Not So Fast: Texas Staff Say Entergy Action on PPAs Creates New "Obstacle" to Joining MISO; Latest Actions Again Show Superiority of ERCOT Option

Entergy Texas, Inc.'s intention to file at FERC to change the termination language of certain unit purchased power agreements (PPAs) between Entergy Texas, Inc. (ETI) and Entergy Gulf States Louisiana, LLC (EGSL) may change the net costs and benefits of ETI joining MISO, and the finding that MISO membership is in the public interest, while also creating a new "obstacle" to ETI leaving the Entergy System Agreement (ESA), Staff of the Public Utility Commission of Texas warned in comments to the PUCT.

The PPAs relate to certain gas/oil-fired generation facilities formerly owned by Entergy Gulf States, Inc., which in 2007 was split into ETI and EGSL to facilitate the introduction of customer choice to ETI, to be accomplished by ETI joining ERCOT (a plan since abandoned).

Specifically, under the PPAs: (1) EGSL became the owner of the facilities located in Louisiana with an obligation to sell to ETI a portion of those units' capacity and energy equal to ETI's responsibility ratio, priced pursuant to Service Schedule MSS-4 of the Entergy System Agreement (MSS-4) and (2) ETI became the owner of the facilities located in Texas with an obligation to sell to EGSL a portion of those units' capacity and energy equal to EGSL's responsibility ratio, priced pursuant to Service Schedule MSS-4. The PPAs for these legacy gas/oil-fired facilities are priced at cost in order to reflect the ratepayers' investments in these units.

"Critically, the plain language of these PPAs sets forth only two ways that a party may terminate the PPAs: 1) by express written consent of the other party; or 2) by implementation of Retail Open Access in the ETI jurisdiction," Texas Staff said.

However, on December 5, ETI informed Texas Staff of ETI's plan to file at FERC to change the PPAs such that these agreements would now include a new termination clause that, according to Texas Staff, could cause ETI to lose the benefit of the legacy PPAs when ETI exits the ESA.

Additionally, on December 5, ETI informed Texas Staff that the Louisiana Public Service Commission (LPSC) had initiated a proceeding to determine the effects of the Entergy operating companies joining MISO on the PPAs. ETI also informed Texas Staff that it was the LPSC-Staff position that some of the PPAs would terminate upon the Entergy operating companies joining MISO.

Texas Staff further learned that on October 24, 2012, during a public Business and Executive meeting, the LPSC directed the LPSC-Staff, "to commence an expedited review ... of the effects of EGSL and/or [ETI] joining MISO on [certain PPAs] between EGSL and ETI for the oil and gas units owned by Entergy Gulf States, Inc. at the time of jurisdictional separation, in view of the terms and requirements of the [LPSC] Jurisdictional Separation Order."

"Just one day after the LPSC Business and Executive meeting, this [Texas] Commission held an open meeting at which it considered ETI's application to join MISO and the NUS [non-unanimous stipulation]. ETI representatives were present at the October 25th Open Meeting and ETI counsel spoke on multiple issues. ETI did not inform the Commission or Staff at the open meeting of this new LPSC proceeding," Texas Staff said.

On December 5, 2012, the same day ETI informed Texas Staff of the pending LPSC proceeding, LPSC-Staff filed testimony regarding the effect of ETI and the other Entergy operating companies joining MISO on the legacy PPAs. In its testimony, LPSC-Staff asserts that the LPSC order approving the separation of former Entergy Gulf States, Inc. into ETI and EGSL requires termination of certain PPAs if the units are no longer part of the Entergy System dispatch. The LPSC-Staff further testified that if ETI and EGSL join MISO their units will no longer be dispatched by Entergy, thereby terminating these gas unit PPAs.

LPSC-Staff confidentially filed the portions of its testimony providing the LPSC-Staff's estimates of the net financial ramifications of the termination of these PPAs; however, the redacted version of LPSC-Staff witness Stephen J. Baron's testimony states that EGSL makes a net payment to ETI as a result of the PPAs.

"Therefore, if ETI loses the benefit of the PPAs, ETI could lose that net payment," Texas Staff noted.

"This recently revealed proposal to change the PPAs raises a number of significant concerns regarding ETI's compliance with the conditions in the [Texas] Commission's MISO Change of Control Order. At a minimum, Staff believes based upon analyses provided by ETI in Docket No. 40346 that ETI's, Entergy Services Inc.'s and Entergy Corporation's actions create a new obstacle to ETI leaving the ESA. This is directly contrary to the NUS condition that ETI, Entergy Services, Inc., and Entergy Corporation are required to seek a consensual means for ETI to leave the ESA sooner than the 96-month period currently provided in the ESA," Texas Staff said.

"In fact, ETI's, Entergy Services Inc.'s or Entergy Corporations' actions could be interpreted as an attempt to erect a barrier to ETI leaving the ESA altogether," Texas Staff added.

"As such, it raises substantial concerns that ETI, Entergy Services Inc. and/or Entergy Corporation may violate the terms of the Commission's MISO Change of Control Order if any attempt is made to modify any PPA in a way that could harm ETI retail ratepayers. As a result, the transfer of operational control of ETI's transmission assets to MISO would not be in the public interest and ETI's application would be denied," Texas Staff said.

Texas Staff also expressed concern that the potential change in certain PPAs and the ongoing LPSC proceeding may also impact the projected ARR [Auction Revenue Right] allocation to ETI.

"In addition, Staff is concerned that ETI's revelations may have ramifications on the validity of the NUS [non-unanimous stipulation approving ETI's MISO membership] and the Commission's overall conditional public interest finding in Docket No. 40346. In particular, the proposed changes to the ETI/EGSL PPAs could result in a significant change in the cost-benefit analysis for Texas retail ratepayers regarding ETI's transfer of operational control to MISO," Texas Staff said.

Texas Staff said that it relied on the "plain language" of the PPAs, including the termination language limiting termination to the two conditions described above, in negotiating the terms and conditions in the NUS, as well as in concluding that the overall transfer of operational control of ETI's transmission assets to MISO was in fact in the public interest.

"ETI never informed Staff during the pendency of Docket No. 40346 that Entergy Services Inc., ETI, and EGSL intended to attempt to change any PPAs. Staff has asked ETI when the decision was made to seek modification of the PPAs. ETI has not yet provided an answer," Texas Staff said.

"On December 6, 2012, Staff informed ETI that in Staff's opinion any filing seeking to modify the ETI/EGSL PPAs would be a violation of the terms and conditions in the MISO Change of Control Order. On December 7, 2012 ETI informed Staff that the filing will nevertheless be made. ETI has further indicated Entergy Services Inc. (on behalf of ETI and EGSL) will make the filing with FERC in late December 2012 or early January 2013," Texas Staff said.

Texas Staff reiterated that, "Failure to comply with any of these conditions [placed by the PUCT on MISO membership] would result in the denial of ETI's application [to join MISO]."

Furthermore, Texas Staff, "has significant concerns about the timing of these disclosures," concerning the PPAs.

"The fact that ETI waited until December 5, 2012 to inform Staff of both Entergy's plan to seek modification of the PPAs and the pending LPSC proceeding casts doubt on the propriety of ETI's actions in negotiations with Staff and in its representations of the underlying factual circumstances of its MISO application before the Commission," Texas Staff said.

Critically, Texas Staff noted that by December 5, 2012:

• The deadline by which a party may file a motion for rehearing of the PUCT's MISO Change of Control Order had passed;

• ETI had already signed the MISO Transmission Owners' Agreement. Entergy Witness Riley testified in Docket No. 40346 that withdrawal from the MISO Transmission Owners' Agreement is subject to exit fees. ETI stated it does not have an estimate for exit fees for ETI alone, but MISO estimated exit fees for all the Entergy operating companies under specific assumptions ranging from $28-33 million or $30-35 million; and

• LPSC Staff had filed testimony in the pending LPSC proceeding.

Staff requested that the Commission direct ETI to provide additional information, including quantitative data, regarding the impact of the potential termination of the legacy PPAs on several issues, including the cost to Texas customers from any PPA termination, the impact on ARR allocation, and the impact on the overall cost/benefits of joining MISO.

ETI's actions, including Texas Staff's concerns regarding ETI's lack of disclosure and Staff's questioning of the "propriety" of ETI's settlement negotiations, again highlight the pitfalls associated with MISO membership, and that joining ERCOT -- an option not seriously considered in the proceeding -- was the best option for ETI customers.

Already, the minimal physical connection between Entergy and the MISO RTO, and state of Entergy's transmission system, left serious concerns whether a workably competitive wholesale market could develop under ETI's MISO membership, let alone a retail market, should one ever have been introduced. But now, as indicated by Texas Staff's filing, ETI customers' ability to receive the benefits of RTO membership are now threatened by the actions of other jurisdictions who are not concerned with the impact on Texas customers -- namely, the LPSC and FERC.

In contrast, ERCOT membership would have brought ETI wholly within the jurisdiction of the Public Utility Commission of Texas, freeing Texas customers from the whims of a distant RTO, state commissions with competing interests, and a non-representative federal regulator.

Docket: 40979