Opinion ID: 895266
Heading Depth: 2
Heading Rank: 1

Heading: Overview of Relevant Provisions of Chapter 39

Text: The Legislature in 1999 overhauled the Public Utility Regulatory Act (PURA or Act) to create a “fully competitive electric power industry” in Texas. 2 As part of this restructuring, utilities were required, not later than January 1, 2002, to split into three distinct units: (1) a power-generation company, (2) a retail electric provider, and (3) a transmission and distribution utility. 3 After that date, known as the date of consumer choice, retail consumers could choose among competing retail providers. 4 As for the transmission and distribution utility, its rates continue to be regulated by the PUC. 5 This unit also continues to provide metering services 6 and to charge retail electric providers for “ nonbypassable delivery charges” under rates approved by the Commission. 7 The transmission and distribution utility may also, at the retail provider’s request, bill retail customers directly. 8
The Legislature recognized that utilities had made investments in power-generation assets that produced a reasonable return under the existing regulated environment “but might well become uneconomic and thus unrecoverable in a competitive, deregulated electric power market.” 9 The Act thus allows utilities to recover these “stranded costs,” which consist generally of “the portion of the book value of a utility’s generation assets that is projected to be unrecovered through rates that are based on market prices.” 1 0 The Act deregulated the market in phases. Retail rates were frozen from September 1, 1999 until January 1, 2002. 1 1 PURA Section 39.201 directed transmission and distribution utilities to file, on or before April 1, 2000, proposed tariffs that included nonbypassable delivery charges to retail electric providers. 1 2 It also directed the PUC to approve rates as of January 1, 2002. 1 3 The nonbypassable delivery charges included a “competition transition charge” (CTC) based on an estimate of stranded costs projected to exist at the end of the freeze period on December 31, 2001. 1 4 The CTC is “ nonbypassable ” in “that with limited exceptions, all retail electric customers in an existing utility’s service area will pay charges to allow that utility to recover stranded costs regardless of whether those customers purchase their electricity from that utility, switch to one of its competitors, or generate their own electricity.” 1 5 In estimating stranded costs, utilities were required to use the “ECOM” model, 1 6 an estimation model earlier used in a 1998 PUC report to the Texas Senate. 1 7 Section 39.201 allowed a utility to recover estimated stranded costs at any time after the start of the freeze period on September 1, 1999, by issuing bonds and using a “transition charge” (TC) to service the bonds, a process known as “securitization” or “securitization financing,” 1 8 or by imposing a CTC. 1 9 But no such charges were imposed because the PUC concluded that under the ECOM model no utility would incur stranded costs. 2 0 Under Section 39.262, utilities were required, after January 10, 2004, to file with the PUC a reconciliation of stranded costs and the previous estimate of stranded costs that had been used in determining rates under Section 39.201. 2 1 By this time, the utility had been unbundled into a transmission and distribution utility, a generating company, and a retail electric provider. Section 39.262 further directed the PUC to conduct a “true-up proceeding” and enter a final order adjusting the CTC to reflect the ultimate valuation of stranded costs. 2 2 “If, based on the proceeding, the competition transition charge is not sufficient, the commission may extend the collection period for the charge or, if necessary, increase the charge.” 2 3 The adjusted CTC is applied to the nonbypassable delivery rates of the transmission and distribution utility. 2 4 For purposes of finalizing the measure of stranded costs, a power-generation company must quantify its stranded costs using “one or more” of four valuation methods specified in the Act: (1) the sale of assets method, (2) the stock valuation method, (3) the partial stock valuation (PSV) method, and (4) the exchange of assets method. 2 5 If the PSV method is used, the PUC may convene “a valuation panel of three independent financial experts to determine whether the percentage of common stock sold is fairly representative of the total common stock equity or whether a control premium exists for the retained interest.” 2 6
In addition to adjustments for stranded costs, the PUC is directed at the true-up proceeding to make other adjustments to the nonbypassable delivery charges of the transmission and distribution utility. These adjustments are made to what are sometimes labeled non-stranded costs, and can result in an increase or decrease in the amount of or collection period of the CTC. 2 7 From January 1, 2002, until January 1, 2007, affiliated retail electric providers were required to charge rates six percent below average rates that were in effect on January 1, 1999, subject to certain adjustments including a fuel factor. 2 8 This price is known as the “price to beat.” After January 1, 2002, each affiliated power-generation company is required to file a final fuel reconciliation that calculates a final fuel balance as of December 31, 2001. 2 9 To foster competition, each utility or its unbundled power-generation company was required, at least 60 days before January 1, 2002, to conduct a “capacity auction” that sold entitlements to at least 15 percent of the utility’s generation capacity. 3 0 The obligation continued until the earlier of 60 months after the date customer choice is introduced or the date the PUC determined “that 40 percent or more of the electric power consumed by residential and small commercial customers within the affiliated transmission and distribution utility’s certificated service area before the onset of customer choice is provided by nonaffiliated retail electric providers.” 3 1 Under Section 39.262(d), the Act directs the affiliated power-generation company at the true-up proceeding to reconcile and either bill or credit the transmission and distribution utility for the net sum of (1) the former integrated utility’s final fuel balance, 3 2 and (2) the capacity auction true-up balance, which consists of the difference between the price of power realized at the capacity auctions and the power-cost projections used in the ECOM model. 3 3 Section 39.262(e) directs the affiliated retail electric provider at the true-up proceeding to credit the affiliated transmission and distribution utility for “any positive difference between the price to beat established under Section 39.202, reduced by the nonbypassable delivery charge established under Section 39.201, and the prevailing market price of electricity during the same time period.” 3 4 This credit is known as the “retail clawback .” Section 39.262(f) directs the PUC at the true-up proceeding to modify the transmission and distribution utility’s nonbypassable rates to reflect adjustment to the amount of “regulatory assets,” a special category of assets 3 5 we have described as “essentially bookkeeping entries.” 3 6