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Corporate Upper Class
On Nov. 10, CenterPoint Energy was awarded the largest stranded costs recovery decision in United States history.
The Houston-based energy giant will be allowed to recover $2.3 billion from consumers under Texas' electric deregulation law, based on the ruling by the Public Utility Commission.
The PUC's ruling came two months after it was required by rule to be delivered and awarded over half of the $4.25 billion requested.
In 2001 before the company filed, the Texas PUC calculated that CenterPoint actually had negative stranded costs of $2.6 billion and rate payers would see a rate reduction.
Despite this, CenterPoint Energy-Houston Electric, an electricity transmission and distribution company with about 1.8 million Houston-area customers, said the PUC's decision was lacking proper funding.
"Although the Commission's final order is essentially in line with what we have been expecting based on their earlier deliberations, we nevertheless are extremely disappointed in the decision," said David M. McClanahan, president and chief executive officer for CenterPoint Energy in the company's press release following the decision.
Centerpoint's General Counsel, Scott Rozzell, said CenterPoint has since filed motions for appeals and plans to take the case all the way to the Texas Supreme Court in order to recuperate the company's supposed losses.
On the other side of the case, the City of Houston joined with 29 other cities in CenterPoint's service territory to intervene in the stranded cost proceeding. Most of the intervening parties see the PUC's decision as fair.
"Cutting CenterPoint's request is the right thing to do,"¨ said Houston Mayor Bill White. "We saw it as our duty to intercede on behalf of the citizens of Houston to reduce rates. We are pleased that the PUC followed the law and agreed with many of our arguments for consumers."
The mayor's office estimates that the ruling could result in a savings of approximately $500 for the average Houston household.
CenterPoint says that securitizing the full amount determined by the PUC will increase the amount the company charges retail electric providers, which in turn increases the monthly bill for a PUC benchmark residential customer (1,000 kwh/month) by approximately $3 per month.
So with CenterPoint seeking more stranded costs recovery and the City of Houston falsely saying that consumers will save money, the ratepayers are stuck with paying the bill for something that many groups say should never have come to pass in the first place.
In 1999,The Texas State Legislature passed the Electricity deregulation bill - SB 7 - which required the regulated monopolies to be unbundled and provided for the recovery of "stranded costs."
"Stranded costs are defined as the decline in the value of electricity-generating assets due to restructuring of the industry," according to the Congressional Budget Office.
Although the recovery of stranded costs is usually a part of deregulation, the collection of them is controversial.
"As to the merits of a stranded costs claim, generally, I see them as industry bailouts, in which the formerly regulated firm is frequently looking to the public [to consumers] to subsidize its private opportunity costs," said Jim Rossi, who taught Administrative Law at UT when electricity was deregulated in Texas and is now the Associate Dean for Research at Florida State University College of Law.
In fact Duquesne Light Co., a utility based in Pennsylvania, decided to eliminate "stranded costs" billed to customers after the costs were awarded in their true-up case.
As a result of Duquesne Light's decision to drop the costs, about 580,000 Duquesne Light customers are expected to see savings from 16 percent to 20 percent.
Pittsburgh-based utility watchdog Citizen Power said it welcomes Duquesne Light Co.'s decision to eliminate so-called "stranded costs" billed to customers, but said the charges never should have been levied in the first place.
TXU Energy, the state's largest utility, settled in June 2002 with the PUC on its stranded costs, which were set at zero.
So how did CenterPoint go from owing $2.6 billion to consumers to being awarded $2.3 billion back from them? They accomplished the feat by engaging in a series of questionable actions to deflate the value of its holdings.
David C. Rode, the director of Quantitative Analysis for DAI Management Consultants who testified on behalf of the Office of Public Utility Counsel, said that for the purpose of the stranded costs hearing CenterPoint wanted to project a negative image of Texas GenCo, their generation assets holding company, as having little value.
But for the purpose of selling its stake in Texas GenCo, CenterPoint wanted to project a positive image of Texas GenCo as having significant value.
Rode said that although CenterPoint did undertake many mitigating measures, a number of other issues raised questions concerning CenterPoint's attempt to devalue Texas GenCo.
- Some have questioned whether Texas GenCo and CenterPoint were truly independent. The two companies shared almost all major executives and over half the board.
- Texas GenCo was prohibited from altering its dividend policy and from using debt - it had zero debt.
- Texas GenCo was prohibited from building, buying, selling or retiring any capacity.
- CenterPoint's retained stake gave it total control over Texas GenCo's actions - control it exercised to its own benefit at the exclusion of Texas GenCo's best interests.
A number of expert witnesses in the case, including Rode, outlined these practices by CenterPoint in an effort to show the true profit-hungry deceptions made by the company. Although the evidence was submitted to back up the testimony, the CEO of CenterPoint, McClanahan, dismissed these arguments by making a personal attack in his direct testimony saying the experts arguments were the work of "conspiracy theorists".
Meanwhile, Wall Street saw Texas GenCo as profitable. In January of 2003, when Texas GenCo went public one share was priced at $10. In July of 2004 GenCo was sold to a private investor for almost $46 a share - a 460 percent increase in 17 months.
In Fact, Texas GenCo owns one of the most profitable merchant energy fleets in the country and was the 15th-best performer on the New York Stock Exchange during its first year of trading in 2003.
Clearly the gambit worked, CenterPoint claimed the maximum in stranded costs and sold Texas GenCo for a tidy profit. And, although CenterPoint claims disappointment with the award, the decision hasn't hurt the company.
On Nov. 12, Fitch ratings raised the rating outlook of CenterPoint from "negative" to "stable", and gave "outstanding"¨ ratings to two of the energy giant's subsidiaries, CenterPoint Energy Houston Electric, LLC (CEHE) and CenterPoint Energy Resources Corp. (CERC).
These rating increases allow the company to pursue loans and lines of credit at much lower interest rates further raising the company's profits.
Even though the company's financial outlook appears strong, there will be no rate reductions, as the PUC stated their should be in 2001, and consumers will most likely be paying more than $3 a month the company forecasts.
The likely increase will be closer to $6 a month per 1,000 kwh. Plus, the average three bedroom home in Houston uses about 2,000 kwh per month and even more in the summer. So the likely increase for those homes will be in the $10 to $12 range.
On Dec. 2, CenterPoint filed for approval of a financing order to issue low-cost securitization bonds to fund the $2.3 billion true-up balance authorized by the PUC. This was the first step in raising the electricity rates for consumers.
Rate payers are now looking at an increase of $120 to $140 per year for the next 12 years with possibly more to pay on the horizon. The securitization bonds should take effect sometime in mid 2005, according to Terry Hadley, spokesperson for the PUC.
Note: Graphics used with permission of David C. Rode.
© Copyright World Internet News 2006-07
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Relevant Documents
Report to the Commission on Electric Utility Restructuring
of the Virginia General Assembly
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