CenterPoint Energy (CNP) is a domestic energy utility headquartered in Houston, Texas. As of December 2007, it delivered natural gas and electricity to over 5,000,000 customers. CenterPoint Energy was formed after industry giant Reliant Energy (RRI) spun off its electric retail sales as Reliant Resources and sold its electric generation assets in 2002. In October of that year, the remaining mostly regulated energy delivery company was renamed CenterPoint Energy. The company now serves metered customers primarily in Arkansas, Louisiana, Minnesota, Mississippi, Oklahoma and Texas and has assets valued at over $17 billion.
When CenterPoint was formed, the Texas energy market had just been subjected to the Texas Electric Choice Act, which dictated that generation and retail service prices by utilities must be subject to the laws of supply and demand instead of having fixed high rates. The company is currently in a large amount of debt because of this deregulation, and it's revenues are largely subject to changes in regulation and rules by utility commissions in Texas and the Midwest. CenterPoint's revenues are often affected by abnormal changes in weather, since electricity and natural gas usage depends largely on temperature. The company's revenues are also affected by its inability to refinance efficiently because of the breadth of CenterPoint's subsidiary functions and fluctuating natural gas prices, which make its services more expensive.
CenterPoint Houston's electric transmission and distribution rates are regulated mainly by the Texas Utility Commission (TUC). A utility is permitted a certain rate of return based on a set rate base. The rate base is set to prevent utilities, which are monopolies, from charging a higher than fair price. It is determined by the TUC after analyzing a test year and is based mainly on operating costs and capital expenditure. Because the analyses are made ahead of time for test years, they do not always match CenterPoint's actual expenses. CERC's rates for the other four services CenterPoint provides are also regulated by state municipalities and interstate pipelines by the FERC (Federal Regulation and Oversight of Energy). For example, in October 2006 a rate case settlement was implemented by the TUC that lowered the permitted rate of return on unrecovered balances from 11.06% to 8.06%, resulting in a $13 million loss. This same case implemented a rate freeze that will not allow CenterPoint to raise its rate base until 2010, so any expected revenue from a higher rate will not be earned at least until there are further proceedings.
Both CenterPoint Houston's electric utility sector and CERC's natural gas sectors are strongly affected by weather in the Texas-Louisiana-Mississippi region where CenterPoint primarily operates. Typically, during the summer more air conditioning is used if the weather is uncharacteristically warm, which results in increased electricity usage. During the winter, colder weather will result in increased natural gas usage since it is typically used to power heaters.
In 2006, milder winter weather led to a $30 million decrease in operating income for CERC's natural gas sector. In the same year, a mild summer led to a $49 million decrease in operating income for CenterPoint Houston because of the decrease in demand for air conditioning services.
In May 1999 a bill was passed in Texas called the Texas Electric Choice Act, which dictated that generation and retail services by utilities be subject to the competitive market---the bill was eneacted in 2002. Before the bill, utilities, which are monopolies, could charge a higher price than would be ideal for the public because so few companies offered similar service. Because it would be unfair for the company to be subject to such a drastic drop in its prices so quickly, "true-up" proceedings began three years after the bill was passed in an effort to compensate the electric utilites for revenues they would have earned with their previously higher prices In March 2004, CenterPoint Houston, CNP's electric utility filed with the TUC requesting the recovery of $3.7 billion. In December of that year, the TUC let the firm recover only $2.3 billion of their requested $3.7 billion. CenterPoint remained in the process of appealing as of December 2007 and looks to recover at least $146 million, but it stood that the company remains in debt and the Texas Utility Commission had yet to make a final decision on whether or not to allow more compensation.
Because CenterPoint Energy is a consolidated holding company that operates in every major utility sector, its ability to refinance existing debt is limited. On a consolidated basis, CNP had $9.7 billion of outstanding indebtedness as of December 2007. The future financing for paying off this debt depends on factors affecting all five major business sectors, including CenterPoint Houston's True-Up proceedings results, general economic and capital market conditions, investor confidence in each market in which CNP operates, and provisions of relevant taxes and securities laws. One example of this uncertainty of refinance possibilities is the $229 million that CenterPoint Houston specifically owes to secure pollution control bonds, the repayment of which depends almost entirely on the results of True-Up proceedings.
CERC, CNP's subsidiary in charge of natural gas sales and distribution, is impacted by the price levels of natural gas. Prices have fluctuated and risen sharply since November 2007, when natural gas prices were below $8 mmbtu, and as of June 24, 2008, the price had risen to $13.20 mmbtu. When gas prices rise sharply, risk increases that the company will not be able to collect balances from customers, and when a sustained period of high prices is reached, downward pressure on demand for natural gas occurs, affecting CERC's total output.
As a utility, CenterPoint Energy naturally has little competition. Utilities are usually monopolies with price regulated by state or federal commissions. They occur naturally because of huge initial capital expenditure costs, such as those required to set up power lines and stations. There are no other electric transmission and distribution utilities in CenterPoint Houston’s service area. CERC's natural gas distribution sector competes primarily with alternate energy sources such as electricity and other fuel sources, and the natural gas sales sector competes with regional and national wholesale and retail gas marketers including the marketing divisions of natural gas producers and utilities. Interstate pipelines are in competition with similar pipelines and the the field services division competes with other companies in the natural gas gathering, treating, and processing business.