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Texas Orders Rate Cuts; Legislation Unlikely to Pass

Fortnightly Magazine - May 15 1997

In the first order under a 1995 law designed to increase competition in the electric wholesale market, the Texas Public Utilities Commission ordered Central Power & Light Co. to cut rates.

Meanwhile, Moody's has predicted that legislation introduced in the Texas Senate and House giving choice to small ratepayers is unlikely to pass.

Rate Cut. On March 31, the PUC ordered a $32.3-million rate cut for Central Power & Light Co. retroactive to May 1996. An additional $16.4-million rate cut must be implemented annually in 1998 and 1999 (Docket No. 14965).

The 1995 legislation has led to a marked decline in prices power paid by utilities. In the Central Power & Light rate decision, the PUC decided that firm customers should benefit from those declining costs. Hence, the use for the first time of a downward "glide path" methodology for rates, which sets rates to capture depreciation and efficiencies. The further reductions, effective in May 1998 and May 1999, would allow customers to benefit from declining book values. The glide path further establishes an additional 1.95-percent decrease for firm customers in 1998, and an additional 2-percent decrease in 1999.

To prepare Central Power & Light for competition, the PUC directed an accelerated depreciation of $859 million of stranded costs related to the utility's investment in the South Texas nuclear project. It ordered the utility to depreciate it over 20 years rather than the remaining 32-year life of the plant.

To balance the reduction of risk associated with accelerated recovery, the PUC ordered a reduced return on equity of 7.96 percent on the $859 million. Remaining invested capital costs were calculated using a 10.9-percent return on equity.

The order marks the first time the PUC has addressed stranded costs. "There is no written contract by which the State of Texas promised to pay CPL a reasonable return on all of its generation investment of CPL built generation facilities to serve customers in its service territory," the order said. The decision does signal that the PUC may be unwilling to force ratepayers to pay for a utility's above-market investments.

Moody's predicts that the PUC decision in support of less than 100-percent stranded cost recovery for CPL introduces an element of risk into the credit profiles of other investor-owned utilities soon up for PUC review. At the same time, Moody's predicts the situation will prompt quick legislative action. Possible legislation includes provisions enacted in other states such as a multi-year transition to competition during which companies would freeze rates, and accelerated depreciation of high-cost assets to write them down to market.

Legislation. Moody's predicts that identical bills introduced in the Texas House and Senate by Rep. Stiles and Sen. Patterson likely will not pass. Moody's said the bills (em which propose phasing in retail competition starting in 1998, limiting ability of utilities to recover stranded costs and implementing a 15-percent rate cut for all investor-owned utilities (em would be detrimental to utility credit quality.

Texas investor-owned utilities do not support the bills. Houston Light & Power Vice President of Governmental Affairs Bruce Gibson called the