Arkansas Elec. Energy Consumers v. Arkansas Public Service Com'n

• Citation: 35 Ark.App. 47,813 S.W.2d 263
• Decision Date: 26 June 1991
• Docket Number: No. CA,CA
• Parties: , Util. L. Rep. P 26,094 ARKANSAS ELECTRIC ENERGY CONSUMERS, Appellant, v. ARKANSAS PUBLIC SERVICE COMMISSION and Arkansas Power and Light Company, Appellees. 90-276.
• Court: Court of Appeals of Arkansas

Page 263

813 S.W.2d 263

35 Ark.App. 47, Util. L. Rep. P 26,094

ARKANSAS ELECTRIC ENERGY CONSUMERS, Appellant, v. ARKANSAS PUBLIC SERVICE COMMISSION and Arkansas Power and Light Company, Appellees.

No. CA 90-276.

Court of Appeals of Arkansas,

En Banc.

June 26, 1991.

Stephen N. Joiner, Little Rock, Stephen A. Herman, Washington, D.C., for appellant.

Mary B. Stallcup, Asst. Atty. Gen., Gilbert L. Glover, E.B. Dillon, Jr., Kent Foster, Little Rock, for appellees.

ROGERS, Judge.

This is an appeal from Orders 17 and 18 of the state Public Service Commission in its Docket No. 89-128U. The appellant is Arkansas Electric Energy Consumers (AEEC), a voluntary association of large industrial customers of Arkansas Power and Light Company. ¹ The appellees are the Arkansas Public Service Commission (APSC), Arkansas Power and Light Company (AP & L), which are here to defend the Commission action, and the Attorney General, who participated below but has not filed briefs here.

This case was commenced before the APSC by AP & L on June 21, 1989. AP & L asked the APSC to approve a Stipulation and Settlement Agreement ("Agreement") entered into by AP & L, the Attorney General, and the APSC staff. The Agreement's major provisions address what amounts to a considerable restructuring in the manner and means by which AP & L proposes to conduct its business. The portions of the agreement at issue in this appeal involve the transfer of AP & L's interests in two generating plants to a sibling corporation named Entergy Power, Inc. (EPI) ², a bulk power marketing company owned by AP & L's parent company, Entergy Corporation. ³ The plants are the Ritchie Steam Electric Station Unit No. 2 (Ritchie 2), an oil/gas burner rated at 544 megawatts (MW) of power located near Helena, and the Independence Steam Electric Station Unit No. 2 (ISES 2), a coal burner rated at 842 MW located near Newark. AP & L owns 31.5% of ISES 2, which amounts to 265 MW of generating capacity. The total capacity involved, therefore, is 809 MW.

The ISES 2 capacity has never served Arkansas customers; rather, it was leased by MP & L from the time ISES came on line in December 1984 through December 1989. As of the date of the APSC hearings, it had a remaining useful life of about forty-four years. Ritchie 2 became operational in 1968 and has a remaining useful life of about twenty-seven years.

By the Agreement, AP & L proposed to sell the 809 megawatts of generating capacity to EPI at book value (approximately $171 million) and to have a right to purchase electricity from those plants (to the extent such is not obligated to other EPI customers outside the Entergy system) at cost as needed. Thus, the fixed costs associated with ownership in those generators will be avoided by AP & L.

The Agreement also provides (1) for the transfer of management and operation (but not ownership) of the two generating units of Arkansas Nuclear One (ANO) plant at Russellville to Entergy Operations, Inc. (EOI), a sibling company owned by Entergy Corporation, (2) for recovery of certain deferrals from ratepayers, and (3) for amortization and retention of certain investment tax credits (ITC's).

The points for reversal, as articulated in its brief by the appellant, are:

I. The PSC Staff's Pre-Filing Commitment to Support the Settlement Violated Due Process.

II. The Commission Failed to Consider Fair Market Value [of the plants].

III. The Settlement was not Supported by Substantial Evidence.

On June 22, 1989, AEEC was granted intervenor status, conditioned upon its identifying its membership. A dispute ensued over the issue of identification, but AEEC identified its membership on August 30, 1989, and was granted full status as an intervenor the following day.

A procedural schedule was established by the Commission, bifurcating AP & L's application into two phases, Phase II to deal with the transfer of the ISES 2 and Ritchie 2 plants and Phase I to deal with all other issues. Phase I issues were heard on January 3 and 4, 1990, and Phase II issues were heard on February 9, 12, and 13, 1990. On April 2, 1990, the Commission issued Order No. 17, which granted the application with several modifications. On May 1, 1990, AEEC requested a rehearing and stay of Order No. 17. The request was denied on May 31, 1990. On June 28, 1990, AEEC filed a Notice of Appeal with this Court, seeking review of Order No. 17 and requesting that this Court stay the APSC's order. On July 3, 1990, this Court issued a per curiam opinion which denied the appellant's request for a stay. Ark. Electric Energy Consumers v. Ark. Public Service Comm'n, 31 Ark.App. 217-A, 791 S.W.2d 719 (1990). The Supreme Court denied AEEC's request for review of this Court's stay on September 10, 1990. AEEC filed its abstract and brief on September 12, 1990. AP & L and the APSC filed supplemental abstracts and briefs on October 19, 1990, and AEEC filed its reply brief on November 13, 1990. Oral arguments were heard April 24, 1991.

The voluminous record in this case consists of nearly 4,000 pages, most of which contain the testimony and exhibits of the dozen or so witnesses who testified on the various issues below. Because so much of the parties' disagreement goes to the substance of the evidence, a brief overview of some of the more salient testimony at the hearings below is appropriate. ⁴

R. Drake Keith, President and Chief Operating Officer for AP & L, testified that AP & L was seeking permission to sell the generating plants because the Commission found in a previous rate case that AP & L had 969 MW of "excess generating capacity." Excess generating capacity is that capacity over and above what is required to meet peak system demand, plus a reasonable reserve. Keith testified the Agreement's ultimate purpose was to hold down rates and obviate the need for a rate increase in the near future, except in certain limited circumstances.

According to Keith, the ISES 2 sale would eliminate the need for $23 million in additional revenues, a figure representing the annual lease payments to AP & L from MP & L for the plant. He testified that, according to his company's analysis, AP & L and the rest of the Entergy electric system will not need any additional generating capacity until 2000 or beyond and that, if additional capacity becomes necessary in the interim, combined cycle capacity or cogeneration projects would be less expensive in present net value terms than retaining Ritchie 2 and ISES 2.

Keith testified the proposed cost of the transfer would be $171 million, a figure which represents original cost adjusted to compensate for income taxes netted against the depreciated original cost, with the proceeds to be used to retire high cost securities, thereby reducing AP & L's cost of capital, which would reduce the need for future rate increase. He also pointed out that, by transferring the coal-fired ISES 2, AP & L could avoid the costs of dealing with charges which could be mandated by acid-rain legislation.

With regard to the nuclear management issue, he testified that, by transferring management responsibility for ANO to a nuclear management subsidiary, significant savings could be realized. He emphasized that AP & L will retain control over the nuclear-fired plants. Keith also set forth the reasons why the company wanted authorization to recover deferrals (about $4.4 million) due to the excess capacity adjustment and how, in his opinion, amortization of investment tax credits could positively affect AP & L's net earnings by about $10.9 million without impacting retail rates.

As to Phase II issues, Keith affirmed AP & L's position that sale of Ritchie 2 and ISES 2 would be beneficial to ratepayers over the coming 10 to 20 years. He explained a "rate cap" proposal whereby AP & L rates would be limited in any event to what rates would be if the plants were not sold. Under the rate cap, if ISES 2 and Ritchie 2 were to be transferred, AP & L would keep records, subject to annual PSC audits, reflecting the costs of retaining the units versus savings from selling the units.

As to the cost of transferring the generators, Keith said that it was his understanding that SEC regulations require that transfers between affiliates of public utility holding companies be at cost and that the proposed transfer from AP & L to EPI would be at book value, which is cost less depreciation. Keith also said it was AP & L's position that the company would in all likelihood not need to build additional generating capacity for at least 15 years.

Lee W. Randall, Senior Vice-President of Finance and Administration and Chief Financial Officer for AP & L, addressed, from a management perspective, how the status quo would change if the Agreement is approved and said, in his opinion, that AP & L's customers would benefit.

T. Gene Campbell, Vice-President and Senior Nuclear Executive for AP & L, said there would be potential savings at ANO of about $7.6 million if the Commission decided to allow management transfer to a nuclear management company. On cross-examination, however, he acknowledged that, even without the management transfer, savings of about $2.8 million could also be achieved with modifications in current management practices.

Sandra Hayley, Management Audits Supervisor of the PSC Staff, testified about the proposal to transfer management of ANO to a nuclear management company. She addressed particular safeguards to be accomplished through an ongoing evaluation that could assure that the consolidation of management is in the public interest. Hayley also proposed some changes in the company's Operating Agreement to satisfy regulatory concerns. Essentially, she testified favorably to the Settlement Agreement, provided adequate oversight and documentation of savings could be maintained.

Russell D. Widmer, Senior Technical Policy Analyst of the PSC Staff, testified about two aspects of the settlement, one involving recovery of excess...