CenterPoint Energy Houston Electric, LLC v. Gulf Coast Coalition of Cities

In CenterPoint Energy Houston Elec., LLC v. Gulf Coast Coalition of Cities, No. 03-05-00557-CV, S.W.3d, (Tex. App.--Austin Dec. 20, 2007, no pet. h.), the Court reversed the district court's judgment and affirmed the Commission's final order disallowing $ 440 million of CenterPoint's requested capacity auction true-up award. Id. CenterPoint had failed to comply with the statutory requirements to auction 15% of its generation capacity and likewise failed to satisfy the applicable safe-harbor provisions. See id. The Court held that, in light of CenterPoint's failures, the Commission acted within its authority when it used an alternative method for establishing the capacity auction price to calculate CenterPoint's capacity auction true-up award. Id. In CenterPoint Energy Houston Electric, LLC v. Gulf Coast Coalition of Cities, No. 03-05-00557-CV, 252 S.W.3d 1 (Tex. App.--Austin Apr. 17, 2008, no pet. h.), the Commission's final order set forth a primary and alternative holding. Id. Under its primary holding, the Commission adopted its own market valuation of CenterPoint's generation assets based on its finding that CenterPoint had failed to establish the market value of those assets as required under section 39.262(h). Id. Under its alternative holding, the Commission adopted the market value proposed by CenterPoint, but made reductions to net book value based on commercial unreasonableness. Id. The Court considered whether the Commission's reductions to net book value for commercial unreasonableness should also be applied to its primary holding. Id. The Court concluded that reductions to net book value for commercially unreasonable behavior were not meant to be punitive in nature. Id. The Court stated that where a utility's commercially unreasonable behavior benefits the utility financially and lessens the impact of stranded costs by increasing the utility's stranded cost recovery, the amount of stranded costs recovered by the utility should be modified to capture the utility's unreasonable behavior. Id. The Court further explained that, if the commercially unreasonable behavior has no financial impact or, if the financial impact is irrelevant to or has already been accounted for in the valuation of the utility's generation assets, any adjustment to the net book value of the utility's generation assets would be contrary to the legislative directive. Id. The Court ultimately concluded that the Commission's decision in the CenterPoint true-up proceeding to limit the adjustments to net book value to its alternative holding was reasonable because the negative effects of any commercially unreasonable behavior on the part of CenterPoint had no effect on the valuation of CenterPoint's generation assets. Id.