CenterPoint Energy 2008 Annual Report Download - page 44

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• reversed the district court’s judgment to the extent it upheld the Texas Utility Commission’s decision to
allow CenterPoint Houston to recover EMCs paid to RRI;
• ordered that the tax normalization issue described below be remanded to the Texas Utility Commission as
requested by the Texas Utility Commission; and
• affirmed the district court’s judgment in all other respects.
In April 2008, the court of appeals denied all motions for rehearing and reissued substantially the same opinion as
it had rendered in December 2007.
In June 2008, CenterPoint Houston petitioned the Texas Supreme Court for review of the court of appeals
decision. In its petition, CenterPoint Houston seeks reversal of the parts of the court of appeals decision that
(i) denied recovery of EMCs paid to RRI, (ii) denied recovery of the capacity auction true-up amounts allowed by
the district court, (iii) affirmed the Texas Utility Commission’s rulings that denied recovery of approximately
$378 million related to depreciation and (iv) affirmed the Texas Utility Commission’s refusal to permit CenterPoint
Houston to utilize the partial stock valuation methodology for determining the market value of its former generation
assets. Two other petitions for review were filed with the Texas Supreme Court by other parties to the appeal. In
those petitions parties contend that (i) the Texas Utility Commission was without authority to fashion the
methodology it used for valuing the former generation assets after it had determined that CenterPoint Houston could
not use the partial stock valuation method, (ii) in fashioning the method it used for valuing the former generating
assets, the Texas Utility Commission deprived parties of their due process rights and an opportunity to be heard,
(iii) the net book value of the generating assets should have been adjusted downward due to the impact of a purchase
option that had been granted to RRI, (iv) CenterPoint Houston should not have been permitted to recover
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 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 $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. 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