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08-0634 - Supreme Court of Texas

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									            FILED
     IN SUPREME COURT
          OF TEXAS                                                               ,MEL AM
            Nov 10 2008
     B LAKE HAWTHORNE
     BY                      Npo
                                          .      08~063 4
                                  In The Supreme Court of Texas


          THE STATE OF TEXAS ; CITIES OF CORPUS CHRISTI, ET AL .,
                  ALLIANCE FOR VALLEY HEALTHCAR E
                   AND TEXAS INDUSTRIAL ENERGY CONSUMERS,
                                              Joint Petitioners

                                                      V.

                          PUBLIC UTILITY COMMISSION OF TEXAS

                                                 Respondent


                               On Petition For Review From the
                            Third Court of Appeals at Austin, Texas
                                          No. 03-07-00196-CV


                    CUSTOMERS.' JOINT RESPONSE TO
          AEP TEXAS CENTRAL COMPANY'S PETITION FOR REVIE W

Bryan Baker                 Thomas Brocato             Kenneth L. Wiseman      Rex D . VanMiddlesworth
State Bar No . 00790256     State Bar No . 03039030    admitted pro hac vice   State Bar No . 20449400
OFFICE OF THE               LLOYD GOSSELINK            ANDREWS KURTH LLP       Lino Mendiola III
ATTORNEY GENERAL            ROCHELLE                   1350 I Street, NW       Caren Pinzur
P .O . BOX 12548            TOWNSEND PC                Suite 1100              ANDREWS KURTH LL P
Austin, TX 78711-2548       816 Congress Ave           Washington, DC 20005    11 1 Congress Avenue
512-475-4237                Suite 1
                                  .900                 202-662-2700            Suite 1700
512-322-9114 Fax            Austin, TX 78701           202-662-2739 Fax        Austin, TX 7870 1
                            512-322-5800                                       (512) 320-920 0
ATTORNEY FOR                512-472-0532 Fax;.         ATTORNEYS FOR           (512) 320-9292 Fax
RESPONDENT AND                                         RESPONDENT AND
CROSS-PETITIONER            ATTORNEY FOR               CROSS-PETITIONER        ATTORNEYSFO R
THE STATE OF                RESPONDENT AND             ALLIANCE FOR            RESPONDENT AND
TEXAS                       CROSS-PETITIONER           VALLEY                  CROSS-PETITIONER
                            CITIES OF CORPUS           HEALTHCARE              TEXAS INDUSTRIAL
                            CHRISTI, ET AL .                                   ENERGY CONSUMERS


                                          November 10, 200 8
                           No . 08-0634
                                In The Supreme Court of Texas


            THE STATE OF TEXAS, CITIES OF CORPUS CHRISTI, ET AL .,
                    ALLIANCE FOR VALLEY HEALTHCAR E
                 AND TEXAS INDUSTRIAL ENERGY CONSUMERS,
                                          Joint Petitioners

                                                    V.


                      PUBLIC UTILITY COMMISSION OF TEXAS

                                             Respondent


                             On Petition For Review From the
                          Third Court of Appeals at Austin, Texas
                                       No. 03-07-00196-C V


                          CUSTOMERS' JOINT RESPONSE T O
             AEP TEXAS CENTRAL COMPANY'S PETITION FOR REVIEW

Bryan Baker               Thomas Brocat o            Kenneth L. Wiseman      Rex D. VanMiddlesworth
State Bar No . 00790256   State Bar No . 03039030    admitted pro hac vice   State Bar No . 20449400
OFFICE OF THE             LLOYD GOSSELINK            ANDREWS KURTH LLP       Lino Mendiola III
ATTORNEY GENERAL          ROCHELLE                   1350 I Street, NW       Caren Pinzur
P.O . BOX 12548           TOWNSEND PC                Suite 1100              ANDREWS KURTH LLP
Austin, TX 78711-2548     816 Congress Ave           Washington, DC 20005    111 Congress Avenue
512-475-4237              Suite 1900                 202-662-2700            Suite 170 0
512-322-9114 Fax          Austin, TX 78701           202-662-2739 Fax        Austin, TX 78701
                          512-322-5800                                       (512) 320-9200
ATTORNEY FOR              512-472-0532 Fa x          ATTORNEYSFOR            (512) 320-9292 Fax
RESPONDENT AND                                       RESPONDENT AND
CROSS-PETITIONER          ATTORNEY FOR               CROSS-PETITIONER        ATTORNEYS FOR
THE STATE OF              RESPONDENT AND             ALLIANCE FOR            RESPONDENT AND
TEXAS                     CROSS-PETITIONER           VALLEY                  CROSS-PETITIONER
                          CITIES OF CORPUS           HEALTHCARE              TEXAS INDUSTRIAL
                          CHRISTI, ET AL.                                    ENERGY CONSUMERS


                                        November 10, 200 8



AUS :607223 .2
                                                                             TABLE OF CONTENTS


                                                                                                                                                                                                              Page

1.           The Commission's capacity auction disallowance was appropriate because TC C
             failed to follow the capacity auction statutes and rules and therefore a
             disallowance was necessary to avoid a windfall to TCC . .. . . .. . .. . . ... . .. . ... . ... . ... . . ...... . . . 5

             A.               The purposes of the capacity auction and true-up required th e
                              Commission's disallowance . . . ... .. . . .. . . ... ... . . . . . . .. . . .. . ... . ... . .. . . .. . . .. . ... . ... . .. . . . .... .. . . . 5
             B.               The lack of a market for some products does not excuse TLC' s
                             failure to meet the capacity auction requirements . . ... . .. . . .. . . .. . ... . ... . .. . . ..... .. . . . 8
             C.               The Commission's decision took into account the monetary impact o f
                             the auction deficiencies . ... . .. . . ... . ... . . . . .... .. . . . . . . . .. . . .. . ... . ... . .. . . .. . . .. . ... . ... . .. . . ....... . . . 8
             D.               The Commission's award ensured that TCC received the margins
                             that the legislature predicted ... . .. . . .. . .... .. . . .. . .. .. .... . ... . ... . .. . . .. . . .. . .. . . .. . . .. . . ..... . . . .. 9
             E.               The capacity auction true-up issue raised by TCC cannot b e
                              important to the jurisprudence of this state .... .... . . . . . .. . . .. . . .. . . .. . .. . . .. . . .. . . ..... . . . 1 1

II.          The court of appeals correctly remanded the Commission's decision regardin g
             EMCs . .. . ... . . . . .. . . ... . .. . . .. . . .... . . . . ... .... . . . . . .. . . .. . .. . . .. . . .. . ... . .... .... . . . . . .. . . .. . ... . ... . .. . . .. . . .. . . ..... . . . 12

             A.              The Commission's decision improperly allowed TCC and its joint
                             applicant in the case below to recover $21 million from ratepayers
                             twice . . .. . . ... . .. . . .. . . .. . . . . . .... .. . . . . . . . .. . . .. . ... . .. . . .. . ... . .... .. . . . . . . . .. . . .. . ... . ... . .. . . .. . . .. . . ... .. . . . 12
             B.              The EMC issue raised by TCC is not important to the jurisprudence
                             of this state. . . . .. . . .. . . .. . .... .. . . . . . .. .. .... . . . . . .. . . .. . ... . .... .. .. . . . . . .. . . .. . ... . ... . .. . . .. . . .. . . ... .. . . . 15
CERTIFICATE OF SERVICE . . . . . . .... .. . . .. . .... . ... . .. . . .. . . .. . .. . . .... .. . . . . . . . .. .... . ... . .. . . .. . . .. . . .. . .... .. . . . 1 9




                                                                                                          ii
AUS :607223 .2
                                                                         INDEX OF AUTHORITIES


                                                                                                                                                                                                  y
                                                                                                                                                                                                Pa ..
                                                                                              CASE S


AEP Texas Cent. Co. et al. v. Pub. Util. Comm'n ,
     No . 03-07-00196-CV . . ... . .. . . .... .... . ... . .... .. . . . . . .. .. .. .. . . . . . .. .. . .. . . . ... .... . . .. . . .. . ... . . .. . ... . ..... . . . . . 7

CenterPoint Energy Houston Elec ., LLC v. Gulf Coast Coal. of Cities ,
      252 S .W.3d 1 (Tex . App .--Austin 2008, pet . filed) .. .. . . . . . .... .... . ... . ... . ... . . .. . . .. . ..... . . . 15

CenterPoint Energy, Inc . v. Pub. Util. Comm'n ,
      143 S .W.3d 81 (Tex . 2004) . .... ... . . . .. . .... .. . . . . . . ... .. . . . . . . ... .. . . . . . .... .... . ... . ... . ... . ... . ... . . .... . . . . . 3

Cities of Corpus Christi v. Pub . Util. Comm'n ,
                188 S .W.3d 681 (Tex . App.-Austin 2005, pet. denied) . .... .... . ... . ... . ... . . .. . ... . . ... 3,16

Reliant Energy, Inc. v. Pub . Util . Comm'n,
       101 S .W.3d 129, 148-49 (Tex . App .---Austin 2003), rev`d in part
       on other grounds sub . nom CenterPoint Energy, Inc . v. Pub. Util.
       Comm'n, 143 S.W.3d 81 (Tex. 2004) . . .. . ... . .... . . . .. . . ... . .. . ... . .... .. .. . . . . . . .. . . .. . . . . . . . . . . . .. . . . . 14


                                                                                          STATUTE S


Tex. Util. Code Ann.
      § 11 .003 .. .. . .. . .. . ... . .. . . .. . . .. . . .. . ... . ... . ... . . . .. . . .. . ... . ... . .. . ... . ... . .. . . .. . .... .... . ... . ... . ... . ... . ... . ..... . . . 12
      § 39.001 .. .. . . . . .. . ... . .. . . .. . . .. . . .. . . .. . . .. . ... . . ... . . .. . ... . ... . .. . . .. . ... . .. . . .. . .... .... . ... . ... . ... . ... . .. . . ..... . . . . . 8
      § 39.153 . . .. . .. . .. . . .. . .. . . .. . . .. . . .. . ... . . .. . ... . . . .. . . .. . .. . . ... . .. . . .. . .. . . .. . .. . . .. .. . .. . . ... . ... . ... . ... . .. . . .. 1, 5, 6
      § 39.156 . . .. . .. . .. . .. . . .. . . .. . . .. . ... . ... . .. . . ... . . ... . ... . .. . . ... . .. . ... . .. . . .. . ... . .... .. .. . ... . .. . . ... . ... . .. . . ..... . 5, 6
      § 39 .262 .. .. . .. . .. . ... . .. . . .. . . .. . ... . ... . .. . . .. . . .... .. .. . .. . . . . . .. . . . .. . .. . . .. . . . . . .. .. . . . . . ... . .. . . .. . . .. 5, 6, 13, 15

Tex. Gov't Code Ann.
      § 22 .001 . . .. . .. . .. . ... . .. . . .. . . . . . ... . .. . . ... . .. . . .. .. ... . . . . . . .. . ... . . .. . .. . . .. . .. . . .. . . .. . . . .. . . ..  .. . . .. . . ... .. . ... . 1
      § 2001 .174 . .. . .. . ... . .. . ... . .. . . .. . . ... . ... . .. . . .... ... . . . . . . .. . ... . ... . .. . . .. . .. . . .. . . .. . . . .. . . .. . . ... . ... . .. . . ... .. . ... . 9


 16 Tex . Admin. Code § 25.381 . .. . . .. . . .. . . .. . . .... ... . . . . . . .. . ... . . . . . .. . ... . . . . . .. . . .. . . . . . . . .. . . .. . . .. . . .. . .... .. . .1- 3




                                                                                                    iii
AUS :607223 .2
TO THE HONORABLE SUPREME COURT OF TEXAS :

         The State of Texas, the Cities of Corpus Christi, et al., Texas Industrial Energy

Consumers, and the Alliance for Valley Healthcare (collectively, "Respondents/Cross-

Petitioners" or "Customers") hereby respond to the petition for review ("Petition") filed

by AEP Texas Central Company ("TCC") . Since it does not implicate issues important

to the jurisprudence of this state, Customers respectfully urge that the Petition be denied .'

                                       STATEMENT OF FACTS

         Customers concur with the statement of facts set out in the opinion of the court of

appeals and object to the characterizations in TCC's statement of facts .

         TCC's statement of facts suggests that its non-compliance with the regulations and

statute governing capacity auctions is irrelevant to whether it qualified for application of

the capacity auction true-up formula . In fact, TLC's right to recover capacity auction

benefits is directly related to and entirely controlled by compliance with the requirements

of the capacity auction regulations and statute . As part of the deregulation process, the

legislature required formerly regulated utilities to sell 15% of their electric generation

capacity to their wholesale competitors through capacity auctions . Tex. Util. Code Ann .

§ 39 .153(a), (d) (Vernon 2003) . To provide guidance to market participants, the Public

Utility Commission of Texas ("Commission" or "PUC") enacted Substantive Rule

25 .381 (the "Rule" or the "Commission Rule") to govern capacity auctions . Like the

statute, this Rule mandated that electric utilities sell at auction entitlements to at leas t

I TCC presented three issues that were not briefed in its Petition . Customers do not respond to those issues herein
but submit that they also do not implicate issues important to the jurisprudence of this state or issues of genuine
statutory construction. Tex . Gov't Code Ann. § 22 .001(x)(3), (6) (Vernon 2004 & Supp 2008) .




AUS :607223.2
15% of their Texas jurisdictional installed generation capacity . 16 Tex . Admin. Code §

25 .381(b) (2003) (Pub . Util. Comm'n, Econ. Regulation) .

          The Commission concluded, and no one disputes, that TCC failed to auction

entitlements to at least 15% of its installed generation capacity . PUC Order at 103

[Tab 1] .2 In an attempt to avoid the legislative requirement to sell 15% of its capacity,

TCC artificially reduced the amount of its generation capacity by deeming some capacity

as "mothballed" and excluding that amount from its calculation of installed generation

capacity . Admin. R. Binder 10, Direct Testimony of Michael Isenberg, TCC Ex . 9 at 17-

18 . Because the "mothballed" capacity was potentially marketable, the Commission

found that the mothballed capacity should be included in calculating TCC's installed

generation capacity for purposes of the capacity auction . PUC Order at Findings of Fact

("FoF") 327-32 [Tab 1] . The Commission also found that even if "mothballed" capacity

were excluded, TCC still did not meet the 15% threshold . Id. at 112, FoF 332-34 .

          The Commission further determined that TCC failed to comply with any of the

three applicable safe harbor provisions that constituted the Commission's interpretation

of substantial compliance with the capacity auction statute and Rule. Id. at 103-10, FoF

322-26 . TCC also failed to meet the capacity auction requirements because it never

offered one- and two-year entitlement strips for sale pursuant to P .U .C . SUBsT . R.

25 .381(h)(3) . 16 Tex . Admin. Code § 25 .381(h)(3) (2003) (Pub . Util. Comm'n, Econ .




2 The references to tabbed documents are to the contents of the Joint Appendix of All Parties that was filed with
TCC's Petition .



                                                        2
AUS :607223 :2
Regulation) . The Commission found that TCC was not excused from meeting that

requirement . PUC Order at 114.17, FoF 335-43 [Tab 1 1 .

          Following the capacity auctions, the utilities that were required to participate in

them were allowed to benefit from the capacity auction true-up . The purpose of the

capacity auction true-up was to ensure that utilities that sold electricity in the wholesale

market through the capacity auctions received the margins from those sales that were

predicted by the legislature . CenterPoint Energy, Inc . v. Pub. Util. Comm'n, 143 S .W.3d

81, 96 (Tex. 2004). Since TCC did not comply with the capacity auction statute, the

Commission reduced the award TCC requested based on the capacity auction true-up rule

and awarded TCC the margins that were predicted by the legislature .

          As to the excess mitigation credits ("EMC") issue, TCC ignores the fact that

ratepayers were originally denied a rate reduction in 2001 to account for $42 million in

excess earnings that TCC collected over the prior three years . PUC Order at 78 [Tab 1] ;

Cities of Corpus Christi v. Pub. UHL Comm'n, 188 S.W.3d 681, 689 (Tex. App.-Austin

2005, pet . denied). Because vertically integrated utilities were estimated to have positive

stranded costs in 1998, the legislature determined that they should be allowed to retain

excess earnings in order to reduce the net book value of their generation assets, which

would ultimately reduce their stranded costs . When stranded costs were recalculated in

2001, however, TCC was found to have negative stranded costs and was ordered to begin

returning retained accumulated excess earnings to customers. Rather than returning the

money directly to customers, EMCs were paid to the retail electric providers ("REPs") ,




                                               3
AUS :607223 .2
including TCC's affiliated REP, CPL Retail, which was TLC's joint applicant in the

proceeding before the Commission.

          It is undisputed that customers never received one cent of the $21 million in

excess mitigation credits that TCC paid to its joint applicant CPL Retail. In its Final

Order, the Commission nevertheless increased TLC's true-up balance by $21 million .

Thus, under the PUC' s Order, customers will have to pay $21 million to TCC and it s

joint applicant twice :         first by paying rates through which TCC accumulated exces s

earnings and then again to offseCTCC's payment of $21 million of the excess earnings to

its joint applicant CPL Retail .

                                  SUMMARY OF THE ARGUMENT

          This case represents one of the last stranded cost appeals stemming from the

deregulation of the electric industry . Through ten contested case proceedings over the

past decade, the Commission authorized four formerly regulated utilities to recover

billions of dollars in regulatory assets and stranded costs from ratepayers .3 Despite its

failure to satisfy the requirements of the Public Utility Regulatory Act ("PURA") and the

Commission's rules, TCC asks this Court to overturn the Commission's Order on

Rehearing-which awarded TCC (and required customers to pay) $1 .4 billion in stranded

costs and other true-up amounts-and award TCC several hundred million dollars more .

The law and substantial evidence support the Commission's Order regarding the capacit y



3 The Third Court of Appeals has issued multiple opinions on appeals of those stranded cost cases, and four appeals
of those cases have already been decided by the Supreme Court. City of Corpus Christi v. Pub. Util. Comm'n, 51
S .W .3d 231 (Tex . 2001) ; TXU Electric Co. v. Pub. Util. Comm'n, 51 S .W .3d 275 (Tex . 2001) ; In re TXU Electric
Co., 67 S .W .3d 130 (Tex . 2001) ; and CenterPoint Energy, Inc. v. Pub. Util. Comm'n, 143 S .W .3d. 81 (Tex . 2004) .



                                                          4
AUS :607223 .2
auction true-up and the court of appeal's decision with respect to the EMC issue . TLC's

arguments for the imposition of even greater financial burdens on TCC's customers are

fatally flawed . The Petition should be denied .

                                ARGUMENT AND AUTHORITIES


I . The Commission's capacity auction disallowance was appropriate because
       TCC. failed to follow the capacity auction statutes and rules and therefore a
       disallowance was necessary to avoid a windfall to TCC .

           A.     The purposes of the capacity auction and true-up required the
                  Commission's disallowance.

           TCC argues that there is nothing in the statute or the PVC's rule that would allow

the Commission to adjust the capacity auction true-up award to account for a utility's

failure to follow the capacity auction statute . TCC Petition ("Pet.") at 5 . This improper

attempt to divorce the capacity auction process under PURA §§ 39 .153 and 39.156 from

the capacity auction true-up under PURA § 39 .262 is directly contradicted by a plain

reading of the statutes . Tex. Util. Code Ann. §§ 39 .153, 39.156, 39.262 (Vernon 2005) .

PURA § 39 .262 states that utilities shall reconcile, and either credit or bill "any

difference between the price of power obtained through the capacity auctions under

Sections 39.153 and 39.156 and the power cost projections that were employed for the

same time period . . . ." Tex. Util. Code Ann. § 39 .262(d) (Vernon 2005) (emphasis

added) . Since TCC indisputably failed to satisfy its obligations to auction capacity under

Sections 39.153 and 39.156, the capacity auction true-up could not be conducted in the

precise manner outlined in the true-up regulations that implemented those statutor y




                                                5
A[JS :607223 .2
provisions. In fact, as explained below, to attempt to do so would have resulted in an

improper windfall to TCC and an overpayment by ratepayers .

          In order to prevent a utility from artificially lowering its prices in the auctions

(which would increase the true-up award it would receive from ratepayers), the

legislature and the Commission required that the utility sell 15% of its capacity and

establish a verifiable market price for the products sold . Since TCC did not meet these

requirements, the prices it received in the capacity auctions were artificially low . This is

the heart of the problem with TCC's assertion : that the only information needed to apply

the formula in the capacity auction rule is the capacity auction price (see TCC Pet. at 5).

TCC's failure to meet the requirements of the capacity auction statute meant that ther e

was no appropriate "price" to use in the capacity auction true-up formula .

          The capacity auction true-up formula in the Commission rule contemplated a sale

of all product types and fuel types required by the capacity auction statute and rule . It

was not designed to address a situation where certain products did not sell . If TCC had

complied with the capacity auction rule and sold the proper types and amounts of

entitlements, the revenue from the capacity sales of each product would have been

matched with fuel expenses from the same product in order to calculate a "margin ."

Because it did not sell certain types of entitlements required by statute, application of the

formula as urged by TCC does not properly compare the revenue from the sale of

capacity products with the fuel expense associated with those products . In calculating its

capacity auction true-up request, TCC calculated market revenue using predominantly

low capacity prices for the baseload (or solid fuel) capacity, then subtracted high fue l


                                               6
AU5 :667223 .2
costs using predominantly non-baseload (or gas) fuel expenses . AEP Texas Cent. Co. et

al. v. Pub. Util. Comm'n, No . 03-07-00196-CV, , slip op . at 61 (Patterson, J ., concurring

and dissenting) [Tab 4] . Through the selective use of low capacity prices compared

against high fuel prices, the formula as applied by TCC vastly understates the "margin" it

received . The Commission's award was not a "penalty" (TCC Pet . at 4), but a

recognition that the formula could not be applied to non-compliant utilities like TCC

without a dramatic windfall to the utility and a dramatic overpayment by customers .

          TCC's description of its capacity auction shortfall is a gross mischaracterization of

the Commission's Order and of TCC's conduct in its capacity auction sales . TCC Pet. at

8-9. Even if there were any merit to TCC's claim that it came close to meeting the safe

harbor requirements in the Commission's rules for some of its products, the undisputed

fact is that TCC still sold significantly fewer entitlements than PURA required . By

enacting the safe harbor as part of its rule, the Commission in effect determined the

threshold for what would be considered "substantial compliance" with the 15%

requirement included in the capacity auction statute. AEP Texas Cent. Co., slip op . at 55

(Patterson, J ., concurring and dissenting) [Tab 4] . After hours of cross-examination and

hundreds of pages of testimony and briefs, the Commission refused to give any credence

to TCC's claims that it fell short by only a small amount . This Court should not do so,

either.




                                                7
AUS ;607223.2
           B.    The lack of a market for some products does not excuse TCC's failure to
                 meet the capacity auction requirements.

          The court of appeals was correct to find that TLC's failure to challenge the

capacity auction rule under PURA § 39 .001(f) precludes TCC's current argument : that

its failure to comply with the capacity auction statute should be excused because there

was no market for certain products that had to be sold in order for the true-up formula to

work properly .     AEP Texas Cent. Co., slip op . at 56 (Patterson, 3 ., concurring and

dissenting) [Tab 4] . TCC incorrectly characterizes the type of challenge the court states

it should have made as a challenge "to how the rule is later applied ." TCC Pet. at 7 . To

the contrary, the court was clearly stating that TCC should have made a validity

challenge . While TCC might not have known at the time the rule was passed which types

of products it would have trouble selling, it clearly could have anticipated that some of

the products might not be attractive to potential buyers . If TCC thought the safe harbor

provision was unfair or invalid, then it was required to challenge the rule within 15 days

after publication, as held by the court of appeals .

          C.     The Commission' s decision did take into account the monetary impact of
                 the auction deficiencies .

          TCC argues that if the court finds that it was appropriate for the PUC to use a

proxy price instead of the price generated by the capacity auction formula, the majority of

commissioners acted arbitrarily in rejecting the $67 million adjustment included in the

memorandum that Commissioner Smitherman distributed to his fellow commissioners

after the close of the hearing . TCC Pet. at 8-9 . However, Commissioner Smitherman's

memorandum is not in the record as evidence in this case . It is nothing more than a


                                               8
AUS :647223 .2
memorandum from one Commissioner to another used as part of deliberations .

Commissioner Smitherman was not a witness and no party was afforded an opportunity

to cross examine any witness on his memorandum .

          Further, the Commission majority found as a matter of fact that the MegaWatt

Daily index cited in the memorandum and relied on by TCC witness Michael Isenberg

bore no logical relation to TCC's competitive revenues . PUC Order at 120 [Tab 1] .

Further, the MegaWatt Daily values are (1) self-reported and not verified, (2) reflective

only of baseload products, and (3) not reflective of any value associated with load

shaping or the supply of ancillary services, which are embedded in the products sold in

the capacity auctions . Id. As discussed below, the Commission majority properly relied

on substantial evidence to determine the proper adjustment as derived from TCC 's actual

capacity and energy sales revenues . The decision of the Commission majority, as to the

weight of the evidence on a question committed to agency discretion, is not subject to

judicial review . Tex. Gov't Code Ann . § 2001 .174 (Vernon 2004 & Supp . 2008).

          D.     The Commission's award ensured that TCC received the margins that the
                 legislature predicted.

          Because of TCC's inability to sell certain products, the Commission determined

that the operation of the formula would not give effect to the purpose of the capacity

auction statute as articulated by this Courtnamely, to "guarantee[] consumers and

power companies that the power company will receive no more and no less than a margin

predetermined by the Commission in 2001 when the ECOM model was run in

compliance with section 39.201 ." CenterPoint Energy, 143 S.W.3d at 96 (Tex . 2004).



                                             9
AUS :607223 .2
The ECOM model predicted that in 2002 and 2003 TCC would receive approximately

$342 million each year (a total of $685 million) to pay for fixed costs, including

depreciation and amortization, operations and maintenance based on a $43 per MWh

price. Admin . R. Binder 20, Direct Testimony of Jeffry Pollock, TIEC Ex . 1 at 25. Thus,

the question is whether TCC received the same "margin" that it was predicted to receive .

There is no dispute here that TCC did receive those margins .

          As demonstrated in the evidence supplied by TIEC witness Jeffry Pollock, TCC's

actual market prices and corresponding market margins were much higher than TCC's

faulty capacity auction prices and the margins that resulted from the malfunctioning

capacity auction true-up formula. TLC's average competitive market prices were $42 .50

per MWh in 2002 and $48 .01 per MWh in 2003 . Id. at 36-37 ; Exhibits JP-4 and JP-5 .

By replacing the average capacity auction prices with the actual prices from TCC's

market sales and making appropriate adjustments to TCC's fuel costs, the Commission

properly reduced TCC's capacity auction true-up amount . PUC Order at FoF 365-67

[Tab 1] .

          TCC is unable to refute that it actually received the prices that Mr . Pollock

calculated it received for power sales during 2002 and 2003 . Instead, TCC makes the

irrelevant argument that the majority of its sales during those years were to its affiliated

REP CPL Retail based on the "price to beat ." TCC Pet. at 10. This argument is wholly

beside the point . While TCC claims that the prices it received during 2002 and 2003 do

not reflect true market prices, it never disputes that those prices reflect the money

actually received by TCC.      If TCC actually received the money-as the Commission


                                             10
AUS :607223 .2
found that it did and TCC tacitly admits that it did-then TCC had the use of the money

to cover the "margin' 'that it had been predicted to receive by the legislature . Thus, TCC

was made whole under the Commission's decision .

           TCC has not disputed the fact that it would receive a windfall if the capacity

auction true-up formula were to be strictly applied even though the sales requirements

under the capacity auction statute were not met . Since TCC did not sell the correct

number of entitlements, the Commission correctly concluded based upon substantial

evidence that the capacity-auction-true-up formula in its rule could not properly be

employed without modification . Given the circumstances, the court of appeals correctly

held that the Commission had fashioned an equitable and proper remedy . AEP Texas

Cent. Co., slip op . at 61 (Patterson, J ., concur-ring and dissenting) [Tab 4] .

           E.     The capacity auction true-up issue raised by TCC cannot be important to
                  the jurisprudence of this state.

           The capacity auction true-up is a specific mechanism created by the legislature in

order to provide cost recovery to a very limited number of entities . The capacity auction

true-up issue presented by TCC will never affect any other entity, so it does not implicate

issues important to the jurisprudence of this state . Within the last year, the Third Court of

Appeals has issued opinions on all three of the possible capacity auction cases, presenting

no inconsistency in the law .4 TCC's petition on this issue should accordingly be denied .




4 In addition to the opinion below, the other two opinions are State v. Pub . Util. Comm'n, 246 S .w .3d 324 (Tex .
App .-Austin 2008) an d CenterPoint Energy Houston Electric, LLC v . Gulf Coast Coal. of Cities, 252 S .w.3d 1,
85-101 (Tex . App .-Austin 2008, pet. filed) .



                                                        11
Aus :6 02223 .2
11.       The court of appeals correctly remanded the Commission's decision
          regarding EMCs.

          A.     The Commission' s decision improperly allowed TCC and its joint
                 applicant in the case below to recover $21 million from ratepayers twice .

          The following facts are undisputed:

                 1.    from 1999 to 2001 TCC's customers paid electric rates that resulted
                       in the accumulation of excess earnings by TCC ;

                 2.    the Commission ordered TCC to return the excess earnings to
                       customers through EMCs ;

                 3.    TCC paid $21 million of the EMCs to its affiliated REP, CPL Retail,
                       which was never passed through to customers ;

                 4.    CPL Retail was a joint applicant of TCC in the proceedings before
                       the Commission; and

                 5.    the PUC's decision below required ratepayers to pay TCC for the
                       $21 million in EMCs that TCC paid to CPL Retail through an
                       increase to its s tranded costs .

TCC and its joint applicants in the proceeding below thus received a double recovery

under the PVC's decision: first through excess earnings, and a second time through CPL

Retail's retaining the EMCs it received rather than returning them to customers . The

court of appeals' decision simply cured the Commission's decision which, as recognized

by Chairman Hudson's dissent on this issue, would result in overpayment by ratepayers

and over-recovery of stranded costs by TCC in violation of PURA § 39 .262(a) . Tex.

Util. Code § 39 .262(a) (Vernon 2005) .

          It is undisputed that TCC and CPL Retail were affiliates during the true-up

proceeding pursuant to PURA § 11 .003(2)(D)(ii) .                Tex. Util. Code Ann.

§ 11 .003(2)(D)(ii) (Vernon 2007 & Supp . 2008). Requiring joint applicants to b e



                                                12
AUS :607223 .2
considered a single unit was necessary in order to avoid one utility seeking to recover as a

cost a benefit given to its affiliate, as recognized by the court of appeals . This is the very

reason that the PUC's rules, the statute, and long-standing Commission precedent

recognize the importance of "affiliate" status . Effective and efficient regulation must be

authorized to "look through" transactions and economic arrangements between related

entities to avoid abuses .

         When joint applicants are considered a single unit, as PURA and the Commission

rules require, it is apparent that TCC and CPL Retail remain whole under the court of

appeals' decision: that TCC should not recover as stranded costs those amounts paid to

CPL Retail as EMCs . See, AEP Texas Cent. Co., slip op. at 37 (Patterson, J ., concurring

and dissenting) [Tab 41 . In disposing of a prior challenge to the Commission's true-up

rule, the court of appeals clarified that the duty to reduce stranded costs falls jointly upon

all of its successor affiliates . Reliant Energy, Inc. v. Pub. Util. Comm'n, 101 S.W.3d 129,

148-49 (Tex. App.-Austin 2003), rev'd in part on other grounds sub. nom CenterPoint

Energy, Inc. v. Pub . Util. Comm'n, 143 S .W.3d 81 (Tex. 2004) . The court of appeals

properly remanded the issue to the Commission for a decision consistent with

CenterPoint Energy Houston Electric, LLC v . Gulf Coast Coal. of Cities, 252 S .W.3d 1,

37-39 (Tex . App.-Austin 2008, pet . filed), in which the court of appeals reduced the

utility's claimed stranded costs in order to account for the EMCs transferred to its

affiliate REP. AEP Texas Cent. Co., slip op. at 37-38 (Patterson, J ., concurring and

dissenting) [Tab 41 .




                                              13
AUS :607223.2
          Both TCC and CPL Retail were well aware of the duty to mitigate stranded costs

and the express statutory provisions preventing over-recovery of stranded costs at the

time that the formerly integrated utilities were unbundled . As TCC notes in its Statement

of Facts, the proceeding below was to determine the stranded costs of the former

integrated utility . TCC Pet . at 1 . PURA §§ 39 .262(a) and (c) treat formerly bundled

utilities as related entities for the purpose of stranded-cost reconciliation . This is

consistent with the obligation of each joint applicant to mitigate stranded costs and to

jointly file the true-up proceeding . During the unbundling process, TCC and CPL Retail

could have entered into an agreement that would have protected ratepayers from having

to pay EMCs twice while still making TCC whole . They chose not to do so, and their

customers should not be penalized for that choice .

          TCC suggests the court of appeals erred by assuming that PURA requires that

ultimate consumers of power directly receive the EMCs . TCC Pet . at 13 . In fact, the

court assumed no such thing, but instead recognized that the EMCs were simply

monetary transfers from one joint applicant to another . TCC posits that customers

received some amorphous benefit from this transfer in the form of "increased vitality of

the-nascent competitive market ." TCC Pet . at 14 . Whether or not this is true is of no

importance to the decision before the court of appeals . Because PURA makes it clear

that TCC and CPL Retail are to be considered a single unit for the purpose of determining

stranded-cost recovery, the net result is that the joint applicants would be made whole by

a decision reducing TCC's stranded costs by $21 million . The court of appeals decision

remanding the case to the Commission was therefore proper .


                                            14
AUS :607223 .2
          B.     The EMC issue raised by TCC is not important to the jurisprudence of
                 this state.

          The court of appeals has now ruled twice on the EMC issue and has presented no

inconsistency of law . Since this Court has already found that the payment of EMCs is

illegal, there is no chance this issue will arise again. Cities of Corpus Christi v. Pub. Util.

Comm'n, 188 S .W.3d 681, 689 (Tex . App.-Austin 2005, pet . denied) . The court of

appeals has simply and correctly addressed the unique factual circumst ance where an

affiliate and joint applic ant did not pass through EMCs to ratepayers . The resolution of

this issue accordingly does not rise to the required level of importance for review by this

Court. In all events, TCC's arguments regarding the EMC issue are fatally flawed, and

its Petition on this issue should be denied .

                                           PRAYER

          TCC's Petition asks that Texas ratepayers pay TCC $441 million more than is

statutorily authorized or required. For the reasons listed above, Customers pray that this

Court deny TCC's Petition for Review and let stand the court of appeals decision of the

issues raised in that Petition.




                                                15
AUS :607223 .2
                 Respectfully submitted,


                  GREG ABBOTT
                  Attorney General of Texas

                  KENT C . SULLIVAN
                  First Assistant Attorney Genera l

                  PAUL D . CARMONA
                  Chief, Consumer Protection and Public
                  Health Division

                  MARY T. HENDERSON
                  Deputy Chief, Consumer Protection
                  and Public Health Division

                  MARION TAYLOR DRE W
                  Public Agency Representation Section
                  Chief

                  OFFICE OF THE ATTORNEY
                  GENERA L




                  Bryan Baker
                  State Bar No. 00790256
                  P.O . BOX 12548
                  Austin, TX 78711-2548
                  (512) 475-4237
                      (512) 322-9114 Fax

                  ATTORNEYS   FOR RESPONDENT
                  AND CROSS-PETITIONER
                  THE STATE OF TEXA S




                 16
AUS :607223 .2
                   LLOYD GOSSELINK
                   ROCHELLE TOWNSEND P C


                                                  I
                     l           10   "-;~            I,"M d r)
                                             4~4
                   Thomas Brocato
                   State Bar No. 03039030
                   816 Congress Ave, Suite 1900
                   Austin, TX 7870 1
                   (512) 322-5800
                   (512) 472-0532 Fax

                   ATTORNEYS FOR RESPONDENT
                   AND CROSS-PETITIONE R
                   CITIES OF CORPUS CHRISTI, ET AL


                   ANDREWS KURTH LLP




                   Kenneth L . Wiseman
                   admitted pro hac vice
               Mark F. Sundback
               Thomas R. Kline
               Jennifer L. Spina
               State Bar No . 489104
               13501 Street, NW, Suite 1100
               Washington, DC 2000 5
               (202) 662-2700
               (202) 562-2739 Fax
               Tonya M . Gray
               State Bar No . 24012726
               1717 Main Street, Suite 3700
               Dallas, TX 7520 1
                   (214) 659-440 0

               ATTORNEYS FOR RESPONDENT
               AND CROSS-PETITIONER
               ALLIANCE FOR VALLEY
               HEALTHCARE


              17
AUM07223 .2
                  ANDREWS KURTH LLP




                  Rex D . VanMiddlesworth
                  State Bar No . 20449400
                  Lino Mendiola III
                  State Bar No. 00791248
                  Caren Pinzur
                  State Bar No. 24053709
                  111 Congress Avenue, Suite 1700
                  Austin, TX 7870 1
                  (512) 320-9200
                  (512) 320-9292 Fax

                      ATTORNEYS FOR RESPONDENT
                      AND CROSS -PETITIONER
                      TEXAS INDUSTRIAL
                      ENERGY CONSUMER S




                 18
AUS :647223 .2
                            CERTIFICATE OF SERVICE

       The undersigned certifies that a true and correct copy of the above and foregoing
instrument was served via United States Certified Mail, return receipt requested and/or
facsimile on this 10th day of November, 2008, to all parties below .




                                                  Caren Pinzur



AEP Texas Central Company                    Commercial Customer Group
DAVID C. DUGGINS                             JIM BOYLE
CASEY WREN                                   LAW OFFICES OF JIM BOYLE PLLC
KERRY MCGRATH                                1005 CONGRESS SUITE 1050
BRET J . SLOCU M                             AUSTIN, TX 7870 1
CLARK THOMAS & WINTERS                       512-474-1492
P.O. BOX 114 8                               512-474-2507 (FAX)
AUSTIN, TX 78767
512-472-8800                                    Public Utility Commission of Texas
512-474-1129 (FAX)                              ELIZABETH R . B . STERLING
                                                ASSISTANT ATTORNEY GENERAL
                                                NATURAL RESOURCES DIVISION
Office of Public Utility Counsel                P. O . BOX 12548, CAPITOL STATION
JAMES K . ROURKE JR.                            AUSTIN, TX 78711-2548
OFFICE OF PUBLIC UTILITY                        (512) 463-201 2
COUNSEL                                         (512) 320-0911 (FAX )
1701 NORTH CONGRESS AVE .
SUITE 9-18 0
P.O. BOX 12397
AUSTIN, TX 78711-2397




                                           19
AUS :607223 .2

								
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