The U.S. Court of Appeals for the District of Columbia Circuit has agreed with the Federal Energy Regulatory Commission (FERC) that two Entergy (NYSE: ETR) subsidiaries should be allowed to leave a regional energy system agreement without paying exit fees that were not mentioned in the agreement.
A three-judge panel for the D.C. Circuit returned the decision Aug. 14 in a case where the New Orleans City Council and the Louisiana Public Service Commission had requested that the appeals court review an earlier FERC order.
The “Entergy System Agreement” had set up the operating framework for the six Entergy companies serving Arkansas, Louisiana, Mississippi and Texas. The agreement sets forth a rate schedule run by FERC and creates a central process for determining when and where the companies will build new power plants, the court noted.
Each operating company assumes responsibility for the costs of building and operating plants in its area and retains the right to energy produced by their plants. Each party to the agreement must also make any excess capacity available to its sister companies “as a backstop for when demand exceeds self-generated supply,” the court noted.
In 1982, FERC interpreted the agreement to require that the cost of producing electricity be “roughly equal” among the operating companies. But production costs tend to be unequal because the companies use different types of fuel. For example, Entergy Arkansas relies primarily on coal, whereas Entergy Louisiana and Entergy Gulf States rely more heavily on natural gas.
To even things up, FERC requires the operating companies with lower costs to make payments to those with higher expenses, the court said. In 2000, the price of natural gas shot up, sharply increasing the existing cost disparities. So in December 2005, FERC ordered the companies to make payments to offset the difference.
As a result, Entergy Arkansas was required to pay hundreds of millions of dollars annually to the other operating companies. The same day as the FERC order, Entergy Arkansas notified the other operating companies that it intended to withdraw from the agreement eight years later, the earliest it could do so under the agreement’s mandatory notice provision.
In late 2007, Entergy Mississippi also informed the other operating companies that it would leave “eight years hence,” the court said.
On Feb. 2, 2009, Entergy Services submitted formal notices to FERC on behalf of Entergy Arkansas and Entergy Mississippi, stating that they would exit the agreement.
The notices provided that the two withdrawing companies would each operate independently while the other four companies would remain in the system. Entergy Arkansas and Entergy Mississippi would still be able to buy and sell power from the remaining operating companies, but without the preferential treatment the agreement affords, the court noted.
In November 2009, FERC accepted the notices and issues orders concluding that the agreement required no further conditions on the withdrawals.
However, New Orleans and the Louisiana PSC petitioned for the review of the FERC order.
The petitioners argue that FERC misinterpreted the agreement and failed to impose two conditions on Entergy Arkansas and Entergy Mississippi. The petitioners claim a company may not leave without compensating the remaining companies for the assets it takes. Even after leaving, the withdrawing company must continue making “rough equalization” payments to its former partners, they argue.
Court finds no obligation aside from 8-year notice
“FERC found no such conditions in the Agreement, and we hold that its view is reasonable,” the appeals court said. The court said any company may end its participation by providing 96-months, or eight years, written notice. FERC held that the agreement places no explicit conditions on the exiting companies aside from the notice.
The petitioners argued that the agreement’s “purpose” requires that the withdrawing companies leave behind the “assets built for the System” or pay for the assets they take with them. This argument, however, failed to convince the court.
“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,” the court held.
The court also found the petitioners’ other arguments unpersuasive.
“Our decision today reaches only the obligation of withdrawing Companies under the Agreement. As FERC noted, it must still review the post-withdrawal arrangements to ensure that they are just, reasonable, and not unduly discriminatory,” the court said.
D.C. Circuit Case No. 11-1043: New Orleans City Council and Louisiana PSC v. FERC.