SOAH DOCKET NO. 473-00-1014
PUC DOCKET NO. 22349
APPLICATION OF TExAS-NEW § STATE OFFICE OF ADMINISTRATIVE
MEXICO POWER COMPANY §
FOR APPROVAL OF UNBUNDLED § HEARINGS
COST OF SERVICE RATES §
PURSUANT TO PURA §39.201 §
AND PUBLIC UTILITY COMMISSION §
SUBSTANTIVE RULE §25.344 §
SOAH DOCKET NO. 473-00-1015
PUC DOCKET NO. 22350
APPLICATION OF txu electric § STATE OFFICE OF ADMINISTRATIVE
FOR APPROVAL OF §
UNBUNDLED COST OF SERVICE § HEARINGS
RATES PURSUANT TO PURA §39.201 §
AND PUBLIC UTILITY COMMISSION §
SUBSTANTIVE RULE §25.344 §
SOAH DOCKET NO. 473-00-1017
PUC DOCKET NO. 22352
APPLICATION OF central § STATE OFFICE OF ADMINISTRATIVE
POWER AND LIGHT COMPANY §
FOR APPROVAL OF §
UNBUNDLED COST OF SERVICE § HEARINGS
RATES PURSUANT TO PURA §39.201 §
AND PUBLIC UTILITY COMMISSION §
SUBSTANTIVE RULE §25.344 §
SOAH DOCKET NO. 473-00-1020
PUC DOCKET NO. 22355
APPLICATION OF Reliant § STATE OFFICE OF ADMINISTRATIVE
ENERGY HL&P FOR APPROVAL §
OF UNBUNDLED COST OF SERVICE § HEARINGS
RATES PURSUANT TO PURA §39.201 §
AND PUBLIC UTILITY COMMISSION §
SUBSTANTIVE RULE §25.344 §
SOAH DOCKET NO. 473-00-1021
PUC DOCKET NO. 22356
APPLICATION OF ENTERGY GULF § STATE OFFICE OF ADMINISTRATIVE
STATES, INC. FOR APPROVAL §
OF UNBUNDLED COST OF SERVICE § HEARINGS
RATES PURSUANT TO PURA §39.201 §
AND PUBLIC UTILITY COMMISSION §
SUBSTANTIVE RULE §25.344 §
OFFICE OF PUBLIC UTILITY COUNSEL'S
BRIEF ON CERTIFIED QUESTIONS
TO THE HONORABLE CHAIRMAN AND COMMISSIONERS:
COMES NOW, the Office of Public Utility Counsel (OPC), and files this brief on certified questions. On October 5, 2000 the State Office of Administrative Hearings (SOAH) certified a question to the Commission concerning the legal authority of the Commission to address negative excess costs over market (ECOM). Subsequently, on October 11, 2000 SOAH submitted an additional question to the Commission seeking further guidance on this issue. OPC’s response to these questions is contained below.
I. Introduction
To date, the dialogue on stranded costs has been dominated by powerful and vocal utilities complaining about their right to recover all of their previously approved, yet uneconomic investment. As a result of ratepayers foregoing significant rate reductions they otherwise would be entitled to and an increase in natural gas prices utilities are going to be able to recover such costs. And then some.
According to the 1998 ECOM Report to the Texas Senate Interim Committee on Electric Utility Restructuring there were five investor owned utilities that were anticipated to have ECOM in 2002. At this time, testimony has been filed in the ECOM phase of four of those utilities’ UCOS dockets.[1] Based upon the Commission’s decisions in the generic proceeding as well as other appropriate adjustments, OPC has determined that each of the four utilities will substantially overcollect their projected ECOM by 2004 unless steps are taken now to stop this trend. A summary of these recommendations is contained in the following chart:
Central Power and Light $602,000,000
TXU $3,400,000,000
Reliant $2,800,000,000
Texas-New Mexico Power $53,500,000
TOTAL OVERCOLLECTION $6,855,500,000
As the table demonstrates, OPC anticipates that utilities in Texas will overcollect their stranded costs in excess of $7 billion dollars.[2] This equates to almost $300 for every person in Texas. In fact, the vast majority of this amount is due, not to a reduction in projected stranded costs, but to overly aggressive mitigation efforts. Despite this fact, ratepayers continue to subsidize utilities through the application of excess earnings to stranded costs and the redirection of transmission and distribution (T&D) depreciation. Common sense and fairness preclude the continuance of these mitigation efforts in the face of this staggering amount of expected overcollections. Put another way, no logical person would continue to make payments on a debt he has paid off. And no person should be required to. Just as it was appropriate to mitigate stranded costs, it is equally appropriate for the Commission to begin mitigating negative ECOM.
Given the huge amount of projected overcollections, OPC urges the Commission to take actions now to reduce the amount of negative ECOM for those utilities whom the Commission determines in the current UCOS cases will have significant amounts of negative ECOM. This can be done by ceasing the application of excess earnings to stranded costs, creating a negative competition transition charge (CTC), stopping the redirection of depreciation and/or unwinding the historic redirection of depreciation.
OPC concedes that the ECOM model, like all models, is not likely to be a perfect indicator of stranded costs. Recognizing this fact, the Legislature provided for a true-up proceeding in 2004. Notwithstanding the true-up, OPC is mindful that, given the uncertainty of the model and the future, the Commission may be hesitant to take certain actions that could create positive ECOM in 2004 where none is anticipated today. However, the desire for conservative action does not justify taking no action given the huge amount of negative ECOM projected.[3] Even if one were to assume that OPC’s projections are somewhat excessive, taking into consideration the magnitude of $7 billion in overcollections, it is still highly likely that utilities will have a significant amount of excess earnings. [4] Consequently, the Commission can achieve its goal of conservative action while taking steps to reduce the amount of overcollections and return those amounts to ratepayers.
II. Impact on Competition
As serious as the issue of the overcollecting ECOM is, the impact of negative ECOM on the long-term future of competition in the Texas electric utility industry is perhaps even more crucial. The Legislature made it clear that the main goal of Senate Bill 7 (SB7) is to establish viable electric competition in Texas. The law states that the fundamental purpose of SB7 is “to protect the public interest during the transition to and in the establishment of a fully competitive electric power industry.”[5]
In order for there to be competition there must be what has been termed “headroom.” Headroom is defined generally as the difference between the price to beat (PTB) and all non-bypassable charges including any CTC used to collect stranded costs. This difference constitutes the potential profit available to a market entrant. To the extent the amount of headroom is reduced the potential for profit and, accordingly, additional market entrants is reduced. In other words, without sufficient headroom there will not be meaningful competition. The Commission has already determined that “the preservation of headroom and the prevention of rate shock are both important issues in the setting of CTCs that can be significantly impacted by the period set for recovery of stranded costs.”[6] Conversely, where headroom is increased, the opportunity for greater competition is enhanced. Headroom is of particular concern to OPC because unless there is significant headroom, there will be no incentive for new entrants to market to residential and small commercial customers.
Overcollection of stranded costs harms competition in several ways. First, it discourages entry into the market once it begins. This is because it results in excessive non-bypassable charges that serve to reduce headroom. In the absence of a credit to non-bypassable charges, the very expectations of higher wholesale market prices which contribute to negative ECOM will simultaneously squeeze competing retail electric providers’ (REPs’) ability to recover market costs within the available headroom. Moreover, it provides an unfair advantage to the affiliate REP.
The Legislature intended that utilities collect their reasonable stranded costs. They did not intend for them the gain an unfair advantage from overmitigation. Nevertheless, utilities would have ratepayers continue to subsidize their businesses. For those wanting competition to emerge, this would have the undesirable effect of giving incumbent utilities and unfair advantage while creating market barriers to entry. The result would be to preclude competition from developing in Texas.
III. Does the law contemplate negative ECOM? Put another way, does the law permit the dollar amount of a utility's ECOM as an input to the competition transition charge to be less than zero?
Senate Bill 7 clearly contemplates negative ECOM. This is manifest by the fact that Section 39.201(h) of PURA requires the use of the ECOM model referenced in Section 39.262 to determine estimated ECOM. In the 1998 ECOM Report, referenced in the statute, the mechanics of the model were set out.[7] Significantly, the Report also presented an update and summary on ECOM. As part of that discussion, the Report discussed negative ECOM in numerous areas and projected negative ECOM in the 2002 base case for nine of the 21 utilities projected. The number of utilities as well as the amount of expected negative ECOM increased markedly if the high market price in the 1998 ECOM Report is considered. Considering that the 1998 ECOM Report was prepared for, and delivered to, the Senate Interim Committee on Electric Utility Restructuring it is clear that the Legislature was mindful of the possibility of negative ECOM when they required the use of the model in Section 39.201(h).
With respect to the second question, it is clear that there is nothing in SB7 that prohibits the Commission from establishing that the dollar amount of a utility’s ECOM as an input to the CTC may be less than zero. That is, SB7 does not preclude the PUC from implementing a negative CTC prior to the 2004 true-up proceeding. In contrast, certain utilities have argued that it is not possible for the CTC to be negative. In support of their arguments they have asserted that PURA §39.201(g) states that the CTC is to be calculated from the amount of stranded costs as defined in Subchapter F of PURA Chapter 39 that are reasonably expected to exist on December 31, 2001. Subchapter F refers to stranded costs as the “positive difference between the net book value of generating assets and the market value of those assets.”[8] Based upon these provisions those parties claim that the CTC must be a positive number.
This argument is flawed because it equates the use of the term stranded costs with the term ECOM. As noted above, Section 39.201(h) of PURA requires the use of the ECOM model referenced in Section 39.262 to determine estimated ECOM. The model takes into account not only the value of a utility’s uneconomic generation assets and purchased power costs but also mitigation efforts including the application of excess earnings to stranded costs and the redirection of T&D depreciation. Conversely, the definition of stranded costs in Section 39.251(7) does not refer to such mitigation efforts; if the definition had encompassed mitigation efforts then the reference to “positive difference” would have contradicted Section 39.262(a), which precludes over-mitigation of stranded costs. In effect, for purposes of the ECOM model, stranded costs is a component of the ECOM calculation along with any mitigation efforts. Consequently, the fact that PURA §39.251(7) does not expressly mention the disposition of negative ECOM does not preclude a negative CTC. As such, a utility could have positive stranded costs while having negative ECOM if it has over mitigated its stranded costs. In fact, that is exactly the case for almost all of the utilities in Texas.
Because of the aggressive mitigation that has occurred since 1998, the projected additional mitigation that is expected to occur through 2001, and securitization for certain utilities, the negative ECOM for most utilities is comprised entirely of excess mitigation rather than negative stranded investment. The results of the ECOM Model are to be used to establish the CTC. Because the model results take into account any mitigation efforts, the CTC includes not only any positive stranded costs but also the effect of any mitigation efforts. Therefore, even if one argues that the stranded cost portion of the CTC must be positive it does not mean that the CTC could, nevertheless, be negative due to excessive mitigation.
The recent ECOM phase of the Reliant proceeding demonstrates this situation. In that case, OPC determined that Reliant is expected to have approximately $2.8 billion of negative ECOM as of December 31, 2001. This amount includes an undisputed $700 in securitization, $1,014 million in redirected T&D depreciation, and at least $678 million in excess earnings.[9] It also includes an additional $823 million in excess earnings projected by OPC.[10] As can be seen, the amount of mitigation is far in excess the $2.8 billion amount. This means that Reliant’s stranded costs have been fully offset by mitigation and securitization. In other words, negative ECOM has been created by the very steps taken to reduce it.
Instead of focusing on whether a negative CTC is permissable the more salient question is whether the law permits a utility to overcollect its stranded costs through mitigation efforts. The answer to that question is no. SB7 gives utilities the right to collect their stranded costs in 2004. It does not, however, provide them with any right to recover or retain any overcollections. By overly aggressive mitigation efforts prior to that time, utilities benefit by having higher revenues than would have existed had rate reductions been ordered.
IV. Does the Commission have the authority to address negative ECOM through:
1. Preventing forecasted redirected transmission and distribution (T&D) depreciation included in the ECOM calculation;
2. Reversing redirected T&D depreciation amounts that have already been applied to accelerate depreciation of generating assets;
3. Offsetting the amount of securitized regulatory assets;
4. Ceasing the application of excess earnings used to reduce the net book value of generation assets;
5. Refunding or crediting of historical accumulated excess earnings that are included in the ECOM calculation; and/or
6. Any other measures to reduce the amount of negative ECOM and/or return negative ECOM to ratepayers?
As discussed above, the Commission not only has the authority but the obligation to address negative ECOM. There are numerous means available to the Commission for accomplishing this task. Senate Bill 7 directed utilities that were expected to have stranded costs in the 1998 ECOM Report to take certain actions to mitigate those costs. However, the Legislature also indicated in PURA §39.262 that applications of these measures could not result in overrecovery of stranded costs. Although Section 39.262 is titled “true-up proceeding” its clear language states that utilities may not overrecover stranded costs due to mitigation procedures without limitation to the true-up proceeding. Based upon this language there is nothing that would prevent the Commission from taking steps to ensure that the redirection of T&D depreciation does not lead to the overrecovery of stranded costs.