TXU Corp. subsidiary TXU Electric has announced a settlement plan to resolve “all major pending issues” related to the company’s transition to competition. The settlement, filed last week with the Public Utility Commission of Texas (PUCT) following months of negotiation, has the endorsement of major customer groups in the state, and the PUCT staff, said TXU.

“This settlement benefits all parties,” said Tom Baker, TXU Electric president. “In one bold stroke, we have significantly improved the market environment in North Texas with customers no longer facing the possibility of the rate shock that might have resulted from recovering stranded costs after the 2004 true-up.”

Baker said, “Retail electric providers get a much clearer picture of their cost structure, which reduces their risk and should encourage competition. And our shareholders receive fair treatment, as we will, among other things, recover our regulatory assets. But most importantly, this settlement resolves a number of issues that could have resulted in numerous years of litigation and allows the company to now focus all of its management efforts towards the future.”

Parties to the settlement include the PUCT staff, the Texas Office of Public Utility Counsel, the coalition of cities served by TXU Electric, Texas Industrial Energy Consumers, Texas Retailers Association and a new retail electric provider for the state. The settlement, which still must be reviewed and approved by the PUCT, does not remove regulatory oversight of the company’s energy delivery business nor does it eliminate the price-to-beat and related possible fuel adjustments. However, TXU Electric noted it “hopes for quick action based on the broad coalition of support for the settlement.”

The agreement, among other things, resolves transmission and distribution rates, the true-up in 2004 of stranded costs related to generation plant, securitization of regulatory assets, collection of current unrecovered fuel costs, reconciliation of three and a half years of fuel expenses, and the retail and wholesale “clawbacks.” The retail clawback provision was included in the Texas Electric Choice Act of 1999 to serve as an incentive for the affiliated retail electric provider of the utilities to actively compete for customers.

Included in the settlement are the following terms:

Transmission and distribution rates: Beginning Tuesday, (Jan. 1), TXU Electric will implement an excess mitigation credit (EMC) in the amount of $350 million, applied over a two-year period as a credit to T&D rates charged to retail electric providers. This amount reflects resolution of stranded cost mitigation, reconciliation of approximately $8.5 billion of fuel costs covering July 1998 through 2001, and an anticipated unrecovered fuel balance at the end of 2001.

Stranded cost resolution: TXU Electric’s stranded costs are fixed at zero, including resolution of amounts related to its repurchase of minority owner interests in the Texas Comanche Peak nuclear generating station and elimination of the 2004 true-up.

Regulatory asset securitization: TXU Electric will receive a financing order authorizing it to issue securitization bonds in the amount of $1.3 billion. The settlement stipulates there will be an initial issuance of securitization bonds in the amount of $500 million followed by a second issuance of $800 million after 2003. This settlement resolves all issues related to regulatory assets.

Retail clawback: In the event that TXU Electric’s affiliated retail electric provider retains more than 60% of its residential and small commercial customers over the first two years of competition, the amount of the retail clawback credit will be equal to the number of residential and small commercial customers retained by TXU’s retail electric provider on Jan.1, 2004 — less the number of new customers TXU’s retail electric provider adds by Jan. 1, 2004 — multiplied by $90. This determination will be made separately for the residential and small commercial classes and compares to the $150 per customer limit contained in the Texas Electric Choice Act. The credit will be applied to T&D rates over a two-year period.

Lawsuit and regulatory proceeding resolution: The parties agreed to seek dismissal of a number of currently pending and planned lawsuits, as well as regulatory proceedings.

TXU also would assume responsibility for any variance between estimates and actual amounts associated with year-end unrecovered fuel and mitigation. TXU believes the variance, if any, will be less than $50 million (after tax) and would be accounted for as a one-time charge in the fourth quarter of 2001.

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