Entergy 2003 Annual Report Download - page 37

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ENTERGY CORPORATION AND SUBSIDIARIES 2003
System Agreement Litigation
The domestic utility companies historically have engaged in
the coordinated planning, construction, and operation of
generating and transmission facilities under the terms of an
agreement called the System Agreement that has been
approved by FERC. Litigation involving the System
Agreement is being pursued by the LPSC at both FERC and
before itself. These proceedings include challenges to the
allocation of costs as defined by the System Agreement, raise
questions of imprudence by the domestic utility companies in
their execution of the System Agreement, and seek support
for local regulatory authority over System Agreement issues.
Regarding the proceeding at the LPSC, Entergy believes that
state and local regulators are pre-empted by federal law from
reviewing and deciding System Agreement issues for them-
selves. An unrelated case between the LPSC and Entergy
Louisiana raised the question of whether a state regulator is
pre-empted by federal law from reviewing and interpreting
FERC rate schedules that are part of the System Agreement,
and from subsequently enforcing that interpretation. The
LPSC interpreted a System Agreement rate schedule in the
unrelated case, and then sought to enforce its interpretation.
The Louisiana Supreme Court affirmed. In 2003, the U.S.
Supreme Court ruled in Entergy Louisiana’s favor and
reversed the decisions of the LPSC and the Louisiana
Supreme Court.
In the proceeding at FERC, the LPSC alleges that the
domestic utility companies’ annual production costs over the
period 2002 to 2007 will be over or (under) the average for
the domestic utility companies by the following amounts:
Entergy Arkansas $(130) to (278) million
Entergy Gulf States - Louisiana $ 11 to 87 million
Entergy Louisiana $ 39 to 132 million
Entergy Mississippi $ (27) to 13 million
Entergy New Orleans $ 7 to 46 million
This range of results is a function of assumptions regarding
such things as future natural gas prices, the future market
price of electricity, and other factors. If FERC grants the
relief requested by the LPSC, the relief may result in a
material increase in production costs allocated to companies
whose costs currently are projected to be less than the
average and a material decrease in production costs allocated
to companies whose costs currently are projected to exceed
the average. Management believes that any changes in the
allocation of production costs resulting from a FERC decision
should result in similar rate changes for retail customers.
Therefore, management does not believe that this proceeding
will have a material effect on the financial condition of any of
the domestic utility companies, although the outcome of the
proceeding at FERC cannot be predicted at this time.
In February 2004 a FERC ALJ issued an Initial Decision
in the proceeding. The Initial Decision decided some issues
in favor of the relief sought by the LPSC, and decided some
issues against the relief sought by the LPSC. Entergy
continues to assess the potential effects of the ALJ’s Initial
Decision, and how it will respond to the decision. It appears
that the shift in total production costs under the terms of
the ALJ’s Initial Decision would not be as great as that
sought in the LPSC’s complaint, but would still be sub-
stantial. As an Initial Decision, it is not a FERC order, and
Entergy and the other parties in the proceeding will have
additional opportunities to explain their positions in the
proceeding prior to the issuance of a FERC decision. FERC
does not have a deadline by which it has to decide the
proceeding and management does not expect a FERC
decision before the fourth quarter 2004.
On February 10, 2004, the APSC issued an “Order of
Investigation,” in which it discusses the negative effect that
implementation of the FERC ALJ’s Initial Decision would have
on Entergy Arkansas’ customers. The APSC order includes a
preliminary estimate that the FERC ALJ’s Initial Decision
would shift approximately $125 million of costs for the year
2003 to Entergy Arkansas’ retail customers, and would shift
an average of approximately $113 million per year for the
years 2004-2011 to Entergy Arkansas’ retail customers. The
APSC order establishes an investigation into whether Entergy
Arkansas’ continued participation in the System Agreement is
in the best interest of its customers, and whether there are
steps that Entergy Arkansas or the APSC can take “to protect
[Entergy Arkansas’ customers] from future attempts by
Louisiana, or any other Entergy retail regulator, to shift its
high costs to Arkansas.” Entergy Arkansas’ initial testimony
in the proceeding is due in April 2004.
In addition to the APSC’s Order of Investigation,
Entergy’s retail regulators have and may continue to
question the prudence and other aspects of Entergy System
or domestic utility company contracts or assets that may
not be subject to their respective jurisdictions. For instance,
in its Order of Investigation, the APSC discusses aspects of
Entergy Louisiana’s power purchases from the Vidalia
project, and the APSC has publicly announced its intention
to initiate an inquiry into the Vidalia purchase power
contract. Entergy believes that any such inquiry would
have to occur at FERC.