                                                                                          ACCEPTED
                                                                                      03-14-00735-CV
                                                                                              5515882
                                                                           THIRD COURT OF APPEALS
                                                                                      AUSTIN, TEXAS
                                                                                  6/2/2015 4:16:02 PM
                                                                                    JEFFREY D. KYLE
                                                                                               CLERK




                                                                   FILED IN
                 NO. 03-14-00735-CV                         3rd COURT OF APPEALS
                                                                AUSTIN, TEXAS
                                                            6/2/2015 4:16:02 PM
                                                              JEFFREY D. KYLE
                                                                    Clerk
                     ENTERGY TEXAS, INC., ET AL.,
                                               Appellants,

                                    v.

         PUBLIC UTILITY COMMISSION OF TEXAS, INC., ET AL.,
                                            Appellees.


                              R EPLY B RIEF



                Filed by: Public Utility Commission of Texas


KEN PAXTON
Attorney General of Texas           ELIZABETH R. B. STERLING
                                    Assistant Attorney General
CHARLES E. ROY                      State Bar No. 19171100
First Assistant Attorney General    elizabeth.sterling@texasattorneygeneral.gov


JAMES E. DAVIS                      Environmental Protection Division
Deputy Attorney General for         P.O. Box 12548, MC-066
Civil Litigation                    Austin, Texas 78711-2548
                                    512.463.2012
JON NIERMANN                        512.457.4616 (fax)
Chief, Environmental Protection
Division

                                                                  June 2, 2015

                      Oral Argument Requested
                                            Table of Contents

Table of Contents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i

Index of Authorities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii

Glossary.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii

Issues Presented.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v

Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Summary of Reply. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Argument. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

         A.       In the fuel reconciliation, the Commission properly
                  removed $4 million in fuel expenses incurred to serve
                  wholesale customers from the amount of fuel expenses
                  Entergy should recover from its retail ratepayers.. . . . . . . . . . . 4

         B.       The Commission’s Order complies with its rules.. . . . . . . . . . . 5

         C.       The Commission’s Order resulted in just and reasonable
                  final fuel rates.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

         D.       Entergy fails to show that it was harmed by the
                  Commission’s Order.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Conclusion and Prayer.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Certificate of Compliance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Certificate of Service. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

APPENDICES

16 Tex. Admin. Code § 25.236. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A

16 Tex. Admin. Code § 25.237.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B

                                                            i
                                        Index of Authorities

Cases                                                                                                  Page(s)

Entergy Gulf States, Inc. v. Pub. Util. Comm’n,
     173 S.W.3d 199 (Tex. App.—Austin 2005, pet. denied). . . . . . . . . . . 6


Statutes

Tex. Util. Code
  § 11.002. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
  § 36.203. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8


Rules

16 Tex. Admin. Code
   §§ 25.01–.508. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv
   § 25.236(b).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii
   § 25.236(d)(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
   § 25.236(e)(1)(A) & (C).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
   § 25.236(e)(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
   § 25.236(e)(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 5, 8
   § 25.236(e)(4). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
   § 25.237(a)(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii, 7




                                                         ii
                                Glossary

ALJ                   Administrative Law Judge

Cities                Cities of Anahuac, Beaumont, Bridge City,
                      Cleveland, Conroe, Dayton, Groves, Houston,
                      Huntsville, Montgomery, Navasota, Nederland, Oak
                      Ridge North, Orange, Pine Forest, Rose City,
                      Pinehurst, Port Arthur, Port Neches, Shenandoah,
                      Silsbee, Sour Lake, Splendora, Vidor, and West
                      Orange, Texas These cities are in the service area of
                      Entergy Texas, Inc. and participated as parties in
                      the rate case at the Commission.

Commission            Public Utility Commission of Texas

Entergy               Entergy Texas, Inc., the utility that asked the
                      Commission to reconcile fuel expenses in this case

ERCOT                 Electric Reliability Council of Texas

FERC                  Federal Energy Regulatory Commission

Fuel factor           A temporary rate set by the Commission to recover
                      the utility’s fuel costs See 16 Tex. Admin. Code
                      § 25.237(a)(3).

Fuel reconciliation   After the utility has collected for fuel costs using the
                      fuel factor, it returns to the Commission to reconcile
                      actual fuel costs with amounts recovered under the
                      Fuel Factor. See 16 Tex. Admin. Code § 25.236(b).

Line losses           Electricity that the utility generates but is “lost” as it
                      travels along the wires from the generator to the
                      customer (More electricity is generated than is
                      metered where it is used.)

Order                 The Commission’s order on rehearing that is the
                      subject of this lawsuit (AR, Item 244.)


                                     iii
Reconciliation period The two-year period from June 1, 2009, through
                      July 31, 2011; the period during which Entergy
                      incurred fuel expenses that were reconciled in this
                      administrative case

Rule                   The Commission’s electric rules are found at 16
                       Texas Administrative Code §§ 25.01–508. In this
                       brief the Commission refers to its rules as Rule
                       25.___ rather than using the longer citation, i.e., 16
                       Tex. Admin. Code § 25.236(e)(3) will be referenced
                       as Rule 25.236(e)(3) in the brief.

$4 million             A rounded-up amount used to represent the
                       $3,981,271 of fuel expenses that the concurrent line-
                       loss study revealed was lost delivering electricity to
                       wholesale customers rather than delivering
                       electricity to retail customers during the
                       reconciliation period




                                     iv
                              Issues Presented

A utility recovers expenses for fuel used to generate electricity that is lost as
it is delivered to the customer. The Commission found that $4 million of
fuel expenses that was estimated in the temporary rates (called a fuel
factor) to be lost serving retail customers was actually lost serving
wholesale customers. Because the Commission only sets rates for retail
customers, did it reasonably deduct that $4 million from the costs that
Entergy could recover in its final rates (fuel reconciliation) from its retail
customers?




                                        v
                                Introduction

   The Commission files this reply to the “Fuel Costs” section of Entergy’s

Response Brief.

   The Commission properly removed nearly $4 million ($3,981,271) from

Entergy’s recoverable fuel expenses when it reconciled Entergy’s fuel

costs—when it determined the utility’s final fuel rates for retail service

provided during the two-year period from June 1, 2009, through July 31,

2011 (reconciliation period). Entergy’s concurrent line-loss study revealed

that $4 million was spent on fuel for electricity that was lost delivering the

electricity to wholesale customers rather than delivering that electricity to

retail customers. Thus, it was not part of the actual, retail fuel costs and

was properly excluded from final rates.

   The fuel reconciliation revealed that estimated line losses of serving

retail customers were not the actual line losses of serving retail customers.

The difference appeared because, when the Commission approved

Entergy’s fuel factor that applied during the reconciliation period, it used a

line-loss study performed in 1997. A line-loss study estimates the amount

of electricity that is lost while delivering it from the generator to the end-

user. The cost for generating that lost electricity is billed to customers so

that the utility can recover its reasonable and necessary expenses. When


                                        1
the Commission conducted the fuel reconciliation in this case, it used the

2010 line-loss study. That study, performed during the reconciliation

period and approved by the Commission in this case (AR, Order, FF

246–247), revealed that $4 million of fuel expenses that were estimated to

be lost delivering electricity to retail customers was actually lost delivering

electricity to wholesale customers.

                             Summary of Reply

   Entergy’s arguments fail to acknowledge the impact of the jurisdictional

separation between the Commission, which sets Entergy’s retail rates, and

the Federal Energy Regulatory Commission (FERC), which sets Entergy’s

wholesale rates, on the line-loss issue in this appeal.

   Entergy ignores the conclusions that naturally follow from the

jurisdictional separation.

   Because FERC sets Entergy’s wholesale rates and the Commission sets

only its retail rates, the fuel costs that the Commission allows Entergy to

recover in final fuel rates are only costs incurred to serve retail customers.

Fuel costs incurred to serve wholesale customers cannot be included as

reasonable and necessary fuel expenses recovered from retail customers.

Thus, the Commission properly excluded the cost of fuel used to generate

electricity that was lost (line losses) in order to serve wholesale customers


                                       2
during the reconciliation period. The Commission reasonably used the

Commission-approved line-loss study done during the reconciliation

period because it more accurately determines the separation of wholesale

fuel costs from retail fuel costs that occurred as a result of line losses during

the relevant period.

   Because the FERC sets Entergy’s wholesale rates and the Commission

sets only its retail rates, the classes included in rates set by the Commission

include only retail customer classes. Thus, interclass allocations that the

Commission makes under Rule 25.236(e)(3) are only among retail classes.

But the Commission’s decision to separate out fuel expenses incurred to

serve wholesale customers affected the total amount of fuel expenses that

are reasonably and necessarily recovered through the Commission’s rates.

The Commission was not allocating those expenses among retail customer

classes.

   Because FERC sets Entergy’s wholesale rates and the Commission sets

only its retail rates, recovery of line losses from wholesale customers will be

controlled by FERC, not the Commission. Looking only at a Commission-

set fuel factor and Commission-determined fuel reconciliation will show

nothing about whether Entergy recovered its expenses for fuel used to




                                        3
generate electricity that was lost (line losses) in order to serve wholesale

customers.

                                  Argument

A.     In the fuel reconciliation, the Commission properly
       removed $4 million in fuel expenses incurred to serve
       wholesale customers from the amount of fuel expenses
       Entergy should recover from its retail ratepayers.

     The Commission properly reconciled the amount of fuel expenses that

retail ratepayers actually owed for service during the reconciliation period

because the updated line-loss study revealed that $4 million in expenses for

fuel was incurred serving wholesale customers rather than serving retail

customers.

     As explained in earlier Commission briefing, a utility’s fuel expenses are

recovered not through base rates, but through a two-step factor-and-

reconciliation process. The Commission adopts a temporary rate called a

fuel factor that estimates what the utility’s fuel expenses will be. But final

rates are determined after the expenses were incurred so that the final rate

accurately reflects the actual, reasonable and necessary amount the utility

incurred in fuel expenses to serve its customers during the reconciliation

period. The fuel factor is based on estimated costs, based on estimated

usage, and is a temporary rate; the fuel reconciliation is based on actual

costs, based on actual usage, and results in an actual rate.

                                        4
     There is no expectation that the estimated fuel expenses used to develop

the fuel factor will be the same as the actual fuel expenses found in the fuel

reconciliation. That is the very reason for the reconciliation. The two-step

factor-and-reconciliation process is used precisely because it is expected

that the estimated fuel expenses will differ from the actual fuel expenses.

Thus, there is nothing exceptional about the Commission’s decision that

retail ratepayers actually used less electricity during the reconciliation

period than estimated. That this difference in usage was revealed by the

most current line-loss study is no reason to ignore that less electricity was

generated, and therefore less fuel used, to serve retail customers. Expenses

incurred to serve wholesale, rather than retail, customers are not

reasonable and necessary expenses to include in retail rates.

B.     The Commission’s Order complies with its rules.

     Contrary to Entergy’s arguments, Rule 25.236(e)(3) does not apply to

the Commission’s decision that $4 million in wholesale costs should be

removed from final retail fuel rates. Expenses to serve wholesale customers

are not included in the pot of fuel expenses that the Commission allocates

among retail rate classes.

     Not only is Rule 25.236(e)(3) about refunds, which Entergy did not

request in this case, but more fundamentally, the Commission can only


                                       5
apply that rule to Entergy’s retail rate classes. This is necessarily true

because the Commission can only set retail rates for Entergy. See Entergy

Gulf States, Inc. v. Pub. Util. Comm’n, 173 S.W.3d 199, 207 (Tex.

App.—Austin 2005, pet. denied) (explaining that FERC regulates the sale of

Entergy’s sale of electricity at wholesale (citing 16 U.S.C. § 824(b); Entergy

La., Inc. v. Louisiana Pub. Serv. Comm’n, 539 U.S. 39, 41, 156 L.Ed.2d 34

(2003)). The Commission cannot order refunds or assess surcharges

against Entergy’s wholesale customers because the Commission has no

jurisdiction to set Entergy’s wholesale rates—only its retail rates.1 Thus, the

Commission’s decision that $4 million in fuel costs were incurred to serve

wholesale rather than retail customers is unaffected by a rule that

addresses Entergy’s interclass allocations only among retail classes.

   None of the other rules Entergy cites require the Commission to impose

wholesale fuel costs on retail customers.

• Rules 25.236(e)(1)(A) & (C) are about the calculation of interest. That

   does not impact the Commission’s authority as part of the fuel

   reconciliation to determine that fuel costs incurred to serve wholesale

   customers are not to be imposed on retail customers.




      1
          Entergy’s indication on page 14 of its response brief is thus wrong: Entergy’s
wholesale customers cannot buy electricity under a Commission tariff.

                                            6
• Rule 25.236(e)(2). Because the Commission sets no wholesale rates,

  there is no Commission-tariffed rate schedule for wholesale customers

  that the Commission has authority to adjust.

• Rule 25.236(e)(4) concerns intraclass allocations. Although it mentions

  wholesale customers, it can have no application to the Commission’s

  regulation of Entergy because the Commission has no jurisdiction to set

  wholesale rates for Entergy. Because that utility is outside ERCOT, its

  wholesale sales are in interstate commerce.

And the rules the Commission cited in its Order do apply.

• Rule 25.236(d)(2). Because the Commission sets only retail rates, it

  would be unreasonable for the Commission to include fuel expenses

  incurred to serve wholesale customers in the actual, final rates, and any

  wholesale fuel expenses Entergy recovered from its retail customers

  through the fuel factor were an over-recovery from its retail customers.

• Rule 25.237(a)(3). Because fuel factors are only temporary rates, the

  Commission can adjust final fuel rates in the reconciliation proceeding

  to reflect the utility’s actual fuel expenses to serve retail customers

  during the reconciliation period. In the reconciliation, the Commission

  is free to use a current line-loss study to determine what fuel expenses

  Entergy actually incurred due to line losses serving its retail customers.


                                      7
     Finally, there is no conflict between these rules and Rule 25.236(e)(3).

Because, for Entergy, the Commission only has authority to set retail rates,

the Commission-set rates include only retail rate classes. Therefore, the

interclass allocations addressed in Rule 25.236(e)(3) apply only to retail

rate classes.

C.     The Commission’s Order resulted in just and reasonable
       final fuel rates.

     The Commission’s Order implements the statutorily prescribed

legislative intent. That intent is stated in Section 11.002 of the Utilities

Code: “The purpose of this title is to establish a comprehensive and

adequate regulatory system for public utilities to assure rates, operations,

and services that are just and reasonable to the consumers and to the

utilities.” The Commission regulates only retail rates for Entergy. And the

Legislature, in Section 36.203 of the Utilities Code, authorized the

Commission to use a fuel factor—a process where final fuel rates are not

determined until a fuel reconciliation is done after the actual expenses are

known. The Commission’s decision—refusing to allow Entergy to recover

fuel expenses incurred to serve wholesale customers from retail

customers—fulfills the legislative intent. It is reasonable to consumers and

to the utility to require retail customers to pay only for expenses incurred to

provide service to retail customers. And the change from the estimated

                                        8
amount to the actual amount was effected through the two-step fuel-factor-

and-reconciliation process authorized by the Legislature.

   Entergy’s attempts to show the Commission’s decision as anything other

than reasonable are unavailing. Entergy’s statement: “Nor did any party

challenge the reasonableness or necessity of the fuel costs actually incurred

for the reconciliation period,” (Entergy Resp. Br. at 4; see also at 19) is at

best misleading.

   While it is true that no party challenged whether the prices Entergy paid

for its fuel were too high, Cities challenged the reasonableness of including

$4 million of fuel expenses that were actually incurred to serve wholesale

customers in fuel rates for only retail customers. Cities’ witness Nalepa

stated: “[Entergy]’s own analysis demonstrates that adjusting the

allocation of fuel costs over the reconciliation period to reflect the actual

line losses for each voltage level for the reconciliation period results in

retail customers subsidizing wholesale customers by approximately $3.98

million.” (AR, Cities Ex. 6 at 44, Binder 9.) And Cities’ brief filed at the

administrative proceeding states: “Failing to reflect the actual line losses

for the reconciliation period … would result in Texas retail customers

subsidizing wholesale and non-fuel factor customers by $3,981,271.” (AR,

Item 161 (Cities’ Initial Br.) at 86, Binder 4.) This testimony and argument


                                        9
show that Cities challenged the reasonableness of including fuel expenses

incurred to serve wholesale customers in Entergy’s final fuel rates for retail

service.

   Entergy is also wrong to suggest that the Commission’s Order fails to

support its decision. Although the Commission’s Order could have been

stated more clearly, when read as a whole, the Order’s finding that

Entergy’s “fuel reconciliation over-recovery should be reduced by

$3,981,271” (Order, FF 246A) reveals that, although Entergy paid

reasonable amounts for the fuel it purchased, Entergy over-recovered

approximately $4 million in fuel expenses that was incurred to serve

wholesale, rather than retail customers.

   The findings that Entergy cites, Findings 214 and 217, 218 and 221, and

222 and 225, show that the amounts paid for natural gas expenses, coal

expenses, and purchased-energy expenses were reasonable. Although it

would have been clearer had the Commission modified those findings when

it added Finding 246A, all the findings taken together with the discussion

on page nine of the Order explain that the overall amount of retail fuel

expenses, modified by removing the $3,981,271 for fuel expenses incurred

to serve wholesale customers, is the reasonable and necessary amount.

And Conclusion of Law 17 does not include any amount. The amount of


                                      10
fuel expenses the Commission found reasonable and necessary is the

amount that results from all of its findings of fact, including Finding 246A.

     The Commission’s Order complies with the legislative intent that the

Commission use a two-step fuel-factor-and-reconciliation process to

develop rates that are reasonable to the consumers and to the utility. The

Order is supported by the record and is internally consistent.

D.     Entergy fails to show that it was harmed by the
       Commission’s Order.

     Because FERC, not the Commission, sets wholesale rates, any recovery

of line losses from wholesale customers will be controlled by FERC, not the

Commission. Thus, looking only at a Commission-set retail fuel factor and

Commission-determined retail fuel reconciliation will reveal nothing about

whether Entergy recovered its expenses for fuel used to generate electricity

that was lost (line losses) serving wholesale customers.

     The record in this case contains no evidence about Entergy’s FERC-set

wholesale rates. Thus, the evidence equally supports a finding that

Entergy’s wholesale fuel costs were under-recovered or over-recovered.

     The testimony Entergy cites to show harm is unavailing. First, Entergy’s

witness stated: “you’re going outside my expertise.” (AR Part III, Binder

43, Vol. I (May 1, 2012, Tr. at 1470–410).) And the witness further

assumes: “you retroactively change an allocation factor and you don’t have

                                      11
the ability to go back and recover those costs from anyone else,” but, as

explained above, the Commission did not allocate costs to any wholesale

rate class. Thus, the Commission neither allocates nor adjusts an allocation

of those costs to wholesale customers; the Commission only allocates retail

costs among retail customers. Moreover, because Entergy provided no

information about wholesale rates, which are set by the FERC, the Court

cannot know whether Entergy has “the ability to go back and recover those

costs from anyone else” or whether the utility already recovered those costs

from wholesale customers.

   Entergy has not shown that it was harmed.

                         Conclusion and Prayer

   Entergy’s arguments against the Commission’s fuel-costs decision fail to

appreciate that FERC sets Entergy’s wholesale rates and the Commission

sets only retail rates. When the Commission determined that $4 million of

costs Entergy claimed as fuel expenses to serve retail customers were

actually incurred to serve wholesale customers, it reasonably removed that

amount from the fuel expenses Entergy could recover from retail customers

through the fuel reconciliation.

   The Commission asks the Court to issue the judgment that the district

court should have issued: one that affirms the Commission’s Order on all


                                     12
issues. Thus, the Commission asks the Court to affirm the district court’s

judgment on the issues raised by Entergy and OPUC, but to reverse the

district court’s judgment to the extent that it found error in the

Commission’s Order. The Commission asks the Court for such other relief

as it may be entitled.

                                Respectfully submitted,

                                KEN PAXTON
                                Attorney General of Texas

                                CHARLES E. ROY
                                First Assistant Attorney General

                                JAMES E. DAVIS
                                Deputy Attorney General for Civil Litigation

                                JON NIERMANN
                                Division Chief
                                Environmental Protection Division

                                /s/ Elizabeth R. B. Sterling
                                Elizabeth R. B. Sterling
                                Assistant Attorney General
                                Texas State Bar No. 19171100
                                elizabeth.sterling@texasattorneygeneral.gov

                                Environmental Protection Division
                                Office of the Attorney General
                                P.O. Box 12548, MC-066
                                Austin, Texas 78711-2548
                                512.463.2012
                                512.457.4616 (fax)

                                COUNSEL FOR PUBLIC UTILITY
                                COMMISSION OF TEXAS

                                      13
                      Certificate of Compliance

       I certify that the foregoing computer-generated document has 2,507
words, calculated using the computer program WordPerfect 12, pursuant to
Texas Rule of Appellate Procedure 9.4, and that the total number of words
for all of the Commission’s briefing is 15,905.

                                 /s/ Elizabeth R. B. Sterling
                                 Elizabeth R. B. Sterling




                                   14
                         Certificate of Service

      I hereby certify that on this the 2nd day of June 2015, a true and
correct copy of the foregoing document was served on the following counsel
electronically, through an electronic filing service and by email:


                                           /s/ Elizabeth R. B. Sterling
                                           Elizabeth R. B. Sterling

Counsel for Appellant Entergy Texas, Inc.:

Marnie A. McCormick
Patrick J. Pearsall
Duggins, Wren, Mann & Romero, LLP
P. O. Box 1149
Austin, Texas 78767-1149
512.744.9300
512.744.9399 (fax)
mmccormick@dwmrlaw.com
ppearsall@dwmrlaw.com


Counsel for Appellants Cities of Anahuac, et al.:

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




                                      15
Counsel for Appellant Office of Public Utility Counsel:

Sara J. Ferris
Senior Assistant Public Counsel
Office of Public Utility
P.O. Box 12397
Austin, Texas 78711-2397
512.936.7500
512.936.7520 (fax)
sara.ferris@opuc.texas.gov

Counsel for State Agencies:

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

Counsel for Texas Industrial Energy Consumers:

Rex VanMiddlesworth
Benjamin Hallmark
Thompson & Knight LLP
98 San Jacinto Blvd., Ste. 1900
Austin, Texas 78701
512.469.6100
512.469.6180 (fax)
rex.vanm@tklaw.com
benjamin.hallmark@tklaw.com




                                   16
APPENDIX A
CHAPTER 25. SUBSTANTIVE RULES APPLICABLE TO ELECTRIC SERVICE
PROVIDERS.

Subchapter F. METERING.


§25.236. Recovery of Fuel Costs.

(a)     Eligible fuel expenses. Eligible fuel expenses include expenses properly recorded in the Federal
        Energy Regulatory Commission Uniform System of Accounts, numbers 501, 502, 503, 509, 518, 536,
        547, and 555, as modified in this subsection, as of April 1, 2013, and the items specified in paragraph
        (8) of this subsection. Any later amendments to the System of Accounts are not incorporated into this
        subsection. Subject to the commission finding special circumstances under paragraph (7) of this
        subsection, eligible fuel expenses are limited to:
        (1)       For any account, the electric utility may not recover, as part of eligible fuel expense, costs
                  incurred after fuel is delivered to the generating plant site, for example, but not limited to,
                  operation and maintenance expenses at generating plants, costs of maintaining and storing
                  inventories of fuel at the generating plant site, unloading and fuel handling costs at the
                  generating plant, and expenses associated with the disposal of fuel combustion residuals.
                  Further, the electric utility may not recover maintenance expenses and taxes on rail cars
                  owned or leased by the electric utility, regardless of whether the expenses and taxes are
                  incurred or charged before or after the fuel is delivered to the generating plant site. The
                  electric utility may not recover an equity return or profit for an affiliate of the electric utility,
                  regardless of whether the affiliate incurs or charges the equity return or profit before or after
                  the fuel is delivered to the generating plant site. In addition, all affiliate payments must
                  satisfy the Public Utility Regulatory Act (PURA) §36.058.
        (2)       For Accounts 501 and 547, the only eligible fuel expenses are the delivered cost of fuel to the
                  generating plant site excluding fuel brokerage fees. For Account 501, revenues associated
                  with the disposal of fuel combustion residuals will also be excluded.
        (3)       For Account 502, the only eligible fuel expenses are environmental consumables that are:
                  properly recorded in the Account as chemicals; required to comply with applicable state or
                  federal emission reduction statutes, orders, and regulations; and whose use is directly
                  proportional to the fuel consumed to generate electricity.
        (4)       For Account 509, the only eligible fuel expenses are allowances expensed concurrent with the
                  monthly emissions of sulfur dioxide and nitrogen oxides.
        (5)       For Accounts 518 and 536, the only eligible fuel expenses are the expenses properly recorded
                  in the Account excluding brokerage fees. For Account 503, the only eligible fuel expenses
                  are the expenses properly recorded in the Account, excluding brokerage fees, return, non-fuel
                  operation and maintenance expenses, depreciation costs and taxes.
        (6)       For Account 555, the electric utility may not recover demand or capacity costs.
        (7)       Upon demonstration that such treatment is justified by special circumstances, an electric
                  utility may recover as eligible fuel expenses fuel or fuel related expenses otherwise excluded
                  in paragraphs (1) - (6) of this subsection. In determining whether special circumstances exist,
                  the commission shall consider, in addition to other factors developed in the record of the
                  reconciliation proceeding, whether the fuel expense or transaction giving rise to the ineligible
                  fuel expense resulted in, or is reasonably expected to result in, increased reliability of supply
                  or lower fuel expenses than would otherwise be the case, and that such benefits received or
                  expected to be received by ratepayers exceed the costs that ratepayers otherwise would have
                  paid or otherwise would reasonably expect to pay.
        (8)       Eligible fuel expenses shall not be offset by revenues by affiliated companies for the purpose
                  of equalizing or balancing the financial responsibility of differing levels of investment and
                  operation costs associated with transmission assets. In addition to the expenses designated in
                  paragraphs (1) - (7) of this subsection, unless otherwise specified by the commission, eligible
                  fuel expenses shall be offset by:
                  (A)       revenues from steam sales included in Accounts 504 and 456 to the extent expenses
                            incurred to produce that steam are included in Account 503;


                                                       §25.236--1                                   effective 6/10/14
                                                                                                            (P 41905)
CHAPTER 25. SUBSTANTIVE RULES APPLICABLE TO ELECTRIC SERVICE
PROVIDERS.

Subchapter F. METERING.


               (B)     revenues from off-system sales in their entirety, except as permitted in paragraph (9)
                       of this subsection; and
               (C)     revenues from disposition of allowances properly recorded in Account 411.8.
      (9)      Shared margins from off-system sales. An electric utility may retain 10% of the margins
               from an off-system energy sales transaction if the following criteria are met:
               (A)     the electric utility participates in a transmission region governed by an independent
                       system operator or a functionally equivalent independent organization;
               (B)     a generally-applicable tariff for firm and non-firm transmission service is offered in
                       the transmission region in which the electric utility operates; and
               (C)     the transaction is not found to be to the detriment of its retail customers.

(b)   Reconciliation of fuel expenses. Electric utilities shall file petitions for reconciliation on a periodic
      basis so that any petition for reconciliation shall contain a maximum of three years and a minimum of
      one year of reconcilable data and will be filed no later than six months after the end of the period to be
      reconciled.

(c)   Petitions to reconcile fuel expenses. In addition to the commission prescribed reconciliation
      application, a fuel reconciliation petition filed by an electric utility must be accompanied by a
      summary and supporting testimony that includes the following information:
      (1)      a summary of significant, atypical events that occurred during the reconciliation period that
               affected the economic dispatch of the electric utility's generating units, including but not
               limited to transmission line constraints, fuel use or deliverability constraints, unit operational
               constraints, and system reliability constraints;
      (2)      a general description of typical constraints that limit the economic dispatch of the electric
               utility's generating units, including but not limited to transmission line constraints, fuel use or
               deliverability constraints, unit operational constraints, and system reliability constraints;
      (3)      the reasonableness and necessity of the electric utility's eligible fuel expenses and its mix of
               fuel used during the reconciliation period;
      (4)      a summary table that lists all the fuel cost elements which are covered in the electric utility's
               fuel cost recovery request, the dollars associated with each item, and where to find the item in
               the prefiled testimony;
      (5)      tables and graphs which show generation (MWh), capacity factor, fuel cost (cents per kWh
               and cents per MMBtu), variable cost and heat rate by plant and fuel type, on a monthly basis;
               and
      (6)      a summary and narrative of the next-day and intra-day surveys of the electricity markets and a
               comparison of those surveys to the electric utility's marginal generating costs.

(d)   Fuel reconciliation proceedings. Burden of proof and scope of proceeding are as follows:
      (1)     In a proceeding to reconcile fuel factor revenues and expenses, an electric utility has the
              burden of showing that:
              (A)       its eligible fuel expenses during the reconciliation period were reasonable and
                        necessary expenses incurred to provide reliable electric service to retail customers;
              (B)       if its eligible fuel expenses for the reconciliation period included an item or class of
                        items supplied by an affiliate of the electric utility, the prices charged by the
                        supplying affiliate to the electric utility were reasonable and necessary and no higher
                        than the prices charged by the supplying affiliate to its other affiliates or divisions or
                        to unaffiliated persons or corporations for the same item or class of items; and
              (C)       it has properly accounted for the amount of fuel-related revenues collected pursuant
                        to the fuel factor during the reconciliation period.



                                                    §25.236--2                                 effective 6/10/14
                                                                                                       (P 41905)
CHAPTER 25. SUBSTANTIVE RULES APPLICABLE TO ELECTRIC SERVICE
PROVIDERS.

Subchapter F. METERING.


      (2)     The scope of a fuel reconciliation proceeding includes any issue related to determining the
              reasonableness of the electric utility's fuel expenses during the reconciliation period and
              whether the electric utility has over- or under-recovered its reasonable fuel expenses.

(e)   Refunds. All fuel refunds and surcharges shall be made using the following methods.
      (1)    Interest shall be calculated on the cumulative monthly ending under- or over-recovery
             balance at the rate established annually by the commission for overbilling and underbilling in
             §25.28 (c) and (d) of this title (relating to Bill Payment and Adjustments). Interest shall be
             calculated based on principles set out in subparagraphs (A) - (E) of this paragraph.
             (A)       Interest shall be compounded annually by using an effective monthly interest factor.
             (B)       The effective monthly interest factor shall be determined by using the algebraic
                       calculation x = (1 + i) (1/12) - 1; where i = commission-approved annual interest
                       rate, and x = effective monthly interest factor.
             (C)       Interest shall accrue monthly. The monthly interest amount shall be calculated by
                       applying the effective monthly interest factor to the previous month's ending
                       cumulative under/over recovery fuel and interest balance.
             (D)       The monthly interest amount shall be added to the cumulative principal and interest
                       under/over recovery balance.
             (E)       Interest shall be calculated through the end of the month of the refund or surcharge.
      (2)    Rate class as used in this subparagraph shall mean all customers taking service under the
             same tariffed rate schedule, or a group of seasonal agricultural customers as identified by the
             electric utility.
      (3)    Interclass allocations of refunds and surcharges, including associated interest, shall be
             developed on a month-by-month basis and shall be based on the historical kilowatt-hour
             usage of each rate class for each month during the period in which the cumulative under- or
             over-recovery occurred, adjusted for line losses using the same commission-approved loss
             factors that were used in the electric utility's applicable fixed or interim fuel factor.
      (4)    Intraclass allocations of refunds and surcharges shall depend on the voltage level at which the
             customer receives service from the electric utility. Retail customers who receive service at
             transmission voltage levels, all wholesale customers, and any groups of seasonal agricultural
             customers as identified by the electric utility shall be given refunds or assessed surcharges
             based on their individual actual historical usage recorded during each month of the period in
             which the cumulative under- or over-recovery occurred, adjusted for line losses if necessary.
             All other customers shall be given refunds or assessed surcharges based on the historical
             kilowatt-hour usage of their rate class.
      (5)    Unless otherwise ordered by the commission, all refunds shall be made through a one-time
             bill credit and all surcharges shall be made on a monthly basis over a period not to exceed 12
             months through a bill charge. However, refunds may be made by check to municipally-
             owned electric utility systems if so requested. Retail customers who receive service at
             transmission voltage levels, all wholesale customers, and any groups of seasonal agricultural
             customers as identified by the electric utility shall be given a one-time credit or assessed a
             surcharge made on a monthly basis over a period not to exceed 12 months through a bill
             charge. All other customers shall be given a credit or assessed a surcharge based on a factor
             which will be applied to their kilowatt-hour usage over the refund or surcharge period. This
             factor will be determined by dividing the amount of refund or surcharge allocated to each rate
             class by forecasted kilowatt-hour usage for the class during the period in which the refund or
             surcharge will be made.




                                                 §25.236--3                               effective 6/10/14
                                                                                                  (P 41905)
CHAPTER 25. SUBSTANTIVE RULES APPLICABLE TO ELECTRIC SERVICE
PROVIDERS.

Subchapter F. METERING.


      (6)     A petition to surcharge or refund a fuel under- or over-recovery balance not associated with a
              proceeding under subsection (d) of this section shall be processed in accordance with the
              filing schedules in §25.237(d) of this title (relating to Fuel factors) and the deadlines in
              §25.237(e) of this title.

(f)   Procedural schedule. Upon the filing of a petition to reconcile fuel expenses in a separate
      proceeding, the presiding officer shall set a procedural schedule that will enable the commission to
      issue a final order in the proceeding within one year after a materially complete petition was filed.
      However, if the deadlines result in a number of electric utilities filing cases within 45 days of each
      other, the presiding officers shall schedule the cases in a manner to allow the commission to
      accommodate the workload of the cases irrespective of whether such procedural schedule enables the
      commission to issue a final order in each of the cases within one year after a materially complete
      petition is filed.




                                                 §25.236--4                               effective 6/10/14
                                                                                                  (P 41905)
APPENDIX B
CHAPTER 25. SUBSTANTIVE                    RULES       APPLICABLE           TO      ELECTRIC SERVICE
            PROVIDERS.
Subchapter J.      COSTS, RATES AND TARIFFS.

DIVISION 1:        RETAIL RATES.


§25.237. Fuel Factors.

(a)     Use and calculation of fuel factors. An electric utility's fuel costs will be recovered from the
        electric utility's customers by the use of a fuel factor that will be charged for each kilowatt-hour
        (kWh) consumed by the customer.
        (1)      An electric utility may determine its fuel factor in dollars per kilowatt-hour pursuant to
                 either subparagraph (A) or (B) of this paragraph. Fuel factors must account for system
                 losses and for the difference in line losses corresponding to the voltage at which the electric
                 service is provided. An electric utility may have different fuel factors for different times of
                 the year to account for seasonal variations. A different method of calculation may be
                 allowed upon a showing of good cause by the electric utility.
                 (A)        Fuel factors may be determined by dividing the electric utility’s projected net
                            eligible fuel expenses, as defined in §25.236(a) of this title (relating to Recovery of
                            Fuel Costs), by the corresponding projected kilowatt-hour sales for the period in
                            which the fuel factors are expected to be in effect.
                 (B)        Fuel factors may be determined using a commission-approved, utility-specific fuel
                            factor formula. Fuel factor formulas may be approved or revised only in a general
                            rate change proceeding or a proceeding to consider an application to establish a
                            fuel factor formula with notice and an opportunity for a hearing.
        (2)      An electric utility may initiate a change to its fuel factor as follows:
                 (A)        Pursuant to subsection (a)(1)(A) of this section, an electric utility may petition to
                            adjust its fuel factor as often as once every four months according to the schedule
                            set out in subsection (d) of this section.
                 (B)        Pursuant to subsection (a)(1)(B) of this section, an electric utility may petition to
                            adjust its fuel factor in accordance with its approved fuel factor formula no sooner
                            than four months after the filing of its most recent fuel factor adjustment petition.
                 (C)        Notwithstanding subsection (a)(2)(A) of this section, an electric utility may petition
                            to change its fuel factor at times other than provided in the schedule if an
                            emergency exists as described in subsection (f) of this section.
                 (D)        An electric utility's fuel factor may be changed in any general rate proceeding.
        (3)      Fuel factors are temporary rates, and the electric utility's collection of revenues by fuel
                 factors is subject to the following adjustments:
                 (A)        The reasonableness of the fuel costs that an electric utility has incurred will be
                            periodically reviewed in a reconciliation proceeding, as described in §25.236 of
                            this title, and any disallowed costs resulting from a reconciliation proceeding will
                            be reflected in the calculation of the utility’s recoverable fuel and over/(under)
                            collections.
                 (B)        To the extent that there are variations between the fuel costs incurred and the
                            revenues collected, it may be necessary or convenient to refund overcollections or
                            surcharge undercollections. Refunds or surcharges may be made without changing
                            an electric utility's fuel factor. Nothwithstanding §25.236(e)(6) of this title, an
                            electric utility may petition for a surcharge any time it has materially
                            undercollected its fuel costs and projects that it will continue to be in a state of
                            material undercollection. Notwithstanding §25.236(e)(6) of this title, an electric
                            utility shall petition to make a refund any time it has materially overcollected its




                                                 §25.237--1                                            9/04/08
CHAPTER 25. SUBSTANTIVE                  RULES       APPLICABLE           TO    ELECTRIC SERVICE
            PROVIDERS.
Subchapter J.     COSTS, RATES AND TARIFFS.

DIVISION 1:       RETAIL RATES.


                         §25.237(a)(3)(B) continued

                         fuel costs and projects that it will continue to be in a state of material
                         overcollection. "Materially" or "material," as used in this section, shall mean that
                         the cumulative amount of over- or under-recovery, including interest, is greater
                         than or equal to 4.0% of the annual actual fuel cost figures on a rolling 12-month
                         basis, as reflected in the utility’s monthly fuel cost reports as filed by the utility
                         with the commission.

(b)    Petitions to revise fuel factors.
       (1)      An electric utility using the fuel factor methodology set forth under subsection (a)(1)(A) of
                this section may file a petition requesting revised fuel factors pursuant to subsection
                (a)(2)(A) of this section during the first five business days of the months specified in
                subsection (d) of this section. A copy of the complete petition package shall be served on
                each party in the utility’s most recent fuel reconciliation and on the Office of Public Utility
                Counsel. Service shall be accomplished by email if possible. Each complete filing package
                shall include the commission-prescribed fuel factor application, a tariff sheet reflecting the
                proposed fuel factors and supporting testimony that includes the following information:
                (A)      For each month of the period in which the fuel-factor has been in effect and has not
                         been reconciled up to the most recent month for which information is available,
                         (i)       the revenues collected pursuant to fuel factors by customer class;
                         (ii)      any other items that to the knowledge of the electric utility have affected
                                   fuel factor revenues and eligible fuel expenses; and
                         (iii)     the difference, by customer class, between the revenues collected pursuant
                                   to fuel factors and the eligible fuel expenses incurred.
                (B)      For each month of the period for which the revised fuel factors are expected to be
                         in effect, provide system energy input and sales, accompanied by the calculations
                         underlying any differentiation of fuel factors to account for differences in line
                         losses corresponding to the voltage at which the electric service is provided.
       (2)      An electric utility using the fuel factor formula methodology set forth under subsection
                (a)(1)(B) of this section may file a petition requesting revised fuel factors pursuant to
                subsection (a)(2)(B) of this section at least 15 days prior to the first billing cycle in the
                billing month in which the proposed fuel factors are requested to become effective. A copy
                of the complete petition package shall be served on each party in the utility’s most recent
                fuel reconciliation and on the Office of Public Utility Counsel. Service shall be
                accomplished by email if possible. Each complete filing package shall include:
                (A)      a tariff sheet reflecting the proposed fuel factors;
                (B)      workpapers supporting the calculation of the revised fuel factors;
                (C)      calculations underlying any differentiation of fuel factors to account for differences
                         in line losses corresponding to the voltage at which the electric service is provided;
                         and
                (D)      any computer generated documents must be provided in their native electronic
                         format with all cells and internal formulas disclosed.




                                              §25.237--2                                           9/04/08
CHAPTER 25. SUBSTANTIVE                  RULES        APPLICABLE           TO     ELECTRIC SERVICE
            PROVIDERS.
Subchapter J.       COSTS, RATES AND TARIFFS.

DIVISION 1:         RETAIL RATES.


§25.237 continued

(c)    Fuel factor revision proceeding. Burden of proof and scope of proceeding are as follows:
       (1)      In a proceeding to revise fuel factors pursuant to subsection (a)(1)(A) of this section, an
                electric utility has the burden of proving that:
                (A)       the expenses proposed to be recovered through the fuel factors are reasonable
                          estimates of the electric utility's eligible fuel expenses during the period that the
                          fuel factors are expected to be in effect;
               (B)        the electric utility's estimated monthly kilowatt-hour system sales and off-system
                          sales are reasonable estimates for the period that the fuel factors are expected to be
                          in effect; and
                (C)       the proposed fuel factors are reasonably differentiated to account for line losses
                          corresponding to the voltage at which the electric service is provided.
       (2)      The scope of a fuel factor revision proceeding under subsection (a)(1)(B) of this section is
                limited to the issue of whether the petitioning electric utility has appropriately calculated its
                proposed fuel factors. In a proceeding to revise fuel factors pursuant to subsection (a)(1)(B)
                of this section, an electric utility has the burden of proving that:
                (A)       the electric utility has calculated its proposed fuel factors in compliance with the
                          commission-approved fuel factor formula; and
                (B)       the proposed fuel factors utilize a commission-approved adjustment to account for
                          line losses corresponding to the voltage at which the electric service is provided.

(d)    Schedule for filing petitions to revise fuel factors. A petition to revise fuel factors or to initiate or
       revise a fuel factor formula may be filed with any general rate proceeding.
       (1)       Otherwise, except as provided by subsection (f) of this section which addresses emergencies,
                 petitions by an electric utility to revise fuel factors pursuant to subsection (a)(1)(A) of this
                 section may only be filed in accordance with the following schedule:
                 (A)      February, June and October : El Paso Electric Company;
                 (B)      March, July and November : Entergy Texas, Inc.;
                 (C)      April, August and December : Southwestern Public Service Company;
                 (D)      May, September and January : Southwestern Electric Power Company; and
                 (E)      March, July and November : any other electric utility not named in this subsection
                          that uses one or more fuel factors.
       (2)       Petitions by an electric utility to revise fuel factors pursuant to subsection (a)(1)(B) of this
                 section may be filed in any month except December.

(e)    Procedural schedules.
       (1)    Upon the filing of a petition to revise fuel factors pursuant to subsection (a)(1)(A) of this
              section, the presiding officer shall set a procedural schedule that will enable the commission
              to issue a final order in the proceeding as follows:
              (A)       within 60 days after the petition was filed, if no hearing is requested within 30 days
                        of the petition; and
              (B)       within 90 days after the petition was filed, if a hearing is requested within 30 days
                        of the petition. If a hearing is requested, the hearing will be held no earlier than
                        the first business day after the 45th day after the application was filed.




                                               §25.237--3                                            9/04/08
CHAPTER 25. SUBSTANTIVE                  RULES        APPLICABLE           TO     ELECTRIC SERVICE
            PROVIDERS.
Subchapter J.     COSTS, RATES AND TARIFFS.

DIVISION 1:       RETAIL RATES.


       §25.237(e) continued

       (2)      Upon the filing of a petition to revise fuel factors pursuant to subsection (a)(1)(B) of this
                section, the presiding officer shall set a procedural schedule as follows:
                (A)       the presiding officer shall issue an order approving the proposed fuel factors on an
                          interim basis no later than 12 days after the date the petition was filed, if no
                          objection to interim approval is filed within 10 days after the date the petition was
                          filed;
                (B)       if no hearing is requested within 30 days after the petition was filed, the presiding
                          officer shall, after submission of proof of notice by the electric utility, issue an
                          order approving the fuel factors without hearing or action by the commission; and
                (C)       if a hearing is requested within 30 days after the petition was filed, the hearing will
                          be held no earlier than the first business day after the 45th day after the petition
                          was filed and a final order will be issued within 90 days after the petition was filed,
                          subject to submission of proof of notice by the electric utility.

(f)    Emergency revisions to the fuel factor. If fuel curtailments, equipment failure, strikes, embargoes,
       sanctions, or other reasonably unforeseeable circumstances have caused a material under-recovery of
       eligible fuel costs, the electric utility may file a petition with the commission requesting an
       emergency interim fuel factor. Such emergency requests shall state the nature of the emergency, the
       magnitude of change in fuel costs resulting from the emergency circumstances, and other
       information required to support the emergency interim fuel factor. The commission shall issue an
       interim order within 30 days after such petition is filed to establish an interim emergency fuel factor.
       If within 120 days after implementation, the emergency interim factor is found by the commission to
       have been excessive, the electric utility shall refund all excessive collections with interest calculated
       on the cumulative monthly ending under- or overrecovery balance in the manner and at the rate
       established by the commission for overbilling and underbilling in §25.28(c) and (d) of this title
       (relating to Bill Payment and Adjustments Billing). If, after full investigation, the commission
       determines that no emergency condition existed, a penalty of up to 10% of such over-collections may
       also be imposed on investor-owned electric utilities.




                                               §25.237--4                                            9/04/08
