CenterPoint Energy 2008 Annual Report Download - page 104

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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.
Review by the Texas Supreme Court of the court of appeals decision is at the discretion of the court. In
November 2008, the Texas Supreme Court requested the parties to the Petitions for Review to submit briefs on the
merits of the issues raised. Briefing at the Texas Supreme Court should be completed in the second quarter of 2009.
Although the Texas Supreme Court has not indicated whether it will grant review of the lower court’s decision, its
request for full briefing on the merits allowed the parties to more fully explain their positions. There is no prescribed
time in which the Texas Supreme Court must determine whether to grant review or, if review is granted, for a
decision by that court. Although the Company 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, the Company 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, the Company 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 the Company’s 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, the Company anticipates that it
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 $170 million to $385 million
(pre-tax) plus interest subsequent to December 31, 2008.
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. The Company believes that the
Texas Utility Commission based its order on proposed regulations issued by the Internal Revenue Service (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 Accumulated Deferred Investment Tax Credits (ADITC) and Excess
Deferred Federal Income Taxes (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, the Company received a Private Letter Ruling (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 the Company 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 the Company’s 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, in the petitions for review or briefs filed with the Texas Supreme Court, has
challenged that order by the court of appeals, though the Texas Supreme Court, if it grants review, will have
authority to consider all aspects of the rulings above, not just those challenged specifically by the appellants. The
Company and CenterPoint Houston will continue to pursue a favorable resolution of this issue through the appellate
or 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.