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************************************************************************ TrueQuote completes connection to EnronOnline and receives equity investmen= t from PG&E. Find out more about SCIENTECH'S E-Commerce InfoGrid at: http://www.consultrci.com ************************************************************************ =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D SCIENTECH IssueAlert, October 26, 2000 TXU Sued By 23 Texas Cities Over Franchise Fees By: Will McNamara, Director, Electric Industry Analysis =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D The City of Denton, Texas, has filed a lawsuit against TXU Electric & Gas, claiming that the utility intentionally underpaid Denton its franchise fees by not accurately reporting its gross revenues, on which franchise fees are based. To date, 23 cities have signed resolutions to join Denton in the lawsuit and more are expected. An initial audit by Denton claims that the amount that TXU owes could potentially exceed $240 million. ANALYSIS: Over this last year, several utilities in Texas have come under fire for allegedly not paying the full amount of franchise fees for which various cities claim they are obligated. This suit against TXU is just the latest, but it follows a judgment against Reliant Energy earlier this spring and a pending suit against CPL (a subsidiary of AEP/CSW). Franchise fees are essentially rental payments that a city has the right to charge a utility for use of the city's public streets and grounds for the placement of pipelines, poles and utility cables. Texas state law allow= s cities to charge utilities 2 percent of their gross revenues for the right to franchises within a city's limits. Some utilities such as Reliant entere= d into agreements=01*stretching back to the 1950s=01*that obligate them to pa= y 4 percent of gross revenues earned in a city in exchange for 50-year=20 franchises. In any case, the cities are arguing that franchise fees should be based on gross revenue, not net revenue, that the utilities have earned from providing service within the city limits. Herein lies the core of the litigation as, in this case, the City of Denton is claiming that TXU intentionally reported lower gross revenue, thereby reducing the amount it was required to pay to Denton and the other cities involved in the lawsuit. The cities involved in the suit claim they are entitled to not only unpaid franchise fees from TXU, but punitive damages as well. The prognosis may not be very good for TXU, if a similar case against Relia= nt Energy is any indication. In May, a Houston jury ruled that Reliant-HL&P "acted with malice by intentionally underpaying cities for decades for the exclusive right to sell electricity in those cities." The state distric= t court ordered HL&P to pay $34.2 million to the cities of Pasadena, Galvesto= n and Wharton. The award consisted of $30 million in punitive damages, anothe= r $3 million because it was determined that HL&P had defrauded the cities, and $1.2 million in actual damages. That seemed to be just the start of Reliant's problems, as following that case 47 additional cities, including Houston, came together and launched a class-action suit against Reliant HL&P, again claiming that the utility intentionally underpaid franchise fees for the sole right to provide power in the cities. This lawsuit is claiming $113 million in damages, the bulk of which ($77 million) is allott= ed for the City of Houston. However, illustrating how polarized this issue is, just last week a state district judge overturned the $34.2 million ruling for the first three cities, and reduced the damages down to $1.2 million. In addition, the same judge overturned the separate ruling that had given the green light for the 47 cities to proceed with the class-action suit. Both rulings are still being appealed by the cities in hopes to reinstate the award for fraud and punitive damages. In addition, the 47 cities involved in the new lawsuit against Reliant are proceeding=01*just with 47 individual cases instead of one. Sound confusing? It certainly is, and it will no doubt amount to one big mess if the cities are not permitted to band together in one class-action suit. Here's Reliant's position in the litigation, which is presently supported by the Texas State District Court. Reliant claims that transactions that do not generate profits or represent the selling of power in a city=01*such as reconnection fees, renting pole space to other utilities and sending electricity to other markets=01*should not be considered part of gross reve= nue and, therefore, not subject to franchise fees. Thus, the figure Reliant reported as gross revenue may indeed be lower than the cities expected it to be=01*but it is an accurate number, based on Reliant's interpretation= . As noted, CPL is also involved in a pending lawsuit with the City of San Juan, Texas, and a group of about 30 other cities. These cities claim that CPL underpaid franchise fees and seek damages of up to $300 million plus attorney's fees. CPL has filed a counterclaim for overpayment of franchise fees and intends to defend itself against the cities' claims. How all of this will impact the case against TXU is unclear, but certainly the momentum is growing against the utilities in Texas. TXU, like Reliant and CPL, maintains that it has done nothing wrong and that it has paid in full all of the fees owed to the over 330 Texas cities and towns to which it provides electric service. Again, the center of the dispute lies in how to calculate gross revenues. TXU contends that gross revenue include= s only the direct proceeds it has received from the sale of electricity and natural gas. The City of Denton, on the other hand, argues that gross reven= ue also should include other income such as taxes and fees collected for bad checks, which conceivably could result in a much higher figure, especially when calculated over a 40-year period. TXU had 1999 operating revenues of approximately $17.1 billion so, like Reliant, a settlement in the $1.2 million range would not wield much financ= ial impact. However, more important to these utilities may be the fact that this could be just the beginning of a string of similar lawsuits, brought forward by cities across Texas. Consider the class action suit against Reliant, to the tune of $113 million. If that suit is allowed to proceed, we're talking about big money, especially when attorney fees are added to the equation. In addition, the reputation of these utilities is at stake= . The cities initiating the lawsuits are using such terms as "unlawful busine= ss practices" and claiming that every dollar utilities like TXU and Reliant have not paid to the cities means a dollar increase in taxes for citizens. As deregulation continues to unfold, a utility's reputation will be one of the foundations on which it attracts new customers and retains current ones. It's also important to note that under Texas' restructuring law, once=20 competition begins in the state (January 2002) the formula to determine franchise fees in the state will switch from a revenue formula to a consumption formula. In other words, the amount that utilities collected as gross revenue in 1998 will be divided by the amount of total kilowatt hours consumed within the city limits during the same year, and that will be the amount of the franchise fee owed by utilities to cities. The franchise fee shall be equal to the charge per kilowatt hour determined for 1998, multiplied times the number of kilowatt hours delivered within the city limits. Of course, all of these pending lawsuits are bringing into question the amount of gross revenue that was collected during 1998, which might make this formula=20 difficult to calculate. In any case, I don't see these issues subsiding any time soon as they are based on a fundamentally different interpretation of how to define gross revenue. The real winners in these lawsuits may be the attorneys themselves, as undoubtedly these cases will remain in litigation for several years. =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D Discover a world of utilities information in our new e-zine, SourceBook Weekly, which will be launched on December 1, 2000. Get a free SourceBook Weekly article at: http://www.consultrci.com/web/rciweb.nsf/Web+Pages/SBEntrance.html =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D SCIENTECH is pleased to provide you with your free, daily IssueAlert. Let us know if we can help you with in-depth analyses or any other SCIENTECH information products. If you would like to refer a colleague to receive our free, daily IssueAlerts, please reply to this email and include their full name and email address or register directly at: http://www.consultrci.com/web/infostore.nsf/Products/IssueAlert Sincerely, Will McNamara Director, Electric Industry Analysis wmcnamara@scientech.com =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D Feedback regarding SCIENTECH's IssueAlert should be sent to=20 wmcnamara@scientech.com =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D SCIENTECH's IssueAlerts are compiled based on independent analysis by=20 SCIENTECH consultants. The opinions expressed in SCIENTECH's IssueAlerts are not intended to predict financial performance of companies discussed or to be the basis for investment decisions of any kind. SCIENTECH's sole purpos= e in publishing its IssueAlerts is to offer an independent perspective regard= ing the key events occurring in the energy industry, based on its long-standing reputation as an expert on energy and telecommunications issues. Copyright 2000. SCIENTECH, Inc. If you do not wish to receive any further IssueAlerts from SCIENTECH, pleas= e reply to this message and in the body of the email type "remove."
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