Improving earnings through rate relief and rate design

We remain committed to achieving our allowed rate of return in our regulated businesses. As part of this strategy, we will seek rate increases when necessary. In 2004, CenterPoint Energy sought and received significant rate relief in several jurisdictions.

In the Houston metropolitan area, we received approval for $14 million in base rate increases from the Texas Railroad Commission, the city of Houston and 28 other cities. In addition to the base rate changes, we also established gas cost adjustment clauses that help mitigate fuel price risks by enhancing our ability to more quickly reflect the current estimated cost of gas in customers’ bills.

We also obtained rate relief in Louisiana and Oklahoma, resulting in a $2 million increase in base rates and service charges in our southern Louisiana service territory, a $7 million increase in base rates and service charges in northern Louisiana and a $3 million rate increase in Oklahoma. We also obtained rate stabilization clauses in northern Louisiana and Oklahoma, which are similar to the clause that is already in effect in southern Louisiana. The stabilization clauses allow us to make small annual adjustments to rates without filing expensive and time-consuming rate cases.

In Minnesota, our request for a $22 million rate increase and new rate design to improve margin stability is currently under review by regulators. Interim rates of $17 million went into effect on Oct. 1, 2004, for all customers, subject to refund. We have reached a settlement with the Minnesota Department of Commerce for an annualized increase of approximately $9 million, subject to approval by the Minnesota Public Utilities Commission (MPUC). A decision by the MPUC is expected in the second quarter of 2005, and we expect to implement new rates by the end of the summer.

In April 2005, we received approval from the Texas Railroad Commission for a $2 million base rate increase for unincorporated areas in Texas. In November of 2004, we filed a request with the Arkansas Public Service Commission for about $34 million in increases. We expect a decision to be made on this request in the second half of 2005.

Get it Right – improving our operating efficiency

A key element of our strategy to “Get it Right” is to leverage our company’s size and skills to continually improve our operating performance.

CenterPoint Energy’s electric transmission and distribution organization is in the third year of its ongoing program to improve performance and achieve top-quartile status in service reliability, cost efficiency and customer satisfaction, while at the same time, lowering capital spending. They have had success in improving their operating income and reducing capital spending, and they are working to control cost initiatives while making improvements in their overall performance.

Our gas delivery business turned in a strong performance in 2004. In Houston, we achieved our target earnings, despite warmer weather during the heating season, primarily by effectively managing costs. Employees were able to stay within budget while meeting service objectives and controlling capital expenditures and operating and maintenance costs.

Our pipeline businesses are ranked in the top quartile among pipeline companies with operations similar to ours, according to the results of an internal study conducted in 2004. The study benchmarked the operating costs for pipelines in the United States as a starting point for comparisons. We were ranked in the top quartile in all measures. Still, recognizing that newly enacted regulatory requirements are placing increased pressure on our operating costs, Pipeline Services and Field Services began a full review of our construction and maintenance processes in 2005 to ensure that we continue to operate our business at maximum efficiency.