Entergy 2007 Annual Report Download - page 44

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Entergy Corporation and Subsidiaries 2007
In addition to the regulatory scrutiny connected with base rate
proceedings, the Utility operating companies’ fuel and purchased power
costs recovered from customers are subject to regulatory scrutiny. e
Utility operating companies’ signicant fuel and purchased power cost
proceedings are described in Note 2 to the nancial statements.
FE D E R A L RE G U L AT I O N
e FERC regulates wholesale rates (including Entergy Utility
intrasystem energy exchanges pursuant to the System Agreement)
and interstate transmission of electricity, as well as rates for System
Energy’s sales of capacity and energy from Grand Gulf to Entergy
Arkansas, Entergy Louisiana, Entergy Mississippi, and Entergy New
Orleans pursuant to the Unit Power Sales Agreement.
Syst em Ag re ement P ro ce edin gs
Production Cost Equalization Proceeding Commenced
by the LPSC
e Utility operating companies historically have engaged in the
coordinated planning, construction, and operation of generating and
bulk transmission facilities under the terms of the System Agreement,
which is a rate schedule that has been approved by the FERC. e
LPSC has been pursuing litigation involving the System Agreement
at the FERC. e proceeding includes challenges to the allocation
of costs as dened by the System Agreement and raises questions of
imprudence by the Utility operating companies in their execution of
the System Agreement.
In June 2005, the FERC issued a decision in the System Agreement
litigation that had been commenced by the LPSC, and essentially
armed its decision in a December 2005 order on rehearing. e
FERC decision concluded, among other things, that:
n฀ e System Agreement no longer roughly equalizes total production
costs among the Utility operating companies.
n฀ In order to reach rough production cost equalization, the FERC
will impose a bandwidth remedy by which each company’s total
annual production costs will have to be within +/- 11% of Entergy
System average total annual production costs.
n฀ In calculating the production costs for this purpose under the
FERC’s order, output from the Vidalia hydroelectric power plant
will not reect the actual Vidalia price for the year but is priced
at that year’s average price paid by Entergy Louisiana for the
exchange of electric energy under Service Schedule MSS-3 of the
System Agreement, thereby reducing the amount of Vidalia costs
reected in the comparison of the Utility operating companies’
total production costs.
n฀ e remedy ordered by FERC calls for no refunds and became
eective based on calendar year 2006 production costs and the rst
potential reallocation payments were made in 2007.
e FERC’s decision reallocates total production costs of the Utility
operating companies whose relative total production costs expressed
as a percentage of Entergy System average production costs are outside
an upper or lower bandwidth. is will be accomplished by payments
from Utility operating companies whose production costs are more
than 11% below Entergy System average production costs to Utility
operating companies whose production costs are more than the
Entergy System average production cost, with payments going rst to
those Utility operating companies whose total production costs are
farthest above the Entergy System average.
Assessing the potential eects of the FERC’s decision requires
assumptions regarding the future total production cost of each Utility
operating company, which assumptions include the mix of solid fuel
and gas-red generation available to each company and the costs of
natural gas and purchased power. Entergy Louisiana, Entergy Gulf
States Louisiana, Entergy Texas, and Entergy Mississippi are more
dependent upon gas-red generation sources than Entergy Arkansas
or Entergy New Orleans. Of these, Entergy Arkansas is the least
dependent upon gas-red generation sources. erefore, increases in
natural gas prices likely will increase the amount by which Entergy
Arkansas’ total production costs are below the average total production
costs of the Utility operating companies.
e LPSC, APSC, MPSC, and the AEEC have appealed the FERC
decision to the Court of Appeals for the D.C. Circuit. Entergy and
the City of New Orleans intervened in the various appeals. e D.C.
Circuit held oral argument on the appeals in November 2007.
Entergy’s Utility Operating Companies’ Compliance Filing
In April 2006, the Utility operating companies led with the FERC
their compliance ling to implement the provisions of the FERC’s
decision. e ling amended the System Agreement to provide for
the calculation of production costs, average production costs, and
payments/receipts among the Utility operating companies to the
extent required to maintain rough production cost equalization
pursuant to the FERC’s decision. e FERC accepted the compliance
ling in November 2006, with limited modications. e Utility
operating companies led a revised compliance plan in December
2006 implementing the provisions of the FERC’s November order. In
accordance with the FERC’s order, the rst payments/receipts were
based on calendar year 2006 production costs, with the payments/
receipts among the aected Utility operating companies made in seven
monthly installments commencing in June 2007.
Various parties led requests for rehearing of the FERC’s order
accepting the compliance ling. Among other things, the LPSC
requested rehearing of the FERC’s decision to have the rst payments
commence in June 2007, rather than earlier; to not require interest on
the unpaid balance, and the FERC’s decision with regard to the re-
pricing of energy from the Vidalia hydroelectric project for purposes
of calculating production cost disparities. Various Arkansas parties
requested rehearing of the FERC’s decision (1) to require payments
be made over seven months, rather than 12; (2) on the application of
the +/- 11% bandwidth; and (3) the FERC’s decision to reject various
accounting allocations proposed by the Utility operating companies.
In April 2007, the FERC denied the requests for rehearing, with one
exception regarding the issue of retrospective refunds. at issue will
be addressed subsequent to the remanded proceeding involving the
interruptible load decision discussed further below in this section
under “Interruptible Load Proceeding.” e LPSC appealed the
decision to the D.C. Circuit Court of Appeals, and the Utility operating
companies and the APSC intervened in that appeal.
Rough Production Cost Equalization Rates
In May 2007 Entergy led with the FERC the rates to implement the
FERC’s orders in the System Agreement proceeding. The ling shows
the following payments/receipts among the Utility operating companies
for 2007, based on calendar year 2006 production costs, commencing
for service in June 2007, are necessary to achieve rough production cost
equalization as dened by the FERC’s orders (in millions):
Payments or (Receipts)
Entergy Arkansas $ 252
Entergy Gulf States Louisiana
(includes $(30) million related to Entergy Texas) $(120)
Entergy Louisiana $ (91)
Entergy Mississippi $ (41)
Entergy New Orleans $ 0
Entergy Texas $ (30)
Management’s Financial Discussion and Analysis conti nued