Appellate court upholds FERC order on Entergy subsidiaries’ exit from system agreements

The D.C. Circuit of Appeals on Aug. 14 denied a petition by the Council of the City of New Orleans and the Louisiana Public Service Commission to review a FERC order allowing Entergy Arkansas and Entergy Mississippi to exit their respective regional system agreements without paying exit fees.

FERC in 2009 accepted Entergy‘s (NYSE:ETR) notice that its two subsidiaries would be exiting their agreements and indicated there were no further conditions to the withdrawals other than the eight-year notice that they had already given according to their mandatory notice provisions in the system agreement.

The appellate court reviewed the Louisiana PSC’s and City of New Orleans’ petitions, which sought compensation for the generating assets that would be leaving their systems with their owners, and found their arguments did not undermine FERC’s interpretation of the system agreements provisions for exit.

“The petitioners argue that FERC misinterpreted the agreement and failed to impose two conditions on Entergy Arkansas and Entergy Mississippi that are required when a company withdraws from the system,” the appellate court said in its decision. “As the petitioners read the agreement, a company may not leave the system without compensating the remaining companies for the assets it takes. And even after leaving, the withdrawing company must continue making ‘rough equalization’ payments to its former partners. FERC found no such conditions in the agreement, and we hold that its view is reasonable.” 

The system agreement requires that in addition to paying for the construction and operation of new power plants in their respective regions, Entergy’s six operating subsidiaries that serve Louisiana, Arkansas, Mississippi and Texas, including Entergy Arkansas and Entergy Mississippi, were required to supply each other excess capacity. 

Then, in 1982, FERC interpreted the agreement as requiring that the cost of producing electricity be “roughly equal” among the operating companies.

“In order to satisfy the agreement’s equality mandate, FERC requires the operating companies with lower production costs to make payments to those with higher expenses,” the appellate court said.

However, these costs may vary depending on the fuel source being used and can result in one generator using a low-cost fuel paying millions of dollars to another generator using a higher cost fuel. Entergy Arkansas, for example, relies primarily on coal, whereas Entergy Louisiana and Entergy Gulf States rely more heavily on natural gas, the court noted.

The cost of natural gas shot up in 2000, prompting FERC in 2005 to order that the operating companies make payments to each other “to offset any difference in their respective annual production costs greater than 11 percent of the system average,” the appellate court said.

As a result, Entergy Arkansas was required to pay “hundreds of millions of dollars annually” to its sister companies. 

On the same day as the FERC order in 2005, Entergy Arkansas notified Entergy and its subsidiaries that it would be withdrawing from the system agreement eight years later, or the earliest it could do so under the agreement’s mandatory notice provision.

Entergy Mississippi followed suit in 2007.

“The agreement provides that ‘any company may terminate its participation in this agreement by ninety-six (96) months written notice to the other companies hereto,’” the appellate court said. “FERC held that the agreement’s text places no explicit conditions on the withdrawing companies save this requirement of notice. The petitioners concede that the text of the agreement ‘says nothing about the rights and obligations of withdrawing companies regarding system assets,’ but argue that the agreement’s purpose requires that withdrawing companies leave behind the ‘assets built for the system.’

“This argument from purpose presumes that the system as a whole has claims to individual assets built by each operating company. But the text of the agreement provides that ‘[e]ach company shall normally own . . . such generating capability and other facilities as are necessary to supply all of the requirements of its own customers.’ Individualized ownership, as opposed to system ownership, also squares with the agreement’s mandate that each operating company ‘is responsible for the costs of the generation plants in its jurisdiction.’

“While the agreement establishes a centralized process for determining when and where to build new plants, FERC reasonably concluded that the agreement’s purpose is central planning, not central ownership, and that there is nothing about that purpose that compels payments prior to withdrawal.”

About Rosy Lum 525 Articles
Rosy Lum, Analyst for TransmissionHub, has been covering the U.S. energy industry since 2007. She began her career in energy journalism at SNL Financial, for which she established a New York news desk. She covered topics ranging from energy finance and renewable policies and incentives, to master limited partnerships and ETFs. Thereafter, she honed her energy and utility focus at the Financial Times' dealReporter, where she covered and broke oil and gas and utility mergers and acquisitions.