CenterPoint Energy 2010 Annual Report Download - page 26

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• 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.
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, but could range from
$190 million to $440 million (pre-tax) plus interest subsequent to December 31, 2010.
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, to reflect 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 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, we 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 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