1st memo to Rick
---------------------- Forwarded by Jean Ryall/NA/Enron on 04/26/2001 09:59 
AM ---------------------------


Jean Ryall
04/24/2001 01:34 AM
To: Richard Shapiro/NA/Enron@Enron
cc:  

Subject: Summary of HB 2107

The Texas statute allows for full collection of stranded costs with a final 
determination of stranded costs in 2004 and interim collection in 2002 and 
2003 based on a Commission estimate.  The Commission bases its estimate of 
stranded costs on the ECOM (Excess Costs Over Market) Model.  The ECOM model 
computes the difference between the revenues a utility would receive in a 
regulated environment versus the revenues a utility would receive if it sold 
all of its generation at market prices (the market price in the ECOM Model is 
based on a Combined Cycle Combustion Turbine). 

In 1998 the Commission estimated more than $4 Billion in stranded costs based 
on the ECOM Model.  Because stranded costs are the difference between the 
market value and the book value of utility generating assets, the Commission 
ordered utilities to "mitigate" stranded costs by increasing depreciation of 
generating assets.  The accelerated depreciation, came from two sources:

 1. Redirected depreciation -- Utilities were allowed to defer depreciation 
of their wires assets and increase depreciation on generating assets; and,
 2. Application of Excess Earnings -- instead of decreasing utility rates the 
Commission set a cap on earnings and directed the utilities to apply any 
earnings above the cap to depreciating generating assets.

Because of the unexpected rise in natural gas prices the market price in the 
ECOM model rose significantly above the weighted average price of the 
regulated side which is weighted by coal and nuclear.  This caused the 2001 
estimate of stranded costs to be severely negative.  Even more negative than 
the amounts of redirected depreciation and application of excess earnings.

Enron argued at the Commission that because the estimate of stranded cost was 
negative the accelerated depreciation was unnecessary.  Consequently, we 
argued that the money spent on mitigation should be used to reduce wires 
rates.  The utilities argued that they should keep mitigation until the final 
determination of stranded costs in 2004.  The Commission ruled in Enron's 
favor.  

Sylvester Turner filed H.B. 2107 to address this situation, however, rather 
than simply reducing wires charges, the bill as filed would reduce utility 
rates making it more difficult to compete.  We are working to amend the bill 
so that the credit for redirected depreciation and excess earnings goes only 
to reducing wires rates and that any negative stranded costs beyond that 
amount would be refunded directly to ratepayers.