As the only “local” utility regulator in the four-state Entergy system, the New Orleans City Council often finds itself in the position of being the tail that wags the dog. Regulating a utility giant ranks among the most far-reaching powers that council members have. They guard that authority jealously.

Major decisions by Entergy Corp. and its various subsidiaries often get rubber-stamped by statewide regulators in Louisiana, Texas, Arkansas and Mississippi, but those same decisions get put under an electron microscope in New Orleans. That frustrates Entergy executives — and some self-proclaimed “reformers” who want to transfer local utility regulation back to the Louisiana Public Service Commission (LPSC).

Supporters of local regulation say the council’s regulatory authority is the only thing standing between New Orleans ratepayers and significantly higher utility bills. It doesn’t happen easily.

Utility regulation at City Hall is an intricate — and intensely political — dance. Council members know they can’t squeeze the utility too much lest it become insolvent. They also are constantly looking over their shoulders at restless voters, who want the lowest rates possible.

Most of the time, the relationship between the council and Entergy New Orleans (ENO), the local subsidiary, is cordial. Sometimes, particularly when ENO makes decisions that put the interests of its parent company in conflict with the interests of local ratepayers, the council flexes its regulatory muscle. This can take the form of calling utility execs before the council Utilities Committee, subpoenaing documents, or even taking the company to court.

On rare occasions, as happened on Nov. 21, the council exercises its nuclear option: a prudence investigation of the utility’s decisions.

That is, the utility must demonstrate that it 'went through a reasonable decision making process to arrive at a course of action and, given the facts as they were or should have been known at the time, responded in a reasonable manner.'

A prudence investigation is the regulatory equivalent of a declaration of war. It gives the council authority to examine documents and decisions that otherwise would not be subject to public review — and if the council deems decisions by the utility to be unreasonable or imprudent, the council can spare ratepayers from any adverse economic impact.

In some ways, it's like taking the utility to court — only the council gets to be judge and jury. This is not something the council does lightly. In the past 30 years, the council has conducted only three prudence investigations; each time, the investigation led to huge savings for local ratepayers — after a protracted, bitter fight with the utility.

Entergy doesn’t shrink from the fight. In the 1980s, when the council questioned the prudence of Entergy’s predecessor agreeing to pay a significant portion of the cost of an expensive nuclear power plant in Mississippi, the company sued each council member — individually — for $1 billion. A federal judge ultimately dismissed the suit, but it showed the company’s willingness to play hardball. Current council members should expect no less pressure this time.

The council’s latest volley against Entergy is two-fold:

• It will investigate the prudence of ENO voting to reduce the amount of advance notice required for Entergy subsidiaries to withdraw from a decades-old “System Agreement” designed to equalize costs and benefits among the subsidiaries and their ratepayers.

• It will investigate the prudence of ENO’s decision to join a statewide “transmission pricing zone” (TPZ) rather than put New Orleans into its own, separate TPZ if Entergy Corp. sells off its vast transmission network to an unregulated third-party company. That proposed sale has not been approved by any of Entergy’s regulators.

By putting ENO into a statewide TPZ, Entergy effectively would place transmission costs — and decisions — beyond the council’s regulatory reach. The council and its utility advisors say that would be disastrous for local ratepayers, but great for Entergy Corp. stockholders.

If those sound like complex, technical issues, they are. They also have the potential to profoundly affect local utility bills.

“The city went through a major decision in the 1980s when we decided to take utility regulation back from the LPSC,” says Councilmember Cynthia Hedge-Morrell, who chairs the council Utilities Committee. “If Entergy’s transmission lines are sold, we have to make sure we’re in an equitable place in terms of regulating the utility company and in terms of what local ratepayers pay.”

Hedge-Morrell added that the System Agreement has brought significant benefits to local ratepayers by attempting to equalize costs among the various Entergy subsidiaries. Years ago, however, Entergy subsidiaries in Arkansas and Mississippi, which generate electricity more cheaply than their counterparts in Louisiana, moved to withdraw from the System Agreement. The agreement allowed those withdrawals — but only after 96 months (eight years) advance notice. That much notice gives the remaining companies time to adjust. (Arkansas’ withdrawal will become effective later this month; Mississippi’s, in November 2015.)

In September, ENO voted with other Entergy subsidiaries to amend the System Agreement by reducing the notice requirement from eight years to five years — after the council expressly and repeatedly asked ENO not to approve such an amendment. The amendment favors Entergy’s subsidiary in Texas, which has since given notice it too will leave the system.

The council’s utility advisors say the amendment needed a unanimous vote and that ENO could have prevented the change on behalf of its customers. Charles Rice, ENO’s president, says only a majority vote was needed, which begs the question of why he wouldn’t just vote “no” anyway.

Rice cites a clause in the System Agreement that provides for decisions by majority vote. Washington-based attorney Clint Vince, who has been advising the council on utility matters for 30 years — and who steered the council through its first three prudence investigations — points to a more specific clause in the agreement stating that it can only be amended by a unanimous vote, and in writing, which makes Rice’s “yes” vote on the amendment a crucial factor.

“For 50 years we’ve had a system agreement, and we benefited from that,” Hedge-Morrell says. “With that agreement dissolving because Arkansas and Mississippi are pulling out soon, and now with Texas wanting to pull out in five years, it puts us in a very precarious place. We need to make sure local ratepayers in the future are not penalized.”

As Entergy’s System Agreement was dissolving, the company moved to join an even larger system known as MISO — Midcontinent Independent System Operator Inc. MISO is an independent, non-profit organization designed to pool the transmission capabilities of its member companies at rates that are lower than the companies could provide on their own, with savings passed on to ratepayers.

The City Council joined other Entergy regulators in approving the move to MISO. However, none of Entergy’s regulators in the four states in which it operates has approved the proposed sale of Entergy’s transmission lines to ITC Holdings, which is the nation’s largest independent electricity transmission company. Like Entergy, ITC is publicly traded. Unlike Entergy, it is not subject to City Council regulation.

As part of the proposed sale to ITC (which all of Entergy’s regulators must approve beforehand), Entergy’s subsidiaries in each state would form single, statewide “transmission pricing zones” to spread the costs of building and maintaining transmission lines — all of which would be owned by ITC.

Because New Orleans sits at the geographic “bottom” of the Entergy system and is virtually surrounded by water, ENO has a relatively small transmission grid. The council and its advisors say joining a statewide transmission pricing zone is a bad idea because it could put local ratepayers on the hook for improvements in other parts of the state that would not benefit New Orleanians.

“Preventing New Orleans from having its own transmission pricing zone and forcing it into a single statewide TPZ is a terrible business deal for local ratepayers, who will be forced to pay dramatically higher costs for transmission, without corresponding benefits,” says Vince.

Casey Roberts, executive director of the Alliance for Affordable Energy, a local utility watchdog group, agrees with Vince. She calls ENO “the red-headed stepchild of the Entergy system” and predicted the MISO, ITC and System Agreement decisions “will increase our energy costs by about $60-$80 million per year with no increase in services or benefit to New Orleans.”

Rice disagrees, saying ENO and its customers derive huge benefits from Entergy’s grid outside the city.

“Because of ENO’s location, it must use the transmission lines of Entergy Louisiana and Entergy Gulf States Louisiana to have access to lower-cost power it receives now,” Rice told GAMBIT. “Because ENO benefits from use of these lines, it is not unreasonable that it share in their costs. Second, we are concerned that if ENO has its own TPZ, it may not be able to handle significant transmission costs by itself if a storm takes out a significant portion of ENO’s transmission system.”

Indeed, after Hurricane Katrina, ENO filed for bankruptcy because of the extent of storm damage to its system. During the bankruptcy process, the council and Vince worked with the company to help bring it back.

On the issue of storm damage, the council’s utility advisors presented the Utilities Committee with an analysis showing Entergy’s costs for storm-related transmission repairs outside New Orleans was four times higher than in the city after Hurricanes Katrina and Rita — because ENO’s grid in the city is so much smaller than Entergy’s statewide grid.

In addition, Vince and Hedge-Morrell note, Entergy currently has 70 transmission projects slated across Louisiana, but only one in New Orleans. “That tilt is clearly not in favor of ENO and its ratepayers,” Vince says.

The sale of Entergy’s transmission grid to ITC is intimately tied to the decision to join MISO. Regulators have approved the MISO move, but not the proposed sale of transmission assets to ITC. As the System Agreement disintegrates, the stalemate over transmission becomes a major sticking point.

For the council, it’s also a matter of local control. If ENO is allowed to join a statewide transmission pricing zone, a major chunk of the council’s regulatory authority will disappear — and voters’ grass-roots campaign to return regulatory authority to the council in 1985 will effectively be overturned.

The council’s only weapon in the face of such a challenge to its continued regulatory authority is a prudence investigation, according to Hedge-Morrell and Vince.

The investigation will include an initial time frame for third parties to intervene in the process and a six-month “discovery” phase. The Alliance is expected to intervene. During the discovery phase, ENO must produce a mountain of corporate documents — some of which are otherwise not subject to council review — to an administrative law judge, who will compile a factual record that will be submitted to the council and its advisors.

Sometime late next year, unless ENO and the council reach a settlement beforehand, the council could rule that ENO’s decisions on the System Agreement amendment and the statewide TPZ were “imprudent” — and thereby deny ENO the right to pass on to ratepayers any higher costs associated with those decisions.

Thus, while the council cannot undo ENO’s decisions, it can make the company eat ratepayers’ higher costs — at the expense of stockholders’ profits. It also can block the sale of Entergy’s transmission lines to ITC.

This fight is going to be long and bruising. No dog likes being wagged by its tail.

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