HBA-NMO H.B. 526 76(R) BILL ANALYSIS Office of House Bill AnalysisH.B. 526 By: Chisum State Affairs 2/11/99 Introduced BACKGROUND AND PURPOSE Currently, the legal structure of the electric industry in Texas consists of regulated transmission and distribution lines with a partially competitive wholesale generation market. A national trend points toward a fully competitive retail market, with transmission and distribution lines remaining regulated monopolies. Two issues facing the implementation of retail electric competition are stranded costs and development of an infrastructure. Stranded costs are utility investments that were approved by the state regulatory authority with a guarantee of recovery, usually over a 30-year amortization period, which will not be recovered before the implementation of competition, because the amortization period will not be complete and the customer base will no longer be guaranteed. Development of an infrastructure refers to the building of a system to ensure that each seller of electricity receives its proper share of the payment from each customer. H.B. 526 provides for the setting of a defined time frame for stranded cost recovery, the development of an infrastructure before the implementation of retail competition, the creation of the Joint Committee on Electric Industry Restructuring, and the creation of the Renewable Energy Assistance Program. RULEMAKING AUTHORITY It is the opinion of the Office of House Bill Analysis that rulemaking authority is expressly delegated to the Public Utility Commission in SECTION 1 (Section 39.001, Utilities Code) and to the Renewable Energy Assistance Program Board in SECTION 1 (39.203, Utilities Code) of this bill. SECTION BY SECTION ANALYSIS SECTION 1. Amends Subtitle B, Title 2, Utilities Code, by adding Chapter 39, as follows: CHAPTER 39. IMPLEMENTATION OF RETAIL COMPETITION SUBCHAPTER A. GENERAL PROVISIONS Sec. 39.001. DEFINITIONS. (1) Defines "generation assets" as generation plants and generation-related costs that have been deferred for future recovery by order of a regulatory authority or as a result of the practice of a regulatory authority. According to Section 11.003, Utilities Code, "regulatory authority" means either the Public Utility Commission (commission) or the governing body of a municipality, in accordance with the context. (2) Defines "net stranded costs" as the excess of the net book value of all generation assets over the market value of those assets, any above-market fuel or fuel transportation contract costs relating to generation assets, any above-market purchased power contract costs, and any other investment the commission, by rule, classifies as a net stranded cost. (3) Defines "stranded costs" as the excess of the book value of all generation assets over the market value of those assets, any above-market fuel or fuel transportation contract costs relating to generation assets, any above-market purchased power contract costs, and any other investment the commission, by rule, classifies as a stranded cost. SUBCHAPTER B. GENERAL GUIDELINES Sec. 39.051. APPLICATION OF SUBCHAPTER. Establishes that this subchapter, except as otherwise expressly provided, applies to each electric utility and municipally owned utility (utility). Sec. 39.052. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. Requires that each computation required by this chapter be made using applicable generally accepted accounting principles. Sec. 39.053. RETAIL COMPETITION FOR ALL CUSTOMERS. Requires each electricity customer, starting December 31, 2003, to have the right to choose the customer's supplier of electricity. Sec. 39.054. COMMISSION AUTHORITY REGARDING RETAIL COMPETITION. Prohibits a rule, policy, or action of the commission relating to the implementation of retail competition from taking effect before December 31, 2003, unless otherwise expressly required by statute. Sec. 39.055. OPEN ACCESS TO TRANSMISSION AND DISTRIBUTION FACILITIES. (a) Requires each utility that owns or operates transmission or distribution facilities to provide transmission and distribution service, or both, at rates and terms, including terms of access, that are comparable to the rates and terms of the entity's use of its system. (b) Requires the commission to ensure that each utility, starting December 31, 2003, provides nondiscriminatory access to transmission and distribution service for qualifying facilities, exempt wholesale generators, power marketers, utilities, and other electricity sellers. (c) Requires the commission, notwithstanding Subchapter C (Rate Freeze and Stranded Cost Recovery) or Section 36.201, Utilities Code (Automatic Adjustment for Changes in Cost), to use an appropriate method to provide for the concurrent recovery of, and reasonable return on, an electric utility's investments in new transmission facilities incurred after September 1, 1999. Provides that a reasonable return on investment is the rate of return approved for the utility in its most recent transmission cost-of-service case. Sec. 39.056. EXEMPTION FOR CERTAIN UTILITIES. (a) Exempts an investor-owned electric utility from the requirements of this chapter if it had in effect on January 1, 1997, and extending beyond December 31, 2003, a system-wide rate freeze for residential and commercial customers that has been found to be in the public interest, and only if application of this chapter to such a utility is not permitted by a federal court or by the regulatory authority. (b) Requires an investor-owned electric utility to offer customer choice at the end of its previously approved rate freeze period and provides that it does not have a claim for stranded cost recovery under Subchapter C, if application of this chapter is not permitted by a federal court or by the regulatory authority. (c) Authorizes any ratepayer of an investor-owned electric utility, not yet exempt, to request that the regulatory authority determine the exemption status of the utility. Requires the regulatory authority, in making a determination, to consider the effect of applying this chapter on the total economic cost to customers as compared to the systemwide rate freeze described by Subsection (a), the utility's financial integrity, and the public interest. SUBCHAPTER C. RATE FREEZE AND STRANDED COST RECOVERY Sec. 39.101. APPLICATION OF SUBCHAPTER. Provides that this subchapter, except as otherwise expressly provided, applies to an electric utility that is an investor-owned electric utility or an electric cooperative corporation that has not elected partial rate deregulation under Subchapters F and G, Chapter 36 (Rates), Utilities Code. Sec. 39.102. DEFINITIONS. (1) Defines "cost of service" as the total reasonable and necessary operating expenses incurred by an electric utility in rendering electric service to its customers, plus a reasonable return on invested capital. (2) Defines "rate of return on common stock equity" as the percentage measure of an investor-owned electric utility's earnings on the utility's common stock, computed by dividing after-tax income, minus preferred dividends and interest payments, by the average book value of common equity over an annual period. Sec. 39.103. RATE FREEZE. (a) Provides that "force majeure" means a major event or combination of major events beyond the control of an electric utility that the regulatory authority finds has increased the utility's nonfuel costs or decreased the utility's nonfuel revenue related to the generation and delivery of electricity by five percent or more for any calendar year during the rate freeze including but not limited to new or expanded statutes or regulations, natural disasters, war, terrorism, or civil disturbances. (b) Requires each electric utility to freeze its retail base rate tariffs as those tariffs exist on January 1, 1999. Prohibits the utility, except for force majeure, from changing those retail base rate tariffs before December 30, 2003. (c) Provides that this section does not limit or alter the ability of an electric utility to revise its fuel factor or reconcile fuel expenses, and to refund fuel overcollections or to surcharge fuel undercollections to customers as authorized by the utility's tariffs or Section 36.203 (Fuel Cost Recovery; Adjustment of Fuel Factor). Sec. 39.104. ECONOMIC DEVELOPMENT RATES. Authorizes a utility, notwithstanding Section 39.103, to provide electricity at a price that is less than the utility's retail tariff rate, but not less than its marginal cost to a new industrial or commercial customer or a new or expanded facility of an existing industrial or commercial customer. Provides that an economic development rate must be provided to a single point of delivery that is within the certified service area and has the potential to create a significant number of new full time positions. Provides that approval of the regulatory authority is not required for this economic development rate. Sec. 39.105. QUALIFIED EARNINGS. Provides that "qualified earnings" of an investorowned electric utility are those that would cause the utility's rate of return on common stock equity to exceed the rate last established for that utility by the regulatory authority, and that "qualified earnings" of an electric cooperative corporation are those that exceed the corporation's cost of service. Requires an electric utility to use qualified earnings to recover net stranded costs or to benefit ratepayers in accordance with Section 39.108 (Use of Qualified Earnings). Requires that, in determining qualified earnings, the utility's actual annual costs be used, except that the operating and maintenance costs are limited to the amount of those costs incurred in calendar year 1998, with an allowance for yearly inflation. Sec. 39.106. DETERMINATION OF MARKET VALUE OF GENERATING CAPACITY. (a) Requires the commission, no later than August 1 of each year from 1999 to 2003, to determine and publicly announce the commission's preliminary determination of the market value of fossil-fueled and nuclear-fueled electric generating capacity, on a dollar-permegawatt basis. (b) Requires the commission to base the market value of fossil-fueled generating capacity on the average sale price for all fossil-fueled electric generating units sold since January 1, 1997, in market-based transactions in the United States with transaction prices obtainable by the commission. (c) Requires the commission to base the market value of nuclear-fueled generating capacity on the average sale price for all nuclear-fueled electric generating units sold since January 1, 1997, in market-based transactions in the United States with transaction prices obtainable by the commission. (d) Requires the commission, after making these preliminary determinations, to request and consider the comments of any interested person regarding the commission's collection of sales data and computation of average sale price. (e) Requires the commission to announce its final determination no later than September 1 of each year. (f) Authorizes the commission to make a determination under this section in an informal proceeding. Provides that a determination under this section is not a contested case for the purposes of Chapter 2001, Government Code (Administrative Procedure), or a rate change for purposes of Chapter 36, Utilities Code (Rates). Sec. 39.107. DETERMINATION OF GENERATION PLANT NET STRANDED COSTS. (a) Requires each electric utility to annually compute its net stranded costs that relate to generation plants in accordance with this section. (b) Provides that the total net value realized from the sale, after January 1, 1999, of all or some of the electric utility's generation plants in a bona fide third-party transaction under a competitive offering is the market value of the generation plants sold. (c) Provides that the market value of a non-nuclear generation plant that is not sold in accordance with Subsection (b) is determined by applying the most recent commission determination of average market value of fossil-fueled electric generating capacity under Section 39.106(e) to the utility's installed fossil-fuel capacity. (d) Provides that the market value of a nuclear generation plant that is not sold in accordance with Subsection (b) is the greater of $450 per kilowatt of installed capacity or the value determined by applying the most recent commission determination of average market value of nuclear-fueled electric generating capacity under Section 39.106(e) to the utility's installed nuclear capacity. Sec. 39.108. USE OF QUALIFIED EARNINGS. (a) Requires an electric utility that has positive net stranded costs to use its qualified earnings to reduce net stranded costs on a dollar-for-dollar basis by accelerating depreciation and amortization of generation assets; redirect depreciation from transmission and distribution assets to generation assets as necessary to mitigate stranded costs; and employ reasonable methods to mitigate stranded costs by renegotiating, where appropriate, purchased power and fuel contracts. (b) Requires an electric utility, when it no longer has positive net stranded costs, to stop applying qualified earnings to net stranded costs and to begin applying them to benefit ratepayers in accordance with Subsection (c). (c) Requires an electric utility that does not have positive net stranded costs to refund at least 75 percent of its qualified earnings to its customers through purchased power cost recovery or other similar mechanism. Sec. 39.109. REPORTS AND COMMISSION ACTION. (a) Requires each electric utility to which this subchapter applies to file an annual report with the commission showing the utilities net stranded costs, including generation plant costs computed in accordance with Section 39.107; the annual and cumulative amounts recovered under 39.108; and whether it has started using qualified earnings to benefit ratepayers in accordance with Section 39.108(c), or when it anticipates it will begin using them for that purpose. (b) Authorizes the commission, if it finds that an electric utility did not timely comply with Section 39.108(c), to bring an enforcement action against the utility and impose an administrative penalty against the utility equal to 25 percent of the amount the utility would have received had it timely complied. Sec. 39.110. TRUE-UP. (a) Requires the commission, not earlier than January 1, 2004, to conduct a "true-up" proceeding for an electric utility that is still applying qualified earnings to reduce net stranded costs in accordance with Section 39.108 on December 30, 2003. (b) Requires the commission, in determining the utility's remaining positive net stranded costs, to compare the book value of its generation assets to the market value of those assets as of December 31, 2003. Requires the commission to compute the market value of a generation asset in accordance with the applicable provisions of Section 39.106, but requires the commission to adjust the average market value of a fossil-fueled generation asset for locational, environmental, and other plant-specific circumstances that affect the generating capacity being valued. (c) Requires the commission, if the book value exceeds market value, to authorize the utility to recover that excess through a non-bypassable wires charge. Requires the commission, if the book value is less than the market value, to order the utility to refund the over-recovery, with interest, to customers or to reverse the depreciation redirection taken under 39.108(a), as necessary. Sec. 39.111. DUTY OF MUNICIPALLY OWNED UTILITY. Requires each municipally owned utility to take any necessary steps to mitigate any stranded costs before December 31, 2003, and file with the commission an annual report showing an estimate of its net stranded costs and the annual and cumulative amounts of net stranded costs recovered. Sec. 39.112. EFFECT OF SUBCHAPTER; SALE REQUIREMENT PROHIBITED. Provides that this subchapter does not require the abrogation of lawful contracts. Prohibits the regulatory authority from requiring the sale of assets by an electric utility. SUBCHAPTER D. JOINT COMMITTEE ON ELECTRIC INDUSTRY RESTRUCTURING Sec. 39.151. CREATION OF COMMITTEE. Creates the Joint Committee on Electric Industry Restructuring to oversee the transition to and establishment of a competitive retail electric industry on December 31, 2003. Provides that the committee is composed of six senators appointed by the lieutenant governor and six members of the house of representatives appointed by the speaker of the house of representatives. Provides that members of the committee serve at the pleasure of the appointing officer. Requires the appointing officers to designate members of the committee to serve as the presiding officer and assistant presiding officer, and requires the alternation of that designation. Sec. 39.152. GENERAL POWERS AND DUTIES OF COMMITTEE. Requires the committee to assess the issues relevant to the implementation of retail competition in the electric industry including consumer protection, recovery of any net stranded costs, consumer education, effects on state and local tax revenues, the proper manner for implementing unbundling of utilities' existing integrated functions, a code of conduct to prohibit the subsidization of competitive functions and discrimination with respect to the provision of regulated services, reliability standards relating to the delivery of electricity to retail customers, and any other issues the committee considers relevant. Sec. 39.153. MONITORING AND OVERSIGHT DUTIES. Requires the committee to monitor the transition to retail competition in the electricity market and conduct active oversight of the activities of the commission relating to implementation of retail competition. SUBCHAPTER E. RENEWABLE ENERGY ASSISTANCE PROGRAM Sec. 39.201. LEGISLATIVE FINDING. Provides the legislative finding. Sec. 39.202. RENEWABLE ENERGY ASSISTANCE PROGRAM BOARD. (a) Provides that the Renewable Energy Assistance Program Board (board) is composed of: (1) eight members appointed by the governor with the advice and consent of the senate; and (2) one member of the commission appointed by the governor or a commission designee appointed by the commission and approved by the governor. (b) Requires the governor to designate a presiding officer and assistant presiding officer from the members appointed under Subsection (a)(1). (c) Provides that four of the members appointed under Subsection (a)(1) must be engaged in or have experience in the banking or financial services industry; two must be involved in environmental issues; and the remaining two must be public members who represent consumers. (d) Provides that the members appointed under Subsection (a)(1) serve staggered two-year terms. (e) Requires the board to employ an executive director and not more than two employees to whom the board is authorized to delegate the responsibility to implement and administer its powers and duties. Sec. 39.203. RENEWABLE ENERGY ASSISTANCE PROGRAM. (a) Requires the board to administer a renewable energy assistance program to assist businesses in the construction of new generation facilities that use renewable energy by providing grants to businesses for interest payments on loans for construction costs. Prohibits the amount of a grant from exceeding the prime commercial lending interest rate plus two percent interest. (b) Requires the board, by rule, to prescribe the qualifications for receiving a grant. (c) Requires the board, in determining whether to award a grant, to consider the financial viability of an applicant's proposal, the applicant's credit history, whether an applicant has secured resources from a private lending institution for construction, whether an applicant has acquired a buyer for the electricity to be generated, and any other information the board considers important. Sec. 39.204. ANNUAL REPORT. Requires the board, not later than January 1 of each even-numbered year, to submit a report detailing its operation to the governor, lieutenant governor, speaker of the house of representatives, and the Joint Committee on Electric Industry Restructuring. Sec. 39.205. OFFICE SPACE AND MEETINGS. Requires the commission to provide reasonable office space to the executive director and employees of the board and allow the board to meet in the commission facilities. Sec. 39.206. FUNDING. Provides that the board is funded through an assessment imposed on each utility that sells electricity to the ultimate consumer. Requires the board to annually set the rate of the assessment. Requires the board, in setting the annual rate, to ensure that the assessment produces not more than the amount necessary to administer this subchapter, while prohibiting the amount from exceeding five million each fiscal year; and to ensure that the rate of the assessment is equal to not more than 1/35 of one percent of a utility's gross receipts from rates charged to the ultimate consumer for electricity. Provides that Sections 16.002 (Payment Date), 16.003 (Late Payment Penalty), and 16.004 (Collection by Comptroller), Utilities Code, apply to the assessment. Sec. 39.207. LIMITATION ON ADMINISTRATIVE EXPENSES. Prohibits the board from using more than five percent of the revenue appropriated to it for administrative expenses. Sec. 39.208. ABOLITION OF BOARD AND ASSESSMENT. Provides that the board and the assessment are abolished December 30, 2003. Requires any grant commitment and revenue to be transferred to the comptroller for administration on that date. Sec. 39.209. EXPIRATION OF SUBCHAPTER. Provides that this subchapter expires on January 1, 2004. SECTION 2. Amends Sections 12.005 and 13.002, Utilities Code, as follows: Sec. 12.005. APPLICATION OF SUNSET ACT. Provides that the commission, unless continued in existence as provided by Chapter 325, Government Code (Texas Sunset Act), is abolished and this title expires on September 1, 2005, rather than 2001. Provides that Subtitle C (Telecommunications Utilities) and the functions of the commission relating to the regulation of the telecommunications industry are subject to review under Chapter 325, Government Code, during the period in which state agencies abolished in 2001 are reviewed. Provides that Subtitle C, if not continued in existence, expires on September 1, 2001. Sec. 13.002. APPLICATION OF SUNSET ACT. Makes a conforming change. SECTION 3. Repealer: Section 31.003, Utilities Code (Report on Scope of Competition). SECTION 4. Effective date: September 1, 1999. SECTION 5. Requires an electric utility to file the first report required by Section 39.109, Utilities Code, as added by this Act, on December 1, 1999. Requires a municipally owned utility to file the first report required by Section 39.111, Utilities Code, as added by this Act, on December 1, 1999. SECTION 6. Requires the lieutenant governor and speaker of the house of representatives, as soon as possible after the effective date of this Act, to appoint the initial members of the Joint Committee on Electric Industry Restructuring. Requires the lieutenant governor to designate a member of the committee as the presiding officer and speaker of the house of representatives to designate a member of the committee as the assistant presiding officer. Requires the committee to make recommendations to the 77th Legislature, Regular Session, regarding a transition to and establishment of a competitive retail electric industry on December 31, 2003. SECTION 7. Requires the governor, as soon as possible after the effective date of this Act, to appoint the members of the Renewable Energy Assistance Program Board. Requires the governor to appoint the members of the board so that two banking and financial services industry members, one environmental member, and one public member serve terms expiring on January 31, 2000; and two banking and financial services industry members, one environmental member, and one public member serve terms expiring on January 31, 2001. SECTION 8. Emergency clause.