Opinion ID: 895304
Heading Depth: 2
Heading Rank: 3

Heading: Capacity Auction True-Up

Text: CenterPoint complains that the court of appeals and the PUC erred in concluding that an adjustment to the capacity auction price should be made in calculating the capacity auction true-up under Section 39.262(d). We agree with CenterPoint. Genco became the affiliated power-generation company of CenterPoint in 2001. Section 39.153 required Genco to auction at least 60 days before [January 1, 2002], entitlements to at least 15 percent of [its] Texas jurisdictional installed generation capacity. [92] The capacity auctions thus assured that power was available to new competitors in the deregulated retail electricity market. The PUC recognized in its Substantive Rule 25.381(b) that the purpose of the capacity auctions is to promote competitiveness in the wholesale market through increased availability of generation and increased liquidity. [93] Under Section 39.201, the PUC approved rates intended to cover expected stranded costs and other charges. Stranded costs were estimated based on the ECOM administrative model [94] the PUC ran in 2001. Section 39.262(d)(2) required a capacity auction true-up at the final true-up proceeding. Section 39.262(d) states: The affiliated power generation company shall reconcile, and either credit or bill to the transmission and distribution utility, the net sum of: (1) the former electric utility's final fuel balance determined under Section 39.202(c); and (2) any difference between the price of power obtained through the capacity auctions under Sections 39.153 and 39.156 and the power cost projections that were employed for the same time period in the ECOM model to estimate stranded costs in the proceeding under Section 39.201. The final fuel balance of subpart (1), which is summed with the capacity auction true-up amount, is not at issue in this appeal. Under subpart (2), the power-generation company (Genco) bills the transmission and distribution company (CenterPoint) if revenues as determined by the capacity auction price are less than the revenues predicted by the ECOM model. The amount billed to the transmission and distribution company can then be recovered from consumers through adjustment of the nonbypassable delivery rates. [95] Under the formula used by the PUC in its Substantive Rule 25.263(i), [96] (ECOM market revenuesECOM fuel costs) less (market revenues (as determined from capacity auctions)actual fuel costs) equals capacity auction true-up Under this formula, market revenues as determined from capacity auctions is a term of art and is a proxy for actual market revenues of the utility during the relevant period. Under the Rule, market revenues consist of the capacity auction price × total 2002 and 2003 busbar sales. Total busbar sales refers to the total quantity of power generated for sale by Genco. The formula deems all busbar sales as being made at the average capacity auction price, since Rule 25.263(i)(1)(C) defines the capacity auction price as the affiliated power-generation company's total capacity auction revenues derived from the capacity auctions conducted for the years 2002 and 2003 divided by that [company's] total [megawatt hour] sales of capacity auction products for the years 2002 and 2003. In its Order the PUC stated that the purpose of the capacity auction true-up is to ensure that utilities receive the margins predicted in the ECOM model which assumed the continuation of regulation. We agree, having previously noted that the capacity auction true-up guarantees consumers and power companies that the power company will receive no more and no less than a margin predetermined by the Commission in 2001 when the ECOM model was run in compliance with section 39.201. [97] We further explained the underlying rationale for the capacity auction true-up as follows: The Legislature recognized that on the first day of deregulation, January 1, 2002, there was no way to validly quantify stranded costs, if any, because a market for electricity, both wholesale and retail, would need time to develop, and there would be interim distortions and fluctuations, perhaps severe ones. The Legislature was also concerned that distortions and fluctuations in the market price of power during the first two years of deregulation could harm consumers and generation companies alike. The Legislature accordingly designed the capacity auction true-up proceeding because of the likelihood that no stable market would exist until up to two years after the first day of deregulation. [98] Sections 39.153(e) and (f) required the PUC to adopt rules governing the statutory capacity auctions. The PUC adopted rules governing the auctions in many particulars, covering the time of sale, the type of products sold, and the terms of the sales. [99] The PUC required Genco to sell entitlements to its generation capacity in four product categories: baseload, gas-intermediate, gas-cyclic, and gas-peaking. Due to variations of market demand, these rules contained a safe-harbor provision deeming the 15-percent requirement met if the affiliated power-generation company offered products in a product category (for example, gas-intermediate) and successfully sold, at least, all of the entitlements offered in one particular month, in that product category. [100] If demand was insufficient to meet even this provision, the company was to make a proposal to the commission to modify the auction process, prices, or products. [101] Genco offered the required 15 percent of its capacity in the four product categories in its statutory capacity auctions and sold all the entitlements for at least one month in 2002 and 2003 for each product category except for gas-intermediate in 2003. Genco made proposals to facilitate the auction for gas-intermediate, two of which were approved by the PUC, that included cut-rate pricing for as little as one cent for kilowatt-month, but Genco was ultimately unsuccessful in meeting the safe-harbor requirement that it sell all entitlements to gas-intermediate for at least one month in 2003. The Commission found that Genco had sold only 65 percent of the capacity it was required to sell under the 15 percent requirement of Section 39.153, and less than half the gas-intermediate capacity required of Commission rules. However, Genco correctly points out that it would have complied with the safe harbor provisions if it had succeeded in selling additional entitlements in one product category for $5,250. Based on this failure, the PUC concluded that Genco had not complied with PURA Section 39.153(a) and therefore its formula under Rule 25.263(i) could not be used. It then proceeded to consider an alternative proper method for determining the capacity auction true-up amount, one that in the eyes of the PUC would avoid the bias created by the failure of [Genco] to auction a full 15 percent of its auction products. [102] The PUC considered various proposals but adopted the approach of an Intervenor witness, Dennis Goins, who proposed that the capacity auction price used in the formula should be defined as the average price of all capacity products sold in the PUC and private auctions. Under this formula, the capacity auction true-up amount was reduced by $439,744,218. The district court reversed the PUC on this issue, but the court of appeals agreed with the PUC and reinstated this disallowance. [103] We conclude that the court of appeals and the PUC erred in reducing the capacity auction true-up amount as described above. The capacity auction true-up amount should not be reduced by over $400 million because Genco was unable to sell $5000 worth of one subcategory of its generation capacity at auction. While Section 39.153 specifies that the utility sell 15 percent of its generating capacity at auction, the record indicates that Genco made a good faith effort to comply with this statute and was simply unable to sell by auction, at any price, the amount of one product category required by PUC rules. It points out that no utility was able to sell all its gas-intermediate entitlements for even one month in 2003. We avoid statutory constructions that impose an impossible condition. [104] Further, Section 39.262 does not state that the capacity auction price specified therein should be ignored because of a trivial noncompliance with rules promulgated under Section 39.153. Nothing in Chapter 39 requires such a result. In the portion of the Order discussing the issue, the PUC conceded, Neither PURA nor the Commission's rules specify what happens if a company fails to meet the 15 percent sales requirement or the safe-harbor provisions. The capacity auction true-up in Section 39.262 is not conditioned on compliance with the requirement, under the separate statute governing the capacity auctions themselves, that the utility succeed in auctioning 15 percent of its generating capacity. As discussed above, the two sections address different legislative purposes. The capacity auctions themselves were intended to provide a supply of power to new entrants in the retail electric market, while the capacity auction true-up was intended to assure that the original utilities recovered a margin predetermined by the Commission in 2001. [105] Section 39.262 does, however, expressly require the use of the  price of power obtained through the capacity auctions under Sections 39.153 and 39.156. [106] Goins conceded that CenterPoint used the statutory price as spelled out in Section 39.262 and Rule 25.263(i) in making its capacity auction true-up request. However, he believed that the statutory formula created a downward bias if the auction was unsuccessful in selling a relatively higher-priced product such as gas-intermediate. He therefore proposed following Rule 25.263(i) with one major modification. He recommended calculating the capacity auction price based on the average prices of products sold in the PUC capacity auctions as well as prices obtained in so-called TGN auctions. The TGN auctions were private auctions that did not have to comply with PUC rules. [107] Notably RERS, Genco's affiliated retail electric provider and its biggest customer, could participate in these auctions, in direct violation of the letter of Section 39.153 [108] and its essential purpose in making capacity available to new competitors. Not surprisingly, the prices obtained in the TGN auctions were sometimes higher than those obtained in the Chapter 39 auctions, since an additional, established competitor was allowed to bid. The chief executive of Genco testified that since RERS had the majority of the load in the Houston area ... there was a lot more competition, I believe, in the TGN than there was in the PUC auction. Goins agreed that the TGN auctions were somewhat more successful in selling products because RERS was eligible to participate in those auctions. Goins's major modification was inconsistent with Chapter 39 and the PUC should not have adopted it. Section 39.262 unambiguously specifies that the statutory capacity auction price, not some other blended price the PUC finds more appropriate, must be used in calculating the capacity auction true-up amount. The PUC's Rule 25.263(i), the validity of which is not challenged by any party, [109] provides the correct method for calculating the capacity auction price, and it should have been used. Parties, experts, and the PUC can look to the formula derived from Section 39.262(d)(2) and question why it chooses the capacity auction price instead of some other price in calculating market revenues, why sales in 2002 and 2003 are used instead of sales in some other time period, or indeed why a capacity auction true-up is necessary at all in light of other provisions providing for the recovery of stranded costs. But the statute is clear enough and we apply it as written. [110]
Intervenors complain that the PUC erred in allowing CenterPoint to recover $168 million in interest on the capacity auction true-up award. The trial court and court of appeals [111] agreed with the PUC on this issue, as do we. In Texas Industrial Energy Consumers v. CenterPoint Houston Electric, LLC, we recently held that interest on the capacity auction true-up and other non-stranded costs awarded in a Section 39.262 true-up proceeding was recoverable. [112] We upheld the validity of the portion of PUC Rule 25.263( l )(3) providing for carrying costs on the true-up balance, even though in CenterPoint Energy we had invalidated another portion of the Rule specifying the date at which interest begins to accrue. [113] We noted that invalidating the whole rule and barring any recovery of interest whatsoever would contradict our view in CenterPoint Energy `that the Legislature intended electric utilities to recover carrying costs on stranded costs to compensate for the financial costs incurred during the stranded cost recovery period,' consistent with the prior ratemaking principle that `carrying costs on investments in generation plants were included in rates.' [114] While, as discussed above, general ratemaking principles need not always be applied to a Chapter 39 true-up proceeding, we again see no valid reason the PUC cannot provide for interest on true-up balances under Rule 25.263( l )(3), including interest on the capacity auction true-up balance. The parties in TIEC challenged the amount of interest specified under Rule 25.263 ( l )(3), and did not necessarily question the authority vel non of the PUC to award interest, but in today's case we see no error in the PUC's decision to award interest on the capacity auction true-up to reflect the time value of money. Since, as discussed above, this true-up award is designed to assure the recovery of revenues projected in the ECOM model for 2002 and 2003, the PUC reasonably concluded that a full recovery of this amount must include interest to reflect the time value of money. It correctly found in its Order: Awarding the time value of the capacity auction true-up award puts the joint applicants in the same economic position they would have been in had they received this amount in 2002 and 2003. Intervenors provide no persuasive reason that interest on the capacity auction true-up cannot be awarded in this case as in other cases where utilities are allowed to recover costs with interest.