PUC DOCKET NO SOAH DOCKET NO

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1 Page 1 of 92 PUC DOCKET NO SOAH DOCKET NO APPLICATION OF SHARYLAND PUBLIC UTILITY COMMISSION UTILITIES, L.P. FOR A CERTIFICATE G^ OF CONVENIENCE AND NECESSITY IN HIDALGO COUNTY, TEXAS OF TEXAS ORDER By this order, the Public Utility Commission of Texas (Commission) grants the requ,-^st oi' Sharyland Utilities, L.P. (SU) for a certificate of convenience and necessity (CCN) to provide*tail electric service in Hidalgo County, Texas. The Applicant provided notice to all interested persons and affected utilities. Central Power and Light Company (CPL), Magic Valley Electric Cooperative, Inc. (MVEC), the City of McAllen (McAllen), and Hino Electric Power Company (Hino) were admitted as intervenors in this proceeding. The Commission referred this docket for hearing to the State Office of Administrative Hearings (SOAH); however, before the hearing was convened, all parties except for Hino, announced they had reached a stipulation resolving all issues. Hino supports the agreement. SU's application is approved. The Commission adopts the following findings of fact and conclusions of law: Procedural Historv 1. Findings of Fact 1. On December 31, 1998, Sharyland Utilities, L.P. (SU) filed an application, assigned as Docket No , for a certificate of convenience and necessity (CCN) to provide retail electric service within the Sharyland Plantation (SharyIand), a new, master planned community being developed in Hidalgo County, Texas. The proposed service area is set out in Attachment A. 2. The total projected cost of the transmission and distribution system that SU would build to serve Sharyland would be approximately $100 million; SU plans to install the system over a 15-year period based on the rate at which development occurs at Sharyland.,f6 ^ 2887

2 --- ^- Page 2 of 92" PUC DOCKET NO ORDER PAGE 2 SOAH DOCKET NO SU is a Texas limited partnership whose general partner is Sharyland Utilities, GP, Inc., and whose limited partners are Bolton Power Corporation, Hunt Valley Industrial I, L.P., and Hunt Power Corporation. 4. Central Power and Light Company (CPL) is an electric utility engaged in generating, transmitting, distributing, and selling electricity in Texas, including a portion of the area SU proposes to serve. 5. Magic Valley Electric Cooperative, Inc. (MVEC) is an electric utility engaged in transmitting, distributing, and selling electricity in Texas, including a portion of the areas SU proposes to serve. 6. On January 27, 1999, the Public Utility Commission of Texas (Commission) referred this proceeding to the State Office of Administrative Hearings (SOAH), SOAH Docket No , for the assignment of an Administrative Law Judge (Presiding Judge) to conduct a hearing and issue a proposal for decision. 7. On February 19, 1999, the Commission issued a Preliminary Order setting forth the issues to be addressed in this proceeding. 8. Timely interventions in this proceeding were filed by CPL; MVEC; the City of McAllen, Texas; Hino Electric Power Company; and the Public Utilities Board of the City of Brownsville (PUB). 9. The Presiding Judge denied the intervention of the PUB for lack of a justiciable interest in this proceeding

3 Page 3 of 92 PUC DOCKET NO ORDER PAGE 3 SOAH DOCKET NO Sharyland is an area of approximately 6,000 acres, or less than 10 square miles, with limited existing development. 11. SU has obtained franchises to provide electric service to the portions of the cities of Mission and McAllen, Texas, which are located in SU's proposed service territory. 12. Approximately two-thirds of the area SU seeks to serve is certificated to MVEC, with the remainder of the area certificated to CPL; a small portion of the area is dually certificated to both MVEC and CPL. 13. SU published notice of its certificate application once a week for two consecutive weeks in "The Monitor," a newspaper of general circulation in Hidalgo County, and provided written notice to neighboring cities, utilities, and the affected county government. _ 14. SU filed its direct, supplemental, and rebuttal testimony, respectively, on December 31, 1998, March 11, 1999, and April 30, CPL filed direct testimony on April 16, CPL withdrew its direct testimony on May 21, MVEC filed direct testimony on April 16, 1999 and supplemental testimony on April 29, MVEC withdrew its direct and supplemental testimony on May 21, The Commission's General Counsel filed direct testimony on April 23, On May 11, 1999, SU, CPL, and MVEC reached an agreement in principle on all issues in this proceeding. The General Counsel supported the agreement in principle. 2889

4 Page 4 of 92 PUC DOCKET NO ORDER PAGE 4 SOAH DOCKET NO On May 21, 1999, SU, General Counsel, CPL, MVEC, and the City of McAllen, Texas, executed a Stipulation and Agreement of Settlement (Settlement) proposing to resolve all issues in this proceeding. This Settlement was filed on May 24, Hino supports the issuance of a CCN to SU and does not oppose the Settlement. Stinulation and Agreement of Settlement 20. The parties desire to compromise and settle the issues raised by the Commission's Preliminary Order to avoid the unnecessary burden and delay, as well as the expense and uncertainty, associated with possible appeal from the ultimate decision on the issues raised and litigated. 21. The Settlement provides generally for: Issuance of a CCN to SU. Payment by SU to CPL and MVEC folcosts associated with idle distribution facilities at the net book value of such facilities. Payment by SU to CPL for stranded generation costs attributable to its existing customers at a rate not to exceed $400 per kw of peak load attributable to such customers, subject to true-up based on subsequent legislation or administrative proceedings. Execution of Interconnection Agreement(s) between SU and CPL in order to facilitate the provision of retail electric service by SU. Access by SU, CPL, and MVEC to each other's transmission and distribution systems to provide services within the Sharyland Plantation on equal terms and conditions. 2890

5 Page 5 of 92 PUC DOCKET NO ORDER PAGE 5 SOAH DOCKET NO _ A mechanism by which MVEC and CPL may obtain amendments to their certificates regarding their service territories within Sharyland without opposition from other Settling Parties. Service by MVEC and CPL of their existing customers within Sharyland for as long as those customers desire to continue receiving service. Waiver of the Settling Parties' right to hearing and to cross-examination of witnesses and withdrawal of CPL's testimony, MVEC's testimony, and SU's rebuttal testimony in this proceeding on the condition that the Commission accepts the Settlement without material modification. Need for a CCN 22. The issuance of a CCN to SU will enable it to construct a uniform, centrally-planned utility infrastructure at Sharyland. 23. A uniform, centrally planned utility system for the Sharyland Plantation is an efficient approach to new facilities construction. 24. Duplication of facilities within the Sharyland Plantation is not in the public interest because it unnecessarily increases costs to customers and contributes to aesthetic and environmental degradation in those areas where duplicate facilities exist. Preliminary Order Issues 25. Preliminary Order Issue No. 1 provides: "Based upon Sharyland's application, does Sharyland fall within the definition of `electric utility' in PURA (1)? For example, will Sharyland `furnish a n electric service or commodity only to... its tenants as an incident of... tenancy,...'?" 2891

6 Page 6 of 92 PUC DOCKET NO ORDER PAGE 6 SOAR DOCKET NO SU will own and operate facilities in this state to transmit, distribute, sell, and furnish for compensation electricity. 27. SU will have no tenants, and is not proposing to furnish electric service only to its tenants or as an incident of tenancy. 28. Preliminary Order Issue No. 2 provides: "If Sharyland falls within the definition of `electric utility,' has it proposed services and facilities in its application for which a retail electric utility is required to obtain a CCN pursuant to PURA 37.05(1)? ' 29. SU will provide services to the public and operate facilities for which a retail electric utility requires a CCN. 30. Preliminary Order Issue No. 3 provides: "If the answer to Issue No. 2 is no, is any further action by the Commission required? If the answer to Issue No. 2 is yes, then Issue Nos. 4-9 should be addressed." 31. In light of the answer to Issue No. 2, Preliminary Order Issue No. 3 requires the Commission to address Issue Nos Preliminary Order Issue No. 4 provides: "Is the issuance of the CCN requested by Sharyland necessary for the service, accommodation, convenience, or safety of the public as required by PURA (a) and P.U.C. SUBST. R ?" 33. The issuance of a CCN to SU, in conjunction with SU's agreement in the Settlement to file a "buy-through" tariff, will provide consumers in Sharyland with the added convenience of multiple suppliers from which to choose power supply and other electric services, encourage competition, innovation and efficiency, and create benefits which accrue to consumers. 2892

7 Page 7 of 92 PUC DOCKET NO ORDER PAGE 7 SOAH DOCKET NO Issuance of a CCN to SU is needed to enable it to construct a uniform utility system at Sharyland, which is necessary for the accommodation and convenience of the public. 35. Preliminary Order Issue No. 5 provides: "Do the factors set forth in PURA (c) weigh in favor of or against granting the CCN requested by Sharyland? In considering these factors, the reasonableness of Sharyland's cost estimates and load forecasts should be addressed." 36. Limited transmission and distribution facilities currently exist within the boundaries of Sharyland; existing facilities and service, while adequate to serve the existing load at Sharyland, are not adequate to meet the projected future needs of the development. 37. SU is technically and financially capable of constructing the new facilities required to serve Sharyland. 38. Issuing a CCN to SU will provide it the opportunity to do business in Texas and its proposed service area, to plan and build a uniform utility system, and to focus on the needs of Sharyland and its customers. 39. The few existing customers, limited facilities currently in place at Sharyland, and SU's agreement to pay MVEC and CPL for idle distribution facilities and stranded generation costs minimizes any potential negative impact on existing utilities from granting a CCN to SU. 40. Granting a certificate to SU will have no adverse impact on community values, recreational and park areas, historical and aesthetic values, and environmental integrity, and is likely to enhance these factors through customer choice and the construction of a technologically advanced, underground distribution system. 2893

8 Page 8 of 92 PVC DOCKET NO ORDER PAGE 8 SOAH DOCKET NO Access to multiple suppliers through SU's "buy-through" tariff is likely to lead to the improvement of service and the lowering of cost to utility customers in Sharyland. 42. The projected cost for SU's preliminary design of substations, transmission, and distribution lines is within a reasonable range and comparable to those of other utilities. 43. SU's preliminary load forecasts are reasonable for purposes of this proceeding. 44. Preliminary Order Issue No. 6 provides: "Should the Commission impose, as a condition of issuing a CCN, a schedule or time limitation by which the facilities (for which the CCN is sought) must be placed in service? In considering this issue, the impact on Sharyland, its potential customers, and any incumbent utilities that may result if development does not occur as planned should be addressed." SU's customers will be protected from any adverse rate impact if development at Sharyland does not occur as planned by the Commission's authority to set just and reasonable rates. 46. Because SU's rates and tariffs will be reviewed in a separate proceeding, good cause exists to waive the requirement of P.U.C. SUBST. R (d) relating to SU's obligation to serve new customers, until such time as its initial rate filing package is approved. 47. SU will coordinate the pace of its build-out with the pace of the development over a 15-year period. This will minimize the impact on Sharyland, its customers, and the incumbent utilities that may result if the development does not occur as planned. 2894

9 Page 9 of 927 PUC DOCKET NO ORDER PAGE 9 SOAA DOCKET NO SU has agreed to file its initial rate application with the Commission no later than September 1, 1999, and its "buy-through" tariff no later than 90 days after SU files its initial rate application. SU has also agreed to provide notice that it is ready to provide service to the existing customers of CPL and MVEC_no later than 90 days following the date on which SU receives a Final Order approving its rates and tariffs for service within Sharyland. No further time limitations by which the facilities for which the CCN is sought should be placed in service are necessary. 49. Preliminary Order Issue No. 7 provides: "Will Sharyland be able to serve every customer in its certificated area and provide continuous and adequate service in the area, as required by PURA ? In considering this issue, the adequacy of Sharyland's financial resources, technical and engineering capabilities, or any other criteria necessary to provide continuous, reliable service on a competitive basis, should be addressed." 50. SU has the financial strength and resources necessary to provide continuous and adequate electric service based on a substantial equity investment of $6.5 million, a$20 million line of credit, and a guaranty by Hunt Consolidated, Inc. 51. SU and the General Counsel have reached an agreement concerning the terms and conditions by which SU shall maintain a minimum equity balance of $6.5 million for a certain time after receiving a CCN. That agreement is reasonable. 52. SU has entered into a letter of intent with Puget Sound Energy (PSE) to assist in the design, construction, operation and maintenance of its proposed underground distribution system. 53. PSE has substantial experience with underground facilities and is qualified to provide the startup services that SU initially needs

10 Page 10 of 92 PUC DOCKET NO ORDER PAGE 10 SOAH DOCKET NO SU has the capability to serve every customer in its certificated area and provide continuous and adequate service in the area. 55. SU's technical and engineering capabilities are adequate to provide continuous, reliable service on a competitive basis. 56. Preliminary Order Issue No. 8 provides: "Will construction of Sharyland's electric distribution system interfere with the operation of a line, plant or system of another utility in a manner prohibited by PURA ? In particular, does Sharyland plan to serve customers that are presently or will be taking retail electric service from other certificated retail electric utilities? If so, will the grant of Sharyland's proposal result in any stranded investment for another certificated retail electric utility? Should such stranded investment be recoverable from Sharyland, and if so, by what method should it be recovered?" 57. The likelihood that the construction of SU's electric"distribution system will interfere with the operation of a line, plant, or system of another utility is remote. 58. Some stranded investment in facilities will result when the minimal overhead facilities currently in service are replaced by SU's underground facilities; SU has agreed to mitigate any impact on MVEC and CPL by purchasing any distribution facilities located within Sharyland idled as a result of an existing CPL or MVEC customer's choice to switch to SU as its electric service provider. 59. SU has agreed to purchase such "Idled Distribution Facilities" at 100% of their net book value. 60. CPL and MVEC have no other stranded investments in facilities within Sharyland. 2896

11 Page 1-1 of 92 PUC DOCKET NO ORDER PAGE 11 SOAH DOCKET NO SU has agreed to compensate CPL for stranded generation costs pursuant to the terms of the Settlement. 62. CPL has agreed to credit stranded generation cost payments from SU towards its South Texas Project investment by deducting such amounts from the excess cost over market (ECOM) asset determined by the Commission under procedures set forth in the Settlement. 63. The terms of the Settlement as it pertaim to stranded facilities and generation costs attributable to CPL's and MVEC's existing and future customers within Sharyland are reasonable and in the public interest. 64. No CPL generation or generation-related stranded costs other than those contemplated in this Settlement are appropriately allocable to areas in Sharyland no longer served by CPL pursuant to the Settlement. 65. Preliminary Order Issue No. 9 provides: "Are there any issues relating to the ability of Sharyland to obtain wholesale transmission interconnection that should be resolved in this docket?" 66. CPL and MVEC have agreed that onctf-su has received a certificate in this proceeding, they will not challenge the status of SU as an "eligible customer," to receive transmission service and ancillary services pursuant to the terms of the applicable Open Access Transportation Tariff or the Commission's transmission rules. 67. Both MVEC and CPL have tariffs that provide for wholesale delivery of transmission service at the primary distribution level voltage. 2897

12 Page 12 of 92 PUC DOCKET NO ORDER PAGE 12 SOAH DOCKET NO MVEC and CPL have committed to cooperate with SU in planning and implementing the necessary Points of Interconnection with their respective systems in order to facilitate the provision of service by SU to its customers. Disposition 69. All issues in this proceeding have been fully stipulated so that no issues of fact or law are disputed by any party. 1. [Deleted]. H. Conclusions of Law 2. Commission has jurisdiction in this proceeding pursuant to PURA , , , , and The notice provided in this docket complied with P.U.C. PROC. R (a). 4. No evidentiary hearing is necessary because there is no genuine issue as to any material fact, and no dispositive issue remains in dispute. 5. SU's application for a CCN may be approved without a hearing pursuant to the Administrative Procedure Act, TEX. Gov''t CODE ANN (Vernon 1999). 6. Pursuant to PURA (b), the existing certificates of MVEC and CPL do not vest exclusive service or property rights to MVEC and CPL within the boundaries of Sharyland. 7. Pursuant to Findings of Fact 32-34, a certificate is necessary for the service, accommodation, convenience, or safety of the public in accordance with PURA (a). 2898

13 VJP/Goodlet - Direct Page 13 of 92 PVC DOCKET NO ORDER PAGE 13 SOAH DOCKET NO Pursuant to Findings of Fact and 35-43, SU meets the requirements enumerated in PURA (c), and upon consideration of such factors, SU's application should be granted. 9. Under P.U.C. SUBST. R and pursuant to Findings of Fact 45-46, there is good cause to waive the requirements ofp.u.c. SUBST R (d) until a Final Order is issued approving SU's initial rate filing package. 10. Pursuant to Findings of Fact 50-55, SU will be able to provide adequate and continuous service to its customers, as required by PURA Pursuant to Findings of Fact 57-64, construction of SU's distribution system will not interfere with another utility's operation in a manner prohibited by PURA The terms of the Settlement are reasonable and in the public interest. III. Ordering Paragraphs In accordance with these findings of fact and conclusions of law, the Commission issues the following order: 1. SU's application is approved. 2. SU shall be assigned CCN No for the area within the Sharyland Plantation, which is being developed in Hidalgo County, Texas. 3. SU shall file its initial rate application including rate schedules and service rules and regulations no later than September 1, 1999, and its "buy-through" tariff no later than 90 days after SU files its initial rate application. 2899

14 Page 14 of 92 PUC DOCKET NO ORDER PAGE 14 SOAH DOCKET NO The entry of an order consistent with the Settlement does not indicate the Commission's endorsement or approval of any principle or methodology that may underlie the Settlement. Neither should the entry of an order consistent with the Settlement be regarded as a binding holding or precedent as to the appropriateness of any principle underlying the Settlement. 5. All other motions, requests for entry of specific fmdings of fact and conclusions of law, and any other requests for general or specific relief, if not expressly granted herein, are hereby denied for want of merit. SIGNED AT AUSTIN, TEXAS the day of July, ^ UTILITY COMMISSION OF TEXAS AV,'411 PAT W 10D, III, CHAIRMAN ^ ^%^ ' BRETT A. PERILMAN, COMMISSIONER q:lopolorderslfina fo.doc 2900

15 WPIGoodlet - Direct Page 15 of 92 EXISTING AND PROPOSED UTILITIES SERVICE AREA BOUNDARIES ATTACH34ffil A

16 Page 16 of 92 DOCKET NO JOINT APPLICATION OF SHARYLAND UTILITIES, LP AND SHARYLAND DISTRIBUTION & TRANSMISSION SERVICES, LP FOR REGULATORY APPROVALS PURSUANT TO PURA , , AND ORDER C^ PUBLIC UTILITY COIVIMISSIM OF TEXAS {'J This Order addresses Sharyland Utilities, LP's (Sharyland's) and Sharyland Distribution & Transmission Services, LP's (SDTS's) (collectively, Applicants') joint application for regulatory approvals pursuant to PURA' , , and This docket was processed in accordance with applicable statutes and Public Utility Commission of Texas (Commission) rules. Applicants, Commission Staff, the Office of Public Utility Counsel (OPC), and Texas Industrial Energy Consumers (TIEC) entered into a stipulation and agreement (Stipulation) which provides for a resolution of all of the issues in this docket. The State of Texas (State), the only other party to this proceeding, does not oppose the Stipulation. Consistent with the Stipulation, Applicants' joint application is approved. The Commission adopts the following findings of fact and conclusions of law: 1. Findings of Facts Procedural History. Background, and Notice 1. Sharyland is a retail electric utility providing transmission and distribution service within a 6,000 acre master-planned community called Sharyland Plantation situated between the Cities of McAllen and Mission along the border between Texas and Mexico. 2. SDTS is a new entity that has been formed by the owners of Sharyland. 1 Public Utility Regulatory Act, TEx. UTU.. Cone ANN (Vernon 2007 & Supp. 2007) (PURA). 2 ^ 2902

17 Page 17 of 92 DOCKET NO ORDER PAGE 2 3. On January 29, 2008, Sharyland and SDTS filed a joint application, including direct testimony, which seeks approval of a proposal to restructure Sharyland and transfer Sharyland's ownership interest in its transmission and distribution assets to SDTS in order to allow Sharyland broader alternatives for obtaining equity for significant capital expenditures. 4. On January 30, 2008, the Commission filed Order No. 1 requiring Commission Staff to file comments on the sufficiency of Applicants' joint application, including the sufficiency of proposed notice. Order No. 1 also entered a protective order and required the parties to file an agreed proposed procedural schedule. In addition, the Commission published notice of the application in the Texas Register. 5. On February 22, 2008, TIEC filed a motion to intervene in this docket. 6. On February 25, 2008, Commission Staff filed a recommendation that Applicants' joint application and proposed notice be found sufficient. 7. On February 26, 2008, the Commission filed Order No. 2 finding the joint application and proposed notice to be sufficient and establishing a procedural schedule. 8. On March 3, 2008, the Commission filed Order No. 3 granting intervenor status to TIEC. 9. On March 24, 2008, Applicants filed proof that notice of this proceeding was provided by individual notice to (a) all municipalities and counties in Sharyland's service area; (b) all entities listed in the Commission's transmission matrix in Commission Staff's Application to Set 2007 Wholesale Transmission Service Rates for the Electric Reliability Council of Texas, Docket No ; (c) all neighboring utilities; (d) all retail electric providers (REPs) currently certificated by the Commission; and (e) counsel for all parties in Sharyland's prior rate proceedings. Applicants also provided notice of this docket by publication once each week for two consecutive weeks in newspapers having general circulation in the counties located within Sharyland's service area. 2903

18 Page 18 of 92 DOCKET NO ORDER PAGE On March 31, 2008, the State filed a motion to intervene in this docket. 11. On April 8, 2008, the Commission filed Order No. 4 granting intervenor status to State. 12. On April 22, 2008, Sharyland filed an unopposed motion to modify the procedural schedule in this docket in order to allow the parties to conduct settlement discussions. 13. On April 23, 2008, the Commission filed Order No. 5 granting Sharyland's unopposed motion to modify the procedural schedule. 14. On April 29, 2008, the Office of Public Utility Counsel (OPC) filed a motion to intervene in this docket. 15. On May 6, 2008, Sharyland filed a second motion to modify the procedural schedule to allow the parties to continue settlement discussions. 16. On May 7, 2008, the Commission filed Order No. 6 granting intervenor status to OPC and granting Sharyland's second motion to modify the procedural schedule. 17. On May 14, 2008, Sharyland filed a third motion to modify the procedural schedule to allow the parties to continue settlement discussions. 18. On May 16, 2008, the Commission filed Order No. 7 granting Sharyland's third motion to modify the procedural schedule. 19. On May 21, 2008, Sharyland filed an unopposed motion stating that the parties had reached agreement on or did not oppose the general terms and conditions of a settlement that would resolve all of the issues in this docket and asked that the procedural schedule be suspended to allow the parties to finalize an agreement. 2904

19 Page 19 o 92 DOCKET NO ORDER PAGE On May 22, 2008, the Commission filed Order No. 8 suspending the procedural schedule and directing the parties to file a stipulation and agreement by June 9, On June 9, 2008, Applicants, Commission Staff, OPC, and TIEC filed a Stipulation settling all outstanding issues in this proceeding. 22. The Stipulation provides for approval of the proposed restructuring and transfer of assets from Sharyland to SDTS, subject to certain conditions. Description and Purpose of Transaction 23. The proposed restructuring and transfer of assets will allow Sharyland and SDTS to access previously untapped public capital markets through the formation of a Master Limited Partnership (MLP) or a Real Estate Investment Trust (REIT) in order to finance new investment in transmission and distribution facilities in the Electric Reliability Council of Texas (ERCOT) region. 24. In order to utilize these new investment vehicles, it is necessary under the federal income tax laws that the owner of the assets receive income in the form of rents from real property. 25. Under the proposed transaction, Sharyland will transfer ownership of its transmission and distribution assets to SDTS. SDTS will then lease the assets to Sharyland, as the operator, in return for quarterly rental payments. 26. There will be no change in the ownership structure of Sharyland. Sharyland will continue to hold its existing Certificate of Convenience and Necessity (CCN) and operate the electric system and will comply with all Commission, ERCOT, and Texas Regional Entity requirements. Sharyland will also maintain operational control of SDTS as the general partner. 2905

20 Page 20 of DOCKET NO ORDER PAGE The limited partner of SDTS will be Transmission and Distribution Company, LLC (TDC). At the date of implementation, the only investors in TDC will be Sharyland and Hunt Transmission Services, LLC (HTS) or an affiliate of HTS. As SDTS acquires additional assets, it expects to obtain additional investors, who will contribute equity to TDC and acquire limited partner interests. When it is appropriate or convenient to access the public capital markets to fund new transmission and distribution facilities for SDTS, the owners of TDC will have the ability to form an MLP or a REIT. TDC will not become an MLP or a REIT. 28, Following formation, the MLP or REIT will issue shares to the public through an initial public offering or a private placement. Shares in MLPs and REITs are widely traded in public capital markets and are attractive to earnings-oriented investors, such as pension funds, insurance companies, mutual fund companies, banks, and individual investors. 29. MLPs are common business structures for oil and natural gas pipelines regulated by the Federal Energy Regulatory Commission (FERC). REITs are commonly utilized in the natural resources, timber, and real estate industries. 30. Sharyland and SDTS are seeking approval of their proposed new structure now so that they will be able to efficiently access the public capital markets to fund new transmission and distribution facilities on a timely basis when necessary. Description ofmmiation 31. The Stipulation includes the following provisions: S^ a. It is not anticipated that there will be any direct savings associated with the restructuring and transfer of assets. However, nothing in the Stipulation precludes the Signatories from arguing in a subsequent proceeding that implementation of the proposed restructuring and transfer of assets resulted in savings and that such savings should be shared, in whole or in part, with ratepayers. The Signatories also have the right to 2906

21 Page 21 of 92 DOCKET NO ORDER PAGE 6 argue in any subsequent application for a merger or acquisition by Sharyland and SDTS that any savings or benefits associated with such a merger or acquisition should be shared with ratepayers. Rate Issues b. Following restructuring, wholesale and resale rates for Sharyland will be determined using the same methodology that would have been utilized if the restructuring had never occurred. basis for Sharyland and SDTS. Rates will be set on a combined The audited books and records of Sharyland and SDTS will be used to prepare a combined rate filing. part of its rate filing, Sharyland and STDS will file workpapers that show how the rate filing schedules were prepared on a combined basis. Both Sharyland and SDTS will keep their books and records according to FERC accounting requirements. c. Sharyland and SDTS agree to a "hold harmless" condition as part of the settlement. Under this condition, Applicants commit that their wholesale and retail transmission and distribution rates will not be any greater than their rates would have been absent restructuring. This commitment also applies to Sharyland's and SDTS's cost of capital. As The Signatories are free to challenge Sharyland's and SDTS's requested rates in a subsequent rate proceeding on the ground that they do not comply with the commitment. d. Sharyland and SDTS will maintain a capital structure consistent with the capital structure that has been approved by the Commission in the most recent rate proceeding for Sharyland and SDTS and will demonstrate their compliance with this commitment in their annual Earnings Monitoring Reports (EMRs). EMRs will be filed on a combined Sharyland and SDTS basis. Relationship between Sharvland and SD TS e. Sharyland will maintain operational control of SDTS as the general partner. Sharyland cannot be removed as general partner of SDTS without 2907

22 DOCKET NO ORDER PAGE 7 prior approval of the Commission pursuant to PURA and f. As the operator of the electrical system and the general partner of SDTS, Sharyland will continue to hold its existing CCN. g. Sharyland will not surrender, resign, transfer, assign, or otherwise cease to be the operator of the electrical transmission and distribution system owned by SDTS without prior Commission approval. The standards for determining whether such a surrender, resignation, transfer, assignment, cessation, or removal should be approved are the standards set forth in PURA (m) and (b). h. SDTS is obligated to fund all improvements to the Sharyland electrical transmission and distribution system that are (a) required by the Commission, ERCOT, or the Texas Regional Entity or (b) reasonably necessary to satisfy Sharyland's obligations as a regulated utility to serve its customers or to maintain the safety or reliability of the electrical system. i. In the event that SDTS fails to meet its obligation to fund necessary improvements, Sharyland, as the operator of the electric system and the CCN holder, is obligated to fund such improvements in order to assure that the safety and reliability of the system is maintained. Conditions Related to SDTS j. SDTS will provide the Commission full access to its books and records as required by PURA and applicable Commission rules. Interested parties are entitled to obtain access to SDTS's books and records in a Commission or State Office of Administrative Hearings proceeding or in a judicial appeal from a Commission order to the same extent that such parties are entitled to obtain access to Sharyland's books and records in such proceeding. k. SDTS will not sell, acquire, lease, or transfer assets in Texas, merge or consolidate with another utility, or transfer a controlling interest in or 2908

23 Page 23 of 92 DOCKET NO ORDER PAGE 8 operational control of SDTS without prior Commission approval, pursuant to PURA , and SDTS will not incur indebtedness, provide guarantees, or pledge assets in a manner that will harm the quality of service or increase the rates paid by Sharyland's customers. m. SDTS will not pledge its assets for indebtedness or other obligations issued to benefit any entity other than SDTS or Sharyland. Recovery of Formation and Issuance Costs n. Sharyland and SDTS will not request recovery of formation costs associated with implementation of the restructuring proposal. o. Sharyland and SDTS will not seek future cost recovery of any issuance costs related to an initial public offering or private placement by an MLP or REIT formed with respect to the assets owned by SDTS, except to the extent that Sharyland and SDTS are able to demonstrate a net benefit to ratepayers. Prior Sharyland Rate Settlements p. The Stipulation will not affect Sharyland's rate settlements in Application of Sharyland Utilities, LP for Authority to Establish Initial Rates and Tariff, Docket No , SOAH Docket No , Order (Jul. 26, 2000), Application of Sharyland Utilities, LP for Approval of Unbundled Cost of Service Rates Pursuant to PURA and Public Utility Commission of Texas Substantive Rule , Docket No , SOAH Docket No , Order (Oct. 4, 2001), Application of Sharyland Utilities, LP for Modification of Order Approving Initial Rates and Tariff, Docket No , Order (Jul. 28, 2003), Application of Sharyland Utilities, LP for Modification of Order in Docket No , Docket No , Order (June 9, 2006), and Application of Sharyland Utilities, LP for Modification of Orders Regarding Rates, Docket No (pending). 2909

24 Page 24 of 92 DOCKET NO ORDER PAGE 9 Reports q. Sharyland and SDTS will notify the Commission within 30 days of the formation of an MLP or REIT by filing a letter in this docket and serving a copy on all parties. The Commission may take the effect of such a formation into consideration when setting wholesale and retail rates for Sharyland and SDTS. Enforceability r. The Commission has authority to enforce the foregoing commitments against both Sharyland and SDTS, including the authority to determine whether Sharyland and SDTS have met their obligation to fund improvements that are reasonably necessary to maintain the safety or reliability of the Sharyland electrical system. Both Sharyland and SDTS are "electric utilities" within the meaning of the definition set forth in PURA (6) and are subject to the Commission's jurisdiction over rates and services. s. The Commission also has authority to enforce the foregoing commitments against Sharyland and SDTS pursuant to PURA (o) and (d). t. To the extent that either Sharyland or SDTS fail to comply with a Commission order, the Commission can take actions to remedy the noncompliance, including (i) seek a court order requiring compliance with the order pursuant to PURA ; (ii) file a court action for contempt for failure to comply with the order pursuant to PURA ; or (iii) impose administrative penalties pursuant to PURA Basis for Relief 32. The proposed transaction to restructure Sharyland and transfer legal ownership of Sharyland's transmission and distribution assets to SDTS will enable Sharyland and SDTS to access previously untapped public capital markets and finance new transmission investment within ERCOT. 2910

25 Page 25 of 92 DOCKET NO ORDER PAGE The proposed restructuring and transfer of assets, with the conditions and commitments set forth in the Stipulation as described above, will not adversely affect Sharyland's wholesale or retail transmission and distribution rates. 34. The proposed restructuring and transfer of assets, with the conditions and commitments set forth in the Stipulation as described above, is consistent with the public interest pursuant to PURA , (m), and The proposed restructuring and transfer of assets will not adversely affect the health or safety of customers or employees, result in the transfer of the jobs of Texas citizens to workers domiciled elsewhere, adversely affect neighboring utilities, or result in a decline in service. 36. Because none of the employees, facilities, rates, 'and operations of Sharyland will be affected by the proposed restructuring, and Sharyland will continue to have sole responsibility for operating the electrical system and will maintain operational control of SDTS, the transfer of ownership of Sharyland's transmission and distribution assets to SDTS will have no effect on the level of service provided by Sharyland. 37. The proposed restructuring and transfer of assets, with the conditions and commitments set forth in the Stipulation as described above, will not adversely affect the reliability of service, availability of service, or cost of service of Sharyland. 38. Upon the proposed restructuring and transfer of assets contemplated by the Application and approved by this Order, none of the rights, privileges, duties, and obligations of a regulated electric utility granted or imposed by PURA and the Commission's substantive rules applicable to Sharyland prior to the contemplated ownership transfer will change as a result of the transfer. 2911

26 Page 26 of 92 DOCKET NO ORDER PAGE 11 II. Conclusions of Law 1. Sharyland is a regulated electric utility as defined in PURA The Commission has jurisdiction and authority over this proceeding pursuant to PURA , , and Sharyland provided proper and adequate notice of the application consistent with P.U.C. PROC. R Sharyland's and SDTS's Application may be approved without a hearing pursuant to of the Administrative Procedure Act, TEx. GOV'T CODE ANN. Chapter 2001 (Vernon 2000 & Supp. 2006). 5. The proposed restructuring and transfer of legal ownership of Sharyland's transmission and distribution assets to SDTS, as described in the joint application and direct testimony in this proceeding and subject to the conditions and commitments set forth in the Stipulation, complies with PURA , , and Once the proposed restructuring and transfer of legal ownership of Sharyland's assets to SDTS is implemented, SDTS will also be an electric utility as defined in PURA The terms of the Stipulation, taken as a whole, are a fair, just, and reasonable resolution of all issues addressed, are consistent with the relevant provisions of PURA, and are in the public interest. 8. The Stipulation constitutes a binding and enforceable contract among the Signatories. 9. The requirements for informal disposition pursuant to P.U.C. PROC. R have been met in this proceeding. 2912

27 Page 27 of 92 DOCKET NO ORDER PAGE 12 III. Ordering Paragraphs In accordance with these findings of fact and conclusions of law, the Commission issues the following order: 1. Consistent with the Stipulation, Sharyland's and SDTS's application is approved and the transfer of legal ownership of Sharyland's transmission and distribution assets from Sharyland to SDTS is approved. 2. The entry of this Order does not indicate the Commission's endorsement or approval of any principle or methodology that may underlie the Stipulation. Neither shall the entry of the Order be regarded as a binding, holding, or precedent as to the appropriateness of any theory or methodology underlying the Stipulation except for the purpose of enforcing the Stipulation or this Order in any firture proceeding. 3. All other motions, requests for entry of specific findings of fact and conclusions of law, and any other requests for general or specific relief, if not expressly granted herein, are denied. SIGNED AT AUSTIN, TEXAS the'cay of July PUBLIC UTILITY COMMISSION OF TEXAS, COMMISSIONER PAUL HUDSON, COMMISSIONER q:\cadm\orderslfina fo.docx 2913

28 Page 28 of 92 P.U.C. DOCKET NO SOAH DOCKET NO APPLICATION OF SHARYLAND PUBLIC UTILITY COMMISSION UTILITIES, L.P. FOR AUTHORITY TO ESTABLISH INITIAL RATES AND OF TEXAS TARIFF ORDER This Order approves Sharyland Utilities, L.P. (SU) initial rates and tariff to provide electric utility service to residential, commercial, and industrial customers of Sharyland Plantation, a 6,400-acre planned community located between the Cities of McAllen and Mission (Cities) in Hidalgo County, consistent with the Non-unanimous Stipulation (Stipulation) filed by SU and the Cities. The Public Utility Commission of Texas (Commission) adopts the State Office of Administrative Hearings (SOAH) Proposal for Decision (PFD) filed on May 26, 2000, as amended by this Order. Accordingly, the Commission adopts the following findings of fact and conclusions of law, as proposed in the PFD, and adds Findings of Fact (FoFs) Nos. 2.A., 13.b.1., and 13.b.2., Conclusions of Law (CoLs) No. 8.A., and Ordering Paragraph 4.A. These modifications are added to clarify that: (1) Prior to placing its transmission and distribution (T&D) system in full service, SU will receive incidental revenue from the system's operation; (2) The stipulation's general rate proceeding to occur no later than May 1, 2003 is in addition to SU's UCOS rate case and will address only T&D rates; (3) The deferral mechanism is different from past Commission treatments of deferred accounting and allows SU to book costs incurred prior to its T&D system becoming fully operational in a manner that will permit the Commission to review these deferred costs in a future proceeding for the purpose of setting new rates; and (4) Notwithstanding the approval of the deferral mechanism, the Commission reserves the right to review SU's deferred costs in the May 1, 2003 rate proceeding

29 Page 29 of 92 P.U.C. Docket No ORDER Page 2 of 11 SOAH Docket No Findings of Fact Procedural History and Notice 1. On November 1, 1999, Sharyland Utilities, L.P. (SU) filed with the Public Utility Commission of Texas (Commission) an application for authority to establish initial rates and tariff for retail electric service, which was assigned Docket No SU is a retail electric utility that is in the process of commencing operations pursuant to a Certificate of Convenience and Necessity (CCN) granted by this Commission in Application of Sharyland Utilities, L.P., for a Certificate of Convenience and Necessity in Hidalgo County, Texas, Docket No A. Consequently, SU will receive incidental revenue from operation while its distribution system is being placed in service. 3. On November 2, 1999, the Commission referred this proceeding to the State Office of Administrative Hearings (SOAH), which was given SOAH Docket No , for the assignment of an Administrative Law Judge (ALJ) to conduct, a hearing and issue a proposal for decision. 4. Timely interventions in this proceeding were filed by Central Power and Light Company (CPL); the City of McAllen, Texas and the City of Mission, Texas (Cities); and the Office of Public Utility Counsel (OPC). 5. On December 8, 1999, the ALT issued Order No. 3, which approved SU's rates and tariff, as proposed in Volume N of its application, as Interim Rates and Tariff pending final Commission action in this proceeding. 6. On December 17, 1999, the Commission issued a Preliminary Order setting forth the issues to be addressed in this proceeding. Additionally, in that Order the Commission 291^

30 VWP/Goodlet - Direct Page 30 of 92 P.U.C. Docket No ORDER Page 3 of 11 SOAH Docket No concluded, inter alia, that the final rates set in this docket are not subject to either the rate freeze in or the price to beat calculation in of the Public Utility Regulatory Act, TEx. Ulu.. CoDE ANN. (Vernon 1998 & Supp. 2000) (PURA). 7. SU published notice of its Application once a week for four consecutive weeks in "The Monitor," a newspaper of general circulation in Hidalgo County, and provided written notice to the Cities of McAllen and Mission. SU filed affidavits demonstrating completion of notice. 8. On March 6, 2000, SU and the Cities of McAllen and Mission executed a Stipulation and Agreement of Settlement (Stipulation) proposing to resolve all issues in this proceeding. The Stipulation was filed on March 6, The Office of Regulatory Affairs (ORA) filed a letter on March 6, 2000, stating that the Stipulation provides adequate protection of the public interest, and that ORA does not oppose the Stipulation. 9. OPC filed testimony in opposition to the Stipulation. 10. On April 7 and 10, 2000, the ALJ issued Order Nos. 9 and 10, admitting Exhibits 1-27 into evidence. 11. The only issue contested by the parties to this proceeding is the reasonableness of the deferral mechanism sought by SU. Stipulation 12. The Settling Parties have achieved a reasonable resolution of all issues in this proceeding that is appropriate for a start-up utility such as SU. 13. The Stipulation provides generally: a. SU's Initial Rates and Tariff, including service rules and regulations, are approved as filed

31 Page 31 of 92 P.U.C. Docket No ORDER Page 4 of 11 SOAH Docket No b. SU agrees to file a general rate proceeding no later than May 1, b.1. The May 1, 2003 rate proceeding is in addition to SU's UCOS rate case to determine T&D rates after January 1, b.2. Since this proceeding occurs after the onset of competition, it is only applicable to SU's T&D rates. c. SU will be allowed to record deferred costs on its books and seek recovery of those costs in accordance with SU's proposal contained in the Direct Testimony of witness James w. Daniel, subject to certain conditions, including: d. The Settling Parties agree not to oppose SU's right to seek recovery of such deferred costs incurred prior to May 1, 2003, through rates that become effective after that date; e. The Settling Parties reserve the right to oppose the reasonableness or prudence of any costs incurred prior to May 1, 2003, included in the deferred cost account in SU's May 1, 2003 general rate proceeding; f. SU retains the right to seek recovery of deferred costs incurred after May 1, 2003; however, the parties are free to oppose any request by SU to defer and recover such costs incurred after May 1, 2003; g. If SU requests approval to record and recover deferred costs incurred after May 1, 2003, and the Commission denies that request, SU will not be permitted to record or recover any deferred costs incurred after May 1, Application Sharyland Utilities, LP. for Approval of Unbundled Transmission and Distribution Rases, Docket No (pending). 2 9'f7

32 Page 32 of 92 P.U.C. Docket No ORDER Page 5 of 11 SOAH Docket No h. The Settling Parties reserve the right to oppose the reasonableness of the period over which SU seeks to recover deferred costs incurred prior to May 1, 200, in any future rate proceeding in which SU seeks to recover such costs. i. SU agrees to a residential rate cap, subject to certain conditions, through May 1, j. SU agrees, subject to certain conditions, that it will not seek to recover any costs deferred under this settlement from a customer terminating service from SU through the assessment of a non-bypassable charge or other stranded cost recovery mechanism. k. The Settling Parties agree that the Commission should grant a waiver of P.U.C. SUBST. R (b) to permit MeterSmart, L.P., an SU affiliate, to own, install and maintain all meters necessary for the measurement of electric energy delivered to SU customers. 14. SU is a start-up utility that had not commenced operations as of its November 1, 1999, rate case filing, and therefore SU does not have historical information upon which to develop a historical test year. 15. SU's projected costs and customer base for the years 2000 or 2001 would not be representative of its operations and would not provide an appropriate basis for setting SU's rates in this proceeding. 16. SU's proposed use of a 2002 test year provides a reasonable basis for setting SU's rates in this proceeding. 17. SU's proposed Initial Rates are below those of neighboring utilities for comparable services. 18. SU's proposed Initial Rates comply with applicable Commission regulations and are just and reasonable. (0 2918