CAPACITY AUCTION.

(a) Each electric utility subject to this section shall sell at auction, at least 60 days before the date set for customer choice to begin, entitlements to at least 15 percent of the electric utility's Texas jurisdictional installed generation capacity. For the purposes of this section, the term "electric utility" includes any affiliated power generation company that is unbundled from the electric utility in accordance with Section 39.051, but does not include any entity owning less than 400 megawatts of installed generation capacity.

(b) The obligation to auction the entitlements shall continue until the earlier of 60 months after the date customer choice is introduced or the date the commission determines that 40 percent or more of the electric power consumed by residential and small commercial customers within the affiliated transmission and distribution utility's certificated service area before the onset of customer choice is provided by nonaffiliated retail electric providers.

(c) An affiliate of the electric utility selling entitlements in the auction required by this section may not purchase entitlements from the affiliated electric utility at the auction. Entitlements may only be purchased by entities lawfully able to sell electricity in Texas.

(d) An electric utility may choose to auction additional entitlements beyond those required by Subsection (a) or continue to auction entitlements after the period required by Subsection (b) in order to comply with Section 39.154.

(e) The commission shall adopt rules by December 31, 2000, that define the scope of the capacity entitlements to be auctioned. Entitlements may be auctioned in blocks of less than 15 percent. The rules shall state the minimum amount of capacity that can be sold at auction as an entitlement. At a minimum, the rules shall provide that the entitlements:

(1) may be sold and purchased in periods of not less than one month nor more than four years;

(2) may be resold to any lawful purchaser, except for a retail electric provider affiliated with the electric utility that originally auctioned the entitlement;

(3) include no possessory interest in the unit from which the power is produced;

(4) include no obligations of a possessory owner of an interest in the unit from which the power is produced; and

(5) give the purchaser the right to designate the dispatch of the entitlement, subject to planned outages, outages beyond the control of the utility operating the unit, and other considerations subject to the oversight of the applicable independent organization.

(f) The commission shall adopt rules by December 31, 2000, that prescribe the procedure for the auction of the entitlements. The rules shall include:

(1) a process for conducting the auction or auctions, including who shall conduct it, how often it shall be conducted, and how winning bidders shall be determined;

(2) a process for the electric utility to designate which generation units or combination of units are offered for auction;

(3) a provision for the utility to establish an opening bid price based on the electric utility's expected cost, with the commission prescribing the means for determining the opening bid price, which may not include return on equity; and

(4) a provision that allows a bidder to specify the magnitude and term of the entitlement, subject to the conditions established in Subsection (e).

(g) In adopting the process under Subsection (f)(2), the commission shall consider the furtherance of the development of the competitive market, the cost of transmission, physical constraints of the transmission system, the proximity of the generation to load, economic efficiency, and any other factors the commission finds relevant. The process may provide for commission approval of the designation before auction. The commission may consult with the applicable independent organization to develop the process.