Split Decision for Consumers on Utility Stranded Costs

Written on: January 21, 2010

In a split decision for consumers, the state’s Third Court of Appeals this month has ruled that certain utility interest payments should not be used to increase the calculation of stranded costs in Texas, but also that certain federal tax benefits for utilities should not reduce them. The ruling, which was issued Jan. 15 by the court, is in response to a case brought by consumer groups relating to the allocation of stranded costs above $5 billion.

Recall that stranded costs are meant to represent the difference between the book value of a company’s assets and the price that would be paid by someone buying the assets on the open market. Think of a company that pays $1 billion to build a nuclear power plant under regulation, but then can only sell it for $500 million in a deregulated market. In this oversimplified example, the $500 million difference would be the “stranded cost” of the nuclear power plant.

The Texas deregulation law allowed utilities to seek reimbursements for stranded costs as part of the transition to deregulation. During a series of separate ruling over the years, the Public Utility Commission has found that CenterPoint, Texas Central Company and Texas-New Mexico Power were owed around $6 billion in combined stranded costs.

The Texas deregulation law included special allocation provisions for stranded costs if they were found to exceed $5 billion statewide. The case before the Third Court of Appeals relates to what proportion of those costs above $5 billion should be allocated to industrial customers for payment, and what proportion should be allocated to residential and commercial customers. The court largely upheld the PUC’s previous rulings with regards to these issues.

Other specifics about the decision this month: the Third Court held that the Public Utility Commission was correct to order a retroactive reconciliation of stranded costs already collected, and that it was appropriate to apply a 5% interest rate for the securitization of stranded costs. The case was brought by the Office of Public Utility Counsel (which represents commercial and residential consumers) and a trade group known as Texas Industrial Energy Consumers. It remains unclear whether either party will appeal to the Texas Supreme Court.

— R.A. Dyer