CenterPoint Energy 2009 Annual Report Download - page 47

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construction work in progress balances without proving those amounts in the manner required by law and (v) the
Texas Utility Commission was without authority to award interest on the capacity auction true up award.
In June 2009, the Texas Supreme Court granted the petitions for review of the court of appeals decision. Oral
argument before the court was held in October 2009. Although we and CenterPoint Houston believe that
CenterPoint Houston’s true-up request is consistent with applicable statutes and regulations and, accordingly, that it
is reasonably possible that it will be successful in its appeal to the Texas Supreme Court, we can provide no
assurance as to the ultimate court rulings on the issues to be considered in the appeal or with respect to the ultimate
decision by the Texas Utility Commission on the tax normalization issue described below.
To reflect the impact of the True-Up Order, in 2004 and 2005, we recorded a net after-tax extraordinary loss of
$947 million. No amounts related to the district court’s judgment or the decision of the court of appeals have been
recorded in our consolidated financial statements. However, if the court of appeals decision is not reversed or
modified as a result of further review by the Texas Supreme Court, we anticipate that we would be required to
record an additional loss to reflect the court of appeals decision. The amount of that loss would depend on several
factors, including ultimate resolution of the tax normalization issue described below and the calculation of interest
on any amounts CenterPoint Houston ultimately is authorized to recover or is required to refund beyond the amounts
recorded based on the True-Up Order, but could range from $180 million to $410 million (pre-tax) plus interest
subsequent to December 31, 2009.
In the True-Up Order, the Texas Utility Commission reduced CenterPoint Houston’s stranded cost recovery by
approximately $146 million, which was included in the extraordinary loss discussed above, for the present value of
certain deferred tax benefits associated with its former electric generation assets. We believe that the Texas Utility
Commission based its order on proposed regulations issued by the IRS in March 2003 that would have allowed
utilities owning assets that were deregulated before March 4, 2003 to make a retroactive election to pass the benefits
of ADITC and EDFIT back to customers. However, the IRS subsequently withdrew those proposed normalization
regulations and, in March 2008, adopted final regulations that would not permit utilities like CenterPoint Houston to
pass the tax benefits back to customers without creating normalization violations. In addition, we received a PLR
from the IRS in August 2007, prior to adoption of the final regulations, that confirmed that the Texas Utility
Commission’s order reducing CenterPoint Houston’s stranded cost recovery by $146 million for ADITC and EDFIT
would cause normalization violations with respect to the ADITC and EDFIT.
If the Texas Utility Commission’s order relating to the ADITC reduction is not reversed or otherwise modified on
remand so as to eliminate the normalization violation, the IRS could require us to pay an amount equal to
CenterPoint Houston’s unamortized ADITC balance as of the date that the normalization violation is deemed to
have occurred. In addition, the IRS could deny CenterPoint Houston the ability to elect accelerated tax depreciation
benefits beginning in the taxable year that the normalization violation is deemed to have occurred. Such treatment, if
required by the IRS, could have a material adverse impact on our results of operations, financial condition and cash
flows in addition to any potential loss resulting from final resolution of the True-Up Order. In its opinion, the court
of appeals ordered that this issue be remanded to the Texas Utility Commission, as that commission requested. No
party has challenged that order by the court of appeals although the Texas Supreme Court has the authority to
consider all aspects of the rulings above, not just those challenged specifically by the appellants. We and
CenterPoint Houston will continue to pursue a favorable resolution of this issue through the appellate and
administrative process. Although the Texas Utility Commission has not previously required a company subject to its
jurisdiction to take action that would result in a normalization violation, no prediction can be made as to the ultimate
action the Texas Utility Commission may take on this issue on remand.
CenterPoint Houston’s receivables are concentrated in a small number of REPs, and any delay or default in
payment could adversely affect CenterPoint Houston’s cash flows, financial condition and results of operations.
CenterPoint Houston’s receivables from the distribution of electricity are collected from REPs that supply the
electricity CenterPoint Houston distributes to their customers. As of December 31, 2009, CenterPoint Houston did
business with approximately 80 REPs. Adverse economic conditions, structural problems in the market served by
ERCOT or financial difficulties of one or more REPs could impair the ability of these REPs to pay for CenterPoint
Houston’s services or could cause them to delay such payments. CenterPoint Houston depends on these REPs to
remit payments on a timely basis. Applicable regulatory provisions require that customers be shifted to a provider of