PAT WOOD III LIKENS HIS JOB TO CLEARING THE UNDER-brush "so the general can march through."

The "general" is the Texas Legislature; Wood is chairman of the state Public Utility Commission; the battle is electric utility restructuring.

To an outsider, it looks like Wood's commission is way out in front of the state's elected officials. Legislators are adjourned this year but the seven-member Senate Interim Committee on Electric Utility Restructuring is doing its best to sort through hearings on market power, transmission and distribution, reliability and other issues. A hearing on the contentious subject of stranded costs was set for early June.

The committee, chaired by Sen. David Sibley (R), may not be moving fast enough (em at least not for state regulators.

The PUC first stepped ahead with the Central Power & Light rate case last year (Docket No. 1496). It scrutinized the utility's rates and decided to lower the return on equity for CP&L's stranded assets. It also provided for some accelerated recovery of that investment.

Wood says the rate case took a hard look at "things like affiliate transactions and all this historic stuff that utilities had done to kind of bury costs and puff up the rate base."

Although the case is on appeal, it snapped back the heads of many a utility executive in Texas (not to mention Wall Street investors). Suddenly, legislated solutions, previously lobbied against, didn't look so bad.

One Case at a Time

The state's elected leaders got as far as considering restructuring in committee last year, but a measure known as "the governor's bill" died when the state's cooperatives insisted they wouldn't support it. The proposed bill had a complex securitization plan, which put off the co-ops. The co-ops serve only 14 percent of the state's retail customers but wield political clout because they have customers spread over all but two of 254 counties.

Since then, the commission has taken on two more rate cases. After the dust settles from those, the panel promises to take on two more.

On March 31, the PUC approved stipulations for rate reductions for Texas Utilities Co. (Docket No. 18490) and Houston Light & Power (Docket No. 18465). Final orders were expected by April 21.

Both companies were about to be brought in for an "over earnings" case for earning too much. To preempt that, the two companies (em serving about 57 percent of the Texas market (em filed transition plans. The stipulations accelerated recovery of investments that could have been stranded in a competitive market. The commission also approved rate reductions of 4 percent for residential customers and as high as 2 percent for commercial customers. In 1999, base rates will drop 1.4 percent for TU's core customers and 2 percent for HL&P's residential users. Total rate reductions for both utilities over two years equal $444 million.

TU also agreed to redirect $335 million in transmission and distribution depreciation to production in 1998 and 1999. HL&P will redirect $362 million over the same period to pay off production plant costs. There will be no 1999 depreciation reduction if the Legislature doesn't pass a restructuring bill during the 1999 session.

The two other pending rate cases that have transition provisions include those for Entergy Gulf States (Docket No. 16705) and Texas-New Mexico Power Co. (Docket No. 17751). TNMP has proposed a date for retail competition; Entergy has not.

Karina Casari, director of the Senate Interim Committee, says the PUC's actions are somewhat irrelevant. "I think we're supportive of the commission trying to get some of those stranded costs paid off. But in terms of the threshold question of whether we should restructure or not, I don't think it affects it at all.

"I think it's obvious to everybody that rates are going to come down one way or another," she says. "We can do it through a regulatory environment or we can do it through a market-based solution that allows competition and that squeezes [rates] down. That doesn't necessary mean we would give a rate reduction through the bill. But I think one way or another, there is room for rate reductions."

Sen. Sibley has said that unless residential rates are cut 15 to 20 percent, there's no point in having competition. Suzi Ray McClellan Office of the Public Utility Counsel has come out in support of transition plans offered by TU and HP&L, partly because the two companies have promised to support retail competition, beginning in 2001, as a condition in their rate cases. Much was accomplished, she believes, and "we didn't incur $15 million in rate case expenses."

McClellan says whatever legislation that comes out of the Interim Committee is likely to be molded by its chairman. "Sibley is actually so powerful in our Senate that whatever he puts his stamp on it would probably be the bill that would be the focus of the discussion," she says.

Casari says the transition plan doesn't tie the committee's hands behind its back: "Not at all¼ The committee's most important question before them is: Should we restructure or not?"

Wood says it's obvious to him action needs to be taken.

"Well, hell, we need a bill passed," says the PUC chairman. "A bill that allows people, competitors, to get in a market and customers to have open access. No, we need some real critical things done."

Even if Sen. Sibley delays action, "that's fine," he says. "Our job is to make sure that all the miscellaneous points are kind of cleaned up so they can make a decision based not on, 'Oh we've got so much more work to do,' but, 'Oh, this is a good policy for Texas.'

"The IOUs have come around. The CP&L case kind of woke them all up as to what regulation would look like. I view the CP&L case as just the opposite. [CP&L] is what the world looks like if we don't deregulate."

Dan L. Jones, the PUC's chief policy analyst, notes that TU and HP&L ironically have come forward with plans "pretty consistent" with the governor's bill. He says the transition cases may prove that it's possible to reduce rates and recapture stranded costs without legislation.

Stranded costs, according to early PUC studies, will top $8 billion statewide in 2001, according to Jones. TU's share of that figure is $2.6 billion in the same year; HL&P's tops $2.8 billion. Stranded costs in 2002 are more than $7 billion; in 2003, more than $6 billion.

The commission also is working on a rulemaking that will address transactions with affiliates (Project No. 17549), yet another task most states have undertaken during or after deregulation.

Co-ops Voice Concern

The final straw, at least for cooperatives that complain the commission is acting as though competition is imminent, is the PUC's unbundling proceeding. (Project No. 16536, Rulemaking on the Unbundling of Electric Distribution Facilities and Functions. See sidebar.) A hearing on a proposed rule in that case was set for May 8.

Co-ops claim that the costs of meeting such requirements would be prohibitive. They made that point very vocally to the Interim Committee at a March 25 committee hearing. But their candid views may only have angered the commission.

"We're [mad] at them because we asked specifically in the rule for companies to provide their costs," Wood counters. He says the commission was considering offering waivers, which would allow small rural utilities not to unbundle their costs and therefore avoid a steep bill for that process. The PUC has estimated the new accounting procedures could cost from $20,000 to $2.5 million, depending on the size of the utility.

"[For us] to bend over backwards to say we're going to accommodate your concerns and then for [co-ops] to go around to the Legislature and act like we're running roughshod over them?" the PUC chairman asks. "It makes me inclined to run roughshod over them. I was planning to give the waiver but now I won't¼ [but] I think customers have the right to know what they're paying for."

He says co-ops don't want customers to know their costs because of high wires charges. Deep East Texas Electric Co-op Inc., for instance, has distribution costs of more than 3 cents a kilowatt-hour, he says. A neighboring co-op has costs of less than a cent.

"The same exact terrain, the same everything," Wood says. "It's just how frugal they are. That's kind of what regulation is supposed to do."

The PUC is also developing five studies to guide the Legislature along the deregulation trail. The five reports will augment an 849-page study provided to state officials in 1997. The first of the five, expected in May, will address stranded costs. The second study, conducted with ERCOT, will address transmission adequacy during retail access. A third work will examine cost recovery mechanisms for "must-run" plants in the state. The fourth will identify low-income, environmental and renewable programs. The last item, a "scope of competition study," required of the PUC by the Legislature every two years, will examine the status of new competition.

At least one restructuring issue (em securitization (em will likely require legislative action. The state's public counsel recognizes that a bargain will need to be struck if more rate reductions are to be had.

"We recognize that and use it as a bargaining chip," McClellan says. "If you get this, this is what we need for reductions."

Joseph F. Schuler Jr. is senior associate editor with Public Utilities Fortnightly.

PUC Rulemaking

Excerpts From a Work in Progress

A NEW PUC RULE on the calculation, rendering, and form of certain electric bills would change and simplify the way information is displayed on the monthly statements issued by electric utilities.

"[D]istribution unbundling reports would require utilities to file an annual report relating to the number and kinds of electric meters in use, generation mix and emissions, and the numbers and kinds of customer services.

"[C]ost separation would require electric utilities to separate costs of electric service into functional categories consisting of electricity production, electricity delivery, and the provision of related services (em metering and billing services, customer services, and energy services (em to electric customers.

"This rulemaking proceeding has three objectives¼ to separate the costs of electric service by function so the commission can monitor the cost of service components¼ to begin the process of removing regulation from those services and markets which are sufficiently competitive¼ [and] to enhance public awareness of electricity production and delivery costs.

"Is an exemption for small utilities appropriate? ¼ Should the commission and utilities conduct customer education efforts before unbundled electric bills are distributed?

"[T]he purpose of the reporting requirement relating to generation mix and emissions is to capture (em to an accuracy of approximately one-half percent (em a utility's annual generation mix and emissions, so that customers who would like this information may have access to it.

"The proposed new sections relating to electric billing and cost separation are likely to increase the cost to the utilities...A rough estimate of the annual cost for utilities that must substantially revise customer billing and cost accounting procedures is from $20,000 to $2.5 million, depending on the size of the utility." Project No. 16536, Rulemaking on the Unbundling of Electric Distribution Facilities and Functions, Texas PUC.

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