Background. Entergy Corporation ( Entergy ) generates, transmits, and delivers electricity to

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1 IN THE MATTER OF A SHOW CAUSE 1 ORDER AGAINST ENTERGY ARKANSAS, ) INC. REGARDING THE PURCHASE BY 1 ENTERGY LOUISIANA, INC. OF THE 1 PERRWILLE ELECTRIC POWER PLANT ) LOCATED NEAR MONROE, LOUISIANA 1 DOCKET NO U ORDERNO. 1 SHOW CAUSE ORDER Background Entergy Corporation ( Entergy ) generates, transmits, and delivers electricity to 2.6 million utility customers in Arkansas, Louisiana, Mississippi, and Texas through its wholly-owned retail electric utility subsidiaries: Entergy Arkansas, Inc. ( EAI ), Entergy Gulf States, Inc. ( EGSI ), Entergy Louisiana, Inc. ( ELI ), Entergy Mississippi, Inc. ( EMI ), and Entergy New Orleans Inc. ( ENOI )(collectively, the Entergy Operating Companies or EOCs ). Entergy is a registered public utility holding company under the Public Utility Holding Company Act of Entergy s wholesale transactions are regulated by the Federal Energy Regulatory Commission ( FERC ). The retail rates and other activities of the EOCs are regulated by the state utility commissions and the City of New Orleans ( CNO ). EAI is a retail electric public utility serving retail electric customers in Arkansas subject to the jurisdiction and regulatory authority of the Arkansas Public Service Commission (the Commission ). ELI and EGSI are retail electric public utilities serving retail electric customers in Louisiana subject to the jurisdiction and regulatory authority of the Louisiana Public Service Commission ( LPSC ) and CNO.

2 Page 2 of 8 The Entergy System Agreement ( System Agreement ) is a FERC-jurisdictional agreement that allocates certain costs among the EOCs. EAI s participation in the System Agreement has embroiled it, and this Commission, in protracted litigation before the FERC and state and federal courts for over twenty years. Two related complaints filed at the FERC by the LPSC have resulted in decisions adverse to the interests of EAI s Arkansas ratepayers, and those clear examples of System Agreement injuries to Arkansas ratepayers now compel this Commission to initiate this Show Cause Order in an effort to protect EAI s ratepayers from further harm associated with EAI s participation in the System Agreement.] Applicable FERC Precedents In 1985 the FERC issued its Opinion No. 234 in the Grand Gulf Nuclear Generation Plant ( Grand Gulf ) System Agreement case*, in which the LPSC sought to shift Grand Gulf costs from Louisiana ratepayers to Arkansas ratepayers. In this case, primarily owing to the extremely high costs associated with bringing the Grand Gulf plant on-line, the FERC ultimately concluded that the cost of electric power production for each EOC was inequitably disparate among the EOCs. To correct the perceived inequitable disparity of production costs, the FERC amended Entergy s Unit Power Sales Agreements ( UPSA ) in such a way as to allocate 36% of the Grand Gulf costs to EAI s Arkansas ratepayers and to achieve what the FERC described as rough I APSC Docket No U was initiated on February io, 2004, for the purpose of investigating EAI s continued participation in the Entergy System Agreement. 2 Middle South Energy, Inc., 31 FERC 161,305, reh g denied, Opinion No. 234-A, 32 FERC 761,425, affd in part sub nom Mississippi Industries u. FERC, 808 F.2d 1525 (D.C. Cir. 1987); Opinion No FERC 761,238 (i987),reh g denied, Opinion No. 292-A, 42 FERC 761,091 (1988), affd sub nom. City of New Orleans u. FERC, 875 F.zd 903 (D.C. Cir. 1989), cert. denied 494 U.S (1990). 3 As filed, the UPSA allocated Grand Gulf costs to ELI, EMI, and ENO, with no costs assigned to MI.

3 Page 3 of 8 production cost equalization. The key justification for this decision was the FERC s finding that, under the System Agreement, all generation units on the Entergy System, including Grand Gulf, were planned and constructed not for the benefit of individual EOCs but for the Entergy System as a whole. Accordingly, although Grand Gulf was planned for and constructed primarily for the benefit of the ratepayers of Mississippi and Louisiana, the FERC required M S Arkansas ratepayers to help pay for the costs of Grand Gulf and the power it produced - power that EAI s ratepayers did not need, did not want, and for which they were not contractually obligated to purchase. Then, in a subsequent System Agreement case4 initiated by the LPSC in 2001, a FERC Administrative Law Judge (the AW ) issued a decision on February 6, 2004, in which he concluded that production costs among the EOCs were no longer in rough production cost equalization. In order to mitigate the perceived inequitable production cost disparities among the EOCs, the AW imposed an over/under production cost bandwidth remedy5 that will require EA1 to provide compensation to Louisiana. The ALJ also ruled that the full costs of another very expensive non-arkansas generation plant, the Vidalia Hydro-Electric Generation Plant ( Vidalia ) located in Vidalia, Louisiana should be included in the calculation of ELI S production costs, which, in conjunction with the application of the over/under bandwidth remedy, means that EAI s ratepayers will be required to help Louisiana pay for Vidalia. The AW s decision was premised upon the FERC s 1985 Grand Gulf precedent, Le., that by operation of the System Agreement, all generation units on the Entergy System, including Grand Gulf, FERC Docket No. ELoi The ALJ imposed a +/- 7.5% annual maximum bandwidth deviation from the system average production cost designed to work in tandem with a +/- 5% 3-year rolling average bandwidth.

4 Page 4 of 8 were planned and constructed not for the benefit of individual EOCs but for the Entergy System as a whole. Based upon preliminary estimates, EAI s Arkansas ratepayers will be required to pay approximately $25 million per year for Vidalia, increasing to $40 million annually by the year If the AW s decision is not overturned on appeal, MI S Arkansas ratepayers, as was the case with Grand Gulf, will once again be required to help pay for another expensive electric generation plant located in another state. This will be the result, even though the Vidalia capacity has never been needed in Arkansas, nor was the Vidalia capacity ever intended for the benefit of Arkansas ratepayers. The history of the Vidalia plant demonstrates that it was planned and constructed solely for the benefit of Louisiana ratepayers, and that the LPSC played a key role in directing both the execution and pricing of the contract by which ELI agreed to purchase the Vidalia power. Because the Vidalia contract was strictly a Louisiana deal, the contract was never submitted for review and approval by this Commission.6 Given the FERC s interpretation of the System Agreement as applied in both the Grand Gulf case and most recently by the ALJ in the case of Vidalia, combined with the AW s imposition of an over/under bandwidth remedy, it is imperative that this Commission take all necessary actions7 to protect EAI s ratepayers from future decisions by Entergy or its EOCs. Absent this Commission s intervention, Entergy s or one of its 6 APSC Docket No U was initiated on April 9,2004, for the purpose of investigating ELI s Vidalia contract. 7 This Commission is currently appealing the AW s decision to the full FERC. If its appeal to the full FERC is unsuccessful, this Commission has stated that it will appeal this decision all the way to the United States Supreme Court if necessary. This Commission has also initiated an investigation into EAI s continued participation in the System Agreement (Docket No u), as well as an investigation into ELI s Vidalia contract (Docket No U).

5 Page 5 of 8 EOC s unilateral generation acquisition decisions could once again lead to Arkansas ratepayers being required to help pay for the costs of uneconomic power plants constructed in another state and/or the costs of uneconomic power contracts executed by an EOC other than EAI, neither of which was ever intended for the benefit of Arkansas. The Perryille Electric Power Plant The Perryville Electric Power Plant ( Perryville ) is a 718 MW natural gas-fired plant which includes a 562 MW combined cycle generation unit and a 156 MW simple cycle generation unit. Perryville is located near Monroe, Louisiana, and is owned by Perryville Energy Partners LLC ( PEP ), a subsidiary of Cleco Corporation ( Cleco ). Entergy announced on January 28, 2004, that ELI has signed a Purchase and Sales Agreement ( PSA ) to acquire Perryville from PEP for $170 million, or $237 per KW. Perryville will be owned 100% by ELI. In addition, Entergy and PEP executed a Power Purchase Agreement ( PPA ) through the date of the acquisition s close for 100% of the output of Perryville. The signing of both agreements follows a voluntary Chapter 11 bankruptcy filing by PEP. According to Entergy s news release announcing the Perryville acquisition, the PSA and the PPA are subject to approval by the bankruptcy court, and various regulatory agencies. EA1 subsequently advised that approval authorization must be secured from the LPSC and the Federal Energy Regulatory Commission ( FERC ). As a part of its evaluation, the FERC will also conduct a market power evaluation regarding the proposed transactions. EA1 also indicated that ELI may seek the concurrence of the

6 Page 6 of 8 City of New Orleans ( CNO ) since ELI has some retail customers within the regulatory jurisdiction and authority of CNO. EA1 has given no indication that the proposed transactions will be submitted to this Commission for review and approval. The news release further states that Entergy intends to use power produced by Perryville to meet the needs of regulated customers primarily in Louisiana with 25% of the Perryville output to be sold to ELI retail customers and 75% to be sold to EGSI retail customers under a PPA. According to Entergy, the purchase of the plant, expected to be completed by December, 2004, is contingent upon obtaining necessary [regulatory] approvals... of all matters, including full cost recovery, giving consideration to the need for the power and the prudence of ELI and EGSI engaging in the transaction. Conclusion Given the FERC s interpretation of the System Agreement, as applied in the case of Grand Gulf and Vidalia, combined with the AM s imposition of the overlunder bandwidth remedy in the Vidalia case, this Commission is concerned that MI S Arkansas ratepayers may ultimately be required to pay for yet another Louisiana generation plant, i.e., the Perryville plant, which is not intended to be used to supply any of EAI s electricity needs and has not been suggested by any party to be either needed by, or beneficial to, MI S Arkansas ratepayers. In Order No. 1 of Docket No U at pages 10-11, issued on February io, 2004, this Commission expressed its concerns as follows: In addition to the immediate negative impact of Vidalia on EAI s ratepayers, the Commission is deeply concerned that, in the future, the

7 Page 7 of 8 responsibility for other uneconomic high cost generation plants or capacity contracts may again be shifted from other EOCs to EA1 and its Arkansas ratepayers. Such costs may result from future decisions made in other jurisdictions, e.g., Vidalia 11, or costs that have already been incurred in other jurisdictions of which this Commission is not yet aware. In 1985, when this Commission reluctantly agreed to a settlement which allowed the partial pass-through of Grand Gulf costs in MI S retail rates, it was believed that Grand Gulf would be a onetime hit. However, unbeknownst to this Commission, in 1985, the LPSC had already set into motion the regulatory approvals that would result in Arkansas ratepayers now being required to pay 25% of the costs of the Vidalia contract. It is now apparent, because of EAI s participation in the Entergy System Agreement, and the Presiding Judge s application of an over/under production cost bandwidth remedy, that Arkansas ratepayers may be exposed to unknown future costs over which this Commission has no control. Accordingly, it is imperative that this Commission issue this Show Cause Order. Jurisdictional Authority MI is an Arkansas electric public utility as defined in Ark. Code Ann ioi(9) and, thus, subject to the supervisory and regulatory jurisdiction and authority of this Commission. This Commission has jurisdiction and authority over this matter pursuant to, but not limited to, the provisions of Ark. Code Ann , , and Rule of this Commission s Rules ofpractice and Procedure. Show Cause For the reasons set forth hereinabove, EA1 is hereby directed: (1) to show cause why this Commission should not issue an order requiring EM to indemnify, or hold- harmless, its retail ratepayers from any adverse financial effects to which they may be exposed as a result of ELI S acquisition of the Perryville generation facility; or (2) in the alternative, to establish by clear, persuasive, and substantial evidence that the Perryville acquisition will produce economic benefits for MI S retail ratepayers.

8 Page 8 of 8 Pursuant to Rule of this Commission Rules ofpractice and Procedure, EA1 shall file its answer to this Show Cause Order within twenty (20) days after the date upon which this Order is entered. An appropriate procedural schedule for this Show Cause proceeding will be established by subsequent Order of the Commission. BY ORDER OF THE COMMISSION. This lbwday of April, I hereby certify that the following order issued by the Arkansas Public Service Comm,sson has been served on all parties of record ttiis :idle by :he U S mail with postage prepad using the address of each party as indicated in the offmi docket tile Secretary of tb Commission Date 4-3, "0 -Ucf &cf7- Sandra L. Hochstetter, Chairman Daryl E. Bassett, Commissioner n Randy Bynum, Commissioner Secretary of the Commission