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

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

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


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

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

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

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


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

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

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

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

APPENDIX

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

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




                                   iii
                                       INDEX OF AUTHORITIES

CASES

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

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

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

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

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

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

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

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

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

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

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

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

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

ADMINISTRATIVE PROCEEDINGS

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

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

TEXAS STATUTES

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

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


TEXAS RULES OF COURT

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


PUBLIC UTILITY COMMISSION OF TEXAS RULES

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




                                                                 vi
                           REPLY BRIEF OF APPELLANT,
                        OFFICE OF PUBLIC UTILITY COUNSEL


TO THE HONORABLE THIRD COURT OF APPEALS:

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

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

Texas, Inc. (ETI).

                            ARGUMENT AND AUTHORITIES

A. Standards of Review

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

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

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

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

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

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

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

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

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

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

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

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

452 (Tex. 1984).

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

capricious standard acknowledged by the Commission as having been invoked in

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

administrative findings, inferences, conclusions, or decisions violate statutory

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

remanded for determination based upon the existing evidentiary record to

determine rates consistent with the Court’s decision.




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

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

presented in the Commission proceeding related to the processes ETI went

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

Company’s preventative maintenance, including vegetation management.


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

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

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

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

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

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

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

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

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


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

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

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

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

Commission committed reversible error by approving the inclusion of one

hundred percent of the 1997 storm costs.


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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

proof under PURA § 36.006 by including unreasonable, unnecessary and

imprudent costs in the storm reserve reflected in rates.




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

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

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

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

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

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

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

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

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

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

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

experienced by customers” and that “vegetation management failures greatly

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

otherwise.


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

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

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

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

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

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

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

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

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

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

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

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

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

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



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

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

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

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

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

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

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

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

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

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

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

exacerbated level of damage and what portion would have been incurred

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

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

storm reserves and rates.




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

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

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

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

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

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

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

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

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

much needed service quality improvements.20

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

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

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

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

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

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

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

system.

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

and anticipated costs into unanticipated costs.                  The requirement in

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

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

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

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

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

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

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

intended.”25

      Although PURA § 36.052 authorizes the Commission to take the quality

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


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

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

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

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

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

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

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

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

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

law.

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

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

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

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

exacerbated damage caused by its imprudent system management.                                         These

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

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



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

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

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

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

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

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

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

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

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

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

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

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

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




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

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

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

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

project were imprudently incurred, the Commission acted properly in disallowing

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

through the evidence and deciding whether imprudent conduct caused certain

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

(and recognizing the need to determine whether imprudent conduct caused

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

court hold that the Commission may allow unreasonable or imprudently incurred

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

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

the inability to segregate imprudent costs.

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

distinguishable from Texas Utilities Electric Company because it was already

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

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

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

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

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

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

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

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

and erroneously failed to take any reasonable approach to considering what

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

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

reserve.

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

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

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

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

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

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

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

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

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

Company’s imprudent vegetation management.                  Vegetation management is a

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

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

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

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

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

corresponding expenses were reasonably anticipated and preventable.

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

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

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

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

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

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

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

statutorily required consideration that requires support by underlying findings of



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

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

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

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

Court in Charter Medical explained that underlying findings of fact have

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

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

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

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

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

function of review.44

       The Commission’s Order fails to show the statutorily required

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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



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

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

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

arbitrary and capricious.”48

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

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

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

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

of vegetation management requirements is to prevent or mitigate foreseeable

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

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

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

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

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

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




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



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

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

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

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

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

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

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

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

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

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

unnecessary to the rendition of a proper order.51

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

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

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


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

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

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

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

exercise    optional      completeness       later   in    the    proceeding      rather     than

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

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

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

Rules of Evidence required the court to admit the complete document

immediately.54

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

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

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

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

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

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

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

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

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

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

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

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

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

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

error.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

address.




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

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

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

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

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

the Commission for further proceedings, based upon the existing evidentiary

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

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

which it may be justly entitled.

                                     Respectfully submitted,

                                     Tonya Baer
                                     Public Counsel
                                     State Bar No. 24026771



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

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


                                      29
                      CERTIFICATE OF COMPLIANCE

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



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




                         CERTIFICATE OF SERVICE

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



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



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


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




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




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

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


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




     Effective as of September 1, 2013



  PUBLIC UTILITY COMMISSION
           OF TEXAS
                                        FOREWORD



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

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

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

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

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

                            SUBCHAPTER A. GENERAL PROVISIONS

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


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

                          SUBCHAPTER B. COMPUTATION OF RATES

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



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

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


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

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

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

             SUBCHAPTER C. GENERAL PROCEDURES FOR RATE CHANGES
                             PROPOSED BY UTILITY

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

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

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

                                                       86
         Appendix2


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




c
                                            Effective:[See Text Amendments]

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


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



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


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


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


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


      (C) made through unlawful procedure;


      (D) affected by other error of law;


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


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


CREDIT(S)




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




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


HISTORICAL AND STATUTORY NOTES

2008 Main Volume

Prior Laws:

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

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


CROSS REFERENCES

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

LAW REVIEW COMMENT ARIES

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

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

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

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

LIBRARY REFERENCES

2008 Main Volume

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

RESEARCH REFERENCES

2015 Electronic Update

ALR Library

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


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




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


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

Tex. Admin. Code tit. 16, § 25.231




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

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




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

Tex. Admin. Code tit. 16, § 25.231



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




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16 TAC § 25.231                                                                                            Page 3

Tex. Admin. Code tit. 16, § 25.231


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




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16 TAC § 25.231                                                                                              Page4

Tex. Admin. Code tit. 16, § 25.231


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

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

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




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


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




                                        PUC DOCKET NO. 18249


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



                                        ORDER ON REHEARING

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


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

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

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


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




                                      I.          Procedural History


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


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



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

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


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


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


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


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


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


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




                                        II.      Background


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


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




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

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


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




                               lll.     Discussion and Analysis of Issues


A. General Concept of Reliability


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

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

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


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


B. Legal Standards


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




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

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


C. Analysis of Issues


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


1. Physical Facilities, Maintenance, and Monitoring


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



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


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


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


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




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


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


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


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


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


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


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

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


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


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



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

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


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


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


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


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


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



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

52   /d.

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

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


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


2. Vegetation Management


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




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


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


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


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



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


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


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




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

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


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


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


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

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

72   Jd.

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


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


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


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


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


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


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


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




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

88   /d.

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


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


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


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


4. Personnel Levels and Management Practices; Spending Levels


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

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


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


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




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


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


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




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

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


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




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


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



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


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


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


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




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


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

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


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




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

5. Pockets of Unreliability; Customer Service


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


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


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

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


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


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


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




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

D. Remedies


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

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


1. Reduction in the Return on Equity and Incentive Pool


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



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


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



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




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


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


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


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


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


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


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

2. Minimum and Target Performance Levels


            a. Frequency and Duration of Interruptions

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

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

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


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

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



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


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




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


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


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


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


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


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


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


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

3. Customer Service Performance Benchmarks


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



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

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


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



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


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


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


5. Customer Information/Notification


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


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


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



                     IV.   Findings of Fact and Conclusions of Law


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

A. Findings of Fact

Procedural History

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

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

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

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


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

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

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

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

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

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

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

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

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

Notice

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

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




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

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

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

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

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

Management Structure

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

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

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

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

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

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


Transmission System

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

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

29.    Transmission line ROW appear to be clear.

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

Physical Condition of Distribution System and Pole Inspection Program

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

Reliability Indices and Performance Standards

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

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

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


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

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

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

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

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

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

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

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

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

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


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


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

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

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

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

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

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

Vegetation Management

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

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

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

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


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

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

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

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

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

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

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

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

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

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


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

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

Emergency Preparedness, Response, and Outage Restoration

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

Spending Levels

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

of the system.

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

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

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

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

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

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

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

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

Personnel Levels

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

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

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

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

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

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

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

Customer Service

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

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

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

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

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

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

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

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


Stipulation

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

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


B. Conclusions ofLaw

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

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

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

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

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

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

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

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

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

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

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


                                  V.       Ordering Paragraphs

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

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

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

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

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

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



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


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

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

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

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


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

   11. In conjunction with its annual reconciliation filing, the Company shall
       submit a proposal for customer notification. At a minimum, the proposal
       shall include the content and format for a billing insert that explains the
       service quality requirements, the Company's performance for the preceding
       year, street light reporting instructions and telephone number, and the
       amount of the escrow pool retained by the Company and/or refunded to
       customers.

  12. The Company shall develop and implement, within the six months of the
      effective date of this Order, a media campaign to inform and educate
      customers in its Texas service territory about the importance and proper
      procedure for reporting to the Company malfunctioning or broken street
      lights.

  13. The provisions of the Stipulation are approved as reflected in this Order.

  14. The entry of an order consistent with the Stipulation of the parties does not
      indicate the Commission's endorsement of approval of any principle or
      methodology that may underlie the Stipulation of the parties. Neither should
      entry of an Order consistent with the full settlement of the parties be
      regarded as a binding holding or precedent as to the appropriateness of any
      principle or methodology underlying the Stipulation of the parties.

  15. All other motions, requests for entry of specific fmdings of fact and
      conclusions of law, and any other requests for general or specific relief, if
      not expressly granted herein, are hereby denied for want of merit.
 PUC DOCKET NO. 18249 ORDER ON REHEARING                                              Page 54


        This Order reflects the opinion of Chairman Wood and Commissioner Walsh.
Commissioner Curran was not present at the adjudicatory hearing conducted in this
                               I

docket, and did not participate. in the final order and order on rehearing deliberations.



                 SIGNED AT AUSTIN, TEXAS, the           ~~~ay of April1998.
                                       PUBLIC        ILITY COMMISSION OF TEXAS




q/share/finaV18249rhr.doc
          Appendix5


Excerpts from PUC Docket No.l6705,
    Second Order on Rehearing ,
                                    PUC DOCKET NO. 16705                                  R£CE:/V£o
                                  SOAR DOCKET NO. XXX-XX-XXXX
                                                                                    98 OCT /4 AH •
APPLICATION OF ENTERGY TEXAS                             §
                                                                                 PUB! tn                 9. 02
                                                                                    .. u U11Ltr··· . :.·
FOR APPROVAL OF ITS TRANSITION                           §                               FILING CL~~~kHISSION
TO COMPETITION PLAN AND THE                              §     PUBLIC UTILITY COMMISSION
TARIFFS IMPLEMENTING THE PLAN,                           §
ANDFORTHEAUTHOIDTYTO                                     §                    OF TEXAS
RECONCILE FUEL COSTS, TO SET                             §
REVISED FUEL FACTORS, AND TO                             §
RECOVERASURCHARGEFOR                                     §
UNDER-RECOVERED FUEL COSTS                               §


                                SECOND ORDER ON REHEARING

        This Second Order on Rehearing (Order) addresses the application filed by Entergy Gulf
States, Inc. (EGS_or the Company) on November 27, 1996, in accordance with Paragraph 9b of
                                                                                                  1
the Stipulation and Agreement approved by the Commission in Docket No. 11292.                         1brough
this Order, the Commission adopts in part and modifies in part the Proposal for Decision (PFD)
as corrected and the Supplemental Proposal for Decision (SPFD) issued by the State Office of
Administrative Hearings (SOAH) Administrative Law Judges (ALJs) in late March 1998.2

                                           I.       Introduction

        The SOAH ALJs conducted separate evidentiary hearings on the four component parts of
this docket: fuel, revenue requirement, cost allocation/rate design, and competitive issues. After
completion of the hearings and review of the record evidence, the ALJs recommended that the
Commission order EGS to reduce its current Texas retail base rates by $137 million, which

        1
         Application of Entergy Corporation and Gulf States Utilities Company for Sale, Transfer or Merger,
DocketNo.11292, 19 P.U.C. BULL. 2040,2041 (Ordering Paragraph 5) (Dec. 29, 1993).
        2
            The ALJs issued the PFD on March 25, 1998, as revised by clarifications, revised text, and revised
schedules filed on June 4, 12, and 16, 1998. The ALJs issued the SPFD, which addresses supplemental fuel-related
issues, on March 27, 1998. The Commission considered the matters addressed in this Order at its open meetings
convened on June 30, July 8 through 10, July 13, July 16, and July 22, 1998. The Commission issued its "fmal"
order in this docket on July 22, 1998. The Commission considered motions for rehearing at its open meetings
convened on August 26, and October 8, 1998. A more detailed procedural history of this case is contained in
Attachment A to the PFD and the Findings of Fact (FoF) and Conclusions of Law (CoL), as modified, contained in
this Order.
PUC DOCKET NO. 16705                       Second Order on Rehearing                                Page2 oflSS
SOAH DOCKET NO. XXX-XX-XXXX

represents a 29% reduction from current base rates.                   The rationale for this recommended
reduction is set forth in detail in the PFD and SPFD which, together, total over 800 pages.

         In this Order, the Commission directs EGS to reduce its Texas retail base rates in
conformance with the attached schedules (approximately $111 million, or $26 million less than
the reduction recommended by the ALJs). This base rate reduction, and the Commission's
rationale for modifying portions of the PFD and SPFD, are explained in detail in the Discussion
section of this Order. In this Introduction, the Commission focuses primarily on the three most
contentious issues in this docket: (1) treatment of EGS' claimed affiliate expenses; (2) the
treatment of EGS' "excess costs over market" (referred to either as "ECOM'' or "potentially
stranded investment"); and (3) interruptible service.

                                          A.       Affiliate Expenses

         The ALJs concluded in the PFD that EGS failed to meet its statutory burden of proof to
justify recovery of approximately $86 million in Texas retail affiliate expenses. The ALJs
therefore recommended that the Commission disallow all of these claimed costs.3 This $86
million in recommended disallowed expenses is comprised of $49 million billed to EGS by its
corporate service affiliate, Entergy Services, Inc. (ESI), or allocated to EGS by its nuclear service
affiliate, Entergy Operations, Inc. (EOI), plus an additional $37 million direct-billed to-EGS by
EOI. 4 In the alternative to a full disallowance, the ALJs recommended that the Commission
could potentially justify allowing EGS to recover the direct-billed EOI affiliate expenses ($37
million), but that the record clearly required disallowance of the $49 million in ESI and EOI
allocated expenses. (To avoid confusion, this Order refers to the ESI billed and EOI allocated
expenses as the $49 million in disallowed "ESI" expenses; the $37 million in EOI direct billed
expenses are referred to as the "EOI'' expenses.) In this Order, the Commission adopts the ALJs'



         3
            For convenience, this Introduction refers only to the Texas retail affiliate expenses claimed by EGS. The
Company's application and the PFD actually refer primarily to "system-wide" affiliate expenses in the range of
$200 million. The system-wide expenses include affiliate expenses allocable to EGS' services in Louisiana,
services in the Texas wholesale market, and services in the Texas retail market.
         4
           The complexity· of the affiliate transactions affecting EGS (previously Gulf States Utilities, Inc. (GSU))
significantly increased when Entergy Corporation purchased GSU in 1993, thereby creating EGS.
PUC DOCKET NO. 16705                         Second Order on Rehearing                          Page t 1 nf 155
SOAH DOCKET NO. XXX-XX-XXXX

are now declining. By allowing the Company to surcharge the AOD expense over a three-year
period, the Commission moves closer to intergenerational equity than would occur if future
customers are required to pay the AOD over the remaining life of River Bend. Thus, the
Commission's treatment both mitigates EGS' ECOM and better matches the recovery period for
the AOD to the time period in which the AOD would normally have been expensed.

                                        C.       Interruptible Service

        The Commission concludes that the current demand charge credits provided to the
interruptible service (IS) customers will not be subject to partial imputation as recommended by
the ALJs. The current IS demand and energy charges also will not be reduced in tandem with the
base rate reductions applicable to firm customers. Instead, the demand and energy charges to IS
customers, under the IS rider, will be frozen at current levels. This treatment results in the IS
customers continuing to receive interruptible service at rates below firm service, but narrows the
demand charge credit as base rates for finn customers are reduced. Also, by freezing the energy
charges billed to IS customers under the IS rider, the Commission is ensuring that IS customers
are allocated their fair share of transmission costs and, where applicable, distribution costs.

                                   D.         Overall Effect of this Order

        The Commission affirms the majority ofthe PFD, but concludes that the record evidence
requires modification to a number of findings and conclusions reached by the ALJs. In addition
to the modification summarized above, the Commission modifies the ALJs' recommendations to
conclude that (1) EGS' wheeling expenses and revenues should be subject to base rate treatment,
rather than fuel reconciliation and fuel surcharges; (2) in recognition of the remedies established
in EGS service quality case,45 the Company's rate ofreturn on equity (ROE) will be set at 11.1%
for the period June 1, 1996 through May 12, 1998, and at 11.4% from May 13, 1998 through the
                                                                           26
remainder of the effective period of the rates in this docket;                  and (3) the Company is also


        25
           Entergy GUlf States, Inc. Service Quality Issues (Severed From Docket No. 16705), Docket No. 18249,
Order on Rehearing (April22, 1998) (EGS Service Quality).
        26
             The remedies established in EGS Service Quality will remain in place for some period beyond the rate
period subject to this docket. Thus, the ROE reduction remedy will also apply in at least some portion ofEGS' next
effective rate period.
PUC DOCKET NO. 16705                Second Order on Rehearing                      Page 12 of 155
SOAH DOCKET NO. XXX-XX-XXXX

entitled to recover approximately $1 0 million more in fuel expense than recommended by the
ALJs.

        The following discussion addresses each of the Commission's modifications to the PFD
and SPFD. The discussion does not track the sequence of the SOAH recommendations, but
begins with the larger transition items arising in the competitive issues and revenue requirement
phases. Discussion of the cost allocation/rate design and fuel issues follows in that sequence.
This Order also includes a separate section addressing how refunds will be treated in this docket,
including refunds resulting from a companion order on rehearing issued on September 2, 1998 in
GulfStates Utilities Company Remand ofActual Taxes Paid Issues, Docket No. 18290.

        Also attached to this Order are schedules detailing (1) the Company-wide Revenue
Requirement and Invested Capital (Commission Schedules I through VI); (2) the Revenue
Requirement and Revenue Deficiency (Commission Schedule KS-Jl); (3) the Texas Retail Class
Revenue Requirement Assignment, the Texas Retail Class Revenue Requirement Allocation, and
the Texas Retail Class Rate Base Allocation (Commission Schedules KS-TX/1 through KS-
TX/3, respectively); and (4) the Calculation of the Fixed Fuel Factor and the Allocation of Fuel
Over/Under Recovery by Rate Class (Commission Schedules KP-Fuel/1 and KP-Fuel/2,
respectively).

        To the extent not addressed below, the Commission affirms the ALJs' discussions and
proposed findings of fact (FoFs) and conclusions of law (CoLs) without substantive
modification.
PUC DOCKET NO. 16705                       Second Order on Rehearing               Page 29 of 155
SOAH DOCKET NO. XXX-XX-XXXX

the ALJs in effect are recommending an improper double disallowance because, in the SPFD, the
ALJs recommend disallowance of certain natural gas expenses related to fuel burns in February
of 1996. As stated by General Counsel, "[t]he Commission therefore should not disallow
imprudent fuel costs related to EGS's failure to burn fuel oil, on the one hand, and refuse to
include the fuel oil in inventory, on the other."60

        The Commission agrees with General Counsel and EGS; if the February 1996 natural gas
expenses are to be disallowed as imprudent (which they are, as discussed below), the Company
should be permitted to recover the costs of the No.6 fuel oil that it should have burned in lieu of
the disallowed high cost natural gas. Accordingly, to reflect the preponderance of evidence in
the record, FoF 117 is modified and F oF 117A is added to fmd that the fuel oil working capital in
rate base is $5,110,085, rather than $2,085,630.

5.      Return on Equity

        The Commission affirms the ALJs' recommendation to set the Company's ROE at 11.7%
in this docket with the following modifications. First, the Commission acknowledges that an
appropriate range for EGS' ROE is 9.65% to 13.94%. This range is based on both the constant
growth and the multi-stage non-constant growth discounted cash flow (DCF) analyses. As the
ALJs recognized, using both of these models more closely resembles the balance employed by
the Commission in Docket No. 14965. Accordingly, FoFs 128 and 129 are modified, New FoF
128A is added, and FoFs 130-132 are deleted. Additionally, the Commission modifies FoF 134
to reflect that, although adjustments to EGS' ROE were not modified in this case for poor
demand-side management and affiliate transactions, the Conunission retains full discretion to
make such adjustments in a future case.

        Second, a new FoF 128B is added to reduce the 11.7% ROE by 60 basis points to 11.1%
for the period June 1, 1996 through May 12, 1998, and by 30 basis points to 11.4% from May 13,
1998 through the remainder of the period in which the rates subject to this docket are in effect.
This bifurcated ROE reduction is required by the Commission's determinations in the related

        60
             See General Counsel's Brief on Exceptions at 18.
PUC DOCKET NO. 16705                       Second Order on Rehearing                       Page 30 oft 55
SOAH DOCKET NO. XXX-XX-XXXX

EGS Service Quality proceeding (Docket No. 18249), which concluded that the ROE ultimately
authorized in this docket (Docket No. 16705) would be reduced permanently by 60 basis points
from the date refunds become effective in this docket "through the effective date of [the final
order in Docket No. 18249]."61 After the effective date of the fmal order in Docket No. 18249
(that is, May 12, 1998), the authorized ROE in Docket No. Hi705 is increased by 30 basis points
to 11.4%, but the Company must escrow that 30 basis points of ROE. As provided in EGS
Service Quality, the Company will be pennitted to retain up to the full amount of the escrowed
30 basis points if it meets certain service quality benchmarks established in that proceeding. 62 If
it does not meet those benchmarks, some portion or all of the escrowed amount will be refunded
to customers, thus effectively resulting in a minimum ROE of 11.1 %. These ROE reductions are
not predicated on a finding that the ALJs erred in recommending the 11.7% ROE. Rather, they
are based on the Commission's rulings in EGS Service Quality. Accordingly, new FoF 128B is
not a modification to the ALJs' ROE recommendation subject to APA § 2003.049(g), but rather
is made to conform the ROE in this docket to the rulings in Docket No. 18249.

        Third, the reduction to the Company's authorized ROE also results in a reduction to the
ALJs' recommended return on invested capita1. 63 This authorized overall return dollar amount is
therefore reduced as reflected on the attached Commission Schedules I and IV. In addition, FoFs
134 and 135 are modified respectively to clarify that only the direct-billed EOI expenses are
approved in this docket, and to reflect the adjustment to the overall cost of capital as a result of
the Commission's decisions in EGS Service Quality.

6.      Amortization Expense

        The amortization expense reflected on Schedule I must be decreased to reflect the
removal of $9 million in annual amortization expenses related to the AOD discussed in the


        61
             EGS Service Quality Order on Rehearing at 51 (Ordering Paragraph 3).
        62
             Id at Ord~ring Paragraph 5.
        63
              This figure is the corrected amount reflected in Schedules I and IV of the ALJs' June 12, 1998
clarification. The original PFD recommends a slightly higher figure. PFD at 317.
PUC DOCKET NO. 16705                Second Order on Rehearing                     Page 54 of 155
SOAH DOCKET NO. XXX-XX-XXXX

before the next fuel reconciliation. Therefore, EGS is not required to file a fuel reconciliation
with the November 1998 rate case, and a good cause exception to the rate case filing requirement
is granted accordingly. The SOAR ALJs assigned to the next case will address the procedural
issues raised by EGS.     Otherwise, EGS- should be prepared to address any other revenue
requirement and major rate design issues in the November 1998 rate case. Accordingly, FoFs
96R through 96U are added to clarify this issue.

        Finally, EGS has not proposed to recover its rate case expenses or the Cities' rate case
expenses in this docket. The question remained whether the Company might attempt to recover
these expenses in a future docket.     At the Commission's open meeting on July 10, 1998,
representatives of EGS committed orally on the record that the Company will not seek to recover
Cities' or its own rate case expenses in this proceeding or any future proceeding. Accordingly, a
FoF 164 is modified and a new FoF 164A is added to reflect this commitment.

                       IV.    Findings ofFact and Conclusions ofLaw

        The section consolidates the FoFs and CoLs contained in both the PFD and SPFD, as
modified in accordance with the foregoing discussion. The numbering sequence contained in the
PFD is retained; the SPFD FoFs and CoLs are integrated into this sequence by placing them in
the proper location and changing the SPFD number to a corresponding numbered and lettered
designation. The designation "SFoF" refers to the fmdings in the Supplemental PFD. The
references to "Revised PFD" refer to the corrected pages to the PFD filed by the ALJs on June 4,
1998.
                                      A. Findings of Fact

1.      Entergy Gulf States, Inc. (EGS) is an electric utility serving southeast Texas and south
        central Louisiana and is one of five wholly-owned operating companies of the Entergy
        Corporation, an investor-owned public utility holding company headquartered in New
        Orleans, Louisiana.
PUC DOCKET NO. 16705                Second Order on Rehearing                    Page 79 of 155
SOAH DOCKET NO. XXX-XX-XXXX

       Property Insurance Reserve Balance
120.   The reasonable and necessary reserve balance in rate base for property insurance should
       be ($15,572,000).


       Other Adjustments to Invested Capital
121.   Based on an amortization period ending January 31, 2000, the test year amortization
       expense for deferred fmancing costs would increase by $5,903,700, and amortization
       expense for property cancellation loss for River Bend 2 would decrease by $1,365,396,
       for a net increase in test year amortization of$4,538,304.


122.   No expenditures necessary to produce cost savings related to the merger between EGS
       and Entergy Corporation should be reflected in rate base consistent with the decision to
       disallow all such costs.


123.   From April 1994 through the end of the test year, June 30, 1996, EGS collected
       $36,205,679 on a total Company basis for post-retirement expenses other than pensions
       (OPEBs). This amount should not be reduced by EGS' OPEB trust funds, as EGS has
       not had access to the funds with which to fund rate base.


124.   The following are appropriate adjustments to EGS' requested level of invested capital:
       Accmmt                        13 Mo. Ayg.            Adjustment           Total Level
       Injuries and Damages           ($5,543,000)           $643,000              ($4,899,000)
       Coal Car Maint. Reserve        ($4,071 ,000)             ($91,000)          ($4,162,000)
       Customer Deposits             ($21,510,000)          ($g60,000)           ($22,370,000)
       Contractor Retainage             ($455,000)               11,000              ($444,000)


       Cost of Capital
125.   EGS' cost of capital should be based on a capital structure consisting of 48.06% long-
       term debt, 2.16% QUIPS, 6.52% preferred stock, and 43.26% common equity.
PUC DOCKET NO. 16705               Second Order on Rehearing                      Page 83 of 155
SOAH DOCKET NO. XXX-XX-XXXX



       Employee Pensions and Benefits
142.   Total electric pension expense should reflect a 3.5% assumed salary escalation factor, an
       eight percent discount rate, and an adjustment to reflect the declining employee levels
       through January 1997.


143.   EGS' reasonable and necessary pension expense through January 1997 is ($3,161,011).
       (See Revised PFD.)


144.   Post-retirement benefits other than pension should be $8,800,267 for total electric. This
       includes a medical cost trend rate of 7.9%, an eight percent discount rate, and employee
       levels through January 1997. It is not reasonable to permit a utility to recover estimated
       costs that exceed by any large degree the actual costs experienced in the test year. The
       $8.8 million level of expense reasonably approximates EGS' test year OPEB expense.


       Production Operation and Maintenance Expense

145.   EGS included $136,327,381 in production O&M expense, of which $51,491,665 relates
       to fossil plants. Production O&M expense for its Big Cajun II Unit 3 plant should be
       $6,428,935, which amounts to a $5,921,024 reduction from EGS' requested O&M
       expense for this plant.    Using EGS' revised figures based on the FERC Form 1
       methodology achieves a reasonable total fossil plant O&M expense of$45,570,641.


       Insurance Expense
146.   EGS' reasonable insurance expense is $1,651,321 per year for current losses.          With
       regard to current losses, EGS should accrue only enough each year to cover typical storm
       damage. (See Revised PFD.)
PUC DOCKET NO. 16705                 Second Order on Rehearing                     Page 84 of 155
SOAH DOCKET NO. XXX-XX-XXXX



147.   Any reduction to the reserve fund occurring after the test year should not be considered in
       this case because EGS did not prove a reasonable post-test-year level for its existing
       reserve fund or that the amount expended in 1997 to reduce the fund was prudent or
       appropriate. Reserve fund levels following the test year in this case can be addressed in
       EGS' November 1998 rate filing when all parties will have the opportunity to evaluate
       the reasonableness of changes to the insurance reserve fund.


       Mfiliate Expenses
148.   Under PURA § 11.003(2), a utility's affiliates include any entity owning five percent or
       more of a utility and any entity in which the holding company has a five percent
       ownership interest. Accordingly, Entergy Service, Inc. (ESI) and Entergy Operations,
       Inc. (EOI), subsidiaries of Entergy Corporation, are EGS' affiliates. Entergy Services,
       Inc. provides numerous services ranging from administrative functions to providing fuel
       supplies to Entergy's various affiliates. Entergy Operations, Inc. is responsible for the
       management, operation, and support of the five nuclear generating units owned by the
       Entergy operating companies.


149.   EGS provided evidence of ESI expenses based on the total of all expenses charged.
       Neither proof by an aggregate finding as to total expenses nor total expenses for that
       affiliate is viable in this docket--because so many services are provided by ESI, the
       quantity and diversity of these costs is enormous and involve thousands of items billed
       during the test-year period.      For this reason, EGS must provide evidence of the
       reasonableness and necessity of its affiliate expense in strict compliance with Section
       36.058 of PURA. That is, it must provide evidence supporting the reasonableness and
       necessity of these expenses by class of costs. It failed to do this.
             Appendix6


         PUC Docket No. 39896,
   Hearing on the Merits Transcript:
Excerpts of Direct and Cross---Examination
    of ETI Witness Shawn Corkran
               SOAH DOCKET NO. XXX-XX-XXXX
                  PUC DOCKET NO. 39896


APPLICATION OF ENTERGY    )    STATE OFFICE OF
TEXAS, INC., FOR AUTHORITY)
TO CHANGE RATES           )
AND RECONCILE FUEL COSTS, )
AND OBTAIN DEF~~RED       )
ACCOUNTING TREATMENT      ) ADMINISTRATIVE HEARINGS




                  HEARING ON THE MERITS
                Thursday, April 26, 2012




               BE IT REMEMBERED THAT at 9:00a.m.,
on Thursday, the 26th day of April 2012, the
above-entitled matter came on for hearing at the
State Office of Administrative Hearings, William P.
Clements, Jr. Building, 300 West 15th Street, Room
404, Austin, Texas, before THOMAS H. WALSTON, STEVEN
D. ARNOLD AND HUNTER BURKHALTER, Administrative Law
Judges, and the following proceedings were reported
by Lou Ray, Kim Pence and Aloma Kennedy, Certified
Shorthand Reporters.


Volume 3                                   Pages 472 - 718
                                                                 Page 567

 1                          AFTERNOON SESSION
 2                      THURSDAY, APRIL 26, 2012
 3                             (1:00 p.m.)
 4                    JUDGE BURKHALTER:        Okay.   We're back on
 5   the record after our lunch break.
 6                    Mr. Neinast, Mr. Olson?
 7                    MR. OLSON:     Yes, sir.     The Company
 8   calls --
 9                    JUDGE BURKHALTER:        Call your next witness.
10                    MR. OLSON:     -- Shawn Corkran.
11                    JUDGE BURKHALTER:        Hello, Mr. Corkran.
12   How are you?
13                    MR. CORKRAN:     Good.
14                    JUDGE BURKHALTER:        Would you raise your
15   right hand, please?
16                    (Witness Corkran sworn)
17           PRESENTATION ON BEHALF OF ENTERGY TEXAS, INC.
18                             (CONTINUED)
19                          SHAWN B. CORKRAN,
20   having been first duly sworn, testified as follows:
21                         DIRECT EXAMINATION
22   BY MR. OLSON:
23       Q      Mr. Corkran, please state your name and title.
24       A      My name is Shawn Burr Corkran, and my title is
25   director of transmission and distribution operations for

                    KENNEDY REPORTING SERVICE, INC.
                              512.474.2233
                                                             Page 568

 1   ETI.
 2          Q    Okay.    Do you have in front of you a stack of
 3   paper entitled ETI Exhibit No. 25?
 4          A    I do.

 5          Q    And can you identify that for the record?

 6          A    Yes, this is the direct testimony and exhibits
 7   as filed.
 8          Q    Okay.    And do you also have in front of you ETI
 9   Exhibit 48?

10          A    Yes, I do.

11          Q    And can you identify that for the record,

12   please?

13          A    Yes, this is rebuttal testimony and exhibits

14   that I filed.

15          Q    Okay.     Was the direct and rebuttal testimony
16   and exhibits prepared by you or under your supervision?

17          A    Yes, sir.

18          Q    Do you have any corrections to the testimony or
19   exhibits at this time?

20          A    I do not.

21          Q    If I were to ask you the same questions today,
22   would your answers be the same?

23          A    Yes, sir.
24                       MR. OLSON:   Your Honor, at this time, I
25   move to admit ETI 25 and 48.

                    KENNEDY REPORTING SERVICE, INC.
                              512.474.2233
                                                               Page 569

 1                    JUDGE BURKHALTER:    Any objection?
 2                    (No response)
 3                    JUDGE BURKHALTER:    They're admitted.
 4                    (Exhibit ETI Nos. 25 and 48 admitted)
 5                    MR. OLSON:    I pass the witness.
 6                    JUDGE BURKHALTER:    Mr. Mack?
 7                    MR. MACK:    Yes, Your Honor.    Thank you.
 8                          CROSS-EXAMINATION
 9   BY MR. MACK:
10       Q    Good afternoon, Mr. Corkran.        My name is
11   Stephen Mack.     I have a few questions for you about the
12   1997 ice storm that Entergy is requesting recovery from
13   customers.     Okay?
14       A    Okay.
15       Q    But before we get to that, I want to talk a
16   little bit about an order you reference in your rebuttal
17   testimony, and that's the order in Docket 18249.          Do you
18   recall referencing that order?
19       A    Yes, I do.
20       Q    And Docket 18249 was a case established by the
21   Commission to address the service quality issues of
22   Entergy Gulf States.     Isn't that right?
23       A    That's my understanding.
24       Q    And in that case, the Commission ultimately
25   determined that the quality of Entergy's electric

                    KENNEDY REPORTING SERVICE, INC.
                              512.474.2233
                                                              Page 570

 1   service to its customers was poor.          Isn't that right?
 2       A       Yes; I understand they identified deficiencies.
 3       Q       Okay.     So in order to remedy the Company's
 4   service quality issues, the Commission ordered an
 5   incentive program to encourage the Company to fix its
 6   problems.     Isn't that right?
 7       A       By "incentive program," are you referring to
 8   the 60 bases point reduction and then the ability to
 9   limit some of that?
10       Q       There was -- yeah, we'll get to that, but there
11   was an incentive plan, wasn't there, ordered as part of
12   that case?     And if it helps you, I can bring you a copy
13   of the order and point you to the page, if you'd like.
14       A       Okay.     Yes, sir, I'd like to see that just to
15   remind me and refresh me.
16                       JUDGE BURKHALTER:   And, Mr. Corkran, I'm
17   having a hard time hearing you.
18                       WITNESS CORKRAN:    Okay.
19                       JUDGE BURKHALTER:    Thank you.
20                       MR. MACK:   May I approach the witness?
21                       JUDGE BURKHALTER:    Yes.
22       Q       (BY MR. MACK)       And I'm directing you to Page 28
23   of the Final Order on Rehearing in Docket No. 18249.
24   Okay?
25       A       Okay.

                    KENNEDY REPORTING SERVICE, INC.
                              512.474.2233
                                                                  Page 571

 1       Q      And could you just -- and basically what it
 2   says is,   11
                     The Commission concludes that the Company's
 3   service quality must be improved.           The following
 4   incentive plan lays out the remedies to help EGS achieve
 5   such improvements.      11
                                   Isn't that correct?
 6       A      Yes, that's correct.

 7       Q      And that's the incentive plan I'm referring to.
 8       A      Okay.     And I'm familiar with that, yes, sir.

 9       Q      Okay.     And I think you just mentioned as part
10   of that incentive plan the Commission ordered a
11   reduction to Entergy's ROE.           Is that right?
12       A      That's my understanding.
13       Q      And if Entergy met some of its              some of the
14   goals in this order, it could earn some of that back.
15   Isn't that right?
16       A      Yes, sir.         That's what I understand.
17       Q      All right.         But you understand that this
18   incentive program was only meant to fix the problem of
19   Entergy's service quality.           Is that right?

20       A      Yes.      As I understand, it was focused on a
21   number of areas of service quality that touched into the
22   reliability areas, call center performance.              There were
23   several areas in that service quality area.

24       Q      And nothing in this order determined who should
25   be responsible for paying for the damage and outages

                       KENNEDY REPORTING SERVICE, INC.
                                 512.474.2233
                                                                       Page 572

 1   caused by the service quality issues.              Isn•t that right?
 2           A    I•m not aware, no.
 3           Q    Are you aware whether the order addressed the
 4   1997 ice storm?

 5           A    I•m aware that it was referenced in some of the
 6   findings, but I don•t know specifically when you say
 7   11
          addressed 11 what you mean by   11
                                               addressed.   11
                                                                 I mean, I
 8   understand it was referenced in the order and in the
 9   project.
10           Q    And you said you read the order and you•re
11   familiar with it?
12           A    I have read it, yes.
13           Q    Well, one issue that the ALJs and the
14   Commission will have to address in this case is who
15   should be responsible for paying for the damage caused
16   by the 1997 ice storm.         Isn•t that right?

17           A    Yes, I believe so.

18           Q    And in this order that you reference in your
19   rebuttal testimony, I believe the Commission found that
20   the damage caused was greatly exacerbated by the
21   Company•s service quality issues.              Isn•t that right?
22           A    That•s -- I understand that finding, yes.
23           Q    And the expense we•re talking about for this
24   1997 ice storm in this case is 13 million?

25           A    That•s correct.

                     KENNEDY REPORTING SERVICE, INC.
                               512.474.2233
                                                         Page 573

 1       Q    And that's what the Company is requesting
 2   recovery for from its customers?
 3       A    Yes.
 4       Q    And I believe it's your position in the
 5   rebuttal that even though the Company's service quality
 6   issues was a major factor in the number and duration of
 7   outages, it's the customers that should have to pay
 8   100 percent of these costs.     Is that right?

 9      A     That's my position, yes.
10       Q    Now, since this case, has Entergy improved its
11   quality of service?
12       A    Yes, sir, we have.
13       Q    So would it be true that the expenses incurred
14   ln the 1997 ice storm, if that same storm were to happen
15   today, would not be as great?
16      A     I'm not certain.     I mean, you know, the finding
17   of fact that was in the docket indicated that probably
18   would be the case.
19       Q    Okay.   And if we can rely on that finding of
20   fact of the Commission to be accurate, if the same storm
21   were to occur now or in the future, the expense level
22   wouldn't be as great.   Is that right?
23       A    I mean, it's difficult to say.     You know, there
24   was a lot of information given with respect to
25   vegetation in particular exacerbating the issue, but I'm

                 KENNEDY REPORTING SERVICE, INC.
                           512.474.2233
                                                           Page 574

 1   also aware that we had icing in the range of one to
 2   three inches, which was very significant and exceeded
 3   our design criteria and also exceeded the design
 4   criteria of the NESC, the National Electric Safety Code.
 5                    So, yes, while there were things that did
 6   exacerbate the damage, it's difficult for me to say
 7   that, you know,    it would be -- you know,   I can't tell
 8   you how much worse.     I understand it exacerbated it and
 9   made it somewhat worse, but it's difficult to say.

10       Q    But it's your testimony that Entergy has
11   greatly improved its quality of service issues since

12   that case?
13       A    We have.

14       Q    All right.     Are you aware of a Company witness

15   named Gregory Wilson?

16       A    Yes,    I'm aware of the name.

17       Q    And in this case, I'll submit to you he
18   performs a study to estimate an annual level of expense
19   for projected storms.     Are you aware of that?

20       A    Yes.

21       Q    Okay.     And to the extent he were to include the
22   full amount of the 1997 ice storm in his analysis, that
23   would not be correct, would it, since the Company has
24   improved its service quality issues -- quality of
25   service issues?     I'm sorry.

                  KENNEDY REPORTING SERVICE, INC.
                            512.474.2233
                                                                 Page 575

 1       A      I'm not sure I understand your question.          Help
 2   me understand the question.
 3       Q      All right.
 4       A      Are you saying that his analysis is based on
 5   the performance from the early --

 6       Q      Do you know whether he has included in his
 7   analysis for estimating future storms the full amount of
 8   the 1997 ice storm?

 9       A      I really do not know.        I'm aware that he
10   testified in this case, but I'm not familiar with his
11   testimony.       I mean, you know, particularly I was focused
12   on the costs associated with the recovery and, you know,
13   how they -- how they really tied to what we saw in the
14   field.     I'm not real familiar with Mr. Wilson's
15   testimony --
16       Q      All right.        I think I put ln
17       A       -- in what he proposed.

18       Q       I think I put in front of you an excerpt of his
19   testimony.
20       A      Okay.
21       Q      Do you have that?
22       A       I   do.
23                         MR. MACK:   And this has not been admitted
24   into evidence yet, but I expect it will be tomorrow by
25   Entergy.

                      KENNEDY REPORTING SERVICE, INC.
                                512.474.2233
                                                                 Page 576

 1                     JUDGE BURKHALTER:       So you're just offering
 2   this as a demonstrative?
 3                     MR. MACK:     Yes.
 4       Q     (BY MR. MACK)       And on Page 7 of his testimony,
 5   Lines 15 and 16, he recommends an amount for annual
 6   expected losses of 4.89 million.           Is that right?
 7       A     Yes.     On Lines 15 and 16?
 8       Q     Yes.
 9       A     Yes, that's the number I see.
10       Q     Okay.     And on Lines 19 through 21, he says he
11   calculates that number "using a Monte Carlo simulation
12   run on the loss history," which he references as being
13   on Exhibit   GSW~3.    Do you see that?
14       A     Yes, I see the statement.
15       Q     Okay.     And can you turn the page to Exhibit
16   GSW-3?   And can you verify for us that the 1997 ice
17   storm was included in his analysis?
18       A     I can't verify it.           I see a large number there
19   of similar magnitude to the 13 million.
20       Q     And that large number has been trended to
21   increase quite a bit, hasn't it?
22       A     Yes, it has.
23                     MR. MACK:     I pass the witness.
24                     JUDGE BURKHALTER:       Mr. Nortey?
25                     MR. NORTEY:     No questions, Your Honor.

                   KENNEDY REPORTING SERVICE, INC.
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 1                    JUDGE BURKHALTER:   Ms. Ferris?
 2                    MS. FERRIS:   Yes, Your Honor.    Thank you.
 3   Can I have a moment?      Because Mr. Mack covered my
 4   questions.
 5                           CROSS-EXAMINATION
 6   BY MS. FERRIS:
 7       Q      Good afternoon, Mr. Corkran.
 8       A      Good afternoon.
 9       Q      I'm going to try not to duplicate Mr. Mack's
10   efforts.
11                    Does a successful restoration effort for a
12   given storm mean that all costs related to the storm
13   restoration effort were necessarily prudent?
14       A      Let's see.     You're asking if a successful
15   restoration means that the costs were prudent,
16   necessary?
17       Q      Does a successful restoration effort for a
18   given storm mean that all the -- all the costs related
19   to that storm were prudent necessarily?
20       A      I mean, I'm not sure.     I can't speak to the
21   definition of "prudency," where it would fall.
22       Q      Fair enough.
23                    I wanted to ask you a little bit about
24   that order from the Docket 18249 that Mr. Mack asked you
25   about.

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 1                    MS. FERRIS:    May I approach, Your Honor?
 2                    JUDGE BURKHALTER:    Yes.
 3                    MS. FERRIS:     I have an excerpt from the
 4   hearing, and I will not be offering this as evidence
 5   because it will speak for itself.        It's merely a
 6   demonstrative.
 7       A    Okay.     Thank you.
 8       Q    (BY MS. FERRIS)        Could you turn to Page 18 of
 9   the order on.rehearing for Docket 18249?
10       A    Okay.
11       Q    There is a sentence that begins at the very end
12   of the third line from the bottom, and it continues to
13   the top of the next page.        Could you read that sentence
14   for us, please?     It begins with the word "While."
15       A    The sentence reads,       "While Company's initial
16   efforts to mobilize and deploy additional nonEGS
17   personnel were slow and caused concern, vegetation
18   management failures greatly aggravated the situation."
19       Q    Thank you.     And just above, I guess this would
20   be three lines down in the middle of the line.           There's
21   another sentence that begins with the word "A major,"
22   could you read that sentence?
23       A    Yes.     The sentence reads,    "A major cause of the
24   outages during the storm were broken or bowed ice-laden
25   tree limbs overhanging the wires."

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 1          Q      Further down the order states that "The
 2   Company's failure to clear the limbs before the storm
 3   was a major factor in the number and duration of the
 4   outages experienced by customers."                Is that right?
 5          A     Yes   1   that's correct.   That's what it says.
 6          Q     Thank you.       Did the cost to restore the system
 7   after the 1997 ice storm 1 was it increased as a result
 8   of EGI's imprudence?
 9          A      Imprudence?
10          Q     Or was it -- let me rephrase.            Were the costs
11   of the 1997 ice storm 1 to recovery it 1 were those costs
12   increased due to the state of the vegetation management?
13          A     My understanding is that was a finding 1 was
14   that it did exacerbate the storm damage.

15          Q     Did the Company          or excuse me -- has the
16   Company made any attempt to quantify the extent to which
17   restoration costs were increased as a result of the
18   state of their vegetation management?

19          A     Not that I'm aware of.
20          Q      Okay.      I want to shift gears a little bit for
21   you.       Let's turn to Page 12 and 13 of your rebuttal
22   testimony/ please.           Are you there?
23          A      Let's see.      Okay.   Yes   1   I'm there.
24          Q      Okay.      On this section of your testimony/ you
25   address Dr. Szerszen's recommendations with regard to

                        KENNEDY REPORTING SERVICE, INC.
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 1          Q     Further down the order states that ''The
 2   Company's failure to clear the limbs before the storm
 3   was a major factor in the number and duration of the
 4   outages experienced by customers.''          Is that right?

 5          A     Yes, that's correct.      That's what it says.
 6          Q     Thank you.     Did the cost to restore the system
 7   after the 1997 ice storm, was it increased as a result
 8   of EGI's imprudence?

 9          A      Imprudence?
10          Q     Or was it -- let me rephrase.       Were the costs
11   of the 1997 ice storm, to recovery it, were those costs
12   increased due to the state of the vegetation management?
13          A     My understanding is that was a finding, was
14   that it did exacerbate the storm damage.
15          Q     Did the Company         or excuse me -- has the
16   Company made any attempt to quantify the extent to which
17   restoration costs were increased as a result of the
18   state of their vegetation management?

19          A     Not that I'm aware of.
20          Q     Okay.    I want to shift gears a little bit for
21   you.       Let's turn to Page 12 and 13 of your rebuttal
22   testimony, please.          Are you there?
23          A      Let's see.     Okay.   Yes, I'm there.

24          Q      Okay.   On this section of your testimony, you
25   address Dr. Szerszen's recommendations with regard to

                      KENNEDY REPORTING SERVICE, INC.
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          Appendix?


      PUC Docket No. 39896
 Hearing on the Merits Transcript:
Excerpts re. Optional Completeness
                                                                   Page 68

     1       Q     Okay.     And you've seen this before.      Correct?

     2       A     Yes, I have.     Well, Irve not seen this exhibit,

     3    but I've seen the full 10-K.

     4        Q    You've seen the full 10-K.        And the full 10-K
     5    was filed in roughly, what was it, March or April of

     6    this year?

      7       A    Yeah; in the first     quarter~

      8       Q    Right.     And the 10-K is a report that the
     .9   parent corporation makes each year on its financials.
     10   Is that correct?

     11       A    That is correct.

     12       Q    And included in these 10-K financials are a
     13   report or a summary of each operating company, including
     14   Entergy Texas, Inc.      Correct?

     15       A    Yes.

     16       Q    And do·you participate in putting this
     17   together, sir?

     18       A     I have reviewed what's in here.        It's usually
     19   put together based upon facts known about the Company
     20   and then sent to my review to see if it is accurate.
                       /


     21       Q     Okay.     Fair enough.

     22                     MR. LAWTON:   And at this time, Your Honor,
I
I·   23   I'd offer Cities Exhib~t B.

     24                     JUDGE WALSTON:    Any objection?

     25                     MR. LAWTON:   7; 7.   Excuse me.

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I
I
                                                                   Page 69

 1                         MR. WREN:   No objection, Your Honor.     We'd

 2   reserve optional completeness.

 3                         JUDGE WALSTON:   Cities Exhibit 7 is

 4   admitted.

 5                         (Exhibit Cities No. 7 admitted)

 6          Q       (BY MR. LAWTON)     Okay.   Now; is Entergy Corp --

 7   and keep that exhibit with you.            Keep it handy.    Okay,

 8   sir?

 9          A      I will.

10          Q      Is Entergy Corp -- as seen from the president,

11   Entergy Texas, Inc., is Entergy Texas, Inc. a growing

12   company?

13          A      It has been slowly growing.

14          Q      .It has been slowly growing?

15          A      Slowly growing.

16          Q      So your load is growing each year?

17          A.     The load has        well, there has been some years
18   when load did not increase very much, but overall on the

19   average since I became president, it has grown.

20          Q      Okay.     And so there's a difference when I say

21   load and sales, I guess.           Do you understand that?

22          A      Let's talk -- good point.       There's energy,

23   ~hich       is the sales, the megawatt-hours that we sell, and

24   theie•s also the need for additional resources for

25   reliability, which would be the capacity that we would

                      KENNEDY REPORTING SERVICE, INC.
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                                                                    Page 183

    1    that time.     Is that accurate?

    2        A     That's correct.

    .3       Q     All right.      And ETI's corporate credit ratings
     4   remain the same, even though that settlement resulted 1n

     5   a lower than requested revenue requirement and an ROE

     6   and none of the alternative ratemaking mechanisms that

     7   ETI~had   proposed in that case.         Correct?

     8       A       Yes.

     9                       MS. GRIFFITHS:     I need to move for the

    10   admission of TIEC -- let's see -- Exhibits 9 and TIEC

    11   Exhibit 8.     And I think I've already asked for 6 and

    12   7 -- or I did not ask for 6 but just for 7.

    13                       JUDGE ARNOLD:     Six has already been

    14   admitted.

    15                       MS. GRIFFITHS:     Okay.   I would ask for the

    16   admission of both of them, Your Honor.

    17                       MR. OLSON:     With respect to 8 and 9, just

    18   reserve optional completeness.

    19                       JUDGE ARNOLD:     Okay.    Seven, 8 and 9 will
I
I        be admitted.        I think 9 is subject to optional
    20

    21   completeness.

    22                        (Exhibit TIEC Nos. 7, 8 and 9 admitted)

    23       Q        (BY MS. GRIFFITHS)        Could you turn to Page 35

    24   of your testimony.         Okay.     Now, on Page 35 of your

    25   testimony, you testify regarding the fact of ETI's

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 1                  MS. CYR:   Your Honor, no objection to
 2   exhibit :..._ I'm trying to find Exhibit 9.

 3                  JUDGE BURKHALTER:   Nine is the --

 4                  MS. CYR:    No objection -- well, Your
 5   Honor, generally we don't have court opinions as an
 6   admitted exhibit, but -- I mean, we don't have an
 7   objection if Your Honors want to have them, but counsel
 8   normally cites --

 9                  JUDGE BURKHALTER:    I   understand~   We can
10   take notice of it and --
11                  MS. FERRIS:    Your Honor, actually, I also,
12   just for you notice as well, the last page'·is the
13   Supreme Court status sheet.     So it's one page in
14   addition to the case law.     I meant to point that out
15   earlier.
16                  JUDGE BURKHALTER:    Well, I tell you what,
17   if there's no objection to it, I'll go ahead and admit
18   it as an exhibit.    I agree we can take notice of it,
19   but -- so 9 is admitted.
20                   (Exhibit OPC No. 9 admitted)

21                  MS. CYR:    Your Honors, as to 10, the
22   highly sensitive, we will want Your Honors -- what

23   counsel has provided is the actual response, but there
24 · is the question to be asked, and we would like for

25 ·optional completeness to provide the question that was

                  KENNEDY REPORTING SERVICE, INC.
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1    actually asked and then the response thereto.

2                    MS. FERRIS:     Your Honor, I actually have
3    the question and I could offer that as lOA if Entergy
4    would prefer.

5                     MS. CYR:   If I can just confirm that 1s
6    our response.

 7                    MS. FERRIS:     This is the question itself.

 8                    MS. CYR:   With the --

 9                    MS. FERRIS:     With the Addendum 1.

10                    MS. CYR:   Okay.       Together with the highly
11   sensitive
12                    MS. FERRIS:     Yes.

13                    JUDGE BURKHALTER:        Why don't we just
14   combine it and make it into -- make· it all 10?             Well,

15   no, let's don't do that, because we've got the stuff in
16   the envelope.     I think it would probably be cleaner to
17   make it lOA.

18                    MS. CYR:      So with that, Your Honor, we
19   would have no objection to

20                    JUDGE BURKHALTER:        All right.   So I'm

21   hearing no objection to. 10 and lOA.          So they are both

22   admitted.
23                     (Exhibit OPC Nos. 10 and lOA admitted.

24                    MS. CYR:      No objection to OPC 11.

25                     JUDGE BURKHALTER:        It's admitted.

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 1                  MS. FERRIS:     Okay.

 2                  JUDGE ARNOLD:      I've looked at 18 where
 3   there are dark blackouts.       They're shaded.   I don't know
 4   if something is supposed to go in there or not.       And I
 5   sure as heck can't tell from 18 whether there is

 6   anything there.

 7                  MS. FERRIS:      Well, can I ask you this
 8   question, ·Your Honor:    This is an RFI response provided
 9   by the company, sponsored by this witness.        The company
10   has provided it to us in response to the question·that
11   asks for their forms.     And to the extent that we-don't
12   understand   whethe~   something is missing or not, it would
13 .be up to the company to provide optional completeness go
14   that.   This is an admission by a party-opponent.

15                   JUDGE ARNOLD:     If I can see the
16   originally-supplied        I .don't know what the company
17   gave you in discovery.      I do know that sometimes when
18   you run something through a copy machine, it comes out
19   black when it's highlighted.

20                   MS. FERRIS:     Your Honor, I'll be glad to

21   pull it up on the interchange right now go my iPad.           I
22 .have the complete FERC Form 1 and·FERC Form 60 pulled up

23   right now, if you would like to review that document.
24   You go onto Page 201 to see that there. are shades there
25   on the blank form and that should resolve any

                   KENNEDY REPORTING SERVICE, INC.
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                                                              Page 945

1    authentication questions that are involved.
2                    Your Honor, would you like to see?
3                    JUDGE ARNOLD:     I apologize.    I'm just
4    trying to find something go my computer, and I've lost
5    it.
 6                   Just found it.     Are you saying this is go
 7   the interchange?
 8                   MS. FERRIS:     The responseq -- and I
 9   actually have go the FERC website, their Form 60
10   document, the pdf form.       And I could give you the link
11   or I could let you use my iPad.
12                   JUDGE ARNOLD:     Give me the link.
13                   MS. FERRIS:     www.FERC.gov/docs-filing\
14   forms --
15                   JUDGE ARNOLD:     Back slash?
16                   MS. FERRIS:      -- or slash forms
17   /form-60.pdf.
18                   JUDGE ARNOLD:      That's the same thing as
19   18B?
20                   MS. FERRIS:      Yes.    And what I was saying,

21   he was say1ng -- if we look go Page 201, which is the

22 . one with the shading, the first one with shading, we can
23   see that the form has shading the same place that we

24   have shading, the 18 has shading.

25                    JUDGE ARNOLD :    No.    I understand that.   I

                 KENNEDY REPORTING SERVICE, INC.
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 1   don't know if something is·supposed to go in there or

 2   not.

 3                       MS. FERRIS:       Your Honor, if the form had
 4   shading, it indicates you're not supposed to fill it ln
 5   go your 10     -~   I mean, you don't fill in go shading.             I
 6   can show you an example.              On Page 102 of the form go
 7   Line 68 there is a title in black, "Current and Accrued
 8   Liabilities."        It's shaded in.       And then things that
 9   fall below it are not shaded in, because that's where
10   you fill in.

11                       JUDGE ARNOLD:        Given the fact that this
12   has been supplied in response to a discovery request,
13   I'm going to go ahead and let it in.                 If the company
14   believes there is something hidden in the blacked-out
15   areas, they can supply it.

16                       MR. NEINAS'J;':     And also, Your Honor, if I
17   may ask optional completeness?

18                       JUDGE ARNOLD:        Yes.

19                       MR. NEINAST:        Thank you.

20                       JUDGE ARNOLD:        It's admitted.·

21                       (Exhibit OPC No. 18 admitted)

22                       MS. FERRIS:        Thank you, Your Honor.

23          Q     (BY MS. FERRIS)          Now I want to go back to your

24   dir~ct     testimony, Ms. Tumminello.           You have your Exhibit      .   \
                                                                                    I
25   SBT-8?

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     1       A       That's correct.

     2                       MR. MACK:     Your Honors, Cities move for
     3    the admission of Cities Exhibit No. 41.

     4                       JUDGE WALSTON:     Just for clarification,
     5    Mr. Mack, is this the entire response?            It's not an
     6    excerpt?
      7                      MR~   MACK:   That is an excerpt. ·Also
      8   attached, or attached with the original was a highly
      9   sensitive cost/benefit analysis.
     10                      MR. McGRATH:. And that is not included in
     11   your Exhibit 41?
     12                      MR.· MACK:    Not included in·the exhibit,
     13   yes, that's right, what we're offering.
     14                      MR. McGRATH:     No objection, subject to
     15   optional completeness.
     16                      JUDGE WALSTON,      Okay.   Cities Exhibit 41
     17   1s admitted, subject to optional completeness.
     18                       (Exhibit Cities No. 41 admitted)

     19       Q       (BY MR. MACK)        All right.    In this question,
r
I    20   the City of Rose City asked the company to provide any
     21   studies or analysis to support the statement that call
     22   options provide the necessary degree of reliability for
     23   fuel supply at a lower cost than alternative means.                Do

1.   24   you see that?
)
     25          A    Yes.

                         KENNEDY REPORTING SERVICE, INC.
                                   512.474.2233
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 1 ·the expenses are volatile, they're not in the company --
 2   subject to the company's control -- for example, they're
 3   not affiliated charges, they're not charges that the
 4   company itself has authority over.      And a third factor

 5   is when the amount of the expenses can be substantial
 6   enough that they can actually impair the company's
 7   integrity or its financial wholeness.

 8       Q      So rate case expenses, those impair the
 9   company's financial integrity if they're not included in
10   a rider?

11       A      Well, I think that they could.    I mean, they
12   could hurt it.

13       Q      What's that based on?

14       A      Well, the fact that. rate case expenses these
15   days are in the many multimillions of dollars.       And, in
16   fact, in this case, I guess you're asking for
17   12 million.

18                    MR. WILLIAMS:    Linda tells me I neglected
19   to offer ETI Exhibit 83.      I offer that exhibit at this

20   point.

21                    JUDGE WALSTON:    Any objection?

22                    MR. MACK:   Your Honors, Mr. Williams kind
23   of made the insinuation that Schedule A from the last

24   case, Docket 37744, was not -- were not retail numbers.

25                    I think we would like to object as far as

                   KENNEDY REPORTING SERVICE, INC.
                              512.474.2233
                                                          Page 1191

1    optional completeness so that we can provide documents

2    to show that these are retail numbers ..

3                    JUDGE WALSTON:    Any other objections?     All

4    right.    Then, Exhibit ETI-83 is. admitted subject to

5    showing of optional·completeness.

 6                   (Exhibit ETI No. 83 admitted)

 7                   MR. WILLIAMS:    Thank you.

 8         Q    (BY MR. WILLIAMS)     Let me go back to the rider.

 9   Are you aware of any Commission ruling indicating that

10   financial integrity is a necessary showing to get a rate

11   case expense rider?

12         A    No, I'm not.

13         Q    So putting that to one side, the main basis you

14   have for approving of riders is that costs are volatile,

15   costs are beyond the Company's control.       Correct?

16         A    Those are the main ones.      I think the courts

17   have looked at and I think commissions have approved or

18   based their decisions on.

19         Q    Also, . when you say· "beyond the control," it• s

20   not       the Company is not going to be able to reduce its

21   costs or make those costs smaller by the way of managing

22   them.     It's just sort of stuck with them.     Correct?

23         A     I don't understand your question.

24         Q     Well, if there's a cost that you can manage

25 . you_r business in a way to reduce it, in your view that

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 1   admiss.ion of Cities Exhibits 43A and 43B.

 2                 JUDGE BURKHALTER:     Any objection?

 3                 MR. NEINAST:     No objections.

 4                 JUDGE BURKHALTER:     They're admitted.

 5                  (Exhibit Cities Nos. 43A and 43B admitted)

 6                 JUDGE BURKHALTER:     And, Mr. Boehm, you
 7   never moved for admission of Kroger 3, 4 and 5.        Did you
 8   wish to have them admitted?

 9                 MR. BOEHM:     Thank you, Your Honor.      Kroger
10   would move for the admission of KRO 3, KRO 4 and KRO 5.
11                 JUDGE BURKHALTER:      Any objection?

12                 MR. NEINAST:     No objections.

13                 JUDGE BURKHALTER:      They're admitted.
14                  (Exhibit KRO Nos. 3 through 5 admitted)
15                 MR. NEINAST:     I do have to go back, Your
16   Honor, I just realized, in optional completeness for
17   43A.
18                 JUDGE BURKHALTER:      Okay.   You have the
19   right to supplement under the rule of optional
20   completeness for 43A.

21                 MR. NEINAST:     And can I also ask for 43B.
22                 Mr. Mack, is there every other page
23   missing in the.-- looks like the ·original sheet 1 and
24   the next one is original sheet 3, 5, as well as 6 ..

25                  MR. MACK:     I wasn 1 t int'ending to refer to·

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1    them, but I have the --

2                     MR-. NEINAST:       Optional completeness on

3    both is fine.

4                     JUDGE BURKHALTER:        All right.

5        Q    (By Mr .. Mack) Now     I   Ms. Talkington, would you

6    agree that this Brazos contrac·t, which has been
 7   attached -- has been partially attached -- to Cities

 8   Exhibit 43B is a contract that allocates costs on a 12CP

 9   basis?
10       A    This is the first time I've ever seen this
11   contract, so I could not tell you that without reading
12   the entire thing.

13       Q    Okay.      Co~ld   I direct your attention to what's
14   been Bates stamped page No. TIEC 4-2 BB414?
15                     Are you there?

16       A    BB414?

17       Q    Yes, ma'am.

18       A     Okay.

19       Q    And the second·paragraph· from the bottom, the

20   second. sentence of that paragraph, could you read that

21   and tell me whether the costs of -- I'm sorry, Entergy's

22   costs are allocated to Brazos based on the 12CP

23   allocation method?

24       A     The sentence that starts, "The ETiproduction"?

25        Q    Yes.

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 l       A      Yes.

 2       Q      And we've done that in this case?

 3      A       Yes.

 4       Q      Now, let me show you Schedule 041 from the rate

 5   filing package.      This is in evidence.    Let me ask if you
 6   can identify the amount of the weather normalization in

 7   this case in terms of dollars.

 8       A      Yes.    According to this schedule, base revenues
 9   were reduced by 22.4 million.        This is the weather
10   adjustment.

11       Q      Okay.    And other things equal, the utility's
12   earnings would be $22 million higher than they otherwise
13   would be during normal weather on account of the
14 . weather.    Correct?

15       A      Pretax, yes.

16       Q      Okay.    Now, let me show you the 10-K for the
17   Company for 2011.       This is in evidence already.    Let me
18   just point to you the net income for ETI for 2011 and
19   see if you can read that and identify that.

20       A      So for Calendar Year 2011 the report shows net

21   income of 80,845,000.

22       Q      Okay.     And what

23                      MR. VanMIDDLESWORTH:    May I ask -- because

24   I don't have the 10-K with me.

25                      MR. WREN:    Oh, I'm sorry.

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       1                    MR. VanMIDDLESWORTH:         I was wondering if I

       2    could either see it or know what exhibit it was.

       3                     MR. WREN:    We reserved for optional

       4    completeness.

       5                     MR. VanMIDDLESWORTH:        Until we know that
       6    it's in the record we would object on asking this

       7    witness to recite from'a company document that hadn't
       8    been introduced yet.

       9                     JUDGE WALSTON:     I believe the Cities had
I
I .
~     10    offered portions of it, and I think the Company had
      11    reserved the right for optional completeness.

      12                     MR. WREN:    Correct, Your Honor.        I didn't
      13    think this would be controversial.           The Cities clearly
      14    offered the 10-K and I clearly reserved optional
      15    completeness.

      16                     MR. VanMIDDLESWORTH:        So are you
      17    offering -- so if he wants to offer the full 10-K 1n,
      18    then I think that would be appropriate.

      19                     MR. WREN:     I'll be glad to do that.       I
      20    think that's unnecessary.         It burdens the record, but if·

      21    that's the wish I can do that.

      22                     JUDGE WALSTON:      Okay.

      23                      MR. VanMIDDLESWORTH:        I may be persuaded
      · 24 ··otherwise, but if you're crossing him on a page that-

       25   hasn't yet been introduced, then I think we would need

                            KENNEDY REPORTING SERVICE, INC.
                                         512.474.2233
                                                           Page 1507

 1   to see whether it's something that is appropriate for
 2   optional completeness and --

 3                 MR. WREN:   I'll let you reserve on
 4   optional completeness.

 5                 JUDGE WALSTON:    I think it would be best,
 6   since we have had bits and parts and pieces referred to,

 7   I would recommend you go ahead and just offer the whole
 8   thing in unless you have some problem with that.

 9                 MR. WREN:   So, Your Honor, then I think
10   this would be ETI Exhibit 98,.because I've reserved 96
11   and 97.
12                 JUDGE WALSTON:    Okay.   Then ETI Exhibit 98
13   will be admitted, and you can get additional copies
14   bring the additional copies later, obviously.
15                  (Exhibit ETI No. 98 marked and admitted)

16                 MR. WREN:   Thank you, Your Honor.       The
17   reference in.question is to Cities Exhibit 8 and 7 that
18   include excerpts from the 10-K.

19                 JUDGE. WALSTON:   Just for our convenience,
20   can you refer us to the page number you were questioning
21   the witness about?

22                 MR. WREN:   Yes, Your Honor.    May I
23   approach the witness?

24                 JUDGE WALSTON:    Yes.

25       Q     (BY MR. WREN)   Can you tell me the page number

                 KENNEDY REPORTING SERVICE,. INC.
                           512.474.2233
                                                                    Page 1686

    1     there.

    2                   MR. SMYTH:      No.

    3                   JUDGE ARNOLD:         Mr. Neinast?

    4                   MR. NEINAST:      I don't -- no.

    5                   JUDGE ARNOLD:         Doctor, thank you so much.
    6     You're excused.

     7                  WITNESS SZERSZEN:         You're welcome.    Thank
     8    you.
     9                  JUDGE ARNOLD:         And we've reached the time
    10    for our afternoon break.      Let's come back at 3:35.
    11                      (Recess:   3:17p.m. to 3:36p.m.)
    12                  JUDGE ARNOLD:         We're back on the record
    13    following a break.      Mr. Mack, I understand you have some
    14 ·matters you want to.discuss.
    15.                 MR. MACK:       Yes, Your Honor.     Thank you.      A
    16    couple days ago during the testimony of Mr. Brazell,

    17    Entergy introduced ETI's Exhibit 83, which showed

I   18    Schedule A of the Company's rate filing from the last

    19    case, and I think he was being asked whether that was a
r   20    total Company number or a wholesale number, and we

    21    reserved the right of optional completeness on that

    22    exhibit.

    23                      And we'd like to introduce Cities

    24    Exhibit 49, which is Schedule A-1, stating that there
    25    was not a wholesale class in the filing.           The second

                       KENNEDY REPORTING SERVICE, INC.
                                 512.474.2233
                                                           Page 1687

 1   page to it is Schedule Q from the same filing showing
 2   what Mr. Brazell noted as his bottom-line number there
 3   on a retail basis.    So we offer Cities- Exhibit No. 49
 4   for optional completeness.

 5                   JUDGE ARNOLD:    Any objections?

 6                   MR. NEINAST:    No objections.

 7                   JUDGE ARNOLD:    Admitted.

 8                   (Exhibit Cities No. 49 admitted)

 9                   JUDGE ARNOLD:    Ms. Ferris --

10                   MS. FERRIS:     Thank you, Your Honor.

11                   JUDGE ARNOLD:     -- you're up.

12                   MS. FERRIS:     Office of Public Utility
13   Counsel calls Nathan Benedict.

14                   JUDGE ARNOLD:     Pardon me.   If I learn how

15   to talk.
16                   Mr. Benedict, if you'd raise your right
17   hand, please?

18                   (Witness Benedict sworn)

19                   JUDGE ARNOLD:     Ms. Ferris, you may

20   proceed.

21                   MS. FERRIS:     Thank you.

22

23

24

25

                 KENNEDY REPORTING SERVICE, INC.
                              512.474.2233
                                                                           Page 2082

     1                 Q       Okay.     I would like to -- do you have in front

     2       of you what's been marked as Cities Exhibit 48?

     3                 A       48?     Yes, I do.

     4                 Q       And can you identify that as Attachment 4 to
         \
     5       the intra-system bill for the test year?

     6                 A       It goes through-- and what's attached here are

     7       the coincident peak calculations for the RA version of
     8       the intra-system bill from July of '10 through June of
     9       I   11.

    10                 Q       And that's Attachment 4.         Correct?

    11                 A       It is Attachment 4.       That's correct.

    12                 Q       And that's where the responsibility ratios are
    13       calculated?

    14                 A       There are two sets of responsibility ratios
    15       calculated on that page.                Correct.

    16                                 MR. MACK:    Your Honor, Cities move for the
    17       admission of Cities Exhibit 48.

    18                                 JUDGE ARNOLD:     Any objections?

    19                                 MR. WESTERBURG:     We would like to reserve
    -20      optional completeness, Your Honor.
t   21                                 JUDGE ARNOLD:     Admitted subject to
I
    22           optional completeness.
    23                                  (Exhibit Cities No. 48 admitted)

     24                    Q    (BY MR. MACK)       Now, could you turn to September

     25          of the rate year             I'm sorry -- of the test year in the

                                     ·KENNEDY REPORTING SERVICE, INC.
                                                512.474 . .2233
                                                             Page 2094

  1        A    If we're talking about the one underneath -- in

  2    WET308

  3        Q    Yes.

  4        A    -- then I believe that's a 10-year contract.

  5        Q    The company is asking for the Commission's
  6    approval of the Calvin-Carville contract in this docket.
  7    Is that right?

  8        A    I believe that's the case.

  9        Q    And once the Texas Commission gives ETI or any
10     other company approval .of a purchased power contract,
11     does the Commission ever revoke this approval?

12         A    I don't know.      I'm not the purchased power
13     expert in this case.

14         Q    Okay.     I want to turn to another project that's
 15    discussed in your rebuttal testimony.       On Page -- let me
 16    see if I can get the page right this time.        I have it.
 17    Here we go.     Yes, Page 10 of 18, I believe you're
 18    discussing Project Code F3PCWE0140.        Is that right?

 19        A    E0140.     Okay.

 20        Q    Do you have that before you marked as OPC

 21    Exhibit 35?

 22        A    Yes, I do.
. 23                    MS. FERRIS:     Your Honor, at·this time we

 24    offer OPC Exhibit 35.

 25                     JUDGE ARNOLD:     Any objections?

                     KENNEDY REPORTING SERVICE, INC.
                               512.474.2233
                                                             Page 2095

1                    MR. WESTERBURG:     ~o,    Your Honor, with
2    reserving optional completeness.

3                    MS. FERRIS:     Oh, I'm sorry.     I would just
4    seek clarification on what you're reserving on, if this
5    is their entire document.       This is a one-page document.

6                     MR. WESTERBURG:     I was just going to
7    confirm that.
 8                    MS. FERRIS:    Okay.

 9                    MR. WESTERBURG:     It looks like it is.

10                    MS. FERRIS:     Okay.     So no reservation
11   needed?
12                    MR. WESTERBURG:     Well, I haven't been able
13   to look at -- it stops.        And so when we look at our
14   book, we'll see if it --

15                    JUDGE ARNOLD:     Okay; okay.

16                    MR. WESTERBURG:        I just want to confirm
17   it's an update.

18                    JUDGE ARNOLD:     He can.reserve optional
19   completeness

20                    MR. WESTERBURG:         Right.
21                    JUDGE ARNOLD:      -- if there is anything

22   left of this document.
23                    MS. FERRIS:      Thank you, Your Honor.

24                     JUDGE ARNOLD:     It's admitted.

25                     (Exhibit OPC No. 35 admitted)

                     KENNEDY REPORTING SERVICE, INC.
                               512.474.2233
                  Appendix 8


Tex. Health Facilities Comm'n v. Charter Medical--Dallas,
            665 S.W.2d 446 (Tex. 1984)
                                                                                                            Page I


665 S.W.2d 446
(Cite as: 665 S.W.2d 446)

                                                           Cases


          Supreme Court of Texas.                               Statute requiring administrative agencies to ac-
 TEXAS HEALTH FACILITIES COMMISSION et                     company fmdings of fact set forth in statutory lan-
               al., Petitioner,                            guage by supporting statement of underlying facts
                      v.                                   requires accompanying statement of underlying facts
 CHARTER MEDICAL-DALLAS, INC., Respond-                    only when ultimate fact-fmding embodies mandatory
                     ent.                                  fact-fmding set forth in relevant enabling act; agency
                                                           may not avoid this statutory requirement by simply
                                                           rewording its criteria. Vernon's Ann. Texas Civ.St. art.
                    No. C-2478.
                                                           6252-13a, § 16(b).
                   Feb. 15, 1984.

                                                            [21 Administrative Law and Procedure l5A
      Appeal was taken from orders of the Health Fa-
cilities Commission granting certificates of need to        ~486

two hospitals and denying certificate of need for an-
other hospital. The 250th Judicial District Court,         15A Administrative Law and Procedure
Travis County, Charles D. Mathews, J., sustained the          15ATV Powers and Proceedings of Administrative
Commission's order. On appeal, the Austin Court of         Agencies, Officers and Agents
Appeals, Third Supreme Judicial District, Powers, J.,            15AIV(D) Hearings and Adjudications
656 S.W.2d 928, reversed and remanded with in-                       15Ak484 Findings
structions, and appeal was taken. The Supreme Court,                     15Ak486 k. Sufficiency. Most Cited
Barrow, J., held that Commission's decision was            Cases
supported by substantial evidence and was not arbi-
trary or capricious.                                            Valid fmdings of fact by administrative agency
                                                            must be clear and specific. Vernon's Ann.Texas
    Court of Appeals reversed and trial court af-           Civ.St. art. 6252-13a, § 16(b).
firmed.
                                                            131 Administrative Law and Procedure l5A
                  West Headnotes                            ~485


[l] Administrative Law and Procedure l5A                    15A Administrative Law and Procedure
~486                                                           15AlV Powers and Proceedings of Administrative
                                                            Agencies, Officers and Agents
                                                                   15AIV(D) Hearings and Adjudications
15A Administrative Law and Procedure
                                                                     15Ak484 Findings
   15AfV Powers and Proceedings of Administrative
Agencies, Officers and Agents                                             15Ak485 k. Necessity and Purpose.
       15AIV(D) Hearings and Adjudications                  Most Cited Cases
          15Ak484 Findings
              15Ak486 k. Sufficiency. Most Cited                Underlying facts which must accompany finding




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                                                                                                              Page2


665 S.W.2d 446
(Cite as: 665 S.W.2d 446)

of fact set forth in statutory language may not be           15A Administrative Law and Procedure
presumed from findings of conclusional nature.                  15AIV Powers and Proceedings of Administrative
Vernon's Ann.Texas Civ.St. art. 6252-13a, § 16(b).           Agencies, Officers and Agents
                                                                    15AIV(D) Hearings and Adjudications
141 Administrative Law and Procedure 15A                               15Ak484 Findings
e:;,486                                                                    15Ak486 k. Sufficiency. Most Cited
                                                             Cases

15A Administrative Law and Procedure
   15AIV Powers and Proceedings of Administrative                 Statement of facts underlying findings set forth in
Agencies, Officers and Agents                                statutory language should relate to material basic facts
      15A1V(D) Hearings and Adjudications                    and should relate to ultimate statutory finding that they
         15Ak484 Findings                                    accompany. Vernon's Ann.Texas Civ.St. art.
              15Ak486 k. Sufficiency. Most Cited             6252-13a, § 16(b).
Cases
                                                             [71 Health 198H ~242
     In general, findings of fact underlying fmding of
fact set forth in statutory language must be such that       198H Health
reviewing court can fairly and reasonably say that                198HI Regulation in General
underlying findings support statutorily required crite-              198HI(C) Institutions and Facilities
ria. Vernon's Ann.Texas Civ.St. art. 6252-13a, §                        198Hk236 Licenses, Permits, and Certifi-
16(b).                                                       cates
                                                                           198Hk242 k. Proceedings on Applica-
[5]Administrative Law and Procedure 15A                      tion. Most Cited Cases
EP486                                                            (Formerly 204kl Hospitals)


15A Administrative Law and Procedure                               Underlying findings of fact made by Health Fa-
   15AIV Powers and Proceedings of Administrative            cilities Commission to support its decision to grant
Agencies, Officers and Agents                                certificates of need to two hospitals and deny certifi-
       15A1V(D) Hearings and Adjudications                   cate of need to another hospital satisfied statutory
          15Ak484 Findings                                   requirement that fmdings set forth in statutory lan-
              15Ak486 k. Sufficiency. Most Cited             guage be accompanied by supporting statement of
Cases                                                        underlying fact where, even though some findings
                                                             were nothing more than mere recitals of evidence,
                                                             other fmdings were sufficient from which basic facts
     Mere recitals of testimony or references to or
                                                             could fairly and reasonably be determined. Vernon's
summations of evidence are improper and do not
                                                             Ann.Texas Civ.St. art. 6252-13a, § 16(b).
satisfy requirement to support fact- findings set forth in
statutory language by statement of underlying facts.
Vernon's Ann.Texas Civ.St. art. 6252-13a, § 16(b).           (8) Administrative Law and Procedure 15A
                                                             e:;,791
[6) Administrative Law and Procedure 15A
~486                                                         15A Administrative Law and Procedure
                                                                15AV Judicial Review of Administrative Deci-




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                                                                                                           Page 3


665 S.W.2d 446
(Cite as: 665 S.W.2d 446)

sions                                                           Although substantial evidence is more than a
       15AV(E) Particular Questions, Review of             mere scintilla, evidence in the record actually may
         15Ak784 Fact Questions                            preponderate against decision of agency and none-
            15Ak791 k. Substantial Evidence. Most          theless amount to substantial evidence; true test is not
Cited Cases                                                whether agency reached correct conclusion, but
                                                           whether some reasonable basis exists in the record for
     In applying substantial evidence test to agency's     the action taken by the agency.
decisions, reviewing court is prohibited from substi-
tuting its judgment for that of the agency as to weight     Ill] Administrative Law and Procedure 15A
of evidence on questions committed to agency dis-          ~753
cretion. Vernon's Ann.Texas Civ.St. art. 6252-13a, §
19(e), (e)(5).                                             I 5A Administrative Law and Procedure
                                                               I 5AV Judicial Review of Administrative Deci-
[9)Administrative Law and Procedure 15A                    sions
~764.1                                                             15AV(D) Scope ofReview in General
                                                                      15Ak753 k. Theory and Grounds of Ad-
I 5A Administrative Law and Procedure                      ministrative Decision. Most Cited Cases
    15A V Judicial Review of Administrative Deci-
sions                                                            Reviewing court is not bound by reasons given by
       15AV(D) Scope of Review in General                   agency in its order, provided there is valid basis for
         15Ak764 Harmless or Prejudicial Error              action taken by agency.
             15Ak764.1 k. In General. Most Cited
Cases                                                       [12] Administrative Law and Procedure 15A
   (Formerly 15Ak764)                                       ~788


     Reviewing court may reverse agency decision            15A Administrative Law and Procedure
because of absence of substantial evidence only if              15A V Judicial Review of Administrative Deci-
such absence has prejudiced substantial rights of liti-     sions
gant. Vernon's Ann.Texas Civ.St. art. 6252-l3a, §                  15AV(E) Particular Questions, Review of
19(e), (e)(5).                                                       15Ak784 Fact Questions
                                                                          I5Ak788 k. Determination Supported
[10) Administrative Law and Procedure 15A                   by Evidence in General. Most Cited Cases
~791
                                                                 Agency's action will be sustained if evidence is
15A Administrative Law and Procedure                        such that reasonable minds could have reached con-
    15AV Judicial Review of Administrative Deci-            clusion that agency must have reached in order to
sions                                                       justify its action.
       15AV(E) Particular Questions, Review of
         15Ak784 Fact Questions                             [131 Administrative Law and Procedure 15A
            15Ak791 k. Substantial Evidence. Most           ~749
Cited Cases




                            © 2015 Thomson Reuters. No Claim to Orig. US Gov. Works.
                                                                                                           Page4


66S S.W.2d 446
(Cite as: 665 S.W.2d 446)

!SA Administrative Law and Procedure                          (Formerly 204kl Hospitals)
    lSAV Judicial Review of Administrative Deci-
sions                                                           Substantial evidence supported decision of Health
       ISA V(D) Scope of Review in General                 Facilities Commission to grant certificate of need to
          ISAk749 k. Presumptions. Most Cited              two hospitals and to deny certificate of need for an-
Cases                                                      other hospital. Vernon's Ann. Texas Civ.St. art. 4418h,
                                                           § 3.10(b)(l).
Administrative Law and Procedure 15A E?750
                                                           [15] Health 198H ~242
!SA Administrative Law and Procedure
    !SAV Judicial Review of Administrative Deci-           198H Health
sions                                                           198HI Regulation in General
       lSAV(D) Scope ofReview in General                           198Hl(C) Institutions and Facilities
         15Ak7SO k. Burden of Showing Error. Most                     198Hk236 Licenses, Permits, and Certifi-
Cited Cases                                                cates
                                                                         198Hk242 k. Proceedings on Applica-
Administrative Law and Procedure 15A ~788                  tion. Most Cited Cases
                                                               (Formerly 204kl Hospitals)
!SA Administrative Law and Procedure
    lSAV Judicial Review of Administrative Deci-                Decision of Health Facilities Commission to
sions                                                      grant certificate of need for two hospitals and to deny
       !SAV(E) Particular Questions, Review of             certificate of need for another was not arbitrary or
         lSAk784 Fact Questions ,                          capricious. Vernon's Ann.Texas Civ.St. mt. 62S2-13a,
              1SAk788 k. Determination Supported           § 16(e)(6).
by Evidence in General. Most Cited Cases
                                                            *448 Jim Mattox, Atty. Gen., Steven L. Martin, Asst.
     Findings, inferences, conclusions, and decisions      Atty. Gen., Austin, Law Offices of Earl Luna, Mary
of administrative agency are presumed to be supported      Mildord, Dallas, Heath, Davis & McCalla, Dudley D.
by substantial evidence and burden is on contestant to     McCalla, Austin, for petitioner.
prove otherwise; hence, ifthere is evidence to support
either affirmative or negative fmdings on specific          Wood, Lucksinger & Epstein, Bruce Bigelow, Austin,
matter, decision of agency must be upheld.                  Trotter, Bondurant, Miller and Hishon, Glen A. Reed,
                                                            Atlanta, Ga., for respondent.
1141 Health 198H E?243
                                                            BARROW, Justice.
198H Health                                                      This is an appeal from three consolidated orders
    198HI Regulation in General                             of petitioner Texas Health Facilities Commission. The
       1981-II(C) Institutions and Facilities               orders of the Commission granted certificates of need
          198Hk236 Licenses, Permits, and Certifi-          to petitioners Healthcare International and Memorial
cates                                                       Hospital of Garland and denied a similar request made
               198Hk243 k. Evidence. Most Cited             by respondent Charter Medical-Dallas, Inc. The action
Cases                                                       of the Commission was upheld by the trial court. The




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                                                                                                            Page 5


665 S.W.2d 446
(Cite as: 665 S.W.2d 446)

court of appeals, with one justice dissenting, reversed     stated reason for the court of appeals' decision is that
the judgment of the trial court and remanded the cause      the Commission's orders contain insufficient under-
to the Commission for further proceedings. Charter          lying (basic) facts to support the ultimate findings or
Medical-Dallas, Ins. v. Texas Health Facilities Com'n,      conclusions of the Commission on the three applica-
656 S.W.2d 928. We reverse the judgment of the court        tions. The court of appeals held that the absence of
of appeals and affirm the judgment of the trial court.      underlying facts rendered the Commission's ultimate
                                                            findings arbitrary and capricious. The court of appeals
     The Texas Health Facilities Commission is the          remanded all three applications to the Commission
Texas administrative agency charged with governing          since the Commission's denial of Charter Medical's
the availability of health care facilities in this state.   request may have been based upon the granting of the
See Health Planning and Development Act,                    other two applications.
Tex.Rev.Civ.Stat.Ann. art. 4418h, §§ 1.01-6.04
(HPDA). The Commission's primary function is to                  In reaching its decision, the court of appeals set
prevent the development of new health care facilities       forth a lengthy recitation of the facts and Commission
with services that are not needed or that cannot feasi-     rules applicable to this appeal; we refer the reader to
bly be developed, staffed, or operated. This function is    that opinion for a more complete statement on these
performed primarily by the Commission's admin-              matters. We limit our discussion to the specific points
istration of a state certificate of need program. Id., §    properly before this Court and upon which we base
2.06. Under this program, a person proposing to es-         our decision.
tablish or modify a health care facility must obtain a
certificate ofneed from the Commission. Id., § 3.01.             This administrative appeal arises under the au-
                                                            thority of the HPDA in conjunction with the Texas
     *449 In December of 1979 and January of 1980,          Administrative Procedure and Texas Register Act.
the parties to this appeal filed applications seeking       Tex.Rev.Civ.Stat.Ann. rui. 6252-l3a (APTRA). Un-
certificates of need for proposed projects. Memorial        der the legislative scheme of the APTRA, the manner
sought permission to convert a portion of its general       of review of agency actions is governed by the ena-
hospital into psychiatric use; Healthcare proposed to       bling statute in the area under adjudication. APTRA, §
construct a new facility, "Green Oaks;" and Charter         19(e); Southwestern Bell Telephone Co. v. Public
Medical applied for permission to construct "Dallas         Utility Commission, 571 S.W.2d 503, 508 (Tex.l978).
Psychiatric Hospital." All three projects were planned      Section 1.04 of the HPDA incorporates the APTRA
for the area encompassing north Dallas County and           "except to the extent inconsistent with" the HPDA.
Collin County. These three applications were con-           Therefore, the scope of judicial review in this case
solidated by the Commission, and a hearing was held         must be discerned from both the HPDA and the AP-
to determine whether one or more of the applications        TRA.
should be granted. The Commission rendered its or-
ders in October of 1980 granting certificates of need to          In determining the role of the reviewing court, we
Healthcare and Memorial and denying the application         must first ascertain the legislative standards to which
of Charter Medical.                                         the Commission must adhere in making its decisions,
                                                            i.e., what fmdings and conclusions the Commission
    The trial court rendered judgment sustaining the        must make before it properly may grant a certificate of
orders of the Commission as to all three applications.      need. Subsection 3.10(a) of the HPDA requires the
This judgment was reversed by the court of appeals          Commission to promulgate rules establishing criteria
and the cause remanded to the Commission. The               to determine whether an applicant is to be issued a




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                                                                                                                Page6


665 S.W.2d 446
(Cite as: 665 S.W.2d 446)

certificate of need for a proposed project. Subsection                teria may be found primarily in subsections
3.1 O(b) sets forth five specific factors that must be                513.5, 513.11, 513.13, and 513.17 ofTitle 25
included among the Commission's criteria:                             of the Texas Administrative Code. The
                                                                      non-mandatory      factors   are   scattered
    Criteria established by the commission must in-                   throughout the other subsections of section
  clude at least the following:                                       513. See Tex. Health Fac. Comm'n, 25
                                                                      Tex.Admin.Code §§ 513.1-513.21 (May 1,
                                                                      1982) (compiling Tex. Health Fac. Comm'n
    (1) whether a proposed project is necessary to
                                                                      Rules 315.19.01.010 to .130, 3 Tex.Reg.
  meet the healthcare needs of the community or
                                                                      1361-64 (1978), as amended 4 Tex.Reg.
  population to be served;
                                                                      2949-50 (1979)).

     (2) whether a proposed project can be adequately
                                                                   Under these broad, general categories are ap-
  staffed and operated when completed;
                                                             proximately fifty-four subcategories or factors that the
                                                             Commission considers relevant to its decision on the
    (3) whether the cost of a proposed project is
                                                             ultimate factors. These subcategories are referred to
  economically feasible;
                                                             by the court of appeals as "intermediate facts." The
                                                             fmdings of the Commission on the totality of these
    (4) if applicable, whether a proposed project            criteria form the basis of the Commission's decision to
  meets the special needs and circumstances for rural        grant or deny a certificate of need. "An applicant or ·
  or sparsely populated areas; and                           party who is aggrieved by an order of the commission
                                                             ... is entitled to judicial review under the substantial
    (5) if applicable, whether the proposed project          evidence rule." HPDA, § 3.15.
  meets special needs for special services or special
  facilities.                                                     Having determined the prerequisites to agency
                                                             action under the HPDA, we look to the APTRA to
     Thereafter, subsection 3.10(c) contains six factors     determine its guidelines for judicial review. Section
that the Commission "shall consider" in developing its       16(b) of the APTRA states: "A fmal decision must
criteria.                                                    include fmdings of fact and conclusions of law, sep-
                                                             arately stated. Findings of fact, if set forth in statutory
     The Commission has promulgated "General Cri-            language, must be accompanied by a concise and
teria for Use in Certificate ofNeedReviews"*450 that         explicit statement of the underlying facts supporting
incorporate both the factors required by subsection          the fmdings." The exact marmer of judicial review is
3.1 O(b) and the factors that the legislature has directed   stated in section 19(e):
the Commission to "consider." FNJ These criteria in-
clude thirteen broad categories addressing such mat-              The scope of judicial review of agency decisions
ters as "Community Health Care Requirements,"                  is as provided by the law under which review is
"Service Area Population," and "Relationship to Ex-            sought.... Where the law authorizes review under
isting Services and Existing Facilities."                      the substantial evidence rule, ... the court may not
                                                               substitute its judgment for that of the agency as to
         FN 1. The matters required by section 3.1 O(b)        the weight of the evidence on questions committed
         to be included within the Commission's cri-           to agency discretion but may affirm the decision of
                                                               the agency in whole or in part and shall reverse or




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                                                                                                           Page 7


665 S.W.2d 446
(Cite as: 665 S.W.2d 446)

  remand the case for further proceedings if substan-      mission's order is to examine the agency's fact fmd-
  tial rights of the appellant have been prejudiced        ings to determine whether they meet the statutory
  because the administrative findings, inferences,         requirements. See Auto Convoy Co. v. Railroad
  conclusions, or decisions are:                           Commission, 507 S.W.2d 718, 719 (Tex.l974). Sec-
                                                           tion 16(b) of the APTRA requires that all fmdings of
    (1) in violation of constitutional or statutory pro-   fact, "if set forth in statutory*451 language," must be
  visions;                                                 accompanied by a supporting statement of underlying
                                                           facts. We must determine the meaning of these words
                                                           in the present context.
    (2) in excess of the statutory authority of the
  agency;
                                                               In Lewis v. Gonzales County Savings and Loan
                                                           Association, 474 S.W.2d 453 (Tex.l97l), we were
    (3) made upon unlawful procedure;
                                                           asked to construe an analogous fact-finding require-
                                                           ment     m    the   Savings     and     Loan    Act.
    (4) affected by other error of law;
                                                           Tex.Rev.Civ.Stat.Ann. art. 852a, § 11.11(4). Therein,
                                                           we held:
     (5) not reasonably supported by substantial evi-
  dence in view of the reliable and probative evidence
                                                              We are of the view this requirement applies only to
  in the record as a whole; or
                                                              findings of fact in the commissioner's orders which
                                                              are "set forth in statutory language." [footnote
    (6) arbitrary or capricious or characterized by           omitted]. When fmdings are made in the language
  abuse of discretion or clearly unwarranted exercise         of the Rules and Regulations that do not embody
  of discretion.                                              statutory language, they need not be accompanied
                                                              by a concise and explicit statement of the underly-
     The above-quoted portions of the APTRA are the           ing facts.
primary guidelines to be used by a court in reviewing
the actions of administrative agencies.                          Gonzales County, 474 S. W.2d at 457. We went
                                                            on to explain that, generally, statutory findings are
     In this case, there are allegations challenging the    broadly stated and require discretion or judgment on
adequacy of the Commission's findings of fact, con-         the part of the agency based on a multitude of factors.
tending that the Commission's action is not supported       Conversely, non-statutory fmdings usually are more
by substantial evidence, and asserting that the Com-        factual in nature and carry with them the supporting
mission's orders are arbitrary and capricious. The          underlying facts. Thus, the latter need no accompa-
court of appeals purported to base its decision solely      nying facts to support them.
on the conclusion that the Commission's fmdings of
fact are arbitrary and capricious. In its opinion, how-          Judicial review would be enhanced if all general
ever, the intermediate court touched upon each of the       conclusions of an agency were accompanied by a
above three contentions. Hence, we shall address each       statement of underlying facts. The plain language of
of these matters.                                           the statute, however, precludes such a construction of
                                                            section 16(b). By limiting the fact-fmding requirement
                  Findings of Fact                          to findings "set forth in statutory language," the leg-
    [1] The logical first step in evaluating the Com-       islature has expressed its intention in this matter. We




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                                                                                                               Page 8


665 S.W.2d 446
(Cite as: 665 S.W.2d 446)

may not impose an additional fact-fmding requirement       761-62 (1951 ). The required underlying facts may not
under the guise of statutory construction. Cf Goldman      be presumed from findings of a conclusional nature.
v. Torres, 161 Tex. 437,341 S.W.2d 154, 158 {1960).        Morgan Drive Away, Inc. v. Railroad Commission,
                                                           498 S.W.2d 147, 152 {Tex.l973). In general, under-
     Gonzales County holds that an accompanying            lying fmdings of fact must be such that the reviewing
statement of underlying facts is required when an          court can fairly and reasonably say that the underlying
ultimate finding of fact embodies statutory language.      findings support the statutorily required criteria.
This construction has been followed in post-APTRA          Railroad Commission v. Entex, Inc., 599 S.W.2d 292,
cases. See, e.g., Gage v. Railroad Commission, 582         298 (Tex.1980); Railroad Commission v. Graford Oil
S.W.2d 410, 414 (Tex.l979); Imperial American              Corp., 557 S.W.2d 946, 950 (Tex.l977).
Resources Fund, Inc. v. Railroad Commission, 557
S.W.2d 280, 286 (Tex.1977). Therefore, we hold that             The underlying findings of fact required by the
section 16(b) of the APTRA requires an accompany-          APTRA have a substantial statutory purpose and are
ing statement of underlying facts only when the ulti-      more than a technical prerequisite.* 452 Morgan Drive
mate fact finding embodies a mandatory fact finding        Away, Inc., 498 S. W.2d at 150. This Court set forth the
set forth in the relevant enabling act. FN 2 An agency     purposes of such fmdings of fact in Miller v. Railroad
may not avoid this statutory requirement by simply         Commission, 363 S.W.2d 244, 245-46 (Tex.l962) as
rewording its criteria; section l6{b) extends to all       follows:
statutory fact fmdings that represent the criteria that
the legislature has directed the agency to consider in        One purpose no doubt is to restrain any disposition
performing its function.                                      on the part of the [agency] to grant a certificate
                                                              without a full consideration of the evidence and a
         FN2. The HPDA does not require that the              serious appraisal of the facts. Another is to inform
         Commission make findings on certain factors          protestants of the facts found so that they may in-
         before it may act; rather, the statute directs       telligently prepare and present an appeal to the
         the Commission to include certain matters            courts. Still another is to assist the courts in properly
         within its criteria for review and directs the       exercising their function of reviewing the order.
         Commission to act upon applications within
         established time limits. HPDA, §§ 3.10, 3.11.           [5][6] This Court has neither the right nor the
         Nonetheless, the factors that the Commission       authority to lay out a precise form of fmdings to be
         must include among its criteria are the type of    made by the Commission. !d. at 246. On the other
         factors that fall within the scope of section      hand, we may make suggestions as to the form of the
         l6(b) so that these findings of fact must be       agency record in the interest of proper judicial review.
         accompanied by a statement of underlying           See Graford Oil Corp., 557 S.W.2d at 952 n. 6. Proper
         facts. Cf Miller v. Railroad Commission, 363       underlying (basic) fmdings of fact should follow the
         S.W.2d 244,245 (Tex.l962).                         guidelines we previously have noted: they should be
                                                            clear, specific, non-conclusory, and supportive of the
     [2][3][4] The characteristics of proper findings of    ultimate statutory fmding. Mere recitals of testimony
fact, as well as their purposes, are well established.      or references to or summations of the evidence are
Valid fmdings of fact must be clear and specific.           improper. Such fmdings should be stated as the
Gage, 582 S.W.2d at 414. A mere conclusion or a             agency's fmdings. The fmdings should relate to mate-
recital of evidence is inadequate. Thompson v. Rail-        rial basic facts and should relate to the ultimate stat-
road Commission, 150 Tex. 307, 240 S.W.2d 759,              utory finding that they accompany. In general, the




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                                                                                                           Page9


665 S.W.2d 446
(Cite as: 665 S.W.2d 446)

fmdings of fact required by APTRA § 16(b) should be        more than a mere scintilla, Alamo Express, Inc. v.
sufficient to serve the overall purposes evident in the    Union City Tran~fer, !58 Tex. 234,309 S.W.2d 815,
legislative requirement that they be made.                 823 (1958), the evidence in the record actually may
                                                           preponderate against the decision of the agency and
      [7] The record of this case discloses that the       nonetheless amount to substantial evidence. Lewis v.
Commission made almost five hundred fmdings of             Metropolitan Savings and Loan Association, 550
fact covering approximately forty-eight pages. The         S. W .2d II, 13 (Tex.l977). The true test is not whether
orders of the Commission includes ultimate fmdings         the agency reached the correct conclusion, but
on each of the criteria required by HPDA section           whether some reasonable basis exists in the record for
3 .I O(b ). In addition, the Commission's fmdings con-     the action taken by the agency. Gerst v. Nixon, 411
tain numerous underlying facts in support of these         S.W.2d 350,354 (Tex.l966). A reviewing court is not
statutory fmdings. Many of these findings do not           bound by the reasons given by an agency in its order,
satisfy the requirements previously stated since they      provided there is a valid basis for the action taken by
are nothing more than recitals of evidence. Neverthe-      the agency. *453Railroad Commission v. City of
less, there are sufficient fmdings such that we can        Austin, 524 S. W.2d 262, 279 (Tex.l975). Thus, the
fairly and reasonably say that the underlying or basic     agency's action will be sustained if the evidence is
facts support the Commission's conclusions on the          such that reasonable minds could have reached the
ultimate or statutory criteria. We hold, therefore, that   conclusion that the agency must have reached in order
the underlying findings of fact made by the Commis-        to justify its action. Suburban Utility Corp. v. Public
sion satisfy the requirements of section 16(b) of the      Utility Commission, 652 S.W.2d 358,364 (Tex.l983).
APTRA.
                                                                [ 13] The findings, inferences, conclusions, and
            The Substantial Evidence Rule                  decisions of an administrative agency are presumed to
     [8][9] The APTRA codifies the principle of judi-      be supported by substantial evidence, and the burden
cial review under the substantial evidence rule. Sec-      is on the contestant to prove otherwise. Imperial
tion 19(e)(5) authorizes a reviewing court to test an      American Resources Fund, Inc. v. Railroad Commis-
agency's fmdings, inferences, conclusions, and deci-       sion, 557 S.W.2d 280,286 (Tex.l977). Hence, if there
sions to determine whether they are reasonably sup-        is evidence to support either affirmative or negative
ported by substantial evidence in view of the reliable     fmdings on a specific matter, the decision of the
and probative evidence in the record as a whole. See       agency must be upheld. Gerst v. Goldsbury, 434
Railroad Commission v. Shell Oil Co., J39 Tex. 66,         S.W.2d 665, 667 (Tex.l968); see also Lewis v. Jack-
 161 S.W.2d 1022, 1029-30 (1942). In applying the          sonville Building and Loan Association, 540 S.W.2d
test, the court is prohibited from substituting its        307, 311 (Tex.l976).
judgment for that of the agency as to the weight of the
evidence on questions committed to agency discre-                [14] The record before this Court is extensive and
tion. See Gerst v. Guardian Savings and Loan Asso-          contains substantial information relevant to the
ciation, 434 S.W.2d 113, 115 (Tex.I968). There-             Commission's inquiry. This controversy was hotly
viewing court may reverse an agency decision because        contested, and the record contains evidence favoring
of the absence of substantial evidence only if such         all three applicants. We will address one statutory
absence has prejudiced substantial rights of the liti-      criterion that supports the Commission's decision in
gant.APTRA, § 19(e).                                        this case. Under HPDA section 3.IO(b)(l), the Com-
                                                            mission considers ''whether a proposed project is
    [ 10] [II][ 12] Although substantial evidence is        necessary to meet the healthcare needs of the com-




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                                                                                                              Page 10


665 S.W.2d 446
(Cite as: 665 S.W.2d 446)

munity or population to be served .... " The Commis-          hold that they are. Our conclusion is based upon the
sion found that Memorial and Green Oaks were nec-             principles of judicial review that we have reiterated
essary, but that Charter Medical was not.                     herein. As required by APTRA section 19(e), we have
                                                              tested each material finding, inference, and conclusion
     On judicial review, we look first to the underlying      for evidentiary support. There is in the record sub-
fmdings of fact made in support of the ultimate finding       stantial evidence to support the underlying facts dis-
of fact contrary to Charter Medical's position. Factors       cussed above and the ultimate fact to which they re-
unfavorable to Charter Medical include the following:         late.
Charter Medical would not be near or connected with
a general hospital and ambulance service would be                 Arbitrary and Capricious Standard of Review
required to transfer a patient to a general hospital for           [ 15] The court of appeals held that the validity of
medical treatment; Charter Medical was not accessible         an agency's inferences of ultimate facts or its reason-
by public transportation; Charter Medical failed to           ing process is judged by whether such inferences are
establish physician interest in its facility similar to the   arbitrary*454 and capricious. The court also con-
interest expressed in the other two facilities by testi-      cluded that the sole purpose of the substantial evi-
fying physicians; and Charter Medical failed to sup-          dence rule is to measure the validity of the process by
port its projected occupancy rates with competent             which the agency has inferred stated basic facts from
evidence. Findings on these matters were relatively           the evidence and matters officially noticed. Our dis-
more favorable regarding both Memorial and Green              cussion of the substantial evidence rule discloses the
Oaks. Other material fmdings concerned the probable           erroneous nature of these conclusions. Because the
absence of certain recreational facilities at Charter         court of appeals has, in effect, engaged in a substantial
Medical, the unnecessary duplication of specified             evidence review of the Commission's order, we also
services and equipment by Charter Medical, and the            have addressed that point. We now turn to a discussion
negative report on Charter Medical by the Texas Area          ofthe arbitrary and capricious standard of review.
5 Health Systems Agency.
                                                                   Throughout the long history of the substantial
     Because the Commission correctly found that              evidence rule the existence of substantial evidence has
Charter Medical failed to establish that its facility was     been equated with fair and reasonable conduct on the
necessary to meet the healthcare needs of the com-            part of the agency. Conversely, agency decisions that
munity, as required by the statute, the Commission's          are unsupported by substantial evidence have been
order must be upheld. Cf Gerst v. Gold~hury, 434              deemed arbitrary and capricious. Thus, the two terms
S.W.2d at 667. We note that many of the Commis-               have many times been considered two sides of the
sion's 213 findings on this criterion are improper and        same coin. See, e.g., Benson v. San Antonio Savings
irrelevant and were not considered by this Court.             Association, 374 S.W.2d 423, 427 (Tex.l963); City
Moreover, we doubt the sufficiency of other ultimate          Savings Association v. Security Savings and Loan
findings made by the Commission, although we reach            Association of Dickinson, 560 S. W.2d 930, 932
no conclusion thereon. We do admonish the Com-                (Tex.l978). On the other hand, cases have arisen in
mission to adhere to the guidelines we have set forth         which a line of demarcation was drawn between these
previously regarding fmdings of fact.                         two concepts.


     Our second inquiry concerns whether the fmd-                 In Lewis v. Metropolitan Savings and Loan As-
ings, inferences, and conclusions that relate to health       sociation, 550 S.W.2d 11 (Tex.l977), this Court was
care needs are supported by substantial evidence. We          faced with an allegation that the agency action in




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                                                                                                        Page 11


665 S.W.2d 446
(Cite as: 665 S.W.2d 446)

question, in admitting and excluding evidence, had
resulted in a denial of due process of law. The agency          We conclude that the fmdings of fact made by the
contended that the only issue on appeal was whether        Commission comply with section 16(b) of the AP-
the decision was supported by substantial evidence; a      TRA. The Commission's fmdings, inferences, con-
denial of due process would not provide a basis for        clusions, and decisions are supported by substantial
reversal so long as the agency's decision was upheld       evidence and do not constitute an abuse of discretion.
under substantial evidence scrutiny. We held that
instances may arise in which the agency's action is
                                                               The judgment of the court of appeals is reversed,
supported by substantial evidence, but is arbitrary and
                                                           and the judgment of the trial court is affirmed.
capricious nonetheless. One such instance is when a
denial of due process has resulted in the prejudice of
                                                           Tex.,1984.
substantial rights of a litigant.
                                                           Texas Health Facilities Com'n v. Charter Medi-
                                                           cal-Dallas, Inc.
     Another example of arbitrary action by an agency
                                                           665 S.W.2d 446
is Railroad Commission v. Alamo Express, 158 Tex.
68, 308 S. W.2d 843 (1958). Therein, this Court found
                                                           END OF DOCUMENT
that the agency had acted in an arbitrary manner when
it failed totally to make findings of fact and instead
based its decision on findings in another case. Arbi-
trary and capricious agency action also may be found
when an agency improperly bases its decision on
non-statutory criteria. Public Utility Commission v.
South Plains Electric Cooperative, Inc., 635 S.W.2d
954, 957 (Tex.App.-Austin 1982, writ refd n.r.e.).


     In enacting the APTRA, it is clear that the legis-
lature intended to distinguish between agency action
that is not supported by substantial evidence and
agency action that is arbitrary and capricious. We
construe section 19(e)(6) of the APTRA to be a
safeguard against agency conduct that is arbitrary or
constitutes an abuse of discretion although that con-
duct does not amount to a violation of any other pro-
vision of the APTRA or the agency's enabling act. The
arbitrary and capricious standard of review histori-
cally has been construed narrowly, and we do not
think that the legislature intended it to be interpreted
as a broad, all-encompassing standard for reviewing
the rationale of agency actions. Under the foregoing
definition of the arbitrary and capricious standard of
review, we hold that the Commission's orders in this
case are not arbitrary nor do they constitute an abuse
of discretion.




                            © 2015 Thomson Reuters. No Claim to Orig. US Gov. Works.
              Appendix 9


    City ofEl Paso v. Public Util. Comm'n,
839 S.W.2d 895 (Tex. App.-Austin 1992)
  aff' din part, rev' din part on other grounds,
       883 S.W.2d 179 (Tex.1994).
                                                                                                        Page 1
839 S.W.2d 895, 135 P.U.R.4th 584
(Cite as: 839 S.W.2d 895)




                                                           cis ions
                                                                   15AV (D) Scope of Review in General
             Court of Appeals of Texas,                                  15Ak749 k. Presumptions. Most Cited
                      Austin.                              Cases
CITY OF EL PASO, the State of Texas and Office             Administrative Law and Procedure 15A       ~750
     of Public Utility Counsel, Appellants,
                        v.                                 l5A Administrative Law and Procedure
PUBLIC UTILITY COMMISSION OF TEXAS, et                          15AV Judicial Review of Administrative De-
                al., Appellees.                            cisions
                                                                  15AV(D) Scope ofReview in General
               No. 3-90-007-CV.                                          15Ak750 k. Burden of showing error.
                 Aug. 26, 1992.                            Most Cited Cases
        Rehearing Overruled Oct. 14, 1992.                      Court of Appeals presumes the validity of ad-
                                                           ministrative orders which it reviews, and challenger
     Proceeding was brought for review of order of
                                                           bears burden of showing error in order.
Public Utility Commission setting rates to be
charged by electric utility. The 250th Judicial Dis-       r21 Administrative Law and Procedure 15A       ~
trict Court, Travis County, Paul R. Davis, Jr., J.,        763
entered order upholding Commission's decision,
and city, state, and Office of Public Utility Counsel      15A Administrative Law and Procedure
appealed. Withdrawing prior opinion, the Court of               15AV Judicial Review of Administrative De-
Appeals, Jones, J., held that: (1) post-in-service car-    cisions
rying costs associated with construction of power                 15AV(D) Scope ofReview in General
plant should not have been included in electric util-                15Ak763 k. Arbitrary, unreasonable orca-
ity's rate base; (2) inclusion in utility's rate base of   pricious action; illegality. Most Cited Cases
deferred post-in-service operating and maintenance
costs was not inconsistent with Texas statutory law;       Administrative Law and Procedure 15A ~791
and (3) Commission did not engage in retroactive
                                                            15A Administrative Law and Procedure
rate making by making onetime adjustment to elec-
                                                                 15AV Judicial Review of Administrative De-
tric utility's cost of service, following passage of
                                                            cisions
federal statute requiring utility to convert from
                                                                   15AV(E) Particular Questions, Review of
flow-through accounting system to normalization
                                                                     15Ak784 Fact Questions
system.
                                                                        15 Ak791 k. Substantial evidence. Most
   Affirmed m part, reversed m part and re-                 Cited Cases
manded.
                                                            Administrative Law and Procedure 15A ~793
                   West Headnotes
                                                            l5A Administrative Law and Procedure
r11 Administrative Law and Procedure 15A          ~              15AV Judicial Review of Administrative De-
749                                                         cisions
                                                                   15AV(E) Particular Questions, Review of
15A Administrative Law and Procedure                                 l5Ak784 Fact Questions
    15AV Judicial Review of Administrative De-                           15Ak793 k. Weight of evidence. Most




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                                                                                                             Page2
839 S.W.2d 895, 135 P.U.R.4th 584
(Cite as: 839 S.W.2d 895)




Cited Cases                                                 stantial evidence in record, that stipulation resolved
     Court of Appeals may not substitute its discre-        matters in dispute in way that was fair, just and
tion or judgment for that of administrative agency,         reasonable and in public interest.
and may reverse agency's decision only if it is un-
supported by substantial evidence, is arbitrary, or         [5] Electricity 145 €::::::>11.3(6)
results from abuse of discretion.
                                                            145 Electricity
)3) Administrative Law and Procedure 15A €:;::::>               145k11.3 Regulation of Charges
754.1                                                                 145k1l.3(6) k. Proceedings before commis-
                                                            sions. Most Cited Cases
l5A Administrative Law and Procedure                              In setting rates for electric utility, Public Util-
      15AV Judicial Review of Administrative De-            ity Commission was not required to accept or reject
cisions                                                     examiners' report in its entirety, but had authority to
       15AV(D) Scope of Review in General                   repudiate portion of report and modify it by dele-
             15Ak7 54 Discretion of Administrative          tion.
Agency
               15Ak754.1 k. In general. Most Cited          )6) Administrative Law and Procedure 15A €:;::::>
Cases                                                       791
    (Formerly 15Ak754)
                                                            15A Administrative Law and Procedure
Administrative Law and Procedure 15A €:;::::>763                 15AV Judicial Review of Administrative De-
                                                            cisions
15A Administrative Law and Procedure                               15A V(E) Particular Questions, Review of
      15AV Judicial Review of Administrative De-                     15Ak784 Fact Questions
cisions                                                                  15Ak791 k. Substantial evidence. Most
       15AV(D) Scope of Review in General                   Cited Cases
           15Ak763 k. Arbitrary, unreasonable orca-
pricious action; illegality. Most Cited Cases               Administrative Law and Procedure 15A €::::::>793
     Administrative agency's decision is arbitrary or
                                                            15A Administrative Law and Procedure
results from abuse of discretion if agency fails to
                                                                  15AV Judicial Review of Administrative De-
consider a factor that legislature directed it to con-
                                                            cisions
sider, considers irrelevant factor, or weighs only
                                                                   15A V(E) Particular Questions, Review of
relevant factors but still reaches completely unreas-
                                                                      15Ak784 Fact Questions
onable result.
                                                                          15Ak793 k. Weight of evidence. Most
[4] Electricity 145 €:;::::>11.3(6)                         Cited Cases
                                                                 In conducting substantial evidence review of
145 Electricity                                             administrative agency's decision, Court of Appeals
   145kll.3 Regulation of Charges                           must determine whether evidence as whole is such
        145kll.3(6) k. Proceedings before commis-           that reasonable minds could have reached the con-
sions. Most Cited Cases                                     clusion that agency must have reached in order to
    Public Utility Commission could adopt nonun-            take disputed action; Court may not substitute its
animous stipulation in setting electric utility's rates,    judgment for that of agency and may consider only
where Commission afforded nonstipulating parties            the record on which agency based its decision.
an opportunity to be heard on merits of stipulation
and made independent finding, supported by sub-              [7] Administrative Law and Procedure 15A €:;::::>
                                                             750




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                                                                                                         Page 3
839 S.W.2d 895, 135 P.U.R.4th 584
(Cite as: 839 S.W.2d 895)




15A Administrative Law and Procedure                                15Ak458 Evidence
      15AV Judicial Review of Administrative De-                         15Ak462 k. Weight and sufficiency.
cisions                                                  Most Cited Cases
       15AV(D) Scope of Review in General                     Declaration contrary to party's position on dis-
              15Ak750 k. Burden of showing error.        puted issue in administrative proceeding is akin to
Most Cited Cases                                         quasi-admission; while not binding on declarant, as
     Appellant bears burden of showing lack of sub-      judicial admission would be, such a concession is
stantial evidence to support administrative agency's     entitled to some evidentiary weight.
decision, a burden which it cannot meet merely by
showing that evidence preponderates against              [11] Administrative Law and Procedure 15A
agency decision.                                         ~486


[8] Public Utilities 317A ~165                           15A Administrative Law and Procedure
                                                             15AIV Powers and Proceedings of Administrat-
317A Public Utilities                                    ive Agencies, Officers and Agents
    317 Alii Public Service Commissions or Boards               15AIV(D) Hearings and Adjudications
       317AIII(B) Proceedings Before Commissions                    15Ak484 Findings
           317 Ak165 k. Evidence. Most Cited Cases                        15Ak486 k. Sufficiency. Most Cited
     Public Utility Commission has power, in rate-       Cases
making proceeding, to judge witnesses' credibility            Administrative agency's findings of fact need
and to accept or reject witness' testimony in whole      additional support of findings of underlying facts
or in part.                                              only when ultimate findings are in terms taken dir-
                                                         ectly from enabling legislation, or when they rep-
[9] Electricity 145   ~11.3(6)                           resent criteria that legislature has directed agency to
                                                         consider in performing its function.
145 Electricity
    l45k 11.3 Regulation of Charges                       [12] Electricity 145   ~11.3(6)
         145k11.3(6) k. Proceedings before commis-
sions. Most Cited Cases                                   145 Electricity
     Decision to disallow $32 million of the nuclear         145kll.3 Regulation of Charges
power plant construction costs that electric utility              145kl1.3(6) k. Proceedings before commis-
sought to include in its rate base, on ground that        sions. Most Cited Cases
utility's decision to participate in nuclear power             Findings of underlying fact made by Public
project was imprudent, was sufficiently supported         Utility Commission in support of its finding that
by evidence presented in rate-making proceeding,          electric utility's decision to participate in nuclear
including utility's stipulation that, if its decision     power plant construction project was not entirely
was improvident, resulting cost that should be dis-       prudent were sufficient to satisfy statutory fact-
allowed totaled $32 million.                              finding requirements; Commission's findings of un-
                                                          derlying fact did not have to identify processes and
[10] Administrative Law and Procedure 15A                 acts found to be imprudent, nexus between those
~462                                                      acts and disallowance amount, and evidentiary sup-
                                                          port for disallowance figure. Vernon's Ann.Texas
15A Administrative Law and Procedure
                                                          Civ.St. art. 6252-13a, § 16(b, e).
    15AIV Powers and Proceedings of Administrat-
ive Agencies, Officers and Agents                         [13] Statutes 361   ~1076
      15AIV(D) Hearings and Adjudications




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                                                                                                          Page 4
839 S.W.2d 895, 135 P.U.R.4th 584
(Cite as: 839 S.W.2d 895)




361 Statutes                                                  Reviewing court may determine, as matter of
   361III Construction                                    law, the scope of agency's statutory authority.
      361 III(A) In General
         361k1074 Purpose                                 [16] Administrative Law and Procedure 15A
              36lkl076 k. Purpose and intent. Most        ~305

Cited Cases
                                                          15A Administrative Law and Procedure
   (Formerly 361k184)
                                                              15AIV Powers and Proceedings of Administrat-
Statutes 361   ~1151                                      ive Agencies, Officers and Agents
                                                                  15AIV(A) In General
361 Statutes                                                        15Ak303 Powers in General
    361 III Construction                                                15Ak305 k. Statutory basis and limita-
           361III(E) Statute as a Whole; Relation of      tion. Most Cited Cases
Parts to Whole and to One Another                              Power of agency to take such actions as may be
           361 k 1151 k. In general. Most Cited Cases     necessary to perform express duty is not without
    (Formerly 36lk205)                                    limits; agency may not, on theory of necessary im-
     In construing statute, court's role is to seek out   plication from specific power, function or duty ex-
legislative intent from general view of enactment as      pressly del'egated, exercise what amounts to new
whole and, once intent has been ascertained, to con-      and additional power or one that is inconsistent
strue statute so as to give effect to purpose of legis-   with statutory provision or ascertainable legislative
lature.                                                   intent.

[14] Administrative Law and Procedure 15A                  [17] Public Utilities 317A   ~124
~305
                                                           317 A Public Utilities
15A Administrative Law and Procedure                          317 All Regulation
    15AIV Powers and Proceedings of Administrat-                 317 Ak119 Regulation of Charges
ive Agencies, Officers and Agents                                    317 Ak 124 k. Value of property; rate base.
       15AIV(A) In General                                 Most Cited Cases
          15Ak303 Powers in General                            As general rule, only assets that may be in-
              15Ak305 k. Statutory basis and limita-       cluded in utility's rate_ base are those found to be
tion. Most Cited Cases                                     used and useful in providing service to utility's cus-
     Administrative agency is creation of legislature      tomers.
and, as such, has only those powers expressly con-
ferred and those necessary to accomplish its duties.       fl8] Electricity 145   ~11.3(2)


[15] Administrative Law and Procedure 15A                  145 Electricity
~796                                                           145k11.3 Regulation of Charges
                                                                    145kll.3(2) k. Determination of rate base.
15A Administrative Law and Procedure                       Most Cited Cases
      15AV Judicial Review of Administrative De-                Post-in-service carrying costs associated with
cisions                                                    construction of new power plant could not be in-
       15AV(E) Particular Questions, Review of             cluded in electric utility's rate base, without violat-
             15Ak796 k. Law questions in general.          ing statute requiring that construction costs be cal-
Most Cited Cases                                           culated as of time that physical asset being con-
    (Formerly 15Ak800)                                     structed is placed in public service. Vemon's




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Ann.Texas Civ.St. art. 1446c, § 4l(a).                    145 Electricity
                                                              145k11.3 Regulation of Charges
[19] Public Utilities 317A   ~124                                   145kll.3(2) k. Determination of rate base.
                                                          Most Cited Cases
317 A Public Utilities
                                                               Deferral, capitalization and inclusion in electric
    31 7All Regulation
                                                          utility's rate base of post-in-service operating and
        317 Ak 119 Regulation of Charges
                                                          maintenance costs associated with newly construc-
           317 Ak124 k. Value of property; rate base.
                                                          ted power plant did not violate constitutional pro-
Most Cited Cases
                                                          hibition against retroactive rate making, even as-
     Power plant was "dedicated to public use,"
                                                          suming that inclusion in rate base of such post-
within meaning of statute limiting those construc-
                                                          in-service costs had retrospective effect, as new
tion costs which may be included in utility's rate
                                                          rates neither impaired vested rights nor changed
base, at time it began operating commercially. Ver-
                                                          substantial rights or obligations of implied contract.
non's Ann. Texas Civ.St. art. 1446c, § 41(a).
                                                          Vcmon's Ann.Tcxas Const. Art. 1, § 16.
[20] Electricity 145   ~11.3(2)
                                                           (23] Public Utilities 317A   ~169.1

145 Electricity
                                                          317 A Public Utilities
   145kl1.3 Regulation of Charges
                                                              317 Alii Public Service Commissions or Boards
         145kll.3(2) k. Determination of rate base.
                                                                 317 AIII(B) Proceedings Before Commissions
Most Cited Cases
                                                                    317 Akl69 Orders
    Public Utility Commission had discretionary
                                                                         317 Ak169.1 k. In general. Most Cited
authority to allow deferral and capitalization of
                                                          Cases
post-in-service operating and maintenance costs as-
                                                              (Formerly 317Ak169)
sociated with newly constructed electric power
                                                               Retrospective effect alone will not invalidate
plant, and to permit electric utility to include such
                                                          rate order, if order does not substantially impair or
costs in its rate base, to the extent that this was not
                                                          destroy vested rights and does not change substan-
inconsistent with other state law. Vernon's
                                                          tial rights and obligations of implied contract
Ann.Texas Civ.St. art. 1446c, §§ 2, 16, 27, 39.
                                                          between utility and its ratepayers. Vernon's
(21( Public Utilities 317A   ~119.1                       Ann.Tcxas Const. Art. 1, § 16.

317 A Public Utilities                                     [24] Public Utilities 317A   ~101

   317 All Regulation
                                                           317 A Public Utilities
       317 Ak119 Regulation of Charges
                                                               31 7 AI In General
              317Ak119.1 k. In general. Most Cited
                                                                   317 Ak 101 k. In general. Most Cited Cases
Cases
                                                               (Formerly 317Ak103)
   (Formerly 317 Ak119)
                                                                 Implied contract exists between utility and its
     Term "thereafter," as used in statute providing
                                                           ratepayers, creating both utility's duty to provide
that new rates set by Public Utility Commission are
                                                           defined service and ratepayers' duty to pay defined
"thereafter to be observed until changed," was not
                                                           rate.
blanket prohibition against any consideration by
Public Utility Commission of utility's past gains or       [25] Public Utilities 317A   ~101
losses in fixing future rates. Vcmon's Ann.Tcxas
Civ.St. art. 1446c, § 43(f).                               317 A Public Utilities
                                                              31 7 AI In General
[22] Electricity 145   ~11.3(2)




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        317 Ak101 k. In general. Most Cited Cases         145 Electricity
    (Formerly 317 Ak1 03)                                     145k11.3 Regulation of Charges
     Under their implied contract with utility, rate-              145k11.3(2) k. Determination of rate base.
payers have right to pay constant rate for utility ser-   Most Cited Cases
vice until, by legislatively approved procedures, old          In disallowing certain construction costs that
rate is formally challenged.                              electric utility sought to include in its rate base,
                                                          based on imprudent delays in construction that in-
[26] Public Utilities 317A ~119.1                         creased financing costs for project, Public Utility
                                                          Commission could properly offset against such in-
317 A Public Utilities
                                                          creased financing costs the unexpected benefit that
    317 All Regulation
                                                          ratepayers realized because of delay, i.e., the con-
       317 Ak119 Regulation of Charges
                                                          tinued use of money that ratepayers would other-
             317 Akll9.1 k. In general. Most Cited
                                                          wise have had to pay in higher rates if construction
Cases
                                                          had been completed; Commission did not thereby
    (Formerly 317Ak119)
                                                          engage in retroactive rate making.
     Only rights and obligations existing between
rate settings are constitutionally protected against      [30] Electricity 145   ~11.3(6)
alteration by retroactive rate making. Vernon's
Ann.Texas Const. Art. 1, § 16.                            145 Electricity
                                                              145k11.3 Regulation of Charges
[27] Statutes 361   ~1559                                          145k11.3(6) k. Proceedings before commis-
                                                          sions. Most Cited Cases
361 Statutes
                                                               Findings of underlying fact that Public Utility
   361IX Retroactivity
                                                          Commission made, in order to support its ultimate
         361k1559 k. Effect on vested rights. Most
                                                          finding of construction imprudence sufficient to re-
Cited Cases
                                                          quire disallowance of portion of costs that electric
   (Formerly 361k278.9, 361k265)
                                                          utility sought to include in its rate base, did not
     Whether legislation substantially impairs or
                                                          have to explain why Commission found particular
destroys vested rights necessitates consideration of
                                                          witness' testimony credible or determined particular
whether retrospective effect advances or retards
                                                          figure to have resulted from imprudent construction
public interest, effectuates or defeats bona fide in-
                                                          management. Vernon's Ann.Texas Civ.St. art.
tentions or reasonable expectations of affected per-
                                                          6252-13a, § 16(b ).
sons, and surprises persons who have long relied on
contrary state of law.                                     [31] Administrative Law and Procedure 15A
                                                           ~486
[28] Motions 267    ~39

                                                           15A Administrative Law and Procedure
267 Motions
                                                               15AIV Powers and Proceedings of Administrat-
     267k39 k. Reargument or rehearing. Most Cited
                                                           ive Agencies, Officers and Agents
Cases
                                                                  15AIV(D) Hearings and Adjudications
      While motions for rehearing must point out the
                                                                     15Ak484 Findings
specific finding challenged and the legal basis for
                                                                           15Ak486 k. Sufficiency. Most Cited
challenge, they need not contain citations of author-
                                                           Cases
ity.
                                                               Administrative agency's articulation of under-
[29] Electricity 145   ~11.3(2)
                                                           lying facts in support of its ultimate findings must
                                                           be more than mere recitals of testimony, should be




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stated as agency's findings, and should relate to ul-       145 Electricity
timate statutory findings. Vemon's Ann.Texas                    145k11.3 Regulation of Charges
Civ.St. art. 6252-13a, § 16(b).                                      145kll.3(2) k. Determination of rate base.
                                                            Most Cited Cases
[32] Administrative Law and Procedure 15A                        Public Utility Commission properly employed
€;:::::>669.1                                               "largest single hazard plus 5%" method in determ-
                                                            ining electric utility's reserve requirements, for pur-
15A Administrative Law and Procedure
                                                            pose of deciding whether utility had any excess ca-
      15AV Judicial Review of Administrative De-
                                                            pacity and whether it should be allowed to include
cisions
                                                            certain power plant construction costs in it rate
       15A V(A) In General
                                                            base.
            15Ak669 Preservation of Questions Be-
fore Administrative Agency                                   [35] Electricity 145 €=:>11.3(6)
               15Ak669.1 k. In general. Most Cited
Cases                                                       145 Electricity
    (Formerly 15Ak669)                                          145kll.3 Regulation of Charges
     Administrative litigant may preserve complaint                  145kll.3(6) k. Proceedings before commis-
only by giving agency an opportunity to review leg-         sions. Most Cited Cases
al ground on which complaint is based.                           Finding that electric utility had no appreciable
                                                            excess capacity was sufficiently supported by evid-
(33] Administrative Law and Procedure 15A                   ence presented in rate-making proceeding, in which
€;:::::>669.1                                               utility sought leave to include nuclear power plan
                                                            construction costs in its rate base, notwithstanding
15A Administrative Law and Procedure
                                                            Public Utility Commission's omission of three gas-
      15AV Judicial Review of Administrative De-
                                                            fired units from utility's generation capability be-
cisions
                                                            cause of utility's plans to retire then early, and not-
       15A V(A) In General
                                                            withstanding Commission's adoption of mainten-
            15Ak669 Preservation of Questions Be-
                                                            ance schedule that required removal of some units
fore Administrative Agency
                                                            from line during summer peak period; two experts
               15Ak669.1 k. In general. Most Cited
                                                            offered their opinions that Commission acted reas-
Cases
                                                            onably in approving maintenance schedule.
    (Formerly 15Ak669)
                                                             (36] Public Utilities 317A €;:::::>146
Electricity 145 €;:::::>11.3(7)
                                                             317 A Public Utilities
145 Electricity
                                                                317 Alii Public Service Commissions or Boards
    145k11.3 Regulation of Charges
                                                                   317 AIII( A) In General
         145k11.3(7) k. Judicial review and enforce-
                                                                      317 Akl45 Powers and Functions
ment. Most Cited Cases
                                                                            317 Ak 146 k. Legislative and judicial
     City failed to preserve objection to exclusion of
                                                             powers and functions. Most Cited Cases
witness' testimony in proceeding to establish reas-
                                                                 Public Utility Commission has discretion to
onable rates for electric utility by failing to provide
                                                             consolidate proceedings with common issue when
administrative agency with any basis for finding
                                                             consolidation would serve judicial or administrative
that testimony was admissible.
                                                             economy.
[34] Electricity 145 €=:>11.3(2)
                                                             [37) Electricity 145 €;:::::>11.3(6)




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(Cite as: 839 S.W.2d 895)




145 Electricity                                           145 Electricity
    145k11.3 Regulation of Charges                           145kll.3 Regulation of Charges
        145kll.3(6) k. Proceedings before commis-                   145kll.3(4) k. Operating expenses. Most
sions. Most Cited Cases                                   Cited Cases
     Public Utility Commission had power, having              Public Utility Commission was not estopped,
consolidated rate-making matter with decision as to       by its refusal to include Tax Reduction Act Stock
whether sale-and-lease-back arrangement entered           Option Plan (TRASOP) expenses in utility's cost of
into by utility was in public interest, to reserve de-    service in two prior dockets, from including ex-
cision on sale-and-lease-back matter and effectively      pense in electric utility's cost of service in later
sever proceedings which it had earlier consolidated.      docket.

)38) Electricity 145 ~11.3(4)                             )41) Electricity 145    ~11.3(4)


145 Electricity                                           145 Electricity
    145k11.3 Regulation of Charges                            145kll.3 Regulation of Charges
            145kll.3(4) k. Operating expenses. Most                 145k11.3(4) k. Operating expenses. Most
Cited Cases                                               Cited Cases
     Public Utility Commission could include in                Public Utility Commission did not engage in
electric utility's cost of service the lease payments     retroactive rate making by making onetime adjust-
that utility made pursuant to sale-and-lease-back ar-     ment to electric utility's cost of service, following
rangement, at least to extent that payments did not       passage of federal statute requiring utility to con-
exceed capital cost that Commission would have in-        vert from flow-through accounting system to nor-
cluded in rate base had utility never entered into        malization system, to put utility in same position
sale-and-lease-back arrangement; to that extend,          that it would have occupied had it used normaliza-
payments could be considered in setting reasonable        tion system all along. 26 U.S.C.A. § l68(i)(9); 26
rates,     without    regard     to   whether    sale-    U.S.C.(1988 Ed.)§ 167(1 )(3)(G).
and-lease-back arrangement was consistent with
public interest.                                           [42] Electricity 145 ~11.3(6)

[39) Electricity 145 ~11.3(4)                             145 Electricity
                                                              1451<11.3 Regulation of Charges
145 Electricity                                                    145k11.3(6) k. Proceedings before commis-
    145kl1.3 Regulation of Charges                        sions. Most Cited Cases
          145kll.3(4) k. Operating expenses. Most              State of Texas had right to intervene on behalf
Cited Cases                                               of various state agencies in proceeding to set rates
     Refusal to recalculate electric utility's estim-     to be charged by electric utility.
ated fuel and purchased power expenses based on
expenses actually incurred, when prolonged rate-           [43) Electricity 145   ~11.3(7)

making hearings delayed new rates' anticipated ef-
                                                           145 Electricity
fective date, was not arbitrary or capricious or ab-
                                                               145k11.3 Regulation of Charges
use of discretion, as recalculation time alone could
                                                                   145kll.3(7) k. Judicial review and enforce-
conceivably delay rendition of new order long
                                                           ment. Most Cited Cases
enough to once again alter new rates' effective date.
                                                                Wrongful exclusion of State of Texas from
[40] Electricity 145   ~11.3(4)                            rate-making proceeding did not necessitate reversal
                                                           of order establishing rates for electric utility, where




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state complained only of its inability to cross-         Commission's approval of rate design.
examine witnesses who testified during its absence,
and examiner specifically stated in his oral ruling      [47] Public Utilities 317A €=>120
that he would permit state to recall and cross-ex-
                                                         317 A Public Utilities
amine such witnesses; state was unable to demon-
                                                            31 7All Regulation
strate any prejudice to its substantial rights. Ver-
                                                                3 17Ak 119 Regulation of Charges
non's Ann. Texas Civ.St. art. 6252-Ba, § 19(e).
                                                                    317 Ak 120 k. Nature and extent in general.
[44] Public Utilities 317A €=>123                        Most Cited Cases

317A Public Utilities                                    Public Utilities 317A €=>167
    317 Ali Regulation
                                                         317 A Public Utilities
        3 17 Ak 119 Regulation of Charges
                                                            317 Alii Public Service Commissions or Boards
              317 Ak123 k. Reasonableness of charges
                                                                317 AIII(B) Proceedings Before Commissions
in general. Most Cited Cases
                                                                    317 Ak167 k. Hearing and rehearing. Most
     Public Utility Commission has broad discretion
                                                         Cited Cases
to determine whether particular rate design will res-
                                                              Utility customer seeking reassignment to dif-
ult in just, reasonable, and nondiscriminatory rates.
                                                         ferent class of ratepayers must show that its condi-
[45] Public Utilities 317A €=>123                        tions of service are similar to those of members of
                                                         class to which it seeks reassignment; issue is one of
317 A Public Utilities                                   fact, to be resolved by reference to particular cir-
    317 Ail Regulation                                   cumstances of each case.
       317 Ak 119 Regulation of Charges
            317 Ak123 k. Reasonableness of charges        [48] Public Utilities 317A €=>165
in general. Most Cited Cases
                                                         317 A Public Utilities
     In deciding whether particular rate design will
                                                             317 A III Public Service Commissions or Boards
result in just, reasonable, and nondiscriminatory
                                                                317 AIII(B) Proceedings Before Commissions
rates, Public Utility Commission may consider
                                                                    317 Ak 165 k. Evidence. Most Cited Cases
factors in addition to cost of producing service,
                                                              Existing ratepayer classification schemes previ-
keeping in mind that overriding considerations of
                                                         ously approved by Public Utility Commission are,
consistency and utility's burden of proving that its
                                                         prima facie, not unreasonably discriminatory, and
proposed rates are just and reasonable. Vcmon's
                                                         complaining party has burden of proving that clas-
Ann.Texas Civ.St. art. 1446c, § 40.
                                                         sification produces unreasonably discriminatory
[46] Public Utilities 317A €=>194                        rates.

317 A Public Utilities                                    [49] Electricity 145 €=>11.3(1)
   317 Alii Public Service Commissions or Boards
                                                          145 Electricity
       317 Alii( C) Judicial Review or Intervention
                                                              145k11.3 Regulation of Charges
            317Akl88 Appeal from Orders of Com-
                                                                 145k11.3(1) k. In general. Most Cited Cases
mission
                                                               Decision not to reassign State of Texas from
                31 7Ak 194 k. Review and determina-
                                                          general services class to city-county consumer class
tion in general. Most Cited Cases
                                                          was not abuse of discretion accorded to Public Util-
     Absent unreasonably discriminatory rates,
                                                          ity Commission in approving rate design for elec-
Court of Appeals will not overturn Public Utility
                                                          tric utility's customers, where state failed to offer




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(Cite as: 839 S.W.2d 895) r




any proof that its load characteristics were similar       JONES, JJ.
to those of city and county governmental custom-
ers, where current classification scheme had appar-
                                                                      ON MOTION FOR REHEARING
ently existed unchallenged for some 50 years, and
                                                           JONES, Justice.
where Commission expressed its intention to in-
                                                                The opinion and judgment issued by this Court
vestigate state's assignment to general services
                                                           on August 14, 1991, are withdrawn, and this opin-
class in next rate case.
                                                           ion is filed in place of the earlier one.
[50] Electricity 145 €::;::>11.3(6)
                                                                The district court affirmed an order of the Pub-
 145 Electricity                                           lic Utility Commission ("Commission") setting
     145k11.3 Regulation of Charges                        rates to be charged by El Paso Electric Company
         145kll.3(6) k. Proceedings before commis-         ("EPEC"). The Commission issued the order, after
sions. Most Cited Cases                                    hearing, pursuant to the Public Utility Regulatory
      Burden was on state, even assuming that it had       Act (PURA), Tex.Rev.Civ.Stat.Ann. art. 1446c
right to be charged a cost-based rate based on con-        (Supp.1992). The City of El Paso ("City"), the State
stitutional provisions preventing it from depleting        of Texas (on behalf of various state agencies loc-
its treasury, to show that rate that it and its agencies   ated in western Texas) ("TSA"), and the Office of
would have to pay to electric utility were not equal       Public Utility Counsel ("OPC"), appellants, seek
to utility's actual costs of providing it and its agen-    reversal of the trial court's judgment. We will af-
cies with service. Vernon's Ann.Texas Const. Art.          firm in part and reverse in part.
3, §§ 44, 51, 53;Art. 16, § 6.
                                                                Disapproving of EPEC's decision to invest in
*900 Norman I. Gordon, Diamond, Rash, Leslie,              the Arizona Nuclear Power Project, appellants com-
Smith & Samaniego, El Paso, Nanette G. Williams,           plain of the Commission's order permitting EPEC
Asst. City Atty., City of El Paso, El Paso, for City       to charge rates that allow it to recover most of the
ofEl Paso.                                                 project's costs. The Commission ordered the rate in-
                                                           crease after conducting a lengthy evidentiary hear-
Jim Mattox, Atty. Gen., W. Scott McCullough,               ing, providing many opportunities for all parties to
Asst. Atty. Gen., Austin, for State of Tex.                plead and present their cases; the Commission con-
                                                           sidered two sets of motions for rehearing. The
C. Kingsbery Ottmers, Public Counsel, John                 Travis County district court, to which the complain-
Laakso, Asst. Public Counsel, Austin, for OPUC.            ing parties brought their appeal, affirmed the Com-
                                                           mission's order.
Jim Mattox, Atty. Gen., Norma K. Scogin, Asst.
Atty. Gen., Austin, for PUC.                                     On appeal, appellants challenge twelve differ-
                                                            ent aspects of the Commission's decision: (1) adop-
Michael D. McQueen, Kemp, Smith, Duncan &
                                                            tion of a non-unanimous stipulation; (2) failure to
Hammond, El Paso, Barry Bishop, John F. Willi-
                                                            disallow more for "decisional" imprudence; (3) ap-
ams, Clark, Thomas, Winters & Newton, Austin,
                                                            proval of deferred accounting for regulatory-lag ex-
for El Paso Elec. Co.
                                                            penses; (4) failure to disallow more for construc-
C. Michael Ginnings, Ginnings, Birkelbach, Keith            tional imprudence; (5) exclusion of witness Hub-
& Delgado, El Paso, for Border Steel.                       bard's testimony; (6) refusal to find excess capacity
                                                            in EPEC's system; (7) inclusion of common facilit-
                                                            ies in rate base; (8) inclusion of income tax expense
*901 Before CARROLL, C.J., and ABOUSSIE and                 in cost of service; (9) inclusion of a portion of Unit




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(Cite as: 839 S.W.2d 895)




2 lease payments in cost of service; (1 0) calculation    tion requesting the Commission to determine*902
and inclusion of other cost-of-service allowances;        whether EPEC's arrangement to sell and lease back
( 11) temporary exclusion of TSA from the proceed-        its ownership interest in Unit 2 was in the public in-
ings; (12) determination of rates and rate class for      terest. On April 6, 1987, EPEC filed applications
TSA. We will reverse the trial court's judgment to        with various affected cities and the Commission to
the extent it affirmed the Commission's approval          raise its rates based on the inclusion of the new
and use of "deferred accounting" for the carrying         nuclear plant in its generation system. The City of
costs EPEC incurred between the date the Palo             El Paso, one of the affected cities, approved rates
Verde plant became commercially operational and           within the El Paso city limits that would not have
the date the new rates were effective; we will af-        allowed EPEC to recover any of its nuclear plant
firm the remainder of the trial court's judgment.         investment; EPEC appealed the City's decision to
                                                          the Commission. The Commission consolidated
                      SETTING                             EPEC's appeal with its appeals from the decisions
     At the heart of this dispute is EPEC's decision      of other municipalities and with the environs case
to expand its power generation system by obtaining        (affecting_areas outside the cities) that was already
an ownership interest in the Arizona Nuclear Power           "'
                                                          be1ore  . I<"N1
                                                                  1t.
Project, also known as the Palo Verde Nuclear Gen-
erating Station. EPEC and four other utility com-                  FN1. All of the affected cities set rates
panies agreed to partially fund and otherwise assist               within their respective city limits prohibit-
in building one or more nuclear steam electric gen-                ing EPEC from recovering its nuclear plant
erating units, with attendant common facilities. In                investment. Only El Paso sought review of
return, EPEC was entitled to 15.8% of the resulting                the Commission's order.
net energy generation and the same percentage of
available generating capability. Construction is               Because of the voluminous evidence to be
complete on the common facilities and two of the          presented, the Commission initially divided the pro-
five units originally planned. At the time this pro-      ceedings in the rate case into three phases. The
ceeding was heard by the Commission, a third unit         Commission added a fourth phase after several
was still under construction.                             parties tendered a non-unanimous "stipulation" to
                                                          the Commission and requested that the Commission
     Factors arising after construction began have        base its decision on the stipulation. In addition, pur-
induced EPEC to alter its ownership interest in the       suant to an agreed motion, the Commission consol-
units. Originally, EPEC owned an undivided in-            idated the rate case with the proceeding to approve
terest in each of the units as a tenant in common         the sale/leaseback arrangement. An examiner con-
with the other four project participants. Although        vened hearings on each of the four phases during
EPEC retains its undivided interest in Unit 1, the        August, September, October, and November of
company has sold its interest in Unit 2 and made ar-      1987. On February 1, 1988, the hearings examiner
rangements to lease the unit back for the duration        filed a report with the Commission recommending
of EPEC's involvement in the project.                     against adoption of the stipulation.

     Because of the complexity of appellants' points            On March 31, 1988, the Commission signed an
of error, we will supply additional facts from there-      order adopting and incorporating the terms of an
cord throughout this opinion as necessary to clarify       amended and restated stipulation and increasing
the discussion.                                            rates to permit EPEC to earn a return on part of its
                                                           investment. The order withheld approval of the
       PROCEDURAL BACKGROUND                               sale/leaseback arrangement until a later proceeding,
    On October 31, 1986, EPEC filed an applica-            effectively undoing the earlier consolidation. On




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(Cite as: 839 S.W.2d 895)




May 10, 1988, the Commission made minor                   438,441 (Tex.App.l985, writ refd n.r.e.).
changes to its order in response to motions for re-
hearing filed by the City, OPC, TSA, and others.               [2][3] *903 We may not substitute our discre-
The City, OPC, and TSA filed second motions for           tion or our judgment for that of the agency; we may
rehearing which the Commission overruled on June          reverse an agency's decision only if it is unsuppor-
16, 1988.                                                 ted by substantial evidence, is arbitrary, or results
                                                          from an abuse of discretion. Railroad Comm'n v.
     The City, OPC, and TSA each appealed the             Continental Bus System, Inc., 616 S.W.2d 179, 181
Commission's order to a Travis County district            (Tex.1981). An agency's decision is arbitrary or
court, and the Commission obtained a consolidation        results from an abuse of discretion if the agency:
of those appeals. All the appellants participated in      (1) failed to consider a factor the legislature directs
the ensuing district-court review, which resulted in      it to consider; (2) considers an irrelevant factor; or
an affirmance of the Commission's order. The City,        (3) weighs only relevant factors that the legislature
OPC, and TSA each raise several challenges to the         directs it to consider but still reaches a completely
trial court's judgment and, through it, to the Com-       unreasonable result. Gerst v. Nixon, 411 S.W.2d
mission's order.                                          350, 360 n. 8 (Tex.1966); Statewide Convoy Trans.,
                                                          Inc. v. Railroad Comm'n, 753 S.W.2d 800, 804
     THE NON-UNANIMOUS STIPULATION                        (Tex.App.l988, no writ).
     The threshold complaint of the City and OPC is
that the Commission erred in basing its final order,           [4] Appellants analogize the present case to a
in part, on a non-unanimous stipulation. Both ap-         civil cause in which the court has rendered an
pellants argue that there is no substantial evidence      agreed judgment without the consent of all parties.
to support the stipulated matters and that the Com-       The analogy is not apt. In the present case, the de-
mission violated its own procedural rules by con-         cision-maker did not impose the terms of a settle-
sidering the stipulation. In addition, OPC asserts        ment on non-settling parties. Although the parties
that some necessary findings or statements of un-         signing the stipulation believed its terms fairly re-
                                                                                        2
derlying facts are lacking and that, by considering       solved disputed issues, FN tender of the stipula-
and basing its final order on the stipulation, the        tion to the examiner did not bind the Commission
Commission "improperly attempt[ed] to negate              to "adopt" it. Furthermore, the Commission did not,
statutorily created rights belonging solely to OPC."      as appellants suggest we presume, adopt the stipu-
                                                          lation as its final order without scrutiny.
     [I] An unarticulated assumption underlies the
majority of appellants' challenges to the Commis-                   FN2. EPEC, the Commission staff, and
sion's decision in these and other points of error; al-             four corporate intervenors which pur-
though they do not say so explicitly, appellants im-                chased significant amounts of electricity
pliedly urge us to presume that, by basing its final                from EPEC all signed the stipulation.
order partially on stipulated matters, the Commis-
sion completely abdicated its responsibility to de-             The non-signing parties had ample opportunity
termine disputed issues. We may not so presume;            to argue their positions both before and after the
indeed, the law compels a contrary presumption. In         Commission rendered its decision. A fourth phase
reviewing a challenged administrative order, we            was added to the hearings to provide a forum in
must presume its validity. The challenger bears the        which parties could object to the Commission's use
burden of showing error. Texas Health Facilities           of the stipulation as a partial basis for its final or-
Comm'n v. Charter Medical-Dallas, Inc., 665                der. In addition to presenting evidence, the parties
S.W.2d 446, 453 (Tex.l984); Continental Cars,              submitted briefs concerning use of the stipulation,
Inc. v. Texas Motor Vehicle Comm'n, 697 S.W.2d             filed exceptions to the proposed final order incor-




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porating stipulated matters, and moved for rehear-        the stipulation as a basis for resolving the contested
ing after the Commission rendered its decision.           issues. Second, the Commission made the requisite
Having urged their objections to the Commission's         independent findings. The initial part of the Com-
use of the stipulation at each of these stages, appel-    mission's Order recited:
lants yet failed to show that basing a final order on
a non-unanimous stipulation would be improper.              *904 4. Even where some parties to a proceeding
                                                            do not agree to a stipulated result, it is reasonable
     In a similar case, coincidentally involving the        to adopt such a stipulation if:
Palo Verde Nuclear Generating Station, the New
Mexico Supreme Court approved the state Public                (a) The parties opposing the stipulation have
Service Commission's adoption of a non-unanimous            notice that the stipulation may be considered by
stipulation:                                                the Commission and an opportunity to be heard
                                                            on their reasons for opposing the stipulation;
  [The Commission] can adopt a contested stipula-
  tion by, first, affording any non-stipulating party         (b) The matters contained in the stipulation are
  an opportunity to be heard on the merits of the           supported by a preponderance of the credible
  stipulation (i.e., whether it is a fair and reason-       evidence in the case;
  able resolution of the controversy before the
                                                              (c) The stipulation is in accordance with ap-
  Commission) and second, making an independent
                                                            plicable law;
  finding, supported by substantial evidence in the
  record, that the stipulation does indeed resolve             (d) The stipulation results in just and reason-
  the matters in dispute in a way that is fair, just         able rates;
  and reasonable and in the public interest.
                                                                (e) The results of the stipulation are in the pub-
     Attorney General of New Mexico v. New Mex-              lic interest, including the interest of those cus-
ico Public Service Comm'n, 111 N.M. 636, 640,                tomers represented by parties opposing the stipu-
808 P.2d 606, 610 (1991). The New Mexico court               lation.
relied on Mobil Oil C01p. v. Federal Power Com-
mission, 417 U.S. 283, 94 S.Ct. 2328, 41 L.Ed.2d             5. Pursuant to the Findings of Fact and Conclu-
72 (1974), where the United States Supreme Court             sions of Law set forth below, the Commission
noted the distinction between considering a propos-          finds the Amended and Restated Stipulation, as
al "as a settlement" and considering it "on its mer-         modified, is a reasonable basis for resolution of
its": "[E]ven if there is a lack of unanimity [in the        the issues in this case and that adoption of the
stipulation], it may be adopted as a resolution on           Amended and Restated Stipulation, as modified,
the merits .... " 417 U.S. at 414, 94 S.Ct. at 2282          as the basis of the Commission's Order in this
(quoting Placid Oil Co. v. FPC, 483 F.2d 880, 893            proceeding is in the public interest.
(5th Cir.1973)) (emphasis in original).
                                                                In addition, Finding of Fact No. 237 stated:
     In the present case, the requirements mentioned       "The provisions of the Amended and Restated Stip-
in the foregoing cases for the adoption of a non-          ulation are reasonable and supported by a prepon-
unanimous stipulation were satisfied. First, the non-      derance of the credible evidence in this record and
stipulating parties were given an opportunity to be        should be adopted." Conclusion of Law No. 28
heard on the merits of the stipulation. Indeed, as         stated: "The Amended and Restated Stipulation, as
stated above, the Commission added a fourth phase          modified per Finding of Fact No. 6, represents a
to the proceedings devoted exclusively to receiving        reasonable resolution of the contested issues in this
evidence and argument on the propriety of using            docket, is supported in the record, is in the public




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interest, and should therefore be adopted, as the          prudence in investing and remaining involved in the
basis for the Commission's Order in this case."            project. We hold that the Commission was not re-
                                                           quired to accept or reject the examiner's report in its
     Appellants have not shown that use of the stip-       entirety. The Commission's authority undoubtedly
ulation as a partial basis for the final order is arbit-   extends to repudiating a part of the examiner's re-
rary, unreasonable, an abuse of discretion, or in-         port and modifying it by deletion.
volves consideration of factors other than those the
legislature has directed the Commission to con-                 Within its challenge to the Commission's use of
sider. Under such circumstances, we conclude that          the stipulation, OPC claims that paragraph 4(e) of
the Commission may generally set just and reason-          the Commission's final order "supplants" OPC's au-
able rates in an order based, in part, on a non-           thority to represent the interest of residential and
unanimous stipulation.                                     small business consumers in ratemaking cases of
                                                           this type. Paragraph 4(e) provides: "The results of
     On a procedural level, OPC asserts that the           the stipulation are in the public *905 interest, in-
Commission's rules, specifically Public Utility            cluding the interest of those customers represented
Commission Rules of Practice & Procedure §                 by parties opposing the stipulation." OPC's inter-
21.151, 16 Tex.Admin.Code § 21.151 (1990), pro-            pretation of the order and of its own enabling legis-
hibit it from basing its order on a non-unanimous          lation is incorrect.
stipulation. Section 21.151 provides:
                                                                The legislature created OPC to "advocate" the
  After the expiration of the time for filing excep-       interests of residential and small commercial con-
  tions and replies thereto, the examiner's report         sumers. PURA § 15A(a). However, the Commission
  and proposal for decision will be considered by          must set just and reasonable rates in ratemaking
  the commission and either adopted, modified and          cases. PURA § 38. In addition, only the Commis-
  adopted, or remanded to the examiner. ...                sion has the authority to determine whether a sale
                                                           of utility assets is in the public interest. See PURA
      OPC admits the Commission has the power to
                                                           § 63. Authority to advocate a position on behalf of
reject an examiner's recommendation; however, it
                                                           small businesses and residential consumers is not
claims the Commission may not modify and then
                                                           equivalent to authority to decide what is in the pub-
adopt a stipulation. OPC argues that the Commis-
                                                           lic's best interest. The only authority OPC possesses
sion violated section 21.151 by basing its final or-
                                                           is the former. OPC's contention is overruled.
der on a modified stipulation over the examiner's
contrary recommendation. The argument is merit-                 One challenge to the Commission's use of the
less.                                                      non-unanimous stipulation remains. Appellants ar-
                                                           gue that some findings of fact phrased in statutory
     [5] Paragraph six of the Commission's final or-
                                                           language lack the required accompanying concise
der expressly adopts findings of fact and conclu-
                                                           statements or findings of underlying facts. This ar-
sions of law proposed by the parties who signed the
                                                           gument, addressed to all the findings accompanying
stipulation. The Commission accepted the proposed
                                                           the final order, is too general to preserve error. To
findings and conclusions rather than those recom-
                                                           the extent that appellants assert generally that ne-
mended by the examiner only when there was a
                                                           cessary findings of underlying fact are missing,
conflict between the two. The Commission ex-
                                                           they have waived their complaint by failing to
pressly adopted the "examiner's report" to the de-
                                                           demonstrate any error prejudicing their substantial
gree it was consistent with the proposed findings
                                                           rights. See Administrative Procedure and Texas Re-
and conclusions; it expressly repudiated the section
                                                           gister       Act        (hereinafter      "APTRA"),
of the examiner's report concerning EPEC's
                                                           Tex.Rev.Civ.Stat.Ann. art. 6252-13a, § 19(e)




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(Supp.1992).                                             ate at the same level. When appellants challenged
                                                         the prudence of EPEC's decisions, the City, EPEC,
     The order addresses numerous issues, and ap-        and the Commission staff each offered expert testi-
pellants have made several specific substantial-evid-    mony on whether EPEC had acted prudently in de-
ence and finding-of-fact challenges. We will dis-        ciding to participate in the project and in continuing
cuss appellants' specific (and consequently pre-         to participate at the 15.8% level. The Commission
served) challenges while disposing of their remain-      concluded EPEC had not been entirely prudent in
ing points of error.                                     making decisions about its level of participation in
                                                         the project.
          "DECISIONAL" IMPRUDENCE
     The Commission concluded that due to im-                The issues we must resolve are: (1) whether
prudent decisions, $32 million of EPEC's costs           substantial evidence supports the findings underly-
should not be included in rate base. The City's third    ing the Commission's disallowance of the precise
point of error and OPC's second point contend that       $32 million figure, and (2) whether the Commission
the disallowance is unsupported by substantial re-       made the necessary findings of fact to allow this
cord evidence arguing that the amount disallowed         Court to conduct a meaningful review of im-
               '           FN3
should have been greater.        OPC also charges        prudently incurred costs.
that the Commission acted arbitrarily and abused its
discretion in selecting the $32 million figure and       A. Substantial Evidence and Abuse of Discretion.
that it made insufficient findings of underlying              [6][7] In conducting a substantial-evidence re-
facts.                                                   view, we must determine whether the evidence as a
                                                         whole is such that reasonable minds could have
        FN3. All parties appear to agree that, to        reached the conclusion*906 the agency must have
        some degree, EPEC made imprudent de-             reached in order to take the disputed action. Texas
        cisions. On its face, PURA § 41(a) con-          State Bd. of Dental Examiners v. Sizemore, 759
        templates an imprudence disallowance             S.W.2d 114, 116 (Tex.1988), cert. denied, 490 U.S.
        only within the framework of a request that      1080, 109 S.Ct. 2100, 104 L.Ed.2d 662 (1989);
        "construction work in progress" be in-           Texas Health Facilities Comm'n v. Charter Medic-
        cluded in rate base. The parties, however,       al-Dallas, Inc., 665 S.W.2d 446, 453 (Tex.l984).
        have not briefed or argued whether a             We may not substitute our judgment for that of the
        "prudence" standard governs the inclusion        agency and may consider only the record on which
        of new nuclear plant-in-service in rate          the agency based its decision. Sizemore, 759
        base. We will therefore discuss appellants'      S.W.2d at 116. The appealing party bears the bur-
        points in the terms they have chosen. We         den of showing a lack of substantial evidence.
        do not express an opinion on the possible        Charter Medical, 665 S.W.2d at 453. It cannot meet
        existence of a distinction between the reas-     this burden merely by showing that the evidence
        onableness standard guiding the PUC in           preponderates against the agency decision. ld. at
        setting rates and the prudence standard it       452. If substantial evidence would support either
        uses pursuant to PURA § 41(a) in deciding        affirmative or negative findings, we must uphold
        whether to include the value of construc-        the agency's order, resolving any conflict in favor
        tion work in progress in rate base.              of the agency's decision. Auto Convoy Co. v. Rail-
                                                         road Comm'n, 507 S.W.2d 718, 722 (Tex.1974);
     Based on its anticipated load demand, EPEC
                                                          Warner v. City of Lz!fkin, 582 S.W.2d 165, 167
first decided to participate in the nuclear power
                                                         (Tex.Civ.App.1979, writ refd n.r.e.).
project at a 15.8% level. Confident that its decision
was a prudent one, EPEC has continued to particip-            Appellants' position is that only the City's wit-




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ness, Ben Johnson, provided a method by which the         complexity of a decision to construCt or purchase
Commission could quantify the amount of im-               new generating capacity. A utility must weigh
prudently incurred costs. Johnson offered the opin-       many competing concerns before undertaking an
ion that EPEC had made several imprudent de-              expansion project. EPEC, as a part of its decision to
cisions and that, as a result, the Commission should      participate in the Arizona Nuclear Power Project,
disallow 50% of its costs. The City contends that         considered the following factors, among others: (1)
because no other witness suggested a quantification       the feasibility of obtaining financing; (2) the effect
method, the Commission, upon a finding of some            of longterm financing on EPEC's financial integ-
decisional imprudence, should have adopted John-          rity; (3) the potential impact on ratepayers of in-
son's quantification method and, necessarily, his         creasing system capacity by a significant percent-
result. We do not agree.                                  age; (4) predicted expenses, revenues, and load de-
                                                          mands for the relevant time periods; (5) EPEC's de-
     [8] The Commission is empowered to hold              gree of financial flexibility; and (6) the availability
hearings, receive evidence, make decisions, issue         of alternative sources for the additional capacity
orders, and find facts. PURA § 16. In addition, the       that forecasts had shown would be necessary. The
Commission impliedly possesses those powers ne-           effects these factors have on total project costs are
cessary and convenient to making findings and de-         not susceptible of ready quantification.
cisions. PURA § 16(a). PURA does not expressly
confer on the Commission power to judge wit-                   [9] Requiring the Commission to adopt or re-
nesses' credibility; however, the requirement that        ject witnesses' testimony in toto, especially when
the Commission make decisions, findings of fact,          the testimony concerns a multi-faceted issue such
and conclusions of law implies the necessary corol-       as this one, would hobble the Commission's ability
lary power to judge credibility and to accept or re-      to assess each witness and render its decision based
ject a witness's testimony in whole or in part. Gerst     solely *907 on the testimony it found credible.
v. Guardian Sav. & Loan Ass'n, 434 S.W.2d 113,            Having deduced that the Commission may properly
116 (Tex.1968); Texas State Bd. of Dental Exam-           accept less than all of a witness's testimony, we
iners v.      Silagi,   766 S.W.2d 280, 283               conclude the Commission committed no error in
(Tex.App.1989, writ denied).                              disallowing a lesser percentage of costs than John-
                                                          son recommended. The Commission could properly
     EPEC maintains that, based on information            identify the factors which credible evidence showed
available at the time it made its decisions, its con-     EPEC should have considered when making its de-
tinued participation in the project would enable it to    cisions. Likewise, the Commission could also de-
supply ratepayers with needed electricity at the          cide that prudence would not have required EPEC
lowest possible cost. Consequently, EPEC contends         to consider other factors because the evidence to
that all its costs should be included in rate base.       the contrary was not credible.
The City, on the other hand, argues that available
data would have informed a prudent utility manager              The record contains substantial evidence to
that involvement in a nuclear project would be un-         support a disallowance figure of zero for decisional
duly burdensome to ratepayers. Consequently,               imprudence; the Commission would, therefore,
Johnson recommended that the Commission disal-             have been acting within its discretion had it agreed
low half of EPEC's costs. However, the evidence            that EPEC was entirely prudent in its management
encompassed more than Johnson's recommenda-                and planning. The substantial evidence would also
tions.                                                     have supported a Commission finding that 50% of
                                                                                                           4
                                                           EPEC's costs should have been disallowed.FN Ap-
    All the witnesses who offered their opinions           pellants assert that the stipulation is the only pos-
about EPEC's decisional prudence recognized the




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sible evidence of the exact $32 million disallow-         against interest all combine to compel our conclu-
ance. Because the appellants do not admit that the        sion that substantial record evidence supports the
stipulation has any evidentiary weight, they contend      $32 million disallowance. We overrule the substan-
there is no evidence to support the $32 million fig-      tial-evidence challenge to the disallowance for de-
ure. We disagree.                                         cisional imprudence.

         FN4. We express no opinion on the pro-                In addition, because OPC's contention that the
         position that, because the Commission's          Commission abused its discretion rests on the
         prudence decision and resulting disallow-        premise that the stipulation has no evidentiary
         ance rested on a number of factors, the          weight, and because we have concluded to the con-
         Commission could reasonably have con-            trary, we overrule this contention as well.
         cluded that the substantial evidence would
         support a figure anywhere within the range       B. Findings ofFact.
         from zero to 50% of the total project costs.          As its final challenge within this point, OPC
                                                          asserts that "[t]he Commission's findings are insuf-
     [ 1OJ Because it is a statement contrary to          ficient to comply with APTRA." However, instead
EPEC's pecuniary interest, the concession has some        of arguing that specific findings of underlying fact
evidentiary weight. A declaration contrary to a           are insufficient, OPC complains that the Commis-
party's position on a disputed issue is akin to a         sion failed to provide "explicit statements of under-
quasi-admission. While not binding on the declar-         lying facts to support its findings as required by
ant, as a judicial admission would be, such a con-        Tex.Rev.Civ.Stat.Ann. art. 6252-13a, § 16(e)
cession constitutes some evidence. Mendoza v. Fi-         (APTRA)." FNS
delity & Guar. Ins. Underwriters, Inc., 606 S.W.2d
692, 694 (Tex.l980); Texas Distillers, Inc. v. How-                FN5. We construe OPC's allegation to
ell, 409 S.W.2d 888, 890 (Tex.Civ.App.l966, writ                   refer to the requirements of section 16(b ),
rcf'd n.r.e.). It is for the trier of fact to determine            which deals with findings of fact. APTRA
the weight to be assigned to a quasi-admission.                    § 16(e) addresses agency motions for re-
Mendoza, 606 S.W.2d at 694.                                        hearing.

     EPEC's position has always been that it acted             [ 11] Section 16(b) of APTRA provides, in part,
prudently in deciding to participate in the project at    that "[f]indings of fact, if set forth in statutory lan-
the 15.8% level. Nevertheless, EPEC conceded              guage, must be accompanied*908 by a concise and
through the stipulation that, if its decision had been    explicit statement of the underlying facts support-
imprudent, the resulting costs that should be disal-      ing the findings." (Emphasis added.) The Texas Su-
lowed totaled $32 million. Such a statement is            preme Court has concluded that an agency's find-
clearly contrary to EPEC's position. Therefore, the       ings of fact need the additional support of findings
Commission could properly consider and weigh the          of underlying facts only when the ultimate findings
stipulation in quantifying the imprudently incurred       are in terms taken directly from the enabling legis-
costs.                                                    lation or when they "represent the criteria that the
                                                          legislature has directed the agency to consider in
     The range of figures supported by the testi-         performing its function." Charter Medical, 665
mony of expert witnesses, the complexity of the is-       S.W.2d at 451.
sues the Commission had to review to determine
whether EPEC made prudent decisions, the diffi-                 The "statutory language" to which APTRA §
culty of assigning a value to the effects of any com-      16(b) refers is the language in the statute that con-
ponent on project costs, and EPEC's admission              fers authority on the agency to take the complained-




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of action. !d. In PURA, the legislature authorized       of its participation in the Palo Verde Project."
the Commission to make orders setting rates.             (Emphasis added.) Taken together, these findings
PURA § 37. A number ofPURA's sections also de-           adequately supply the required concise statement of
tail the criteria the Commission is to consider in       underlying facts supporting Finding 101.
setting rates. See PURA §§ 38, 39, 41, and 43.
Therefore, only when the Commission's findings                OPC contends that, in order to be sufficient, the
are stated in PURA's express terms, or when they         Commission's findings of underlying fact must
represent criteria the legislature has directed the      identify "the processes and acts found to be im-
Commission to consider, must the Commission also         prudent, the nexus between those acts and the disal-
make findings of underlying fact.                        lowance amount, [and] the evidentiary support for
                                                         the disallowance figure." OPC fails to point either
     [12] OPC does not direct us to a particular         to statutory provisions or case law mandating that
finding that requires, but is not accompanied by,        the Commission make such findings. Not having
findings of underlying fact. However, we conclude        discovered any such authority ourselves, we con-
from its argument that Findings 101 through 103          clude that such findings are not required.
are the subjects of its complaint, because those
findings address the prudence and disallowance is-          We overrule the City's third point of error and
sues. Although PURA does not expressly require           OPC's second point of error.
the Commission to make a finding of prudence be-
                                                                             DEFERRALS
fore including costs in rate base, once the Commis-
                                                              EPEC requested that its rate base be increased
sion finds a major project to have been imprudently
                                                         by the amount of carrying costs and operating and
planned or managed, it should generally disallow
                                                         maintenance costs it incurred during "regulatory
project costs to the extent of the imprudence. See                6
                                                         lag." FN The utility had "deferred" these types of
PURA § 41(a); supra note 3.
                                                         costs for Units 1 and 2, aggregating each type of
     Finding of Fact 101 is phrased in statutory         cost for each unit into a separate capital *909 ac-
terms; the Commission therein decided that EPEC          count.FN? EPEC obtained the Commission's prior
was "not entirely prudent in its planning and man-       permission to defer Unit 1 costs. The Commission
agement" of the project. The phrasing of that find-      reserved the right, however, to refuse subsequently
ing in statutory terms required the Commission to        to include the deferred costs in rate base to the ex-
make findings of underlying fact showing the basis       tent they were unreasonable, related to plant not
for the Commission's determination of imprudence         used and useful, or were spent or incurred im-
and supplying the amount of the disallowance.            prudently. Although EPEC did not obtain prior per-
Findings 102 and 103 accomplish these goals.             mission to defer its post-in-service costs for Unit 2,
                                                         it nevertheless deferred them, apparently assuming
     Neither Finding 102 or 103 is phrased in stat-      that obtaining prior approval a second time was un-
utory     terms.    Finding     103    states   that     necessary. After the rate-increase proceeding was
"[ q]uantification of the effects of imprudence re-      completed, the Commission included the deferred
quires the exercise of judgment. based upon the          costs for both units in rate base.
evidence. In light of the evidence relating to
prudence and the difficulties in quantification, the              FN6. "Regulatory lag" is the period
quantification of decisional imprudence at $32 mil-               between the date a new plant begins com-
lion for Units 1 and 2 is reasonable and appropri-                mercial operation (the "in-service" date)
ate." Finding 102 indicates the Commission con-                   and the effective date of the new rates that
cluded that imprudence existed only with respect to               result from including the new plant's costs
"the Company's continuing evaluation of the level                 in rate base.




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        FN7. "Deferral" is an accounting proced-                 have been waived. APTRA § 16(e); Burke
        ure a utility can use to record all costs of a           v. Central Educ. Agency, 725 S.W.2d 393,
        certain type in two accounts, one an ex-                 396 (Tex.App.l987, writ refd n.r.e.).
        pense account and the other a capital asset
        account. As the expense account balance               [ 13] A reviewing court's role in construing a
        increases, so does the capital asset account     statute is to "seek out the legislative intent from a
        balance; so that the two balances remain         general view of the enactment as a whole, and, once
        identical. Recording costs this way pre-         the intent has been ascertained, to construe the stat-
        serves evidence the utility may later use to     ute so as to give effect to the purpose of the Legis-
        seek inclusion of the capital account bal-       lature." Hightower v. State Comm'r of Educ., 778
        ance in rate base and a corresponding in-        S.W.2d 595, 597 (Tex.App.1989, no writ); see also
        crease in rates.                                 Medeiros v. Insurance Co. of N. Am., 781 S.W.2d
                                                         404, 406 (Tex.App.l989, no writ); Sexton v. Mount
     In this appeal, the City and OPC contend the        Olivet Cemetery Ass'n, 720 S.W.2d 129, 137
Commission erred, first, in entering an order per-       (Tex.App.l986, writ refd n.r.e.).
mitting EPEC to defer Unit 1 costs and, second, in
subsequently including the "deferred-costs assets"            [14][15] As a general rule, an administrative
                                8                        agency is a creation of the legislature and, as such,
for both units in rate base. FN OPC and the City
lodge several arguments against the deferred ac-         has only those powers expressly conferred and
counting procedure used here, including that the         those necessary to the accomplishment of its duties.
practice constitutes impermissible retroactive rate-     State v. Jackson, 376 S.W.2d 341, 344 (Tex.l964);
making and t~at it. violates the "ormal-cost"            Sexton, 720 S.W.2d at 137; Railroad Comm'n v.
                                            9            Atchison, T. & S.F. R.R., 609 S.W.2d 641, 643
standard contamed m PURA § 4l(a). ·           Thus,
they assert that the Commission exceeded its au-         (Tex.Civ.App.1980, writ refd n.r.e.). The present
thority by including the deferred post-in-service        case is governed by PURA, which expressly grants
costs in rate base.                                      to the Commission "the general power to regulate
                                                         and supervise the business of every public utility
        FN8. TSA also purports to complain of the        within its jurisdiction and to do all things, whether
        deferral procedure. However, TSA failed          specifically designated in this Act or implied
        to address the alleged error in its motions      herein, necessary and convenient to the exercise of
        for rehearing to the agency. Therefore, it       this power and jurisdiction." PURA § 16(a). Are-
        has waived any error. APTRA § 16(e);             viewing court may determine, as a matter of law,
        Burke v. Central Educ. Agency, 725               the scope of an agency's statutory authority. See
        S.W.2d 393,396 (Tex.App.l987, writ refd          Gage v. Railroad Comm'n, 582 S.W.2d 410, 412
        n.r.e.).                                         (Tex.l979).

        FN9. The City did not preserve a sec-                  [16] The power of an agency to take such ac-
        tion-4l(a) argument in its motion for re-         tions as may be "necessary" to perform an express
        hearing to the Commission. The City also          duty is not without limits. This Court has previ-
        argues in its brief to this Court that the        ously held that
        Commission failed to make necessary find-
        ings of underlying fact to support its con-            [t]he agency may not, however, on a theory of
        clusion that Unit 2 costs should be in-             necessary implication from a specific power,
        cluded in rate base, but the City likewise          function, or duty expressly delegated, erect and
        did not assign such failure as error in its         exercise what really amounts to a new and addi-
        motion for rehearing. Both complaints               tional power or one that contradicts the statute,




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  no matter that the new power is *910 viewed as            able earning capacity of the property under par-
  being expedient for administrative purposes.              ticular rates prescribed by statute, and the sum re-
                                                            quired to meet operating expenses, are all matters
     Sexton, 720 S.W.2d at 137-38 (emphasis ad-             for consideration, and are to be given such weight
ded). Thus, if there is no specific express authority       as may be just and right in each case. We do not
for a challenged action, and if the action is incon-        say that there may not be other matters to be re-
sistent with a statutory provision or ascertainable         garded in estimating the value of the property.
legislative intent, we must conclude that, by per-          What the company is entitled to ask is a fair re-
forming the act, the agency has exceeded its grant          turn upon the value of that which it employs for
of statutory authority.                                     the public convenience.

     PURA requires the Commission to set rates at a           !d. at 546-47, 18 S.Ct. at 434.
level that will permit each utility "a reasonable op-
portunity to earn a reasonable return on its invested          Smyth v. Ames commanded that both the ori-
capital used and useful in rendering service to the       ginal cost of construction, on the one hand, and the
public over and above its reasonable operating ex-        current reproduction or replacement cost, on the
penses." PURA § 39(a). This provision imposes             other hand, must be "considered" in setting rates.
many complex tasks on the Commission: What are            As debate raged as to which of the two cost meas-
the utility's reasonable operating expenses? What         ures should receive the greater weight or emphasis,
portion of the utility's expenditures constitute capit-   the Smyth fair-return doctrine received increasing
al investment? What portion of the utility's invested     criticism over the years. Finally, Smyth was aban-
capital is used and useful in rendering service?          doned by the Supreme Court in Federal Power
How should the value of the utility's used-               Comm'n v. Hope Natural Gas Co., 320 U.S. 591, 64
and-useful invested capital be calculated? What is a      S.Ct. 281, 88 L.Ed. 333 (1944). The Court in Hope
reasonable return on the utility's used-and-useful        held that regulatory commissions are not bound by
invested capital?                                         any particular formula in determining rates, as long
                                                          as the rates established "enable the company to op-
     Historically, one of the most vexing questions       erate successfully, to maintain its financial integ-
for regulatory authorities has been how to calculate      rity, to attract capital, and to compensate its in-
the value of a utility's invested capital. See Charles    vestors for the risks assumed." 320 U.S. at 605, 64
F. Phillips, The Regulation of Public Utilities           S.Ct. at 289.
305-29 (2nd ed. 1988) (hereinafter cited as
"Phillips"). In the landmark case of Smyth v. Ames,            The Texas experience roughly paralleled that
169 U.S. 466, 18 S.Ct. 418, 42 L.Ed. 819 (1898),           of the federal system. In Railroad Commission v.
the United States Supreme Court established the            Houston Natural Gas Corporation, 289 S.W.2d 559
legal basis of the so-called "fair value" doctrine:        (Tex.1956), after a thorough historical review, the
                                                           Texas Supreme Court held that pre-PURA statutes
  [T]he basis of all calculations as to the reason-        mandated a fair-value method of valuation, which
  ableness of rates to be charged by a corporation         the court defined as "a reasonable balance between
  ... must be the fair value of the property being         original cost less depreciation and replacement cost
  used by it for the convenience of the public. And        new less an adjustment for present age and condi-
  in order to ascertain that value, the original cost      tion." !d. at 572. As originally adopted in 1975d
  of construction, the amount expended in perman-          PURA incorporated this fair-value definition. FNl
  ent improvements, the amount and market value            In 1983, however, the legislature amended PURA
  of its bonds and stock, the present as compared          to make Texas a pure "original-cost" state. Section
  with the original cost of construction, the prob-        4l(a) ofPURA now provides:




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        FN 10. The relevant sections of PURA ori-                  nor more than 40% current cost less an
        ginally provided:                                          adjustment for both present age and con-
                                                                   dition. The regulatory authority may
          Sec. 39. In fixing the rates of a public                 consider inflation, deflation, quality of
          utility the regulatory authority shall fix               service being provided, the growth rate
          its overall revenues at a level which will               of the service area, and the need for the
          permit such utility to recover its operat-               public utility to attract new capital in de-
          ing expenses together with a reasonable                  termining a reasonable balance.
          return on its invested capital.
                                                                   1975 Tex.Gen.Laws, ch. 721, §§ 39-41,
          Sec. 40. (a) The regulatory authority                    at 2341-42 (PURA §§ 39-41, since
          shall not prescribe any rate which will                  amended); see also Southwestern Bell
          yield more than a fair return upon the ad-               Tel. Co. v. PUC, 571 S.W.2d 503,
          justed value of the invested capital used                512-16 (Tex.1978).
          and useful in rendering service to the
          public.                                             *911 Sec. 41. The components of invested cap-
        ******                                             ital ... shall be determined according to the fol-
                                                           lowing rules:
          Sec. 41. The components of adjusted
          value of invested capital and net income           (a) Invested Capital. Utility rates shall be
          shall be determined according to the fol-        based upon the original cost of property used by
          lowing rules:                                    and useful to the public utility in providing ser-
                                                           vice including construction work in progress at
         (a) Adjusted Value of Invested Capital.           cost as recorded on the books of the utility. The
         Utility rates shall be based upon the ad-         inclusion of construction work in progress is an
         justed value of property used by and use-         exceptional form of rate relief to be granted only
         ful to the public utility in providing ser-       upon the demonstration by the utility that such
         vice including where necessary to the             inclusion is necessary to the financial integrity of
         financial integrity of the utility construc-      the utility. Construction work in progress shall
         tion work in progress at cost as recorded         not be included in the rate base for major projects
         on the books of the utility. The adjusted         under construction to the extent that such projects
         value of such property shall be a reason-         have been inefficiently or imprudently planned or
         able balance between original cost less           managed. Original cost shall be the actual money
         depreciation and current cost less an ad-         cost, or the actual money value of any considera-
         justment for both present age and condi-          tion paid other than money, of the property at the
         tion. The regulatory authority shall have         time it shall have been dedicated to public use,
         the discretion to determine a reasonable          whether by the utility which is the present owner
         balance that reflects not less than 60%           or by a predecessor, less depreciation.
         nor more than 75% original cost, that is,
         the actual money cost, or the actual                PURA § 41(a) (emphasis added).
         money value of any consideration paid
         other than money, of the property at the             In addressing the arguments made by the City
         time it shall have been dedicated to pub-       and OPC in the present case, we deem it convenient
         lic use, whether by the utility which is        to discuss separately the two different types of costs
         the present owner or by a predecessor,          for which the Commission allowed deferred-ac-
         less depreciation, and not less than 25%        counting treatment: (1) carrying costs, and (2) oper-




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ating and maintenance costs.                              struction projects. Two methods have been de-
        .         FNII                                    veloped to compensate utilities for such costs. The
A. Carrymg Costs.                                         first method

         FNll. There are actually two types of such         capitalizes the carrying charges incurred during
         "costs" associated with capital construc-          the construction period as allowance for funds
         tion projects: ( 1) interest paid on debt cap-     used during construction (AFUDC). AFUDC is
         ital (i.e., borrowed funds); and (2) inability     recorded part as current income, part as an offset
         to earn a fair return on equity capital.           to interest expenses, but no cash payments are
         While the difference between the two is            made by ratepayers during construction. The pay-
         relevant for some purposes, it does not ap-        ments from ratepayers to recover the carrying
         pear to be so for purposes of our decision         charges begin when the completed plant goes on
         in the present case. Accordingly, we refer         stream. The entire cost of the plant (including
         to both collectively as "carrying costs."          AFUDC) is added to rate base, and it earns a rate
                                                            of return on investment and is depreciated over
      [17][18] As a general rule, the only assets that
                                                            the life of that plant.
may be included in a utility's rate base (so that the
utility earns a return on the value of such assets) are        James Bonbright, et al., Principles of Public
those found to be "used and useful" in providing          Utility Rates 246 (2nd ed. 1988) (hereinafter cited
service to the utility's customers. As quoted above,      as "Bonbright"). The second method, as the Bon-
for example, section 41(a) of PURA specifically           bright treatise explains it,
states that rates must be based on "the original cost       is to include construction work in progress
of property used by and useful to the public utility        (CWIP) in the rate base. (CWIP includes accrued
in providing service." When a new plant is built,           AFUDC on investment not in rate base.) The reg-
the utility must invest large amounts of capital dur-       ulatee recovers its carrying charges currently
ing construction. Until the plant is completed,             from ratepayers through the return component of
however, it is usually not considered a used and            its rates, rather than adding them to the cost of
useful asset. Accordingly, a rigid application of the       construction for recovery when the plant is in ser-
used-and-useful rule could prohibit the utility from        vice. The return on CWIP is recorded as income
earning a return on this invested capital until the         on a current basis (like AFUDC), and actual cash
new plant is completed and its cost is included in          payments are made by the ratepayers currently
rate base by the regulatory authority. Thus, under          (unlike AFUDC).
such a rigid application, equity capital that had
been or *912 could have been earning a return for               Id. Section 41(a) of PURA expressly permits
the utility would, when devoted to construction of         the inclusion of CWIP in rate base where the utility
the new plant, be unable to earn a return until the        demonstrates that "such inclusion is necessary to
new plant was completed and its cost included in           the financial integrity of the utility," and CWIP
rate base; further, any interest actually paid on bor-     may be included only to the extent that the project
rowed funds would not earn a return, even though           has not been "inefficiently or imprudently planned
the payment of such interest might have required           or managed." PURA § 41(a).
the investment of additional capital.
                                                                In the present case, CWIP was not requested;
     It has been widely if not universally conceded        rather, EPEC accrued AFUDC in a capital account
that utilities should, in fairness and occasionally out    while the plant was under construction. When the
of economic necessity, be compensated for these            new plant began commercial operation, FERC ac-
carrying costs, especially for major capital con-          counting rules required EPEC to cease accruing




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AFUDC in a capital account; any such costs that           costs that were allowed to be "deferred" and which
continue after commercial operation begins must           were included in rate base in the present case are
thereafter be recorded as expenses. Except for de-        indistinguishable from the AFUDC that was prop-
ductions for imprudence, the "original cost" of the       erly accrued and capitalized before commercial op-
plant, including AFUDC, was included by the Com-          eration began. Accordingly, any procedure that per-
mission in EPEC's rate base. In addition, however,        mits such costs to be included in rate base would
the Commission allowed EPEC to defer, and later           effec tively allow the inclusion in rate base of a con-
                                                               1

included in rate base, the carrying costs that EPEC       struction cost of the plant that was incurred after
incurred between the date of commercial operation         the plant's dedication to public use, thereby violat-
and the effective date of the new rates that included     ing the mandate of section 4l(a) that the original
in rate base the "original cost" of the Palo Verde        cost of new plant be calculated as of the date the
plant. These carrying costs appear to be simply a         plant is placed in public service. In effect, such a
continuation of AFUDC under a different name.             procedure would, by an accounting device, permit
OPC contends that the Commission's action viol-           the Commission to let in through the back door
ated the provision in section 41(a) permitting only       what the legislature has expressly prohibited com-
the cost of the new plant "at the time it shall have      ing in the front door.
been dedicated to public use" to be included in rate
base. We agree.                                                 Even without the unique wording of section
                                                          41(a), the Washington Utilities and Transportation
     The legislature has made it clear in section         Commission reached the same conclusion when
4l(a) that the value of new plant is, for rate-base       faced with a request to extend the period of capital-
purposes, to be measured by its original cost at the      ization of AFUDC from the in-service date of a
time the plant is dedicated to public use. As stated      new plant to the date when new rates went into ef-
above, it has been generally recognized that carry-       fect:
ing costs associated with the construction of a new
plant are essentially part of the "original cost" of        [A]ccrual of AFUDC after the in-service date of a
constructing the plant, and the utility should be           utility plant would result in a utility plant with a
compensated for them by including at least part of          value exceeding its "original" cost. The original
those costs in rate base. Nonetheless, the legislature      cost concept requires that the value of utility
apparently chose to simplify the calculation of a           plant be determined at the time it is first placed in
plant's original cost by placing a "cut-off date" on        service to the public. To grant this petition would
construction and acquisition costs: such costs must         establish a dangerous and unwarranted precedent
be calculated as of the *913 time the physical asset        leading to further requests to disregard the origin-
being constructed or acquired is placed in public           al cost concept.
    . FN12
serv1ce.
                                                               In re Puget Sound Power & Light Co., 62
        FN12. "Since no program of rate regula-           PUR4th 436, 440 (Wash. Util. & Transp. Comm'n
        tion is self-executing, one of the most im-       1984). Whether or not one agrees that the original-
        portant virtues of an original cost valu-         cost method of valuation requires, as a general pro-
        ation method is that of relative ease of ad-      position, that the value of a utility plant must be de-
        ministration." H. Louis Nichols & Randall         termined at the time it is first placed in service to
        Hagan Fields, Rate Base Under PURA:               the public, the language of section 41 (a) clearly
        How Firm is the Foundation?, 28 Baylor            mandates that approach. Accordingly, the Commis-
        L.Rev. 861, 866 (1976).                           sion contravened section 4l(a) when it allowed
                                                          post-in-service carrying costs to be included in
    As stated earlier, the post-in-service carrying       EPEC's rate base.




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     EPEC and the Commission present several ar-          ficant, ongoing cost of that asset cease being capit-
guments against such a construction of section            alized and start being expensed.
41(a). First, they argue that the phrase "at the time
it shall have been dedicated to public use" does not          In this connection, EPEC and the Commission
mean the time the plant itself is placed in service.      also argue that section 41 (a) does not contain any
They assert, instead, that the phrase refers to the       temporal limitation (i.e., "cut-off date") on the de-
money spent to construct the plant, and that such         termination of the original cost of capital assets.
money is dedicated to public use at the time it is        They stress that section 41(a) provides that original
spent. We cannot agree with this interpretation of        cost is the actual money cost of property "at the
section 41(a). For example, section 41(a) states that     time it shall have been dedicated to public use,
"original cost" is "the actual money cost ... of the      whether by the utility which is the present owner or
property at the time it shall have been dedicated to      by a predecessor. " They contend that the emphas-
public use." Thus, the reference to "property" in         ized clause above shows that the purpose of section
section 4l(a) is obviously to property being ac-          41(a) is simply to prevent utilities from selling or
quired or constructed in exchange for the payment         transferring a plant to another utility and having the
of money, not to the funds themselves used to pay         purchasing utility use its purchase price as the ori-
for its acquisition or construction. Just as clearly,     ginal cost of the plant. Thus, they argue, the last
the term "it" in the phrase "at the time it shall have    sentence of section 4l(a) merely requires that ori-
been dedicated to public use" refers back to the          ginal cost be the cost to whichever utility first
"property" being acquired or constructed. Thus, in        placed the plant in public service, not that original
the case of new plant, section 41 (a) requires that the   cost must necessarily be determined at the specific
plant's original cost be determined as of the time        time that the plant was placed in service. We dis-
the new plant is placed in service.                       agree. The language of section 4l(a) could hardly
                                                          be clearer in this regard: "Original cost shall be the
     [19] EPEC and the Commission next argue that         actual money cost ... of the property at the time it
"dedicated to public use" does not refer to the time      shall have been dedicated to public use .... " The
a plant begins commercial operation. We disagree.         clause that follows, "whether by the utility which is
Having determined that the "cut-off date" contained       the present owner or by a predecessor," is simply
in section 41 (a) refers to the property being ac-        one of clarification, emphasizing that the time of
quired or constructed, and not to the money used to       dedication to public use is the critical date, irre-
pay for its acquisition or construction, the question     spective of whether that dedication was made by
becomes: When is a new plant dedicated to public          the current owner or a predecessor.
use? We conclude that new plant is dedicated to
public use when it is first placed in public service.           Ignoring the statute's plain language, EPEC
First, the plain meaning of the statutory provision        cites Office of Consumers' Counsel v. Public Utilit-
supports the proposition that a plant has not been         ies Commission, 18 Ohio St.3d 264, 480 N.E.2d
"dedicated to *914 public use" until it has been           1105 (1985), in which the Ohio Supreme Court
placed in public service, and a plant is placed in         construed the relevant Ohio statute to mean that ori-
public service when it begins operating commer-            ginal cost would be the cost "to the person that first
cially. Second, under FERC rules and Commission            dedicated the property to the public use"; the court
practice, a utility must cease accruing AFUDC              went on to hold that the statute "establishes which
when a new plant begins commercial operation.              entities' costs are to be utilized in establishing a rate
Simple logic dictates that the most appropriate time       base. [It] does not affect the timing of property
to determine the original cost of a capital asset is       valuation." !d. 480 N.E.2d at 1107. A comparison
when existing accounting rules require that a signi-       of the Ohio statute with the Texas statute, however,




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shows why the Texas statute cannot rationally be           (plant)"; (2) "other elements of value, [which] in-
given the same construction. The Ohio statute              cludes working capital, property held for future use,
provided: "Such original cost of property ... shall be     and intangibles"; (3) "customer contributions and
the cost, as determined to be reasonable by the            tax deferrals, [which are] frequently deducted from
commission, to the person that first dedicated the         the rate base, since those components do not repres-
property to the public use .... " Ohio Rev.Code Ann.       ent investor-supplied capital"; and (4) "construction
§ 4909.05(E) (emphasis added). The Texas statute           work in progress." Phillips, supra at 302. The Bon-
provides: "Original cost shall be the actual money         bright treatise also identifies four elements of rate
cost ... of the property at the time it shall have been    base, although it arranges the categories somewhat
dedicated to public use, whether by the utility            differently: "(1) net plant in service; (2) property
which is the present owner or by a predecessor, less       held for future use; (3) working capital; and (4)
depreciation." PURA § 41(a). The two statutes              construction work m progress (CWIP)-no
could not be more different in their focus and             AFUDC." Bonbright, supra at 237.
meaning. The Ohio statute focuses on "who"; the
Texas statute focuses on "when." Accordingly, the               Although "invested capital" can include more
Office of Consumers' Counsel case is inapposite.           than tangible assets, it is simply not feasible to ap-
                                                           ply the original-cost formula contained in section
     EPEC and the Commission next argue that our           41(a) to certain types of assets, e.g., intangibles and
construction of section 41(a) will prevent the inclu-      working capital. Such assets have no money "cost"
sion in rate base of recognized elements of invested       by which they are acquired or constructed; indeed,
capital, such as working capital, "accumulated de-         in some instances they more closely resemble the
ferred federal income tax," and rate case expenses,        payment of money than a tangible asset for which
none of which have a "commercial operation" date           money is paid. Nonetheless, we do not believe the
or an "in-service" date. We disagree that our hold-        legislature intended for section 41 (a) to limit a util-
ing will have such an effect. As stated above, the         ity's rate base to the original cost of tangible assets,
purpose of section 41 (a) was to establish a method        and we do not so hold. We hold only that the ori-
of valuing tangible property acquired or constructed       ginal-cost formula ("the actual money cost ... of the
by the utility. Although the term "property" can, in       property at the time it shall have been dedicated to
an appropriate context, certainly have a meaning           public use") states a mandatory method for the
broader than just tangibles, the history of the ori-       valuation of tangible assets, i.e., plant-in-service.
ginal-cost/replacement-cost debate as to the proper        This holding neither addresses nor affects the issue
method of valuing a utility's invested capital indic-      of whether-and to what extent-other types of as-
ates that the crux of the dispute has related primar-      sets may be included in rate base.
ily, if not exclusively, to plant-in-service. Indeed,
the supreme court in the Alvin Case held that "the              EPEC and the Commission next argue that sec-
Texas statutes require a physical *915 property            tions 2, 16, 27, and 39 of PURA grant broad
valuation rate base. " Houston Natural Gas, 289            enough powers to the Commission to allow it to use
S.W.2d at 564 (emphasis added).                            "deferred accounting" procedures. Without discuss-
                                                           ing those statutory provisions in detail, we note our
     We recognize that a utility's invested capit-         general agreement that they grant broad power and
al-and therefore its rate base-can include more            discretion to the Commission. However, they do
than plant-in-service. For example, one noted com-         not expressly authorize inclusion of post-in-service
mentator identifies the following four elements of a       carrying costs in rate base, and we cannot construe
utility's rate base: (1) "tangibles, which includes        them to impliedly permit an action that is contrary
'used and useful' land, buildings, and equipment           to or inconsistent with another section of PURA.




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Sexton, 720 S.W.2d at 137-38. And as we have              in-service 0 & M costs are not part of the "actual
held, allowing post-in-service carrying costs to be       money cost" of acquiring or constructing the plant,
included in rate base is inconsistent with section        the original-cost formula contained in section 4l(a)
4 l(a).FN13                                               simply has no application to such expenditures. Ac-
                                                          cordingly, whatever other objections may be made
        FN13. Our holding does not prevent post-          to the inclusion in rate base of post-in-service 0 &
        in-service carrying costs from being amort-       M costs, such inclusion is not inconsistent with
        ized and recovered by a utility; it merely        PURA § 41(a).
        prevents them from being included in rate
        base. Moreover, even if the practical effect      2. Retroactive Ratemaking
        of this holding were to prevent recovery of            Initially, we note that EPEC applied for and re-
        such costs incurred during regulatory lag,        ceived from the Commission permission to defer
        "[a]ny change in protection for the utility       post-in-service 0 & M costs on Palo Verde Unit 1
        against undue regulatory lag should come          before that unit became commercially operational.
        from the legislature." Railroad Comm'n v.         Accordingly, we question whether the inclusion of
        Lone Star Gas Co., 656 S.W.2d 421, 427            Unit 1 0 & M costs has any retrospective effect at
        (Tex.1983).                                       all. Indeed, the City does not even lodge a retroact-
                                                          ive-ratemaking complaint about the inclusion in
     We conclude, therefore, that the Commission          rate base of 0 & M costs as to Unit 1. However, be-
exceeded its authority when it included in EPEC's         cause we must address whether the inclusion in rate
rate base the carrying costs incurred by EPEC after       base of 0 & M costs for Unit 2 constitutes improp-
the Palo Verde plant began commercial operation.          er retroactive ratemaking, we will assume without
                                                          deciding that the Commission's inclusion of Unit 1
B. Operating and Maintenance Costs.
                                                          0 & M costs in rate base did have a retrospective
1. PURA § 4J(a)                                           effect.

     The foregoing discussion makes it clear that we           [20] As stated previously, sections 2, 16, 27,
consider the purpose ofPURA § 41(a) to be the es-         and 39 of PURA expressly grant broad powers to
tablishment of a method of determining the value of       the Commission. We believe those provisions give
tangible capital assets that a utility has acquired or    the Commission discretionary authority to allow
constructed. Section 4l(a) prohibits post-in-service      deferral and capitalization of post-in-service 0 & M
carrying costs from being included in rate base be-       costs, and to permit the Commission to include
cause carrying costs constitute part of the actual        such costs in rate base, unless such a procedure is
money cost of acquiring or constructing new plant.        inconsistent with other state law. Thus, to determ-
Operating and maintenance (0 & M) costs, on the           ine the validity of the Commission's action in the
other hand, are not part of the cost of acquiring or      present case, we must determine whether the defer-
constructing new plant; rather, they are expenses         ral, capitalization, and inclusion in rate base of such
associated with maintaining the plant after it is         costs is inconsistent with a statutory or constitution-
already in service. To illustrate the distinction, if     al prohibition of retroactive ratemaking. See Texas
the Palo Verde plant had been completely shut             Ass'n of Long Distance Tel. Cos. (TEXALTEL) v.
down and abandoned the day after it became opera-         PUC, 798 S.W.2d 875, 881-82 (Tex.App.l990,
tional, EPEC's carrying costs *916 would have con-        writ denied); Southwestern Bell Tel. Co. v. PUC,
tinued unabated until all funds borrowed for its          615 S.W.2d 947, 953 (Tex.Civ.App.), writ refd
construction were repaid; the 0 & M costs,                n.r.e., 622 S.W.2d 82 (Tex.l981).
however, would have ceased. Because post-
                                                                        a. Statutory prohibitions.




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     In order to satisfy the first prong of the retro-              reason, then, for the inclusion of the
activity test, the action allegedly having retrospect-              "thereafter" language in the enabling
ive effect must not contravene any statutory prohib-                statutes is the simple fact that after the
ition. As stated above, we have concluded that the                  commission enters a rate order, a utility
deferral, capitalization, and later inclusion in rate               cannot mechanically collect rates in the
base of post-in-service 0 & M costs is not contrary                 past.
to PURA § 41(a).

      Appellants also contend, however, that inclu-                 .. . If commissions in their rate orders are
sion of such 0 & M costs is inconsistent with                       allowed to consider only losses or gains
PURA § 43(f). Section 43(f) provides that if, after                 forecasted to occur "thereafter," then it
hearing, the Commission finds the existing rates to                 is difficult to discern how commissions
be unreasonable or in violation of law, it shall fix                have the authority to correct mistakes in
new rates "by order," which rates are "thereafter to                past rate orders, to allow recoveries for
be observed until changed." Although many juris-                    past extraordinary gains or losses, to
dictions have construed the term "thereafter" to                    change accounting treatment for past
give the regulatory authority power to prescribe                    gains or losses, or to grant refunds or
rates prospectively only, the Texas Supreme Court                   surcharges after reversal of a rate order.
stated in one case that the term in section 43(t)
gives Texas agencies "discretion" in setting the ef-                 Stefan Krieger, The Ghost ofRegulation
fective date of new rates. See Railroad Comm'n v.                    Past: Current Applications of the Rule
Lone Star Gas Co., 656 S.W.2d 421, 425~26                            Against Retroactive Ratemaking in Pub-
             FN14                         .                          lic     Utility   Proceedings,    1991
(Tex.l983 ).       Nonetheless, this *917 Court has
held that PURA § 43(f) prohibits the Commission                      U.Ill.L.Rev. 983, 1034-35 (1991).
from making new rates effective at a date earlier
                                                               [21] In the present case, the effective date of
than the date of the order fixing those rates. See
                                                          the new rates was not prior to the date of the order
PUC       v.    GTE-SW,      833     S.W.2d     153
                                                          fixing the rates. Therefore, the Commission's action
(Tex.App.-Austin, 1992, writ denied); PUC v.
                                                          here was not inconsistent with our holdings in
General Tel. Co., 777 S.W.2d 827 (Tex.App.1989,
                                                          GTE-SW and General Telephone. Appellants argue,
writ dism'd); cf TEXALTEL, 798 S.W.2d at 882-84
                                                          however, that the inclusion in rate base of deferred
(rates may be made effective after order fixing the
                                                          0 & M costs had the effect of implementing the
level of revenues but before final approval of tar-
                                                          new rates as of the date the Palo Verde plant be-
iffs).
                                                          came commercially operational, i.e., retroactively.
         FN14. One commentator has recently ar-           We decline to construe the term "thereafter" in sec-
         gued against giving undue importance to          tion 43(t) to have such sweeping effect. We are not
         the "thereafter" language contained m            willing to say that the term "thereafter" in PURA §
         many state utility regulatory acts:              43(f) constitutes a blanket prohibition of any con-
                                                          sideration by the Commission of a utility's past
           It is difficult to understand why legis-       gains or losses in fixing future rates. Thus, even if
           latures would have delegated such broad        the "thereafter" language in section 43(t) precludes
           powers to commissions, but would have          the Commission from making new rates effective at
           simultaneously limited that authority          a date earlier than the date of the order fixing those
           with off-hand wording in a provision           rates, the Commission's action in the present
           merely describing the process for the          case-permitting deferral, capitalization, and inclu-
           entry of a rate order. The most probable       sion in rate base of EPEC's post-in-service 0 & M




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costs-is not inconsistent with such a prohibition.         time prior to the retroactive law ....

     We conclude, therefore, that the Commission's            ... Under limitations [one and two], it is true, a
inclusion in rate base of EPEC's deferred post-            law gives to an event which has already tran-
in-service 0 & M costs is not inconsistent with            spired a juristic significance it did not have at the
Texas statutory law.                                       time it occurred; but it does this only in order that
                                                           it may thereby regulate future conduct.
             b. Constitutional prohibition.
     [22] To withstand the second prong of appel-            Bryant Smith, Retroactive Laws and Vested
lants' retroactive-ratemaking challenge, the Com-        Rights, 5 Tex.L.Rev. 231-33 (1927). In addition,
mission's order must not violate Article I, § I 6 of     the supreme court has recognized that statutes per-
the Texas Constitution, which provides: "No bill of      mitting agencies to consider prior conduct have ret-
attainder, ex post facto law, retroactive law, or any    rospective effect. Texas Water Rights Commission
law impairing the obligation of contracts shall be       v. Wright, 464 S.W.2d 642, 648-49 (Tex. 1971).
made." Courts often recite the rule that ratemaking
is a legislative activity, even when delegated to an           In the present case, the past event given signi-
administrative body. See, e.g., Houston Natural          ficance by inclusion in rate base of the deferred
Gas Corp., 289 S.W.2d at 563. For that reason, it        post-in-service 0 & M costs is the *918 start-up of
has often been stated that rates set after an agency     commercial operation of Units 1 and 2. Appellants
hearing generally must have a prospective effec~         assert that allowing EPEC to earn a return on such
just as would laws enacted by the legislature.FNl        deferred-cost assets gives the start-up of those units
!d.; see also Tex. Const. Ann. art. I,§ 16 (1984).       the effect, ab initio, of creating a new duty for rate-
                                                         payers: they are thereafter required, without Com-
        FNI 5. A mechanical recitation of this rule      mission approval, to pay higher rates for services
        to support application of the retroactive-       received. Thus, recovery of such 0 & M costs
        ratemaking prohibition may not be justi-         would, in appellants' view, effect a change in
        fied. See Krieger, supra at 1035-37. Pro-        charges after ratepayers have consumed the service.
        fessor Krieger points out that many states,      See, e.g., Lone Star Gas, 656 S.W.2d 421. For pur-
        including Texas, expressly require the use       poses of the ensuing discussion, we will assume
        of adjudicative rather than rulemaking pro-      without deciding that inclusion in rate base of the
        cedures for rate hearings. !d. at 1037; see      post-in-service 0 & M costs has a retrospective ef-
        APTRA § 3(2).                                    fect.

     Appellants complain that allowing EPEC to re-              [23] A retrospective effect alone, however, will
cover post-in-service 0 & M costs through deferred        not invalidate an agency action. Wright, 464
accounting would permit EPEC to charge ratepay-           S.W.2d at 648. Notwithstanding a retrospective ef-
ers an additional amount for services that they have      fect, a rate order may avoid constitutional infirmity
already received and paid for. In this regard, the        if it does not substantially impair or destroy vested
following general observations about retroactive          rights, McCain v. Yost, 155 Tex. 174, 284 S.W.2d
laws are instructive:                                     898, 900 (1955); TEXALTEL, 798 S.W.2d at 882,
                                                          and if it does not change the substantial rights and
  [One,] a law is retroactive if it assumes to give       obligations of the implied contract between a utility
  effect to a past event, in order to create a present    and its ratepayers, Southwestern Bell, 615 S.W.2d
  right or duty. [Two,] ... a law is retroactive when     at 956; Amarillo Gas Co. v. City of Amarillo, 208
  it assumes to give to a past event the effect of        S.W. 239, 240 (Tex.Civ.App.1919, no writ). Al-
  creating rights and duties ab initio, or as of some     though courts have often failed to explicate or ap-




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ply the latter consideration, we conclude that it is         make a substantial change in the rights and oblig-
significant in the present case.                             ations of the consumer, and we conclude [that
                                                             they] cannot be applied to the gas consumed prior
     [24][25][26] Several courts have concluded              to the time the ordinance took effect.
that an implied contract exists between a utility and
its ratepayers, creating both the utility's duty to            I d.
provide a defined service and the ratepayers' duty to
pay a defined rate. See, e.g., Amarillo Gas Co., 208            Unlike Amarillo Gas, the present case involves
S.W. at 240; Southwestern Bell. 615 S.W.2d at 956.         no attempt to charge ratepayers an additional sum
Under this implied contract, ratepayers have a right       for service already purchased. Before the effective
to pay a constant rate for service until, by legislat-     date of the new rates, EPEC's ratepayers paid Com-
ively approved procedures, the old rate is formally        mission-authorized rates for the service they were
challenged. See TEXALTEL, 798 S.W.2d at 882.               obtaining. EPEC invested in the Palo Verde plant to
The setting of new rates permissibly adjusts the re-       equip itself to provide additional service to its rate-
spective rights and obligations of the ratepayers and      payers. When the new plant became commercially
the utility. Only the rights and obligations existing      operational, the ratepayers began receiving the be-
between rate settings are constitutionally protected       nefit of the new service before being charged for it.
against alteration by retroactive ratemaking. 208          Therefore, because the Commission had not defined
S.Vf. at 240. Therefore, only if new rates alter the       the substantial *919 rights and obligations of a new
ratepayers' right to pay a set rate for a specified ser-   implied contract between EPEC and its ratepayers,
vice will they violate the prohibition of article I, §     the ratepayers had no substantial right to pay a cer-
16.                                                        tain rate for service being provided by the Palo
                                                           Verde plant. Significantly, the ratepayers also had
     The Amarillo Gas case, involving city ordin-          not paid rates which would allow EPEC a return on
ances which set consumer gas rates, typifies true          its investment in the plant. Therefore, including in
retroactive ratemaking. Among other things, the            new rates costs incident to the interim benefit
first ordinance included a provision which allowed         provided by the operation of Palo Verde plant does
consumers a 10% discount if they paid their bills          not change a substantial right belonging to the rate-
within ten days. The subsequent ordinance elimin-          payers. Cf Business & Prof People for the Pub. In-
ated the discount and imposed a 10% surcharge on           terest v. Illinois Commerce Comm'n, 205 Ill.App.3d
payments made after ten days. A dispute arose              891, 150 Ill.Dec. 750, 563 N.E.2d 877 (1990)
when the gas company attempted to collect sur-             (deferral of regulatory-lag costs allowed because
charges on bills for gas the company had supplied          costs of new plant had not been taken into account
before the effective date of the second ordinance.         in setting existing rates), rev'd on other grounds,
The question on appeal was whether imposing the             146 Ill.2d I 75, 166 Ill.Dec. 10, 585 N.E.2d 1032
surcharge on bills for gas supplied before the ef-         (1991).
fective date "change[ d] the substantial rights and
obligations of this contract as to transactions                  [27] Just as allowing inclusion in rate base of
already had under it." 208 S.W. at 240. The court           the Palo Verde plant's post-in-service 0 & M costs
concluded that                                              does not change the ratepayers' substantial rights,
                                                            likewise it does not impair or destroy vested rights.
  the practical and necessary result of the amend-          Whether legislation substantially impairs or des-
  ment was to require the consumer to pay consid-           troys vested rights necessitates consideration of
  erably more for his gas than he would have been           whether the retrospective effect: (1) advances or re-
  required to pay under the old rates .... The rates        tards the public interest; (2) effectuates or defeats
  established by the new ordinance did inevitably           the bona fide intentions or reasonable expectations




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of affected persons; and (3) surprises persons who        der allowing deferral of Unit 1 costs. Apparently,
have long relied on a contrary state of the law.          OPC has construed this reservation as a representa-
Southwestern Bell, 615 S.W.2d at 956-57; see also         tion that the costs would not be included; we do not
Wright, 464 S.W.2d at 648.                                find any such representation in the order.

     The public has an interest in obtaining a reas-      D. Substantial Evidence.
onable quantity and quality of service. The utility           As its final complaint within this point of error,
should generate the service safely, under the guid-       OPC contends that the total figure assigned by the
ance of efficient management, and make the service        Commission to the deferred-costs asset is not sup-
obtainable at reasonable rates. See Phillips, supra,      ported by substantial evidence. We do not agree.
at 164. In the present case, the Commission could         Our review of the record shows that EPEC provided
reasonably have concluded that including post-            ample documentation of the costs it had incurred
in-service 0 & M costs in rate base would advance         and deferred after the Palo Verde plant became
these interests. Further, a ratepayer could not reas-     commercially operational.
onably expect a utility to spend millions of dollars
building a nuclear facility, use the facility to gener-        We sustain OPC's and the City's fifth points of
ate electricity, and then not seek a return on its in-    error to the extent they complain *920 of the Com-
vestment therein. In addition, the fact that the Com-     mission's deferral, capitalization, and inclusion in
mission had previously granted EPEC a certificate         rate base of EPEC's post-in-service carrying costs.
of convenience and necessity to participate in the        We overrule OPC's and the City's fifth points of er-
project thereafter precluded any interested persons       ror to the extent they complain of the Commission's
from reasonably claiming surprise at finding them-        deferral, capitalization, and inclusion in rate base of
selves obligated to pay the costs of building and op-     EPEC's post-in-service 0 & M costs, and in all oth-
erating the new plant.                                    er respects.

     All of these important considerations support                CONSTRUCTIONAL IMPRUDENCE
the conclusion that the Commission has not sub-                 By its third point of error, OPC raises three dis-
stantially impaired or destroyed vested rights by in-      tinct complaints about the disallowance of $28 mil-
cluding in rate base EPEC's post-in-service 0 & M          lion in construction costs as a result of EPEC's im-
costs. Therefore, because the new rates neither im-        prudent planning or management of the project's
pair vested rights nor change substantial rights or        construction. First, OPC asserts that substantial
obligations of implied contract, we conclude that          evidence does not support the Commission's meth-
deferral, capitalization, and inclusion in rate base of    od of quantifying the imprudently incurred costs.
such costs does not violate the constitutional pro-        Second, OPC argues that the quantification method
hibition against retroactive ratemaking.                   used by the Commission results in retroactive rate-
                                                           making. Finally, OPC complains that "[t]he Com-
C. Disallowance for Imprudence.                            mission's finding regarding construction cost im-
    OPC also argues in point of error five that the        pacts is conclusory and does not indicate the under-
Commission erred by not reducing the deferred 0            lying facts relied upon by the PUC." We construe
& M costs in proportion to the imprudence disal-           this contention to be a challenge to the sufficiency
lowance before including the assets in rate base.          of Finding of Fact 100 and an assertion that the
OPC cites no authority that would require the Com-         Commission should have made additional findings
mission to reduce the "deferred-costs asset" be-           of underlying facts to support Finding 100.
cause of imprudence. Instead, it points to the Com-
mission's reservation of the right to exclude the               [28] EPEC maintains that OPC has waived all
capitalized costs from rate base contained in the or-      of its contentions except that concerning retroactive




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ratemaking because it failed to present legal bases       ibly increase revenue requirements "fixed in prior
for its complaints in its second motion for rehear-       rate proceedings." We conclude that by offsetting
ing. We do not agree. Although OPC's second mo-           such a benefit against increased financing costs in
tion for rehearing contained no citations to legal au-    determining the constructional-imprudence disal-
thority for its complaints, the motion did contain        lowance, the Commission did not change the sub-
statements of OPC's legal bases for its argument.         stantial rights of the ratepayers or impair or destroy
While motions for rehearing must point out the spe-       any of their vested rights. See. McCain v. Yost, 155
cific finding challenged and the legal basis for the      Tex. 174, 284 S.W.2d 898, 900 (1955); Amarillo
challenge, they need not contain citations of author-     Gas Co. v. City of Amarillo, 208 S.W. 239, 240
ity. Burke v. Central Educ. Agency, 725 S.W.2d            (T~x.Civ.App.1919, no writ). Therefore, we reject
393, 397 (Tex.App.l987, writ refd n.r.e.).                OPC's retroactive-ratemaking argument.

A. Retroactive Ratemaking.                                B. Substantial Evidence.
     [29] OPC asserts that by disallowing a smaller            Finding of Fact 100 provides: "Staff witness
portion of construction costs than OPC recommen-          Jacobs presented a credible quantification*921 of
ded, "the Commission has retroactively increased          construction management imprudence related to
the value of the Company's revenue requirement            costs of delay in the amount of $28 million." The
fixed in prior rate proceedings, and shifted these        gist of OPC's purported substantial-evidence argu-
additional hypothetical costs to future ratepayers."      ment is that the Commission erred in adopting J ac-
Essentially, OPC argues that the Commission may           obs's method of quantifying imprudently incurred
not legally adopt a method recognizing any savings        costs. This is not, however, a substantial evidence
that ratepayers may have realized because of delays       challenge. OPC has not attempted to show that ap-
in completing construction.                               plication of Jacobs's method results in a figure un-
                                                          supported by substantial evidence; nor does OPC
     The Commission staffs expert, Morris Jacobs,         argue that substantial evidence supports another,
and the City's expert, Richard B. Hubbard, agreed         but different, figure. We must, therefore, make two
that financing costs had increased because of             distinct determinations: (1) whether the finding un-
delays. Jacobs also testified, however, that ratepay-     derlying the Commission's $28 million disallow-
ers had received an unexpected benefit because of         ance of imprudently incurred construction costs is
the delay: they had had the present use of money          supported by substantial evidence, and (2) whether
they would otherwise have had to pay in rates if the      Jacobs's method considered all imprudently in-
construction had been completed and the costs in-         curred costs.
cluded in rate base as scheduled. Consequently, ac-
cording to Jacobs, the true amount of imprudently              Turning to the latter first, we recognize that we
incurred costs can be determined only by reducing         must not disturb an agency's exercise of discretion
the increased financing costs by the amount of the        unless it is arbitrary or unreasonable, Murphy v.
benefit to ratepayers. OPC objects to offsetting the      Rowland,         609       S. W.2d       292,      297
ratepayers' benefit against the increased financing       (Tex.Civ.App.1980) and that we must allow the
costs, apparently because the former accrued before       agency some leeway to select the method by which
the Commission could set rates including the plant        it carries out its own legislative mandate, Railroad
in rate base. Accordingly, OPC argues that the sav-       Cornm'n v. Humble Oil & Refining Co., 193 S.W.2d
ings cannot be taken into account without having a        824, 833 (Tex.Civ.App.1946, writ refd n.r.e.), a.ffd,
retrospective effect on rates.                            331 U.S. 791,67 S.Ct. 1523,91 L.Ed. 1820 (1947).
                                                          Therefore, we will not reverse the Commission's
     We fail to see how recognizing an actual bene-       decision to use Jacobs's method unless OPC can
fit ratepayers derive from delays would impermiss-




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show that the Commission made its decision arbit-          The characteristics of proper findings of fact, as
rarily and unreasonably.                                   well as their purposes, are well established. Valid
                                                           findings of fact must be clear and specific. A
     Jacobs did not relate any particular imprudent        mere conclusion or a recital of evidence is inad-
construction management actions to any specific            equate. The required underlying facts may not be
delays. Jacobs's testimony supports the amount of          presumed from findings of a conclusional nature.
the Commission's disallowance. In addition, other          In general, underlying findings of fact must be
witnesses testified that some construction delays          such that the reviewing court can fairly and reas-
were unavoidable and not the result of management          onably say that the underlying findings support
imprudence. Although the City's witness, Hubbard,          the statutorily required criteria.
supplied testimony linking specific construction de-
cisions with resulting delays, we conclude that sub-          ******
stantial evidence supports Jacobs's quantification
method.                                                    Proper underlying (basic) findings of fact should
                                                           follow the guidelines we previously have noted:
C. Finding of Fact 100.                                    they should be clear, specific, non-conclusory,
     [30] OPC challenges the sufficiency of Finding        and supportive of the ultimate statutory finding.
of Fact 100 and alleges that it lacks necessary find-      Mere recitals of testimony or references to or
ings of underlying facts. Finding 100 is not a find-       summations of the evidence are improper.*922
ing "set forth in statutory language" such that it         Such findings should be stated as the agency's
must have a "concise and explicit statement of the         findings. The findings should relate to material
underlying facts." See APTRA § 16(b). Instead, it is       basic facts and should relate to the ultimate stat-
itself a finding of underlying fact which supports         utory finding that they accompany.
Finding 99. Finding 99 is phrased in statutory lan-
guage and states that EPEC was imprudent to some              Charter Medical, 665 S.W.2d at 451-52
degree. Finding 100 concisely sets out the underly-      (citations omitted); see also State Banking Bd. v.
ing facts that (1) based on Jacobs's credible quanti-    Allied Bank Marble Falls, 748 S.W.2d 447
fication, (2) $28 million in construction costs would    (Tex.1988).
be disallowed.
                                                               [31] The supreme court has recently recon-
     OPC contends the Commission was obligated            sidered the question of sufficiency of underlying
to explain its adoption of Jacobs's method rather         fact findings. See Goeke v. Houston Lighting &
than Hubbard's. In addition, OPC claims the Com-          Power Co., 797 S.W.2d 12 (Tcx.l990). The court
mission had a duty to identify individual instances       expressed the opinion that, although there is no pre-
of construction imprudence. Appellants have not           cise form for an agency's articulation of underlying
cited any authority that would require the Commis-        facts, certain "guidelines" exist to grevent the types
                                                                                              1
sion to explain why it found a particular witness's       of abuses courts have found. FN        Those specific
testimony credible or determined a particular figure      guidelines are that the findings: (1) must be more
to have resulted from imprudent construction man-         than mere recitals of testimony; (2) should be stated
agement. We consider these arguments to be chal-          as the agency's findings; and (3) should relate to the
lenges to the sufficiency of the finding.                 ultimate statutory findings. ld. at 15. We will re-
                                                          view appellants' sufficiency complaints under the
    APTRA § 16(b) does not delineate a standard           Goeke guidelines.
for sufficient findings of underlying fact. The su-
preme court articulated the established principles in              FN16. Within the context of this opinion,
Charter Medical:                                                   we need not decide whether the language




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         the supreme court used in Goeke reduces          second point of error.
         the requirements set forth in Charter Med-
         ical and Allied Bank in order for underly-            If we had resolved the complaint on its merits,
         ing findings of fact to be considered suffi-     however, we would have found no reversible error.
         cient to comply with APTRA § 16(b).              Hubbard testified at length about the duration of
                                                          design-problem delays and the necessity of rework-
      Finding 100 is not conclusory; it indicates not     ing the designs. We must assume the Commission
only the evidence on which the Commission relied          considered this testimony and gave it due weight.
in making Finding 99, but also the Commission's           The examiner excised only minute sections from
conclusion that the figure found using the method         the thick attachments to Hubbard's direct testimony.
was credible. The finding obviously supports Find-        Ample evidence existed from which the Commis-
ing 99, an ultimate statutory finding. Therefore,         sion could have found that EPEC had managed the
Finding 100 is a sufficient finding of underlying         construction imprudently. The City has not shown
fact.                                                     that the exclusion prejudiced its substantial rights,
                                                          and has therefore failed to carry its burden of show-
   For all of the foregoing reasons, we overrule          ing harmful error.
OPC's third point of error in its entirety.
                                                                         EXCESS CAP ACITY
   THE EXCLUSION OF HUBBARD'S TESTI-                           The City and OPC, each in its fourth point of
                         MONY                             error, complain that the Commission erred in find-
     In support of its request that plant construction    ing that EPEC had no system excess capacity. Both
costs be included in rate base, EPEC offered evid-        appellants contend that Finding of Fact 107, in
ence of prudent construction management. In re-           which *923 the Commission concludes that no
sponse, the City called Hubbard, who testified that       present excess capacity exists, is unsupported by
EPEC had managed the construction imprudently             substantial evidence in the record. In its argument,
and that, as a result, construction costs had been un-    the City specifically challenges the action of the
reasonably high. EPEC moved to strike sections of         Commission in: (1) including in the load determina-
Hubbard's testimony, arguing that his conclusions         tion the amount of power EPEC has contracted to
were inadmissible because they were speculative           sell to the Texas-New Mexico Power Company
and not based on concrete information. The hearing        (TNP); (2) allowing EPEC to reduce estimated sys-
examiner excluded the challenged testimony. The           tem capacity by retiring three gas-fired units earlier
City complains of the exclusion. EPEC answers that        than it had originally planned; (3) rescheduling
the City waived its complaint by failing to state a       maintenance because of the alteration in system
legal basis to support it in the City's second motion     components; and (4) calculating the reserve re-
for rehearing.                                            quirement.

     [32][33] An administrative litigant may pre-               OPC joins in the last of these four specific
serve a complaint only by giving the agency an op-         complaints. In addition, OPC complains that Find-
portunity to review the legal ground on which the          ings of Fact 111 through 113 do not explicitly state
complaint is based. Sears v. State Bd. of Dental Ex-       the facts the Commission relied on and the reason-
aminers, 759 S.W.2d 748, 750 (Tex.App.1988, no             ing it used in disregarding the Examiner's recom-
writ); Burke, 725 S.W.2d at 397. Our review of the         mendations. OPC also asserts the Commission
City's motions for rehearing convinces us that             erred by not making a conclusion of law clarifying
EPEC is correct. The City failed to provide the            the relation, if any, between the "used and useful"
Commission any basis for finding the testimony ad-         standard of PURA § 39(a) and the excess capacity
missible. For this reason, we overrule the City's          concept. Finally, OPC complains that the Commis-




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839 S.W.2d 895, 135 P.U.R.4th 584
(Cite as: 839 S.W.2d 895)




sion "abrogated OPC's right to represent the in-         er two possibilities, one would set an unnecessarily
terests of residential and small commercial custom-      high reserve and the other would produce an insuf-
ers on excess capacity issues in future rate cases of    ficient reserve to protect against a blackout in the
El Paso Electric Company."                               event of a significant loss in system generation ca-
                                                         pacity. Considering these expert opinions, we can-
     EPEC's application to increase rates sought         not say that reasonable minds could not have
only the inclusion in rate base of costs related to      reached the conclusion the Commission must have
Units 1 and 2. At the time the Commission heard          reached in order to make the finding it did. We con-
evidence on the application, Unit 3 was not com-         clude that substantial evidence supports the Com-
plete and had not begun commercial operation. It         mission's adoption of the "largest single hazard plus
would have been improper for the Commission to           5%" method of determining reserve requirements.
have determined, at that time, whether excess capa-
city would exist on EPEC's system once Unit 3 be-             [35] The City also complains that the Commis-
came operational. The Unit 3 issues, including ex-       sion determined the overall demand on the system
cess capacity, are not yet ripe for determination.       to be much higher than it should have been, thereby
Consequently, to the extent the City seeks resolu-       inflating the system capacity found necessary. The
tion of Unit 3's used-and-useful status, we overrule     City contends the Commission erred by: (1) includ-
its point of error for lack of ripeness.                 ing in its calculation the power EPEC has contrac-
                                                         ted to supply TNP; (2) omitting three gas-fired
A. Substantial Evidence.                                 units from generation capability because of plans to
     [34] Appellants complain that the Commission        retire them early; and (3) adopting a maintenance
erred in disregarding the examiner's recommenda-         schedule that requires removal of some units from
tions for treatment of four disputed issues. The         *924 the line during the summer peak period. Two
most heated debate arose when the Commission se-         experts offered their opinions that the Commission
lected the "largest single hazard plus 5%" method        acted reasonably in approving the maintenance
for determining reserve requirements. The examiner       schedule and including the TNP obligation in peak
recommended that the Commission use the "20% of          load. In addition, one witness recognized that
peak load" method. Use of the examiner's recom-          EPEC's objective in planning generation capacity
mended method would have resulted in excess ca-          was to "meet forecasted load demands with ad-
pacity of approximately 50% of the units EPEC was        equate system reliability while minimizing total sys-
requesting be included in rate base. Appellants          tem cost. " The Commissioners could reasonably
claim the Commission's use of an improper method         have found that adding two nuclear power units to
was the principal cause of the "no excess capacity"      the system and retiring three gas-fired units would
finding.                                                 achieve this objective. We conclude that substantial
                                                         evidence in the record supports the Commission's
     Two of EPEC's expert witnesses explained
                                                         finding that there is no appreciable excess capacity
EPEC's method of determining reserve require-
                                                         in the EPEC system.
ments. The company uses one of the methods out-
lined by the Western Systems Coordinating Coun-           B. Other Contentions.
cil, an organization responsible for promoting reli-           OPC complains that the Commission has ab-
able operations among the interconnected bulk             rogated OPC's right to represent its cli-
power system to which EPEC belongs. The Council           ents-residential and small commercial users-in
recommends three different methods of determining         future rate cases. OPC bases this contention on
reserve requirements, of which the "largest single        Finding 107. The relevant portion of that finding
hazard plus 5%" is one. There was expert testimony        states that the excess capacity findings in the
that EPEC selected this method because, of the oth-




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present case will not be considered "precedents in        Commission's failure to explicate the relationship
any manner in cases involving the addition of fu-         between the concept of excess capacity and PURA's
ture generating capacity to the system, including         "used and useful" standard. We need not resolve
Palo Verde Unit 3, or in any reconsideration pro-         this issue in order to dispose of the present case;
ceeding conducted pursuant to paragraph 11 of the         therefore, we express no opinion on the matter.
Amended and Restated Stipulation." The finding
merely recites the Commission's refusal to address             We overrule the City's and OPC's fourth points
issues not yet ripe for determination. OPC has had a      of error.
full and fair opportunity to litigate the excess capa-
                                                                         COMMON FACILITIES
city issue with respect to Units 1 and 2. Even
                                                              As a part of its application to increase rates,
without Finding 107, general principles of issue
                                                          EPEC requested that costs incurred in constructing
preclusion would bar OPC from relitigating the ex-
                                                          the facilities to be used in common by all of the
cess capacity issue with respect to those units.
                                                          generating units, including those not yet completed,
Finding 107 does no more than that.
                                                          be included in rate base. The Commission found it
     OPC next complains of Findings of Fact               reasonable to include such costs and made two
111-113; it asserts that each finding requires addi-      findings of fact about which OPC now complains.
tional findings of underlying fact. The challenged
                                                               In its sixth point of error, OPC asserts gener-
findings are as follows:
                                                          ally that the Commission erred by deciding to con-
  111. The largest single hazard plus five percent        sider the common facilities as "plant-in-service."
  ("LSH + 5") criterion for determining a reason-         OPC argues that the Commission, by refusing to
  able reserve margin is used by EPEC and recom-          apportion the costs of the common facilities to each
  mended by the Western Systems Coordinating              unit, has changed its position on apportionment
  Council, of which EPEC is a member.                     questions and that such a shift in position *925 is
                                                          improper. OPC also asserts that the findings of fact
  112. Based on the evidence presented, use of the        relating to treatment of common facilities costs are
  LSH + 5 criterion is reasonable for application to      insufficient and that additional findings of underly-
  the EPEC system in this case.                           ing fact are necessary to show the evidence on
                                                          which the Commission relied in determining wheth-
  113. Using the LSH + 5 criterion, EPEC should           er to include the common facilities costs in rate
  carry 258 MW of reserve capacity in 1988.               base.

     These findings are not ultimate findings; there-          OPC has failed to brief adequately its com-
fore, the Commission had no duty to make addi-            plaint on this issue. Each of its legal contentions
tional findings ofunderlying fact.                        comprises but a single sentence, and only in con-
                                                          junction with its change-of-position complaint has
     OPC also argues that the Commission was
                                                          OPC provided any supporting authority at all. OPC
bound to explain its reasons for rejecting the exam-
                                                          also fails to point out evidence in the record
iner's recommendation and adopting a different
                                                          demonstrating either that the Commission has erred
method of determining reserve requirements.
                                                          or that any error has substantially prejudiced OPC's
Again, OPC has not shown any authority requiring
                                                          rights. Finally, OPC cites no authority for the pro-
the Commission to do so. Therefore, we also find
                                                          positions that the Commission was obligated to
this argument to be meritless.
                                                          make more findings of fact than it did, that the
    In its motions for rehearing to the Commission        Commission had to allocate costs rather than fol-
and at the trial court level, OPC objected to the         lowing generally accepted accounting principles, or




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that OPC was unable to present its appeal ad-                  OPC has waived its seventh point by failing ad-
equately because of the Commission's alleged fail-        equately to support or to argue the offending issue
ure to explain why it declined to apportion the com-      in its original brief.
mon facilities' capital costs. Such a complete failure
to develop and support a complaint waives the com-                 LEASE PAYMENTS ON UNIT 2
plaint. Helle v. Hightower, 735 S.W.2d 650, 654                As required by PURA § 63, EPEC notified the
(Tex.App.l987, writ denied). We conclude OPC              Commission of the sale/leaseback arrangement for
has waived its sixth point of error, and we overrule      Unit 2. The sole issue to be determined as to that
it.                                                       transaction was whether the sale/leaseback was
                                                          consistent with the public interest. In January 1987
                   INCOME TAXES                           the hearings examiner stayed proceedings in the
     In its final point of error, OPC generally chal-     sale/leaseback matter so that the Commission could
lenges the cost-of-service determination on grounds       consider the public interest issue along with EPEC's
that the amount found includes a "hypothetical"           rate case. In response to a motion filed by EPEC,
federal income tax expense. In the most cursory of        the Commission consolidated the two matters under
fashions, OPC alleges the Commission erred in in-         the docket number for the rate case.
cluding the federal income tax expense in EPEC's
cost of service because: (1) no evidence supports              When the Commission rendered a final order,
the inclusion; (2) the Commission made no findings        however, it did not decide whether the sale/
of fact or conclusions of law regarding federal in-       leaseback transaction was consistent with the public
come tax expense; and (3) the Commission failed to        interest; instead, it specifically reserved that issue
inquire whether EPEC had actually incurred all of         for later determination. Nonetheless, the Commis-
the tax expense. As a matter of interest, we note         sion made fact findings that allowed Unit 2 lease
that OPC has overlooked Finding of Fact 186,              payments to be included in EPEC's cost of service
which expressly addresses federal income tax ex-          to the extent they did not exceed the amount the
pense. Consequently, OPC's complaint that the             Commission would have included in rate base for
Commission made no findings with respect to fed-          Unit 2 capital costs if EPEC had retained an owner-
eral income taxes is meritless.                           ship *926 interest. The partial inclusion of lease
                                                          payments in cost of service prompts the City's sub-
     OPC's briefing of this point of error is wholly      stantial evidence challenge in its final point of er-
inadequate. The only authority to which OPC has           ror.
drawn this Court's attention is the opinion in PUC
v. Houston Lighting & Power Company, 748                       PURA § 63 requires a utility to report a con-
S.W.2d 439 (Tex.l987). Even more than in its sixth         templated or consummated transaction within a
point of error, this multifarious seventh point con-       reasonable time if the total transaction considera-
tains conclusory statements unsupported by author-         tion exceeds $100,000. Further, the section
ity.                                                       provides that

     In its motion for rehearing, OPC complains that         [o]n the filing of a report with the commission,
this Court "misunderstood" OPC's position on this            the commission shall investigate the same with or
issue; there follows a lengthy exposition of the pos-        without public hearing, to determine whether the
ition OPC intended to argue in its initial brief. The        action is consistent with the public interest. In
detailed discussion in OPC's motion for rehearing            reaching its determination, the commission shall
further underscores the inadequacy of the argument           take into consideration the reasonable value of
on this point in its original brief.                         the property, facilities, or securities to be ac-
                                                             quired, disposed of, merged or consolidated. If




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  the commission finds that such transactions are          ing power to sever. During the hearing, the Com-
  not in the public interest, the commission shall         mission apparently concluded that "the effect" of
  take the effect of the transaction into considera-       the sale/leaseback transaction did not include the
  tion in the rate-making proceedings and disallow         entire amount of lease payments made. EPEC
  the effect of such transaction if it will unreason-      would have incurred certain costs even if it had re-
  ably affect rates or service. The provisions of this     tained its ownership interest in the unit instead of
  section shall not be construed as being applicable       arranging the sale/leaseback. Therefore, even if the
  to the purchase of units of property for replace-        Commission were ultimately to find the transaction
  ment or to the addition to the facilities of the pub-    inconsistent with the public interest, the cost that
  lic utility by construction.                             EPEC would have incurred had it retained owner-
                                                           ship would be includable in rates because it was not
     PURA § 63 (emphasis added). Pursuant to               an "effect" contemplated by the disallowance pro-
PURA, the Commission must, at some point, decide           vision of PURA § 63. Consequently, the Commis-
whether the sale/leaseback transaction is consistent       sion did not err in including this amount in cost of
with the public interest. The statute designates no        service.
time within which the Commission must make that
determination after the utility files its report. The           By post-submission brief, the City argues that
section expressly allows the Commission to decide          deferral of the public-interest determination implies
the issue without holding a public hearing; con-           a finding that EPEC failed to carry its burden of
sequently, we do not construe PURA to require the          proof on that issue. In support of this argument, the
Commission to resolve that question in the context         City directs our attention to the supreme court's re-
of a formal ratemaking proceeding.                         cent decision in Coalition of Cities for Affordable
                                                           Utility Rates v. PUC, 798 S.W:2d 560 (Tex.l990).
     [36][37][38] The Commission has discretion to         The City did not make this argument below; there-
consolidate proceedings with common issues when            fore, it is not properly before this Court. See City of
consolidation would serve judicial or administrative       San Antonio v. Texas Water Comm'n, 407 S.W.2d
economy. See Alamo Express, Inc. v. Union City             752 (Tex.l966).
Transfer, 309 S.W.2d 815, 821 (Tex.l958). The
City does not deny this, but asserts that once the              Even if we were to agree that the Commission
Commission had consolidated the proceedings, it             impliedly found EPEC had failed to carry its bur-
was powerless to sever them. The City contends              den of showing that the transaction was consistent
that at that point the Commission became bound to           with the public interest, *927 we would find no re-
settle the public interest question in its order setting    versible error in the inclusion of part of the pay-
rates. This contention fails to recognize the Com-          ments in cost of service. Finding of Fact 122
mission's discretion to regulate its docket so that         provides: "EPEC's proposed 'book brea~-even' cal-
only issues which can reasonably and fairly be tried        culation of the portion of the lease payment may be
within the framework of a single proceeding are             included in cost of service in this instance, as it is
tried together. We conclude the Commission has              not in excess of the amount that would result if cal-
the power to sever. Any other result would defeat           culated using the traditional ratemaking plant in
the legislative intent in delegating duties to the          service/rate base methodology." The City fails to
Commission for more efficient administration.               recognize that the Commission is responsible not
Therefore, in the interest of accomplishing the le-         only for determining whether the transaction in
gislative purpose underlying the Commission's cre-          question is consistent with the public interest, but
ation, we deem it essential that the Commission's           also for disallowing the effect of the transaction "if
power to consolidate be balanced by a correspond-           it will unreasonably affect rates or service." PURA




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§ 63. Only if inclusion of the effect will unreason-          Staff witness Stan Kaplan calculated EPEC's
ably affect rates will it be disallowed. Therefore,      reasonably predictable fuel costs based on the as-
Finding 122 implies, consistent with the Coalition       sumption that the new rates would become effective
analysis, that the Commission found that EPEC car-       January 1, 1988. In estimating the amount of pur-
ried its burden of showing that inclusion of the rel-    chased power costs, Kaplan anticipated that EPEC
evant portion of the lease payment would not un-         would purchase 75 megawatts in January 1988 and
reasonably affect rates. The City has not challenged     50 megawatts per month for the balance of the cal-
this implied finding; therefore, even if the City's      endar year. However, the prolonged hearings
untimely argument were correct, it would not show        delayed the new rates' effective date to a point ap-
reversible harm. We overrule the City's seventh          proximately three months beyond the January 1,
point of error.                                          1988, date Kaplan had assumed. Nonetheless, the
                                                         Commission's final order was based on Kaplan's
       COST-OF-SERVICE ALLOWANCES                        prediction, which included an anticipated first-
     The City makes several general complaints           month purchase of 75 megawatts. The City argues
about the Commission's revenue-requirements de-          that the cost of 25 megawatts, which EPEC did not
termination and, in addition, specifically challenges    purchase after the new rates became effective,
five separate components of the cost-of-service al-      should be excluded from cost of service.
lowance. The general complaints are that: (1) sub-
stantial evidence does not support the Commis-                A utility's allowable expenses are calculated by
sion's revenue requirements finding; (2) the Com-        adjusting its historical test year expenses for known
mission applied no statutory standard in determin-       and measurable changes. 16 Tex.Admin.Code §
ing revenue requirements; and (3) the Commission         23.21(b) (1991). Based on the evidence filed before
failed to make all required findings of underlying       and the testimony adduced during the hearing, the
facts.                                                   Commission determines the amount of the utility's
                                                         reasonably predictable purchased power costs for
     We conclude that, except for the specific chal-     the "rate year," i.e., the first twelve months after the
lenges to five component amounts, the City has           rates will become effective. 16 Tex.Admin.Code §
waived its complaints by failing to show that partic-    23.23(b)(2)(B) (1991). This determination inher-
ular cost-of-service component amounts are unsup-        ently involves estimation and the making of anum-
ported by substantial evidence. Nor has the City         ber of assumptions. One necessary assumption is
identified a statutory standard requiring the Com-       that rates will become effective on some specific
mission to supply findings of underlying facts in        *928 date. In the present case, that assumption
addition to those already made. Although the City        turned out to be incorrect by three months. On that
contends that the Commission decided the matter          basis, the City argues that the Commission's de-
without referring to PUC Substantive Rule §              termination of EPEC's reasonable and necessary
23.21 (b), the findings obviously refer to that rule.    operating expenses was invalid. We do not agree.
Therefore, we overrule the City's general com-
plaints and proceed to address the challenges to               If we were to hold the relevant determination in
specific component amounts.                               this case invalid, we would be imposing an onerous
                                                          burden on the Commission; it would have to recal-
A. Fuel and Purchased Power Expense.                      culate each element of every component of revenue
    [39] The City contends that the Commission            requirements whenever a witness's assumption that
overstated expenses for fuel and "purchased power"        new rates would become effective on a certain date
because it included in that amount the price of 25        later proved to be incorrect. The recalculation time
megawatts of electricity not actually purchased by        alone could conceivably delay rendition of a new
EPEC.




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order long enough once again to alter the effective       pense, to which the City did not object. Although
date. Such a process might never end. We conclude         this figure was undisputed, the Commission re-
that, under the circumstances of this case, the Com-      duced it before including the amount in revenue re-
mission did not abuse its discretion and did not act      quirements as cost of service. We will not reverse
arbitrarily or capriciously by refusing to recalculate    the Commission's order absent a showing that the
purchased-power cost once it became apparent that         City's substantial rights were prejudiced by the in-
the actual effective date would not coincide with         clusion of the reduced expense figures in cost of
the assumed effective date. We overrule the City's        service. Since the City has not shown harm, we
contention regarding this component.                      overrule its challenge.

B. Operating and Maintenance Expenses.                         Finally, the City contends the Commission im-
    The City next asserts that the Commission             properly included the rate-case cost in operating
found an improper amount of "operating and main-          and maintenance expense. The City bases its claim
tenance expenses" because it: (1) listed the expense      of error on the alleged prior severance of the rate-
as a single-line item; (2) provided no findings of        case expense issue from the proceeding. In para-
underlying fact to explain its reasoning in adopting      graph 16 of its final order, the Commission held
the figure; (3) found a figure unsupported by any         that "[t]he issue as to the reasonableness of the
evidence; and (4) included rate-case expenses in          Company's and the Cities' rate case expense in-
operating and maintenance expense after having            curred in the prosecution of this case is severed
severed them out of the docket.                           from this docket." The City argues that, because of
                                                          paragraph 16, no regulatory commission expense
     The City points to no duty compelling the            should be included in the revenue requirements. We
Commission to find, as underlying facts, the              do not agree. The Commission's staff provided
amounts comprising a sum which is itself a com-           testimony supporting the findings of that portion of
ponent of a statutorily mandated criterion. PURA          the regulatory commission expense that was undis-
directs the Commission to find the amount of              puted, and the Commission included only these un-
"reasonable and necessary operating expenses," not        disputed amounts in cost of service.
operating and maintenance expense; likewise,
PURA does not expressly mandate consideration of                 We conclude that the City's contentions regard-
operating and maintenance expense when the Com-            ing operating and maintenance expense are merit-
mission determines net income. See PURA § 41(c).           less.
In the present case, the Commission found specific
amounts for "operating expenses" and for that cat-         *929 C. Employee Benefits.
egory's components, one of which was labelled                   The City next challenges the Commission's
"operating and maintenance expenses." Because the          findings on employee benefits. It asserts that the
Commission had no duty to itemize the subcompon-           Commission erred by concluding that the evidence
ents of "operating and maintenance expenses," its          supported staff witness Young's adjustments to the
failure to find them as underlying facts cannot be         401-k plan expenses and the Tax Reduction Act
considered error. See, e.g., Frost v. PUC, 672             Stock Option Plan (TRASOP) expenses.
S.W.2d 883, 885 (Tex.App.1984, writ refcl n.r.e.).
                                                               The City argues that the Commission abused its
We conclude the Commission did not act arbitrarily
                                                           discretion by finding a 401-k plan expense in ex-
and capriciously in declining to further subdivide
                                                           cess of the amount requested by EPEC was reason-
the components of operating expense.
                                                           able and necessary when the evidence does not sup-
    During the proceeding, EPEC offered evidence           port the finding. According to the City, by doing so,
of the amount of operating and maintenance ex-             the Commission has violated its own rules. The




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City has not indicated which of its substantive rules     can identify evidence supporting the upward adjust-
the Commission violated, and it identifies no evid-       ment.
ence that would tend to show that the Commission
acted without reference to any guiding legal prin-             Contrary to the City's assertion, EPEC offered
ciples. In addition, the staff offered evidence that      testimony supporting the tax expense alterations.
the greater sum was necessary to provide the bene-        EPEC's witness Mayhew testified that taxes are
fit to all existing employees and reasonably anticip-     uniquely tied to other elements of revenue require-
ated additional employees. We conclude that sub-          ments. Therefore, when other components of the
stantial evidence supports the Commission's find-         revenue requirement were adjusted, the tax expense
ings that the amount recommended by the staff was         necessarily was changed to accurately reflect the
reasonable and necessary.                                 expense EPEC would incur. Mayhew explained that
                                                          one way of isolating the tax effect of alterations in
     [40] The City next contends that the Commis-         revenue requirements would be to compare the two
sion erred in including any TRASOP costs in em-           reconciliation statements, line by line, identifying
ployee benefits expense. The basis for this argu-         changes and recalculating taxes based on them. The
ment appears to be that the Commission had rejec-         City has not attempted to show that the recalcula-
ted inclusion of these expenses in two prior dock-        tion was done incorrectly, and we conclude that its
ets; in the City's view, apparently, the Commis-          contention on this issue is meritless.
sion's prior holdings estop it from including the ex-
pense in later dockets. The City cites no authority        E. Depreciation Add-Back.
for this proposition.                                           In its final challenge to the Commission's cost-
                                                           of-service findings, the City attacks Finding of Fact
     The legislature has given the Commission dis-         187. By that finding, the Commission included in
cretion to determine which of a utility's expenses         cost of service an element referred to as
are reasonable and necessary and, hence, may be re-        "depreciation add-back," the purpose of which was
covered. PURA § 41(c). Because the reasonable-             to account for EPEC's transition from a
ness determination is one committed to agency dis-         "flow-through" system of tax accounting to a
cretion, it may be overturned only by a showing            "normalization" system. The City challenges this
that the agency either based its decision on legally       finding on the grounds that: ( 1) inclusion of
irrelevant factors, failed to consider legally relevant    "depreciation add-back" amounts to retroactive
factors, or reached a completely unreasonable result       ratemaking, (2) the inclusion is not supported by
after weighing only legally relevant factors. Gerst,       substantial *930 evidence, and (3) certain necessary
411 S.W.2d at 360; Statewide Convoy, 753 S.W.2d            findings of underlying fact have been omitted.
at 804. The City has not shown that the Commis-
sion erred in any of these respects. Consequently,             The City complains that it "cannot know how
we conclude that the City's attacks on the Commis-         the Commission reached its determination because
sion's findings regarding employee benefits are            there are no underlying findings of fact." Without
without merit.                                             providing legal authority for its position, the City
                                                           argues that the Commission failed in its duty to
D. Taxes Other Than Federal Income Taxes.                  make additional findings of underlying fact that
    The City contends that no evidence supports            would show "a logical nexus between the conclu-
the Commission's finding of a specific amount for          sion of the underlying fact[s] and the evidence."
expenses incurred for taxes other than federal in-         For the same reasons that we held such findings of
come taxes. This item of expense increased by              "nexus" unnecessary in connection with the Com-
$992,773 after the stipulation phase of the hearing,       mission's "decisional-imprudence" findings, we
and the City claims that neither EPEC nor the staff        conclude they are also unnecessary here.




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     [41] The City next argues that inclusion of de-      match, such that ratepayers will have paid an
preciation add-back constitutes retroactive ratemak-      amount equal to the actual tax liability incurred by
ing because                                               the utility. See generally GTE-SW, 833 S.W.2d at
                                                          164-65.
  [t]he evidence does not identify any shortfall in
  depreciation reserves to cover test year tax timing          Federal law now requires that all public utilit-
  reversals. The evidence does show that some of          ies which accelerate depreciation for federal in-
  the alleged deficiency may be attributed to years       come tax purposes use the normalization system. 26
  before the Company's first rate proceeding, which       U.S.C. § J68(f)(2), (i)(9) (Supp.1992). In most
  would mean that the burden imposed on ratepay-          cases, a utility that had been using the flow-through
  ers by the Commission as a result of Finding of         system had to switch to normalization in the middle
  Fact No. 187, inured to the benefit of the Com-         years of the useful lives of its assets, rather than at
  pany and its shareholders in the past.                  the beginning or end of those lives. As a result, the
                                                          utility had not built up a deferred-tax account with
     The City misconstrues the nature of the trans-       which to pay its taxes during the later years in
ition from a flow-through accounting system to a          which its actual tax liability will exceed the tax
normalization system.                                     payments ratepayers will be making under normal-
                                                          ization. The utility therefore faces an increasing tax
      As is common for utilities, EPEC depreciated
                                                          liability without a means of recovering the in-
its assets at an accelerated rate for tax purposes
                                                          creased expense; yet, in spite of the deficiency in
while depreciating them using the straight-line
                                                          funds available to satisfy the tax liability, the utility
method on its ratemaking books. Under a flow-
                                                          must pay its taxes as they become due. Con-
through system, any tax benefit that resulted from
                                                          sequently, in this case, the Commission has in-
the practice of keeping one set of books. for tax pur-
                                                          cluded in cost of service a one-time adjustment to
poses and another for ratemaking purposes was
                                                          put EPEC in the position it would have occupied
passed on to the ratepayers as it accrued. As time
                                                          had it used normalization all along.
passed, the utility would incur, first, a very low,
then a medium, and, finally, a relatively high level           The City complains bitterly about the allegedly
of income tax liability. The portion of rates attribut-   retroactive effect of the new rates because the ad-
able to income taxes that ratepayers paid over the        justment the Commission made is called
asset's life would also rise, corresponding to the        "depreciation add-back." This label does indeed
utility's actual tax liability.                           make it sound as if the Commission has obliged
                                                          present and prospective ratepayers to pay the utility
      Under normalization, on the other hand, while
                                                          a second time for assets already *931 depreciated.
actual tax liability follows the same increasing path,
                                                          However, we do not decide the propriety of Com-
rates reflect that the ratepayers' contribution to the
                                                          mission action based on the name the Commission
payment of the utility's income taxes remains con-
                                                          has elected to apply to it. The true effect of the
stant throughout the asset's useful life. To the extent
                                                          "depreciation add-back" adjustment is to allow the
that this creates an "overpayment" of taxes during
                                                          utility to obtain from present and prospective rate-
the early years of an asset's useful life, the utility
                                                          payers its actual current and future tax expenses.
accumulates the excess in a deferred-income-tax
                                                          Consequently, this adjustment to the deferred-tax
account. The accumulated funds are later used dur-
                                                          account does not, in any way, constitute retroactive
ing the stage of the asset's useful life when ratepay-
                                                          ratemaking.
er payments are not enough to satisfy the utility's
actual tax liability. At the end of the asset's useful         As a final matter, we note that the City's asser-
life, the total overpayments and underpayments will        tion of inadequate evidence to reveal a shortfall in




                           © 2015 Thomson Reuters. No Claim to Orig. US Gov. Works.
                                                                                                        Page 42
839 S.W.2d 895, 135 P.U.R.4th 584
(Cite as: 839 S.W.2d 895)




the reserves needed to pay taxes in the test year or      entitlement to party status. Finally, TSA asserts that
ensuing years is incorrect. Moises Rodriguez, the         the Commission erred in refusing to make findings
supervisor of the EPEC's tax accounting section,          of fact and conclusions of law concerning the due
testified that, while EPEC had adjusted reserves to       process claim.
compensate for the shift to normalization as it af-
fected the timing differences related to depreci-             The supreme court's holding in State v.
ation, EPEC had not done so for differences related       Thomas. 766 S.W.2d 217 (Tex.l989), is dispositive
to the tax "bases" of all its assets. In Mr. Rodrig-      of TSA's complaint. TSA had the right, under the
uez's words, "[t]he net result is that the current ac-    Texas Constitution, to intervene in the proceedings.
cumulated deferred Federal income tax balance             ld. at 219. However, the wrongful exclusion of
does not fully reflect the timing difference that oc-     TSA will necessitate reversal of the Commission's
curred prior to 1979." Rodriguez concluded that an        order only if the error prejudiced substantial rights
adjustment was necessary to bring EPEC into com-          ofTSA. APTRA § 19(e).
pliance with federal law. We therefore conclude
                                                               After TSA appealed the October 22 order to the
that substantial evidence supports the Commission's
                                                          Commission, that body granted itself five exten-
adjustment to the deferred-tax element of EPEC's
                                                          sions of time to consider the complaint. These ex-
cost of service.
                                                          tensions allowed the Commission to avoid deciding
    Having concluded that all of the City's chal-         the issue; the final extension postponed considera-
lenges to the Commission's cost-of-service allow-         tion of the appeal until after the Commission had
ances are without merit, we overrule the City's sixth     signed a final order in the docket. Nevertheless,
point of error.                                           TSA participated as a party in all proceedings after
                                                          its reinstatement on November 6. TSA suffered no
 EXCLUSION OF TSA DURING PROCEEDINGS                      harm, therefore, from the Commission's failure to
     [42][43] On October 22, 1987, the examiner or-       rule on its appeal. The harm, if any, stems from
ally granted EPEC's motion to strike TSA as a             TSA's inability to cross-examine the thirty-plus wit-
party, excluding TSA from the proceedings. TSA            nesses who testified while it was absent from the
appealed the decision to the Commission, but the          proceedings.
Commission extended its time for making a de-
cision such that it rendered the order setting new              TSA does not complain of its inability to cross-
rates before ruling on TSA's appeal. In the mean-          examine approximately two dozen of the witnesses
time, on November 6, 1987, EPEC withdrew its               who testified during its absence. TSA claims to
motion to remove TSA from the proceedings, and             have suffered harm only by losing the opportunity
the examiner readmitted TSA and reinstated its             to cross-examine: (1) three prudence and deferral
party status.                                              witnesses who had testified during the first two
                                                           days TSA was excluded; and (2) four *932 rate-
     During the fifteen days that TSA did not parti-       design witnesses. As to the latter, TSA has not pre-
cipate in the hearing, more than thirty witnesses          served any error; the examiner specifically stated in
offered testimony on various issues. TSA contends          his oral ruling that he would permit TSA to recall
that the October 22 order violated its due process         and cross-examine any rate-design witnesses. As to
rights by preventing it from cross-examining these         the former, the examiner made it clear he would en-
witnesses. In addition, TSA alleges that the Com-          tertain a motion from TSA to recall them.
mission intentionally postponed considering its ap-
peal solely to prevent TSA from obtaining a stay of             TSA recalled only EPEC witness Mayhew, a
the proceedings from the Texas Supreme Court un-           rate-design expert. It made no motion to recall and
til such time as that court could determine TSA's          cross-examine the three prudence and deferral wit-




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                                                                                                      Page 43
839 S.W.2d 895, 135 P.U.R.4th 584
(Cite as: 839 S.W.2d 895)




nesses. Further, while TSA was still present during      consumers; and consequently, that PURA § 38 re-
the original rate-base phase of the hearing-the          quired the Commission to reassign TSA to the city/
only phase to which deferral and prudence issues         county class to prevent EPEC from charging un-
would have been pertinent-it did not seek to             reasonably discriminatory rates.
cross-examine witnesses or present evidence of its
own. Under these circumstances, and because TSA               [44][45][46] The Commission has broad dis-
failed to request available relief that would have       cretion to determine whether a particular rate
made it whole, we cannot say that the error in ex-       design would result in just, reasonable, and non-
cluding TSA for fifteen days prejudiced substantial      discriminatory rates. In making the determination,
rights of TSA. We therefore overrule TSA's first         the Commission may consider factors in addition to
point of error.                                          the cost of providing service, keeping in mind the
                                                         overriding considerations of consistency and the
     In addition, because Thomas dictates the con-       utility's burden of proving that its proposed rates
clusion that TSA should not have been excluded,          are just and reasonable. See PURA § 40; Texas
we need not rule on TSA's complaint regarding the        Alarm & Signal Assoc. v. PUC, 603 S.W.2d 766,
Commission's failure to make the requested find-         773 (Tex.l980). Absent unreasonably discriminat-
ings of fact and conclusions of law on that issue.       ory rates, we will not overturn the Commission's
                                                         approval of a rate design. PUC v. AT & T Commu-
          TSA'S RATE CLASSIFICATION                      nications of the Southwest, 777 S.W.2d 363
     The third phase of the proceedings, the rate-       (Tex.1989).
design segment, afforded the parties an opportunity
to offer evidence in support of or in opposition to           [47][48] A customer seeking reassignment to a
the proposed method of apportioning the anticip-         different class must show that its conditions of ser-
ated rate increase among the various rate classes. In    vice are similar to those of the members of the class
addition, because TSA sought to be reassigned to         to which it seeks reassignment. The issue is one of
the city/county governmental-consumer class (rate        fact, to be resolved by reference to the particular
class 41) from the general services class (rate class    circumstances of each case. Ford v. Rio Grande
24), the parties also offered evidence on the classi-    Valley Gas Co., 174 S.W.2d 479, 480 (Tex.1943);
fication issue. The examiners recommended that           Amtel Communications v. PUC, 687 S.W.2d 95,
TSA not be reassigned and that the proposed appor-       102 (Tcx.App.l985, no writ). Existing classifica-
tionment method be approved. The Commission ad-          tion schemes previously approved by the Commis-
opted both recommendations and the examiners' un-        sion are, prima facie, not unreasonably discriminat-
derlying reasoning. In its second and third points of    ory, and the complaining party has the burden of
error, TSA argues that the Commission erred by ap-       proving that the classification produces unreason-
proving a rate for TSA that is not cost-based and by     ably discriminatory*933 rates. Ashley v. City of
refusing to move TSA to the city/county rate class.      Gilmer, 271 S.W.2d 100, 102 (Tcx.Civ.App.1954,
                                                         writ ref'd); see also Ford, 174 S.W.2d at 480; Amtel
A. Rate Class 41                                         Communications, 687 S.W.2d at 102.
     TSA urges us to conclude that the Commission
erred in refusing to include TSA in the city/county            [49] Resolution of the burden-of-proof issue
rate class, which arguably pays lower rates than the      disposes of the dispute here. TSA failed to offer
general services class. TSA asserts that there is no      proof that its load characteristics were similar to
reasonable basis for differentiating TSA from the         those of the city and county governmental custom-
city and county governmental consumers; that              ers. In addition, TSA offered no proof that its con-
EPEC offered no proof of a factor justifying differ-      stituent agencies are similar to the city/county con-
ent treatment for TSA than for the city and county        sumers in other respects which the Commission




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                                                                                                        Page 44
839 S.W.2d 895, 135 P.U.R.4th 584
(Cite as: 839 S.W.2d 895)




considers when classifying a customer. Having             City of Austin, 160 Tex. 348, 331 S.W.2d 737, 742
offered no proof of these similarities, TSA has           (1960); Olshan Demolishing Co. v. Angleton Indep.
failed to carry its burden of showing that its rate is    School Dist., 684 S.W.2d 179, 185 (Tex.App.l984,
unreasonably discriminatory.                              writ refd n.r.e.); and State v. City q{ Dallas, 319
                                                          S.W.2d 767, 775-76 (Tex.Civ.App.l959), affd, 160
     Another consideration which persuades us that        Tex. 348, 331 S.W.2d 737, 742 (1960). We need
the Commission did not abuse its discretion in re-        not decide, however, whether rates that are not
fusing to reassign TSA is that the Commission's fi-       cost-based violate these provisions. TSA's chal-
nal order, following a suggestion in the Examiners'       lenge to the proposed rate, like its challenge to its
Report, directed EPEC                                     classification, is resolved by examining the burden
                                                          of proof on the issue. Even assuming for the pur-
  to perform the appropriate studies, so that during
                                                          poses of this discussion that TSA correctly identi-
  [EPEC's] next general rate case, the load and us-
                                                          fied a constitutional entitlement to cost-based rates,
  age characteristics at the state agencies, as a
                                                          we conclude that it had the burden ofproving that
  group, including any state universities and col-
                                                          its new rates were not cost-based. Because it did
  leges, can be compared to the load and usage
                                                          not carry this burden, we will overrule its second
  characteristics of both Rate Classes 24 and 41.
                                                          point.
    Considering that the current classification
                                                               TSA insists that EPEC had the burden of prov-
scheme has apparently existed unchallenged for
                                                          ing that the rate it proposed for TSA was based on
some fifty years, that the Commission has ex-
                                                          its cost of serving TSA. This argument is premised
pressed its intention to investigate TSA's assign-
                                                          on: ( 1) the overall burden of proof a utility bears in
ment to the general services class in the next rate
                                                          ratemaking proceedings imposed by PURA § 40;
case, and that requiring EPEC to produce the
                                                          and (2) EPEC's exclusive control of cost-of-service
needed information in this proceeding could have
                                                          information. We conclude that these considerations
resulted in a significant delay, we conclude that t~e
                                                          are insufficient to impose on EPEC the burden of
Commission acted reasonably by refusing to reas-
                                                          proving that its proposed rates are based on its costs
sign TSA to the city/county rate class. We overrule
                                                          to serve this select group of customers.
TSA's third point of error.
                                                                All individual state agencies were originally as-
B. Cost-Based Rates
                                                           signed to the general services rate class fifty years
    TSA next contends that it is entitled to rates
                                                           ago; until now, they have not complained of that as-
based on the utility's actual cost of serving only the
                                                           signment. The agencies comprising TSA intervened
agencies constituting TSA. To support this argu-
                                                           in this ratemaking proceeding as a newly formed
ment, TSA cites four Texas constitutional provi-
                                                           group seeking to be reassigned to the city/county
sions it claims require EPEC to charge TSA a rate
                                                           class. The crux of the group's *934 cost-based-rates
based on the cost of serving only TSA. See Tex.
                                                           argument is that EPEC was obligated to prove that
Const. art. III, §§ 44, 51, and 53 (1984), and art.
                                                           the rate EPEC anticipated charging the group was
XVI, § 6 (Supp.1992).
                                                           based on the utility's cost of serving only the mem-
     [50] The cited constitutional provisions prevent      bers of the group. We conclude that the Commis-
the State from depleting its treasury by disbursing        sion acted reasonably both in refusing to impose
State funds without obtaining a corresponding be-          such a burden on EPEC and in ordering EPEC to
nefit for the public. See, e.g., University qf Texas       produce information necessary to evaluate the issue
Svstem v. Robert E. McKee, Inc ... 521 S.W.2d 944,         in the next ratemaking case.
948 (Tex.Civ.App.1975, writ refd n.r.e.); State v.
                                                               The Texas Supreme Court has held that a uti!-




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                                                                                                         Page 45
839 S.W.2d 895, 135 P.U.R.4th 584
(Cite as: 839 S.W.2d 895)




ity is not required to compare profits and rates of        Commission did not abuse its discretion in approv-
return between services. Texas Alarm & Signal, 603         ing the new rates is the fact that TSA did not re-
S.W.2d at 772. The considerations supporting the           quest the information before the hearings, even
decision not to require such a comparison also sup-        though the Commission could have compelled
port the decision not to require a utility to determ-      EPEC to produce the information necessary to
ine and offer proof of the costs of serving individu-      prove TSA's claim of being overcharged. Instead,
al customers or subclasses of customers who share          TSA asserted, during the rate-design phase, that it
one or more characteristics. Cf City of Corpus             needed the information but had no access to it. Be-
Christi v. PUC, 572 S.W.2d 290, 294-96                     cause TSA made little attempt to acquire the in-
(Tex.l978). Comparing rates of return between ser-         formation it needed to carry its burden of proof, its
vices requires the utility to determine the expenses       policy argument is unsympathetic. Therefore, even
it incurred and the adjusted value of property it          assuming for the sake of argument that TSA's con-
used in producing each service. Determining cost-          stitutional theory is correct, the record it has
based rates for subclasses of consumers would re-          brought this Court is insufficient to show harm. We
quire the utility to determine the expenses it in-         find no reversible error on this record. TSA's
curred and the adjusted value of property it used in       second point of error is overruled.
producing service for each individual customer.
This would be even more onerous a burden than                                 CONCLUSION
that rejected by the supreme court in Texas Alarm               In the context of a myriad of complex issues
& Signal. In addition, requiring EPEC to determine         and often-contentious parties, the Commission must
costs of service for individual customers would            be allowed to weigh all competing interests in set-
generate more costs, which would then be passed            ting rates that will be fair to all consumers. With
on to consumers. The increase in rates that could          the exception of the use of deferred accounting as
result from added costs of the ratemaking proceed-         to EPEC's carrying costs incurred during the regu-
ing is a factor the Commission can and should con-         latory-lag period, we conclude that the Commission
sider. !d. at 772 n. 7.                                    acted within its discretion in setting new rates for
                                                           EPEC.
     Allocation of the burden of proof to a com-
plaining party is reasonable in circumstances in                We reverse that portion of the trial court's judg-
which individual customers have combined to form           ment which affirmed the Commission's approval
a subclass, which then asserts an entitlement to           and use of deferred accounting as to the carrying
rates based not on the costs of serving all custom-        costs incurred by EPEC between the date Palo
ers, but of serving only the members of the sub-           Verde Units 1 and 2 became commercially opera-
class. If the complaining subclass were not assigned       tional and the effective date of the new rates. We
the burden of proof in such circumstances, the util-       affirm the remainder of the trial court's judgment.
ity would arguably be obligated, in every rate-            We remand the cause to the Commission for such
making proceeding, to present evidence of the cost         further *935 proceedings as may be necessary or
of serving every subclass that customers could             appropriate to implement this Court's judgment.
define based on shared characteristics. Even assum-
                                                            Tex.App.-Austin, 1992.
ing that it would be possible for the utility to satisfy
                                                            City of El Paso v. Public Utility Com'n of Texas
such an obligation, it is questionable whether the
                                                            839 S.W.2d 895, 135 P.U.R.4th 584
vastly increased costs which such a presentation
would entail would be in the public's interest.             END OF DOCUMENT
    Further supporting our conclusion that the




                            © 2015 Thomson Reuters. No Claim to Orig. US Gov. Works.
           Appendix 10


City ofEl Paso v. Public Util. Comm'n,
   883 S.W.2d 179 (Tex.1994)
                                                                                                           Page 1


883 S.W.2d 179, Util. L. Rep. P 26,411
(Cite as: 883 S.W.2d 179)


                                                                    l45k 11.3(6) k. Proceedings before commis-
                                                            sions. Most Cited Cases
             Supreme Court of Texas.
CITY OF EL PASO, The State ofTexas, and Office of           Public Utilities 317A ~161
        Public Utility Counsel, Petitioners,
                         v.                                 317 A Public Utilities
PUBLIC UTILITY COMMISSION OF TEXAS and                          317Alll Public Service Commissions or Boards
     El Paso Electric Company, Respondents.                        317 AIII(B) Proceedings Before Commissions
                                                                     317Ak 161 k. In general. Most Cited Cases
                    No. D-3053.
               Argued Sept. 13, 1993.                            Public Utility Commission could properly base
              Decided June 22, 1994.                        rate order, in part, on nonunanimous stipulation;
          Rehearing Overruled Oct. 6, 1994.                 Commission made independent findings that stipula-
                                                            tion was supported by preponderance of record evi-
     Electric utility applied for rate increase. The        dence and resulted in just and reasonable rates, after
Texas Public Utility Commission set rate, and judicial      providing all parties, including nonsignatories, op-
review was sought. The 250th District Court, Travis         portunity to be heard on merits of stipulation.
County, Paul R. Davis, Jr.; J., upheld Commission's         V.T.C.A., Government Code§ 2001.141.
decision, and appeal was taken. Withdrawing prior
opinion, the Austin Court of Appeals, J. Woodfin            [2]   Administrative Law and Procedure 15A
Jones, J., 839 S.W.2d 895, affirmed in part, reversed       ~754.1
in part, and writ of error was sought. The Supreme
Court, Enoch, J., held that: (1) Commission acted           15A Administrative Law and Procedure
within its discretion by basing its final order, in part,       15AV Judicial Review of Administrative Deci-
on nonunanimous stipulation agreement, and (2) in-          sions
clusion of deferred costs in electric utility's rate base          15AV(D) Scope ofReview in General
did not violate test year requirement.                                15Ak754 Discretion of Administrative
                                                            Agency
    Affirmed in part and reversed in part.                               15Ak754.l k. In general. Most Cited
                                                            Cases
   Spector, J., dissented and filed opinion in which
Gonzalez, Doggett and Gammage, JJ.,joined.                  Administrative Law and Procedure 15A ~763

                   West Headnotes                           15A Administrative Law and Procedure
                                                                15A V Judicial Review of Administrative Deci-
[l] Electricity 145 ~11.3(6)                                sions
                                                                    15AV(D) Scope ofReview in General
145 Electricity                                                        l5Ak763 k. Arbitrary, unreasonable or
    145kll.3 Regulation of Charges                          capricious action; illegality. Most Cited Cases




                            © 2015 Thomson Reuters. No Claim to Orig. US Gov. Works.
                                                                                                            Page2


883 S.W.2d 179, Util. L. Rep. P 26,411
(Cite as: 883 S.W.2d 179)

                                                            15A Administrative Law and Procedure
     Agency's decision is arbitrary or results from             15A V Judicial Review of Administrative Deci-
abuse of discretion if agency: (1) fails to consider        sions
factor legislature directs it to consider; (2) considers           15AV(D) Scope of Review in General
irrelevant factor; or (3) weighs only relevant factors                15Ak749 k. Presumptions. Most Cited
that legislature directs it to consider but still reaches   Cases
completely unreasonable result.
                                                            Administrative Law and Procedure 15A ~750
(3] Public Utilities 317A ~161
                                                            15A Administrative Law and Procedure
317 A Public Utilities                                          15A V Judicial Review of Administrative Deci-
   317 AIH Public Service Commissions or Boards             sions
       317Alii( B) Proceedings Before Commissions                  15AV(D) Scope of Review in General
         317Ak 161 k. In general. Most Cited Cases                   15Ak750 k. Burden of showing error. Most
                                                            Cited Cases

     Public Utility Commission is free to accept or
reject, in whole or in part, hearing examiner's rec-             Findings, inferences, conclusions, and decisions
ommendations; Commission may repudiate part of              of administrative agency are presumed to be supported
examiner's report and modify it by deletion.                by substantial evidence, and burden is on contestant to
                                                            prove otherwise.

[41 Administrative Law and Procedure 15A
~791                                                        [6] Electricity 145 ~11.3(6)


15A Administrative Law and Procedure                        145 Electricity
    15AV Judicial Review of Administrative Deci-                145kl1.3 Regulation of Charges
sions                                                               145kl1.3(6) k. Proceedings before commis-
       15A V(E) Particular Questions, Review of             sions. Most Cited Cases
         15Ak784 Fact Questions
             15Ak791 k. Substantial evidence. Most               Substantial evidence supported Public Utility
Cited Cases                                                 Commission's disallowance of certain amount of costs
                                                            in electric utility's rate base due to imprudent deci-
     At its core, "substantial evidence test" for re-       sions made in connection with construction of new
viewing agency decisions is reasonableness test or          generating capacity; Commission reasonably exer-
rational basis test; true test is not whether agency        cised its discretion in selecting amount within range of
reached correct conclusion, but whether some rea-           figures provided by experts.
sonable basis exists in record for action taken by
agency.                                                     171 Public Utilities 317A ~128

151 Administrative Law and Procedure 15A                    317A Public Utilities
~749                                                           3 17 AJJ Regulation
                                                                    3 17Ak 1 19 Regulation of Charges




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                                                                                                               Page 3


883 S. W.2d 179, Uti!. L. Rep. P 26,411
(Cite as: 883 S.W.2d 179)

          317Ak128 k. Operating expenses. Most
Cited Cases                                                    317A Public Utilities
                                                                  317All Regulation
Public Utilities 317A ~129                                           3 17Ak 119 Regulation of Charges
                                                                        317Ak 124 k. Value of property; rate base.
317A Public Utilities                                          Most Cited Cases
   3 I 7 All Regulation
         317Ak 119 Regulation of Charges                            In determining whether to allow particular utility
            317Ak 129 k. Rate of return. Most Cited            to defer post-in-service costs, Public Utility Commis-
Cases                                                          sion has discretion to proceed on ad hoc or
                                                               "case-by-case" basis.
     Statutory standard that controls revenue re-
quirement determinations is that rates be fixed to             *181 Nmman J. Gordon, El Paso, James G. Boyle,
permit utility reasonable opportunity to earn reasona-         Austin, Nanette G. Williams, David C. Caylor, El
ble return on its invested capital plus "reasonable and        Paso, Luis A. Wilmot, San Antonio, Stephen Fogel,
necessary" operating expense to provide service.               William L. Magness, W. Scott McCollough, Dan
Vernon's Ann.Texas Civ.St. art. 1446c, § 39(a).                Morales, Joe K. Crews and Richard A. Muscat, Aus-
                                                               tin, for petitioners.
181 Electricity 145 ~11.3(2)
                                                               James W. Check ley, Alan Holman, Austin, Thomas S.
145 Electricity                                                Leatherbury, Ferd C. Meyer, Jr., Kenneth C. Raney,
   145k11.3 Regulation of Charges                              Jr., Dallas, R. Eden Martin, Chicago, IL, Barry
        145kll.3(2) k. Determination of rate base.             Bishop, John F. Williams, Austin, Harry M. Reasoner,
Most Cited Cases                                               Houston, Walter Demond, Austin, Alton J. Hall, Jr.,
                                                               Houston, Norma K. Scogin, Dan Morales, Joe N.
                                                               Pratt, and Davison W. Grant, Austin, for respondents.
Public Utilities 317A ~124

                                                               Justice ENOCH delivered the opinion of the Court, in
317A Public Utilities
                                                               which Chief Justice PHILLIPS, Justices HIGH-
   3 I 7 All Regulation
                                                               TOWER, HECHT, and CORNYN join.
         317Ak 119 Regulation of Charges
                                                                    This is an administrative appeal from an order of
           317Ak 124 k. Value of property; rate base.
                                                               the Public Utility Commission (Commission) setting
Most Cited Cases
                                                               rates to be charged by El Paso Electric Company
                                                               (EPEC). FNI The order was consistent with a
      Inclusion of deferred costs in electric utility's rate   non-unanimous stipulation between EPEC and several
base does not violate test year requirement; Public            parties, including the Commission General Counsel.
Utility Commission may, in its discretion, go outside          In its fmal order, the Commission authorized EPEC to
test year when necessary to achieve just and reasona-          capitalize and include in rate base deferrals associated
ble rates. Vernon's Ann.Texas Civ.St. art. 1446c, §            with certain post-in-service carrying costs and oper-
3(t).                                                          ating costs related to its investment in the Palo Verde
                                                               Nuclear Generating Station (Palo Verde). The ques-
19] Public Utilities 317A ~124                                 tions presented by this appeal are first, whether the




                              © 2015 Thomson Reuters. No Claim to Orig. US Gov. Works.
                                                                                                            Page4


883 S.W.2d 179, Util. L. Rep. P 26,411
(Cite as: 883 S.W.2d 179)

Commission acted within its discretion by basing its       tober 22, 1987, during the course of the hearing on
final order, in part, on the nonunanimous stipulation      EPEC's application, certain industrial intervenors and
agreement, and second, whether the Commission has          the Commission General Counsel announced and filed
the authority under the Public Utility Regulatory Act      a stipulation agreement intended to resolve the case.
(PURA) FN 2 to allow a public utility to include in a      FNs The Examiners scheduled an additional phase of
utility's rate base certain costs incurred during the      the hearing to consider the stipulation, and eventually
"regulatory lag" period.FN 3 We answer both issues yes,    recommended to the Commission that the stipulation
and consequently affirm the judgment of the court of       be rejected. The Commissioners modified the pro-
appeals in part and reverse in part.                       posed stipulation and, as modified, adopted its terms
                                                           in its final order.
         FNl. Tex. Public Utils. Comm'n, Application
         ofEl Paso Electric Company for Authority to                FN4. EPEC and four other utility companies
         Change Rates, Docket No. 7460, 14                          agreed to partially fund and otherwise assist
         TEX.P.U.C.BULL. 932, 1202 (June 16,                        in building one or more nuclear steam elec-
         1988) (Docket No. 7460).                                   tric generating units, with attendant common
                                                                    facilities. Construction is complete on the
         FN2. TEX.REV.ClV.STAT.ANN. art. 1446c                      common facilities and two of the five units
         (Vernon Supp.1994).                                        originally planned (Palo Verde Units 1 and
                                                                    2). After construction began, EPEC modified
                                                                    its ownership interest in the units. Originally,
         FN3. Generally, regulatory lag is the delay
                                                                    EPEC owned an undivided interest in each of
         between the time when a utility's profits are
                                                                    the units as a tenant in common with the
         above or below standard and the time when
                                                                    other four project participants. Although
         an offsetting rate decrease or rate increase
                                                                    EPEC retains its undivided interest in Unit 1,
         may be put into effect by commission order
                                                                    the company has sold its interest in Unit 2
         or otherwise. This delay is due to the inherent
                                                                    and made arrangements to lease the unit back
         inability in the regulatory process to allow
                                                                    for the duration ofEPEC's involvement in the
         for immediate rate decreases or increases.
                                                                    project.
         For purposes of this opinion, "regulatory lag"
         is the period between the date a new plant
         begins      commercial       operation     (the            FN5. EPEC, the Commission staff, and four
         "in-service" date) and the effective date of               corporate intervenors which purchased sig-
         the new rates that result from including the               nificant amounts of electricity from EPEC all
         new plant's costs in the rate base. See JAMES              signed the stipulation.
         C. BONBRIGHT ET AL., PRINCIPLES OF
         PUBLIC UTILITY RATES 96 (2d ed. 1988).                 As part of its request for a rate increase, EPEC
                                                           requested that its rate base be increased*182 by the
     In April1987, EPEC filed an application for a rate    amount of carrying costs and operating and mainte-
increase with the Commission seeking to recover costs      nance costs it incurred during the "regulatory lag"
associated with its investment in the Palo Verde Pro-      period. The utility had deferred these types of costs for
ject. EPEC sought rate treatment related to its in-        Units 1 and 2, aggregating each type of cost for each
vestment in the two units which had started commer-        unit into a separate capital account. EPEC obtained the
cial operation, Palo Verde Units 1 and 2. FN 4 On Oc-      Commission's prior permission to defer Unit 1
                                                           costs.FN6 The Commission reserved the right, howev-




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883 S.W.2d 179, Uti!. L. Rep. P 26,411
(Cite as: 883 S.W.2d 179)

er, to refuse subsequently to include the deferred costs
in the rate base to the extent they were unreasonable,                 FN7. The court of appeals separated the costs
related to plant not used and useful, or were spent or                 into two categories: (1) operating and
incurred imprudently. Although EPEC did not obtain                     maintenance costs, and (2) carrying costs.
prior permission to defer its post-in-service costs for                Our holding makes no distinction between
Unit 2, it nevertheless deferred them. After the hear-                 these costs.
ing, the Commission granted EPEC's request to in-
clude the deferred costs for both units in the rate base.
                                                                                          I.
                                                                        The Non-Unanimous Stipulation
         FN6. The Commission authorized deferred                   The City and OPUC make several arguments
         accounting treatment for Unit 1 in Tex. Pub-         supporting their position that the Commission erred by
         lic Utils. Comm'n, Application of El Paso            basing its order, in part, on a non-unanimous stipula-
         Electric Company for Authority to Change             tion. They ask this Court to reverse the judgment of
         Rates,     Docket      No.     6350,      13         the court of appeals, contending that its holding af-
         TEX.P.U.C.BULL. 1091, 1239-41 (1986).                firms an action of the Commission that is not sup-
                                                              ported by substantial evidence, not consistent with
     The City ofEI Paso (City), the State of Texas (on        Texas law, arbitrary and capricious and characterized
behalf of various state agencies located in western           by an abuse of discretion. We do not accept the City's
Texas) (State), and the Office of Public Utility              or OPUC's arguments.
Counsel (OPUC) sought judicial review of the Com-
mission's order, contending that the Commission erred                                A.
by basing its order, in part, on the non-unanimous               Reliance on the Non-Unanimous Stipulation
stipulation. The City, State, and OPUC also argued                 The City and OPUC contend that where no evi-
that the Commission lacked the authority to permit            dence existed to support its decision, the Commis-
EPEC to defer post-in-service costs, and subsequently         sioners erroneously relied on the stipulation itself as a
to include the deferrals in the utility's rate base.          substitute for the evidence. The City argues that by
                                                              relying on the stipulation as opposed to the evidence,
     The trial court upheld the Commission's order.           the Commissioners violated the statutory requirement
The court of appeals affirmed the portion of the trial        that every fmding be based exclusively on the evi-
court's judgment which affirmed the Commission's              dence. TEX.GOV'T CODE ANN. § 2001.141
order allowing the inclusion of capitalized                   (Vernon Pamphlet 1994 ). The City analogizes the
post-in-service operating costs in the utility's rate         present case to a civil cause in which the court renders
base. 839 S.W.2d 895, 934 (1991). The court of ap-            an agreed judgment without consent of all the parties.
peals reversed the portion of the trial court's judgment      It contends that in adopting the stipulation as a reso-
which affirmed the Commission's order allowing the            lution of the case, the Commission improperly im-
deferral of post-in-service carrying costs. Id FN? All        posed the terms of the settlement on the non-signing
parties filed applications for writ of error to this court.   parties.
For the reasons stated below, we reverse the judgment
of the court of appeals to the extent that it disallows            We reject the City's analogy. In Mobil Oil Corp.
the deferral of post-in-service carrying costs. In all        v. Federal Power Commission, 417 U.S. 283, 94 S.Ct.
other respects, the judgment of the court of appeals is       2328, 41 L.Ed.2d 72 (1974), the Supreme Court up-
affirmed.                                                     held the Federal Power Commission's fmal order




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883 S. W.2d 179, Util. L. Rep. P 26,411
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establishing a rate structure that was based, in part, on       (e) The results of the stipulation are in the public
a non-unanimous stipulation. The Court empha-                 interest, including the interest of those customers
sized*183 the importance of considering a                     represented by parties opposing the stipulation.
non-unanimous proposal "on its merit:"
                                                                 Docket No. 7460, supra note 1, at 1202--03
  If a proposal enjoys unanimous support from all of        (emphasis added).FN 8 The Commission's order con-
  the immediate parties, it could certainly be adopted      tinued to conclude that:
  as a settlement agreement if approved in the general
  interest of the public. But even if there is a lack of             FN8. We note that the Commission has used
  unanimity, it may be adopted as a resolution on the                these    same   standards   to    evaluate
  merits, if FPC makes an independent finding sup-                   non-unanimous settlements in several other
  ported by 'substantial evidence on the record as a                 dockets. See, e.g., Tex. Public Utils.
  whole' that the proposal will establish 'just and                  Comm'n, Application of El Paso Electric
  reasonable' rates for the area.                                    Company to Declare Palo Verde Unit 1 in
                                                                     Service,    Docket     No.    6764,     12
     417 U.S. at 314, 94 S.Ct. at 2348-49 (quoting                   TEX.P.U.C.BULL. 1533, 1534--35 (No-
Placid Oil Co. v. Federal Power Comm'n, 483 F.2d                     vember 14, 1986).
880, 893 (5th Cir.1973)) (emphasis in original).
                                                              5. Pursuant to the Findings of Fact and Conclusions
    In Docket No. 7460, the Commission's order                of Law set forth below, the Commission fmds the
provided, in part:                                            Amended and Restated Stipulation, as modified, is a
                                                              reasonable basis for resolution of the issues in this
  4. Even where some parties to a proceeding do not           case and that adoption of the Amended and Restated
  agree to a stipulated result, it is reasonable to adopt     Stipulation, as modified, as the basis of the Com-
  such a stipulation if:                                      mission's Order in this proceeding is in the public
                                                              interest.
                                                              Finding of Fact No. 237 provided:
     (a) The parties opposing the stipulation have no-
  tice that the stipulation inay be considered by the
  Commission and an opportunity to be heard on their          237. The provisions of the Amended and Restated
  reasons for opposing the stipulation;                       Stipulation are reasonable and supported by a pre-
                                                              ponderance of the credible evidence in this record
                                                              and should be adopted. FN9
    (b) The matters contained in the stipulation are
  supported by a preponderance of the credible evi-
  dence in the case,·                                                FN9. In addition to the recitations above,
                                                                     Conclusion of Law No. 28 stated: "The
                                                                     Amended and Restated Stipulation, as modi-
    (c) The stipulation is in accordance with applica-
                                                                     fied per Finding of Fact No. 6, represents a
  ble law;
                                                                     reasonable resolution of the contested issues
                                                                     in this docket, is supported in the record, is in
     (d) The stipulation results in just and reasonable
                                                                     the public interest, and should therefore be
  rates; and;
                                                                     adopted, as the basis for the Commission's
                                                                     order in this case." Docket No. 7460, supra




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883 S.W.2d 179, Util. L. Rep. P 26,411
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         note 1, at 1280.                                  we reject the City's argument that the substantial rights
                                                           of the City and other non-signatory parties were in
     [ 1] It is clear from the Commission's order that,    some way prejudiced by the Commission's adoption of
consistent with Mobil Oil, the Commission's decision       the non-unanimous stipulation.
in Docket No. 7460 was based on the merits; it was not
simply an adoption of a non-unanimous "settlement."             The OPUC independently argues that the Com-
The Commission made an independent fmding that             mission's reliance on the non-unanimous stipulation
the non-unanimous stipulation was supported by a           agreement was arbitrary and capricious because the
preponderance of the record evidence and resulted in       Commission failed to follow its own standards in
just and reasonable rates.FN 10 Thus, contrary to the      relying on the stipulation. Specifically, the OPUC
City's arguments, the Commission's final order was         notes that the court of appeals concluded that the in-
consistent with the requirement that every fmding be       clusion of deferred post-in-service carrying costs
based exclusively on the evidence.                         violates PURA section 4l(a); and, because the stipu-
                                                           lation included provisions concerning treatment of
         FNJO. We note that the Commission's Final         deferred carrying charges, the stipulation violates the
         Order included 237 separate, specific Find-       Commission's own standard, see supra text above, that
         ings of Fact concerning the rate increase. The    the stipulation be "in accordance with applicable law."
         Commission specifically considered the            As a result, the OPUC argues that the court of appeals
         amended and restated stipulation in the con-      should have reversed and remanded the Commission's
         text of these findings as a whole. See Docket     fmal order in toto. Because we conclude that the in-
         7460, supra note 1, at 1233-74. Thus, con-        clusion of deferred post-in-service carrying costs does
         trary to the City's and OPUC's contentions,       not violate PURA section 4l(a), see infra IV., the
         the Commission's findings supporting its re-      OPUC's argument on this point is moot.
         liance on the non-unanimous stipulation were
         not ''wholly conclusory." Further, because             [2] An agency's decision is arbitrary or results
         the Commission explicitly provided that it        from an abuse of discretion if the agency: (1) failed to
         was based on a review of the evidence in the      consider a factor the legislature directs it to consider;
         record as a whole, we reject the City's con-      (2) considers an irrelevant factor; or (3) weighs only
         tention that the Commission acted arbitrarily     relevant factors that the legislature directs it to con-
         and abused its discretion as a fact finder and    sider but still reaches a completely unreasonable re-
         decision maker by adopting a contested set-       sult. Gerst v. Nixon, 411 S.W.2d 350, 360 n. 8
         tlement "without a review of the record or        (Tex.l966). We agree with the court of appeals that
         support in the evidentiary record."               the City and OPUC have failed to establish that the use
                                                           of the stipulation as a partial basis for the final order
     In addition to considering the non-unanimous          involves consideration of factors other than those the
stipulation on its merits, the Commission provided all     legislature has directed the Commission to consider.
parties, including non-signatories,*184 the oppor-         839 S.W.2d 895,903-04.
tunity to be heard on the merits of the stipulation. As
the court of appeals notes, the Commission added an                                  B.
additional phase to the proceedings devoted exclu-                             Section 21.151
sively to receiving evidence and argument on the                 [3] Section 21.151 of the Public Utility Commis-
propriety of using the stipulation as a basis for re-       sion's Rules of Practice and Procedure provides:
solving the contested issues. 839 S.W.2d at 903. Thus,




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883 S.W.2d 179, Util. L. Rep. P 26,411
(Cite as: 883 S.W.2d 179)
                                                                              Disallowance FN!l
  After the expiration of the time for filing exceptions
  and replies thereto, the examiner's report and pro-               FN 11. "Decisional" imprudence refers to
  posal for decision will be considered by the com-                 EPEC's decisions to become involved in the
  mission and either adopted, modified and adopted,                 Palo Verde Project, the extent of its in-
  or remanded to the examiner ....                                  volvement and its decisions to remain in the
                                                                    project at the 15.8% participation level.
     16 TEX.ADMIN.CODE § 21.151 (West 1990).
The City and the OPUC argue that the Commission                 The Commission concluded that due to imprudent
violated section 21.151 by basing its fmal order on a      decisions, $32 million of EPEC's costs should not be
modified stipulation over the examiner's recommen-         included in rate base. Both the City and OPUC argue
dation. This argument is without merit. First, section     that the disallowance is unsupported by substantial
21.151 does not speak to the Commission's ability to       record evidence, claiming that the amount disallowed
consider non-unanimous stipulations in reaching its        should have been greater.
orders. Second, the Commission is free to accept or
reject the examiner's recommendations. See Ross v.              [4][5] At its core, the substantial evidence rule is a
Texas Catastrophe Prop. Ins., 770 S.W.2d 641, 642          reasonableness test or a rational basis test. Railroad
(Tex.App.-Austin 1989, no writ). Section 21.151            Comm'n of Texas v. Pend Oreille Oil & Gas Co., 817
does not require the Commission to accept or reject        S. W.2d 36, 41 (Tex.1991 ). The reviewing court, then,
the examiner's report in its entirety. Rather, the         concerns itself with the reasonableness of the admin-
Commission may repudiate part of the examiner's            istrative order, not the correctness of the order. ld In
report and modify it by deletion as it did in this case.   applying this test, we may not substitute our judgment
                                                           as to the weight of the evidence for that of the agency.
                          c.                               Jd (the substantial evidence rule "prevents the court
        Findings of Facts/Substantial Evidence             from 'usurping the agency's adjudicative authority
      In a fmal challenge to the Commission's use of the   even though the court would have struck a different
non-stipulation agreement, the City argues that "[t]he     balance' ").
non-unanimous 'stipulation' used by the Commission
... is not supported by substantial evidence and key             Although substantial evidence is more than a
findings of fact drafted to support the final order are     mere scintilla, the evidence in the record actually may
inadequate to satisfy statutory requirements." We will      preponderate against the decision of the agency and
discuss the City's specific substantial-evidence and        nonetheless amount to substantial evidence. Texas
finding-of-fact challenges. See iyifra 11-Ill However,      Health Facilities Comm'n v. Charter Medical-Dallas,
to the extent the City makes a general complaint            Inc., 665 S.W.2d 446, 452 (Tex.l984). The true test is
against the stipulation, we agree with the court of         not whether the agency reached the correct conclu-
appeals that the City has waived any argument on this       sion, but whether some reasonable basis exists in the
point as its point and argument are too general to          record for the action taken by the agency. ld The
preserve error. The City provides no substantive ar-        fmdings, inferences, conclusions, and decisions of an
gument to support its legally conclusory statements.        administrative agency are presumed to be supported
                                                            by substantial evidence, and the burden is on the
                    *185 II.                                contestant to prove otherwise. ld at 453; Imperial
 Substantial Evidence-"Decisional" Imprudence               American Resources Fund, Inc. v. Railroad Comm'n,




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883 S.W.2d 179, Uti!. L. Rep. P 26,411
(Cite as: 883 S.W.2d 179)

557 S. W.2d 280, 286 (Tex.1977); City of San Antonio      contains substantial information relevant to the
v. Texas Water Comm'n, 407 S.W.2d 752, 758                Commission's inquiry on this issue. The evidence
(Tex.1966).                                               includes expert testimony offered by the City, EPEC,
                                                          and the Commission staff The City's witness, Ben
     The City argues that although the City, EPEC,        Johnson, stated that in his opinion the EPEC had made
and the Commission staff each offered expert testi-       several imprudent decisions and that, as a result, the
mony on the decisional imprudence issue, the eviden-      Commission should disallow 50% of its costs.FNJ 2
tiary record contains no specific reference to amount.    EPEC testified that there *186 should be a zero dis-
Further, the City contends that the court of appeals      allowance because there simply was no decisional
erred by relying, in part, on matters included in the     imprudence. The Commission staff offered testimony
non-unanimous stipulation to conclude that the            that certain aspects of the Company's decision making
Commission's decision was supported by substantial        process were imprudent. However, the Commission's
evidence because the matters relied on were not in-       witnesses did not conclude that the decision to par-
dependently supported by a preponderance of the           ticipate in the project was itself imprudent. Rather,
evidence.                                                 they focused on the perceived errors associated with
                                                          EPEC's decision making process. The Commission's
                                                          witnesses noted that they were unaware of any theory
      In the Findings of Fact, the Commission provid-
                                                          that would enable them to recommend any specific
ed:
                                                          disallowance of project costs or capacity based on
                                                          their conclusions.FNI 3
  101. The Company was not entirely prudent in its
  planning and management of its participation in the
                                                                   FN 12. Although not clear from Mr. Johnson's
  Palo Verde project.
                                                                   testimony, under his suggested approach, the
                                                                   imprudence disallowance would have ex-
  102. There is evidence in the record of imprudence
                                                                   ceeded $350 million.
  in the Company's continuing evaluation of the level
  of its participation in the Palo Verde Project. The
                                                                   FN13. We note that the Examiner likewise
  parties to the Amended and Restated Stipulation
                                                                   recognized flaws in EPEC's decision making
  have quantified The [sic] cost of such imprudence
                                                                   process. However, the Examiner noted that
  as $22 million as applied to Units 1 and 2. The
                                                                   "it is too much to ask that one reconstruct the
  Company has conceded an additional $10 million
                                                                   appropriate process fifteen years after the
  disallowance to be applied to PVNGS Units 1 and 2.
                                                                   fact in order [to] fmd whether a decision
                                                                   made on an inappropriate basis might still
  103. Quantification of the effects of imprudence
                                                                   have been made on an appropriate one."
  requires the exercise of judgment based upon the
                                                                   Docket No. 7460, supra note 1, at 981.
  evidence. In light of the evidence relating to pru-
  dence and the difficulties in quantification, the
                                                                The evidence before the Commission therefore
  quantification of decisional imprudence at $32 mil-
                                                           ranged from expert testimony that no imprudence
  lion for Units 1 and 2 is reasonable and appropriate.
                                                           disallowance should be imposed, to testimony that a
                                                           50% imprudence disallowance should be imposed,
      Docket No. 7460, supra note 1, at 1250.
                                                           and finally to testimony that there is no known theory
                                                           to quantify the flaws in EPEC's decision making
      The record before this Court is extensive and        process giving rise to its investment. In other words,




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883 S.W.2d 179, Util. L. Rep. P 26,411
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several experts had significant differences of opinion    Comm'n, 407 S.W.2d 752,758 (Tex.1966). We do not
on the proper method to determine and the proper          accept that the City and OPUC have met their burdens
amount of EPEC's imprudence disallowance. These           to overcome the presumption in this case.
differences are understandable when considering the
enormous complexity involved in a utility's decision               FN 14. In affirming the Commission's order,
to construct or purchase new generating capacity.                  the court of appeals relied in part on its de-
                                                                   termination that EPEC's agreement in the
      [6] In conducting a substantial-evidence review,             non-binding stipulation to a $32 million dis-
we must determine whether the evidence as a whole is               allowance constituted a "quasi-admission."
such that reasonable minds could have reached the                  839 S.W.2d at 907. The court of appeals
conclusion the agency must have reached in order to                concluded that "[b]ecause it is a statement
take the disputed action. Te.'cas State Bd. of Dental              contrary to EPEC's pecuniary interest, the
Examiners v. Sizemore, 759 S.W.2d 114, 116                         concession has some evidentiary weight." Id
(Tex.l988), cert. denied, 490 U.S. 1080, 109 S.Ct.                 While we need not address whether the
2100, 104 L.Ed.2d 662 (1989). The true test is not                 EPEC's agreement in the non-binding stipu-
whether the agency reached the correct conclusion,                 lation constituted a "quasi-admission," we
but whether some reasonable basis exists in the record             note that it is debatable as to whether EPEC's
for the action taken by the agency. Texas Health Fa-               acceptance of a $32 million figure was in fact
cilities Comm'n v. Charter Medical-Dallas, Inc., 665               a statement against its pecuniary interest,
S.W.2d 446, 452 (Tex.l984). We agree with the court                considering that the evidence could have
of appeals that the record contains substantial evi-               supported a much higher disallowance. See
dence to support a disallowance figure of zero for                 supra note 12.
decisional imprudence; and, the record contains sub-
stantial evidence to support a Commission finding that                         *187 III.
50 percent of EPEC's costs should have been disal-                  Final Revenue Requirement FNts
lowed. See 839 S.W.2d at 907. Thus, because of the
admitted complexity in valuing the decisional im-
                                                                    FN15. The final revenue requirement repre-
prudence in this case, we hold that there is a reasona-
                                                                    sents the total revenues needed by the utility
ble basis for the Commission to, in its discretion,
                                                                    in order to cover its reasonable and necessary
select an amount within the range of figures provided
                                                                    operating expenses and receive a return on
by expert testimony of the parties. FNJ 4 Moreover, the
                                                                    the rate base.
City and OPUC have failed to explain why any one
amount within that range is more reasonable or better
                                                                The City complains generally about the revenue
supported by the evidence than the $32 million figure
                                                           requirement determination and then makes specific
eventually reached by the Commission. The fmdings,
                                                           contentions concerning particular components of the
inferences, conclusions, and decisions of an adminis-
                                                           revenue requirement. The City argues that the fmal
trative agency are presumed to be supported by sub-
                                                           revenue requirement of the Commission was based
stantial evidence, and the burden is on the contestant
                                                           solely on the non-binding stipulation agreement and
to prove otherwise. Texas Health Facilities Comm'n v.
                                                           not on the record evidence. According to the city, the
Charter Medical-Dallas, Inc., 665 S.W.2d 446, 452
                                                           fmdings and conclusions adopted by the Commission
(Tex.l984); Imperial American Resources Fund, Inc.
                                                           do not allow this Court to analyze the decision because
v. Railroad Comm'n, 557 S.W.2d 280, 286
                                                           the agreement between the parties is not evidence and
(Tex.l977); City of San Antonio v. Texas Water




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883 S. W.2d 179, Util. L. Rep. P 26,411
(Cite as: 883 S.W.2d 179)

not a statutory standard for review. We disagree.          Employee Benefits; and (3) Taxes other than Federal
                                                           Income Taxes. After reviewing the opinion of the
    Finding of Fact No. 152 provides:                      court of appeals, the briefs of the parties, and the rec-
                                                           ord, we conclude that the City's arguments on these
                                                           issues are without merit. The court of appeals cor-
  The preponderance of the evidence establishes that
                                                           rectly articulates the error in the City's claims. 839
  the company has a total revenue requirement with
                                                           S. W.2d at 927-31.
  components as set forth in Exhibit B of the
  Amended and Restated Stipulation.
                                                                                      IV.
                                                                                  Deferrals
     Docket No. 7460, supra note 1, at 1260. This
                                                                The City, OPUC, and State make several argu-
finding is supported by twenty-five underlying fmd-
                                                           ments contesting the Commission's authority to permit
ings of fact addressing the components of the total
                                                           the deferral of post-in-service costs, and the inclusion
revenue requirement, with each finding supported by
                                                           of the deferred costs in the utility's rate base. FNJ<i In
record evidence. Id. at 1260-1265 (Findings of Fact
                                                           State of Texas v. Public Utility Commission, 883
153-87). Except for the specific challenges to three of
                                                           S. W.2d 190 (Tex.l994), we held that the Commission
the components making up the total revenue re-
                                                           possesses the authority to allow a utility to defer
quirement, the City does not complain specifically that
                                                           post-in-service costs in order to protect the utility's
any particular underlying fmding supporting Finding
                                                           fmancial integrity. We further held that the subsequent
of Fact No. 152 is not supported by substantial evi-
                                                           inclusion of the deferred costs in the utility's rate base
dence. We presume that the Commission's decision is
                                                           did not violate PURA section 4l(a), nor did it violate
supported by substantial evidence. Charter Medical,
                                                           the rule against retroactive ratemaking. As a result we
665 S.W.2d at 453.
                                                           reject the arguments of the City, OPUC and State on
                                                           these issues. We will address only those issues that
     [7] In addition, we reject the City's argument that
                                                           were not addressed in State of Texas v. Public Utility
the Commission applied no statutory standard in de-        Commission. FNJ?
termining revenue requirements. As the City recog-
nizes, the statutory standard that controls revenue
                                                                    FN16. The Commission allowed EPEC to
requirement determinations is that rates be fixed to
                                                                    include $74,503,575 of deferrals in rate base.
permit the utility a reasonable opportunity to earn a
                                                                    Docket No. 7460, supra note 1, at 1258
reasonable return on its invested capital plus "rea-
                                                                    (Finding ofFact 144).
sonable and necessary" operating expense to provide
service. TEX.REV.CIV.STAT.ANN. art. 1446c, §
39(a). The Commission's determination of the revenue                 FN17. In State of Texas v. Public Utility
requirement is supported by findings which detail the                Commission, 883 S.W.2d 190, we held that
Commission's resolution of contested issues regarding                the Commission must consider to what extent
the Company's "reasonable and necessary" operating                   the inclusion of the deferred cost assets in
expenses. Thus, the statutory standard for determining               rate base is actually necessary to preserve the
the revenue requirement was met.                                     utilities' fmancial integrity. 883 S.W.2d at
                                                                     20 1. We noted that such a determination
                                                                     should be made at the rate hearing. Jd. Be-
    The City makes numerous challenges to three
                                                                     cause no party argued that the Commission
components of the fmal revenue requirement, in-
                                                                     should have made such a determination in
cluding (1) Operating and Maintenance expenses; (2)
                                                                     this case, any argument on this point is




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883 S.W.2d 179, Util. L. Rep. P 26,411
(Cite as: 883 S.W.2d 179)

          waived.
                                                                        FN 18. The deferral period for Palo Verde
                           *188 A.                                      Unit 1 was twenty-five months and for Unit 2
                Test Year Requirement                                   was nineteen months.
     [8] PURA requires utilities to file for a rate in-
crease by presenting revenue and expense data from                                       B.
the same 12-month period using an historical test                               Standards Applied
year. TEX.REV.CIV.STAT.ANN. art. 1446c, § 3(t);                     The Commission granted EPEC's request to defer
16 TEX.ADMIN.CODE § 23.21(a); Suburban Utility                 post-in-service costs for Unit 1 based upon a "fman-
Corp. v. Public Utility Comm'n, 652 S.W.2d 358, 366            cial integrity and viability" standard. Docket No.
(Tex.1983). In State of Texas v. Public Utility Com-           6350, supra note 6, at 1239-41. However, the Com-
mission, we held that an accounting order authorizing          mission granted EPEC's unit 2 request for deferred
deferred accounting treatment does not violate the test        accounting based on a "measurable harm" standard.
year requirement because there is no requirement in            Docket No. 7460, supra note 1, at 1079. The City
PURA or the Commission's procedures that the                   argues that the use of two different standards is arbi-
Commission must follow a test year when determining            trary and capricious because the Commission has
accounting policy. However, in the context of a rate           created new standards for each decision concerning
case, the test year requirement applies. Thus, we must         deferred accounting. FNI 9 We disagree.
address the argument that the actual inclusion of de-
ferred costs in a utility's rate base violates the test year
                                                                        FN19. We note that in State of Texas v. Pub-
requirement.
                                                                        lic Uti!. Comm'n, 883 S.W.2d 190
                                                                        (Tex.l994), we held that the Commission
     The State argues that post-in-service costs were                   possesses the authority to authorize deferred
deferred for up to 25 months and thus, the inclusion of                 accounting treatment of post-in-service costs.
such rates in EPEC's rate base violated the test year                   Further, we concluded that it was not an
requirement.FNIS However, the Commission may, in                        abuse of discretion for the Commission to
its discretion, go outside the test year when necessary                 apply a fmancial integrity standard to deter-
to achieve just and reasonable rates. In Suburban                       mine whether to authorize deferred ac-
Utility Corp. v. Public Utility Commission, 652                         counting because that standard "ensured that
S.W.2d 358, 366 (Tex.1983), we stated that                              the utilities will receive an opportunity to
"[ c]hanges occurring after the test period, if known,                  recover the minimum rates mandated by
may be taken into consideration by the regulatory                       PURA." Jd. at 197. However, in Office of
agency to help mitigate the effects of inflation and in                 Public Utility Counsel v. Public Uti!.
order to make the test year data as representative as                   Comm'n, 883 S.W.2d 190 (Tex.l994), we
possible of the cost situation that is apt to prevail in the            held that the measurable harm standard
future." Because it ordered the deferral of                             lacked "a foundation in the regulatory
post-in-service costs, the Commission understood the                    scheme provided by PURA" and, as a result,
impact of deferring post-in-service costs on the test                   the Commission abused its discretion by ap-
year. It is within the discretion of the Commission to                  plying the measurable harm standard to de-
consider expenditures that occur outside the test year                  termine whether to allow deferred account-
if such consideration will assist the Commission in                      ing. 883 S.W.2dat 196. WenotethattheCity
making the test year as representative as possible to                    does not contest the Commission's decision
the cost situation expected in the future.                               as to Unit 2 on the grounds that it was based




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                                                                                                          Page 13


883 S.W.2d 179, Util. L. Rep. P 26,411
(Cite as: 883 S.W.2d 179)

         on a standard that was too speculative. Thus,    capital in nuclear plants. Proceeding on an ad hoc or
         we do not address that issue in this case.       "case-by-case" basis is fully understandable in the
                                                          context of a newly created competitive market that
      [9] In determining whether to allow a particular    involves complex technical considerations and com-
utility to defer post-in-service costs, the Commission    peting statutory objectives. See Southwestern Bell Tel.
has discretion to proceed on an ad hoc or                 Co. v. Public Uti!. Comm'n, 745 S.W.2d 918, 926-27
"case-by-case" basis. See, e.g., Securities and Exch.     (Tex.App.-Austin 1988, \vrit denied); see also Se-
Comm'n v. Chene1y COJ]J., 332 U.S. 194, 67 S.Ct.          curities and Exch. Comm'n v. Chenery Corp., 332 U.S.
1575, 91 L.Ed. 1995 (1947); National Labor Relations      194,202-03,67 S.Ct. 1575, 1580-81,91 L.Ed. 1995
Bd. v. Wyman-Gordon Co., 394 U.S. 759, 89 S.Ct.           (194 7). As a result, we hold that the Commission was
1426, 22 L.Ed.2d 709 (1969); *189Southwestern Bell        within its discretion in proceeding on a "case-by-case"
Tel. Co. v. Public Uti!. Comm'n, 745 S.W.2d 918,926       or ad hoc basis and applying different standards in
(Tex.App.- Austin 1988, writ denied). In SEC v.           different proceedings. FNzt
Chenery Corp., 332 U.S. 194, 202-03, 67 S.Ct. 1575,
1580-81, 91 L.Ed. 1995 (1947), the Court stated that                FN21. The Commission's discretion to pro-
ad hoc adjudication may be preferable to a formal                   ceed on a "case-by-case" basis is not abso-
rulemaking proceeding where "the agency may not                     lute. When the underlying considerations that
have had sufficient experience with a particular                    support ad hoc adjudication are no longer
problem to warrant rigidifying its tentative judgment               present, then the Commission will be bound
into a hard and fast rule;" and where the problem is so             to follow the formal rulemaking procedures
"specialized and varying in nature as to be impossible              set out in the TEX.GOV'T CODE ANN. §
of capture within the boundaries of a general rule."                2001.141. See Southwestern Bell Tel. Co. v.
Both of the foregoing considerations apply in the                   Public Uti!. Comm'n, 745 S.W.2d 918,
Commission's early attempts to defme the proper                     926-27 (Tex.App.-Austin 1988, writ de-
standard to apply to deferred accounting cases.rnzo                 nied).


         FN20. In fact, the Commission ultimately                                    v.
        concluded that the measurable harm standard                               Conclusion
        was too speculative. See, e.g., Tex.Public              We hold that the Commission did not err by
        Utils. Comm'n, Petition of Houston Lighting        basing its final order, in part, on a non-unanimous
        and Power Company for Approval of De-              stipulation. Further, based on our holding in State of
        ferred Accounting Treatment for Limestone          Texas v. Public Utility Commission, 883 S.W.2d 190
         Unit 2 and the South Texas Project Unit I,        (Tex.l994), we hold that the Commission has the
        Docket No. 8230, 14 TEX.P.U.C.BULL.                authority under PURA to include deferred
        2752,2811 (April19, 1989).                         post-in-service costs in a utility's rate base. Further,
                                                           the Commission did not abuse its discretion by ap-
    Early in the process, the Commission was faced         plying different standards in determining whether to
with numerous complex problems presented by the            allow deferred accounting treatment for Palo Verde
recent arrival of nuclear generation plants. While         Units 1 and 2. We reverse the court of appeals to the
remaining within the statutory framework of PURA,          extent that it disallows the deferral and inclusion in
the Commission had to balance the interests of con-        rate base of deferred post-in-service carrying costs. In
sumers with the complex financial consideration cre-       all other respects, the judgment of the court of appeals
ated by public utilities investing large amounts of        is affirmed.




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                                                                                                          Page 14


883 S. W.2d 179, Util. L. Rep. P 26,411
(Cite as: 883 S.W.2d 179)


Justice SPECTOR, joined by Justice GONZALEZ,                    The majority cites no evidence in support of the
Justice DOGGETT, and Justice GAMMAGE, dis-                 $32 million disallowance, because none exists.
senting.                                                   Nonetheless, the majority upholds the Commission's
     This case demonstrates the weakness of the            fmdings as supported by substantial evidence. Supra
safeguards relied upon today in State of Texas v.          at 186.
Public Utility Commission, 883 S.W.2d 190
(Tex.1994 ). In that case, the majority defends its ap-         With the standard of review applied today, it is
proval of deferred accounting treatment on the ground      difficult to imagine any Commission decision relating
that deferred cost assets will be included in rate base    to prudence that would be set aside by the Court. This
only to the extent that they are deemed "prudent,          lack of review will be especially pernicious in the
reasonable and necessary." !d. at 197-198 n. 12. In the    context of deferred cost assets. Valuing the prudence
present case, however, the majority approves the           of such assets will involve the same degree of com-
Public Utility Commission's application of a similar       plexity as valuing the imprudence in this case. Thus, in
standard, despite a total lack of evidence supporting      approving deferred amounts for inclusion in rate base,
the Commission's findings. I dissent.                      the Commission may arbitrarily select a figure within
                                                           a wide range, and its decision will effectively be im-
    At the rate hearings below, the City of El Paso        mune from judicial review. Judging by the example of
presented extensive evidence concerning the impru-         this case, the figure selected will typically be much
dence of El Paso Electric Company's decisions to           closer to the utility's recommended figure than it is to
become involved in the Palo Verde Project and to           the ratepayers'.
remain involved at the 15.8 percent participation level.
See Tex. Pub. Utils. Comm'n, Application of El Paso             I would hold that the disallowance for decisional
Electric Company for Authority to Change *190              imprudence must be based on the evidentiary record.
Rates, Docket No. 7460, 14 TEX.P.U.C.BULL. 932,            Additionally, for the reasons stated in my dissenting
965-84 (June 16, 1988). The City's expert testimony        opinion in State of Texas v. Public Utility Commis-
concluded that 50 percent of the cost of all three Palo    sion, 883 S. W.2d at 205-209, I would hold that no
Verde units should be disallowed as imprudent. ld. at      expenses incurred after the beginning of commercial
983. Using this figure, some $350 million should have      operation may be capitalized and included in rate base.
been disallowed for Unit 1 alone.                          Accordingly, I would remand this cause to the Com-
                                                           mission for a determination of rates in keeping with
     The Commission agreed that El Paso Electric was       traditional standards.
"not entirely prudent" in planning and managing its
participation in the Palo Verde project. ld. at 1250. In    Tex.,l994.
determining the amount of the disallowance, however,        City ofEl Paso v. Public Utility Com'n of Texas
the Commission chose not to rely on the evidence            883 S.W.2d 179, Util. L. Rep. P 26,411
presented; instead, it seized upon a figure of $32 mil-
lion that had been discussed in the course of settlement
                                                            END OF DOCUMENT
negotiations. ld. at 1250-51. El Paso Electric's own
expert testified, in regard to the settlement amount, "I
don't think it really relates to anything." The $32 mil-
lion figure has no basis in reality; it resulted solely
from the parties' efforts to buy peace.




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


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


47 S.W.3d 486,44 Tex. Sup. Ct. J. 675
(Cite as: 47 S.W.3d 486)



                                                                Affirmed.
           Supreme Court of Texas.
   HELENA CHEMICAL COMPANY and Hyper-                          Abbott, J., filed a dissenting opinion, in which
       former Seed Company, Petitioners,                    Hecht and Owen, JJ., joined.
                           V.
 Kenneth WILKINS and Tom Wilkins individually,                                 West Headnotes
 and d/b/a Chapotal Farms and Porciones 99 Proper-
 ties, Geen Wilkins and Mark Wilkins, individually
                                                            Ill Statutes 361   ~1080
   and d/b/a Tabasco, and Wilkins Family Limited
              Partnership, Respondents.
                                                            361 Statutes
                                                                36llll Construction
                   No. 00--0418.
                                                                   36llll(A) In General
                Argued Feb. 7, 2001.
                                                                      36lkl078 Language
               Decided April 26, 200 l.
                                                                          36lk1080 k. Language and intent, will,
                                                            purpose, or policy. Most Cited Cases
     Farmers filed action against seed seller, alleging        (Formerly 36lkl88)
violation of Deceptive Trade Practices Act (DTPA),
breach of warranties, and fraud. The 229th Judicial
                                                            Statutes 361 ~1081
District Court, Starr County, John A. Pope, lll, J.,
entered judgment on jury verdict awarding damages to
farmers. Both sides appealed. The Court of Appeals,         361 Statutes
18 S.W.3d 744, affirmed. Seller filed petition for              361 llJ Construction
review. The Supreme Court, Baker, J., held that: {l) as             36llll{A) ln General
matter of first impression, farmers' delay in submitting               36lkl078 Language
claims against seed seller to arbitration, as was re-                      361 k 1081 k. Construction as written.
quired by Seed Arbitration Act, did not deprive trial       Most Cited Cases
court of jurisdiction to hear farmers' lawsuit; (2)            (Formerly 36lkl76)
farmers' witness was sufficiently qualified to testify as
expert as to suitability of grain sorghum seed for dry          Court must construe statutes as written and, if
land farming and its susceptibility to charcoal rot         possible, ascertain legislative intent from the statute's
disease; (3) expert's testimony on suitability of seed      language.
for dry land farming was sufficiently reliable to be
admissible; (4) evidence supported conclusion that          121 Statutes 361   ~1082
seller's misrepresentations about seed's characteristics,
quality, and grade amounted to more than mere puff-
                                                            361 Statutes
ing; and (5) evidence was sufficient for jury to calcu-
                                                               361II1 Construction
late, with reasonable certainty, award of lost profit              3611Il(A) In General
damages.
                                                                      36lkl082 k. Construction based on multiple




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                                                                                                           Page2


47 S.W.3d 486, 44 Tex. Sup. Ct. J. 675
(Cite as: 47 S.W.3d 486)

factors. Most Cited Cases                                   151 Statutes 361 ~1407
   (Formerly 36lkl74)
                                                           361 Statutes
     Even when a statute is not ambiguous on its face,         3611V Operation and Effect
a court can consider other factors to determine the               36lkl407 k. Mandatory or directory statutes.
Legislature's intent, including the object sought to be    Most Cited Cases
obtained, the circumstances of the statute's enactment,       (Formerly 36lk227)
the legislative history, the common law or former
statutory provisions, including laws on the same or            Word "must" in a statute is given a mandatory
similar subjects, the consequences of a particular         meaning when followed by a noncompliance penalty.
construction, administrative construction of the stat-     V.T.C.A., Govenunent Code§ 311.016(2, 3).
ute, and the title, preamble, and emergency provision.
V.T.C.A., Government Code§ 311.023.
                                                            [61 Statutes 361 ~1407

131 Statutes 361 ~1151
                                                           361 Statutes
                                                               361IV Operation and Effect
361 Statutes                                                      361k1407 k. Mandatory or directory statutes.
    36llll Construction                                    Most Cited Cases
       3611IJ(E) Statute as a Whole; Relation of Parts        (Formerly 361k227)
to Whole and to One Another
          36Ikl151 k. In general. Most Cited Cases
                                                                To determine whether the Legislature intended a
   (Formerly 361k205)
                                                           provision to be mandatory or directory, a court con-
                                                           siders the plain meaning of the words used, as well as
     Court must always consider the statute as a whole     the entire act, its nature and object, and the conse-
rather than its isolated provisions.                       quences that would follow from each construction.

141 Statutes 361 ~1155                                      171 Statutes 361 ~1407

361 Statutes                                                361 Statutes
    361IJI Construction                                         361 IV Operation and Effect
       361III(E) Statute as a Whole; Relation of Parts              361kl407 k. 'Mandatory or directory statutes.
to Whole and to One Another                                 Most Cited Cases
          361kll55 k. Construing together; harmony.            (Formerly 36lk227)
Most Cited Cases
   (Formerly 36lk207)
                                                                 Even if a statutory requirement is mandatory, this
                                                            does not mean that compliance is necessarily juris-
    Court should not give one provision of a statute a      dictional.
meaning out of harmony or inconsistent with other
provisions, although it might be susceptible to such a
                                                            [8J Statutes 361 ~1407
construction standing alone.

                                                            361 Statutes




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                                                                                                                 Page3


47 S.W.3d 486, 44 Tex. Sup. Ct. J. 675
(Cite as: 47 S.W.3d 486)

   361 TV Operation and Effect                                   (Formerly 33k8 Arbitration)
       361 k1407 k. Mandatory or directory statutes.
Most Cited Cases                                                  Arbitration scheme established under the Seed
  (Formerly 361k1075, 361k184)                                Arbitration Act was created to provide an alternate
                                                              forum for farmers to initially submit claims, not as a
     When a statute is silent about the consequences of       mechanism to preclude farmers' suits altogether.
noncompliance, the court looks to the statute's purpose       V.T.C.A., Agriculture Code§ 64.001 et seq.
to determine the proper consequences.
                                                              [11] Statutes 361 ~1407
[9] Alternative Dispute Resolution 25T ~181
                                                              361 Statutes
25T Alternative Dispute Resolution                                3611V Operation and Effect
     25TII Arbitration                                               36lk1407 k. Mandatory or directory statutes.
        25Tll(D) Performance, Breach, Enforcement,            Most Cited Cases
and Contest                                                      (Formerly 361k227)
           25Tk 177 Right to Enforcement and De-
fenses in General                                                  To determine whether a statute's timing provision
              25Tk181 k. Applicant's default, delay,          is mandatory, a court frrst looks to whether the statute
or laches. Most Cited Cases                                   contains a noncompliance penalty; if a provision re-
    (Formerly 33k23.2 Arbitration)                            quires that an act be performed within a certain time.
                                                              without any words restraining the act's performance
     Farmers' delay in submitting claims against seed         after that time, the timing provision is usually direc-
seller to arbitration, as was required by Seed Arbitra-       tory.
tion Act, until trial court granted seller's motion to
compel arbitration, did not deprive trial court of ju-        [12] Statutes 361 ~1221
risdiction to hear farmers' lawsuit, even though delay
prompted arbitration board to refuse to arbitrate matter
                                                              361 Statutes
due to inability to investigate crops in field conditions,
                                                                  3 61 Ill Construction
in light of Act's specific authorization for trial court to
                                                                       36111I(G) Other Law, Construction with Ref-
take such delay into account, court's ability to fashion
                                                              erence to
remedy, and lack of provision dictating dismissal for
                                                                          361k1220 Other Jurisdictions
noncompliance with timing requirement.V.T.C.A.,
                                                                              361k1221 k. In general. Most Cited
Agriculture Code§ 64.004.
                                                              Cases
                                                                 (Formerly 361k226)
[10] Alternative Dispute Resolution 25T ~152
                                                                   When a state statute is modeled after another ju-
25T Alternative Dispute Resolution                            risdiction's, that jurisdiction's interpretation before the
    25TH Arbitration                                          Legislature enacts the state statute may be given
       25Tll(B) Agreements to Arbitrate                       weight.
         25Tk150 Operation and Effect
              2511<: 152 k. As ousting jurisdiction of or
                                                              [13] Statutes 361 ~1221
precluding resort to courts. Most Cited Cases




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                                                                                                            Page4


4 7 S. W.3d 486, 44 Tex. Sup. Ct. J. 675
(Cite as: 47 S.W.3d 486)


361 Statutes                                                [16] Evidence 157 ~508
    361 Ill Construction
        361 JIT(G) Other Law, Construction with Ref-        157 Evidence
erence to                                                       157XI1 Opinion Evidence
           36 Ik 1220 Other Jurisdictions                           157Xll(B) Subjects ofExpert Testimony
                3611<1221 k. In general. Most Cited                   157k508 k. Matters involving scientific or
Cases                                                       other special knowledge in general. Most Cited Cases
   (Formerly 361k226)

                                                            Evidence 157 ~535
     When the Legislature looks to another jurisdic-
tion's statute, but modifies rather than adopts some of
                                                            157 Evidence
its provisions, it does so purposefully.
                                                                157Xll Opinion Evidence
                                                                   157Xll(C) Competency ofExperts
[14] Alternative Dispute Resolution 25T ~114                         1571<535 k. Necessity of qualification. Most
                                                            Cited Cases
25T Alternative Dispute Resolution
    25TH Arbitration                                        Evidence 157 ~555.2
        25Tll(A) Nature and Form of Proceeding
           25Tk114 k. Constitutional and statutory
provisions and rules of court. Most Cited Cases
                                                            i 57 Evidence
                                                              157Xll Opinion Evidence
   (Formerly 33k2 Arbitration)
                                                                  157XII(D) Examination ofExperts
                                                                     157k555 Basis of Opinion
    Seed arbitration laws are established to protect the                157k555.2 k. Necessity and sufficiency.
farmer. V.T.C.A., Agriculture Code§ 64.001 et seq.          Most Cited Cases

[15] Alternative Dispute Resolution 25T ~181                     Two-part test governs whether expert testimony
                                                            is admissible: (I) the expert must be qualified, and (2)
25T Alternative Dispute Resolution                          the testimony must be relevant and be based on a
     25TH Arbitration                                       reliable foundation. Rules ofEvid., Rule 702.
        25TII(D) Performance, Breach, Enforcement,
and Contest                                                 [17] Evidence 157 €::;:)546
           25Tk177 Right to Enforcement and De-
fenses in General
                                                            157 Evidence
              25Tk181 k. Applicant's default, delay,
                                                               157XIl Opinion Evidence
or laches. Most Cited Cases
                                                                   157Xll(C) Competency ofExperts
    (Formerly 33k23.2 Arbitration)
                                                                     1571<546 k. Determination of question of
                                                            competency. Most Cited Cases
     While submission to arbitration under the Seed
Arbitration Act is mandatory if not waived by the seed
                                                               Trial court makes the initial determination about
seller, the Act's timing requirement is not. V.T.C.A.,
                                                            whether an expert is qualified and the proffered tes-
Agriculture Code§ 64.004.




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                                                                                                           Page 5


47 S.W.3d 486,44 Tex. Sup. Ct. J. 675
(Cite as: 47 S.W.3d 486)

timony is relevant and based on a reliable foundation.    157 Evidence
Rules of Evid., Rule 702.                                    157XIl Opinion Evidence
                                                                 157XII(D) Examination ofExperts
1181 Appeal and Error 30 ~971(2)                                   1571<555 Basis of Opinion
                                                                       157k555.2 k. Necessity and sufficiency.
                                                          Most Cited Cases
30 Appeal and Error
   30XVI Review
      30XYJ(H) Discretion of Lower Court                       If an expert relies upon unreliable foundational
         30k97l Examination of Witnesses                  data, any opinion drawn from that data is likewise
             30k971(2) k. Competency of witness.          unreliable. Rules of Evid., Rule 702.
Most Cited Cases
                                                          [21] Evidence 157 ~555.2
Evidence 157 ~546
                                                          157 Evidence
157 Evidence                                                 157XJJ Opinion Evidence
   157XIT Opinion Evidence                                       157XII(D) Examination of Experts
       157XII(C) Competency ofExperts                              157k555 Basis of Opinion
         157k546 k. Determination of question of                       157k555.2 k. Necessity and sufficiency.
competency. Most Cited Cases                              Most Cited Cases


     Trial court has broad discretion to determine ad-        Expert's testimony is unreliable even when the
missibility of expert testimony, and the Supreme          underlying data is sound if the expert's methodology is
Court will reverse only if there is an abuse of that      flawed. Rules of Evid., Rule 702.
discretion.
                                                           [22] Evidence 157 ~542
1191 Evidence 157 €;::::)536
                                                           157 Evidence
157 Evidence                                                   157XI1 Opinion Evidence
     157XIl Opinion Evidence                                      157Xli(C) Competency ofExperts
         l57XIT(C) Competency of Experts                             157k542 k. Physical facts. Most Cited Cases
            157k536 k. Knowledge, experience, and
skill in general. Most Cited Cases                              Witness was sufficiently qualified to testify as
                                                           expert as to suitability of grain sorghum seed for dry
    In deciding if an expert is qualified, trial courts    land farming and its susceptibility to charcoal rot
must ensure that those who purport to be experts truly     disease, even though he was not plant pathologist,
have expertise concerning the actual subject about         where witness, a plant scientist with a doctorate in
which they are offering an opinion. Rules of Evid.,        plant physiology, used his experience in conducting
Rule 702.                                                  crop-variety testing to formulate conclusion on basis
                                                           of research, study of independent tests, and observa-
                                                           tions regarding seed's suitability for dry land farming.
[201 Evidence 157 ~555.2
                                                           Rules of Evid., Rule 702.




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                                                                                                          Page6


47 S.W.3d 486, 44 Tex. Sup. Ct. J. 675
(Cite as: 47 S.W.3d 486)

1231 Evidence 157 ~555.4(1)
                                                           [25] Antitrust and Trade Regulation 29T ~161
157 Evidence
    157Xll Opinion Evidence                                29T Antitrust and Trade Regulation
       157XTT{D) Examination of Experts                         29TJJI Statutory Unfair Trade Practices and
         157k555 Basis of Opinion                          Consumer Protection
             157k555.4 Sources ofData                             29TIII(B) Particular Practices
                157k555.4{1) k. In general. Most                     29Tkl61 k. Representations, assertions, and
Cited Cases                                                descriptions in general. Most Cited Cases
                                                              (Formerly 92Hk34 Consumer Protection)
Evidence 157 ~557
                                                               Party need not prove intent to make a misrepre-
!57 Evidence                                              sentation under the Deceptive Trade Practices Act
    157Xll Opinion Evidence                               {DTPA); making the false representation is itself ac-
       157XII{D) Examination of Experts                   tionable. V.T.C.A., Bus. & C. § I 7.46(b )(5, 7).
         1571<557 k. Experiments and results thereof.
Most Cited Cases                                           [26] Antitrust and Trade Regulation 29T ~138

     Expert's testimony on suitability of grain sorghum    29T Antitrust and Trade Regulation
seed for dry land farming was sufficiently reliable to          29T!Il Statutory Unfair Trade Practices and
be admissible in farmers' action against seed seller,      Consumer Protection
where expert had 20 years experience as a plant sci-               29TIJI{A) In General
entist and conducting and interpreting crop trials and                29Tkl33 Nature and Elements
his conclusion flowed from his observation of seed                       29Tk138 k. Reliance; causation; injury,
tests and other factors including weather and              loss, or damage. Most Cited Cases
weed-control reports, disease publications, other             (Formerly 92Hk4 Consumer Protection)
testing, and comparisons with crops on adjacent
farms.
                                                           Antitrust and Trade Regulation 29T ~162

1241 Antitrust and Trade Regulation 29T ~161
                                                           29T Antitrust and Trade Regulation
                                                                29TJII Statutory Unfair Trade Practices and
29T Antitrust and Trade Regulation                         Consumer Protection
     29Tlii Statutory Unfair Trade Practices and                   29TIII(B) Particular Practices
Consumer Protection                                                  29Tk 162 k. Omissions and other failures to
       29TIII{B) Particular Practices                      act in general; disclosure. Most Cited Cases
          29Tk161 k. Representations, assertions, and         (Formerly 92Hk4 Consumer Protection)
descriptions in general. Most Cited Cases
   (Formerly 92Hk6 Consumer Protection)
                                                               To recover under the Deceptive Trade Practices
                                                           Act {DTPA), the plaintiff must show that the de-
    Actionable representations under the Deceptive         fendant's actions were the "producing cause" of actual
Trade Practices Act {DTPA) may be oral or written.         damages, which requires some evidence that the de-
V.T.C.A., Bus. & C. § 17.41 et seq.




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                                                                                                         Page 7


47 S.W.3d 486, 44 Tex. Sup. Ct. J. 675
(Cite as: 47 S.W.3d 486)

fendant's act or omission was a cause in fact of the                    30kl001 Sufficiency of Evidence in
plaintiffs injury. V.T.C.A., Bus. & C.§ 17.50(a).         Support
                                                                          30kl001(1) k. In general. Most Cited
1271 Antitrust and Trade Regulation 29T E?138             Cases


29T Antitrust and Trade Regulation                             If more than a scintilla of evidence exists, the
      29Till Statutory Unfair Trade Practices and         evidence is legally sufficient to support the fmding of
Consumer Protection                                       the disputed fact.
        29TIII(A) In General
           29Tkl33 Nature and Elements                    [30] Antitrust and Trade Regulation 29T ~369
              29Tkl38 k. Reliance; causation; injury,
loss, or damage. Most Cited Cases                         29T Antitrust and Trade Regulation
   (Formerly 92Hk4 Consumer Protection)                       29Tlll Statutory Unfair Trade Practices and
                                                          Consumer Protection
     In presenting some evidence that the defendant's           29TIII(E) Enforcement and Remedies
act or omission was a cause in fact of the plaintiffs              29Tl!I(E)6 Evidence
injury, under the Deceptive Trade Practices Act                         29Tk369 k. Weight and sufficiency.
(DTPA), it is not necessary to show that the harm was     Most Cited Cases
foreseeable. V.T.C.A., Bus. & C.§ 17.50(a).                 (Formerly 92Hk39 Consumer Protection)


[28] Appeal and Error 30 ~930(1)                               Evidence of specific representations about grain
                                                          sorghum seed's characteristics and specific represen-
30 Appeal and Error                                       tations about how farmers' crop in particular would
   30XVI Review                                           perform supported conclusion that seller's misrepre-
      30XVI(G) Presumptions                               sentations about seed's characteristics, quality, and
         30k930 Verdict                                   grade amounted to more than mere puffmg, under the
             30k930(1) k. In general. Most Cited          Deceptive Trade Practices Act (DTPA). V.T.C.A.,
Cases                                                     Bus. & C.§ 17.46(b)(5, 7).


     In conducting a no-evidence review, the Supreme       131] Antitrust and Trade Regulation 29T E?369
Court must view the evidence in a light that tends to
support the finding of the disputed fact and disregard     29T Antitrust and Trade Regulation
all evidence and inferences to the contrary.                   29TIII Statutory Unfair Trade Practices and
                                                           Consumer Protection
[29] Appeal and Error 30 ~1001(1)                                 29T!Il(E) Enforcement and Remedies
                                                                    29TIII(E)6 Evidence
                                                                          29Tk369 k. Weight and sufficiency.
30 Appeal and Error
                                                           Most Cited Cases
   30XVl Review
                                                              (Formerly 92Hk39 Consumer Protection)
        30XVI(l) Questions of Fact, Verdicts, and
Findings
         30XVI(I)2 Verdicts                                Sales 343 E?441(3)




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47 S.W.3d 486,44 Tex. Sup. Ct. J. 675
(Cite as: 47 S. W.3d 486)

343 Sales                                                  petent evidence with reasonable certainty.
   343VIIl Remedies ofBuyer
        343VIIl(D) Actions and Counterclaims for            [341 Damages 115 ~190
Breach of Warranty
          343k438 Evidence
                                                            115 Damages
             343k441 Weight and Sufficiency
                                                                1151X Evidence
                343k441(3) k. Breach of warranty.
                                                                   115kl83 Weight and Sufficiency
Most Cited Cases
                                                                      115k 190 k. Loss of profits. Most Cited
                                                            Cases
     Evidence that farmers' neighbor had no adverse
effect from rotating from cotton to grain and that seed
                                                                 Establishing amount of lost profits         is   a
seller recommended alleged over-planting by farmers,
                                                            fact-intensive determination.
together with evidence about grain sorghum seed's
unsuitability for dryland farming, was sufficient to
rebut possibility of causes of farmers' low yields other    [35] Damages 115 ~190
than seller's seed, which thus supported farmers' De-
ceptive Trade Practices Act (DTPA) and breach of            115 Damages
warranty claims against seed seller. V.T.C.A., Bus. &          115IX Evidence
c. § 17.46(b)(5, 7).                                              l15k183 Weight and Sufficiency
                                                                     115k 190 k. Loss of profits. Most Cited
[32] Damages 115 ~190                                       Cases


115 Damages                                                     At a minimum, opinions or lost-profit estimates
    li51X Evidence                                          must be based on objective facts, figures, or data from
        115k183 Weight and Sufficiency                      which the lost-profits amount may be ascertained.
           115k190 k. Loss of profits. Most Cited
Cases                                                       [36] Damages 115 €?112


     Recovery for lost profits does not require that the    115 Damages
loss be susceptible to exact calculation; however, the          115Vl Measure ofDamages
injured party must do more than show that it suffered              115VI(B) Injuries to Property
some lost profits.                                                    ll5k107 Injuries to Real Property
                                                                            ll5k112 k. Growing crops, grass,
[33] Damages 115 €?190                                      shrubbery, or trees. Most Cited Cases


115 Damages                                                      General rule for assessing damages for crop loss
   ll5IX Evidence                                           is the market value of the lost part of the crop, as
       115k183 Weight and Sufficiency                       measured at maturity, less the cost of harvesting and
          115k190 k. Loss of profits. Most Cited            marketing the lost part.
Cases
                                                            [37] Damages 115 E?188(1)
    Amount of lost profits must be shown by com-




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47 S.W.3d 486,44 Tex. Sup. Ct. J. 675
(Cite as: 47 S.W.3d 486)

115 Damages
   115IX Evidence                                             29T Antitrust and Trade Regulation
        115kl83 Weight and Sufficiency                            29TIII Statutory Unfair Trade Practices and
          I 15k 188 Loss of or Damage to Property             Consumer Protection
               I I 5k I 88( I) k. Extent of damage in               29Tlii(E) Enforcement and Remedies
general. Most Cited Cases                                              29TIII(E)7 Relief
                                                                           29Tk3 87 Monetary Relief; Damages
Damages 115 ~188(2)                                                           29Tk391 k. Profits. Most Cited Cases
                                                                (Formerly 92Hk40 Consumer Protection)
115 Damages
    115IX Evidence                                                 Evidence was sufficient for jury to calculate, with
       115kl83 Weight and Sufficiency                         reasonable certainty, award of damages to farmers for
          I 15kl88 Loss of or Damage to Property              lost profits resulting from seed seller's deceptive act or
              115kl88(2) k. Value of property. Most           unconscionable action, under Deceptive Trade Prac-
Cited Cases                                                   tices Act (DTPA), concerning suitability of seed sold
                                                              to farmers; farmer's testimony allowed jury to con-
     Law does not demand perfect proof of damages             sider yield attributable to other seed, recalculate lease
for crop loss but liberally permits estimates of crop         payments, and regard elevator costs as either reflected
value and probable yield, as well as cultivating and          in yield or refundable so as to be not part of net cost
marketing expenses.                                           calculation. V.T.C.A., Bus. & C.§ 17.41 et seq.


[38] Antitrust and Trade Regulation 29T ~391                  [40) Damages 115 ~40(1)


29T Antitrust and Trade Regulation                            115 Damages
    29TIII Statutory Unfair Trade Practices and                   115III Grounds and Subjects of Compensatory
Consumer Protection                                           Damages
      29TIJJ(E) Enforcement and Remedies                             1151IJ(A) Direct or Remote, Contingent, or
         29TIII(E)7 Relief                                    Prospective Consequences or Losses
             29Tk3 87 Monetary Relief; Damages                          115III(A) I In General
                29Tk391 k. Profits. Most Cited Cases                       115k35 Pecuniary Losses
  (Formerly 92Hk40 Consumer Protection)                                       115k40 Loss of Profits
                                                                                   115k40( I) k. In general. Most
                                                              Cited Cases
     While "limitation of liability and remedies"
clauses printed on seed seller's invoices, delivery
tickets, and seed labels were effective to limit farmers' ·        Lack of a profit history does not, by itself, pre-
recovery for breach of warranty, clauses did not pre-         clude a new business from recovering lost future
clude farmer' lost-profit recovery for nonwarranty            profits.
representations or unconscionability under the De-
ceptive Trade Practices Act (DTPA). V.T.C.A., Bus.            [41] Damages 115 ~190
& C. § 17.41 et seq.
                                                              1 I5 Damages
[39] Antitrust and Trade Regulation 29T ~391                      115IX Evidence




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47 S.W.3d 486, 44 Tex. Sup. Ct. J. 675
(Cite as: 47 S.W.3d 486)

        115k183 Weight and Sufficiency                     advertising that it had "excellent dryland yield poten-
           115kl90 k. Loss of profits. Most Cited          tial." Helena also represented that the seed had a
Cases                                                      "good field tolerance" to charcoal rot, a condition that
                                                           causes the grain's stem to weaken and "fall down "
                                                                                                                 '
     Showing lost profit damages with reasonable           reducing yield.
certainty can be accomplished with a profit history or
some other objective data, such as future contracts.            The 1992 crop had a good yield, but the 1993 crop
                                                           yield was much lower. The Wilkinses claim that
*490 Charles C. Murray, Lisa Powell, Atlas & Hall,         Helena's agent blamed this low yield on the seeds
McAllen, for Petitioners.                                  being planted too close together and that the agent
                                                           recommended planting Cherokee seed on the entire
                                                           tract with increased spacing between seeds. The Wil-
John B. Skaggs, Skaggs & Garza, Michele Nicole
                                                           kinses followed this advice in 1994 with no increase in
Gonzales, McAllen, for Respondents.
                                                           yield. Helena claims that insufficient rainfall and soil
                                                           moisture depletion brought about by the Wilkinses'
Justice BAKER delivered the opinion of the Court, in
                                                           planting cotton on part ofthe property in 1993 caused
which Chief Justice PHILLIPS, Justice ENOCH,
                                                           the reduced yield.
Justice HANKINSON, Justice O'NEILL, and Justice
JEFFERSON joined.
                                                                In February 1995, the Wilkinses sued Helena al-
     This is a case of first impression involving*491
the Texas Seed Arbitration Act.FNJ The Act requires        leging Deceptive Trade Practices-Consumer Protec-
                                                           tion Act {DTPA) violations, breach of express and
that certain defective-seed claims be submitted to
                                                           implied warranties, and fraud. In March, Helena filed
arbitration as a prerequisite to maintaining a legal
                                                           a plea in abatement and motion to compel nonbinding
action against the labeler. We must decide whether the
                                                           arbitration under the Act. In April, the trial court
timeliness requirement for submitting claims to arbi-
                                                           granted Helena's motion and abated the proceedings.
tration is jurisdictional under the Act. We conclude
                                                           Fifteen months later, the Wilkinses submitted their
that it is not, and that the evidence was legally suffi-
                                                           claims to the Texas Plant and Seed Board for arbitra-
cient to support the jury's verdict on liability, causa-
                                                           tion. The Board declined to arbitrate because the crops
tion, and damages. Accordingly, we affirm the court
                                                           were no longer in "field condition" and thus the Board
of appeals' judgment.
                                                           could not inspect the crops.

         FNl. Unless otherwise indicated, all refer-
                                                                 The trial court lifted the abatement and the case
         ences to "the Act" are to the Texas Seed Ar-
                                                            proceeded to trial. The jury found for the Wilkinses on
         bitration Act. See TEX. AGRIC. CODE §
                                                            all claims except fraud. It did not fmd that Helena had
         64.001-.007.
                                                            acted knowingly. It awarded the Wilkinses $360,000
                                                            in damages. The trial court also awarded prejudgment
                I. BACKGROUND
                                                            interest from the date the Board declined to arbitrate.
     The Wilkinses began farming in 1989 and first
                                                            Helena and the Wilkinses appealed.
planted grain in 1992. Most of their land is nonirri- .
gated dryland. They purchased a Cherokee-variety
                                                                 The court of appeals held that Helena had effec-
grain sorghum seed from Helena Chemical Company
                                                            tively disclaimed any warranties. 18 S.W.3d at 758.
in 1992, 1993, and 1994. The Wilkinses claim that
                                                            But it affirmed the judgment on the DTPA claims
when they purchased this seed, they relied on Helena's                                                            '




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47 S.W.3d 486, 44 Tex. Sup. Ct. J. 675
(Cite as: 47 S.W.3d 486)

holding that the Board's refusal to arbitrate the Wil-
kinses' claims did not jurisdictionally bar their suit. 18      § 64.002. Requirement of Arbitration
S.W.3d at 751-52. It also held that the evidence was
legally and factually sufficient to support the jury's
                                                               (a) When a purchaser of seed designed for planting
verdict on causation, liability, and damages. 18
                                                               claims to have been damaged by the failure of the
S.W.3d at 754-59. Finally, in response to the Wil-
                                                               seed to produce or perform as represented by war-
kinses' cross-appeal, the court held that the trial court
                                                               ranty or by the label required to be attached to the
properly calculated prejudgment interest. 18 S.W.3d
                                                               seed under this subtitle or as a result of negligence,
at 760. Only Helena petitioned this Court for review.
                                                               the purchaser must submit the claim to arbitration as
                                                               provided by this chapter as a prerequisite to the
     II. TEXAS SEED ARBITRATION ACT                            exercise of the purchaser's right to maintain a legal
     Helena argues that the trial court did not have ju-       action against the labeler ....
risdiction over the Wilkinses' *492 claims because the
Act requires that all defective-seed claims first be
                                                                   TEX. AGRIC. CODE § 64.002(a) (emphasis
timely submitted to nonbinding arbitration so the
                                                              added).
Board may effectively inspect the plants under field
                                                                 § 64.004. Effect of Arbitration
conditions. Thus, Helena argues, the Wilkinses' delay
in submitting their claims for arbitration-which
                                                               In any litigation involving a complaint that has been
caused     the     Board    to     refuse    to    arbi-
                                                               the subject of arbitration under this chapter, any
trate-jurisdictionally barred the claims.
                                                               party may introduce the report of arbitration as ev-
                                                               idence of the facts found in the report, and the court
     In response, the Wilkinses argue that submitting
                                                               may give such weight to the arbitration board's
their claims to arbitration is all the Act requires. They
                                                               fmdings of fact, conclusions of law, and recom-
posit that Helena's interpretation would render other
                                                               mendations as to damages and costs as the court
statutory provisions meaningless and note that the Act
                                                               determines advisable. The court may also take into
does not authorize dismissal as a remedy under its
                                                               account any findings of the board of arbitration
arbitration procedures. Thus, the Wilkinses argue, the
                                                               with respect to the failure of any party to cooperate
court of appeals correctly held that once they submit-
                                                               in the arbitration proceedings, including any finding
ted their claims to arbitration under the Act, the trial
                                                               as to the effect of delay in filing the arbitration
court had jurisdiction to hear the claims regardless of
                                                               claim or the arbitration board's ability to determine
whether arbitration actually occurred.
                                                               the facts of the case.

               A. APPLICABLE LAW
                                                                  TEX. AGRIC. CODE§ 64.004 (emphasis added).
            1. Texas Seed Arbitration Act
                                                                § 64.005. Arbitration Board
      The Legislature enacted the Act in 1989 to "pro-
vide[ ] for an unbiased third party investigation by the
                                                                (b) As a board of arbitration, the State Seed and
State Seed and Plant Board of the Texas Department
                                                                Plant Board shall conduct arbitration as provided
of Agriculture of complaints concerning seed per-
                                                                by this chapter ....
formance." HOUSE COMJ\1. ON AGRICULTURE
AND LIVESTOCK, BILL ANALYSIS, Tex. S.B. 64,
71 st Leg., R.S. ( 1989). Pertinent to this appeal, the Act       TEX. AGRlC. CODE § 64.005(b) (emphasis
provides:                                                     added).
                                                                § 64.006. Arbitration Procedures




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47 S.W.3d 486, 44 Tex. Sup. Ct. J. 675
(Cite as: 47 S.W.3d 486)

                                                            Legislature's intent, including: the object sought to be
  (a) A purchaser may begin arbitration by filing with      obtained; the circumstances of the statute's enactment;
  the commissioner a sworn complaint and a filing           the legislative history; the common law or former
  fee, as provided by department rule .... Except in the    statutory provisions, including laws on the same or
  case of seed that has not been planted, the complaint     similar subjects; the consequences of a particular
  must be filed within the time necessary to permit         construction; administrative construction of the stat-
  effective inspection of the plants under field condi-     ute; and the title, preamble, and emergency provision.
  tions.                                                    TEX. GOV'T CODE § 311.023; Ken Petroleum Corp.
                                                            v. Questor Drilling Corp., 24 S.W.3d 344, 350
                                                            (Tex.2000).


                                                                 [3][4] Additionally, we must always consider the
  *493 (c) The commissioner shall refer the complaint
                                                            statute as a whole rather than its isolated provisions.
  and the answer to the arbitration board for investi-
                                                            Morrison, 699 S. W.2d at 208. We should not give one
  gation, fmdings, and recommendations.
                                                            provision a meaning out of harmony or inconsistent
                                                            with other provisions, although it might be susceptible
  (d) On referral of the complaint for investigation,
                                                            to such a construction standing alone. Barr v. Bern-
  the arbitration board shall make a prompt and full
                                                            hard, 562 S.W.2d 844, 849 (Tex.l978). We must
  investigation of the matters complained of and re-
                                                            presume that the Legislature intends an entire statute
  port its fmdings and recommendations to the com-
                                                            to be effective and that a just and reasonable result is
  missioner not later than the 60th day after the date of
                                                            intended. TEX. GOV'T CODE § 311.021(2), (3).
  the referral, or before a later date determined by the
  parties.
                                                                 [5] When used in a statute, the term "must" cre-
                                                            ates or recognizes a condition precedent. TEX. GO V'T
  (e) The report of the arbitration board shall include
                                                            CODE § 311.0 16(3). While Texas courts have not
  findings of fact, conclusions of law, and recom-
                                                            interpreted "must" as often as "shall," both terms are
  mendations as to costs, if any ....
                                                            generally recognized as mandatory, creating a duty or
                                                            obligation. See TEX. GOV'T CODE§ 311.016(2), (3);
                                                            Wright v. Ector County Indep. Sch. Dist., 867 S.W.2d
                                                            863, 868 (Tex.App.-El Paso 1993, no writ) ("The
  (h) The arbitration board shall consider any field        ordinary meaning of 'shall' or 'must' is of a manda-
  inspection or other data submitted by either party in     tory effect."); Inwood N. Homeowners' Ass'n, Inc. v.
  its report and recommendation.                            Meier, 625 S.W.2d 742, 743 (Tex.Civ.App.-Houston
                                                            [1st Dist.] 1981, no writ) (same); Mitchell v. Hancock.
    TEX. AGRIC. CODE§ 64.006 (emphasis added).               196 S.W. 694,700 (Tex.Civ.App.-FortWorth 1917,
                                                            no writ) (same). The word " 'must' is given a man-
                                                            datory meaning when followed by a noncompliance
              2. Statutory Construction
                                                            penalty." Harris County Appraisal Dist. v. Consoli-
      [1][2] We must construe statutes as written and, if
                                                            dated Capital Props. IV, 795 S.W.2d 39, 41
possible, ascertain legislative intent from the statute's
                                                            (Tex.App.-Amarillo 1990, writ denied). However,
language. Morrison v. Chan, 699 S.W.2d 205, 208
                                                            we have held language that appears to impose a
(Tex.1985). Even when a statute is not ambiguous on
                                                            mandatory duty to be only directory when this inter-
its face, we can consider other factors to determine the
                                                            pretation is most consistent with the Legislature's




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47 S.W.3d 486,44 Tex. Sup. Ct. J. 675
(Cite as: 47 S. W.3d 486)

intent. E.g., Barshop v. Medina County Underground          essary to permit effective inspection of the plants
Water Conservation Dist., 925 S.W.2d 618, 629               under field conditions" is mandatory and jurisdic-
(Tex.l996); Le·wis v. Jacksonville Bldg. & Loan Ass'n,      tional. The Wilkinses acknowledge this statutory
540 S.W.2d 307, 310 (Tex.l976); *494 Thomas v.              timing requirement, but argue that submission is the
Groebl, 147Tex. 70,212S.W.2d625,630-31 (1948).              mandatory act and that timeliness is merely a factor
                                                            the trial court may consider. We agree with the Wil-
     [6][7][8] To determine whether the Legislature         kinses' interpretation.
intended a provision to be mandatory or directory, we
consider the plain meaning of the words used, as well            Section 64.006(a) states that a purchaser's com-
as the entire act, its nature and object, and the conse-    plaint "must" be filed within the time necessary to
quences that would follow from each construction.           permit effective inspection under field conditions. The
Albertson's, Inc. v. Sinclair, 984 S.W.2d 958, 961          word " '[m]ust' creates or recognizes a condition
(Tex.l999); Chisholm v. Bewley Mills, 155 Tex. 400,         precedent." TEX. GOV'T CODE § 311.016(3). The
287 S.W.2d 943, 945 (1956). Even if a statutory re-         Legislature has instructed us to apply this defmition
quirement is mandatory, this does not mean that             unless its context "necessarily requires a different
compliance is necessarily jurisdictional. Sinclair, 984     construction." TEX. GOV'T CODE § 311.016.
S.W.2d at 961; Hines v. Hash, 843 S.W.2d 464,467
(Tex.l992); Schepps v. Presbyterian Hasp. ofDallas,              The problem with Helena's position that delay in
652 S. W.2d 934, 93 8 (Tex.l983 ). When a statute is        submitting a claim to arbitration creates a jurisdic-
silent about the consequences of noncompliance, we          tional bar is that we cannot read section 64.006(a) in a
look to the statute's purpose to determine the proper       vacuum. Read in context, Helena's interpretation
consequences. Sinclair, 984 S. W.2d at 961; Schepps,        renders other provisions meaningless. In fact, section
652 S.W.2d at 937-38; Chisholm, 287 S.W.2d at 945.          64.004 expressly contemplates that a claim may be
                                                            arbitrated and continue on to trial even when a delay in
                      B. ANALYSIS                           submission to arbitration prevents the Board from
      [9] The parties agree that if the Wilkinses had not   thoroughly investigating the claim. It provides:
submitted their claims to arbitration after the trial
court abated the proceedings, any claims subject to the       In any litigation involving a complaint that has been
Act would be jurisdictionally barred. See TEX.                the subject of arbitration under this chapter ... [t]he
AGRJC. CODE § 64.002(a) ( "[T]he purchaser must               court may also take into account any fmdings of the
submit the claim to arbitration ... as a prerequisite to      board of arbitration with respect to the failure of any
the exercise of the purchaser's right to maintain a legal     party to cooperate ... including any finding as to the
action against the labeler."); see also Hines, 843            effect of delay in filing the arbitration claim or the
S. W.2d at 469 (holding failure to perform mandatory          arbitration board's ability to determine the facts of
but nonjurisdictional act while suit is abated for that       the case.
purpose results in dismissal). However, because the
Wilkinses did submit their claims to the Board, the
                                                                 TEX. AGRJC. CODE§ 64:004 (emphasis added).
only issue is whether their delay in doing so, and the
                                                            Accepting Helena's argument that section 64.006(a)'s
Board's subsequent refusal to arbitrate, deprived the
                                                            timing requirement is *495 jurisdictional renders
trial court of jurisdiction.
                                                            section 64.004 meaningless because in any case "in-
                                                            volving a complaint that has been the subject of arbi-
   Helena argues that section 64.006(a)'s require-          tration under this chapter," there could not be a
ment that a complaint be "filed within the time nee-




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47 S.W.3d 486,44 Tex. Sup. Ct. J. 675
(Cite as: 47 S.W.3d 486)

"finding as to the effect of delay in filing ... or the    quence of a failure to hear a forfeiture case within the
arbitration board's ability to determine the facts ofthe   prescribed period, it could easily have said so."); see
case."                                                     also Sinclair, 984 S. W.2d at 962 ("[T]hat section
                                                           410.253 does not dictate the consequence of non-
     [1 0] Actually, the Act's language and purpose        compliance is significant when considering the entire
demonstrate that the Legislature simply did not con-       statute."). To the contrary, the Act expressly provides
template the situation presented her~a submission to       nonjurisdictional consequences by allowing the Board
arbitration where the Board then refuses to arbitrate.     to make fmdings about any delay and allowing the
Rather, the Legislature created this arbitration scheme    trial court to consider these findings. See TEX.
to provide an alternate forum for farmers to initially     AGRlC. CODE § 64.004. Thus, we conclude the Act's
submit claims, not as a mechanism to preclude farm-        silence about dismissal, coupled with its provision for
ers' suits altogether. See HOUSE COMM. ON AG-              other consequences, weighs in favor of a nonjurisdic-
RICULTURE AND LIVESTOCK, BILL ANALY-                       tional interpretation.
SIS, Tex. S.B. 64, 71st Leg., R.S. (1989) (explaining
that one reason this Act was passed was that "farmers           When deciding whether the Legislature intended
are often reluctant to litigate" seed disputes).           a particular provision to be jurisdictional, we must
                                                           also consider the consequences that result from each
     In addition to the overall statutory objective, we    possible construction. Chisholm, 287 S. W.2d at
have historically looked to two factors to determine if    945-46. Under Helena's interpretation, a delay in
the Legislature intended a provision to be jurisdic-       submitting a claim to arbitration precludes any con-
tional: (1) the presence or absence of specific conse-     sideration of the claim-by the Board or a trial court.
quences for noncompliance, Sinclair, 984 S.W.2d at         Because the Board's arbitration is nonbinding and the
961-62, and (2) the consequences that result from          trial court is not required to consider the Board's
each possible interpretation. Bars hop, 925 S. W.2d at     findings, we conclude that Helena's jurisdictional
629. Applying these factors supports our interpreta-       interpretation of section 64.006's timing requirement
tion that delay in submitting claims is not jurisdic-      leads to an absurd result. See Bm·shop, 925 S.W.2d at
tional.                                                    629.


     [11] To determine whether a timing provision is             Helena urges that our adopting a nonjurisdictional
mandatory, we first look to whether the statute con-        interpretation allows purchasers to bypass the Act and
tains a noncompliance penalty. If a provision requires      thwart its underlying purpose of providing for an
that an act be performed within a certain time without      unbiased, independent Board investigation. See
any words restraining the act's performance after that      HOUSE COMM. ON AGRICULTURE *496 AND
time, the timing provision is usually directory. Lewis,     LIVESTOCK, BILL ANALYSIS, Tex. S.B. 64, 71st
540 S.W.2d at 310; Markowsky v. Newman, 134 Tex.            Leg., R.S. {1989). We disagree.
440, 136 S.W.2d 808, 812 (1940). Here, the Act states
that a purchaser's complaint must be filed "within the           The Act permits the Board to independently in-
time necessary to permit effective inspection of the        vestigate and assess the purchaser's claims. TEX.
plants under field conditions." TEX. AGRIC. CODE§           AGRIC. CODE § 64.006(d). But, while the Act re-
64.006(a). However, the Act has no corresponding            quires the Board to consider any field inspection or
provision dictating dismissal for noncompliance. State      other data either party submits, nowhere does it re-
v. $435,000, 842 S.W.2d 642, 644 {Tex.l992) ("If the        quire the Board itself to conduct a field inspection; nor
Legislature had intended dismissal to be the conse-         does it expressly mention the Board conducting such




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47 S.W.3d 486, 44 Tex. Sup. Ct. J. 675
(Cite as: 47 S. W.3d 486)

an inspection. See TEX. AGRIC. CODE §                        forum-are the consequences the Legislature con-
64.006(f)-(h). Instead, by the Act's express terms, the      templated under the Act.
Board can carry out its investigation in a number of
ways that do not necessarily require it to conduct its            The dissent disagrees with this conclusion, as-
own field inspection. For example, the Act authorizes        serting that the Act absolutely forecloses a purchaser's
the Board to delegate all or any part of its investigation   action if the purchaser does not comply with section
to its members. TEX. AGRIC. CODE § 64.006(g).                64.006(a)'s timing requirement. 47 S.W.3d at 507. The
And the Board may grow representative samples,               dissent notes section 64.006's language that the com-
conduct hearings, and examine the parties. TEX.              plaint "must" be filed within the time necessary to
AGRlC. CODE § 64.006(f). In fact, here both parties'         permit effective crop inspection. 47 S.W.3d at 507. It
experts conducted field inspections that they could          then reconciles this language with section 64.004 by
have submitted to the Board to aid it in fulfilling its      interpreting section 64.004 to permit Board findings
duties. See TEX. AGRIC. CODE § 64.006(h) ("The               about a purchaser's delay only while the crops are still
arbitration board shall consider any field inspection or     in the ground. 47 S.W.3d at 507. It explains that "[a]
other data submitted by either party.") (emphasis            purchaser could certainly delay filing an arbitration
added). Thus, because the Board can conduct an in-           complaint for many months yet still file while the
vestigation despite a delay in submission to arbitra-        seeds are under field conditions." 47 S.W.3d at 508.
tion, concluding that section 64.006(a)'s timing re-         Thus, it reasons, submitting a claim while the seeds
quirement is nonjurisdictional does not thwart the           are in the ground, but after a hot summer season, could
Act's purpose of providing for a Board investigation.        "affect the Board's investigation." 47 S.W.3d at 511.
See Hines, 843 S. W.2d at 469 (holding statute's pur-
pose could be furthered without jurisdictional inter-
                                                                  However, while purporting to apply a
pretation of mandatory timing requirement).
                                                             plain-language analysis to *497section 64.006(a), the
                                                             dissent glosses over the section's actual language and
     Further, our interpretation does not render a delay     ignores the maxim that we must presume that every
in submitting a claim to arbitration without conse-          word in a statute is included purposefully. See Cam-
quence. Indeed, if a purchaser does not submit a claim       eron v. Terrelr& Garrett, Inc., 618 S.W.2d 535, 540
in time for the Board or the seller to conduct an ef-        (Tex.1981 ). First, the dissent's interpretation assumes
fective field inspection, it does so at its own peril. The   the Board itself must conduct the field inspection
Board may make findings adverse to the purchaser on          referenced in section 64.006(a). The Act's text does
this basis. TEX. AGRIC. CODE § 64.004. If the                not support this assumption. Instead, the Act provides
purchaser then sues, the Board's findings and rec-           that a complaint must be filed in time to "permit ef-
ommendations are admissible, and the Act expressly           fective inspection of the plants under field condi-
authorizes the court to both "give such weight to the        tions," TEX. AGRIC. CODE § 64.006(a), thus per-
arbitration board's fmdings of fact, conclusions of law,     mitting the parties to inspect under field conditions
and recommendations as to damages and costs as the           and provide their reports to the Board. TEX. AGRIC.
court determines advisable" and "take into account           CODE § 64.006(h). Second, the dissent's interpreta-
any findings ... with respect to the failure of any party    tion presumes that any claim submitted while crops
to cooperate in the arbitration proceedings, including       are still in the ground will satisfy section 64.006(a)'s
any finding as to the effect of delay in filing the arbi-    language. 47 S.W.3d at 511. However, section 64.006
tration claim." TEX. AGRIC. CODE § 64.004. We                does not only require that a claim be submitted while
conclude that these consequences-not the complete            the crops are available for inspection "under field
deprival of any right to have the claims heard in any        conditions." Rather, it states a claim must be filed in




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47 S.W.3d 486,44 Tex. Sup. Ct. J. 675
(Cite as: 47 S.W.3d 486)

time to permit an "effective inspection of the plants      submit its claim to arbitration "within such time as to
under field conditions." TEX. AGRlC. CODE §                permit inspection of the crops, plants, or trees by the
64.006(a) (emphasis added). We must presume the            seed investigation and conciliation council or its rep-
word "effective" has meaning. See Cameron, 618             resentatives and by the dealer from whom the deed
S. W.2d at 540. Thus, under the dissent's interpretation   was purchased." FLA. STAT. ANN .. § 578.026(1)(a)
of 64.006(a), any claim brought while the crops are in     (emphasis added). In Ferry-Morse Seed Co., the case
the ground but after an effective inspection could be      upon which the dissent relies, the Florida Supreme
accomplished would already be barred under                 Court interpreted a prior version's timing requirement
64.006(a}-rendering section 64.004's provision for         to be jurisdictional. 426 So.2d at 961. This prior ver-
the Board to make fmdings about delay in submitting        sion required a claim be filed "within ten days after the
the claim meaningless.                                     defect or violation becomes apparent." See Fer-
                                                           ry-Morse Seed Co., 426 So.2d at 960. There are two
     The dissent also urges us to adopt the Florida        important differences between the Texas *498 and
Supreme Court's interpretation of a prior version of its   Florida Acts. First, the Florida Act's current version
Seed Act because our statute's legislative history in-     specifies that the Board and the seed seller must both
dicates that our statute was modeled in part after         be able to conduct an independent field inspection.
Florida's. See Ferry-Morse Seed Co. v. Hitchcock,          The Texas Act has no such language. Second, and
426 So.2d 958, 961 (Fla.l983) (holding Florida Seed        more significant, neither version of Florida's Act pro-
Act's arbitration submission timing requirement ju-        vides for the Board to make fmdings about the effect
risdictional). There is only one reference to Florida in   of the purchaser's delay in submitting a claim to arbi-
our Act's bill analysis. The background section notes      tration as section 64.004 of the Texas Act does. Thus,
that "[f]or many years the state of Florida has used a     while we might be inclined to adopt Florida's inter-
method of arbitration with an unbiased third party         pretation that timely submitting to arbitration is juris-
investigation and opinion" and that "[t]he American        dictional if its statute were identical to ours, we are not
Seed Trade Association has recommended to each of          bound to interpret one similar provision of our Act in a
its member states that they work to pass measures          way that conflicts with other provisions that differ
similar to Florida's." HOUSE COMM. ON AGRI-                from Florida's statute.
CULTURE AND LIVESTOCK, BILL ANALYSIS,
Tex. S.B. 64, 7lst Leg., R.S. (1989).                            Finally, while we base our interpretation on the
                                                            Act's language and the Legislature's intent, we note
     [12][13] We recognize that when a Texas statute        that one other court has had occasion to interpret its
is modeled after another jurisdiction's, that jurisdic-     Seed Act's similar arbitration provisions. Illinois' Seed
tion's interpretation before the Legislature enacts our     Act provides:
statute may be given weight. City of Garland v. Dallas
Morning News, 22 S.W.3d 351, 360 (Tex.2000).                  A purchaser of seed cannot maintain a civil action
However, when the Legislature looks to another ju-            against the seller for failure of the seed to produce
risdiction's statute, but modifies rather than adopts         or perform (i) as represented by a label attached to
some of its provisions, it does so purposefully. See          the seed or furnished under the Illinois Seed Law,
Shar{fi v. Young Bros., Inc., 835 S.W.2d 221; 223             (ii) as represented by warranty, or (iii) because of
(Tex.App.-Waco I 992, VvTit denied).                          negligence, unless the buyer has first submitted the
                                                              claim to arbitration.
     When the Legislature enacted the Texas Act, the
Florida Seed Act provided that a purchaser must




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47 S.W.3d 486,44 Tex. Sup. Ct. J. 675
(Cite as: 47 S.W.3d 486)

                                                            and thus did not perform as represented. Helena con-
  Except in case of seed that has not been planted, the     tends that Pleunneke lacked the required qualifications
  claim shall be filed within a time that will permit       and that his testimony lacked the "indicia of reliabil-
  effective inspection of the plants under field condi-     ity" required for admission. The court of appeals held
  tions and in no case later than 90 days after com-        the trial court did not abuse its discretion by admitting
  pletion of harvest.                                       Pleunneke's testimony. 18 S.W.3d at 754. We agree
                                                            with the court of appeals.
     701 ILL. COMP. STAT.. 25110,25/20 (emphasis
added). In Presley v. P & S Grain Co., the Illinois                     *499 A. APPLICABLE LAW
court of appeals held this timing requirement to be              If scientific, technical, or other specialized
directory rather than mandatory. 289 Ill.App.3d 453,        knowledge will assist the trier offact to understand the
225 Ill.Dec. 398, 683 N.E.2d 901, 910 (1997). It rea-       evidence or to determine a fact in issue, a witness
soned, as we have here, that the statute's failure to       qualified as an expert by knowledge, skill, experience,
provide for dismissal as a consequence for noncom-          training, or education may testify thereto in the form
pliance with its arbitration provisions weighs in favor     of opinion or otherwise. TEX.R. EVID. 702. Other-
of a directory interpretation. Presley, 225 Ili.Dec. 398,   wise admissible opinion testimony is not objectiona-
683 N.E.2d at 909. Likewise, it concluded that inter-       ble because it embraces an ultimate issue of fact.
preting the nonbinding arbitration procedures as ju-        TEX.R. EVID. 704.
risdictional would lead to an absurd result. Presley,
225 Ill.Dec. 398, 683 N.E.2d at 909.                             [ 16] [ 17] [ 18] A two-part test governs whether
                                                            expert testimony is admissible: (I) the expert must be
      [14][15] We agree with the Florida Supreme            qualified; and (2) the testimony must be relevant and
Court's observation that seed arbitration laws are          be based on a reliable foundation. E. I. du Pont de
"established to protect the farmer." Ferry-Morse Seed       Nemours & Co. v. Robinson, 923 S.W.2d 549, 556
Co., 426 So.2d at 961. Thus, when, as here, we are          (Tex.l995). The trial court makes the initial determi-
faced with two competing interpretations, we must           nation about whether the expert and the proffered
choose the one most harmonious with the Act's ob-           testimony meet these requirements. Robinson, 923
jectives and other provisions. Accordingly, we con-         S.W.2d at 556. The trial court has broad discretion to
clude that while submission to arbitration under the        determine admissibility, and we will reverse only if
Act is mandatory if not waived by the seller, the Act's     there is an abuse of that discretion. Robinson, 923
timing requirement is not. See Hines, 843 S. W.2d at        S.W.2d at 558.
469; $435,000, 842 S.W.2d at 644. Because the Wil-
kinses submitted their claims to arbitration and thus             [ 19] [20] [21] In deciding if an expert is qualified,
complied with the Act's mandatory requirements, the         trial courts "must ensure that those who purport to be
trial court correctly concluded that it had jurisdiction    experts truly have expertise concerning the actual
over their claims.                                          subject about which they are offering an opinion."
                                                            Gammill v. Jack Williams Chevrolet, Inc., 972 S.W.2d
            III. EXPERT TESTIMONY                           713, 719 (Tex.l998) (quoting Broden:; v. Heise, 924
     Helena argues that the trial court abused its dis-     S. W.2d 148, 152 (Tex.1996)). To gauge reliability, we
cretion by admitting the Wilkinses' expert's testimony.     have explained:
The expert, Dr. Pleunneke, testified that in his opinion,
Cherokee seed is not appropriate for dryland farming          Daubert and Rule 702 demand that the district court




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47 S.W.3d 486,44 Tex. Sup. Ct. J. 675
(Cite as: 47 S.W.3d 486)

  evaluate the methods, analysis, and principles relied      "work[ing] on different problems related to plant
  upon in reaching the opinion. The court should en-         science, science pertaining to the physiology of plants,
  sure that the opinion comports with applicable             malnutrition, the way the environment affects them
  professional standards outside the courtroom and           and so forth." In fact, the Wilkinses initially hired him,
  that it will have a reliable basis in the knowledge        not as a litigation expert, but as a consultant to help
  and experience of the discipline.                          them identify the source of their crop problems.


      Gammill, 972 S.W.2d at 725-26 (quotations                   Helena notes that Pleunneke is not a plant
omitted). In Robinson, we identified six nonexclusive        pathologist and argues that his testimony does not
factors to determine whether an expert's testimony is        establish he is an expert about charcoal rot. However,
reliable and thus admissible. Robinson, 923 S.W.2d at        this argument incorrectly frames the issue. The Wil-
557. But in Gammill we recognized that the Robinson          kinses allege Helena misrepresented Cherokee seed's
factors may not apply to certain testimony. Gammill,         fitness for use in a nonirrigated environment. Ac-
972 S.W.2d at 726. In those instances, there still must      cordingly, the factual issue is not solely whether
be some basis for the opinion offered to show its re-        Cherokee is susceptible to charcoal rot. Also at issue is
liability, and, ultimately, the trial court must determine   whether Cherokee is particularly suited for dryland
how to assess reliability. Gammill, 972 S. W.2d at 726.      farming as Helena represented.
If an expert relies upon unreliable foundational data,
any opinion drawn from that data is likewise unrelia-             The causation evidence in this case included: seed
ble. Merrell Dow Pharms., Inc. v. Havner, 953                performance trial results, the Wilkinses' farm's current
S. W.2d 706, 714 (Tex.1997). Further, an expert's            and past performance, the current and past perfor-
testimony is unreliable even when the underlying data        mance ofthe Wilkinses' neighbor's farm, and weather
is sound if the expert's methodology is flawed.              and soil statistics. In response to this evidence, Helena
Havner, 953 S.W.2d at 714.                                   contended that environmental factors, not Cherokee
                                                             seed's drought intolerance, led to the Wilkinses' poor
                    B. ANALYSIS                              crop. Thus, to determine whether Pleunneke is a
                   1. Qualifications                         qualified expert, the question is whether Pleunneke
     [22] Pleunneke testified that he grew up on a           has scientific, technical, or other specialized
ranch. He earned a bachelor's degree in wildlife             knowledge that would assist the jury to understand
management from Texas A & M University. He then              this evidence and determine if Cherokee seed is suit-
worked in a bank's trust department managing farm            able for dryland farming as represented. See TEX.R.
and ranch lands in Texas and Louisiana. During this          EVID. 702.
time he worked with many different types of crops,
including grain sorghum. He then returned to school                We conclude that Pleunneke's knowledge would
and fmished a doctorate in plant physiology. After-          aid the jury in understanding the evidence. Several
wards, he worked with crops for Mississippi State            grain performance trial results were entered into evi-
University's Agronomy and Biochemistry Depart-               dence. Pleunneke has experience conducting crop
ment. At this job, he conducted crop-variety testing,        trials, and, presumably, experience interpreting and
predominantly on soybean crops, and he was "quite            comparing those results. Also, as a plant-science
familiar with setting up tests and so forth and see[ing]     consultant, he works on "different problems related to
which varieties are best." For the past twenty years he      plant science, science pertaining to the physiology of
has worked in Texas as a plant scientist and consult-        plants, malnutrition, the way the environment affects
ant. He characterized some of his functions*SOO as           them and so forth." Because Helena contends envi-




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 47 S.W.3d 486, 44 Tex. Sup. Ct. J. 675
 (Cite as: 47 S.W.3d 486)

  rorunental factors caused the Wilkinses' crop failure      weather and weed-control reports, disease publica-
  rather than Cherokee seed's drought intolerance,           tions, testing, and comparison with crops adjacent to
  Pleunneke's experience identifying environmental           the Wilkinses' farm. Thus, Pleunneke's experience,
  factors affecting crops could have been helpful to the     coupled with his thorough testimony about the
. jury. Accordingly, we conclude that the court of ap-       methodology he employed, demonstrate that the
  peals correctly held that the trial court's fmding         opinions he drew from the underlying data are relia-
  Pleunneke qualified was not an abuse of discretion.        ble. See Gammill, 972 S.W.2d at 726. Thus, we con-
                                                             clude that the court of appeals correctly held that the
                      2. Reliability                         trial court did not abuse its discretion by admitting
       [23] Helena also contends that Pleunneke's tes-       Pleunneke's testimony.
 timony is unreliable because he is not qualified to
 testify about charcoal rot and because he does not state                     IV. DTPA CLAIMS
 the basis and the methodology behind his opinion.                Helena argues that the Wilkinses' failure to timely
 Again, Helena fails to recognize that the issue here is     submit their claims to arbitration under the Act also
 whether Cherokee seed is suitable for dry land farming      precludes the trial court from considering their DTPA
 as Helena represented. And it ignores the numerous          claims. In the alternative, it argues that there is no
 bases underlying Pleunneke's opinion and his quali-         evidence to support the jury's DTP A liability and
 fications.                                                  causation fmdings. Specifically, Helena argues that
                                                             any representations it made amounted to nonactiona-
       Pleunneke testified that, in forming his opinions,    ble puffing.
 he relied on a number of things: a physical inspection
 of the Wilkinses' Cherokee crop; photographs and               A. RELATIONSHIP BETWEEN THE DTPA
 videotape ofthe Wilkinses' field; samples of the Wil-        AND THE TEXAS SEED ARBITRATION ACT
 kinses' soil and plants; samples of the Wilkinses'               Helena argues that if the Act governs any part of a
 neighbors' soil and plants; lab analysis results from his   suit, then all the purchaser's claims must be arbitrated,
 field samples; South Texas rainfall statistics during       regardless of the theory of recovery. The dissent
 the relevant period; Texas A & M grain-sorghum              agrees, concluding that all the Wilkinses' theories are
 trials; Texas A & M grain-sorghum literature; publi-        "factually intertwined," and thus that their DTPA
 cations by Dr. Fredrickson, a Texas A & M plant             claims cannot provide an alternative basis for the trial
 pathologist who is a grain-sorghum expert; Helena's         court's judgment. Because we conclude that the Wil-
 soil and plant samples and analyses; and Helena's           kinses complied with the Act and hold that their delay
 marketing literature. Helena does not argue that this       in submitting their claims to arbitration did not bar
 foundational data underlying Pleunneke's opinion            their suit, determining whether the DTP A claims are
 testimony is unreliable.                                    within the Act's purview is not necessary here.


      *501 Moreover, Pleunneke has twenty years ex-             B. EVIDENCE TO SUPPORT DTPA JURY
 perience as a plant scientist and conducting and in-                             QUESTIONS
 terpreting crop trials. While testifying, Pleunneke              The trial court submitted two DTP A questions to
 explained the results of several grain trials, why he       the jury. The first question asked, in the disjunctive,
 found those to be significant, and how they supported       whether Helena had violated three DTPA laundry-list
 his opinions. He also explained the other factors that      provisions: sections 17.46(b)(5) (misrepresentations
 contributed to his opinion, and why they were signif-       about a product's characteristics), 17.46(b)(7) (mis-
 icant to his conclusions. These other factors included      representations about a product's standard, quality, or




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47 S.W.3d 486,44 Tex. Sup. Ct. J. 675
(Cite as: 47 S.W.3d 486)

grade), or 17 .46(b)(23) (failure to disclose information       or 17 .46(b)(7)-making the false representation is
with intent to induce another to enter transaction). See        itself actionable. Smith v. Baldwin, 611 S.W.2d 611,
TEX. BUS. & COM.CODE § 17.46. The second                        616-17 (Tex.l980).
question asked only whether Helena violated section
 17.50(a)(3) (unconscionable action or course of ac-                [26][27] To recover under the DTPA, the plaintiff
tion). See TEX. BUS. & COM.CODE § 17.50. The                    must also show that the defendant's actions were the
jury answered both questions "yes."                             "producing cause" of actual damages. See TEX. BUS.
                                                                & COM.CODE § 17.50(a). This showing requires
     Helena argues that there is no evidence to support         some evidence that the defendant's act or omission
the jury's answers. Specifically, it argues that any            was a cause in fact of the plaintiffs injury. Doe v. Boys
representations made to the Wilkinses amounted to               Clubs of Greater Dallas, Inc., 907 S.W.2d 472, 481
nonactionable puffmg and that there is no causation             (Tex.1995). Under this standard, it is not necessary to
evidence. The court of appeals held there was some              show that the harm was foreseeable. Boys Clubs of
evidence to support the jury's answers to both ques-            Greater Dallas, Inc., 907 S. W.2d at 481.
tions. 18 S.W.3d at 755-57. We agree with the court
of appeals.                                                          The DTP A does not mention "puffmg" as a de-
                                                                fense. However, this Court has recognized that "mere
                   1. Applicable Law                            puffing" statements are not actionable under sections
     [24][25] The DTPA prohibits "[t]alse, mislead-             17.46(b)(5) or 17.46(b )(7). Pennington v. Singleton,
ing, or deceptive acts or practices in the conduct of any       606 S. W.2d 682, 687 (Tex.l980). Neither this Court
trade or commerce." TEX. BUS. & COM.CODE §                      nor any court of appeals has extended the puffmg
17.46(a). Section 17.46(b) is a laundry list of specifi-        defense to violations of sections 17 .46(b)(23) (failure
cally prohibited acts. Sections 17 .46(b)(5) and                to disclose) or 17.50(a)(3) (unconscionable conduct).
17 .46(b )(7) prohibit "false, misleading, or deceptive
acts or practices includ[ing] representing that goods
                                 000
                                                                     [28][29] In conducting a no-evidence review, we
and services have *502 characteristics, ingredients,
                           000
                                                                must view the evidence in a light that tends to support
uses, [or] benefits  00. which they do not have" and            the fmding of the disputed fact and disregard all evi-
"representing that goods or services are of a particular        dence and inferences to the contrary. Weirich v.
standard, quality, or grade oo• if they are of another."        Weirich, 833 S.W.2d 942, 945 (Tex.l992). If more
Section 17 .46(b )(23) prohibits "the failure to disclose       than a scintilla of evidence exists, the evidence is
information concerning goods or services which was              legally sufficient to support the fmding. Brown-
known at the time of the transaction if such failure to         ing-Ferris, Inc. v. Reyna, 865 S.W.2d 925, 928
disclose such information was intended to induce the            (Tex.1993).
consumer into a transaction into which the consumer
would not have entered had the information been
                                                                                     2. Analysis
disclosed." Section 17.50 provides the remedy for
                                                                     The Wilkinses offered the following evidence to
violations of the laundry-list provisions of 17.46(b)
                                                                 support their DTPA claims:
and for "any unconscionable action or course of action
by any person." Actionable representations may be
                                                                   (1) Kenny Wilkins' testimony that he read Helena's
oral or written. Hedley Feedlot, Inc. v. Weatherly
                                                                   seed brochure (PX-25) before purchasing Cherokee
Trust, 855 S.W.2d 826, 838 (Tex.App.-Amarillo
                                                                   seed and that he would not have planted Cherokee in
1993, writ denied). A party need not prove intent to
                                                                   1993 and 1994 had the brochure not represented
make a misrepresentation under sections 17 .46(b)( 5)




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47 S.W.3d 486,44 Tex. Sup. Ct. J. 675
(Cite as: 47 S.W.3d 486)

  Cherokee was a good dry land variety.                      (8) The Wilkinses' testimony that they relied upon
                                                             the Helena agent's oral representations.
  (2) The PX-25 brochure's description of Cherokee
  seed as "one of the most durable, top yielding hy-         (9) Testimony indicating that it is reasonable and
  brids" with an "outstanding disease tolerance              customary for farmers to rely on oral representa-
  package."                                                  tions and advice from seed companies' representa-
                                                             tives and that, in fact, the neighboring farm's owner
  (3) The PX-25 brochure's "grain sorghum lineup"            also relies on advice from his seed company repre-
  chart stating that Cherokee seed has "good" head           sentative.
  exertion, "very good" standability, "excellent" yield
  potential in drylands, and that it is "FD [field] tol-     ( 10) Another Helena agent's representations that
  erant" to charcoal rot.                                    Cherokee seed was a "good dry land variety and that
                                                             it would hold up well under the dry land condi-
  (4) Helena's written representation that its sorghum       tions," and his recommendation that the Wilkinses
  hybrids "constitute our best research and develop-         plant Cherokee seed.
  ment efforts," that Cherokee seed has "excellent
  weatherability," that Cherokee seed is "the tough          (11) A Helena representative's statement that the
  performer," and that it has "the stamina and *503          Wilkinses had planted "too thick" and that if they
  hardiness to withstand the harsh conditions from the       would plant Cherokee on the whole lot, but with
  Texas coastal bend across the lower south to the           greater spacing, "the plant[ s] will go ahead and
  Carolinas."                                                perform."


  (5) Testimony that the Wilkinses did not expect a             Helena argues that its "alleged misleading state-
  "FD tolerant" plant would be affected by charcoal        ments are not statements of "fact,' but constitute, if
  rot and that they understood ''tolerant" to mean that    anything, nonactionable opinion or puffmg." It relies
  "if there was an acceptable level of something out in    extensively on Autohaus, Inc. v. Aguilar, where the
  the field it would be tolerant to it."                   court of appeals held that an automobile salesman's
                                                           stating that Mercedes is the best-engineered automo-
  (6) The American Seed Association's (of which            bile in the world and "jok[ing]" that the car would
  Helena is a member) definition of"tolerant" as "the      "probably" only need to be brought in for oil changes
  ability of plants to endure a specified pest or an       every 7,500 miles was nonactionable puffmg. 794
  adverse environmental condition, performing and          S,W.2d 459, 464 (Tex.App.-Dallas 1990), writ de-
  producing in spite ofthe·disorder."                      nied per curiam, 800 S.W.2d 853 (Tex.1991). The
                                                           court noted that these two sentences were "the extent
                                                           of the evidence presented to show the misrepresenta-
  (7) A Helena agent's testimony that "tolerance to
                                                           tion by the salesman." Aguilar, 794 S.W.2d at 464. It
  charcoal rot is known to occur in grain sorghum. In
                                                           also noted that the terms "probably" and ''joked"
  this case the plant may develop a disease but may
                                                           demonstrated the generality of the statements. Agui-
  escape the full development of symptoms and pro-
                                                           lar, 794 S.W.2d at 464.
  duce some level ofharvestable yield which it could
  not otherwise do in the absence of the tolerance
  phenomenon."                                                   [30] Here, the Wilkinses' evidence reflects spe-
                                                            cific representations about Cherokee seed's charac-




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47 S.W.3d 486, 44 Tex. Sup. Ct. J. 675
(Cite as: 47 S.W.3d 486)

teristics and specific representations about how the
Wilkinses' crop in particular would perform. We               Wilkins explained that the cotton-grain rotation is
conclude some of the representations in this case are         required by the local crop-management office; his
much more specific than those in Aguilar and are more         neighbor rotated cotton and grain on certain por-
analogous to representations held actionable in other         tions ofhis acreage without adverse effects; and the
cases. See, e.g., Pennington, 606 S.W.2d at 687               alleged "over planting" occurred because the Wil-
(holding representations that used boat and motor             kins[ es] followed the recommendations of Helena in
were in "excellent condition," "perfect condition," and       planting their 1993 crop.
"just like new" were actionable misrepresentations
about characteristics and benefits); Hedley Feedlot;
                                                                 18 S. W.3d at 756. Thus, we conclude the Wil-
Inc., 855 S.W.2d at 831, 838-39 (holding cattle
                                                            kinses presented some evidence of producing cause.
seller's representations to a buyer about "the type of
cattle, weight, projected cost of feeding, the length of
                                                                  In sum, there is some evidence to support a
*504 time on feed, and the projected gain of the cattle"
                                                            fmding that Helena violated sections 17 .46(b )( 5) and
were actionable under the DTPA); Gold Kist, Inc. v.
                                                             17 .46(b )(7). This fmding is sufficient to support the
Massey, 609 S.W.2d 645, 646-47 (Tex.App.-Fort
                                                            jury's verdict. Thus, the court of appeals correctly held
Worth 1980, no writ) (holding representations about
                                                            that there is some evidence of DTP A violations and
seed-germination rate were actionable under the
                                                            that Helena's puffmg defense did not defeat liability
DTPA). Thus, viewing the evidence in a light most
                                                            under the DTP A.
favorable to the jury's findings, we conclude that there
is some evidence of misrepresentations about Chero-
kee seed's characteristics, quality, and grade amount-                          V.DAMAGES
ing to more than mere puffing.                                  Finally, Helena argues that there is no evidence to
                                                            support the jury's $360,000 damages award. The court
                                                            of appeals held there was evidence to support this
     [31] Helena also argues that there is no evidence
                                                            amount. 18 S.W.3d at 759. We agree with the court of
that its actions were the producing cause of the Wil-
                                                            appeals.
kinses' injuries because the Wilkinses did not exclude
other possible causes for the crop failure. Specifically,
Helena contends that the Wilkinses depleted their soil                     A. APPLICABLE LAW
by planting cotton the prior year.                               [32][33][34][35] Recovery for lost profits does
                                                            not require that the loss be susceptible to exact cal-
                                                            culation. Texas Instruments, Inc. v. Teletron Energy
     The Wilkinses presented evidence about Chero-
                                                            Mgmt., Inc., 877 S.W.2d 276, 279 (Tex.1994). How-
kee's unsuitability for dryland farming. This evidence
                                                            ever, the injured party must do more than show that it
included their crop's performance, their neighbor's
                                                            suffered some lost profits. Teletron Energy Mgmt.,
crop performance, several seed performance trial
                                                            Inc., 877 S.W.2d at 279. The loss amount must be
results, and South Texas rainfall statistics. The Wil-
                                                            shown by competent evidence with reasonable cer-
kinses' expert, Dr. Pleunneke, testified that Cherokee
                                                            tainty. Szczepanik v. FirstS. Trust Co., 883 S.W.2d
seed does not produce a good yield in a nonirrigated
                                                            648, 649 (Tex.1994); Holt Atherton Indus., Inc. v.
environment.
                                                            Heine, 835 S.W.2d 80, 84 (Tex.l992). This is a
                                                            fact-intensive determination. Heine, 835 S. W.2d at 84.
    The Wilkinses also presented evidence excluding
                                                            At a minimum, opinions or lost-profit estimates must
other causes. The court of appeals summarized this
                                                            be based on objective facts, figures, or data from
evidence:




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47 S.W.3d 486, 44 Tex. Sup. Ct. J. 675
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which the lost-profits amount may be ascertained.
Szczepanik, 883 S.W.2d at 649; Heine, 835 S.W.2d at              The Wilkinses first planted grain in 1992 and
84.                                                          brought this suit to recover for crop damages sustained
                                                             in 1993 and 1994. Thus, they only had one year to
     [36][37] Texas' general rule for assessing dam-         establish a profit history.
ages for crop loss is the market value of the lost part of
the crop, as measured at maturity, less the cost of               [40][ 41] We have held that past profits, coupled
harvesting and marketing the lost part. International        with other facts and circumstances, may establish a
Harvester Co. v. Kesey, 507 S.W.2d 195, 197                  lost-profits amount with reasonable certainty. See
(Tex.l974). The law does not demand perfect proof of         Teletron Energy Mgmt., Inc., 877 S.W.2d at 279.
damages for crop *505 loss but liberally permits es-         However, lack of a profit history does not, by itself,
timates of crop value and probable yield, as well as         preclude a new business from recovering lost future
cultivating and marketing expenses. International            profits. See, e.g., Orchid Software, inc. v. Pren-
Harvester Co., 507 S.W.2d at 197.                            tice-Hall,     Inc.,    804     S.W.2d      208,    211
                                                             (Tex.App.-Austin 199 I, writ denied). Rather, our
                    B. ANALYSIS                              focus is on whether damages can be shown with rea-
     [38] Helena argues that the Wilkinses' damages          sonable certainty. E.g., Szczepanik, 883 S.W.2d at
should have been limited to the Cherokee seed's pur-         649. This can be accomplished with a profit history or
chase price. Helena relies upon the "limitation of           some other objective data, such as future contracts,
liability and remedies" clause printed on its invoices,      from which lost profits can be calculated with rea-
delivery tickets, and seed label. The DTP A provides         sonable certainty. See, e.g., Szczepanik, 883 S. W.2d at
that "[a]ny waiver by a consumer of the provisions of        649; Allied Bank W. Loop v. C.B.D. & Assocs., Inc.,
this subchapter is contrary to public policy and is          728 S.W.2d 49, 54-55 (Tex.App.-Houston [1st
unenforceable and void." TEX. BUS. & COM.CODE                Dist.] 1987, writ refd n.r.e).
§ 17.42(a). We have held that a clause limiting re-
covery for breach of warranty is effective, even when             To establish their lost profits with reasonable
brought under the DTP A, because the DTP A did not           certainty, the Wilkinses had to show: (l) the lost crop's
create warranty claims. Southwestern Bell Tel. Co. v.        market value, and (2) the harvesting and marketing
FDP Corp., 811 S.W.2d 572, 576-77 (Tex.l991).                expenses they would have incurred on that lost part.
However, the same does not hold true for other DTPA          International Harvester Co., 507 S.W.2d at 197. To
claims. FDP Corp., 811 S.W.2d at 576-77. Thus,               calculate their lost crop's market value, the Wilkinses
Helena's liability-limitation clauses cannot preclude        relied upon the United States Agriculture Stabilization
the Wilkinses' lost-profit recovery for nonwarranty          and Conservation Service's farm-yield data. Each year
representations or unconscionability.                        the USASC measurement service gathers crop yield
                                                             information from sorghum growers. The Wilkinses
     [39] Alternatively, Helena argues that there is no      took the average sorghum yield per acre and sub-
evidence to support the jury's damage award because          tracted their actual per acre yield, as evidenced by
prior losses cannot establish lost profits and because       sales receipts. Then they multiplied this resulting
the Wilkinses did not prove their damages with rea-          deficit by the number of acres planted and multiplied
sonable certainty. Specifically, Helena argues that          this figure by the market price. The result was
deducting government subsides and disaster relief            $129,170.95 for 1993 and$361,684.63 for 1994. They
from the Wilkinses' income results in a history of           submitted the $490,855.58 total to the jury as their
losses rather than profits.                                  estimated damages.




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    *506 To reach an estimated lost-profits figure, the     Justice ABBOTT, joined by Justice HECHT and Jus-
cost of harvesting and marketing the lost crop must be      tice OWEN, dissenting.
deducted from the $490,855.58 value of the lost crop.            Although he knew about both the alleged problem
These costs include additional lease payments,              with the seed and the Act's requirement that seed'
grain-elevator costs, and transportation charges. See       complaints be submitted to arbitration, Wilkins de-
International Hctrvester Co., 507 S.W.2d at 197.            layed submitting his complaint to arbitration until
Harvesting and marketing expenses can be liberally          years after he first discovered the problem. Because of
estimated. International Harvester Co .. 507 S.W.2d at      this delay, it was too late for the State Seed and Plant
197.                                                        Board to conduct a meaningful investigation, and the
                                                            Board appropriately concluded that the complaint did
     Here, the Wilkinses' neighbor testified about av-      not qualify for arbitration. Despite the Act's plain
erage transportation costs to move grain between his        requirement that seed complaints be timely submitted
farm and the grain elevator in McCook, Texas, where         to arbitration as a prerequisite to maintaining a legal
both the neighbor and the Wilkinses sent their crops.       action, the Court sidesteps this requirement and per-
Kenneth Wilkins testified about how the                     mits Wilkins to maintain his suit. In doing so, the
grain-elevator company calculates drying charges and        Court encourages all seed buyers who wish to cir-
provided the jury with the Wilkinses' 1993 and 1994         cumvent the Act's arbitration requirement to simply
grain-elevator receipts. The Wilkinses' leases con-         delay submitting the complaint to arbitration until it is
taining the percentage of profits that the Wilkinses'       too late for the Board to investigate. Because the Court
were required to pay their landlord were entered into       ignores the Act's plain language and undermines the
evidence. Finally, there was some evidence presented        Act's purpose by permitting seed purchasers to com-
to the jury about the seed's actual price and some          pletely circumvent the Act's arbitration requirement, I
evidence that Helena may have "written off' a part of       dissent.
the price. With this evidence, the jury assessed the
Wilkinses' net lost profits at $360,000. We agree with                                 I
the court of appeals that the jury's damages award was           The Act's purpose is to "provide[ ] for an unbi-
within the range of evidence the Wilkinses presented        ased third party investigation by the State Seed and
and that this award is supported with evidence estab-       Plant Board of the Texas Department of Agriculture of
lishing damages with reasonable certainty. 18 S.W.3d        complaints concerning seed performance." HOUSE
at 759. Thus, we hold that there is some evidence to        COMM. ON AGRIC. AND LIVESTOCK, BILL
support the jury's damage award.                            ANALYSIS, Tex. S.B. 64, 71st Leg., R.S. (1989). To
                                                            achieve this purpose, the Act requires that a seed
                 VI. CONCLUSION                             purchaser who "claims to have been damaged by the
     We conclude that the Wilkinses' delay in submit-       failure of the *507 seed to produce or perform as
ting their claims to arbitration did not jurisdictionally   represented by warranty or by the label required to be
bar their suit. We also conclude that the trial court did   attached to the seed ... or as a result of negligence ...
not abuse its discretion in admitting the Wilkinses'        must submit the claim to arbitration" before the Board
expert's testimony. Finally, we conclude that there is      "as a prerequisite to the exercise of the purchaser's
some evidence to support the jury's liability, causa-       right to maintain a legal action." TEX. AGRIC.
tion, and damages fmdings. Accordingly, we affirm           CODE§ 64.002 (emphasis added).
the court of appeals' judgment.
                                                                 In order for the Board to be able to conduct a




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47 S.W.3d 486, 44 Tex. Sup. Ct. J. 675
(Cite as: 47 S. W.3d 486)

meaningful investigation, the Act expressly provides       biased third party investigation and opinion" and the
that the arbitration complaint must be submitted           "American Seed Trade Association has recommended
"within the time necessary to permit effective inspec-     to each of its member states that they work to pass
tion of the plants under field conditions." Id §           measures similar to Florida's." See HOUSE COMM.
64.006(a). The question the Court must answer today        ON AGRIC. AND LIVESTOCK, BILL ANALYSIS,
is: When the seed purchaser does not file the arbitra-     Tex. S.B. 64, 71st Leg., R.S. (1989). At the time the
tion complaint within the time necessary to permit         Texas Seed Arbitration Act was enacted, the Florida
effective inspection of the plants under field condi-      statute provided that:
tions (even though he is aware of the problem during
that time and conducts his own inspection), and the          [w ]hen any farmer is damaged by the failure of ...
Board concludes that the complaint does not qualify          seed to produce or perform as represented by the
for arbitration because of the delay, is the purchaser's     label ... , as a prerequisite to his right to maintain a
legal action based on the seller's alleged misrepre-         legal action against the dealer from whom such seed
sentations barred? Simple rules of statutory construc-       was purchased, such farmer shall make a sworn
tion require that this question be answered yes.             complaint.... The complaint shall be filed with the
                                                             department, and a copy of the complaint shall be
      First, the Act provides both that the seed pur-        served on the dealer by certified mail, within such
chaser "must submit the claim to arbitration as pro-         time as to permit inspection of the crops, plants, or
vided by [Chapter 64]" and that "the complaint must          trees by the seed investigation and conciliation
be filed within the time necessary to permit effective       council or its representatives and by the dealer from
inspection of the plants under field conditions." Id §§      whom the seed was purchased.
64.002, 64.006(a) (emphasis added). According to the
Code Construction Act, "must" creates or recognizes a          FLA. STAT. ANN .. § 578.26(l)(a) (1989) (em-
condition precedent. TEX. GOV'T CODE §                     phasis added).
311.0 16(3 ). A condition precedent is "an event that
must happen or be performed before a right can accrue
                                                                The Florida and Texas statutes are substantially
to enforce an obligation." Centex Corp. v. Dalton, 840
                                                           similar-both provide that the *508 seed purchaser or
S.W.2d 952, 956 (Tex.l992). Thus, before a seed
                                                           farmer must file a complaint or submit the claim to
purchaser may maintain his suit, he must submit his
                                                           arbitration "as a prerequisite to [the purchaser's] right
claim to arbitration and he must do so within the time
                                                           to maintain a legal action" against the dealer or Ia-
necessary to permit effective inspection of the plants
                                                           beier. Both statutes require the complaint to be filed in
under field conditions-it is not enough to "submit"
                                                           a timely manner so that it can be appropriately inves-
the claim when no inspection is possible. Because the
                                                           tigated and the crops can be inspected.
Board "shall conduct arbitration as provided by
[Chapter 64]," id § 64.005(b), if the seed purchaser
                                                                 "[I]t is a generally accepted rule of statutory
fails to timely submit the claim as directed by Chapter
                                                            construction that when the Legislature adopts a 'for-
64, the Board cannot arbitrate and the sole purpose of
                                                            eign' statute it also adopts the construction of that
the Act is thwarted.
                                                            statute by the foreign jurisdiction occurring prior to
                                                            the Texas enactment." State v. Moreno, 807 S.W.2d
     Second, the Legislature expressly indicated that
                                                            327, 332 n. 5 (Tex.Crim.App.1991); see also City of
the Act was based on a similar Florida statute. The bill
                                                            Garlandv. Dallas Morning News, 22 S.W.3d 351,360
analysis recognizes that "[ f]or many years the state of
                                                            (Tex.2000); Tex. Dep't of Pub. Safety v. Gilbreath,
Florida has used a method of arbitration with an un-




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47 S.W.3d 486, 44 Tex. Sup. Ct. J. 675
(Cite as: 47 S. W.3d 486)

842 S.W.2d 408, 412 (Tex.App.-Austin 1992, no                  ings, including any fmding as to the effect of delay
writ). The Florida Supreme Court construed Florida's           in filing the arbitration claim or the arbitration
seed act in 1983 in Ferry-Morse Seed Co. v. Hitch-             board's ability to determine the facts of the case.
cock, 426 So.2d 958 (Fia.l983). FNI Just as in this case,
the farmer in Hitchcock waited over two years after               TEX. AGRIC. CODE § 64.004. Both the Court
discovering the problem to bring suit alleging breach        and Wilkins contend that Wilkins's delay in filing his
of warranty and negligence, and made no attempt to           arbitration complaint does not bar his suit because the
comply with the statutory requirements. The Florida          statute specifically addresses this problem by allowing
Supreme Court held that the farmer's claims were             the trial court to take such delays into account. How-
inextricably bound to the statute's labeling require-        ever, because that interpretation allows Wilkins to
ments, and that by failing to comply with the statutory      completely circumvent Chapter 64's arbitration re-
requirements, the farmer was barred from bringing            quirement, it simply cannot be an accurate application
suit for damages. /d. at 961.                                of section 64.004.

         FNl. Florida's 1977 Act, which was at issue              To the contrary, section 64.004 deals with the
         in F'eny--:lv!orse, was similar to its 1989 ver-    situation in which the complaint is filed within the
         sion except that it required the farmer to file a   time necessary to permit effective inspection under
         sworn complaint with the department of ag-          field conditions, but the seed purchaser's delay in
         riculture within 10 days after the problem          filing nevertheless affects the investigation. A pur-
         became apparent. FLA. STAT. ANN .. §                chaser could certainly delay filing an arbitration
         578.26(1) (1977).                                   complaint for many months yet still file while the
                                                             seeds are under field conditions. For example, if the
     The Texas Legislature enacted Chapter 64 in             problem became apparent early in the season but *509
1989, well after the Florida Supreme Court issued its        the farmer delayed submitting the claim to arbitration
decision construing Florida's seed act. Accordingly,         until after the heat of the summer, the delay could
we should presume that the Legislature intended to           affect the Board's investigation. Section 64.004 allows
adopt Florida's construction of its statute, so long as      the trial court to consider such a delay; it does not
the Florida and Texas statutes are substantially similar     allow the court to completely ignore the statute's
and our statute does not reflect a contrary intent. See      timeliness requirements. Moreover, section 64.004, by
Shar(/i v. Young Bros., 835 S.W.2d 221, 223                  its terms, applies only to a complaint "that has been
(Tex.App.-Waco 1992, writ denied). As noted, the             the subject of arbitration under [Chapter 64]." Because
acts are substantially similar, and neither the Texas        Wilkins's complaint was not arbitrated-and could not
statute itself nor the available legislative history in-     have been under the terms of the statute-section
dicates a contrary intent.                                   64.004 does not apply.


      The only notable difference between the Texas               Construed in this manner, section 64.004 is con-
and Florida statutes is the provision in section 64.004      sistent with the Act's purpose and with the conclusion
that:                                                        that a purchaser's failure to file an arbitration com-
                                                             plaint within the time necessary to permit inspection
  [t]he court may ... take into account any fmdings of       during field conditions is a bar to suit. But the Court
  the board of arbitration with respect to the failure of    would rather rely on this one provision to gut the
  any party to cooperate in the arbitration proceed-         purpose of the Act. Rather than interpreting this single
                                                             sentence in a manner entirely inconsistent with the




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47 S.W.3d 486,44 Tex. Sup. Ct. J. 675
(Cite as: 47 S.W.3d 486)

Act's purpose of allowing an independent third-party        file the arbitration complaint so that the only field
investigation, we should interpret it consistently with     inspection the Board could consider would be the
the Act as a whole. See Tex. Workers' Camp. Ins. Fund       farmer's.
v. Del Indus., Inc., 35 S.W.3d 591, 593 (Tex.2000)
(stating that we do not construe statutory language in           The Court's construction reads section 64.006(a)'s
isolation but in the context of the entire statutory        timeliness requirement right out of the Act. To be
scheme). And, when two constructions are possible,          consistent with both the Act's language and its pur-
we should choose the one most consistent with the           pose, I would hold that Wilkins's failure to submit his
Act's purpose over the construction completely at odds      claim to arbitration within the requisite time period
with it.                                                    bars him from maintaining a legal action against
                                                            Helena.
     The Court's construction of the Act renders
meaningless section 64.006(a)'s requirement that the                                  II
arbitration complaint be submitted within the time               Wilkins argues that, regardless of whether the Act
necessary to permit effective inspection of the plants      bars certain claims that *510 have not been arbitrated,
under field conditions. Relying on the fact that the Act    the jury's verdict can be sustained on the basis of the
does not expressly state that the Board must conduct        DTPA unconscionability and misrepresentation
the field inspection, the Court reasons that "the Act       causes of action, which he contends are not subject to
provides that a complaint must be filed in time to          the Act's arbitration requirement. Wilkins obtained
'permit an effective inspection of the plants under         favorable jury findings on his claims for breach of
field conditions,' thus permitting the parties to inspect   warranty, DTPA unconscionability, and DTPA oral
under field conditions and provide their reports to the     misrepresentations. Wilkins argues that, even if the
Board." 47 S.W.3d at 507 (citations omitted). But this      breach of warranty claim is barred by his failure to
reasoning makes no sense. The timing requirement            arbitrate, the Act does not bar his DTP A uncon-
must have been intended to allow someone to conduct         scionability and misrepresentation claims because the
a field inspection. According to the Court, that            statute requires only claims based on the label, war-
someone is simply "the parties." But surely the Act's       ranty, or negligence to be submitted to arbitration, and
timeliness requirement was not included to allow the        his DTPA claims are not based on the label, warranty,
farmer to conduct a field inspection, since the farmer      or negligence.
has access to his fields and can conduct an inspection
at any time. Accordingly, the requirement must have
                                                                 If Wilkins is correct, plaintiffs could easily cir-
been intended to permit the Board or the seed seller to
                                                            cumvent the Act simply by recharacterizing their
conduct an inspection. Since the Act's purpose is to
                                                            claims as DTPA claims. This would render the Act
allow a third party investigation and the Board em-
                                                            wholly ineffective and would undermine the legisla-
ploys its own field inspectors, the only conclusion is
                                                            tive intent. Cf Sorokolit v. Rhodes, 889 S.W.2d 239,
that the Legislature intended to permit the Board to
                                                            242 (Tex.l994) ("Claims that a physician or health
conduct an inspection. But under the Court's inter-
                                                            care provider was negligent may not be recast as
pretation, there would be no problem even if no one
                                                            DTPA actions to avoid the standards set forth in the
conducted a field inspection and the farmer waited
                                                            Medical Liability and Insurance Improvement Act.").
until well after the crops had been harvested to file the
                                                            The Act's language is broad-it applies whenever a
arbitration complaint so that no field inspection could
                                                            seed purchaser claims to have been damaged "by the
be performed. Or, the farmer could conduct a field
                                                            failure of the seed to produce or perform as repre-
inspection but then wait until after field conditions to
                                                            sented by warranty or by the label required to be at-




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47 S.W.3d 486,44 Tex. Sup. Ct. J. 675
(Cite as: 47 S. W.3d 486)

tached ... or as a result of negligence." TEX. AGRIC.       Courts provision of the Texas Constitution. See TEX.
CODE § 64.002(a). The Business and Commerce                 CONST. art. I, § 13. We should, ifpossible, interpret
Code-the same code in which the DTP A is                    statutes in a manner that avoids constitutional infir-
found-defmes warranties to include "[a]ny affirma-          mities. Owens Corning v. Carter, 997 S.W.2d 560,
tion of fact or promise made by the seller to the buyer     577 (Tex.l999). *511 The Attorney General has con-
which relates to the goods and becomes part of the          cluded, and I agree, that Chapter 64's arbitration re-
basis of the bargain" and "[a]ny description of the         quirements do not on their face violate the Open
goods which is made part of the basis of the bargain."      Courts provision of the Texas Constitution. Op. Tex.
TEX. BUS. & COM.CODE § 2.313(a)(l),(2). Wil-                Att'y Gen. No. DM-3 (1991 ). As noted in that deci-
kins's claims for DTP A misrepresentation and un-           sion, Chapter 64 does not purport to abolish the right
conscionability fall within the scope of this definition.   of seed performance disputants to obtain redress in
                                                            court. !d. The arbitration is non-binding, and seed
     In the jury charge, the DTP A misrepresentation        purchasers are free to pursue their claims in court after
claim defined "false, misleading, or deceptive act or       the arbitration. Moreover, Chapter 64's arbitration
practice" as "representing that Cherokee seed had or        requirements are certainly not unreasonable or arbi-
would have characteristics that it did not have" or         trary when balanced against the purpose and basis of
"representing that Cherokee seed was of a particular        the statute. !d.; see Carter, 997 S.W.2d at 573; Sax v.
quality if it was of another." These representations fall   Votteler, 648 S.W.2d 661,666 (Tex.l983).
within the definition of warranty, and, although
couched as a DTP A misrepresentation claim, the un-              The Attorney General did caution, however, that
derlying nature of the complaint is that the seeds did      the Act could raise Open Courts questions as applied
not produce or perform as represented. See Sorokolit,       to some cases. Op. Tex. Att'y Gen. No. DM-3 (1991).
889 S.W.2d at 242 (holding that the underlying nature       In particular, the Attorney General pointed out that the
of the claim, not its label, determines whether section     Open Courts provision could limit the application of
12.0 l (a) of the Medical Liability and Insurance Im-       section 64.006(a)'s requirement that the arbitration
provement Act prevents suit for violation of the            complaint be filed in time to permit inspection ofthe
DTPA). Wilkins's DTPA unconscionability claims are          plants under field conditions. !d. I agree that this re-
also predicated on Helena's representations concern-        quirement might arguably violate the Open Courts
ing the Cherokee seed. The evidence supporting Wil-         provision as applied to cases in which the Act's com-
kins's DTP A misrepresentation and unconscionability        plaint-filing time period has expired before the seed
claims is the same evidence supporting his breach of        purchaser has a reasonable opportunity to discover the
warranty claims. Because all of Wilkins's claims are        problem. But where, as here, the seed purchaser dis-
so significantly factually intertwined, they should be      covers the problem while the seeds are under field
arbitrated together. Cf Jack B. Anglin Co. v. Tipps,        conditions (and conducts his own independent inves-
842 S.W.2d 266,271 (Tex.I992)(requiring arbitration         tigation of the crops in the field), is aware ofthe arbi-
of factually intertwined contract and misrepresenta-        tration requirement, and has ample opportunity to file
tion claims in contractual arbitration context). Ac-        his complaint in a timely manner but simply fails to do
cordingly, Wilkins's DTPA claims are included within        so, the Open Courts provision is satisfied.
the Act's arbitration requirement.

                                                                 *****
                           III
    Wilkins argued in the trial court that construing           Wilkins knew of the potential problem with the
the Act to bar his legal action would violate the Open      Cherokee seed within plenty of time to file a com-




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47 S.W.3d 486,44 Tex. Sup. Ct. J. 675
(Cite as: 47 S.W.3d 486)

plaint with the Board during the requisite time period.
Although he allowed some experts to investigate his
crops under field conditions, he failed to file a com-
plaint with the Board to allow the neutral third-party
investigation required by the Act. Because Wilkins
failed to submit his complaint within the requisite time
period, the Board properly concluded that the com-
plaint did not qualify for arbitration under the Act's
plain language. And because arbitration is a prerequi-
site to Wilkins's right to maintain a legal action for his
claims that he has been damaged by the failure of the
seed to produce or perform as represented, Wilkins's
claims are barred. The Court nevertheless decides that
they are not. Because that decision contradicts the
Act's plain language and undermines its purpose, I
dissent.


Tex.,2001.
Helena Chemical Co. v. Wilkins
47 S.W.3d 486,44 Tex. Sup. Ct. J. 675


END OF DOCUMENT




                             © 2015 Thomson Reuters. No Claim to Orig. US Gov. Works.
                  Appendix 12


Texas Utilities Electric Co. v. Public Utility Commission,
    881 S.W.2d 387 (Tex. App.- Austin 1994)
       aff'd in part, rev'd in part on other grounds,
             935 S.W.2d 109 (Tex. 1997)
west taw,
                                                                                                          Page I


881 S.W.2d 387
(Cite as: 881 S.W.2d 387)


                                                               15A Administrative Law and Procedure
                                                                    15AIV Powers and Proceedings of Administrative
                                                               Agencies, Officers and Agents
               Court of Appeals of Texas,
                                                                       15AIV(A) In General
                         Austin.
                                                                          15Ak314 k. Bias, prejudice or other disqualifi-
                                                               cation to exercise powers. Most Cited Cases
   TEXAS UTILITIES ELECTRIC COMPANY, Public
Utility Commission, Office of Public Utility Counsel, and
                                                                   Adjudicators involved in administrative proceedings
          Cities of Arlington, et al., Appellants,
                                                               are presumed to be honest and act with integrity but pre-
                             v.
                                                               sumption may be overcome by demonstrating that decision
 PUBLIC UTILITY COMMISSION, Texas Utilities Elec-
                                                               maker's mind was irrevocably closed on matters at issue.
tric Company, Office of Public Utility Counsel, and Cities
              of Arlington, et al., Appellees.
                                                                [2] Electricity 145 ~11.3(6)
                 No. 3-92-548-CV.
                    June 15, 1994.                              145 Electricity
    Rehearings Overruled Aug. 31 and Oct. 12, 1994.                145k 11.3 Regulation of Charges
                                                                       145kll.3(6) k. Proceedings before commissions.
     Final order by Public Utility Commission in electric       Most Cited Cases
rate case conducted under Public Utility Regulatory Act
(PURA) was reversed and remanded in part when re-                   Public Utility Commission chairperson's pecuniary
viewed by the 250th Judicial District Court, Travis County,    interest in natural gas industry did not invalidate Com-
John K. Dietz, J. Appeals were taken. The Court of Ap-         mission's decision in electric rate case which decided
peals, Bea Ann Smith, J., held that: (1) commissioner's        whether costs of nuclear power plant construction should
financial interest in gas industry was not prejudicial; (2)    be included in utilities' rate base costs; chairperson's pe-
Commission lacked authority to review costs associated         cuniary interest was not shown to have deprived parties of
with reacquiring minority interests in nuclear power plant;    impartial and fair hearing. V.T.C.A., Government Code §
(3) using hypothetical tax method was error; (4) Commis-       2001.174; Vernon's Ann.Texas Civ.St. art. 1446c, § I et
sion had authority to allow utility to implement bonded        seq.
rates; (5) disallowing some revalidation expenses for nu-
clear power plant as imprudent was not error; and (6) set-      [31 Administrative Law and Procedure 15A ~314
ting rate of return on common equity at 13.2% was within
Commission's discretion.                                        15A Administrative Law and Procedure
                                                                     15AIV Powers and Proceedings of Administrative
    Reversed and remanded with instructions.                    Agencies, Officers and Agents
                                                                        15AIV(A) In General
                     West Headnotes                                        15Ak314 k. Bias, prejudice or other disqualifi-
                                                                cation to exercise powers. Most Cited Cases
[II Administrative Law and Procedure 15A ~314
                                                                    Administrative officer is not disqualified simply be-




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                                                                                                            Page2


881 S.W.2d 387
(Cite as: 881 S.W.2d 387)

cause officer has previously taken position, even in public,    [6] Administrative Law and Procedure 15A ~431
on policy issue related to particular dispute absent showing
of incapability to decide particular controversy fairly.       15A Administrative Law and Procedure
V.T.C.A., Government Code§ 2001.174.                                15AIV Powers and Proceedings of Administrative
                                                               Agencies, Officers and Agents
[4] Administrative Law and Procedure 15A ~305                          15AIV(C) Rules, Regulations, and Other Policy-
                                                               making
15A Administrative Law and Procedure                                     15Ak428 Administrative Construction of Stat-
    15AIV Powers and Proceedings of Administrative             utes
Agencies, Officers and Agents                                               15Ak431 k. Deference to agency in general.
       15AIV(A) In General                                     Most Cited Cases
          15Ak303 Powers in General                               (Formerly 361 k219(1))
             · 15Ak305 k. Statutory basis and limitation.
Most Cited Cases                                                   Reviewing court has power and duty to consider
                                                               agency's interpretation and application of statute.
Administrative Law and Procedure 15A ~325
                                                                [7] Electricity 145 ~11.3(7)
15A Administrative Law and Procedure
    15AIV Powers and Proceedings of Administrative              145 Electricity
Agencies, Officers and Agents                                      145kll.3 Regulation of Charges
       15AIV(A) In General                                             145kl1.3(7) k. Judicial review and enforcement.
          15Ak325 k. Implied powers. Most Cited Cases           Most Cited Cases


    Administrative agencies have only those powers that              Section of Public Utility Regulatory Act (PURA) au-
are expressly conferred by statute, together with those         thorizing Public Utility Commission to review changes in
necessarily implied from authority conferred or duties          public utility ownership did not apply to electric utility's
imposed.                                                        repurchase of minority joint ownership interests in nuclear
                                                                power plant given that ownership of plant did not change
(5] Administrative Law and Procedure 15A ~447.1                 hands as result of repurchase; utility's decision to purchase
                                                                minority interest was limited to review under prudent
                                                                investment standard. Vernon's Ann.Texas Civ.St. art.
15A Administrative Law and Procedure
                                                                1446c, § 63.
    15A1V Powers and Proceedings of Administrative
Agencies, Officers and Agents
       15AIV(D) Hearings and Adjudications                      [8] Electricity 145 ~11.3(4)
          15Ak447 Jurisdiction
             15Ak447 .l k. In general. Most Cited Cases         145 Electricity
                                                                    145k 11.3 Regulation of Charges
     Jurisdiction cannot be conferred upon administrative               145kll.3(4) k. Operating expenses. Most Cited
agencies by parties before it, but rather must emanate from     Cases
statute itself.
                                                                    Public Utility Commission erred in electric rate case




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                                                                                                             Page 3


881 S.W.2d 387
(Cite as: 881 S.W.2d 387)

by calculating utility's federal income tax liability using           If utility enjoys tax deduction based on interest ex-
hypothetical rather than actual-tax method; utility's rates       pense, benefits of deduction must be passed on to rate-
must reflect tax liability actually incurred. Vernon's            payers, rather than to shareholders. Vernon's Ann.Texas
Ann.Texas Civ.St. art. 1446c, § 1 et seq.                         Civ.St. art. 1446c, § 41(c)(2).


[9) Electricity 145 ~11.3(4)                                      [12) Electricity 145 ~11.3(4)


145 Electricity                                                   145 Electricity
   145kl1.3 Regulation of Charges                                    145k11.3 Regulation of Charges
        145kll.3(4) k. Operating expenses. Most Cited                     1451<11.3(4) k. Operating expenses. Most Cited
Cases                                                             Cases


     Electric rates must be set based on utility's actual tax          Allocation of tax benefits to electric utility from in-
liability and, thus, utility's tax expense will be adjusted to    terest expense and deduction between present and future
reflect tax savings which would result from filing consol-        ratepayers is matter within Public Utility Commission's
idated tax return, regardless of whether utility did in fact      discretion. Vernon's Ann.Texas Civ.St. art. 1446c, §
file consolidated return. Vernon's Ann.Texas Civ.St. art.         41(c)(2).
1446c, § 41(c)(2).
                                                                  [13] Electricity 145 ~11.3(4)
1101 Electricity 145 ~11.3(4)
                                                                  145 Electricity
145 Electricity                                                      145k11.3 Regulation of Charges
    145k 11.3 Regulation of Charges                                       1451<11.3(4) k. Operating expenses. Most Cited
        145k11.3(4) k. Operating expenses. Most Cited             Cases
Cases
                                                                      Electric utility's income tax expense must be reduced
     The Public Utility Commission's refusal to allocate to       by amount of tax deductions, even if associated with dis-
electric utility tax savings resulting from affiliate's losses    allowed capital expenses. Vernon's Ann.Texas Civ.St. mt.
violated actual-tax doctrine, requiring that rates be based       1446c, § I et seq.
on utility's actual tax liability, even if utility did not bear
risks a.ssociated with tax savings attributed to affiliates.      [14) Public Utilities 317A ~119.1
Vernon's Ann.Texas Civ.St. art. 1446c, § 4l(c)(2).

                                                                  3 17A Public Utilities
[11] Public Utilities 317A ~128                                       317All Regulation
                                                                         317Ak 119 Regulation of Charges
317 A Public Utilities                                                     317Ak 119 .I k. In general. Most Cited Cases
    317A II Regulation
       317Ak 119 Regulation of Charges                                 Utility may implement bonded rates in municipal ar-
          317 Akl28 k. Operating expenses. Most Cited             eas when underlying rate increase is subject to appellate
Cases                                                             jurisdiction of Public Utility Commission. Vernon's
                                                                  Ann. Texas Civ.St. art. 1446c, § 43(e).




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                                                                                                         Page4


881 S.W.2d 387
(Cite as: 881 S.W.2d 387)

                                                                   In conducting substantial evidence review, court must
[15) Administrative       Law    and    Procedure     15A      determine whether evidence as whole is such that reason-
~438(26)                                                       able minds could have reached conclusion agency must
                                                               have reached in order to take disputed action.

15A Administrative Law and Procedure
      I 5AIV Powers and Proceedings of Administrative          [17] Administrative Law and Procedure 15A ~793
Agencies, Officers and Agents
          I 5AIV(C) Rules, Regulations, and Other Policy-      15A Administrative Law and Procedure
making                                                            15AV Judicial Review of Administrative Decisions
             15Ak428 Administrative Construction of Stat-            15A V(E) Particular Questions, Review of
utes                                                                   l5Ak784 Fact Questions
                15Ak438 Particular Statutes and Contexts                   15Ak793 k. Weight of evidence. Most Cited
                  15Ak438(26) k. Carriers and public utili-    Cases
ties. Most Cited Cases
    (Formerly 36 Ik2 I 9(9. I))                                     Reviewing court may not substitute its judgment for
                                                               that of agency and must consider only record on which
Public Utilities 317A ~194                                     agency based its decision while conducting substantial
                                                               evidence review.
3 I 7A Public Utilities
      3 I 7Alii Public Service Commissions or Boards            (18) Administrative Law and Procedure 15A ~750
           3 I 7Alll(C) Judicial Review or Intervention
               317 Akl88 Appeal from Orders of Commission      15A Administrative Law and Procedure
                   317Ak 194 k. Review and determination in        I 5A V Judicial Review of Administrative Decisions
general. Most Cited Cases                                              15AV(D) Scope ofReview in General
     (Formerly 361k219(9.1))                                               15Ak750 k. Burden of showing error. Most
                                                               Cited Cases
     Public Utility Commission's interpretation of Public
Utility Regulatory Act (PURA) is entitled to great weight,          Party bringing appeal bears burden of showing that
provided that interpretation is reasonable and does not         decision by administrative agency lacks substantial evi-
contradict plain language of statute. Vernon's Ann. Texas       dence.
Civ.St. art. 1446c, § 1 et seq.

                                                                [19) Administrative Law and Procedure 15A ~791
(16] Administrative Law and Procedure 15A ~791
                                                                15A Administrative Law and Procedure
15A Administrative Law and Procedure                               l5A V Judicial Review of Administrative Decisions
   15A V Judicial Review of Administrative Decisions                  15A V(E) Particular Questions, Review of
      15AV(E) Particular Questions, Review of                            I 5Ak784 Fact Questions
         l5Ak784 Fact Questions                                              I 5Ak791 k. Substantial evidence. Most Cited
            15 Ak791 k. Substantial evidence. Most Cited        Cases
Cases
                                                                    Agency's order must be upheld despite substantial




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                                                                                                         Page 5


881 S.W.2d 387
(Cite as: 881 S. W.2d 387)

evidence challenge, if evidence would support either af-
firmative or negative findings.                                 145 Electricity
                                                                   145k11.3 Regulation of Charges
[20] Electricity 145 ~11.3(6)                                          145k11.3(6) k. Proceedings before commissions.
                                                                Most Cited Cases
145 Electricity
   145k11.3 Regulation of Charges                                   Underlying findings supported fmding of fact by
       145k11.3(6) k. Proceedings before commissions.           Public Utility Commission that some but not all costs of
Most Cited Cases                                                complying with increased inspection standards and pro-
                                                                cedures during construction of nuclear power plant were
     Substantial evidence supported decision by Public          caused by imprudence, warranting exclusion from rate
Utility Commission that electric utility's imprudence           base. V.T.C.A., Government Code§ 2001.141(d).
caused some but not all of increased costs incurred by
revalidation and reinspection program during construction       [23) Public Utilities 317A ~194
of nuclear power plant; costs to respond to concerns by
federal Nuclear Regulatory Commission were necessitated         317 A Public Utilities
in part because of utility imprudence and in part because of        317 ATTT Public Service Commissions or Boards
higher safety and inspection standards. Vernon's                        317 AIII(C) Judicial Review or Intervention
Ann.Texas Civ.St. art. 1446c, §§ 39, 41.                                  3 17 Ak188 Appeal from Orders of Commission
                                                                               317Ak 194 k. Review and determination in
[21] Public Utilities 317 A ~124                                general. Most Cited Cases


317 A Public Utilities                                               Reviewing court is bound by determinations of Public
    3 I 7All Regulation                                         Utility Commission as to weight and credibility of evi-
         317 Akl19 Regulation of Charges                        dence as long as there is substantial evidence in record
           317Ak124 k. Value ofproperty; rate base. Most        supporting Commission's decision.
Cited Cases
                                                                [24] Electricity 145 ~11.3(6)
Public Utilities 317A ~168
                                                                145 Electricity
317 A Public Utilities                                             145k 11.3 Regulation of Charges
    317 Alii Public Service Commissions or Boards                      145k11.3(6) k. Proceedings before commissions.
        317AliT (B) Proceedings Before Commissions              Most Cited Cases
          317 Ak168 k. Findings. Most Cited Cases
                                                                Public Utilities 317A ~164
     Determination that expenditure is imprudent carries
legal consequence of its exclusion from rate base and must      317A Public Utilities
be supported by underlying fmdings. V.T.C.A., Govern-              317 AllT Public Service Commissions or Boards
ment Code § 2001.141 (d).                                              317 AUJ(B) Proceedings Before Commissions
                                                                          317 Ak 164 k. Pleading. Most Cited Cases
[22] Electricity 145 ~11.3(6)




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                                                                                                              Page 6


881 S.W.2d 387
(Cite as: 881 S.W.2d 387)

     Utility's conditional request to include construction              145kll.3(4) k. Operating expenses. Most Cited
work in progress costs (CWIP) in rate base if proposed rate     Cases
increase were materially disallowed provided adequate
notice of utility's intent to seek inclusion of CWIP in rate         Natural gas purchase contract which set upper limit on
base in rate-making proceeding. Vernon's Ann.Texas              electric utility's right to purchase gas at contract price did
Civ.St. art. 1446c, §§ 39(a), 41 (a).                           not obligate utility to purchase gas under contract and,
                                                                thus, supported determination by Public Utility Commis-
[25[ Electricity 145 c€?11.3(4)                                 sion in rate case that utility violated its obligation to pur-
                                                                chase fuel at lowest reasonable cost to ratepayers. Vernon's
I 45 Electricity                                                Ann.Texas Civ.St. art. l446c, § 4l(c)(l).
   145kll.3 Regulation of Charges
      l45k11.3(4) k. Operating expenses. Most Cited              [28] Electricity 145 c€?11.3(4)
Cases
                                                                145 Electricity
     Public Utility Commission may either make contract            145k11.3 Regulation of Charges
by contract determination of reasonableness of contracts                145kll.3(4) k. Operating expenses. Most Cited
for purchase of alternate energy sources or group contracts     Cases
together and declare them all to be reasonable when rec-
onciling fuel costs as part of rate case. Vernon's Ann. Texas         Limiting electric utility's fuel inventory level based on
Civ.St. art. 1446c, § 4l(c)(l).                                 utility's actual experience over several years was not arbi-
                                                                trary and capricious, despite utility's request in rate case for
[26] Electricity 145 c€?11.3( 4)                                increased fuel inventory level. V.T.C.A., Government
                                                                Code§ 2001.174(2)(E, F).
145 Electricity
    l45k 11.3 Regulation of Charges                              [29] Administrative Law and Procedure 15A c€?753
        145k11.3(4) k. Operating expenses. Most Cited
Cases                                                            15A Administrative Law and Procedure
                                                                     15A V Judicial Review of Administrative Decisions
     Disallowing excessive price for natural gas as alter-               15 AV(D) Scope of Review in General
native fuel by electric utility, during rate case, was sup-                 15Ak753 k. Theory and grounds of administra-
ported by utility's accounting records indicating that pur-      tive decision. Most Cited Cases
chase was made pursuant to spot contract with unreason-
ably high price, despite utility's later contention that pur-         Mental processes of individual administrators are
chase was made part of separate short-term commercial            immaterial to judicial review of agency order; order is
contract for which purchase price would be reasonable.           reviewed in light of record on which it purports to rest.
Vernon's Ann. Texas Civ.St. art. l446c, § 41(c)(l).

                                                                 [30] Electricity 145 c€?11.3(5)
[27] Electricity 145 c€?11.3(4)
                                                                 145 Electricity
145 Electricity                                                      145k11.3 Regulation of Charges
   145k11.3 Regulation of Charges                                       145kll.3(5) k. Reasonableness of charges. Most




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                                                                                                       Page 7


881 S.W.2d 387
(Cite as: 881 S.W.2d 387)

Cited Cases                                                  Cities of Arlington, et al.


     Public Utility Commission has discretion in electric    David C. Duggins, Clark Thomas & Winters, Austin, for
rate case to decide whether imprudence by utility's man-     Texas Utilities Elec. Co.
agement warrants reduction in overall rate of return on
common equity. Vernon's Ann. Texas Civ.St. art. 1446c, §     Before CARROLL, C.J., and ABOUSSIE and B.A.
39(a).                                                       SMITH, JJ.

[31] Electricity 145 <8=>11.3(5)                             BEA ANN SMITH, Justice.
                                                                   Texas Utilities Electric Company, the Public Utility
145 Electricity                                              Commission, the Office of Public Utility Counsel, and the
    145kll.3 Regulation of Charges                           Cities of Arlington, et al. appeal from a district-court
        145kll.3(5) k. Reasonableness of charges. Most       judgment rendered in a suit for judicial review of the
Cited Cases                                                  Commission's final order in an electric utility rate case
                                                             conducted under the Public Utility Regulatory Act (PU-
    Setting electric utility's return on common equity at    RA),     Tex.Rev.Civ.Stat.Ann.      art.   1446c    (West
13.2% in rate case was not abuse of discretion. Vemon's      Supp.1994).FNI The district-court judgment reverses and
Ann. Texas Civ.St. art. 1446c, § 39(b).                      remands certain aspects of the Commission's final order,
                                                             and affirms the remainder. We will reverse the dis-
                                                             trict-court judgment and remand the cause to the district
*389 Roy Q. Minton, Minton Burton Foster & Collins,
                                                             court with instructions that the cause be remanded to the
Austin, for Texas Utilities Elec. Co.
                                                             Commission for further proceedings consistent with our
                                                             opinion. See Administrative Procedure Act (APA), Tex.
Dan Morales, Atty. Gen., Susan Bergen, Asst. Atty. Gen.,     Gov't Code Ann.§ 2001.174 (West 1994).FN 2
Austin, for Public Utility Com'n.

                                                                      FN 1. Cities of Arlington, et al. includes the mu-
Stephen Fogel, Austin, for Office of Public Utility Coun-             nicipalities of Addison, Allen, Azle, Belton,
sel.                                                                  Breckenridge, Bridgeport, Burkburnett, Burleson,
                                                                      Carrollton, Celina, Centerville, Cleburne, Col-
*390 Geoffrey M. Gay, Buter Porter Gay & Day, Austin,                 leyville, Copperas Cove, Corinth, Crowley,
for Cities of Arlington, et al.                                       Dalworthington Gardens, De Leon, Denison,
                                                                      Euless, Farmers Branch, Forest Hill, Fort Worth,
David C. Duggins, Clark Thomas & Winters, Austin, for                 Glen Heights, Grand Prairie, Granger, Hewitt,
Texas Utilities Elec. Co.                                             Howe, Hurst, Irving, Keller, Lindale, Luella,
                                                                      McKinney, Milford, Murchison, New Chapel
Dan Morales, Atty. Gen., Steven Baron, Asst. Atty. Gen.,              Hill, Ovilla, Pantego, Plano, Ranger, Richardson,
Austin, for Public Utility Com'n.                                     Roanoke, Rockwall, Rosser, Rowlett, Sherman,
                                                                      Sunnyvale, The Colony, Tyler, University Park,
                                                                      Venus, Waco, White Settlement, and Wichita
Yolanda L. Woods, Asst. Public Counsel, Austin, for Of-
                                                                      Falls. In addition to bringing individual appeals,
fice ofPublic Utility Counsel.
                                                                      each of the appellants is also an appellee with
                                                                      respect to certain parts of the district-court
Steven A. Porter, Butler Porter Gay & Day, Austin, for




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                                                                                                                   Page 8


881 S.W.2d 387
(Cite as: 881 S.W.2d 387)

         judgment.                                                  prejudiced in favor of the gas industry. The allegations of
                                                                    impermissible bias center around Meek's ties with Amer-
          FN2. All citations in this opinion are to the cur-        ican *391 Petrofina ("Fina"). During the rate-making
          rent Administrative Procedure Act rather than the         proceedings, Meek served as chairman of Fina's board,
          former Administrative Procedure and Texas                 received retirement benefits from Fina, and held shares of
          Register Act because the recent recodification did        its publicly traded common stock. Fina's direct sales of
          not substantively change the law. Act of May 4,           natural gas to Texas Utilities from 1989 to 1991 totalled
          1993, 73d Leg., R.S., ch. 268, § 47, 1993                 $60,782; indirect revenue from sales to other Texas Utili-
          Tex.Gen.Laws 583, 986.                                    ties suppliers approximated $104 million. Because of his
                                                                    connections with Fina, the Cities and Public Utility
                                                                    Counsel claim that Meek's participation in the hearings
                  THE CONTROVERSY
                                                                    precluded the Commission from making impartial find-
     Texas Utilities filed its application for a rate increase
                                                                    ings. The district court found the evidence insufficient to
in January 1990 seeking to include in its rate base costs
                                                                    show that Meek's service on the Commission led to unfair
associated with Comanche Peak, a newly constructed
                                                                    proceedings or prejudiced substantial rights of the parties.
nuclear power plant. The utility sought an agency adjudi-
                                                                    We agree.
cation regarding what portion of its costs it could include in
its rate base as being a "prudent" investment, public in-
terest findings on its reacquisition of a 12.2 percent own-               PURA provides that no commissioner may, during a
ership interest in the plant, final reconciliation of its fuel       period of service with the Commission, "have any pecu-
costs and revenues for the period Aprill983 to June 1989,            niary interest .. . in any person or corporation or other
and a reduction of its fuel factor for the period May 1990 to        business entity a significant portion of whose business
Aprill991. After the Commission issued its order, motions            consists of furnishing goods or services to public utilities
for rehearing were filed and the Commission issued a                 or affiliated interests .... " PURA § 6(b)(l). It is grounds for
second order on rehearing. Subsequent motions for re-                removal from the Commission if a member has interests in
hearing were overruled by operation of law, and five par-            violation of section 6(b) at the time of his or her appoint-
ties to the rate-making proceeding filed suit for judicial           ment. PURA § 6A. However, "the validity of an action of
review in district court. See PURA § 69; APA § 2001.171.             the commission is not affected by the fact that it was taken
The district court affirmed the Commission order in part             when a ground for removal of a member of the commission
and reversed it in part, after which Texas Utilities, Public         existed." PURA § 6A(b). Meek resigned from the Com-
Utility Counsel, the Cities, and the Commission each ap-             mission effective April 20, 1992, after the Attorney Gen-
pealed the district-court judgment.FN3 For clarity, we will          eral requested that he either sever all ties with Fina or
provide additional facts germane to the various points of            resign from the Commission. Although Meek was not
error throughout the opinion.                                        removed from the Commission because of a conflict of
                                                                     interest pursuant to PURA section 6A, he did resign in the
                                                                     face of a perceived conflict. Meek's conflict, however, has
         FN3. With one exception, the Cities and Public
                                                                   · no effect on the Commission's order in Docket 9300.
         Utility Counsel jointly raised their points of error.
                                                                     PURA § 6A(b ). This Court is left, therefore, with the
                                                                     power to reverse and remand the Commission's order only
               CONFLICT OF INTEREST
                                                                     if Meek's participation resulted in an order that prejudices
    In their first point of error, the Cities and Public Utility
                                                                     substantial rights of the appellants. See APA § 2001.174.
Counsel argue that the chairman of the Commission, Paul                 4
                                                                     FN We understand appellants to contend that this Court
Meek, was biased because he had a pecuniary interest in
                                                                     should reverse the Commission's order because Meek's
the outcome of the proceedings, and because he was
                                                                     interests in Fina resulted in an order that is arbitrary and




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                                                                                                              Page 9

881 S.W.2d 387
(Cite as: 881 S. W.2d 387)

capricious and a violation of their constitutional right to a              (2) fmding of fact 379 relating to the reasona-
fair and impartial hearing.                                                bleness of Texas Utilities' fuel expenditures dur-
                                                                           ing the reconciliation period insofar as such ex-
         FN4. APA section 2001.174 directs this Court to                   penditures relate to gas contracts between the
         reverse and remand a cause for further proceed-                   utility and Fina, and (3) fmding of fact 389 re-
         ings only if substantial rights of the appellant                  lating to the reasonableness of Texas Utilities'
         have been prejudiced because the administrative                   fuel oil expenditures during the reconciliation
         findings, inferences, conclusions, or decisions                   period.
         are: (1) in violation of a constitutional or statutory
         provision, (2) in excess of the agency's statutory            *392 [3] It is well established that absent a showing of
         authority, (3) made through unlawful procedure,          incapability to decide a particular controversy fairly, an
         (4) affected by error of law, (5) not reasonably         administrative officer is not disqualified simply because he
         supported by substantial evidence, or (6) arbitrary      or she has previously taken a position, even in public, on a
         or capricious or characterized by abuse of discre-       policy issue related to a particular dispute. Morgan, 313
         tion or clearly unwarranted exercise of discretion.      U.S. at 421, 61 S.Ct. at 1004. In Morgan, the Supreme
                                                                  Court held that the Secretary of Agriculture's strong views
     [I] [2] In order to prevail, appellants must overcome        on a particular issue did not make him unfit to exercise his
the presumption that agency members are persons of                duties in administrative proceedings relating to those
conscience and intellectual discipline, capable of judging a      matters. Td. Similarly, in Cement Institute the Court held
particular controversy fairly on the basis of its own cir-        that members of the Federal Trade Commission were not
cumstances. United States v. Morgan, 313 U.S. 409,421,            disqualified from participating in adjudicatory proceedings
61 S.Ct. 999, 1004, 85 L.Ed. 1429 (1941). Following the           simply because they had previously expressed their opin-
United States Supreme Court, we recognize a presumption           ions that a pricing system at issue in the proceeding was
of honesty and integrity in those serving as adjudicators.        illegal. Cement Tnstitute, 333 U.S. at 700-01, 68 S.Ct. at
Withrow v. Larkin, 421 U.S. 35, 47, 95 S.Ct. 1456, 1464,          803-04.
43 L.Ed.2d 712 (1975). One may overcome this presump-
tion by demonstrating that the decisionmaker's mind is                 In this appeal, the Cities and Public Utility Counsel
"irrevocably closed" on the matters at issue. Federal Trade       question Meek's impartiality because of a newspaper in-
Comm'n v. Cement Inst., 333 U.S. 683, 701, 68 S.Ct. 793,          terview in which he expressed his disappointment with the
803-04, 92 L.Ed. I 010 (1948). During confirmation                Commission's decision to disallow $1.3 billion of Co-
hearings conducted in May 1990, the Texas Senate fully            manche Peak costs. The Supreme Court has decided,
explored the issue of Meek's conflict. At that time, aware        however, that public criticism "is a practice familiar in the
of Meek's connections with Fina, the Senate satisfied itself      long history of ... litigation," and that while an adminis-
that Meek could execute his duties as commissioner im-            trator may have an underlying philosophy in approaching a
partially and without prejudice in favor of the gas industry.     specific case, he or she may still be assumed to be a person
Additionally, Meek promised to recuse himself from vot-           of conscience and intellectual discipline, capable of judg-
ing on any contested issue regarding contracts between            ing a particular controversy fairly. Morgan, 313 U.S. at
public utilities and Fina, a promise he upheld by not re-         421,61 S.Ct. at 1004.
viewing contracts between Texas Utilities and Fina.FN5
                                                                       The Cities and Public Utility Counsel argue that this
         FN5. Meek recused himself from voting on three           order should be invalidated, relying on American Cyana-
         issues: (1) finding of fact 172 relating to the rea-     mid Co. v. Federal Trade Commission, 363 F.2d 757 (6th
         sonableness of Texas Utilities' fuel oil inventory,      Cir.l966). In American Cyanamicl, the court invalidated a




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commission order because one of the commissioners had             sale of fifty percent or more of a public utility's stock.FN6
previously served as counsel for a Senate subcommittee            When any one of these transactions takes place, the utility
investigating many of the same facts and issues that later        *393 must file a report with the Commission, which then
came before the commission. The court found that the              investigates the transaction to determine whether it is in the
commissioner's dual investigative and adjudicative expe-          public interest. In making this determination, the Com-
riences with the issues involved in the hearing created a         mission is to consider the reasonable value of the property,
risk that commission decisions might be based on evidence         facilities or securities involved. If the Commission finds
outside the record. It was the presentation of nonrecord          that the transaction was not in the public interest, it must
evidence, not the commissioner's personal viewpoints, that        "disallow the effect of such transaction if it will unrea-
led the court to invalidate the order. American Cyanamid,         sonably affect rates or service." PURA § 63.
363 F.2d at 767. In this case, however, appellants base their
reqtJest for invalidation of the order on assertions that                  FN6. Section 63 expressly provides that it shall
Meek's personal views about the gas industry made it im-                   not be construed as applying to the purchase of
possible for him to decide the issues fairly. Under the                    units of property for replacement or to additions
circumstances of this proceeding, we cannot agree.                         to the public utility's facilities by construction.

     We do not express any opinion regarding whether                    In reviewing the costs associated with the construction
Meek should have been removed from the Commission                 of Comanche Peak, the Commission exercised its authority
had he not resigned. This Court is limited to the judicial        under section 63 to make a disallowance of$908,688,938.
review enumerated in APA section 2001.174. We conclude            The Commission asserted that it had jurisdiction to make
that Meek's involvement with Fina and his opinions about          disallowances pursuant to section 63 because Texas Utili-
the gas industry have not been shown by the complaining           ties' repurchase of certain minority interests in the Co-
parties to have resulted in a deprivation of the right to an      manche Peak project constituted the purchase of a plant or
impartial and fair hearing before the Commission, nor has         unit as an operating system for consideration in excess of
it been shown that he exhibited bias such that his votes          $100,000. Texas Utilities' second motion for rehearing
were necessarily arbitrary and capricious. The Cities and         filed with the Commission included an assignment of error
Public Utility Counsel's first point of error is overruled.       stating:

   REACQUISITION OF MINORITY INTERESTS                              The Commission erred in concluding that PURA § 63
     All appellants bring points of error related to the dis-       controls this Commission's review of [Texas Utilities']
trict court's disposition of the Commission order disal-            reacquisition of minority owner interests in Comanche
lowing more than $908 million spent to repurchase 12.2              Peak, for the reason that, as a matter of law, PURA § 63
percent of Comanche Peak from minority interest owners              does not apply to the transfer between joint owners of
and to settle litigation arising from the joint ownership of        partial, undivided interests in a plant and does not apply
the project. Section 63 of PURA permits the Commission              to a plant under construction that is not operating.
to disallow certain expenses associated with transactions
involving changes in public utility ownership. The Com-
                                                                       When this second motion for rehearing was overruled
mission's authority to make disallowances under section 63
                                                                  by operation of law, Texas Utilities sought review in the
is limited to three specific types of transactions: (1) the
                                                                  district court, and continued to maintain that the Commis-
acquisition, sale or lease of any plant as an operating unit in
                                                                  sion had improperly applied section 63 to the repurchase of
the state of Texas for a total consideration in excess of
                                                                  minority interests in the project. As part of its appeal to this
$1 00,000; (2) a public utility's merger or consolidation
                                                                  Court, Texas Utilities contends in its second point of error
with another public utility operating in the state; and (3) the




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881 S.W.2d 387
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that the Commission's section 63 review was an error of                     terests in Comanche Peak. It instead argues that
law.                                                                        the Commission should determine the prudent
                                                                            cost of 100 percent of Comanche Peak, rather
     [4][5] The Cities, Public Utility Counsel, and the                     than just 87.8 percent of the plant, in deter-
 Commission each argue thatTexas Utilities has waived its                   mining the extent to which the costs of the 12.2
right to challenge the Commission's decision to proceed                     percent repurchased plant are included in rate
under section 63 because it was the utility that initially                  base.
 identified section 63 as one of the provisions giving the
Commission jurisdiction over the rate-making proceed-                       The Report goes on to state:
ing.FN? Administrative agencies, however, have only those
powers that are expressly conferred by statute, together                    The relevant precedent [for applying§ 63] ... is
with those necessarily implied from the authority conferred                 found in the three dockets in which the Com-
or the duties imposed. State v. Jackson, 376 S. W.2d 341,                   mission approved the CCN amendments re-
344 (Tex. 1964) (citing Stauffer v. City ofSan Antonio, 162                 flecting the Company's reacquisition of the
Tex. 13, 344 S.W.2d 158, 160 (1961)); Sexton v. Mount                       minority owners' interests: Docket Nos. 8015,
Olivet Cemetef)J Ass'n, 720 S.W.2d 129, 142                                 8236, and 8736.
(Tex.App.-Austin 1986, writ refd n.r.e.). Jurisdiction
cannot be conferred upon the agency by the parties before
                                                                            In each of those dockets' fmal orders, the
it, but rather must emanate from the statute itself. See
                                                                            Commission envisioned a future § 63 review of
Nueces County Water Control & Improvement Dist~ v.
                                                                            [Texas Utilities'] buyback of a minority owner's
Texas Water Rights Comm'n, 481 S.W.2d 924, 929
                                                                            interest.. .. [Texas Utilities] did not file a motion
(Tex.Civ.App.-Austin 1972, writ refd n.r.e.) ("If the
                                                                            for rehearing in any of the final orders in the
statutes do not grant the board the power to do a thing, then
                                                                            CCN dockets related to the repurchases of the
it has no such power."). If the utility's reacquisition of
                                                                            minority owners' interests, even though each of
minority interests in Comanche Peak is not one of the
                                                                            the fmal orders envisioned a future § 63 review.
specific transactions identified in section 63 of PURA, the
Commission has no jurisdiction to make disallowances
                                                                      [6] This Court has the power, as well as the duty, to
based on *394 the standards set forth in that section; such
                                                                 review the agency's interpretation and application of a
jurisdiction cannot be conferred on the Commission simply
                                                                 statute. See Railroad Comm'n v. Lone Star Gas Co., 599
because the parties have requested or agreed to it.
                                                                 S.W.2d 659, 662 (Tex.Civ.App.-Austin 1980, writ refd
                                                                 n.r.e.) (stating that an agency's duty is to carry forward the
         FN7. The Examiners' Report notes:
                                                                 directives of statutes, and the courts review agency orders
                                                                 to ensure that statutes are enforced). In reviewing the
           In the petition and statement of intent initiating    Commission's order, we are therefore obliged to determine
           this docket, [Texas Utilities] requested that "the    whether the repurchase of minority ownership interests is a
           public interest and other findings be made fa-        transaction contemplated by section 63 of PURA. If it is
           vorably" with respect to its repurchases of the       not, the Commission had no authority to conduct a section
           minority owner interests. [Texas Utilities']          63 review, and we may not uphold that portion of the order.
           pleading also cited § 63 as one ofthe statutory       Accordingly, we first examine the repurchase at issue in
           provisions granting the Commission jurisdic-          this case to determine if it falls within the scope of trans-
           tion over [Texas Utilities'] application. [Texas      actions the Commission is directed to review under PURA
           Utilities] now contends that§ 63 does not apply       section 63.
           to its reacquisition of the minority owners' in-




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     [7] In August 1973, Texas Utilities' corporate prede-                 3.01 Ownership: The Parties shall have title to
cessors, Dallas Power & Light Company, Texas Power &                       the Project and Fuel as tenants in common and .
Light Company, and Texas Electric Service Company,                         shall, as co-tenants with an undivided interest
signed a memorandum of agreement to design, construct,                     therein, subject to the terms of this Agreement,
and operate the Comanche Peak nuclear power plant. FN8                     own the Project and Fuel and have the related
Texas Utilities originally intended to own the entire plant,               rights and obligations .... (emphasis added).
but was required to sell ownership interests in the project in
order to receive construction permits from the Nuclear                      The agreement also contains a provision
Regulatory Commission (NRC). In 1974, Texas Utilities                       whereby the parties to the agreement waive the
agreed to allow participation in the ownership of Coman-                    right to partition their interest in the project.
che Peak, thereby eliminating antitrust concerns associated
with the issuance of the construction permits. By 1979,
                                                                         FN 10. In exchange for the ownership interest,
Texas Municipal Power Agency and Brazos Electrical
                                                                         each minority interest owner agreed to advance
Power Cooperative had acquired ownership shares of 6.2
                                                                         sufficient funds to pay its ownership interest share
percent and 3.8 percent respectively. FN9 In 1982, Tex-La
                                                                         of the project's construction and operation costs.
Electric Cooperative of Texas became another co-owner of
                                                                         Additionally, each minority interest owner agreed
the Comanche Peak project. Because Tex-La had raised
                                                                         to pay its percentage share plus interest of the
antitrust issues with the Department of Justice and had
                                                                         accumulated costs of fuel and construction paid
filed a petition to intervene in the Comanche Peak antitrust
                                                                         by Texas Utilities before the applicable date of
review related to its application for an operating license,
                                                                         closing. The minority interest owners essentially
Texas Utilities agreed to sell Tex-La a 4.3 percent interest
                                                                         agreed to assume financial responsibility for a
in the project. Before the closing, however, Tex-La re-
                                                                         percentage of the cost of building the plant in
duced its purchase to 2.2 percent of the project. The joint
                                                   · sa1e. FNIO          exchange for a corresponding percentage undi-
operating agreement was amended to reflect thts
                                                                         vided interest in the completed plant. Once the
The Commission granted certificates of public conven-
                                                                         plant was operating, the minority interest owner
ience and necessity for all three sales of ownership inter-
     . the proJect.
                ·    FNII
                                                                         was entitled to capacity equal to its percentage
ests m                ·
                                                                         share of Comanche Peak's net effective genera-
                                                                         tion.
         FN8. Texas Utilities Electric Company ("Texas
         Utilities") is the principal subsidiary of Texas
                                                                          FN 11. For example, in Docket No. 3589, the
         Utilities Company (the "Holding Company"), an
                                                                          Commission reviewed the transfer of a four and
         investor-owned holding company. Texas Utilities
                                                                          one-third percent ownership interest in Comanche
         was created in 1984 after the merger of Dallas
                                                                          Peak from Texas Utilities' corporate predecessors
         Power & Light Company, Texas Electric Service
                                                                          to Tex-La Electric Cooperative. Though PURA
         Company, and Texas Power & Light Compa-
                                                                          section 63 was cited as one of the statutory pro-
         ny-all Holding Company subsidiaries.
                                                                          visions giving the Commission jurisdiction to
                                                                          review the sale, the Examiners' Report states,
         FN9. Joint ownership agreements executed with                    "Because only a portion of [a] joint interest is
         Texas Municipal Power Agency and Brazos                          being conveyed, it may not be necessary to com-
         Electrical Power Cooperative described the                       ply with § 63 of the Act because it speaks to the
         ownership of Comanche Peak as follows:                           transfer of' ... any plant as an operating unit or




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881 S.W.2d 387
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         system .... '"                                         Utilities settled with the minority interest owners by re-
                                                                purchasing their undivided interests in the project.FN 12 The
      *395 The joint ownership agreement began to deteri-       settlement agreements ended all litigation between Texas
orate over time. In May 1985, Brazos Electrical Power           Utilities and the minority interest owners. The repurchases
Cooperative ceased making its contractual payments to           were approved by the Commission which, as previously
Texas Utilities. In early 1985, Tex-La Electric Coopera-        noted, indicated its intention to review the repurchase of
tive made several late payments, and thereafter stopped         these minority interests under PURA section 63 in the
making payments altogether. Texas Municipal Power               future rate-making proceedings.
Agency continued to make payments, but it made them
under protest. Thereafter, the minority interest owners                  FN 12. The repurchase prices were based on the
claimed that Texas Utilities had failed to meet its respon-              cost ofbuilding the percentage of the plant owned
sibilities under the joint ownership agreement, resulting in             by each seller. Therefore, it appears that Texas
rising costs, schedule delays, and licensing problems. The               Utilities reacquired the interests by reimbursing
three minority interest owners contended that they were                  each minority interest owner the money each had
therefore relieved of any obligation to pay their percentage             contributed to the construction and operation of
costs of the construction and operation of the project.                  the plant. Additionally, Texas Utilities agreed to
                                                                         repurchase nuclear fuel and transmission facili-
     Texas Utilities sued for breach of contract, seeking                ties, and to reimburse the minority interest own-
monetary damages and a declaratory judgment affirming                    ers' litigation expenses. These payments together
the minority interest owners' continuing obligation to pay               constitute the settlement costs paid by Texas
their share of the plant's remaining costs. The minority                 Utilities to the minority interest owners. The
interest owners filed counterclaims alleging mismanage-                  Commission reviewed these settlement costs
ment of the project, breach of contract, and deceptive trade             under PURA section 63 and made the following
practices. Faced with mounting litigation costs, Texas                   disallowances:


Repurchase of 12.2% Ownership Interest                                                                          $811,342,938
Reimbursement of Litigation Expenses                                                                            $ 72,684,000
Repurchase of Nuclear Fuel                                                                                      $ 24,662,000
Total                                                                                                         $908,688,938
                                                                kilowatt than was "reasonable." FNB Accordingly, the
      As part of Docket 9300, the Commission did in fact        Commission disallowed the excess purchase price
conduct the section 63 review. The Commission deter-            amounting to almost $812 million. The Commission also
mined that the repurchase was in the public interest "to the    disallowed the utility's reimbursement of the minority
extent that [Texas Utilities] paid a reasonable value for the   interest owners' litigation costs, amounting to $72.684
repurchased capacity." The Commission found that the            million, and $24.662 million of the total consideration paid
utility had reacquired the minority interests by paying         for the nuclear fuel.
$4,765 per kilowatt-the cost of building Comanche Peak.
By contrast, the Commission decided that a "reasonable                   FN13. It does not appear, however, that pur-
value" would be $1,865 per kilowatt, the cost ofbuilding a               chasing a stand-alone coal plant was an option
stand-alone "generic coal plant" with 12.2 percent of                    available to the utility in its attempts to resolve the
Comanche Peak's capacity. As a result, the Commission                    litigation quagmire that threatened the entire
determined that Texas Utilities had paid $2,900 more per                 project. The utility was required to obtain a li-




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881 S.W.2d 387
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         cense for the Comanche Peak power plant; it                        reasonable utility manager would exercise or
         could not choose to license 87.8 percent of the                    choose in the same or similar circumstances
         capacity and turn to alternative power sources for                 given the information or alternatives available
         more capacity. The 12.2 percent was part of the                    at the point in time such judgment is exercised
         whole project, and until the dispute with the mi-                  or option is chosen.
         nority interest owners was resolved, the entire
         plant would remain inoperative.                                    If the Commission indeed applied a prudence
                                                                            standard when evaluating the repurchase, the
     The district court concluded that although review                      resulting findings of fact are arbitrary and ca-
under section 63 of PURA was appropriate, the Commis-                       pricious because they reflect consideration of a
sion made disallowances that were arbitrary and capricious                  factor legally irrelevant to a review of expend-
and not supported by substantial evidence. In two jointly                   itures under the prudent investment standard.
raised points of error, the Cities and Public Utility Counsel               See Public Uti!. Comm'n v. South Plains Elec.
assert that the district court erred in remanding some of the               Coop., Inc.,        635 S.W.2d 954, 957
Commission's fmdings of fact and that the Commission                        (Tex.App.-Austin 1982, writ refd n.r.e.)
properly carried out its section 63 review. They do not                     (citing Starr County v. Starr Indus. Servs., Inc.,
challenge the propriety of the section 63 review. The                        584 S.W.2d 352 (Tex.Civ.App.-Austin 1979,
Commission *396 also brings two separate points of error                    writ refd n.r.e.), for the proposition that an
relating to its section 63 review, contending that it properly              agency's consideration of a non-statutory factor
applied section 63 and that its findings of fact were sup-                   amounts to arbitrary and capricious action re-
ported by substantial evidence. We do not address these                      quiring reversal); John E. Powers, Agency Ad-
points of error because our conclusion that the repurchase                  judications 165 (1990). The Commission dis-
of the undivided minority interests in the plant are not                     allowed the purchase price to the extent that it
transactions reviewable under section 63 renders moot any                    exceeded the cost ofbuilding a stand-alone coal
further controversy about what would constitute a proper                    plant with capacity equivalent to 12.2 percent
disallowance under that provision.FNJ 4                                      of Comanche Peak's. Building a stand-alone
                                                                             coal plant was not, however, one of the options
         FN 14. The Cities and Public Utility Counsel ar-                    available to the utility at the time it made the
         gue that the standard applied by the Commission                     repurchase. The purpose of repurchasing the
         in its section 63 review is identical to the standard               minority interests was not to obtain capacity,
         employed in the typical "prudence review" of a                      but to eliminate expensive and time-consuming
         rate-making proceeding, and for that reason the                     litigation that jeopardized licensing of the en-
         Commission's findings should be affirmed even if                    tire project; building or buying a coal plant
         this Court determines that section 63 is inappli-                   would not achieve that objective.
         cable to this transaction. Assuming, without de-
         ciding, that the standards are the same, we would            As previously noted, section 63 applies to three types
         still reverse the Commission's disallowances be-        of transactions: (1) the purchase, sale or lease of a plant or
         cause they are arbitrary and capricious. In Docket      unit as an operating system for consideration in excess of
         9300, the Commission adopted the following              $100,000; (2) sales ofmore than fifty percent ofthe stock
         prudence standard:                                      of a public utility; and (3) a merger or consolidation of two
                                                                 public utilities. Texas Utilities' repurchase of the undivided
           The exercise of that judgment and the choosing        ownership interests sold to Texas Municipal Power
           of one of that select range of options which a        Agency, Brazos Electrical Power Cooperative, and




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881 S.W.2d387
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Tex-La Electric Cooperative falls into none of these cat-         150. For the reasons discussed in Section VII.C. of this
egories. Rather than repurchasing a "plant or unit," Texas        Report, [Texas Utilities'] repurchases of the minority
Utilities acquired the undivided ownership interests of           owners' interests in Comanche Peak are consistent with
three tenants-in-common. Under the joint ownership                the public interest to the extent that [Texas Utilities] paid
agreement, the co-tenants had waived any right to partition       a reasonable value for the repurchased capacity.
the interests, thereby foreclosing the possibility of identi-
fying any part of the plant as belonging specifically to any      151. For the reasons discussed in Section VII.C. ofthis
co-tenant. The fallacy in the Commission's analysis is its        Report, all amounts in excess of the reasonable value of
assumption that the minority interests translate into a           the repurchased interests should be disallowed from in-
complete and independently operable portion of Coman-             vested capital as unreasonably affecting rates.
che Peak, ownership of which changed hands when the
repurchase took place.
                                                                  152. For the reasons discussed in Section VII.B.2.d. and
                                                                  Section VII.D. of this Report, a reasonable value of the
     The Cities and Public Utility Counsel argue that ex-         repurchased interests in Comanche Peak is $1,856 per
cluding the repurchase ofthe undivided interests from the         kW.
scope of a section 63 review renders the provision mean-
ingless. They contend that it is illogical to conclude that "a
                                                                  153. For the reasons discussed in Section VII.D. of this
statute concerned with transactions of at least $100,000
                                                                  Report, the reasonable value of $1,856 per kW should
would not apply to a transaction 1,000 times greater than
                                                                  apply to valuating the repurchased interests in Unit 1 and
that amount." This argument fails because the element that
                                                                  Unit 2.
triggers section 63 review is not the amount of money
involved in the transaction, although the legislature has set
                                                                  153A. Consistent with an estimated fuel cost for Co-
a $100,000 minimum presumably to exclude transactions
                                                                  manche Peak of $11 billion, the test-year-end cost of
so small that there is no real risk they will unreasonably
                                                                  $5.938 billion should be used to value the repurchased
affect rates or service. Rather, section 63 is concerned with
                                                                  12.2 percent interest in Unit 1 and an estimated cost of
certain types of transactions that result in changes of
                                                                  $5.0 billion should be used to value the repurchased 12.2
ownership of the utility or its operating units to ensure that
                                                                  percent interest in Unit 2.
the costs of transactions inconsistent with the public in-
terest are not assessed against the ratepayers. We conclude
that the Commission erred in reviewing the costs associ-           153B. The plant disallowances related to the repur-
ated with the minority interests under PURA section 63.            chased 12.2 percent interest in Unit 1 is $462,764,691;
                                                                   the plant disallowance related to the repurchased 12.2
                                                                   percent interest in Unit 2 is $348,578,247. Taken to-
     In its final judgment, the district court reversed and
                                                                   gether, the total plant disallowance related to the re-
remanded for reconsideration on the existing record the
                                                                   purchased 12.2 percent interest in the entire plant is
following specific *397 fmdings of fact related to the mi-
                                                                   $811,342,938.
nority interest repurchases:

                                                                   154. For the reasons discussed in Section VILE. of this
  149. For the reasons discussed in Section VII.C.2. of this
                                                                   Report, the $72.684 million in minority owners' litiga-
  Report, [Texas Utilities] failed to prove that the consid-
                                                                   tion expenses reimbursed by [Texas Utilities] as part of
  eration it paid for the repurchased 12.2 percent interest in
                                                                   the settlement agreements should be disallowed.
  the plant was reasonable.

                                                                      ******



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                                                                           tion was reasonable from [Texas Utilities']
  156. As modified by Findings of Fact 153A and 153B,                      perspective.
  Section VII.F. of this Report indicates the disallowances
  for Unit 1 and Unit 2, as calculated in Section VI.                      The Report noted that "it is clear that the mi-
  (Prudence) and Section VII. (Reacquisition ofMinority                    nority owner litigation potentially threatened
  Owner Interests). The total Unit 1 disallowance is                       the Company's licensing efforts, which in tum
  $847,004,966; the total Unit 2 disallowance is                           threatened further schedule delays and cost
  $534,139,597. Taken together, the total disallowance is                  overruns on the project. At the time of the set-
  $1,381,144,563.                                                          tlements with the minority owners, the project
                                                                           was incurring approximately $60 to $70 million
     The purpose of remanding these findings was to allow                  a month in case requirements and carrying
the Commission to reconsider the "reasonable value" it                     costs. Consequently, a settlement of the mi-
assigned the repurchased interests, presumably to make an                  nority owner litigation was reasonable in order
upward adjustment in its $1,856 per kilowatt valuation to                  to avoid the possibility of any further project
reflect the "intangible" benefits of repurchasing the mi-                  delay and unnecessary expenditures of these
nority interests. The district court instructed the Commis-                amounts."
sion to consider not only the "economic value" of the
property and facilities acquired, but also benefits gained               FN16. We realize the Commission has already
from terminating expensive and time-consuming litigation                 conducted an overall prudence review of the costs
that jeopardized the entire project. We affirm the district              associated with the original construction of Co-
court's rejection of these findings of fact based on our                 manche Peak resulting in a disallowance of ap-
conclusion that the Commission erroneously reviewed the                  proximately $537 million. Rather than hold that
repurchases under PURA section 63 and failed to evaluate                 this figure is the appropriate disallowance, we
the repurchase price in light of the relevant statutory con-             note that the question on remand is not whether
siderations. We reverse that portion of the district court's             the original construction costs of the 12.2% at
judgment affirming the Commission's disallowance of                      issue here were prudently incurred, but rather
$24,662,000 ofthe cost to Texas Utilities of repurchasing                whether it was prudent for the utility to repur-
nuclear fuel from the minority interest owners. This pay-                chase that portion of the plant at its original cost.
ment was part of the overall settlement cost and should be
reviewed under the prudent investment standard along with                FEDERAL INCOME TAX EXPENSE
all other costs related to the repurchase. The Commission            In points of error seven through ten, the Cities and
has already approved the utility's decision to settle the       Public Utility Counsel complain that the district court erred
dispute with the minority interest owners; FNIS on remand,      in affirming the Commission's calculation of the utility's
we *398 direct the Commission to consider, under the            federal income tax expense. They contend that the Com-
prudent investment standard, the price paid for the repur-      mission's calculation (1) improperly employed the hypo-
chase, including the litigation costs and repurchase of         thetical rather than the actual-tax method, (2) failed to
nuclear fuel at its original cost.FNI 6                         account for tax savings resulting from the utility's consol-
                                                                idated tax return, (3) did not reflect deductions for actual
         FN 15. Finding of fact 148 states:                     interest expense, and (4) failed to reflect deductions taken
                                                                for below-the-line expenses, including disallowed Co-
           For the reasons discussed in Section VII.C.l. of     manche Peak plant costs.
           this Report, settling the minority owner litiga-




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     [8] We sustain the seventh point of error complaining         though it had received any tax benefits a consolidated
of the Commission's use of the hypothetical tax method.            return would provide. Once the Commission determines
The mandate from the supreme court is clear: "The utility's        that a consolidated filing would have been, or was, ad-
rates must reflect the tax liability actually incurred." Public    vantageous to the utility, the Commission must adjust the
Uti!. Comm'n v. Houston Lighting & Power Co., 748                  utility's tax expense to reflect those savings. If the Com-
S.W.2d 439, 442 (Tex.1987). This Court has repeatedly              mission does not reduce the utility's tax expense to reflect
affrrmed that statement by consistently requiring the              the utility's tax savings, it violates the actual-tax doctrine's
Commission to employ the actual-taxes-paid doctrine. See           underlying principle *399 that rates must be set based on
City qf Alvin v. Public Uti!. Comm'n, 876 S. W.2d 346,             the utility's actual tax liability. GTE-SW, 833 S.W.2d at
359-60 (Tex.App.-Austin 1994, no writ h.); Cities of                166.
Abilene v. Public Uti!. Comm'n, 854 S.W.2d 932, 944
(Tex.App.-Austin 1993, writ requested); Public Uti!.                     [10] The Commission argues that it was not required
Comm'n v. GTE-SW, 833 S.W.2d 153, 159                              to allocate any of the tax savings from the consolidated
(Tex.App.-Austin 1992, writ granted). Furthermore,                 filing to the utility because it specifically found that the
under the actual-taxes-paid test, "any utility tax savings         consolidated filing was not advantageous to the utility. See
must benefit ratepayers." Cities of Abilene, 854 S.W.2d at         Finding of Fact 331A. In Cities qf Abilene we held that no
945 (emphasis added). In this case, as well, we reject the         adjustment to income tax expense is necessary under
Commission's refusal to adhere to binding precedent.               PURA section 41(c)(2) ifthe Commission finds either (1)
                                                                   that it was not advantageous to the utility to consolidate
     [9] The Cities and Public Utility Counsel's eighth            returns, or (2) that the Commission has computed taxes as
point of error asserts that the Commission erred when it           though a consolidated return were filed and the utility has
failed to adjust its calculation of the utility's tax expense to   received its fair share of the savings from the consolidated
reflect savings that resulted from the utility's filing a con-     return. Cities of Abilene, 854 S.W.2d at 944. In this case,
solidated tax return. The Commission rejoins that its deci-        the Commission relied on its own conclusion that the util-
sion not to allocate any of the savings to the utility was         ity's fair share of the savings was zero to support its fmding
consistent with PURA section 41 (c)(2) and cases con-              that the consolidated return was not advantageous to the
struing that statutory provision. Section 41(c)(2) states:         utility. We will uphold the Commission's decision only if it
                                                                   properly found that the utility's fair share of the tax savings
  If the public utility is a member of an affiliated group         was zero.
  that is eligible to file a consolidated income tax return,
  and if it is advantageous to the public utility to do so,             Finding of fact 331D states:
  income taxes shall be computed as though a consolidated
  return had been so filed and the utility had realized its           The federal income tax savings resulting from the filing
  fair share ofthe savings resulting from the consolidated            of a consolidated federal income tax return should ac-
  return, unless it is shown to the satisfaction ofthe regu-          crue to the entity that provided the tax attributes that
  latory authority that it was reasonable to choose not to            allowed for such savings, and [Texas Utilities] was not
  consolidate returns.                                                the entity that provided such tax attributes.

    Texas Utilities argues that this statute only applies               This Court has previously decided that even when it is
when the utility has not filed a consolidated return. We           the utility's affiliates that have suffered losses and provided
disagree. The statute provides that, regardless of whether         "the tax attributes that allowed for savings," those savings
the utility actually filed a consolidated return, the Com-         must be passed on to the ratepayers. GTE-SW, 833 S. W.2d
mission must calculate the utility's income tax expense as




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at 167. In finding of fact 331F, the Commission asserts that        tion."). We sustain the point of error to the extent that we
it would be unfair to allocate to the utility tax savings           continue to require the Commission to pass through to
resulting from the affiliates' losses because the utility will      ratepayers any tax benefits from interest expense deduc-
never be responsible for paying the affiliates' taxes when          tions. However, the Commission must allocate those sav-
"timing differences reverse and those affiliates have taxa-         ings between present and future ratepayers, and the proper
ble income." Again, this Court has rejected that argument.          allocation is within the Commission's discretion.
GTE-SW, 833 S. W .2d at 167 n. 16 (inequity resulting from
ratepayers' benefitting from tax savings not offset by ob-               *400 [13] The Cities and Public Utility Counsel's
ligation to pay higher rates in the event of affiliates' gains is   tenth point of error contends that the Commission erro-
a matter for the legislature to remedy by amending PURA             neously excluded tax benefits resulting from be-
section 41(c)(2)). Similarly, finding of fact 331H, that            low-the-line expenses, including tax deductions related to
Texas Utilities should not benefit from tax savings at-             expenses disallowed as imprudently incurred. This Court
tributed to affiliates because it bears none of the risks           has already decided that PURA requires that the Commis-
associated with those entities, conflicts with existing             sion reduce the utility's income tax expense by the amount
caselaw. The Commission's finding that the consolidated             of tax deductions, even if they are associated with disal-
tax return was not advantageous cannot rest upon its own            lowed capital expenses. City of Alvin, No. 3-92-459-CV,
improper refusal to allocate any savings to the utility.            slip op. at 17 (citing GTE-SW, 833 S.W.2d at 169). We
Having rejected several of the fmdings supporting the               remain unpersuaded by the Commission's argument that
Commission's conclusion that the utility's fair share of the        the actual-tax doctrine conflicts with the normalization
tax savings is zero, we are unable to uphold that conclu-           rules. See City of Alvin, No. 3-92-459-CV, slip op. at 18.
sion. There is no indication that each finding is inde-             We sustain the tenth point of error.
pendently sufficient to support the conclusion. We there-
fore sustain the Cities and Public Utility Counsel's eighth
                                                                                         BONDED RATES
point of error.                                                          In their twenty-frrst point of error, the Cities challenge
                                                                    the Commission's authority to allow Texas Utilities to
     [ll ][12] The ninth point of error objects to the Com-         implement bonded rates in both the municipal and
mission's failure to adjust the tax expense calculation to          non-municipal sections of its service area.FNl? Disposition
reflect actual-interest-expense deductions. The Commis-             of this point of error requires an interpretation of PURA
sion is required to allocate tax savings to ratepayers rather       section 43(e). This appeal presents the frrst opportunity for
than to shareholders. The actual-tax doctrine requires that         this Court to consider the bonded-rate provision of the
the ratepayers be held accountable only for "those tax              statute since its amendment in 1983.
expenses that are actually incurred by a utility." Houston
Lighting & Power, 748 S.W.2d at 442. Ifthe utility enjoys
                                                                             FN17. Public Utility Counsel does not join the
a tax deduction based on interest expense,. the benefits of                  Cities in bringing this point of error.
that deduction must be passed on to the ratepayers. In City
of Alvin, however, we rejected the argument that the
                                                                         When an electric utility wishes to change its rates it
Commission must pass on immediately the entire savings
                                                                    must follow the procedures outlined in PURA section
related to a utility's tax deductions. City of Alvin, No.
                                                                    43.FN 18 The utility initiates rate proceedings by filing a
3-92-459-CV, slip op. at 18 ("Section 27(e) of PURA
                                                                    statement of intent to change rates with the regulatory
directs the Commission to distribute [tax savings benefits]
                                                                    authority having original jurisdiction. PURA § 43(a). FNI 9
to all ratepayers, however, both present and future. We will
                                                                    In all proceedings involving major rate changes,FN 20 the
not interpret Houston Lighting as mandating that present
                                                                    regulatory authority having original jurisdiction must hold
ratepayers receive all the benefits of accelerated deprecia-




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a hearing on the proposed rate schedule. PURA § 43(c).           areas. The Commission, however, has a 150-day period of
Pending the hearing, the regulatory authority may suspend        original jurisdiction over its portion of the rate proceeding.
implementation of the new rate schedule. If the original         In addition, the Commission is allowed two days for each
proceeding involves a proposed increase in the rates             day of hearings in excess of fifteen days. The practical
charged in municipal areas, the municipality holds the           result of allowing the Commission a longer period of
hearing and has ninety days in which to come to a final          original jurisdiction is that it can wait for the municipality
decision. If the municipality has made no fmal disposition       to issue a final appealable order and then consolidate de
of the rate proceeding at the expiration of ninety days, the     novo appellate review with its own consideration of the
proposed rate schedule is deemed to have been approved           same proposed rate increase in non-municipal areas.
and the municipality loses jurisdiction over the proceeding.     Therefore, the Commission typically exercises its original
PURA § 43(d). If an order is issued, any party to the pro-       and appellate jurisdiction concurrently.
ceeding may seek de novo appellate review in the Com-
mission. PURA § 26(a), (g).                                            In these consolidated rate proceedings, the Commis-
                                                                 sion has 150 days plus two days for each day ofhearings in
         FN18. This discussion focuses on the more typi-         excess of fifteen days in which to make a final determina-
         cal situation in which a utility requests a rate in-    tion. When the Commission is faced with a particularly
         crease rather than a decrease.                          complex rate proceeding, protracted *401 hearings can
                                                                 mean a utility's proposed rate schedule may not take effect
         FN19. Original jurisdiction over rate proceedings       for a long period oftime.FNZI The term "regulatory lag" is
         is divided between the governing body of each           used to describe the economic consequences of this delay.
                                                                    22
         municipality ("the municipality") and the Com-          FN    In order to protect utilities from the financial harm
         mission. Each municipality exercises exclusive          engendered by prolonged regulatory lag, PURA section
         original jurisdiction over electric rates and ser-      43(e) provides that in cases in which the Commission has
         vices within its corporate limits ("municipal are-      failed to render a fmal order within 150 days of the pro-
         as"), whereas the Commission exercises exclu-           posed effective date of the rate increase, the utility
         sive original jurisdiction over rates and services in
         all other areas ("non-municipal areas"). PURA §                  FN21. In this case, for example, there were 203
         17(a), (e). In addition, the Commission has ex-                  days of hearings. This means the utility might not
         clusive appellate jurisdiction to review each mu-                be allowed to increase its rates for as many as 526
         nicipality's order in any rate proceeding. PURA §                days.
         17(d).
                                                                          FN22. "Regulatory lag arises from the loss in
         FN20. The statute defines a "major change" as an                 revenue experienced by a utility whose rates are
         increase in rates that will augment the aggregate                in need of upward adjustment during the period
         revenues of the utility making the rate application              between filing an application for a rate increase
         by more than $100,000 or two and one-half per-                   and the date when relief is granted." Railroad
         cent, whichever is greater. PURA § 43(b).                        Comm'n v. Lone Star Gas Co., 656 S.W.2d 421,
                                                                          423 (Tex.l983).
     Because most utilities provide services in both mu-
nicipal and non-municipal areas, there is usually a parallel       may put a changed rate, not to exceed the proposed rate,
proceeding originating in the Commission to consider the           into effect upon the filing with the regulatory authority
same proposed rate increase as it affects non-municipal            of a bond .... The utility concerned shall refund or credit




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  against future bills all sums collected ... in excess of the            nicipal areas. Section 43(e) specifically states that
  rate fmally ordered plus interest at the current rate as                a utility may not put bonded rates into effect until
  finally determined by the regulatory authority.FNZJ                     150 days have passed. Because the municipality
                                                                          loses its jurisdiction after only ninety days, a
         FN23. PURA section 3(g) provides that the term                   utility's right to bonded rates will always arise
         "regulatory authority" means either the governing                after the municipality has lost its original juris-
         body of any municipality or the Commission,                      diction over the rate proceeding.
         depending upon the context in which the word is
         used.                                                       Section 43(e) contains no language that limits the
                                                                 bonding provisions to rates being considered under the
     PURA § 43(e). This practice is known as "bonding in"        Commission's original jurisdiction:
rates and is used to relieve the potential financial hardship
imposed on a utility while it awaits a final Commission            If the 150-day period has been extended, ... and the
order on its requested rate increase.                              commission fails to make its final determination of rates
                                                                   within 150 days from the date that the proposed change
      [14] In Docket 9300, Texas Utilities requested the           would have gone into effect, the utility concerned may
same rate increase throughout its entire service area, en-         put a changed rate, not to exceed the proposed rate, into
compassing both municipal and non-municipal areas. As              effect upon the filing with the regulatory authority of a
permitted by the 1983 amendments to PURA, the Com-                 bond ....
mission reviewed the proposed rate increase in municipal
areas under its appellate jurisdiction at the same time it             PURA § 43(e). In support of its contention that the
considered the increase in non-municipal areas under its         utility may implement bonded rates only for those rates
original jurisdiction. When 150 days had passed without          subject to the Commission's original jurisdiction, the Cities
the Commission's having reached a final determination, the       rely on two pre-1983 cases holding that the former version
utility decided to implement bonded rates throughout its         of section 43(e) did not permit bonded rates in areas under
entire service area, and pursuant to PURA 43(e) requested        the Commission's appellate jurisdiction. See Lone Star
thatthe Commission approve its bond. The Cities objected         Gas, 656 S.W.2d at 425; *402Arkansas Louisiana Gas Co.
to Texas Utilities' request for bonded rates in municipal        (Ark/a) v. Railroad Comm'n, 586 S.W.2d 643
areas, maintaining that PURA prohibits bonded rates in           (Tex.Civ.App.-Austin 1979, writ ref'd n.r.e.). We con-
municipal areas once the municipality has lost its original      clude that the reasoning of those cases is so closely tied to
jurisdiction over the rate proceeding. FN24 The Commission       the wording of PURA before the 1983 amendments that
rejected this argument and determined that PURA's                they do not support the Cities' interpretation of amended
bonding provision does not prohibit a utility from imple-        section 43(e).FNzs
menting bonded rates in municipal areas when the under-
lying rate increase is subject to the Commission's appellate              FN25. Moreover, the supreme court expressly
jurisdiction. We conclude that the Commission's interpre-                 limited the effect of its decision in Lone Star Gas
tation ofPURA section 43(e) is correct.                                   to cases arising before September 1, 19 83, the
                                                                          effective date of significant amendments to
         FN24. When considered in conjunction with other                  PURA. Lone Star Gas, 656 S.W.2d at 427.
         provisions of PURA, the Cities' interpretation of
         section 43(e) leads to the result that a utility will       In Lone Star Gas the supreme court recognized the
         never be able to implement bonded rates in mu-          hardship created by PURA's failure to provide for bonded




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rates during an extended period of appellate review, but
commented that "any changes in the protection afforded                 [15] The Commission's interpretation of section 43(e)
the utility should be made by the legislature." 656 S.W.2d        is entitled to great weight, provided it is reasonable and
at 425. Perhaps responding to the court's invitation to act,      does not contradict the plain language of the statute. Tar-
in 1983 the legislature significantly amended PURA and            rant Appraisal Dist. v. Moore, 845 S. W.2d 820, 823
apparently cured this particular hardship. See GTE-8W,            (Tex.l993). The Commission's construction of the bonding
833 S. W.2d at 173 (noting that an almost identical bonded        provision is consistent with the statutory scheme embodied
rate provision in the new Gas Utility Regulatory Act cured        in the 1983 amendments designed to facilitate contempo-
the problems caused by the utility's inability to implement       raneous disposition of system-wide rates in a single pro-
bonded rates in municipal areas pending review de novo by         ceeding. It also affords the utility protection from regula-
the Commission).                                                  tory lag through bonded rates, whether inside or outside
                                                                  city limits. Nothing in the statute itself or the relevant case
      Without the ability to bond in rates, a utility's only      law supports the Cities' restricted reading of section 43(e).
avenue for relief from regulatory lag in city rates, tradi-       We overrule the Cities' twenty-first point of error.
tionally the lion's share of its service area, would be to
request interim rates. See PURA § 26(g) (allowing the                          RATE BASE ALLOWANCES
Commission to authorize interim rates if "necessary to                 In points of error two through four, the Cities and
effect uniform system-wide rates"). This would necessitate        Public Utility Counsel complain that the district court
a bifurcated process of considering the request for interim       improperly upheld various aspects of the Commission's
city rates while contemporaneously implementing bonded            order on rehearing relating to the prudence phase of the
rates outside city limits. Such an inefficient and unwieldy       rate-making proceeding. Specifically, they contend that the
process undermines the amended statutory scheme de-               Commission's disallowance of Comanche Peak costs is
signed to consolidate consideration of system-wide rates in       contrary to substantial evidence and inconsistent with the
one proceeding. Furthermore, interim rates that require a         Commission's factual determinations regarding the insuf-
hearing do not provide relief from regulatory lag equiva-         ficiency of Texas Utilities' proof and with Texas law re-
lent to the bonding provision which permits implementa-           garding the burden of proof. The Cities and Public Utility
tion of new rates without Commission approval, subject            Counsel assert that reasonable minds could not reach the
only to a bond adequate to ensure possible refunds. We see        decision arrived at by the Commission regarding the rea-
no suggestion in the amended version of section 43( e) that       sonable cost of Comanche Peak, and that the Commission
utilities should be limited to seeking interim rates to cure      failed to disallow imprudent project costs as required by
                •            • •   · ·    FN26
regulatory lag m  areas servtcmg  ctttes.                         statute. See PURA §§ 39, 41.

         FN26. It is more sensible to view interim rates                In August 1972, Texas Utilities announced its plan to
         and bonded rates as separate and independent             build Comanche Peak, its first *403 nuclear power plant.
         methods by which a utility may obtain rate relief        In 1977, the utility estimated that Comanche Peak Unit 1
         in its entire service area, rather than alternative      would be commercially operable in 1981, and Unit 2
         procedures for setting rates inside and outside city     would achieve commercial operation in 1983. The total
         limits. A utility might first request interim rates in   estimated cost ofthe project was $1.7 billion, including an
         order to avoid posting a large bond. If the Com-         allowance for funds used during construction (AFUDC).
         mission did not approve the interim rates, the           However, Unit 1 did not become commercially operable
         utility could then post a bond, which it would risk      until August 1990. At the rate-making proceeding, the
         losing entirely or in part if final rates set by the     examiners attributed this substantial delay to Texas Utili-
         Commission were lower than the bonded rates.             ties' inability to obtain an operating license from the NRC.




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See Examiners' Report at 5.FN27                                  lowed based on Nielsen-Wurster's findings that the utility
                                                                 acted imprudently in discrete instances during the life of
         FN27. In March 1984, the NRC formed a Tech-             the project. The Commission reviewed the evidence pre-
         nical Review Team to identify and resolve all           sented by the parties and general counsel and determined
         regulatory issues raised by Texas Utilities' at-        that $537.90 million of Comanche Peak costs were im-
         tempt to obtain an operating license. The utility,      prudently incurred and should be disallowed.
         in turn, created the Comanche Peak Response
         Team to assess and resolve any issues raised by               To support the assertion that the Commission erred in
         the Technical Review Team. In January 1985, the         the prudence phase of Docket 9300, the Cities and Public
         Technical Review Team issued a letter suggesting        Utility Counsel make three basic points: (1) Texas Utilities
         that Comanche Peak was deficient in the areas of        did not sustain its burden of proof on the prudence of its
         quality assurance and quality control. In response,     Comanche Peak expenditures, (2) Texas Utilities did not
         the utility formed the Design Adequacy Program          properly quantify its imprudent Comanche Peak costs, and
         and the Corrective Action Program to address the        (3) the Nielsen-Wurster report does not constitute sub-
         NRC's concerns and ensure that Comanche Peak            stantial evidence to support the Commission's determina-
         received an operating license. The NRC issued a         tion of which Comanche Peak costs were imprudently
         license for Comanche Peak Unit 1 in February            incurred. Taken together, these points assert that the evi-
         1990.                                                   dence presented during 203 days of hearings cannot sup-
                                                                 port the Commission's fmal order with respect to disal-
      Docket 9300 addressed the prudence of costs incurred       lowances. See APA § 2001.174(2)(E); Te.:ws Health Fa-
by the utility in responding to the NRC's concerns; the          cilities Comm'n v. Charter Medical-Dallas, Inc., 665
utility engaged in an unprecedented revalidation and re-         S.W.2d 446,452-53 (Tex.l984).
inspection program which caused Comanche Peak costs to
nearly double. The Commission, which heard three ex-                  [16][17][18][19] In conducting a substantial evidence
planations for these costs, was charged with determining         review, we must determine whether the evidence as a
which costs were prudent. Texas Utilities contended that         whole is such that reasonable minds could have reached
the NRC unforeseeably and unreasonably applied stricter          the conclusion the agency must have reached in order to
licensing standards to Comanche Peak, forcing the utility        take the disputed action. Charter Medical, 665 S.W.2d at
to implement an expensive and time-consuming revalida-           453. We may not substitute our judgment for that of the
tion and reinspection program in order to obtain an oper-        agency and may consider only the record on which the
ating license. The utility took the position that all of these   agency based its decision. Texas State Bd. of Dental Ex-
were regulatory costs that should be included in rate base.      aminers v. Sizemore, 759 S.W.2d 114, 116 (Tex.l988),
At the other end of the spectrum, the Cities and Public          cert. denied, 490 U.S. 1080, 109 S.Ct. 2100, 104 L.Ed.2d
Utility Counsel argued that imprudent project management         662 (1989). The party bringing the appeal bears the burden
caused the NRC to lose confidence in Comanche Peak's             of showing a lack of substantial evidence. Charter Medi-
safety, and that all post-19 84 costs incurred in responding     cal, 665 S.W.2d at 453. If substantial evidence would
to these concerns should be disallowed as imprudent. The         support either affirmative or negative fmdings, we must
Commission's general counsel, supported by an evaluation         uphold the agency's order, resolving any conflict in *404
conducted by the Nielsen-Wurster Group, an independent           favor of the agency's decision. Auto Convoy Co. v. Rail-
auditor, concluded that Texas Utilities' inability to obtain     road Comm'n, 507 S.W.2d 718,722 (Tex.1974).
an operating license resulted from the NRC's significant,
but unfounded, quality concerns. The general counsel                  [20] The Cities and Public Utility Counsel essentially
maintained that certain costs should, however, be disal-          argue that because the Commission was not persuaded by




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the utility's argument that all Comanche Peak costs were         to utility imprudence and those that would have been
prudent, and because the utility then failed to quantify the     necessary absent any imprudence. They assert that in order
impact of its imprudence by identifying costs related to         to provide evidence sufficient to support the Commission's
imprudent management, the Commission was required to             order, either the utility or Nielsen-Wurster was required to
disallow all of these expenditures.FN 28 We do not agree.        "produce a breakdown ofthe Company's post-March 1985
The Commission determined the evidence presented by the          expenditures, disaggregated between those that were 're-
parties did not provide an accurate foundation on which to       medial' and those that would have been incurred even
base its disallowance decisions. It therefore turned to the      absent the prolonged licensing delay." The argument urged
report prepared by the Nielsen-Wurster Group. Niel-              on appeal is that once the Commission has determined the
sen-Wurster had previously performed twelve compre-              utility's evidence is insufficient to demonstrate that all
hensive prudence reviews of other nuclear plants, eight for      expenditures were prudently incurred, the utility must then
commissions and four on behalf of utilities, before it was       "isolate out the costs associated with its imprudent con-
retained by the Commission to evaluate the planning and          duct" in order to avoid having the Commission disallow all
management of Comanche Peak. After an extensive in-              the costs incurred. FN29 In support of their argument, the
vestigation, Nielsen-Wurster offered its findings in ten         Cities and Public Utility Counsel direct this Court to Coa-
days of testimony presented by five expert witnesses.            lition of Cities v. Public Utility Commission, 798 S. W.2d
                                                                 560, 563-64 (Tex.1990), cert. denied, 499 U.S. 983, 111
         FN28. The Commission rejected several of Texas          S.Ct. 1641, 113 L.Ed.2d 736 (1991 ), in which the supreme
         Utilities' attempts to justify costs associated with    court stated that "[a] party who fails to meet its burden of
         Comanche Peak. For example, the Commission              proof loses." In Coalition of Cities, the utility "lost" be-
         found: ( 1) the plant cost comparisons tendered by       cause neither the utility nor any other party satisfied the
         the parties were not credible for purposes of es-        Commission that $1.453 billion in expenditures were
         tablishing a reasonable cost, (2) the cost variance     prudently incurred. Nowhere does the supreme court state
         analysis tendered by the utility had limited, if any,   that a utility must segregate imprudent costs. When a util-
         value in a prudence review of Comanche Peak,             ity fails to persuade the Commission of the wisdom of all
         (3) the schedule variance analysis tendered by the       its expenditures, that does not preclude the Commission
         utility did not credibly evaluate the post-March         from considering the other evidence presented in the
         1985 schedule extensions, and (4) the present            rate-making proceeding. Indeed, it is the Commission that
         value revenue requirements analysis and capital          is charged with sifting through the evidence and deciding
         cost correction analysis tendered by Texas Utili-        whether imprudent conduct caused certain expenditures.
         ties were improper methodologies for quantifying         Having reviewed the utility's evidence and the Niel-
         the impact of a seven-month delay. However, the          sen-Wurster report, *405 the Commission determined that
         Commission's fmal order shows that it did accept         $90.5 million of the Comanche Peak Response Team ex-
         much of Texas Utilities' and the Nielsen-Wurster         penses and $79.9 million ofthe Corrective Action Program
         Group's evidence supporting the prudence of a            expenses were imprudent. The Commission made further
         variety of decisions related to the overall con-         disallowances for other imprudent conduct associated with
         struction and management of Comanche Peak.               the delay in licensing; it disallowed $54.1 million in
                                                                  time-driven indirect costs and $167.3 million in AFUDC.
     The Cities and Public Utility Counsel argue that the
evidence presented by Nielsen-Wurster cannot serve as a                   FN29. This Court has previously rejected similar
proper foundation for Commission decision-making be-                      arguments. In City of El Paso v. Public Utility
cause it does not provide a sufficiently detailed breakdown               Commission we held:
of all Texas Utilities' expenditures identifying those related




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           Requiring the Commission to adopt or reject          reasonable minds could not have come to that decision
           witnesses' testimony in toto, especially when        based on this record. Charter Medical, 665 S.W.2d at 453.
           the testimony concerns a multi-faceted issue
           such as [prudence], would hobble the Com-                  The Cities and Public Utility Counsel also complain
           mission's ability to assess each witness and         that the Commission improperly applied a "sliding"
           render its decision based solely on the testi-       standard of prudence, assigning degrees of imprudence to
           mony it found credible.                              utility decisions and making disallowances only when the
                                                                imprudence reached a certain level or degree. After re-
           City of El Paso v. Public Uti!. Comm'n, 839          viewing the record we believe this criticism is unfound-
           S.W.2d 895, 906-07 (Tex.App.-Austin 1992,            ed.FN30 The Commission determined that the costs associ-
           writ granted).                                       ated with responding to NRC concerns were necessary in
                                                                part because of utility imprudence and in part because of
     The Commission rejected Texas Utilities' claim that        the NRC's application of higher safety and inspection
the costs associated with the reinspection and revalidation     standards in the face of mounting concerns about the safety
program were entirely due to higher regulatory standards;       of nuclear power plants in general. The Commission's
it similarly rejected the Cities and Public Utility Counsel's   finding of fact 138 expresses this conclusion.FN31 The
contentions that all such costs should be disallowed as         Examiners' Report notes that Texas Utilities' conduct was
imprudent. The Commission accepted the Niel-                    not the sole reason for the expenditures necessary to regain
sen-Wurster study as evidence that some, but not all, ofthe     the NRC's confidence. The Commission then made partial
expenditures were imprudently incurred. The Commission          disallowances for the costs of the remedial action program,
found that the NRC's Technical Review Team findings on          not the wholesale disallowances recommended by the
the plant's condition were partly unfounded, although they      intervenors. After a careful and thorough review of all the
did identify weaknesses in the pre-1985 quality assurance       evidence presented in 203 days of hearings, the Commis-
program. The Commission also concluded that the growth          sion made fmdings of fact and conclusions oflaw based on
of regulatory requirements increased the cost and extended      that review. For each finding of imprudence in the con-
the construction schedule beyond Texas Utilities' control.      struction and management of Comanche Peak, the Com-
These findings are supported by testimony adduced during        mission *406 made a disallowance for the associated
the rate-making proceeding and provide substantial evi-         costs.FN32 The Commission also made significant disal-
dence upon which the Commission could base its decision         lowances for the cost of the delay in licensing, reflecting its
to examine all the costs in detail and make discrete disal-     opinion that the utility's imprudence was partially respon-
lowances associated with imprudent conduct.                     sible for that delay.


     The Cities and Public Utility Counsel vigorously as-                 FN30. The Cities and Public Utility Counsel base
sert that the Commission erred in not making any disal-                   their argument on the following statement con-
lowance for the costs of executing the Corrective Action                  tained in the Examiners' Report: "Although the
Program. However, the Commission determined that alt-                     examiners conclude that certain [Texas Utilities]
hough the imprudence of the utility was partially respon-                 management decisions were imprudent and un-
sible for the need to carry out the Corrective Action Pro-                doubtedly contributed to the Company's licensing
gram, the changed regulatory climate would have made                      problems, they do not find that those practices rise
such a program necessary even in the absence of utility                   to the level of imprudence which would justify a
imprudence. The Commission's findings are presumed to                     substantial disallowance of Comanche Peak
be supported by substantial evidence, and the Cities and                  costs." That the Report expresses only the view
Public Utility Counsel have failed to demonstrate that                    that not all costs should be disallowed because




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881 S.W.2d 387
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         they were not all occasioned by utility impru-                     in the necessity to incur all of the post-1984
         dence is clarified by the examiners' careful ex-                   costs.
         planation of their position:
                                                                         FN31. Finding of fact 138 states: "As discussed in
           True, certain unreasonable conduct unques-                    Section VI.Q.2. of this Report, the evidence does
           tionably contributed to the NRC staffs shift in               not support imprudence disallowances of the
           position with respect to its expectation of proof,            magnitude proposed by the intervenors."
           as reflected in the Third Technical Team letter,
           but other circumstances also contributed to this              FN32. The Commission made the following dis-
           change in position. In other words, the impru-                allowances:
           dent conduct of [Texas Utilities] did not result


Item                                                                                          Amount (Millions of Dollars)


Electrical Labor                                                                                                        51.3
Electrical Penetration Assemblies                                                                                       16.2
Electrical Switchgear                                                                                                    4.1
Heating, Ventilation & Air Conditioning                                                                                 60.1
Reactor Pressure Vessel Supports                                                                                           .4
Diesel Generators                                                                                                       10.6
DAP Root Cause Analysis                                                                                                  3.2
CPRT Start-Up Costs                                                                                                     90.5
CAP Start-Up Costs                                                                                                      79.9
Construction Permit Lapse                                                                                                  .2
TOTAL                                                                                                                 $316.5
                                                                 451. The Cities and Public Utility Counsel contend that
     The Cities and Public Utility Counsel next contend          findings of fact 13 8 through 152 are "ultimate" findings by
that the Commission's order is improper because it is not        which the Commission fulfills its statutory obligation to
supported by underlying findings of fact. We understand          exclude from rate base all imprudently incurred post-1985
their complaint to be that the findings of fact do not meet      remedial costs, and as such they require underlying find-
the requirements of the APA. See APA § 2001.14l(d) (             ings of fact. FNJJ
"Findings of fact, if set forth in statutory language, must be
accompanied by a concise and explicit statement of the                    FN33. We limit our discussion to findings of fact
underlying facts supporting the findings.") The supreme                   138, 139, and 140. The Cities and Public Utility
court has concluded that an agency's findings of fact need                Counsel waive any separate attack on findings of
the additional support of findings of underlying facts only               fact 141 and 142 in their brief, stating that they
when the findings are stated in terms taken directly from                 consist primarily of calculations that "fall out" of
the enabling legislation or when they "represent the criteria             the three previous fmdings. We understand this to
that the legislature has directed the agency to consider in               mean that if the three preceding findings are suf-
performing its function." Charter Medical, 665 S.W.2d at                  ficient, there is no independent reason that fmd-




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         ings offact 141 and 142 are improper. Findings of       the magnitude proposed by the intervenors.
         fact 143 through 152 are addressed separately in
         this opinion.                                           *407 139. As discussed in Section VI.Q.2. of this Re-
                                                                 port, the costs of executing the Comanche Peak Re-
     [21] We first consider whether the findings of fact at      sponse Team and Corrective Action Program were
issue are indeed "ultimate fmdings." In City of El Paso,         prudent.
this Court stated that although PURA does not expressly
require the Commission to make a fmding of prudence              140. As calculated in Section VI.Q.2. of this Report, the
before including costs in rate base, once the Commission         total imprudent costs incurred by [Texas Utilities]
finds a major project to have been imprudently planned or        through the end of the test year is $537.9 million, which
managed, it should generally disallow project costs to the       allocates $382.05 million to Unit 1 and $155.85 million
extent of the imprudence. City qfEl Paso, 839 S.W.2d at          to Unit 2.
908.FN 34 A determination that an expenditure is imprudent
carries the legal consequence of its exclusion from rate
                                                                    To meet the criteria set forth in Charter Medical and
base. Such a fmding must be supported by underlying
                                                               City of El Paso, these findings must be accompanied by
findings because it embodies one of the criteria the Com-
                                                               underlying fmdings connecting evidence to the conclu-
mission must consider in deciding whether to include the
                                                               sions expressed in the Commission's ultimate fmdings. In
particular expenditure in rate base.
                                                               support of finding of fact 138, the Examiners' Report ex-
                                                               plains that the utility should not be prohibited from in-
         FN34. This Court held:                                cluding any ofthe costs of the remedial action program in
                                                               rate base because other factors contributed to the NRC's
           The "statutory language" to which [AP A §           application of stricter regulatory standards. See Examiners'
           2001.141 (d) ] refers is the language in the        Report at 169. Those other factors are also identified in the
           statute that confers authority on the agency to     Report: "On balance, although the inspection standards
           take the complained-of action. In PURA, the         and procedures applied by the Technical Review Team
           legislature authorized the Commission to make       were the same as those previously used by the project's
           orders setting rates. A number of PURA's sec-       quality control inspectors, the Technical Review Team
           tions also detail the criteria the Commission is    conducted its inspections and scrutinized its inspection
           to consider in setting rates. Therefore, only       results at Comanche Peak in a manner as never before."
           when the Commission's findings are stated in        See id. at 124. These findings support the Commission's
           PURA's express terms, or when they represent        decision not to make the wholesale disallowances pro-
           criteria the legislature has directed the Com-      posed by the intervenors. Nie1sen-Wurster did not rec-
           mission to consider, must the Commission also       ommend disallowing any costs related to the post-effective
           make findings ofunderlying fact.                    date execution of the response team or the corrective action
                                                               program. See Examiners' Report at 139.FN35 Finding of fact
            City qf'El Paso, 839 S.W.2d at 908 (citations      140 expresses the Commission's final calculation of total.
           omitted) (emphasis added).                          imprudent costs incurred by the utility through the end of
                                                               the test year. These calculations are supported by extensive
                                                               explanations in the Examiners' Report as well as specific
    [22] The following findings of fact are here at issue:
                                                               findings of fact in the order on rehearing for each element
                                                               of the total disallowance. We reject the Cities and Public
  138. As discussed in Section VI.Q.2. of this Report, the
                                                               Utility Counsel's contention that fmdings of fact 138, 139,
  evidence does not support imprudence disallowances of
                                                               and 140 are not adequately supported by underlying fmd-




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ings of fact.                                                        After careful review and consideration of all the ar-
                                                                guments raised by the Cities and the Office of Public
          FN35. The Report also provides several refer-         Utility Counsel, we overrule points of error two through
          ences to the administrative record including pages    four.
          28200-28204 ofthe statement of facts.
                                                                  COMANCHE PEAK RESPONSE TEAM DELAY
     Finally the Cities and Public Utility Counsel challenge         In its first point of error, Texas Utilities complains of
the Commission's failure to impose specific disallowances       the Commission's disallowance of $194.4 million repre-
flowing from its finding that the utility imprudently failed    senting costs associated with an imprudent seven-month
to infuse its senior management with personnel having the       delay in Comanche Peak construction. Each of the utility's
appropriate nuclear experience. During the rate-making          arguments advanced under this point of error, however,
proceedings the examiners determined that it was impos-         was presented to the Commission*408 during the
sible to state generally the effect of this lack of nuclear     rate-making proceeding and rejected with adequate ac-
experience; rather, as in the entire prudence review, the       companying findings supported by substantial evidence.
examiners proposed an examination of the utility's discrete     We decline to substitute our judgment for that of the
actions and decisions throughout the project. The Com-          Commission, and will overrule the point of error.
mission adopted the examiners' reasoning and made dis-
allowances for costs associated with imprudent manage-               The utility first argues that there is not substantial
ment. FN 36 These disallowances represent the Commission's      evidence to support the Commission's fmding that Revi-
exercise of its discretion in determining rate base; the        sion 2 to the Comanche Peak Response Team Program
findings are not arbitrary or capricious or unsupported by      Plan was not a reasonable licensing response. To the con-
substantial evidence.                                           trary, the Commission relied on evidence that the NRC
                                                                Technical Review Team letter, issued on January 8, 1985,
         FN36. For example, the Commission found that           marked a distinct departure from the NRC staffs previous
         Texas Utilities management's lack of nuclear           position on Comanche Peak's licensability, and that the
         experience caused the imprudent decision to            Comanche Peak Response Team did not adequately ad-
         discontinue the integrated cube schedule and im-       dress the outstanding licensing issues raised by the Tech-
         plement a start-up driven schedule in May 1980.        nical Review Team until the issuance of Revision 3 in
         This led to reduced productivity in electrical craft   January 1986. Findings ofFact 105, 109. The Commission
         labor from June 1980 to September 1981. See            further found that Revision 2 should have included a
         Findings of Fact 40, 41, 42. Accordingly, the          sampling methodology equivalent to that ultimately in-
         Commission disallowed $51.3 million in electri-        cluded in Revision 3. Finding of Fact 111. The Commis-
         cal craft labor costs. The Commission also dis-        sion relies on the Examiners' Report to further explain its
         allowed $90.5 in costs expended in developing an       finding:
         effective Comanche Peak Response Team pro-
         gram plan and $79.9 million in start-up costs as-         [Texas Utilities'] contention that it could not anticipate
         sociated with the Corrective Action Program,              the unacceptability of the Revision 2 sampling method-
         having concluded that these costs arose from              ology until after it filed Revision 2 is a red herring. The
         management's imprudent decision to discontinue            strongly worded third Technical Review Team letter
         its comprehensive policy of updating original             suggested a possible programmatic quality assur-
         design drawings. See Findings of Fact 78, 79.             ance/quality control breakdown, a position never before
                                                                   expressed by the NRC staff.




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                                                                  path activity during this period was not the sampling-based
      Examiners' Report at 133. The utility simply failed to      CPRT activities but instead was the 100 percent design
convince the Commission that, as it reasserts in its brief, "it   validation of piping and pipe supports .... " This Court is
had every reason to believe that the entire program under         bound by the Commission's determination as to the weight
Revision 2 ... would be acceptable to the NRC." The Ex-           and credibility of the evidence. As long as there is sub-
aminers' Report outlines many of the same arguments the           stantial evidence in the record supporting the Commis-
utility now makes on appeal and explains its rejection of         sion's decision, we will not disturb its findings. Suburban
those arguments in light of conflicting evidence and pro-         Uri!. Corp. v. Public Uti!. Comm'n, 652 S.W.2d 358, 364
posals and recommendations made by the Commission's               (Tex.l983) (holding that the agency's action will be sus-
staff.                                                            tained if the evidence is such that reasonable minds could
                                                                  have reached the conclusion that the agency must have
                                                                  reached in order to justify its action).
     [23] The utility next argues that even if there was a
delay in preparing an adequate response plan to NRC
concerns, the delay had no impact on project duration                  The utility next argues that the work performed pur-
because the project schedule was controlled by a design           suant to Revision 2 would have *409 been necessary under
validation of piping and pipe supports that began in              Revision 3, and thus failure to adopt Revision 3 until
mid-1985. Again, the Commission specifically rejected             January 1986 had no effect on the project schedule. To
this argument when it was presented at the rate-making            support this argument, the utility asserts: "There is no
proceeding.                                                       evidence in the record that [work performed pursuant to
                                                                  Revision 2] was not necessary under Revision 3." They
                                                                  point to record evidence that work performed in accord-
  [T]he examiners reject [Texas Utilities'] argument that
                                                                  ance with Revision 2 during the seven-month period was
  the delay in formulating an adequate Comanche Peak
                                                                  productive, useful, and necessary under the subsequent
  Review Team Program Plan did not delay the comple-
                                                                  Revision 3. The fact that work performed was productive,
  tion of Units I and 2. First, the Comanche Peak Review
                                                                  useful, and necessary does not, however, foreclose the
  Team-the initial vehicle by which the Company sought
                                                                  possibility thaV activities dictated by Revision 3 could
  to assure licensability---constituted the critical path ac-
                                                                  have, and should have, been carried out contemporane-
  tivity for both units during this period. Therefore, any
                                                                  ously with the necessary Revision 2 activities. In other
  imprudent delay in formulating an acceptable Comanche
                                                                  words, nothing in the record states that the Revision 3 work
  Peak Review Team Program Plan delayed fuel load ....
                                                                  could not have begun until all the work done under Revi-
  [Texas Utilities] argues that the I 00 percent design re-
                                                                  sion 2 was completed. The Commission specifically found
  validation of large bore pipe and pipe supports, which
                                                                  that Revision 3 greatly expanded the scope of the Co-
  commenced sometime in mid-1985, constituted the
                                                                  manche Peak Review Team effort. This supports a finding
  critical path activity with respect to Unit I at this time.
                                                                  that the failure to expand the scope sooner caused delay in
  This argument, however, is contradicted by the direct
                                                                  completing the project.
  testimony of [Texas Utilities] witness Mr. Manzi, who
  stated the Comanche Peak Review Team's activities
  paced the project's schedule through early 1987.                    Finally, the utility argues that even if the failure to
                                                                  implement Revision 3 until January 1986 caused delay in
                                                                  completing Comanche Peak Unit I, it had no effect on the
    Examiners' Report at 134 (emphasis added). Again,
                                                                  completion of Unit 2. Again, we need look no further than
the Commission's decision is supported by record evi-
                                                                  the Examiners' Report for references to evidence support-
dence. In its brief, the utility asserts: "The Commission
                                                                  ing the Commission's decision: "Unit 2 delay costs oc-
improperly rejected the [utility's] evidence that the critical
                                                                  curred in the same manner as those for Unit I; both were




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equally affected by the licensing quagmire in which the          the utility to present evidence in the rate-making pro-
entire project found itself. [Texas Utilities] witness Mr.       ceeding to justify the inclusion of CWIP in rate base. FN 37
Nace agreed that the licensing issues facing Unit I also         Rule 21.69(a) provided:
faced Unit 2." Examiners' Report at 134. The substantial
evidence standard is well established. Charter Medical,                   FN37. Public Utility Counsel attempts to join the
665 S.W.2d at 452. We may not reweigh the evidence in                     Cities in bringing this point of error. However,
order to come to a conclusion different from the Commis-                  because its motion for rehearing filed with the
sion's. Texas Utilities' arguments on appeal are nothing                  Commission does not raise this claim, it has
more than a restatement of arguments and evidence con-                    waived the right to raise it on appeal. AP A §
sidered by the Commission and rejected in favor of other                  2001.171 (requiring a party to a contested case to
evidence and recommendations. We will not presume to                      exhaust administrative remedies before seeking
substitute our judgment for that of the agency, but rather                judicial review).
uphold its findings that are reasonably supported by sub-
stantial evidence. Texas Utilities' first point of error is
                                                                   Any utility filing an application, petition, or statement of
overruled.
                                                                   intent to change its rates in a major rate proceeding must
                                                                   file all of its evidence, including the prepared testimony
         INCLUSION OF CWIP IN RATE BASE                            of all of its witnesses and exhibits, on the *410 same date
      [24] As part of Docket 9300, the Commission deter-           that such application, petition, or statement of intent to
mined that the utility should be allowed to include some           change its rates is filed with the commission .... A utility
"construction-work-in progress" (CWIP) costs in rate base.         filing for a change in rates shall be prepared to go for-
The term "CWIP" refers to money dedicated to facilities            ward at a hearing on the data which have been previously
that are currently under construction. Because it is a             submitted and sustain the burden of proof of establishing
state-regulated monopoly, a utility has the responsibility to      that its proposed changes are just and reasonable, and the
provide utility service that meets public demand. In a             material submitted as the filing and supporting work
growing market, therefore, a utility must continually ex-          papers shall be of such composition, scope, and format
pand to create greater capacity and must replace existing          so as to serve as the utility's completed case.
facilities as they wear out or become obsolete. Although            16 Tex.Admin.Code § 21.69(a) (1993) (since amend-
these projects require huge capital outlays, PURA does not         ed).FN38 The Cities argue that Texas Utilities did not in-
allow a utility to include these costs in rate base until the      clude CWIP as a basis for rate relief in its request for a
completed facility becomes "used and useful in rendering           rate increase filed on January 16, 1990. They assert that,
service to the public." PURA § 39(a). Before completion            in fact, the utility affirmatively disavowed an intention
of a project, the utility includes these construction costs in     to request CWIP in the upcoming rate-making pro-
a separate CWIP account. A utility may be permitted to             ceeding. The Cities allege that the utility's testimony
include some CWIP costs in rate base as an exceptional             regarding the amount of CWIP necessary to maintain its
form of rate relief upon a showing that their inclusion is         financial integrity in the face of proposed disallowances
necessary to the utility's financial integrity. PURA § 4l(a).       came as a complete surprise to the Cities and other par-
In its order on rehearing, the Commission allowed the              ties to the proceeding and was tantamount to the utility
utility to include $695,177,625 of CWIP in rate base. In            changing the basis of its request for a rate increase in
three points of error, the Cities and Office of Public Utility      contravention ofRule 21.69(a).
Counsel challenge this decision.
                                                                          FN38. The Commission established this rule
    In its eleventh point of error, the Cities contend that               pursuant to PURA section 43(a) which provides:
the Commission violated Rule 21.69(a) when it allowed




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881 S.W.2d 387
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                                                                  rate increase, a very likely occurrence in any rate-making
           The statement of intent [to change rates] shall        proceeding. Even though the utility's conditional request
           include proposed revisions of tariffs and              for inclusion of CWIP in rate base appears to improperly
           schedules and a statement specifying in detail         treat CWIP as a means to offset the Commission's disal-
           each proposed change, the effect the proposed          lowance of imprudent expenditures, it nevertheless satis-
           change is expected to have on the revenues of          fies the notice requirement of Rule 21.69(a) by announcing
           the company, the classes and numbers of utility        that the utility intended to request inclusion of CWIP in
           customers affected, and such other iriformation        rate base if disallowances were recommended. Though the
           as may be required by the regulatory authori-          utility did not indicate what level of CWIP it would seek it
                                                                                                                           '
           ty's rules and regulations.                            was hardly in a position to do so before the rate-making
                                                                  proceeding began. We reject the Cities' contention that
                                                                  they did not know the utility would seek inclusion ofCWIP
           PURA § 43(a) (emphasis added).
                                                                  in rate base until the final stages of the proceeding. The
                                                                  Cities' eleventh point of error is overruled.
      We disagree with the Cities' characterization of the
utility's position on CWIP presented in its rate filing
                                                                        In their twelfth point of error, the Cities and Public
package. Schedule C-4.1, included in the rate filing
                                                                  Utility Counsel assert that the Commission rewarded the
package, stated, "The Company is not requesting any
                                                                  utility's imprudence by making CWIP allowances to offset
construction work in progress in rate base, as discussed in
                                                                  the disallowances of imprudent expenditures. Although the
the testimony of Mr. H. Dan Farell." Through Mr. Farell's
                                                                  utility announced its decision to seek CWIP only if its rate
testimony, the utility explains:
                                                                  request was substantially disallowed, we believe the
                                                                  Commission applied the proper standard for including
  In this particular case ... a relatively large level of CWIP
                                                                  CWIP in rate base. The Commission *411 determined that
  attributable to Comanche Peak Unit 1 as of June 30
                                                              '   over $2 billion of Comanche Peak Unit 2 CWIP was pru-
  1989, is being transferred to rate base as electric plant in
                                                                  dent and could be included in rate base to the extent nec-
  service. Provided the Company's requested rate base
                                                                  essary to preserve the utility's fmancial integrity. Finding
  and cost of service levels are approved, the Company
                                                                  of Fact 169. The examiners recommended that sufficient
 will have a reasonable opportunity to reverse the nega-
                                                                  CWIP be included in rate base to allow the utility to re-
  tive trends and begin to restore the previously discussed
                                                                  cover up to 80 percent of its requested rate increase. In
 financial integrity measures to acceptable levels without
                                                                  their report the examiners explained:
  the inclusion of CWIP in rate base. However, as dis-
  cussed subsequently in conjunction with the overall cost
                                                                    Including CWIP in rate base may appear to offset any
  of capital, any material reductions in the Company's
                                                                    prudence disallowance and require the ratepayers to in-
 requested rate base or cost of service will require re-
                                                                    demnify the shareholders. However, in reality, the in-
  consideration of the issue, and may well make inclusion
                                                                    clusion of CWIP in rate base does not offset a prudence
  of some level of CWIP in rate base necessary.
                                                                    disallowance. Instead, it reflects a policy determination
                                                                    that in order to save the Company's financial integrity so
      (emphasis added). We are satisfied that the utility
                                                                    that the utility may continue to provide reliable service,
provided adequate notice of its intent to seek inclusion of
                                                                    the ratepayers should pay now what they would soon pay
CWIP in rate base in the rate-making proceeding. The
                                                                    anyway but in greater amounts.
utility did not represent that it would not request CWIP at
all, but rather that it would seek to include CWIP in the
                                                                      Examiners' Report at 218. The Commission based its
event the Commission materially disallowed its proposed
                                                                  decision to allow CWIP in rate base on this reasoning




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along with the utility's testimony regarding the need for       it found necessary to maintain financial integrity remains
CWIP in rate base to preserve the company's financial           the benchmark in light of this reexamination. A conse-
integrity. Conclusion of Law 59. We conclude that the           quence of our remand is to moot the Commission's CWIP
Commission included CWIP in rate base to accomplish its         findings because they were calculated pursuant to erro-
proper purpose, consistent with the statutory requirements.     neous disallowances. We do not, therefore, address the
See PURA § 4l(a).FN39 Consequently, we overrule the             thirteenth point of error challenging the adequacy of the
Cities and Public Utility Counsel's twelfth point of error.     Commission's findings to support a CWIP allowance that
                                                                is now immaterial. Similarly, we do not address the Cities
         FN39. That CWIP allowances were not made as a          and Public Utility Counsel's fourteenth and fifteenth points
         direct dollar-for-dollar offset of imprudence dis-     of error which attack a specific fmding of fact regarding
         allowances is clear when comparing the total           the CWIP allowance.
         disallowance for Comanche Peak Units I and 2,
         $1,381,144,563, with the amount of CWIP in-                           GAS RECONCILIATION
         cluded in rate base, $695,177,625. This is con-            [25] In their sixteenth and seventeenth points of error,
         sistent with the Commission's obligation to in-        the Cities and Public Utility Counsel complain of error in
         clude CWIP in rate base only to the extent nec-        the Commission's determination of the proper measure of
         essary to ensure the utility's financial integrity.    imprudent costs associated with Texas Utilities' purchases
                                                                of gas from Texas Utilities Fuel Company (the "Fuel
     The thirteenth point of error asserts that the Commis-     Company").
sion failed to make proper underlying findings of fact to
support its decision to include $695,177,625 of CWIP in              Part ofDocket 9300 involved the reconciliation of fuel
rate base. The Commission set this figure based on its          costs incurred by Texas Utilities during the period from
conclusion that the utility required a rate increase of 10.1    April 1, 1983, to June 30, 1989. Fuel reconciliation is a
percent, or $442,353,160, to maintain financial stability.      term used to describe periodic adjustments to a utility's
We have already determined that this order must be re-          *412 fuel costs made to account for the difference between
manded to the Commission to reconsider disallowances            previously anticipated costs and actual, reasonable costs
associated with the 12.2 percent of the project repurchased     incurred. The Commission makes these adjustments on a
from the minority interest owners. The Commission will          periodic basis because of the practical difficulty of decid-
be required to reevaluate the utility's CWlP requirements       ing a new rate case with each variation in fuel prices. In a
in light of the level of disallowance on remand. In making      hearing on fuel reconciliation, the utility has the burden of
this determination, the Commission may only consider the        proving that its fuel expenses during the reconciliation
financial condition of the utility at the time ofthe hearing;   period were reasonable and necessary expenses incurred to
it may not consider subsequent positive or negative             provide reliable service. See 16 Tex.Admin.Code
changes in the utility's financial integrity. Therefore,        23.23(3)(B) (1994). If the fuel is purchased from or pro-
though we agree that the Commission could properly              vided by an affiliate, the utility must also show that the
consider including CWIP in rate base, we recognize that its     price to the utility is no higher than prices charged by the
decision as to the appropriate amount of CWIP will              supplying affiliate to its other affiliates or divisions for the
change, and is dependent upon the disallowances it makes        same item or class of items, or to unaffiliated persons or
on remand. We do not, therefore, review the findings re-        corporations. PURA § 41 (c)(1 ).
lated to CWIP allowances, as they will be superseded by
the Commission's findings when it reexamines the utility's           As part of the fuel reconciliation proceedings in
need for CWIP on remand. The Commission will be re-              Docket No. 9300, Texas Utilities sought to establish the
quired to reconsider whether the 10.1 percent rate increase      reasonableness and necessity of$7,167,233,745 in natural




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gas costs incurred during the six year reconciliation period.             Report as to why the Examiners did not include
Upon reviewing the evidence, the Commission disallowed                    all I 00 contracts reviewed by the Reed Consult-
$29, I73,090 of those costs and determined that the re-                   ing Group in their chart.
mainder were reasonable and necessary expenditures.
There is no dispute that the gas purchase transactions re-          The examiners recommend a total disallowance for un-
viewed by the Commission were affiliate transactions; the           reasonable expenditures for gas purchases by [Texas
Fuel Company, an affiliate of Texas Utilities, supplies all         Utilities] from its affiliate, [the Fuel Company], of
the utility's gas requirements. In addition, because Texas          $78,504,776. The remainder of the Company's requested
Utilities is the Fuel Company's only customer, whether the          reconcilable gas costs, $7,088,728,967, are reasonable
Fuel Company charged Texas Utilities prices commensu-               and should be approved. FN 41
rate with those charged to other affiliates or to unaffiliated
entities is not an issue. The Commission's only task was to
                                                                           FN41. We note that a chart entitled Summary of
determine the extent to which the affiliate fuel expenses
                                                                           Recommended Disallowances-Gas Contracts
were reasonable and necessary costs that could be included
                                                                           appearing on page 434 of the Examiners' Report
in Texas Utilities' rate base. At issue in the Cities and
                                                                           shows an additional recommended disallowance
Public Utility Counsel's sixteenth and seventeenth points
                                                                           for open access transportation. The total recom-
of error is the Commission's decision to disallow only
                                                                           mended disallowance on this chart is therefore
$29, I73,090 in gas costs as unreasonable expenditures.
                                                                           $8I,504,776. Without explanation, in the sum-
                                                                           mary section on page 479, the examiners dropped
      The Commission arrived at this figure in the following               this $3 million disallowance leaving a recom-
way. First, it heard evidence from Texas Utilities regarding               mended total disallowance of $78,504,776.
the reasonableness of the approximately 900 gas contracts
subject to the reconciliation proceedings. Then it heard
                                                                      Examiners' Report at 479. The chart and summary
evidence presented by the Reed Consulting Group, which
                                                                 imply that the examiners accepted Texas Utilities' evi-
reviewed I 00 of the 900 contracts representing eighty
                                                                 dence regarding the reasonableness of all the gas contracts
percent of the gas purchases made during the reconciliation
                                                                 not represented in the chart, and allowed all costs related to
period. In their report, the examiners reviewed sixty-four
                                                                 those contracts in rate base.
contracts, and after considering disallowances suggested
by both Texas Utilities and the Reed Consulting Group,
                                                                       In its final order, the Commission made specific
made their own recommendations for disallowances for
                                                                  findings of fact for each gas contract that appeared in the
each contract. A chart included in the Examiners' Report
                                                                  examiners' chart, rejecting*413 the examiners' recom-
sets forth the disallowances recommended by Texas Utili-
                                                                  mended disallowance in only five instances.FN 42 Like the
ties, the Reed Consulting Group, and the examiners with
                                                                  examiners, the Commission only disallowed costs associ-
respect to thirty-seven production contracts, six long-term
                                                                  ated with the contracts that appear in the examiners' chart.
commercial contracts, thirteen short-term commercial
                                                                  The Commission allowed all costs associated with all other
contracts, and eight spot contracts. See Examiners' Report
                                                                  gas contracts.
at 448-51. FN 40 The Examiners' Report then includes a
summary section which states:
                                                                           FN42. The Commission disallowed less than the
                                                                           examiners recommended in four instances:
         FN40. There is no explanation in the Examiners'


Contract No.                                Examiners' Recommendation                   Commission's Disallowance




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881 S.W.2d 387
(Cite as: 881 S.W.2d 387)



1690 (Empire)                                       $19,222,738                                      $0
3205 (PG & E)                                       $13,453,686                                      $0
3697 (Coronado)                                     $ 1,916,756                                  $1,455,193
3011, 3701,3707 (Houston                            $16,721,007                                      $0
Pipeline, Panhandle)
The Commission disallowed more than the examiners recommended in one instance:
Contract No.                                Examiners' Recommendation                   Commission's Disallowance


3076 (Amalgamated)                                        $0                                      $527,308
                                                                  gas contracts, the Cities' witness, Richard S. Morey, rec-
     In points of error sixteen and seventeen, the Cities and     ommended a disallowance of $452 million in gas-related
Public Utility Counsel challenge the Commission's gas             expenditures. This amount represented fuel costs for the
contract disallowances on two grounds: (1) the Commis-            years 1985 through 1988. The examiners determined that
sion did not review all the affiliate gas costs associated        Mr. Morey's quantification technique was seriously flawed
with approximately 800 contracts making up twenty per-            because it relied on comparisons with utilities not compa-
cent of Texas Utilities' gas costs and as a result included       rable to Texas Utilities. The examiners recommended that
unreasonable costs in rate base, and (2) the Commission           the Commission reject Mr. Morey's analysis and his rec-
did not make the specific findings required by PURA sec-          ommended disallowance, which the Commission did. If
tion 41(c)(1) to support the costs it did allow. Because we       that had been the whole of the evidence presented to the
find both arguments to be without merit, we overrule the          Commission, it would have been within the Commission's
sixteenth and seventeenth points of error.                        discretion to allow all the costs requested by Texas Utili-
                                                                  ties if it found they were supported by substantial evidence.
                                                                  However, the Commission also considered the evidence
     The Cities and Public Utility Counsel essentially ar-
                                                                  presented by its own auditor and, as a result, disallowed
gue that because the Reed Consulting Group did not re-
                                                                  some of the expenses associated with the larger gas con-
view the smaller and more numerous gas contracts making
                                                                  tracts. While the Commission may consider evidence such
up approximately twenty percent of Texas Utilities' gas
                                                                  as that presented by the Reed Consulting Group, it is not
costs, the Commission did not review the contracts. Simply
                                                                  required to do so. In the absence of such evidence, it may
because the Reed Consulting Group did not include these
                                                                  accept or reject the evidence presented by the utility, the
contracts in its sample does not mean that the Commission
                                                                  party bearing the burden of proof of reasonableness. With
did not review those expenses or that there was no evi-
                                                                  respect to the smaller *414 gas contracts, the Commission
dence that the contracts met the requirements of PURA
                                                                  apparently accepted the evidence of reasonableness pre-
section 41 (c)(l ).
                                                                  sented by Texas Utilities. If substantial evidence supports
                                                                  the Commission's findings, which we conclude it does, we
     Texas Utilities presented evidence as to the reasona-
                                                                   must uphold the order. See Auto Convoy, 507 S.W.2d at
bleness of all of the approximately 900 gas contracts sub-
                                                                  722.
ject to the reconciliation proceeding. As part of its evi-
dence of reasonableness, the utility presented testimony
                                                                           FN43. Texas Utilities asserted that its three major
justifying its decisions to enter into the various gas con-
       FN41       •                                                        gas contracts expired between late 1980 and
tracts. · - Opposmg the reasonableness of Texas Utilities'
                                                                           1983, at a time when its forecasts showed a con-




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881 S.W.2d 387
(Cite as: 881 S.W.2d 387)

         tinuing increase in the cost of natural gas and        this statute demands specific findings of reasonableness for
         when prices were still escalating. The utility en-     each contract. We disagree. The statute allows the Com-
         tered into new contracts during a sellers' market      mission to address its specific findings either to "each
         with the result that the new contracts were less       item" or "each class of items." The Commission may either
         favorable to the utility than they would have been     make a contract-by-contract determination of reasonable-
         if they had entered into them at another time.         ness, or it may group the contracts together and declare
         Texas Utilities attributes its failure to obtain gas   them all to be reasonable.
         in an interstate market to a desire to remain free
         from burdensome and expensive federal regula-              The Commission made a specific fmding that, with the
         tion.                                                  exceptions set forth in fmdings of fact 383A-383AAA,
                                                                Texas Utilities had established the reasonableness and
     The Cities and Public Utility Counsel also maintain        necessity of its gas costs. We conclude that these fmdings
that the Commission did not make the findings of fact           meet the requirements ofPURA section 4l(c)(l).
required by PURA section 4l(c)(l) to support an allow-
ance of all gas costs related to those contracts not included            AMOCO CONTRACT NUMBER 1627
in the chart. The following are the portions of the Com-             [26] In its sixth point of error, Texas Utilities claims
mission order relating to its determination of gas disal-       that the trial court incorrectly affirmed the Commission's
lowances:                                                       decision to disallow $447,972 as imprudent gas expendi-
                                                                tures pursuant to Amoco contract number 1627. At the
  Finding of Fact 379: The Company's fuel expenditures          Commission hearing, Texas Utilities initially offered evi-
  during the reconciliation period of April 1983 through        dence indicating that it had purchased fuel in March 1989
  June 1989 should be approved to the extent of                 from Amoco pursuant to contract number 1627, a spot
  $10,488,044,993.                                              contract. The Commission determined that the price paid
                                                                for this gas was unreasonably high given the spot price of
  Conclusion of Law 82: Except to the extent of the dis-        gas at the time, and disallowed the excess purchase price
  allowed reconciliation period gas costs (reflected in the     from rate base. During "surrebuttal testimony," the utility's
  Findings of Fact attached to the order), Texas Utilities      fourth opportunity to file testimony on fuel issues, it as-
  met its burden of proof under PURA § 4l(c)(l), re-            serted that the gas purchase was not actually made pursu-
  garding affiliate transactions.                               ant to a spot contract, but rather pursuant to a separate
                                                                short-term commercial contract under which the price paid
                                                                would be reasonable. The utility explained that it had made
  Conclusion of Law 83: Except to the extent of the dis-
                                                                an accounting error, forgetting to reform its ledger to credit
  allowed reconciliation period gas costs (reflected in the
                                                                the purchases to the short-term contract.FN44 The Com-
  findings of fact attached to the order), the Company's
                                                                mission treated the gas as purchased pursuant to the spot
  fuel expenditures during the reconciliation period com-
                                                                 contract and disallowed the $447,972 it believed to be in
  ply with the requirements of P.U.C.SUBST.R.
                                                                excess of a reasonable spot price for gas.
  23 .23(b)(2)(H).

                                                                         FN44. The utility's testimony was that it had for a
     The question for this Court is whether these findings
                                                                         short time credited purchases made pursuant to a
satisfy the requirements of PURA section 41 (c)(1) that
                                                                         short-term commercial contract with Amoco to
"[a]ny such finding shall include specific findings of the
                                                                         contract number 1627 because of delay in setting
reasonableness and necessity of each item or class of items
                                                                         up the short-term contract for payment. Presum-
allowed." The Cities and Public Utility Counsel assert that
                                                                         ably, the utility only realized its failure to change




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881 S.W.2d 387
(Cite as: 881 S.W.2d 387)

          its records after the rate-making proceeding had          reversed this conclusion. Because we agree with the
          been under way for some time.                             Commission that the contract contained no take-or-pay
                                                                    provision, we will sustain this point of error.
     We do not agree with Texas Utilities that its testimony
of an accounting error is uncontroverted or that it neces-              The pertinent contract provision provides:
sarily established that the gas was purchased under a
short-term commercial contract as a matter of law. The                Delhi hereby grants [the Fuel Company] the option to
Commission, rather, was presented with conflicting evi-               purchase up to fifty percent (50%) (calculated in terms
dence: the utility's own records showing the gas purchased            of heating value) of the Schlensker-Texas Crude Gas,
pursuant to a spot contract and its contradictory testimony           purchased by Delhi, at Delhi's cost of such gas plus 5
that in fact the gas was purchased under a short-term                 cents/MMBtu. Such option to purchase may be exer-
commercial contract. The utility *415 characterizes the               cised by [the Fuel Company] at any time and from time
Commission's decision to rely on the utility's records rather         to time during the term of Delhi's respective gas pur-
than the testimony provided by the utility as arbitrary and           chase agreements for such gas in blocks of ten percent
capricious. We come to the opposite conclusion. The                   (10%) of Delhi's purchases, and until [the Fuel Com-
Commission is the judge of the weight to be accorded                  pany] has exercised completely its option to purchase
witnesses' testimony and is free to accept part of the tes-           such fifty percent (50%). Each such exercise of its option
timony of one witness and disregard the remainder.                    to purchase by _[the Fuel Company] shall be evidenced
Southern Union Gas Co. v. Railroad Comm'n, 692 S.W.2d                 by not less than thirty (30) days prior written notice to
137, 141-42 (Tex.App.-Austin 1985, writ ref'd n.r.e.).                Delhi and shall be effective on the first day of the month
The Commission was not required to accept the utility's               following that month in which the said thirty (30) day
eleventh-hour accounting error explanation, but was free to           period expires.
rely on the utility's own records. It is the utility that carries
the burden of proof at a rate-making proceeding; the utility
                                                                          Contrary to Texas Utilities' assertions, this contract
that submits records to the Commission that do not accu-
                                                                    embodies no take-or-pay obligations. It is apparent from its
rately reflect its expenditures does so at its own peril. The
                                                                    unambiguous terms that the contract gives Texas Utilities
point of error is overruled.
                                                                    the option to buy, in ten percent blocks and at a fixed price,
                                                                    up to fifty percent of any Schlenker-Texas crude gas
          DELHI CONTRACT NUMBER 1659                                purchased by Delhi. We are not persuaded by Texas Utili-
     [27] In the rate proceeding, Texas Utilities asserted          ties' argument that the phrase "and until TUFCO has ex-
that Delhi gas contract number 1659 contained a                     ercised completely its option to purchase such fifty per-
take-or-pay clause which obligated the utility to purchase a        cent" means that once the utility has purchased at that level
certain amount of gas under the contract. The Commission            it must continue to do so. The contract contemplates that
considered the contract and determined that it imposed no           whenever Delhi purchases Schlenker-Texas crude gas the
take-or-pay obligation and that Texas Utilities had pur-            Fuel Company may purchase up to fifty percent of that gas
chased gas at a price higher than necessary. The Commis-            at Delhi's cost plus five cents per MMBtu. The phrase "and
sion concluded that Texas Utilities' gas purchases pursuant         until [the Fuel Company] has exercised completely its
to this contract violated its obligation to purchase fuel at        option to purchase such fifty percent" sets an upper, rather
the lowest reasonable cost to ratepayers and disallowed             than a lower, limit on the utility's right to purchase this gas
$2,509,810 in fuel costs incurred under the contract. See           at the contract price; it does not operate to convert the
PURA § 4l(c)(l); 16 Tex.Admin.Code § 23.23(b)(2)(H)                 option to purchase gas into an obligation. We sustain the
(1993) (since amended). In its third point of error, the            Commission's third point of error.
Commission contends that the district court incorrectly




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881 S.W.2d 387
(Cite as: 881 S.W.2d 387)

                                                                  agency could conclude what the utility's future needs will
                  FUEL OIL INVENTORY                              be. If the utility could convince the Commission of the
      [28] In its fourth point of error, Texas Utilities chal-    need to increase that level, then such an increase would be
lenges the Commission's decision to set fuel oil inventory        in order. The burden, however, was on the utility. Texas
at 1. 7 million barrels. The utility contends that this finding   Utilities' fourth point of error is overruled.
is arbitrary and capricious, and not supported by substan-
tial evidence. See APA § 200l.l74(2)(E), (F). We disa-                    RETURN ON COMMON EQUITY FN45
gree.
                                                                           FN45. We understand "common equity" to mean
    Texas Utilities requested a fuel inventory level of                    the utility's common stock. We refer to the utili-
2,031,540 barrels, an increase of 331,540 barrels from the                 ty's common stock as "common equity" so as not
previously authorized level of 1. 7 million barrels. See                   to deviate from the terminology used by the
*416Application _ofTexas Utilities Electric CompanY,/'or a                 Commission in the proceeding below. See
Rate Increase, 10 P.U.C.Bull. at 954. The higher figure                    GTE-ST¥, 833 S.W.2d at 157 n. 3.
was based on the utility's test-year end thirteen-month
average inventory of fuel oil. The Cities argued that the              In points of error eighteen through twenty, the Cities
utility needed a fuel oil inventory of only 1,279,363 bar-        and Public Utility Counsel challenge the trial court's af-
rels, suggesting that access to nuclear-generated power           firmance of the Commission's decision to set the utility's
from Comanche Peak Unit 1 reduced the utility's need for          return on common equity at 13.2 percent. FN46 Specifically,
fuel oil. Additionally, the Cites contended that increased        they contend that the Commission (1) did not identify the
levels of non-oil/gas fired generation caused a decrease,         methodology it used to arrive at this figure; (2) failed to
rather than an increase, in the necessary fuel oil inventory      consider the statutory factors set out in PURA section
level. Texas Utilities countered that it burned 1,201,008         39(a); and (3) did not make adequate findings of fact.
barrels of oil in December 1983 and 1,249,952 barrels
during two cold weather periods in February and March                      FN46. Return on equity is one element of the rate
1989. The utility hoped to demonstrate that the Cities had                 of return on a utility's invested capital. Other
miscalculated its needs in the event of cold weather.                      elements include long-term and short-term debt
                                                                           and preferred stock.
      The Commission rejected both the Cities' and the
utility's requests, adopting instead the examiners' recom-             [29] During the rate-making proceeding, all the
mendation that the "level of fuel oil inventory established       presentations regarding the appropriate return on common
in Docket No. 5640 of 1.7 million barrels should be left in       equity used some form of a discounted cash-flow meth-
place." This decision was not arbitrary and capricious or         odology. Because this methodology was the only one
unsupported by substantial evidence. The examiners based          presented, the Commission's adoption of any of the range
their recommendation on an evaluation of the utility's            of figures presented as the appropriate return on common
actual needs since the 1.7 million barrel inventory level         equity in itself entails adoption of the discounted cash-flow
was established in 1984. The examiners stated, "[I]n light        methodology. The Commission's order is presumed to be
of the Company's experience, the examiners find that the          based on substantial evidence and we will not require the
level of fuel oil inventory established in Docket No. 5640        Commission to make a separate finding simply to confirm
of 1.7 million barrels should be left in place by the Com-        that it has based its decision on the only method of calcu-
mission." The utility's actual experience over the past           lating return on common equity presented during the
several years provides probative evidence from which the          rate-making proceeding. See Charter Medical, 665 S. W.2d




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881 S.W.2d 387
(Cite as: 881 S.W.2d 387)

at 451; see also GTE--sW, 833 S. W.2d at 159 (holding that       Fact 215 ("Staffs recommended 15-basis-point upward
a return on equity falling within the range presented by         adjustment to recognize the Company's exceptional
expert testimony meets the substantial evidence test). We        achievement in conservation and load management is
reject the Cities and Public Utility Counsel's attempts to       reasonable."); Finding of Fact 40 I ("[Texas Utilities']
look to the transcript of the Commission's final order           demand side management achievements have been re-
meeting to show that the Commission based its decision           markable, commendable, and clearly far above those of
regarding return on common equity on something other             other utilities.").
than record evidence. We judge the agency order on the
basis on which it purports to rest, and the mental processes          [30][31] The chief complaint appears to be the Cities
of individual commissioners are immaterial to judicial           and Public Utility Counsel's perception that the Commis-
review. Pedernales Elec. Coop., Inc. v. Public Uti!.             sion made no downward adjustment to the return on
Comm'n, 809 S.W.2d 332, 341 (Tex.App.-Austin 1991,               common equity to penalize the utility for instances of
no writ); see also *417City ofFrisco v. Texas Water Rights       imprudent management. While the statute instructs the
Comm'n, 579 S.W.2d 66, 72 (Tex.Civ.App.- Austin                  Commission to consider the quality of the utility's man-
1979, writ refd n.r.e.) ("The thought processes or motiva-       agement, it does not require that the Commission lower the
tions of an administrator are irrelevant in the judicial de-     return on common equity if it fmds any imprudence. We
termination whether the agency order is reasonably sus-          understand the statute to leave to the Commission's dis-
tained by appropriate findings and conclusions that have         cretion the decision whether the utility's management
support in the evidence.").                                      warrants a reduction in the overall rate of return. We also
                                                                 reject the assertion that the Commission's chosen rate of
      The Cities and Public Utility Counsel next argue that      return is not supported by adequate findings. The utility
the Commission failed to consider the necessary statutory        testified to a recommended range of return from 13 to
criteria in choosing the appropriate return on common            14.25 percent. The staffs recommendation ranged from
equity. The statute directs the Commission to consider,          12.36 to 13.4 percent. The Examiners' Report summarizes
among other things, the utility's efforts to comply with the     extensive testimony supporting the various ranges spon-
statewide energy plan, its efforts and achievements in the       sored by the parties and the staff. The Commission made a
conservation of resources, the quality of its services, the      specific finding that a 13.2 percent return on common
efficiency of its operations, and the quality of its man-        equity is reasonable and appropriate for the utility. Finding
agement. PURA § 39(b). Our examination of the order              of Fact 213. This Court has already decided that a fmding
reveals findings of fact and conclusions of law addressing       regarding the appropriate cost of equity is not a fmding set
each of these criteria. The Commission addressed the util-       forth in statutory language, and therefore needs no under-
ity's operational efficiency, finding that the utility gener-    lying fmdings. City ofAlvin, No. 3-92-459-CV, slip op. at
ated electricity efficiently and reliably during the recon-      28; see also GTE--SW, 833 S.W.2d at 158 (approving a
ciliation period and that the energy efficiency plan satisfied   finding on return on equity that was "the Commission's
the Commission's substantive rules. Findings of Fact 396,        own estimate converted into a fmding" so long as the es-
398. Conclusion of law 58 states that Texas Utilities' gen-      timate was "within the range made by the testimony of the
eration, transmission, and distribution facilities are safe,     various expert witnesses"). Choosing a rate of return is a
adequate, efficient, and reasonable. Regarding the quality       proper exercise of the Commission's discretion in setting
of management, the Commission found that, with limited           the rate of return, and we will not require any more specific
exceptions, the quality of management was adequate.              findings than its selection from a range of rates all sup-
Finding of Fact 12. The Commission also considered the           ported by credible expert testimony. The Cities and Public
utility's efforts and achievements in conservation and           Utility Counsel's points of error eighteen through twenty
compliance with the statewide energy plan. See Finding of        are overruled.




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881 S.W.2d 387
(Cite as: 881 S.W.2d 387)


               CASH WORKING CAPITAL
     Texas Utilities' fifth point of error complains of the
district court's decision to remand the Commission's cash
working capital allowance. The district court found, and
the Commission agreed, that the Commission made a
mathematical error in its calculation of the cash working
capital. On appeal, Texas Utilities argues that there is no
evidence that the Commission made a mathematical error
and that in any case the district court could not address the
issue because it was not raised in the motions for rehearing
filed with the Commission. See APA § 2001.145. We do
not address this point of error. On *418 remand the
Commission will have an opportunity to recalculate the
cash working capital and correct its mathematical error or
make other changes to cash working capital in light of its
decisions on remand.


                     CONCLUSION
     For the reasons stated in this opinion, we reverse the
district-court judgment and remand the cause to the district
court with instructions that it be remanded to the Com-
mission for further proceedings consistent with this opin-
ion.


Tex.App.-Austin, 1994.
Texas Utilities Elec. Co. v. Public Utility Com'n
881 S.W.2d 387


END OF DOCUMENT




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west law.
                                                                                                               Page 1


935 S.W.2d 109,39 Tex. Sup. Ct. J. 267,40 Tex. Sup. Ct. J. 238
(Cite as: 935 S.W.2d 109)


H                                                           pealed).


           Supreme Court of Texas.                          *109 Appealed From Austin Court of Appeals, Third
PUBLIC UTILITY COMMISSION OF TEXAS et al.,                  Judicial District; Bea Ann Smith, Judge.Geoffrey M.
                 Petitioners,                               Gay, Steven A. Pmter, Dan Morales, Steven Baron,
                      v.                                    Susan Bergen Schultz, Elizabeth R.B. Sterling, Aus-
 TEXAS UTILITIES ELECTRIC COMPANY et al.,                   tin, for Petitioners.
                Respondents.
                                                            Stephen Gardner, Ellen Greer, Stefan H. Krieger, Brad
                   No. 94-1071.                             Sutera, Patrick Gattari, Dallas, Alan Holman, James
                   Feb. 9, 1996.                            W. Checkley, Jr., Mark W. Smith, Austin, Peggy
         Rehearing Overruled Jan. 10, 1997.                 Wells Dobbins, Coral Gables, FL, Dick Terrell
                                                            Brown, Walter Washington, Stephen Fogel, Marion
                                                            Taylor-Drew, Jack W. Smith, Mark R. Davis, Austin,
     Judicial review was sought of Public Utility
                                                            William H. Burchette, A. Hewitt Rose, Washington,
Commission (PUC) order in electric utility rate case.
                                                            DC, Jonathan Day, Houston, Michael G. Shirley,
The 250th Judicial District Court, Travis County, John
                                                            Rupaco T. Gonzalez, David C. Duggins, Fernando
K. Dietz, J., reversed and remanded in part. Appeals
                                                            Rodriguez, Roy Q. Minton, John L. Foster, Austin, J.
were taken. The Austin Court of Appeals, Bea Ann
                                                            Dan Bohannan, Dallas, Walter Demond, Austin,
Smith, J., 881 S. W.2d 387, reversed and remanded
                                                            Robert M. Fillmore, Howard V. Fisher, Robe1t A.
with instructions. Utility applied for writ of error. The
                                                            Wooldridge, Dallas, for Respondents.
Supreme Court held that, in setting electric utility
rates, PUC is not required to recognize utility's
available tax deductions for disallowed capital costs.      PER CURIAM.
                                                                 This is an appeal from a final order of the Public
                                                            Utility Commission in a ratemaking proceeding initi-
    Reversed in part and affirmed in part.
                                                            ated by Texas Utilities. The district court reversed the
                                                            Commission's order in certain respects and remanded
                   West Headnotes
                                                            the case for further proceedings. The court of appeals
                                                            reversed the district court's judgment but also re-
Electricity 145 ~11.3(4)                                    manded the case to the Commission. 881 S.W.2d 387.
                                                            We find but one error in the court of appeals' opinion
145 Electricity                                             warranting our review.
    145kll.3 Regulation of Charges
        145k 11.3(4) k. Operating Expenses. Most                 The Commission refused to reduce Texas Utility's
Cited Cases                                                 income tax expenses by potential savings from con-
                                                            solidated tax returns with the Texas Utilities' affiliates,
      In setting electric utility rates, Public Utility     by savings from available deductions for disallowed
Commission (PUC) is not required to recognize util-         capital and operating expenses, and by savings from
ity's available tax deductions for disallowed capital       available deductions for interest expense. The court of
costs. Vernon's Ann.Texas Civ.St. art. 1446c (Re-           appeals held that the Commission should have used an




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935 S.W.2d 109, 39 Tex. Sup. Ct. J. 267,40 Tex. Sup. Ct. J. 238
(Cite as: 935 S.W.2d 109)

"actual taxes paid" and not a "hypothetical tax"               payers. If Texas Utilities refers to assets that are not
standard in applying Section 4l{c)(2) of the Public            currently included in the rate base but will be in the
Utility Regulatory Act, Act of June 2, 1975, 64th Leg.,        future, its argument may be that related interest de-
R.S., ch. 721, § 4l(c)(2), 1975 Tex.Gen.Laws (for-             ductions should be allotted to future ratepayers. All
merly TEX.REV.CIV.STAT.ANN. art. 1446c, §                      such matters are within the Commission's discretion,
4l(c){2), recodified without change as Section                 which was properly exercised in this case. If Texas
4l{c)(2) of the Public Utility Regulatory Act of 1995,         Utilities refers to assets that will never be included in
id. art. 1446c-O, § 2.208(c)). From this the court of          the rate base because they have been disallowed, then
appeals concluded that the Commission should have              its argument may be that related interest deductions
reduced Texas Utility's estimated income tax expense           should be treated consistently with other deductions
by: (1) the utility's "fair share" of savings from con-        for disallowed capital expenses. We agree.
solidated tax returns with the utility's affiliates; (2) the
utility's available deductions for disallowed capital                Because the opinion of the court of appeals con-
and noncapital expenses; and (3) available deductions          flicts with our decision in GTE-Southwest, we grant
for interest expense "to the extent that we continue to        Texas Utilities' application for writ of error, and
require the Commission to pass through to ratepayers           without hearing oral argument, reverse the judgment
any tax benefits from interest expense deductions",            of the court of appeals to the extent that it conflicts
but not necessarily immediately. The latter saving,            with this opinion. TEX.R.APP.P. 170. Texas Utilities'
*110 the court explained, must be allocated between            application does not complain of any other error in the
present and future ratepayers, in the Commission's             court of appeals' opinion that requires reversal. We
discretion. 881 S. W.2d at 398-400.                            deny the applications of the Public Utility Commis-
                                                               sion, the Office of Public Utility Counsel, and the
      The appeals court's opinion preceded and con-            Cities of Arlington, et al. Jd. Rule 133. Thus, the
flicts with our decision in Public Utility Commission          judgment of the court of appeals is, in all other re-
v. OTE-Southwest; Inc., 901 S.W.2d 401 (Tex.l995).             spects, affirmed.
There we held that neither PURA § 41 (c){2) nor the
reference to taxes "actually incurred" in Public Utility       Tex.,l996.
Commission v. Houston Lighting & Power Co., 748                Public Utility Com'n of Texas v. Texas Utilities Elec.
S.W.2d 439, 442 (Tex.l987), required the Commis-               Co.
sion to apply an "actual-taxes-paid" methodology to            935 S.W.2d 109,39 Tex. Sup. Ct. J. 267,40 Tex. Sup.
estimate a utility's income tax expense. We held that          Ct. J. 238
the Commission "has neither the power nor the dis-
cretion to consider expenses disallowed under section
                                                               END OF DOCUMENT
43{c)(3)." 901 S.W.2d at 411. Although we did not
directly address whether the Commission is required
to recognize available deductions for disallowed cap-
ital costs, as opposed to noncapital costs, id. at
411-12, our reasoning applies equally to both.


     Regarding deductions for interest expenses,
Texas Utilities argues that the court of appeals erred
"to the extent" it required that tax deductions related to
assets not included in rate base be passed on to rate-




                              © 2015 Thomson Reuters. No Claim to Orig. US Gov. Works.
         Appendix 13


          Gilmore v. State,
        744 S.W.2d 630
(Tex. App.-Dallas 1987, pet. ref'd)
                                                                                                           Page 1


744 S.W.2d 630
(Cite as: 744 S.W.2d 630)


H                                                          that time introduce any other part of writing, which
                                                           ought in fairness to be considered contemporaneously
                                                           with it, is not mandatory. Rules of Crim.Evid., Rule
             Court of Appeals of Texas,
                                                           106.
                       Dallas.


          Kenneth GILMORE, Appellant,                       [2] Criminal Law 110 ~1170(3)
                          v.
          The STATE of Texas, Appellee.                    11 0 Criminal Law
                                                               ll OXXJV Review
                No. 05-87-00230-CR.                                110XXIV(Q) Harmless and Reversible Error
                    Dec. 16, 1987.                                   II Ok 1170 Exclusion of Evidence
                                                                          11 Ok 1170(3) k. Prior or Subsequent
                                                           Admission of Same Evidence. Most Cited Cases
     Defendant was convicted in the 282nd Criminal
District Court, Dallas County, Tom Price, J., of mur-
der. Defendant appealed. The Court of Appeals,                  Defendant was not prejudiced when State offered
Baker, J., held that defendant was not prejudiced when     for all purposes defendant's handwritten confession
State offered for all purposes defendant's handwritten     with two portions deleted and offered for record pur-
confession with two portions deleted and offered           poses only the whole confession and when trial court
whole confession for record purposes only.                 did not allow defendant to contemporaneously admit
                                                           whole confession, although defendant contended that
                                                           rule provides that when writing or part thereof is in-
    Affirmed.
                                                           troduced, adverse party may introduce any other part
                                                           of writing which ought in fairness to be considered
                  West Headnotes                           contemporaneously with it; rule was not mandatory,
                                                           and State eventually withdrew objection to whole
(1) Criminal Law 110 ~396(2)                               confession, and it was admitted for all purposes. Rules
                                                           of Crim.Evid., Rule 106.
1 10 Criminal Law
    110XVII Evidence                                        *631 Lawrence B. Mitchell, Dallas, for appellant.
        110XVIJ(I) Competency in General
          11 Ok396 Evidence Admissible by Reason of         Karen R. Wise, Dallas, for appellee.
Admission of Similar Evidence of Adverse Party
               110k396(2) k. Admission of Whole
                                                            Before DEYANY, BAKER and LAGARDE, JJ.
Conversation, Transaction, or Instrument Because of
Admission of Part or Reference Thereto. Most Cited
                                                            BAKER, Justice.
Cases
                                                                 Appealing from his murder conviction, Kenneth
                                                            Gilmore is contending that the trial court erred in
    Criminal rule providing that if writing or a part
                                                            failing to admit evidence he offered contemporane-
thereof is introduced by party, adverse party may at
                                                            ously with the admission of evidence offered by the




                            © 2015 Thomson Reuters. No Claim to Orig. US Gov. Works.
                                                                                                                Page2

744 S.W.2d 630
(Cite as: 744 S.W.2d 630)

State. Finding no merit in this contention, we affirm         pleteness, controlling the time an adversary can in-
the trial court's judgment.                                   troduce certain kinds of remainder evidence. The
                                                              language of the rule is a permissive grant and not a
     During direct examination of Dallas Police Of-           requirement. As noted in the comment to the rule, this
ficer Stan McNear, the State sought to offer into evi-        rule does not in any way circumscribe the right of a
dence appellant's written confession. State's Exhibit         party to develop fully the matter on cross-examination
14 was a handwritten judicial confession by appellant.        or as part of his own case. Since it is a permissive
State's Exhibit 15 was a copy of the same handwritten         grant, not a requirement, the adversary may introduce
confession with two portions deleted. The State of-           the remainder evidence contemporaneously with the
fered Exhibit 14 for record purposes only and Exhibit         presentation of the incomplete evidence, he can wait
15 for all purposes. Appellant moved the trial court to       to do so during cross-examination, or during the de-
require introduction of Exhibit 14 for all purposes.          velopment ofhis own case. TEX.R.CRlM.EVID. 106.
The court overruled this motion. However, shortly             We hold that the terms of this rule are not mandatory.
thereafter, during the State's continuation of its direct
examination of Officer McNear, the State withdrew its              The underlying purpose for both rules 106 and
objection to Exhibit 14, and it was admitted for all          107 of the Texas Rules of Criminal Evidence is to
purposes.                                                     reduce the possibility of the fact fmder receiving a
                                                              false impression from hearing the evidence of only a
     [ 1] Appellant contends that the trial court's failure   part of a writing. The theory is that by allowing the
to admit the document in its entirety at the time he          jury to have the benefit of the rest of the writing on the
made the request is a violation of Rule 106 of the            same subject, the whole picture will be presented
Texas Rules of Criminal Evidence. This rule provides          removing any misleading effect which may have oc-
that when a writing or part thereof is introduced by a        curred from introducing only a portion of the writing.
party, the adverse party may at that time introduce any       See Roman v. State, 503 S.W.2d 252, 253
other part of the writing which ought in fairness to be       (Tex.Crim.App.1974). The Roman case was constru-
considered contemporaneously with it. Appellant               ing article 38.24 of the Texas Code of Criminal Pro-
contends the terms of this rule are mandatory. Alt-           cedure which in part is the predecessor to Rule 106.
hough the document was admitted shortly after the
appellant first requested its admission, appellant ar-             [2] In this case, the writing that appellant re-
gues that the failure to enter the same contempora-           quested to be admitted was in fact admitted by the trial
neously with the State's Exhibit was error because it         court during the remainder of the direct examination
was critical for the defense that the jury understand         by the State of Officer McNear; therefore, both
that the completed confession introduced originally           documents were before the jury prior to appellant's
before them was in fact consistent with the version of        subsequent testimony concerning his version of the
events subsequently presented by appellant in his             facts. We conclude *632 that circumstances in this
testimony. Appellant argues that the circumstances            case do not demonstrate that the appellant was harmed
establish harm to him from the violation of the man-          or otherwise prejudiced by the trial court's action.
datory terms of Rule 106 of the Texas Rules of                TEX.R.APP.P. 81(b)(2); Prior v. State, 647 S.W.2d
Criminal Evidence. We disagree.                               956, 959 (Tex.Crim.App.l983); Rezac v. State, 722
                                                              S.W.2d 32,33 (Tex.App.-Dallas 1986, no pet.).
    Rule 106 of the Texas ·Rules of Criminal Evi-
dence is not written in mandatory terms. This rule is a           Appellant's point of error is overruled and the trial
narrow modification of the doctrine of optional com-          court's judgment is affirmed.




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                                                                                       Page 3


744 S.W.2d 630
(Cite as: 744 S.W.2d 630)


Tex.App.-Dallas, 1987.
Gilmore v. State
744 S.W.2d 630


END OF DOCUMENT




                            © 2015 Thomson Reuters. No Claim to Orig. US Gov. Works.
        Appendix 14

  Crosby v. Minyard Food Stores,
        122 S.W.3d 899
(Tex. App.- Dallas 2003, no pet.)
west law.
                                                                                                         Page 1
122 S.W.3d 899
(Cite as: 122 S.W.3d 899)




                                                           [2] Evidence 157 <£:::::;>155(1)

            Court of Appeals of Texas,                     157 Evidence
                      Dallas.                                  157IV Admissibility in General
           Maerene CROSBY, Appellant,                             157IV(E) Competency
                           v.                                         157k155 Evidence Admissible by Reason
 MINYARD FOOD STORES, INC. d/b/a Sack N'                   of Admission of Similar Evidence of Adverse Party
    Save a!k/a Sack N' Save # 206, Appellee.                              157kl55(1) k. In general. Most Cited
                                                           Cases
             No. 05-02-01766-CV.                                Affidavit by grocery store's expert doctor was
                 Nov. 26, 2003.                            not admissible in patron's slip-and-fall negligence
        Rehearing Overruled Jan. 13, 2004.                 action, under rule of optional completeness, which
                                                           allowed inquiry into the whole of an act, declara-
Background: Grocery store patron brought negli-
                                                           tion, conversation, writing, or recorded statement if
gence action, alleging that she tripped and fell on
                                                           the opposite party had introduced a portion of it; it
buckled floor mat near entrance of store. The
                                                           was not necessary to admit affidavit to explain or
County Court at Law No. 5, Dallas County, Don
                                                           understand portions of it referred to in testimony by
Metcalfe, J., entered judgment on jury verdict for
                                                           shopper's chiropractor. Rules of Evid., Rule I 07.
patron. Appeal was taken.
                                                            13] Evidence 157 <£:::::;>155(1)
Holdings: The Court ofAppeals, Joseph B. Morris,
J., held that:                                             157 Evidence
(I) evidence that store knew that mat regularly                157IV Admissibility in General
buckled created jury question on negligence;                      157IV(E) Competency
(2) admission of affidavit from store's expert wit-                   157k155 Evidence Admissible by Reason
ness physician was error; but                              of Admission of Similar Evidence of Adverse Party
(3) error was harmless.                                                    157k155(1) k. In general. Most Cited
                                                           Cases
    Affirmed.
                                                                Rule of optional completeness, under which the
                   West Headnotes                          whole of an act, declaration, conversation, writing,
                                                           or recorded statement may be inquired into if the
[1] Negligence 272 <£:::::;>1708                           opposite party had introduced a portion of it, is de-
                                                           signed to guard against the possibility of confusion,
272 Negligence                                             distortion, or false impression that could be created
   272XVUI Actions                                         when only a portion of evidence is introduced.
        272XVIII(D) Questions for Jury and Direc-          Rules ofEvid., Rule 107.
ted Verdicts
          272k1705 Premises Liability                       [4] Evidence 157 <£:::::;>155(1)
             272kl708 k. Buildings and other struc-
tures. Most Cited Cases                                     157 Evidence
     Evidence that grocery store knew that mat at              157IV Admissibility in General
entrance had a tendency to buckle and required fre-               157IV(E) Competency
quent straightening raised fact issue of store's negli-              157kl55 Evidence Admissible by Reason
gence for jury, in patron's personal injury action.         of Admission of Similar Evidence of Adverse Party




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                                                                                                         Page 2
122 S.W.3d 899
(Cite as: 122 S.W.3d 899)




               157k155(1) k. In general. Most Cited        171 Appeal and Error 30 €:=>1051(1)
Cases
     There are two threshold requirements for the          30 Appeal and Error
application of the rule of optional completeness,             30XVI Review
under which the whole of an act, declaration, con-               30XVI(J) Harmless Error
versation, writing, or recorded statement may be in-                 30XVI(J) I 0 Admission of Evidence
quired into if the opposite party has introduced a                     30k1051 Facts Otherwise Established
portion of it: (1) some portion of the matter sought                       30k1051(1) k. By other evidence in
to be "completed" must have actually been intro-           general. Most Cited Cases
duced into evidence, and (2) the party seeking to              An error in admitting evidence is harmless if
complete the matter must show that the remainder           other competent evidence of the fact in question ap-
being offered is on the same subject and is neces-         pears elsewhere in the record.
sary to fully understand or explain the matter. Rules
                                                           [81 Appeal and Error 30 €:=>1050.1(12)
ofEvid., Rule 107.
                                                           30 Appeal and Error
151 Evidence 157 €:=>155(1)
                                                              30XVI Review
157 Evidence                                                      30XVI(J) Harmless Error
    1571V Admissibility in General                                   30XVI(J) I 0 Admission of Evidence
       1571V(E) Competency                                              30k1050 Prejudicial Effect in General
          157kl55 Evidence Admissible by Reason                             30kl050.1 Evidence in General
of Admission of Similar Evidence of Adverse Party                                30k1050.1(8) Particular Types
               157kl55(1) k. In general. Most Cited        of Evidence
Cases                                                                               30k1050.1(12) k. Opinions
     Merely referring to a statement does not invoke       and conclusions. Most Cited Cases
the rule of optional completeness, under which the              Even though admission of affidavit from gro-
whole of an act, declaration, conversation, writing,       cery store's expert doctor, in which he disputed the
or recorded statement may be inquired into if the          extent of shopper's injuries, was error, in shopper's
opposite party had introduced a portion. Rules of          slip-and-fall negligence action, there was no harm;
Evid., Rule 107.                                           shopper's chiropractor testified that his treatment of
                                                           patron was appropriate, and that grocery store's ex-
[61 Appeal and Error 30 €:=>1051.1(1)                      pert's diagnosis was not consistent with her injuries.

30 Appeal and Error                                        *900 Anjel Kerrigan Avant, Kondas & Kondas
   30XVI Review                                            Law Office, Richardson, for Appellant.
       30XVI(J) Harmless Error
          30XVI(J)10 Admission of Evidence                 Jerry Fazio, Jason Eric Kipness, Owen & Fazio,
               30k1051.1 Same or Similar Evidence          P.C., Dallas, for Appellee.
Otherwise Admitted
                   30k I 051.1 (1) k. In general. Most      Before Justices MORRIS, O'NEILL, and LANG.
Cited Cases
    Erroneous rulings on the admissibility of evid-
ence are ordinarily not reversible where the evid-                               OPINION
ence is cumulative and not controlling on a material        Opinion by Justice MORRIS.
issue dispositive of the case.                                  In this trip and fall case, Maerene Crosby sued
                                                            Minyard Food Stores, Inc. for injuries she allegedly




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                                                                                                            Page 3
122 S.W.3d 899
(Cite as: 122 S.W.3d 899)




sustained after tripping on a mat at the entrance of a      knew or should have known about the bump in the
grocery store. Although she prevailed at trial,             entry mat that caused Crosby to fall. Minyard's fo-
Crosby appeals the jury's verdict finding her 50%           cus on the bump in the mat as the dangerous condi-
negligent and awarding her $488.75 for past medic-          tion is misplaced, however.
al care. Crosby contends the trial court erred by ad-
mitting into evidence the affidavit of Minyard's ex-             *901 Crosby testified at trial that she fell on
pert doctor because the contents of the affidavit           the mat in the entry of the grocery store. According
were hearsay. Crosby further contends the trial             to Crosby, the mat was buckled causing her to trip.
court's admission of the affidavit probably caused          Crosby presented evidence that the mat frequently
the rendition of an improper judgment.                      became buckled due to heavy foot traffic in and out
                                                            of the store. An employee of the store testified he
     In a single cross issue, Minyard contends the          had to straighten the mat between 48 and 86 times
trial court erred in refusing to grant it a directed        during an eight hour shift. Finally, Crosby submit-
verdict on the ground that Crosby submitted no              ted accident reports signed by the store's managers
evidence that Minyard had actual or constructive            showing that several people had tripped and fallen
knowledge of the allegedly dangerous condition              on the mat within a few weeks before Crosby's ac-
that caused her injuries. After reviewing the evid-         cident.
ence, we conclude the trial court properly refused
to grant Minyard's motion for directed verdict be-               The Texas Supreme Court has held that "even
cause there was some evidence of probative force            in the absence of evidence showing the storeown-
to show that Minyard had knowledge of a condition           er's actual or constructive knowledge of the pres-
on the premises that posed an unreasonable risk of          ence on the floor of the specific object causing the
harm. We also conclude the trial court erred in ad-         fall," the storeowner may be liable if the invitee can
mitting the affidavit of Minyard's expert doctor.           show the storeowner was aware of a high risk that
After reviewing the record, however, we conclude            the dangerous condition would occur. See Corbin v.
the erroneous admission of the affidavit was harm-          Safeway Stores, Inc., 648 S.W.2d 292, 295
less. Accordingly, we affirm the trial court's judg-        (Tex.1983). In Corbin, evidence showed grapes re-
ment.                                                       curringly fell from a grape display and posed a high
                                                            risk of customer falls. The supreme court held the
     [ 1] We first address the issue of the trial court's   store owner's knowledge about the display and the
ruling on Minyard's motion for directed verdict.            risk the fallen grapes posed was sufficient to allow
Minyard claims it was entitled to a directed verdict        the issue of negligence to go to the jury despite the
because the evidence was insufficient to raise a fact       fact there was no evidence to show the storeowner
issue on an essential element of Crosby's claim. See        knew there were grapes on the floor at the time the
Cano v. North Tex. Nephrology Assocs., P.A., 99             plaintiff fell. !d. at 297. Similarly, in National Con-
S.W.3d 330, 338 (Tex.App.-Fort Worth 2003, no               venience Stores, Inc. v. Erevia, the evidence was
pet. h.). To succeed on her claims, Crosby was re-          held sufficient to support the jury's finding of liabil-
quired to show that Minyard had actual or con-              ity where it was shown the storeowner was aware
structive knowledge of a condition on its premises          that ice on the floor was a common problem associ-
that posed an unreasonable risk of harm. See CMH            ated with its drink display even though there was no
Homes, Inc. v. Daenen, 15 S.W.3d 97, 99                     showing the storeowner was aware of the ice on the
(Tex.2000). Crosby claimed in her suit that she             floor at the time of the accident at issue. Nat'I Con-
tripped because a mat at the entrance of the store          venience Stores, Inc. v. Erevia, 73 S.W.3d 5 I 8, 523
was buckled and had a bump in it. According to              (Tex.App.-Houston [1st Dist.] 2002, pet. denied).
Minyard, Crosby presented no evidence the store
                                                                In this case, Crosby presented evidence that




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                                                                                                         Page4
122 S.W.3d 899
(Cite as: 122 S.W.3d 899)




Minyard was aware of the fact that the mat at the          Reece, 81 S.W.3d 812, 813 (Tex.2002). Although
entry to the store was often buckled and caused cus-       the store manager conceded at trial that the self-
tomers to fall. Because Crosby presented evidence          service drink and ice machine generally increased
that the mat itself was a problem creating a frequent      the likelihood of spills in the snack bar area, there
risk of injury, it was not necessary for her to show       was no evidence that the spilled liquid causing the
that Minyard was aware or should have been aware           customer to fall was a drink or ice. Id. at 817. Fur-
of the specific bump in the mat that caused her to         thermore, in contrast to the case before us, there
fall. See Corbin, 648 S.W.2d at 297; Erevia, 73            does not appear to have been any evidence of a his-
S.W.3d at 523.                                             tory of falls in the snack bar caused by spilled
                                                           drinks or ice that would have put the store on notice
     Although Minyard attempts to analogize the            that the self-service machine itself posed an unreas-
facts of this case to cases in which property owners       onable risk of injury.
were found not liable because they were unaware of
the unsafe condition at the time the accident oc-               All the evidence in this case showed that the
curred, the cases cited by Minyard address a               mat at the entrance of the store had a tendency to
storeowner's knowledge of a specific, non-recurring        buckle and required frequent straightening. The
condition rather than claims based on a continuing         evidence also showed that Minyard was aware that
hazard of which the storeowner was aware. See              the recurrent bumps in the mat were causing cus-
Wal-Mart Stores, Inc. v. Gonzalez, 968 S.W.2d 934          tomers to fall. This evidence was sufficient to allow
(Tex.l998); Brookshire Food Stores, L.L. C. v. Al-         the issue of Minyard's negligence to be presented to
len, 93 S.W.3d 897 (Tex.App.-Texarkana 2002, no            the jury. The trial court did not err in denying Min-
pet.); Wal-Mart Stores, Inc. v. Bolado, 54 S.W.3d          yard's motion for directed verdict. We resolve Min-
837 (Tex.App.-Corpus Christi 2001, no pet.). A             yard's cross issue against it.
claim that something used by the storeowner is in-
herently dangerous is fundamentally different than              We turn now to Crosby's issue relating to the
a claim that a dangerous condition arose in the store      trial court's admission of an affidavit created by
and caused injuries.                                       Minyard's expert physician, Dr. Jack Kern. Kern's
                                                           affidavit sets forth his opinions about Crosby's
    In CMH Homes v. Daenen, the Texas Supreme              medical condition and her treatment by Dr. Mark
Court addressed the legal consequences of a                Rayshell, a chiropractor. During Crosby's direct ex-
premises owner's awareness that the premises, al-          amination of Rayshell at trial, Rayshell was asked
though originally safe, would become unsafe over           if he had read Kern's affidavit. Rayshell said he
time. See CMH Homes, 15 S.W.3d at 101. The                 had. Rayshell was then asked to go over the affi-
co~rt specifically distinguished the facts before it       davit.
from those cases such as Corbin in which the in-
jury-causing instrument was unsafe from the mo-                In response to Crosby's direct examination
ment it was used. ld. In the case before us, the mat       about the affidavit, Rayshell testified he did not
did not become unsafe over time but was unsafe             know whether Kern knew anything about chiro-
from the moment it was put on the floor *902 be-           practic care or the orthopedic tests performed on
cause of its tendency to buckle frequently when            Crosby. Rayshell further testified he concluded
subjected to foot traffic.                                 from reading the affidavit that Kern never ex-
                                                           amined Crosby personally and it did not appear that
     In Wal-Mart Stores, Inc. v. Reece, a customer         he had read her medical records closely. In Ray-
slipped in a puddle of clear liquid by the store's         shell's opinion, a doctor could be found to say
snack-bar. The snack-bar contained a self-service          whatever the person hiring him wanted him to say,
drink and ice machine. See Wal-Mart Stores, Inc. v.        including that the treatment the patient received




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                                                                                                         Page 5
122 S.W.3d 899
(Cite as: 122 S.W.3d 899)




was not necessary. Rayshell admitted Kern stated in        Minyard does not dispute that the affidavit contains
his affidavit that he approved of some of the treat-       hearsay but argues the document, though otherwise
ment Crosby had received from Rayshell. Kern's af-         inadmissible, was properly admitted under rule 107
fidavit also stated, however, that Crosby should           of the Texas Rules of Evidence. Rule 107, entitled
have reached maximum medical improvement with-             the "Rule of Optional Completeness," states that
in six to nine months. Rayshell noted that Crosby          "[ w]hen part of an act, declaration, conversation,
released herself from his care less than six months        writing or recorded statement is given in evidence
after he began treating her. According to Rayshell,        by one party, the whole on the same subject may be
Kern's affidavit stated there was no evidence              inquired into by the other, and any other act, declar-
Crosby suffered from anything other than a self-           ation, writing or recorded statement which is neces-
limiting, soft tissue injury. Rayshell disputed this       sary to make it fully understood or to explain the
opinion and referred to tests showing Crosby had           same may also be given in evidence .... " TEX.R.
herniated discs. Rayshell stated that Kern's diagnos-      EVID. 107. Rule 107 is designed to guard against
is of Crosby was an example of how expert doctors          the possibility of confusion, distortion, or false im-
write things with a jury in mind.                          pression that could be created when only a portion
                                                           of evidence is introduced. See Grunsfeld v. State,
     After the close of Crosby's direct examination        813 S.W.2d 158, 163 (Tex.App.-Dallas 1991), aff'd,
of Rayshell, Minyard moved to admit Kern's affi-           843 S.W.2d 521 (Tex.Crim.App.1992). There are
davit into evidence. Crosby objected on the ground         two threshold requirements for the application of
that the affidavit was hearsay. The trial court over-      the rule. First, some portion of the matter sought to
ruled the objection and admitted the affidavit.            be "completed" must have actually been introduced
                                                           into evidence. See Washington v. State, 856 S.W.2d
     During Minyard's cross-examination of Ray-
                                                            184, 186 (Tex.Crim.App.1993); Mendiola v. State,
shell, Minyard asked about Crosby's general medic-
                                                            61 S.W.3d 541, 545 (Tex.App.-San Antonio 2001,
al condition. Rayshell stated Crosby suffered from
                                                            no pet.). Merely referring to a statement does not
degenerative spinal problems such as spondylosis
                                                            invoke the rule. See Goldberg v. State, 95 S.W.3d
and osteoporosis due to advanced age. It was also
                                                            345, 386 (Tex.App.-Houston [1st Dist.] 2002, pet.
noted that Crosby suffered from spinal stenosis and
                                                            refd). Second, the party seeking to complete the
disc desiccation. When asked whether the spinal
                                                            matter must show that the remainder being offered
manipulation treatments Crosby. received from him
                                                            under rule 107 is on the same subject and is neces-
were *903 standard for a seventy-three year old
                                                            sary to fully understand or explain the matter. See
woman, Rayshell responded they were if they were
                                                            Mendiola, 61 S.W.3d at 545.
medically necessary. Although Rayshell did not
specifically refer to Kern's affidavit during cross-            Even assuming Rayshell's testimony about the
examination, the affidavit states that Crosby              contents of Kern's affidavit was sufficient to meet
suffered from "multi-level degenerative changes            the first requirement for the application of rule 107,
and problems throughout the spine of a structural          we conclude Minyard clearly failed to meet the
nature" and, in Kern's opinion, "manipulative care         second requirement. Minyard has not shown why it
is contraindicated" at Crosby's age.                       was necessary to admit the affidavit to explain or
                                                           understand the portions referred to by Rayshell. Al-
     [2][3][4][5] Crosby contends the trial court
                                                           though Rayshell discussed many of the opinions set
erred in admitting Kern's affidavit because the
                                                           forth in the affidavit and his reasons for disagreeing
statements made in the document are hearsay. See
                                                           with them, Minyard has made no attempt to show
Lewallen v. Hardin, 563 S.W.2d 356, 357
                                                           how Rayshell's testimony could have confused or
(Tex.Civ.App.-Dallas 1978, no writ) (affidavits are
                                                           misled the jury regarding the contents of Kern's af-
inadmissible hearsay upon final trial of a case).




                            © 2015 Thomson Reuters. No Claim to Orig. US Gov. Works.
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122 S.W.3d 899
(Cite as: 122 S.W.3d 899)




fidavit or its meaning. Furthermore, Minyard has           merely stated the opinions he was hired to say.
not contended that Rayshell misrepresented the
statements in the affidavit in any way. Because                Before Kern's affidavit was admitted into evid-
Minyard failed to meet the second requirement for          ence, Crosby elicited testimony from her own med-
the application of rule 107, the trial court erred in      ical care provider, Rayshell, about a substantial
admitting the document.                                    amount of the affidavit's content. During Rayshell's
                                                           cross-examination after the trial court erroneously
     [6][7] Having concluded the trial court erred in      admitted the affidavit, Rayshell testified without
admitting the affidavit, we must now determine             objection about the degenerative problems in
whether the error was harmful. In other words, we          Crosby's spine noted by Kern in the affidavit. In ex-
must determine whether the error was reasonably            amining the record as a whole, we conclude the tri-
calculated to cause and probably did cause the             al court's error in admitting Kern's affidavit did not
rendition of an improper judgment. See Gee v.              contribute to or cause the rendition of an improper
Liberzy Mut. Fire Ins. Co., 765 S.W.2d 394, 396            judgment. We resolve Crosby's issue against her.
(Tex.1989). Erroneous rulings on the admissibility
of evidence are ordinarily not reversible where the            We affirm the trial court's judgment.
evidence is cumulative and not controlling on a ma-
                                                           Tex.App.-Dallas,2003.
terial issue dispositive of the case. *904 !d. The er-
                                                           Crosby v. Minyard Food Stores, Inc.
ror is harmless if other competent evidence of the
                                                           122 S.W.3d 899
fact in question appears elsewhere in the record. Id.
at 397; Cash America Intern., Inc. v. Hampton              END OF DOCUMENT
Place, Inc., 955 S.W.2d 459, 463 (Tex.App.-Fort
Worth 1997, pet. denied).

     [8) In her appeal, Crosby contends the affi-
davit's admission was harmful because it was the
only evidence refuting the reasonableness and ne-
cessity of her medical care and it was allowed to go
unchallenged. Kern's opinions were directly chal-
lenged by Rayshell, however, when he stated that
his treatment of Crosby was appropriate and Kern's
diagnosis of Crosby was not consistent with her test
results. Indeed, the jury could not have relied on
Kern's assessment of Crosby's medical condition
when it rendered its verdict because it awarded her
even less money for past medical care than what
Kern stated was reasonable and necessary.

     Crosby also complains she had no opportunity
to cross-examine Kern about his credibility, bias,
motive, education, training, and experience. All of
these topics, however, were discussed by Rayshell
either directly or by implication. Moreover, because
Kern was never called as a witness, he had no op-
portunity to dispute Rayshell's statements that, as
an expert hired for trial, Kern was careless and




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