ACCEPTED

03-14-00709-CV 3761772 THIRD COURT OF APPEALS AUSTIN, TEXAS 1/14/2015 10:35:02 AM JEFFREY D. KYLE CLERK No. 03-14-00709-CV

IN THE FILED IN 3rd COURT OF APPEALS THIRD COURT OF APPEALS AUSTIN, TEXAS AT AUSTIN 1/14/2015 10:35:02 AM JEFFREY D. KYLE ENTERGY TEXAS, INC., Clerk Appellant, v.

PUBLIC UTILITY COMMISSION OF TEXAS, Appellee.

Appeal from the 53rd Judicial District Court, Travis County, Texas The Honorable Amy Clark Meachum, Judge Presiding ________________________________________________________________

APPELLANT’S BRIEF

_________________________________________________________________

John F. Williams [email protected] Marnie A. McCormick [email protected] DUGGINS WREN MANN & ROMERO, LLP 600 Congress Ave., Ste. 1900 (78701) P. O. Box 1149 Austin, Texas 78767-1149 (512) 744-9300 (512) 744-9399 fax ATTORNEYS FOR APPELLANT ENTERGY TEXAS, INC.

ORAL ARGUMENT REQUESTED

January 2015 IDENTITY OF PARTIES AND COUNSEL Pursuant to Texas Rule of Appellate Procedure 38.1(a), the following is a list of all parties to the order appealed from and the names and addresses of all trial and appellate counsel:

Parties: Attorneys: Entergy Texas, Inc. David C. Duggins Appellant John F. Williams Marnie A. McCormick Duggins Wren Mann & Romero, LLP 600 Congress Ave., Ste. 1900 (78701) P. O. Box 1149 Austin, Texas 78767-1149 Counsel in District Court John F. Williams Marnie A. McCormick Duggins Wren Mann & Romero, LLP 600 Congress Ave., Ste. 1900 (78701) P. O. Box 1149 Austin, Texas 78767-1149 Counsel on Appeal Public Utility Commission of Texas Elizabeth R. B. Sterling Appellee Megan M. Neal Environmental Protection Division Office of the Attorney General P.O. Box 12548 Austin, Texas 78711-2548 Counsel in District Court i Texas Industrial Energy Consumers Rex VanMiddlesworth Intervenor Benjamin Hallmark Thompson & Knight LLP 98 San Jacinto Blvd., Ste. 1900 Austin TX 78701 Counsel in District Court Meghan Griffiths Andrews Kurth LLP 111 Congress Ave., Ste. 1700 Austin TX 78701 Counsel in District Court Office of Public Utility Counsel Sara J. Ferris Intervenor Office of Public Utility Counsel 1701 N. Congress Ave., Ste. 9-180 P. O. Box 12397 Austin, Texas 78711-2397 Counsel in District Court ii TABLE OF CONTENTS IDENTITY OF PARTIES AND COUNSEL ............................................................ i  TABLE OF CONTENTS ......................................................................................... iii  INDEX OF AUTHORITIES......................................................................................v  STATEMENT OF THE CASE .............................................................................. viii  STATEMENT REGARDING ORAL ARGUMENT ........................................... viii  ISSUES PRESENTED............................................................................................. ix  NOTE REGARDING ADMINISTRATIVE RECORD .......................................... ix  STATEMENT OF FACTS ........................................................................................1  I.  ETI is an electric utility that is subject to traditional rate regulation by the Public Utility Commission of Texas. ........................................................1  II.  Under traditional ratemaking principles, a utility is entitled to a reasonable opportunity to recover all of its reasonable and necessary expenses and to earn a return on its investment. .............................................2  III.  The Texas legislature has required ETI to participate in a new program that creates new costs and guarantees ETI a way to recover them outside the traditional ratemaking framework........................................5  IV.  The Commission has refused to permit ETI to recover all of the costs that result from the implementation of the new program. ...............................7  SUMMARY OF THE ARGUMENT ......................................................................12  ARGUMENT ...........................................................................................................14  I.  The Commission erred in determining that “unrecovered costs,” as contemplated by PURA section 39.452(b), include only the costs necessary to implement and administer the CGS program, and do not include “lost revenues, embedded generation costs, or any other types of costs.” ........................................................................................................14  A.  The Commission’s decision is inconsistent with the plain language of PURA section 39.452(b). ................................................14  iii B.  The Commission’s decision also contradicts the framework for cost recovery established in PURA section 39.452(b). .......................17  C.  This Court’s decision in CenterPoint Energy Houston Electric, LLC v. Public Util. Comm’n of Tex. does not support the Commission’s decision. ......................................................................20  The Texas legislature in 1999 ordered electric utilities to “unbundle” their generation, transmission, distribution, and customer service functions as part of an effort to introduce competition into the Texas retail electric industry. See Tex. Util. Code Ann. §§ 39.001-.359. However, in the course of implementing the legislature’s mandate, uncertainty developed about whether several areas of the state, including ETI’s service territory, were ready for the successful transition to retail competition. See In re Entergy Corp., 142 S.W.3d 316, 320 (Tex. 2004) (orig. proceeding). In 2009, the legislature amended PURA to require ETI to stop activities relating to the transition to retail competition. See Tex. Util. Code Ann. § 39.452 (i). Accordingly, ETI remains subject to traditional rate regulation. Id. § 39.452(a).

II. Under traditional ratemaking principles, a utility is entitled to a reasonable opportunity to recover all of its reasonable and necessary expenses and to earn a return on its investment.

PURA sets the framework for setting electric utility rates in Texas. See generally Tex. Util. Code Ann. Ch. 36. Under PURA and applicable constitutional principles, a utility is entitled to rates that afford it 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.” Id. § 36.051; Federal Power Comm’n v. Hope Natural Gas Co., 320 U.S. 591, 603 (1944); Bluefield Waterworks & Improvement Co. v. Public Serv. Comm’n of State of W.Va., 262 U.S. 679, 692 (1923). In plain English, that means a rate for a utility like ETI does two, separate things: enables the utility to pay its expenses and to earn a return on its investment. Regarding the former, PURA mandates that the Commission enable a utility to recover all of its reasonable and necessary expenses. Tex. Util. Code Ann. § 36.051; see also Texas Coast Utils. Coalition v. Railroad Comm’n of Tex., 423 S.W.3d 355, 367 (Tex. 2014) (citing Railroad Comm’n of Tex. v. High Plains Natural Gas Co., 628 S.W.2d 753 (Tex. 1981)) (construing materially analogous provision in Gas Utility Regulatory Act).

In Texas, electric utility rates are set for an indefinite period in the future. E.g.,Oncor Elec. Delivery Co. LLC v. Public Util. Comm’n of Tex., 406 S.W.3d 253, 263 (Tex. App. – Austin 2013, no pet.); City of El Paso v. Public Util. Comm’n of Tex., 344 S.W.3d 609, 613 (Tex. App. – Austin 2011, no pet.). To set a rate, the Commission projects the amount of money the utility will need to cover both its expenses and a return on its investment. The total is called the utility’s “revenue requirement” or “cost of service.” See, e.g., City of El Paso v. Public Util. Comm’n of Tex., 883 S.W.2d 179, 187 (Tex. 1994) (ratemaking formula determines “revenue requirement”); Suburban Util. Corp. v. Public Util. Comm’n of Tex., 652 S.W.2d 358, 362 (Tex. 1983) (ratemaking formula determines “cost of service”); City of Dallas v. Railroad Comm’n of Tex., No. 03-06-00580-CV, 2008 WL 4823225 *1 (Tex. App. – Austin Nov. ^[6], 2008, no pet.) (not designated for publication) (using “revenue requirement” and “cost of service” to describe the same thing); 16 Tex. Admin. Code § 25.231 (PUCT’s basic ratemaking rule entitled “cost of service”).

The Commission has adopted a rule governing this process. To calculate a utility’s expected cost of service, the Commission examines the utility’s costs from a historical “test year.” See 16 Tex. Admin. Code § 25.231(a). The Commission evaluates the reasonableness of the utility’s test-year expenses and adjusts them for “known and measurable” changes that occur after the test year. Id. § 25.231(b); see also Oncor Elec. Delivery Co. LLC, 406 S.W.3d at 263. The Commission also determines what level of capital investment (or rate base) is reasonable, and then determines a reasonable rate of return on that investment. E.g., Suburban Util. Corp., 652 S.W.2d at 362. The Commission adds the expense and return components together to calculate the utility’s total cost of service. The Texas Supreme Court has acknowledged that a central goal of this process is to arrive at cost recovery as representative as reasonably possible of the utility’s “cost situation expected in the future.” City of El Paso, 883 S.W.2d at 188; see also Oncor Elec. Delivery Co. LLC, 406 S.W.3d at 263.

Utilities have different classes of customer that have different purposes and needs. Examples of some customer classes are residential, large industrial, and state institutions of higher education. The Commission allocates a utility’s total cost of service among its various customer classes in a process called “rate design.” 16 Tex. Admin. Code § 25.234; Texas Alarm & Signal Ass’n v. Public Util. Comm’n of Tex., 603 S.W.2d 766, 768 n.2 (Tex. 1980). This process results in a separate “bundled” rate for each customer class going forward. The rate design process is intended to assign each class of customer its fair share of the utility’s total cost of service.

III. The Texas legislature has required ETI to participate in a new program that creates new costs and guarantees ETI a way to recover them outside the traditional ratemaking framework.

In 2005, the Texas legislature enacted a statute that required ETI to propose a new program through which some customers could obtain service outside the traditional paradigm. The legislature intended the new program to enable certain retail customers to contract for “competitive generation” instead of relying upon ETI’s portfolio of resources at ETI’s traditionally regulated rates. See Act of May 30, 2005, 79th Leg., R.S., ch. 1072 (HB 1567), § 1 (amended 2006 & 2009) (current version at Tex. Util. Code Ann. § 39.452 (b)).

The provision governing this program currently reads:

An electric utility subject to this subchapter shall propose a competitive generation tariff to allow eligible customers the ability to contract for competitive generation. The commission shall approve, reject, or modify the proposed tariff not later than September 1, 2010. The tariffs subject to this subsection may not be considered to offer a discounted rate or rates under Section 36.007, and the utility’s rates shall be set, in the proceeding in which the tariff is adopted, to recover any costs unrecovered as a result of the implementation of the tariff. The commission shall ensure that a competitive generation tariff shall not be implemented in a manner that harms the sustainability or competitiveness of manufacturers that choose not to take advantage of competitive generation. Pursuant to the competitive generation tariff, an electric utility subject to this subsection shall purchase competitive generation service, selected by the customer, and provide the generation at retail to the customer. An electric utility subject to this subsection shall provide and price retail transmission service, including necessary ancillary services, to retail customers who choose to take advantage of the competitive generation tariff at a rate that is unbundled from the utility’s cost of service. Such customers shall not be considered wholesale transmission customers. Notwithstanding any other provision of this chapter, the commission may not issue a decision relating to a competitive generation tariff that is contrary to an applicable decision, rule, or policy statement of a federal regulatory agency having jurisdiction.

Tex. Util. Code Ann. § 39.452 (b).

This new “competitive generation service” or “CGS” program costs ETI money to develop and administer.^[6] It also costs ETI money in that the CGS program permits eligible customers to contract for electric generation resources from alternative suppliers, which allows them to avoid paying some of ETI’s costs that would otherwise be allocated to them under ETI’s base rates.7 Specifically, the program allows eligible customers to avoid generation, i.e., production-related, costs. The customers continue to pay ETI for applicable transmission, distribution, and customer service costs.8

It is clear from the language of section 39.452(b) that the legislature recognized the implementation of this program may result in “unrecovered costs” to ETI. It is equally clear that the legislature intended the utility to recover “any” such costs.

IV. The Commission has refused to permit ETI to recover all of the costs that result from the implementation of the new program.

In 2009, ETI initiated a general rate case because the rates then in effect did not adequately compensate it for its cost of providing service.9 In accordance with PURA section 39.452(b), quoted above, ETI proposed a CGS program. The program consisted of three riders:

• a CGS Tariff, proposed to describe the mechanics of the program and to identify eligible customers as the Large Industrial Power Service (“LIPS”) class of customers;

• a CGS Cost Rider (“CGSC”), designed to recover from CGS-eligible customers costs related to the start-up and ongoing operations incurred to implement the CGS program; and • a CGS Unrecovered Service Cost Rider (“CGSUSC”).10

The CGSUSC rider is the principal tariff at issue in this appeal. The CGSUSC rider was designed to recover, from non-participating customers, the

8 Supp. AR Binder 3 (Docket No. 37744, ETI Exh. 9, May Direct at 15). 9 Supp. AR Binder 3 (Docket No. 37744, ETI Exh. ^[4], Domino Direct at 5-10). 10 Supp. AR Binder 3 (Docket No. 37744, ETI Exh. 9, May Direct Exh. PRM-1).

base rate costs that CGS customers would avoid by switching. That is, it was designed to recover the fixed costs of generating or acquiring electricity that do not change with changes in customer demand.^[11] For example, CGS customers would avoid the costs of building and running power plants. They would also avoid the costs of capacity acquired under purchased power agreements.^[12] ETI proposed to measure the costs at risk of non-recovery under the CGS program consistent with the way its rates for these bundled services were set. That is, ETI proposed to measure the embedded generation-related costs that migrating customers would have been expected to pay under traditional rates but for the CGS program.^[13]

The Commission assigned Docket Number 37744 to the rate case proceeding. The parties eventually reached an agreement on all the issues in the case except those pertaining to the CGS program. An Administrative Law Judge (“ALJ”) conducted an evidentiary hearing on the CGS issues.

An ETI witness estimated that ETI would incur about $610,000 of costs to implement the program, and another $330,000 annually to keep it going.^[14] Additionally, ETI estimated that, based upon the test year used in Docket No. 37744, the customers expected to be eligible for the CGS program (the LIPS class) represented approximately 23% of ETI’s total demand and 32% of the Company’s total sales.^[15] ETI estimated that the revenue requirement resulting from ETI’s embedded generation costs for the total load eligible for the CGS program was about $57.5 million.^[16] This was the total amount of ETI production costs that eligible customers would avoid if they all took CGS service for their entire load. ETI acknowledged, however, that it could not precisely identify the level of unrecovered costs until the actual level of participation in the CGS program was known.^[17]

After the evidentiary hearing, the ALJ issued a proposal for decision on the CGS issues. The ALJ recommended that the CGS program be rejected altogether, one of the options authorized by the CGS statute. See Tex. Util. Code Ann. § 39.452(b). The basis of the ALJ’s decision was his conclusion that though the program would definitely result in unrecovered costs for ETI, the only feasible way for the Company to recover them in compliance with PURA section 39.452(b)

14 Supp. AR Binder 3 (Docket No. 37744, ETI Exh. 9, May Direct at 19). 15 Supp. AR Binder 3 (Docket No. 37744, ETI Exh. 9, May Direct at 13). 16 Supp. AR Binder 3 (Docket No. 37744, ETI Exh. 9, May Direct at 14). 17 AR Binder 3 (Docket No. 38951, ETI Exh. 101, Roach Supp. Direct at 21).

would be to charge the unrecovered costs to customers that did not participate in the program. The ALJ perceived this result as unfair.18

The Commission did not adopt the ALJ’s proposal. Instead, the Commission severed the CGS issues from the rate case and established a new docket for them to be addressed. The Commission ordered that the record from the rate case be included in the new CGS docket.^[19] The Commission assigned Docket Number 38951 to the new CGS docket, and urged the parties to attempt to settle as many CGS-related issues as possible.

In the new docket, the parties reached agreements on many of the outstanding issues. They filed several stipulations of fact, as well as partial settlements addressing discrete elements of the program. They were unable to agree, however, on the meaning of the phrase “costs unrecovered as a result of implementation of the CGS program tariff” in PURA section 39.452(b).

The Commission issued an interim order on this issue. In that order, the Commission disagreed with the ALJ’s proposal for decision and determined that the term entitles ETI to recover only “costs to implement and administer the CGS program,” not “lost revenues, embedded generation costs, or any other types of costs.” In other words, the Commission determined as a matter of law that the 18 See Supp. AR Binder 2, Item 36 (Docket No. 37744, Proposal for Decision at 2-3). 19 The rate case record was voluminous, and much of it did not pertain to the CGS issue. Only the pieces of the record in Docket No. 37744 that the parties to the district-court proceeding identified as relevant have been included in the record. Again, those pieces comprise the Supplemental Administrative Record, Joint Exhibit 2 of the Reporter’s Record.

statutory term “unrecovered costs” did not include unrecovered “embedded generation costs.” The Commission, therefore, concluded that ETI could not implement its proposed CGSUSC rider.^[20]

After issuance of the interim order, the parties filed supplemental testimony. Some (but not all) of the parties reached another agreement on unresolved issues.^[21] The Commission ultimately adopted some aspects of that agreement, but rejected other aspects of it. In the end, the Commission issued a final order that adopted CGS and CGSC riders but not a CGSUSC rider.^[22]

In its final order, the Commission incorporated its interim order. The agency expressly ruled that ETI may recover only the costs necessary to “implement and administer” the CGS program, and not “lost revenues, embedded generation costs, or any other types of costs.”23 The Commission even excluded from evidence the “CGSUSC” rider that ETI proffered in its supplemental testimony on the ground that the Commission’s interim decision rendered it “irrelevant.”24 The Commission further imposed a limitation on ETI’s ability to recover CGS implementation costs. That is, the Commission ruled that ETI could not accrue (or, consequently, recover) implementation costs incurred before the

20 AR Binder 1, Item 77 (Docket No. 38951, Interim Order at 5-7 & FOFs 38-40). 21 AR Binder 2, Item 113 (Docket No. 38951, May 17, 2013 Stipulation and Settlement Agreement at 4).

22 AR Binder 2, Item 119 (Docket No. 38951, July 19, 2013 Order). 23 AR Binder 2, Item 119 (Docket No. 38951, July 19, 2013 Order at 7-8 & FOFs 50-51). 24 AR Binder 2, Item 25 (Docket No. 38951, Order No. 11).

CGSC rider was approved.^[25] The Commission also declined to authorize ETI to recover interest on its unrecovered balance of CGSC rider costs.^[26]

ETI filed a motion for rehearing challenging each of these decisions.^[27] The motion was overruled by operation of law. ETI then filed a suit for judicial review of the Commission’s decisions on these issues.^[28] The district court, Judge Amy Clark Meachum presiding, summarily affirmed the Commission’s order.^[29] ETI appeals that judgment to this Court.

SUMMARY OF THE ARGUMENT

The Commission erred as a matter of law when it determined that “any costs unrecovered as a result of the implementation of” the CGS program includes only the costs of implementing and administering the program. The Commission’s decision violates the plain language of PURA section 39.452(b), which does not circumscribe the categories of cost eligible for recovery. The decision also violates other provisions of the statute, which evidence the legislature’s intent that “unrecovered costs” be determined using the same test-year production costs that are used to determine base rates, and that the program not constitute a “discounted rate,” enabling ETI to allocate unrecovered base rate costs to customers who do not

25 AR Binder 2, Item 119 (Docket No. 38951, July 19, 2013 Order at FOF 57A). 26 AR Binder 2, Item 119 (Docket No. 38951, July 19, 2013 Order at FOF 57C). 27 AR Binder 2, Item 121 (Docket No. 38951, ETI’s Aug. 8, 2013 Motion for Rehearing). 28 CR 4-19.

29 CR 523-26.

participate in the CGS program. The Commission is bound to give effect to the legislature’s mandates.

The Commission is also bound to adhere to a more fundamental principle of utility ratemaking. That is, the Commission must set rates that afford a utility a reasonable opportunity to recover all of its reasonable and necessary operating expenses. By excluding a significant chunk of ETI’s expenses from eligibility for recovery under CGS program tariffs, the Commission violated this principle.

The only legal justification the Commission gave for its decision is this Court’s opinion in CenterPoint Energy Houston Electric, LLC v. Public Util. Comm’n of Tex., 354 S.W.3d 899 (Tex. App. – Austin 2011, no pet.). This Court in that case construed a different statute that is worded in materially different language from the CGS statute. Viewed in context, the Court’s reasoning in CenterPoint Energy Houston Electric does not support the Commission’s decision – it actually undermines the Commission decision. There is no legal justification for the Commission’s disregard of a clear legislative mandate. The decision to render production costs unrecoverable is entitled to no deference and must be reversed.

The Commission further erred in determining that ETI may not recover costs it incurred to put the legislatively mandated CGS program in place. Again, PURA section 39.452(b) allows ETI to recover any and all costs that result from implementation of the program. Because the program cannot be implemented without start-up costs, the Commission’s decision violates the statute and must be reversed.

Finally, the Commission erred as a matter of law in deciding not to authorize the recovery of interest on CGS implementation costs. The Texas Supreme Court has confirmed that when PURA expressly confers upon a utility a right to recover certain costs, PURA impliedly entitles the utility to recover interest on those costs until they are recovered. See CenterPoint Energy, Inc. v. Public Util. Comm’n of Tex., 143 S.W.3d 81, 84 (Tex. 2004). Regardless of when ETI was entitled to begin accruing implementation costs, ETI is entitled to interest on recoverable amounts until they are recovered. The Commission’s order to the contrary must be reversed.

ARGUMENT

I. The Commission erred in determining that “unrecovered costs,” as contemplated by PURA section 39.452(b), include only the costs necessary to implement and administer the CGS program, and do not include “lost revenues, embedded generation costs, or any other types of costs.”

A. The Commission’s decision is inconsistent with the plain language of PURA section 39.452(b).

PURA section 39.452(b) says that a utility’s rates “shall be set … to recover any costs unrecovered as a result of the implementation of the tariff.” Tex. Util.

Code Ann. § 39.452(b). As the ALJ correctly observed,30 the statute does not limit the categories of cost that are subject to this requirement. So long as a cost flows from the implementation of the CGS program and is not otherwise recovered, it falls within the express language of the statutory mandate.

As noted above, ETI proved there are several categories of costs that may be unrecovered as a result of the implementation of the CGS program. There are costs directly associated with the development of the program itself and carrying costs between the time of expenditure and recovery. Also, under the traditional ratemaking paradigm, ETI’s rates, and the revenue requirement used to establish them, are required by statute and Commission rule to be designed to recover the embedded production costs the Company incurs to serve each and every one of its customers. Tex. Util. Code Ann. § 36.051; 16 Tex. Admin. Code § 25.231(a) & (b). With every customer that migrates to the CGS program, ETI is not recovering through base rates charged to that customer the fixed costs it has previously incurred to provide electricity to that customer. For example, if the fixed test-year cost of serving ten customers is shown to be $50 million, but those ten customers migrate to the CGS program, the utility is at risk of not recovering that $50 million from anyone.

30 Supp. AR Binder 2, Item 36 (Docket No. 37744, Proposal for Decision at 23).

The legislature understood this and mandated that ETI be allowed to recover “any” costs that would otherwise be unrecovered as a result of implementing the program. Tex. Util. Code Ann. § 39.452(b). Even though this mandate is expansive and unlimited in category of cost, the Commission dramatically circumscribed the categories of costs eligible for recovery. The Commission found that the only costs recoverable under the CGS statute are the costs “to implement and administer the CGS program tariff.”31 The Commission did not (nor can it) point to any language in the statute that supports its interpretation.

First and foremost, statutes must be construed according to their plain language. E.g., State v. Shumake, 199 S.W.3d 279, 284 (Tex. 2006). The Commission reads the statute as requiring reimbursement for only the costs “of implementing” the program, giving the phrase “unrecovered as a result of” no meaning. The Commission has written that phrase out of the statute. It is well established that the legislature is presumed to have chosen its words with care, and that statutes should not be construed to render legislatively enacted words superfluous. E.g., Columbia Med. Ctr. of Las Colinas, Inc. v. Hogue, 271 S.W.3d 238, 256 (Tex. 2008). The Commission’s erroneous construction of the clear, unambiguous words of the CGS statute is not entitled to any deference. E.g., Texas Coast Utils. Coalition, 423 S.W.3d at 363 n.16; Ojo v. Farmers Group, Inc.,

31 AR Binder 2, Item 119 (Docket No. 38951, July 19, 2013 Order at 23 & FOF 51).

356 S.W.3d 421, 443 (Tex. 2011) (Willett, J., concurring) (“This Court does not consider agency interpretations of unambiguous statutes.”); Railroad Comm'n of Tex. v. Citizens for a Safe Future & Clean Water, 336 S.W.3d 619, 634 (Tex. 2011) (Jefferson, C.J., concurring) (“We do not defer to agency interpretations of unambiguous statutes.”). The Commission’s decision must be reversed on this basis alone.

B. The Commission’s decision also contradicts the framework for cost recovery established in PURA section 39.452(b).

The Commission’s decision not only flatly ignores the absence of any limitation on costs eligible for recovery and the legislature’s express confirmation that “any” costs be included. The decision also contradicts other language in the statute.

First, the cost recovery framework of section 39.452(b) includes the requirement that “unrecovered costs” be identified, and rates be “set, in the [same] proceeding in which the tariff is adopted,” to recover those costs. Thus, the statute plainly contemplates that the level of “unrecovered costs” will be determined based on the same test-year production costs that are used to determine base rates. By excluding embedded production-related base rate costs from the definition of “unrecovered costs,” the Commission has violated this key requirement of the statute.

Second, the legislature not only entitled ETI to recover costs, but it said some things that affect who may and may not pay them. The legislature prohibited the program from prejudicing eligible customers who choose not to participate in it. See Tex. Util. Code Ann. § 39.452(b). The logical result of that prohibition is that costs avoided by participating customers may not be assigned to customers who are eligible but opt out. The legislature did not, however, say anything that prohibits costs from being recovered from other customers. In fact, the legislature expressly opened the door for recovering costs from other customers. That invitation is embodied in the legislature’s reference in the CGS statute to another provision of PURA – section 36.007. Tex. Util. Code Ann. § 39.452(b) (“The tariffs subject to this subsection may not be considered to offer a discounted rate or rates under Section 36.007….”).

Section 36.007 generally governs what happens when a utility gives a customer a “discounted rate.” That provision prevents a utility from recovering in its base rates, which are charged to all customers that take service under traditional regulation, the “allocable costs of serving customers paying discounted rates under this section….” Id. § 36.007. That is, section 36.007 prohibits a utility from giving one customer a discount, and then saddling another customer with the costs the first one avoided. The result is that, generally, a utility risks having unrecovered costs if it chooses to give a customer a discounted rate.

But the legislature said the CGS program may not result in a “discounted rate.” By saying so, the legislature effectively removed the general prohibition on shifting costs to customers who do not pay a discount, and confirmed that ETI must be allowed to recover the full allocable costs of serving customers even after they migrate to the CGS program. The Commission’s constricted definition of “unrecovered costs” leaves ETI in the same position regarding cost recovery as if it were charging a discount rate.^[32] In this respect, the decision violates the language of section 39.452(b).

The Commission and intervenors have characterized the assignment of costs to non-participating customers as unfair. These arguments ignore that the legislature – not ETI – has required this result. There is no way to implement the CGS program in conformity with the terms of the CGS statute without, in some manner, creating a preferential rate or assigning costs to customers that may not cause them. There is no free lunch, and the legislature dictated that ETI not pick up the tab for the special deal it authorized for certain customers. It gave the Commission the power to cancel the lunch altogether if it could not find a way to pay for it equitably, but did not give the Commission the power to host the lunch at the utility’s expense.

32 Supp. AR Binder 3 (Docket No. 37744, ETI Exh. 76, May Rebuttal at 26); AR Binder 3 (Docket No. 38951, ETI Exh. 91, May Supp. Direct at 8); Supp. AR Part IV, Vol. E (Docket No. 37744, 7/20/2010 Tr. at 341-48).

PUCT Chairman Smitherman acknowledged this fact in his public discussion of the CGS program. Speaking to ETI, he said, “[I]t’s clear you’re not supposed to shoulder the burden of this [program] …” and “[U]nder no circumstances will you eat it [the costs of the program] ….”).33 Nevertheless, the Commission has chosen to implement a CGS program and prevent ETI from recovering costs that may be unrecovered as a result of its implementation.

The Commission is bound to adhere to the strictures of its enabling statute. E.g., Texas Coast Utils. Coalition, 423 S.W.3d at 359-60 (“As a statutorily created body, the Commission has no inherent authority, and instead has only the authority that the Legislature confers upon it.”). The Commission may not violate the plain language of PURA.

C. This Court’s decision in CenterPoint Energy Houston

Electric, LLC v. Public Util. Comm’n of Tex. does not support the Commission’s decision.

The only legal basis the Commission articulated in its order to support its definition of “unrecovered costs” was this Court’s decision in CenterPoint Energy Houston Electric, LLC v. Public Util. Comm’n of Tex., 354 S.W.3d 899 (Tex. App. – Austin 2011, no pet.). The Commission characterized ETI’s request for embedded production costs as a request for “lost revenues,” and found:

50. In CenterPoint, the Third Court of Appeals found that because the language of PURA § 39.905 did not specifically provide for

33 Supp. AR Part IV, Vol. F (Docket No. 37744, Nov. ^[10], 2010 Open Meeting Tr. at 179 & 210).

recovery of “lost revenues” and that in at least two other provisions of PURA the legislature expressly distinguishes “costs” from “revenues,” the term “costs,” as used by the legislature in PURA § 39.905, is not intended to include lost revenues. Like PURA § 39.905, PURA § 39.452(b) only provides for “costs unrecovered as a result of implementation of the tariff” and does not specifically provide for the utility to recover lost revenues or any other type of costs.^[34] According to the Commission, this Court in CenterPoint Energy Houston Electric decided that the term “costs,” everywhere it appears in PURA, is not intended to include “lost revenues.” This Court did not so hold. Even if it had, the holding would not support the Commission’s decision in this case.

1. This Court in CenterPoint Energy Houston Electric construed a different statute that had different language and a different purpose.

CenterPoint Energy Houston Electric concerned a Commission rule implementing a PURA provision that governed an energy efficiency program. In PURA section 39.905, the legislature directed utilities to implement energy efficiency programs to reduce the state’s demand for electricity. Tex. Util. Code Ann. § 39.905. The legislature directed the Commission to establish “energy efficiency cost recovery factors” (“EECRFs”) under which utilities could recover the expenditures they made to satisfy the legislature’s energy efficiency goals. Id. § 39.905(b)(1). The legislature further required a mechanism by which a utility’s EECRF would periodically be trued-up to “reflect any over-collection or under-

34 AR Binder 2, Item 119 (Docket No. 38951, July 19, 2013 Order at 22-23 & FOF 50).

collection of energy efficiency cost recovery revenues in previous years.” Id. § 39.905(b-1). CenterPoint contended these provisions required the Commission to afford it an opportunity to recover not only the expenditures it made to implement its program, but also revenues it lost as a result of the program’s success in reducing demand for electricity. This Court disagreed, holding that the EECRF statute precluded the Commission from accounting for “lost revenues” in the reconciliation mechanism. CenterPoint Energy Houston Electric, 354 S.W.3d at 905.

The CenterPoint Energy Houston Electric decision does not inform the question presented in this case. The language of the EECRF statute is materially different from the language of the CGS statute. The EECRF statute authorizes “cost recovery for utility expenditures made to satisfy the goal of this section….” Tex. Util. Code Ann. § 39.905(b)(1) (emphasis added). The use of the term “expenditures,” and the qualification of eligible expenditures as those made for the purpose of satisfying the energy efficiency program goal, circumscribe the universe of costs eligible for recovery under the EECRF. The Court determined that this language, “[c]onsidered in context,” indicates an intent for a utility to recover “out- of-pocket expenditures associated with its implementation of energy-efficiency programs, not to compensate a utility for any associated lost revenues attributable to those programs.” CenterPoint, 354 S.W.3d at 904.

The CGS statute, in contrast, requires that “rates shall be set … to recover any costs unrecovered as a result of the implementation of the tariff.” Id. § 39.452(b) (emphasis added). The CGS language is broader than the EECRF language. “Any” costs means just that, including fixed production costs incurred to provide electric service to customers who ultimately migrate to the CGS program. In contravention of this language, the Commission has categorically precluded ETI from recovering these costs via the CGSUSC rider. This Court’s construction of the EECRF statute does not speak to the proper construction of the CGS statute, much less bind the Commission to misconstrue the latter.

2. The Court’s reasoning in the CenterPoint Energy

Houston Electric case does not support the Commission’s decision here.

The Commission cites the CenterPoint Energy Houston Electric decision as support for the broad proposition that the concepts of “costs” and “revenues” are distinct throughout PURA, such that express authority to recover “costs” is never authority to recover “revenues” the utility has lost as the result of the implementation of one program or another. a. This Court did not distinguish “costs” and “revenues” for all purposes.

This Court did not say that. The only issue before the Court in CenterPoint was the scope of costs recoverable under the EECRF statute. CenterPoint argued that the cost-recovery provisions of the EECRF statute authorized utilities to recover not only the direct costs of implementing the energy efficiency program, but also “revenues” lost as a result of implementing that program. In rejecting that argument, the Court first examined the express language of the energy efficiency provisions. The Court then observed that the legislature in two other places in PURA distinguished between “costs” and “revenues.” CenterPoint Energy Houston Electric, 354 S.W.3d at 903-04. The Court said, “[t]hese provisions further support our conclusion that the term ‘costs,’ as used by the legislature in PURA, is not intended to include lost revenues.” Id. at 904. This discussion appeared in the context of construing the EECRF provision. The Court certainly did not cite or discuss the CGS provision. It is clear from the language of the CGS statute that the legislature did intend the utility to recover costs that result from implementing that program. Those are the very words of the statute. b. Regardless, ETI indisputably sought “costs” here.

Furthermore, the facts before this Court in CenterPoint Energy Houston Electric were fundamentally different from those presented in this case. CenterPoint asked to recover “lost revenues” that were not tied to the particular category of “expenditure” it was entitled to recover under the EECRF statute. ETI in contrast, does not seek “lost revenues” different from or in addition to the “costs” it is entitled to recover under the statute. ETI gets to recover “any” costs that result from CGS program implementation, including production costs.

None of the experts in this case disputed that the CGS program could lead to unrecovered “costs” of the type claimed by ETI, and the ALJ agreed it would.^[35] While intervenor and Staff experts argued that certain alleged benefits of the CGS program, or revenues from load growth, might be available to offset ETI’s unrecovered costs, they did not say that the Company could not experience unrecovered production costs. This fact is confirmed in the agreement on how to quantify the rate reduction that CGS customers earn by switching from traditional rates. The credit is explicitly based on the level of ETI’s fixed production costs that CGS customers are able to avoid paying by switching.^[36]

Logically, then, ETI proposed to measure its unrecovered costs caused by migrating LIPS customers by calculating “the difference between what would have been billed under traditional LIPS service and the amounts collected under CGS service.”37 What would have been billed may logically be termed “revenues.” But even assuming arguendo that a utility cannot recover lost “revenues” without the

35 Supp. AR Binder 2, Item 36 (Docket No. 37744, Proposal for Decision at 2-3 & 21-22); Supp. AR Binder 4 (Docket No. 37744, OPUC Exh. ^[1], Johnson Direct at 85 & 88 (“The CGSUSC rider will allow the company to flow through unrecovered embedded cost to other customer classes.”); Docket No. 37744, Kroger Exh. ^[1], Higgins Direct at 6; Docket No. 37744, State Agencies Exh. ^[2], Pevoto Direct at 39-41; Docket No. 37744, TIEC Exh. ^[1], Pollock Direct at 51- 52 & Exh. JP-16); AR Binder 3 (Docket No. 38951, ETI Exh. 91, May Supp. Direct at 6-7); Supp. AR Part IV, Vol. E (Docket No. 37744, 7/20/2010 Tr. at 261-63). 36 AR Binder 2, Item 113 (Docket No. 38951, Stipulation and Settlement Agreement ¶ A.^[1] & Attachment 1, “Competitive Generation Service” tariff at ¶ VI.B; Docket No. 38951, July 19, 2013 Order at FOF 41.c. 2-4); AR Binder 3 (Docket No. 38951, ETI Exh. 101, Roach Supp. Direct at 7-8).

37 Supp. AR Binder 3 (Docket No. 37744, ETI Exh. 9, May Direct at 21); AR Binder 3 (Docket No. 38951, ETI Exh. 91, May Supp. Direct at 6-7).

legislature expressly saying so, the Commission reached the wrong decision here. Though “costs” and “revenues” may not be the same in all contexts, they are the same in the context of what ETI was seeking in this case.^[38]

In the test-year ratemaking construct, a utility’s revenues are designed to recover exactly the amount of its costs.^[39] A utility’s “revenue requirement” is its “cost of service.” And just as test-year expenses determine what a utility’s anticipated future revenue requirement will be for a particular class, a utility’s anticipated revenue requirement for a class of customers establishes what are indisputably the costs of serving those customers. Unlike CenterPoint, ETI is not seeking to recover lost revenues in addition to, or instead of, a category of costs that are guaranteed by a statute. The costs ETI seeks here – and the “revenues” that the Commission says the Company seeks – are the same thing. The ALJ understood this reality.^[40]

Even this Court in CenterPoint Energy Houston Electric recognized a connection between eligible costs and revenues when it discussed the EECRF true- up provision. That is, the Court acknowledged that CenterPoint was entitled to

38 Supp. AR Binder 4 (Docket No. 37744, OPUC Exh. ^[1], Johnson Direct at 88 (“Revenues are intended to equal embedded cost of service for the adjusted test year.”)); Supp. AR Binder 3 (Docket No. 37744, ETI Exh. 76, May Rebuttal at 28); AR Binder 3 (Docket No. 38951, ETI Exh. 92, May Supp. Rebuttal at 4-5).

39 AR Binder 3 (Docket No. 38951, ETI Exh. 91, May Supp. Direct at 7; Docket No. 38951, ETI Exh. 92, May Supp. Rebuttal at 4); Supp. AR Binder 4 (Docket No. 37744, OPUC Exh. ^[1], Johnson Direct at 88; Docket No. 37744, TIEC Exh. ^[1], Pollock Direct at 51-52 & Exh. JP-16 (recognizing that ETI could incur unrecovered costs)). 40 Supp. AR Binder 2, Item 36 (Docket No. 37744, Proposal for Decision at 22).

recover revenues equal to its EECRF costs. CenterPoint Energy Houston Electric, 354 S.W.3d at 901. The Court simply found that CenterPoint was seeking revenues unrelated to the narrow class of costs the EECRF statute addressed -- those related to setting up and running the EECRF program. The same logic, applied to the broader language of the CGS statute, leads to the inescapable conclusion that ETI is entitled to recover all the costs it incurred (or, stated differently, revenues it would have received to cover those costs) but for the CGS program. Thus, though the CenterPoint Energy Houston Electric decision is not on point because it addresses statutory language fundamentally different from the CGS statute, this Court’s reasoning in that case undermines the Commission’s decision in this case.

D. The Commission’s decision runs afoul of the principle espoused in High Plains and its progeny.

The Commission’s decision not only violates the language and intent of PURA section 39.452(d), it also violates a more fundamental tenet of Texas utility ratemaking also embodied in that statutory language. That is, as noted above, PURA requires that a utility’s rates be set to permit it to recover all of its reasonable and necessary operating costs. Tex. Util. Code Ann. § 36.051. The Texas Supreme Court construed a materially identical requirement in the Gas Utility Regulatory Act and concluded that the Railroad Commission violated the requirement by adopting a tariff that provided for less than 100% of the utility’s cost recovery. The Court noted that the statutory language at issue “mandates that the Commission structure a system that will permit the utility to recover all of its operating expenses.” See High Plains Natural Gas Co., 628 S.W.2d at 753. The Texas Supreme Court last year reiterated the same principle, citing High Plains Natural Gas Co., in upholding a Railroad Commission tariff that was designed to give the utility the opportunity to recover all of its reasonable and necessary costs. See Texas Coast Utils. Coalition, 423 S.W.3d 367. The Commission’s decision in this case, like the Railroad Commission’s decision in High Plains, categorically renders ineligible for recovery certain costs that are indisputably reasonable and necessary for the utility to provide service to customers. This is contrary to law and must be reversed.

E. The quantity of production costs eligible for recovery is not at issue here -- the Commission never reached that issue.

There was much debate before the Commission and district court over the extent to which ETI’s embedded production-related costs will actually be unrecovered, and the extent to which unrecovered costs might be offset or mitigated upon implementation of the CGS program. Indeed, both the Commission and intervenor Texas Industrial Electric Consumers (“TIEC”) argued that the basis of the Commission’s decision was a determination that none of ETI’s embedded production costs will be unrecovered as a result of the CGS program. These parties will likely make the same argument again. It has no merit.

The Commission did not make a factual determination that ETI will not have any unrecovered costs as a result of CGS program implementation.

The Commission said:

The Commission finds that unrecovered costs are only those costs necessary to implement and administer the CGS program and are not to be defined to include lost revenues, embedded generation costs, or any other types of costs.

***

In making its determination of the definition of unrecovered costs, the Commission follows the precedent set in CenterPoint Energy Houston Electric, LLC v. Pub. Util. Comm’n, 354 S.W.3d 899 (Tex. App. – Austin, 2011 no pet.) … Like PURA § 39.905, PURA § 39.452 (b) [the CGS statute] only provides for “costs unrecovered as a result of implementation of the tariff” and does not specifically provide for the utility to recover lost revenues or any other type of costs.

Based on the evidence and testimony, the Commission finds that the proper interpretation of “costs unrecovered as a result of implementation of the CGS program tariff” is costs to implement and administer the CGS program tariff. Such unrecovered costs do not include lost revenues, embedded generation costs, or any other types of costs. The Commission reverses the proposal for decision on this issue.41

In short, the Commission’s order is based solely upon its interpretation of the CGS statute. The Commission did not reach the issue of how much of ETI’s costs will be unrecovered as a result of implementing the CGS program, because the Commission defined the term “unrecovered costs” in a way that precludes the

41 AR Binder 2 (Docket No. 38951, Final Order at 6, 7-8; see also FOFs 49-51) (emphasis added; footnotes omitted)).

issue from arising. The Commission concluded that the words “any unrecovered costs” in PURA section 39.452(b) include only the costs of implementing and administering the CGS program. That is the only reason the Commission gave for rejecting the proposed CGSUSC rider, which was designed to recover embedded production costs avoided by participating CGS customers.

To be clear, the debate on appeal is not whether -- or what -- costs will in fact be unrecovered. The question before this Court is whether ETI is statutorily entitled to recoup unrecovered, embedded production-related costs of serving customers that migrate to the CGS program. The Commission answered that question in the negative. This Court must reverse that decision because it contravenes the clear language and intent of PURA section 39.452(b).

II. The Commission erred in determining that ETI may not recover CGS implementation costs prior to the date that the CGSC rider is approved.

In addition to its request to recover, via its CGSUSC rider, all embedded production-related costs that are unrecovered as a result of customers migrating to the CGS program, ETI sought to recover through its CGSC rider all the costs of implementing and administering the CGS program. Though the Commission apparently recognized that ETI is entitled to recover its costs of implementing and administering the program, the Commission improperly narrowed the universe of costs that qualify. The Commission decided that ETI “should not be able to recover any costs via the CGSC rider until the CGS program is implemented.”42 The Commission found:

57A. The appropriate date upon which ETI is authorized to begin accruing CGS program implementation and administration costs is the date that the CGS Rider implemented [sic].43 The effect of this ruling is to prevent ETI from recovering the lion’s share of the CGS implementation costs it has incurred in the conduct of this proceeding and in its previous good faith efforts to reach agreement with the parties on a host of issues related to the design of the CGS program and tariffs. These collaborative efforts among the parties led to stipulations on the vast majority of the elements of the CGS program and tariffs. Before the underlying proceeding had concluded, ETI had already incurred over $900,000 in costs toward implementation of the program.44

The Commission’s decision on this issue violates the plain language of PURA section 39.452(b). Again, that statute requires that ETI be allowed to recover “any costs unrecovered as a result of the implementation of the [CGS] tariff….” Tex. Util. Code Ann. § 39.452(b). The statute does not limit recoverable

42 AR Binder 2, Item 119 (Docket No. 38951, July 19, 2013 Order at 9). 43 AR Binder 2, Item 119 (Docket No. 38951, July 19, 2013 Order at 25 & FOF 57A). 44 AR Binder 3 (Docket No. 38951, ETI Exh. 101, Roach Supp. Direct at 15). There is a small amount of CGS-related expense (approximately $300,000) that forms part of the test-year costs upon which ETI’s base rates were established in Docket No. 37744. ETI proposed to credit that amount under the CGSC rider, so the costs will not be recovered twice. AR Binder 3 (Docket No. 38951, ETI Exh. 101, Roach Supp. Direct at 15; Docket No. 38951, ETI Exh. 103, Roach Supp. Rebuttal at 3).

costs to those incurred in any particular time period. The provision contemplates recovery of all CGS tariff implementation costs, regardless of when they are incurred.

This is not the first time the Commission has assigned an unduly narrow meaning to the concept of program implementation. In the docket underlying CenterPoint Energy Houston Electric, LLC v. Public Util. Comm’n of Tex., 408 S.W.3d 910 (Tex. App. – Austin 2013, pet. denied) (“CenterPoint Energy Houston Electric II”), the Commission decided CenterPoint was not entitled to a performance bonus on energy efficiency programs funded by $10 million in settlement proceeds. The basis for the Commission’s decision was that although performance bonuses were due on programs “implemented under” the Commission’s rule, the programs at issue were implemented under a settlement, not the rule. In reversing the Commission’s decision, this Court noted, “the PUC’s position here unnecessarily complicates what is fairly standard statutory and regulatory language. ‘Implement’ simply means ‘carry out.’” CenterPoint Energy Houston Electric II, 408 S.W.3d at 917. The Court applied this common-sense meaning to the word, holding that CenterPoint was entitled to a performance bonus on all its programs “carried out” to achieve the energy efficiency goals of the rule, so long as they met the other requirements of the rule, regardless of the source of program funding.

The same common-sense meaning should be applied to the word “implementation” in the CGS statute. Furthermore, the Court should give effect to the breadth of the CGS entitlement. That is, in the CGS statute, the legislature not only entitled the utility to the costs of implementing the program; the legislature also entitled the utility to the unrecovered costs that result from implementing the program. Without incurring the costs of proposing, negotiating, and developing the CGS tariff (and the associated CGSC and CGSUSC riders), the program could not be implemented or “carried out.”45 The costs incurred to develop the tariff and riders are just as much a result of program implementation as are the costs incurred after they are adopted and go into effect. Moreover, excluding recovery of any of these costs is inconsistent with the legislative intent, discussed above, that ETI not subsidize the implementation of the CGS program and tariffs. In short, the Commission’s limitation of the time frame for accrual of CGS implementation costs is contrary to PURA section 39.452(b) and must be reversed.

45 AR Binder 3 (Docket No. 38951, ETI Exh. 103, Roach Supp. Rebuttal at 2).

III. The Commission erred in deciding not to authorize the recovery of interest on CGS implementation costs.

Finally, ETI requested to earn interest on the unrecovered balance of the CGSC rider charges.46 The Commission decided that ETI should not be permitted to recover interest on this balance.47 The Commission found:

57C. It is not appropriate for ETI to recover interest on the unrecovered balance of the CGSC rider charges.48 The sole rationale for the Commission’s decision is that it typically does not allow interest to accrue on the unamortized balance of legal and consulting expenses (i.e., “rate case expenses”) that utilities incur in prosecuting full, general rate cases.49

That is not a legitimate basis upon which to deny ETI interest on unrecovered CGSC rider charges. Rate case expenses are not governed by PURA section 39.452(b), which assures, without exception, ETI’s right to recover all costs associated with implementing the CGS program. The time value of money that ETI must forego while it waits for the CGSC rider to be approved, and that it will just as surely forego between periods of adjustment to that rider, is an

46 AR Binder 3 (Docket No. 38951, ETI Exh. 101, Roach Supp. Direct, Exh. DRR-SD-3 at 2 (Section V “True-Up Provision”) and DRR-SD-6 (redline) at 2 (Section V “True-Up Provision”)).

47 AR Binder 2, Item 119 (Docket No. 38951, July 19, 2013 Order at 10). 48 AR Binder 2, Item 119 (Docket No. 38951, July 19, 2013 Order at 25 & FOF 57C). 49 AR Binder 2, Item 119 (Docket No. 38951, July 19, 2013 Order at 10).

unrecovered cost to the same extent as are the other CGS program implementation costs.50

The Texas Supreme Court’s decision in CenterPoint Energy, Inc. v. Public Util. Comm’n of Tex., 143 S.W.3d 81, 84 (Tex. 2004) confirms that when PURA expressly confers upon a utility a right to recover certain costs, PURA impliedly entitles the utility to recover interest on those costs until they are recovered. In CenterPoint Energy, Inc., CenterPoint sought to accrue interest on stranded costs until they were quantified. PURA section 39.252(a) expressly authorized utilities like CenterPoint to recover their stranded costs that resulted from the introduction of retail competition into their service territories. Tex. Util. Code Ann. § 39.252(a). PURA did not expressly authorize utilities to earn interest on their unrecovered stranded costs. The Commission adopted a rule that precluded the utility from beginning to accrue interest on the stranded costs when they arose, and required the utility to wait to accrue interest until the stranded costs were quantified. The Texas Supreme Court invalidated the rule, holding that it was “inconsistent with the Legislature’s intent, expressed in Chapter 39 of the PURA, that utilities fully recover their ‘net, verifiable, nonmitigable stranded costs’ … A two- or three-year gap in recovery of carrying costs would not permit generation

50 AR Binder 3 (Docket No. 38951, ETI Exh. 101, Roach Supp. Direct at 17; Docket No. 38951, ETI Exh. 103, Roach Supp. Rebuttal at 6).

companies full recovery of their stranded costs as the Legislature envisioned.” CenterPoint Energy, Inc., 143 S.W.3d at 84.

The Court’s reasoning applies equally to this case. ETI is statutorily entitled to recover all of its costs of implementing the CGS program, including interest. The Commission, in denying ETI the right to earn interest on unrecovered amounts, violated PURA section 39.452(b). This Court must reverse the Commission’s ruling on this issue.

PRAYER

For all these reasons, Entergy Texas, Inc. respectfully requests that the Court reverse the district court’s judgment insofar as it upholds the Commission’s decision in the respects discussed above. ETI has the statutory right to recover: its embedded production-related costs that are unrecovered as a result of implementing the CGS program; costs ETI incurred to implement the program before the CGSC rider becomes effective; and interest on the unrecovered balance of costs incurred to implement the CGS program. ETI requests that this Court remand the case to the Commission for further proceedings consistent with the Court’s decision. Finally, ETI requests its costs of court and any other relief to which it may show itself justly entitled.

Respectfully submitted, DUGGINS WREN MANN & ROMERO, LLP

By: /s/ Marnie A. McCormick John F. Williams [email protected] Marnie A. McCormick [email protected] P. O. Box 1149 Austin, Texas 78767-1149 (512) 744-9300 (512) 744-9399 fax ATTORNEYS FOR APPELLANT ENTERGY TEXAS, INC.

CERTIFICATE OF COMPLIANCE

I certify that this document contains 9,085 words in the portions of the document that are subject to the word limits of Texas Rule of Appellate Procedure 9.4(i), as measured by the undersigned’s word-processing software. /s/ Marnie A. McCormick Marnie A. McCormick

CERTIFICATE OF SERVICE

As required by Texas Rule of Appellate Procedure 9.5, I certify that on the 14th day of January, 2015, the foregoing document was electronically filed with the Clerk of the Court using the electronic case filing system of the Court, and that a true and correct copy was served on the following lead counsel for all parties listed below via electronic service:

Elizabeth R. B. Sterling Megan M. Neal Environmental Protection Division Office of the Attorney General P.O. Box 12548 Austin, TX 78711-2548 Counsel for the Public Utility Commission of Texas Rex VanMiddlesworth Benjamin Hallmark Thompson & Knight LLP 98 San Jacinto Blvd., Ste. 1900 Austin, TX 78701 Counsel for Texas Industrial Energy Consumers Sara J. Ferris Office of Public Utility Counsel 1701 N. Congress Ave., Ste. 9-180 P.O. Box 12397 Austin, TX 78711-2397 Counsel for Office of Public Utility Counsel

/s/ Marnie A. McCormick Marnie A. McCormick

APPENDICES

A. Final Order of the Public Utility Commission of Texas in Docket No. 38951

B. Interim Order of the Public Utility Commission of Texas in Docket No. 38951

C. Entergy Texas, Inc.’s Motion for Rehearing in Docket No. 38951

D. Texas Utilities Code section 39.452(b)

E. District Court’s Judgment

APPENDIX A

FINAL ORDER

. ... .

• , .. . - f '

• l ·' : .I r. ! ) '"

PUC DOCKET NO. 38951

- '2013 JUL I 9 PH 3: II t--\l,JL I(; .J' II.

I ( ( ( • I'

FILi l'fG C( t. R,..,' .. ~ .l..t·:

APPLICATION OF ENTERGY TEXAS, § PUBLIC UTILITY COMMISSION INC. FOR APPROVAL OF § COMPETITIVE GENERATION § OF TEXAS SERVICE TARIFF (ISSUES SEVERED § FROM DOCKET NO. 37744) §

ORDER

I. Introduction

This order addresses Entergy Texas, Inc. 's (ETI's) application for a competitive generation service (CGS) under PURA § 39.452(b). The Commission approves ETI's CGS rider and competitive generation service cost (CGSC) rider as set out in this order.

This order incorporates the Commission's interim order issued in this docket on June 12, 2012 and the Commission's rulings adopting in part and rejecting in part the stipulation and settlement agreement filed by ETI, Texas Industrial Energy Consumers (TIEC), and Commission Staff on May 17, 2013. The interim order addressed the Commission' s decision regarding three threshold issues surrounding ETI's CGS program. The May 17 settlement, as adopted in part and rejected in part, resolves all other contested issues in this docket.

II. Procedural History

ETI submitted its proposed CGS tariff and related riders in Docket No. 37744, its last rate case. ^[1] In that rate case, the parties settled on all issues except for ETI's CGS proposal. After a hearing on the CGS proposal and the associated riders, the administrative law judge (AU) forwarded the parties' stipulation and settlement agreement and the proposal for decision to the Commission for consideration.

1 Application of Entergy Texas, Inc. for Authority to Change Rates and Reconcile Fuel Costs, Docket No. 37744, Corrected Application (Feb. ^[23], 201 0). PUC Docket No. 389~1 Order Page 2 of27 The Commission considered the settlement and the proposal for decision at the November 10 and December 1, 2010 open meetings. The Commission adopted the settlement for the rate case issues and severed the CGS issues into this docket, including the record in Docket No. 37744. 2 At the December 1, 201 0 open meeting, the Commission requested the parties to enter into negotiations and work to come to agreement on as many of the undetermined CGS program issues as possible, and then bring the issues for which an agreement could not be reached back to the Commission for consideration. Status reports were filed on January 13 and 28, February 18, March 11 , and April 8, 2011. These reports indicated that parties continued to negotiate and that they were working to narrow the contested issues. On September 8, 2011, State Agencies, Cities, OPUC, Kroger, and Wal-Martjointly filed a motion requesting a decision on the proposal for decision in this docket TIEC and Commission Staff filed responses to the joint motion and generally opposed the motion. At its September 29, 2011 open meeting, the Commissioners considered the motions and issued an order requiring the parties to file pleadings identifying the CGS tariff issues that have been settled on by the parties and identifying the issues for which a settlement could not be reached. The parties were also permitted to identify issues that are contingent upon the Commission's determination of the unsettled issues.

On November 1, 2011, several parties3 filed an agreed list of settled issues. However, the parties did not agree on a recommendation as to how the unsettled issues and issues that are contingent on the Commission's determination of unsettled issues should be addressed and resolved by the Commission. Therefore, TIEC also separately filed a list of unsettled issues and request for procedural schedule. TIEC also requested that the Commission receive additional evidence in order to resolve the unrecovered costs issue because ETrs proposal in Docket No. 37744 was based on ETI's proposal for an energy-only program, not an energy and capacity-based program. TIEC reported that during the time period when the parties were 2 Application of Entergy Texas, Inc. for Authority to Change Rates and Reconcile Fuel Costs, Docket No. 37744, Order No. 14 Memorializing Decision Granting Motion to Sever (Dec. 3, 2010). 3 Cities, Entergy, OPUC, Commission Staff, State Agencies, and Wal·Mart/Sam's East Kroger Company did not oppose the agreed settled issues and Cottonwood Energy has not participated in the discussions. PUC Docket No. 38951 Order Page3 of27 negotiating, the Entergy Operating Committee had agreed that CGS power from qualifying facilities in the ETI service territory could provide firm generation.• At the December 8 and December 15, 2011 open meetings, the Commission decided that the parties should submit stipulated facts, the Commission would re-open the record to admit additional evidence, and then the Commission would make a decision on the unsettled issues. After that, the Commission planned to issue an interim order reflecting the decisions on the unsettled, threshold issues.

On January 20, 2012, the parties submitted agreed settlement terms and stipulated facts. The parties reached agreement in principle on a number of discrete items within the overall framework of the CGS program and tariffs. Many of the items were simply elements of larger program issues that retained, at that time, one or more unsettled aspects essential to final resolution of that program issue. Items as to which there was agreement in principle were "subject to satisfactory resolution of unsettled issues."s On January 26, 2012, ETI submitted supplemental direct testimony. On February 10, 2012, the intervenors submitted supplemental direct testimony and on February 25, 2012, ETI and intervenors submitted rebuttal and cross rebuttal testimony. The parties submitted statements of position and pre-hearing briefs on March 26, 2012. On April 13, 2012, the parties submitted an unopposed stipulation on the threshold issue regarding customers responsible for paying unrecovered costs. The parties, except ETI, agreed that CGS customers would be the only ETI customers responsible for unrecovered costs of the CGS program. ETI did not join or oppose this stipulation.^[6] On April 18, 201 2, the parties submitted a third stipulation on customer eligibility stating that large industrial power service (LIPS) customers would be the COS-eligible customers, with certain limitations on the LIPS customers' participation and other program minimums and caps.7 The Commission held a hearing on the remaining contested threshold issue-what types of costs will be considered unrecovered for purposes of PURA § 39.452(b}-on April 19, 2012. • TIEC's Response to Joint Motion for Decision on Proposal for Decision at 4 (Sep. ^[15], 20 11 ). 5 CGS Stipulated Maners and Stipulated Facts (Jan. ^[20], 2012). 6 Unopposed Stipulation on Unresolved Issue No. 3 (Apr. ^[13], 2012). 7 Stipulation on Unresolved Issue No. 2 (Apr. 18, 20 12). PUC Docket No. 38951 Order Page4 ofl7 An interim order was issued on June 12, 2012. It was expected that the parties would reach agreement on the remaining issues.

On November 27, 2012, TIEC filed a motion to adopt a CGS program and submitted proposed CGS riders for approval. TIEC and ETI had not been able to resolve certain issues related to the CGS tariffs and TIEC stated that continued negotiations would only result in further delay of the implementation of the CGS program. 8 Commission Staff requested that the parties be required to submit a procedural schedule to govern the handling of the docket. 9 ETI submitted its own version of the CGS tariffs for approval and proposed procedures to lead to final disposition of this docket. ^[10] The Commission AU issued Order No. 10 adopting a procedural schedule that required the parties to indicate by February 8, 2013 whether a hearing was necessary. TIEC filed a letter stating that no party intended to file a request for a live hearing to cross-examine witnesses on the remaining contested issues. ^[11] Cities, OPUC, ETI, TIEC, and Commission Staff filed briefs on March 1, 2013 and reply briefs on March 20, 2013. At the April25, 2013 open meeting, the parties gave oral argument and the Commissioners discussed the Entergy Operating Committee review of the capacity component of the CGS program and the proposed MISO regulatory change provision. The Commission deferred its ultimate decision on all of the issues to the May 9, 2013 open meeting.

On May 8, 2013, TIEC filed a letter stating that TIEC and ETI had reached a preliminary agreement on the remaining disputed issues, but that the other parties had not had an opportunity to review the agreement 12 At the May 9 open meeting, the Commission deferred consideration of the docket until the May 23, 2013 open meeting. ETI filed a stipulation and settlement agreement on May 17, 2013 that addressed each of the disputed issues that remained in this case. ETI, TIEC, and Commission Staff signed the 1 TIEC's Motion to Adopt a Competitive Generation Services Program (Nov. ^[27], 2012). 9 Com.mission Staff's Response to TIEC' s Motion to Adopt a Competitive Generation Services Program (Dec 4, 2012).

CGS program. TIEC's version of the CGSC rider would permH ETI to be able to recover the incremental, reasonable, and necessary CGS program implementation and administration costs generation costs, or any other types of costs." The Company respectfully submits that this ruling is inconsistent with the plain terms and requirements ofPURA § 39.452(b), which broadly encompass not only tariff implementation and administration costs, but also the embedded production costs that ETI will lose the ability to recover as a result of the COS program and tariffs. For the same reason, the Company excepts to and requests rehearing of the Commission's ruling excluding ETI' s proposed COS USC Rider tariff and related testimony from evidence, since that ruling follows from the Commission's reading of Section 39.452(b).l As the SOAH judge correctly concluded, ETI's right to recover costs that arise due to the implementation of the COS program and tariffs is not subject to limiting terms or categories.3 The statute does not state that ETI shall recover only costs incurred "in implementing and administering the COS tariff." Instead, the plain terms of the statute entitle ETJ to recover "any" manner of costs that would otherwise be unrecovered "as a result or• the tariff's implementation. The Commission's limitation of ''unrecovered costs" to a single specific category of costs (implementation and administration costs) is not consistent with the statute. ETI is entitled to an opportunity to show under the statute, and has shown by its evidence, that implementation of the COS tariffs will cause it to incur production costs that it cannot recover absent Commission provision for recovery in this case.

The Commission's interpretation of ''unrecovered costs" is also at odds with the framework for cost recovery established in PURA § 39.452(b). First, the statute makes clear that the COS program may not operate like a discount rate under PURA § 36.007; that is, the effect of the COS program must n ot be that ETI is prevented from recovering the full "allocable costs of serving customers... .'"' Since PURA § 39.452(b) says, in effect, that ETI cannot be precluded, due to the COS program, from recovering the allocable costs of servi ng its customers, it necessarily follows that ''unrecovered costs" include those very same types of costs, and not merely implementation and administration costs. In addition, the cost recovery framework of Section 39.452(b) includes a requirement that "unrecovered costs" be identified, and rates be "set, in the [same) proceeding in which the tariff is adopted," to recover those costs. Thus, the statute plainly contemplates that the level of "unrecovered costs" be determined based on the same test year production costs that are used to determine base rates in that same proceeding. This is the approach that ETI's evidence and testimony takes in this case; ETI's witnesses identify the portion of the test year costs that will no longer be paid by customers migrating to COS service and utilize that amount as the measure of unrecovered costs. s The Commission's definition of unrecovered costs does not give effect to this key requirement of the statute.

The provisions of Section 39.452(b) evidence the legislature's intent to ensure that ETI not be required to subsidize the COS program,' as recognized by Chairman Smitherman in his discussion of the COS program. 7 Moreover, the provisions in Section 39.452(b) preventing the COS tariff from being treated as a discount rate are clearly intended to avoid the result in past rate cases where the Company's shareholders were required to absorb any shortfall in cost recovery arising from the offering of discount rates to retail industrial customers.• Contrary to this legislative intent, under the Commission's definition of ''unrecovered costs,'' the evidence in this case shows that ETI will lose any opportunity or ability to recover a portion of the fixed production costs it incurs to serve its customers, because customers moving to the COS program will cease paying their share of those costs and no other customers will pick up the shortfall in cost recovery. In these circumstances, the Commission's interpretation of the tcnn "unrecovered costs" has two statutorily impermissible impacts: I) it prevents ETT from recovering costs that are unrecovered as a result of the COS program's implementation, or even

1 See, e.g., PFD at 22.

' PFD at 3 (~the CGS legislation makes clear ETI is not to bear any costs as a result or the implementation or the program.").

1 Open Meeting (Nov. ^[10], 2010) Tr. at 179 ("'it"s clear you're not supposed to shoulder the burden or this (program) ...."), 210 ("under no c~wnstances wall you eat it (costs or program) ...."). ' E.g., Application of Entugy Tuas for Approval oflrs Traruition to Competition Plan, and for the Authority to Reconcile Fuel Costs, to Set Revised Fuel Factors, and to Recover a Surcharge/or Under-Recovered Fuel Cos11, Docket No. 16705, Proposal ror Oocision at 399; Second Order on Rehearin& at 37-38. FoF 247-252 (Sep. ^[4], 1998).

the opportunity to make a demonstration that it has experienced "unrecovered costs"; and 2) it puts ETI in the same position as it would be if it were charging a discounted rate to COS customers (that is, ETI and its shareholder have to absorb the shortfall in recovery and thereby subsidize the COS program).

The Commission supports its position regarding the definition and scope of "unrecovered costs" almost exclusively by reference to the Third Court of Appeals decision in CenterPoint Energy Houston Electric, LLC v. Pub. Uti/. Comm'n.9 For numerous reasons, that case is not pertinent to this proceeding. First, ETI 's proposed defmition of unrecovered costs addresses not lost revenues, but instead recovery of test year fixed production costs that it would recover through base rates from the COS customer, but for that customer's switch to COS service. As the AU determined and the evidence clearly demonstrates, "the ' unrecovered costs' referenced in PURA § 39.452(b) and the ' lost revenue' that ETI has calculated as the measure of the unrecovered costs are one and the same in the ratesetting context."10 The expert witnesses in this case agreed with the ALJ on this point, and they also recognized that these fixed production costs could constitute a variety of "unrecovered costs" within the meaning of Section 39.452(b). 11 Tellingly, the rate reduction that COS customers earn by switching from their former firm Large Industrial Power Service ("LIPS'') rates is explicitly based on the level ofETI's fixed production costs that they are able to avoid paying by the switch. ^[12] The Commission, however, has not recognized any means by which ETI can seek to recover those costs in its order. Instead, the Commission has categorically precluded their recovery. ^[13] From this discussion, it should be evident the Third Court's ruling in CenterPoint-that "lost revenues" and "unrecovered costs" are distinct statutory terms-does not address or justify the Commission's determination that ETI will not experience and cannot recover any manner of unrecovered costs (save for implementation/administration costs). Finally, the CenterPoint decision is distinguishable from the case at hand because of the clear differences in the COS-related statutory provisions and the energy efficiency-related provisions that were before the Third Court of Appeals. PURA § 39.905(bXl) specifies that energy efficiency cost recovery is limited to "expenditures made;" i.e., "out of pocket expenditures associated with [the utility's] implementation of energy-efficiency programs ...."t 4 This is a completely different context and standard from the cost recovery concept set out in PURA § 39.452(b). Under the CGS statute, the standard for recovery-"any costs unrecovered as a result of the implementation of the tariff"-must be read in context with the requirement that the program not have the impact of a discounted rate. Viewing these provisions as a whole demonstrates that PURA § 39.452(h) is intentionally aimed at recovery of otherwise forgone embedded production costs. Recovery of such costs is the focus of the Company's proposed definition and tariff provisions. For all these reasons, ETI respectfully submits that the Commission's determination regarding the scope and definition of "unrecovered costs" (as well as its exclusion from evidence of ETI's proposed CGSUSC tariff and explanatory testimony) is contrary to PURA, affected by error of law, arbitrary and capricious, an abuse of discretion, and unsupported by substantial evidence. Furthermore, the Commission's action contradicts ETI's right, under PURA § 36.051 and the Texas and United States Constitutions,ts to rates sufficient to provide a reasonable

11 The Commission's decision to narrowly define ''unrecovered costs" to include only implementation and administration costs has rendered immaterial claims by the other parties that maners such as capacity value, load growth, or reductions in the variability of QF put, should be considered as offsets or as means to recoup "unrecovered costs." To the extent any party anempts to defend the Commission's order on the basis of such offsets, they are not contemplated by PURA § 39.452(b), are speculative, hypothetical, and unquantifiable at this time, and do not eliminate the existence of unrecovered costs and the need for a proper, staMorily supported defmition supporting their recovery. E.g., Tr. at 251 (TIEC witness concedes offsets caMot be quantified); TIEC Initial Brief at 16 (alleged reduced operational costs associated with implementation of CGS program caMot be quantified). These alleged offsets do not provide a reasonable basis or substantial evidence for iiS rulings regarding the meaning of "unrecovered costs," nor remedy the flaws in statutory interpretation regarding PURA § 39.452(b). "CenterPoint, 354 S.W.3 d at 901,904.

" See Tex. Const. An. I,§ 19; U.S. Const. Amend. V, XIV.

opportunity to earn a reasonable return over and above the recovery of its reasonable and necessary expenses.

Point of Error No. 3: The Commission erred in determining that ETI may not recover CGS implementation costs prior to the date that Rider CGS is approved. (Final Order at 8-9, 11, FoF 57A, Ordering Paragraph 8).

The Commission determined that ETI could only begin to recover CGS program implementation and administration costs (i.e., the costs to be recovered under the future CGS Cost, or "CGSC" Rider), on the date of the tariff's approval and further implementation pursuant to that approval (that is, July 19, 2013). The effect of this ruling is to prevent ETI from recovering the lion's share of the CGS implementation costs it has incurred in the conduct of this proceeding and in its previous good faith efforts to reach agreement with the parties on a host of issues related to the design of the CGS program and tariffs. ^[16] These collaborative efforts among the parties led to stipulations as to the vast majority of the elements of the CGS tariff. The Commission's decision in this instance is at odds with the plain meaning of the statutory requirement in PURA § 39.452(b) that ETI be allowed to recover "any costs unrecovered as a result of the implementation of the [CGS] tariff...." This provision contemplates recovery of all CGS tariff implementation costs, regardless of when they are incurred. Without incurring the costs of bringing the CGS program and tariffs to this point, ETI and the Commission could not implement the tariff. Moreover, excluding recovery of these costs is inconsistent with the legislative intent, described in Point of Error No. I, that ETI not subsidize the implementation of the CGS program and tariffs. For these reasons, the Company respectfully submits that the Commission's determination regarding the timeframe for recovery of CGS implementation costs is contrary to the applicable statutory requirements, affected by error of law, arbitrary and capricious, an abuse of discretion, and unsupported by substantial evidence.

Point of Error No. 4: The Commission erred in its determination not to authorize the recovery of interest on CGS implementation costs. (Final Order at 10-11, FoF 57C, Ordering Paragraph 5).

The Commission determined that it "is not appropriate for ETI to recover interest on the unrecovered balance of the CGSC rider charges." 17 The Commission supported its

16 There is a small amount of CGS-related expense (approximately $300,000) that forms pan of the test year costs upon which ETI's current base rates were established. ^[11] Fof 57C.

determination by comparison to its recent practice regarding the treatment of rate case expenses, "which are typically amortized over a three-year period without a return on the unamortized balance." 11 The Commission's practice regarding the amortization and recovery without interest of rate case expenses, however, has not, to ETI's knowledge, been the subject of judicial review and is not controlling in this case. Rate case expenses are not governed by PURA § 39.452(b), which assures, without exception, ETI's the ability to recover all otherwise unrecovered implementation costs associated with the CGS program. The time value of money ETI must forgo while it waits to begin recovery of CGS program administration and implementation costs, via the yet to be established CGSC Rider, and which it wi ll just as surely forgo between periods of adjustment to that rider, is an unrecovered cost to the same extent as are other CGS program implementation costs. In an analogous context, the Texas Supreme Court has ruled that when otherwise statutorily mandated recovery of costs by a utility is delayed, then recovery of interest to reflect the time value of money is likewise required. ^[19] For these reasons, the Commission' s denial of the recovery of interest is contrary to the applicable statutory requirements, affected by error of law, arbitrary and capricious, an abuse of discretion, and unsupported by substantial evidence. Ln conclusion, ETI respectfully requests that the Commission grant this motion for rehearing in all respects. ETI requests such other and further relief to which it may show itself justly entitled.

Respectfully submitted, Steven H. Neinast Assistant General Counsel ENTERGY SERVICES, INC.

919 Congress Avenue, Suite 840 Austin, Texas 78701 (512) 487-3957 telephone (512) 487-3958 facsimile John F. Williams Jay Breed veld DUGGINS WREN MANN & ROMERO, LLP 600 Congress Avenue, Suite 1900 P.O. Box 1149 Austin, Texas 78767-1149 (512) 744-9300 telephone (512) 744-9399 facsimile

APPENDIX D

Texas Utilities Code § 39.452(b) V.T.C.A., Utilities Code § 39.452 Page 1 OCT-16-2014 15:03 201ST DISTRICT COURT 512 854 2268 P.04/0S OCT-16-2014 15:03 201ST DISTRICT COURT 512 854 2268 P.0S/0S

TOTAL P.05