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January 1998 EAI is a subsidiary of Entergy Corp., a registered holding company under the Public Utility Holding Company Act. In addition to EAI, Entergy owns four other regulated electric utilities and a wholesale generating subsidiary whose sole asset is the Grand Gulf Nuclear Station. On October 24, 1996, EAI filed an application with the PSC to estructure its retail rates in anticipation of the introduction of retail competition in Arkansas. To facilitate the transition to competition, EAI proposed a seven-year rate freeze, with any excess revenues earned by EAI to be used to accelerate the amortization of the Arkansas Nuclear One Facility. In addition, EAI proposed to accelerate the amortization of its portion of the Grand Gulf facility. Under the EAI proposal, all pre-1996 embedded investments in nuclear plants would be paid at the end of the seven-year period. The staff objected to the EAI proposal and noted that there was little reason to recover all potential stranded costs prior to the time the costs are actually stranded. In addition, the staff stated that EAI has not established a legal entitlement to the recovery of stranded costs. However, the staff stated that it was likely that some portion of EAI’s costs may become stranded. Therefore, the staff proposed the creation of the TCA which would receive funds from certain of EAI’s earnings. These funds would not be used until the PSC determined EAI’s stranded costs. Subsequently, most of the parties to the proceeding entered into a stipulation which contained the staff’s TCA proposal. Under the stipulation, EAI will reduce retail rates by approximately $155 million in 1998 and $62 million in 1999. After 1999, EAI’s base rates will be frozen until July 1, 2001. The rate freeze will give EAI the opportunity to earn more revenue than it would under traditional ratemaking because, under traditional rate making, EAI’s retail rates would be lower during this period. EAI’s excess earnings from this period will be placed in the TCA and will be subject to the PSC’s future rulings on EAI’s stranded costs. The stipulation states that EAI can only utilize the TCA funds if the PSC makes all of the following determinations: EAI has taken all necessary steps for the commencement of retail competition; EAI has taken all reasonable stranded cost mitigation measures; EAI has verified and quantified its stranded costs; EAI is entitled to recover some or all of its stranded costs and this recovery is in the public interest; and retail competition is available in EAI’s service territory. The stipulation also provides that if no date has been established for commencement of retail competition by December 31, 2001, funds will no longer be placed in the TCA. In addition, if by December 31, 2003, no date for retail competition has been established, the ratepayers will receive the monies in the TCA. The stipulation states that EAI will request FERC to permit it to accelerate the amortization of EAI’s portion of the Grand Gulf facility. This acceleration of amortization is intended to address the potential stranded costs resulting from this facility. The monies necessary to fund this acceleration will come from two sources: rates from the Grand Gulf facility will be frozen at 1998 levels and $21 million in previously scheduled rate reductions will be deferred. Currently, the rates charged to EAI for the Grand Gulf facility decline each year as the book value of the plant is reduced. In its December 12, 1997 order, the PSC approved the proposed stipulation but noted that the stipulation gives the PSC control over the TCA but does not limit EAI’s ability to recover additional stranded costs from Arkansas ratepayers through a subsequent application to the FERC. Secondly, the PSC noted that, under the FERC approved Entergy System Operation Agreement, costs of the Entergy System shift among Entergy’s operating utilities based on the utility’s load. The PSC stated it was concerned that, if a state served by another Entergy company instituted retail competition prior to Arkansas and that operating company lost load as a result of retail competition, Arkansas ratepayers could be responsible for more costs of the Entergy System pursuant to the Entergy System Agreement. Under such a scenario, EAI would be responsible for increased costs and, therefore, EAI may not earn the additional revenues needed to offset its future stranded costs. The PSC stated that, if either of these events occurs and the benefit of the stipulation to the Arkansas ratepayers is diminished, the PSC reserves the right to terminate the TCA or to take other actions, including lowering EAI’s retail rates to provide redress for EAI’s ratepayers. Pursuant to the stipulation, the PSC also stated that it would open four generic proceedings to investigate retail competition and that it would submit a report to the Arkansas General Assembly by October 1, 1998.
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