Entergy's Eternal Power Struggle: MISO Move Decades in the Making

In a little more than a year, Entergy Corp. will hand over the reins of its electricity transmission business to a regional operator called MISO and then shift its focus entirely to power generation.

The transfer is decades in the making and has been met with quarrels and controversy almost every step of the way. In the end, Arkansas ratepayers should enjoy a small savings, in part because they will no longer be liable for the cost of energy they don’t need.

A regional transmission operator, or RTO, is a nonprofit that coordinates all generators within its footprint, calculates the costs and bids on the power and uses an algorithm to determine which line route will cost ratepayers the least. All of the Entergy Corp. operating companies, including Entergy Arkansas Inc., have been attempting to join an RTO since the late 1990s. Entergy Corp. even made a failed attempt to establish an RTO itself in the mid-2000s. Joining an RTO is important for Entergy for several reasons.

• First, the Federal Energy Regulatory Commission believed it was best for Entergy to have a singular focus: power generation.

• Second, large utilities are frequently accused of bias toward their own generators.

"In the current world, there's always going to be a perception by some parties that the entities that own generators and also own transmission … favor their own generators over other companies'," said Entergy Arkansas President Hugh McDonald.

For example, when Entergy Corp. decided to purchase two power plants belonging to KGen of Houston in 2010, it prompted an investigation by the U.S. Department of Justice's antitrust division, which believed Entergy was trying to abuse its control of transmission lines. The division allowed the $523 million purchase this month, provided that Entergy continue its move to MISO.

• The third, and most urgent matter, is Entergy Arkansas' exit from the infamous "system agreement" with other Entergy operating units. The system agreement has historically forced Arkansas customers to subsidize the cost of generating electricity that they don't need.

This odyssey started in the 1950s when Entergy Arkansas, then known as Arkansas Power & Light, joined with several other Southern utility companies to become part of Midsouth Utilities, which in 1989 became Entergy Corp.

Around the same time, AP&L joined the system agreement.

The agreement "establishes terms and conditions on how the Entergy system plans for its long-term generation and transmission requirements," McDonald said. "There are certain provisions in that contract that set the rules for how certain costs are allocated among operating companies and how other costs are borne by certain operating companies."

It was a smooth operation until, in 1982, FERC allotted Entergy Arkansas 36 percent of the building cost of Mississippi's Grand Gulf Nuclear Power Station.

"It didn't sit well for Arkansas consumers on the decision that FERC made," McDonald said.

FERC's decision resulted in litigation, and McDonald said courts eventually decided that costs among companies in the system agreement needed to be distributed "roughly equally" among them.

That decision was challenged again in 2001. Natural gas prices had spiked, driving up energy production costs in Louisiana and Texas, while Arkansas ratepayers were enjoying the lower costs of coal-fired and nuclear generating plants.

"The Louisiana Public Service Commission said that the system agreement was not working right," McDonald said. "They had never really defined 'roughly equal.' The LPSC complained that 'roughly equal' should mean fully equalized. All the operating companies should be exactly the same on their rates."

Effectively, regions with lower production costs would subsidize more expensive regions. Arkansas' costs were about 30 percent below the average within the Entergy system.

"We — Entergy Corp., and all its operating companies — opposed the LPSC," McDonald said. "We did not believe that allocating all costs on an equal basis across the operating companies' customers was the right thing to do. We thought the customers in the respective states should receive the benefits of costs associated with the investments made in those states."

As FERC began evaluating the LPSC's complaint, Entergy Arkansas began evaluating leaving the system agreement. It's not a small decision: An eight-year notice is required.

"It is a long time," McDonald said. "It's part of the agreement. Any operating company can leave, but they have to give the others eight years' notice. It takes eight years to plan for and build a coal plant."

It took FERC four years to reach a decision on the LPSC's complaint. On Dec. 19, 2005, its "final order" ruled in favor of the LPSC, declaring that costs would be distributed equally among operating companies.

"Every time the Arkansas Commission challenged accusations by FERC, they lost," said Edward Skinner, a utilities lawyer in Arkadelphia. "Finally, Entergy Arkansas said enough is enough."

Sure enough, on the same day, McDonald gave Entergy Arkansas' official notice of leaving the system agreement.

Entergy Mississippi Inc. subsequently gave its exit notice in 2007, and Entergy Texas Inc. is considering its own exit, but Entergy's three Louisiana operating companies are, so far, staying in the agreement.

In 2007, Entergy Arkansas customers began receiving bills that included a charge for "FERC-imposed payments."

"For the first couple of years, we were paying $250 million per year," McDonald said. "We did not see a point in time in the future where customers were not making subsidy payments."

Outside of the system agreement, Entergy Arkansas' options were to stand alone, choose an RTO or create some other pooling agreement. It chose the RTO option, which set a hard deadline of December 2013 — the end of McDonald's eight-year notice — for the entire Entergy Corp. family to finally join an RTO.

"And that place to go is what we've been, essentially, arguing over and litigating for the past three years," McDonald said.

MISO vs. SPP

The choice boiled down to two options. The first, Southwest Power Pool of Little Rock, was already temporary transmission operator for Entergy Corp., having been placed in this position in 2006 after Entergy Corp. failed to create its own RTO.

The second was MISO, the Midwest Independent Transmission System Operator of Carmel, Ind., a much larger company that operates in much of the Midwestern U.S. and Canada.

“MISO got involved in early 2011 when some studies were being done to determine the viability of the Entergy companies joining an RTO,” said Todd Hillman, MISO’s executive director of Entergy region integration.

By the end of 2011, MISO was selected over SPP as RTO of all Entergy companies. Entergy stated this was due mainly to MISO’s larger size and resources, as well as its access to a day-two market.

“They have a day ahead in real-time energy market,” McDonald said. “They will make sure that all the customers that are part of the utilities in MISO will receive the lowest-priced energy within that footprint while at the same time making sure the transmission system remains reliable.”

Southwest Power Pool, naturally, bristled at the decision.

“We’re disappointed,” said Carl Monroe, EVP and COO of SPP. “We think Entergy would be better off joining SPP, and we think their consumers and our consumers would be better off, too.”

Further controversy occurred when the Arkansas Public Service Commission released a set of conditions MISO would need to meet before the move was approved. When MISO filed its reply to the conditions, and the APSC approved of them, SPP didn’t agree.

“It’s always been SPP’s position that the MISO governance procedure wasn’t consistent with condition 13 of the commission’s order this summer,” said Skinner, the utilities lawyer. He has represented SPP in the past.

Essentially, condition 13 requires MISO to give state commissions leverage over its decisions, something Skinner said the Arkansas PSC already had over SPP. When MISO filed its initial response to the conditions, its agreement didn’t quite meet that condition, Skinner said. MISO called for more of an equal authority between the operator and the state commissions.

“It didn’t look to me, independently, that the filing really addresses what the commission wanted in 13,” Skinner said.

SPP filed a complaint before the APSC, but it was rejected. MISO received its last state-level clearance this month. Southwest Power Pool could appeal again, but that doesn’t seem likely. Neither Entergy nor MISO nor the APSC is worried about any further snags in the move.

“Thirty days after the order, the petition for rehearing has to be filed before an appeal can be pursued,” said John Bethel, executive director of the Arkansas PSC. The APSC’s order was filed on Oct. 26.

“But the commission found in its order that Entergy and MISO had sufficiently satisfied its concerns about governance.”

“We feel like we came and did as much as we could in cooperation and coordination of the two parties,” MISO’s Hillman said.

There is still room for opposition to the move at the federal level.

“As a practical matter, I don’t think that there’s a whole lot more that can be done to stop this thing,” Skinner said. “My sense of this thing is that the Arkansas commission found substantial compliance with the conditions imposed on the [move to MISO], and along with the fact that several other adjacent states approved of the proposed [move] … I suspect that FERC would be hard pressed to step back now and say, ‘Oops.’”

SPP may not walk away.

“We really believed that for Entergy and for ratepayers it was better to join SPP,” Monroe said, noting that there still “may be actions taken in order to protect ratepayers and utilities” in the SPP footprint.

‘Work Is Just Beginning’

The MISO move needed to clear the PSC conditions quickly because it will take between 12 and 14 months to make the full transition.

“Moving systems, people, procedures and the testing of systems all has to occur between now and December 2013,” McDonald said.

“A lot of work is just beginning,” said Hillman at MISO. “There are really a series of touch points and signposts along the way to get us toward that December 2013 integration date. The really key milestones tend to be around things like commercial model updates, registration of parties, assuring credit, making sure we understand the units and how to operate them within MISO standards and working with companies on how to best understand how systems are modeled.”

Some of that includes shifting of executives. McDonald said about a dozen new top-level jobs were added during the last year due to the move, but the general employee number at Entergy and MISO shouldn’t change very much.

There was also one other problem Entergy Corp. needed to solve before December 2013 as well: An RTO operates power lines, but it doesn’t own or maintain them, and Entergy didn’t want that responsibility.

In late 2011, Entergy Corp. announced it would divest its 15,700 miles of power lines to ITC Holdings Corp. of Novi, Mich., in a $1.8 billion deal. That part of the story still has a gantlet of regulations to clear, however.

“We made the filing here in Arkansas late last September,” McDonald said. “That case really hasn’t gotten started yet. It will finish sometime in 2013.”

There’s still a question of SPP’s future, too, since it will cease business as Entergy’s temporary RTO in December 2012.

“Having Entergy go to MISO raises questions for SPP just from a business model,” attorney Skinner said. “It’s a major situation that SPP has to consider. It doesn’t mean SPP will go away: It has other companies, other members. But it may limit their ability to expand and grow.”

Monroe at SPP did not seem fazed by the possible changes. SPP is working on its own day-two market, to be implemented by 2014, he said.

As SPP’s business gets smaller, MISO’s footprint will grow by about 30 percent.

As far as benefits to ratepayers, Entergy Arkansas expects to save about $250 million over a period of 10 years due to the MISO move.

On day one, McDonald said, the ITC and MISO deals won’t significantly change bills. Over a longer period, however, the MISO benefits, as well as the end of the FERC-imposed payments, should lower costs, he said. Those payments will end in January 2014.

“Entergy operating companies will be realizing the savings through the wholesale markets,” Hillman said. “In a wholesale, nondiscriminatory type of market, those savings are passed onto ratepayers.”

And the name on the energy bill for Entergy’s current customers in Arkansas?

“We’ll still be Entergy Arkansas,” McDonald said. “We’ll still be a subsidiary of our parent company, Entergy Corp. We’ll just be operating under a different agreement.”

Entergy Arkansas Timeline

1913
Arkansas Power Co. founded by Harvey Crowley Couch.

1914
Couch changes company’s name to Arkansas Power & Light Co.

1949
AP&L joins with Louisiana Power & Light, Mississippi Power & Light and New Orleans Public Service Inc. to create Middle South Utilities.

1951
AP&L enters system agreement, which sets terms and conditions on how Middle South companies plan for long-term generation and transmission, regulated by the Federal Energy Regulatory Commission.

1967
Arkansas Nuclear One announced for construction in Russellville.

1982-84
FERC assigns AP&L 36 percent of construction costs for Mississippi’s Grand Gulf Nuclear Station in Port Gibson, Miss., increasing bills for Arkansas ratepayers. Questions raised on how costs are allocated among companies in the system agreement.

1990s
Middle South Utilities becomes Entergy Corp.; AP&L becomes Entergy Arkansas.

Entergy Corp. determines that transmission elements would be better operated by an independent company. Search for a regional transmission operator begins.

2000-01
Customer rates in Louisiana and Texas driven up due to rising price of natural gas.

2001
Spurred by natural gas prices, Louisiana Public Services Commission enters litigation to declare the system agreement dysfunctional, alleging that production costs of operating companies were not being allocated fairly.

2004
Entergy Arkansas begins considering leaving the system.

2005
Entergy Corp. attempts, unsuccessfully, to form an RTO (regional transmission operator) for the southeastern United States.

Dec. 19, 2005
FERC “final order” determines that production costs outside of certain “bandwidth” to be distributed equally among operating companies. Hugh McDonald, president of Entergy Arkansas, gives eight-year notice of exiting the system agreement.

2006
Southwest Power Pool of Little Rock named as temporary independent coordinator of transmission.

2007
Entergy Arkansas customers begin making equalization payments to other operating companies, appearing as “FERC-imposed payment” on bills. Entergy Mississippi also announces intent to exit system agreement.

April 2011
Entergy Corp. chooses the Midwest Independent System Operator of Carmel, Ind., as its RTO.

May 2011
SPP files protest with Arkansas Public Service Commission against Entergy Corp.’s decision.

July 2011
APSC upholds Entergy Corp.’s decision.

December 2011
Entergy Corp. announces $1.8 billion divestment of its 15,700 miles of transmission lines to ITC Holdings Corp. of Novi, Mich.

August 2012
APSC sets conditions for MISO move.

October 2012
APSC approves of Entergy-MISO move. SPP voices disapproval.

November 2012
Mississippi PSC and New Orleans City Council vote to approve Entergy-MISO move, clearing last legislative hurdle.

December 2012
SPP ends role as independent coordinator of transmission.

Dec. 18, 2013
Date announced for Entergy Arkansas’ official exit from the system agreement.