factor in the number and duration of the 4 outages experienced by customers.'' Is that right?

5 A Yes, that's correct. That's what it says. 6 Q Thank you. Did the cost to restore the system 7 after the 1997 ice storm, was it increased as a result 8 of EGI's imprudence?

9 A Imprudence? 10 Q Or was it -- let me rephrase. Were the costs 11 of the 1997 ice storm, to recovery it, were those costs 12 increased due to the state of the vegetation management? 13 A My understanding is that was a finding, was 14 that it did exacerbate the storm damage. 15 Q Did the Company or excuse me -- has the 16 Company made any attempt to quantify the extent to which 17 restoration costs were increased as a result of the 18 state of their vegetation management?

19 A Not that I'm aware of. 20 Q Okay. I want to shift gears a little bit for 21 you. Let's turn to Page 12 and 13 of your rebuttal 22 testimony, please. Are you there? 23 A Let's see. Okay. Yes, I'm there.

24 Q Okay. On this section of your testimony, you 25 address Dr. Szerszen's recommendations with regard to

KENNEDY REPORTING SERVICE, INC. 512.474.2233 Appendix?

PUC Docket No. 39896 Hearing on the Merits Transcript: Excerpts re. Optional Completeness Page 68

1 Q Okay. And you've seen this before. Correct?

2 A Yes, I have. Well, Irve not seen this exhibit,

3 but I've seen the full 10-K.

4 Q You've seen the full 10-K. And the full 10-K 5 was filed in roughly, what was it, March or April of

6 this year?

7 A Yeah; in the first quarter~

8 Q Right. And the 10-K is a report that the .9 parent corporation makes each year on its financials. 10 Is that correct?

11 A That is correct.

12 Q And included in these 10-K financials are a 13 report or a summary of each operating company, including 14 Entergy Texas, Inc. Correct?

15 A Yes.

16 Q And do·you participate in putting this 17 together, sir?

18 A I have reviewed what's in here. It's usually 19 put together based upon facts known about the Company 20 and then sent to my review to see if it is accurate. /

21 Q Okay. Fair enough.

22 MR. LAWTON: And at this time, Your Honor, I I· 23 I'd offer Cities Exhib~t B.

24 JUDGE WALSTON: Any objection?

25 MR. LAWTON: 7; 7. Excuse me.

KENNEDY REPORTING SERVICE, INC. 512.474.2233 I I Page 69

1 MR. WREN: No objection, Your Honor. We'd

2 reserve optional completeness.

3 JUDGE WALSTON: Cities Exhibit 7 is

4 admitted.

5 (Exhibit Cities No. 7 admitted)

6 Q (BY MR. LAWTON) Okay. Now; is Entergy Corp --

7 and keep that exhibit with you. Keep it handy. Okay,

8 sir?

9 A I will.

10 Q Is Entergy Corp -- as seen from the president,

11 Entergy Texas, Inc., is Entergy Texas, Inc. a growing

12 company?

13 A It has been slowly growing.

14 Q .It has been slowly growing?

15 A Slowly growing.

16 Q So your load is growing each year?

17 A. The load has well, there has been some years 18 when load did not increase very much, but overall on the

19 average since I became president, it has grown.

20 Q Okay. And so there's a difference when I say

21 load and sales, I guess. Do you understand that?

22 A Let's talk -- good point. There's energy,

23 ~hich is the sales, the megawatt-hours that we sell, and

24 theie•s also the need for additional resources for

25 reliability, which would be the capacity that we would

KENNEDY REPORTING SERVICE, INC. 512.474.2233 Page 183

1 that time. Is that accurate?

2 A That's correct.

.3 Q All right. And ETI's corporate credit ratings 4 remain the same, even though that settlement resulted 1n

5 a lower than requested revenue requirement and an ROE

6 and none of the alternative ratemaking mechanisms that

7 ETI~had proposed in that case. Correct?

8 A Yes.

9 MS. GRIFFITHS: I need to move for the

10 admission of TIEC -- let's see -- Exhibits 9 and TIEC

11 Exhibit 8. And I think I've already asked for 6 and

12 7 -- or I did not ask for 6 but just for 7.

13 JUDGE ARNOLD: Six has already been

14 admitted.

15 MS. GRIFFITHS: Okay. I would ask for the

16 admission of both of them, Your Honor.

17 MR. OLSON: With respect to 8 and 9, just

18 reserve optional completeness.

19 JUDGE ARNOLD: Okay. Seven, 8 and 9 will I I be admitted. I think 9 is subject to optional 20

21 completeness.

22 (Exhibit TIEC Nos. 7, 8 and 9 admitted)

23 Q (BY MS. GRIFFITHS) Could you turn to Page 35

24 of your testimony. Okay. Now, on Page 35 of your

25 testimony, you testify regarding the fact of ETI's

KENNEDY REPORTING SERVICE' INC. 512.474.2233 Page 282

1 MS. CYR: Your Honor, no objection to 2 exhibit :..._ I'm trying to find Exhibit 9.

3 JUDGE BURKHALTER: Nine is the --

4 MS. CYR: No objection -- well, Your 5 Honor, generally we don't have court opinions as an 6 admitted exhibit, but -- I mean, we don't have an 7 objection if Your Honors want to have them, but counsel 8 normally cites --

9 JUDGE BURKHALTER: I understand~ We can 10 take notice of it and -- 11 MS. FERRIS: Your Honor, actually, I also, 12 just for you notice as well, the last page'·is the 13 Supreme Court status sheet. So it's one page in 14 addition to the case law. I meant to point that out 15 earlier. 16 JUDGE BURKHALTER: Well, I tell you what, 17 if there's no objection to it, I'll go ahead and admit 18 it as an exhibit. I agree we can take notice of it, 19 but -- so 9 is admitted. 20 (Exhibit OPC No. 9 admitted)

21 MS. CYR: Your Honors, as to 10, the 22 highly sensitive, we will want Your Honors -- what

23 counsel has provided is the actual response, but there 24 · is the question to be asked, and we would like for

25 ·optional completeness to provide the question that was

KENNEDY REPORTING SERVICE, INC. 512.474.2233 Page 283

1 actually asked and then the response thereto.

2 MS. FERRIS: Your Honor, I actually have 3 the question and I could offer that as lOA if Entergy 4 would prefer.

5 MS. CYR: If I can just confirm that 1s 6 our response.

7 MS. FERRIS: This is the question itself.

8 MS. CYR: With the --

9 MS. FERRIS: With the Addendum 1.

10 MS. CYR: Okay. Together with the highly 11 sensitive 12 MS. FERRIS: Yes.

13 JUDGE BURKHALTER: Why don't we just 14 combine it and make it into -- make· it all 10? Well,

15 no, let's don't do that, because we've got the stuff in 16 the envelope. I think it would probably be cleaner to 17 make it lOA.

18 MS. CYR: So with that, Your Honor, we 19 would have no objection to

20 JUDGE BURKHALTER: All right. So I'm

21 hearing no objection to. 10 and lOA. So they are both

22 admitted. 23 (Exhibit OPC Nos. 10 and lOA admitted.

24 MS. CYR: No objection to OPC 11.

25 JUDGE BURKHALTER: It's admitted.

KENNEDY REPORTING SERVICE, INC. 512.474.2233 Page 944·

1 MS. FERRIS: Okay.

2 JUDGE ARNOLD: I've looked at 18 where 3 there are dark blackouts. They're shaded. I don't know 4 if something is supposed to go in there or not. And I 5 sure as heck can't tell from 18 whether there is

6 anything there.

7 MS. FERRIS: Well, can I ask you this 8 question, ·Your Honor: This is an RFI response provided 9 by the company, sponsored by this witness. The company 10 has provided it to us in response to the question·that 11 asks for their forms. And to the extent that we-don't 12 understand whethe~ something is missing or not, it would 13 .be up to the company to provide optional completeness go 14 that. This is an admission by a party-opponent.

15 JUDGE ARNOLD: If I can see the 16 originally-supplied I .don't know what the company 17 gave you in discovery. I do know that sometimes when 18 you run something through a copy machine, it comes out 19 black when it's highlighted.

20 MS. FERRIS: Your Honor, I'll be glad to

21 pull it up on the interchange right now go my iPad. I 22 .have the complete FERC Form 1 and·FERC Form 60 pulled up

23 right now, if you would like to review that document. 24 You go onto Page 201 to see that there. are shades there 25 on the blank form and that should resolve any

KENNEDY REPORTING SERVICE, INC. 512.474.2233 Page 945

1 authentication questions that are involved. 2 Your Honor, would you like to see? 3 JUDGE ARNOLD: I apologize. I'm just 4 trying to find something go my computer, and I've lost 5 it. 6 Just found it. Are you saying this is go 7 the interchange? 8 MS. FERRIS: The responseq -- and I 9 actually have go the FERC website, their Form 60 10 document, the pdf form. And I could give you the link 11 or I could let you use my iPad. 12 JUDGE ARNOLD: Give me the link. 13 MS. FERRIS: www.FERC.gov/docs-filing\ 14 forms -- 15 JUDGE ARNOLD: Back slash? 16 MS. FERRIS: -- or slash forms 17 /form-60.pdf. 18 JUDGE ARNOLD: That's the same thing as 19 18B? 20 MS. FERRIS: Yes. And what I was saying,

21 he was say1ng -- if we look go Page 201, which is the

22 . one with the shading, the first one with shading, we can 23 see that the form has shading the same place that we

24 have shading, the 18 has shading.

25 JUDGE ARNOLD : No. I understand that. I

KENNEDY REPORTING SERVICE, INC. 512.474.2233 Page 946

1 don't know if something is·supposed to go in there or

2 not.

3 MS. FERRIS: Your Honor, if the form had 4 shading, it indicates you're not supposed to fill it ln 5 go your 10 -~ I mean, you don't fill in go shading. I 6 can show you an example. On Page 102 of the form go 7 Line 68 there is a title in black, "Current and Accrued 8 Liabilities." It's shaded in. And then things that 9 fall below it are not shaded in, because that's where 10 you fill in.

11 JUDGE ARNOLD: Given the fact that this 12 has been supplied in response to a discovery request, 13 I'm going to go ahead and let it in. If the company 14 believes there is something hidden in the blacked-out 15 areas, they can supply it.

16 MR. NEINAS'J;': And also, Your Honor, if I 17 may ask optional completeness?

18 JUDGE ARNOLD: Yes.

19 MR. NEINAST: Thank you.

20 JUDGE ARNOLD: It's admitted.·

21 (Exhibit OPC No. 18 admitted)

22 MS. FERRIS: Thank you, Your Honor.

23 Q (BY MS. FERRIS) Now I want to go back to your

24 dir~ct testimony, Ms. Tumminello. You have your Exhibit . \ I 25 SBT-8?

KENNEDY REPORTING SERVICE, INC. 512.474.2233 Page 968

1 A That's correct.

2 MR. MACK: Your Honors, Cities move for 3 the admission of Cities Exhibit No. 41.

4 JUDGE WALSTON: Just for clarification, 5 Mr. Mack, is this the entire response? It's not an 6 excerpt? 7 MR~ MACK: That is an excerpt. ·Also 8 attached, or attached with the original was a highly 9 sensitive cost/benefit analysis. 10 MR. McGRATH:. And that is not included in 11 your Exhibit 41? 12 MR.· MACK: Not included in·the exhibit, 13 yes, that's right, what we're offering. 14 MR. McGRATH: No objection, subject to 15 optional completeness. 16 JUDGE WALSTON, Okay. Cities Exhibit 41 17 1s admitted, subject to optional completeness. 18 (Exhibit Cities No. 41 admitted)

19 Q (BY MR. MACK) All right. In this question, r I 20 the City of Rose City asked the company to provide any 21 studies or analysis to support the statement that call 22 options provide the necessary degree of reliability for 23 fuel supply at a lower cost than alternative means. Do

1. 24 you see that? ) 25 A Yes.

KENNEDY REPORTING SERVICE, INC. 512.474.2233 Page 1190

1 ·the expenses are volatile, they're not in the company -- 2 subject to the company's control -- for example, they're 3 not affiliated charges, they're not charges that the 4 company itself has authority over. And a third factor

5 is when the amount of the expenses can be substantial 6 enough that they can actually impair the company's 7 integrity or its financial wholeness.

8 Q So rate case expenses, those impair the 9 company's financial integrity if they're not included in 10 a rider?

11 A Well, I think that they could. I mean, they 12 could hurt it.

13 Q What's that based on?

14 A Well, the fact that. rate case expenses these 15 days are in the many multimillions of dollars. And, in 16 fact, in this case, I guess you're asking for 17 12 million.

18 MR. WILLIAMS: Linda tells me I neglected 19 to offer ETI Exhibit 83. I offer that exhibit at this

20 point.

21 JUDGE WALSTON: Any objection?

22 MR. MACK: Your Honors, Mr. Williams kind 23 of made the insinuation that Schedule A from the last

24 case, Docket 37744, was not -- were not retail numbers.

25 I think we would like to object as far as

KENNEDY REPORTING SERVICE, INC. 512.474.2233 Page 1191

1 optional completeness so that we can provide documents

2 to show that these are retail numbers ..

3 JUDGE WALSTON: Any other objections? All

4 right. Then, Exhibit ETI-83 is. admitted subject to

5 showing of optional·completeness.

6 (Exhibit ETI No. 83 admitted)

7 MR. WILLIAMS: Thank you.

8 Q (BY MR. WILLIAMS) Let me go back to the rider.

9 Are you aware of any Commission ruling indicating that

10 financial integrity is a necessary showing to get a rate

11 case expense rider?

12 A No, I'm not.

13 Q So putting that to one side, the main basis you

14 have for approving of riders is that costs are volatile,

15 costs are beyond the Company's control. Correct?

16 A Those are the main ones. I think the courts

17 have looked at and I think commissions have approved or

18 based their decisions on.

19 Q Also, . when you say· "beyond the control," it• s

20 not the Company is not going to be able to reduce its

21 costs or make those costs smaller by the way of managing

22 them. It's just sort of stuck with them. Correct?

23 A I don't understand your question.

24 Q Well, if there's a cost that you can manage

25 . you_r business in a way to reduce it, in your view that

KENNEDY REPORTING SERVICE, INC. 512.474.2233 Page 1456

1 admiss.ion of Cities Exhibits 43A and 43B.

2 JUDGE BURKHALTER: Any objection?

3 MR. NEINAST: No objections.

4 JUDGE BURKHALTER: They're admitted.

5 (Exhibit Cities Nos. 43A and 43B admitted)

6 JUDGE BURKHALTER: And, Mr. Boehm, you 7 never moved for admission of Kroger 3, 4 and 5. Did you 8 wish to have them admitted?

9 MR. BOEHM: Thank you, Your Honor. Kroger 10 would move for the admission of KRO 3, KRO 4 and KRO 5. 11 JUDGE BURKHALTER: Any objection?

12 MR. NEINAST: No objections.

13 JUDGE BURKHALTER: They're admitted. 14 (Exhibit KRO Nos. 3 through 5 admitted) 15 MR. NEINAST: I do have to go back, Your 16 Honor, I just realized, in optional completeness for 17 43A. 18 JUDGE BURKHALTER: Okay. You have the 19 right to supplement under the rule of optional 20 completeness for 43A.

21 MR. NEINAST: And can I also ask for 43B. 22 Mr. Mack, is there every other page 23 missing in the.-- looks like the ·original sheet 1 and 24 the next one is original sheet 3, 5, as well as 6 ..

25 MR. MACK: I wasn 1 t int'ending to refer to·

KENNEDY REPORTING SERVICE, INC. 512.474.2233 Page 1457

1 them, but I have the --

2 MR-. NEINAST: Optional completeness on

3 both is fine.

4 JUDGE BURKHALTER: All right.

5 Q (By Mr .. Mack) Now I Ms. Talkington, would you

6 agree that this Brazos contrac·t, which has been 7 attached -- has been partially attached -- to Cities

8 Exhibit 43B is a contract that allocates costs on a 12CP

9 basis? 10 A This is the first time I've ever seen this 11 contract, so I could not tell you that without reading 12 the entire thing.

13 Q Okay. Co~ld I direct your attention to what's 14 been Bates stamped page No. TIEC 4-2 BB414? 15 Are you there?

16 A BB414?

17 Q Yes, ma'am.

18 A Okay.

19 Q And the second·paragraph· from the bottom, the

20 second. sentence of that paragraph, could you read that

21 and tell me whether the costs of -- I'm sorry, Entergy's

22 costs are allocated to Brazos based on the 12CP

23 allocation method?

24 A The sentence that starts, "The ETiproduction"?

25 Q Yes.

KENNEDY REPORTING SERVICE, INC. 512.474.2233 Page 1505

l A Yes.

2 Q And we've done that in this case?

3 A Yes.

4 Q Now, let me show you Schedule 041 from the rate

5 filing package. This is in evidence. Let me ask if you 6 can identify the amount of the weather normalization in

7 this case in terms of dollars.

8 A Yes. According to this schedule, base revenues 9 were reduced by 22.4 million. This is the weather 10 adjustment.

11 Q Okay. And other things equal, the utility's 12 earnings would be $22 million higher than they otherwise 13 would be during normal weather on account of the 14 . weather. Correct?

15 A Pretax, yes.

16 Q Okay. Now, let me show you the 10-K for the 17 Company for 2011. This is in evidence already. Let me 18 just point to you the net income for ETI for 2011 and 19 see if you can read that and identify that.

20 A So for Calendar Year 2011 the report shows net

21 income of 80,845,000.

22 Q Okay. And what

23 MR. VanMIDDLESWORTH: May I ask -- because

24 I don't have the 10-K with me.

25 MR. WREN: Oh, I'm sorry.

KENNEDY REPORTING SERVICE, INC. 512.474.2233 Page 1506

1 MR. VanMIDDLESWORTH: I was wondering if I

2 could either see it or know what exhibit it was.

3 MR. WREN: We reserved for optional

4 completeness.

5 MR. VanMIDDLESWORTH: Until we know that 6 it's in the record we would object on asking this

7 witness to recite from'a company document that hadn't 8 been introduced yet.

9 JUDGE WALSTON: I believe the Cities had I I . ~ 10 offered portions of it, and I think the Company had 11 reserved the right for optional completeness.

12 MR. WREN: Correct, Your Honor. I didn't 13 think this would be controversial. The Cities clearly 14 offered the 10-K and I clearly reserved optional 15 completeness.

16 MR. VanMIDDLESWORTH: So are you 17 offering -- so if he wants to offer the full 10-K 1n, 18 then I think that would be appropriate.

19 MR. WREN: I'll be glad to do that. I 20 think that's unnecessary. It burdens the record, but if·

21 that's the wish I can do that.

22 JUDGE WALSTON: Okay.

23 MR. VanMIDDLESWORTH: I may be persuaded · 24 ··otherwise, but if you're crossing him on a page that-

25 hasn't yet been introduced, then I think we would need

KENNEDY REPORTING SERVICE, INC. 512.474.2233 Page 1507

1 to see whether it's something that is appropriate for 2 optional completeness and --

3 MR. WREN: I'll let you reserve on 4 optional completeness.

5 JUDGE WALSTON: I think it would be best, 6 since we have had bits and parts and pieces referred to,

7 I would recommend you go ahead and just offer the whole 8 thing in unless you have some problem with that.

9 MR. WREN: So, Your Honor, then I think 10 this would be ETI Exhibit 98,.because I've reserved 96 11 and 97. 12 JUDGE WALSTON: Okay. Then ETI Exhibit 98 13 will be admitted, and you can get additional copies 14 bring the additional copies later, obviously. 15 (Exhibit ETI No. 98 marked and admitted)

16 MR. WREN: Thank you, Your Honor. The 17 reference in.question is to Cities Exhibit 8 and 7 that 18 include excerpts from the 10-K.

19 JUDGE. WALSTON: Just for our convenience, 20 can you refer us to the page number you were questioning 21 the witness about?

22 MR. WREN: Yes, Your Honor. May I 23 approach the witness?

24 JUDGE WALSTON: Yes.

25 Q (BY MR. WREN) Can you tell me the page number

KENNEDY REPORTING SERVICE,. INC. 512.474.2233 Page 1686

1 there.

2 MR. SMYTH: No.

3 JUDGE ARNOLD: Mr. Neinast?

4 MR. NEINAST: I don't -- no.

5 JUDGE ARNOLD: Doctor, thank you so much. 6 You're excused.

7 WITNESS SZERSZEN: You're welcome. Thank 8 you. 9 JUDGE ARNOLD: And we've reached the time 10 for our afternoon break. Let's come back at 3:35. 11 (Recess: 3:17p.m. to 3:36p.m.) 12 JUDGE ARNOLD: We're back on the record 13 following a break. Mr. Mack, I understand you have some 14 ·matters you want to.discuss. 15. MR. MACK: Yes, Your Honor. Thank you. A 16 couple days ago during the testimony of Mr. Brazell,

17 Entergy introduced ETI's Exhibit 83, which showed

I 18 Schedule A of the Company's rate filing from the last

19 case, and I think he was being asked whether that was a r 20 total Company number or a wholesale number, and we

21 reserved the right of optional completeness on that

22 exhibit.

23 And we'd like to introduce Cities

24 Exhibit 49, which is Schedule A-1, stating that there 25 was not a wholesale class in the filing. The second

KENNEDY REPORTING SERVICE, INC. 512.474.2233 Page 1687

1 page to it is Schedule Q from the same filing showing 2 what Mr. Brazell noted as his bottom-line number there 3 on a retail basis. So we offer Cities- Exhibit No. 49 4 for optional completeness.

5 JUDGE ARNOLD: Any objections?

6 MR. NEINAST: No objections.

7 JUDGE ARNOLD: Admitted.

8 (Exhibit Cities No. 49 admitted)

9 JUDGE ARNOLD: Ms. Ferris --

10 MS. FERRIS: Thank you, Your Honor.

11 JUDGE ARNOLD: -- you're up.

12 MS. FERRIS: Office of Public Utility 13 Counsel calls Nathan Benedict.

14 JUDGE ARNOLD: Pardon me. If I learn how

15 to talk. 16 Mr. Benedict, if you'd raise your right 17 hand, please?

18 (Witness Benedict sworn)

19 JUDGE ARNOLD: Ms. Ferris, you may

20 proceed.

21 MS. FERRIS: Thank you.

KENNEDY REPORTING SERVICE, INC. 512.474.2233 Page 2082

1 Q Okay. I would like to -- do you have in front

2 of you what's been marked as Cities Exhibit 48?

3 A 48? Yes, I do.

4 Q And can you identify that as Attachment 4 to \ 5 the intra-system bill for the test year?

6 A It goes through-- and what's attached here are

7 the coincident peak calculations for the RA version of 8 the intra-system bill from July of '10 through June of 9 I 11.

10 Q And that's Attachment 4. Correct?

11 A It is Attachment 4. That's correct.

12 Q And that's where the responsibility ratios are 13 calculated?

14 A There are two sets of responsibility ratios 15 calculated on that page. Correct.

16 MR. MACK: Your Honor, Cities move for the 17 admission of Cities Exhibit 48.

18 JUDGE ARNOLD: Any objections?

19 MR. WESTERBURG: We would like to reserve -20 optional completeness, Your Honor. t 21 JUDGE ARNOLD: Admitted subject to I 22 optional completeness. 23 (Exhibit Cities No. 48 admitted)

24 Q (BY MR. MACK) Now, could you turn to September

25 of the rate year I'm sorry -- of the test year in the

·KENNEDY REPORTING SERVICE, INC. 512.474 . .2233 Page 2094

1 A If we're talking about the one underneath -- in

2 WET308

3 Q Yes.

4 A -- then I believe that's a 10-year contract.

5 Q The company is asking for the Commission's 6 approval of the Calvin-Carville contract in this docket. 7 Is that right?

8 A I believe that's the case.

9 Q And once the Texas Commission gives ETI or any 10 other company approval .of a purchased power contract, 11 does the Commission ever revoke this approval?

12 A I don't know. I'm not the purchased power 13 expert in this case.

14 Q Okay. I want to turn to another project that's 15 discussed in your rebuttal testimony. On Page -- let me 16 see if I can get the page right this time. I have it. 17 Here we go. Yes, Page 10 of 18, I believe you're 18 discussing Project Code F3PCWE0140. Is that right?

19 A E0140. Okay.

20 Q Do you have that before you marked as OPC

21 Exhibit 35?

22 A Yes, I do. . 23 MS. FERRIS: Your Honor, at·this time we

24 offer OPC Exhibit 35.

25 JUDGE ARNOLD: Any objections?

KENNEDY REPORTING SERVICE, INC. 512.474.2233 Page 2095

1 MR. WESTERBURG: ~o, Your Honor, with 2 reserving optional completeness.

3 MS. FERRIS: Oh, I'm sorry. I would just 4 seek clarification on what you're reserving on, if this 5 is their entire document. This is a one-page document.

6 MR. WESTERBURG: I was just going to 7 confirm that. 8 MS. FERRIS: Okay.

9 MR. WESTERBURG: It looks like it is.

10 MS. FERRIS: Okay. So no reservation 11 needed? 12 MR. WESTERBURG: Well, I haven't been able 13 to look at -- it stops. And so when we look at our 14 book, we'll see if it --

15 JUDGE ARNOLD: Okay; okay.

16 MR. WESTERBURG: I just want to confirm 17 it's an update.

18 JUDGE ARNOLD: He can.reserve optional 19 completeness

20 MR. WESTERBURG: Right. 21 JUDGE ARNOLD: -- if there is anything

22 left of this document. 23 MS. FERRIS: Thank you, Your Honor.

24 JUDGE ARNOLD: It's admitted.

25 (Exhibit OPC No. 35 admitted)

KENNEDY REPORTING SERVICE, INC. 512.474.2233 Appendix 8

Tex. Health Facilities Comm'n v. Charter Medical--Dallas, 665 S.W.2d 446 (Tex. 1984) Page I

665 S.W.2d 446 (Cite as: 665 S.W.2d 446)

Cases

Supreme Court of Texas. Statute requiring administrative agencies to ac- TEXAS HEALTH FACILITIES COMMISSION et company fmdings of fact set forth in statutory lan- al., Petitioner, guage by supporting statement of underlying facts v. requires accompanying statement of underlying facts CHARTER MEDICAL-DALLAS, INC., Respond- only when ultimate fact-fmding embodies mandatory ent. fact-fmding set forth in relevant enabling act; agency may not avoid this statutory requirement by simply rewording its criteria. Vernon's Ann. Texas Civ.St. art. No. C-2478. 6252-13a, § 16(b). Feb. 15, 1984.

[21 Administrative Law and Procedure l5A Appeal was taken from orders of the Health Fa- cilities Commission granting certificates of need to ~486

two hospitals and denying certificate of need for an- other hospital. The 250th Judicial District Court, 15A Administrative Law and Procedure Travis County, Charles D. Mathews, J., sustained the 15ATV Powers and Proceedings of Administrative Commission's order. On appeal, the Austin Court of Agencies, Officers and Agents Appeals, Third Supreme Judicial District, Powers, J., 15AIV(D) Hearings and Adjudications 656 S.W.2d 928, reversed and remanded with in- 15Ak484 Findings structions, and appeal was taken. The Supreme Court, 15Ak486 k. Sufficiency. Most Cited Barrow, J., held that Commission's decision was Cases supported by substantial evidence and was not arbi- trary or capricious. Valid fmdings of fact by administrative agency must be clear and specific. Vernon's Ann.Texas Court of Appeals reversed and trial court af- Civ.St. art. 6252-13a, § 16(b). firmed. 131 Administrative Law and Procedure l5A West Headnotes ~485

[l] Administrative Law and Procedure l5A 15A Administrative Law and Procedure ~486 15AlV Powers and Proceedings of Administrative Agencies, Officers and Agents 15AIV(D) Hearings and Adjudications 15A Administrative Law and Procedure 15Ak484 Findings 15AfV Powers and Proceedings of Administrative Agencies, Officers and Agents 15Ak485 k. Necessity and Purpose. 15AIV(D) Hearings and Adjudications Most Cited Cases 15Ak484 Findings 15Ak486 k. Sufficiency. Most Cited Underlying facts which must accompany finding

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665 S.W.2d 446 (Cite as: 665 S.W.2d 446)

of fact set forth in statutory language may not be 15A Administrative Law and Procedure presumed from findings of conclusional nature. 15AIV Powers and Proceedings of Administrative Vernon's Ann.Texas Civ.St. art. 6252-13a, § 16(b). Agencies, Officers and Agents 15AIV(D) Hearings and Adjudications 141 Administrative Law and Procedure 15A 15Ak484 Findings e:;,486 15Ak486 k. Sufficiency. Most Cited Cases

15A Administrative Law and Procedure 15AIV Powers and Proceedings of Administrative Statement of facts underlying findings set forth in Agencies, Officers and Agents statutory language should relate to material basic facts 15A1V(D) Hearings and Adjudications and should relate to ultimate statutory finding that they 15Ak484 Findings accompany. Vernon's Ann.Texas Civ.St. art. 15Ak486 k. Sufficiency. Most Cited 6252-13a, § 16(b). Cases [71 Health 198H ~242 In general, findings of fact underlying fmding of fact set forth in statutory language must be such that 198H Health reviewing court can fairly and reasonably say that 198HI Regulation in General underlying findings support statutorily required crite- 198HI(C) Institutions and Facilities ria. Vernon's Ann.Texas Civ.St. art. 6252-13a, § 198Hk236 Licenses, Permits, and Certifi- 16(b). cates 198Hk242 k. Proceedings on Applica- [5]Administrative Law and Procedure 15A tion. Most Cited Cases EP486 (Formerly 204kl Hospitals)

15A Administrative Law and Procedure Underlying findings of fact made by Health Fa- 15AIV Powers and Proceedings of Administrative cilities Commission to support its decision to grant Agencies, Officers and Agents certificates of need to two hospitals and deny certifi- 15A1V(D) Hearings and Adjudications cate of need to another hospital satisfied statutory 15Ak484 Findings requirement that fmdings set forth in statutory lan- 15Ak486 k. Sufficiency. Most Cited guage be accompanied by supporting statement of Cases underlying fact where, even though some findings were nothing more than mere recitals of evidence, other fmdings were sufficient from which basic facts Mere recitals of testimony or references to or could fairly and reasonably be determined. Vernon's summations of evidence are improper and do not Ann.Texas Civ.St. art. 6252-13a, § 16(b). satisfy requirement to support fact- findings set forth in statutory language by statement of underlying facts. Vernon's Ann.Texas Civ.St. art. 6252-13a, § 16(b). (8) Administrative Law and Procedure 15A e:;,791 [6) Administrative Law and Procedure 15A ~486 15A Administrative Law and Procedure 15AV Judicial Review of Administrative Deci-

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665 S.W.2d 446 (Cite as: 665 S.W.2d 446)

sions Although substantial evidence is more than a 15AV(E) Particular Questions, Review of mere scintilla, evidence in the record actually may 15Ak784 Fact Questions preponderate against decision of agency and none- 15Ak791 k. Substantial Evidence. Most theless amount to substantial evidence; true test is not Cited Cases whether agency reached correct conclusion, but whether some reasonable basis exists in the record for In applying substantial evidence test to agency's the action taken by the agency. decisions, reviewing court is prohibited from substi- tuting its judgment for that of the agency as to weight Ill] Administrative Law and Procedure 15A of evidence on questions committed to agency dis- ~753 cretion. Vernon's Ann.Texas Civ.St. art. 6252-13a, § 19(e), (e)(5). I 5A Administrative Law and Procedure I 5AV Judicial Review of Administrative Deci- [9)Administrative Law and Procedure 15A sions ~764.1 15AV(D) Scope ofReview in General 15Ak753 k. Theory and Grounds of Ad- I 5A Administrative Law and Procedure ministrative Decision. Most Cited Cases 15A V Judicial Review of Administrative Deci- sions Reviewing court is not bound by reasons given by 15AV(D) Scope of Review in General agency in its order, provided there is valid basis for 15Ak764 Harmless or Prejudicial Error action taken by agency. 15Ak764.1 k. In General. Most Cited Cases [12] Administrative Law and Procedure 15A (Formerly 15Ak764) ~788

Reviewing court may reverse agency decision 15A Administrative Law and Procedure because of absence of substantial evidence only if 15A V Judicial Review of Administrative Deci- such absence has prejudiced substantial rights of liti- sions gant. Vernon's Ann.Texas Civ.St. art. 6252-l3a, § 15AV(E) Particular Questions, Review of 19(e), (e)(5). 15Ak784 Fact Questions I5Ak788 k. Determination Supported [10) Administrative Law and Procedure 15A by Evidence in General. Most Cited Cases ~791 Agency's action will be sustained if evidence is 15A Administrative Law and Procedure such that reasonable minds could have reached con- 15AV Judicial Review of Administrative Deci- clusion that agency must have reached in order to sions justify its action. 15AV(E) Particular Questions, Review of 15Ak784 Fact Questions [131 Administrative Law and Procedure 15A 15Ak791 k. Substantial Evidence. Most ~749 Cited Cases

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66S S.W.2d 446 (Cite as: 665 S.W.2d 446)

!SA Administrative Law and Procedure (Formerly 204kl Hospitals) lSAV Judicial Review of Administrative Deci- sions Substantial evidence supported decision of Health ISA V(D) Scope of Review in General Facilities Commission to grant certificate of need to ISAk749 k. Presumptions. Most Cited two hospitals and to deny certificate of need for an- Cases other hospital. Vernon's Ann. Texas Civ.St. art. 4418h, § 3.10(b)(l). Administrative Law and Procedure 15A E?750 [15] Health 198H ~242 !SA Administrative Law and Procedure !SAV Judicial Review of Administrative Deci- 198H Health sions 198HI Regulation in General lSAV(D) Scope ofReview in General 198Hl(C) Institutions and Facilities 15Ak7SO k. Burden of Showing Error. Most 198Hk236 Licenses, Permits, and Certifi- Cited Cases cates 198Hk242 k. Proceedings on Applica- Administrative Law and Procedure 15A ~788 tion. Most Cited Cases (Formerly 204kl Hospitals) !SA Administrative Law and Procedure lSAV Judicial Review of Administrative Deci- Decision of Health Facilities Commission to sions grant certificate of need for two hospitals and to deny !SAV(E) Particular Questions, Review of certificate of need for another was not arbitrary or lSAk784 Fact Questions , capricious. Vernon's Ann.Texas Civ.St. mt. 62S2-13a, 1SAk788 k. Determination Supported § 16(e)(6). by Evidence in General. Most Cited Cases *448 Jim Mattox, Atty. Gen., Steven L. Martin, Asst. Findings, inferences, conclusions, and decisions Atty. Gen., Austin, Law Offices of Earl Luna, Mary of administrative agency are presumed to be supported Mildord, Dallas, Heath, Davis & McCalla, Dudley D. by substantial evidence and burden is on contestant to McCalla, Austin, for petitioner. prove otherwise; hence, ifthere is evidence to support either affirmative or negative fmdings on specific Wood, Lucksinger & Epstein, Bruce Bigelow, Austin, matter, decision of agency must be upheld. Trotter, Bondurant, Miller and Hishon, Glen A. Reed, Atlanta, Ga., for respondent. 1141 Health 198H E?243 BARROW, Justice. 198H Health This is an appeal from three consolidated orders 198HI Regulation in General of petitioner Texas Health Facilities Commission. The 1981-II(C) Institutions and Facilities orders of the Commission granted certificates of need 198Hk236 Licenses, Permits, and Certifi- to petitioners Healthcare International and Memorial cates Hospital of Garland and denied a similar request made 198Hk243 k. Evidence. Most Cited by respondent Charter Medical-Dallas, Inc. The action Cases of the Commission was upheld by the trial court. The

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665 S.W.2d 446 (Cite as: 665 S.W.2d 446)

court of appeals, with one justice dissenting, reversed stated reason for the court of appeals' decision is that the judgment of the trial court and remanded the cause the Commission's orders contain insufficient under- to the Commission for further proceedings. Charter lying (basic) facts to support the ultimate findings or Medical-Dallas, Ins. v. Texas Health Facilities Com'n, conclusions of the Commission on the three applica- 656 S.W.2d 928. We reverse the judgment of the court tions. The court of appeals held that the absence of of appeals and affirm the judgment of the trial court. underlying facts rendered the Commission's ultimate findings arbitrary and capricious. The court of appeals The Texas Health Facilities Commission is the remanded all three applications to the Commission Texas administrative agency charged with governing since the Commission's denial of Charter Medical's the availability of health care facilities in this state. request may have been based upon the granting of the See Health Planning and Development Act, other two applications. Tex.Rev.Civ.Stat.Ann. art. 4418h, §§ 1.01-6.04 (HPDA). The Commission's primary function is to In reaching its decision, the court of appeals set prevent the development of new health care facilities forth a lengthy recitation of the facts and Commission with services that are not needed or that cannot feasi- rules applicable to this appeal; we refer the reader to bly be developed, staffed, or operated. This function is that opinion for a more complete statement on these performed primarily by the Commission's admin- matters. We limit our discussion to the specific points istration of a state certificate of need program. Id., § properly before this Court and upon which we base 2.06. Under this program, a person proposing to es- our decision. tablish or modify a health care facility must obtain a certificate ofneed from the Commission. Id., § 3.01. This administrative appeal arises under the au- thority of the HPDA in conjunction with the Texas *449 In December of 1979 and January of 1980, Administrative Procedure and Texas Register Act. the parties to this appeal filed applications seeking Tex.Rev.Civ.Stat.Ann. rui. 6252-l3a (APTRA). Un- certificates of need for proposed projects. Memorial der the legislative scheme of the APTRA, the manner sought permission to convert a portion of its general of review of agency actions is governed by the ena- hospital into psychiatric use; Healthcare proposed to bling statute in the area under adjudication. APTRA, § construct a new facility, "Green Oaks;" and Charter 19(e); Southwestern Bell Telephone Co. v. Public Medical applied for permission to construct "Dallas Utility Commission, 571 S.W.2d 503, 508 (Tex.l978). Psychiatric Hospital." All three projects were planned Section 1.04 of the HPDA incorporates the APTRA for the area encompassing north Dallas County and "except to the extent inconsistent with" the HPDA. Collin County. These three applications were con- Therefore, the scope of judicial review in this case solidated by the Commission, and a hearing was held must be discerned from both the HPDA and the AP- to determine whether one or more of the applications TRA. should be granted. The Commission rendered its or- ders in October of 1980 granting certificates of need to In determining the role of the reviewing court, we Healthcare and Memorial and denying the application must first ascertain the legislative standards to which of Charter Medical. the Commission must adhere in making its decisions, i.e., what fmdings and conclusions the Commission The trial court rendered judgment sustaining the must make before it properly may grant a certificate of orders of the Commission as to all three applications. need. Subsection 3.10(a) of the HPDA requires the This judgment was reversed by the court of appeals Commission to promulgate rules establishing criteria and the cause remanded to the Commission. The to determine whether an applicant is to be issued a

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665 S.W.2d 446 (Cite as: 665 S.W.2d 446)

certificate of need for a proposed project. Subsection teria may be found primarily in subsections 3.1 O(b) sets forth five specific factors that must be 513.5, 513.11, 513.13, and 513.17 ofTitle 25 included among the Commission's criteria: of the Texas Administrative Code. The non-mandatory factors are scattered Criteria established by the commission must in- throughout the other subsections of section clude at least the following: 513. See Tex. Health Fac. Comm'n, 25 Tex.Admin.Code §§ 513.1-513.21 (May 1, 1982) (compiling Tex. Health Fac. Comm'n (1) whether a proposed project is necessary to Rules 315.19.01.010 to .130, 3 Tex.Reg. meet the healthcare needs of the community or 1361-64 (1978), as amended 4 Tex.Reg. population to be served; 2949-50 (1979)).

(2) whether a proposed project can be adequately Under these broad, general categories are ap- staffed and operated when completed; proximately fifty-four subcategories or factors that the Commission considers relevant to its decision on the (3) whether the cost of a proposed project is ultimate factors. These subcategories are referred to economically feasible; by the court of appeals as "intermediate facts." The fmdings of the Commission on the totality of these (4) if applicable, whether a proposed project criteria form the basis of the Commission's decision to meets the special needs and circumstances for rural grant or deny a certificate of need. "An applicant or · or sparsely populated areas; and party who is aggrieved by an order of the commission ... is entitled to judicial review under the substantial (5) if applicable, whether the proposed project evidence rule." HPDA, § 3.15. meets special needs for special services or special facilities. Having determined the prerequisites to agency action under the HPDA, we look to the APTRA to Thereafter, subsection 3.10(c) contains six factors determine its guidelines for judicial review. Section that the Commission "shall consider" in developing its 16(b) of the APTRA states: "A fmal decision must criteria. include fmdings of fact and conclusions of law, sep- arately stated. Findings of fact, if set forth in statutory The Commission has promulgated "General Cri- language, must be accompanied by a concise and teria for Use in Certificate ofNeedReviews"*450 that explicit statement of the underlying facts supporting incorporate both the factors required by subsection the fmdings." The exact marmer of judicial review is 3.1 O(b) and the factors that the legislature has directed stated in section 19(e): the Commission to "consider." FNJ These criteria in- clude thirteen broad categories addressing such mat- The scope of judicial review of agency decisions ters as "Community Health Care Requirements," is as provided by the law under which review is "Service Area Population," and "Relationship to Ex- sought.... Where the law authorizes review under isting Services and Existing Facilities." the substantial evidence rule, ... the court may not substitute its judgment for that of the agency as to FN 1. The matters required by section 3.1 O(b) the weight of the evidence on questions committed to be included within the Commission's cri- to agency discretion but may affirm the decision of the agency in whole or in part and shall reverse or

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665 S.W.2d 446 (Cite as: 665 S.W.2d 446)

remand the case for further proceedings if substan- mission's order is to examine the agency's fact fmd- tial rights of the appellant have been prejudiced ings to determine whether they meet the statutory because the administrative findings, inferences, requirements. See Auto Convoy Co. v. Railroad conclusions, or decisions are: Commission, 507 S.W.2d 718, 719 (Tex.l974). Sec- tion 16(b) of the APTRA requires that all fmdings of (1) in violation of constitutional or statutory pro- fact, "if set forth in statutory*451 language," must be visions; accompanied by a supporting statement of underlying facts. We must determine the meaning of these words in the present context. (2) in excess of the statutory authority of the agency; In Lewis v. Gonzales County Savings and Loan Association, 474 S.W.2d 453 (Tex.l97l), we were (3) made upon unlawful procedure; asked to construe an analogous fact-finding require- ment m the Savings and Loan Act. (4) affected by other error of law; Tex.Rev.Civ.Stat.Ann. art. 852a, § 11.11(4). Therein, we held: (5) not reasonably supported by substantial evi- dence in view of the reliable and probative evidence We are of the view this requirement applies only to in the record as a whole; or findings of fact in the commissioner's orders which are "set forth in statutory language." [footnote (6) arbitrary or capricious or characterized by omitted]. When fmdings are made in the language abuse of discretion or clearly unwarranted exercise of the Rules and Regulations that do not embody of discretion. statutory language, they need not be accompanied by a concise and explicit statement of the underly- The above-quoted portions of the APTRA are the ing facts. primary guidelines to be used by a court in reviewing the actions of administrative agencies. Gonzales County, 474 S. W.2d at 457. We went on to explain that, generally, statutory findings are In this case, there are allegations challenging the broadly stated and require discretion or judgment on adequacy of the Commission's findings of fact, con- the part of the agency based on a multitude of factors. tending that the Commission's action is not supported Conversely, non-statutory fmdings usually are more by substantial evidence, and asserting that the Com- factual in nature and carry with them the supporting mission's orders are arbitrary and capricious. The underlying facts. Thus, the latter need no accompa- court of appeals purported to base its decision solely nying facts to support them. on the conclusion that the Commission's fmdings of fact are arbitrary and capricious. In its opinion, how- Judicial review would be enhanced if all general ever, the intermediate court touched upon each of the conclusions of an agency were accompanied by a above three contentions. Hence, we shall address each statement of underlying facts. The plain language of of these matters. the statute, however, precludes such a construction of section 16(b). By limiting the fact-fmding requirement Findings of Fact to findings "set forth in statutory language," the leg- [1] The logical first step in evaluating the Com- islature has expressed its intention in this matter. We

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may not impose an additional fact-fmding requirement 761-62 (1951 ). The required underlying facts may not under the guise of statutory construction. Cf Goldman be presumed from findings of a conclusional nature. v. Torres, 161 Tex. 437,341 S.W.2d 154, 158 {1960). Morgan Drive Away, Inc. v. Railroad Commission, 498 S.W.2d 147, 152 {Tex.l973). In general, under- Gonzales County holds that an accompanying lying fmdings of fact must be such that the reviewing statement of underlying facts is required when an court can fairly and reasonably say that the underlying ultimate finding of fact embodies statutory language. findings support the statutorily required criteria. This construction has been followed in post-APTRA Railroad Commission v. Entex, Inc., 599 S.W.2d 292, cases. See, e.g., Gage v. Railroad Commission, 582 298 (Tex.1980); Railroad Commission v. Graford Oil S.W.2d 410, 414 (Tex.l979); Imperial American Corp., 557 S.W.2d 946, 950 (Tex.l977). Resources Fund, Inc. v. Railroad Commission, 557 S.W.2d 280, 286 (Tex.1977). Therefore, we hold that The underlying findings of fact required by the section 16(b) of the APTRA requires an accompany- APTRA have a substantial statutory purpose and are ing statement of underlying facts only when the ulti- more than a technical prerequisite.* 452 Morgan Drive mate fact finding embodies a mandatory fact finding Away, Inc., 498 S. W.2d at 150. This Court set forth the set forth in the relevant enabling act. FN 2 An agency purposes of such fmdings of fact in Miller v. Railroad may not avoid this statutory requirement by simply Commission, 363 S.W.2d 244, 245-46 (Tex.l962) as rewording its criteria; section l6{b) extends to all follows: statutory fact fmdings that represent the criteria that the legislature has directed the agency to consider in One purpose no doubt is to restrain any disposition performing its function. on the part of the [agency] to grant a certificate without a full consideration of the evidence and a FN2. The HPDA does not require that the serious appraisal of the facts. Another is to inform Commission make findings on certain factors protestants of the facts found so that they may in- before it may act; rather, the statute directs telligently prepare and present an appeal to the the Commission to include certain matters courts. Still another is to assist the courts in properly within its criteria for review and directs the exercising their function of reviewing the order. Commission to act upon applications within established time limits. HPDA, §§ 3.10, 3.11. [5][6] This Court has neither the right nor the Nonetheless, the factors that the Commission authority to lay out a precise form of fmdings to be must include among its criteria are the type of made by the Commission. !d. at 246. On the other factors that fall within the scope of section hand, we may make suggestions as to the form of the l6(b) so that these findings of fact must be agency record in the interest of proper judicial review. accompanied by a statement of underlying See Graford Oil Corp., 557 S.W.2d at 952 n. 6. Proper facts. Cf Miller v. Railroad Commission, 363 underlying (basic) fmdings of fact should follow the S.W.2d 244,245 (Tex.l962). guidelines we previously have noted: they should be clear, specific, non-conclusory, and supportive of the [2][3][4] The characteristics of proper findings of ultimate statutory fmding. Mere recitals of testimony fact, as well as their purposes, are well established. or references to or summations of the evidence are Valid fmdings of fact must be clear and specific. improper. Such fmdings should be stated as the Gage, 582 S.W.2d at 414. A mere conclusion or a agency's fmdings. The fmdings should relate to mate- recital of evidence is inadequate. Thompson v. Rail- rial basic facts and should relate to the ultimate stat- road Commission, 150 Tex. 307, 240 S.W.2d 759, utory finding that they accompany. In general, the

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fmdings of fact required by APTRA § 16(b) should be more than a mere scintilla, Alamo Express, Inc. v. sufficient to serve the overall purposes evident in the Union City Tran~fer, !58 Tex. 234,309 S.W.2d 815, legislative requirement that they be made. 823 (1958), the evidence in the record actually may preponderate against the decision of the agency and [7] The record of this case discloses that the nonetheless amount to substantial evidence. Lewis v. Commission made almost five hundred fmdings of Metropolitan Savings and Loan Association, 550 fact covering approximately forty-eight pages. The S. W .2d II, 13 (Tex.l977). The true test is not whether orders of the Commission includes ultimate fmdings the agency reached the correct conclusion, but on each of the criteria required by HPDA section whether some reasonable basis exists in the record for 3 .I O(b ). In addition, the Commission's fmdings con- the action taken by the agency. Gerst v. Nixon, 411 tain numerous underlying facts in support of these S.W.2d 350,354 (Tex.l966). A reviewing court is not statutory fmdings. Many of these findings do not bound by the reasons given by an agency in its order, satisfy the requirements previously stated since they provided there is a valid basis for the action taken by are nothing more than recitals of evidence. Neverthe- the agency. *453Railroad Commission v. City of less, there are sufficient fmdings such that we can Austin, 524 S. W.2d 262, 279 (Tex.l975). Thus, the fairly and reasonably say that the underlying or basic agency's action will be sustained if the evidence is facts support the Commission's conclusions on the such that reasonable minds could have reached the ultimate or statutory criteria. We hold, therefore, that conclusion that the agency must have reached in order the underlying findings of fact made by the Commis- to justify its action. Suburban Utility Corp. v. Public sion satisfy the requirements of section 16(b) of the Utility Commission, 652 S.W.2d 358,364 (Tex.l983). APTRA. [ 13] The findings, inferences, conclusions, and The Substantial Evidence Rule decisions of an administrative agency are presumed to [8][9] The APTRA codifies the principle of judi- be supported by substantial evidence, and the burden cial review under the substantial evidence rule. Sec- is on the contestant to prove otherwise. Imperial tion 19(e)(5) authorizes a reviewing court to test an American Resources Fund, Inc. v. Railroad Commis- agency's fmdings, inferences, conclusions, and deci- sion, 557 S.W.2d 280,286 (Tex.l977). Hence, if there sions to determine whether they are reasonably sup- is evidence to support either affirmative or negative ported by substantial evidence in view of the reliable fmdings on a specific matter, the decision of the and probative evidence in the record as a whole. See agency must be upheld. Gerst v. Goldsbury, 434 Railroad Commission v. Shell Oil Co., J39 Tex. 66, S.W.2d 665, 667 (Tex.l968); see also Lewis v. Jack- 161 S.W.2d 1022, 1029-30 (1942). In applying the sonville Building and Loan Association, 540 S.W.2d test, the court is prohibited from substituting its 307, 311 (Tex.l976). judgment for that of the agency as to the weight of the evidence on questions committed to agency discre- [14] The record before this Court is extensive and tion. See Gerst v. Guardian Savings and Loan Asso- contains substantial information relevant to the ciation, 434 S.W.2d 113, 115 (Tex.I968). There- Commission's inquiry. This controversy was hotly viewing court may reverse an agency decision because contested, and the record contains evidence favoring of the absence of substantial evidence only if such all three applicants. We will address one statutory absence has prejudiced substantial rights of the liti- criterion that supports the Commission's decision in gant.APTRA, § 19(e). this case. Under HPDA section 3.IO(b)(l), the Com- mission considers ''whether a proposed project is [ 10] [II][ 12] Although substantial evidence is necessary to meet the healthcare needs of the com-

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665 S.W.2d 446 (Cite as: 665 S.W.2d 446)

munity or population to be served .... " The Commis- hold that they are. Our conclusion is based upon the sion found that Memorial and Green Oaks were nec- principles of judicial review that we have reiterated essary, but that Charter Medical was not. herein. As required by APTRA section 19(e), we have tested each material finding, inference, and conclusion On judicial review, we look first to the underlying for evidentiary support. There is in the record sub- fmdings of fact made in support of the ultimate finding stantial evidence to support the underlying facts dis- of fact contrary to Charter Medical's position. Factors cussed above and the ultimate fact to which they re- unfavorable to Charter Medical include the following: late. Charter Medical would not be near or connected with a general hospital and ambulance service would be Arbitrary and Capricious Standard of Review required to transfer a patient to a general hospital for [ 15] The court of appeals held that the validity of medical treatment; Charter Medical was not accessible an agency's inferences of ultimate facts or its reason- by public transportation; Charter Medical failed to ing process is judged by whether such inferences are establish physician interest in its facility similar to the arbitrary*454 and capricious. The court also con- interest expressed in the other two facilities by testi- cluded that the sole purpose of the substantial evi- fying physicians; and Charter Medical failed to sup- dence rule is to measure the validity of the process by port its projected occupancy rates with competent which the agency has inferred stated basic facts from evidence. Findings on these matters were relatively the evidence and matters officially noticed. Our dis- more favorable regarding both Memorial and Green cussion of the substantial evidence rule discloses the Oaks. Other material fmdings concerned the probable erroneous nature of these conclusions. Because the absence of certain recreational facilities at Charter court of appeals has, in effect, engaged in a substantial Medical, the unnecessary duplication of specified evidence review of the Commission's order, we also services and equipment by Charter Medical, and the have addressed that point. We now turn to a discussion negative report on Charter Medical by the Texas Area ofthe arbitrary and capricious standard of review. 5 Health Systems Agency. Throughout the long history of the substantial Because the Commission correctly found that evidence rule the existence of substantial evidence has Charter Medical failed to establish that its facility was been equated with fair and reasonable conduct on the necessary to meet the healthcare needs of the com- part of the agency. Conversely, agency decisions that munity, as required by the statute, the Commission's are unsupported by substantial evidence have been order must be upheld. Cf Gerst v. Gold~hury, 434 deemed arbitrary and capricious. Thus, the two terms S.W.2d at 667. We note that many of the Commis- have many times been considered two sides of the sion's 213 findings on this criterion are improper and same coin. See, e.g., Benson v. San Antonio Savings irrelevant and were not considered by this Court. Association, 374 S.W.2d 423, 427 (Tex.l963); City Moreover, we doubt the sufficiency of other ultimate Savings Association v. Security Savings and Loan findings made by the Commission, although we reach Association of Dickinson, 560 S. W.2d 930, 932 no conclusion thereon. We do admonish the Com- (Tex.l978). On the other hand, cases have arisen in mission to adhere to the guidelines we have set forth which a line of demarcation was drawn between these previously regarding fmdings of fact. two concepts.

Our second inquiry concerns whether the fmd- In Lewis v. Metropolitan Savings and Loan As- ings, inferences, and conclusions that relate to health sociation, 550 S.W.2d 11 (Tex.l977), this Court was care needs are supported by substantial evidence. We faced with an allegation that the agency action in

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665 S.W.2d 446 (Cite as: 665 S.W.2d 446)

question, in admitting and excluding evidence, had resulted in a denial of due process of law. The agency We conclude that the fmdings of fact made by the contended that the only issue on appeal was whether Commission comply with section 16(b) of the AP- the decision was supported by substantial evidence; a TRA. The Commission's fmdings, inferences, con- denial of due process would not provide a basis for clusions, and decisions are supported by substantial reversal so long as the agency's decision was upheld evidence and do not constitute an abuse of discretion. under substantial evidence scrutiny. We held that instances may arise in which the agency's action is The judgment of the court of appeals is reversed, supported by substantial evidence, but is arbitrary and and the judgment of the trial court is affirmed. capricious nonetheless. One such instance is when a denial of due process has resulted in the prejudice of Tex.,1984. substantial rights of a litigant. Texas Health Facilities Com'n v. Charter Medi- cal-Dallas, Inc. Another example of arbitrary action by an agency 665 S.W.2d 446 is Railroad Commission v. Alamo Express, 158 Tex. 68, 308 S. W.2d 843 (1958). Therein, this Court found END OF DOCUMENT that the agency had acted in an arbitrary manner when it failed totally to make findings of fact and instead based its decision on findings in another case. Arbi- trary and capricious agency action also may be found when an agency improperly bases its decision on non-statutory criteria. Public Utility Commission v. South Plains Electric Cooperative, Inc., 635 S.W.2d 954, 957 (Tex.App.-Austin 1982, writ refd n.r.e.).

In enacting the APTRA, it is clear that the legis- lature intended to distinguish between agency action that is not supported by substantial evidence and agency action that is arbitrary and capricious. We construe section 19(e)(6) of the APTRA to be a safeguard against agency conduct that is arbitrary or constitutes an abuse of discretion although that con- duct does not amount to a violation of any other pro- vision of the APTRA or the agency's enabling act. The arbitrary and capricious standard of review histori- cally has been construed narrowly, and we do not think that the legislature intended it to be interpreted as a broad, all-encompassing standard for reviewing the rationale of agency actions. Under the foregoing definition of the arbitrary and capricious standard of review, we hold that the Commission's orders in this case are not arbitrary nor do they constitute an abuse of discretion.

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City ofEl Paso v. Public Util. Comm'n, 839 S.W.2d 895 (Tex. App.-Austin 1992) aff' din part, rev' din part on other grounds, 883 S.W.2d 179 (Tex.1994). Page 1 839 S.W.2d 895, 135 P.U.R.4th 584 (Cite as: 839 S.W.2d 895)

cis ions 15AV (D) Scope of Review in General Court of Appeals of Texas, 15Ak749 k. Presumptions. Most Cited Austin. Cases CITY OF EL PASO, the State of Texas and Office Administrative Law and Procedure 15A ~750 of Public Utility Counsel, Appellants, v. l5A Administrative Law and Procedure PUBLIC UTILITY COMMISSION OF TEXAS, et 15AV Judicial Review of Administrative De- al., Appellees. cisions 15AV(D) Scope ofReview in General No. 3-90-007-CV. 15Ak750 k. Burden of showing error. Aug. 26, 1992. Most Cited Cases Rehearing Overruled Oct. 14, 1992. Court of Appeals presumes the validity of ad- ministrative orders which it reviews, and challenger Proceeding was brought for review of order of bears burden of showing error in order. Public Utility Commission setting rates to be charged by electric utility. The 250th Judicial Dis- r21 Administrative Law and Procedure 15A ~ trict Court, Travis County, Paul R. Davis, Jr., J., 763 entered order upholding Commission's decision, and city, state, and Office of Public Utility Counsel 15A Administrative Law and Procedure appealed. Withdrawing prior opinion, the Court of 15AV Judicial Review of Administrative De- Appeals, Jones, J., held that: (1) post-in-service car- cisions rying costs associated with construction of power 15AV(D) Scope ofReview in General plant should not have been included in electric util- 15Ak763 k. Arbitrary, unreasonable orca- ity's rate base; (2) inclusion in utility's rate base of pricious action; illegality. Most Cited Cases deferred post-in-service operating and maintenance costs was not inconsistent with Texas statutory law; Administrative Law and Procedure 15A ~791 and (3) Commission did not engage in retroactive 15A Administrative Law and Procedure rate making by making onetime adjustment to elec- 15AV Judicial Review of Administrative De- tric utility's cost of service, following passage of cisions federal statute requiring utility to convert from 15AV(E) Particular Questions, Review of flow-through accounting system to normalization 15Ak784 Fact Questions system. 15 Ak791 k. Substantial evidence. Most Affirmed m part, reversed m part and re- Cited Cases manded. Administrative Law and Procedure 15A ~793 West Headnotes l5A Administrative Law and Procedure r11 Administrative Law and Procedure 15A ~ 15AV Judicial Review of Administrative De- 749 cisions 15AV(E) Particular Questions, Review of 15A Administrative Law and Procedure l5Ak784 Fact Questions 15AV Judicial Review of Administrative De- 15Ak793 k. Weight of evidence. Most

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Cited Cases stantial evidence in record, that stipulation resolved Court of Appeals may not substitute its discre- matters in dispute in way that was fair, just and tion or judgment for that of administrative agency, reasonable and in public interest. and may reverse agency's decision only if it is un- supported by substantial evidence, is arbitrary, or [5] Electricity 145 €::::::>11.3(6) results from abuse of discretion. 145 Electricity )3) Administrative Law and Procedure 15A €:;::::> 145k11.3 Regulation of Charges 754.1 145k1l.3(6) k. Proceedings before commis- sions. Most Cited Cases l5A Administrative Law and Procedure In setting rates for electric utility, Public Util- 15AV Judicial Review of Administrative De- ity Commission was not required to accept or reject cisions examiners' report in its entirety, but had authority to 15AV(D) Scope of Review in General repudiate portion of report and modify it by dele- 15Ak7 54 Discretion of Administrative tion. Agency 15Ak754.1 k. In general. Most Cited )6) Administrative Law and Procedure 15A €:;::::> Cases 791 (Formerly 15Ak754) 15A Administrative Law and Procedure Administrative Law and Procedure 15A €:;::::>763 15AV Judicial Review of Administrative De- cisions 15A Administrative Law and Procedure 15A V(E) Particular Questions, Review of 15AV Judicial Review of Administrative De- 15Ak784 Fact Questions cisions 15Ak791 k. Substantial evidence. Most 15AV(D) Scope of Review in General Cited Cases 15Ak763 k. Arbitrary, unreasonable orca- pricious action; illegality. Most Cited Cases Administrative Law and Procedure 15A €::::::>793 Administrative agency's decision is arbitrary or 15A Administrative Law and Procedure results from abuse of discretion if agency fails to 15AV Judicial Review of Administrative De- consider a factor that legislature directed it to con- cisions sider, considers irrelevant factor, or weighs only 15A V(E) Particular Questions, Review of relevant factors but still reaches completely unreas- 15Ak784 Fact Questions onable result. 15Ak793 k. Weight of evidence. Most [4] Electricity 145 €:;::::>11.3(6) Cited Cases In conducting substantial evidence review of 145 Electricity administrative agency's decision, Court of Appeals 145kll.3 Regulation of Charges must determine whether evidence as whole is such 145kll.3(6) k. Proceedings before commis- that reasonable minds could have reached the con- sions. Most Cited Cases clusion that agency must have reached in order to Public Utility Commission could adopt nonun- take disputed action; Court may not substitute its animous stipulation in setting electric utility's rates, judgment for that of agency and may consider only where Commission afforded nonstipulating parties the record on which agency based its decision. an opportunity to be heard on merits of stipulation and made independent finding, supported by sub- [7] Administrative Law and Procedure 15A €:;::::> 750

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15A Administrative Law and Procedure 15Ak458 Evidence 15AV Judicial Review of Administrative De- 15Ak462 k. Weight and sufficiency. cisions Most Cited Cases 15AV(D) Scope of Review in General Declaration contrary to party's position on dis- 15Ak750 k. Burden of showing error. puted issue in administrative proceeding is akin to Most Cited Cases quasi-admission; while not binding on declarant, as Appellant bears burden of showing lack of sub- judicial admission would be, such a concession is stantial evidence to support administrative agency's entitled to some evidentiary weight. decision, a burden which it cannot meet merely by showing that evidence preponderates against [11] Administrative Law and Procedure 15A agency decision. ~486

[8] Public Utilities 317A ~165 15A Administrative Law and Procedure 15AIV Powers and Proceedings of Administrat- 317A Public Utilities ive Agencies, Officers and Agents 317 Alii Public Service Commissions or Boards 15AIV(D) Hearings and Adjudications 317AIII(B) Proceedings Before Commissions 15Ak484 Findings 317 Ak165 k. Evidence. Most Cited Cases 15Ak486 k. Sufficiency. Most Cited Public Utility Commission has power, in rate- Cases making proceeding, to judge witnesses' credibility Administrative agency's findings of fact need and to accept or reject witness' testimony in whole additional support of findings of underlying facts or in part. only when ultimate findings are in terms taken dir- ectly from enabling legislation, or when they rep- [9] Electricity 145 ~11.3(6) resent criteria that legislature has directed agency to consider in performing its function. 145 Electricity l45k 11.3 Regulation of Charges [12] Electricity 145 ~11.3(6) 145k11.3(6) k. Proceedings before commis- sions. Most Cited Cases 145 Electricity Decision to disallow $32 million of the nuclear 145kll.3 Regulation of Charges power plant construction costs that electric utility 145kl1.3(6) k. Proceedings before commis- sought to include in its rate base, on ground that sions. Most Cited Cases utility's decision to participate in nuclear power Findings of underlying fact made by Public project was imprudent, was sufficiently supported Utility Commission in support of its finding that by evidence presented in rate-making proceeding, electric utility's decision to participate in nuclear including utility's stipulation that, if its decision power plant construction project was not entirely was improvident, resulting cost that should be dis- prudent were sufficient to satisfy statutory fact- allowed totaled $32 million. finding requirements; Commission's findings of un- derlying fact did not have to identify processes and [10] Administrative Law and Procedure 15A acts found to be imprudent, nexus between those ~462 acts and disallowance amount, and evidentiary sup- port for disallowance figure. Vernon's Ann.Texas 15A Administrative Law and Procedure Civ.St. art. 6252-13a, § 16(b, e). 15AIV Powers and Proceedings of Administrat- ive Agencies, Officers and Agents [13] Statutes 361 ~1076 15AIV(D) Hearings and Adjudications

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361 Statutes Reviewing court may determine, as matter of 361III Construction law, the scope of agency's statutory authority. 361 III(A) In General 361k1074 Purpose [16] Administrative Law and Procedure 15A 36lkl076 k. Purpose and intent. Most ~305

Cited Cases 15A Administrative Law and Procedure (Formerly 361k184) 15AIV Powers and Proceedings of Administrat- Statutes 361 ~1151 ive Agencies, Officers and Agents 15AIV(A) In General 361 Statutes 15Ak303 Powers in General 361 III Construction 15Ak305 k. Statutory basis and limita- 361III(E) Statute as a Whole; Relation of tion. Most Cited Cases Parts to Whole and to One Another Power of agency to take such actions as may be 361 k 1151 k. In general. Most Cited Cases necessary to perform express duty is not without (Formerly 36lk205) limits; agency may not, on theory of necessary im- In construing statute, court's role is to seek out plication from specific power, function or duty ex- legislative intent from general view of enactment as pressly del'egated, exercise what amounts to new whole and, once intent has been ascertained, to con- and additional power or one that is inconsistent strue statute so as to give effect to purpose of legis- with statutory provision or ascertainable legislative lature. intent.

[14] Administrative Law and Procedure 15A [17] Public Utilities 317A ~124 ~305 317 A Public Utilities 15A Administrative Law and Procedure 317 All Regulation 15AIV Powers and Proceedings of Administrat- 317 Ak119 Regulation of Charges ive Agencies, Officers and Agents 317 Ak 124 k. Value of property; rate base. 15AIV(A) In General Most Cited Cases 15Ak303 Powers in General As general rule, only assets that may be in- 15Ak305 k. Statutory basis and limita- cluded in utility's rate_ base are those found to be tion. Most Cited Cases used and useful in providing service to utility's cus- Administrative agency is creation of legislature tomers. and, as such, has only those powers expressly con- ferred and those necessary to accomplish its duties. fl8] Electricity 145 ~11.3(2)

[15] Administrative Law and Procedure 15A 145 Electricity ~796 145k11.3 Regulation of Charges 145kll.3(2) k. Determination of rate base. 15A Administrative Law and Procedure Most Cited Cases 15AV Judicial Review of Administrative De- Post-in-service carrying costs associated with cisions construction of new power plant could not be in- 15AV(E) Particular Questions, Review of cluded in electric utility's rate base, without violat- 15Ak796 k. Law questions in general. ing statute requiring that construction costs be cal- Most Cited Cases culated as of time that physical asset being con- (Formerly 15Ak800) structed is placed in public service. Vemon's

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Ann.Texas Civ.St. art. 1446c, § 4l(a). 145 Electricity 145k11.3 Regulation of Charges [19] Public Utilities 317A ~124 145kll.3(2) k. Determination of rate base. Most Cited Cases 317 A Public Utilities Deferral, capitalization and inclusion in electric 31 7All Regulation utility's rate base of post-in-service operating and 317 Ak 119 Regulation of Charges maintenance costs associated with newly construc- 317 Ak124 k. Value of property; rate base. ted power plant did not violate constitutional pro- Most Cited Cases hibition against retroactive rate making, even as- Power plant was "dedicated to public use," suming that inclusion in rate base of such post- within meaning of statute limiting those construc- in-service costs had retrospective effect, as new tion costs which may be included in utility's rate rates neither impaired vested rights nor changed base, at time it began operating commercially. Ver- substantial rights or obligations of implied contract. non's Ann. Texas Civ.St. art. 1446c, § 41(a). Vcmon's Ann.Tcxas Const. Art. 1, § 16. [20] Electricity 145 ~11.3(2) (23] Public Utilities 317A ~169.1

145 Electricity 317 A Public Utilities 145kl1.3 Regulation of Charges 317 Alii Public Service Commissions or Boards 145kll.3(2) k. Determination of rate base. 317 AIII(B) Proceedings Before Commissions Most Cited Cases 317 Akl69 Orders Public Utility Commission had discretionary 317 Ak169.1 k. In general. Most Cited authority to allow deferral and capitalization of Cases post-in-service operating and maintenance costs as- (Formerly 317Ak169) sociated with newly constructed electric power Retrospective effect alone will not invalidate plant, and to permit electric utility to include such rate order, if order does not substantially impair or costs in its rate base, to the extent that this was not destroy vested rights and does not change substan- inconsistent with other state law. Vernon's tial rights and obligations of implied contract Ann.Texas Civ.St. art. 1446c, §§ 2, 16, 27, 39. between utility and its ratepayers. Vernon's (21( Public Utilities 317A ~119.1 Ann.Tcxas Const. Art. 1, § 16.

317 A Public Utilities [24] Public Utilities 317A ~101

317 All Regulation 317 A Public Utilities 317 Ak119 Regulation of Charges 31 7 AI In General 317Ak119.1 k. In general. Most Cited 317 Ak 101 k. In general. Most Cited Cases Cases (Formerly 317Ak103) (Formerly 317 Ak119) Implied contract exists between utility and its Term "thereafter," as used in statute providing ratepayers, creating both utility's duty to provide that new rates set by Public Utility Commission are defined service and ratepayers' duty to pay defined "thereafter to be observed until changed," was not rate. blanket prohibition against any consideration by Public Utility Commission of utility's past gains or [25] Public Utilities 317A ~101 losses in fixing future rates. Vcmon's Ann.Tcxas Civ.St. art. 1446c, § 43(f). 317 A Public Utilities 31 7 AI In General [22] Electricity 145 ~11.3(2)

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317 Ak101 k. In general. Most Cited Cases 145 Electricity (Formerly 317 Ak1 03) 145k11.3 Regulation of Charges Under their implied contract with utility, rate- 145k11.3(2) k. Determination of rate base. payers have right to pay constant rate for utility ser- Most Cited Cases vice until, by legislatively approved procedures, old In disallowing certain construction costs that rate is formally challenged. electric utility sought to include in its rate base, based on imprudent delays in construction that in- [26] Public Utilities 317A ~119.1 creased financing costs for project, Public Utility Commission could properly offset against such in- 317 A Public Utilities creased financing costs the unexpected benefit that 317 All Regulation ratepayers realized because of delay, i.e., the con- 317 Ak119 Regulation of Charges tinued use of money that ratepayers would other- 317 Akll9.1 k. In general. Most Cited wise have had to pay in higher rates if construction Cases had been completed; Commission did not thereby (Formerly 317Ak119) engage in retroactive rate making. Only rights and obligations existing between rate settings are constitutionally protected against [30] Electricity 145 ~11.3(6) alteration by retroactive rate making. Vernon's Ann.Texas Const. Art. 1, § 16. 145 Electricity 145k11.3 Regulation of Charges [27] Statutes 361 ~1559 145k11.3(6) k. Proceedings before commis- sions. Most Cited Cases 361 Statutes Findings of underlying fact that Public Utility 361IX Retroactivity Commission made, in order to support its ultimate 361k1559 k. Effect on vested rights. Most finding of construction imprudence sufficient to re- Cited Cases quire disallowance of portion of costs that electric (Formerly 361k278.9, 361k265) utility sought to include in its rate base, did not Whether legislation substantially impairs or have to explain why Commission found particular destroys vested rights necessitates consideration of witness' testimony credible or determined particular whether retrospective effect advances or retards figure to have resulted from imprudent construction public interest, effectuates or defeats bona fide in- management. Vernon's Ann.Texas Civ.St. art. tentions or reasonable expectations of affected per- 6252-13a, § 16(b ). sons, and surprises persons who have long relied on contrary state of law. [31] Administrative Law and Procedure 15A ~486 [28] Motions 267 ~39

15A Administrative Law and Procedure 267 Motions 15AIV Powers and Proceedings of Administrat- 267k39 k. Reargument or rehearing. Most Cited ive Agencies, Officers and Agents Cases 15AIV(D) Hearings and Adjudications While motions for rehearing must point out the 15Ak484 Findings specific finding challenged and the legal basis for 15Ak486 k. Sufficiency. Most Cited challenge, they need not contain citations of author- Cases ity. Administrative agency's articulation of under- [29] Electricity 145 ~11.3(2) lying facts in support of its ultimate findings must be more than mere recitals of testimony, should be

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stated as agency's findings, and should relate to ul- 145 Electricity timate statutory findings. Vemon's Ann.Texas 145k11.3 Regulation of Charges Civ.St. art. 6252-13a, § 16(b). 145kll.3(2) k. Determination of rate base. Most Cited Cases [32] Administrative Law and Procedure 15A Public Utility Commission properly employed €;:::::>669.1 "largest single hazard plus 5%" method in determ- ining electric utility's reserve requirements, for pur- 15A Administrative Law and Procedure pose of deciding whether utility had any excess ca- 15AV Judicial Review of Administrative De- pacity and whether it should be allowed to include cisions certain power plant construction costs in it rate 15A V(A) In General base. 15Ak669 Preservation of Questions Be- fore Administrative Agency [35] Electricity 145 €=:>11.3(6) 15Ak669.1 k. In general. Most Cited Cases 145 Electricity (Formerly 15Ak669) 145kll.3 Regulation of Charges Administrative litigant may preserve complaint 145kll.3(6) k. Proceedings before commis- only by giving agency an opportunity to review leg- sions. Most Cited Cases al ground on which complaint is based. Finding that electric utility had no appreciable excess capacity was sufficiently supported by evid- (33] Administrative Law and Procedure 15A ence presented in rate-making proceeding, in which €;:::::>669.1 utility sought leave to include nuclear power plan construction costs in its rate base, notwithstanding 15A Administrative Law and Procedure Public Utility Commission's omission of three gas- 15AV Judicial Review of Administrative De- fired units from utility's generation capability be- cisions cause of utility's plans to retire then early, and not- 15A V(A) In General withstanding Commission's adoption of mainten- 15Ak669 Preservation of Questions Be- ance schedule that required removal of some units fore Administrative Agency from line during summer peak period; two experts 15Ak669.1 k. In general. Most Cited offered their opinions that Commission acted reas- Cases onably in approving maintenance schedule. (Formerly 15Ak669) (36] Public Utilities 317A €;:::::>146 Electricity 145 €;:::::>11.3(7) 317 A Public Utilities 145 Electricity 317 Alii Public Service Commissions or Boards 145k11.3 Regulation of Charges 317 AIII( A) In General 145k11.3(7) k. Judicial review and enforce- 317 Akl45 Powers and Functions ment. Most Cited Cases 317 Ak 146 k. Legislative and judicial City failed to preserve objection to exclusion of powers and functions. Most Cited Cases witness' testimony in proceeding to establish reas- Public Utility Commission has discretion to onable rates for electric utility by failing to provide consolidate proceedings with common issue when administrative agency with any basis for finding consolidation would serve judicial or administrative that testimony was admissible. economy. [34] Electricity 145 €=:>11.3(2) [37) Electricity 145 €;:::::>11.3(6)

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145 Electricity 145 Electricity 145k11.3 Regulation of Charges 145kll.3 Regulation of Charges 145kll.3(6) k. Proceedings before commis- 145kll.3(4) k. Operating expenses. Most sions. Most Cited Cases Cited Cases Public Utility Commission had power, having Public Utility Commission was not estopped, consolidated rate-making matter with decision as to by its refusal to include Tax Reduction Act Stock whether sale-and-lease-back arrangement entered Option Plan (TRASOP) expenses in utility's cost of into by utility was in public interest, to reserve de- service in two prior dockets, from including ex- cision on sale-and-lease-back matter and effectively pense in electric utility's cost of service in later sever proceedings which it had earlier consolidated. docket.

)38) Electricity 145 ~11.3(4) )41) Electricity 145 ~11.3(4)

145 Electricity 145 Electricity 145k11.3 Regulation of Charges 145kll.3 Regulation of Charges 145kll.3(4) k. Operating expenses. Most 145k11.3(4) k. Operating expenses. Most Cited Cases Cited Cases Public Utility Commission could include in Public Utility Commission did not engage in electric utility's cost of service the lease payments retroactive rate making by making onetime adjust- that utility made pursuant to sale-and-lease-back ar- ment to electric utility's cost of service, following rangement, at least to extent that payments did not passage of federal statute requiring utility to con- exceed capital cost that Commission would have in- vert from flow-through accounting system to nor- cluded in rate base had utility never entered into malization system, to put utility in same position sale-and-lease-back arrangement; to that extend, that it would have occupied had it used normaliza- payments could be considered in setting reasonable tion system all along. 26 U.S.C.A. § l68(i)(9); 26 rates, without regard to whether sale- U.S.C.(1988 Ed.)§ 167(1 )(3)(G). and-lease-back arrangement was consistent with public interest. [42] Electricity 145 ~11.3(6)

[39) Electricity 145 ~11.3(4) 145 Electricity 1451<11.3 Regulation of Charges 145 Electricity 145k11.3(6) k. Proceedings before commis- 145kl1.3 Regulation of Charges sions. Most Cited Cases 145kll.3(4) k. Operating expenses. Most State of Texas had right to intervene on behalf Cited Cases of various state agencies in proceeding to set rates Refusal to recalculate electric utility's estim- to be charged by electric utility. ated fuel and purchased power expenses based on expenses actually incurred, when prolonged rate- [43) Electricity 145 ~11.3(7)

making hearings delayed new rates' anticipated ef- 145 Electricity fective date, was not arbitrary or capricious or ab- 145k11.3 Regulation of Charges use of discretion, as recalculation time alone could 145kll.3(7) k. Judicial review and enforce- conceivably delay rendition of new order long ment. Most Cited Cases enough to once again alter new rates' effective date. Wrongful exclusion of State of Texas from [40] Electricity 145 ~11.3(4) rate-making proceeding did not necessitate reversal of order establishing rates for electric utility, where

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state complained only of its inability to cross- Commission's approval of rate design. examine witnesses who testified during its absence, and examiner specifically stated in his oral ruling [47] Public Utilities 317A €=>120 that he would permit state to recall and cross-ex- 317 A Public Utilities amine such witnesses; state was unable to demon- 31 7All Regulation strate any prejudice to its substantial rights. Ver- 3 17Ak 119 Regulation of Charges non's Ann. Texas Civ.St. art. 6252-Ba, § 19(e). 317 Ak 120 k. Nature and extent in general. [44] Public Utilities 317A €=>123 Most Cited Cases

317A Public Utilities Public Utilities 317A €=>167 317 Ali Regulation 317 A Public Utilities 3 17 Ak 119 Regulation of Charges 317 Alii Public Service Commissions or Boards 317 Ak123 k. Reasonableness of charges 317 AIII(B) Proceedings Before Commissions in general. Most Cited Cases 317 Ak167 k. Hearing and rehearing. Most Public Utility Commission has broad discretion Cited Cases to determine whether particular rate design will res- Utility customer seeking reassignment to dif- ult in just, reasonable, and nondiscriminatory rates. ferent class of ratepayers must show that its condi- [45] Public Utilities 317A €=>123 tions of service are similar to those of members of class to which it seeks reassignment; issue is one of 317 A Public Utilities fact, to be resolved by reference to particular cir- 317 Ail Regulation cumstances of each case. 317 Ak 119 Regulation of Charges 317 Ak123 k. Reasonableness of charges [48] Public Utilities 317A €=>165 in general. Most Cited Cases 317 A Public Utilities In deciding whether particular rate design will 317 A III Public Service Commissions or Boards result in just, reasonable, and nondiscriminatory 317 AIII(B) Proceedings Before Commissions rates, Public Utility Commission may consider 317 Ak 165 k. Evidence. Most Cited Cases factors in addition to cost of producing service, Existing ratepayer classification schemes previ- keeping in mind that overriding considerations of ously approved by Public Utility Commission are, consistency and utility's burden of proving that its prima facie, not unreasonably discriminatory, and proposed rates are just and reasonable. Vcmon's complaining party has burden of proving that clas- Ann.Texas Civ.St. art. 1446c, § 40. sification produces unreasonably discriminatory [46] Public Utilities 317A €=>194 rates.

317 A Public Utilities [49] Electricity 145 €=>11.3(1) 317 Alii Public Service Commissions or Boards 145 Electricity 317 Alii( C) Judicial Review or Intervention 145k11.3 Regulation of Charges 317Akl88 Appeal from Orders of Com- 145k11.3(1) k. In general. Most Cited Cases mission Decision not to reassign State of Texas from 31 7Ak 194 k. Review and determina- general services class to city-county consumer class tion in general. Most Cited Cases was not abuse of discretion accorded to Public Util- Absent unreasonably discriminatory rates, ity Commission in approving rate design for elec- Court of Appeals will not overturn Public Utility tric utility's customers, where state failed to offer

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any proof that its load characteristics were similar JONES, JJ. to those of city and county governmental custom- ers, where current classification scheme had appar- ON MOTION FOR REHEARING ently existed unchallenged for some 50 years, and JONES, Justice. where Commission expressed its intention to in- The opinion and judgment issued by this Court vestigate state's assignment to general services on August 14, 1991, are withdrawn, and this opin- class in next rate case. ion is filed in place of the earlier one. [50] Electricity 145 €::;::>11.3(6) The district court affirmed an order of the Pub- 145 Electricity lic Utility Commission ("Commission") setting 145k11.3 Regulation of Charges rates to be charged by El Paso Electric Company 145kll.3(6) k. Proceedings before commis- ("EPEC"). The Commission issued the order, after sions. Most Cited Cases hearing, pursuant to the Public Utility Regulatory Burden was on state, even assuming that it had Act (PURA), Tex.Rev.Civ.Stat.Ann. art. 1446c right to be charged a cost-based rate based on con- (Supp.1992). The City of El Paso ("City"), the State stitutional provisions preventing it from depleting of Texas (on behalf of various state agencies loc- its treasury, to show that rate that it and its agencies ated in western Texas) ("TSA"), and the Office of would have to pay to electric utility were not equal Public Utility Counsel ("OPC"), appellants, seek to utility's actual costs of providing it and its agen- reversal of the trial court's judgment. We will af- cies with service. Vernon's Ann.Texas Const. Art. firm in part and reverse in part. 3, §§ 44, 51, 53;Art. 16, § 6. Disapproving of EPEC's decision to invest in *900 Norman I. Gordon, Diamond, Rash, Leslie, the Arizona Nuclear Power Project, appellants com- Smith & Samaniego, El Paso, Nanette G. Williams, plain of the Commission's order permitting EPEC Asst. City Atty., City of El Paso, El Paso, for City to charge rates that allow it to recover most of the ofEl Paso. project's costs. The Commission ordered the rate in- crease after conducting a lengthy evidentiary hear- Jim Mattox, Atty. Gen., W. Scott McCullough, ing, providing many opportunities for all parties to Asst. Atty. Gen., Austin, for State of Tex. plead and present their cases; the Commission con- sidered two sets of motions for rehearing. The C. Kingsbery Ottmers, Public Counsel, John Travis County district court, to which the complain- Laakso, Asst. Public Counsel, Austin, for OPUC. ing parties brought their appeal, affirmed the Com- mission's order. Jim Mattox, Atty. Gen., Norma K. Scogin, Asst. Atty. Gen., Austin, for PUC. On appeal, appellants challenge twelve differ- ent aspects of the Commission's decision: (1) adop- Michael D. McQueen, Kemp, Smith, Duncan & tion of a non-unanimous stipulation; (2) failure to Hammond, El Paso, Barry Bishop, John F. Willi- disallow more for "decisional" imprudence; (3) ap- ams, Clark, Thomas, Winters & Newton, Austin, proval of deferred accounting for regulatory-lag ex- for El Paso Elec. Co. penses; (4) failure to disallow more for construc- C. Michael Ginnings, Ginnings, Birkelbach, Keith tional imprudence; (5) exclusion of witness Hub- & Delgado, El Paso, for Border Steel. bard's testimony; (6) refusal to find excess capacity in EPEC's system; (7) inclusion of common facilit- ies in rate base; (8) inclusion of income tax expense *901 Before CARROLL, C.J., and ABOUSSIE and in cost of service; (9) inclusion of a portion of Unit

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2 lease payments in cost of service; (1 0) calculation tion requesting the Commission to determine*902 and inclusion of other cost-of-service allowances; whether EPEC's arrangement to sell and lease back ( 11) temporary exclusion of TSA from the proceed- its ownership interest in Unit 2 was in the public in- ings; (12) determination of rates and rate class for terest. On April 6, 1987, EPEC filed applications TSA. We will reverse the trial court's judgment to with various affected cities and the Commission to the extent it affirmed the Commission's approval raise its rates based on the inclusion of the new and use of "deferred accounting" for the carrying nuclear plant in its generation system. The City of costs EPEC incurred between the date the Palo El Paso, one of the affected cities, approved rates Verde plant became commercially operational and within the El Paso city limits that would not have the date the new rates were effective; we will af- allowed EPEC to recover any of its nuclear plant firm the remainder of the trial court's judgment. investment; EPEC appealed the City's decision to the Commission. The Commission consolidated SETTING EPEC's appeal with its appeals from the decisions At the heart of this dispute is EPEC's decision of other municipalities and with the environs case to expand its power generation system by obtaining (affecting_areas outside the cities) that was already an ownership interest in the Arizona Nuclear Power "' be1ore . I<"N1 1t. Project, also known as the Palo Verde Nuclear Gen- erating Station. EPEC and four other utility com- FN1. All of the affected cities set rates panies agreed to partially fund and otherwise assist within their respective city limits prohibit- in building one or more nuclear steam electric gen- ing EPEC from recovering its nuclear plant erating units, with attendant common facilities. In investment. Only El Paso sought review of return, EPEC was entitled to 15.8% of the resulting the Commission's order. net energy generation and the same percentage of available generating capability. Construction is Because of the voluminous evidence to be complete on the common facilities and two of the presented, the Commission initially divided the pro- five units originally planned. At the time this pro- ceedings in the rate case into three phases. The ceeding was heard by the Commission, a third unit Commission added a fourth phase after several was still under construction. parties tendered a non-unanimous "stipulation" to the Commission and requested that the Commission Factors arising after construction began have base its decision on the stipulation. In addition, pur- induced EPEC to alter its ownership interest in the suant to an agreed motion, the Commission consol- units. Originally, EPEC owned an undivided in- idated the rate case with the proceeding to approve terest in each of the units as a tenant in common the sale/leaseback arrangement. An examiner con- with the other four project participants. Although vened hearings on each of the four phases during EPEC retains its undivided interest in Unit 1, the August, September, October, and November of company has sold its interest in Unit 2 and made ar- 1987. On February 1, 1988, the hearings examiner rangements to lease the unit back for the duration filed a report with the Commission recommending of EPEC's involvement in the project. against adoption of the stipulation.

Because of the complexity of appellants' points On March 31, 1988, the Commission signed an of error, we will supply additional facts from there- order adopting and incorporating the terms of an cord throughout this opinion as necessary to clarify amended and restated stipulation and increasing the discussion. rates to permit EPEC to earn a return on part of its investment. The order withheld approval of the PROCEDURAL BACKGROUND sale/leaseback arrangement until a later proceeding, On October 31, 1986, EPEC filed an applica- effectively undoing the earlier consolidation. On

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May 10, 1988, the Commission made minor 438,441 (Tex.App.l985, writ refd n.r.e.). changes to its order in response to motions for re- hearing filed by the City, OPC, TSA, and others. [2][3] *903 We may not substitute our discre- The City, OPC, and TSA filed second motions for tion or our judgment for that of the agency; we may rehearing which the Commission overruled on June reverse an agency's decision only if it is unsuppor- 16, 1988. ted by substantial evidence, is arbitrary, or results from an abuse of discretion. Railroad Comm'n v. The City, OPC, and TSA each appealed the Continental Bus System, Inc., 616 S.W.2d 179, 181 Commission's order to a Travis County district (Tex.1981). An agency's decision is arbitrary or court, and the Commission obtained a consolidation results from an abuse of discretion if the agency: of those appeals. All the appellants participated in (1) failed to consider a factor the legislature directs the ensuing district-court review, which resulted in it to consider; (2) considers an irrelevant factor; or an affirmance of the Commission's order. The City, (3) weighs only relevant factors that the legislature OPC, and TSA each raise several challenges to the directs it to consider but still reaches a completely trial court's judgment and, through it, to the Com- unreasonable result. Gerst v. Nixon, 411 S.W.2d mission's order. 350, 360 n. 8 (Tex.1966); Statewide Convoy Trans., Inc. v. Railroad Comm'n, 753 S.W.2d 800, 804 THE NON-UNANIMOUS STIPULATION (Tex.App.l988, no writ). The threshold complaint of the City and OPC is that the Commission erred in basing its final order, [4] Appellants analogize the present case to a in part, on a non-unanimous stipulation. Both ap- civil cause in which the court has rendered an pellants argue that there is no substantial evidence agreed judgment without the consent of all parties. to support the stipulated matters and that the Com- The analogy is not apt. In the present case, the de- mission violated its own procedural rules by con- cision-maker did not impose the terms of a settle- sidering the stipulation. In addition, OPC asserts ment on non-settling parties. Although the parties that some necessary findings or statements of un- signing the stipulation believed its terms fairly re- 2 derlying facts are lacking and that, by considering solved disputed issues, FN tender of the stipula- and basing its final order on the stipulation, the tion to the examiner did not bind the Commission Commission "improperly attempt[ed] to negate to "adopt" it. Furthermore, the Commission did not, statutorily created rights belonging solely to OPC." as appellants suggest we presume, adopt the stipu- lation as its final order without scrutiny. [I] An unarticulated assumption underlies the majority of appellants' challenges to the Commis- FN2. EPEC, the Commission staff, and sion's decision in these and other points of error; al- four corporate intervenors which pur- though they do not say so explicitly, appellants im- chased significant amounts of electricity pliedly urge us to presume that, by basing its final from EPEC all signed the stipulation. order partially on stipulated matters, the Commis- sion completely abdicated its responsibility to de- The non-signing parties had ample opportunity termine disputed issues. We may not so presume; to argue their positions both before and after the indeed, the law compels a contrary presumption. In Commission rendered its decision. A fourth phase reviewing a challenged administrative order, we was added to the hearings to provide a forum in must presume its validity. The challenger bears the which parties could object to the Commission's use burden of showing error. Texas Health Facilities of the stipulation as a partial basis for its final or- Comm'n v. Charter Medical-Dallas, Inc., 665 der. In addition to presenting evidence, the parties S.W.2d 446, 453 (Tex.l984); Continental Cars, submitted briefs concerning use of the stipulation, Inc. v. Texas Motor Vehicle Comm'n, 697 S.W.2d filed exceptions to the proposed final order incor-

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porating stipulated matters, and moved for rehear- the stipulation as a basis for resolving the contested ing after the Commission rendered its decision. issues. Second, the Commission made the requisite Having urged their objections to the Commission's independent findings. The initial part of the Com- use of the stipulation at each of these stages, appel- mission's Order recited: lants yet failed to show that basing a final order on a non-unanimous stipulation would be improper. *904 4. Even where some parties to a proceeding do not agree to a stipulated result, it is reasonable In a similar case, coincidentally involving the to adopt such a stipulation if: Palo Verde Nuclear Generating Station, the New Mexico Supreme Court approved the state Public (a) The parties opposing the stipulation have Service Commission's adoption of a non-unanimous notice that the stipulation may be considered by stipulation: the Commission and an opportunity to be heard on their reasons for opposing the stipulation; [The Commission] can adopt a contested stipula- tion by, first, affording any non-stipulating party (b) The matters contained in the stipulation are an opportunity to be heard on the merits of the supported by a preponderance of the credible stipulation (i.e., whether it is a fair and reason- evidence in the case; able resolution of the controversy before the (c) The stipulation is in accordance with ap- Commission) and second, making an independent plicable law; finding, supported by substantial evidence in the record, that the stipulation does indeed resolve (d) The stipulation results in just and reason- the matters in dispute in a way that is fair, just able rates; and reasonable and in the public interest. (e) The results of the stipulation are in the pub- Attorney General of New Mexico v. New Mex- lic interest, including the interest of those cus- ico Public Service Comm'n, 111 N.M. 636, 640, tomers represented by parties opposing the stipu- 808 P.2d 606, 610 (1991). The New Mexico court lation. relied on Mobil Oil C01p. v. Federal Power Com- mission, 417 U.S. 283, 94 S.Ct. 2328, 41 L.Ed.2d 5. Pursuant to the Findings of Fact and Conclu- 72 (1974), where the United States Supreme Court sions of Law set forth below, the Commission noted the distinction between considering a propos- finds the Amended and Restated Stipulation, as al "as a settlement" and considering it "on its mer- modified, is a reasonable basis for resolution of its": "[E]ven if there is a lack of unanimity [in the the issues in this case and that adoption of the stipulation], it may be adopted as a resolution on Amended and Restated Stipulation, as modified, the merits .... " 417 U.S. at 414, 94 S.Ct. at 2282 as the basis of the Commission's Order in this (quoting Placid Oil Co. v. FPC, 483 F.2d 880, 893 proceeding is in the public interest. (5th Cir.1973)) (emphasis in original). In addition, Finding of Fact No. 237 stated: In the present case, the requirements mentioned "The provisions of the Amended and Restated Stip- in the foregoing cases for the adoption of a non- ulation are reasonable and supported by a prepon- unanimous stipulation were satisfied. First, the non- derance of the credible evidence in this record and stipulating parties were given an opportunity to be should be adopted." Conclusion of Law No. 28 heard on the merits of the stipulation. Indeed, as stated: "The Amended and Restated Stipulation, as stated above, the Commission added a fourth phase modified per Finding of Fact No. 6, represents a to the proceedings devoted exclusively to receiving reasonable resolution of the contested issues in this evidence and argument on the propriety of using docket, is supported in the record, is in the public

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interest, and should therefore be adopted, as the prudence in investing and remaining involved in the basis for the Commission's Order in this case." project. We hold that the Commission was not re- quired to accept or reject the examiner's report in its Appellants have not shown that use of the stip- entirety. The Commission's authority undoubtedly ulation as a partial basis for the final order is arbit- extends to repudiating a part of the examiner's re- rary, unreasonable, an abuse of discretion, or in- port and modifying it by deletion. volves consideration of factors other than those the legislature has directed the Commission to con- Within its challenge to the Commission's use of sider. Under such circumstances, we conclude that the stipulation, OPC claims that paragraph 4(e) of the Commission may generally set just and reason- the Commission's final order "supplants" OPC's au- able rates in an order based, in part, on a non- thority to represent the interest of residential and unanimous stipulation. small business consumers in ratemaking cases of this type. Paragraph 4(e) provides: "The results of On a procedural level, OPC asserts that the the stipulation are in the public *905 interest, in- Commission's rules, specifically Public Utility cluding the interest of those customers represented Commission Rules of Practice & Procedure § by parties opposing the stipulation." OPC's inter- 21.151, 16 Tex.Admin.Code § 21.151 (1990), pro- pretation of the order and of its own enabling legis- hibit it from basing its order on a non-unanimous lation is incorrect. stipulation. Section 21.151 provides: The legislature created OPC to "advocate" the After the expiration of the time for filing excep- interests of residential and small commercial con- tions and replies thereto, the examiner's report sumers. PURA § 15A(a). However, the Commission and proposal for decision will be considered by must set just and reasonable rates in ratemaking the commission and either adopted, modified and cases. PURA § 38. In addition, only the Commis- adopted, or remanded to the examiner. ... sion has the authority to determine whether a sale of utility assets is in the public interest. See PURA OPC admits the Commission has the power to § 63. Authority to advocate a position on behalf of reject an examiner's recommendation; however, it small businesses and residential consumers is not claims the Commission may not modify and then equivalent to authority to decide what is in the pub- adopt a stipulation. OPC argues that the Commis- lic's best interest. The only authority OPC possesses sion violated section 21.151 by basing its final or- is the former. OPC's contention is overruled. der on a modified stipulation over the examiner's contrary recommendation. The argument is merit- One challenge to the Commission's use of the less. non-unanimous stipulation remains. Appellants ar- gue that some findings of fact phrased in statutory [5] Paragraph six of the Commission's final or- language lack the required accompanying concise der expressly adopts findings of fact and conclu- statements or findings of underlying facts. This ar- sions of law proposed by the parties who signed the gument, addressed to all the findings accompanying stipulation. The Commission accepted the proposed the final order, is too general to preserve error. To findings and conclusions rather than those recom- the extent that appellants assert generally that ne- mended by the examiner only when there was a cessary findings of underlying fact are missing, conflict between the two. The Commission ex- they have waived their complaint by failing to pressly adopted the "examiner's report" to the de- demonstrate any error prejudicing their substantial gree it was consistent with the proposed findings rights. See Administrative Procedure and Texas Re- and conclusions; it expressly repudiated the section gister Act (hereinafter "APTRA"), of the examiner's report concerning EPEC's Tex.Rev.Civ.Stat.Ann. art. 6252-13a, § 19(e)

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(Supp.1992). ate at the same level. When appellants challenged the prudence of EPEC's decisions, the City, EPEC, The order addresses numerous issues, and ap- and the Commission staff each offered expert testi- pellants have made several specific substantial-evid- mony on whether EPEC had acted prudently in de- ence and finding-of-fact challenges. We will dis- ciding to participate in the project and in continuing cuss appellants' specific (and consequently pre- to participate at the 15.8% level. The Commission served) challenges while disposing of their remain- concluded EPEC had not been entirely prudent in ing points of error. making decisions about its level of participation in the project. "DECISIONAL" IMPRUDENCE The Commission concluded that due to im- The issues we must resolve are: (1) whether prudent decisions, $32 million of EPEC's costs substantial evidence supports the findings underly- should not be included in rate base. The City's third ing the Commission's disallowance of the precise point of error and OPC's second point contend that $32 million figure, and (2) whether the Commission the disallowance is unsupported by substantial re- made the necessary findings of fact to allow this cord evidence arguing that the amount disallowed Court to conduct a meaningful review of im- ' FN3 should have been greater. OPC also charges prudently incurred costs. that the Commission acted arbitrarily and abused its discretion in selecting the $32 million figure and A. Substantial Evidence and Abuse of Discretion. that it made insufficient findings of underlying [6][7] In conducting a substantial-evidence re- facts. view, we must determine whether the evidence as a whole is such that reasonable minds could have FN3. All parties appear to agree that, to reached the conclusion*906 the agency must have some degree, EPEC made imprudent de- reached in order to take the disputed action. Texas cisions. On its face, PURA § 41(a) con- State Bd. of Dental Examiners v. Sizemore, 759 templates an imprudence disallowance S.W.2d 114, 116 (Tex.1988), cert. denied, 490 U.S. only within the framework of a request that 1080, 109 S.Ct. 2100, 104 L.Ed.2d 662 (1989); "construction work in progress" be in- Texas Health Facilities Comm'n v. Charter Medic- cluded in rate base. The parties, however, al-Dallas, Inc., 665 S.W.2d 446, 453 (Tex.l984). have not briefed or argued whether a We may not substitute our judgment for that of the "prudence" standard governs the inclusion agency and may consider only the record on which of new nuclear plant-in-service in rate the agency based its decision. Sizemore, 759 base. We will therefore discuss appellants' S.W.2d at 116. The appealing party bears the bur- points in the terms they have chosen. We den of showing a lack of substantial evidence. do not express an opinion on the possible Charter Medical, 665 S.W.2d at 453. It cannot meet existence of a distinction between the reas- this burden merely by showing that the evidence onableness standard guiding the PUC in preponderates against the agency decision. ld. at setting rates and the prudence standard it 452. If substantial evidence would support either uses pursuant to PURA § 41(a) in deciding affirmative or negative findings, we must uphold whether to include the value of construc- the agency's order, resolving any conflict in favor tion work in progress in rate base. of the agency's decision. Auto Convoy Co. v. Rail- road Comm'n, 507 S.W.2d 718, 722 (Tex.1974); Based on its anticipated load demand, EPEC Warner v. City of Lz!fkin, 582 S.W.2d 165, 167 first decided to participate in the nuclear power (Tex.Civ.App.1979, writ refd n.r.e.). project at a 15.8% level. Confident that its decision was a prudent one, EPEC has continued to particip- Appellants' position is that only the City's wit-

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ness, Ben Johnson, provided a method by which the complexity of a decision to construCt or purchase Commission could quantify the amount of im- new generating capacity. A utility must weigh prudently incurred costs. Johnson offered the opin- many competing concerns before undertaking an ion that EPEC had made several imprudent de- expansion project. EPEC, as a part of its decision to cisions and that, as a result, the Commission should participate in the Arizona Nuclear Power Project, disallow 50% of its costs. The City contends that considered the following factors, among others: (1) because no other witness suggested a quantification the feasibility of obtaining financing; (2) the effect method, the Commission, upon a finding of some of longterm financing on EPEC's financial integ- decisional imprudence, should have adopted John- rity; (3) the potential impact on ratepayers of in- son's quantification method and, necessarily, his creasing system capacity by a significant percent- result. We do not agree. age; (4) predicted expenses, revenues, and load de- mands for the relevant time periods; (5) EPEC's de- [8] The Commission is empowered to hold gree of financial flexibility; and (6) the availability hearings, receive evidence, make decisions, issue of alternative sources for the additional capacity orders, and find facts. PURA § 16. In addition, the that forecasts had shown would be necessary. The Commission impliedly possesses those powers ne- effects these factors have on total project costs are cessary and convenient to making findings and de- not susceptible of ready quantification. cisions. PURA § 16(a). PURA does not expressly confer on the Commission power to judge wit- [9] Requiring the Commission to adopt or re- nesses' credibility; however, the requirement that ject witnesses' testimony in toto, especially when the Commission make decisions, findings of fact, the testimony concerns a multi-faceted issue such and conclusions of law implies the necessary corol- as this one, would hobble the Commission's ability lary power to judge credibility and to accept or re- to assess each witness and render its decision based ject a witness's testimony in whole or in part. Gerst solely *907 on the testimony it found credible. v. Guardian Sav. & Loan Ass'n, 434 S.W.2d 113, Having deduced that the Commission may properly 116 (Tex.1968); Texas State Bd. of Dental Exam- accept less than all of a witness's testimony, we iners v. Silagi, 766 S.W.2d 280, 283 conclude the Commission committed no error in (Tex.App.1989, writ denied). disallowing a lesser percentage of costs than John- son recommended. The Commission could properly EPEC maintains that, based on information identify the factors which credible evidence showed available at the time it made its decisions, its con- EPEC should have considered when making its de- tinued participation in the project would enable it to cisions. Likewise, the Commission could also de- supply ratepayers with needed electricity at the cide that prudence would not have required EPEC lowest possible cost. Consequently, EPEC contends to consider other factors because the evidence to that all its costs should be included in rate base. the contrary was not credible. The City, on the other hand, argues that available data would have informed a prudent utility manager The record contains substantial evidence to that involvement in a nuclear project would be un- support a disallowance figure of zero for decisional duly burdensome to ratepayers. Consequently, imprudence; the Commission would, therefore, Johnson recommended that the Commission disal- have been acting within its discretion had it agreed low half of EPEC's costs. However, the evidence that EPEC was entirely prudent in its management encompassed more than Johnson's recommenda- and planning. The substantial evidence would also tions. have supported a Commission finding that 50% of 4 EPEC's costs should have been disallowed.FN Ap- All the witnesses who offered their opinions pellants assert that the stipulation is the only pos- about EPEC's decisional prudence recognized the

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sible evidence of the exact $32 million disallow- against interest all combine to compel our conclu- ance. Because the appellants do not admit that the sion that substantial record evidence supports the stipulation has any evidentiary weight, they contend $32 million disallowance. We overrule the substan- there is no evidence to support the $32 million fig- tial-evidence challenge to the disallowance for de- ure. We disagree. cisional imprudence.

FN4. We express no opinion on the pro- In addition, because OPC's contention that the position that, because the Commission's Commission abused its discretion rests on the prudence decision and resulting disallow- premise that the stipulation has no evidentiary ance rested on a number of factors, the weight, and because we have concluded to the con- Commission could reasonably have con- trary, we overrule this contention as well. cluded that the substantial evidence would support a figure anywhere within the range B. Findings ofFact. from zero to 50% of the total project costs. As its final challenge within this point, OPC asserts that "[t]he Commission's findings are insuf- [ 1OJ Because it is a statement contrary to ficient to comply with APTRA." However, instead EPEC's pecuniary interest, the concession has some of arguing that specific findings of underlying fact evidentiary weight. A declaration contrary to a are insufficient, OPC complains that the Commis- party's position on a disputed issue is akin to a sion failed to provide "explicit statements of under- quasi-admission. While not binding on the declar- lying facts to support its findings as required by ant, as a judicial admission would be, such a con- Tex.Rev.Civ.Stat.Ann. art. 6252-13a, § 16(e) cession constitutes some evidence. Mendoza v. Fi- (APTRA)." FNS delity & Guar. Ins. Underwriters, Inc., 606 S.W.2d 692, 694 (Tex.l980); Texas Distillers, Inc. v. How- FN5. We construe OPC's allegation to ell, 409 S.W.2d 888, 890 (Tex.Civ.App.l966, writ refer to the requirements of section 16(b ), rcf'd n.r.e.). It is for the trier of fact to determine which deals with findings of fact. APTRA the weight to be assigned to a quasi-admission. § 16(e) addresses agency motions for re- Mendoza, 606 S.W.2d at 694. hearing.

EPEC's position has always been that it acted [ 11] Section 16(b) of APTRA provides, in part, prudently in deciding to participate in the project at that "[f]indings of fact, if set forth in statutory lan- the 15.8% level. Nevertheless, EPEC conceded guage, must be accompanied*908 by a concise and through the stipulation that, if its decision had been explicit statement of the underlying facts support- imprudent, the resulting costs that should be disal- ing the findings." (Emphasis added.) The Texas Su- lowed totaled $32 million. Such a statement is preme Court has concluded that an agency's find- clearly contrary to EPEC's position. Therefore, the ings of fact need the additional support of findings Commission could properly consider and weigh the of underlying facts only when the ultimate findings stipulation in quantifying the imprudently incurred are in terms taken directly from the enabling legis- costs. lation or when they "represent the criteria that the legislature has directed the agency to consider in The range of figures supported by the testi- performing its function." Charter Medical, 665 mony of expert witnesses, the complexity of the is- S.W.2d at 451. sues the Commission had to review to determine whether EPEC made prudent decisions, the diffi- The "statutory language" to which APTRA § culty of assigning a value to the effects of any com- 16(b) refers is the language in the statute that con- ponent on project costs, and EPEC's admission fers authority on the agency to take the complained-

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of action. !d. In PURA, the legislature authorized of its participation in the Palo Verde Project." the Commission to make orders setting rates. (Emphasis added.) Taken together, these findings PURA § 37. A number ofPURA's sections also de- adequately supply the required concise statement of tail the criteria the Commission is to consider in underlying facts supporting Finding 101. setting rates. See PURA §§ 38, 39, 41, and 43. Therefore, only when the Commission's findings OPC contends that, in order to be sufficient, the are stated in PURA's express terms, or when they Commission's findings of underlying fact must represent criteria the legislature has directed the identify "the processes and acts found to be im- Commission to consider, must the Commission also prudent, the nexus between those acts and the disal- make findings of underlying fact. lowance amount, [and] the evidentiary support for the disallowance figure." OPC fails to point either [12] OPC does not direct us to a particular to statutory provisions or case law mandating that finding that requires, but is not accompanied by, the Commission make such findings. Not having findings of underlying fact. However, we conclude discovered any such authority ourselves, we con- from its argument that Findings 101 through 103 clude that such findings are not required. are the subjects of its complaint, because those findings address the prudence and disallowance is- We overrule the City's third point of error and sues. Although PURA does not expressly require OPC's second point of error. the Commission to make a finding of prudence be- DEFERRALS fore including costs in rate base, once the Commis- EPEC requested that its rate base be increased sion finds a major project to have been imprudently by the amount of carrying costs and operating and planned or managed, it should generally disallow maintenance costs it incurred during "regulatory project costs to the extent of the imprudence. See 6 lag." FN The utility had "deferred" these types of PURA § 41(a); supra note 3. costs for Units 1 and 2, aggregating each type of Finding of Fact 101 is phrased in statutory cost for each unit into a separate capital *909 ac- terms; the Commission therein decided that EPEC count.FN? EPEC obtained the Commission's prior was "not entirely prudent in its planning and man- permission to defer Unit 1 costs. The Commission agement" of the project. The phrasing of that find- reserved the right, however, to refuse subsequently ing in statutory terms required the Commission to to include the deferred costs in rate base to the ex- make findings of underlying fact showing the basis tent they were unreasonable, related to plant not for the Commission's determination of imprudence used and useful, or were spent or incurred im- and supplying the amount of the disallowance. prudently. Although EPEC did not obtain prior per- Findings 102 and 103 accomplish these goals. mission to defer its post-in-service costs for Unit 2, it nevertheless deferred them, apparently assuming Neither Finding 102 or 103 is phrased in stat- that obtaining prior approval a second time was un- utory terms. Finding 103 states that necessary. After the rate-increase proceeding was "[ q]uantification of the effects of imprudence re- completed, the Commission included the deferred quires the exercise of judgment. based upon the costs for both units in rate base. evidence. In light of the evidence relating to prudence and the difficulties in quantification, the FN6. "Regulatory lag" is the period quantification of decisional imprudence at $32 mil- between the date a new plant begins com- lion for Units 1 and 2 is reasonable and appropri- mercial operation (the "in-service" date) ate." Finding 102 indicates the Commission con- and the effective date of the new rates that cluded that imprudence existed only with respect to result from including the new plant's costs "the Company's continuing evaluation of the level in rate base.

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FN7. "Deferral" is an accounting proced- have been waived. APTRA § 16(e); Burke ure a utility can use to record all costs of a v. Central Educ. Agency, 725 S.W.2d 393, certain type in two accounts, one an ex- 396 (Tex.App.l987, writ refd n.r.e.). pense account and the other a capital asset account. As the expense account balance [ 13] A reviewing court's role in construing a increases, so does the capital asset account statute is to "seek out the legislative intent from a balance; so that the two balances remain general view of the enactment as a whole, and, once identical. Recording costs this way pre- the intent has been ascertained, to construe the stat- serves evidence the utility may later use to ute so as to give effect to the purpose of the Legis- seek inclusion of the capital account bal- lature." Hightower v. State Comm'r of Educ., 778 ance in rate base and a corresponding in- S.W.2d 595, 597 (Tex.App.1989, no writ); see also crease in rates. Medeiros v. Insurance Co. of N. Am., 781 S.W.2d 404, 406 (Tex.App.l989, no writ); Sexton v. Mount In this appeal, the City and OPC contend the Olivet Cemetery Ass'n, 720 S.W.2d 129, 137 Commission erred, first, in entering an order per- (Tex.App.l986, writ refd n.r.e.). mitting EPEC to defer Unit 1 costs and, second, in subsequently including the "deferred-costs assets" [14][15] As a general rule, an administrative 8 agency is a creation of the legislature and, as such, for both units in rate base. FN OPC and the City lodge several arguments against the deferred ac- has only those powers expressly conferred and counting procedure used here, including that the those necessary to the accomplishment of its duties. practice constitutes impermissible retroactive rate- State v. Jackson, 376 S.W.2d 341, 344 (Tex.l964); making and t~at it. violates the "ormal-cost" Sexton, 720 S.W.2d at 137; Railroad Comm'n v. 9 Atchison, T. & S.F. R.R., 609 S.W.2d 641, 643 standard contamed m PURA § 4l(a). · Thus, they assert that the Commission exceeded its au- (Tex.Civ.App.1980, writ refd n.r.e.). The present thority by including the deferred post-in-service case is governed by PURA, which expressly grants costs in rate base. to the Commission "the general power to regulate and supervise the business of every public utility FN8. TSA also purports to complain of the within its jurisdiction and to do all things, whether deferral procedure. However, TSA failed specifically designated in this Act or implied to address the alleged error in its motions herein, necessary and convenient to the exercise of for rehearing to the agency. Therefore, it this power and jurisdiction." PURA § 16(a). Are- has waived any error. APTRA § 16(e); viewing court may determine, as a matter of law, Burke v. Central Educ. Agency, 725 the scope of an agency's statutory authority. See S.W.2d 393,396 (Tex.App.l987, writ refd Gage v. Railroad Comm'n, 582 S.W.2d 410, 412 n.r.e.). (Tex.l979).

FN9. The City did not preserve a sec- [16] The power of an agency to take such ac- tion-4l(a) argument in its motion for re- tions as may be "necessary" to perform an express hearing to the Commission. The City also duty is not without limits. This Court has previ- argues in its brief to this Court that the ously held that Commission failed to make necessary find- ings of underlying fact to support its con- [t]he agency may not, however, on a theory of clusion that Unit 2 costs should be in- necessary implication from a specific power, cluded in rate base, but the City likewise function, or duty expressly delegated, erect and did not assign such failure as error in its exercise what really amounts to a new and addi- motion for rehearing. Both complaints tional power or one that contradicts the statute,

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no matter that the new power is *910 viewed as able earning capacity of the property under par- being expedient for administrative purposes. ticular rates prescribed by statute, and the sum re- quired to meet operating expenses, are all matters Sexton, 720 S.W.2d at 137-38 (emphasis ad- for consideration, and are to be given such weight ded). Thus, if there is no specific express authority as may be just and right in each case. We do not for a challenged action, and if the action is incon- say that there may not be other matters to be re- sistent with a statutory provision or ascertainable garded in estimating the value of the property. legislative intent, we must conclude that, by per- What the company is entitled to ask is a fair re- forming the act, the agency has exceeded its grant turn upon the value of that which it employs for of statutory authority. the public convenience.

PURA requires the Commission to set rates at a !d. at 546-47, 18 S.Ct. at 434. level that will permit each utility "a reasonable op- portunity to earn a reasonable return on its invested Smyth v. Ames commanded that both the ori- capital used and useful in rendering service to the ginal cost of construction, on the one hand, and the public over and above its reasonable operating ex- current reproduction or replacement cost, on the penses." PURA § 39(a). This provision imposes other hand, must be "considered" in setting rates. many complex tasks on the Commission: What are As debate raged as to which of the two cost meas- the utility's reasonable operating expenses? What ures should receive the greater weight or emphasis, portion of the utility's expenditures constitute capit- the Smyth fair-return doctrine received increasing al investment? What portion of the utility's invested criticism over the years. Finally, Smyth was aban- capital is used and useful in rendering service? doned by the Supreme Court in Federal Power How should the value of the utility's used- Comm'n v. Hope Natural Gas Co., 320 U.S. 591, 64 and-useful invested capital be calculated? What is a S.Ct. 281, 88 L.Ed. 333 (1944). The Court in Hope reasonable return on the utility's used-and-useful held that regulatory commissions are not bound by invested capital? any particular formula in determining rates, as long as the rates established "enable the company to op- Historically, one of the most vexing questions erate successfully, to maintain its financial integ- for regulatory authorities has been how to calculate rity, to attract capital, and to compensate its in- the value of a utility's invested capital. See Charles vestors for the risks assumed." 320 U.S. at 605, 64 F. Phillips, The Regulation of Public Utilities S.Ct. at 289. 305-29 (2nd ed. 1988) (hereinafter cited as "Phillips"). In the landmark case of Smyth v. Ames, The Texas experience roughly paralleled that 169 U.S. 466, 18 S.Ct. 418, 42 L.Ed. 819 (1898), of the federal system. In Railroad Commission v. the United States Supreme Court established the Houston Natural Gas Corporation, 289 S.W.2d 559 legal basis of the so-called "fair value" doctrine: (Tex.1956), after a thorough historical review, the Texas Supreme Court held that pre-PURA statutes [T]he basis of all calculations as to the reason- mandated a fair-value method of valuation, which ableness of rates to be charged by a corporation the court defined as "a reasonable balance between ... must be the fair value of the property being original cost less depreciation and replacement cost used by it for the convenience of the public. And new less an adjustment for present age and condi- in order to ascertain that value, the original cost tion." !d. at 572. As originally adopted in 1975d of construction, the amount expended in perman- PURA incorporated this fair-value definition. FNl ent improvements, the amount and market value In 1983, however, the legislature amended PURA of its bonds and stock, the present as compared to make Texas a pure "original-cost" state. Section with the original cost of construction, the prob- 4l(a) ofPURA now provides:

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FN 10. The relevant sections of PURA ori- nor more than 40% current cost less an ginally provided: adjustment for both present age and con- dition. The regulatory authority may Sec. 39. In fixing the rates of a public consider inflation, deflation, quality of utility the regulatory authority shall fix service being provided, the growth rate its overall revenues at a level which will of the service area, and the need for the permit such utility to recover its operat- public utility to attract new capital in de- ing expenses together with a reasonable termining a reasonable balance. return on its invested capital. 1975 Tex.Gen.Laws, ch. 721, §§ 39-41, Sec. 40. (a) The regulatory authority at 2341-42 (PURA §§ 39-41, since shall not prescribe any rate which will amended); see also Southwestern Bell yield more than a fair return upon the ad- Tel. Co. v. PUC, 571 S.W.2d 503, justed value of the invested capital used 512-16 (Tex.1978). and useful in rendering service to the public. *911 Sec. 41. The components of invested cap- ****** ital ... shall be determined according to the fol- lowing rules: Sec. 41. The components of adjusted value of invested capital and net income (a) Invested Capital. Utility rates shall be shall be determined according to the fol- based upon the original cost of property used by lowing rules: and useful to the public utility in providing ser- vice including construction work in progress at (a) Adjusted Value of Invested Capital. cost as recorded on the books of the utility. The Utility rates shall be based upon the ad- inclusion of construction work in progress is an justed value of property used by and use- exceptional form of rate relief to be granted only ful to the public utility in providing ser- upon the demonstration by the utility that such vice including where necessary to the inclusion is necessary to the financial integrity of financial integrity of the utility construc- the utility. Construction work in progress shall tion work in progress at cost as recorded not be included in the rate base for major projects on the books of the utility. The adjusted under construction to the extent that such projects value of such property shall be a reason- have been inefficiently or imprudently planned or able balance between original cost less managed. Original cost shall be the actual money depreciation and current cost less an ad- cost, or the actual money value of any considera- justment for both present age and condi- tion paid other than money, of the property at the tion. The regulatory authority shall have time it shall have been dedicated to public use, the discretion to determine a reasonable whether by the utility which is the present owner balance that reflects not less than 60% or by a predecessor, less depreciation. nor more than 75% original cost, that is, the actual money cost, or the actual PURA § 41(a) (emphasis added). money value of any consideration paid other than money, of the property at the In addressing the arguments made by the City time it shall have been dedicated to pub- and OPC in the present case, we deem it convenient lic use, whether by the utility which is to discuss separately the two different types of costs the present owner or by a predecessor, for which the Commission allowed deferred-ac- less depreciation, and not less than 25% counting treatment: (1) carrying costs, and (2) oper-

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ating and maintenance costs. struction projects. Two methods have been de- . FNII veloped to compensate utilities for such costs. The A. Carrymg Costs. first method

FNll. There are actually two types of such capitalizes the carrying charges incurred during "costs" associated with capital construc- the construction period as allowance for funds tion projects: ( 1) interest paid on debt cap- used during construction (AFUDC). AFUDC is ital (i.e., borrowed funds); and (2) inability recorded part as current income, part as an offset to earn a fair return on equity capital. to interest expenses, but no cash payments are While the difference between the two is made by ratepayers during construction. The pay- relevant for some purposes, it does not ap- ments from ratepayers to recover the carrying pear to be so for purposes of our decision charges begin when the completed plant goes on in the present case. Accordingly, we refer stream. The entire cost of the plant (including to both collectively as "carrying costs." AFUDC) is added to rate base, and it earns a rate of return on investment and is depreciated over [17][18] As a general rule, the only assets that the life of that plant. may be included in a utility's rate base (so that the utility earns a return on the value of such assets) are James Bonbright, et al., Principles of Public those found to be "used and useful" in providing Utility Rates 246 (2nd ed. 1988) (hereinafter cited service to the utility's customers. As quoted above, as "Bonbright"). The second method, as the Bon- for example, section 41(a) of PURA specifically bright treatise explains it, states that rates must be based on "the original cost is to include construction work in progress of property used by and useful to the public utility (CWIP) in the rate base. (CWIP includes accrued in providing service." When a new plant is built, AFUDC on investment not in rate base.) The reg- the utility must invest large amounts of capital dur- ulatee recovers its carrying charges currently ing construction. Until the plant is completed, from ratepayers through the return component of however, it is usually not considered a used and its rates, rather than adding them to the cost of useful asset. Accordingly, a rigid application of the construction for recovery when the plant is in ser- used-and-useful rule could prohibit the utility from vice. The return on CWIP is recorded as income earning a return on this invested capital until the on a current basis (like AFUDC), and actual cash new plant is completed and its cost is included in payments are made by the ratepayers currently rate base by the regulatory authority. Thus, under (unlike AFUDC). such a rigid application, equity capital that had been or *912 could have been earning a return for Id. Section 41(a) of PURA expressly permits the utility would, when devoted to construction of the inclusion of CWIP in rate base where the utility the new plant, be unable to earn a return until the demonstrates that "such inclusion is necessary to new plant was completed and its cost included in the financial integrity of the utility," and CWIP rate base; further, any interest actually paid on bor- may be included only to the extent that the project rowed funds would not earn a return, even though has not been "inefficiently or imprudently planned the payment of such interest might have required or managed." PURA § 41(a). the investment of additional capital. In the present case, CWIP was not requested; It has been widely if not universally conceded rather, EPEC accrued AFUDC in a capital account that utilities should, in fairness and occasionally out while the plant was under construction. When the of economic necessity, be compensated for these new plant began commercial operation, FERC ac- carrying costs, especially for major capital con- counting rules required EPEC to cease accruing

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AFUDC in a capital account; any such costs that costs that were allowed to be "deferred" and which continue after commercial operation begins must were included in rate base in the present case are thereafter be recorded as expenses. Except for de- indistinguishable from the AFUDC that was prop- ductions for imprudence, the "original cost" of the erly accrued and capitalized before commercial op- plant, including AFUDC, was included by the Com- eration began. Accordingly, any procedure that per- mission in EPEC's rate base. In addition, however, mits such costs to be included in rate base would the Commission allowed EPEC to defer, and later effec tively allow the inclusion in rate base of a con- 1

included in rate base, the carrying costs that EPEC struction cost of the plant that was incurred after incurred between the date of commercial operation the plant's dedication to public use, thereby violat- and the effective date of the new rates that included ing the mandate of section 4l(a) that the original in rate base the "original cost" of the Palo Verde cost of new plant be calculated as of the date the plant. These carrying costs appear to be simply a plant is placed in public service. In effect, such a continuation of AFUDC under a different name. procedure would, by an accounting device, permit OPC contends that the Commission's action viol- the Commission to let in through the back door ated the provision in section 41(a) permitting only what the legislature has expressly prohibited com- the cost of the new plant "at the time it shall have ing in the front door. been dedicated to public use" to be included in rate base. We agree. Even without the unique wording of section 41(a), the Washington Utilities and Transportation The legislature has made it clear in section Commission reached the same conclusion when 4l(a) that the value of new plant is, for rate-base faced with a request to extend the period of capital- purposes, to be measured by its original cost at the ization of AFUDC from the in-service date of a time the plant is dedicated to public use. As stated new plant to the date when new rates went into ef- above, it has been generally recognized that carry- fect: ing costs associated with the construction of a new plant are essentially part of the "original cost" of [A]ccrual of AFUDC after the in-service date of a constructing the plant, and the utility should be utility plant would result in a utility plant with a compensated for them by including at least part of value exceeding its "original" cost. The original those costs in rate base. Nonetheless, the legislature cost concept requires that the value of utility apparently chose to simplify the calculation of a plant be determined at the time it is first placed in plant's original cost by placing a "cut-off date" on service to the public. To grant this petition would construction and acquisition costs: such costs must establish a dangerous and unwarranted precedent be calculated as of the *913 time the physical asset leading to further requests to disregard the origin- being constructed or acquired is placed in public al cost concept. . FN12 serv1ce. In re Puget Sound Power & Light Co., 62 FN12. "Since no program of rate regula- PUR4th 436, 440 (Wash. Util. & Transp. Comm'n tion is self-executing, one of the most im- 1984). Whether or not one agrees that the original- portant virtues of an original cost valu- cost method of valuation requires, as a general pro- ation method is that of relative ease of ad- position, that the value of a utility plant must be de- ministration." H. Louis Nichols & Randall termined at the time it is first placed in service to Hagan Fields, Rate Base Under PURA: the public, the language of section 41 (a) clearly How Firm is the Foundation?, 28 Baylor mandates that approach. Accordingly, the Commis- L.Rev. 861, 866 (1976). sion contravened section 4l(a) when it allowed post-in-service carrying costs to be included in As stated earlier, the post-in-service carrying EPEC's rate base.

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EPEC and the Commission present several ar- ficant, ongoing cost of that asset cease being capit- guments against such a construction of section alized and start being expensed. 41(a). First, they argue that the phrase "at the time it shall have been dedicated to public use" does not In this connection, EPEC and the Commission mean the time the plant itself is placed in service. also argue that section 41 (a) does not contain any They assert, instead, that the phrase refers to the temporal limitation (i.e., "cut-off date") on the de- money spent to construct the plant, and that such termination of the original cost of capital assets. money is dedicated to public use at the time it is They stress that section 41(a) provides that original spent. We cannot agree with this interpretation of cost is the actual money cost of property "at the section 41(a). For example, section 41(a) states that time it shall have been dedicated to public use, "original cost" is "the actual money cost ... of the whether by the utility which is the present owner or property at the time it shall have been dedicated to by a predecessor. " They contend that the emphas- public use." Thus, the reference to "property" in ized clause above shows that the purpose of section section 4l(a) is obviously to property being ac- 41(a) is simply to prevent utilities from selling or quired or constructed in exchange for the payment transferring a plant to another utility and having the of money, not to the funds themselves used to pay purchasing utility use its purchase price as the ori- for its acquisition or construction. Just as clearly, ginal cost of the plant. Thus, they argue, the last the term "it" in the phrase "at the time it shall have sentence of section 4l(a) merely requires that ori- been dedicated to public use" refers back to the ginal cost be the cost to whichever utility first "property" being acquired or constructed. Thus, in placed the plant in public service, not that original the case of new plant, section 41 (a) requires that the cost must necessarily be determined at the specific plant's original cost be determined as of the time time that the plant was placed in service. We dis- the new plant is placed in service. agree. The language of section 4l(a) could hardly be clearer in this regard: "Original cost shall be the [19] EPEC and the Commission next argue that actual money cost ... of the property at the time it "dedicated to public use" does not refer to the time shall have been dedicated to public use .... " The a plant begins commercial operation. We disagree. clause that follows, "whether by the utility which is Having determined that the "cut-off date" contained the present owner or by a predecessor," is simply in section 41 (a) refers to the property being ac- one of clarification, emphasizing that the time of quired or constructed, and not to the money used to dedication to public use is the critical date, irre- pay for its acquisition or construction, the question spective of whether that dedication was made by becomes: When is a new plant dedicated to public the current owner or a predecessor. use? We conclude that new plant is dedicated to public use when it is first placed in public service. Ignoring the statute's plain language, EPEC First, the plain meaning of the statutory provision cites Office of Consumers' Counsel v. Public Utilit- supports the proposition that a plant has not been ies Commission, 18 Ohio St.3d 264, 480 N.E.2d "dedicated to *914 public use" until it has been 1105 (1985), in which the Ohio Supreme Court placed in public service, and a plant is placed in construed the relevant Ohio statute to mean that ori- public service when it begins operating commer- ginal cost would be the cost "to the person that first cially. Second, under FERC rules and Commission dedicated the property to the public use"; the court practice, a utility must cease accruing AFUDC went on to hold that the statute "establishes which when a new plant begins commercial operation. entities' costs are to be utilized in establishing a rate Simple logic dictates that the most appropriate time base. [It] does not affect the timing of property to determine the original cost of a capital asset is valuation." !d. 480 N.E.2d at 1107. A comparison when existing accounting rules require that a signi- of the Ohio statute with the Texas statute, however,

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shows why the Texas statute cannot rationally be (plant)"; (2) "other elements of value, [which] in- given the same construction. The Ohio statute cludes working capital, property held for future use, provided: "Such original cost of property ... shall be and intangibles"; (3) "customer contributions and the cost, as determined to be reasonable by the tax deferrals, [which are] frequently deducted from commission, to the person that first dedicated the the rate base, since those components do not repres- property to the public use .... " Ohio Rev.Code Ann. ent investor-supplied capital"; and (4) "construction § 4909.05(E) (emphasis added). The Texas statute work in progress." Phillips, supra at 302. The Bon- provides: "Original cost shall be the actual money bright treatise also identifies four elements of rate cost ... of the property at the time it shall have been base, although it arranges the categories somewhat dedicated to public use, whether by the utility differently: "(1) net plant in service; (2) property which is the present owner or by a predecessor, less held for future use; (3) working capital; and (4) depreciation." PURA § 41(a). The two statutes construction work m progress (CWIP)-no could not be more different in their focus and AFUDC." Bonbright, supra at 237. meaning. The Ohio statute focuses on "who"; the Texas statute focuses on "when." Accordingly, the Although "invested capital" can include more Office of Consumers' Counsel case is inapposite. than tangible assets, it is simply not feasible to ap- ply the original-cost formula contained in section EPEC and the Commission next argue that our 41(a) to certain types of assets, e.g., intangibles and construction of section 41(a) will prevent the inclu- working capital. Such assets have no money "cost" sion in rate base of recognized elements of invested by which they are acquired or constructed; indeed, capital, such as working capital, "accumulated de- in some instances they more closely resemble the ferred federal income tax," and rate case expenses, payment of money than a tangible asset for which none of which have a "commercial operation" date money is paid. Nonetheless, we do not believe the or an "in-service" date. We disagree that our hold- legislature intended for section 41 (a) to limit a util- ing will have such an effect. As stated above, the ity's rate base to the original cost of tangible assets, purpose of section 41 (a) was to establish a method and we do not so hold. We hold only that the ori- of valuing tangible property acquired or constructed ginal-cost formula ("the actual money cost ... of the by the utility. Although the term "property" can, in property at the time it shall have been dedicated to an appropriate context, certainly have a meaning public use") states a mandatory method for the broader than just tangibles, the history of the ori- valuation of tangible assets, i.e., plant-in-service. ginal-cost/replacement-cost debate as to the proper This holding neither addresses nor affects the issue method of valuing a utility's invested capital indic- of whether-and to what extent-other types of as- ates that the crux of the dispute has related primar- sets may be included in rate base. ily, if not exclusively, to plant-in-service. Indeed, the supreme court in the Alvin Case held that "the EPEC and the Commission next argue that sec- Texas statutes require a physical *915 property tions 2, 16, 27, and 39 of PURA grant broad valuation rate base. " Houston Natural Gas, 289 enough powers to the Commission to allow it to use S.W.2d at 564 (emphasis added). "deferred accounting" procedures. Without discuss- ing those statutory provisions in detail, we note our We recognize that a utility's invested capit- general agreement that they grant broad power and al-and therefore its rate base-can include more discretion to the Commission. However, they do than plant-in-service. For example, one noted com- not expressly authorize inclusion of post-in-service mentator identifies the following four elements of a carrying costs in rate base, and we cannot construe utility's rate base: (1) "tangibles, which includes them to impliedly permit an action that is contrary 'used and useful' land, buildings, and equipment to or inconsistent with another section of PURA.

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Sexton, 720 S.W.2d at 137-38. And as we have in-service 0 & M costs are not part of the "actual held, allowing post-in-service carrying costs to be money cost" of acquiring or constructing the plant, included in rate base is inconsistent with section the original-cost formula contained in section 4l(a) 4 l(a).FN13 simply has no application to such expenditures. Ac- cordingly, whatever other objections may be made FN13. Our holding does not prevent post- to the inclusion in rate base of post-in-service 0 & in-service carrying costs from being amort- M costs, such inclusion is not inconsistent with ized and recovered by a utility; it merely PURA § 41(a). prevents them from being included in rate base. Moreover, even if the practical effect 2. Retroactive Ratemaking of this holding were to prevent recovery of Initially, we note that EPEC applied for and re- such costs incurred during regulatory lag, ceived from the Commission permission to defer "[a]ny change in protection for the utility post-in-service 0 & M costs on Palo Verde Unit 1 against undue regulatory lag should come before that unit became commercially operational. from the legislature." Railroad Comm'n v. Accordingly, we question whether the inclusion of Lone Star Gas Co., 656 S.W.2d 421, 427 Unit 1 0 & M costs has any retrospective effect at (Tex.1983). all. Indeed, the City does not even lodge a retroact- ive-ratemaking complaint about the inclusion in We conclude, therefore, that the Commission rate base of 0 & M costs as to Unit 1. However, be- exceeded its authority when it included in EPEC's cause we must address whether the inclusion in rate rate base the carrying costs incurred by EPEC after base of 0 & M costs for Unit 2 constitutes improp- the Palo Verde plant began commercial operation. er retroactive ratemaking, we will assume without deciding that the Commission's inclusion of Unit 1 B. Operating and Maintenance Costs. 0 & M costs in rate base did have a retrospective 1. PURA § 4J(a) effect.

The foregoing discussion makes it clear that we [20] As stated previously, sections 2, 16, 27, consider the purpose ofPURA § 41(a) to be the es- and 39 of PURA expressly grant broad powers to tablishment of a method of determining the value of the Commission. We believe those provisions give tangible capital assets that a utility has acquired or the Commission discretionary authority to allow constructed. Section 4l(a) prohibits post-in-service deferral and capitalization of post-in-service 0 & M carrying costs from being included in rate base be- costs, and to permit the Commission to include cause carrying costs constitute part of the actual such costs in rate base, unless such a procedure is money cost of acquiring or constructing new plant. inconsistent with other state law. Thus, to determ- Operating and maintenance (0 & M) costs, on the ine the validity of the Commission's action in the other hand, are not part of the cost of acquiring or present case, we must determine whether the defer- constructing new plant; rather, they are expenses ral, capitalization, and inclusion in rate base of such associated with maintaining the plant after it is costs is inconsistent with a statutory or constitution- already in service. To illustrate the distinction, if al prohibition of retroactive ratemaking. See Texas the Palo Verde plant had been completely shut Ass'n of Long Distance Tel. Cos. (TEXALTEL) v. down and abandoned the day after it became opera- PUC, 798 S.W.2d 875, 881-82 (Tex.App.l990, tional, EPEC's carrying costs *916 would have con- writ denied); Southwestern Bell Tel. Co. v. PUC, tinued unabated until all funds borrowed for its 615 S.W.2d 947, 953 (Tex.Civ.App.), writ refd construction were repaid; the 0 & M costs, n.r.e., 622 S.W.2d 82 (Tex.l981). however, would have ceased. Because post- a. Statutory prohibitions.

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In order to satisfy the first prong of the retro- reason, then, for the inclusion of the activity test, the action allegedly having retrospect- "thereafter" language in the enabling ive effect must not contravene any statutory prohib- statutes is the simple fact that after the ition. As stated above, we have concluded that the commission enters a rate order, a utility deferral, capitalization, and later inclusion in rate cannot mechanically collect rates in the base of post-in-service 0 & M costs is not contrary past. to PURA § 41(a).

Appellants also contend, however, that inclu- .. . If commissions in their rate orders are sion of such 0 & M costs is inconsistent with allowed to consider only losses or gains PURA § 43(f). Section 43(f) provides that if, after forecasted to occur "thereafter," then it hearing, the Commission finds the existing rates to is difficult to discern how commissions be unreasonable or in violation of law, it shall fix have the authority to correct mistakes in new rates "by order," which rates are "thereafter to past rate orders, to allow recoveries for be observed until changed." Although many juris- past extraordinary gains or losses, to dictions have construed the term "thereafter" to change accounting treatment for past give the regulatory authority power to prescribe gains or losses, or to grant refunds or rates prospectively only, the Texas Supreme Court surcharges after reversal of a rate order. stated in one case that the term in section 43(t) gives Texas agencies "discretion" in setting the ef- Stefan Krieger, The Ghost ofRegulation fective date of new rates. See Railroad Comm'n v. Past: Current Applications of the Rule Lone Star Gas Co., 656 S.W.2d 421, 425~26 Against Retroactive Ratemaking in Pub- FN14 . lic Utility Proceedings, 1991 (Tex.l983 ). Nonetheless, this *917 Court has held that PURA § 43(f) prohibits the Commission U.Ill.L.Rev. 983, 1034-35 (1991). from making new rates effective at a date earlier [21] In the present case, the effective date of than the date of the order fixing those rates. See the new rates was not prior to the date of the order PUC v. GTE-SW, 833 S.W.2d 153 fixing the rates. Therefore, the Commission's action (Tex.App.-Austin, 1992, writ denied); PUC v. here was not inconsistent with our holdings in General Tel. Co., 777 S.W.2d 827 (Tex.App.1989, GTE-SW and General Telephone. Appellants argue, writ dism'd); cf TEXALTEL, 798 S.W.2d at 882-84 however, that the inclusion in rate base of deferred (rates may be made effective after order fixing the 0 & M costs had the effect of implementing the level of revenues but before final approval of tar- new rates as of the date the Palo Verde plant be- iffs). came commercially operational, i.e., retroactively. FN14. One commentator has recently ar- We decline to construe the term "thereafter" in sec- gued against giving undue importance to tion 43(t) to have such sweeping effect. We are not the "thereafter" language contained m willing to say that the term "thereafter" in PURA § many state utility regulatory acts: 43(f) constitutes a blanket prohibition of any con- sideration by the Commission of a utility's past It is difficult to understand why legis- gains or losses in fixing future rates. Thus, even if latures would have delegated such broad the "thereafter" language in section 43(t) precludes powers to commissions, but would have the Commission from making new rates effective at simultaneously limited that authority a date earlier than the date of the order fixing those with off-hand wording in a provision rates, the Commission's action in the present merely describing the process for the case-permitting deferral, capitalization, and inclu- entry of a rate order. The most probable sion in rate base of EPEC's post-in-service 0 & M

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costs-is not inconsistent with such a prohibition. time prior to the retroactive law ....

We conclude, therefore, that the Commission's ... Under limitations [one and two], it is true, a inclusion in rate base of EPEC's deferred post- law gives to an event which has already tran- in-service 0 & M costs is not inconsistent with spired a juristic significance it did not have at the Texas statutory law. time it occurred; but it does this only in order that it may thereby regulate future conduct. b. Constitutional prohibition. [22] To withstand the second prong of appel- Bryant Smith, Retroactive Laws and Vested lants' retroactive-ratemaking challenge, the Com- Rights, 5 Tex.L.Rev. 231-33 (1927). In addition, mission's order must not violate Article I, § I 6 of the supreme court has recognized that statutes per- the Texas Constitution, which provides: "No bill of mitting agencies to consider prior conduct have ret- attainder, ex post facto law, retroactive law, or any rospective effect. Texas Water Rights Commission law impairing the obligation of contracts shall be v. Wright, 464 S.W.2d 642, 648-49 (Tex. 1971). made." Courts often recite the rule that ratemaking is a legislative activity, even when delegated to an In the present case, the past event given signi- administrative body. See, e.g., Houston Natural ficance by inclusion in rate base of the deferred Gas Corp., 289 S.W.2d at 563. For that reason, it post-in-service 0 & M costs is the *918 start-up of has often been stated that rates set after an agency commercial operation of Units 1 and 2. Appellants hearing generally must have a prospective effec~ assert that allowing EPEC to earn a return on such just as would laws enacted by the legislature.FNl deferred-cost assets gives the start-up of those units !d.; see also Tex. Const. Ann. art. I,§ 16 (1984). the effect, ab initio, of creating a new duty for rate- payers: they are thereafter required, without Com- FNI 5. A mechanical recitation of this rule mission approval, to pay higher rates for services to support application of the retroactive- received. Thus, recovery of such 0 & M costs ratemaking prohibition may not be justi- would, in appellants' view, effect a change in fied. See Krieger, supra at 1035-37. Pro- charges after ratepayers have consumed the service. fessor Krieger points out that many states, See, e.g., Lone Star Gas, 656 S.W.2d 421. For pur- including Texas, expressly require the use poses of the ensuing discussion, we will assume of adjudicative rather than rulemaking pro- without deciding that inclusion in rate base of the cedures for rate hearings. !d. at 1037; see post-in-service 0 & M costs has a retrospective ef- APTRA § 3(2). fect.

Appellants complain that allowing EPEC to re- [23] A retrospective effect alone, however, will cover post-in-service 0 & M costs through deferred not invalidate an agency action. Wright, 464 accounting would permit EPEC to charge ratepay- S.W.2d at 648. Notwithstanding a retrospective ef- ers an additional amount for services that they have fect, a rate order may avoid constitutional infirmity already received and paid for. In this regard, the if it does not substantially impair or destroy vested following general observations about retroactive rights, McCain v. Yost, 155 Tex. 174, 284 S.W.2d laws are instructive: 898, 900 (1955); TEXALTEL, 798 S.W.2d at 882, and if it does not change the substantial rights and [One,] a law is retroactive if it assumes to give obligations of the implied contract between a utility effect to a past event, in order to create a present and its ratepayers, Southwestern Bell, 615 S.W.2d right or duty. [Two,] ... a law is retroactive when at 956; Amarillo Gas Co. v. City of Amarillo, 208 it assumes to give to a past event the effect of S.W. 239, 240 (Tex.Civ.App.1919, no writ). Al- creating rights and duties ab initio, or as of some though courts have often failed to explicate or ap-

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ply the latter consideration, we conclude that it is make a substantial change in the rights and oblig- significant in the present case. ations of the consumer, and we conclude [that they] cannot be applied to the gas consumed prior [24][25][26] Several courts have concluded to the time the ordinance took effect. that an implied contract exists between a utility and its ratepayers, creating both the utility's duty to I d. provide a defined service and the ratepayers' duty to pay a defined rate. See, e.g., Amarillo Gas Co., 208 Unlike Amarillo Gas, the present case involves S.W. at 240; Southwestern Bell. 615 S.W.2d at 956. no attempt to charge ratepayers an additional sum Under this implied contract, ratepayers have a right for service already purchased. Before the effective to pay a constant rate for service until, by legislat- date of the new rates, EPEC's ratepayers paid Com- ively approved procedures, the old rate is formally mission-authorized rates for the service they were challenged. See TEXALTEL, 798 S.W.2d at 882. obtaining. EPEC invested in the Palo Verde plant to The setting of new rates permissibly adjusts the re- equip itself to provide additional service to its rate- spective rights and obligations of the ratepayers and payers. When the new plant became commercially the utility. Only the rights and obligations existing operational, the ratepayers began receiving the be- between rate settings are constitutionally protected nefit of the new service before being charged for it. against alteration by retroactive ratemaking. 208 Therefore, because the Commission had not defined S.Vf. at 240. Therefore, only if new rates alter the the substantial *919 rights and obligations of a new ratepayers' right to pay a set rate for a specified ser- implied contract between EPEC and its ratepayers, vice will they violate the prohibition of article I, § the ratepayers had no substantial right to pay a cer- 16. tain rate for service being provided by the Palo Verde plant. Significantly, the ratepayers also had The Amarillo Gas case, involving city ordin- not paid rates which would allow EPEC a return on ances which set consumer gas rates, typifies true its investment in the plant. Therefore, including in retroactive ratemaking. Among other things, the new rates costs incident to the interim benefit first ordinance included a provision which allowed provided by the operation of Palo Verde plant does consumers a 10% discount if they paid their bills not change a substantial right belonging to the rate- within ten days. The subsequent ordinance elimin- payers. Cf Business & Prof People for the Pub. In- ated the discount and imposed a 10% surcharge on terest v. Illinois Commerce Comm'n, 205 Ill.App.3d payments made after ten days. A dispute arose 891, 150 Ill.Dec. 750, 563 N.E.2d 877 (1990) when the gas company attempted to collect sur- (deferral of regulatory-lag costs allowed because charges on bills for gas the company had supplied costs of new plant had not been taken into account before the effective date of the second ordinance. in setting existing rates), rev'd on other grounds, The question on appeal was whether imposing the 146 Ill.2d I 75, 166 Ill.Dec. 10, 585 N.E.2d 1032 surcharge on bills for gas supplied before the ef- (1991). fective date "change[ d] the substantial rights and obligations of this contract as to transactions [27] Just as allowing inclusion in rate base of already had under it." 208 S.W. at 240. The court the Palo Verde plant's post-in-service 0 & M costs concluded that does not change the ratepayers' substantial rights, likewise it does not impair or destroy vested rights. the practical and necessary result of the amend- Whether legislation substantially impairs or des- ment was to require the consumer to pay consid- troys vested rights necessitates consideration of erably more for his gas than he would have been whether the retrospective effect: (1) advances or re- required to pay under the old rates .... The rates tards the public interest; (2) effectuates or defeats established by the new ordinance did inevitably the bona fide intentions or reasonable expectations

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of affected persons; and (3) surprises persons who der allowing deferral of Unit 1 costs. Apparently, have long relied on a contrary state of the law. OPC has construed this reservation as a representa- Southwestern Bell, 615 S.W.2d at 956-57; see also tion that the costs would not be included; we do not Wright, 464 S.W.2d at 648. find any such representation in the order.

The public has an interest in obtaining a reas- D. Substantial Evidence. onable quantity and quality of service. The utility As its final complaint within this point of error, should generate the service safely, under the guid- OPC contends that the total figure assigned by the ance of efficient management, and make the service Commission to the deferred-costs asset is not sup- obtainable at reasonable rates. See Phillips, supra, ported by substantial evidence. We do not agree. at 164. In the present case, the Commission could Our review of the record shows that EPEC provided reasonably have concluded that including post- ample documentation of the costs it had incurred in-service 0 & M costs in rate base would advance and deferred after the Palo Verde plant became these interests. Further, a ratepayer could not reas- commercially operational. onably expect a utility to spend millions of dollars building a nuclear facility, use the facility to gener- We sustain OPC's and the City's fifth points of ate electricity, and then not seek a return on its in- error to the extent they complain *920 of the Com- vestment therein. In addition, the fact that the Com- mission's deferral, capitalization, and inclusion in mission had previously granted EPEC a certificate rate base of EPEC's post-in-service carrying costs. of convenience and necessity to participate in the We overrule OPC's and the City's fifth points of er- project thereafter precluded any interested persons ror to the extent they complain of the Commission's from reasonably claiming surprise at finding them- deferral, capitalization, and inclusion in rate base of selves obligated to pay the costs of building and op- EPEC's post-in-service 0 & M costs, and in all oth- erating the new plant. er respects.

All of these important considerations support CONSTRUCTIONAL IMPRUDENCE the conclusion that the Commission has not sub- By its third point of error, OPC raises three dis- stantially impaired or destroyed vested rights by in- tinct complaints about the disallowance of $28 mil- cluding in rate base EPEC's post-in-service 0 & M lion in construction costs as a result of EPEC's im- costs. Therefore, because the new rates neither im- prudent planning or management of the project's pair vested rights nor change substantial rights or construction. First, OPC asserts that substantial obligations of implied contract, we conclude that evidence does not support the Commission's meth- deferral, capitalization, and inclusion in rate base of od of quantifying the imprudently incurred costs. such costs does not violate the constitutional pro- Second, OPC argues that the quantification method hibition against retroactive ratemaking. used by the Commission results in retroactive rate- making. Finally, OPC complains that "[t]he Com- C. Disallowance for Imprudence. mission's finding regarding construction cost im- OPC also argues in point of error five that the pacts is conclusory and does not indicate the under- Commission erred by not reducing the deferred 0 lying facts relied upon by the PUC." We construe & M costs in proportion to the imprudence disal- this contention to be a challenge to the sufficiency lowance before including the assets in rate base. of Finding of Fact 100 and an assertion that the OPC cites no authority that would require the Com- Commission should have made additional findings mission to reduce the "deferred-costs asset" be- of underlying facts to support Finding 100. cause of imprudence. Instead, it points to the Com- mission's reservation of the right to exclude the [28] EPEC maintains that OPC has waived all capitalized costs from rate base contained in the or- of its contentions except that concerning retroactive

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ratemaking because it failed to present legal bases ibly increase revenue requirements "fixed in prior for its complaints in its second motion for rehear- rate proceedings." We conclude that by offsetting ing. We do not agree. Although OPC's second mo- such a benefit against increased financing costs in tion for rehearing contained no citations to legal au- determining the constructional-imprudence disal- thority for its complaints, the motion did contain lowance, the Commission did not change the sub- statements of OPC's legal bases for its argument. stantial rights of the ratepayers or impair or destroy While motions for rehearing must point out the spe- any of their vested rights. See. McCain v. Yost, 155 cific finding challenged and the legal basis for the Tex. 174, 284 S.W.2d 898, 900 (1955); Amarillo challenge, they need not contain citations of author- Gas Co. v. City of Amarillo, 208 S.W. 239, 240 ity. Burke v. Central Educ. Agency, 725 S.W.2d (T~x.Civ.App.1919, no writ). Therefore, we reject 393, 397 (Tex.App.l987, writ refd n.r.e.). OPC's retroactive-ratemaking argument.

A. Retroactive Ratemaking. B. Substantial Evidence. [29] OPC asserts that by disallowing a smaller Finding of Fact 100 provides: "Staff witness portion of construction costs than OPC recommen- Jacobs presented a credible quantification*921 of ded, "the Commission has retroactively increased construction management imprudence related to the value of the Company's revenue requirement costs of delay in the amount of $28 million." The fixed in prior rate proceedings, and shifted these gist of OPC's purported substantial-evidence argu- additional hypothetical costs to future ratepayers." ment is that the Commission erred in adopting J ac- Essentially, OPC argues that the Commission may obs's method of quantifying imprudently incurred not legally adopt a method recognizing any savings costs. This is not, however, a substantial evidence that ratepayers may have realized because of delays challenge. OPC has not attempted to show that ap- in completing construction. plication of Jacobs's method results in a figure un- supported by substantial evidence; nor does OPC The Commission staffs expert, Morris Jacobs, argue that substantial evidence supports another, and the City's expert, Richard B. Hubbard, agreed but different, figure. We must, therefore, make two that financing costs had increased because of distinct determinations: (1) whether the finding un- delays. Jacobs also testified, however, that ratepay- derlying the Commission's $28 million disallow- ers had received an unexpected benefit because of ance of imprudently incurred construction costs is the delay: they had had the present use of money supported by substantial evidence, and (2) whether they would otherwise have had to pay in rates if the Jacobs's method considered all imprudently in- construction had been completed and the costs in- curred costs. cluded in rate base as scheduled. Consequently, ac- cording to Jacobs, the true amount of imprudently Turning to the latter first, we recognize that we incurred costs can be determined only by reducing must not disturb an agency's exercise of discretion the increased financing costs by the amount of the unless it is arbitrary or unreasonable, Murphy v. benefit to ratepayers. OPC objects to offsetting the Rowland, 609 S. W.2d 292, 297 ratepayers' benefit against the increased financing (Tex.Civ.App.1980) and that we must allow the costs, apparently because the former accrued before agency some leeway to select the method by which the Commission could set rates including the plant it carries out its own legislative mandate, Railroad in rate base. Accordingly, OPC argues that the sav- Cornm'n v. Humble Oil & Refining Co., 193 S.W.2d ings cannot be taken into account without having a 824, 833 (Tex.Civ.App.1946, writ refd n.r.e.), a.ffd, retrospective effect on rates. 331 U.S. 791,67 S.Ct. 1523,91 L.Ed. 1820 (1947). Therefore, we will not reverse the Commission's We fail to see how recognizing an actual bene- decision to use Jacobs's method unless OPC can fit ratepayers derive from delays would impermiss-

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show that the Commission made its decision arbit- The characteristics of proper findings of fact, as rarily and unreasonably. well as their purposes, are well established. Valid findings of fact must be clear and specific. A Jacobs did not relate any particular imprudent mere conclusion or a recital of evidence is inad- construction management actions to any specific equate. The required underlying facts may not be delays. Jacobs's testimony supports the amount of presumed from findings of a conclusional nature. the Commission's disallowance. In addition, other In general, underlying findings of fact must be witnesses testified that some construction delays such that the reviewing court can fairly and reas- were unavoidable and not the result of management onably say that the underlying findings support imprudence. Although the City's witness, Hubbard, the statutorily required criteria. supplied testimony linking specific construction de- cisions with resulting delays, we conclude that sub- ****** stantial evidence supports Jacobs's quantification method. Proper underlying (basic) findings of fact should follow the guidelines we previously have noted: C. Finding of Fact 100. they should be clear, specific, non-conclusory, [30] OPC challenges the sufficiency of Finding and supportive of the ultimate statutory finding. of Fact 100 and alleges that it lacks necessary find- Mere recitals of testimony or references to or ings of underlying facts. Finding 100 is not a find- summations of the evidence are improper.*922 ing "set forth in statutory language" such that it Such findings should be stated as the agency's must have a "concise and explicit statement of the findings. The findings should relate to material underlying facts." See APTRA § 16(b). Instead, it is basic facts and should relate to the ultimate stat- itself a finding of underlying fact which supports utory finding that they accompany. Finding 99. Finding 99 is phrased in statutory lan- guage and states that EPEC was imprudent to some Charter Medical, 665 S.W.2d at 451-52 degree. Finding 100 concisely sets out the underly- (citations omitted); see also State Banking Bd. v. ing facts that (1) based on Jacobs's credible quanti- Allied Bank Marble Falls, 748 S.W.2d 447 fication, (2) $28 million in construction costs would (Tex.1988). be disallowed. [31] The supreme court has recently recon- OPC contends the Commission was obligated sidered the question of sufficiency of underlying to explain its adoption of Jacobs's method rather fact findings. See Goeke v. Houston Lighting & than Hubbard's. In addition, OPC claims the Com- Power Co., 797 S.W.2d 12 (Tcx.l990). The court mission had a duty to identify individual instances expressed the opinion that, although there is no pre- of construction imprudence. Appellants have not cise form for an agency's articulation of underlying cited any authority that would require the Commis- facts, certain "guidelines" exist to grevent the types 1 sion to explain why it found a particular witness's of abuses courts have found. FN Those specific testimony credible or determined a particular figure guidelines are that the findings: (1) must be more to have resulted from imprudent construction man- than mere recitals of testimony; (2) should be stated agement. We consider these arguments to be chal- as the agency's findings; and (3) should relate to the lenges to the sufficiency of the finding. ultimate statutory findings. ld. at 15. We will re- view appellants' sufficiency complaints under the APTRA § 16(b) does not delineate a standard Goeke guidelines. for sufficient findings of underlying fact. The su- preme court articulated the established principles in FN16. Within the context of this opinion, Charter Medical: we need not decide whether the language

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the supreme court used in Goeke reduces second point of error. the requirements set forth in Charter Med- ical and Allied Bank in order for underly- If we had resolved the complaint on its merits, ing findings of fact to be considered suffi- however, we would have found no reversible error. cient to comply with APTRA § 16(b). Hubbard testified at length about the duration of design-problem delays and the necessity of rework- Finding 100 is not conclusory; it indicates not ing the designs. We must assume the Commission only the evidence on which the Commission relied considered this testimony and gave it due weight. in making Finding 99, but also the Commission's The examiner excised only minute sections from conclusion that the figure found using the method the thick attachments to Hubbard's direct testimony. was credible. The finding obviously supports Find- Ample evidence existed from which the Commis- ing 99, an ultimate statutory finding. Therefore, sion could have found that EPEC had managed the Finding 100 is a sufficient finding of underlying construction imprudently. The City has not shown fact. that the exclusion prejudiced its substantial rights, and has therefore failed to carry its burden of show- For all of the foregoing reasons, we overrule ing harmful error. OPC's third point of error in its entirety. EXCESS CAP ACITY THE EXCLUSION OF HUBBARD'S TESTI- The City and OPC, each in its fourth point of MONY error, complain that the Commission erred in find- In support of its request that plant construction ing that EPEC had no system excess capacity. Both costs be included in rate base, EPEC offered evid- appellants contend that Finding of Fact 107, in ence of prudent construction management. In re- which *923 the Commission concludes that no sponse, the City called Hubbard, who testified that present excess capacity exists, is unsupported by EPEC had managed the construction imprudently substantial evidence in the record. In its argument, and that, as a result, construction costs had been un- the City specifically challenges the action of the reasonably high. EPEC moved to strike sections of Commission in: (1) including in the load determina- Hubbard's testimony, arguing that his conclusions tion the amount of power EPEC has contracted to were inadmissible because they were speculative sell to the Texas-New Mexico Power Company and not based on concrete information. The hearing (TNP); (2) allowing EPEC to reduce estimated sys- examiner excluded the challenged testimony. The tem capacity by retiring three gas-fired units earlier City complains of the exclusion. EPEC answers that than it had originally planned; (3) rescheduling the City waived its complaint by failing to state a maintenance because of the alteration in system legal basis to support it in the City's second motion components; and (4) calculating the reserve re- for rehearing. quirement.

[32][33] An administrative litigant may pre- OPC joins in the last of these four specific serve a complaint only by giving the agency an op- complaints. In addition, OPC complains that Find- portunity to review the legal ground on which the ings of Fact 111 through 113 do not explicitly state complaint is based. Sears v. State Bd. of Dental Ex- the facts the Commission relied on and the reason- aminers, 759 S.W.2d 748, 750 (Tex.App.1988, no ing it used in disregarding the Examiner's recom- writ); Burke, 725 S.W.2d at 397. Our review of the mendations. OPC also asserts the Commission City's motions for rehearing convinces us that erred by not making a conclusion of law clarifying EPEC is correct. The City failed to provide the the relation, if any, between the "used and useful" Commission any basis for finding the testimony ad- standard of PURA § 39(a) and the excess capacity missible. For this reason, we overrule the City's concept. Finally, OPC complains that the Commis-

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sion "abrogated OPC's right to represent the in- er two possibilities, one would set an unnecessarily terests of residential and small commercial custom- high reserve and the other would produce an insuf- ers on excess capacity issues in future rate cases of ficient reserve to protect against a blackout in the El Paso Electric Company." event of a significant loss in system generation ca- pacity. Considering these expert opinions, we can- EPEC's application to increase rates sought not say that reasonable minds could not have only the inclusion in rate base of costs related to reached the conclusion the Commission must have Units 1 and 2. At the time the Commission heard reached in order to make the finding it did. We con- evidence on the application, Unit 3 was not com- clude that substantial evidence supports the Com- plete and had not begun commercial operation. It mission's adoption of the "largest single hazard plus would have been improper for the Commission to 5%" method of determining reserve requirements. have determined, at that time, whether excess capa- city would exist on EPEC's system once Unit 3 be- [35] The City also complains that the Commis- came operational. The Unit 3 issues, including ex- sion determined the overall demand on the system cess capacity, are not yet ripe for determination. to be much higher than it should have been, thereby Consequently, to the extent the City seeks resolu- inflating the system capacity found necessary. The tion of Unit 3's used-and-useful status, we overrule City contends the Commission erred by: (1) includ- its point of error for lack of ripeness. ing in its calculation the power EPEC has contrac- ted to supply TNP; (2) omitting three gas-fired A. Substantial Evidence. units from generation capability because of plans to [34] Appellants complain that the Commission retire them early; and (3) adopting a maintenance erred in disregarding the examiner's recommenda- schedule that requires removal of some units from tions for treatment of four disputed issues. The *924 the line during the summer peak period. Two most heated debate arose when the Commission se- experts offered their opinions that the Commission lected the "largest single hazard plus 5%" method acted reasonably in approving the maintenance for determining reserve requirements. The examiner schedule and including the TNP obligation in peak recommended that the Commission use the "20% of load. In addition, one witness recognized that peak load" method. Use of the examiner's recom- EPEC's objective in planning generation capacity mended method would have resulted in excess ca- was to "meet forecasted load demands with ad- pacity of approximately 50% of the units EPEC was equate system reliability while minimizing total sys- requesting be included in rate base. Appellants tem cost. " The Commissioners could reasonably claim the Commission's use of an improper method have found that adding two nuclear power units to was the principal cause of the "no excess capacity" the system and retiring three gas-fired units would finding. achieve this objective. We conclude that substantial evidence in the record supports the Commission's Two of EPEC's expert witnesses explained finding that there is no appreciable excess capacity EPEC's method of determining reserve require- in the EPEC system. ments. The company uses one of the methods out- lined by the Western Systems Coordinating Coun- B. Other Contentions. cil, an organization responsible for promoting reli- OPC complains that the Commission has ab- able operations among the interconnected bulk rogated OPC's right to represent its cli- power system to which EPEC belongs. The Council ents-residential and small commercial users-in recommends three different methods of determining future rate cases. OPC bases this contention on reserve requirements, of which the "largest single Finding 107. The relevant portion of that finding hazard plus 5%" is one. There was expert testimony states that the excess capacity findings in the that EPEC selected this method because, of the oth-

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present case will not be considered "precedents in Commission's failure to explicate the relationship any manner in cases involving the addition of fu- between the concept of excess capacity and PURA's ture generating capacity to the system, including "used and useful" standard. We need not resolve Palo Verde Unit 3, or in any reconsideration pro- this issue in order to dispose of the present case; ceeding conducted pursuant to paragraph 11 of the therefore, we express no opinion on the matter. Amended and Restated Stipulation." The finding merely recites the Commission's refusal to address We overrule the City's and OPC's fourth points issues not yet ripe for determination. OPC has had a of error. full and fair opportunity to litigate the excess capa- COMMON FACILITIES city issue with respect to Units 1 and 2. Even As a part of its application to increase rates, without Finding 107, general principles of issue EPEC requested that costs incurred in constructing preclusion would bar OPC from relitigating the ex- the facilities to be used in common by all of the cess capacity issue with respect to those units. generating units, including those not yet completed, Finding 107 does no more than that. be included in rate base. The Commission found it OPC next complains of Findings of Fact reasonable to include such costs and made two 111-113; it asserts that each finding requires addi- findings of fact about which OPC now complains. tional findings of underlying fact. The challenged In its sixth point of error, OPC asserts gener- findings are as follows: ally that the Commission erred by deciding to con- 111. The largest single hazard plus five percent sider the common facilities as "plant-in-service." ("LSH + 5") criterion for determining a reason- OPC argues that the Commission, by refusing to able reserve margin is used by EPEC and recom- apportion the costs of the common facilities to each mended by the Western Systems Coordinating unit, has changed its position on apportionment Council, of which EPEC is a member. questions and that such a shift in position *925 is improper. OPC also asserts that the findings of fact 112. Based on the evidence presented, use of the relating to treatment of common facilities costs are LSH + 5 criterion is reasonable for application to insufficient and that additional findings of underly- the EPEC system in this case. ing fact are necessary to show the evidence on which the Commission relied in determining wheth- 113. Using the LSH + 5 criterion, EPEC should er to include the common facilities costs in rate carry 258 MW of reserve capacity in 1988. base.

These findings are not ultimate findings; there- OPC has failed to brief adequately its com- fore, the Commission had no duty to make addi- plaint on this issue. Each of its legal contentions tional findings ofunderlying fact. comprises but a single sentence, and only in con- junction with its change-of-position complaint has OPC also argues that the Commission was OPC provided any supporting authority at all. OPC bound to explain its reasons for rejecting the exam- also fails to point out evidence in the record iner's recommendation and adopting a different demonstrating either that the Commission has erred method of determining reserve requirements. or that any error has substantially prejudiced OPC's Again, OPC has not shown any authority requiring rights. Finally, OPC cites no authority for the pro- the Commission to do so. Therefore, we also find positions that the Commission was obligated to this argument to be meritless. make more findings of fact than it did, that the In its motions for rehearing to the Commission Commission had to allocate costs rather than fol- and at the trial court level, OPC objected to the lowing generally accepted accounting principles, or

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that OPC was unable to present its appeal ad- OPC has waived its seventh point by failing ad- equately because of the Commission's alleged fail- equately to support or to argue the offending issue ure to explain why it declined to apportion the com- in its original brief. mon facilities' capital costs. Such a complete failure to develop and support a complaint waives the com- LEASE PAYMENTS ON UNIT 2 plaint. Helle v. Hightower, 735 S.W.2d 650, 654 As required by PURA § 63, EPEC notified the (Tex.App.l987, writ denied). We conclude OPC Commission of the sale/leaseback arrangement for has waived its sixth point of error, and we overrule Unit 2. The sole issue to be determined as to that it. transaction was whether the sale/leaseback was consistent with the public interest. In January 1987 INCOME TAXES the hearings examiner stayed proceedings in the In its final point of error, OPC generally chal- sale/leaseback matter so that the Commission could lenges the cost-of-service determination on grounds consider the public interest issue along with EPEC's that the amount found includes a "hypothetical" rate case. In response to a motion filed by EPEC, federal income tax expense. In the most cursory of the Commission consolidated the two matters under fashions, OPC alleges the Commission erred in in- the docket number for the rate case. cluding the federal income tax expense in EPEC's cost of service because: (1) no evidence supports When the Commission rendered a final order, the inclusion; (2) the Commission made no findings however, it did not decide whether the sale/ of fact or conclusions of law regarding federal in- leaseback transaction was consistent with the public come tax expense; and (3) the Commission failed to interest; instead, it specifically reserved that issue inquire whether EPEC had actually incurred all of for later determination. Nonetheless, the Commis- the tax expense. As a matter of interest, we note sion made fact findings that allowed Unit 2 lease that OPC has overlooked Finding of Fact 186, payments to be included in EPEC's cost of service which expressly addresses federal income tax ex- to the extent they did not exceed the amount the pense. Consequently, OPC's complaint that the Commission would have included in rate base for Commission made no findings with respect to fed- Unit 2 capital costs if EPEC had retained an owner- eral income taxes is meritless. ship *926 interest. The partial inclusion of lease payments in cost of service prompts the City's sub- OPC's briefing of this point of error is wholly stantial evidence challenge in its final point of er- inadequate. The only authority to which OPC has ror. drawn this Court's attention is the opinion in PUC v. Houston Lighting & Power Company, 748 PURA § 63 requires a utility to report a con- S.W.2d 439 (Tex.l987). Even more than in its sixth templated or consummated transaction within a point of error, this multifarious seventh point con- reasonable time if the total transaction considera- tains conclusory statements unsupported by author- tion exceeds $100,000. Further, the section ity. provides that

In its motion for rehearing, OPC complains that [o]n the filing of a report with the commission, this Court "misunderstood" OPC's position on this the commission shall investigate the same with or issue; there follows a lengthy exposition of the pos- without public hearing, to determine whether the ition OPC intended to argue in its initial brief. The action is consistent with the public interest. In detailed discussion in OPC's motion for rehearing reaching its determination, the commission shall further underscores the inadequacy of the argument take into consideration the reasonable value of on this point in its original brief. the property, facilities, or securities to be ac- quired, disposed of, merged or consolidated. If

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the commission finds that such transactions are ing power to sever. During the hearing, the Com- not in the public interest, the commission shall mission apparently concluded that "the effect" of take the effect of the transaction into considera- the sale/leaseback transaction did not include the tion in the rate-making proceedings and disallow entire amount of lease payments made. EPEC the effect of such transaction if it will unreason- would have incurred certain costs even if it had re- ably affect rates or service. The provisions of this tained its ownership interest in the unit instead of section shall not be construed as being applicable arranging the sale/leaseback. Therefore, even if the to the purchase of units of property for replace- Commission were ultimately to find the transaction ment or to the addition to the facilities of the pub- inconsistent with the public interest, the cost that lic utility by construction. EPEC would have incurred had it retained owner- ship would be includable in rates because it was not PURA § 63 (emphasis added). Pursuant to an "effect" contemplated by the disallowance pro- PURA, the Commission must, at some point, decide vision of PURA § 63. Consequently, the Commis- whether the sale/leaseback transaction is consistent sion did not err in including this amount in cost of with the public interest. The statute designates no service. time within which the Commission must make that determination after the utility files its report. The By post-submission brief, the City argues that section expressly allows the Commission to decide deferral of the public-interest determination implies the issue without holding a public hearing; con- a finding that EPEC failed to carry its burden of sequently, we do not construe PURA to require the proof on that issue. In support of this argument, the Commission to resolve that question in the context City directs our attention to the supreme court's re- of a formal ratemaking proceeding. cent decision in Coalition of Cities for Affordable Utility Rates v. PUC, 798 S.W:2d 560 (Tex.l990). [36][37][38] The Commission has discretion to The City did not make this argument below; there- consolidate proceedings with common issues when fore, it is not properly before this Court. See City of consolidation would serve judicial or administrative San Antonio v. Texas Water Comm'n, 407 S.W.2d economy. See Alamo Express, Inc. v. Union City 752 (Tex.l966). Transfer, 309 S.W.2d 815, 821 (Tex.l958). The City does not deny this, but asserts that once the Even if we were to agree that the Commission Commission had consolidated the proceedings, it impliedly found EPEC had failed to carry its bur- was powerless to sever them. The City contends den of showing that the transaction was consistent that at that point the Commission became bound to with the public interest, *927 we would find no re- settle the public interest question in its order setting versible error in the inclusion of part of the pay- rates. This contention fails to recognize the Com- ments in cost of service. Finding of Fact 122 mission's discretion to regulate its docket so that provides: "EPEC's proposed 'book brea~-even' cal- only issues which can reasonably and fairly be tried culation of the portion of the lease payment may be within the framework of a single proceeding are included in cost of service in this instance, as it is tried together. We conclude the Commission has not in excess of the amount that would result if cal- the power to sever. Any other result would defeat culated using the traditional ratemaking plant in the legislative intent in delegating duties to the service/rate base methodology." The City fails to Commission for more efficient administration. recognize that the Commission is responsible not Therefore, in the interest of accomplishing the le- only for determining whether the transaction in gislative purpose underlying the Commission's cre- question is consistent with the public interest, but ation, we deem it essential that the Commission's also for disallowing the effect of the transaction "if power to consolidate be balanced by a correspond- it will unreasonably affect rates or service." PURA

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§ 63. Only if inclusion of the effect will unreason- Staff witness Stan Kaplan calculated EPEC's ably affect rates will it be disallowed. Therefore, reasonably predictable fuel costs based on the as- Finding 122 implies, consistent with the Coalition sumption that the new rates would become effective analysis, that the Commission found that EPEC car- January 1, 1988. In estimating the amount of pur- ried its burden of showing that inclusion of the rel- chased power costs, Kaplan anticipated that EPEC evant portion of the lease payment would not un- would purchase 75 megawatts in January 1988 and reasonably affect rates. The City has not challenged 50 megawatts per month for the balance of the cal- this implied finding; therefore, even if the City's endar year. However, the prolonged hearings untimely argument were correct, it would not show delayed the new rates' effective date to a point ap- reversible harm. We overrule the City's seventh proximately three months beyond the January 1, point of error. 1988, date Kaplan had assumed. Nonetheless, the Commission's final order was based on Kaplan's COST-OF-SERVICE ALLOWANCES prediction, which included an anticipated first- The City makes several general complaints month purchase of 75 megawatts. The City argues about the Commission's revenue-requirements de- that the cost of 25 megawatts, which EPEC did not termination and, in addition, specifically challenges purchase after the new rates became effective, five separate components of the cost-of-service al- should be excluded from cost of service. lowance. The general complaints are that: (1) sub- stantial evidence does not support the Commis- A utility's allowable expenses are calculated by sion's revenue requirements finding; (2) the Com- adjusting its historical test year expenses for known mission applied no statutory standard in determin- and measurable changes. 16 Tex.Admin.Code § ing revenue requirements; and (3) the Commission 23.21(b) (1991). Based on the evidence filed before failed to make all required findings of underlying and the testimony adduced during the hearing, the facts. Commission determines the amount of the utility's reasonably predictable purchased power costs for We conclude that, except for the specific chal- the "rate year," i.e., the first twelve months after the lenges to five component amounts, the City has rates will become effective. 16 Tex.Admin.Code § waived its complaints by failing to show that partic- 23.23(b)(2)(B) (1991). This determination inher- ular cost-of-service component amounts are unsup- ently involves estimation and the making of anum- ported by substantial evidence. Nor has the City ber of assumptions. One necessary assumption is identified a statutory standard requiring the Com- that rates will become effective on some specific mission to supply findings of underlying facts in *928 date. In the present case, that assumption addition to those already made. Although the City turned out to be incorrect by three months. On that contends that the Commission decided the matter basis, the City argues that the Commission's de- without referring to PUC Substantive Rule § termination of EPEC's reasonable and necessary 23.21 (b), the findings obviously refer to that rule. operating expenses was invalid. We do not agree. Therefore, we overrule the City's general com- plaints and proceed to address the challenges to If we were to hold the relevant determination in specific component amounts. this case invalid, we would be imposing an onerous burden on the Commission; it would have to recal- A. Fuel and Purchased Power Expense. culate each element of every component of revenue [39] The City contends that the Commission requirements whenever a witness's assumption that overstated expenses for fuel and "purchased power" new rates would become effective on a certain date because it included in that amount the price of 25 later proved to be incorrect. The recalculation time megawatts of electricity not actually purchased by alone could conceivably delay rendition of a new EPEC.

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order long enough once again to alter the effective pense, to which the City did not object. Although date. Such a process might never end. We conclude this figure was undisputed, the Commission re- that, under the circumstances of this case, the Com- duced it before including the amount in revenue re- mission did not abuse its discretion and did not act quirements as cost of service. We will not reverse arbitrarily or capriciously by refusing to recalculate the Commission's order absent a showing that the purchased-power cost once it became apparent that City's substantial rights were prejudiced by the in- the actual effective date would not coincide with clusion of the reduced expense figures in cost of the assumed effective date. We overrule the City's service. Since the City has not shown harm, we contention regarding this component. overrule its challenge.

B. Operating and Maintenance Expenses. Finally, the City contends the Commission im- The City next asserts that the Commission properly included the rate-case cost in operating found an improper amount of "operating and main- and maintenance expense. The City bases its claim tenance expenses" because it: (1) listed the expense of error on the alleged prior severance of the rate- as a single-line item; (2) provided no findings of case expense issue from the proceeding. In para- underlying fact to explain its reasoning in adopting graph 16 of its final order, the Commission held the figure; (3) found a figure unsupported by any that "[t]he issue as to the reasonableness of the evidence; and (4) included rate-case expenses in Company's and the Cities' rate case expense in- operating and maintenance expense after having curred in the prosecution of this case is severed severed them out of the docket. from this docket." The City argues that, because of paragraph 16, no regulatory commission expense The City points to no duty compelling the should be included in the revenue requirements. We Commission to find, as underlying facts, the do not agree. The Commission's staff provided amounts comprising a sum which is itself a com- testimony supporting the findings of that portion of ponent of a statutorily mandated criterion. PURA the regulatory commission expense that was undis- directs the Commission to find the amount of puted, and the Commission included only these un- "reasonable and necessary operating expenses," not disputed amounts in cost of service. operating and maintenance expense; likewise, PURA does not expressly mandate consideration of We conclude that the City's contentions regard- operating and maintenance expense when the Com- ing operating and maintenance expense are merit- mission determines net income. See PURA § 41(c). less. In the present case, the Commission found specific amounts for "operating expenses" and for that cat- *929 C. Employee Benefits. egory's components, one of which was labelled The City next challenges the Commission's "operating and maintenance expenses." Because the findings on employee benefits. It asserts that the Commission had no duty to itemize the subcompon- Commission erred by concluding that the evidence ents of "operating and maintenance expenses," its supported staff witness Young's adjustments to the failure to find them as underlying facts cannot be 401-k plan expenses and the Tax Reduction Act considered error. See, e.g., Frost v. PUC, 672 Stock Option Plan (TRASOP) expenses. S.W.2d 883, 885 (Tex.App.1984, writ refcl n.r.e.). The City argues that the Commission abused its We conclude the Commission did not act arbitrarily discretion by finding a 401-k plan expense in ex- and capriciously in declining to further subdivide cess of the amount requested by EPEC was reason- the components of operating expense. able and necessary when the evidence does not sup- During the proceeding, EPEC offered evidence port the finding. According to the City, by doing so, of the amount of operating and maintenance ex- the Commission has violated its own rules. The

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City has not indicated which of its substantive rules can identify evidence supporting the upward adjust- the Commission violated, and it identifies no evid- ment. ence that would tend to show that the Commission acted without reference to any guiding legal prin- Contrary to the City's assertion, EPEC offered ciples. In addition, the staff offered evidence that testimony supporting the tax expense alterations. the greater sum was necessary to provide the bene- EPEC's witness Mayhew testified that taxes are fit to all existing employees and reasonably anticip- uniquely tied to other elements of revenue require- ated additional employees. We conclude that sub- ments. Therefore, when other components of the stantial evidence supports the Commission's find- revenue requirement were adjusted, the tax expense ings that the amount recommended by the staff was necessarily was changed to accurately reflect the reasonable and necessary. expense EPEC would incur. Mayhew explained that one way of isolating the tax effect of alterations in [40] The City next contends that the Commis- revenue requirements would be to compare the two sion erred in including any TRASOP costs in em- reconciliation statements, line by line, identifying ployee benefits expense. The basis for this argu- changes and recalculating taxes based on them. The ment appears to be that the Commission had rejec- City has not attempted to show that the recalcula- ted inclusion of these expenses in two prior dock- tion was done incorrectly, and we conclude that its ets; in the City's view, apparently, the Commis- contention on this issue is meritless. sion's prior holdings estop it from including the ex- pense in later dockets. The City cites no authority E. Depreciation Add-Back. for this proposition. In its final challenge to the Commission's cost- of-service findings, the City attacks Finding of Fact The legislature has given the Commission dis- 187. By that finding, the Commission included in cretion to determine which of a utility's expenses cost of service an element referred to as are reasonable and necessary and, hence, may be re- "depreciation add-back," the purpose of which was covered. PURA § 41(c). Because the reasonable- to account for EPEC's transition from a ness determination is one committed to agency dis- "flow-through" system of tax accounting to a cretion, it may be overturned only by a showing "normalization" system. The City challenges this that the agency either based its decision on legally finding on the grounds that: ( 1) inclusion of irrelevant factors, failed to consider legally relevant "depreciation add-back" amounts to retroactive factors, or reached a completely unreasonable result ratemaking, (2) the inclusion is not supported by after weighing only legally relevant factors. Gerst, substantial *930 evidence, and (3) certain necessary 411 S.W.2d at 360; Statewide Convoy, 753 S.W.2d findings of underlying fact have been omitted. at 804. The City has not shown that the Commis- sion erred in any of these respects. Consequently, The City complains that it "cannot know how we conclude that the City's attacks on the Commis- the Commission reached its determination because sion's findings regarding employee benefits are there are no underlying findings of fact." Without without merit. providing legal authority for its position, the City argues that the Commission failed in its duty to D. Taxes Other Than Federal Income Taxes. make additional findings of underlying fact that The City contends that no evidence supports would show "a logical nexus between the conclu- the Commission's finding of a specific amount for sion of the underlying fact[s] and the evidence." expenses incurred for taxes other than federal in- For the same reasons that we held such findings of come taxes. This item of expense increased by "nexus" unnecessary in connection with the Com- $992,773 after the stipulation phase of the hearing, mission's "decisional-imprudence" findings, we and the City claims that neither EPEC nor the staff conclude they are also unnecessary here.

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[41] The City next argues that inclusion of de- match, such that ratepayers will have paid an preciation add-back constitutes retroactive ratemak- amount equal to the actual tax liability incurred by ing because the utility. See generally GTE-SW, 833 S.W.2d at 164-65. [t]he evidence does not identify any shortfall in depreciation reserves to cover test year tax timing Federal law now requires that all public utilit- reversals. The evidence does show that some of ies which accelerate depreciation for federal in- the alleged deficiency may be attributed to years come tax purposes use the normalization system. 26 before the Company's first rate proceeding, which U.S.C. § J68(f)(2), (i)(9) (Supp.1992). In most would mean that the burden imposed on ratepay- cases, a utility that had been using the flow-through ers by the Commission as a result of Finding of system had to switch to normalization in the middle Fact No. 187, inured to the benefit of the Com- years of the useful lives of its assets, rather than at pany and its shareholders in the past. the beginning or end of those lives. As a result, the utility had not built up a deferred-tax account with The City misconstrues the nature of the trans- which to pay its taxes during the later years in ition from a flow-through accounting system to a which its actual tax liability will exceed the tax normalization system. payments ratepayers will be making under normal- ization. The utility therefore faces an increasing tax As is common for utilities, EPEC depreciated liability without a means of recovering the in- its assets at an accelerated rate for tax purposes creased expense; yet, in spite of the deficiency in while depreciating them using the straight-line funds available to satisfy the tax liability, the utility method on its ratemaking books. Under a flow- must pay its taxes as they become due. Con- through system, any tax benefit that resulted from sequently, in this case, the Commission has in- the practice of keeping one set of books. for tax pur- cluded in cost of service a one-time adjustment to poses and another for ratemaking purposes was put EPEC in the position it would have occupied passed on to the ratepayers as it accrued. As time had it used normalization all along. passed, the utility would incur, first, a very low, then a medium, and, finally, a relatively high level The City complains bitterly about the allegedly of income tax liability. The portion of rates attribut- retroactive effect of the new rates because the ad- able to income taxes that ratepayers paid over the justment the Commission made is called asset's life would also rise, corresponding to the "depreciation add-back." This label does indeed utility's actual tax liability. make it sound as if the Commission has obliged present and prospective ratepayers to pay the utility Under normalization, on the other hand, while a second time for assets already *931 depreciated. actual tax liability follows the same increasing path, However, we do not decide the propriety of Com- rates reflect that the ratepayers' contribution to the mission action based on the name the Commission payment of the utility's income taxes remains con- has elected to apply to it. The true effect of the stant throughout the asset's useful life. To the extent "depreciation add-back" adjustment is to allow the that this creates an "overpayment" of taxes during utility to obtain from present and prospective rate- the early years of an asset's useful life, the utility payers its actual current and future tax expenses. accumulates the excess in a deferred-income-tax Consequently, this adjustment to the deferred-tax account. The accumulated funds are later used dur- account does not, in any way, constitute retroactive ing the stage of the asset's useful life when ratepay- ratemaking. er payments are not enough to satisfy the utility's actual tax liability. At the end of the asset's useful As a final matter, we note that the City's asser- life, the total overpayments and underpayments will tion of inadequate evidence to reveal a shortfall in

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the reserves needed to pay taxes in the test year or entitlement to party status. Finally, TSA asserts that ensuing years is incorrect. Moises Rodriguez, the the Commission erred in refusing to make findings supervisor of the EPEC's tax accounting section, of fact and conclusions of law concerning the due testified that, while EPEC had adjusted reserves to process claim. compensate for the shift to normalization as it af- fected the timing differences related to depreci- The supreme court's holding in State v. ation, EPEC had not done so for differences related Thomas. 766 S.W.2d 217 (Tex.l989), is dispositive to the tax "bases" of all its assets. In Mr. Rodrig- of TSA's complaint. TSA had the right, under the uez's words, "[t]he net result is that the current ac- Texas Constitution, to intervene in the proceedings. cumulated deferred Federal income tax balance ld. at 219. However, the wrongful exclusion of does not fully reflect the timing difference that oc- TSA will necessitate reversal of the Commission's curred prior to 1979." Rodriguez concluded that an order only if the error prejudiced substantial rights adjustment was necessary to bring EPEC into com- ofTSA. APTRA § 19(e). pliance with federal law. We therefore conclude After TSA appealed the October 22 order to the that substantial evidence supports the Commission's Commission, that body granted itself five exten- adjustment to the deferred-tax element of EPEC's sions of time to consider the complaint. These ex- cost of service. tensions allowed the Commission to avoid deciding Having concluded that all of the City's chal- the issue; the final extension postponed considera- lenges to the Commission's cost-of-service allow- tion of the appeal until after the Commission had ances are without merit, we overrule the City's sixth signed a final order in the docket. Nevertheless, point of error. TSA participated as a party in all proceedings after its reinstatement on November 6. TSA suffered no EXCLUSION OF TSA DURING PROCEEDINGS harm, therefore, from the Commission's failure to [42][43] On October 22, 1987, the examiner or- rule on its appeal. The harm, if any, stems from ally granted EPEC's motion to strike TSA as a TSA's inability to cross-examine the thirty-plus wit- party, excluding TSA from the proceedings. TSA nesses who testified while it was absent from the appealed the decision to the Commission, but the proceedings. Commission extended its time for making a de- cision such that it rendered the order setting new TSA does not complain of its inability to cross- rates before ruling on TSA's appeal. In the mean- examine approximately two dozen of the witnesses time, on November 6, 1987, EPEC withdrew its who testified during its absence. TSA claims to motion to remove TSA from the proceedings, and have suffered harm only by losing the opportunity the examiner readmitted TSA and reinstated its to cross-examine: (1) three prudence and deferral party status. witnesses who had testified during the first two days TSA was excluded; and (2) four *932 rate- During the fifteen days that TSA did not parti- design witnesses. As to the latter, TSA has not pre- cipate in the hearing, more than thirty witnesses served any error; the examiner specifically stated in offered testimony on various issues. TSA contends his oral ruling that he would permit TSA to recall that the October 22 order violated its due process and cross-examine any rate-design witnesses. As to rights by preventing it from cross-examining these the former, the examiner made it clear he would en- witnesses. In addition, TSA alleges that the Com- tertain a motion from TSA to recall them. mission intentionally postponed considering its ap- peal solely to prevent TSA from obtaining a stay of TSA recalled only EPEC witness Mayhew, a the proceedings from the Texas Supreme Court un- rate-design expert. It made no motion to recall and til such time as that court could determine TSA's cross-examine the three prudence and deferral wit-

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nesses. Further, while TSA was still present during consumers; and consequently, that PURA § 38 re- the original rate-base phase of the hearing-the quired the Commission to reassign TSA to the city/ only phase to which deferral and prudence issues county class to prevent EPEC from charging un- would have been pertinent-it did not seek to reasonably discriminatory rates. cross-examine witnesses or present evidence of its own. Under these circumstances, and because TSA [44][45][46] The Commission has broad dis- failed to request available relief that would have cretion to determine whether a particular rate made it whole, we cannot say that the error in ex- design would result in just, reasonable, and non- cluding TSA for fifteen days prejudiced substantial discriminatory rates. In making the determination, rights of TSA. We therefore overrule TSA's first the Commission may consider factors in addition to point of error. the cost of providing service, keeping in mind the overriding considerations of consistency and the In addition, because Thomas dictates the con- utility's burden of proving that its proposed rates clusion that TSA should not have been excluded, are just and reasonable. See PURA § 40; Texas we need not rule on TSA's complaint regarding the Alarm & Signal Assoc. v. PUC, 603 S.W.2d 766, Commission's failure to make the requested find- 773 (Tex.l980). Absent unreasonably discriminat- ings of fact and conclusions of law on that issue. ory rates, we will not overturn the Commission's approval of a rate design. PUC v. AT & T Commu- TSA'S RATE CLASSIFICATION nications of the Southwest, 777 S.W.2d 363 The third phase of the proceedings, the rate- (Tex.1989). design segment, afforded the parties an opportunity to offer evidence in support of or in opposition to [47][48] A customer seeking reassignment to a the proposed method of apportioning the anticip- different class must show that its conditions of ser- ated rate increase among the various rate classes. In vice are similar to those of the members of the class addition, because TSA sought to be reassigned to to which it seeks reassignment. The issue is one of the city/county governmental-consumer class (rate fact, to be resolved by reference to the particular class 41) from the general services class (rate class circumstances of each case. Ford v. Rio Grande 24), the parties also offered evidence on the classi- Valley Gas Co., 174 S.W.2d 479, 480 (Tex.1943); fication issue. The examiners recommended that Amtel Communications v. PUC, 687 S.W.2d 95, TSA not be reassigned and that the proposed appor- 102 (Tcx.App.l985, no writ). Existing classifica- tionment method be approved. The Commission ad- tion schemes previously approved by the Commis- opted both recommendations and the examiners' un- sion are, prima facie, not unreasonably discriminat- derlying reasoning. In its second and third points of ory, and the complaining party has the burden of error, TSA argues that the Commission erred by ap- proving that the classification produces unreason- proving a rate for TSA that is not cost-based and by ably discriminatory*933 rates. Ashley v. City of refusing to move TSA to the city/county rate class. Gilmer, 271 S.W.2d 100, 102 (Tcx.Civ.App.1954, writ ref'd); see also Ford, 174 S.W.2d at 480; Amtel A. Rate Class 41 Communications, 687 S.W.2d at 102. TSA urges us to conclude that the Commission erred in refusing to include TSA in the city/county [49] Resolution of the burden-of-proof issue rate class, which arguably pays lower rates than the disposes of the dispute here. TSA failed to offer general services class. TSA asserts that there is no proof that its load characteristics were similar to reasonable basis for differentiating TSA from the those of the city and county governmental custom- city and county governmental consumers; that ers. In addition, TSA offered no proof that its con- EPEC offered no proof of a factor justifying differ- stituent agencies are similar to the city/county con- ent treatment for TSA than for the city and county sumers in other respects which the Commission

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considers when classifying a customer. Having City of Austin, 160 Tex. 348, 331 S.W.2d 737, 742 offered no proof of these similarities, TSA has (1960); Olshan Demolishing Co. v. Angleton Indep. failed to carry its burden of showing that its rate is School Dist., 684 S.W.2d 179, 185 (Tex.App.l984, unreasonably discriminatory. writ refd n.r.e.); and State v. City q{ Dallas, 319 S.W.2d 767, 775-76 (Tex.Civ.App.l959), affd, 160 Another consideration which persuades us that Tex. 348, 331 S.W.2d 737, 742 (1960). We need the Commission did not abuse its discretion in re- not decide, however, whether rates that are not fusing to reassign TSA is that the Commission's fi- cost-based violate these provisions. TSA's chal- nal order, following a suggestion in the Examiners' lenge to the proposed rate, like its challenge to its Report, directed EPEC classification, is resolved by examining the burden of proof on the issue. Even assuming for the pur- to perform the appropriate studies, so that during poses of this discussion that TSA correctly identi- [EPEC's] next general rate case, the load and us- fied a constitutional entitlement to cost-based rates, age characteristics at the state agencies, as a we conclude that it had the burden ofproving that group, including any state universities and col- its new rates were not cost-based. Because it did leges, can be compared to the load and usage not carry this burden, we will overrule its second characteristics of both Rate Classes 24 and 41. point. Considering that the current classification TSA insists that EPEC had the burden of prov- scheme has apparently existed unchallenged for ing that the rate it proposed for TSA was based on some fifty years, that the Commission has ex- its cost of serving TSA. This argument is premised pressed its intention to investigate TSA's assign- on: ( 1) the overall burden of proof a utility bears in ment to the general services class in the next rate ratemaking proceedings imposed by PURA § 40; case, and that requiring EPEC to produce the and (2) EPEC's exclusive control of cost-of-service needed information in this proceeding could have information. We conclude that these considerations resulted in a significant delay, we conclude that t~e are insufficient to impose on EPEC the burden of Commission acted reasonably by refusing to reas- proving that its proposed rates are based on its costs sign TSA to the city/county rate class. We overrule to serve this select group of customers. TSA's third point of error. All individual state agencies were originally as- B. Cost-Based Rates signed to the general services rate class fifty years TSA next contends that it is entitled to rates ago; until now, they have not complained of that as- based on the utility's actual cost of serving only the signment. The agencies comprising TSA intervened agencies constituting TSA. To support this argu- in this ratemaking proceeding as a newly formed ment, TSA cites four Texas constitutional provi- group seeking to be reassigned to the city/county sions it claims require EPEC to charge TSA a rate class. The crux of the group's *934 cost-based-rates based on the cost of serving only TSA. See Tex. argument is that EPEC was obligated to prove that Const. art. III, §§ 44, 51, and 53 (1984), and art. the rate EPEC anticipated charging the group was XVI, § 6 (Supp.1992). based on the utility's cost of serving only the mem- [50] The cited constitutional provisions prevent bers of the group. We conclude that the Commis- the State from depleting its treasury by disbursing sion acted reasonably both in refusing to impose State funds without obtaining a corresponding be- such a burden on EPEC and in ordering EPEC to nefit for the public. See, e.g., University qf Texas produce information necessary to evaluate the issue Svstem v. Robert E. McKee, Inc ... 521 S.W.2d 944, in the next ratemaking case. 948 (Tex.Civ.App.1975, writ refd n.r.e.); State v. The Texas Supreme Court has held that a uti!-

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ity is not required to compare profits and rates of Commission did not abuse its discretion in approv- return between services. Texas Alarm & Signal, 603 ing the new rates is the fact that TSA did not re- S.W.2d at 772. The considerations supporting the quest the information before the hearings, even decision not to require such a comparison also sup- though the Commission could have compelled port the decision not to require a utility to determ- EPEC to produce the information necessary to ine and offer proof of the costs of serving individu- prove TSA's claim of being overcharged. Instead, al customers or subclasses of customers who share TSA asserted, during the rate-design phase, that it one or more characteristics. Cf City of Corpus needed the information but had no access to it. Be- Christi v. PUC, 572 S.W.2d 290, 294-96 cause TSA made little attempt to acquire the in- (Tex.l978). Comparing rates of return between ser- formation it needed to carry its burden of proof, its vices requires the utility to determine the expenses policy argument is unsympathetic. Therefore, even it incurred and the adjusted value of property it assuming for the sake of argument that TSA's con- used in producing each service. Determining cost- stitutional theory is correct, the record it has based rates for subclasses of consumers would re- brought this Court is insufficient to show harm. We quire the utility to determine the expenses it in- find no reversible error on this record. TSA's curred and the adjusted value of property it used in second point of error is overruled. producing service for each individual customer. This would be even more onerous a burden than CONCLUSION that rejected by the supreme court in Texas Alarm In the context of a myriad of complex issues & Signal. In addition, requiring EPEC to determine and often-contentious parties, the Commission must costs of service for individual customers would be allowed to weigh all competing interests in set- generate more costs, which would then be passed ting rates that will be fair to all consumers. With on to consumers. The increase in rates that could the exception of the use of deferred accounting as result from added costs of the ratemaking proceed- to EPEC's carrying costs incurred during the regu- ing is a factor the Commission can and should con- latory-lag period, we conclude that the Commission sider. !d. at 772 n. 7. acted within its discretion in setting new rates for EPEC. Allocation of the burden of proof to a com- plaining party is reasonable in circumstances in We reverse that portion of the trial court's judg- which individual customers have combined to form ment which affirmed the Commission's approval a subclass, which then asserts an entitlement to and use of deferred accounting as to the carrying rates based not on the costs of serving all custom- costs incurred by EPEC between the date Palo ers, but of serving only the members of the sub- Verde Units 1 and 2 became commercially opera- class. If the complaining subclass were not assigned tional and the effective date of the new rates. We the burden of proof in such circumstances, the util- affirm the remainder of the trial court's judgment. ity would arguably be obligated, in every rate- We remand the cause to the Commission for such making proceeding, to present evidence of the cost further *935 proceedings as may be necessary or of serving every subclass that customers could appropriate to implement this Court's judgment. define based on shared characteristics. Even assum- Tex.App.-Austin, 1992. ing that it would be possible for the utility to satisfy City of El Paso v. Public Utility Com'n of Texas such an obligation, it is questionable whether the 839 S.W.2d 895, 135 P.U.R.4th 584 vastly increased costs which such a presentation would entail would be in the public's interest. END OF DOCUMENT Further supporting our conclusion that the

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City ofEl Paso v. Public Util. Comm'n, 883 S.W.2d 179 (Tex.1994) Page 1

883 S.W.2d 179, Util. L. Rep. P 26,411 (Cite as: 883 S.W.2d 179)

l45k 11.3(6) k. Proceedings before commis- sions. Most Cited Cases Supreme Court of Texas. CITY OF EL PASO, The State ofTexas, and Office of Public Utilities 317A ~161 Public Utility Counsel, Petitioners, v. 317 A Public Utilities PUBLIC UTILITY COMMISSION OF TEXAS and 317Alll Public Service Commissions or Boards El Paso Electric Company, Respondents. 317 AIII(B) Proceedings Before Commissions 317Ak 161 k. In general. Most Cited Cases No. D-3053. Argued Sept. 13, 1993. Public Utility Commission could properly base Decided June 22, 1994. rate order, in part, on nonunanimous stipulation; Rehearing Overruled Oct. 6, 1994. Commission made independent findings that stipula- tion was supported by preponderance of record evi- Electric utility applied for rate increase. The dence and resulted in just and reasonable rates, after Texas Public Utility Commission set rate, and judicial providing all parties, including nonsignatories, op- review was sought. The 250th District Court, Travis portunity to be heard on merits of stipulation. County, Paul R. Davis, Jr.; J., upheld Commission's V.T.C.A., Government Code§ 2001.141. decision, and appeal was taken. Withdrawing prior opinion, the Austin Court of Appeals, J. Woodfin [2] Administrative Law and Procedure 15A Jones, J., 839 S.W.2d 895, affirmed in part, reversed ~754.1 in part, and writ of error was sought. The Supreme Court, Enoch, J., held that: (1) Commission acted 15A Administrative Law and Procedure within its discretion by basing its final order, in part, 15AV Judicial Review of Administrative Deci- on nonunanimous stipulation agreement, and (2) in- sions clusion of deferred costs in electric utility's rate base 15AV(D) Scope ofReview in General did not violate test year requirement. 15Ak754 Discretion of Administrative Agency Affirmed in part and reversed in part. 15Ak754.l k. In general. Most Cited Cases Spector, J., dissented and filed opinion in which Gonzalez, Doggett and Gammage, JJ.,joined. Administrative Law and Procedure 15A ~763

West Headnotes 15A Administrative Law and Procedure 15A V Judicial Review of Administrative Deci- [l] Electricity 145 ~11.3(6) sions 15AV(D) Scope ofReview in General 145 Electricity l5Ak763 k. Arbitrary, unreasonable or 145kll.3 Regulation of Charges capricious action; illegality. Most Cited Cases

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883 S.W.2d 179, Util. L. Rep. P 26,411 (Cite as: 883 S.W.2d 179)

15A Administrative Law and Procedure Agency's decision is arbitrary or results from 15A V Judicial Review of Administrative Deci- abuse of discretion if agency: (1) fails to consider sions factor legislature directs it to consider; (2) considers 15AV(D) Scope of Review in General irrelevant factor; or (3) weighs only relevant factors 15Ak749 k. Presumptions. Most Cited that legislature directs it to consider but still reaches Cases completely unreasonable result. Administrative Law and Procedure 15A ~750 (3] Public Utilities 317A ~161 15A Administrative Law and Procedure 317 A Public Utilities 15A V Judicial Review of Administrative Deci- 317 AIH Public Service Commissions or Boards sions 317Alii( B) Proceedings Before Commissions 15AV(D) Scope of Review in General 317Ak 161 k. In general. Most Cited Cases 15Ak750 k. Burden of showing error. Most Cited Cases

Public Utility Commission is free to accept or reject, in whole or in part, hearing examiner's rec- Findings, inferences, conclusions, and decisions ommendations; Commission may repudiate part of of administrative agency are presumed to be supported examiner's report and modify it by deletion. by substantial evidence, and burden is on contestant to prove otherwise.

[41 Administrative Law and Procedure 15A ~791 [6] Electricity 145 ~11.3(6)

15A Administrative Law and Procedure 145 Electricity 15AV Judicial Review of Administrative Deci- 145kl1.3 Regulation of Charges sions 145kl1.3(6) k. Proceedings before commis- 15A V(E) Particular Questions, Review of sions. Most Cited Cases 15Ak784 Fact Questions 15Ak791 k. Substantial evidence. Most Substantial evidence supported Public Utility Cited Cases Commission's disallowance of certain amount of costs in electric utility's rate base due to imprudent deci- At its core, "substantial evidence test" for re- sions made in connection with construction of new viewing agency decisions is reasonableness test or generating capacity; Commission reasonably exer- rational basis test; true test is not whether agency cised its discretion in selecting amount within range of reached correct conclusion, but whether some rea- figures provided by experts. sonable basis exists in record for action taken by agency. 171 Public Utilities 317A ~128

151 Administrative Law and Procedure 15A 317A Public Utilities ~749 3 17 AJJ Regulation 3 17Ak 1 19 Regulation of Charges

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883 S. W.2d 179, Uti!. L. Rep. P 26,411 (Cite as: 883 S.W.2d 179)

317Ak128 k. Operating expenses. Most Cited Cases 317A Public Utilities 317All Regulation Public Utilities 317A ~129 3 17Ak 119 Regulation of Charges 317Ak 124 k. Value of property; rate base. 317A Public Utilities Most Cited Cases 3 I 7 All Regulation 317Ak 119 Regulation of Charges In determining whether to allow particular utility 317Ak 129 k. Rate of return. Most Cited to defer post-in-service costs, Public Utility Commis- Cases sion has discretion to proceed on ad hoc or "case-by-case" basis. Statutory standard that controls revenue re- quirement determinations is that rates be fixed to *181 Nmman J. Gordon, El Paso, James G. Boyle, permit utility reasonable opportunity to earn reasona- Austin, Nanette G. Williams, David C. Caylor, El ble return on its invested capital plus "reasonable and Paso, Luis A. Wilmot, San Antonio, Stephen Fogel, necessary" operating expense to provide service. William L. Magness, W. Scott McCollough, Dan Vernon's Ann.Texas Civ.St. art. 1446c, § 39(a). Morales, Joe K. Crews and Richard A. Muscat, Aus- tin, for petitioners. 181 Electricity 145 ~11.3(2) James W. Check ley, Alan Holman, Austin, Thomas S. 145 Electricity Leatherbury, Ferd C. Meyer, Jr., Kenneth C. Raney, 145k11.3 Regulation of Charges Jr., Dallas, R. Eden Martin, Chicago, IL, Barry 145kll.3(2) k. Determination of rate base. Bishop, John F. Williams, Austin, Harry M. Reasoner, Most Cited Cases Houston, Walter Demond, Austin, Alton J. Hall, Jr., Houston, Norma K. Scogin, Dan Morales, Joe N. Pratt, and Davison W. Grant, Austin, for respondents. Public Utilities 317A ~124

Justice ENOCH delivered the opinion of the Court, in 317A Public Utilities which Chief Justice PHILLIPS, Justices HIGH- 3 I 7 All Regulation TOWER, HECHT, and CORNYN join. 317Ak 119 Regulation of Charges This is an administrative appeal from an order of 317Ak 124 k. Value of property; rate base. the Public Utility Commission (Commission) setting Most Cited Cases rates to be charged by El Paso Electric Company (EPEC). FNI The order was consistent with a Inclusion of deferred costs in electric utility's rate non-unanimous stipulation between EPEC and several base does not violate test year requirement; Public parties, including the Commission General Counsel. Utility Commission may, in its discretion, go outside In its fmal order, the Commission authorized EPEC to test year when necessary to achieve just and reasona- capitalize and include in rate base deferrals associated ble rates. Vernon's Ann.Texas Civ.St. art. 1446c, § with certain post-in-service carrying costs and oper- 3(t). ating costs related to its investment in the Palo Verde Nuclear Generating Station (Palo Verde). The ques- 19] Public Utilities 317A ~124 tions presented by this appeal are first, whether the

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Commission acted within its discretion by basing its tober 22, 1987, during the course of the hearing on final order, in part, on the nonunanimous stipulation EPEC's application, certain industrial intervenors and agreement, and second, whether the Commission has the Commission General Counsel announced and filed the authority under the Public Utility Regulatory Act a stipulation agreement intended to resolve the case. (PURA) FN 2 to allow a public utility to include in a FNs The Examiners scheduled an additional phase of utility's rate base certain costs incurred during the the hearing to consider the stipulation, and eventually "regulatory lag" period.FN 3 We answer both issues yes, recommended to the Commission that the stipulation and consequently affirm the judgment of the court of be rejected. The Commissioners modified the pro- appeals in part and reverse in part. posed stipulation and, as modified, adopted its terms in its final order. FNl. Tex. Public Utils. Comm'n, Application ofEl Paso Electric Company for Authority to FN4. EPEC and four other utility companies Change Rates, Docket No. 7460, 14 agreed to partially fund and otherwise assist TEX.P.U.C.BULL. 932, 1202 (June 16, in building one or more nuclear steam elec- 1988) (Docket No. 7460). tric generating units, with attendant common facilities. Construction is complete on the FN2. TEX.REV.ClV.STAT.ANN. art. 1446c common facilities and two of the five units (Vernon Supp.1994). originally planned (Palo Verde Units 1 and 2). After construction began, EPEC modified its ownership interest in the units. Originally, FN3. Generally, regulatory lag is the delay EPEC owned an undivided interest in each of between the time when a utility's profits are the units as a tenant in common with the above or below standard and the time when other four project participants. Although an offsetting rate decrease or rate increase EPEC retains its undivided interest in Unit 1, may be put into effect by commission order the company has sold its interest in Unit 2 or otherwise. This delay is due to the inherent and made arrangements to lease the unit back inability in the regulatory process to allow for the duration ofEPEC's involvement in the for immediate rate decreases or increases. project. For purposes of this opinion, "regulatory lag" is the period between the date a new plant begins commercial operation (the FN5. EPEC, the Commission staff, and four "in-service" date) and the effective date of corporate intervenors which purchased sig- the new rates that result from including the nificant amounts of electricity from EPEC all new plant's costs in the rate base. See JAMES signed the stipulation. C. BONBRIGHT ET AL., PRINCIPLES OF PUBLIC UTILITY RATES 96 (2d ed. 1988). As part of its request for a rate increase, EPEC requested that its rate base be increased*182 by the In April1987, EPEC filed an application for a rate amount of carrying costs and operating and mainte- increase with the Commission seeking to recover costs nance costs it incurred during the "regulatory lag" associated with its investment in the Palo Verde Pro- period. The utility had deferred these types of costs for ject. EPEC sought rate treatment related to its in- Units 1 and 2, aggregating each type of cost for each vestment in the two units which had started commer- unit into a separate capital account. EPEC obtained the cial operation, Palo Verde Units 1 and 2. FN 4 On Oc- Commission's prior permission to defer Unit 1 costs.FN6 The Commission reserved the right, howev-

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er, to refuse subsequently to include the deferred costs in the rate base to the extent they were unreasonable, FN7. The court of appeals separated the costs related to plant not used and useful, or were spent or into two categories: (1) operating and incurred imprudently. Although EPEC did not obtain maintenance costs, and (2) carrying costs. prior permission to defer its post-in-service costs for Our holding makes no distinction between Unit 2, it nevertheless deferred them. After the hear- these costs. ing, the Commission granted EPEC's request to in- clude the deferred costs for both units in the rate base. I. The Non-Unanimous Stipulation FN6. The Commission authorized deferred The City and OPUC make several arguments accounting treatment for Unit 1 in Tex. Pub- supporting their position that the Commission erred by lic Utils. Comm'n, Application of El Paso basing its order, in part, on a non-unanimous stipula- Electric Company for Authority to Change tion. They ask this Court to reverse the judgment of Rates, Docket No. 6350, 13 the court of appeals, contending that its holding af- TEX.P.U.C.BULL. 1091, 1239-41 (1986). firms an action of the Commission that is not sup- ported by substantial evidence, not consistent with The City ofEI Paso (City), the State of Texas (on Texas law, arbitrary and capricious and characterized behalf of various state agencies located in western by an abuse of discretion. We do not accept the City's Texas) (State), and the Office of Public Utility or OPUC's arguments. Counsel (OPUC) sought judicial review of the Com- mission's order, contending that the Commission erred A. by basing its order, in part, on the non-unanimous Reliance on the Non-Unanimous Stipulation stipulation. The City, State, and OPUC also argued The City and OPUC contend that where no evi- that the Commission lacked the authority to permit dence existed to support its decision, the Commis- EPEC to defer post-in-service costs, and subsequently sioners erroneously relied on the stipulation itself as a to include the deferrals in the utility's rate base. substitute for the evidence. The City argues that by relying on the stipulation as opposed to the evidence, The trial court upheld the Commission's order. the Commissioners violated the statutory requirement The court of appeals affirmed the portion of the trial that every fmding be based exclusively on the evi- court's judgment which affirmed the Commission's dence. TEX.GOV'T CODE ANN. § 2001.141 order allowing the inclusion of capitalized (Vernon Pamphlet 1994 ). The City analogizes the post-in-service operating costs in the utility's rate present case to a civil cause in which the court renders base. 839 S.W.2d 895, 934 (1991). The court of ap- an agreed judgment without consent of all the parties. peals reversed the portion of the trial court's judgment It contends that in adopting the stipulation as a reso- which affirmed the Commission's order allowing the lution of the case, the Commission improperly im- deferral of post-in-service carrying costs. Id FN? All posed the terms of the settlement on the non-signing parties filed applications for writ of error to this court. parties. For the reasons stated below, we reverse the judgment of the court of appeals to the extent that it disallows We reject the City's analogy. In Mobil Oil Corp. the deferral of post-in-service carrying costs. In all v. Federal Power Commission, 417 U.S. 283, 94 S.Ct. other respects, the judgment of the court of appeals is 2328, 41 L.Ed.2d 72 (1974), the Supreme Court up- affirmed. held the Federal Power Commission's fmal order

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establishing a rate structure that was based, in part, on (e) The results of the stipulation are in the public a non-unanimous stipulation. The Court empha- interest, including the interest of those customers sized*183 the importance of considering a represented by parties opposing the stipulation. non-unanimous proposal "on its merit:" Docket No. 7460, supra note 1, at 1202--03 If a proposal enjoys unanimous support from all of (emphasis added).FN 8 The Commission's order con- the immediate parties, it could certainly be adopted tinued to conclude that: as a settlement agreement if approved in the general interest of the public. But even if there is a lack of FN8. We note that the Commission has used unanimity, it may be adopted as a resolution on the these same standards to evaluate merits, if FPC makes an independent finding sup- non-unanimous settlements in several other ported by 'substantial evidence on the record as a dockets. See, e.g., Tex. Public Utils. whole' that the proposal will establish 'just and Comm'n, Application of El Paso Electric reasonable' rates for the area. Company to Declare Palo Verde Unit 1 in Service, Docket No. 6764, 12 417 U.S. at 314, 94 S.Ct. at 2348-49 (quoting TEX.P.U.C.BULL. 1533, 1534--35 (No- Placid Oil Co. v. Federal Power Comm'n, 483 F.2d vember 14, 1986). 880, 893 (5th Cir.1973)) (emphasis in original). 5. Pursuant to the Findings of Fact and Conclusions In Docket No. 7460, the Commission's order of Law set forth below, the Commission fmds the provided, in part: Amended and Restated Stipulation, as modified, is a reasonable basis for resolution of the issues in this 4. Even where some parties to a proceeding do not case and that adoption of the Amended and Restated agree to a stipulated result, it is reasonable to adopt Stipulation, as modified, as the basis of the Com- such a stipulation if: mission's Order in this proceeding is in the public interest. Finding of Fact No. 237 provided: (a) The parties opposing the stipulation have no- tice that the stipulation inay be considered by the Commission and an opportunity to be heard on their 237. The provisions of the Amended and Restated reasons for opposing the stipulation; Stipulation are reasonable and supported by a pre- ponderance of the credible evidence in this record and should be adopted. FN9 (b) The matters contained in the stipulation are supported by a preponderance of the credible evi- dence in the case,· FN9. In addition to the recitations above, Conclusion of Law No. 28 stated: "The Amended and Restated Stipulation, as modi- (c) The stipulation is in accordance with applica- fied per Finding of Fact No. 6, represents a ble law; reasonable resolution of the contested issues in this docket, is supported in the record, is in (d) The stipulation results in just and reasonable the public interest, and should therefore be rates; and; adopted, as the basis for the Commission's order in this case." Docket No. 7460, supra

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note 1, at 1280. we reject the City's argument that the substantial rights of the City and other non-signatory parties were in [ 1] It is clear from the Commission's order that, some way prejudiced by the Commission's adoption of consistent with Mobil Oil, the Commission's decision the non-unanimous stipulation. in Docket No. 7460 was based on the merits; it was not simply an adoption of a non-unanimous "settlement." The OPUC independently argues that the Com- The Commission made an independent fmding that mission's reliance on the non-unanimous stipulation the non-unanimous stipulation was supported by a agreement was arbitrary and capricious because the preponderance of the record evidence and resulted in Commission failed to follow its own standards in just and reasonable rates.FN 10 Thus, contrary to the relying on the stipulation. Specifically, the OPUC City's arguments, the Commission's final order was notes that the court of appeals concluded that the in- consistent with the requirement that every fmding be clusion of deferred post-in-service carrying costs based exclusively on the evidence. violates PURA section 4l(a); and, because the stipu- lation included provisions concerning treatment of FNJO. We note that the Commission's Final deferred carrying charges, the stipulation violates the Order included 237 separate, specific Find- Commission's own standard, see supra text above, that ings of Fact concerning the rate increase. The the stipulation be "in accordance with applicable law." Commission specifically considered the As a result, the OPUC argues that the court of appeals amended and restated stipulation in the con- should have reversed and remanded the Commission's text of these findings as a whole. See Docket fmal order in toto. Because we conclude that the in- 7460, supra note 1, at 1233-74. Thus, con- clusion of deferred post-in-service carrying costs does trary to the City's and OPUC's contentions, not violate PURA section 4l(a), see infra IV., the the Commission's findings supporting its re- OPUC's argument on this point is moot. liance on the non-unanimous stipulation were not ''wholly conclusory." Further, because [2] An agency's decision is arbitrary or results the Commission explicitly provided that it from an abuse of discretion if the agency: (1) failed to was based on a review of the evidence in the consider a factor the legislature directs it to consider; record as a whole, we reject the City's con- (2) considers an irrelevant factor; or (3) weighs only tention that the Commission acted arbitrarily relevant factors that the legislature directs it to con- and abused its discretion as a fact finder and sider but still reaches a completely unreasonable re- decision maker by adopting a contested set- sult. Gerst v. Nixon, 411 S.W.2d 350, 360 n. 8 tlement "without a review of the record or (Tex.l966). We agree with the court of appeals that support in the evidentiary record." the City and OPUC have failed to establish that the use of the stipulation as a partial basis for the final order In addition to considering the non-unanimous involves consideration of factors other than those the stipulation on its merits, the Commission provided all legislature has directed the Commission to consider. parties, including non-signatories,*184 the oppor- 839 S.W.2d 895,903-04. tunity to be heard on the merits of the stipulation. As the court of appeals notes, the Commission added an B. additional phase to the proceedings devoted exclu- Section 21.151 sively to receiving evidence and argument on the [3] Section 21.151 of the Public Utility Commis- propriety of using the stipulation as a basis for re- sion's Rules of Practice and Procedure provides: solving the contested issues. 839 S.W.2d at 903. Thus,

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883 S.W.2d 179, Util. L. Rep. P 26,411 (Cite as: 883 S.W.2d 179) Disallowance FN!l After the expiration of the time for filing exceptions and replies thereto, the examiner's report and pro- FN 11. "Decisional" imprudence refers to posal for decision will be considered by the com- EPEC's decisions to become involved in the mission and either adopted, modified and adopted, Palo Verde Project, the extent of its in- or remanded to the examiner .... volvement and its decisions to remain in the project at the 15.8% participation level. 16 TEX.ADMIN.CODE § 21.151 (West 1990). The City and the OPUC argue that the Commission The Commission concluded that due to imprudent violated section 21.151 by basing its fmal order on a decisions, $32 million of EPEC's costs should not be modified stipulation over the examiner's recommen- included in rate base. Both the City and OPUC argue dation. This argument is without merit. First, section that the disallowance is unsupported by substantial 21.151 does not speak to the Commission's ability to record evidence, claiming that the amount disallowed consider non-unanimous stipulations in reaching its should have been greater. orders. Second, the Commission is free to accept or reject the examiner's recommendations. See Ross v. [4][5] At its core, the substantial evidence rule is a Texas Catastrophe Prop. Ins., 770 S.W.2d 641, 642 reasonableness test or a rational basis test. Railroad (Tex.App.-Austin 1989, no writ). Section 21.151 Comm'n of Texas v. Pend Oreille Oil & Gas Co., 817 does not require the Commission to accept or reject S. W.2d 36, 41 (Tex.1991 ). The reviewing court, then, the examiner's report in its entirety. Rather, the concerns itself with the reasonableness of the admin- Commission may repudiate part of the examiner's istrative order, not the correctness of the order. ld In report and modify it by deletion as it did in this case. applying this test, we may not substitute our judgment as to the weight of the evidence for that of the agency. c. Jd (the substantial evidence rule "prevents the court Findings of Facts/Substantial Evidence from 'usurping the agency's adjudicative authority In a fmal challenge to the Commission's use of the even though the court would have struck a different non-stipulation agreement, the City argues that "[t]he balance' "). non-unanimous 'stipulation' used by the Commission ... is not supported by substantial evidence and key Although substantial evidence is more than a findings of fact drafted to support the final order are mere scintilla, the evidence in the record actually may inadequate to satisfy statutory requirements." We will preponderate against the decision of the agency and discuss the City's specific substantial-evidence and nonetheless amount to substantial evidence. Texas finding-of-fact challenges. See iyifra 11-Ill However, Health Facilities Comm'n v. Charter Medical-Dallas, to the extent the City makes a general complaint Inc., 665 S.W.2d 446, 452 (Tex.l984). The true test is against the stipulation, we agree with the court of not whether the agency reached the correct conclu- appeals that the City has waived any argument on this sion, but whether some reasonable basis exists in the point as its point and argument are too general to record for the action taken by the agency. ld The preserve error. The City provides no substantive ar- fmdings, inferences, conclusions, and decisions of an gument to support its legally conclusory statements. administrative agency are presumed to be supported by substantial evidence, and the burden is on the *185 II. contestant to prove otherwise. ld at 453; Imperial Substantial Evidence-"Decisional" Imprudence American Resources Fund, Inc. v. Railroad Comm'n,

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557 S. W.2d 280, 286 (Tex.1977); City of San Antonio contains substantial information relevant to the v. Texas Water Comm'n, 407 S.W.2d 752, 758 Commission's inquiry on this issue. The evidence (Tex.1966). includes expert testimony offered by the City, EPEC, and the Commission staff The City's witness, Ben The City argues that although the City, EPEC, Johnson, stated that in his opinion the EPEC had made and the Commission staff each offered expert testi- several imprudent decisions and that, as a result, the mony on the decisional imprudence issue, the eviden- Commission should disallow 50% of its costs.FNJ 2 tiary record contains no specific reference to amount. EPEC testified that there *186 should be a zero dis- Further, the City contends that the court of appeals allowance because there simply was no decisional erred by relying, in part, on matters included in the imprudence. The Commission staff offered testimony non-unanimous stipulation to conclude that the that certain aspects of the Company's decision making Commission's decision was supported by substantial process were imprudent. However, the Commission's evidence because the matters relied on were not in- witnesses did not conclude that the decision to par- dependently supported by a preponderance of the ticipate in the project was itself imprudent. Rather, evidence. they focused on the perceived errors associated with EPEC's decision making process. The Commission's witnesses noted that they were unaware of any theory In the Findings of Fact, the Commission provid- that would enable them to recommend any specific ed: disallowance of project costs or capacity based on their conclusions.FNI 3 101. The Company was not entirely prudent in its planning and management of its participation in the FN 12. Although not clear from Mr. Johnson's Palo Verde project. testimony, under his suggested approach, the imprudence disallowance would have ex- 102. There is evidence in the record of imprudence ceeded $350 million. in the Company's continuing evaluation of the level of its participation in the Palo Verde Project. The FN13. We note that the Examiner likewise parties to the Amended and Restated Stipulation recognized flaws in EPEC's decision making have quantified The [sic] cost of such imprudence process. However, the Examiner noted that as $22 million as applied to Units 1 and 2. The "it is too much to ask that one reconstruct the Company has conceded an additional $10 million appropriate process fifteen years after the disallowance to be applied to PVNGS Units 1 and 2. fact in order [to] fmd whether a decision made on an inappropriate basis might still 103. Quantification of the effects of imprudence have been made on an appropriate one." requires the exercise of judgment based upon the Docket No. 7460, supra note 1, at 981. evidence. In light of the evidence relating to pru- dence and the difficulties in quantification, the The evidence before the Commission therefore quantification of decisional imprudence at $32 mil- ranged from expert testimony that no imprudence lion for Units 1 and 2 is reasonable and appropriate. disallowance should be imposed, to testimony that a 50% imprudence disallowance should be imposed, Docket No. 7460, supra note 1, at 1250. and finally to testimony that there is no known theory to quantify the flaws in EPEC's decision making The record before this Court is extensive and process giving rise to its investment. In other words,

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several experts had significant differences of opinion Comm'n, 407 S.W.2d 752,758 (Tex.1966). We do not on the proper method to determine and the proper accept that the City and OPUC have met their burdens amount of EPEC's imprudence disallowance. These to overcome the presumption in this case. differences are understandable when considering the enormous complexity involved in a utility's decision FN 14. In affirming the Commission's order, to construct or purchase new generating capacity. the court of appeals relied in part on its de- termination that EPEC's agreement in the [6] In conducting a substantial-evidence review, non-binding stipulation to a $32 million dis- we must determine whether the evidence as a whole is allowance constituted a "quasi-admission." such that reasonable minds could have reached the 839 S.W.2d at 907. The court of appeals conclusion the agency must have reached in order to concluded that "[b]ecause it is a statement take the disputed action. Te.'cas State Bd. of Dental contrary to EPEC's pecuniary interest, the Examiners v. Sizemore, 759 S.W.2d 114, 116 concession has some evidentiary weight." Id (Tex.l988), cert. denied, 490 U.S. 1080, 109 S.Ct. While we need not address whether the 2100, 104 L.Ed.2d 662 (1989). The true test is not EPEC's agreement in the non-binding stipu- whether the agency reached the correct conclusion, lation constituted a "quasi-admission," we but whether some reasonable basis exists in the record note that it is debatable as to whether EPEC's for the action taken by the agency. Texas Health Fa- acceptance of a $32 million figure was in fact cilities Comm'n v. Charter Medical-Dallas, Inc., 665 a statement against its pecuniary interest, S.W.2d 446, 452 (Tex.l984). We agree with the court considering that the evidence could have of appeals that the record contains substantial evi- supported a much higher disallowance. See dence to support a disallowance figure of zero for supra note 12. decisional imprudence; and, the record contains sub- stantial evidence to support a Commission finding that *187 III. 50 percent of EPEC's costs should have been disal- Final Revenue Requirement FNts lowed. See 839 S.W.2d at 907. Thus, because of the admitted complexity in valuing the decisional im- FN15. The final revenue requirement repre- prudence in this case, we hold that there is a reasona- sents the total revenues needed by the utility ble basis for the Commission to, in its discretion, in order to cover its reasonable and necessary select an amount within the range of figures provided operating expenses and receive a return on by expert testimony of the parties. FNJ 4 Moreover, the the rate base. City and OPUC have failed to explain why any one amount within that range is more reasonable or better The City complains generally about the revenue supported by the evidence than the $32 million figure requirement determination and then makes specific eventually reached by the Commission. The fmdings, contentions concerning particular components of the inferences, conclusions, and decisions of an adminis- revenue requirement. The City argues that the fmal trative agency are presumed to be supported by sub- revenue requirement of the Commission was based stantial evidence, and the burden is on the contestant solely on the non-binding stipulation agreement and to prove otherwise. Texas Health Facilities Comm'n v. not on the record evidence. According to the city, the Charter Medical-Dallas, Inc., 665 S.W.2d 446, 452 fmdings and conclusions adopted by the Commission (Tex.l984); Imperial American Resources Fund, Inc. do not allow this Court to analyze the decision because v. Railroad Comm'n, 557 S.W.2d 280, 286 the agreement between the parties is not evidence and (Tex.l977); City of San Antonio v. Texas Water

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not a statutory standard for review. We disagree. Employee Benefits; and (3) Taxes other than Federal Income Taxes. After reviewing the opinion of the Finding of Fact No. 152 provides: court of appeals, the briefs of the parties, and the rec- ord, we conclude that the City's arguments on these issues are without merit. The court of appeals cor- The preponderance of the evidence establishes that rectly articulates the error in the City's claims. 839 the company has a total revenue requirement with S. W.2d at 927-31. components as set forth in Exhibit B of the Amended and Restated Stipulation. IV. Deferrals Docket No. 7460, supra note 1, at 1260. This The City, OPUC, and State make several argu- finding is supported by twenty-five underlying fmd- ments contesting the Commission's authority to permit ings of fact addressing the components of the total the deferral of post-in-service costs, and the inclusion revenue requirement, with each finding supported by of the deferred costs in the utility's rate base. FNJ

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waived. FN 18. The deferral period for Palo Verde *188 A. Unit 1 was twenty-five months and for Unit 2 Test Year Requirement was nineteen months. [8] PURA requires utilities to file for a rate in- crease by presenting revenue and expense data from B. the same 12-month period using an historical test Standards Applied year. TEX.REV.CIV.STAT.ANN. art. 1446c, § 3(t); The Commission granted EPEC's request to defer 16 TEX.ADMIN.CODE § 23.21(a); Suburban Utility post-in-service costs for Unit 1 based upon a "fman- Corp. v. Public Utility Comm'n, 652 S.W.2d 358, 366 cial integrity and viability" standard. Docket No. (Tex.1983). In State of Texas v. Public Utility Com- 6350, supra note 6, at 1239-41. However, the Com- mission, we held that an accounting order authorizing mission granted EPEC's unit 2 request for deferred deferred accounting treatment does not violate the test accounting based on a "measurable harm" standard. year requirement because there is no requirement in Docket No. 7460, supra note 1, at 1079. The City PURA or the Commission's procedures that the argues that the use of two different standards is arbi- Commission must follow a test year when determining trary and capricious because the Commission has accounting policy. However, in the context of a rate created new standards for each decision concerning case, the test year requirement applies. Thus, we must deferred accounting. FNI 9 We disagree. address the argument that the actual inclusion of de- ferred costs in a utility's rate base violates the test year FN19. We note that in State of Texas v. Pub- requirement. lic Uti!. Comm'n, 883 S.W.2d 190 (Tex.l994), we held that the Commission The State argues that post-in-service costs were possesses the authority to authorize deferred deferred for up to 25 months and thus, the inclusion of accounting treatment of post-in-service costs. such rates in EPEC's rate base violated the test year Further, we concluded that it was not an requirement.FNIS However, the Commission may, in abuse of discretion for the Commission to its discretion, go outside the test year when necessary apply a fmancial integrity standard to deter- to achieve just and reasonable rates. In Suburban mine whether to authorize deferred ac- Utility Corp. v. Public Utility Commission, 652 counting because that standard "ensured that S.W.2d 358, 366 (Tex.1983), we stated that the utilities will receive an opportunity to "[ c]hanges occurring after the test period, if known, recover the minimum rates mandated by may be taken into consideration by the regulatory PURA." Jd. at 197. However, in Office of agency to help mitigate the effects of inflation and in Public Utility Counsel v. Public Uti!. order to make the test year data as representative as Comm'n, 883 S.W.2d 190 (Tex.l994), we possible of the cost situation that is apt to prevail in the held that the measurable harm standard future." Because it ordered the deferral of lacked "a foundation in the regulatory post-in-service costs, the Commission understood the scheme provided by PURA" and, as a result, impact of deferring post-in-service costs on the test the Commission abused its discretion by ap- year. It is within the discretion of the Commission to plying the measurable harm standard to de- consider expenditures that occur outside the test year termine whether to allow deferred account- if such consideration will assist the Commission in ing. 883 S.W.2dat 196. WenotethattheCity making the test year as representative as possible to does not contest the Commission's decision the cost situation expected in the future. as to Unit 2 on the grounds that it was based

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on a standard that was too speculative. Thus, capital in nuclear plants. Proceeding on an ad hoc or we do not address that issue in this case. "case-by-case" basis is fully understandable in the context of a newly created competitive market that [9] In determining whether to allow a particular involves complex technical considerations and com- utility to defer post-in-service costs, the Commission peting statutory objectives. See Southwestern Bell Tel. has discretion to proceed on an ad hoc or Co. v. Public Uti!. Comm'n, 745 S.W.2d 918, 926-27 "case-by-case" basis. See, e.g., Securities and Exch. (Tex.App.-Austin 1988, \vrit denied); see also Se- Comm'n v. Chene1y COJ]J., 332 U.S. 194, 67 S.Ct. curities and Exch. Comm'n v. Chenery Corp., 332 U.S. 1575, 91 L.Ed. 1995 (1947); National Labor Relations 194,202-03,67 S.Ct. 1575, 1580-81,91 L.Ed. 1995 Bd. v. Wyman-Gordon Co., 394 U.S. 759, 89 S.Ct. (194 7). As a result, we hold that the Commission was 1426, 22 L.Ed.2d 709 (1969); *189Southwestern Bell within its discretion in proceeding on a "case-by-case" Tel. Co. v. Public Uti!. Comm'n, 745 S.W.2d 918,926 or ad hoc basis and applying different standards in (Tex.App.- Austin 1988, writ denied). In SEC v. different proceedings. FNzt Chenery Corp., 332 U.S. 194, 202-03, 67 S.Ct. 1575, 1580-81, 91 L.Ed. 1995 (1947), the Court stated that FN21. The Commission's discretion to pro- ad hoc adjudication may be preferable to a formal ceed on a "case-by-case" basis is not abso- rulemaking proceeding where "the agency may not lute. When the underlying considerations that have had sufficient experience with a particular support ad hoc adjudication are no longer problem to warrant rigidifying its tentative judgment present, then the Commission will be bound into a hard and fast rule;" and where the problem is so to follow the formal rulemaking procedures "specialized and varying in nature as to be impossible set out in the TEX.GOV'T CODE ANN. § of capture within the boundaries of a general rule." 2001.141. See Southwestern Bell Tel. Co. v. Both of the foregoing considerations apply in the Public Uti!. Comm'n, 745 S.W.2d 918, Commission's early attempts to defme the proper 926-27 (Tex.App.-Austin 1988, writ de- standard to apply to deferred accounting cases.rnzo nied).

FN20. In fact, the Commission ultimately v. concluded that the measurable harm standard Conclusion was too speculative. See, e.g., Tex.Public We hold that the Commission did not err by Utils. Comm'n, Petition of Houston Lighting basing its final order, in part, on a non-unanimous and Power Company for Approval of De- stipulation. Further, based on our holding in State of ferred Accounting Treatment for Limestone Texas v. Public Utility Commission, 883 S.W.2d 190 Unit 2 and the South Texas Project Unit I, (Tex.l994), we hold that the Commission has the Docket No. 8230, 14 TEX.P.U.C.BULL. authority under PURA to include deferred 2752,2811 (April19, 1989). post-in-service costs in a utility's rate base. Further, the Commission did not abuse its discretion by ap- Early in the process, the Commission was faced plying different standards in determining whether to with numerous complex problems presented by the allow deferred accounting treatment for Palo Verde recent arrival of nuclear generation plants. While Units 1 and 2. We reverse the court of appeals to the remaining within the statutory framework of PURA, extent that it disallows the deferral and inclusion in the Commission had to balance the interests of con- rate base of deferred post-in-service carrying costs. In sumers with the complex financial consideration cre- all other respects, the judgment of the court of appeals ated by public utilities investing large amounts of is affirmed.

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883 S. W.2d 179, Util. L. Rep. P 26,411 (Cite as: 883 S.W.2d 179)

Justice SPECTOR, joined by Justice GONZALEZ, The majority cites no evidence in support of the Justice DOGGETT, and Justice GAMMAGE, dis- $32 million disallowance, because none exists. senting. Nonetheless, the majority upholds the Commission's This case demonstrates the weakness of the fmdings as supported by substantial evidence. Supra safeguards relied upon today in State of Texas v. at 186. Public Utility Commission, 883 S.W.2d 190 (Tex.1994 ). In that case, the majority defends its ap- With the standard of review applied today, it is proval of deferred accounting treatment on the ground difficult to imagine any Commission decision relating that deferred cost assets will be included in rate base to prudence that would be set aside by the Court. This only to the extent that they are deemed "prudent, lack of review will be especially pernicious in the reasonable and necessary." !d. at 197-198 n. 12. In the context of deferred cost assets. Valuing the prudence present case, however, the majority approves the of such assets will involve the same degree of com- Public Utility Commission's application of a similar plexity as valuing the imprudence in this case. Thus, in standard, despite a total lack of evidence supporting approving deferred amounts for inclusion in rate base, the Commission's findings. I dissent. the Commission may arbitrarily select a figure within a wide range, and its decision will effectively be im- At the rate hearings below, the City of El Paso mune from judicial review. Judging by the example of presented extensive evidence concerning the impru- this case, the figure selected will typically be much dence of El Paso Electric Company's decisions to closer to the utility's recommended figure than it is to become involved in the Palo Verde Project and to the ratepayers'. remain involved at the 15.8 percent participation level. See Tex. Pub. Utils. Comm'n, Application of El Paso I would hold that the disallowance for decisional Electric Company for Authority to Change *190 imprudence must be based on the evidentiary record. Rates, Docket No. 7460, 14 TEX.P.U.C.BULL. 932, Additionally, for the reasons stated in my dissenting 965-84 (June 16, 1988). The City's expert testimony opinion in State of Texas v. Public Utility Commis- concluded that 50 percent of the cost of all three Palo sion, 883 S. W.2d at 205-209, I would hold that no Verde units should be disallowed as imprudent. ld. at expenses incurred after the beginning of commercial 983. Using this figure, some $350 million should have operation may be capitalized and included in rate base. been disallowed for Unit 1 alone. Accordingly, I would remand this cause to the Com- mission for a determination of rates in keeping with The Commission agreed that El Paso Electric was traditional standards. "not entirely prudent" in planning and managing its participation in the Palo Verde project. ld. at 1250. In Tex.,l994. determining the amount of the disallowance, however, City ofEl Paso v. Public Utility Com'n of Texas the Commission chose not to rely on the evidence 883 S.W.2d 179, Util. L. Rep. P 26,411 presented; instead, it seized upon a figure of $32 mil- lion that had been discussed in the course of settlement END OF DOCUMENT negotiations. ld. at 1250-51. El Paso Electric's own expert testified, in regard to the settlement amount, "I don't think it really relates to anything." The $32 mil- lion figure has no basis in reality; it resulted solely from the parties' efforts to buy peace.

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Helena Chemical Co. v. Wilkins, 47 S.W.3d 486 (Tex. 2001) Pagel

47 S.W.3d 486,44 Tex. Sup. Ct. J. 675 (Cite as: 47 S.W.3d 486)

Affirmed. Supreme Court of Texas. HELENA CHEMICAL COMPANY and Hyper- Abbott, J., filed a dissenting opinion, in which former Seed Company, Petitioners, Hecht and Owen, JJ., joined. V. Kenneth WILKINS and Tom Wilkins individually, West Headnotes and d/b/a Chapotal Farms and Porciones 99 Proper- ties, Geen Wilkins and Mark Wilkins, individually Ill Statutes 361 ~1080 and d/b/a Tabasco, and Wilkins Family Limited Partnership, Respondents. 361 Statutes 36llll Construction No. 00--0418. 36llll(A) In General Argued Feb. 7, 2001. 36lkl078 Language Decided April 26, 200 l. 36lk1080 k. Language and intent, will, purpose, or policy. Most Cited Cases Farmers filed action against seed seller, alleging (Formerly 36lkl88) violation of Deceptive Trade Practices Act (DTPA), breach of warranties, and fraud. The 229th Judicial Statutes 361 ~1081 District Court, Starr County, John A. Pope, lll, J., entered judgment on jury verdict awarding damages to farmers. Both sides appealed. The Court of Appeals, 361 Statutes 18 S.W.3d 744, affirmed. Seller filed petition for 361 llJ Construction review. The Supreme Court, Baker, J., held that: {l) as 36llll{A) ln General matter of first impression, farmers' delay in submitting 36lkl078 Language claims against seed seller to arbitration, as was re- 361 k 1081 k. Construction as written. quired by Seed Arbitration Act, did not deprive trial Most Cited Cases court of jurisdiction to hear farmers' lawsuit; (2) (Formerly 36lkl76) farmers' witness was sufficiently qualified to testify as expert as to suitability of grain sorghum seed for dry Court must construe statutes as written and, if land farming and its susceptibility to charcoal rot possible, ascertain legislative intent from the statute's disease; (3) expert's testimony on suitability of seed language. for dry land farming was sufficiently reliable to be admissible; (4) evidence supported conclusion that 121 Statutes 361 ~1082 seller's misrepresentations about seed's characteristics, quality, and grade amounted to more than mere puff- 361 Statutes ing; and (5) evidence was sufficient for jury to calcu- 361II1 Construction late, with reasonable certainty, award of lost profit 3611Il(A) In General damages. 36lkl082 k. Construction based on multiple

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factors. Most Cited Cases 151 Statutes 361 ~1407 (Formerly 36lkl74) 361 Statutes Even when a statute is not ambiguous on its face, 3611V Operation and Effect a court can consider other factors to determine the 36lkl407 k. Mandatory or directory statutes. Legislature's intent, including the object sought to be Most Cited Cases obtained, the circumstances of the statute's enactment, (Formerly 36lk227) the legislative history, the common law or former statutory provisions, including laws on the same or Word "must" in a statute is given a mandatory similar subjects, the consequences of a particular meaning when followed by a noncompliance penalty. construction, administrative construction of the stat- V.T.C.A., Govenunent Code§ 311.016(2, 3). ute, and the title, preamble, and emergency provision. V.T.C.A., Government Code§ 311.023. [61 Statutes 361 ~1407

131 Statutes 361 ~1151 361 Statutes 361IV Operation and Effect 361 Statutes 361k1407 k. Mandatory or directory statutes. 36llll Construction Most Cited Cases 3611IJ(E) Statute as a Whole; Relation of Parts (Formerly 361k227) to Whole and to One Another 36Ikl151 k. In general. Most Cited Cases To determine whether the Legislature intended a (Formerly 361k205) provision to be mandatory or directory, a court con- siders the plain meaning of the words used, as well as Court must always consider the statute as a whole the entire act, its nature and object, and the conse- rather than its isolated provisions. quences that would follow from each construction.

141 Statutes 361 ~1155 171 Statutes 361 ~1407

361 Statutes 361 Statutes 361IJI Construction 361 IV Operation and Effect 361III(E) Statute as a Whole; Relation of Parts 361kl407 k. 'Mandatory or directory statutes. to Whole and to One Another Most Cited Cases 361kll55 k. Construing together; harmony. (Formerly 36lk227) Most Cited Cases (Formerly 36lk207) Even if a statutory requirement is mandatory, this does not mean that compliance is necessarily juris- Court should not give one provision of a statute a dictional. meaning out of harmony or inconsistent with other provisions, although it might be susceptible to such a [8J Statutes 361 ~1407 construction standing alone.

361 Statutes

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361 TV Operation and Effect (Formerly 33k8 Arbitration) 361 k1407 k. Mandatory or directory statutes. Most Cited Cases Arbitration scheme established under the Seed (Formerly 361k1075, 361k184) Arbitration Act was created to provide an alternate forum for farmers to initially submit claims, not as a When a statute is silent about the consequences of mechanism to preclude farmers' suits altogether. noncompliance, the court looks to the statute's purpose V.T.C.A., Agriculture Code§ 64.001 et seq. to determine the proper consequences. [11] Statutes 361 ~1407 [9] Alternative Dispute Resolution 25T ~181 361 Statutes 25T Alternative Dispute Resolution 3611V Operation and Effect 25TII Arbitration 36lk1407 k. Mandatory or directory statutes. 25Tll(D) Performance, Breach, Enforcement, Most Cited Cases and Contest (Formerly 361k227) 25Tk 177 Right to Enforcement and De- fenses in General To determine whether a statute's timing provision 25Tk181 k. Applicant's default, delay, is mandatory, a court frrst looks to whether the statute or laches. Most Cited Cases contains a noncompliance penalty; if a provision re- (Formerly 33k23.2 Arbitration) quires that an act be performed within a certain time. without any words restraining the act's performance Farmers' delay in submitting claims against seed after that time, the timing provision is usually direc- seller to arbitration, as was required by Seed Arbitra- tory. tion Act, until trial court granted seller's motion to compel arbitration, did not deprive trial court of ju- [12] Statutes 361 ~1221 risdiction to hear farmers' lawsuit, even though delay prompted arbitration board to refuse to arbitrate matter 361 Statutes due to inability to investigate crops in field conditions, 3 61 Ill Construction in light of Act's specific authorization for trial court to 36111I(G) Other Law, Construction with Ref- take such delay into account, court's ability to fashion erence to remedy, and lack of provision dictating dismissal for 361k1220 Other Jurisdictions noncompliance with timing requirement.V.T.C.A., 361k1221 k. In general. Most Cited Agriculture Code§ 64.004. Cases (Formerly 361k226) [10] Alternative Dispute Resolution 25T ~152 When a state statute is modeled after another ju- 25T Alternative Dispute Resolution risdiction's, that jurisdiction's interpretation before the 25TH Arbitration Legislature enacts the state statute may be given 25Tll(B) Agreements to Arbitrate weight. 25Tk150 Operation and Effect 2511<: 152 k. As ousting jurisdiction of or [13] Statutes 361 ~1221 precluding resort to courts. Most Cited Cases

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4 7 S. W.3d 486, 44 Tex. Sup. Ct. J. 675 (Cite as: 47 S.W.3d 486)

361 Statutes [16] Evidence 157 ~508 361 Ill Construction 361 JIT(G) Other Law, Construction with Ref- 157 Evidence erence to 157XI1 Opinion Evidence 36 Ik 1220 Other Jurisdictions 157Xll(B) Subjects ofExpert Testimony 3611<1221 k. In general. Most Cited 157k508 k. Matters involving scientific or Cases other special knowledge in general. Most Cited Cases (Formerly 361k226)

Evidence 157 ~535 When the Legislature looks to another jurisdic- tion's statute, but modifies rather than adopts some of 157 Evidence its provisions, it does so purposefully. 157Xll Opinion Evidence 157Xll(C) Competency ofExperts [14] Alternative Dispute Resolution 25T ~114 1571<535 k. Necessity of qualification. Most Cited Cases 25T Alternative Dispute Resolution 25TH Arbitration Evidence 157 ~555.2 25Tll(A) Nature and Form of Proceeding 25Tk114 k. Constitutional and statutory provisions and rules of court. Most Cited Cases i 57 Evidence 157Xll Opinion Evidence (Formerly 33k2 Arbitration) 157XII(D) Examination ofExperts 157k555 Basis of Opinion Seed arbitration laws are established to protect the 157k555.2 k. Necessity and sufficiency. farmer. V.T.C.A., Agriculture Code§ 64.001 et seq. Most Cited Cases

[15] Alternative Dispute Resolution 25T ~181 Two-part test governs whether expert testimony is admissible: (I) the expert must be qualified, and (2) 25T Alternative Dispute Resolution the testimony must be relevant and be based on a 25TH Arbitration reliable foundation. Rules ofEvid., Rule 702. 25TII(D) Performance, Breach, Enforcement, and Contest [17] Evidence 157 €::;:)546 25Tk177 Right to Enforcement and De- fenses in General 157 Evidence 25Tk181 k. Applicant's default, delay, 157XIl Opinion Evidence or laches. Most Cited Cases 157Xll(C) Competency ofExperts (Formerly 33k23.2 Arbitration) 1571<546 k. Determination of question of competency. Most Cited Cases While submission to arbitration under the Seed Arbitration Act is mandatory if not waived by the seed Trial court makes the initial determination about seller, the Act's timing requirement is not. V.T.C.A., whether an expert is qualified and the proffered tes- Agriculture Code§ 64.004.

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timony is relevant and based on a reliable foundation. 157 Evidence Rules of Evid., Rule 702. 157XIl Opinion Evidence 157XII(D) Examination ofExperts 1181 Appeal and Error 30 ~971(2) 1571<555 Basis of Opinion 157k555.2 k. Necessity and sufficiency. Most Cited Cases 30 Appeal and Error 30XVI Review 30XYJ(H) Discretion of Lower Court If an expert relies upon unreliable foundational 30k97l Examination of Witnesses data, any opinion drawn from that data is likewise 30k971(2) k. Competency of witness. unreliable. Rules of Evid., Rule 702. Most Cited Cases [21] Evidence 157 ~555.2 Evidence 157 ~546 157 Evidence 157 Evidence 157XJJ Opinion Evidence 157XIT Opinion Evidence 157XII(D) Examination of Experts 157XII(C) Competency ofExperts 157k555 Basis of Opinion 157k546 k. Determination of question of 157k555.2 k. Necessity and sufficiency. competency. Most Cited Cases Most Cited Cases

Trial court has broad discretion to determine ad- Expert's testimony is unreliable even when the missibility of expert testimony, and the Supreme underlying data is sound if the expert's methodology is Court will reverse only if there is an abuse of that flawed. Rules of Evid., Rule 702. discretion. [22] Evidence 157 ~542 1191 Evidence 157 €;::::)536 157 Evidence 157 Evidence 157XI1 Opinion Evidence 157XIl Opinion Evidence 157Xli(C) Competency ofExperts l57XIT(C) Competency of Experts 157k542 k. Physical facts. Most Cited Cases 157k536 k. Knowledge, experience, and skill in general. Most Cited Cases Witness was sufficiently qualified to testify as expert as to suitability of grain sorghum seed for dry In deciding if an expert is qualified, trial courts land farming and its susceptibility to charcoal rot must ensure that those who purport to be experts truly disease, even though he was not plant pathologist, have expertise concerning the actual subject about where witness, a plant scientist with a doctorate in which they are offering an opinion. Rules of Evid., plant physiology, used his experience in conducting Rule 702. crop-variety testing to formulate conclusion on basis of research, study of independent tests, and observa- tions regarding seed's suitability for dry land farming. [201 Evidence 157 ~555.2 Rules of Evid., Rule 702.

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1231 Evidence 157 ~555.4(1) [25] Antitrust and Trade Regulation 29T ~161 157 Evidence 157Xll Opinion Evidence 29T Antitrust and Trade Regulation 157XTT{D) Examination of Experts 29TJJI Statutory Unfair Trade Practices and 157k555 Basis of Opinion Consumer Protection 157k555.4 Sources ofData 29TIII(B) Particular Practices 157k555.4{1) k. In general. Most 29Tkl61 k. Representations, assertions, and Cited Cases descriptions in general. Most Cited Cases (Formerly 92Hk34 Consumer Protection) Evidence 157 ~557 Party need not prove intent to make a misrepre- !57 Evidence sentation under the Deceptive Trade Practices Act 157Xll Opinion Evidence {DTPA); making the false representation is itself ac- 157XII{D) Examination of Experts tionable. V.T.C.A., Bus. & C. § I 7.46(b )(5, 7). 1571<557 k. Experiments and results thereof. Most Cited Cases [26] Antitrust and Trade Regulation 29T ~138

Expert's testimony on suitability of grain sorghum 29T Antitrust and Trade Regulation seed for dry land farming was sufficiently reliable to 29T!Il Statutory Unfair Trade Practices and be admissible in farmers' action against seed seller, Consumer Protection where expert had 20 years experience as a plant sci- 29TIJI{A) In General entist and conducting and interpreting crop trials and 29Tkl33 Nature and Elements his conclusion flowed from his observation of seed 29Tk138 k. Reliance; causation; injury, tests and other factors including weather and loss, or damage. Most Cited Cases weed-control reports, disease publications, other (Formerly 92Hk4 Consumer Protection) testing, and comparisons with crops on adjacent farms. Antitrust and Trade Regulation 29T ~162

1241 Antitrust and Trade Regulation 29T ~161 29T Antitrust and Trade Regulation 29TJII Statutory Unfair Trade Practices and 29T Antitrust and Trade Regulation Consumer Protection 29Tlii Statutory Unfair Trade Practices and 29TIII(B) Particular Practices Consumer Protection 29Tk 162 k. Omissions and other failures to 29TIII{B) Particular Practices act in general; disclosure. Most Cited Cases 29Tk161 k. Representations, assertions, and (Formerly 92Hk4 Consumer Protection) descriptions in general. Most Cited Cases (Formerly 92Hk6 Consumer Protection) To recover under the Deceptive Trade Practices Act {DTPA), the plaintiff must show that the de- Actionable representations under the Deceptive fendant's actions were the "producing cause" of actual Trade Practices Act {DTPA) may be oral or written. damages, which requires some evidence that the de- V.T.C.A., Bus. & C. § 17.41 et seq.

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fendant's act or omission was a cause in fact of the 30kl001 Sufficiency of Evidence in plaintiffs injury. V.T.C.A., Bus. & C.§ 17.50(a). Support 30kl001(1) k. In general. Most Cited 1271 Antitrust and Trade Regulation 29T E?138 Cases

29T Antitrust and Trade Regulation If more than a scintilla of evidence exists, the 29Till Statutory Unfair Trade Practices and evidence is legally sufficient to support the fmding of Consumer Protection the disputed fact. 29TIII(A) In General 29Tkl33 Nature and Elements [30] Antitrust and Trade Regulation 29T ~369 29Tkl38 k. Reliance; causation; injury, loss, or damage. Most Cited Cases 29T Antitrust and Trade Regulation (Formerly 92Hk4 Consumer Protection) 29Tlll Statutory Unfair Trade Practices and Consumer Protection In presenting some evidence that the defendant's 29TIII(E) Enforcement and Remedies act or omission was a cause in fact of the plaintiffs 29Tl!I(E)6 Evidence injury, under the Deceptive Trade Practices Act 29Tk369 k. Weight and sufficiency. (DTPA), it is not necessary to show that the harm was Most Cited Cases foreseeable. V.T.C.A., Bus. & C.§ 17.50(a). (Formerly 92Hk39 Consumer Protection)

[28] Appeal and Error 30 ~930(1) Evidence of specific representations about grain sorghum seed's characteristics and specific represen- 30 Appeal and Error tations about how farmers' crop in particular would 30XVI Review perform supported conclusion that seller's misrepre- 30XVI(G) Presumptions sentations about seed's characteristics, quality, and 30k930 Verdict grade amounted to more than mere puffmg, under the 30k930(1) k. In general. Most Cited Deceptive Trade Practices Act (DTPA). V.T.C.A., Cases Bus. & C.§ 17.46(b)(5, 7).

In conducting a no-evidence review, the Supreme 131] Antitrust and Trade Regulation 29T E?369 Court must view the evidence in a light that tends to support the finding of the disputed fact and disregard 29T Antitrust and Trade Regulation all evidence and inferences to the contrary. 29TIII Statutory Unfair Trade Practices and Consumer Protection [29] Appeal and Error 30 ~1001(1) 29T!Il(E) Enforcement and Remedies 29TIII(E)6 Evidence 29Tk369 k. Weight and sufficiency. 30 Appeal and Error Most Cited Cases 30XVl Review (Formerly 92Hk39 Consumer Protection) 30XVI(l) Questions of Fact, Verdicts, and Findings 30XVI(I)2 Verdicts Sales 343 E?441(3)

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343 Sales petent evidence with reasonable certainty. 343VIIl Remedies ofBuyer 343VIIl(D) Actions and Counterclaims for [341 Damages 115 ~190 Breach of Warranty 343k438 Evidence 115 Damages 343k441 Weight and Sufficiency 1151X Evidence 343k441(3) k. Breach of warranty. 115kl83 Weight and Sufficiency Most Cited Cases 115k 190 k. Loss of profits. Most Cited Cases Evidence that farmers' neighbor had no adverse effect from rotating from cotton to grain and that seed Establishing amount of lost profits is a seller recommended alleged over-planting by farmers, fact-intensive determination. together with evidence about grain sorghum seed's unsuitability for dryland farming, was sufficient to rebut possibility of causes of farmers' low yields other [35] Damages 115 ~190 than seller's seed, which thus supported farmers' De- ceptive Trade Practices Act (DTPA) and breach of 115 Damages warranty claims against seed seller. V.T.C.A., Bus. & 115IX Evidence c. § 17.46(b)(5, 7). l15k183 Weight and Sufficiency 115k 190 k. Loss of profits. Most Cited [32] Damages 115 ~190 Cases

115 Damages At a minimum, opinions or lost-profit estimates li51X Evidence must be based on objective facts, figures, or data from 115k183 Weight and Sufficiency which the lost-profits amount may be ascertained. 115k190 k. Loss of profits. Most Cited Cases [36] Damages 115 €?112

Recovery for lost profits does not require that the 115 Damages loss be susceptible to exact calculation; however, the 115Vl Measure ofDamages injured party must do more than show that it suffered 115VI(B) Injuries to Property some lost profits. ll5k107 Injuries to Real Property ll5k112 k. Growing crops, grass, [33] Damages 115 €?190 shrubbery, or trees. Most Cited Cases

115 Damages General rule for assessing damages for crop loss ll5IX Evidence is the market value of the lost part of the crop, as 115k183 Weight and Sufficiency measured at maturity, less the cost of harvesting and 115k190 k. Loss of profits. Most Cited marketing the lost part. Cases [37] Damages 115 E?188(1) Amount of lost profits must be shown by com-

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115 Damages 115IX Evidence 29T Antitrust and Trade Regulation 115kl83 Weight and Sufficiency 29TIII Statutory Unfair Trade Practices and I 15k 188 Loss of or Damage to Property Consumer Protection I I 5k I 88( I) k. Extent of damage in 29Tlii(E) Enforcement and Remedies general. Most Cited Cases 29TIII(E)7 Relief 29Tk3 87 Monetary Relief; Damages Damages 115 ~188(2) 29Tk391 k. Profits. Most Cited Cases (Formerly 92Hk40 Consumer Protection) 115 Damages 115IX Evidence Evidence was sufficient for jury to calculate, with 115kl83 Weight and Sufficiency reasonable certainty, award of damages to farmers for I 15kl88 Loss of or Damage to Property lost profits resulting from seed seller's deceptive act or 115kl88(2) k. Value of property. Most unconscionable action, under Deceptive Trade Prac- Cited Cases tices Act (DTPA), concerning suitability of seed sold to farmers; farmer's testimony allowed jury to con- Law does not demand perfect proof of damages sider yield attributable to other seed, recalculate lease for crop loss but liberally permits estimates of crop payments, and regard elevator costs as either reflected value and probable yield, as well as cultivating and in yield or refundable so as to be not part of net cost marketing expenses. calculation. V.T.C.A., Bus. & C.§ 17.41 et seq.

[38] Antitrust and Trade Regulation 29T ~391 [40) Damages 115 ~40(1)

29T Antitrust and Trade Regulation 115 Damages 29TIII Statutory Unfair Trade Practices and 115III Grounds and Subjects of Compensatory Consumer Protection Damages 29TIJJ(E) Enforcement and Remedies 1151IJ(A) Direct or Remote, Contingent, or 29TIII(E)7 Relief Prospective Consequences or Losses 29Tk3 87 Monetary Relief; Damages 115III(A) I In General 29Tk391 k. Profits. Most Cited Cases 115k35 Pecuniary Losses (Formerly 92Hk40 Consumer Protection) 115k40 Loss of Profits 115k40( I) k. In general. Most Cited Cases While "limitation of liability and remedies" clauses printed on seed seller's invoices, delivery tickets, and seed labels were effective to limit farmers' · Lack of a profit history does not, by itself, pre- recovery for breach of warranty, clauses did not pre- clude a new business from recovering lost future clude farmer' lost-profit recovery for nonwarranty profits. representations or unconscionability under the De- ceptive Trade Practices Act (DTPA). V.T.C.A., Bus. [41] Damages 115 ~190 & C. § 17.41 et seq. 1 I5 Damages [39] Antitrust and Trade Regulation 29T ~391 115IX Evidence

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115k183 Weight and Sufficiency advertising that it had "excellent dryland yield poten- 115kl90 k. Loss of profits. Most Cited tial." Helena also represented that the seed had a Cases "good field tolerance" to charcoal rot, a condition that causes the grain's stem to weaken and "fall down " ' Showing lost profit damages with reasonable reducing yield. certainty can be accomplished with a profit history or some other objective data, such as future contracts. The 1992 crop had a good yield, but the 1993 crop yield was much lower. The Wilkinses claim that *490 Charles C. Murray, Lisa Powell, Atlas & Hall, Helena's agent blamed this low yield on the seeds McAllen, for Petitioners. being planted too close together and that the agent recommended planting Cherokee seed on the entire tract with increased spacing between seeds. The Wil- John B. Skaggs, Skaggs & Garza, Michele Nicole kinses followed this advice in 1994 with no increase in Gonzales, McAllen, for Respondents. yield. Helena claims that insufficient rainfall and soil moisture depletion brought about by the Wilkinses' Justice BAKER delivered the opinion of the Court, in planting cotton on part ofthe property in 1993 caused which Chief Justice PHILLIPS, Justice ENOCH, the reduced yield. Justice HANKINSON, Justice O'NEILL, and Justice JEFFERSON joined. In February 1995, the Wilkinses sued Helena al- This is a case of first impression involving*491 the Texas Seed Arbitration Act.FNJ The Act requires leging Deceptive Trade Practices-Consumer Protec- tion Act {DTPA) violations, breach of express and that certain defective-seed claims be submitted to implied warranties, and fraud. In March, Helena filed arbitration as a prerequisite to maintaining a legal a plea in abatement and motion to compel nonbinding action against the labeler. We must decide whether the arbitration under the Act. In April, the trial court timeliness requirement for submitting claims to arbi- granted Helena's motion and abated the proceedings. tration is jurisdictional under the Act. We conclude Fifteen months later, the Wilkinses submitted their that it is not, and that the evidence was legally suffi- claims to the Texas Plant and Seed Board for arbitra- cient to support the jury's verdict on liability, causa- tion. The Board declined to arbitrate because the crops tion, and damages. Accordingly, we affirm the court were no longer in "field condition" and thus the Board of appeals' judgment. could not inspect the crops.

FNl. Unless otherwise indicated, all refer- The trial court lifted the abatement and the case ences to "the Act" are to the Texas Seed Ar- proceeded to trial. The jury found for the Wilkinses on bitration Act. See TEX. AGRIC. CODE § all claims except fraud. It did not fmd that Helena had 64.001-.007. acted knowingly. It awarded the Wilkinses $360,000 in damages. The trial court also awarded prejudgment I. BACKGROUND interest from the date the Board declined to arbitrate. The Wilkinses began farming in 1989 and first Helena and the Wilkinses appealed. planted grain in 1992. Most of their land is nonirri- . gated dryland. They purchased a Cherokee-variety The court of appeals held that Helena had effec- grain sorghum seed from Helena Chemical Company tively disclaimed any warranties. 18 S.W.3d at 758. in 1992, 1993, and 1994. The Wilkinses claim that But it affirmed the judgment on the DTPA claims when they purchased this seed, they relied on Helena's '

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holding that the Board's refusal to arbitrate the Wil- kinses' claims did not jurisdictionally bar their suit. 18 § 64.002. Requirement of Arbitration S.W.3d at 751-52. It also held that the evidence was legally and factually sufficient to support the jury's (a) When a purchaser of seed designed for planting verdict on causation, liability, and damages. 18 claims to have been damaged by the failure of the S.W.3d at 754-59. Finally, in response to the Wil- seed to produce or perform as represented by war- kinses' cross-appeal, the court held that the trial court ranty or by the label required to be attached to the properly calculated prejudgment interest. 18 S.W.3d seed under this subtitle or as a result of negligence, at 760. Only Helena petitioned this Court for review. the purchaser must submit the claim to arbitration as provided by this chapter as a prerequisite to the II. TEXAS SEED ARBITRATION ACT exercise of the purchaser's right to maintain a legal Helena argues that the trial court did not have ju- action against the labeler .... risdiction over the Wilkinses' *492 claims because the Act requires that all defective-seed claims first be TEX. AGRIC. CODE § 64.002(a) (emphasis timely submitted to nonbinding arbitration so the added). Board may effectively inspect the plants under field § 64.004. Effect of Arbitration conditions. Thus, Helena argues, the Wilkinses' delay in submitting their claims for arbitration-which In any litigation involving a complaint that has been caused the Board to refuse to arbi- the subject of arbitration under this chapter, any trate-jurisdictionally barred the claims. party may introduce the report of arbitration as ev- idence of the facts found in the report, and the court In response, the Wilkinses argue that submitting may give such weight to the arbitration board's their claims to arbitration is all the Act requires. They fmdings of fact, conclusions of law, and recom- posit that Helena's interpretation would render other mendations as to damages and costs as the court statutory provisions meaningless and note that the Act determines advisable. The court may also take into does not authorize dismissal as a remedy under its account any findings of the board of arbitration arbitration procedures. Thus, the Wilkinses argue, the with respect to the failure of any party to cooperate court of appeals correctly held that once they submit- in the arbitration proceedings, including any finding ted their claims to arbitration under the Act, the trial as to the effect of delay in filing the arbitration court had jurisdiction to hear the claims regardless of claim or the arbitration board's ability to determine whether arbitration actually occurred. the facts of the case.

A. APPLICABLE LAW TEX. AGRIC. CODE§ 64.004 (emphasis added). 1. Texas Seed Arbitration Act § 64.005. Arbitration Board The Legislature enacted the Act in 1989 to "pro- vide[ ] for an unbiased third party investigation by the (b) As a board of arbitration, the State Seed and State Seed and Plant Board of the Texas Department Plant Board shall conduct arbitration as provided of Agriculture of complaints concerning seed per- by this chapter .... formance." HOUSE COMJ\1. ON AGRICULTURE AND LIVESTOCK, BILL ANALYSIS, Tex. S.B. 64, 71 st Leg., R.S. ( 1989). Pertinent to this appeal, the Act TEX. AGRlC. CODE § 64.005(b) (emphasis provides: added). § 64.006. Arbitration Procedures

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Legislature's intent, including: the object sought to be (a) A purchaser may begin arbitration by filing with obtained; the circumstances of the statute's enactment; the commissioner a sworn complaint and a filing the legislative history; the common law or former fee, as provided by department rule .... Except in the statutory provisions, including laws on the same or case of seed that has not been planted, the complaint similar subjects; the consequences of a particular must be filed within the time necessary to permit construction; administrative construction of the stat- effective inspection of the plants under field condi- ute; and the title, preamble, and emergency provision. tions. TEX. GOV'T CODE § 311.023; Ken Petroleum Corp. v. Questor Drilling Corp., 24 S.W.3d 344, 350 (Tex.2000).

[3][4] Additionally, we must always consider the *493 (c) The commissioner shall refer the complaint statute as a whole rather than its isolated provisions. and the answer to the arbitration board for investi- Morrison, 699 S. W.2d at 208. We should not give one gation, fmdings, and recommendations. provision a meaning out of harmony or inconsistent with other provisions, although it might be susceptible (d) On referral of the complaint for investigation, to such a construction standing alone. Barr v. Bern- the arbitration board shall make a prompt and full hard, 562 S.W.2d 844, 849 (Tex.l978). We must investigation of the matters complained of and re- presume that the Legislature intends an entire statute port its fmdings and recommendations to the com- to be effective and that a just and reasonable result is missioner not later than the 60th day after the date of intended. TEX. GOV'T CODE § 311.021(2), (3). the referral, or before a later date determined by the parties. [5] When used in a statute, the term "must" cre- ates or recognizes a condition precedent. TEX. GO V'T (e) The report of the arbitration board shall include CODE § 311.0 16(3). While Texas courts have not findings of fact, conclusions of law, and recom- interpreted "must" as often as "shall," both terms are mendations as to costs, if any .... generally recognized as mandatory, creating a duty or obligation. See TEX. GOV'T CODE§ 311.016(2), (3); Wright v. Ector County Indep. Sch. Dist., 867 S.W.2d 863, 868 (Tex.App.-El Paso 1993, no writ) ("The (h) The arbitration board shall consider any field ordinary meaning of 'shall' or 'must' is of a manda- inspection or other data submitted by either party in tory effect."); Inwood N. Homeowners' Ass'n, Inc. v. its report and recommendation. Meier, 625 S.W.2d 742, 743 (Tex.Civ.App.-Houston [1st Dist.] 1981, no writ) (same); Mitchell v. Hancock. TEX. AGRIC. CODE§ 64.006 (emphasis added). 196 S.W. 694,700 (Tex.Civ.App.-FortWorth 1917, no writ) (same). The word " 'must' is given a man- datory meaning when followed by a noncompliance 2. Statutory Construction penalty." Harris County Appraisal Dist. v. Consoli- [1][2] We must construe statutes as written and, if dated Capital Props. IV, 795 S.W.2d 39, 41 possible, ascertain legislative intent from the statute's (Tex.App.-Amarillo 1990, writ denied). However, language. Morrison v. Chan, 699 S.W.2d 205, 208 we have held language that appears to impose a (Tex.1985). Even when a statute is not ambiguous on mandatory duty to be only directory when this inter- its face, we can consider other factors to determine the pretation is most consistent with the Legislature's

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intent. E.g., Barshop v. Medina County Underground essary to permit effective inspection of the plants Water Conservation Dist., 925 S.W.2d 618, 629 under field conditions" is mandatory and jurisdic- (Tex.l996); Le·wis v. Jacksonville Bldg. & Loan Ass'n, tional. The Wilkinses acknowledge this statutory 540 S.W.2d 307, 310 (Tex.l976); *494 Thomas v. timing requirement, but argue that submission is the Groebl, 147Tex. 70,212S.W.2d625,630-31 (1948). mandatory act and that timeliness is merely a factor the trial court may consider. We agree with the Wil- [6][7][8] To determine whether the Legislature kinses' interpretation. intended a provision to be mandatory or directory, we consider the plain meaning of the words used, as well Section 64.006(a) states that a purchaser's com- as the entire act, its nature and object, and the conse- plaint "must" be filed within the time necessary to quences that would follow from each construction. permit effective inspection under field conditions. The Albertson's, Inc. v. Sinclair, 984 S.W.2d 958, 961 word " '[m]ust' creates or recognizes a condition (Tex.l999); Chisholm v. Bewley Mills, 155 Tex. 400, precedent." TEX. GOV'T CODE § 311.016(3). The 287 S.W.2d 943, 945 (1956). Even if a statutory re- Legislature has instructed us to apply this defmition quirement is mandatory, this does not mean that unless its context "necessarily requires a different compliance is necessarily jurisdictional. Sinclair, 984 construction." TEX. GOV'T CODE § 311.016. S.W.2d at 961; Hines v. Hash, 843 S.W.2d 464,467 (Tex.l992); Schepps v. Presbyterian Hasp. ofDallas, The problem with Helena's position that delay in 652 S. W.2d 934, 93 8 (Tex.l983 ). When a statute is submitting a claim to arbitration creates a jurisdic- silent about the consequences of noncompliance, we tional bar is that we cannot read section 64.006(a) in a look to the statute's purpose to determine the proper vacuum. Read in context, Helena's interpretation consequences. Sinclair, 984 S. W.2d at 961; Schepps, renders other provisions meaningless. In fact, section 652 S.W.2d at 937-38; Chisholm, 287 S.W.2d at 945. 64.004 expressly contemplates that a claim may be arbitrated and continue on to trial even when a delay in B. ANALYSIS submission to arbitration prevents the Board from [9] The parties agree that if the Wilkinses had not thoroughly investigating the claim. It provides: submitted their claims to arbitration after the trial court abated the proceedings, any claims subject to the In any litigation involving a complaint that has been Act would be jurisdictionally barred. See TEX. the subject of arbitration under this chapter ... [t]he AGRJC. CODE § 64.002(a) ( "[T]he purchaser must court may also take into account any fmdings of the submit the claim to arbitration ... as a prerequisite to board of arbitration with respect to the failure of any the exercise of the purchaser's right to maintain a legal party to cooperate ... including any finding as to the action against the labeler."); see also Hines, 843 effect of delay in filing the arbitration claim or the S. W.2d at 469 (holding failure to perform mandatory arbitration board's ability to determine the facts of but nonjurisdictional act while suit is abated for that the case. purpose results in dismissal). However, because the Wilkinses did submit their claims to the Board, the TEX. AGRJC. CODE§ 64:004 (emphasis added). only issue is whether their delay in doing so, and the Accepting Helena's argument that section 64.006(a)'s Board's subsequent refusal to arbitrate, deprived the timing requirement is *495 jurisdictional renders trial court of jurisdiction. section 64.004 meaningless because in any case "in- volving a complaint that has been the subject of arbi- Helena argues that section 64.006(a)'s require- tration under this chapter," there could not be a ment that a complaint be "filed within the time nee-

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"finding as to the effect of delay in filing ... or the quence of a failure to hear a forfeiture case within the arbitration board's ability to determine the facts ofthe prescribed period, it could easily have said so."); see case." also Sinclair, 984 S. W.2d at 962 ("[T]hat section 410.253 does not dictate the consequence of non- [1 0] Actually, the Act's language and purpose compliance is significant when considering the entire demonstrate that the Legislature simply did not con- statute."). To the contrary, the Act expressly provides template the situation presented her~a submission to nonjurisdictional consequences by allowing the Board arbitration where the Board then refuses to arbitrate. to make fmdings about any delay and allowing the Rather, the Legislature created this arbitration scheme trial court to consider these findings. See TEX. to provide an alternate forum for farmers to initially AGRlC. CODE § 64.004. Thus, we conclude the Act's submit claims, not as a mechanism to preclude farm- silence about dismissal, coupled with its provision for ers' suits altogether. See HOUSE COMM. ON AG- other consequences, weighs in favor of a nonjurisdic- RICULTURE AND LIVESTOCK, BILL ANALY- tional interpretation. SIS, Tex. S.B. 64, 71st Leg., R.S. (1989) (explaining that one reason this Act was passed was that "farmers When deciding whether the Legislature intended are often reluctant to litigate" seed disputes). a particular provision to be jurisdictional, we must also consider the consequences that result from each In addition to the overall statutory objective, we possible construction. Chisholm, 287 S. W.2d at have historically looked to two factors to determine if 945-46. Under Helena's interpretation, a delay in the Legislature intended a provision to be jurisdic- submitting a claim to arbitration precludes any con- tional: (1) the presence or absence of specific conse- sideration of the claim-by the Board or a trial court. quences for noncompliance, Sinclair, 984 S.W.2d at Because the Board's arbitration is nonbinding and the 961-62, and (2) the consequences that result from trial court is not required to consider the Board's each possible interpretation. Bars hop, 925 S. W.2d at findings, we conclude that Helena's jurisdictional 629. Applying these factors supports our interpreta- interpretation of section 64.006's timing requirement tion that delay in submitting claims is not jurisdic- leads to an absurd result. See Bm·shop, 925 S.W.2d at tional. 629.

[11] To determine whether a timing provision is Helena urges that our adopting a nonjurisdictional mandatory, we first look to whether the statute con- interpretation allows purchasers to bypass the Act and tains a noncompliance penalty. If a provision requires thwart its underlying purpose of providing for an that an act be performed within a certain time without unbiased, independent Board investigation. See any words restraining the act's performance after that HOUSE COMM. ON AGRICULTURE *496 AND time, the timing provision is usually directory. Lewis, LIVESTOCK, BILL ANALYSIS, Tex. S.B. 64, 71st 540 S.W.2d at 310; Markowsky v. Newman, 134 Tex. Leg., R.S. {1989). We disagree. 440, 136 S.W.2d 808, 812 (1940). Here, the Act states that a purchaser's complaint must be filed "within the The Act permits the Board to independently in- time necessary to permit effective inspection of the vestigate and assess the purchaser's claims. TEX. plants under field conditions." TEX. AGRIC. CODE§ AGRIC. CODE § 64.006(d). But, while the Act re- 64.006(a). However, the Act has no corresponding quires the Board to consider any field inspection or provision dictating dismissal for noncompliance. State other data either party submits, nowhere does it re- v. $435,000, 842 S.W.2d 642, 644 {Tex.l992) ("If the quire the Board itself to conduct a field inspection; nor Legislature had intended dismissal to be the conse- does it expressly mention the Board conducting such

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an inspection. See TEX. AGRIC. CODE § forum-are the consequences the Legislature con- 64.006(f)-(h). Instead, by the Act's express terms, the templated under the Act. Board can carry out its investigation in a number of ways that do not necessarily require it to conduct its The dissent disagrees with this conclusion, as- own field inspection. For example, the Act authorizes serting that the Act absolutely forecloses a purchaser's the Board to delegate all or any part of its investigation action if the purchaser does not comply with section to its members. TEX. AGRIC. CODE § 64.006(g). 64.006(a)'s timing requirement. 47 S.W.3d at 507. The And the Board may grow representative samples, dissent notes section 64.006's language that the com- conduct hearings, and examine the parties. TEX. plaint "must" be filed within the time necessary to AGRlC. CODE § 64.006(f). In fact, here both parties' permit effective crop inspection. 47 S.W.3d at 507. It experts conducted field inspections that they could then reconciles this language with section 64.004 by have submitted to the Board to aid it in fulfilling its interpreting section 64.004 to permit Board findings duties. See TEX. AGRIC. CODE § 64.006(h) ("The about a purchaser's delay only while the crops are still arbitration board shall consider any field inspection or in the ground. 47 S.W.3d at 507. It explains that "[a] other data submitted by either party.") (emphasis purchaser could certainly delay filing an arbitration added). Thus, because the Board can conduct an in- complaint for many months yet still file while the vestigation despite a delay in submission to arbitra- seeds are under field conditions." 47 S.W.3d at 508. tion, concluding that section 64.006(a)'s timing re- Thus, it reasons, submitting a claim while the seeds quirement is nonjurisdictional does not thwart the are in the ground, but after a hot summer season, could Act's purpose of providing for a Board investigation. "affect the Board's investigation." 47 S.W.3d at 511. See Hines, 843 S. W.2d at 469 (holding statute's pur- pose could be furthered without jurisdictional inter- However, while purporting to apply a pretation of mandatory timing requirement). plain-language analysis to *497section 64.006(a), the dissent glosses over the section's actual language and Further, our interpretation does not render a delay ignores the maxim that we must presume that every in submitting a claim to arbitration without conse- word in a statute is included purposefully. See Cam- quence. Indeed, if a purchaser does not submit a claim eron v. Terrelr& Garrett, Inc., 618 S.W.2d 535, 540 in time for the Board or the seller to conduct an ef- (Tex.1981 ). First, the dissent's interpretation assumes fective field inspection, it does so at its own peril. The the Board itself must conduct the field inspection Board may make findings adverse to the purchaser on referenced in section 64.006(a). The Act's text does this basis. TEX. AGRIC. CODE § 64.004. If the not support this assumption. Instead, the Act provides purchaser then sues, the Board's findings and rec- that a complaint must be filed in time to "permit ef- ommendations are admissible, and the Act expressly fective inspection of the plants under field condi- authorizes the court to both "give such weight to the tions," TEX. AGRIC. CODE § 64.006(a), thus per- arbitration board's fmdings of fact, conclusions of law, mitting the parties to inspect under field conditions and recommendations as to damages and costs as the and provide their reports to the Board. TEX. AGRIC. court determines advisable" and "take into account CODE § 64.006(h). Second, the dissent's interpreta- any findings ... with respect to the failure of any party tion presumes that any claim submitted while crops to cooperate in the arbitration proceedings, including are still in the ground will satisfy section 64.006(a)'s any finding as to the effect of delay in filing the arbi- language. 47 S.W.3d at 511. However, section 64.006 tration claim." TEX. AGRIC. CODE § 64.004. We does not only require that a claim be submitted while conclude that these consequences-not the complete the crops are available for inspection "under field deprival of any right to have the claims heard in any conditions." Rather, it states a claim must be filed in

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time to permit an "effective inspection of the plants submit its claim to arbitration "within such time as to under field conditions." TEX. AGRlC. CODE § permit inspection of the crops, plants, or trees by the 64.006(a) (emphasis added). We must presume the seed investigation and conciliation council or its rep- word "effective" has meaning. See Cameron, 618 resentatives and by the dealer from whom the deed S. W.2d at 540. Thus, under the dissent's interpretation was purchased." FLA. STAT. ANN .. § 578.026(1)(a) of 64.006(a), any claim brought while the crops are in (emphasis added). In Ferry-Morse Seed Co., the case the ground but after an effective inspection could be upon which the dissent relies, the Florida Supreme accomplished would already be barred under Court interpreted a prior version's timing requirement 64.006(a}-rendering section 64.004's provision for to be jurisdictional. 426 So.2d at 961. This prior ver- the Board to make fmdings about delay in submitting sion required a claim be filed "within ten days after the the claim meaningless. defect or violation becomes apparent." See Fer- ry-Morse Seed Co., 426 So.2d at 960. There are two The dissent also urges us to adopt the Florida important differences between the Texas *498 and Supreme Court's interpretation of a prior version of its Florida Acts. First, the Florida Act's current version Seed Act because our statute's legislative history in- specifies that the Board and the seed seller must both dicates that our statute was modeled in part after be able to conduct an independent field inspection. Florida's. See Ferry-Morse Seed Co. v. Hitchcock, The Texas Act has no such language. Second, and 426 So.2d 958, 961 (Fla.l983) (holding Florida Seed more significant, neither version of Florida's Act pro- Act's arbitration submission timing requirement ju- vides for the Board to make fmdings about the effect risdictional). There is only one reference to Florida in of the purchaser's delay in submitting a claim to arbi- our Act's bill analysis. The background section notes tration as section 64.004 of the Texas Act does. Thus, that "[f]or many years the state of Florida has used a while we might be inclined to adopt Florida's inter- method of arbitration with an unbiased third party pretation that timely submitting to arbitration is juris- investigation and opinion" and that "[t]he American dictional if its statute were identical to ours, we are not Seed Trade Association has recommended to each of bound to interpret one similar provision of our Act in a its member states that they work to pass measures way that conflicts with other provisions that differ similar to Florida's." HOUSE COMM. ON AGRI- from Florida's statute. CULTURE AND LIVESTOCK, BILL ANALYSIS, Tex. S.B. 64, 7lst Leg., R.S. (1989). Finally, while we base our interpretation on the Act's language and the Legislature's intent, we note [12][13] We recognize that when a Texas statute that one other court has had occasion to interpret its is modeled after another jurisdiction's, that jurisdic- Seed Act's similar arbitration provisions. Illinois' Seed tion's interpretation before the Legislature enacts our Act provides: statute may be given weight. City of Garland v. Dallas Morning News, 22 S.W.3d 351, 360 (Tex.2000). A purchaser of seed cannot maintain a civil action However, when the Legislature looks to another ju- against the seller for failure of the seed to produce risdiction's statute, but modifies rather than adopts or perform (i) as represented by a label attached to some of its provisions, it does so purposefully. See the seed or furnished under the Illinois Seed Law, Shar{fi v. Young Bros., Inc., 835 S.W.2d 221; 223 (ii) as represented by warranty, or (iii) because of (Tex.App.-Waco I 992, VvTit denied). negligence, unless the buyer has first submitted the claim to arbitration. When the Legislature enacted the Texas Act, the Florida Seed Act provided that a purchaser must

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and thus did not perform as represented. Helena con- Except in case of seed that has not been planted, the tends that Pleunneke lacked the required qualifications claim shall be filed within a time that will permit and that his testimony lacked the "indicia of reliabil- effective inspection of the plants under field condi- ity" required for admission. The court of appeals held tions and in no case later than 90 days after com- the trial court did not abuse its discretion by admitting pletion of harvest. Pleunneke's testimony. 18 S.W.3d at 754. We agree with the court of appeals. 701 ILL. COMP. STAT.. 25110,25/20 (emphasis added). In Presley v. P & S Grain Co., the Illinois *499 A. APPLICABLE LAW court of appeals held this timing requirement to be If scientific, technical, or other specialized directory rather than mandatory. 289 Ill.App.3d 453, knowledge will assist the trier offact to understand the 225 Ill.Dec. 398, 683 N.E.2d 901, 910 (1997). It rea- evidence or to determine a fact in issue, a witness soned, as we have here, that the statute's failure to qualified as an expert by knowledge, skill, experience, provide for dismissal as a consequence for noncom- training, or education may testify thereto in the form pliance with its arbitration provisions weighs in favor of opinion or otherwise. TEX.R. EVID. 702. Other- of a directory interpretation. Presley, 225 Ili.Dec. 398, wise admissible opinion testimony is not objectiona- 683 N.E.2d at 909. Likewise, it concluded that inter- ble because it embraces an ultimate issue of fact. preting the nonbinding arbitration procedures as ju- TEX.R. EVID. 704. risdictional would lead to an absurd result. Presley, 225 Ill.Dec. 398, 683 N.E.2d at 909. [ 16] [ 17] [ 18] A two-part test governs whether expert testimony is admissible: (I) the expert must be [14][15] We agree with the Florida Supreme qualified; and (2) the testimony must be relevant and Court's observation that seed arbitration laws are be based on a reliable foundation. E. I. du Pont de "established to protect the farmer." Ferry-Morse Seed Nemours & Co. v. Robinson, 923 S.W.2d 549, 556 Co., 426 So.2d at 961. Thus, when, as here, we are (Tex.l995). The trial court makes the initial determi- faced with two competing interpretations, we must nation about whether the expert and the proffered choose the one most harmonious with the Act's ob- testimony meet these requirements. Robinson, 923 jectives and other provisions. Accordingly, we con- S.W.2d at 556. The trial court has broad discretion to clude that while submission to arbitration under the determine admissibility, and we will reverse only if Act is mandatory if not waived by the seller, the Act's there is an abuse of that discretion. Robinson, 923 timing requirement is not. See Hines, 843 S. W.2d at S.W.2d at 558. 469; $435,000, 842 S.W.2d at 644. Because the Wil- kinses submitted their claims to arbitration and thus [ 19] [20] [21] In deciding if an expert is qualified, complied with the Act's mandatory requirements, the trial courts "must ensure that those who purport to be trial court correctly concluded that it had jurisdiction experts truly have expertise concerning the actual over their claims. subject about which they are offering an opinion." Gammill v. Jack Williams Chevrolet, Inc., 972 S.W.2d III. EXPERT TESTIMONY 713, 719 (Tex.l998) (quoting Broden:; v. Heise, 924 Helena argues that the trial court abused its dis- S. W.2d 148, 152 (Tex.1996)). To gauge reliability, we cretion by admitting the Wilkinses' expert's testimony. have explained: The expert, Dr. Pleunneke, testified that in his opinion, Cherokee seed is not appropriate for dryland farming Daubert and Rule 702 demand that the district court

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evaluate the methods, analysis, and principles relied "work[ing] on different problems related to plant upon in reaching the opinion. The court should en- science, science pertaining to the physiology of plants, sure that the opinion comports with applicable malnutrition, the way the environment affects them professional standards outside the courtroom and and so forth." In fact, the Wilkinses initially hired him, that it will have a reliable basis in the knowledge not as a litigation expert, but as a consultant to help and experience of the discipline. them identify the source of their crop problems.

Gammill, 972 S.W.2d at 725-26 (quotations Helena notes that Pleunneke is not a plant omitted). In Robinson, we identified six nonexclusive pathologist and argues that his testimony does not factors to determine whether an expert's testimony is establish he is an expert about charcoal rot. However, reliable and thus admissible. Robinson, 923 S.W.2d at this argument incorrectly frames the issue. The Wil- 557. But in Gammill we recognized that the Robinson kinses allege Helena misrepresented Cherokee seed's factors may not apply to certain testimony. Gammill, fitness for use in a nonirrigated environment. Ac- 972 S.W.2d at 726. In those instances, there still must cordingly, the factual issue is not solely whether be some basis for the opinion offered to show its re- Cherokee is susceptible to charcoal rot. Also at issue is liability, and, ultimately, the trial court must determine whether Cherokee is particularly suited for dryland how to assess reliability. Gammill, 972 S. W.2d at 726. farming as Helena represented. If an expert relies upon unreliable foundational data, any opinion drawn from that data is likewise unrelia- The causation evidence in this case included: seed ble. Merrell Dow Pharms., Inc. v. Havner, 953 performance trial results, the Wilkinses' farm's current S. W.2d 706, 714 (Tex.1997). Further, an expert's and past performance, the current and past perfor- testimony is unreliable even when the underlying data mance ofthe Wilkinses' neighbor's farm, and weather is sound if the expert's methodology is flawed. and soil statistics. In response to this evidence, Helena Havner, 953 S.W.2d at 714. contended that environmental factors, not Cherokee seed's drought intolerance, led to the Wilkinses' poor B. ANALYSIS crop. Thus, to determine whether Pleunneke is a 1. Qualifications qualified expert, the question is whether Pleunneke [22] Pleunneke testified that he grew up on a has scientific, technical, or other specialized ranch. He earned a bachelor's degree in wildlife knowledge that would assist the jury to understand management from Texas A & M University. He then this evidence and determine if Cherokee seed is suit- worked in a bank's trust department managing farm able for dryland farming as represented. See TEX.R. and ranch lands in Texas and Louisiana. During this EVID. 702. time he worked with many different types of crops, including grain sorghum. He then returned to school We conclude that Pleunneke's knowledge would and fmished a doctorate in plant physiology. After- aid the jury in understanding the evidence. Several wards, he worked with crops for Mississippi State grain performance trial results were entered into evi- University's Agronomy and Biochemistry Depart- dence. Pleunneke has experience conducting crop ment. At this job, he conducted crop-variety testing, trials, and, presumably, experience interpreting and predominantly on soybean crops, and he was "quite comparing those results. Also, as a plant-science familiar with setting up tests and so forth and see[ing] consultant, he works on "different problems related to which varieties are best." For the past twenty years he plant science, science pertaining to the physiology of has worked in Texas as a plant scientist and consult- plants, malnutrition, the way the environment affects ant. He characterized some of his functions*SOO as them and so forth." Because Helena contends envi-

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rorunental factors caused the Wilkinses' crop failure weather and weed-control reports, disease publica- rather than Cherokee seed's drought intolerance, tions, testing, and comparison with crops adjacent to Pleunneke's experience identifying environmental the Wilkinses' farm. Thus, Pleunneke's experience, factors affecting crops could have been helpful to the coupled with his thorough testimony about the . jury. Accordingly, we conclude that the court of ap- methodology he employed, demonstrate that the peals correctly held that the trial court's fmding opinions he drew from the underlying data are relia- Pleunneke qualified was not an abuse of discretion. ble. See Gammill, 972 S.W.2d at 726. Thus, we con- clude that the court of appeals correctly held that the 2. Reliability trial court did not abuse its discretion by admitting [23] Helena also contends that Pleunneke's tes- Pleunneke's testimony. timony is unreliable because he is not qualified to testify about charcoal rot and because he does not state IV. DTPA CLAIMS the basis and the methodology behind his opinion. Helena argues that the Wilkinses' failure to timely Again, Helena fails to recognize that the issue here is submit their claims to arbitration under the Act also whether Cherokee seed is suitable for dry land farming precludes the trial court from considering their DTPA as Helena represented. And it ignores the numerous claims. In the alternative, it argues that there is no bases underlying Pleunneke's opinion and his quali- evidence to support the jury's DTP A liability and fications. causation fmdings. Specifically, Helena argues that any representations it made amounted to nonactiona- Pleunneke testified that, in forming his opinions, ble puffing. he relied on a number of things: a physical inspection of the Wilkinses' Cherokee crop; photographs and A. RELATIONSHIP BETWEEN THE DTPA videotape ofthe Wilkinses' field; samples of the Wil- AND THE TEXAS SEED ARBITRATION ACT kinses' soil and plants; samples of the Wilkinses' Helena argues that if the Act governs any part of a neighbors' soil and plants; lab analysis results from his suit, then all the purchaser's claims must be arbitrated, field samples; South Texas rainfall statistics during regardless of the theory of recovery. The dissent the relevant period; Texas A & M grain-sorghum agrees, concluding that all the Wilkinses' theories are trials; Texas A & M grain-sorghum literature; publi- "factually intertwined," and thus that their DTPA cations by Dr. Fredrickson, a Texas A & M plant claims cannot provide an alternative basis for the trial pathologist who is a grain-sorghum expert; Helena's court's judgment. Because we conclude that the Wil- soil and plant samples and analyses; and Helena's kinses complied with the Act and hold that their delay marketing literature. Helena does not argue that this in submitting their claims to arbitration did not bar foundational data underlying Pleunneke's opinion their suit, determining whether the DTP A claims are testimony is unreliable. within the Act's purview is not necessary here.

*501 Moreover, Pleunneke has twenty years ex- B. EVIDENCE TO SUPPORT DTPA JURY perience as a plant scientist and conducting and in- QUESTIONS terpreting crop trials. While testifying, Pleunneke The trial court submitted two DTP A questions to explained the results of several grain trials, why he the jury. The first question asked, in the disjunctive, found those to be significant, and how they supported whether Helena had violated three DTPA laundry-list his opinions. He also explained the other factors that provisions: sections 17.46(b)(5) (misrepresentations contributed to his opinion, and why they were signif- about a product's characteristics), 17.46(b)(7) (mis- icant to his conclusions. These other factors included representations about a product's standard, quality, or

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grade), or 17 .46(b)(23) (failure to disclose information or 17 .46(b)(7)-making the false representation is with intent to induce another to enter transaction). See itself actionable. Smith v. Baldwin, 611 S.W.2d 611, TEX. BUS. & COM.CODE § 17.46. The second 616-17 (Tex.l980). question asked only whether Helena violated section 17.50(a)(3) (unconscionable action or course of ac- [26][27] To recover under the DTPA, the plaintiff tion). See TEX. BUS. & COM.CODE § 17.50. The must also show that the defendant's actions were the jury answered both questions "yes." "producing cause" of actual damages. See TEX. BUS. & COM.CODE § 17.50(a). This showing requires Helena argues that there is no evidence to support some evidence that the defendant's act or omission the jury's answers. Specifically, it argues that any was a cause in fact of the plaintiffs injury. Doe v. Boys representations made to the Wilkinses amounted to Clubs of Greater Dallas, Inc., 907 S.W.2d 472, 481 nonactionable puffmg and that there is no causation (Tex.1995). Under this standard, it is not necessary to evidence. The court of appeals held there was some show that the harm was foreseeable. Boys Clubs of evidence to support the jury's answers to both ques- Greater Dallas, Inc., 907 S. W.2d at 481. tions. 18 S.W.3d at 755-57. We agree with the court of appeals. The DTP A does not mention "puffmg" as a de- fense. However, this Court has recognized that "mere 1. Applicable Law puffing" statements are not actionable under sections [24][25] The DTPA prohibits "[t]alse, mislead- 17.46(b)(5) or 17.46(b )(7). Pennington v. Singleton, ing, or deceptive acts or practices in the conduct of any 606 S. W.2d 682, 687 (Tex.l980). Neither this Court trade or commerce." TEX. BUS. & COM.CODE § nor any court of appeals has extended the puffmg 17.46(a). Section 17.46(b) is a laundry list of specifi- defense to violations of sections 17 .46(b)(23) (failure cally prohibited acts. Sections 17 .46(b)(5) and to disclose) or 17.50(a)(3) (unconscionable conduct). 17 .46(b )(7) prohibit "false, misleading, or deceptive acts or practices includ[ing] representing that goods 000 [28][29] In conducting a no-evidence review, we and services have *502 characteristics, ingredients, 000 must view the evidence in a light that tends to support uses, [or] benefits 00. which they do not have" and the fmding of the disputed fact and disregard all evi- "representing that goods or services are of a particular dence and inferences to the contrary. Weirich v. standard, quality, or grade oo• if they are of another." Weirich, 833 S.W.2d 942, 945 (Tex.l992). If more Section 17 .46(b )(23) prohibits "the failure to disclose than a scintilla of evidence exists, the evidence is information concerning goods or services which was legally sufficient to support the fmding. Brown- known at the time of the transaction if such failure to ing-Ferris, Inc. v. Reyna, 865 S.W.2d 925, 928 disclose such information was intended to induce the (Tex.1993). consumer into a transaction into which the consumer would not have entered had the information been 2. Analysis disclosed." Section 17.50 provides the remedy for The Wilkinses offered the following evidence to violations of the laundry-list provisions of 17.46(b) support their DTPA claims: and for "any unconscionable action or course of action by any person." Actionable representations may be (1) Kenny Wilkins' testimony that he read Helena's oral or written. Hedley Feedlot, Inc. v. Weatherly seed brochure (PX-25) before purchasing Cherokee Trust, 855 S.W.2d 826, 838 (Tex.App.-Amarillo seed and that he would not have planted Cherokee in 1993, writ denied). A party need not prove intent to 1993 and 1994 had the brochure not represented make a misrepresentation under sections 17 .46(b)( 5)

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Cherokee was a good dry land variety. (8) The Wilkinses' testimony that they relied upon the Helena agent's oral representations. (2) The PX-25 brochure's description of Cherokee seed as "one of the most durable, top yielding hy- (9) Testimony indicating that it is reasonable and brids" with an "outstanding disease tolerance customary for farmers to rely on oral representa- package." tions and advice from seed companies' representa- tives and that, in fact, the neighboring farm's owner (3) The PX-25 brochure's "grain sorghum lineup" also relies on advice from his seed company repre- chart stating that Cherokee seed has "good" head sentative. exertion, "very good" standability, "excellent" yield potential in drylands, and that it is "FD [field] tol- ( 10) Another Helena agent's representations that erant" to charcoal rot. Cherokee seed was a "good dry land variety and that it would hold up well under the dry land condi- (4) Helena's written representation that its sorghum tions," and his recommendation that the Wilkinses hybrids "constitute our best research and develop- plant Cherokee seed. ment efforts," that Cherokee seed has "excellent weatherability," that Cherokee seed is "the tough (11) A Helena representative's statement that the performer," and that it has "the stamina and *503 Wilkinses had planted "too thick" and that if they hardiness to withstand the harsh conditions from the would plant Cherokee on the whole lot, but with Texas coastal bend across the lower south to the greater spacing, "the plant[ s] will go ahead and Carolinas." perform."

(5) Testimony that the Wilkinses did not expect a Helena argues that its "alleged misleading state- "FD tolerant" plant would be affected by charcoal ments are not statements of "fact,' but constitute, if rot and that they understood ''tolerant" to mean that anything, nonactionable opinion or puffmg." It relies "if there was an acceptable level of something out in extensively on Autohaus, Inc. v. Aguilar, where the the field it would be tolerant to it." court of appeals held that an automobile salesman's stating that Mercedes is the best-engineered automo- (6) The American Seed Association's (of which bile in the world and "jok[ing]" that the car would Helena is a member) definition of"tolerant" as "the "probably" only need to be brought in for oil changes ability of plants to endure a specified pest or an every 7,500 miles was nonactionable puffmg. 794 adverse environmental condition, performing and S,W.2d 459, 464 (Tex.App.-Dallas 1990), writ de- producing in spite ofthe·disorder." nied per curiam, 800 S.W.2d 853 (Tex.1991). The court noted that these two sentences were "the extent of the evidence presented to show the misrepresenta- (7) A Helena agent's testimony that "tolerance to tion by the salesman." Aguilar, 794 S.W.2d at 464. It charcoal rot is known to occur in grain sorghum. In also noted that the terms "probably" and ''joked" this case the plant may develop a disease but may demonstrated the generality of the statements. Agui- escape the full development of symptoms and pro- lar, 794 S.W.2d at 464. duce some level ofharvestable yield which it could not otherwise do in the absence of the tolerance phenomenon." [30] Here, the Wilkinses' evidence reflects spe- cific representations about Cherokee seed's charac-

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teristics and specific representations about how the Wilkinses' crop in particular would perform. We Wilkins explained that the cotton-grain rotation is conclude some of the representations in this case are required by the local crop-management office; his much more specific than those in Aguilar and are more neighbor rotated cotton and grain on certain por- analogous to representations held actionable in other tions ofhis acreage without adverse effects; and the cases. See, e.g., Pennington, 606 S.W.2d at 687 alleged "over planting" occurred because the Wil- (holding representations that used boat and motor kins[ es] followed the recommendations of Helena in were in "excellent condition," "perfect condition," and planting their 1993 crop. "just like new" were actionable misrepresentations about characteristics and benefits); Hedley Feedlot; 18 S. W.3d at 756. Thus, we conclude the Wil- Inc., 855 S.W.2d at 831, 838-39 (holding cattle kinses presented some evidence of producing cause. seller's representations to a buyer about "the type of cattle, weight, projected cost of feeding, the length of In sum, there is some evidence to support a *504 time on feed, and the projected gain of the cattle" fmding that Helena violated sections 17 .46(b )( 5) and were actionable under the DTPA); Gold Kist, Inc. v. 17 .46(b )(7). This fmding is sufficient to support the Massey, 609 S.W.2d 645, 646-47 (Tex.App.-Fort jury's verdict. Thus, the court of appeals correctly held Worth 1980, no writ) (holding representations about that there is some evidence of DTP A violations and seed-germination rate were actionable under the that Helena's puffmg defense did not defeat liability DTPA). Thus, viewing the evidence in a light most under the DTP A. favorable to the jury's findings, we conclude that there is some evidence of misrepresentations about Chero- kee seed's characteristics, quality, and grade amount- V.DAMAGES ing to more than mere puffing. Finally, Helena argues that there is no evidence to support the jury's $360,000 damages award. The court of appeals held there was evidence to support this [31] Helena also argues that there is no evidence amount. 18 S.W.3d at 759. We agree with the court of that its actions were the producing cause of the Wil- appeals. kinses' injuries because the Wilkinses did not exclude other possible causes for the crop failure. Specifically, Helena contends that the Wilkinses depleted their soil A. APPLICABLE LAW by planting cotton the prior year. [32][33][34][35] Recovery for lost profits does not require that the loss be susceptible to exact cal- culation. Texas Instruments, Inc. v. Teletron Energy The Wilkinses presented evidence about Chero- Mgmt., Inc., 877 S.W.2d 276, 279 (Tex.1994). How- kee's unsuitability for dryland farming. This evidence ever, the injured party must do more than show that it included their crop's performance, their neighbor's suffered some lost profits. Teletron Energy Mgmt., crop performance, several seed performance trial Inc., 877 S.W.2d at 279. The loss amount must be results, and South Texas rainfall statistics. The Wil- shown by competent evidence with reasonable cer- kinses' expert, Dr. Pleunneke, testified that Cherokee tainty. Szczepanik v. FirstS. Trust Co., 883 S.W.2d seed does not produce a good yield in a nonirrigated 648, 649 (Tex.1994); Holt Atherton Indus., Inc. v. environment. Heine, 835 S.W.2d 80, 84 (Tex.l992). This is a fact-intensive determination. Heine, 835 S. W.2d at 84. The Wilkinses also presented evidence excluding At a minimum, opinions or lost-profit estimates must other causes. The court of appeals summarized this be based on objective facts, figures, or data from evidence:

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which the lost-profits amount may be ascertained. Szczepanik, 883 S.W.2d at 649; Heine, 835 S.W.2d at The Wilkinses first planted grain in 1992 and 84. brought this suit to recover for crop damages sustained in 1993 and 1994. Thus, they only had one year to [36][37] Texas' general rule for assessing dam- establish a profit history. ages for crop loss is the market value of the lost part of the crop, as measured at maturity, less the cost of [40][ 41] We have held that past profits, coupled harvesting and marketing the lost part. International with other facts and circumstances, may establish a Harvester Co. v. Kesey, 507 S.W.2d 195, 197 lost-profits amount with reasonable certainty. See (Tex.l974). The law does not demand perfect proof of Teletron Energy Mgmt., Inc., 877 S.W.2d at 279. damages for crop *505 loss but liberally permits es- However, lack of a profit history does not, by itself, timates of crop value and probable yield, as well as preclude a new business from recovering lost future cultivating and marketing expenses. International profits. See, e.g., Orchid Software, inc. v. Pren- Harvester Co., 507 S.W.2d at 197. tice-Hall, Inc., 804 S.W.2d 208, 211 (Tex.App.-Austin 199 I, writ denied). Rather, our B. ANALYSIS focus is on whether damages can be shown with rea- [38] Helena argues that the Wilkinses' damages sonable certainty. E.g., Szczepanik, 883 S.W.2d at should have been limited to the Cherokee seed's pur- 649. This can be accomplished with a profit history or chase price. Helena relies upon the "limitation of some other objective data, such as future contracts, liability and remedies" clause printed on its invoices, from which lost profits can be calculated with rea- delivery tickets, and seed label. The DTP A provides sonable certainty. See, e.g., Szczepanik, 883 S. W.2d at that "[a]ny waiver by a consumer of the provisions of 649; Allied Bank W. Loop v. C.B.D. & Assocs., Inc., this subchapter is contrary to public policy and is 728 S.W.2d 49, 54-55 (Tex.App.-Houston [1st unenforceable and void." TEX. BUS. & COM.CODE Dist.] 1987, writ refd n.r.e). § 17.42(a). We have held that a clause limiting re- covery for breach of warranty is effective, even when To establish their lost profits with reasonable brought under the DTP A, because the DTP A did not certainty, the Wilkinses had to show: (l) the lost crop's create warranty claims. Southwestern Bell Tel. Co. v. market value, and (2) the harvesting and marketing FDP Corp., 811 S.W.2d 572, 576-77 (Tex.l991). expenses they would have incurred on that lost part. However, the same does not hold true for other DTPA International Harvester Co., 507 S.W.2d at 197. To claims. FDP Corp., 811 S.W.2d at 576-77. Thus, calculate their lost crop's market value, the Wilkinses Helena's liability-limitation clauses cannot preclude relied upon the United States Agriculture Stabilization the Wilkinses' lost-profit recovery for nonwarranty and Conservation Service's farm-yield data. Each year representations or unconscionability. the USASC measurement service gathers crop yield information from sorghum growers. The Wilkinses [39] Alternatively, Helena argues that there is no took the average sorghum yield per acre and sub- evidence to support the jury's damage award because tracted their actual per acre yield, as evidenced by prior losses cannot establish lost profits and because sales receipts. Then they multiplied this resulting the Wilkinses did not prove their damages with rea- deficit by the number of acres planted and multiplied sonable certainty. Specifically, Helena argues that this figure by the market price. The result was deducting government subsides and disaster relief $129,170.95 for 1993 and$361,684.63 for 1994. They from the Wilkinses' income results in a history of submitted the $490,855.58 total to the jury as their losses rather than profits. estimated damages.

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*506 To reach an estimated lost-profits figure, the Justice ABBOTT, joined by Justice HECHT and Jus- cost of harvesting and marketing the lost crop must be tice OWEN, dissenting. deducted from the $490,855.58 value of the lost crop. Although he knew about both the alleged problem These costs include additional lease payments, with the seed and the Act's requirement that seed' grain-elevator costs, and transportation charges. See complaints be submitted to arbitration, Wilkins de- International Hctrvester Co., 507 S.W.2d at 197. layed submitting his complaint to arbitration until Harvesting and marketing expenses can be liberally years after he first discovered the problem. Because of estimated. International Harvester Co .. 507 S.W.2d at this delay, it was too late for the State Seed and Plant 197. Board to conduct a meaningful investigation, and the Board appropriately concluded that the complaint did Here, the Wilkinses' neighbor testified about av- not qualify for arbitration. Despite the Act's plain erage transportation costs to move grain between his requirement that seed complaints be timely submitted farm and the grain elevator in McCook, Texas, where to arbitration as a prerequisite to maintaining a legal both the neighbor and the Wilkinses sent their crops. action, the Court sidesteps this requirement and per- Kenneth Wilkins testified about how the mits Wilkins to maintain his suit. In doing so, the grain-elevator company calculates drying charges and Court encourages all seed buyers who wish to cir- provided the jury with the Wilkinses' 1993 and 1994 cumvent the Act's arbitration requirement to simply grain-elevator receipts. The Wilkinses' leases con- delay submitting the complaint to arbitration until it is taining the percentage of profits that the Wilkinses' too late for the Board to investigate. Because the Court were required to pay their landlord were entered into ignores the Act's plain language and undermines the evidence. Finally, there was some evidence presented Act's purpose by permitting seed purchasers to com- to the jury about the seed's actual price and some pletely circumvent the Act's arbitration requirement, I evidence that Helena may have "written off' a part of dissent. the price. With this evidence, the jury assessed the Wilkinses' net lost profits at $360,000. We agree with I the court of appeals that the jury's damages award was The Act's purpose is to "provide[ ] for an unbi- within the range of evidence the Wilkinses presented ased third party investigation by the State Seed and and that this award is supported with evidence estab- Plant Board of the Texas Department of Agriculture of lishing damages with reasonable certainty. 18 S.W.3d complaints concerning seed performance." HOUSE at 759. Thus, we hold that there is some evidence to COMM. ON AGRIC. AND LIVESTOCK, BILL support the jury's damage award. ANALYSIS, Tex. S.B. 64, 71st Leg., R.S. (1989). To achieve this purpose, the Act requires that a seed VI. CONCLUSION purchaser who "claims to have been damaged by the We conclude that the Wilkinses' delay in submit- failure of the *507 seed to produce or perform as ting their claims to arbitration did not jurisdictionally represented by warranty or by the label required to be bar their suit. We also conclude that the trial court did attached to the seed ... or as a result of negligence ... not abuse its discretion in admitting the Wilkinses' must submit the claim to arbitration" before the Board expert's testimony. Finally, we conclude that there is "as a prerequisite to the exercise of the purchaser's some evidence to support the jury's liability, causa- right to maintain a legal action." TEX. AGRIC. tion, and damages fmdings. Accordingly, we affirm CODE§ 64.002 (emphasis added). the court of appeals' judgment. In order for the Board to be able to conduct a

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meaningful investigation, the Act expressly provides biased third party investigation and opinion" and the that the arbitration complaint must be submitted "American Seed Trade Association has recommended "within the time necessary to permit effective inspec- to each of its member states that they work to pass tion of the plants under field conditions." Id § measures similar to Florida's." See HOUSE COMM. 64.006(a). The question the Court must answer today ON AGRIC. AND LIVESTOCK, BILL ANALYSIS, is: When the seed purchaser does not file the arbitra- Tex. S.B. 64, 71st Leg., R.S. (1989). At the time the tion complaint within the time necessary to permit Texas Seed Arbitration Act was enacted, the Florida effective inspection of the plants under field condi- statute provided that: tions (even though he is aware of the problem during that time and conducts his own inspection), and the [w ]hen any farmer is damaged by the failure of ... Board concludes that the complaint does not qualify seed to produce or perform as represented by the for arbitration because of the delay, is the purchaser's label ... , as a prerequisite to his right to maintain a legal action based on the seller's alleged misrepre- legal action against the dealer from whom such seed sentations barred? Simple rules of statutory construc- was purchased, such farmer shall make a sworn tion require that this question be answered yes. complaint.... The complaint shall be filed with the department, and a copy of the complaint shall be First, the Act provides both that the seed pur- served on the dealer by certified mail, within such chaser "must submit the claim to arbitration as pro- time as to permit inspection of the crops, plants, or vided by [Chapter 64]" and that "the complaint must trees by the seed investigation and conciliation be filed within the time necessary to permit effective council or its representatives and by the dealer from inspection of the plants under field conditions." Id §§ whom the seed was purchased. 64.002, 64.006(a) (emphasis added). According to the Code Construction Act, "must" creates or recognizes a FLA. STAT. ANN .. § 578.26(l)(a) (1989) (em- condition precedent. TEX. GOV'T CODE § phasis added). 311.0 16(3 ). A condition precedent is "an event that must happen or be performed before a right can accrue The Florida and Texas statutes are substantially to enforce an obligation." Centex Corp. v. Dalton, 840 similar-both provide that the *508 seed purchaser or S.W.2d 952, 956 (Tex.l992). Thus, before a seed farmer must file a complaint or submit the claim to purchaser may maintain his suit, he must submit his arbitration "as a prerequisite to [the purchaser's] right claim to arbitration and he must do so within the time to maintain a legal action" against the dealer or Ia- necessary to permit effective inspection of the plants beier. Both statutes require the complaint to be filed in under field conditions-it is not enough to "submit" a timely manner so that it can be appropriately inves- the claim when no inspection is possible. Because the tigated and the crops can be inspected. Board "shall conduct arbitration as provided by [Chapter 64]," id § 64.005(b), if the seed purchaser "[I]t is a generally accepted rule of statutory fails to timely submit the claim as directed by Chapter construction that when the Legislature adopts a 'for- 64, the Board cannot arbitrate and the sole purpose of eign' statute it also adopts the construction of that the Act is thwarted. statute by the foreign jurisdiction occurring prior to the Texas enactment." State v. Moreno, 807 S.W.2d Second, the Legislature expressly indicated that 327, 332 n. 5 (Tex.Crim.App.1991); see also City of the Act was based on a similar Florida statute. The bill Garlandv. Dallas Morning News, 22 S.W.3d 351,360 analysis recognizes that "[ f]or many years the state of (Tex.2000); Tex. Dep't of Pub. Safety v. Gilbreath, Florida has used a method of arbitration with an un-

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47 S.W.3d 486, 44 Tex. Sup. Ct. J. 675 (Cite as: 47 S. W.3d 486)

842 S.W.2d 408, 412 (Tex.App.-Austin 1992, no ings, including any fmding as to the effect of delay writ). The Florida Supreme Court construed Florida's in filing the arbitration claim or the arbitration seed act in 1983 in Ferry-Morse Seed Co. v. Hitch- board's ability to determine the facts of the case. cock, 426 So.2d 958 (Fia.l983). FNI Just as in this case, the farmer in Hitchcock waited over two years after TEX. AGRIC. CODE § 64.004. Both the Court discovering the problem to bring suit alleging breach and Wilkins contend that Wilkins's delay in filing his of warranty and negligence, and made no attempt to arbitration complaint does not bar his suit because the comply with the statutory requirements. The Florida statute specifically addresses this problem by allowing Supreme Court held that the farmer's claims were the trial court to take such delays into account. How- inextricably bound to the statute's labeling require- ever, because that interpretation allows Wilkins to ments, and that by failing to comply with the statutory completely circumvent Chapter 64's arbitration re- requirements, the farmer was barred from bringing quirement, it simply cannot be an accurate application suit for damages. /d. at 961. of section 64.004.

FNl. Florida's 1977 Act, which was at issue To the contrary, section 64.004 deals with the in F'eny--:lv!orse, was similar to its 1989 ver- situation in which the complaint is filed within the sion except that it required the farmer to file a time necessary to permit effective inspection under sworn complaint with the department of ag- field conditions, but the seed purchaser's delay in riculture within 10 days after the problem filing nevertheless affects the investigation. A pur- became apparent. FLA. STAT. ANN .. § chaser could certainly delay filing an arbitration 578.26(1) (1977). complaint for many months yet still file while the seeds are under field conditions. For example, if the The Texas Legislature enacted Chapter 64 in problem became apparent early in the season but *509 1989, well after the Florida Supreme Court issued its the farmer delayed submitting the claim to arbitration decision construing Florida's seed act. Accordingly, until after the heat of the summer, the delay could we should presume that the Legislature intended to affect the Board's investigation. Section 64.004 allows adopt Florida's construction of its statute, so long as the trial court to consider such a delay; it does not the Florida and Texas statutes are substantially similar allow the court to completely ignore the statute's and our statute does not reflect a contrary intent. See timeliness requirements. Moreover, section 64.004, by Shar(/i v. Young Bros., 835 S.W.2d 221, 223 its terms, applies only to a complaint "that has been (Tex.App.-Waco 1992, writ denied). As noted, the the subject of arbitration under [Chapter 64]." Because acts are substantially similar, and neither the Texas Wilkins's complaint was not arbitrated-and could not statute itself nor the available legislative history in- have been under the terms of the statute-section dicates a contrary intent. 64.004 does not apply.

The only notable difference between the Texas Construed in this manner, section 64.004 is con- and Florida statutes is the provision in section 64.004 sistent with the Act's purpose and with the conclusion that: that a purchaser's failure to file an arbitration com- plaint within the time necessary to permit inspection [t]he court may ... take into account any fmdings of during field conditions is a bar to suit. But the Court the board of arbitration with respect to the failure of would rather rely on this one provision to gut the any party to cooperate in the arbitration proceed- purpose of the Act. Rather than interpreting this single sentence in a manner entirely inconsistent with the

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Act's purpose of allowing an independent third-party file the arbitration complaint so that the only field investigation, we should interpret it consistently with inspection the Board could consider would be the the Act as a whole. See Tex. Workers' Camp. Ins. Fund farmer's. v. Del Indus., Inc., 35 S.W.3d 591, 593 (Tex.2000) (stating that we do not construe statutory language in The Court's construction reads section 64.006(a)'s isolation but in the context of the entire statutory timeliness requirement right out of the Act. To be scheme). And, when two constructions are possible, consistent with both the Act's language and its pur- we should choose the one most consistent with the pose, I would hold that Wilkins's failure to submit his Act's purpose over the construction completely at odds claim to arbitration within the requisite time period with it. bars him from maintaining a legal action against Helena. The Court's construction of the Act renders meaningless section 64.006(a)'s requirement that the II arbitration complaint be submitted within the time Wilkins argues that, regardless of whether the Act necessary to permit effective inspection of the plants bars certain claims that *510 have not been arbitrated, under field conditions. Relying on the fact that the Act the jury's verdict can be sustained on the basis of the does not expressly state that the Board must conduct DTPA unconscionability and misrepresentation the field inspection, the Court reasons that "the Act causes of action, which he contends are not subject to provides that a complaint must be filed in time to the Act's arbitration requirement. Wilkins obtained 'permit an effective inspection of the plants under favorable jury findings on his claims for breach of field conditions,' thus permitting the parties to inspect warranty, DTPA unconscionability, and DTPA oral under field conditions and provide their reports to the misrepresentations. Wilkins argues that, even if the Board." 47 S.W.3d at 507 (citations omitted). But this breach of warranty claim is barred by his failure to reasoning makes no sense. The timing requirement arbitrate, the Act does not bar his DTP A uncon- must have been intended to allow someone to conduct scionability and misrepresentation claims because the a field inspection. According to the Court, that statute requires only claims based on the label, war- someone is simply "the parties." But surely the Act's ranty, or negligence to be submitted to arbitration, and timeliness requirement was not included to allow the his DTPA claims are not based on the label, warranty, farmer to conduct a field inspection, since the farmer or negligence. has access to his fields and can conduct an inspection at any time. Accordingly, the requirement must have If Wilkins is correct, plaintiffs could easily cir- been intended to permit the Board or the seed seller to cumvent the Act simply by recharacterizing their conduct an inspection. Since the Act's purpose is to claims as DTPA claims. This would render the Act allow a third party investigation and the Board em- wholly ineffective and would undermine the legisla- ploys its own field inspectors, the only conclusion is tive intent. Cf Sorokolit v. Rhodes, 889 S.W.2d 239, that the Legislature intended to permit the Board to 242 (Tex.l994) ("Claims that a physician or health conduct an inspection. But under the Court's inter- care provider was negligent may not be recast as pretation, there would be no problem even if no one DTPA actions to avoid the standards set forth in the conducted a field inspection and the farmer waited Medical Liability and Insurance Improvement Act."). until well after the crops had been harvested to file the The Act's language is broad-it applies whenever a arbitration complaint so that no field inspection could seed purchaser claims to have been damaged "by the be performed. Or, the farmer could conduct a field failure of the seed to produce or perform as repre- inspection but then wait until after field conditions to sented by warranty or by the label required to be at-

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47 S.W.3d 486,44 Tex. Sup. Ct. J. 675 (Cite as: 47 S. W.3d 486)

tached ... or as a result of negligence." TEX. AGRIC. Courts provision of the Texas Constitution. See TEX. CODE § 64.002(a). The Business and Commerce CONST. art. I, § 13. We should, ifpossible, interpret Code-the same code in which the DTP A is statutes in a manner that avoids constitutional infir- found-defmes warranties to include "[a]ny affirma- mities. Owens Corning v. Carter, 997 S.W.2d 560, tion of fact or promise made by the seller to the buyer 577 (Tex.l999). *511 The Attorney General has con- which relates to the goods and becomes part of the cluded, and I agree, that Chapter 64's arbitration re- basis of the bargain" and "[a]ny description of the quirements do not on their face violate the Open goods which is made part of the basis of the bargain." Courts provision of the Texas Constitution. Op. Tex. TEX. BUS. & COM.CODE § 2.313(a)(l),(2). Wil- Att'y Gen. No. DM-3 (1991 ). As noted in that deci- kins's claims for DTP A misrepresentation and un- sion, Chapter 64 does not purport to abolish the right conscionability fall within the scope of this definition. of seed performance disputants to obtain redress in court. !d. The arbitration is non-binding, and seed In the jury charge, the DTP A misrepresentation purchasers are free to pursue their claims in court after claim defined "false, misleading, or deceptive act or the arbitration. Moreover, Chapter 64's arbitration practice" as "representing that Cherokee seed had or requirements are certainly not unreasonable or arbi- would have characteristics that it did not have" or trary when balanced against the purpose and basis of "representing that Cherokee seed was of a particular the statute. !d.; see Carter, 997 S.W.2d at 573; Sax v. quality if it was of another." These representations fall Votteler, 648 S.W.2d 661,666 (Tex.l983). within the definition of warranty, and, although couched as a DTP A misrepresentation claim, the un- The Attorney General did caution, however, that derlying nature of the complaint is that the seeds did the Act could raise Open Courts questions as applied not produce or perform as represented. See Sorokolit, to some cases. Op. Tex. Att'y Gen. No. DM-3 (1991). 889 S.W.2d at 242 (holding that the underlying nature In particular, the Attorney General pointed out that the of the claim, not its label, determines whether section Open Courts provision could limit the application of 12.0 l (a) of the Medical Liability and Insurance Im- section 64.006(a)'s requirement that the arbitration provement Act prevents suit for violation of the complaint be filed in time to permit inspection ofthe DTPA). Wilkins's DTPA unconscionability claims are plants under field conditions. !d. I agree that this re- also predicated on Helena's representations concern- quirement might arguably violate the Open Courts ing the Cherokee seed. The evidence supporting Wil- provision as applied to cases in which the Act's com- kins's DTP A misrepresentation and unconscionability plaint-filing time period has expired before the seed claims is the same evidence supporting his breach of purchaser has a reasonable opportunity to discover the warranty claims. Because all of Wilkins's claims are problem. But where, as here, the seed purchaser dis- so significantly factually intertwined, they should be covers the problem while the seeds are under field arbitrated together. Cf Jack B. Anglin Co. v. Tipps, conditions (and conducts his own independent inves- 842 S.W.2d 266,271 (Tex.I992)(requiring arbitration tigation of the crops in the field), is aware ofthe arbi- of factually intertwined contract and misrepresenta- tration requirement, and has ample opportunity to file tion claims in contractual arbitration context). Ac- his complaint in a timely manner but simply fails to do cordingly, Wilkins's DTPA claims are included within so, the Open Courts provision is satisfied. the Act's arbitration requirement.

***** III Wilkins argued in the trial court that construing Wilkins knew of the potential problem with the the Act to bar his legal action would violate the Open Cherokee seed within plenty of time to file a com-

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47 S.W.3d 486,44 Tex. Sup. Ct. J. 675 (Cite as: 47 S.W.3d 486)

plaint with the Board during the requisite time period. Although he allowed some experts to investigate his crops under field conditions, he failed to file a com- plaint with the Board to allow the neutral third-party investigation required by the Act. Because Wilkins failed to submit his complaint within the requisite time period, the Board properly concluded that the com- plaint did not qualify for arbitration under the Act's plain language. And because arbitration is a prerequi- site to Wilkins's right to maintain a legal action for his claims that he has been damaged by the failure of the seed to produce or perform as represented, Wilkins's claims are barred. The Court nevertheless decides that they are not. Because that decision contradicts the Act's plain language and undermines its purpose, I dissent.

Tex.,2001. Helena Chemical Co. v. Wilkins 47 S.W.3d 486,44 Tex. Sup. Ct. J. 675

END OF DOCUMENT

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Texas Utilities Electric Co. v. Public Utility Commission, 881 S.W.2d 387 (Tex. App.- Austin 1994) aff'd in part, rev'd in part on other grounds, 935 S.W.2d 109 (Tex. 1997) west taw, Page I

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15A Administrative Law and Procedure 15AIV Powers and Proceedings of Administrative Agencies, Officers and Agents Court of Appeals of Texas, 15AIV(A) In General Austin. 15Ak314 k. Bias, prejudice or other disqualifi- cation to exercise powers. Most Cited Cases TEXAS UTILITIES ELECTRIC COMPANY, Public Utility Commission, Office of Public Utility Counsel, and Adjudicators involved in administrative proceedings Cities of Arlington, et al., Appellants, are presumed to be honest and act with integrity but pre- v. sumption may be overcome by demonstrating that decision PUBLIC UTILITY COMMISSION, Texas Utilities Elec- maker's mind was irrevocably closed on matters at issue. tric Company, Office of Public Utility Counsel, and Cities of Arlington, et al., Appellees. [2] Electricity 145 ~11.3(6) No. 3-92-548-CV. June 15, 1994. 145 Electricity Rehearings Overruled Aug. 31 and Oct. 12, 1994. 145k 11.3 Regulation of Charges 145kll.3(6) k. Proceedings before commissions. Final order by Public Utility Commission in electric Most Cited Cases rate case conducted under Public Utility Regulatory Act (PURA) was reversed and remanded in part when re- Public Utility Commission chairperson's pecuniary viewed by the 250th Judicial District Court, Travis County, interest in natural gas industry did not invalidate Com- John K. Dietz, J. Appeals were taken. The Court of Ap- mission's decision in electric rate case which decided peals, Bea Ann Smith, J., held that: (1) commissioner's whether costs of nuclear power plant construction should financial interest in gas industry was not prejudicial; (2) be included in utilities' rate base costs; chairperson's pe- Commission lacked authority to review costs associated cuniary interest was not shown to have deprived parties of with reacquiring minority interests in nuclear power plant; impartial and fair hearing. V.T.C.A., Government Code § (3) using hypothetical tax method was error; (4) Commis- 2001.174; Vernon's Ann.Texas Civ.St. art. 1446c, § I et sion had authority to allow utility to implement bonded seq. rates; (5) disallowing some revalidation expenses for nu- clear power plant as imprudent was not error; and (6) set- [31 Administrative Law and Procedure 15A ~314 ting rate of return on common equity at 13.2% was within Commission's discretion. 15A Administrative Law and Procedure 15AIV Powers and Proceedings of Administrative Reversed and remanded with instructions. Agencies, Officers and Agents 15AIV(A) In General West Headnotes 15Ak314 k. Bias, prejudice or other disqualifi- cation to exercise powers. Most Cited Cases [II Administrative Law and Procedure 15A ~314 Administrative officer is not disqualified simply be-

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cause officer has previously taken position, even in public, [6] Administrative Law and Procedure 15A ~431 on policy issue related to particular dispute absent showing of incapability to decide particular controversy fairly. 15A Administrative Law and Procedure V.T.C.A., Government Code§ 2001.174. 15AIV Powers and Proceedings of Administrative Agencies, Officers and Agents [4] Administrative Law and Procedure 15A ~305 15AIV(C) Rules, Regulations, and Other Policy- making 15A Administrative Law and Procedure 15Ak428 Administrative Construction of Stat- 15AIV Powers and Proceedings of Administrative utes Agencies, Officers and Agents 15Ak431 k. Deference to agency in general. 15AIV(A) In General Most Cited Cases 15Ak303 Powers in General (Formerly 361 k219(1)) · 15Ak305 k. Statutory basis and limitation. Most Cited Cases Reviewing court has power and duty to consider agency's interpretation and application of statute. Administrative Law and Procedure 15A ~325 [7] Electricity 145 ~11.3(7) 15A Administrative Law and Procedure 15AIV Powers and Proceedings of Administrative 145 Electricity Agencies, Officers and Agents 145kll.3 Regulation of Charges 15AIV(A) In General 145kl1.3(7) k. Judicial review and enforcement. 15Ak325 k. Implied powers. Most Cited Cases Most Cited Cases

Administrative agencies have only those powers that Section of Public Utility Regulatory Act (PURA) au- are expressly conferred by statute, together with those thorizing Public Utility Commission to review changes in necessarily implied from authority conferred or duties public utility ownership did not apply to electric utility's imposed. repurchase of minority joint ownership interests in nuclear power plant given that ownership of plant did not change (5] Administrative Law and Procedure 15A ~447.1 hands as result of repurchase; utility's decision to purchase minority interest was limited to review under prudent investment standard. Vernon's Ann.Texas Civ.St. art. 15A Administrative Law and Procedure 1446c, § 63. 15A1V Powers and Proceedings of Administrative Agencies, Officers and Agents 15AIV(D) Hearings and Adjudications [8] Electricity 145 ~11.3(4) 15Ak447 Jurisdiction 15Ak447 .l k. In general. Most Cited Cases 145 Electricity 145k 11.3 Regulation of Charges Jurisdiction cannot be conferred upon administrative 145kll.3(4) k. Operating expenses. Most Cited agencies by parties before it, but rather must emanate from Cases statute itself. Public Utility Commission erred in electric rate case

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by calculating utility's federal income tax liability using If utility enjoys tax deduction based on interest ex- hypothetical rather than actual-tax method; utility's rates pense, benefits of deduction must be passed on to rate- must reflect tax liability actually incurred. Vernon's payers, rather than to shareholders. Vernon's Ann.Texas Ann.Texas Civ.St. art. 1446c, § 1 et seq. Civ.St. art. 1446c, § 41(c)(2).

[9) Electricity 145 ~11.3(4) [12) Electricity 145 ~11.3(4)

145 Electricity 145 Electricity 145kl1.3 Regulation of Charges 145k11.3 Regulation of Charges 145kll.3(4) k. Operating expenses. Most Cited 1451<11.3(4) k. Operating expenses. Most Cited Cases Cases

Electric rates must be set based on utility's actual tax Allocation of tax benefits to electric utility from in- liability and, thus, utility's tax expense will be adjusted to terest expense and deduction between present and future reflect tax savings which would result from filing consol- ratepayers is matter within Public Utility Commission's idated tax return, regardless of whether utility did in fact discretion. Vernon's Ann.Texas Civ.St. art. 1446c, § file consolidated return. Vernon's Ann.Texas Civ.St. art. 41(c)(2). 1446c, § 41(c)(2). [13] Electricity 145 ~11.3(4) 1101 Electricity 145 ~11.3(4) 145 Electricity 145 Electricity 145k11.3 Regulation of Charges 145k 11.3 Regulation of Charges 1451<11.3(4) k. Operating expenses. Most Cited 145k11.3(4) k. Operating expenses. Most Cited Cases Cases Electric utility's income tax expense must be reduced The Public Utility Commission's refusal to allocate to by amount of tax deductions, even if associated with dis- electric utility tax savings resulting from affiliate's losses allowed capital expenses. Vernon's Ann.Texas Civ.St. mt. violated actual-tax doctrine, requiring that rates be based 1446c, § I et seq. on utility's actual tax liability, even if utility did not bear risks a.ssociated with tax savings attributed to affiliates. [14) Public Utilities 317A ~119.1 Vernon's Ann.Texas Civ.St. art. 1446c, § 4l(c)(2).

3 17A Public Utilities [11] Public Utilities 317A ~128 317All Regulation 317Ak 119 Regulation of Charges 317 A Public Utilities 317Ak 119 .I k. In general. Most Cited Cases 317A II Regulation 317Ak 119 Regulation of Charges Utility may implement bonded rates in municipal ar- 317 Akl28 k. Operating expenses. Most Cited eas when underlying rate increase is subject to appellate Cases jurisdiction of Public Utility Commission. Vernon's Ann. Texas Civ.St. art. 1446c, § 43(e).

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In conducting substantial evidence review, court must [15) Administrative Law and Procedure 15A determine whether evidence as whole is such that reason- ~438(26) able minds could have reached conclusion agency must have reached in order to take disputed action.

15A Administrative Law and Procedure I 5AIV Powers and Proceedings of Administrative [17] Administrative Law and Procedure 15A ~793 Agencies, Officers and Agents I 5AIV(C) Rules, Regulations, and Other Policy- 15A Administrative Law and Procedure making 15AV Judicial Review of Administrative Decisions 15Ak428 Administrative Construction of Stat- 15A V(E) Particular Questions, Review of utes l5Ak784 Fact Questions 15Ak438 Particular Statutes and Contexts 15Ak793 k. Weight of evidence. Most Cited 15Ak438(26) k. Carriers and public utili- Cases ties. Most Cited Cases (Formerly 36 Ik2 I 9(9. I)) Reviewing court may not substitute its judgment for that of agency and must consider only record on which Public Utilities 317A ~194 agency based its decision while conducting substantial evidence review. 3 I 7A Public Utilities 3 I 7Alii Public Service Commissions or Boards (18) Administrative Law and Procedure 15A ~750 3 I 7Alll(C) Judicial Review or Intervention 317 Akl88 Appeal from Orders of Commission 15A Administrative Law and Procedure 317Ak 194 k. Review and determination in I 5A V Judicial Review of Administrative Decisions general. Most Cited Cases 15AV(D) Scope ofReview in General (Formerly 361k219(9.1)) 15Ak750 k. Burden of showing error. Most Cited Cases Public Utility Commission's interpretation of Public Utility Regulatory Act (PURA) is entitled to great weight, Party bringing appeal bears burden of showing that provided that interpretation is reasonable and does not decision by administrative agency lacks substantial evi- contradict plain language of statute. Vernon's Ann. Texas dence. Civ.St. art. 1446c, § 1 et seq.

[19) Administrative Law and Procedure 15A ~791 (16] Administrative Law and Procedure 15A ~791 15A Administrative Law and Procedure 15A Administrative Law and Procedure l5A V Judicial Review of Administrative Decisions 15A V Judicial Review of Administrative Decisions 15A V(E) Particular Questions, Review of 15AV(E) Particular Questions, Review of I 5Ak784 Fact Questions l5Ak784 Fact Questions I 5Ak791 k. Substantial evidence. Most Cited 15 Ak791 k. Substantial evidence. Most Cited Cases Cases Agency's order must be upheld despite substantial

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evidence challenge, if evidence would support either af- firmative or negative findings. 145 Electricity 145k11.3 Regulation of Charges [20] Electricity 145 ~11.3(6) 145k11.3(6) k. Proceedings before commissions. Most Cited Cases 145 Electricity 145k11.3 Regulation of Charges Underlying findings supported fmding of fact by 145k11.3(6) k. Proceedings before commissions. Public Utility Commission that some but not all costs of Most Cited Cases complying with increased inspection standards and pro- cedures during construction of nuclear power plant were Substantial evidence supported decision by Public caused by imprudence, warranting exclusion from rate Utility Commission that electric utility's imprudence base. V.T.C.A., Government Code§ 2001.141(d). caused some but not all of increased costs incurred by revalidation and reinspection program during construction [23) Public Utilities 317A ~194 of nuclear power plant; costs to respond to concerns by federal Nuclear Regulatory Commission were necessitated 317 A Public Utilities in part because of utility imprudence and in part because of 317 ATTT Public Service Commissions or Boards higher safety and inspection standards. Vernon's 317 AIII(C) Judicial Review or Intervention Ann.Texas Civ.St. art. 1446c, §§ 39, 41. 3 17 Ak188 Appeal from Orders of Commission 317Ak 194 k. Review and determination in [21] Public Utilities 317 A ~124 general. Most Cited Cases

317 A Public Utilities Reviewing court is bound by determinations of Public 3 I 7All Regulation Utility Commission as to weight and credibility of evi- 317 Akl19 Regulation of Charges dence as long as there is substantial evidence in record 317Ak124 k. Value ofproperty; rate base. Most supporting Commission's decision. Cited Cases [24] Electricity 145 ~11.3(6) Public Utilities 317A ~168 145 Electricity 317 A Public Utilities 145k 11.3 Regulation of Charges 317 Alii Public Service Commissions or Boards 145k11.3(6) k. Proceedings before commissions. 317AliT (B) Proceedings Before Commissions Most Cited Cases 317 Ak168 k. Findings. Most Cited Cases Public Utilities 317A ~164 Determination that expenditure is imprudent carries legal consequence of its exclusion from rate base and must 317A Public Utilities be supported by underlying fmdings. V.T.C.A., Govern- 317 AllT Public Service Commissions or Boards ment Code § 2001.141 (d). 317 AUJ(B) Proceedings Before Commissions 317 Ak 164 k. Pleading. Most Cited Cases [22] Electricity 145 ~11.3(6)

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Utility's conditional request to include construction 145kll.3(4) k. Operating expenses. Most Cited work in progress costs (CWIP) in rate base if proposed rate Cases increase were materially disallowed provided adequate notice of utility's intent to seek inclusion of CWIP in rate Natural gas purchase contract which set upper limit on base in rate-making proceeding. Vernon's Ann.Texas electric utility's right to purchase gas at contract price did Civ.St. art. 1446c, §§ 39(a), 41 (a). not obligate utility to purchase gas under contract and, thus, supported determination by Public Utility Commis- [25[ Electricity 145 c€?11.3(4) sion in rate case that utility violated its obligation to pur- chase fuel at lowest reasonable cost to ratepayers. Vernon's I 45 Electricity Ann.Texas Civ.St. art. l446c, § 4l(c)(l). 145kll.3 Regulation of Charges l45k11.3(4) k. Operating expenses. Most Cited [28] Electricity 145 c€?11.3(4) Cases 145 Electricity Public Utility Commission may either make contract 145k11.3 Regulation of Charges by contract determination of reasonableness of contracts 145kll.3(4) k. Operating expenses. Most Cited for purchase of alternate energy sources or group contracts Cases together and declare them all to be reasonable when rec- onciling fuel costs as part of rate case. Vernon's Ann. Texas Limiting electric utility's fuel inventory level based on Civ.St. art. 1446c, § 4l(c)(l). utility's actual experience over several years was not arbi- trary and capricious, despite utility's request in rate case for [26] Electricity 145 c€?11.3( 4) increased fuel inventory level. V.T.C.A., Government Code§ 2001.174(2)(E, F). 145 Electricity l45k 11.3 Regulation of Charges [29] Administrative Law and Procedure 15A c€?753 145k11.3(4) k. Operating expenses. Most Cited Cases 15A Administrative Law and Procedure 15A V Judicial Review of Administrative Decisions Disallowing excessive price for natural gas as alter- 15 AV(D) Scope of Review in General native fuel by electric utility, during rate case, was sup- 15Ak753 k. Theory and grounds of administra- ported by utility's accounting records indicating that pur- tive decision. Most Cited Cases chase was made pursuant to spot contract with unreason- ably high price, despite utility's later contention that pur- Mental processes of individual administrators are chase was made part of separate short-term commercial immaterial to judicial review of agency order; order is contract for which purchase price would be reasonable. reviewed in light of record on which it purports to rest. Vernon's Ann. Texas Civ.St. art. l446c, § 41(c)(l).

[30] Electricity 145 c€?11.3(5) [27] Electricity 145 c€?11.3(4) 145 Electricity 145 Electricity 145k11.3 Regulation of Charges 145k11.3 Regulation of Charges 145kll.3(5) k. Reasonableness of charges. Most

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Cited Cases Cities of Arlington, et al.

Public Utility Commission has discretion in electric David C. Duggins, Clark Thomas & Winters, Austin, for rate case to decide whether imprudence by utility's man- Texas Utilities Elec. Co. agement warrants reduction in overall rate of return on common equity. Vernon's Ann. Texas Civ.St. art. 1446c, § Before CARROLL, C.J., and ABOUSSIE and B.A. 39(a). SMITH, JJ.

[31] Electricity 145 <8=>11.3(5) BEA ANN SMITH, Justice. Texas Utilities Electric Company, the Public Utility 145 Electricity Commission, the Office of Public Utility Counsel, and the 145kll.3 Regulation of Charges Cities of Arlington, et al. appeal from a district-court 145kll.3(5) k. Reasonableness of charges. Most judgment rendered in a suit for judicial review of the Cited Cases Commission's final order in an electric utility rate case conducted under the Public Utility Regulatory Act (PU- Setting electric utility's return on common equity at RA), Tex.Rev.Civ.Stat.Ann. art. 1446c (West 13.2% in rate case was not abuse of discretion. Vemon's Supp.1994).FNI The district-court judgment reverses and Ann. Texas Civ.St. art. 1446c, § 39(b). remands certain aspects of the Commission's final order, and affirms the remainder. We will reverse the dis- trict-court judgment and remand the cause to the district *389 Roy Q. Minton, Minton Burton Foster & Collins, court with instructions that the cause be remanded to the Austin, for Texas Utilities Elec. Co. Commission for further proceedings consistent with our opinion. See Administrative Procedure Act (APA), Tex. Dan Morales, Atty. Gen., Susan Bergen, Asst. Atty. Gen., Gov't Code Ann.§ 2001.174 (West 1994).FN 2 Austin, for Public Utility Com'n.

FN 1. Cities of Arlington, et al. includes the mu- Stephen Fogel, Austin, for Office of Public Utility Coun- nicipalities of Addison, Allen, Azle, Belton, sel. Breckenridge, Bridgeport, Burkburnett, Burleson, Carrollton, Celina, Centerville, Cleburne, Col- *390 Geoffrey M. Gay, Buter Porter Gay & Day, Austin, leyville, Copperas Cove, Corinth, Crowley, for Cities of Arlington, et al. Dalworthington Gardens, De Leon, Denison, Euless, Farmers Branch, Forest Hill, Fort Worth, David C. Duggins, Clark Thomas & Winters, Austin, for Glen Heights, Grand Prairie, Granger, Hewitt, Texas Utilities Elec. Co. Howe, Hurst, Irving, Keller, Lindale, Luella, McKinney, Milford, Murchison, New Chapel Dan Morales, Atty. Gen., Steven Baron, Asst. Atty. Gen., Hill, Ovilla, Pantego, Plano, Ranger, Richardson, Austin, for Public Utility Com'n. Roanoke, Rockwall, Rosser, Rowlett, Sherman, Sunnyvale, The Colony, Tyler, University Park, Venus, Waco, White Settlement, and Wichita Yolanda L. Woods, Asst. Public Counsel, Austin, for Of- Falls. In addition to bringing individual appeals, fice ofPublic Utility Counsel. each of the appellants is also an appellee with respect to certain parts of the district-court Steven A. Porter, Butler Porter Gay & Day, Austin, for

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judgment. prejudiced in favor of the gas industry. The allegations of impermissible bias center around Meek's ties with Amer- FN2. All citations in this opinion are to the cur- ican *391 Petrofina ("Fina"). During the rate-making rent Administrative Procedure Act rather than the proceedings, Meek served as chairman of Fina's board, former Administrative Procedure and Texas received retirement benefits from Fina, and held shares of Register Act because the recent recodification did its publicly traded common stock. Fina's direct sales of not substantively change the law. Act of May 4, natural gas to Texas Utilities from 1989 to 1991 totalled 1993, 73d Leg., R.S., ch. 268, § 47, 1993 $60,782; indirect revenue from sales to other Texas Utili- Tex.Gen.Laws 583, 986. ties suppliers approximated $104 million. Because of his connections with Fina, the Cities and Public Utility Counsel claim that Meek's participation in the hearings THE CONTROVERSY precluded the Commission from making impartial find- Texas Utilities filed its application for a rate increase ings. The district court found the evidence insufficient to in January 1990 seeking to include in its rate base costs show that Meek's service on the Commission led to unfair associated with Comanche Peak, a newly constructed proceedings or prejudiced substantial rights of the parties. nuclear power plant. The utility sought an agency adjudi- We agree. cation regarding what portion of its costs it could include in its rate base as being a "prudent" investment, public in- terest findings on its reacquisition of a 12.2 percent own- PURA provides that no commissioner may, during a ership interest in the plant, final reconciliation of its fuel period of service with the Commission, "have any pecu- costs and revenues for the period Aprill983 to June 1989, niary interest .. . in any person or corporation or other and a reduction of its fuel factor for the period May 1990 to business entity a significant portion of whose business Aprill991. After the Commission issued its order, motions consists of furnishing goods or services to public utilities for rehearing were filed and the Commission issued a or affiliated interests .... " PURA § 6(b)(l). It is grounds for second order on rehearing. Subsequent motions for re- removal from the Commission if a member has interests in hearing were overruled by operation of law, and five par- violation of section 6(b) at the time of his or her appoint- ties to the rate-making proceeding filed suit for judicial ment. PURA § 6A. However, "the validity of an action of review in district court. See PURA § 69; APA § 2001.171. the commission is not affected by the fact that it was taken The district court affirmed the Commission order in part when a ground for removal of a member of the commission and reversed it in part, after which Texas Utilities, Public existed." PURA § 6A(b). Meek resigned from the Com- Utility Counsel, the Cities, and the Commission each ap- mission effective April 20, 1992, after the Attorney Gen- pealed the district-court judgment.FN3 For clarity, we will eral requested that he either sever all ties with Fina or provide additional facts germane to the various points of resign from the Commission. Although Meek was not error throughout the opinion. removed from the Commission because of a conflict of interest pursuant to PURA section 6A, he did resign in the face of a perceived conflict. Meek's conflict, however, has FN3. With one exception, the Cities and Public · no effect on the Commission's order in Docket 9300. Utility Counsel jointly raised their points of error. PURA § 6A(b ). This Court is left, therefore, with the power to reverse and remand the Commission's order only CONFLICT OF INTEREST if Meek's participation resulted in an order that prejudices In their first point of error, the Cities and Public Utility substantial rights of the appellants. See APA § 2001.174. Counsel argue that the chairman of the Commission, Paul 4 FN We understand appellants to contend that this Court Meek, was biased because he had a pecuniary interest in should reverse the Commission's order because Meek's the outcome of the proceedings, and because he was interests in Fina resulted in an order that is arbitrary and

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capricious and a violation of their constitutional right to a (2) fmding of fact 379 relating to the reasona- fair and impartial hearing. bleness of Texas Utilities' fuel expenditures dur- ing the reconciliation period insofar as such ex- FN4. APA section 2001.174 directs this Court to penditures relate to gas contracts between the reverse and remand a cause for further proceed- utility and Fina, and (3) fmding of fact 389 re- ings only if substantial rights of the appellant lating to the reasonableness of Texas Utilities' have been prejudiced because the administrative fuel oil expenditures during the reconciliation findings, inferences, conclusions, or decisions period. are: (1) in violation of a constitutional or statutory provision, (2) in excess of the agency's statutory *392 [3] It is well established that absent a showing of authority, (3) made through unlawful procedure, incapability to decide a particular controversy fairly, an (4) affected by error of law, (5) not reasonably administrative officer is not disqualified simply because he supported by substantial evidence, or (6) arbitrary or she has previously taken a position, even in public, on a or capricious or characterized by abuse of discre- policy issue related to a particular dispute. Morgan, 313 tion or clearly unwarranted exercise of discretion. U.S. at 421, 61 S.Ct. at 1004. In Morgan, the Supreme Court held that the Secretary of Agriculture's strong views [I] [2] In order to prevail, appellants must overcome on a particular issue did not make him unfit to exercise his the presumption that agency members are persons of duties in administrative proceedings relating to those conscience and intellectual discipline, capable of judging a matters. Td. Similarly, in Cement Institute the Court held particular controversy fairly on the basis of its own cir- that members of the Federal Trade Commission were not cumstances. United States v. Morgan, 313 U.S. 409,421, disqualified from participating in adjudicatory proceedings 61 S.Ct. 999, 1004, 85 L.Ed. 1429 (1941). Following the simply because they had previously expressed their opin- United States Supreme Court, we recognize a presumption ions that a pricing system at issue in the proceeding was of honesty and integrity in those serving as adjudicators. illegal. Cement Tnstitute, 333 U.S. at 700-01, 68 S.Ct. at Withrow v. Larkin, 421 U.S. 35, 47, 95 S.Ct. 1456, 1464, 803-04. 43 L.Ed.2d 712 (1975). One may overcome this presump- tion by demonstrating that the decisionmaker's mind is In this appeal, the Cities and Public Utility Counsel "irrevocably closed" on the matters at issue. Federal Trade question Meek's impartiality because of a newspaper in- Comm'n v. Cement Inst., 333 U.S. 683, 701, 68 S.Ct. 793, terview in which he expressed his disappointment with the 803-04, 92 L.Ed. I 010 (1948). During confirmation Commission's decision to disallow $1.3 billion of Co- hearings conducted in May 1990, the Texas Senate fully manche Peak costs. The Supreme Court has decided, explored the issue of Meek's conflict. At that time, aware however, that public criticism "is a practice familiar in the of Meek's connections with Fina, the Senate satisfied itself long history of ... litigation," and that while an adminis- that Meek could execute his duties as commissioner im- trator may have an underlying philosophy in approaching a partially and without prejudice in favor of the gas industry. specific case, he or she may still be assumed to be a person Additionally, Meek promised to recuse himself from vot- of conscience and intellectual discipline, capable of judg- ing on any contested issue regarding contracts between ing a particular controversy fairly. Morgan, 313 U.S. at public utilities and Fina, a promise he upheld by not re- 421,61 S.Ct. at 1004. viewing contracts between Texas Utilities and Fina.FN5 The Cities and Public Utility Counsel argue that this FN5. Meek recused himself from voting on three order should be invalidated, relying on American Cyana- issues: (1) finding of fact 172 relating to the rea- mid Co. v. Federal Trade Commission, 363 F.2d 757 (6th sonableness of Texas Utilities' fuel oil inventory, Cir.l966). In American Cyanamicl, the court invalidated a

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commission order because one of the commissioners had sale of fifty percent or more of a public utility's stock.FN6 previously served as counsel for a Senate subcommittee When any one of these transactions takes place, the utility investigating many of the same facts and issues that later *393 must file a report with the Commission, which then came before the commission. The court found that the investigates the transaction to determine whether it is in the commissioner's dual investigative and adjudicative expe- public interest. In making this determination, the Com- riences with the issues involved in the hearing created a mission is to consider the reasonable value of the property, risk that commission decisions might be based on evidence facilities or securities involved. If the Commission finds outside the record. It was the presentation of nonrecord that the transaction was not in the public interest, it must evidence, not the commissioner's personal viewpoints, that "disallow the effect of such transaction if it will unrea- led the court to invalidate the order. American Cyanamid, sonably affect rates or service." PURA § 63. 363 F.2d at 767. In this case, however, appellants base their reqtJest for invalidation of the order on assertions that FN6. Section 63 expressly provides that it shall Meek's personal views about the gas industry made it im- not be construed as applying to the purchase of possible for him to decide the issues fairly. Under the units of property for replacement or to additions circumstances of this proceeding, we cannot agree. to the public utility's facilities by construction.

We do not express any opinion regarding whether In reviewing the costs associated with the construction Meek should have been removed from the Commission of Comanche Peak, the Commission exercised its authority had he not resigned. This Court is limited to the judicial under section 63 to make a disallowance of$908,688,938. review enumerated in APA section 2001.174. We conclude The Commission asserted that it had jurisdiction to make that Meek's involvement with Fina and his opinions about disallowances pursuant to section 63 because Texas Utili- the gas industry have not been shown by the complaining ties' repurchase of certain minority interests in the Co- parties to have resulted in a deprivation of the right to an manche Peak project constituted the purchase of a plant or impartial and fair hearing before the Commission, nor has unit as an operating system for consideration in excess of it been shown that he exhibited bias such that his votes $100,000. Texas Utilities' second motion for rehearing were necessarily arbitrary and capricious. The Cities and filed with the Commission included an assignment of error Public Utility Counsel's first point of error is overruled. stating:

REACQUISITION OF MINORITY INTERESTS The Commission erred in concluding that PURA § 63 All appellants bring points of error related to the dis- controls this Commission's review of [Texas Utilities'] trict court's disposition of the Commission order disal- reacquisition of minority owner interests in Comanche lowing more than $908 million spent to repurchase 12.2 Peak, for the reason that, as a matter of law, PURA § 63 percent of Comanche Peak from minority interest owners does not apply to the transfer between joint owners of and to settle litigation arising from the joint ownership of partial, undivided interests in a plant and does not apply the project. Section 63 of PURA permits the Commission to a plant under construction that is not operating. to disallow certain expenses associated with transactions involving changes in public utility ownership. The Com- When this second motion for rehearing was overruled mission's authority to make disallowances under section 63 by operation of law, Texas Utilities sought review in the is limited to three specific types of transactions: (1) the district court, and continued to maintain that the Commis- acquisition, sale or lease of any plant as an operating unit in sion had improperly applied section 63 to the repurchase of the state of Texas for a total consideration in excess of minority interests in the project. As part of its appeal to this $1 00,000; (2) a public utility's merger or consolidation Court, Texas Utilities contends in its second point of error with another public utility operating in the state; and (3) the

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that the Commission's section 63 review was an error of terests in Comanche Peak. It instead argues that law. the Commission should determine the prudent cost of 100 percent of Comanche Peak, rather [4][5] The Cities, Public Utility Counsel, and the than just 87.8 percent of the plant, in deter- Commission each argue thatTexas Utilities has waived its mining the extent to which the costs of the 12.2 right to challenge the Commission's decision to proceed percent repurchased plant are included in rate under section 63 because it was the utility that initially base. identified section 63 as one of the provisions giving the Commission jurisdiction over the rate-making proceed- The Report goes on to state: ing.FN? Administrative agencies, however, have only those powers that are expressly conferred by statute, together The relevant precedent [for applying§ 63] ... is with those necessarily implied from the authority conferred found in the three dockets in which the Com- or the duties imposed. State v. Jackson, 376 S. W.2d 341, mission approved the CCN amendments re- 344 (Tex. 1964) (citing Stauffer v. City ofSan Antonio, 162 flecting the Company's reacquisition of the Tex. 13, 344 S.W.2d 158, 160 (1961)); Sexton v. Mount minority owners' interests: Docket Nos. 8015, Olivet Cemetef)J Ass'n, 720 S.W.2d 129, 142 8236, and 8736. (Tex.App.-Austin 1986, writ refd n.r.e.). Jurisdiction cannot be conferred upon the agency by the parties before In each of those dockets' fmal orders, the it, but rather must emanate from the statute itself. See Commission envisioned a future § 63 review of Nueces County Water Control & Improvement Dist~ v. [Texas Utilities'] buyback of a minority owner's Texas Water Rights Comm'n, 481 S.W.2d 924, 929 interest.. .. [Texas Utilities] did not file a motion (Tex.Civ.App.-Austin 1972, writ refd n.r.e.) ("If the for rehearing in any of the final orders in the statutes do not grant the board the power to do a thing, then CCN dockets related to the repurchases of the it has no such power."). If the utility's reacquisition of minority owners' interests, even though each of minority interests in Comanche Peak is not one of the the fmal orders envisioned a future § 63 review. specific transactions identified in section 63 of PURA, the Commission has no jurisdiction to make disallowances [6] This Court has the power, as well as the duty, to based on *394 the standards set forth in that section; such review the agency's interpretation and application of a jurisdiction cannot be conferred on the Commission simply statute. See Railroad Comm'n v. Lone Star Gas Co., 599 because the parties have requested or agreed to it. S.W.2d 659, 662 (Tex.Civ.App.-Austin 1980, writ refd n.r.e.) (stating that an agency's duty is to carry forward the FN7. The Examiners' Report notes: directives of statutes, and the courts review agency orders to ensure that statutes are enforced). In reviewing the In the petition and statement of intent initiating Commission's order, we are therefore obliged to determine this docket, [Texas Utilities] requested that "the whether the repurchase of minority ownership interests is a public interest and other findings be made fa- transaction contemplated by section 63 of PURA. If it is vorably" with respect to its repurchases of the not, the Commission had no authority to conduct a section minority owner interests. [Texas Utilities'] 63 review, and we may not uphold that portion of the order. pleading also cited § 63 as one ofthe statutory Accordingly, we first examine the repurchase at issue in provisions granting the Commission jurisdic- this case to determine if it falls within the scope of trans- tion over [Texas Utilities'] application. [Texas actions the Commission is directed to review under PURA Utilities] now contends that§ 63 does not apply section 63. to its reacquisition of the minority owners' in-

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[7] In August 1973, Texas Utilities' corporate prede- 3.01 Ownership: The Parties shall have title to cessors, Dallas Power & Light Company, Texas Power & the Project and Fuel as tenants in common and . Light Company, and Texas Electric Service Company, shall, as co-tenants with an undivided interest signed a memorandum of agreement to design, construct, therein, subject to the terms of this Agreement, and operate the Comanche Peak nuclear power plant. FN8 own the Project and Fuel and have the related Texas Utilities originally intended to own the entire plant, rights and obligations .... (emphasis added). but was required to sell ownership interests in the project in order to receive construction permits from the Nuclear The agreement also contains a provision Regulatory Commission (NRC). In 1974, Texas Utilities whereby the parties to the agreement waive the agreed to allow participation in the ownership of Coman- right to partition their interest in the project. che Peak, thereby eliminating antitrust concerns associated with the issuance of the construction permits. By 1979, FN 10. In exchange for the ownership interest, Texas Municipal Power Agency and Brazos Electrical each minority interest owner agreed to advance Power Cooperative had acquired ownership shares of 6.2 sufficient funds to pay its ownership interest share percent and 3.8 percent respectively. FN9 In 1982, Tex-La of the project's construction and operation costs. Electric Cooperative of Texas became another co-owner of Additionally, each minority interest owner agreed the Comanche Peak project. Because Tex-La had raised to pay its percentage share plus interest of the antitrust issues with the Department of Justice and had accumulated costs of fuel and construction paid filed a petition to intervene in the Comanche Peak antitrust by Texas Utilities before the applicable date of review related to its application for an operating license, closing. The minority interest owners essentially Texas Utilities agreed to sell Tex-La a 4.3 percent interest agreed to assume financial responsibility for a in the project. Before the closing, however, Tex-La re- percentage of the cost of building the plant in duced its purchase to 2.2 percent of the project. The joint · sa1e. FNIO exchange for a corresponding percentage undi- operating agreement was amended to reflect thts vided interest in the completed plant. Once the The Commission granted certificates of public conven- plant was operating, the minority interest owner ience and necessity for all three sales of ownership inter- . the proJect. · FNII was entitled to capacity equal to its percentage ests m · share of Comanche Peak's net effective genera- tion. FN8. Texas Utilities Electric Company ("Texas Utilities") is the principal subsidiary of Texas FN 11. For example, in Docket No. 3589, the Utilities Company (the "Holding Company"), an Commission reviewed the transfer of a four and investor-owned holding company. Texas Utilities one-third percent ownership interest in Comanche was created in 1984 after the merger of Dallas Peak from Texas Utilities' corporate predecessors Power & Light Company, Texas Electric Service to Tex-La Electric Cooperative. Though PURA Company, and Texas Power & Light Compa- section 63 was cited as one of the statutory pro- ny-all Holding Company subsidiaries. visions giving the Commission jurisdiction to review the sale, the Examiners' Report states, FN9. Joint ownership agreements executed with "Because only a portion of [a] joint interest is Texas Municipal Power Agency and Brazos being conveyed, it may not be necessary to com- Electrical Power Cooperative described the ply with § 63 of the Act because it speaks to the ownership of Comanche Peak as follows: transfer of' ... any plant as an operating unit or

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system .... '" Utilities settled with the minority interest owners by re- purchasing their undivided interests in the project.FN 12 The *395 The joint ownership agreement began to deteri- settlement agreements ended all litigation between Texas orate over time. In May 1985, Brazos Electrical Power Utilities and the minority interest owners. The repurchases Cooperative ceased making its contractual payments to were approved by the Commission which, as previously Texas Utilities. In early 1985, Tex-La Electric Coopera- noted, indicated its intention to review the repurchase of tive made several late payments, and thereafter stopped these minority interests under PURA section 63 in the making payments altogether. Texas Municipal Power future rate-making proceedings. Agency continued to make payments, but it made them under protest. Thereafter, the minority interest owners FN 12. The repurchase prices were based on the claimed that Texas Utilities had failed to meet its respon- cost ofbuilding the percentage of the plant owned sibilities under the joint ownership agreement, resulting in by each seller. Therefore, it appears that Texas rising costs, schedule delays, and licensing problems. The Utilities reacquired the interests by reimbursing three minority interest owners contended that they were each minority interest owner the money each had therefore relieved of any obligation to pay their percentage contributed to the construction and operation of costs of the construction and operation of the project. the plant. Additionally, Texas Utilities agreed to repurchase nuclear fuel and transmission facili- Texas Utilities sued for breach of contract, seeking ties, and to reimburse the minority interest own- monetary damages and a declaratory judgment affirming ers' litigation expenses. These payments together the minority interest owners' continuing obligation to pay constitute the settlement costs paid by Texas their share of the plant's remaining costs. The minority Utilities to the minority interest owners. The interest owners filed counterclaims alleging mismanage- Commission reviewed these settlement costs ment of the project, breach of contract, and deceptive trade under PURA section 63 and made the following practices. Faced with mounting litigation costs, Texas disallowances:

Repurchase of 12.2% Ownership Interest $811,342,938 Reimbursement of Litigation Expenses $ 72,684,000 Repurchase of Nuclear Fuel $ 24,662,000 Total $908,688,938 kilowatt than was "reasonable." FNB Accordingly, the As part of Docket 9300, the Commission did in fact Commission disallowed the excess purchase price conduct the section 63 review. The Commission deter- amounting to almost $812 million. The Commission also mined that the repurchase was in the public interest "to the disallowed the utility's reimbursement of the minority extent that [Texas Utilities] paid a reasonable value for the interest owners' litigation costs, amounting to $72.684 repurchased capacity." The Commission found that the million, and $24.662 million of the total consideration paid utility had reacquired the minority interests by paying for the nuclear fuel. $4,765 per kilowatt-the cost of building Comanche Peak. By contrast, the Commission decided that a "reasonable FN13. It does not appear, however, that pur- value" would be $1,865 per kilowatt, the cost ofbuilding a chasing a stand-alone coal plant was an option stand-alone "generic coal plant" with 12.2 percent of available to the utility in its attempts to resolve the Comanche Peak's capacity. As a result, the Commission litigation quagmire that threatened the entire determined that Texas Utilities had paid $2,900 more per project. The utility was required to obtain a li-

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cense for the Comanche Peak power plant; it reasonable utility manager would exercise or could not choose to license 87.8 percent of the choose in the same or similar circumstances capacity and turn to alternative power sources for given the information or alternatives available more capacity. The 12.2 percent was part of the at the point in time such judgment is exercised whole project, and until the dispute with the mi- or option is chosen. nority interest owners was resolved, the entire plant would remain inoperative. If the Commission indeed applied a prudence standard when evaluating the repurchase, the The district court concluded that although review resulting findings of fact are arbitrary and ca- under section 63 of PURA was appropriate, the Commis- pricious because they reflect consideration of a sion made disallowances that were arbitrary and capricious factor legally irrelevant to a review of expend- and not supported by substantial evidence. In two jointly itures under the prudent investment standard. raised points of error, the Cities and Public Utility Counsel See Public Uti!. Comm'n v. South Plains Elec. assert that the district court erred in remanding some of the Coop., Inc., 635 S.W.2d 954, 957 Commission's fmdings of fact and that the Commission (Tex.App.-Austin 1982, writ refd n.r.e.) properly carried out its section 63 review. They do not (citing Starr County v. Starr Indus. Servs., Inc., challenge the propriety of the section 63 review. The 584 S.W.2d 352 (Tex.Civ.App.-Austin 1979, Commission *396 also brings two separate points of error writ refd n.r.e.), for the proposition that an relating to its section 63 review, contending that it properly agency's consideration of a non-statutory factor applied section 63 and that its findings of fact were sup- amounts to arbitrary and capricious action re- ported by substantial evidence. We do not address these quiring reversal); John E. Powers, Agency Ad- points of error because our conclusion that the repurchase judications 165 (1990). The Commission dis- of the undivided minority interests in the plant are not allowed the purchase price to the extent that it transactions reviewable under section 63 renders moot any exceeded the cost ofbuilding a stand-alone coal further controversy about what would constitute a proper plant with capacity equivalent to 12.2 percent disallowance under that provision.FNJ 4 of Comanche Peak's. Building a stand-alone coal plant was not, however, one of the options FN 14. The Cities and Public Utility Counsel ar- available to the utility at the time it made the gue that the standard applied by the Commission repurchase. The purpose of repurchasing the in its section 63 review is identical to the standard minority interests was not to obtain capacity, employed in the typical "prudence review" of a but to eliminate expensive and time-consuming rate-making proceeding, and for that reason the litigation that jeopardized licensing of the en- Commission's findings should be affirmed even if tire project; building or buying a coal plant this Court determines that section 63 is inappli- would not achieve that objective. cable to this transaction. Assuming, without de- ciding, that the standards are the same, we would As previously noted, section 63 applies to three types still reverse the Commission's disallowances be- of transactions: (1) the purchase, sale or lease of a plant or cause they are arbitrary and capricious. In Docket unit as an operating system for consideration in excess of 9300, the Commission adopted the following $100,000; (2) sales ofmore than fifty percent ofthe stock prudence standard: of a public utility; and (3) a merger or consolidation of two public utilities. Texas Utilities' repurchase of the undivided The exercise of that judgment and the choosing ownership interests sold to Texas Municipal Power of one of that select range of options which a Agency, Brazos Electrical Power Cooperative, and

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Tex-La Electric Cooperative falls into none of these cat- 150. For the reasons discussed in Section VII.C. of this egories. Rather than repurchasing a "plant or unit," Texas Report, [Texas Utilities'] repurchases of the minority Utilities acquired the undivided ownership interests of owners' interests in Comanche Peak are consistent with three tenants-in-common. Under the joint ownership the public interest to the extent that [Texas Utilities] paid agreement, the co-tenants had waived any right to partition a reasonable value for the repurchased capacity. the interests, thereby foreclosing the possibility of identi- fying any part of the plant as belonging specifically to any 151. For the reasons discussed in Section VII.C. ofthis co-tenant. The fallacy in the Commission's analysis is its Report, all amounts in excess of the reasonable value of assumption that the minority interests translate into a the repurchased interests should be disallowed from in- complete and independently operable portion of Coman- vested capital as unreasonably affecting rates. che Peak, ownership of which changed hands when the repurchase took place. 152. For the reasons discussed in Section VII.B.2.d. and Section VII.D. of this Report, a reasonable value of the The Cities and Public Utility Counsel argue that ex- repurchased interests in Comanche Peak is $1,856 per cluding the repurchase ofthe undivided interests from the kW. scope of a section 63 review renders the provision mean- ingless. They contend that it is illogical to conclude that "a 153. For the reasons discussed in Section VII.D. of this statute concerned with transactions of at least $100,000 Report, the reasonable value of $1,856 per kW should would not apply to a transaction 1,000 times greater than apply to valuating the repurchased interests in Unit 1 and that amount." This argument fails because the element that Unit 2. triggers section 63 review is not the amount of money involved in the transaction, although the legislature has set 153A. Consistent with an estimated fuel cost for Co- a $100,000 minimum presumably to exclude transactions manche Peak of $11 billion, the test-year-end cost of so small that there is no real risk they will unreasonably $5.938 billion should be used to value the repurchased affect rates or service. Rather, section 63 is concerned with 12.2 percent interest in Unit 1 and an estimated cost of certain types of transactions that result in changes of $5.0 billion should be used to value the repurchased 12.2 ownership of the utility or its operating units to ensure that percent interest in Unit 2. the costs of transactions inconsistent with the public in- terest are not assessed against the ratepayers. We conclude that the Commission erred in reviewing the costs associ- 153B. The plant disallowances related to the repur- ated with the minority interests under PURA section 63. chased 12.2 percent interest in Unit 1 is $462,764,691; the plant disallowance related to the repurchased 12.2 percent interest in Unit 2 is $348,578,247. Taken to- In its final judgment, the district court reversed and gether, the total plant disallowance related to the re- remanded for reconsideration on the existing record the purchased 12.2 percent interest in the entire plant is following specific *397 fmdings of fact related to the mi- $811,342,938. nority interest repurchases:

154. For the reasons discussed in Section VILE. of this 149. For the reasons discussed in Section VII.C.2. of this Report, the $72.684 million in minority owners' litiga- Report, [Texas Utilities] failed to prove that the consid- tion expenses reimbursed by [Texas Utilities] as part of eration it paid for the repurchased 12.2 percent interest in the settlement agreements should be disallowed. the plant was reasonable.

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tion was reasonable from [Texas Utilities'] 156. As modified by Findings of Fact 153A and 153B, perspective. Section VII.F. of this Report indicates the disallowances for Unit 1 and Unit 2, as calculated in Section VI. The Report noted that "it is clear that the mi- (Prudence) and Section VII. (Reacquisition ofMinority nority owner litigation potentially threatened Owner Interests). The total Unit 1 disallowance is the Company's licensing efforts, which in tum $847,004,966; the total Unit 2 disallowance is threatened further schedule delays and cost $534,139,597. Taken together, the total disallowance is overruns on the project. At the time of the set- $1,381,144,563. tlements with the minority owners, the project was incurring approximately $60 to $70 million The purpose of remanding these findings was to allow a month in case requirements and carrying the Commission to reconsider the "reasonable value" it costs. Consequently, a settlement of the mi- assigned the repurchased interests, presumably to make an nority owner litigation was reasonable in order upward adjustment in its $1,856 per kilowatt valuation to to avoid the possibility of any further project reflect the "intangible" benefits of repurchasing the mi- delay and unnecessary expenditures of these nority interests. The district court instructed the Commis- amounts." sion to consider not only the "economic value" of the property and facilities acquired, but also benefits gained FN16. We realize the Commission has already from terminating expensive and time-consuming litigation conducted an overall prudence review of the costs that jeopardized the entire project. We affirm the district associated with the original construction of Co- court's rejection of these findings of fact based on our manche Peak resulting in a disallowance of ap- conclusion that the Commission erroneously reviewed the proximately $537 million. Rather than hold that repurchases under PURA section 63 and failed to evaluate this figure is the appropriate disallowance, we the repurchase price in light of the relevant statutory con- note that the question on remand is not whether siderations. We reverse that portion of the district court's the original construction costs of the 12.2% at judgment affirming the Commission's disallowance of issue here were prudently incurred, but rather $24,662,000 ofthe cost to Texas Utilities of repurchasing whether it was prudent for the utility to repur- nuclear fuel from the minority interest owners. This pay- chase that portion of the plant at its original cost. ment was part of the overall settlement cost and should be reviewed under the prudent investment standard along with FEDERAL INCOME TAX EXPENSE all other costs related to the repurchase. The Commission In points of error seven through ten, the Cities and has already approved the utility's decision to settle the Public Utility Counsel complain that the district court erred dispute with the minority interest owners; FNIS on remand, in affirming the Commission's calculation of the utility's we *398 direct the Commission to consider, under the federal income tax expense. They contend that the Com- prudent investment standard, the price paid for the repur- mission's calculation (1) improperly employed the hypo- chase, including the litigation costs and repurchase of thetical rather than the actual-tax method, (2) failed to nuclear fuel at its original cost.FNI 6 account for tax savings resulting from the utility's consol- idated tax return, (3) did not reflect deductions for actual FN 15. Finding of fact 148 states: interest expense, and (4) failed to reflect deductions taken for below-the-line expenses, including disallowed Co- For the reasons discussed in Section VII.C.l. of manche Peak plant costs. this Report, settling the minority owner litiga-

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[8] We sustain the seventh point of error complaining though it had received any tax benefits a consolidated of the Commission's use of the hypothetical tax method. return would provide. Once the Commission determines The mandate from the supreme court is clear: "The utility's that a consolidated filing would have been, or was, ad- rates must reflect the tax liability actually incurred." Public vantageous to the utility, the Commission must adjust the Uti!. Comm'n v. Houston Lighting & Power Co., 748 utility's tax expense to reflect those savings. If the Com- S.W.2d 439, 442 (Tex.1987). This Court has repeatedly mission does not reduce the utility's tax expense to reflect affrrmed that statement by consistently requiring the the utility's tax savings, it violates the actual-tax doctrine's Commission to employ the actual-taxes-paid doctrine. See underlying principle *399 that rates must be set based on City qf Alvin v. Public Uti!. Comm'n, 876 S. W.2d 346, the utility's actual tax liability. GTE-SW, 833 S.W.2d at 359-60 (Tex.App.-Austin 1994, no writ h.); Cities of 166. Abilene v. Public Uti!. Comm'n, 854 S.W.2d 932, 944 (Tex.App.-Austin 1993, writ requested); Public Uti!. [10] The Commission argues that it was not required Comm'n v. GTE-SW, 833 S.W.2d 153, 159 to allocate any of the tax savings from the consolidated (Tex.App.-Austin 1992, writ granted). Furthermore, filing to the utility because it specifically found that the under the actual-taxes-paid test, "any utility tax savings consolidated filing was not advantageous to the utility. See must benefit ratepayers." Cities of Abilene, 854 S.W.2d at Finding of Fact 331A. In Cities qf Abilene we held that no 945 (emphasis added). In this case, as well, we reject the adjustment to income tax expense is necessary under Commission's refusal to adhere to binding precedent. PURA section 41(c)(2) ifthe Commission finds either (1) that it was not advantageous to the utility to consolidate [9] The Cities and Public Utility Counsel's eighth returns, or (2) that the Commission has computed taxes as point of error asserts that the Commission erred when it though a consolidated return were filed and the utility has failed to adjust its calculation of the utility's tax expense to received its fair share of the savings from the consolidated reflect savings that resulted from the utility's filing a con- return. Cities of Abilene, 854 S.W.2d at 944. In this case, solidated tax return. The Commission rejoins that its deci- the Commission relied on its own conclusion that the util- sion not to allocate any of the savings to the utility was ity's fair share of the savings was zero to support its fmding consistent with PURA section 41 (c)(2) and cases con- that the consolidated return was not advantageous to the struing that statutory provision. Section 41(c)(2) states: utility. We will uphold the Commission's decision only if it properly found that the utility's fair share of the tax savings If the public utility is a member of an affiliated group was zero. that is eligible to file a consolidated income tax return, and if it is advantageous to the public utility to do so, Finding of fact 331D states: income taxes shall be computed as though a consolidated return had been so filed and the utility had realized its The federal income tax savings resulting from the filing fair share ofthe savings resulting from the consolidated of a consolidated federal income tax return should ac- return, unless it is shown to the satisfaction ofthe regu- crue to the entity that provided the tax attributes that latory authority that it was reasonable to choose not to allowed for such savings, and [Texas Utilities] was not consolidate returns. the entity that provided such tax attributes.

Texas Utilities argues that this statute only applies This Court has previously decided that even when it is when the utility has not filed a consolidated return. We the utility's affiliates that have suffered losses and provided disagree. The statute provides that, regardless of whether "the tax attributes that allowed for savings," those savings the utility actually filed a consolidated return, the Com- must be passed on to the ratepayers. GTE-SW, 833 S. W.2d mission must calculate the utility's income tax expense as

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at 167. In finding of fact 331F, the Commission asserts that tion."). We sustain the point of error to the extent that we it would be unfair to allocate to the utility tax savings continue to require the Commission to pass through to resulting from the affiliates' losses because the utility will ratepayers any tax benefits from interest expense deduc- never be responsible for paying the affiliates' taxes when tions. However, the Commission must allocate those sav- "timing differences reverse and those affiliates have taxa- ings between present and future ratepayers, and the proper ble income." Again, this Court has rejected that argument. allocation is within the Commission's discretion. GTE-SW, 833 S. W .2d at 167 n. 16 (inequity resulting from ratepayers' benefitting from tax savings not offset by ob- *400 [13] The Cities and Public Utility Counsel's ligation to pay higher rates in the event of affiliates' gains is tenth point of error contends that the Commission erro- a matter for the legislature to remedy by amending PURA neously excluded tax benefits resulting from be- section 41(c)(2)). Similarly, finding of fact 331H, that low-the-line expenses, including tax deductions related to Texas Utilities should not benefit from tax savings at- expenses disallowed as imprudently incurred. This Court tributed to affiliates because it bears none of the risks has already decided that PURA requires that the Commis- associated with those entities, conflicts with existing sion reduce the utility's income tax expense by the amount caselaw. The Commission's finding that the consolidated of tax deductions, even if they are associated with disal- tax return was not advantageous cannot rest upon its own lowed capital expenses. City of Alvin, No. 3-92-459-CV, improper refusal to allocate any savings to the utility. slip op. at 17 (citing GTE-SW, 833 S.W.2d at 169). We Having rejected several of the fmdings supporting the remain unpersuaded by the Commission's argument that Commission's conclusion that the utility's fair share of the the actual-tax doctrine conflicts with the normalization tax savings is zero, we are unable to uphold that conclu- rules. See City of Alvin, No. 3-92-459-CV, slip op. at 18. sion. There is no indication that each finding is inde- We sustain the tenth point of error. pendently sufficient to support the conclusion. We there- fore sustain the Cities and Public Utility Counsel's eighth BONDED RATES point of error. In their twenty-frrst point of error, the Cities challenge the Commission's authority to allow Texas Utilities to [ll ][12] The ninth point of error objects to the Com- implement bonded rates in both the municipal and mission's failure to adjust the tax expense calculation to non-municipal sections of its service area.FNl? Disposition reflect actual-interest-expense deductions. The Commis- of this point of error requires an interpretation of PURA sion is required to allocate tax savings to ratepayers rather section 43(e). This appeal presents the frrst opportunity for than to shareholders. The actual-tax doctrine requires that this Court to consider the bonded-rate provision of the the ratepayers be held accountable only for "those tax statute since its amendment in 1983. expenses that are actually incurred by a utility." Houston Lighting & Power, 748 S.W.2d at 442. Ifthe utility enjoys FN17. Public Utility Counsel does not join the a tax deduction based on interest expense,. the benefits of Cities in bringing this point of error. that deduction must be passed on to the ratepayers. In City of Alvin, however, we rejected the argument that the When an electric utility wishes to change its rates it Commission must pass on immediately the entire savings must follow the procedures outlined in PURA section related to a utility's tax deductions. City of Alvin, No. 43.FN 18 The utility initiates rate proceedings by filing a 3-92-459-CV, slip op. at 18 ("Section 27(e) of PURA statement of intent to change rates with the regulatory directs the Commission to distribute [tax savings benefits] authority having original jurisdiction. PURA § 43(a). FNI 9 to all ratepayers, however, both present and future. We will In all proceedings involving major rate changes,FN 20 the not interpret Houston Lighting as mandating that present regulatory authority having original jurisdiction must hold ratepayers receive all the benefits of accelerated deprecia-

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a hearing on the proposed rate schedule. PURA § 43(c). areas. The Commission, however, has a 150-day period of Pending the hearing, the regulatory authority may suspend original jurisdiction over its portion of the rate proceeding. implementation of the new rate schedule. If the original In addition, the Commission is allowed two days for each proceeding involves a proposed increase in the rates day of hearings in excess of fifteen days. The practical charged in municipal areas, the municipality holds the result of allowing the Commission a longer period of hearing and has ninety days in which to come to a final original jurisdiction is that it can wait for the municipality decision. If the municipality has made no fmal disposition to issue a final appealable order and then consolidate de of the rate proceeding at the expiration of ninety days, the novo appellate review with its own consideration of the proposed rate schedule is deemed to have been approved same proposed rate increase in non-municipal areas. and the municipality loses jurisdiction over the proceeding. Therefore, the Commission typically exercises its original PURA § 43(d). If an order is issued, any party to the pro- and appellate jurisdiction concurrently. ceeding may seek de novo appellate review in the Com- mission. PURA § 26(a), (g). In these consolidated rate proceedings, the Commis- sion has 150 days plus two days for each day ofhearings in FN18. This discussion focuses on the more typi- excess of fifteen days in which to make a final determina- cal situation in which a utility requests a rate in- tion. When the Commission is faced with a particularly crease rather than a decrease. complex rate proceeding, protracted *401 hearings can mean a utility's proposed rate schedule may not take effect FN19. Original jurisdiction over rate proceedings for a long period oftime.FNZI The term "regulatory lag" is is divided between the governing body of each used to describe the economic consequences of this delay. 22 municipality ("the municipality") and the Com- FN In order to protect utilities from the financial harm mission. Each municipality exercises exclusive engendered by prolonged regulatory lag, PURA section original jurisdiction over electric rates and ser- 43(e) provides that in cases in which the Commission has vices within its corporate limits ("municipal are- failed to render a fmal order within 150 days of the pro- as"), whereas the Commission exercises exclu- posed effective date of the rate increase, the utility sive original jurisdiction over rates and services in all other areas ("non-municipal areas"). PURA § FN21. In this case, for example, there were 203 17(a), (e). In addition, the Commission has ex- days of hearings. This means the utility might not clusive appellate jurisdiction to review each mu- be allowed to increase its rates for as many as 526 nicipality's order in any rate proceeding. PURA § days. 17(d). FN22. "Regulatory lag arises from the loss in FN20. The statute defines a "major change" as an revenue experienced by a utility whose rates are increase in rates that will augment the aggregate in need of upward adjustment during the period revenues of the utility making the rate application between filing an application for a rate increase by more than $100,000 or two and one-half per- and the date when relief is granted." Railroad cent, whichever is greater. PURA § 43(b). Comm'n v. Lone Star Gas Co., 656 S.W.2d 421, 423 (Tex.l983). Because most utilities provide services in both mu- nicipal and non-municipal areas, there is usually a parallel may put a changed rate, not to exceed the proposed rate, proceeding originating in the Commission to consider the into effect upon the filing with the regulatory authority same proposed rate increase as it affects non-municipal of a bond .... The utility concerned shall refund or credit

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against future bills all sums collected ... in excess of the nicipal areas. Section 43(e) specifically states that rate fmally ordered plus interest at the current rate as a utility may not put bonded rates into effect until finally determined by the regulatory authority.FNZJ 150 days have passed. Because the municipality loses its jurisdiction after only ninety days, a FN23. PURA section 3(g) provides that the term utility's right to bonded rates will always arise "regulatory authority" means either the governing after the municipality has lost its original juris- body of any municipality or the Commission, diction over the rate proceeding. depending upon the context in which the word is used. Section 43(e) contains no language that limits the bonding provisions to rates being considered under the PURA § 43(e). This practice is known as "bonding in" Commission's original jurisdiction: rates and is used to relieve the potential financial hardship imposed on a utility while it awaits a final Commission If the 150-day period has been extended, ... and the order on its requested rate increase. commission fails to make its final determination of rates within 150 days from the date that the proposed change [14] In Docket 9300, Texas Utilities requested the would have gone into effect, the utility concerned may same rate increase throughout its entire service area, en- put a changed rate, not to exceed the proposed rate, into compassing both municipal and non-municipal areas. As effect upon the filing with the regulatory authority of a permitted by the 1983 amendments to PURA, the Com- bond .... mission reviewed the proposed rate increase in municipal areas under its appellate jurisdiction at the same time it PURA § 43(e). In support of its contention that the considered the increase in non-municipal areas under its utility may implement bonded rates only for those rates original jurisdiction. When 150 days had passed without subject to the Commission's original jurisdiction, the Cities the Commission's having reached a final determination, the rely on two pre-1983 cases holding that the former version utility decided to implement bonded rates throughout its of section 43(e) did not permit bonded rates in areas under entire service area, and pursuant to PURA 43(e) requested the Commission's appellate jurisdiction. See Lone Star thatthe Commission approve its bond. The Cities objected Gas, 656 S.W.2d at 425; *402Arkansas Louisiana Gas Co. to Texas Utilities' request for bonded rates in municipal (Ark/a) v. Railroad Comm'n, 586 S.W.2d 643 areas, maintaining that PURA prohibits bonded rates in (Tex.Civ.App.-Austin 1979, writ ref'd n.r.e.). We con- municipal areas once the municipality has lost its original clude that the reasoning of those cases is so closely tied to jurisdiction over the rate proceeding. FN24 The Commission the wording of PURA before the 1983 amendments that rejected this argument and determined that PURA's they do not support the Cities' interpretation of amended bonding provision does not prohibit a utility from imple- section 43(e).FNzs menting bonded rates in municipal areas when the under- lying rate increase is subject to the Commission's appellate FN25. Moreover, the supreme court expressly jurisdiction. We conclude that the Commission's interpre- limited the effect of its decision in Lone Star Gas tation ofPURA section 43(e) is correct. to cases arising before September 1, 19 83, the effective date of significant amendments to FN24. When considered in conjunction with other PURA. Lone Star Gas, 656 S.W.2d at 427. provisions of PURA, the Cities' interpretation of section 43(e) leads to the result that a utility will In Lone Star Gas the supreme court recognized the never be able to implement bonded rates in mu- hardship created by PURA's failure to provide for bonded

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rates during an extended period of appellate review, but commented that "any changes in the protection afforded [15] The Commission's interpretation of section 43(e) the utility should be made by the legislature." 656 S.W.2d is entitled to great weight, provided it is reasonable and at 425. Perhaps responding to the court's invitation to act, does not contradict the plain language of the statute. Tar- in 1983 the legislature significantly amended PURA and rant Appraisal Dist. v. Moore, 845 S. W.2d 820, 823 apparently cured this particular hardship. See GTE-8W, (Tex.l993). The Commission's construction of the bonding 833 S. W.2d at 173 (noting that an almost identical bonded provision is consistent with the statutory scheme embodied rate provision in the new Gas Utility Regulatory Act cured in the 1983 amendments designed to facilitate contempo- the problems caused by the utility's inability to implement raneous disposition of system-wide rates in a single pro- bonded rates in municipal areas pending review de novo by ceeding. It also affords the utility protection from regula- the Commission). tory lag through bonded rates, whether inside or outside city limits. Nothing in the statute itself or the relevant case Without the ability to bond in rates, a utility's only law supports the Cities' restricted reading of section 43(e). avenue for relief from regulatory lag in city rates, tradi- We overrule the Cities' twenty-first point of error. tionally the lion's share of its service area, would be to request interim rates. See PURA § 26(g) (allowing the RATE BASE ALLOWANCES Commission to authorize interim rates if "necessary to In points of error two through four, the Cities and effect uniform system-wide rates"). This would necessitate Public Utility Counsel complain that the district court a bifurcated process of considering the request for interim improperly upheld various aspects of the Commission's city rates while contemporaneously implementing bonded order on rehearing relating to the prudence phase of the rates outside city limits. Such an inefficient and unwieldy rate-making proceeding. Specifically, they contend that the process undermines the amended statutory scheme de- Commission's disallowance of Comanche Peak costs is signed to consolidate consideration of system-wide rates in contrary to substantial evidence and inconsistent with the one proceeding. Furthermore, interim rates that require a Commission's factual determinations regarding the insuf- hearing do not provide relief from regulatory lag equiva- ficiency of Texas Utilities' proof and with Texas law re- lent to the bonding provision which permits implementa- garding the burden of proof. The Cities and Public Utility tion of new rates without Commission approval, subject Counsel assert that reasonable minds could not reach the only to a bond adequate to ensure possible refunds. We see decision arrived at by the Commission regarding the rea- no suggestion in the amended version of section 43( e) that sonable cost of Comanche Peak, and that the Commission utilities should be limited to seeking interim rates to cure failed to disallow imprudent project costs as required by • • • · · FN26 regulatory lag m areas servtcmg ctttes. statute. See PURA §§ 39, 41.

FN26. It is more sensible to view interim rates In August 1972, Texas Utilities announced its plan to and bonded rates as separate and independent build Comanche Peak, its first *403 nuclear power plant. methods by which a utility may obtain rate relief In 1977, the utility estimated that Comanche Peak Unit 1 in its entire service area, rather than alternative would be commercially operable in 1981, and Unit 2 procedures for setting rates inside and outside city would achieve commercial operation in 1983. The total limits. A utility might first request interim rates in estimated cost ofthe project was $1.7 billion, including an order to avoid posting a large bond. If the Com- allowance for funds used during construction (AFUDC). mission did not approve the interim rates, the However, Unit 1 did not become commercially operable utility could then post a bond, which it would risk until August 1990. At the rate-making proceeding, the losing entirely or in part if final rates set by the examiners attributed this substantial delay to Texas Utili- Commission were lower than the bonded rates. ties' inability to obtain an operating license from the NRC.

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See Examiners' Report at 5.FN27 lowed based on Nielsen-Wurster's findings that the utility acted imprudently in discrete instances during the life of FN27. In March 1984, the NRC formed a Tech- the project. The Commission reviewed the evidence pre- nical Review Team to identify and resolve all sented by the parties and general counsel and determined regulatory issues raised by Texas Utilities' at- that $537.90 million of Comanche Peak costs were im- tempt to obtain an operating license. The utility, prudently incurred and should be disallowed. in turn, created the Comanche Peak Response Team to assess and resolve any issues raised by To support the assertion that the Commission erred in the Technical Review Team. In January 1985, the the prudence phase of Docket 9300, the Cities and Public Technical Review Team issued a letter suggesting Utility Counsel make three basic points: (1) Texas Utilities that Comanche Peak was deficient in the areas of did not sustain its burden of proof on the prudence of its quality assurance and quality control. In response, Comanche Peak expenditures, (2) Texas Utilities did not the utility formed the Design Adequacy Program properly quantify its imprudent Comanche Peak costs, and and the Corrective Action Program to address the (3) the Nielsen-Wurster report does not constitute sub- NRC's concerns and ensure that Comanche Peak stantial evidence to support the Commission's determina- received an operating license. The NRC issued a tion of which Comanche Peak costs were imprudently license for Comanche Peak Unit 1 in February incurred. Taken together, these points assert that the evi- 1990. dence presented during 203 days of hearings cannot sup- port the Commission's fmal order with respect to disal- Docket 9300 addressed the prudence of costs incurred lowances. See APA § 2001.174(2)(E); Te.:ws Health Fa- by the utility in responding to the NRC's concerns; the cilities Comm'n v. Charter Medical-Dallas, Inc., 665 utility engaged in an unprecedented revalidation and re- S.W.2d 446,452-53 (Tex.l984). inspection program which caused Comanche Peak costs to nearly double. The Commission, which heard three ex- [16][17][18][19] In conducting a substantial evidence planations for these costs, was charged with determining review, we must determine whether the evidence as a which costs were prudent. Texas Utilities contended that whole is such that reasonable minds could have reached the NRC unforeseeably and unreasonably applied stricter the conclusion the agency must have reached in order to licensing standards to Comanche Peak, forcing the utility take the disputed action. Charter Medical, 665 S.W.2d at to implement an expensive and time-consuming revalida- 453. We may not substitute our judgment for that of the tion and reinspection program in order to obtain an oper- agency and may consider only the record on which the ating license. The utility took the position that all of these agency based its decision. Texas State Bd. of Dental Ex- were regulatory costs that should be included in rate base. aminers v. Sizemore, 759 S.W.2d 114, 116 (Tex.l988), At the other end of the spectrum, the Cities and Public cert. denied, 490 U.S. 1080, 109 S.Ct. 2100, 104 L.Ed.2d Utility Counsel argued that imprudent project management 662 (1989). The party bringing the appeal bears the burden caused the NRC to lose confidence in Comanche Peak's of showing a lack of substantial evidence. Charter Medi- safety, and that all post-19 84 costs incurred in responding cal, 665 S.W.2d at 453. If substantial evidence would to these concerns should be disallowed as imprudent. The support either affirmative or negative fmdings, we must Commission's general counsel, supported by an evaluation uphold the agency's order, resolving any conflict in *404 conducted by the Nielsen-Wurster Group, an independent favor of the agency's decision. Auto Convoy Co. v. Rail- auditor, concluded that Texas Utilities' inability to obtain road Comm'n, 507 S.W.2d 718,722 (Tex.1974). an operating license resulted from the NRC's significant, but unfounded, quality concerns. The general counsel [20] The Cities and Public Utility Counsel essentially maintained that certain costs should, however, be disal- argue that because the Commission was not persuaded by

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the utility's argument that all Comanche Peak costs were to utility imprudence and those that would have been prudent, and because the utility then failed to quantify the necessary absent any imprudence. They assert that in order impact of its imprudence by identifying costs related to to provide evidence sufficient to support the Commission's imprudent management, the Commission was required to order, either the utility or Nielsen-Wurster was required to disallow all of these expenditures.FN 28 We do not agree. "produce a breakdown ofthe Company's post-March 1985 The Commission determined the evidence presented by the expenditures, disaggregated between those that were 're- parties did not provide an accurate foundation on which to medial' and those that would have been incurred even base its disallowance decisions. It therefore turned to the absent the prolonged licensing delay." The argument urged report prepared by the Nielsen-Wurster Group. Niel- on appeal is that once the Commission has determined the sen-Wurster had previously performed twelve compre- utility's evidence is insufficient to demonstrate that all hensive prudence reviews of other nuclear plants, eight for expenditures were prudently incurred, the utility must then commissions and four on behalf of utilities, before it was "isolate out the costs associated with its imprudent con- retained by the Commission to evaluate the planning and duct" in order to avoid having the Commission disallow all management of Comanche Peak. After an extensive in- the costs incurred. FN29 In support of their argument, the vestigation, Nielsen-Wurster offered its findings in ten Cities and Public Utility Counsel direct this Court to Coa- days of testimony presented by five expert witnesses. lition of Cities v. Public Utility Commission, 798 S. W.2d 560, 563-64 (Tex.1990), cert. denied, 499 U.S. 983, 111 FN28. The Commission rejected several of Texas S.Ct. 1641, 113 L.Ed.2d 736 (1991 ), in which the supreme Utilities' attempts to justify costs associated with court stated that "[a] party who fails to meet its burden of Comanche Peak. For example, the Commission proof loses." In Coalition of Cities, the utility "lost" be- found: ( 1) the plant cost comparisons tendered by cause neither the utility nor any other party satisfied the the parties were not credible for purposes of es- Commission that $1.453 billion in expenditures were tablishing a reasonable cost, (2) the cost variance prudently incurred. Nowhere does the supreme court state analysis tendered by the utility had limited, if any, that a utility must segregate imprudent costs. When a util- value in a prudence review of Comanche Peak, ity fails to persuade the Commission of the wisdom of all (3) the schedule variance analysis tendered by the its expenditures, that does not preclude the Commission utility did not credibly evaluate the post-March from considering the other evidence presented in the 1985 schedule extensions, and (4) the present rate-making proceeding. Indeed, it is the Commission that value revenue requirements analysis and capital is charged with sifting through the evidence and deciding cost correction analysis tendered by Texas Utili- whether imprudent conduct caused certain expenditures. ties were improper methodologies for quantifying Having reviewed the utility's evidence and the Niel- the impact of a seven-month delay. However, the sen-Wurster report, *405 the Commission determined that Commission's fmal order shows that it did accept $90.5 million of the Comanche Peak Response Team ex- much of Texas Utilities' and the Nielsen-Wurster penses and $79.9 million ofthe Corrective Action Program Group's evidence supporting the prudence of a expenses were imprudent. The Commission made further variety of decisions related to the overall con- disallowances for other imprudent conduct associated with struction and management of Comanche Peak. the delay in licensing; it disallowed $54.1 million in time-driven indirect costs and $167.3 million in AFUDC. The Cities and Public Utility Counsel argue that the evidence presented by Nielsen-Wurster cannot serve as a FN29. This Court has previously rejected similar proper foundation for Commission decision-making be- arguments. In City of El Paso v. Public Utility cause it does not provide a sufficiently detailed breakdown Commission we held: of all Texas Utilities' expenditures identifying those related

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Requiring the Commission to adopt or reject reasonable minds could not have come to that decision witnesses' testimony in toto, especially when based on this record. Charter Medical, 665 S.W.2d at 453. the testimony concerns a multi-faceted issue such as [prudence], would hobble the Com- The Cities and Public Utility Counsel also complain mission's ability to assess each witness and that the Commission improperly applied a "sliding" render its decision based solely on the testi- standard of prudence, assigning degrees of imprudence to mony it found credible. utility decisions and making disallowances only when the imprudence reached a certain level or degree. After re- City of El Paso v. Public Uti!. Comm'n, 839 viewing the record we believe this criticism is unfound- S.W.2d 895, 906-07 (Tex.App.-Austin 1992, ed.FN30 The Commission determined that the costs associ- writ granted). ated with responding to NRC concerns were necessary in part because of utility imprudence and in part because of The Commission rejected Texas Utilities' claim that the NRC's application of higher safety and inspection the costs associated with the reinspection and revalidation standards in the face of mounting concerns about the safety program were entirely due to higher regulatory standards; of nuclear power plants in general. The Commission's it similarly rejected the Cities and Public Utility Counsel's finding of fact 138 expresses this conclusion.FN31 The contentions that all such costs should be disallowed as Examiners' Report notes that Texas Utilities' conduct was imprudent. The Commission accepted the Niel- not the sole reason for the expenditures necessary to regain sen-Wurster study as evidence that some, but not all, ofthe the NRC's confidence. The Commission then made partial expenditures were imprudently incurred. The Commission disallowances for the costs of the remedial action program, found that the NRC's Technical Review Team findings on not the wholesale disallowances recommended by the the plant's condition were partly unfounded, although they intervenors. After a careful and thorough review of all the did identify weaknesses in the pre-1985 quality assurance evidence presented in 203 days of hearings, the Commis- program. The Commission also concluded that the growth sion made fmdings of fact and conclusions oflaw based on of regulatory requirements increased the cost and extended that review. For each finding of imprudence in the con- the construction schedule beyond Texas Utilities' control. struction and management of Comanche Peak, the Com- These findings are supported by testimony adduced during mission *406 made a disallowance for the associated the rate-making proceeding and provide substantial evi- costs.FN32 The Commission also made significant disal- dence upon which the Commission could base its decision lowances for the cost of the delay in licensing, reflecting its to examine all the costs in detail and make discrete disal- opinion that the utility's imprudence was partially respon- lowances associated with imprudent conduct. sible for that delay.

The Cities and Public Utility Counsel vigorously as- FN30. The Cities and Public Utility Counsel base sert that the Commission erred in not making any disal- their argument on the following statement con- lowance for the costs of executing the Corrective Action tained in the Examiners' Report: "Although the Program. However, the Commission determined that alt- examiners conclude that certain [Texas Utilities] hough the imprudence of the utility was partially respon- management decisions were imprudent and un- sible for the need to carry out the Corrective Action Pro- doubtedly contributed to the Company's licensing gram, the changed regulatory climate would have made problems, they do not find that those practices rise such a program necessary even in the absence of utility to the level of imprudence which would justify a imprudence. The Commission's findings are presumed to substantial disallowance of Comanche Peak be supported by substantial evidence, and the Cities and costs." That the Report expresses only the view Public Utility Counsel have failed to demonstrate that that not all costs should be disallowed because

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they were not all occasioned by utility impru- in the necessity to incur all of the post-1984 dence is clarified by the examiners' careful ex- costs. planation of their position: FN31. Finding of fact 138 states: "As discussed in True, certain unreasonable conduct unques- Section VI.Q.2. of this Report, the evidence does tionably contributed to the NRC staffs shift in not support imprudence disallowances of the position with respect to its expectation of proof, magnitude proposed by the intervenors." as reflected in the Third Technical Team letter, but other circumstances also contributed to this FN32. The Commission made the following dis- change in position. In other words, the impru- allowances: dent conduct of [Texas Utilities] did not result

Item Amount (Millions of Dollars)

Electrical Labor 51.3 Electrical Penetration Assemblies 16.2 Electrical Switchgear 4.1 Heating, Ventilation & Air Conditioning 60.1 Reactor Pressure Vessel Supports .4 Diesel Generators 10.6 DAP Root Cause Analysis 3.2 CPRT Start-Up Costs 90.5 CAP Start-Up Costs 79.9 Construction Permit Lapse .2 TOTAL $316.5 451. The Cities and Public Utility Counsel contend that The Cities and Public Utility Counsel next contend findings of fact 13 8 through 152 are "ultimate" findings by that the Commission's order is improper because it is not which the Commission fulfills its statutory obligation to supported by underlying findings of fact. We understand exclude from rate base all imprudently incurred post-1985 their complaint to be that the findings of fact do not meet remedial costs, and as such they require underlying find- the requirements of the APA. See APA § 2001.14l(d) ( ings of fact. FNJJ "Findings of fact, if set forth in statutory language, must be accompanied by a concise and explicit statement of the FN33. We limit our discussion to findings of fact underlying facts supporting the findings.") The supreme 138, 139, and 140. The Cities and Public Utility court has concluded that an agency's findings of fact need Counsel waive any separate attack on findings of the additional support of findings of underlying facts only fact 141 and 142 in their brief, stating that they when the findings are stated in terms taken directly from consist primarily of calculations that "fall out" of the enabling legislation or when they "represent the criteria the three previous fmdings. We understand this to that the legislature has directed the agency to consider in mean that if the three preceding findings are suf- performing its function." Charter Medical, 665 S.W.2d at ficient, there is no independent reason that fmd-

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ings offact 141 and 142 are improper. Findings of the magnitude proposed by the intervenors. fact 143 through 152 are addressed separately in this opinion. *407 139. As discussed in Section VI.Q.2. of this Re- port, the costs of executing the Comanche Peak Re- [21] We first consider whether the findings of fact at sponse Team and Corrective Action Program were issue are indeed "ultimate fmdings." In City of El Paso, prudent. this Court stated that although PURA does not expressly require the Commission to make a fmding of prudence 140. As calculated in Section VI.Q.2. of this Report, the before including costs in rate base, once the Commission total imprudent costs incurred by [Texas Utilities] finds a major project to have been imprudently planned or through the end of the test year is $537.9 million, which managed, it should generally disallow project costs to the allocates $382.05 million to Unit 1 and $155.85 million extent of the imprudence. City qfEl Paso, 839 S.W.2d at to Unit 2. 908.FN 34 A determination that an expenditure is imprudent carries the legal consequence of its exclusion from rate To meet the criteria set forth in Charter Medical and base. Such a fmding must be supported by underlying City of El Paso, these findings must be accompanied by findings because it embodies one of the criteria the Com- underlying fmdings connecting evidence to the conclu- mission must consider in deciding whether to include the sions expressed in the Commission's ultimate fmdings. In particular expenditure in rate base. support of finding of fact 138, the Examiners' Report ex- plains that the utility should not be prohibited from in- FN34. This Court held: cluding any ofthe costs of the remedial action program in rate base because other factors contributed to the NRC's The "statutory language" to which [AP A § application of stricter regulatory standards. See Examiners' 2001.141 (d) ] refers is the language in the Report at 169. Those other factors are also identified in the statute that confers authority on the agency to Report: "On balance, although the inspection standards take the complained-of action. In PURA, the and procedures applied by the Technical Review Team legislature authorized the Commission to make were the same as those previously used by the project's orders setting rates. A number of PURA's sec- quality control inspectors, the Technical Review Team tions also detail the criteria the Commission is conducted its inspections and scrutinized its inspection to consider in setting rates. Therefore, only results at Comanche Peak in a manner as never before." when the Commission's findings are stated in See id. at 124. These findings support the Commission's PURA's express terms, or when they represent decision not to make the wholesale disallowances pro- criteria the legislature has directed the Com- posed by the intervenors. Nie1sen-Wurster did not rec- mission to consider, must the Commission also ommend disallowing any costs related to the post-effective make findings ofunderlying fact. date execution of the response team or the corrective action program. See Examiners' Report at 139.FN35 Finding of fact City qf'El Paso, 839 S.W.2d at 908 (citations 140 expresses the Commission's final calculation of total. omitted) (emphasis added). imprudent costs incurred by the utility through the end of the test year. These calculations are supported by extensive explanations in the Examiners' Report as well as specific [22] The following findings of fact are here at issue: findings of fact in the order on rehearing for each element of the total disallowance. We reject the Cities and Public 138. As discussed in Section VI.Q.2. of this Report, the Utility Counsel's contention that fmdings of fact 138, 139, evidence does not support imprudence disallowances of and 140 are not adequately supported by underlying fmd-

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ings of fact. After careful review and consideration of all the ar- guments raised by the Cities and the Office of Public FN35. The Report also provides several refer- Utility Counsel, we overrule points of error two through ences to the administrative record including pages four. 28200-28204 ofthe statement of facts. COMANCHE PEAK RESPONSE TEAM DELAY Finally the Cities and Public Utility Counsel challenge In its first point of error, Texas Utilities complains of the Commission's failure to impose specific disallowances the Commission's disallowance of $194.4 million repre- flowing from its finding that the utility imprudently failed senting costs associated with an imprudent seven-month to infuse its senior management with personnel having the delay in Comanche Peak construction. Each of the utility's appropriate nuclear experience. During the rate-making arguments advanced under this point of error, however, proceedings the examiners determined that it was impos- was presented to the Commission*408 during the sible to state generally the effect of this lack of nuclear rate-making proceeding and rejected with adequate ac- experience; rather, as in the entire prudence review, the companying findings supported by substantial evidence. examiners proposed an examination of the utility's discrete We decline to substitute our judgment for that of the actions and decisions throughout the project. The Com- Commission, and will overrule the point of error. mission adopted the examiners' reasoning and made dis- allowances for costs associated with imprudent manage- The utility first argues that there is not substantial ment. FN 36 These disallowances represent the Commission's evidence to support the Commission's fmding that Revi- exercise of its discretion in determining rate base; the sion 2 to the Comanche Peak Response Team Program findings are not arbitrary or capricious or unsupported by Plan was not a reasonable licensing response. To the con- substantial evidence. trary, the Commission relied on evidence that the NRC Technical Review Team letter, issued on January 8, 1985, FN36. For example, the Commission found that marked a distinct departure from the NRC staffs previous Texas Utilities management's lack of nuclear position on Comanche Peak's licensability, and that the experience caused the imprudent decision to Comanche Peak Response Team did not adequately ad- discontinue the integrated cube schedule and im- dress the outstanding licensing issues raised by the Tech- plement a start-up driven schedule in May 1980. nical Review Team until the issuance of Revision 3 in This led to reduced productivity in electrical craft January 1986. Findings ofFact 105, 109. The Commission labor from June 1980 to September 1981. See further found that Revision 2 should have included a Findings of Fact 40, 41, 42. Accordingly, the sampling methodology equivalent to that ultimately in- Commission disallowed $51.3 million in electri- cluded in Revision 3. Finding of Fact 111. The Commis- cal craft labor costs. The Commission also dis- sion relies on the Examiners' Report to further explain its allowed $90.5 in costs expended in developing an finding: effective Comanche Peak Response Team pro- gram plan and $79.9 million in start-up costs as- [Texas Utilities'] contention that it could not anticipate sociated with the Corrective Action Program, the unacceptability of the Revision 2 sampling method- having concluded that these costs arose from ology until after it filed Revision 2 is a red herring. The management's imprudent decision to discontinue strongly worded third Technical Review Team letter its comprehensive policy of updating original suggested a possible programmatic quality assur- design drawings. See Findings of Fact 78, 79. ance/quality control breakdown, a position never before expressed by the NRC staff.

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path activity during this period was not the sampling-based Examiners' Report at 133. The utility simply failed to CPRT activities but instead was the 100 percent design convince the Commission that, as it reasserts in its brief, "it validation of piping and pipe supports .... " This Court is had every reason to believe that the entire program under bound by the Commission's determination as to the weight Revision 2 ... would be acceptable to the NRC." The Ex- and credibility of the evidence. As long as there is sub- aminers' Report outlines many of the same arguments the stantial evidence in the record supporting the Commis- utility now makes on appeal and explains its rejection of sion's decision, we will not disturb its findings. Suburban those arguments in light of conflicting evidence and pro- Uri!. Corp. v. Public Uti!. Comm'n, 652 S.W.2d 358, 364 posals and recommendations made by the Commission's (Tex.l983) (holding that the agency's action will be sus- staff. tained if the evidence is such that reasonable minds could have reached the conclusion that the agency must have reached in order to justify its action). [23] The utility next argues that even if there was a delay in preparing an adequate response plan to NRC concerns, the delay had no impact on project duration The utility next argues that the work performed pur- because the project schedule was controlled by a design suant to Revision 2 would have *409 been necessary under validation of piping and pipe supports that began in Revision 3, and thus failure to adopt Revision 3 until mid-1985. Again, the Commission specifically rejected January 1986 had no effect on the project schedule. To this argument when it was presented at the rate-making support this argument, the utility asserts: "There is no proceeding. evidence in the record that [work performed pursuant to Revision 2] was not necessary under Revision 3." They point to record evidence that work performed in accord- [T]he examiners reject [Texas Utilities'] argument that ance with Revision 2 during the seven-month period was the delay in formulating an adequate Comanche Peak productive, useful, and necessary under the subsequent Review Team Program Plan did not delay the comple- Revision 3. The fact that work performed was productive, tion of Units I and 2. First, the Comanche Peak Review useful, and necessary does not, however, foreclose the Team-the initial vehicle by which the Company sought possibility thaV activities dictated by Revision 3 could to assure licensability---constituted the critical path ac- have, and should have, been carried out contemporane- tivity for both units during this period. Therefore, any ously with the necessary Revision 2 activities. In other imprudent delay in formulating an acceptable Comanche words, nothing in the record states that the Revision 3 work Peak Review Team Program Plan delayed fuel load .... could not have begun until all the work done under Revi- [Texas Utilities] argues that the I 00 percent design re- sion 2 was completed. The Commission specifically found validation of large bore pipe and pipe supports, which that Revision 3 greatly expanded the scope of the Co- commenced sometime in mid-1985, constituted the manche Peak Review Team effort. This supports a finding critical path activity with respect to Unit I at this time. that the failure to expand the scope sooner caused delay in This argument, however, is contradicted by the direct completing the project. testimony of [Texas Utilities] witness Mr. Manzi, who stated the Comanche Peak Review Team's activities paced the project's schedule through early 1987. Finally, the utility argues that even if the failure to implement Revision 3 until January 1986 caused delay in completing Comanche Peak Unit I, it had no effect on the Examiners' Report at 134 (emphasis added). Again, completion of Unit 2. Again, we need look no further than the Commission's decision is supported by record evi- the Examiners' Report for references to evidence support- dence. In its brief, the utility asserts: "The Commission ing the Commission's decision: "Unit 2 delay costs oc- improperly rejected the [utility's] evidence that the critical curred in the same manner as those for Unit I; both were

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equally affected by the licensing quagmire in which the the utility to present evidence in the rate-making pro- entire project found itself. [Texas Utilities] witness Mr. ceeding to justify the inclusion of CWIP in rate base. FN 37 Nace agreed that the licensing issues facing Unit I also Rule 21.69(a) provided: faced Unit 2." Examiners' Report at 134. The substantial evidence standard is well established. Charter Medical, FN37. Public Utility Counsel attempts to join the 665 S.W.2d at 452. We may not reweigh the evidence in Cities in bringing this point of error. However, order to come to a conclusion different from the Commis- because its motion for rehearing filed with the sion's. Texas Utilities' arguments on appeal are nothing Commission does not raise this claim, it has more than a restatement of arguments and evidence con- waived the right to raise it on appeal. AP A § sidered by the Commission and rejected in favor of other 2001.171 (requiring a party to a contested case to evidence and recommendations. We will not presume to exhaust administrative remedies before seeking substitute our judgment for that of the agency, but rather judicial review). uphold its findings that are reasonably supported by sub- stantial evidence. Texas Utilities' first point of error is Any utility filing an application, petition, or statement of overruled. intent to change its rates in a major rate proceeding must file all of its evidence, including the prepared testimony INCLUSION OF CWIP IN RATE BASE of all of its witnesses and exhibits, on the *410 same date [24] As part of Docket 9300, the Commission deter- that such application, petition, or statement of intent to mined that the utility should be allowed to include some change its rates is filed with the commission .... A utility "construction-work-in progress" (CWIP) costs in rate base. filing for a change in rates shall be prepared to go for- The term "CWIP" refers to money dedicated to facilities ward at a hearing on the data which have been previously that are currently under construction. Because it is a submitted and sustain the burden of proof of establishing state-regulated monopoly, a utility has the responsibility to that its proposed changes are just and reasonable, and the provide utility service that meets public demand. In a material submitted as the filing and supporting work growing market, therefore, a utility must continually ex- papers shall be of such composition, scope, and format pand to create greater capacity and must replace existing so as to serve as the utility's completed case. facilities as they wear out or become obsolete. Although 16 Tex.Admin.Code § 21.69(a) (1993) (since amend- these projects require huge capital outlays, PURA does not ed).FN38 The Cities argue that Texas Utilities did not in- allow a utility to include these costs in rate base until the clude CWIP as a basis for rate relief in its request for a completed facility becomes "used and useful in rendering rate increase filed on January 16, 1990. They assert that, service to the public." PURA § 39(a). Before completion in fact, the utility affirmatively disavowed an intention of a project, the utility includes these construction costs in to request CWIP in the upcoming rate-making pro- a separate CWIP account. A utility may be permitted to ceeding. The Cities allege that the utility's testimony include some CWIP costs in rate base as an exceptional regarding the amount of CWIP necessary to maintain its form of rate relief upon a showing that their inclusion is financial integrity in the face of proposed disallowances necessary to the utility's financial integrity. PURA § 4l(a). came as a complete surprise to the Cities and other par- In its order on rehearing, the Commission allowed the ties to the proceeding and was tantamount to the utility utility to include $695,177,625 of CWIP in rate base. In changing the basis of its request for a rate increase in three points of error, the Cities and Office of Public Utility contravention ofRule 21.69(a). Counsel challenge this decision. FN38. The Commission established this rule In its eleventh point of error, the Cities contend that pursuant to PURA section 43(a) which provides: the Commission violated Rule 21.69(a) when it allowed

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rate increase, a very likely occurrence in any rate-making The statement of intent [to change rates] shall proceeding. Even though the utility's conditional request include proposed revisions of tariffs and for inclusion of CWIP in rate base appears to improperly schedules and a statement specifying in detail treat CWIP as a means to offset the Commission's disal- each proposed change, the effect the proposed lowance of imprudent expenditures, it nevertheless satis- change is expected to have on the revenues of fies the notice requirement of Rule 21.69(a) by announcing the company, the classes and numbers of utility that the utility intended to request inclusion of CWIP in customers affected, and such other iriformation rate base if disallowances were recommended. Though the as may be required by the regulatory authori- utility did not indicate what level of CWIP it would seek it ' ty's rules and regulations. was hardly in a position to do so before the rate-making proceeding began. We reject the Cities' contention that they did not know the utility would seek inclusion ofCWIP PURA § 43(a) (emphasis added). in rate base until the final stages of the proceeding. The Cities' eleventh point of error is overruled. We disagree with the Cities' characterization of the utility's position on CWIP presented in its rate filing In their twelfth point of error, the Cities and Public package. Schedule C-4.1, included in the rate filing Utility Counsel assert that the Commission rewarded the package, stated, "The Company is not requesting any utility's imprudence by making CWIP allowances to offset construction work in progress in rate base, as discussed in the disallowances of imprudent expenditures. Although the the testimony of Mr. H. Dan Farell." Through Mr. Farell's utility announced its decision to seek CWIP only if its rate testimony, the utility explains: request was substantially disallowed, we believe the Commission applied the proper standard for including In this particular case ... a relatively large level of CWIP CWIP in rate base. The Commission *411 determined that attributable to Comanche Peak Unit 1 as of June 30 ' over $2 billion of Comanche Peak Unit 2 CWIP was pru- 1989, is being transferred to rate base as electric plant in dent and could be included in rate base to the extent nec- service. Provided the Company's requested rate base essary to preserve the utility's fmancial integrity. Finding and cost of service levels are approved, the Company of Fact 169. The examiners recommended that sufficient will have a reasonable opportunity to reverse the nega- CWIP be included in rate base to allow the utility to re- tive trends and begin to restore the previously discussed cover up to 80 percent of its requested rate increase. In financial integrity measures to acceptable levels without their report the examiners explained: the inclusion of CWIP in rate base. However, as dis- cussed subsequently in conjunction with the overall cost Including CWIP in rate base may appear to offset any of capital, any material reductions in the Company's prudence disallowance and require the ratepayers to in- requested rate base or cost of service will require re- demnify the shareholders. However, in reality, the in- consideration of the issue, and may well make inclusion clusion of CWIP in rate base does not offset a prudence of some level of CWIP in rate base necessary. disallowance. Instead, it reflects a policy determination that in order to save the Company's financial integrity so (emphasis added). We are satisfied that the utility that the utility may continue to provide reliable service, provided adequate notice of its intent to seek inclusion of the ratepayers should pay now what they would soon pay CWIP in rate base in the rate-making proceeding. The anyway but in greater amounts. utility did not represent that it would not request CWIP at all, but rather that it would seek to include CWIP in the Examiners' Report at 218. The Commission based its event the Commission materially disallowed its proposed decision to allow CWIP in rate base on this reasoning

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along with the utility's testimony regarding the need for it found necessary to maintain financial integrity remains CWIP in rate base to preserve the company's financial the benchmark in light of this reexamination. A conse- integrity. Conclusion of Law 59. We conclude that the quence of our remand is to moot the Commission's CWIP Commission included CWIP in rate base to accomplish its findings because they were calculated pursuant to erro- proper purpose, consistent with the statutory requirements. neous disallowances. We do not, therefore, address the See PURA § 4l(a).FN39 Consequently, we overrule the thirteenth point of error challenging the adequacy of the Cities and Public Utility Counsel's twelfth point of error. Commission's findings to support a CWIP allowance that is now immaterial. Similarly, we do not address the Cities FN39. That CWIP allowances were not made as a and Public Utility Counsel's fourteenth and fifteenth points direct dollar-for-dollar offset of imprudence dis- of error which attack a specific fmding of fact regarding allowances is clear when comparing the total the CWIP allowance. disallowance for Comanche Peak Units I and 2, $1,381,144,563, with the amount of CWIP in- GAS RECONCILIATION cluded in rate base, $695,177,625. This is con- [25] In their sixteenth and seventeenth points of error, sistent with the Commission's obligation to in- the Cities and Public Utility Counsel complain of error in clude CWIP in rate base only to the extent nec- the Commission's determination of the proper measure of essary to ensure the utility's financial integrity. imprudent costs associated with Texas Utilities' purchases of gas from Texas Utilities Fuel Company (the "Fuel The thirteenth point of error asserts that the Commis- Company"). sion failed to make proper underlying findings of fact to support its decision to include $695,177,625 of CWIP in Part ofDocket 9300 involved the reconciliation of fuel rate base. The Commission set this figure based on its costs incurred by Texas Utilities during the period from conclusion that the utility required a rate increase of 10.1 April 1, 1983, to June 30, 1989. Fuel reconciliation is a percent, or $442,353,160, to maintain financial stability. term used to describe periodic adjustments to a utility's We have already determined that this order must be re- *412 fuel costs made to account for the difference between manded to the Commission to reconsider disallowances previously anticipated costs and actual, reasonable costs associated with the 12.2 percent of the project repurchased incurred. The Commission makes these adjustments on a from the minority interest owners. The Commission will periodic basis because of the practical difficulty of decid- be required to reevaluate the utility's CWlP requirements ing a new rate case with each variation in fuel prices. In a in light of the level of disallowance on remand. In making hearing on fuel reconciliation, the utility has the burden of this determination, the Commission may only consider the proving that its fuel expenses during the reconciliation financial condition of the utility at the time ofthe hearing; period were reasonable and necessary expenses incurred to it may not consider subsequent positive or negative provide reliable service. See 16 Tex.Admin.Code changes in the utility's financial integrity. Therefore, 23.23(3)(B) (1994). If the fuel is purchased from or pro- though we agree that the Commission could properly vided by an affiliate, the utility must also show that the consider including CWIP in rate base, we recognize that its price to the utility is no higher than prices charged by the decision as to the appropriate amount of CWIP will supplying affiliate to its other affiliates or divisions for the change, and is dependent upon the disallowances it makes same item or class of items, or to unaffiliated persons or on remand. We do not, therefore, review the findings re- corporations. PURA § 41 (c)(1 ). lated to CWIP allowances, as they will be superseded by the Commission's findings when it reexamines the utility's As part of the fuel reconciliation proceedings in need for CWIP on remand. The Commission will be re- Docket No. 9300, Texas Utilities sought to establish the quired to reconsider whether the 10.1 percent rate increase reasonableness and necessity of$7,167,233,745 in natural

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gas costs incurred during the six year reconciliation period. Report as to why the Examiners did not include Upon reviewing the evidence, the Commission disallowed all I 00 contracts reviewed by the Reed Consult- $29, I73,090 of those costs and determined that the re- ing Group in their chart. mainder were reasonable and necessary expenditures. There is no dispute that the gas purchase transactions re- The examiners recommend a total disallowance for un- viewed by the Commission were affiliate transactions; the reasonable expenditures for gas purchases by [Texas Fuel Company, an affiliate of Texas Utilities, supplies all Utilities] from its affiliate, [the Fuel Company], of the utility's gas requirements. In addition, because Texas $78,504,776. The remainder of the Company's requested Utilities is the Fuel Company's only customer, whether the reconcilable gas costs, $7,088,728,967, are reasonable Fuel Company charged Texas Utilities prices commensu- and should be approved. FN 41 rate with those charged to other affiliates or to unaffiliated entities is not an issue. The Commission's only task was to FN41. We note that a chart entitled Summary of determine the extent to which the affiliate fuel expenses Recommended Disallowances-Gas Contracts were reasonable and necessary costs that could be included appearing on page 434 of the Examiners' Report in Texas Utilities' rate base. At issue in the Cities and shows an additional recommended disallowance Public Utility Counsel's sixteenth and seventeenth points for open access transportation. The total recom- of error is the Commission's decision to disallow only mended disallowance on this chart is therefore $29, I73,090 in gas costs as unreasonable expenditures. $8I,504,776. Without explanation, in the sum- mary section on page 479, the examiners dropped The Commission arrived at this figure in the following this $3 million disallowance leaving a recom- way. First, it heard evidence from Texas Utilities regarding mended total disallowance of $78,504,776. the reasonableness of the approximately 900 gas contracts subject to the reconciliation proceedings. Then it heard Examiners' Report at 479. The chart and summary evidence presented by the Reed Consulting Group, which imply that the examiners accepted Texas Utilities' evi- reviewed I 00 of the 900 contracts representing eighty dence regarding the reasonableness of all the gas contracts percent of the gas purchases made during the reconciliation not represented in the chart, and allowed all costs related to period. In their report, the examiners reviewed sixty-four those contracts in rate base. contracts, and after considering disallowances suggested by both Texas Utilities and the Reed Consulting Group, In its final order, the Commission made specific made their own recommendations for disallowances for findings of fact for each gas contract that appeared in the each contract. A chart included in the Examiners' Report examiners' chart, rejecting*413 the examiners' recom- sets forth the disallowances recommended by Texas Utili- mended disallowance in only five instances.FN 42 Like the ties, the Reed Consulting Group, and the examiners with examiners, the Commission only disallowed costs associ- respect to thirty-seven production contracts, six long-term ated with the contracts that appear in the examiners' chart. commercial contracts, thirteen short-term commercial The Commission allowed all costs associated with all other contracts, and eight spot contracts. See Examiners' Report gas contracts. at 448-51. FN 40 The Examiners' Report then includes a summary section which states: FN42. The Commission disallowed less than the examiners recommended in four instances: FN40. There is no explanation in the Examiners'

Contract No. Examiners' Recommendation Commission's Disallowance

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1690 (Empire) $19,222,738 $0 3205 (PG & E) $13,453,686 $0 3697 (Coronado) $ 1,916,756 $1,455,193 3011, 3701,3707 (Houston $16,721,007 $0 Pipeline, Panhandle) The Commission disallowed more than the examiners recommended in one instance: Contract No. Examiners' Recommendation Commission's Disallowance

3076 (Amalgamated) $0 $527,308 gas contracts, the Cities' witness, Richard S. Morey, rec- In points of error sixteen and seventeen, the Cities and ommended a disallowance of $452 million in gas-related Public Utility Counsel challenge the Commission's gas expenditures. This amount represented fuel costs for the contract disallowances on two grounds: (1) the Commis- years 1985 through 1988. The examiners determined that sion did not review all the affiliate gas costs associated Mr. Morey's quantification technique was seriously flawed with approximately 800 contracts making up twenty per- because it relied on comparisons with utilities not compa- cent of Texas Utilities' gas costs and as a result included rable to Texas Utilities. The examiners recommended that unreasonable costs in rate base, and (2) the Commission the Commission reject Mr. Morey's analysis and his rec- did not make the specific findings required by PURA sec- ommended disallowance, which the Commission did. If tion 41(c)(1) to support the costs it did allow. Because we that had been the whole of the evidence presented to the find both arguments to be without merit, we overrule the Commission, it would have been within the Commission's sixteenth and seventeenth points of error. discretion to allow all the costs requested by Texas Utili- ties if it found they were supported by substantial evidence. However, the Commission also considered the evidence The Cities and Public Utility Counsel essentially ar- presented by its own auditor and, as a result, disallowed gue that because the Reed Consulting Group did not re- some of the expenses associated with the larger gas con- view the smaller and more numerous gas contracts making tracts. While the Commission may consider evidence such up approximately twenty percent of Texas Utilities' gas as that presented by the Reed Consulting Group, it is not costs, the Commission did not review the contracts. Simply required to do so. In the absence of such evidence, it may because the Reed Consulting Group did not include these accept or reject the evidence presented by the utility, the contracts in its sample does not mean that the Commission party bearing the burden of proof of reasonableness. With did not review those expenses or that there was no evi- respect to the smaller *414 gas contracts, the Commission dence that the contracts met the requirements of PURA apparently accepted the evidence of reasonableness pre- section 41 (c)(l ). sented by Texas Utilities. If substantial evidence supports the Commission's findings, which we conclude it does, we Texas Utilities presented evidence as to the reasona- must uphold the order. See Auto Convoy, 507 S.W.2d at bleness of all of the approximately 900 gas contracts sub- 722. ject to the reconciliation proceeding. As part of its evi- dence of reasonableness, the utility presented testimony FN43. Texas Utilities asserted that its three major justifying its decisions to enter into the various gas con- FN41 • gas contracts expired between late 1980 and tracts. · - Opposmg the reasonableness of Texas Utilities' 1983, at a time when its forecasts showed a con-

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tinuing increase in the cost of natural gas and this statute demands specific findings of reasonableness for when prices were still escalating. The utility en- each contract. We disagree. The statute allows the Com- tered into new contracts during a sellers' market mission to address its specific findings either to "each with the result that the new contracts were less item" or "each class of items." The Commission may either favorable to the utility than they would have been make a contract-by-contract determination of reasonable- if they had entered into them at another time. ness, or it may group the contracts together and declare Texas Utilities attributes its failure to obtain gas them all to be reasonable. in an interstate market to a desire to remain free from burdensome and expensive federal regula- The Commission made a specific fmding that, with the tion. exceptions set forth in fmdings of fact 383A-383AAA, Texas Utilities had established the reasonableness and The Cities and Public Utility Counsel also maintain necessity of its gas costs. We conclude that these fmdings that the Commission did not make the findings of fact meet the requirements ofPURA section 4l(c)(l). required by PURA section 4l(c)(l) to support an allow- ance of all gas costs related to those contracts not included AMOCO CONTRACT NUMBER 1627 in the chart. The following are the portions of the Com- [26] In its sixth point of error, Texas Utilities claims mission order relating to its determination of gas disal- that the trial court incorrectly affirmed the Commission's lowances: decision to disallow $447,972 as imprudent gas expendi- tures pursuant to Amoco contract number 1627. At the Finding of Fact 379: The Company's fuel expenditures Commission hearing, Texas Utilities initially offered evi- during the reconciliation period of April 1983 through dence indicating that it had purchased fuel in March 1989 June 1989 should be approved to the extent of from Amoco pursuant to contract number 1627, a spot $10,488,044,993. contract. The Commission determined that the price paid for this gas was unreasonably high given the spot price of Conclusion of Law 82: Except to the extent of the dis- gas at the time, and disallowed the excess purchase price allowed reconciliation period gas costs (reflected in the from rate base. During "surrebuttal testimony," the utility's Findings of Fact attached to the order), Texas Utilities fourth opportunity to file testimony on fuel issues, it as- met its burden of proof under PURA § 4l(c)(l), re- serted that the gas purchase was not actually made pursu- garding affiliate transactions. ant to a spot contract, but rather pursuant to a separate short-term commercial contract under which the price paid would be reasonable. The utility explained that it had made Conclusion of Law 83: Except to the extent of the dis- an accounting error, forgetting to reform its ledger to credit allowed reconciliation period gas costs (reflected in the the purchases to the short-term contract.FN44 The Com- findings of fact attached to the order), the Company's mission treated the gas as purchased pursuant to the spot fuel expenditures during the reconciliation period com- contract and disallowed the $447,972 it believed to be in ply with the requirements of P.U.C.SUBST.R. excess of a reasonable spot price for gas. 23 .23(b)(2)(H).

FN44. The utility's testimony was that it had for a The question for this Court is whether these findings short time credited purchases made pursuant to a satisfy the requirements of PURA section 41 (c)(1) that short-term commercial contract with Amoco to "[a]ny such finding shall include specific findings of the contract number 1627 because of delay in setting reasonableness and necessity of each item or class of items up the short-term contract for payment. Presum- allowed." The Cities and Public Utility Counsel assert that ably, the utility only realized its failure to change

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its records after the rate-making proceeding had reversed this conclusion. Because we agree with the been under way for some time. Commission that the contract contained no take-or-pay provision, we will sustain this point of error. We do not agree with Texas Utilities that its testimony of an accounting error is uncontroverted or that it neces- The pertinent contract provision provides: sarily established that the gas was purchased under a short-term commercial contract as a matter of law. The Delhi hereby grants [the Fuel Company] the option to Commission, rather, was presented with conflicting evi- purchase up to fifty percent (50%) (calculated in terms dence: the utility's own records showing the gas purchased of heating value) of the Schlensker-Texas Crude Gas, pursuant to a spot contract and its contradictory testimony purchased by Delhi, at Delhi's cost of such gas plus 5 that in fact the gas was purchased under a short-term cents/MMBtu. Such option to purchase may be exer- commercial contract. The utility *415 characterizes the cised by [the Fuel Company] at any time and from time Commission's decision to rely on the utility's records rather to time during the term of Delhi's respective gas pur- than the testimony provided by the utility as arbitrary and chase agreements for such gas in blocks of ten percent capricious. We come to the opposite conclusion. The (10%) of Delhi's purchases, and until [the Fuel Com- Commission is the judge of the weight to be accorded pany] has exercised completely its option to purchase witnesses' testimony and is free to accept part of the tes- such fifty percent (50%). Each such exercise of its option timony of one witness and disregard the remainder. to purchase by _[the Fuel Company] shall be evidenced Southern Union Gas Co. v. Railroad Comm'n, 692 S.W.2d by not less than thirty (30) days prior written notice to 137, 141-42 (Tex.App.-Austin 1985, writ ref'd n.r.e.). Delhi and shall be effective on the first day of the month The Commission was not required to accept the utility's following that month in which the said thirty (30) day eleventh-hour accounting error explanation, but was free to period expires. rely on the utility's own records. It is the utility that carries the burden of proof at a rate-making proceeding; the utility Contrary to Texas Utilities' assertions, this contract that submits records to the Commission that do not accu- embodies no take-or-pay obligations. It is apparent from its rately reflect its expenditures does so at its own peril. The unambiguous terms that the contract gives Texas Utilities point of error is overruled. the option to buy, in ten percent blocks and at a fixed price, up to fifty percent of any Schlenker-Texas crude gas DELHI CONTRACT NUMBER 1659 purchased by Delhi. We are not persuaded by Texas Utili- [27] In the rate proceeding, Texas Utilities asserted ties' argument that the phrase "and until TUFCO has ex- that Delhi gas contract number 1659 contained a ercised completely its option to purchase such fifty per- take-or-pay clause which obligated the utility to purchase a cent" means that once the utility has purchased at that level certain amount of gas under the contract. The Commission it must continue to do so. The contract contemplates that considered the contract and determined that it imposed no whenever Delhi purchases Schlenker-Texas crude gas the take-or-pay obligation and that Texas Utilities had pur- Fuel Company may purchase up to fifty percent of that gas chased gas at a price higher than necessary. The Commis- at Delhi's cost plus five cents per MMBtu. The phrase "and sion concluded that Texas Utilities' gas purchases pursuant until [the Fuel Company] has exercised completely its to this contract violated its obligation to purchase fuel at option to purchase such fifty percent" sets an upper, rather the lowest reasonable cost to ratepayers and disallowed than a lower, limit on the utility's right to purchase this gas $2,509,810 in fuel costs incurred under the contract. See at the contract price; it does not operate to convert the PURA § 4l(c)(l); 16 Tex.Admin.Code § 23.23(b)(2)(H) option to purchase gas into an obligation. We sustain the (1993) (since amended). In its third point of error, the Commission's third point of error. Commission contends that the district court incorrectly

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881 S.W.2d 387 (Cite as: 881 S.W.2d 387)

agency could conclude what the utility's future needs will FUEL OIL INVENTORY be. If the utility could convince the Commission of the [28] In its fourth point of error, Texas Utilities chal- need to increase that level, then such an increase would be lenges the Commission's decision to set fuel oil inventory in order. The burden, however, was on the utility. Texas at 1. 7 million barrels. The utility contends that this finding Utilities' fourth point of error is overruled. is arbitrary and capricious, and not supported by substan- tial evidence. See APA § 200l.l74(2)(E), (F). We disa- RETURN ON COMMON EQUITY FN45 gree. FN45. We understand "common equity" to mean Texas Utilities requested a fuel inventory level of the utility's common stock. We refer to the utili- 2,031,540 barrels, an increase of 331,540 barrels from the ty's common stock as "common equity" so as not previously authorized level of 1. 7 million barrels. See to deviate from the terminology used by the *416Application _ofTexas Utilities Electric CompanY,/'or a Commission in the proceeding below. See Rate Increase, 10 P.U.C.Bull. at 954. The higher figure GTE-ST¥, 833 S.W.2d at 157 n. 3. was based on the utility's test-year end thirteen-month average inventory of fuel oil. The Cities argued that the In points of error eighteen through twenty, the Cities utility needed a fuel oil inventory of only 1,279,363 bar- and Public Utility Counsel challenge the trial court's af- rels, suggesting that access to nuclear-generated power firmance of the Commission's decision to set the utility's from Comanche Peak Unit 1 reduced the utility's need for return on common equity at 13.2 percent. FN46 Specifically, fuel oil. Additionally, the Cites contended that increased they contend that the Commission (1) did not identify the levels of non-oil/gas fired generation caused a decrease, methodology it used to arrive at this figure; (2) failed to rather than an increase, in the necessary fuel oil inventory consider the statutory factors set out in PURA section level. Texas Utilities countered that it burned 1,201,008 39(a); and (3) did not make adequate findings of fact. barrels of oil in December 1983 and 1,249,952 barrels during two cold weather periods in February and March FN46. Return on equity is one element of the rate 1989. The utility hoped to demonstrate that the Cities had of return on a utility's invested capital. Other miscalculated its needs in the event of cold weather. elements include long-term and short-term debt and preferred stock. The Commission rejected both the Cities' and the utility's requests, adopting instead the examiners' recom- [29] During the rate-making proceeding, all the mendation that the "level of fuel oil inventory established presentations regarding the appropriate return on common in Docket No. 5640 of 1.7 million barrels should be left in equity used some form of a discounted cash-flow meth- place." This decision was not arbitrary and capricious or odology. Because this methodology was the only one unsupported by substantial evidence. The examiners based presented, the Commission's adoption of any of the range their recommendation on an evaluation of the utility's of figures presented as the appropriate return on common actual needs since the 1.7 million barrel inventory level equity in itself entails adoption of the discounted cash-flow was established in 1984. The examiners stated, "[I]n light methodology. The Commission's order is presumed to be of the Company's experience, the examiners find that the based on substantial evidence and we will not require the level of fuel oil inventory established in Docket No. 5640 Commission to make a separate finding simply to confirm of 1.7 million barrels should be left in place by the Com- that it has based its decision on the only method of calcu- mission." The utility's actual experience over the past lating return on common equity presented during the several years provides probative evidence from which the rate-making proceeding. See Charter Medical, 665 S. W.2d

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at 451; see also GTE--sW, 833 S. W.2d at 159 (holding that Fact 215 ("Staffs recommended 15-basis-point upward a return on equity falling within the range presented by adjustment to recognize the Company's exceptional expert testimony meets the substantial evidence test). We achievement in conservation and load management is reject the Cities and Public Utility Counsel's attempts to reasonable."); Finding of Fact 40 I ("[Texas Utilities'] look to the transcript of the Commission's final order demand side management achievements have been re- meeting to show that the Commission based its decision markable, commendable, and clearly far above those of regarding return on common equity on something other other utilities."). than record evidence. We judge the agency order on the basis on which it purports to rest, and the mental processes [30][31] The chief complaint appears to be the Cities of individual commissioners are immaterial to judicial and Public Utility Counsel's perception that the Commis- review. Pedernales Elec. Coop., Inc. v. Public Uti!. sion made no downward adjustment to the return on Comm'n, 809 S.W.2d 332, 341 (Tex.App.-Austin 1991, common equity to penalize the utility for instances of no writ); see also *417City ofFrisco v. Texas Water Rights imprudent management. While the statute instructs the Comm'n, 579 S.W.2d 66, 72 (Tex.Civ.App.- Austin Commission to consider the quality of the utility's man- 1979, writ refd n.r.e.) ("The thought processes or motiva- agement, it does not require that the Commission lower the tions of an administrator are irrelevant in the judicial de- return on common equity if it fmds any imprudence. We termination whether the agency order is reasonably sus- understand the statute to leave to the Commission's dis- tained by appropriate findings and conclusions that have cretion the decision whether the utility's management support in the evidence."). warrants a reduction in the overall rate of return. We also reject the assertion that the Commission's chosen rate of The Cities and Public Utility Counsel next argue that return is not supported by adequate findings. The utility the Commission failed to consider the necessary statutory testified to a recommended range of return from 13 to criteria in choosing the appropriate return on common 14.25 percent. The staffs recommendation ranged from equity. The statute directs the Commission to consider, 12.36 to 13.4 percent. The Examiners' Report summarizes among other things, the utility's efforts to comply with the extensive testimony supporting the various ranges spon- statewide energy plan, its efforts and achievements in the sored by the parties and the staff. The Commission made a conservation of resources, the quality of its services, the specific finding that a 13.2 percent return on common efficiency of its operations, and the quality of its man- equity is reasonable and appropriate for the utility. Finding agement. PURA § 39(b). Our examination of the order of Fact 213. This Court has already decided that a fmding reveals findings of fact and conclusions of law addressing regarding the appropriate cost of equity is not a fmding set each of these criteria. The Commission addressed the util- forth in statutory language, and therefore needs no under- ity's operational efficiency, finding that the utility gener- lying fmdings. City ofAlvin, No. 3-92-459-CV, slip op. at ated electricity efficiently and reliably during the recon- 28; see also GTE--SW, 833 S.W.2d at 158 (approving a ciliation period and that the energy efficiency plan satisfied finding on return on equity that was "the Commission's the Commission's substantive rules. Findings of Fact 396, own estimate converted into a fmding" so long as the es- 398. Conclusion of law 58 states that Texas Utilities' gen- timate was "within the range made by the testimony of the eration, transmission, and distribution facilities are safe, various expert witnesses"). Choosing a rate of return is a adequate, efficient, and reasonable. Regarding the quality proper exercise of the Commission's discretion in setting of management, the Commission found that, with limited the rate of return, and we will not require any more specific exceptions, the quality of management was adequate. findings than its selection from a range of rates all sup- Finding of Fact 12. The Commission also considered the ported by credible expert testimony. The Cities and Public utility's efforts and achievements in conservation and Utility Counsel's points of error eighteen through twenty compliance with the statewide energy plan. See Finding of are overruled.

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881 S.W.2d 387 (Cite as: 881 S.W.2d 387)

CASH WORKING CAPITAL Texas Utilities' fifth point of error complains of the district court's decision to remand the Commission's cash working capital allowance. The district court found, and the Commission agreed, that the Commission made a mathematical error in its calculation of the cash working capital. On appeal, Texas Utilities argues that there is no evidence that the Commission made a mathematical error and that in any case the district court could not address the issue because it was not raised in the motions for rehearing filed with the Commission. See APA § 2001.145. We do not address this point of error. On *418 remand the Commission will have an opportunity to recalculate the cash working capital and correct its mathematical error or make other changes to cash working capital in light of its decisions on remand.

CONCLUSION For the reasons stated in this opinion, we reverse the district-court judgment and remand the cause to the district court with instructions that it be remanded to the Com- mission for further proceedings consistent with this opin- ion.

Tex.App.-Austin, 1994. Texas Utilities Elec. Co. v. Public Utility Com'n 881 S.W.2d 387

END OF DOCUMENT

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935 S.W.2d 109,39 Tex. Sup. Ct. J. 267,40 Tex. Sup. Ct. J. 238 (Cite as: 935 S.W.2d 109)

H pealed).

Supreme Court of Texas. *109 Appealed From Austin Court of Appeals, Third PUBLIC UTILITY COMMISSION OF TEXAS et al., Judicial District; Bea Ann Smith, Judge.Geoffrey M. Petitioners, Gay, Steven A. Pmter, Dan Morales, Steven Baron, v. Susan Bergen Schultz, Elizabeth R.B. Sterling, Aus- TEXAS UTILITIES ELECTRIC COMPANY et al., tin, for Petitioners. Respondents. Stephen Gardner, Ellen Greer, Stefan H. Krieger, Brad No. 94-1071. Sutera, Patrick Gattari, Dallas, Alan Holman, James Feb. 9, 1996. W. Checkley, Jr., Mark W. Smith, Austin, Peggy Rehearing Overruled Jan. 10, 1997. Wells Dobbins, Coral Gables, FL, Dick Terrell Brown, Walter Washington, Stephen Fogel, Marion Taylor-Drew, Jack W. Smith, Mark R. Davis, Austin, Judicial review was sought of Public Utility William H. Burchette, A. Hewitt Rose, Washington, Commission (PUC) order in electric utility rate case. DC, Jonathan Day, Houston, Michael G. Shirley, The 250th Judicial District Court, Travis County, John Rupaco T. Gonzalez, David C. Duggins, Fernando K. Dietz, J., reversed and remanded in part. Appeals Rodriguez, Roy Q. Minton, John L. Foster, Austin, J. were taken. The Austin Court of Appeals, Bea Ann Dan Bohannan, Dallas, Walter Demond, Austin, Smith, J., 881 S. W.2d 387, reversed and remanded Robert M. Fillmore, Howard V. Fisher, Robe1t A. with instructions. Utility applied for writ of error. The Wooldridge, Dallas, for Respondents. Supreme Court held that, in setting electric utility rates, PUC is not required to recognize utility's available tax deductions for disallowed capital costs. PER CURIAM. This is an appeal from a final order of the Public Utility Commission in a ratemaking proceeding initi- Reversed in part and affirmed in part. ated by Texas Utilities. The district court reversed the Commission's order in certain respects and remanded West Headnotes the case for further proceedings. The court of appeals reversed the district court's judgment but also re- Electricity 145 ~11.3(4) manded the case to the Commission. 881 S.W.2d 387. We find but one error in the court of appeals' opinion 145 Electricity warranting our review. 145kll.3 Regulation of Charges 145k 11.3(4) k. Operating Expenses. Most The Commission refused to reduce Texas Utility's Cited Cases income tax expenses by potential savings from con- solidated tax returns with the Texas Utilities' affiliates, In setting electric utility rates, Public Utility by savings from available deductions for disallowed Commission (PUC) is not required to recognize util- capital and operating expenses, and by savings from ity's available tax deductions for disallowed capital available deductions for interest expense. The court of costs. Vernon's Ann.Texas Civ.St. art. 1446c (Re- appeals held that the Commission should have used an

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935 S.W.2d 109, 39 Tex. Sup. Ct. J. 267,40 Tex. Sup. Ct. J. 238 (Cite as: 935 S.W.2d 109)

"actual taxes paid" and not a "hypothetical tax" payers. If Texas Utilities refers to assets that are not standard in applying Section 4l{c)(2) of the Public currently included in the rate base but will be in the Utility Regulatory Act, Act of June 2, 1975, 64th Leg., future, its argument may be that related interest de- R.S., ch. 721, § 4l(c)(2), 1975 Tex.Gen.Laws (for- ductions should be allotted to future ratepayers. All merly TEX.REV.CIV.STAT.ANN. art. 1446c, § such matters are within the Commission's discretion, 4l(c){2), recodified without change as Section which was properly exercised in this case. If Texas 4l{c)(2) of the Public Utility Regulatory Act of 1995, Utilities refers to assets that will never be included in id. art. 1446c-O, § 2.208(c)). From this the court of the rate base because they have been disallowed, then appeals concluded that the Commission should have its argument may be that related interest deductions reduced Texas Utility's estimated income tax expense should be treated consistently with other deductions by: (1) the utility's "fair share" of savings from con- for disallowed capital expenses. We agree. solidated tax returns with the utility's affiliates; (2) the utility's available deductions for disallowed capital Because the opinion of the court of appeals con- and noncapital expenses; and (3) available deductions flicts with our decision in GTE-Southwest, we grant for interest expense "to the extent that we continue to Texas Utilities' application for writ of error, and require the Commission to pass through to ratepayers without hearing oral argument, reverse the judgment any tax benefits from interest expense deductions", of the court of appeals to the extent that it conflicts but not necessarily immediately. The latter saving, with this opinion. TEX.R.APP.P. 170. Texas Utilities' *110 the court explained, must be allocated between application does not complain of any other error in the present and future ratepayers, in the Commission's court of appeals' opinion that requires reversal. We discretion. 881 S. W.2d at 398-400. deny the applications of the Public Utility Commis- sion, the Office of Public Utility Counsel, and the The appeals court's opinion preceded and con- Cities of Arlington, et al. Jd. Rule 133. Thus, the flicts with our decision in Public Utility Commission judgment of the court of appeals is, in all other re- v. OTE-Southwest; Inc., 901 S.W.2d 401 (Tex.l995). spects, affirmed. There we held that neither PURA § 41 (c){2) nor the reference to taxes "actually incurred" in Public Utility Tex.,l996. Commission v. Houston Lighting & Power Co., 748 Public Utility Com'n of Texas v. Texas Utilities Elec. S.W.2d 439, 442 (Tex.l987), required the Commis- Co. sion to apply an "actual-taxes-paid" methodology to 935 S.W.2d 109,39 Tex. Sup. Ct. J. 267,40 Tex. Sup. estimate a utility's income tax expense. We held that Ct. J. 238 the Commission "has neither the power nor the dis- cretion to consider expenses disallowed under section END OF DOCUMENT 43{c)(3)." 901 S.W.2d at 411. Although we did not directly address whether the Commission is required to recognize available deductions for disallowed cap- ital costs, as opposed to noncapital costs, id. at 411-12, our reasoning applies equally to both.

Regarding deductions for interest expenses, Texas Utilities argues that the court of appeals erred "to the extent" it required that tax deductions related to assets not included in rate base be passed on to rate-

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Gilmore v. State, 744 S.W.2d 630 (Tex. App.-Dallas 1987, pet. ref'd) Page 1

744 S.W.2d 630 (Cite as: 744 S.W.2d 630)

H that time introduce any other part of writing, which ought in fairness to be considered contemporaneously with it, is not mandatory. Rules of Crim.Evid., Rule Court of Appeals of Texas, 106. Dallas.

Kenneth GILMORE, Appellant, [2] Criminal Law 110 ~1170(3) v. The STATE of Texas, Appellee. 11 0 Criminal Law ll OXXJV Review No. 05-87-00230-CR. 110XXIV(Q) Harmless and Reversible Error Dec. 16, 1987. II Ok 1170 Exclusion of Evidence 11 Ok 1170(3) k. Prior or Subsequent Admission of Same Evidence. Most Cited Cases Defendant was convicted in the 282nd Criminal District Court, Dallas County, Tom Price, J., of mur- der. Defendant appealed. The Court of Appeals, Defendant was not prejudiced when State offered Baker, J., held that defendant was not prejudiced when for all purposes defendant's handwritten confession State offered for all purposes defendant's handwritten with two portions deleted and offered for record pur- confession with two portions deleted and offered poses only the whole confession and when trial court whole confession for record purposes only. did not allow defendant to contemporaneously admit whole confession, although defendant contended that rule provides that when writing or part thereof is in- Affirmed. troduced, adverse party may introduce any other part of writing which ought in fairness to be considered West Headnotes contemporaneously with it; rule was not mandatory, and State eventually withdrew objection to whole (1) Criminal Law 110 ~396(2) confession, and it was admitted for all purposes. Rules of Crim.Evid., Rule 106. 1 10 Criminal Law 110XVII Evidence *631 Lawrence B. Mitchell, Dallas, for appellant. 110XVIJ(I) Competency in General 11 Ok396 Evidence Admissible by Reason of Karen R. Wise, Dallas, for appellee. Admission of Similar Evidence of Adverse Party 110k396(2) k. Admission of Whole Before DEYANY, BAKER and LAGARDE, JJ. Conversation, Transaction, or Instrument Because of Admission of Part or Reference Thereto. Most Cited BAKER, Justice. Cases Appealing from his murder conviction, Kenneth Gilmore is contending that the trial court erred in Criminal rule providing that if writing or a part failing to admit evidence he offered contemporane- thereof is introduced by party, adverse party may at ously with the admission of evidence offered by the

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744 S.W.2d 630 (Cite as: 744 S.W.2d 630)

State. Finding no merit in this contention, we affirm pleteness, controlling the time an adversary can in- the trial court's judgment. troduce certain kinds of remainder evidence. The language of the rule is a permissive grant and not a During direct examination of Dallas Police Of- requirement. As noted in the comment to the rule, this ficer Stan McNear, the State sought to offer into evi- rule does not in any way circumscribe the right of a dence appellant's written confession. State's Exhibit party to develop fully the matter on cross-examination 14 was a handwritten judicial confession by appellant. or as part of his own case. Since it is a permissive State's Exhibit 15 was a copy of the same handwritten grant, not a requirement, the adversary may introduce confession with two portions deleted. The State of- the remainder evidence contemporaneously with the fered Exhibit 14 for record purposes only and Exhibit presentation of the incomplete evidence, he can wait 15 for all purposes. Appellant moved the trial court to to do so during cross-examination, or during the de- require introduction of Exhibit 14 for all purposes. velopment ofhis own case. TEX.R.CRlM.EVID. 106. The court overruled this motion. However, shortly We hold that the terms of this rule are not mandatory. thereafter, during the State's continuation of its direct examination of Officer McNear, the State withdrew its The underlying purpose for both rules 106 and objection to Exhibit 14, and it was admitted for all 107 of the Texas Rules of Criminal Evidence is to purposes. reduce the possibility of the fact fmder receiving a false impression from hearing the evidence of only a [ 1] Appellant contends that the trial court's failure part of a writing. The theory is that by allowing the to admit the document in its entirety at the time he jury to have the benefit of the rest of the writing on the made the request is a violation of Rule 106 of the same subject, the whole picture will be presented Texas Rules of Criminal Evidence. This rule provides removing any misleading effect which may have oc- that when a writing or part thereof is introduced by a curred from introducing only a portion of the writing. party, the adverse party may at that time introduce any See Roman v. State, 503 S.W.2d 252, 253 other part of the writing which ought in fairness to be (Tex.Crim.App.1974). The Roman case was constru- considered contemporaneously with it. Appellant ing article 38.24 of the Texas Code of Criminal Pro- contends the terms of this rule are mandatory. Alt- cedure which in part is the predecessor to Rule 106. hough the document was admitted shortly after the appellant first requested its admission, appellant ar- [2] In this case, the writing that appellant re- gues that the failure to enter the same contempora- quested to be admitted was in fact admitted by the trial neously with the State's Exhibit was error because it court during the remainder of the direct examination was critical for the defense that the jury understand by the State of Officer McNear; therefore, both that the completed confession introduced originally documents were before the jury prior to appellant's before them was in fact consistent with the version of subsequent testimony concerning his version of the events subsequently presented by appellant in his facts. We conclude *632 that circumstances in this testimony. Appellant argues that the circumstances case do not demonstrate that the appellant was harmed establish harm to him from the violation of the man- or otherwise prejudiced by the trial court's action. datory terms of Rule 106 of the Texas Rules of TEX.R.APP.P. 81(b)(2); Prior v. State, 647 S.W.2d Criminal Evidence. We disagree. 956, 959 (Tex.Crim.App.l983); Rezac v. State, 722 S.W.2d 32,33 (Tex.App.-Dallas 1986, no pet.). Rule 106 of the Texas ·Rules of Criminal Evi- dence is not written in mandatory terms. This rule is a Appellant's point of error is overruled and the trial narrow modification of the doctrine of optional com- court's judgment is affirmed.

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744 S.W.2d 630 (Cite as: 744 S.W.2d 630)

Tex.App.-Dallas, 1987. Gilmore v. State 744 S.W.2d 630

END OF DOCUMENT

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Crosby v. Minyard Food Stores, 122 S.W.3d 899 (Tex. App.- Dallas 2003, no pet.) west law. Page 1 122 S.W.3d 899 (Cite as: 122 S.W.3d 899)

[2] Evidence 157 <£:::::;>155(1)

Court of Appeals of Texas, 157 Evidence Dallas. 157IV Admissibility in General Maerene CROSBY, Appellant, 157IV(E) Competency v. 157k155 Evidence Admissible by Reason MINYARD FOOD STORES, INC. d/b/a Sack N' of Admission of Similar Evidence of Adverse Party Save a!k/a Sack N' Save # 206, Appellee. 157kl55(1) k. In general. Most Cited Cases No. 05-02-01766-CV. Affidavit by grocery store's expert doctor was Nov. 26, 2003. not admissible in patron's slip-and-fall negligence Rehearing Overruled Jan. 13, 2004. action, under rule of optional completeness, which allowed inquiry into the whole of an act, declara- Background: Grocery store patron brought negli- tion, conversation, writing, or recorded statement if gence action, alleging that she tripped and fell on the opposite party had introduced a portion of it; it buckled floor mat near entrance of store. The was not necessary to admit affidavit to explain or County Court at Law No. 5, Dallas County, Don understand portions of it referred to in testimony by Metcalfe, J., entered judgment on jury verdict for shopper's chiropractor. Rules of Evid., Rule I 07. patron. Appeal was taken. 13] Evidence 157 <£:::::;>155(1) Holdings: The Court ofAppeals, Joseph B. Morris, J., held that: 157 Evidence (I) evidence that store knew that mat regularly 157IV Admissibility in General buckled created jury question on negligence; 157IV(E) Competency (2) admission of affidavit from store's expert wit- 157k155 Evidence Admissible by Reason ness physician was error; but of Admission of Similar Evidence of Adverse Party (3) error was harmless. 157k155(1) k. In general. Most Cited Cases Affirmed. Rule of optional completeness, under which the West Headnotes whole of an act, declaration, conversation, writing, or recorded statement may be inquired into if the [1] Negligence 272 <£:::::;>1708 opposite party had introduced a portion of it, is de- signed to guard against the possibility of confusion, 272 Negligence distortion, or false impression that could be created 272XVUI Actions when only a portion of evidence is introduced. 272XVIII(D) Questions for Jury and Direc- Rules ofEvid., Rule 107. ted Verdicts 272k1705 Premises Liability [4] Evidence 157 <£:::::;>155(1) 272kl708 k. Buildings and other struc- tures. Most Cited Cases 157 Evidence Evidence that grocery store knew that mat at 157IV Admissibility in General entrance had a tendency to buckle and required fre- 157IV(E) Competency quent straightening raised fact issue of store's negli- 157kl55 Evidence Admissible by Reason gence for jury, in patron's personal injury action. of Admission of Similar Evidence of Adverse Party

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157k155(1) k. In general. Most Cited 171 Appeal and Error 30 €:=>1051(1) Cases There are two threshold requirements for the 30 Appeal and Error application of the rule of optional completeness, 30XVI Review under which the whole of an act, declaration, con- 30XVI(J) Harmless Error versation, writing, or recorded statement may be in- 30XVI(J) I 0 Admission of Evidence quired into if the opposite party has introduced a 30k1051 Facts Otherwise Established portion of it: (1) some portion of the matter sought 30k1051(1) k. By other evidence in to be "completed" must have actually been intro- general. Most Cited Cases duced into evidence, and (2) the party seeking to An error in admitting evidence is harmless if complete the matter must show that the remainder other competent evidence of the fact in question ap- being offered is on the same subject and is neces- pears elsewhere in the record. sary to fully understand or explain the matter. Rules [81 Appeal and Error 30 €:=>1050.1(12) ofEvid., Rule 107. 30 Appeal and Error 151 Evidence 157 €:=>155(1) 30XVI Review 157 Evidence 30XVI(J) Harmless Error 1571V Admissibility in General 30XVI(J) I 0 Admission of Evidence 1571V(E) Competency 30k1050 Prejudicial Effect in General 157kl55 Evidence Admissible by Reason 30kl050.1 Evidence in General of Admission of Similar Evidence of Adverse Party 30k1050.1(8) Particular Types 157kl55(1) k. In general. Most Cited of Evidence Cases 30k1050.1(12) k. Opinions Merely referring to a statement does not invoke and conclusions. Most Cited Cases the rule of optional completeness, under which the Even though admission of affidavit from gro- whole of an act, declaration, conversation, writing, cery store's expert doctor, in which he disputed the or recorded statement may be inquired into if the extent of shopper's injuries, was error, in shopper's opposite party had introduced a portion. Rules of slip-and-fall negligence action, there was no harm; Evid., Rule 107. shopper's chiropractor testified that his treatment of patron was appropriate, and that grocery store's ex- [61 Appeal and Error 30 €:=>1051.1(1) pert's diagnosis was not consistent with her injuries.

30 Appeal and Error *900 Anjel Kerrigan Avant, Kondas & Kondas 30XVI Review Law Office, Richardson, for Appellant. 30XVI(J) Harmless Error 30XVI(J)10 Admission of Evidence Jerry Fazio, Jason Eric Kipness, Owen & Fazio, 30k1051.1 Same or Similar Evidence P.C., Dallas, for Appellee. Otherwise Admitted 30k I 051.1 (1) k. In general. Most Before Justices MORRIS, O'NEILL, and LANG. Cited Cases Erroneous rulings on the admissibility of evid- ence are ordinarily not reversible where the evid- OPINION ence is cumulative and not controlling on a material Opinion by Justice MORRIS. issue dispositive of the case. In this trip and fall case, Maerene Crosby sued Minyard Food Stores, Inc. for injuries she allegedly

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sustained after tripping on a mat at the entrance of a knew or should have known about the bump in the grocery store. Although she prevailed at trial, entry mat that caused Crosby to fall. Minyard's fo- Crosby appeals the jury's verdict finding her 50% cus on the bump in the mat as the dangerous condi- negligent and awarding her $488.75 for past medic- tion is misplaced, however. al care. Crosby contends the trial court erred by ad- mitting into evidence the affidavit of Minyard's ex- *901 Crosby testified at trial that she fell on pert doctor because the contents of the affidavit the mat in the entry of the grocery store. According were hearsay. Crosby further contends the trial to Crosby, the mat was buckled causing her to trip. court's admission of the affidavit probably caused Crosby presented evidence that the mat frequently the rendition of an improper judgment. became buckled due to heavy foot traffic in and out of the store. An employee of the store testified he In a single cross issue, Minyard contends the had to straighten the mat between 48 and 86 times trial court erred in refusing to grant it a directed during an eight hour shift. Finally, Crosby submit- verdict on the ground that Crosby submitted no ted accident reports signed by the store's managers evidence that Minyard had actual or constructive showing that several people had tripped and fallen knowledge of the allegedly dangerous condition on the mat within a few weeks before Crosby's ac- that caused her injuries. After reviewing the evid- cident. ence, we conclude the trial court properly refused to grant Minyard's motion for directed verdict be- The Texas Supreme Court has held that "even cause there was some evidence of probative force in the absence of evidence showing the storeown- to show that Minyard had knowledge of a condition er's actual or constructive knowledge of the pres- on the premises that posed an unreasonable risk of ence on the floor of the specific object causing the harm. We also conclude the trial court erred in ad- fall," the storeowner may be liable if the invitee can mitting the affidavit of Minyard's expert doctor. show the storeowner was aware of a high risk that After reviewing the record, however, we conclude the dangerous condition would occur. See Corbin v. the erroneous admission of the affidavit was harm- Safeway Stores, Inc., 648 S.W.2d 292, 295 less. Accordingly, we affirm the trial court's judg- (Tex.1983). In Corbin, evidence showed grapes re- ment. curringly fell from a grape display and posed a high risk of customer falls. The supreme court held the [ 1] We first address the issue of the trial court's store owner's knowledge about the display and the ruling on Minyard's motion for directed verdict. risk the fallen grapes posed was sufficient to allow Minyard claims it was entitled to a directed verdict the issue of negligence to go to the jury despite the because the evidence was insufficient to raise a fact fact there was no evidence to show the storeowner issue on an essential element of Crosby's claim. See knew there were grapes on the floor at the time the Cano v. North Tex. Nephrology Assocs., P.A., 99 plaintiff fell. !d. at 297. Similarly, in National Con- S.W.3d 330, 338 (Tex.App.-Fort Worth 2003, no venience Stores, Inc. v. Erevia, the evidence was pet. h.). To succeed on her claims, Crosby was re- held sufficient to support the jury's finding of liabil- quired to show that Minyard had actual or con- ity where it was shown the storeowner was aware structive knowledge of a condition on its premises that ice on the floor was a common problem associ- that posed an unreasonable risk of harm. See CMH ated with its drink display even though there was no Homes, Inc. v. Daenen, 15 S.W.3d 97, 99 showing the storeowner was aware of the ice on the (Tex.2000). Crosby claimed in her suit that she floor at the time of the accident at issue. Nat'I Con- tripped because a mat at the entrance of the store venience Stores, Inc. v. Erevia, 73 S.W.3d 5 I 8, 523 was buckled and had a bump in it. According to (Tex.App.-Houston [1st Dist.] 2002, pet. denied). Minyard, Crosby presented no evidence the store In this case, Crosby presented evidence that

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Minyard was aware of the fact that the mat at the Reece, 81 S.W.3d 812, 813 (Tex.2002). Although entry to the store was often buckled and caused cus- the store manager conceded at trial that the self- tomers to fall. Because Crosby presented evidence service drink and ice machine generally increased that the mat itself was a problem creating a frequent the likelihood of spills in the snack bar area, there risk of injury, it was not necessary for her to show was no evidence that the spilled liquid causing the that Minyard was aware or should have been aware customer to fall was a drink or ice. Id. at 817. Fur- of the specific bump in the mat that caused her to thermore, in contrast to the case before us, there fall. See Corbin, 648 S.W.2d at 297; Erevia, 73 does not appear to have been any evidence of a his- S.W.3d at 523. tory of falls in the snack bar caused by spilled drinks or ice that would have put the store on notice Although Minyard attempts to analogize the that the self-service machine itself posed an unreas- facts of this case to cases in which property owners onable risk of injury. were found not liable because they were unaware of the unsafe condition at the time the accident oc- All the evidence in this case showed that the curred, the cases cited by Minyard address a mat at the entrance of the store had a tendency to storeowner's knowledge of a specific, non-recurring buckle and required frequent straightening. The condition rather than claims based on a continuing evidence also showed that Minyard was aware that hazard of which the storeowner was aware. See the recurrent bumps in the mat were causing cus- Wal-Mart Stores, Inc. v. Gonzalez, 968 S.W.2d 934 tomers to fall. This evidence was sufficient to allow (Tex.l998); Brookshire Food Stores, L.L. C. v. Al- the issue of Minyard's negligence to be presented to len, 93 S.W.3d 897 (Tex.App.-Texarkana 2002, no the jury. The trial court did not err in denying Min- pet.); Wal-Mart Stores, Inc. v. Bolado, 54 S.W.3d yard's motion for directed verdict. We resolve Min- 837 (Tex.App.-Corpus Christi 2001, no pet.). A yard's cross issue against it. claim that something used by the storeowner is in- herently dangerous is fundamentally different than We turn now to Crosby's issue relating to the a claim that a dangerous condition arose in the store trial court's admission of an affidavit created by and caused injuries. Minyard's expert physician, Dr. Jack Kern. Kern's affidavit sets forth his opinions about Crosby's In CMH Homes v. Daenen, the Texas Supreme medical condition and her treatment by Dr. Mark Court addressed the legal consequences of a Rayshell, a chiropractor. During Crosby's direct ex- premises owner's awareness that the premises, al- amination of Rayshell at trial, Rayshell was asked though originally safe, would become unsafe over if he had read Kern's affidavit. Rayshell said he time. See CMH Homes, 15 S.W.3d at 101. The had. Rayshell was then asked to go over the affi- co~rt specifically distinguished the facts before it davit. from those cases such as Corbin in which the in- jury-causing instrument was unsafe from the mo- In response to Crosby's direct examination ment it was used. ld. In the case before us, the mat about the affidavit, Rayshell testified he did not did not become unsafe over time but was unsafe know whether Kern knew anything about chiro- from the moment it was put on the floor *902 be- practic care or the orthopedic tests performed on cause of its tendency to buckle frequently when Crosby. Rayshell further testified he concluded subjected to foot traffic. from reading the affidavit that Kern never ex- amined Crosby personally and it did not appear that In Wal-Mart Stores, Inc. v. Reece, a customer he had read her medical records closely. In Ray- slipped in a puddle of clear liquid by the store's shell's opinion, a doctor could be found to say snack-bar. The snack-bar contained a self-service whatever the person hiring him wanted him to say, drink and ice machine. See Wal-Mart Stores, Inc. v. including that the treatment the patient received

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was not necessary. Rayshell admitted Kern stated in Minyard does not dispute that the affidavit contains his affidavit that he approved of some of the treat- hearsay but argues the document, though otherwise ment Crosby had received from Rayshell. Kern's af- inadmissible, was properly admitted under rule 107 fidavit also stated, however, that Crosby should of the Texas Rules of Evidence. Rule 107, entitled have reached maximum medical improvement with- the "Rule of Optional Completeness," states that in six to nine months. Rayshell noted that Crosby "[ w]hen part of an act, declaration, conversation, released herself from his care less than six months writing or recorded statement is given in evidence after he began treating her. According to Rayshell, by one party, the whole on the same subject may be Kern's affidavit stated there was no evidence inquired into by the other, and any other act, declar- Crosby suffered from anything other than a self- ation, writing or recorded statement which is neces- limiting, soft tissue injury. Rayshell disputed this sary to make it fully understood or to explain the opinion and referred to tests showing Crosby had same may also be given in evidence .... " TEX.R. herniated discs. Rayshell stated that Kern's diagnos- EVID. 107. Rule 107 is designed to guard against is of Crosby was an example of how expert doctors the possibility of confusion, distortion, or false im- write things with a jury in mind. pression that could be created when only a portion of evidence is introduced. See Grunsfeld v. State, After the close of Crosby's direct examination 813 S.W.2d 158, 163 (Tex.App.-Dallas 1991), aff'd, of Rayshell, Minyard moved to admit Kern's affi- 843 S.W.2d 521 (Tex.Crim.App.1992). There are davit into evidence. Crosby objected on the ground two threshold requirements for the application of that the affidavit was hearsay. The trial court over- the rule. First, some portion of the matter sought to ruled the objection and admitted the affidavit. be "completed" must have actually been introduced into evidence. See Washington v. State, 856 S.W.2d During Minyard's cross-examination of Ray- 184, 186 (Tex.Crim.App.1993); Mendiola v. State, shell, Minyard asked about Crosby's general medic- 61 S.W.3d 541, 545 (Tex.App.-San Antonio 2001, al condition. Rayshell stated Crosby suffered from no pet.). Merely referring to a statement does not degenerative spinal problems such as spondylosis invoke the rule. See Goldberg v. State, 95 S.W.3d and osteoporosis due to advanced age. It was also 345, 386 (Tex.App.-Houston [1st Dist.] 2002, pet. noted that Crosby suffered from spinal stenosis and refd). Second, the party seeking to complete the disc desiccation. When asked whether the spinal matter must show that the remainder being offered manipulation treatments Crosby. received from him under rule 107 is on the same subject and is neces- were *903 standard for a seventy-three year old sary to fully understand or explain the matter. See woman, Rayshell responded they were if they were Mendiola, 61 S.W.3d at 545. medically necessary. Although Rayshell did not specifically refer to Kern's affidavit during cross- Even assuming Rayshell's testimony about the examination, the affidavit states that Crosby contents of Kern's affidavit was sufficient to meet suffered from "multi-level degenerative changes the first requirement for the application of rule 107, and problems throughout the spine of a structural we conclude Minyard clearly failed to meet the nature" and, in Kern's opinion, "manipulative care second requirement. Minyard has not shown why it is contraindicated" at Crosby's age. was necessary to admit the affidavit to explain or understand the portions referred to by Rayshell. Al- [2][3][4][5] Crosby contends the trial court though Rayshell discussed many of the opinions set erred in admitting Kern's affidavit because the forth in the affidavit and his reasons for disagreeing statements made in the document are hearsay. See with them, Minyard has made no attempt to show Lewallen v. Hardin, 563 S.W.2d 356, 357 how Rayshell's testimony could have confused or (Tex.Civ.App.-Dallas 1978, no writ) (affidavits are misled the jury regarding the contents of Kern's af- inadmissible hearsay upon final trial of a case).

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fidavit or its meaning. Furthermore, Minyard has merely stated the opinions he was hired to say. not contended that Rayshell misrepresented the statements in the affidavit in any way. Because Before Kern's affidavit was admitted into evid- Minyard failed to meet the second requirement for ence, Crosby elicited testimony from her own med- the application of rule 107, the trial court erred in ical care provider, Rayshell, about a substantial admitting the document. amount of the affidavit's content. During Rayshell's cross-examination after the trial court erroneously [6][7] Having concluded the trial court erred in admitted the affidavit, Rayshell testified without admitting the affidavit, we must now determine objection about the degenerative problems in whether the error was harmful. In other words, we Crosby's spine noted by Kern in the affidavit. In ex- must determine whether the error was reasonably amining the record as a whole, we conclude the tri- calculated to cause and probably did cause the al court's error in admitting Kern's affidavit did not rendition of an improper judgment. See Gee v. contribute to or cause the rendition of an improper Liberzy Mut. Fire Ins. Co., 765 S.W.2d 394, 396 judgment. We resolve Crosby's issue against her. (Tex.1989). Erroneous rulings on the admissibility of evidence are ordinarily not reversible where the We affirm the trial court's judgment. evidence is cumulative and not controlling on a ma- Tex.App.-Dallas,2003. terial issue dispositive of the case. *904 !d. The er- Crosby v. Minyard Food Stores, Inc. ror is harmless if other competent evidence of the 122 S.W.3d 899 fact in question appears elsewhere in the record. Id. at 397; Cash America Intern., Inc. v. Hampton END OF DOCUMENT Place, Inc., 955 S.W.2d 459, 463 (Tex.App.-Fort Worth 1997, pet. denied).

[8) In her appeal, Crosby contends the affi- davit's admission was harmful because it was the only evidence refuting the reasonableness and ne- cessity of her medical care and it was allowed to go unchallenged. Kern's opinions were directly chal- lenged by Rayshell, however, when he stated that his treatment of Crosby was appropriate and Kern's diagnosis of Crosby was not consistent with her test results. Indeed, the jury could not have relied on Kern's assessment of Crosby's medical condition when it rendered its verdict because it awarded her even less money for past medical care than what Kern stated was reasonable and necessary.

Crosby also complains she had no opportunity to cross-examine Kern about his credibility, bias, motive, education, training, and experience. All of these topics, however, were discussed by Rayshell either directly or by implication. Moreover, because Kern was never called as a witness, he had no op- portunity to dispute Rayshell's statements that, as an expert hired for trial, Kern was careless and

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