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Click here for the full text of this decision FACTS:In changing the electric power industry, the Legislature understood that the cost of power generation assets likely would be recovered in a regulated environment, but might well become uneconomic and thus unrecoverable in a competitive, deregulated electric power market. The Legislature called such uneconomic assets stranded costs. The Legislature said in the Public Utility Regulatory Act that if there are stranded costs, an electric utility “is allowed to recover all of its net, incurred in purchasing power and providing electric generation service.” The Legislature set forth a comprehensive method for estimating, finalizing and recovering those costs. Stranded cost recovery, if any, will occur over a period of years rather than in a lump sum. No one disputes that the Legislature intended electric utilities to recover carrying costs on stranded costs to compensate for the financing costs incurred during the stranded cost recovery period. Nor does anyone dispute that prior to deregulation, carrying costs on investments in generation plants were included in rates. The only issue before the court is the date from which carrying costs may be recovered once deregulation commenced: Jan. 1, 2002, which was the first day of deregulation, or two or more years later, at the end of final true-up proceedings. In a rulemaking proceeding, the Texas Public Utility Commission determined that carrying costs on a true-up balance must be calculated from the later date, the date of a true-up final order (sometime after Jan. 10, 2004). CenterPoint Energy Inc. (formerly known as Reliant Energy Inc.) and American Electric Power Company Inc. (“AEP,” a public utility holding company whose Texas operating company was formerly known as Central Power and Light Company) contend that this rule is invalid, arguing that carrying costs should be recovered from the date that regulated rates ended and competition commenced, which was Jan. 1, 2002. The court of appeals rejected the generation companies’ arguments and upheld Rule 25.263(l)(3). The court of appeals also rejected a related challenge to Rule 25.263(l)(3). In separate proceedings, the commission directed CenterPoint and AEP to reverse early efforts to mitigate potential stranded costs. If it is ultimately determined in an appeal from those proceedings that the generation companies have stranded costs and the commission erred by reversing early mitigation efforts, the generation companies argue that Rule 25.263(l)(3) does not permit them to recover interest for the period of time that amounts associated with early mitigation efforts were incorrectly refunded to customers. The court of appeals in this case held that “a utility’s right to fully recover its stranded costs does not encompass a right to early mitigation.” The generation companies take issue with this determination, but advise the court that the matter would be moot if the court concludes that they are entitled to carrying costs on stranded costs from Jan. 1, 2002. HOLDING:Remanded. The court holds that Rule 25.263(l)(3) is inconsistent with the Legislature’s intent, expressed in Chapter 39 of the PURA, that utilities fully recover their “net, verifiable, nonmitigable stranded costs incurred in purchasing power and providing electric generation service,” that “exist on the last day of the freeze period [Dec. 31, 2001].” A two-or three-year gap in recovery of carrying costs would not permit generation companies full recovery of their stranded costs as the Legislature envisioned. However, the capacity auction true-up procedure set forth in the act may include a component for return of or on stranded costs in 2002 and 2003, a determination that cannot be made from the record in this rulemaking proceeding. The amount of stranded cost recovery, if any, through capacity auction true-ups will have to be considered in determining the amount of carrying costs on stranded costs from Jan. 1, 2002 to ensure that there is no over-recovery of stranded costs. The court accordingly remands this issue to the commission for further consideration of whether to address carrying costs in a rule or in contested case hearings applicable to each electric utility and its affiliates. Because Rule 25.263(l)(3) is invalid and the court is remanding this matter to the commission, the court does not address whether or under what circumstances generation companies might be entitled to interest on refunds of early mitigation credits if those refunds were to be reversed. OPINION:Owen, J.; Hecht, O’Neill, Jefferson and Wainwright, JJ., join. DISSENT:Brister, J.; Phillips, C.J., Schneider and Smith, JJ. join. “As a part of electricity-market deregulation, the Legislature allowed existing utility companies to recover stranded costs but no more. The Legislature said nothing about interest. Nevertheless, the Court holds utilities are potentially entitled to billions of dollars in interest (to be collected from consumers through higher prices) because any other rule is inconsistent with the statute. I do not see how an order refusing to grant interest is inconsistent with a statute that says nothing about interest; thus, I respectfully dissent. . . . “In a government of separated powers, it is not our role to decide whether paying interest to utilities during 2002 and 2003 would be wise, or fair, or what we would do in similar circumstances. We can decide only whether the Commission violated the deregulation statute by providing for interest from the 2004 true-up forward. Because the statute is silent on the matter, I would hold it did not.”

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