Entergy Gulf States v. Public Utility Com'n

• Decision Date: 31 August 2005
• Docket Number: No. 03-03-00628-CV.,03-03-00628-CV.
• Citation: 173 S.W.3d 199
• Parties: ENTERGY GULF STATES, INC., Appellant, v. PUBLIC UTILITY COMMISSION OF TEXAS; Office of Public Utility Counsel; Cities of Beaumont, Bridge City, Conroe, Groves, Nederland and Port Neches; and Texas Industrial Energy Consumers, Appellees.
• Court: Texas Supreme Court

Page 199

173 S.W.3d 199

ENTERGY GULF STATES, INC., Appellant, v. PUBLIC UTILITY COMMISSION OF TEXAS; Office of Public Utility Counsel; Cities of Beaumont, Bridge City, Conroe, Groves, Nederland and Port Neches; and Texas Industrial Energy Consumers, Appellees.

No. 03-03-00628-CV.

Court of Appeals of Texas, Austin.

August 31, 2005.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

John F. Williams, Jay Breedveld, Clark, Thomas & Winters, L. Richard Westerburg, Paula Cyr, Entergy Gulf States, Inc., Austin, for Appellant.

Elizabeth R.B. Sterling, Steven Baron, Asst. Attys. Gen., Natural Resources Div., Austin, for Public Utility Commission of Texas.

Eva King Andries, Suzette Ray McClellan, Assistant Public Counsel, Office of Public Utility Counsel, Austin, for Office of Public Utility Counsel.

Daniel J. Lawton, The Lawton Law Firm, Austin, for Cities of Beaumont, et al.

Rex D. VanMiddlesworth, Karen D. Whitt, Andrews Kurth, LLP, Austin, for Texas Industrial Energy Consumers.

Before Chief Justice LAW, Justices B.A. SMITH and PEMBERTON.

ON MOTION FOR REHEARING

OPINION

W. KENNETH LAW, Chief Justice.

To address concerns raised in the motion for rehearing of Appellant Entergy Gulf States, Inc., we withdraw our opinion and judgment issued on May 19, 2005, and substituted the following opinion in its place. We overrule the motion for rehearing.

This appeal originated as a suit for judicial review challenging the Public Utility Commission's (Commission) order from a fuel reconciliation proceeding conducted under the Public Utility Regulatory Act (PURA). See Tex. Util.Code Ann. § 36.203 (West 1998). Appellant Entergy Gulf States, Inc. (Entergy)¹ claims that the Commission erred when it refused to permit Entergy to recover from retail customers approximately $4.2 million in costs Entergy incurred to purchase additional power from its own River Bend Nuclear Generating Station (River Bend) and from purchased power contracts. Entergy argues that the purchase of energy generated by the 30% interest in the River Bend power plant implicates the interstate wholesale energy market and that the Commission's actions are preempted by federal law. Entergy also asserts that the Commission erred when it disallowed purchased power capacity charges. For the reasons stated below, we affirm the judgment of the trial court upholding the Commission's order.

Background

During the summer of 1999, Entergy experienced an unanticipated power shortage that caused it to impose rolling blackouts on its retail customers. In response to regulatory criticism and fines, Entergy arranged to acquire more power from River Bend and from unaffiliated wholesale energy providers (purchased power) to adequately meet the anticipated energy needs of its customers.

Initially, Entergy owned a 70% interest in River Bend (River Bend 70%). The energy generated from the River Bend 70% is earmarked for regulated service. The rates Entergy charges its customers, which includes the costs of providing the River Bend 70% energy, are set by the Commission and are designed to permit Entergy to realize a reasonable profit in excess of the utility's reasonable and necessary operating expenses associated with generating the River Bend 70% energy. See Tex. Util.Code Ann. § 36.051 (West 1998).

Entergy subsequently acquired the remaining 30% of the River Bend power plant (River Bend 30%) as part of a bankruptcy settlement. It set aside the energy generated from the River Bend 30% for sale in the unregulated wholesale energy market.² Thus, Entergy recovers its costs plus a regulated profit from the River Bend 70% energy but obtains wholesale market prices for its unregulated River Bend 30% energy.

During the 1999 blackout, Entergy sold its River Bend 30% energy on the wholesale market instead of making it available to satisfy its native load,³ even though Entergy realized it had made insufficient resources available for its retail customers. Entergy was criticized and fined by the Commission for the blackout and decided to make the River Bend 30% energy available to retail customers for summer 2000 as part of a comprehensive plan to avoid another blackout. To this end, Entergy Services, Inc.⁴ filed a contract for the sale of the River Bend 30% energy with the Federal Energy Regulatory Commission (FERC) on May 8, 2000 (May 2000 Tariff). The filing contemplates the sale of the River Bend 30% energy between two Entergy affiliates, Entergy as the proposed seller and Entergy Services, Inc. as the proposed buyer.⁵ The FERC approved the River Bend 30% transaction and set a rate for the sale of the wholesale energy. The May 2000 Tariff became effective June 1 of that same year.

Entergy used the River Bend 30% energy and purchased power to supplement its native load, ensuring that its customers would not experience another energy shortage. Entergy sought reimbursement for nearly $583 million in additional energy expenses by instituting a fuel reconciliation proceeding. See Tex. Util.Code Ann. § 36.203 (West 1998).

The Commission permitted Entergy to recover its eligible fuel reconciliation costs, including the cost of the nuclear fuel associated with generating the River Bend 30% energy. The Commission disallowed nearly $4.2 million of non-fuel costs associated with the River Bend 30% energy and associated with capacity costs that were embedded in the purchased power contracts. It is these two categories of disallowed costs to which Entergy objects.

Entergy disagreed with the Commission's decision and the Commission referred the matter to the State Office of Administrative Hearings (SOAH) for a hearing. Several parties, including the cities that Entergy serves (Cities) and the Office of Public Utility Counsel (OPC) intervened.

At the SOAH hearing, Entergy discussed the July 1999 blackout and its decision to use the unregulated River Bend 30% energy to prevent future energy shortfalls. Entergy claimed that the Commission erred when it disallowed the recovery of the River Bend 30% energy costs because the River Bend 30% energy transaction was an interstate wholesale energy transaction and subject to the rate set forth in FERC's May 2000 Tariff. Thus, according to Entergy, federal preemption precludes the Commission's discretion in determining the rate Entergy should recover in the fuel reconciliation; the Commission was required to honor the May 2000 Tariff rate and permit Entergy to recover all of its River Bend 30% costs.

The Cities and OPC disagreed with Entergy and claimed that the River Bend 30% energy sale was the product of an affiliate transaction and, thus, the Commission acted properly when it disallowed nonfuel-related costs, including the affiliate profit Entergy realized on the sale of its River Bend 30% energy to itself. The Cities and OPC also offered evidence that suggested Entergy impermissibly included capacity charges in the other purchased power costs for which it sought reimbursement. Based on these two assertions, the Cities and OPC recommended that the ALJ disallow the non-fuel costs associated with the River Bend 30% energy transaction and disallow the capacity charge component embedded in the price of the purchased power contracts.

The ALJ found that the River Bend 30% energy acquisition was an affiliate transaction that violated the Commission's cost-of-service rules, which prohibit recovery of additional profit for an affiliate sale. The ALJ indicated that there might have been some impermissibly embedded capacity costs in the purchased power contracts but declined to calculate and impute the precise amount of ineligible costs.

The Commission rejected the ALJ's recommendations regarding the affiliate sale and embedded capacity cost issues and remanded the case to SOAH to determine the portion of Entergy's claimed reimbursable expenses that was a profit Entergy realized on the sale of Entergy's River Bend 30% energy to itself, and to determine the capacity costs reflected in the claimed eligible fuel costs. On remand, the ALJ determined that the transaction was not an affiliate transaction and that all of the costs should be reimbursed.

The Commission disagreed with the ALJ's subsequent conclusions, stating that the River Bend 30% energy was not part of a purchased power transaction, but, if anything, was an affiliate transaction. Moreover, the Commission found that there was no purchase or sale in connection with the River Bend 30% energy transaction because there was no transfer of title from Entergy to Entergy Services, Inc., and because Entergy did not "buy back" the power from Entergy Services Inc. The Commission's Final Order stated, "An internal corporate transfer between Entergy's unregulated and regulated business activities does not amount to a sale." The Commission explained that it was unreasonable for Entergy to recover a profit and ineligible costs associated with the "purchase" of its own wholesale electricity and to record the transaction as a "sale" in its accounting system, when Entergy merely used its own, albeit unregulated, generation. Pursuant to the administrative code, the Commission reimbursed Entergy for the River Bend 30% energy fuel costs in the fuel reconciliation and disallowed the non-fuel costs and profit Entergy realized on the affiliate sale of the River Bend 30%. See 16 Tex. Admin. Code § 25.236(a)(1) (2004).

The Commission also found that the purchased power included capacity charges embedded in the contract price, even though the contracts did not separately state capacity charges. Because capacity charges are ineligible for reimbursement in a fuel reconciliation proceeding, the Commission disallowed 24% of the contract price, which was the percentage Entergy admitted was a reasonable estimate of the proper capacity charge. See id. § 25.236(a)(4). Accordingly, the Commission allowed Entergy to recover its purchased power costs, less the disallowed capacity charges. The Commission noted that the...