CenterPoint Energy 2014 Annual Report Download - page 8

Electric Distribution
In the Electric Reliability Council of Texas, Inc. (ERCOT), end users purchase their electricity directly from certificated REPs. CenterPoint
Houston delivers electricity for REPs in its certificated service area by carrying lower-
voltage power from the substation to the retail electric
customer. CenterPoint Houston’
s distribution network receives electricity from the transmission grid through power distribution substations and
delivers electricity to end users through distribution feeders. CenterPoint Houston’
s operations include construction and maintenance of
distribution facilities, metering services, outage response services and call center operations. CenterPoint Houston provides distribution services
under tariffs approved by the Texas Utility Commission. Texas Utility Commission rules and market protocols govern the commercial
operations of distribution companies and other market participants. Rates for these existing services are established pursuant to rate proceedings
conducted before municipalities that have original jurisdiction and the Texas Utility Commission.
ERCOT Market Framework
CenterPoint Houston is a member of ERCOT. Within ERCOT, prices for wholesale generation and retail electric sales are unregulated, but
services provided by transmission and distribution companies, such as CenterPoint Houston, are regulated by the Texas Utility Commission.
ERCOT serves as the regional reliability coordinating council for member electric power systems in most of Texas. ERCOT membership is open
to consumer groups, investor and municipally-
owned electric utilities, rural electric cooperatives, independent generators, power marketers, river
authorities and REPs. The ERCOT market includes most of the State of Texas, other than a portion of the panhandle, portions of the eastern part
of the state bordering Arkansas and Louisiana and the area in and around El Paso. The ERCOT market represents approximately 90% of the
demand for power in Texas and is one of the nation’
s largest power markets. The ERCOT market included available generating capacity of over
77,000 megawatts (MW) at December 31, 2014. Currently, there are only limited direct current interconnections between the ERCOT market
and other power markets in the United States and Mexico.
The ERCOT market operates under the reliability standards set by the North American Electric Reliability Corporation (NERC) and
approved by the Federal Energy Regulatory Commission (FERC). These reliability standards are administered by the Texas Regional Entity
(TRE), a functionally independent division of ERCOT. The Texas Utility Commission has primary jurisdiction over the ERCOT market to
ensure the adequacy and reliability of electricity supply across the state’
s main interconnected power transmission grid. The ERCOT
independent system operator (ERCOT ISO) is responsible for operating the bulk electric power supply system in the ERCOT market. Its
responsibilities include ensuring that electricity production and delivery are accurately accounted for among the generation resources and
wholesale buyers and sellers. Unlike certain other regional power markets, the ERCOT market is not a centrally dispatched power pool, and the
ERCOT ISO does not procure energy on behalf of its members other than to maintain the reliable operations of the transmission system.
Members who sell and purchase power are responsible for contracting sales and purchases of power bilaterally. The ERCOT ISO also serves as
agent for procuring ancillary services for those members who elect not to provide their own ancillary services.
CenterPoint Houston’
s electric transmission business, along with those of other owners of transmission facilities in Texas, supports the
operation of the ERCOT ISO. The transmission business has planning, design, construction, operation and maintenance responsibility for the
portion of the transmission grid and for the load-
serving substations it owns, primarily within its certificated area. CenterPoint Houston
participates with the ERCOT ISO and other ERCOT utilities to plan, design, obtain regulatory approval for and construct new transmission lines
necessary to increase bulk power transfer capability and to remove existing constraints on the ERCOT transmission grid.
Restructuring of the Texas Electric Market
In 1999, the Texas legislature adopted the Texas Electric Choice Plan (Texas electric restructuring law). Pursuant to that legislation,
integrated electric utilities operating within ERCOT were required to unbundle their integrated operations into separate retail sales, power
generation and transmission and distribution companies. The legislation provided for a transition period to move to the new market structure and
provided a mechanism for the formerly integrated electric utilities to recover stranded and certain other costs resulting from the transition to
competition. Those costs were recoverable after approval by the Texas Utility Commission either through the issuance of securitization bonds or
through the implementation of a competition transition charge as a rider to the utility’s tariff. CenterPoint Houston’
s integrated utility business
was restructured in accordance with the Texas electric restructuring law and its generating stations were sold to third parties. Ultimately
CenterPoint Houston was authorized to recover a total of approximately $5 billion in stranded costs, other charges and related interest. Most of
that amount was recovered through the issuance of transition bonds by special purpose subsidiaries of CenterPoint Houston. The transition
bonds are repaid through charges imposed on customers in CenterPoint Houston’
s service territory. As of December 31, 2014, approximately
$2.6 billion aggregate principal amount of transition bonds were outstanding.
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