Should Entergy Arkansas’s retail customers pick up part of the tab for a $135 million refund federal regulators ordered the Arkansas entity to pay to other Entergy companies? Last week, a federal judge answered that question with a resounding “no.”
Because energy production and distribution involves multiple layers of regulatory and administrative agencies, the procedural background of this case is somewhat convoluted. Long story short-ish:
- Entergy Arkansas (“EAL”) has a “system agreement” to operate as a pool with Entergy Texas, Louisiana, New Orleans, Texas and Mississippi, which allows each entity to share capacity and access additional capacity as needed. Under this arrangement, costs of power generation and transmission are allocated among the five entities.
- As part of this agreement, EAL and the other entities are allowed to sell certain amounts of excess energy to third parties in what are called “opportunity sales” or “sales to others.” However, the lowest-cost energy in the system has to be allocated to customers and other Entergy companies’ needs (“pool energy”); under section 30.04 of the system agreement, only the highest-cost energy remaining is available for these opportunity sales.
- To ensure that none of the Entergy companies in the pool pay too much or too little, any company whose costs are more than 11% below the pool average pays the other companies to make up the difference. These are called “bandwidth payments.”
- From 2000 to 2009, Entergy Arkansas made opportunity sales to third-party customers, and, for accounting purposes, it treated the energy for these sales as part of EAL’s share of the pool energy, rather than sales to others under section 30.04.
- In 2009, the Louisiana Public Service Commission filed a complaint against Entergy Arkansas with the Federal Energy Regulatory Commission (“FERC”), arguing that EAL’s accounting of these opportunity sales violated the system agreement. FERC found that Entergy Arkansas was authorized to make the sales, but that they violated the system agreement by failing to treat those sales as sales to others under section 30.04.
- Entergy Arkansas and the Public Service Commissions from both Arkansas and Louisiana asked the D.C. Circuit to review FERC’s decision. The D.C. Circuit found that FERC’s decision was reasonable and it was affirmed.
- In late 2018, in compliance with FERC’s orders, EAL paid $135,037,914 to the other Entergy companies, reflecting the difference caused by EAL’s improper accounting of opportunity sales, plus interest. This amount also reflected a credit to EAL in the amount of $13,709,000 for bandwidth payments EAL made to the other Entergy entities.
All of which brings us to the point where the Arkansas Public Service Commission (“APSC”) became Entergy Arkansas’s primary opponent in these proceedings.
In May 2019, Entergy Arkansas applied to Arkansas Public Service Commission for approval of a surcharge that would allow them to recover a portion of the $135,037,914 from Entergy Arkansas’s retail customers. Entergy Arkansas argued they were entitled to 99.9992% based on a percentage in place at the time they made the payment, or, alternatively, that they were entitled to no less than 86.13% based on a retail/wholesale energy ratio used until 2003.
The commission determined that passing these costs to Entergy customers was not in the public interest. Since the wholesale sales were made to third-parties, Entergy Arkansas and its shareholders were solely responsible for any profit or loss from those sales, and retail customers could not be expected to underwrite losses resulting from improper accounting of wholesale transactions.
The Arkansas Public Service Commission also ordered Entergy Arkansas to refund the $13,709,000 bandwidth-payment offset to retail customers. The commission reasoned that Entergy Arkansas’s improper wholesale accounting had caused their production costs to be artificially low, resulting in bandwidth payments from Arkansas to the other Entergy companies, and Entergy Arkansas had already recouped those bandwidth payments from retail customers. Proper accounting would have prevented Entergy Arkansas from making bandwidth payments, and retail customers should not have paid for bandwidth payments that shouldn’t have been made in the first place, the public service commission determined. Entergy Arkansas credited the bandwidth offset — $15,446,957 including interest — to retail customers in August 2020.
It seems reasonable that Entergy Arkansas retail customers shouldn’t be liable for Entergy’s own errors and improper accounting. Who would disagree with that?
Entergy Arkansas, apparently.
About a year after repaying their retail customers, Entergy Arkansas filed an appeal in the U.S. District Court for the Eastern District of Arkansas. They argued, essentially, that the Public Service Commission’s decision was wrong across the board, that Arkansas retail customers should have to reimburse the $135,037,914 paid to the other Entergy companies, and that Entergy Arkansas should also be able to recoup the $15,446,957 in refunded bandwidth-payment reimbursements.
Entergy Arkansas banked on winning this appeal. Their most recent year-end report to the Securities and Exchange Commission included “a $132 million regulatory asset reflecting the expected recovery of a portion of the costs at issue in the opportunity sales proceeding.”
U.S. District Court Judge Brian S. Miller disagreed. On March 7, Miller entered an order affirming that it was Entergy Arkansas and shareholders, not customers, who were on the hook here.
Entergy Arkansas’s opportunity sales “provided little benefit to retail customers,” Miller wrote. “Retail customers did not receive energy from the generating resources that supported the opportunity sales [and] did not pay costs associated with the resources used for opportunity sales.” Additionally, Miller explained, “revenues from the opportunity sales did not go to retail customers [and] capacity that EAL sold through opportunity sales was capacity for which EAL—not retail customers—was responsible.”
In other words, Miller said, “retail customers—who did not benefit from the opportunity sales—should not be required to pay for losses associated with the sales years after those sales concluded.”
Regarding the refund of bandwidth-payment reimbursements, Miller found that Entergy Arkansas’s retail customers “overpaid due to the misallocation of costs associated with the opportunity sales,” and longstanding rules regarding energy rates “do not prevent the APSC from requiring EAL to refund those overpayments to retail customers.”
Miller also said, “The order benefits Arkansas retail electricity customers by preventing EAL from passing approximately $135 million in increased costs associated with the opportunity sales to them and allowing them to recover approximately $13.7 million in bandwidth overpayments.”
Following Miller’s decision, Entergy Arkansas filed an update with the SEC, in which they noted, “As a result of the adverse decision by the U.S. District Court for the Eastern District of Arkansas, on March 12, 2024, Entergy Arkansas concluded that it can no longer support the recognition of” the $132 million regulatory asset they had been carrying on their balance sheet, and they would amend their first-quarter 2024 earnings to reflect this change.
Entergy Arkansas plans to appeal the decision to the Eighth Circuit, according to their recent SEC filing.