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Texas ALJs: Entergy/ITC Transaction, "Circumventing Some Of The Purposes Behind The Transfer To Competition" Two Texas ALJs would deny the proposed transfer of Entergy Texas, Inc. to a subsidiary of ITC Holdings Corp. because, among other reasons, the transfer would, "circumvent[] some of the purposes behind the transfer to competition"
"After considering the evidence and arguments presented, the ALJs conclude, as a legal matter, that PURA does not explicitly and unambiguously prohibit the Transaction. Nevertheless, the Transaction appears inconsistent with the Commission's past policy considerations as well as with legislative intent, as evidenced in certain portions of PURA. Therefore, the ALJs recommend the Commission interpret PURA as not allowing the Transaction as proposed. The ALJs additionally find that Applicants have not demonstrated the Transaction is in the public interest. This provides a separate-and more substantive-ground for denial," the ALJs said in a proposal for decision.
"After considering the arguments presented, the ALJs conclude that, although the statutory language is somewhat ambiguous and does not explicitly prohibit the Transaction, policy reasons support the interpretation offered by the protesting parties that the Transaction is not permissible under PURA. Specifically, the ALJs agree with the protesting parties that allowing the transfer of transmission assets as proposed here would amount to an end run around the statutory framework of the transfer to competition established by the legislature," the ALJs said
"Approving the proposed Transaction would essentially allow partial unbundling in a manner other than that provided for by the legislature in PURA chapter 39, which dictated the methods for transferring the regulated utility market to competition, and also in a manner that appears inconsistent with the Commission's prior determination of how to regulate ETI before a full move to retail choice," the ALJs said.
"To be clear, though, the ALJs do not find the statutory language of PURA explicitly prohibits the Transaction-nor does it clearly authorize the Transaction. Rather, the provisions of PURA are ambiguous enough to allow room for interpretation by the Commission ... [T]he ALJs conclude that authority to allow a transmission-only utility outside of ERCOT rests within the discretion of the Commission."
In exercising this discretion, the ALJs noted that ETI seeks to spin off its transmission assets in the transaction, and those assets will be owned by ITC and regulated by FERC under FERC methodology.
"The ALJs conclude that such a transaction is inconsistent with the statutory framework established by the legislature. The legislature, in subchapter J of PURA chapter 39, specifically addressed EGSI's situation and provided the path for it to unbundle and transition to competition. That path was not followed, and the legislative intent seems clear that ETI (as a regulated Texas entity created by EGSI) must continue to be regulated by the Commission under cost-of-service ratemaking," the ALJs said
"By spinning off its transmission asset, which will then have its rates set by FERC and not the Commission, ETI would be circumventing some of the purposes behind the transfer to competition. Ratepayers would still have no customer choice, but the Commission would lose jurisdiction over part of the rate-setting for those customers because the transmission rates would be subject to FERC authority," the ALJs said (emphasis added)
Commission policy appears to match the legislature's -- that unbundling should occur with a transition to competition, the ALJs said.
Story Continues Below...
ADVERTISEMENT Regarding the more substantive grounds for denial, the ALJs said:
"A number of things are clearly known about the proposed Transaction. First, it is projected to generate financial gain for ETI shareholders, who will acquire ITC stock in an amount that significantly exceeds the book value of the assets to be transferred. Second, ITC executives stand to reap significant financial rewards. The Applicants have structured the Transaction in such a way that it triggers change of ownership clauses in ITC's executives' contracts, leading to significant payouts for these executives. Third, transmission costs for consumers will immediately increase. This increase is undisputed. Finally, if the Transaction is approved, the Commission will lose most of its regulatory authority over the transmission assets, as they will come under the rate-making jurisdiction of the Federal Energy Regulatory Commission (FERC)."
"While these results are clear, others, such as whether Texas customers will gain significant benefits, are not. Only one effect on transmission customers is known: their transmission costs will immediately increase. Applicants contend that these increased costs will be offset by a decrease in other components of their electricity costs (for instance, through access to cheaper generation), or through qualitative improvements in their transmission service. Applicants also contend that economies of scale may mean that the transmission customers will have lower transmission costs in the long run than if the transmission assets continue to be owned and managed by ETI. But these purported benefits to customers rest on shaky factual foundations and on projections from hypothetical future projects that ITC does not contend should actually be built," the ALJs said.
"Ultimately, the ALJs conclude that the evidentiary record does not provide a sufficient basis to determine that the Transaction's benefits justify Commission approval. Put plainly, the record contains little basis upon which to quantify the supposed benefits to the public from this Transaction. And although qualitative benefits could support a transfer of assets in some circumstances, the Applicants have not presented sufficient evidence to show that any qualitative benefits from the Transaction can come close to justifying its significant costs," the ALJs said.
"In summary, the ALJs recommend the Commission deny the application because the Applicants have not demonstrated the proposed Transaction is in the public interest, as required by PURA §§ 14.101(b), 39.262(m), and 39.915(b)," the ALJs said.
If the Commission disagrees with the ALJs' recommendation and approves the transaction, the ALJs recommend the Commission adopt several conditions, including:
• All transmission-related cost increases by ITC that would ultimately flow through to Texas wholesale and retail customers through ETI must first be approved by the Texas Commission, upon a showing that the quantifiable transaction benefits equal or exceed such costs;
• ETI/ITC shall not seek to recover any costs incurred to effectuate the ITC Transaction from its customers;
• ITC should be subject to applicable Texas or multi-state regulatory oversight to the extent such oversight does not conflict with FERC regulation;
• The Commission should maintain input on transmission planning activities, and Applicants should support an oversight group similar to the existing Entergy Regional State Committee;
• ETI should keep the Commission apprised of ITC Transaction activities in other EOC jurisdictions, and provide all Transaction-related Orders and updates, studies, reviews, reports, and analyses as required under the Orders;
• In the event any EOC or ITC Company commits to provide rate discounts or concessions to customers in any other EOC jurisdiction, ETI and ITC must offer substantially the same concession to customers in Texas.
Docket 41223
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Reporting by Karen Abbott • kabbott@energychoicematters.com
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