Commissioner James Danly Statement
December 23, 2022
EL18-152-001
I dissent from today’s order[1] that affirms in part and modifies in part the Initial Decision issued by the Presiding Judge in the captioned proceeding.
We are essentially asked to abrogate a contract, a request that has been styled as a complaint by the Louisiana Public Service Commission (Louisiana Commission) in which the Louisiana Commission alleges that System Energy Resources, Inc. (SERI) and Entergy Services, Inc. (Entergy Services) violated the filed rate and the Commission’s ratemaking and accounting requirements in billing the costs of the Grand Gulf Nuclear Power Station’s (Grand Gulf) lease renewals (collectively, Lease Renewal) through the Unit Power Sales Agreement (UPSA) formula rate.[2] The majority concludes that, while the formula in the UPSA is the filed rate, inputs, such as the Lease Renewal payments, are not the filed rate; therefore—so the reasoning goes—the majority is free to order refunds as to the inputs.[3] By disallowing payments under the Lease Renewal and refusing to recognize it as an extension of the Original Sale-Leaseback Agreement, the majority effectively abrogates the various agreements. Everyone unfortunate enough to be operating with a Sale-Leaseback Agreement that includes a renewal option should take note. I would not be surprised if today’s order sounds the death knell for such arrangements going forward.
Before addressing the merits of this particular case, I would be remiss if I did not ask why we are involving ourselves at all. The Commission routinely declines to exercise primary jurisdiction over contract disputes, and I would have done so here. Courts are perfectly capable of adducing the necessary evidence and ruling on the merits of claims sounding in contract. Given the history of this proceeding, I can only imagine that judicial action would have led to a swifter resolution of this case. This proceeding has languished before the Commission for over four years,[4] with briefs on exception to the Initial Decision pending for two years.[5]
To the merits: having staked its position that the Lease Renewal is not a continuation of the Original Sale-Leaseback Agreement, the majority concludes that SERI should have sought Commission approval for the Lease Renewal pursuant to FPA section 203(a)(1)(D).[6] I disagree.
In 1988, SERI entered into the Original Sale-Leaseback transactions regarding Grand Gulf for an initial term expiring in 2015. FPA section 203(a)(1)(D)[7] was enacted in 2005 after execution of the 1988 Original Sale-Leaseback Agreement. As part of the original 1988 transactions, SERC transferred ownership of that asset to the new owners, and the lease extension in 2015 did not provide for SERI to reacquire any ownership in those assets.
Nevertheless, the majority now determines that SERI was required to seek prior authorization under FPA section 203(a)(1)(D) before entering into the Lease Renewal, which it unaccountably describes as a stand-alone lease. The majority “disagree[s] with SERI that the Lease Renewal should be considered part of the Original Sale-Leaseback.”[8] According to the majority, “[t]he Lease Renewal was not simply an extension of the Original Sale-Leaseback under the terms of that agreement, pursuant to, for example, an evergreen clause; rather, after a dispute arose about the fair market rental value of the Leased Assets for a three-year rental term and Owner-Lessors commenced a September 26, 2013 action in a California court to resolve this issue, SERI and the Owner-Lessors altered the terms of their negotiation and executed new lease instruments that memorialized a new lease term as well as the amounts and frequency of the new rental payments.” [9] “[G]iven these changes,” the majority finds that “the Lease Renewal did constitute a lease that required authorization under FPA section 203(a)(1)(D).”[10]
The Presiding Judge found otherwise stating that given the “absence of any actual disposition of ownership of generating facilities, section 203 of the FPA does not apply to these transactions and Commission approval under that provision is not required for SERI to engage in them.”[11]
As to FPA section 203(a)(1)(D), the majority is wrong. The Lease Renewal was an extension of the Original Sale-Leaseback Agreement, which expressly provided for SERI to renew the term “for one or more periods of three years or such shorter period as shall extend to the expiration of the License.”[12] Ultimately, the parties agreed upon an extension of 21 years, which is, of course, seven three-year periods. Moreover, upon the expiration of any Renewal Term, the Lessee could also exercise one of several options, including a renewal option in accordance with section 12(b) of the Original Sale-Leaseback Agreement. In that respect, it is more like an evergreen clause than not. The majority’s contention that there was no reason to conclude at the time of a 1991 settlement approved by the Commission related to the Original Sale-Leaseback Agreement[13] that it would continue beyond the 2015 expiration date is belied by the terms of the agreement.
The Original Sale-Leaseback Agreement required SERI to make a decision in 2013 whether or not to relinquish its interest or to renew the lease at a fixed rate or a Fair Market Rental Value rate. The Original Sale-Leaseback Agreement contemplated that the parties would agree as to the Fair Market Rental Value and set forth a process in the event they did not agree. Ultimately, they were able to mutually agree to the renewal term and the Fair Market Rental Value.[14] The fact that they litigated issues until an agreement was reached is of no moment. There was a seamless transition on July 15, 2015, with no gaps in time, at which point the basic term ended, and the renewal term began—all with no actual change in ownership.
The Lease Renewal implements and cross-references key sections 12(b) and 13(a) of the Original Sale-Leaseback Agreement and makes clear that “[a]ll of the other terms and provisions of the Lease and each other Transaction Document shall continue in full force and effect.”[15]
While claiming to be issued pursuant to FPA section 203, in reality, today’s order merely abrogates SERI’s agreements, does so contrary to Mobile-Sierra,[16] and modifies the essential terms of the parties’ agreement. The majority notes[17] that, while its analysis of rate effects under FPA section 203 differs from the analysis under FPA section 205,[18] SERI never submitted a filing pursuant to either FPA section 203 or 205 to recover the costs of the Lease Renewal rental expenses. SERI is directed to either file an FPA section 203 application within 60 days of the issuance of this order or state in its compliance filing when it plans to submit its FPA section 203 application requesting authorization of the Lease Renewal.[19] The order also directs SERI to refile its FERC Form No. 1 to account for the commencement of a separate lease from the Original Sale-Leaseback.[20]
The disallowance of the Lease Renewal payments is unlawful. Perhaps in tacit recognition of the illogic of its FPA section 203 argument, the majority states that, regardless of the Lease Renewal’s classification as a standalone lease or a continuation of the original lease, the Commission would apply its original cost principle to SERI’s recovery of the Lease Renewal payments in the UPSA rates.[21] Finding that there was an acquisition premium in substance without prior Commission approval under FPA section 205, the majority directs, in part, SERI to make refunds for all amounts recovered under the Lease Renewal and the portion of the lease payments that were charged to ratepayers on and after January 1, 2014, that exceeded the payments set forth in the amortization schedule under the Original Sale-Leaseback Agreement.[22] In doing so, the majority gives short shrift to the fact that the accounting principles SERI followed were the result of a 1990 audit that FERC conducted and which led to a settlement in 1991 that the Commission itself approved.[23] According to the order, “[p]ursuant to the 1990 Audit Report[,] SERI was required to treat the Original Sale-Leaseback on its books as a financing (long-term debt) rather than as an outright sale and subsequent lease.”[24] “SERI maintained the same book treatment for the Renewal Lease as the Original Sale-Leaseback, by invoking a re-financing of what remained of the financing under the Original Sale-Leaseback by stretching out the remaining principal payments and changing the interest rates to fit the boundaries of the Lease Renewal rental payments.”[25] The record demonstrates that SERI treated the Lease Renewal in compliance with the terms of the 1991 settlement.
As to why the Commission’s acquisition adjustment policy cannot be applied to the Lease Renewal, SERI argued that there is no direct precedent to support applying the acquisition adjustment principles to a Lease Renewal. SERI also argued that it did not acquire any assets, did not use the Lease Renewal to write-up rate base and did not earn any return on the Leased Assets.[26] According to SERI, the Original Sale-Leaseback involved a true sale as SERI sold a portion of the Grand Gulf plant, leased it back at a negotiated rental rate, and charged customers only for the lease costs.[27] SERI argued that its customers are paying a fair market price in order to continue to receive energy and capacity from the leased portion of the facility; they are not paying twice for the asset.[28] Yet, the majority “find[s] that the Commission’s existing policies are sufficient and appropriate to resolve this issue and agree with the Initial Decision’s finding that the acquisition adjustment policy can apply to the Lease Renewal.”[29] The majority asserts that in order for a utility to receive rate recovery of any amounts related to an acquisition premium, a public utility must request Commission authorization pursuant to section 205 of the FPA,[30] and the majority states that the same holds true here for amounts related to the Lease Renewal.[31] Based on the record, I am not convinced. SERI has explained that this transaction does not involve an acquisition premium and that there is no precedent regarding lease renewals that requires this outcome.
Today’s order is based on flawed factual and legal predicates. I remind the parties that they may engage in settlement negotiations at any time and should do so promptly.
For these reasons, I respectfully dissent.
[1] La. Pub. Serv. Comm’n v. Sys. Energy Res., Inc., 181 FERC ¶ 61,243 (2022) (Order).
[2] La. Pub. Serv. Comm’n v. Sys. Energy Res., Inc., 171 FERC ¶ 63,003, at P 75 (2020) (Initial Decision). The UPSA is between SERI and Entergy Arkansas, LLC, Entergy Louisiana L.L.C., Entergy Mississippi, LLC., and Entergy New Orleans, LLC (collectively, Entergy Operating Companies). An additional Entergy Operating Company, Entergy Texas, Inc., does not purchase Grand Gulf energy from SERI.
[3] Order, 181 FERC ¶ 61,243 at P 148 & n.425.
[4] This proceeding commenced on May 18, 2018 and was filed pursuant to Federal Power Act (FPA) section 206. 16 U.S.C. § 824e.
[5] Sys. Energy Res., Inc., 181 FERC ¶ 61,120 (2022) (order approving partial settlement).
[6] Order, 181 FERC ¶ 61,243 at P 172.
[7] 16 U.S.C. § 824b(a)(1)(D).
[8] Order, 181 FERC ¶ 61,243 at P 173.
[9] Id. (citations omitted).
[10] Id. P 174.
[11] Initial Decision, 171 FERC ¶ 63,003 at P 307; see also id. PP 285-306.
[12] Ex. LC-0012, page 28 of 66.
[13] See Order, 181 FERC ¶ 61,243 at PP 142.
[14] According to SERI, at all times SERI took 100% of the output of the leased portion of the plant, operated the entire plant, retained the obligation to fund and be responsible for 100% of the future decommissioning of the plant and for funding and making all requisite capital additions. See Initial Decision, 171 FERC ¶ 63,003 at P 29. Had SERI relinquished the capacity under the Grand Gulf leases, it would have had to secure replacement capacity and that would have been at a market price.
[15] Ex. LC-0017, page 4 of 33.
[16] United Gas Pipe Line Co. v. Mobile Gas Serv. Corp., 350 U.S. 332 (1956) (Mobile); FPC v. Sierra Pac. Power Co., 350 U.S. 348 (1956) (Sierra).
[17] Order, 181 FERC ¶ 61,243 at P 148 n.426.
[18] 16 U.S.C. § 824d.
[19] Order, 181 FERC ¶ 61,243 at P 176.
[20] Id. P 147.
[21] Id. P 141.
[22] Id. P 147; see also PP 133, 137.
[23] See id. PP 12-14 & n.27.
[24] Id. P 135 (citing Docket No. FA89-28-000, FERC Audit Report, Division of Audits of the Office of Chief Accountant, at Schedule No. 3 (December 21, 1990)).
[25] Id. P 136 (citation omitted).
[26] See id. P 78.
[27] See id. P 109.
[28] See id. PP 152, 157.
[29] Id. P 143.
[30] Id. P 144 (citing Ameren Corp., 140 FERC ¶ 61,034, at P 31 (2012) (citing Duke Energy Moss Landing, 86 FERC ¶ 61,227, at 61,816 (1999)).
[31] Id.