Got Mad, Got Even

In July 1994, HL&P filed its rate package, a complex document that covered its fuel costs and accounting procedures. The utility said that although its numbers justified a rate increase of $239 million a year, it was not going ask for one.

At that point, the city of Houston showed up, attending meetings but not declaring itself as an intervenor. The city was standing to the side because then-city attorney Benjamin Hall had signed an agreement with HL&P attorney Hugh Rice Kelly not to call for a rate reduction. Pace obtained a copy of the agreement and leaked it to the news media. Frustrated by the failure of Houston to aggressively fight for a rate reduction, several cities, led by Friendswood Councilwoman Janice Lowe, broke away from the Houston-led Coalition of Cities and formed the Gulf Coast Coalition to join the Section 42 review.

In September the administrative judge forced the city of Houston to join as an intervenor or get out of the way. By December the intervenors and their experts had combed through the utility's numbers and were talking about hitting HL&P for up to $433 million a year for five years to make up for excess earnings and mismanagement. That figure excluded the additional costs of the STP outage. The intervenors would have to fight for these huge reductions in the hearing, which might prove embarrassing to HL&P. The lawyers could probe such issues as how the utility shares its earnings with the money-losing subsidiaries of its parent company, Houston Industries. The hearing would investigate "phantom taxes," taxes for which the utility collects money in its rate base but which it never has to pay.

While the intervenors turned on the heat, the city of Houston made a deal that sounded impressive: a total of $1.2 billion in lower bills over a period of three years.

But as Pace and Williams, as well as utility consultants around town, pointed out, much of that reduction would have come anyway, because it was required by PUC regulations. HL&P had to give back its overcharges for fuel, incurred primarily because the price of natural gas dropped. Other refunds were due because of expired cogeneration contracts. What the city actually got from the utility was $62.2 million in rate cuts for three years, plus a $70 million one-time refund to compensate for the outage at the South Texas Project nuclear plant. In exchange, the city exempted itself from any further rate reductions resulting from the ongoing investigation of STP.

As Williams likes to put it, the city gave away the possibility of $2 billion more. Pace and Williams filed a protest, saying the mayor had settled for "chump change."

Mayor Lanier defended the settlement, saying he didn't want to gamble that a larger reduction might result from the hearing and the ruling of the state's three public utility commissioners. The city's agreement will be accepted by most of the intervenors, Pace and Williams say, because the loss of Houston took away most of their negotiating leverage.

But Pace and Williams continue to relentlessly pursue the utility. At the end of February, HL&P employees supplied them with a morale-building speech that Don Jordan, the chairman and CEO of Houston Industries, made at the company's annual management conference in January. In it, Jordan pointed out that the utility has strong friends both in Congress and the Texas Legislature. Among them is state Senator Ken Armbrister of Victoria, "a proven friend of the company," Jordan said, who is also the co-chairman of the Sunset Advisory Commission, which is reviewing the PUC this year.

Armbrister is carrying a bill this year that will nicely help HL&P if it is passed. The legislation would, among other things, make it harder for OPUC and municipalities to initiate rate cases; remove the PUC's jurisdiction over subsidiary companies owned by utilities; make cost-recovery policies more liberal; and allow utilities to mark up cogenerated power, which they currently cannot do.

Houston Industries can count on such support because, like other highly regulated industries, it makes significant political contributions. How long utilities can get such favored treatment remains to be seen.

"The danger with having a new Republican governor and Legislature," Jordan pointed out to his management, "is that they are pro-competition. They are friends on alleviating tax burdens on businesses, but they don't have much sympathy for monopoly status. They would rather open it up and let the best company win."

Among the companies challenging HL&P is Destec Energy, a subsidiary of Dow Chemical that is calling for the deregulation of electrical power in full-page newspaper and television ads. In February such big industrial users of electricity as Exxon Corporation and Amoco Corporation announced the creation of their own transmission utility company to supply power in the Houston Ship Channel area.

Williams and Pace doubt that HL&P will be able to adapt to competition. "They don't know how to compete,"says Pace. "When in doubt, get if from the ratepayers. That's their whole mindset."

The two would like to see HL&P turned into a distribution service. The company would be paid a fee to move power over its lines.