Texas utilities' latest stranded cost estimates in the billions

Ann de Rouffignac
OGJ Online

TXU Corp., Dallas, and Reliant Energy Inc., Houston, want Texas regulators to approve as much as $2.8 billion and $1.7 billion in stranded costs, respectively, nearly $2 billion more per utility than state regulators recommend.

The two largest utilities in Texas filed this week with the Public Utility Commission of Texas an updated version of what they estimate stranded costs will be as a result of higher natural gas prices and higher environmental compliance costs.

The PUC staff�s updated estimates were $14 million for TXU and $16 million for Reliant. Stranded costs are what the utilities say represent the value of investments in power plants and other assets approved under regulation that would not be economic in a competitive world.

Stranded costs must be approved by the commission and are important because electricity consumers will pay for these costs when competition begins in 2002, under deregulation legislation passed in the spring of 1999.

Texas utilities initially filed estimates of their stranded costs beginning in late 1999 and earlier this year. The commission ordered utilities to update the estimates by including new natural gas price data and costs for environmental upgrades made before 2002. The natural gas price is critical because the higher the price, the more economical the power generated by nuclear plants becomes. Nuclear generation is generally higher cost power than gas-fired generation, depending on the price of natural gas.

High gas prices
Natural gas prices have hit historic highs in the last several months and are forecast to remain high for the near future as huge demand coupled with still limited supply response from the natural gas companies continues to pressure prices upward.

Natural gas prices have not only been higher but more volatile recently. Prices were around $2.50/Mcf last year and are expected to average about $4.00/Mcf for 2000.

TXU filed three estimates for stranded costs using natural gas prices approved by the commission on Aug. 10. Using the commission model to estimate stranded costs, natural gas prices, and the estimated market value of a power plant, TXU said the model yields stranded costs of only $14 million.

Using a different market valuation of a power plant but the same gas price produces stranded costs of $433 million, according to the filing.

Finally, in its preferred case, TXU estimates its stranded costs will be $2.8 billion. The estimates vary due to different views of power plant capital costs and the expenses for emission control retrofits.

�The commission assumes that it costs $597/kw for a power plant and we say it costs $475/kw,� says Chris Schein, spokesman for TXU.

Schein says that the commission does not deny TXU is �entitled� to all these funds. He says the difference is whether the company is allowed to start collecting stranded costs in 2002 or in 2004. In 2004, under deregulation legislation stranded costs will to be re-evaluated using actual price information from the first 2 years of competition.

�The REPS (electricity retailers) will come in and start business," says Schein. "The risk we run is that in 2004 there could be a potential spike in this wires charge that will adversely affect them.�

In its filed testimony, Reliant stated the difference between the staff estimate of $16 million and the company�s $1.7 billion results mostly from how much of the company�s environmental upgrades can be included in stranded costs as well as forecast changes in future coal prices.

Reliant will be forced to shut down its Limestone coal plant if it cannot include the cost of equipment needed to comply with environmental rules and installed after 2002, William G. Rice, Reliant general counsel, said in PUC testimony.

Most stranded costs will be �securitized� in bonds issued by the utilities but backed by the state of Texas. The bonds will be paid off over 12 years by consumers in each utility territory through their bills for transmission and distribution.

�The stranded cost estimates that the utilities want to put into securitized bonds is wildly volatile,� says Bob Webb, president of Power Choice in Austin, a company that intends to broker sales for electricity in Texas. �What sort of policy making is this, if we go off and sell $2 billion of bonds locking in a number that goes from zero to $2 billion in a matter of months.�

The commission staff is still reviewing the numbers submitted by the utilities for stranded cost recovery and has not filed anything yet in response, says Terry Hadley, commission spokesman.

Consumer watchdog groups who are eyeing the filings wonder how the utilities can come up with higher estimates in the face of higher gas prices.

�They are coming up with new costs like unspent environmental clean-up costs to put into the stranded cost estimate,� says Janee Briesemeister, senior policy analyst with Consumers Union, Austin.