Opinion ID: 895266
Heading Depth: 3
Heading Rank: 1

Heading: Stranded Costs

Text: 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