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

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accounting for mitigation at true up

Accounting For Mitigation at True-up

Project No. 23571 Workshop

April 2001

mitigation question for true up
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?

analysis framework
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
two sets of possible scenarios
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

scenario a 1
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.

scenario a 2
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.

scenario a 3
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.

scenario a 4
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.

scenario b 1
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.

scenario b 2
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.

scenario b 3
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.

scenario b 4
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.

treatment of income taxes
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.