CenterPoint aims to push cost of repairing Hurricane Beryl’s damage onto Houston-area ratepayers

From Houston Public Media:

CenterPoint Energy defended its accounting practices last Thursday, in the latest hearing before the state agency that regulates Texas utilities. Jason Ryan, CenterPoint’s executive vice president for regulatory services and government affairs, told the Public Utility Commission (PUC) how the company was running internal and externally managed audits of the expenses filed by the mutual assistance crews it had brought in after Hurricane Beryl.

“Ultimately, it’s not our judgment, though, on what’s reasonable. Even though we’re going to have internal audit, external audit, we will then have a process here at the Commission for intervening parties and the staff to look over that and get their opinion on what’s reasonable,” Ryan said.

The PUC, which is investigating CenterPoint’s handling of Beryl under orders from Governor Greg Abbott, was clear about the company’s responsibility to its customers.

“When we want mutual assistance folks, gosh, we need them now,” said Commissioner Jimmy Glotfelty, “but the ratepayers deserve every audited, every component, every nickel scrutinized, so that we can ensure that they’re getting the best service.”

Glotfelty’s underlying message was that whatever costs the PUC ultimately approves will be passed along to the ratepayers.

Asked about the total costs CenterPoint was racking up for repairs relating to Beryl, and the May derecho that preceded it, Ryan hedged. He said the total costs for the derecho likely won’t be available until the fourth quarter of this year. “It will take us a while longer to get the invoices and go through the audit process, both internal and external, for Hurricane Beryl,” Ryan said. “So, I wouldn’t expect that to be until well into next year.”

CenterPoint responded to a similar request from Houston Public Media for comment on the cost with the statement, “We are currently focused on the work we are completing and do not have a final cost at this time.”

Estimated costs for Beryl and how CenterPoint intends to pay

CenterPoint’s latest quarterly report to the U.S. Securities and Exchange Commission, however, suggests the company does have some idea of the ultimate costs.

“(CenterPoint subsidiary) Houston Electric currently estimates that total costs to restore the electric delivery facilities damaged as a result of the May 2024 Storm Events and Hurricane Beryl will be in the range of $425 million to $475 million and $1.2 billion to $1.3 billion, respectively, based on currently available information,” the filing said. “These preliminary estimates are subject to revision as certain restoration costs may continue through the end of 2024.”

The filing also indicated how CenterPoint intends to pay for those costs: “The ultimate recovery of costs relating to the May 2024 Storm Events and Hurricane Beryl is expected to be sought through the issuance and sale of non-recourse securitization bonds for distribution-related costs and the…capital mechanism for transmission-related costs, as applicable… with the debt service and other financing costs of the securitization bonds being paid over the term of the securitization bonds through a storm restoration charge imposed on Houston Electric’s customers.”

So, why does CenterPoint, which failed to keep power flowing to millions of customers after Hurricane Beryl, get to pass the buck to the public?

“In my almost 35 years of experience in this utility business, the customers end up paying. They always end up paying,” said energy consultant Karl Rábago, who served on the PUC under Governors Ann Richards and George W. Bush. “That’s because electricity is essential for modern life, and you can’t just go around bankrupting or allowing utilities to go bankrupt by forcing shareholders to bear what some people might say is the fair consequences of mismanagement.”

That’s not unique to Texas. Paul Arbaje is an energy analyst with the Union of Concerned Scientists.

“There’s a general fear by regulators that they don’t want to open the Pandora’s box of making shareholders pay for these disaster costs, at least thus far, because they’re worried that investors will take their money elsewhere,” Arbaje said.

Unlike shareholders, ratepayers are a captive audience. They need the electricity that the utility, a local monopoly, supplies through its power lines.

“Shareholders don’t even live in the communities that these utilities serve oftentimes,” Arbaje said. “An investor in CenterPoint stock might live in New York or California or something. So, I think it’s just a problem with the way we finance utilities in this country. There’s sort of a disconnect there, and there’s a difference in leverage and the options that ratepayers have versus what shareholders have.”

CenterPoint’s profit structure

The reason CenterPoint can pass on all those costs from the recent storms to customers stems from the Texas Utilities Code. CenterPoint gets to earn about five cents for every kilowatt-hour that flows through its lines to your home or business. But it also makes a profit based on certain kinds of expenditures.

“Every dollar they spend in capital infrastructure, they make 9.4% (return on equity). So, when they build a transmission line, a substation, they deploy a transformer — that’s capital infrastructure — they spend $1 million, they make $94,000 in profit on that,” said Doug Lewin, author of the Texas Energy and Power Newsletter.

Case in point: late last month, Senator Charles Schwertner (R-Georgetown), chairman of the Senate Select Committee on Hurricane and Tropical Storm Preparedness, Recovery, and Electricity, grilled CenterPoint CEO Jason Wells about the company’s giant mobile generators. The state allowed CenterPoint to lease the generators after Winter Storm Uri as a hedge against future power outages, but they proved useless in restoring power to the Houston area after Beryl.

“Eight hundred million of capital expenditures, for which you get a rate of return, that’s $70-plus million to the bottom line a year,” Schwertner said. “Am I right about…the mathematics of that?”

“No, the rate of returns only apply to the equity ratio, so about 42.5% of the $800 million is eligible for the return. So, it’s about 30-ish,” Wells said.

“So,” Schwertner said, “$30-plus million to your bottom line that go to shareholders?”

“Yes, Mr. Chairman,” Wells said.

Jason Wells, CEO and COO of CenterPoint Energy, testified before the Senate Select Committee on Hurricane and Tropical Storm Preparedness, Recovery, and Electricity, July 29, 2024.
Screenshot / Texas Senate

Lt. Gov. Dan Patrick wants the PUC to claw back that $800 million for customers.

“I just can’t imagine that politically they could allow them to keep those profits,” Doug Lewin said, “but $30 million out of the $1 billion that they make on an annual basis, that’s a pretty small price to pay.”So, it’s clear that CenterPoint’s capital investments make them money, such as on the giant generators. But consumer advocates believe this system discourages accountability and encourages abuse. Take something as simple as replacing utility poles and power lines.”When lines and poles and new equipment are put in, a profit is allowed off of that installation of the equipment. So, obviously, when you rebuild after storms, a lot of that is installation of equipment,” said Sandra Haverlah, president of the Texas Consumer Association. “What we’d like to see happen when the storm expenses are presented by CenterPoint, is that we have a chance to look to see if some of those expenses have already been billed back to the customers in previous rate cases.”

Haverlah, together with a collection of Houston-area city governments, recently filed an interventionto keep CenterPoint from potentially dodging the PUC’s efforts to lower its rates. She said CenterPoint has been overcharging customers hundreds of millions of dollars.

“I think there’s an argument to be made on whether or not some double and/or triple billing would be going on,” Haverlah said, “because much of the equipment was already put in and then had to be reinstalled after (the) derecho and then installed again after Beryl.”

One of the main complaints against CenterPoint’s handling of Beryl is that it failed adequately to trim back trees growing around its power lines – trees that then fell on those lines during the derecho and Beryl, knocking out power. That kind of work is known as operations and maintenance.

“They do not get a return on the operations and maintenance work they do, which is very relevant to the Hurricane Beryl response,” Doug Lewin said. “They’re reimbursed effectively, essentially, but they do not earn a profit on that.”

The prospects for reform

Lewin said there is a way to encourage more spending on basic maintenance and discourage expensive boondoggles like the giant generators, but it involves changing the entire Texas Utilities Code to a performance-based regulatory model.

In such a case, CenterPoint would earn higher profits by meeting clearly defined performance metrics – like restoring power faster after an outage – and less if it doesn’t meet those metrics. It’s a model that’s worked well in the United Kingdom for years, but it’s yet to be adopted anywhere in the U.S.

“There are 17 states that have proceedings underway,” Lewin said, “at a minimum, to investigate it. Texas is not one of them. In the United States, Hawaii is the furthest along. Connecticut has moved pretty quickly towards this. There’s quite a bit going on in Colorado and Michigan.”

But the political inertia in Texas to keep the current profit structure in place is tremendous, and CenterPoint and other utilities are likely to invest heavily to support that system.

“They spend a lot of money on lobbying, a lot of money on political contributions, which they say comes out of their profits and isn’t from ratepayers,” Lewin said. “But I always like to ask the follow-up question, ‘Where do your profits come from?’ Comes from ratepayers. So, ratepayers are paying for that lobbying. They’re paying for those donations.”

Ed Hirs, an energy fellow at the University of Houston, said it will be up to the lawmakers and the PUC to show the leadership needed to change the situation. Having spent years watching it build to where it is now, he’s skeptical.

“You and I can’t negotiate with CenterPoint for service. We have to rely upon our elected representatives to make sure we get value for our dollar,” Hirs said. “That’s the regulatory compact, and that regulatory compact is broken in Texas.”

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