Entergy Gulf States, Inc. 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

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN

444444444444444444444444444
ON MOTION FOR REHEARING
444444444444444444444444444

NO. 03-03-00628-CV

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

FROM THE DISTRICT COURT OF TRAVIS COUNTY, 345TH JUDICIAL DISTRICT
NO. GN203604, HONORABLE SCOTT H. JENKINS, JUDGE PRESIDING

OPINION

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

1
Entergy is one of five public utilities that comprise the Entergy System, a single integrated
electric system that operates under the Entergy System Agreement (System Agreement). The System
Agreement is a separate Federal Energy Regulatory Commission tariff that controls how electricity
and the total costs of generating power on the system are allocated among the corporate siblings.
Entergy La., Inc. v. Louisiana Pub. Serv. Comm’n, 539 U.S. 39, 37-38 (2003). A sale under the
System Agreement can occur only when a subsidiary has energy in excess of its own needs. In any
given hour, a subsidiary can be buying from or selling to the Entergy Energy Exchange, a pool of
surplus energy generated by other subsidiaries.

2
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

2
Entergy characterizes the River Bend 30% asset as “unregulated.” Although the term
“unregulated asset” is not defined, for our purposes we assume that the term means an asset whose
generated energy is sold in the wholesale market and whose costs are not recovered in the base rate
charged to retail ratepayers.
3
“Native load” refers to the collective energy needs of Entergy’s retail customers.
4
Entergy Services, Inc. is a subsidiary of Entergy Corporation and is a service company
affiliate of the Entergy utility subsidiaries. It acts as their agent in the execution and administration
of certain contracts.

3
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

5
The proposed sale would be executed according to the System Agreement.

4
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.

5
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

6
charges. The Commission noted that the proper forum for Entergy to recover the disallowed capacity

and demand costs is through a rate case proceeding, not an interim fuel reconciliation proceeding.

See Tex. Util. Code Ann. § 36.051 (West 1998).

Entergy appealed the decision to the district court seeking a reversal of the

Commission’s final order and seeking a declaratory judgment to address similar subsequent purchase

power agreements. The district court denied all relief requested by Entergy. This appeal followed.

DISCUSSION

Entergy challenges the trial court’s decision in three issues: (1) whether the

Commission’s discretion to disallow the costs associated with the River Bend 30% energy purchase

is preempted by federal law, and whether the order violates PURA and the Commission’s own

previous orders, and constitutes an abuse of discretion; (2) whether the Commission’s order

disallowing imputed capacity costs associated with other purchased power is preempted by federal

law, violates the fuel rule, constitutes an arbitrary ad hoc amendment to the fuel rule, and was

disallowed in the absence of substantial evidence; and (3) whether the district court erred in refusing

to grant a declaratory judgment that Entergy’s similarly situated power purchases are subject to the

requirements of the filed rate doctrine.

State and Federal Regulatory Overview

A brief review of the relevant state and federal law and regulations will be helpful to

our discussion. Under PURA, a regulated electric utility such as Entergy may not automatically pass

its actual fuel costs through to its customers. Tex. Util. Code Ann. § 36.201 (West Supp. 2004-05);

7
Nucor Steel v. Public Util. Comm’n, 26 S.W.3d 742, 744 (Tex. App.—Austin 2000, pet. denied).

Instead, the Commission conducts a full rate hearing to determine the base rate a utility may charge

its customers for its energy. See Entergy Gulf States, Inc. v. Public Util. Comm’n, 112 S.W.3d 208,

215 (Tex. App.—Austin 2003, pet. denied). The base rate is prospective, and is set at a level that

will permit the utility to realize a reasonable profit and reimburse the utility’s projected reasonable

and necessary operating costs. Tex. Util. Code Ann. § 36.051 (West 1998). A fuel factor component

is also incorporated in the rates, and takes into account projected fuel costs. Id. § 36.203. A fuel

reconciliation, as distinguished from a base rate case, is an interim “true-up” proceeding, where the

Commission periodically adjusts the utility’s fuel factor to correct for the variance between the

anticipated fuel costs and fuel costs actually incurred. Id.; Nucor Steel, 26 S.W.3d at 744.

A fuel reconciliation is a narrow inquiry that aims only to adjust the fuel factor for

the anomalies that result from actual, fluctuating fuel prices that occur in between rate hearings. See

G.T.E. S.W., Inc. v. Public Util. Comm’n, 978 S.W.2d 161, 168 (Tex. App.—Austin 1998, pet.

denied) (Powers, J., dissenting). “The obvious intention of the legislature was to avoid the time and

expense of a full-scale rate case, both to the public and to the utility, when the issue involves only

a single item of what are indisputably operating expenses–fuel costs. . . .” Id. at 168-69. If the

Commission determines that an adjustment to the fuel factor is in order, a refund or a surcharge to

customers will result. 16 Tex. Admin. Code § 25.236(e) (2004). In a fuel reconciliation hearing,

the utility bears the burden of demonstrating that its actual fuel-related expenses were “reasonable

and necessary” and eligible for recovery. Id. § 25.236(d).

8
 Eligible fuel reconciliation expenses are those expenses properly recorded in the

utility’s general ledger accounts 501, 503, 518, 536, 547, 555 and 565, under the FERC Uniform

System of Accounts. Id. § 25.236(a). The FERC rules provide that account 555 shall include

purchased power expenses that are incurred when a utility purchases wholesale electricity for resale.

See 18 C.F.R. § 101 (2004). The fuel rule prohibits a utility from recovering purchased power

capacity costs in a fuel reconciliation. 16 Tex. Admin. Code § 25.236(a)(4) (2004). Capacity

charges and other operating expenses may be recovered in a full rate case hearing. See Tex. Util.

Code Ann. § 36.051 (West 1998).

Utilities are also prohibited from charging customers for an additional profit realized

from the sale of energy from an affiliate of the utility to itself. 16 Tex. Admin. Code § 25.236(a)(1)

(2004). “The electric utility may not recover [a] . . . profit for an affiliate of the electric utility,

regardless of whether the affiliate incurs or charges the . . . profit before or after the fuel is delivered

to the generating plant site.” Id.

The FERC regulates the sale of electricity at wholesale in interstate commerce. 16

U.S.C. § 824(b); Entergy La., Inc. v. Louisiana Pub. Serv. Comm’n, 539 U.S. 39, 41 (2003). Under

the filed rate doctrine, interstate power rates filed with the FERC or fixed by the FERC must be

given binding effect by state utility commissions determining intrastate rates. Nantahala Power &

Light Co. v. Thornburg, 476 U.S. 953, 963 (1986). When the FERC sets a rate between a purchaser

and seller of wholesale power, a state may not exercise its jurisdiction over retail sales to prevent the

seller from recovering the FERC-approved rate, impermissibly “trapping” costs. Mississippi Power

9
& Light Co. v. Mississippi ex rel. Moore, 487 U.S. 354, 372 (1988).6 A state agency’s failure to give

binding effect to a FERC-approved wholesale power rate is a violation of the FERC’s exclusive

jurisdiction and therefore is preempted by federal law. Id. at 371. A fuel reconciliation is a

ratemaking proceeding. Southwestern Pub. Serv. Co. v. Public Util. Comm’n, 962 S.W.2d 207, 219

(Tex. App.—Austin 1998, pet. denied); G.T.E. S.W., Inc., 978 S.W.2d at 166.

The River Bend 30% Transaction

In its first issue, Entergy asserts that it was error for the Commission to disallow the

River Bend 30% energy non-fuel costs. Entergy argues that because the transaction was an interstate

sale of wholesale electricity, the filed rate doctrine requires the Commission to permit Entergy to

recover all of its River Bend 30% energy costs, as provided for in the May 2000 Tariff rate. Thus,

according to Entergy, the Commission’s regulation of the River Bend 30% energy costs, i.e.,

disallowing its non-fuel expenses, is preempted by federal law. Entergy also complains that the

Commission’s disallowance of the River Bend 30% energy non-fuel costs contradicted the

Commission’s previous orders and constitutes an abuse of discretion.

We begin our discussion by setting forth our analytical framework. We confine our

inquiry to whether the Commission properly disallowed ineligible costs in evaluating the

Commission’s actions in the fuel reconciliation. See Tex. Util. Code Ann. § 36.203 (West 1998).

6
The Supreme Court recognized a limited “prudence review” exception to the scope of the
FERC’s jurisdiction and filed rate doctrine. Gulf States Utils. Co. v. Public Util. Comm’n, 841
S.W.2d 459, 469 (Tex. App.—Austin 1992, writ denied). Federal preemption does not preclude a
state utility commission’s review of a utility’s prudence in contracting to purchase a quantity of
energy capacity in light of its projected needs and considering its alternative power sources. Id. The
prudence review exception is not at issue in this case.

10
Pursuant to the fuel reconciliation hearing, the Commission permitted Entergy to recover its River

Bend 30% energy nuclear fuel costs but disallowed certain non-fuel expenses Entergy wanted to

charge through to its retail customers, including the profit Entergy realized on the sale of its

wholesale energy to itself, and other ineligible operating expenses. Entergy asserts that the filed rate

doctrine applies and thus the Commission must permit Entergy to recover all of its River Bend 30%

energy costs as allowed by the May 2000 Tariff. See Nantahala Power and Light Co., 476 U.S. at

963. We disagree.

Texas law prohibits a utility from charging customers for an additional profit realized

from the sale of energy from an affiliate of the utility to itself. 16 Tex. Admin. Code § 25.236(a)(1)

(2004). The May 2000 Tariff contemplated the sale of the River Bend 30% energy from Entergy to

Entergy Services, Inc., then a sale from Entergy Services, Inc. back to Entergy to supplement its

native load.

In its effort to avoid affiliate sale fuel reconciliation deductions, Entergy proved that

in fact no sale occurred. The evidence in the record shows that the proposed sales transaction was

never executed as structured in the May 2000 Tariff. James Kenney, Vice President of Energy

Management for Entergy Services, Inc., testified at the SOAH hearing that Entergy, not Entergy

Services, Inc., acquired the River Bend 30% energy. He asserted that “regardless of the contract and

the filing at the FERC, this is strictly a transaction from Entergy to itself.” Kenney averred that the

unregulated River Bend 30% energy was dedicated to regulated retail service for a limited period of

time, and that the energy never left Entergy.

11
 Furthermore, under the terms of the System Agreement, it would have been

impossible for Entergy to sell the River Bend 30% energy to the Entergy System. During the

summer of 1999, while Entergy was experiencing the energy shortfall that led to the blackout and

its regulatory discipline, Entergy sold its River Bend 30% to a third party instead of using the River

Bend 30% energy to address Entergy’s native load demands. Entergy was informed by both the

Texas and Louisiana energy regulatory commissioners that it should use the River Bend 30% energy

to supplement its anticipated energy needs for the summer of 2000. Under the System Agreement,

an operating company, like Entergy, may only sell energy it produces in excess of its needs. Because

Entergy needed the River Bend 30% energy to satisfy its native load, Entergy, by the terms of the

System Agreement, was never in the position to sell the River Bend 30% to the Entergy System and

to repurchase the energy, as structured under the May 2000 Tariff.

The Commission also found that no purchase or sale occurred because there was no

transfer of title from Entergy to Entergy Services, Inc., nor did Entergy “buy back” the power from

Entergy Services, Inc. Obtaining approval from the FERC for a transaction is not tantamount to

consummating the transaction. Thus the sale to Entergy Services, Inc. contemplated in the FERC

filing never took place.

Entergy argues that an intra-corporate transfer under Public Serv. Comm’n v. Mid-La.

Gas Co., 463 U.S. 319 (1983) is considered a “sale.” In Mid-La. Gas Co., the U.S. Supreme Court

found that under federal statutes regulating the sales of natural gas, an intra-corporate transfer could

be considered a “first sale.” Id. at 326. The Supreme Court examined the legislative history of the

Natural Gas Policy Act and determined that Congress intended for pipeline production to receive

12
first sale pricing. Id. at 338. The Supreme Court’s Mid-La. Gas Co. decision was narrowly tailored

to address the question of “first sales” under the Natural Gas Policy Act; it did not hold that all utility

intra-corporate transfers are “sales.” See Southern Ca. Edison Co. v. Southern Ca. Gas Co., 80

F.E.R.C. ¶ 61,390 (1997).

Because the May 2000 Tariff sale never took place and because under these

circumstances the intra-corporate transfer is not considered a “sale,” the filed rate doctrine does not

apply and the Commission’s discretion to disallow non-fuel costs in the fuel reconciliation is not

preempted by federal law. A fuel reconciliation is a narrow inquiry about the fluctuation of actual

fuel costs. Tex. Util. Code Ann. § 36.203 (West 1998); see G.T.E. S.W., Inc., 978 S.W.2d at 168.

We hold that the Commission’s treatment of the River Bend 30% transaction is not preempted by

federal law and does not violate the filed rate doctrine. The Commission properly disallowed the

non-fuel components of the River Bend 30% energy costs. See Tex. Util. Code Ann. § 36.051 (West

1998).

Entergy also complains that if the filed rate doctrine does not apply, Entergy’s non-

fuel costs will be theoretically trapped because these costs are not already included in Entergy’s base

rate and Entergy claims that it cannot otherwise recover these costs. See Mississippi Power and

Light Co., 487 U.S. at 372. We disagree.

Entergy has not shown that it failed to recover its non-fuel rates through its base rate

due to the additional electricity it sold during the summer of 2000. Entergy’s base rates were set

based on the expectation that it would sell a certain amount of electricity at retail, and the base rates

were frozen after the rate case proceeding. During the Summer of 2000, Entergy sold more

13
electricity at retail than had been expected when the base rates were set. Thus with each incremental

unit sold at retail, Entergy may very well have recovered more in its base rates than it and the

Commission had expected Entergy to recover. To show that non-fuel costs were trapped, Entergy

would have to show that the non-fuel related costs were not recovered in the additional revenue

Entergy realized through base rates. Entergy made no such showing.

Entergy also complains that the Commission’s disallowance of the River Bend 30%

energy non-fuel costs was an abuse of discretion because it contradicted the Commission’s previous

orders by treating the River Bend 30% energy as a regulated asset for the purpose of the fuel

reconciliation.

A state agency decision may be found to be arbitrary and capricious when it fails to

reflect consideration of statutory factors and when it reflects an unreasonable result, even if the

agency purports to review pertinent factors. E.g., City of El Paso v. Public Util. Comm’n, 883

S.W.2d 179, 184 (Tex. 1994).

The Commission had previously treated the River Bend 30% energy as a wholesale

generation asset. It did not include any of the River Bend 30% energy non-fuel related costs in the

base rates Entergy charges its customers because Entergy insisted on selling the River Bend 30%

energy on the wholesale energy market. Entergy elected to use its own River Bend 30% wholesale

energy to comply with the Commission’s mandate to secure additional power to satisfy the needs of

its retail customers. Because a portion of the costs for which Entergy seeks reimbursement are

ineligible non-fuel expenses, the Commission disallowed the ineligible costs, consistent with the

14
guidelines set forth in the Texas Administrative Code. See 16 Tex. Admin. Code § 25.236(a) (2004).

Thus the Commission’s decision was not arbitrary or capricious. We overrule Entergy’s first issue.

Imputed Capacity Charges

In its second issue, Entergy asserts that the Commission improperly imputed capacity

charges from the additional power Entergy purchased from external wholesalers.7 Entergy argues

that the filed rate doctrine preempts the Commission’s actions and that the Commission violated the

federal interpretation of the System Agreement. Entergy also challenges the Commission’s

disallowance of imputed capacity costs because this treatment violates the fuel rule, is not supported

by substantial evidence, and constitutes an arbitrary ad hoc amendment to the fuel rule.

The Commission asserts that Entergy waived its federal preemption argument by

failing to raise it in its motion for rehearing. Entergy argues that case law permits Entergy to raise

an issue of federal preemption at any time. See Gorman v. Life Ins. Co. of North Am., 811 S.W.2d

542, 545 (Tex. 1991).

In administrative proceedings, a party must timely file a motion for rehearing as a

prerequisite to appeal. Tex. Gov’t Code Ann. § 2001.145 (West 2000). The motion for rehearing

must be sufficiently definite to allow the agency to cure the error or defend the order. Ray v. State

Bd. of Pub. Accountancy, 4 S.W.3d 429, 433 (Tex. App.—Austin 1999, no pet.); Four Stars Food

7
This issue only concerns power purchased from outside energy wholesalers and not the
River Bend 30% transaction.

15
Mart, Inc. v. Texas Alcoholic Beverage Comm’n, 923 S.W.2d 266, 270 (Tex. App.—Fort Worth

1996, no writ). To preserve the issue for review, the party must state in the motion for rehearing the

particular issue the party asserts was error and the legal basis upon which the claim rests. Id.

In Gorman, a widow sued her husband’s employer and its insurer to recover work-

related death benefits she claimed the insurance company improperly denied. See Gorman, 811

S.W.2d at 544. The defendants contended that the widow’s causes of actions were preempted by

ERISA because they “related to” an employee benefit welfare plan organized pursuant to the

authority and requirements of ERISA. Id. The supreme court recognized that it had to clarify the

extent of the ERISA preemption. Id. “At the heart of the present dispute is whether, given the facts

of this case, ERISA preemption implicates the subject matter jurisdiction of the court or merely

affects which law is to be used in the case.” Id. A preemption argument that affects forum rather

than choice of law cannot be waived and may be raised on appeal. Id. However, an argument that

affects choice of law can be waived. See id.

Entergy claims that federal law preempts the Commission’s actions because the filed

rate doctrine mandates that the Commission apply wholesale power rates fixed by the FERC. Thus,

Entergy asserts a choice of law argument as to which rules, federal or state, the Commission should

have applied in this case. Entergy does not assert a preemption argument attacking the competency

of the Commission or the courts to hear the case. Thus, Gorman does not support Entergy’s

argument. Because Entergy did not preserve the choice of law issue in its motion for rehearing,

Entergy has waived the right to argue this issue on appeal. Ray, 4 S.W.3d at 433.

16
 Entergy also asks us to decide whether the Commission’s treatment of capacity costs

violates the fuel rule, whether the Commission’s decision is supported by substantial evidence, and

whether the Commission’s actions constitute an arbitrary ad hoc amendment to the fuel rule.

The fuel rule prevents a utility from recovering capacity costs through the fuel factor

as part of purchased power. 16 Tex. Admin. Code § 25.236(a)(4) (2004).8 In determining whether

substantial evidence exists to support an agency’s decision, the reviewing court may decide only

whether the record demonstrates some reasonable basis for the agency’s action. Mireles v. Texas

Dep’t of Pub. Safety, 9 S.W.3d 128 (Tex. 1999). The court may not substitute its judgment for that

of the agency, and the court does not determine whether the agency’s decision was correct. Id.

Courts must affirm administrative findings in contested cases if there is more than a scintilla of

evidence to support them. Id. An administrative decision may be sustained even if the evidence

preponderates against it. Id.

A state agency must promulgate new rules through formal rulemaking procedures,

which include giving notice of a proposed new rule, soliciting public comment, submitting to

legislative review, and entering an order to adopt the new rule. See Tex. Gov’t Code Ann.

§§ 2001.023; 2001.029; 2001.032-.033 (West 2000).

Entergy claims that the Commission violated the fuel rule because it disallowed

capacity charges that were not explicitly stated separately as line items. In essence, Entergy argues

8
Capacity charges may be recovered in a full rate case hearing. See Tex. Util. Code Ann.
§ 36.051 (West 1998).

17
that the fuel rule requires the Commission to pass through to retail customers the entire cost of

purchased power unless the contract explicitly states capacity charges. In other words, Entergy

argues the Commission cannot look beyond the stated “energy only” purchased power contract terms

to determine whether the contract in fact includes embedded capacity charges.

The plain language of the fuel rule prohibits a utility from recovering capacity charges

associated with purchased power. See 16 Tex. Admin. Code § 25.236(a)(4) (2004). The rule is not

stated in terms of segregated electricity and capacity charges, but in terms of total capacity charges.

The expert testimony in the record shows that the contracts provided capacity benefits by offering

system-wide reliability and firmness of supply, even though the contracts did not separately state a

capacity charge. Entergy did not advance its own estimate of the imputed capacity charge, but

conceded that the expert’s estimate of 24% of the contract price was reasonable. Furthermore,

Entergy testimony corroborated Entergy’s desire to acquire through purchased power the power and

capacity it required to avoid another energy shortfall in 2000. We hold that the Commission

properly excluded the imputed capacity charges and that there is substantial evidence to support the

Commission’s decision.

Last, Entergy asserts that the Commission illegally modified the fuel rule when it

disallowed the embedded capacity charges associated with the purchased power. Entergy claims that

this practice departed from previous applications of the fuel rule and that the ad hoc modification

is unlawful because the Commission did not engage the formal rulemaking process to modify the

fuel rule. See Tex. Gov’t Code Ann. §§ 2001.023; 2001.029; 2001.032-.033 (West 2000). In

18
January 2005, the Commission solicited comments on proposed amendments to the fuel rule

regarding eligible purchased power expenses. See 30 Tex. Reg. 335-36 (2005) (proposed January

10, 2005).

Entergy asserts that the Commission’s decision departed from its fuel reconciliation

policy and rules and suggests that this request for public comment is tantamount to the Commission

admitting that it must engage the formal rulemaking process to modify the fuel rule to permit the

Commission to impute capacity charges. We disagree.

The proposed modification for which the Commission seeks public comment will

facilitate the identification and calculation of imputed energy charges in purchased power contracts

when no capacity charge is separately stated. See id. The modification does not seek to establish

whether the Commission may impute charges.

Furthermore, the Commission may consider a matter in a contested case before

adopting a rule later. See City of El Paso, 883 S.W.2d at 189 (“ad hoc adjudication may be

preferable to formal rulemaking proceeding where ‘the agency may not have had sufficient

experience with a particular problem to warrant rigidifying its tentative judgment into a hard and fast

rule.’”).

We hold that the Commission’s treatment of the imputed capacity costs was proper

under the fuel rule and was supported by substantial evidence, and that the Commission’s decision

to disallow imputed capacity charges did not constitute an ad hoc amendment to the fuel rule. We

overrule Entergy’s second issue.

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Declaratory Judgment

In its last issue, Entergy asserts that the district court erred in refusing to grant a

declaratory judgment that Entergy’s similarly situated future power purchases are subject to federal

preemption and the filed rate doctrine. Because we hold that the transactions at issue in this case are

not subject to the filed rate doctrine, we need not reach the declaratory judgment issue.

CONCLUSION

We hold that the Commission properly disallowed the non-fuel costs associated with

the River Bend 30% energy transaction and properly disallowed the purchased power contracts’

imputed capacity costs in the fuel reconciliation. We affirm the judgment of the district court,

affirming the Commission’s actions.

W. Kenneth Law, Chief Justice

Before Chief Justice Law, Justices B. A. Smith and Pemberton

Affirmed

Filed: August 31, 2005

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