Entergy Gulf States v. LPSC

• Decision Date: 16 April 1999
• Docket Number: No. 98-CA-1235.,98-CA-1235.
• Citation: 730 So.2d 890
• Parties: ENTERGY GULF STATES, INC. v. LOUISIANA PUBLIC SERVICE COMMISSION.
• Court: Louisiana Supreme Court

730 So.2d 890

ENTERGY GULF STATES, INC. v. LOUISIANA PUBLIC SERVICE COMMISSION.

No. 98-CA-1235.

Supreme Court of Louisiana.

April 16, 1999.

Rehearing Denied May 28, 1999.

L. Richard Westerburg, Jr., Baton Rouge, Stephen Thomas Perrien, Monroe & Lehmann, New Orleans; J. Wayne Anderson, Kathryn J. Lichtenberg, Margot Gallup Augustin, New Orleans, Counsel for Applicant.

Michael R. Fontham, Baton Rouge, Laurie A. Barcelona, Stone, Pigman, Walther, Wittman & Hutchinson, New Orleans; Suzanne Mary Ciaccio, Brian Andrew Eddington, Eve Kahoa Gonzalez, Baton Rouge, Noel J. Darce, New Orleans, Counsel for Respondent.

CALOGERO, Chief Justice.¹

This appeal is taken by Entergy Gulf States, Inc. from a judgment of the Nineteenth Judicial District Court affirming Order No. U-21485 by the Louisiana Public Service Commission in which the Commission directed the appellant Company, based upon the 1994 test year, to refund $9.635 million to its customers and to reduce base rates prospectively by $33.275 million. Challenging the entire $9.635 million refund and $26.850 million of the prospective base rate reduction, the Company has appealed the district court judgment directly to this Court pursuant to La. Const. Art. IV, § 21(E). Accordingly, we now address a multitude of ratemaking decisions adverse to the Company, including the Commission's exclusion from the Company's base rate of certain operations and maintenance expenses, accumulated deferred income taxes, and short-term construction work in progress; the Commission's use of the Consumer Price Index, as opposed to a higher rate of inflation, to determine the future cost of decommissioning a nuclear power plant; the Commission's use of gross, rather than net, proceeds of debt in the Company's capital structure; and the Commission's implementation of adjustments retroactive to the date the Company filed its revenue requirement. Additionally, we address the district court's ruling excluding certain additional evidence proffered by the Company on appeal to the district court.

After a thorough review of the record, briefs, and relevant authorities, we reverse that part of the $33.275 million prospective rate order removing from the Company's Louisiana jurisdictional revenue requirement $6.116 million related to 1994 operations and maintenance expenses incurred to produce savings, and remand the case to the Commission for a determination of the appropriate amortization period for the recovery of these costs. We further reverse the $9.635 million refund order to the extent that it includes $3.643 million related to the revenue annualization adjustment. In all other respects, Order No. U-21485 is affirmed. Additionally, the district court's ruling excluding additional evidence proffered by the Company regarding the proper capital structure to be employed is affirmed.

La. Const. Art. IV, § 21(B) grants the Commission "broad and independent regulatory powers over public utilities." Additionally, La.R.S. 45:1163(A)(1) provides that "[t]he commission shall exercise all necessary power and authority over any ... local public utility for the purpose of fixing and regulating the rates charged or to be charged by... such public utilities." La.R.S. 45:1167 further requires that the Commission promulgate "reasonable and just rules, regulations and orders." Pursuant to these regulatory powers, the Commission has "exclusive jurisdiction, in the first instance, to fix or change any rate to be charged by a public utility." Daily Advertiser v. Trans-La, 92-0988 & 92-1001, 612 So.2d 7, 16 (La.1/19/93) (citing Gulf States Utils. Co. v. Louisiana Pub. Serv. Com'n, 578 So.2d 71, 100(La.1991), cert. denied, 502 U.S. 1004, 112 S.Ct. 637, 116 L.Ed.2d 655 (1991)).

When fixing the rates to be charged by an electric utility, the Commission determines annually the appropriate "base rate," which is the rate charged per unit of electricity. Entergy Gulf States, Inc. v. Louisiana Pub. Serv. Comm'n, No. 98-0881 (La.1/20/99), 726 So.2d 870. The base rate should allow the utility to recoup its revenue requirement, i.e. "sufficient revenues to meet its operating expenses, provide its shareholders with a reasonable rate of return, and attract new capital." Central La. Elec. Co. v. Louisiana Pub. Serv. Comm'n, 508 So.2d at 1365 (La.1987). Mathematically, the utility's revenue requirement is the sum of the utility's operating expenses and its rate of return times the amount of its rate base. Operating expenses include "maintenance, depreciation, and taxes, incurred to produce revenues;" rate base is "the value of the property, plant and equipment (less accumulated depreciation) which provide the service, and on which a return should be earned;" and rate of return is "a percentage figure which, when applied to the rate base, will generate revenues sufficient to cover costs and give investors a fair return on their investment." Id.

In addition to the above Constitutional, legislative and jurisprudential authority, the rate order at issue in this appeal is also governed in part by a previous Commission order, Order No. U-19904 (the "Merger Order"), in which the Commission approved, subject to conditions, the merger of Entergy Corporation ("Entergy") with Gulf States Utilities Company ("Gulf States"), two companies doing business in Louisiana and regulated by the Commission. In the Merger Order, the Commission concluded that the companies' merger was in the public interest partly because Entergy would be able to reduce nonfuel operation and maintenance ("O & M") expenses by restructuring operations and introducing other efficiencies. These cost reductions, or "savings," could then be passed on to ratepayers and investors.

In order to compensate Entergy for the premium it would pay to acquire Gulf States,² Entergy had proposed that these O & M savings be added to the operating expenses recoverable through base rates—over and above the actual expenses experienced by Entergy—over eight years, through an amortization schedule.³ Entergy first proposed that a fixed amount be amortized based on its then-available estimates of anticipated future savings. The Commission Staff was concerned, however, that Entergy's estimates of potential savings were inflated or unrealistic. Accordingly, the Commission rejected Entergy's proposed fixed amortization schedule. Instead, the Commission Staff offered, and Entergy accepted, a different plan in which the actual savings achieved by the Company over an eight year period are calculated using a savings tracker mechanism described in the Joint Regulatory Proposal (the "Proposal"), an appendix to the Merger Order containing conditions to the merger. Pursuant to the savings tracker mechanism, savings are calculated according to a formula comparing base year normalized O & M expenses with future year normalized O & M expenses. To the extent that the merger produces O & M savings in a year, sixty percent of those savings allocable to Louisiana retail operations will be treated as legitimate and prudent expenses are treated, that is, included in any Louisiana jurisdictional revenue requirement based upon that year as a test year. In sum, for seven consecutive post-merger years, the Company may recoup through base rates sixty percent of O & M savings flowing from the merger. The remaining forty percent of merger savings would contribute to lower rates and thereby benefit ratepayers. By this agreement, the Commission noted that:

Entergy literally is putting its money where its mouth is, relying on its own ability to cut costs as the means to collect the premium. This decision is credible evidence that Entergy expects to produce savings; it also provides a substantial incentive to Entergy to fulfill its predictions.

In view of these facts, the Commission concludes that Entergy will achieve nonfuel operation and maintenance cost reductions in its operation of GSU. For Entergy to collect the full amount it originally wished to amortize, it will have to exceed its predictions.

L.P.S.C. Order No. U-19904 at 73.

To ensure that savings and other cost reductions are in fact passed on to ratepayers for an eight year period, the Proposal outlines an annual earnings review procedure. Under that procedure, the Company files with the Commission a Louisiana jurisdictional revenue requirement analysis based on data for the previous calendar year, or "test year." The Proposal further provides that, following the initial filing based on the pre-merger test year (1993), the Company must file, within five months after the end of each of the next seven post-merger calendar years, a Louisiana jurisdictional revenue requirement analysis based on data for the respective test year.

The Proposal further requires that the following principles apply to the annual savings and rate review:

a) The cost of equity will be reviewed no less frequently than every other year. Any party can request a change in the approved cost of equity in any annual review. All other cost of capital components will be reviewed annually;

b) The Company will not be allowed to defer O & M expense for the purpose of computing savings under the [the O & M savings tracker] mechanism ...;

c) The Commission shall retain the right to review the accounting practices of the Company to ensure that they are consistent with [Generally Accepted Accounting Principles] and sound regulatory principles and practices; and

d) The Commission shall retain the right to review the prudence of capital expenditures consistent with traditional regulatory principles.

The Commission reviews each filing, makes appropriate adjustments, and issues a rate order. The order on appeal, Order No. U-21485, is the rate order issued by the Commission following the second annual review of the Company's earnings.⁴

The Company timely filed its second annual Louisiana jurisdictional revenue requirement analysis on May 31, 1995 based on a test year ending December 31, 1994....