(a) Purpose. The purpose of this section is to:
  (1) establish the procedures and criteria for determining the amount of stranded cost recovery electric utilities and affiliated power generation companies shall receive for environmental cleanup costs incurred to improve air quality in the state pursuant to Public Utility Regulatory Act (PURA) §39.263; and
  (2) minimize stranded costs associated with the implementation of PURA §39.264.
(b) Applicability. This section applies to:
  (1) electric utilities that seek to recover capital costs incurred during the period January 1, 1999 to April 30, 2003 to improve air quality; and
  (2) affiliated power generation companies that seek to recover capital costs incurred during the period January 1, 2002, to April 30, 2003 to improve air quality.
(c) Definitions. The following words and terms, when used in this chapter, shall have the following meanings unless the context clearly indicates otherwise:
  (1) Conservation Commission - The Texas Natural Resource Conservation Commission.
  (2) Cost of replacement generating capacity - The cost of replacing generating capacity lost through retirement of an electric generating facility. The annual cost of replacement generating capacity will be calculated using the following equation:
Attached Graphic
  (3) Electric generating facility - A facility that generates electric energy for compensation and that is owned or operated by a person in this state, including a municipal corporation, electric cooperative, or river authority.
  (4) Expected remaining life - The estimated life in whole years of the generating facility from May 1, 2003 as estimated by the utility at the time of filing its application for approval of its cost-effectiveness determination plan.
  (5) Net book value - The original cost of an asset less accumulated depreciation.
  (6) Offset - The allocation of emission allowances or credits from one facility to another facility in the same region.
  (7) Operations and maintenance (O&M) escalator - The applicable operations and maintenance (O & M) escalator set forth in the unbundling cost of service rate filing package. The O& M escalator for a gas-fired electric generating unit shall be 2.0% and the O & M escalator for a coal-fired electric generating unit shall be 1.0%. Notwithstanding the foregoing, the O & M escalator for TNP One shall be 1.5%.
  (8) Region - The East Texas Region, West Texas Region, or El Paso Region, as defined by the conservation commission at 30 TAC §101.330.
  (9) Retirement - The permanent removal from service of an electric generating facility.
  (10) Retrofit - The installation of control technology on an electric generating facility to reduce the emissions of nitrogen oxide, sulfur dioxide, or both.
  (11) Retrofit Cost - The net present value of the total capital cost and operating and maintenance cost to operate an electric generating facility after installation of a retrofit. The cost of a retrofitted unit shall be expressed in net present value dollars as of 2003 using the equation VALUE = (ECCR + O & M+ FUEL + O & M R + OE), where:
    (A) VALUE = net present value in 2003 over the expected remaining life of a retrofitted unit;
    (B) ECCR = net present value of the estimated capital cost of retrofit as of 2003 and the net present value as of 2003 of the expected capital cost of environmental controls installed no later than 2010 to meet future regulations for emissions. The commission will adopt a methodology for calculating the capital cost of environmental controls to meet future regulations for emissions.
    (C) O & M= net present value as of 2003 of operation and maintenance cost of unit without retrofit, calculated as O & M= (((average of plant non-fuel fixed O & M cost reported for the most current five calendar years on FERC Form 1) x ((maximum generator nameplate rating as reported for the unit on Form EIA-411 or if not available on Form EIA-411, then the rating as reported to the commission) / (sum of the maximum generator nameplate rating as reported for all units comprising the plant at which such unit is located on Form EIA-411 or if not available on Form EIA-411, then the rating as reported to the commission))) + ((average of plant non-fuel variable O & M cost, expressed in $/MWh, reported for the most current five calendar years on FERC Form 1) x (unit generation for 2003, calculated as the average generation in MWh for the most current five years as reported on Form EIA-767 or if not available on Form EIA-767, then the generation as reported to the commission, declining for the years 2004 and thereafter at the rate of 2.0% per year)) escalated by the O & M Escalator for each year subsequent to the year in which the cost effectiveness determination was filed;
    (D) FUEL = Cost of fuel, calculated as net present value as of 2003, over the expected remaining life of the retrofitted unit, using the equation FUEL = HR x G x Gas where:
      (i) HR = unit heat rate, calculated as the average of the heat rate reported for the most current five calendar years on Form EIA-411 or if not available on Form EIA-411, then the heat rate as reported to the commission, expressed in mmBtu/MWh;
      (ii) G = unit generation, calculated for 2003 as the average generation in MWh reported for the three most current calendar years on Form EIA-767 or if not available on Form EIA-767, then the generation as reported to the commission, declining for the years 2004 and thereafter at the rate of 2.0% per year; and
      (iii) Gas = forward natural gas prices as adopted for the ECOM model in August, 2000 by the commission;
    (E) O & MR = Net present value as of 2003 of estimated additional operating and maintenance cost resulting from the retrofit, beginning with costs for calendar year 2003 and escalated each year at 2.0% per year and the net present value as of 2003 of the expected operating and maintenance cost of environmental controls to meet future regulations for emissions beginning with costs for the estimated year of installation and escalated each year through 2010 at 2.0% per year. The commission will adopt a methodology for calculating the O & MR cost of environmental controls to meet future regulations for emissions;
    (F) OE = Ownership effect, calculated as the net present value as of 2003, over the expected remaining life of the retrofitted unit, using the equation OE = VALUE(PT + PI + CAPIMP - OMTA - CAPIMPDEP - DEPTAXBEN) where:
      (i) PT = annual property tax, adjusted for income tax benefit = (applicable property tax rate) x (ADJECCR) x (1 - income tax rate) where ADJECCR is equal to ECCR reduced to reflect any property tax exemption for which the unit might qualify;
      (ii) PI = annual property insurance, adjusted for income tax benefit = (applicable property insurance rate) x (ECCR) x (1 - income tax rate);
      (iii) CAPIMP = annual continuing capital improvements, adjusted for income tax benefit = (1.25% of the sum of the net book value plus improvements) x (1- income tax rate);
      (iv) OMTA = annual income tax benefit on O & MR = (income tax rate) x (estimated additional operating and maintenance cost of the retrofit for the applicable year);
      (v) CAPIMPDEP = annual tax depreciation on CAPIMP; and
      (vi) DEPTAXBEN = (income tax rate) x (annual tax depreciation on ECCR).
  (12) Transportation equipment - A rail spur at a lignite-fired electric generating facility installed to receive deliveries of western coal. Transportation equipment does not include rail cars and unloading facilities.
(d) Requirements.
  (1) Qualifying retrofit costs. To be eligible for recovery as invested capital pursuant to PURA §39.263, a retrofit cost must be:
    (A) reasonable and prudent;
    (B) incurred in carrying out the most cost-effective alternative for improving air quality as approved pursuant to this section;
    (C) incurred to reduce or offset emissions by an amount and at a location that is consistent with the air quality goals and policies of the conservation commission;
    (D) incurred to offset or reduce the emission of airborne contaminants from an electric generating facility, where:
      (i) the emission reduction or offset is determined by the conservation commission to be an essential component in achieving compliance with a national ambient air quality standard. For purposes of this section, any emission reduction or offset achieved by an electric utility or affiliated power generation company to comply with conservation commission regulations at 30 TAC Chapter 117 is deemed to have been determined by the conservation commission to be an essential component in achieving compliance with a national ambient air quality standard; or
Cont'd...