EXHIBIT 99(f)
COMPETITION
HL&P and other members of the electric utility industry, like other
regulated industries, are being subjected to technological, regulatory and
economic pressures that are increasing competition and offer the possibility for
fundamental changes in the industry and its regulation. The electric utility
industry historically has been composed of vertically integrated companies which
largely have been the exclusive providers of electric service within a
governmentally- defined geographic area. Prices for that service have been set
by governmental authority under
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principles that were designed to provide the utility with an opportunity to
recover its costs of providing electric service plus a reasonable return on its
invested capital.
By legislation adopted in 1978, Congress contributed to the development
of new sources of electric generation by freeing cogenerators (i.e., facilities
which produce electrical energy along with thermal energy used for industrial
processes, usually the generation of steam) from most regulatory constraints
applicable to traditional utilities, such as state and federal pricing
regulation and organizational restrictions arising under the 1935 Act. This
legislation contributed to the development of approximately 40 cogeneration
facilities in the highly industrialized Houston area, with a power generation
capability of over 5,000 MW. As a consequence, HL&P has lost some industrial
customers to self-generation (representing approximately 2,500 MW), and
additional projects continue to be considered by customers.
In 1992 Congress authorized, in the Energy Policy Act, another category
of wholesale generators, Exempt Wholesale Generators (EWGs). Like cogenerators,
these entities exist to sell electric energy at wholesale, but unlike
cogenerators, EWGs may be formed for the generation of electricity without
regard to the simultaneous production of thermal energy. Congress chose to free
EWGs from the structural constraints applicable to traditional utilities under
the 1935 Act, but Congress also authorized traditional utilities to form such
entities themselves without being burdened by those restrictions. At the same
time, Congress placed significant limitations on the ability of traditional
utilities to purchase power in their own service territories from an affiliated
EWG.
There are increasing pressures today by both cogenerators and exempt
wholesale generators for access to the electric transmission and distribution
systems of the regulated utilities in order to have greater flexibility in
moving power to other purchasers, including access for the purpose of making
retail sales to either affiliates of the unregulated generator or to other
customers of the regulated utility. In February 1995, a new entity sought
permission from the Public Utility Commission of Texas (Utility Commission) to
construct a transmission line within HL&P's service territory for the purpose of
transmitting power from a cogeneration facility owned by an industrial concern
to an affiliate of that concern. This proceeding has been docketed by the
Utility Commission, but currently is in its early stages.
Neither federal nor Texas law currently permits retail sales by
unregulated entities. However, changes to the Federal Power Act made in the
Energy Policy Act of 1992 increase the power of the Federal Energy Regulatory
Commission (FERC) to order utilities to transmit power generated by both
regulated and unregulated entities to other wholesale customers, and efforts are
underway in some states that may lead to broader authorization of transmission
access for such entities and even to retail sales by such entities. HL&P
anticipates that some of those arguments will be advanced in the current session
of the Texas legislature during the consideration of the re-enactment to the
Public Utility Regulatory Act (PURA), which governs electric regulation in
Texas.
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Traditional utilities such as HL&P also face increased competition from
alternate energy sources, primarily natural gas. Gas suppliers increasingly are
seeking to supplant traditional electric loads with gas-powered equipment, such
as gas-powered chillers in air conditioning installations.
HL&P continues to maintain an aggressive approach in attempting to
preserve its existing customer base. HL&P has instituted various programs to
reduce its costs and has adopted aggressive marketing programs to identify and
respond to customer needs. One example is HL&P's development of the San Jacinto
Steam Electric Station, a rate-based cogeneration facility that will begin
service in 1995. In addition, in February 1995, the Utility Commission approved
a new tariff proposed by HL&P that will allow special pricing for industrial
customers who can demonstrate the ability to obtain electric service on terms
more favorable than HL&P's traditional tariff offerings. While such pricing may
retain such customers and minimize the prospect that HL&P would be left with
stranded investment whose costs might have to be borne by customers who have no
other alternatives, HL&P's revenues and earnings will be reduced from such
pricing tariffs.
In addition, HL&P and nine other Texas investor-owned utilities are
supporting a legislative proposal for amendment to the PURA. That proposal calls
for (i) a streamlined resource planning process, (ii) competitive bidding for
new generation capacity requirements, (iii) regulatory incentives that reward
efficiency and innovation and (iv) granting utilities pricing flexibility to
meet the changing needs of their customers. These changes, if adopted in the
form proposed by the utilities, would enhance the flexibility of regulated
entities to address competition, while also providing utility customers with the
benefits of more diverse energy supplies.
Under rules adopted by the Utility Commission and under interconnection
guidelines adopted by the Electric Reliability Council of Texas, Inc., through
which a number of utilities and unregulated suppliers are connected, HL&P and
other Texas utilities have provided for movement of power for both regulated and
unregulated power suppliers at compensatory rates. Unregulated power suppliers
continue to seek additional access and more favorable pricing provisions.
At this time it is impossible to predict what changes to the electric
utility industry will emerge as a result of any legislative changes that may be
adopted by the Texas legislature. Nor is it possible to predict what other
changes to the industry will emerge from federal regulatory and legislative
initiatives or from regulatory decisions of the Utility Commission, though, it
seems likely that such changes ultimately will increase the competition HL&P
faces in supplying electric energy to its customers.
REGULATION OF THE COMPANY
FEDERAL
The Company is a holding company as defined in the 1935 Act; however,
based upon the intrastate operations of HL&P and the exemptions applicable to
the affiliates of HI Energy, the Company is exempt from regulation as a
"registered" holding company under the 1935 Act except with respect to the
acquisition of voting securities of other domestic public utility companies and
holding companies. The Company has no present intention of entering into any
transaction which would cause it to become a registered holding company subject
to regulation by the Securities and Exchange Commission (SEC) under the 1935
Act. In November 1994, the SEC issued a Concept Release that called for comments
on a broad range of topics relevant to regulation of both registered and exempt
companies under the 1935 Act. In calling for comments, the SEC acknowledged that
significant changes are affecting the electric utility industry, and in
responding, some utilities have argued for repeal or substantial modification of
the 1935 Act and the regulation it provides. At this time, no prediction can be
made as to what changes, if any, will result from this review by the SEC, but
repeal or significant modification to the 1935 Act may have an effect on the
electric utility industry. In addition, it is possible that changes to the 1935
Act and its interpretation would eliminate some distinctions between exempt and
registered companies in their regulation under the 1935 Act, possibly in ways
that would increase the regulatory burdens on exempt companies such as the
Company.