the Railroad Commission of Texas CenterPoint Energy Resources Corp., D/B/A CenterPoint Energy Entex And CenterPoint Energy Texas Gas v. Gulf Coast Coalition of Cities ( 2016 )

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN
NO. 03-14-00302-CV
The Railroad Commission of Texas; CenterPoint Energy Resources Corp., d/b/a
CenterPoint Energy Entex; and CenterPoint Energy Texas Gas, Appellants
v.
Gulf Coast Coalition of Cities, Appellee
FROM THE DISTRICT COURT OF TRAVIS COUNTY, 345TH JUDICIAL DISTRICT
NO. D-1-GN-12-001695, HONORABLE GISELA D. TRIANA, JUDGE PRESIDING
MEMORANDUM OPINION
Appellee Gulf Coast Coalition of Cities sued for judicial review of the final order
issued by appellant Railroad Commission of Texas in a cost-of-service-adjustment proceeding
related to rates charged by appellants CenterPoint Energy Resources Corp., d/b/a CenterPoint Energy
Entex, and CenterPoint Energy Texas Gas (collectively, “CenterPoint”). See Tex. Util. Code
§§ 103.024, 105.001; Tex. Gov’t Code §§ 2001.171, .176. The district court concluded that the
Commission was within its authority to disallow the Coalition’s rate-case expenses,1 but the court
reversed and remanded the issue of the amount of the disallowance to the Commission for further
proceedings, and it affirmed the Commission’s order in all other respects. On appeal to this Court,
1
“Rate-case expenses” are the reasonable and necessary costs incurred in litigation before
the Commission that the parties may recover from ratepayers. See City of El Paso v. Public Util.
Comm’n of Tex., 916 S.W.2d 515, 518-19 (Tex. App.—Austin 1995, writ dism’d by agr.).
the Commission and CenterPoint contend that the Commission acted within its discretion to disallow
expenses for duplicative issues that were irrelevant and unnecessary and that substantial evidence
supports the Commission’s decision to disallow the Coalition’s rate-case expenses in the amount of
$40,772.03. We will reverse the district court’s judgment on the rate-case-expense issue and render
judgment reinstating the Commission’s full final order.2
BACKGROUND
The cities that are part of the Coalition are municipalities that exercise original
jurisdiction over the rates and charges of retail gas utilities, including CenterPoint. Tex. Util. Code
§ 103.001. The Coalition and CenterPoint agreed in 2008 to the Cost of Service Adjustment tariff
(“COSA-2”) that requires CenterPoint to annually propose adjustments to its Texas Coast Division
customer charges for natural-gas distribution service, calculated according to the COSA-2 tariff.
CenterPoint proposes those adjustments by making a filing with each regulatory authority having
original jurisdiction, which includes both the Coalition cities and the Commission, which exercises
exclusive original jurisdiction over gas-utility rates and services for areas outside a municipality
and for areas inside a municipality that surrenders its jurisdiction to the Commission, see
id. § 102.001(a).
This case arises out of CenterPoint’s 2011 COSA-2 filings. The Coalition cities and
the Commission independently reviewed the same COSA-2 filing package submitted by CenterPoint
2
No party has challenged the district court’s order affirming the remainder of the
Commission’s order, and therefore, we express no opinion on the remainder of the final order, as it
is not before this Court.
2
at the end of April 2011. The Commission docketed CenterPoint’s COSA-2 filing for the
municipalities that had ceded jurisdiction to the Commission as Gas Utilities Docket No. 10075.
After the Commission completed its regulatory review, it and CenterPoint reached an agreement on
certain adjustments to the rates requested by CenterPoint in its filing. CenterPoint had originally
proposed a system-wide increase in revenue of $914,910; after the agreed adjustments, the
system-wide increase in revenue was $853,506. The new COSA-2 rate became effective on
August 1, 2011 for the areas under the Commission’s original jurisdiction.
After the Coalition cities each reviewed CenterPoint’s filing, they denied
CenterPoint’s requested COSA-2 adjustment. On August 10, 2011, CenterPoint filed a petition for
review with the Commission, which has appellate jurisdiction over the orders and ordinances of
municipalities exercising original jurisdiction. See id. § 101.001(b). The Commission docketed the
appeal as Gas Utilities Docket No. 10106. Docket No. 10106 is the docket from which this
appeal originated.
CenterPoint included a revised COSA-2 adjustment request with its petition for
review in Docket No. 10106, following discussions with the Commission’s staff. The revised
request incorporated the changes already approved by the Commission in Docket No. 10075. See
id. § 103.005 (allowing utility to adjust its request on appeal to reflect known changes and conditions
that are measurable with reasonable accuracy). The parties agreed to a procedural schedule that was
approved by the hearing examiners and that included the opportunity to conduct discovery. A
hearing on the merits was held for the purpose of submitting stipulated evidence. The Commission
issued its final order in Docket No. 10106 in March 2012. The Commission approved CenterPoint’s
3
requested COSA-2 adjustments, which it found were consistent with the adjustments approved in
Docket No. 10075.
In its final order, the Commission also awarded rate-case expenses to both
CenterPoint and the Coalition. Among other findings, the Commission reduced the Coalition’s
requested rate-case expenses based on its determination that 40% of the adjustments to CenterPoint’s
request proposed by the Coalition were “irrelevant” and “unnecessary.” See 16 Tex. Admin. Code
§ 7.5530(a), (b) (2015) (R.R. Comm’n of Tex., Allowable Rate Case Expenses) (requiring
Commission to consider factors relevant to reasonableness of rate-case expenses, including “whether
the work was relevant and reasonably necessary to the proceeding”).3 The Commission found that
the Coalition had presented ten issues that it contended required an adjustment to CenterPoint’s rate
request and that four of those issues were unnecessary because CenterPoint’s cost-of-service
calculation no longer included costs associated with those issues. When determining how to
calculate the unnecessary expenses, the Commission used three different methodologies, all of which
indicated that approximately 40% of the time spent by the Coalition’s attorneys and consultants was
dedicated to issues that were no longer relevant to the proceeding. The Coalition’s actual expenses
for the appeal to the Commission were $60,476.18, and 40% of that expense is $24,190.47. In
addition, CenterPoint estimated that the amount of legal services it incurred in litigating the four
irrelevant issues was approximately 20%. CenterPoint’s actual expenses for the appeal to the
Commission were $82,907.80, and 20% of that expense is $16,581.56. Accordingly, the
3
Although Rule 7.5530 was amended in 2015, the portions of the Rule relevant to this
appeal, subsections (a) and (b), did not change. Accordingly, we cite to the current version of the
Rule for convenience.
4
Commission reduced the Coalition’s rate-case expenses by $40,772.03, the total of $24,190.47
plus $16,581.56.
The Coalition appealed the Commission’s final order to the district court, challenging
the Commission’s disallowance of rate-case expenses in the amount of $40,772.03, among
other issues. The district court affirmed the Commission’s final order on all issues, except the
rate-case-expense issue. The district court reversed the order in part because it found that the
Commission was within its authority to disallow the Coalition’s rate-case expenses, but that the issue
of the amount of the disallowance, if any, should be remanded to the Commission for further
proceedings. This appeal by the Commission and CenterPoint followed.
ANALYSIS
The Commission and CenterPoint both challenge the district court’s judgment
reversing and remanding the Commission’s order on the rate-case-expense issue. They assert that
(1) the Commission acted within its discretion when it reduced the Coalition’s rate-case expenses
based on the Commission’s determination that the expenses were related to irrelevant and
unnecessary issues and (2) substantial evidence supports the Commission’s decision to reduce the
Coalition’s rate-case expenses and the amount by which it reduced those expenses. In response, the
Coalition contends that the Commission’s reduction of its rate-case expenses was arbitrary and
capricious because it was based on Docket No. 10075, a proceeding that the Coalition was not
permitted to participate in, and from which the Coalition was unable to ascertain the necessary facts
to avoid the reduction in expenses. The Coalition does not assert that the Commission’s order is not
supported by substantial evidence; instead, it contends that even if an agency’s order is supported
5
by substantial evidence, if the agency acts completely unreasonably, its decision is arbitrary and
capricious. In addition, the Coalition contends that the Commission also acted arbitrarily and
capriciously by applying a new standard for calculating the reduction of rate-case expenses without
prior notice to the parties or any explanation of its departure from past practices.
Standard of review
In an administrative appeal governed by the substantial-evidence rule, like this one,
a court shall reverse the state agency’s decision if substantial rights of the appellant at the
agency level have been prejudiced because the agency has committed one of the errors listed in
Section 2001.174(2)(A)-(F).4 See Tex. Gov’t Code § 2001.174 (establishing standard for review
under substantial-evidence rule); Tex. Util. Code § 105.001 (providing that any party to proceeding
before Commission is entitled to judicial review under substantial-evidence rule). The list of
potential reversible errors includes administrative decisions that are not reasonably supported by
substantial evidence or that are arbitrary and capricious or characterized by an abuse of discretion.
Tex. Gov’t Code § 2001.174(2)(E), (F).
An agency acts arbitrarily and capriciously when it: (1) denies a litigant due process
and prejudices its substantial rights; (2) wholly adopts the record from another case involving
4
Whether the agency’s order satisfies the substantial-evidence standard is a question of law.
Firemen’s & Policemen’s Civil Serv. Comm’n v. Brinkmeyer, 662 S.W.2d 953, 956 (Tex. 1984).
Consequently, the district court’s judgment is not entitled to deference on appeal, see Texas Dep’t
of Pub. Safety v. Alford, 209 S.W.3d 101, 103 (Tex. 2006) (per curiam), and the focus of this Court’s
review on appeal from the district court’s judgment is on the agency decision, not the district court’s
judgment, see Heritage on the San Gabriel Homeowners Ass’n v. Texas Comm’n on Envtl. Quality,
393 S.W.3d 417, 424 (Tex. App.—Austin 2012, pet. denied).
6
different parties, fails to make findings of fact, and bases its decision on its findings made in the
other case; or (3) improperly bases its decision on non-statutory criteria. Texas Health Facilities
Comm’n v. Charter Med.-Dallas, Inc., 665 S.W.2d 446, 454 (Tex. 1984) (analyzing cases). In
addition, an agency abuses its discretion or its decision is arbitrary “if the agency: (1) failed to
consider a factor that 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 of Tex., 883 S.W.2d 179, 184 (Tex.
1994) (citing Gerst v. Nixon, 411 S.W.2d 350, 360 n.8 (Tex. 1966)). An agency’s decision is also
arbitrary if it is made without regard for the facts, relies on fact findings that are not supported by
any evidence, or lacks a rational connection between the facts and the decision. See City of Waco
v. Texas Comm’n on Envtl. Quality, 346 S.W.3d 781, 819-20 (Tex. App.—Austin 2011) (analyzing
cases), rev’d on other grounds, 413 S.W.3d 409 (Tex. 2013). In other words, we must remand for
arbitrariness if we conclude that the agency has not “‘genuinely engaged in reasoned
decision-making.’” Id. (quoting Starr Cty. v. Starr Indus. Servs., Inc., 584 S.W.2d 352, 356 (Tex.
Civ. App.—Austin 1979, writ ref’d n.r.e.)).
We review the agency’s legal conclusions for errors of law and its factual findings
for support by substantial evidence. Heat Energy Advanced Tech., Inc. v. West Dallas Coal. for
Envtl. Justice, 962 S.W.2d 288, 294-95 (Tex. App.—Austin 1998, pet. denied). Substantial evidence
“does not mean a large or considerable amount of evidence, but rather such relevant evidence as a
reasonable mind might accept as adequate to support a conclusion of fact.” Lauderdale v. Texas
Dep’t of Agric., 923 S.W.2d 834, 836 (Tex. App.—Austin 1996, no writ) (quoting Pierce
7
v. Underwood, 487 U.S. 552, 564-65 (1988)) (internal quotation marks omitted). We consider the
reliable and probative evidence in the record as a whole when testing an agency’s findings,
inferences, conclusions, and decisions to determine whether they are reasonably supported by
substantial evidence. See Charter Med., 665 S.W.2d at 452. We presume that the Commission’s
order is supported by substantial evidence, and the Coalition bears the burden of proving otherwise.
See id. at 453. The burden is a heavy one—even a showing that the evidence preponderates against
the agency’s decision will not be enough to overcome it, if there is some reasonable basis in the
record for the action taken by the agency. See id. at 452. We may not substitute our judgment for
the agency’s judgment “on the weight of the evidence on questions committed to agency discretion.”
Tex. Gov’t Code § 2001.174. Resolving factual conflicts and ambiguities is the agency’s function,
and the substantial-evidence rule protects that function. Firemen’s & Policemen’s Civil Serv.
Comm’n v. Brinkmeyer, 662 S.W.2d 953, 956 (Tex. 1984). Our ultimate concern is the
reasonableness of the agency’s order, not its correctness. Id.
The Commission’s discretion to determine reasonableness of rate-case expenses
We first consider the scope of the Commission’s discretion to determine the
reasonableness of litigants’ rate-case expenses. “The Commission has broad discretion to determine
recovery of expenses in a ratemaking proceeding.” City of Port Neches v. Railroad Comm’n of Tex.,
212 S.W.3d 565, 579 (Tex. App.—Austin 2006, no pet.). The Texas Utilities Code provides that
the gas utility “shall reimburse the governing body of the municipality for the reasonable cost of the
services of a person engaged [to provide services related to a ratemaking proceeding, including
attorneys] to the extent the applicable regulatory authority determines reasonable.” Tex. Util. Code
8
§ 103.022(b) (emphasis added). In addition, the Commission has the authority to adopt reasonable
rules “for including and excluding certain expenses in computing the rates to be established.”
Id. § 104.055(d).
The Commission has promulgated a rule that addresses its evaluation of rate-case
expenses. Section 7.5530 provides:
(a) In any rate proceeding, any utility and/or municipality claiming
reimbursement for its rate case expenses pursuant to Texas Utilities Code,
§103.022(b), shall have the burden to prove the reasonableness of such rate
case expenses by a preponderance of the evidence. Each gas utility and/or
municipality shall detail and itemize all rate case expenses and allocations
and shall provide evidence showing the reasonableness of the cost of all
professional services, including but not limited to:
(1) the amount of work done;
(2) the time and labor required to accomplish the work;
(3) the nature, extent, and difficulty of the work done;
(4) the originality of the work;
(5) the charges by others for work of the same or similar nature; and
(6) any other factors taken into account in setting the amount of the
compensation.
(b) In determining the reasonableness of the rate case expenses, the Commission
shall consider all relevant factors including but not limited to those set out
previously, and shall also consider whether the request for a rate change was
warranted, whether there was duplication of services or testimony, whether
the work was relevant and reasonably necessary to the proceeding, and
whether the complexity and expense of the work was commensurate with
both the complexity of the issues in the proceeding and the amount of the
increase sought as well as the amount of any increase granted.
16 Tex. Admin. Code § 7.5530(a), (b) (2015) (R.R. Comm’n of Tex., Allowable Rate Case
Expenses) (emphases added). The Commission is “the sole judge of the weight of the evidence and
the credibility of the witnesses” presented to show the reasonableness and necessity of rate-case
9
expenses, but it “may not disregard undisputed facts or testimony unless the record contains ‘some
explanation or reason upon which the reasonableness of [its] action might be judged.’” City of Port
Neches, 212 S.W.3d at 579-80 (quoting Cities of Port Arthur, Port Neches, Nederland, & Groves
v. Railroad Comm’n of Tex., 886 S.W.2d 266, 271 (Tex. App.—Austin 1994, no writ)). The
Commission’s explanation need not necessarily appear in the final order, as long as it is contained
somewhere in the record. See id. at 580 (holding action ultimately taken by Commission was
supported by thorough and accurate explanation in proposal for decision, which was supported by
testimony in record).
In this case, the Commission disallowed recovery of rate-case expenses based on its
determination that the Coalition had litigated irrelevant and unnecessary issues. The Coalition
argues that the disallowance was arbitrary and capricious and an abuse of the Commission’s
discretion because it was based on the outcome of Docket No. 10075, a proceeding that the Coalition
was not permitted to participate in, and from which the Coalition was unable to ascertain the
necessary facts to avoid the reduction in expenses. Consequently, the Coalition contends, the facts
in the record do not support the disallowance of expenses, which it asserts makes the result
unreasonable on its face. Our examination of the record demonstrates that CenterPoint informed the
Coalition from the beginning of the appeal to the Commission that CenterPoint was amending its
original request to the Coalition to seek approval of the COSA-2 adjustment approved in Docket
No. 10075, and it provided the Coalition with the particulars of the adjustment that the Commission
had approved in Docket No. 10075.
10
The Coalition asserts that it “had no way of knowing precisely what issues had been
addressed in [Docket] No. 10075 because the Commission prevented the Coalition from
participating in [Docket] No. 10075” and because no publicly available document set forth the terms
of CenterPoint’s settlement with the Commission. As an initial matter, we note that the Coalition
is not appealing the hearing examiners’ and the Commission’s denial of its motion to intervene in
Docket No. 10075, so the issue of whether that denial was appropriate is not before this Court. More
importantly, CenterPoint’s initial petition for review in Docket No. 10106 notified the Coalition that
CenterPoint “by this appeal seeks approval of the same COSA-2 adjustment for the [Coaltion] Cities
as the Commission has already approved for the cities under the original jurisdiction of the
Commission in [Docket] No. 10075.” CenterPoint also included the Commission’s final order from
Docket No. 10075 (“10075 Final Order”) as an exhibit to its petition for review in Docket
No. 10106. The Coalition suggests that the 10075 Final Order does not detail the adjustments made
by the Commission and that two findings of fact (Nos. 36 and 37) in the 10075 Final Order provide
the only information about the issues upon which the Commission and CenterPoint reached a
compromise. However, Exhibit A to the 10075 Final Order, entitled “Prior Commission Decisions
Applicable to CenterPoint’s COSA Applications,” includes prior docket citations and explanations
of the Commission’s requirements of CenterPoint related to the issues that the Commission later
determined that the Coalition unnecessarily litigated. Exhibit B to the 10075 Final Order sets forth
the adjusted COSA-2 Cost of Service, showing the calculations after the agreed adjustments.
In addition, the prefiled direct testimony of one of CenterPoint’s witnesses,
Scott Doyle, which was included with CenterPoint’s petition for review, reinforces CenterPoint’s
11
petition. Doyle stated that CenterPoint sought approval in Docket No. 10106 from the Commission
for “the same COSA-2 adjustment for the [Coalition] Cities as the Commission approved and found
reasonable in [Docket] No. 10075” for the customers under the Commission’s original jurisdiction.
After CenterPoint filed its initial petition for review, the parties had the opportunity
to conduct discovery before the Commission staff and the Coalition were due to submit their
witnesses’ direct testimony. One of the Coalition’s witnesses, Karl Nalepa, in his direct testimony
recommended ten adjustments to CenterPoint’s request, including adjustments to conform cash
working capital to the Commission’s prior order in Docket No. 9902 and adjustments to conform
incentive compensation to the Commission’s prior order in Docket No. 9902 and to reduce other
employee expenses. The Commission and CenterPoint assert that the Commission had already made
the adjustments to cash working capital, incentive-compensation expense, and other employee
expenses in Docket No. 10075, and CenterPoint had therefore already incorporated them into its
request on appeal in Docket No. 10106. Nalepa had recommended these same adjustments before
CenterPoint’s appeal to the Commission in an earlier consultant’s report dated June 15, 2011. In
Doyle’s testimony filed with CenterPoint’s petition for review, he addressed Nalepa’s June report,
stating that the hearing examiners in Docket No. 10075 analyzed each issue and evaluated “the
Company’s cash working capital, incentive compensation, and other [operations and maintenance]
expenses” raised in the report. Doyle further stated that “[a]ccordingly, the rates approved by the
Commission in [Docket] No. 10075 already include any adjustments necessary to assure that the
COSA-2 adjustment complies with the terms of the COSA-2 tariff and prior Commission orders
applicable to this case.”
12
Furthermore, the Coalition was notified on the face of the 10075 Final Order that
CenterPoint had already agreed to its adjustments regarding incentive-compensation expense and
other employee expenses. Finding of fact number 36 in the 10075 Final Order states:
Following discussions between the Commission’s Gas Services Division and
CenterPoint, CenterPoint agreed to modify and re-file its requested COSA-2
adjustments to reflect ($148,156) of reductions to the cost of service, as shown on
Exhibit B, Line No. 6, related to the decrease or removal of expenses for:
• Incentive compensation expense for employees that are neither direct
employees of the Texas Coast Division nor Houston support employees
• Alcoholic beverage expense
• Entertainment expense
• Meal expenses without documentation
• Meal expenses in excess of $25 per person
• Meal expenses for charitable functions
• Meal expenses that are corporate allocations to the Texas Coast Division
• Lodging expense exceeding $150 per night
• Advertising, memberships, contributions, and donation expenses prohibited
by Rule 7.5414
On appeal to this Court, the Coalition addresses only the two issues related to cash working capital.
Regarding cash working capital, finding of fact number 37 in the 10075 Final Order states:
Following discussions between the Commission’s Staff and CenterPoint, CenterPoint
reduced the amount of cash working capital included in the COSA formula by
($1,552,935), from ($590,077) to ($2,143,012), as shown on Exhibit B, Line No. 14.
Consistent with the Commission’s practice, an offsetting expense for factoring, in the
13
amount of $194,632, was included in the COSA formula, as shown on Exhibit B,
Line No. 7.
The Coalition asserts that “cash working capital is a highly contested issue at the Commission,
containing numerous sub-issues,” but that the only information provided about the issue is found in
finding of fact number 37 of the 10075 Final Order, and further, that Exhibit B does not explain the
basis for the reduction in cash working capital. The Coalition contends that even if the discussions
that took place between Commission staff and CenterPoint were “based on particular adjustments
for lead or lag periods for particular expenses or payments[,] . . . no document provides this detail.”
However, the information provided in the 10075 Final Order and its Exhibit A reflects
that CenterPoint had already resolved the two issues related to cash working capital—bill processing
lags and expense leads—more favorably than the Coalition requested. To calculate cash working
capital, regulators must net revenue lags, which are the number of days between when the utility
offers a service and when it receives payment, against expense leads, which are the number of days
between when a utility purchases an item and when it tenders payment for that item. The net result
of these two figures is used to calculate cash working capital. If the result is positive, then it is
provided by investors and is an addition to rate base; if negative, it is provided by customers and thus
a deduction to rate base. In his testimony, Nalepa recommended a cash-working-capital negative
adjustment of $2,114,574 in favor of the Coalition, based on what he identified as CenterPoint’s
request for a cash-working-capital negative adjustment of $590,077. Nalepa asserted that the
Commission’s findings in Docket No. 9902 required a reduction in the bill-processing lag time and
increase in the number of expense lead days. But CenterPoint had already agreed to a $2,143,012
14
negative adjustment in favor of the Coalition, based on the Commission’s findings in Docket
No. 9902. Later in his testimony, Nalepa acknowledged that “[t]he Commission Staff’s analysis
was consistent with my recommendation that the Company’s working capital calculation in the
COSA application should be consistent with the Commission’s findings in [Docket] No. 9902.”
(Emphasis added.)
We conclude that the 10075 Final Order and its exhibits provided the Coalition with
the necessary information for it to avoid unnecessarily litigating issues that had already been resolved
in the manner it requested. But to the extent that the Coalition argues the information provided was
not specific enough to prevent it from unnecessarily litigating the issues, it had another avenue
available to it to “know[] precisely what issues had been addressed in [Docket] No. 10075.” The
parties had agreed to conduct discovery before the deadline for the Coalition to submit its witness
testimony. The discovery process provided a way that the Coalition could have sought clarification
regarding the underlying reasoning for the Commission’s decision about specific adjustments before
filing Nalepa’s testimony. Knowing that it would bear the burden of proving the reasonableness of
its rate-case expenses by a preponderance of the evidence, it was incumbent on the Coalition to
ensure that it fully understood the basis for CenterPoint’s revised COSA-2 adjustment request before
responding to it.
In essence, the Coalition contends that the Commission’s disallowance of its rate-case
expenses for litigating these issues is arbitrary because a rational connection between the facts and
15
the decision is lacking.5 See City of Waco, 346 S.W.3d at 819. Based on the record before us, we
disagree. The Commission’s conclusion that the Coalition unnecessarily litigated these issues is not
“a completely unreasonable result,” as the Coalition alleges. There is a rational basis in the record
for the Commission’s decision that the Coalition did not need to litigate these issues that the
Commission had already resolved as it requested.6 Consequently, the Commission acted within its
discretion when it determined that some of the Coalition’s rate-case expenses were related to
irrelevant and unnecessary issues, and its decision was not arbitrary and capricious.
Substantial evidence supporting the Commission’s decision to reduce rate-case-expenses
by 40%
Having concluded that the Commission’s decision to disallow some of the Coalition’s
rate-case expenses was within its discretion, we now turn to the issue of whether the amount of the
reduction in expenses was supported by substantial evidence and not arbitrary or capricious. In the
proposal for decision, the hearing examiners proposed reducing the rate-case expenses requested by
5
The Coalition contends that the Commission essentially improperly applied the principles
of res judicata and collateral estoppel in Docket No. 10106 by applying rates based on the settlement
agreement in Docket No. 10075. We disagree. The Commission did not wholesale apply its
decision in Docket No. 10075 and preclude the Coalition from litigating any issues. The
Commission allowed the Coalition to litigate issues other than the ones it determined were irrelevant,
and it did not reduce the Coalition’s rate-case expenses for those issues. Not awarding expenses for
the litigation of issues that were irrelevant because they were not related to CenterPoint’s rate request
in Docket No. 10106 did not prevent the Coalition from presenting its case concerning relevant
issues related to CenterPoint’s rate request.
6
Even if the adjustment amounts related to these issues are not precisely what the Coalition
was seeking, the issues were resolved by the Commission in accord with the precedential basis that
the Coalition suggested. Thus, “the record contains ‘some explanation or reason upon which the
reasonableness of [the Commission’s] action might be judged.’” City of Port Neches v. Railroad
Comm’n of Tex., 212 S.W.3d 565, 580 (Tex. App.—Austin 2006, no pet.).
16
the Coalition based on their concern that there was “certain duplication of effort or that certain issues
raised were simply not relevant to this proceeding.” The examiners proposed that a reasonable
adjustment would be based on the percentage of issues that were not relevant to the proceeding.
After considering the examiners’ proposed rate-case-expense reduction, the Commission requested
that the parties provide supplemental billing information to identify the amounts spent developing
or responding to the evidence related to the four issues it identified as not relevant to this proceeding.
In response, the Coalition explained that its review of its bills was “inconclusive in precisely
determining the amount of time that was dedicated to a particular issue in this case based on billing
information” because each time entry was not broken down by issue. Instead, the Coalition reviewed
the testimony filed and briefs submitted as guidance for the amount of time allocated to the four
issues by both the Coalition and CenterPoint. Based on its calculations, the Coalition proposed that
if lines of testimony or pages of briefing are assumed to correlate with the amount of time dedicated
to an issue, the parties spent approximately 9.9% to 16% of their time on these issues.
The Commission ultimately used three different methodologies to arrive at the
40% reduction. First, it found that four of the ten issues that the Coalition contended required an
adjustment to CenterPoint’s rate request were unnecessary because the cost-of-service calculation
no longer included costs associated with those issues, meaning that the total percentage of irrelevant
adjustments proposed by the Coalition was 40%. Second, it analyzed the proportion of Nalepa’s
testimony related to substantive issues as “a reasonable allocation of the amount of time dedicated
by the consultants and attorneys of [the Coalition] to issues in this docket.” The Commission
calculated the number of lines dedicated to issues that were removed by CenterPoint from its rate
17
request and found that approximately 40.25% of Nalepa’s substantive testimony was dedicated to
issues no longer relevant to the proceeding. Third, the Commission also analyzed the proportion of
the Coalition’s briefing on substantive issues as “a reasonable allocation of the amount of time
dedicated by the consultants and attorneys of [the Coalition] to issues in this docket.” It calculated
the number of pages dedicated to litigating issues that were removed by CenterPoint from its rate
request and found that 39.2% of the briefing filed by the Coalition was related to issues no longer
relevant to the proceeding.7
Both the Commission and CenterPoint urge that the Commission’s decision to
disallow 40% of the Coalition’s expenses is fully supported by the facts in the record. CenterPoint
also urges that the district court was not free to remand the case based on its disagreement with the
amount of the disallowance, insisting that the substantial-evidence standard requires the court to
affirm the Commission’s order so long as some evidence supports the order and that the Commission
is the sole judge of the weight to be given the evidence presented about the reasonableness and
necessity of a rate-case expense. Moreover, as the Commission points out, the burden to prove its
rate-case expenses is on the Coalition, and it was the Coalition that suggested a consideration of its
testimony or briefing when it was unable to provide billing information to identify how much time
was spent on the issues that the Commission determined were relevant to this proceeding versus
issues that the Commission determined were not relevant.
7
CenterPoint also provided an estimate of the time it spent on the four identified issues and
estimated, based to some extent on its discovery, testimony, and briefing, that the amount of legal
services incurred litigating those issues was approximately 20%. The Commission used this amount
as part of the basis for the total amount by which the Coalition’s expenses were reduced.
18
The Coalition, on the other hand, argues that the Commission acted arbitrarily and
capriciously by applying a new standard with regard to rate-case expenses without prior notice to the
parties or any explanation of its departure from past practices, relying on this Court’s opinion in
Oncor Electric Delivery Co. v. Public Utility Commission of Texas, 406 S.W.3d 253 (Tex.
App.—Austin 2013, no pet.). In Oncor, the Court held that the Public Utility Commission acted
arbitrarily and capriciously when it instituted a new policy requiring prior authorization before a
utility could recover rate-case expenses incurred in an earlier rate case without notice to Oncor or
an explanation for the Public Utility Commission’s change from its past practice. Id. at 264-69, 272.
The Coalition contends that because the hearing examiners’ application of the methodology of
expense allocation suggested by the Coalition differs from the Coalition’s application of the same
methodology, it was “atypical of Commission precedent relating to rate case expenses.” The
Coalition suggests that “[t]ypically litigants are not penalized for raising issues that were ultimately
unsuccessful,” citing to another docket in which the municipal intervenors were not successful on
all issues raised, but in which the Commission did not reduce the requested rate-case expenses.
In this case, however, the Commission is not penalizing the Coalition for raising
issues that were ultimately unsuccessful—instead, it determined that the Coalition litigated issues
that were irrelevant and unnecessary because they related to adjustments that CenterPoint was no
longer requesting in its revised cost-of-service calculation on appeal. The Coalition has not
identified any cases in which parties recovered their expenses for litigating irrelevant and
unnecessary issues that establishes the kind of agency prior practice that existed in Oncor. In fact,
this Court has previously upheld the Commission’s reduction of rate-case expenses on a percentage
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basis based on a lack of adequate explanation or support for the expenses. See City of Amarillo
v. Railroad Comm’n of Tex., 894 S.W.2d 491, 496 (Tex. App.—Austin 1995, writ denied).
Furthermore, the Coalition itself suggested the use of this methodology when it could not itemize
its expenses by issue as requested, so its complaint that it lacked notice of the standard that the
Commission would apply is unavailing. Likewise, to the extent that the Coalition complains that
the issue of rate-case expenses was raised in the proposal for decision for the first time and that no
party challenged its rate-case-expense request, we note that CenterPoint began explicitly pointing
out that these issues were no longer part of its rate request with its rebuttal testimony and continued
pointing it out throughout the briefing stage of the case. Furthermore, it is ultimately the Coalition
alone that bears the burden of proving the reasonableness of its expense request. The standard at
issue here is whether the expenses were reasonable and the work was “relevant and reasonably
necessary.” See 16 Tex. Admin. Code § 7.5530(a), (b) (2015) (R.R. Comm’n of Tex., Allowable
Rate Case Expenses).
The Coalition also complains about how the hearing examiners applied the
line-by-line analysis of Nalepa’s testimony and discounted some lines of testimony when computing
the allocation of testimony to the issues. The examiners recommended (and the Commission
adopted their recommendation) that any allocation of lines of testimony be based upon an analysis
of the substantive portions of the testimony, so they excluded the lines related to Nalepa’s
background, the procedural history of the case, the introduction to the rate-case-expense section, and
a quotation of the rule related to rate-case expenses when computing the total substantive testimony
related to proposed adjustments to CenterPoint’s rate request and to the Coalition’s rate-case
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expenses. While yielding a different result from the calculation proposed by the Coalition, there is
a rational connection between the facts and the Commission’s decision to only count the lines of
testimony related to substantive issues when calculating the proportion of testimony dedicated to
unnecessary issues, and therefore, the Commission’s decision is not arbitrary and capricious.
Even if we were to disagree with the Commission’s exact calculation under any of
the three methods, our ultimate concern is the reasonableness of the agency’s order, not its
correctness. Brinkmeyer, 662 S.W.2d at 956. The Commission is the sole judge of the weight of
the evidence presented to show the reasonableness of an expense request, and we may not substitute
our judgment for the Commission’s on the weight of the evidence. See City of Port Neches,
212 S.W.3d at 579-80. The administrative record before this Court, including the examiners’ and
parties’ correspondence, the proposal for decision, and the final order, provides substantial evidence
supporting the Commission’s decision to disallow 40% of the Coalition’s rate-case expenses. We
sustain the Commission’s and CenterPoint’s issue on appeal.
CONCLUSION
Having concluded that the Commission acted within its discretion by disallowing
40% of the Coalition’s rate-case expenses, we reverse the portion of the district court’s order
reversing and remanding the Commission’s final order on the issue of the amount of the Coalition’s
rate-case expenses, and we render judgment affirming the Commission’s decision to reduce the
Coalition’s rate-case expenses in the amount of $40,772.03.
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__________________________________________
Cindy Olson Bourland, Justice
Before Justices Puryear, Pemberton, and Bourland
Reversed and Rendered
Filed: May 31, 2016
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