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There are other accounting gimmicks that can help to inflate the utility rate base, but the big one, the one that virtually ensures continuing high rates of return for Texas electric companies, has to do with the way the cost of construction the PUC. The utilities represent CWIP costs on their books as useful assets in plant and property, although these assets obviously will not add one iota to utility service until construction is finished. If these expenses for uncompleted plants go into the rate base, today’s consumers foot the bill for investments that won’t benefit any ratepayers until as many as six years later. The sums of money at stake are considerable. In one Houston Lighting & Power case, for instance, CWIP charges passed on to HL&P’s customers accounted for 70 percent of a $50 million rate increase granted by the PUC. Texas law allows inclusion of CWIP costs in a utility’s rate base only “where necessary to the financial integrity of the utility,” but the PUC finds reason to include at least some portion of these costs in the rate base of all the large electric companies. The commis sion has allowed 40, 50, and even 100 percent in various cases. It is one of the half dozen or so state regulatory commissions that are most generous to the utility industry on this score. The rationale for this generosity, according to PUC chairman Cowden, is that Texas electric utilities are in a period of very costly transition from the use of natural gas to fuel their generators to reliance on coal and nuclear power. Cowden and former commissioner Erwin, who resigned this spring and whose successor is soon to be named by Gov. Bill Clements, say that the utilities have been encouraged by the Texas Railroad Commission and the U.S. Congress to make this conversion, and they argue that the heavy financing requirements of retooling old plants and building new ones cannot be met unless enough CWIP charges are allowed in the rate base to keep the rate of return tempting to Wall Street investors. But the consequence of the PUC approach to CWIP costs, according to more than one lawyer well-versed in Texas utility law, has been the subversion of the rate-setting policy prescribed by the Public Utility Regulatory Act of 1975 and a sharp departure from standard rate-setting methods used by other state utility commissions. The law calls on the commission to assign a value to the utility rate base and set a reasonable rate of return by looking at the data from the utility’s most recent year of operationin other words, the PUC is supposed to base its determinations on actual costs incurred in an “historic” test year. The PUC staff does indeed use such operating data from the past 12month period, but the commission has often taken those figures as just a starting-point. Having calculated how much it actually cost the utility to provide service, the agency’s staff makes computer projections of the economic outlook for the utility based on estimates of its revenues, expenses, and profits. Then the PUC adds enough CWIP costs to the rate base to assure the utility a level of income and profit the commissioners and their staff deem appropriate. How does the commission decide what level of profit is appropriate? The answer came from William Avera, the PUC’s ex-chief of economic research, when he explained the staff’s recommendation in a Houston Lighting & Power rate case: “We hear from financial analysts what the requirements are for this companywhere the company has been and our perception of how the financial community feels about where the company is.” The object is to preserve the “very favorable indicators” long enjoyed and which have caused Wall Street investment analysts to give their stocks and bonds very high ratings. One key indicator the financial analysts and, therefore, the PUC look to is “interest coverage,” the ratio between a utility’s annual income and its annual debt. Keep it high and the Wall Street ratings stay high, making it easier for the companies to raise private capital for Hans-Peter Otto Nancy Jacobson & Richard Fouke on the PUC “The PUC legal department, although it has a reputation for being consumeroriented . . . shows a great impatience with consumer groups and citizens, especially nonlawyers. They would never step in and help us with legal advice. If they stepped in, it was on the side of the utilities.” So says Nancy Jacobson, who has taken part in three PUC rate hearings as what she terms a “de facto” lawyer for a Tarrant County consumer group called Citizens for Fair Utility Regulation. “We’ve been shocked by the PUC’s indifference to consumers,” she says. “They listenpolitelybut that’s all. And it’s expensive to go down there [to the PUC offices in Austin]. Our time and money is spent. We think we make substantial and important contributions, and they ignore us. They use their own staff testimony as the primary evidence.” Another of the 100 members of CFUR, Richard Fouke, says the PUC lets the utilities get away with a number of “questionable practices.” He cites as one example the agency’s treatment of the “phantom” federal income taxes the companies report to the commission as current expenses that ratepayers must cover with their monthly bills. “They count regular federal taxes” as part of the rate base, Fouke says, “but in reality these taxes are deferred. Utilities claim that this was the intent of federal tax laws. I took exception to this. The PUC did not.” Fouke believes that one way to make the PUC pay attention to consumers would be to require that hearings on rate increases be held in the areas served by the utilities instead of in Austin. “And another way to make the PUC more responsive,” he says, “is to have the commissioners elected” instead of appointed by the governor. “But this is not a cure-all,” Fouke warns. “Look at the Railroad Commission.” Edward Humes lowed by the Internal Revenue Service to put off almost indefinitely. The PUC lets the utilities count these taxes they may never pay as a current cost of service; the companies are permitted not only to bill customers for such phantom taxes, but also -to collect a profit on this “operating expense” they appear to have incurred on paper. Utility commissioner Garrett Mo’ rris THE TEXAS OBSERVER 5