Accounting For Mitigation at True-up

1. Accounting For Mitigation at True-up Project No. 23571 Workshop April 2001

2. Mitigation Question For True-up Most utilities that were identified as having stranded costs in the Commission’s 1998 Report to the Texas Legislature have used one or both of the mitigation measures included in SB 7 (depreciation transfers and/or excess earnings). One question that must be addressed at true-up is whether any of that mitigation was “excess” -- i.e., should the mitigation continue to be used to reduce the net book value of generation plant, or should it be returned to customers?

3. Analysis Framework • The fundamental question can be viewed as: • Is market value > net book value? • Is market value > mitigated net book value? • With, • market value = value determined used methods in PURA § 39.262(h)-(i) • net book value = original cost less accumulated depreciation • mitigated net book value = net book value less mitigation

4. Two Sets of Possible Scenarios Depending upon the outcome of the UCOS cases, two sets of scenarios are possible: A. An EMC is not imposed B. An EMC is imposed

5. Scenario A1 Is market value > net book value? No Is market value > mitigated net book value? No Therefore, no mitigation is excess. Charge to recover stranded cost amount of “20” is compared to existing charge which is adjusted, if necessary, by: extending the CTC period, increasing the CTC, or securitization.

6. Scenario A2 Is market value > net book value? No Is market value > mitigated net book value? Equal Therefore, no mitigation is excess. Charge to recover stranded cost amount of “0” is compared to existing charge which is adjusted, if necessary, by: reducing the CTC, and/or reversing in whole or part redirected depreciation, and/or reducing T&D rates.

7. Scenario A3 Is market value > net book value? Yes Is market value > mitigated net book value? Yes Therefore, all of the mitigation is excess and “20” of mitigation is returned to customers by: reducing the CTC, and/or reversing in whole or part redirected depreciation, and/or reducing T&D rates.

8. Scenario A4 Is market value > net book value? No Is market value > mitigated net book value? Yes Therefore, half of the mitigation is excess and “10” of mitigation is returned to customers by: reducing the CTC, and/or reversing in whole or part redirected depreciation, and/or reducing T&D rates.

9. Scenario B1 Is market value > net book value? No Is market value > mitigated net book value? No Therefore, no mitigation was excess. The existing EMC is halted and “30” of stranded costs is recovered by a CTC or securitization.

10. Scenario B2 Is market value > net book value? No Is market value > mitigated net book value? No Therefore, no mitigation was excess. The existing EMC is halted and “10” of stranded costs is recovered through a CTC or securitization.

11. Scenario B3 Is market value > net book value? Yes Is market value > mitigated net book value? Yes Therefore, remaining “10” of mitigation is excess and should be returned to customers by: maintaining the EMC, and/or reversing in whole or part redirected depreciation, and/or reducing T&D rates.

12. Scenario B4 Is market value > net book value? No Is market value > mitigated net book value? Equal Therefore, appropriate amount of mitigation has already been returned and EMC should be halted. No CTC is necessary.

13. Treatment of Income Taxes If a utility sells generating assets pursuant to PURA § 39.262(h)(1), should the income taxes on the gain or loss be considered at true-up? No, taxes on the sale should not be netted against the proceeds. This approach is consistent with the results of the Stock and Partial Stock methods. Likewise, the Commission’s ECOM model estimates stranded costs on a pre-tax basis.