ENTERGY SYSTEM ACCOUNTING POLICIES Title: AFFILIATE TRANSACTIONS Effective Date: September 15, 2007 Prepared by: Jennifer Goodlett Reviewed by: Lee Canova and Lyn Rouchell Approved by: Theo Bunting I. POLICY SUMMARY This policy sets forth the billing and payment requirements for transactions between any Entergy affiliated companies, whether regulated or non-regulated. This policy provides basic guidance on the billing methodologies based on compliance requirements set forth by federal, state, and local rules, regulations, and agreements. Affiliate rules issued by regulatory agencies, including the Federal Energy Regulatory Commission (FERC) and settlement agreements with retail regulators, govern interactions between regulated and nonregulated Entergy Corporation affiliates. Cross References: employees that are contemplating an affiliate interaction should also refer to the following policy: Entergy System Policies & Procedures: Affiliate Interactions. Inquires regarding affiliate transaction billing questions should be directed to IntraSystem Affiliate Billing (ISABill) by calling the Accounting Help Line at 1-866-576-7400 and choosing option 6.
II. POLICY DETAILS Policy Common Affiliate Transactions Billing Authorizations Payment of Inter-Company Service Billings Authority Responsibility Definitions 1. Policy The Federal Energy Regulatory Commission (FERC), under the provisions of the Public Utility Holding Company Act (PUHCA) of 2005, has the authority over affiliate transactions that affect the jurisdictional rates of a public utility or a natural gas company, as well as the authority to review and authorize cost allocations requested by centralized service companies, Entergy Services, Inc. (ESI) and Entergy Operations, Inc. (EOI). 1.1. General Policy: 1.1.1. Transactions involving the provision of products or services by either a regulated or non-regulated subsidiary of Entergy to a regulated or non-regulated affiliate will be priced and billed on a direct cost basis to the extent practical and common or shared costs should be priced and billed at the fully allocated cost or as otherwise specified below. 1.1.2. All rates and charges made, demanded, or received by any public utility for or in connection with the transmission or sale of electric energy subject to the jurisdiction of the FERC, and all rules and regulations affecting or pertaining to such rates or charges will be just and reasonable. 1.1.3. Transactions involving the provision of services provided by a regulated subsidiary to a non-regulated subsidiary that has not obtained market-based rate authority will be billed at fully allocated cost plus 5%. 1.1.4. Transactions involving the provision of services provided by a regulated subsidiary to a non-regulated subsidiary that has obtained market-based rate authority pursuant to FERC regulations will be billed at the higher of (i) fully allocated cost plus 5%; or (ii) market price. 1.1.5. All business units can loan labor and/or materials, with the exception of ESI. ESI, where appropriate, will bill the department and/or business unit via the Service Company Billings process. Loaning transactions are billed directly and are not based on any
allocation factor. Please refer to the accounting policy entitled Loaning of Labor, Transportation, and/or Materials for details. 1.2. Policy Exceptions: 1.2.1. Services provided by regulated utilities to non-regulated affiliates: priced and billed in accordance with sections 1.1.3 and 1.1.4 above. This pricing provision does not apply to sales or services that are subject to a rate schedule or tariff filed with or approved by an appropriate regulatory body. Also, it does not apply to services provided by EAI to Entergy Power Inc. (EPI) in connection with the operation and management of two electric steam generating facilities, Independence and White Bluff. 1.2.2. Transfers of generating assets, fuel and fuel-related assets and real property and improvements exceeding a fair market value of $100,000 from a regulated utility to a non-regulated affiliate must be priced at market value unless such method is detrimental (i.e. if market value is less than cost) to the regulated utility s ratepayers. (Further exception: for those Entergy companies and subsidiaries whose costs are directly or indirectly recovered in Louisiana retail rates, these items are priced at the higher of cost or market.) 1.2.3. Market, technological, or similar data transferred, directly or indirectly, from a regulated utility to a non-regulated affiliate must be priced at market value unless such method is detrimental (i.e. if market value is less than cost) to the regulated utility s ratepayers. Products developed by regulated utilities and marketed by nonregulated affiliate are subject to a profit-sharing formula. (Further exception: for those Entergy companies and subsidiaries whose costs are directly or indirectly recovered in Louisiana retail rates, these items are priced at the higher of cost or market.) 1.2.4. Transfer of product rights, patents, copyrights, or similar rights from a regulated utility to a non-regulated affiliate may be subject to a payment of a royalty. 1.2.5. Services provided by and transfers of non-power goods from regulated utility affiliates to non-regulated affiliated power marketers and merchant plant affiliates are to be priced at the higher of cost or market. 1.2.6. Services provided by and transfers of non-power goods from nonregulated affiliated power marketers and merchant plant affiliates to regulated utility affiliates are to be priced at no higher than market. 1.2.7. Specific price regulation: sales or transfers of products or services in instances where a state or federal regulatory agency regulates the price will be priced at the price established by the regulator and that price will apply for ratemaking purposes and will be considered the fair market value. 1.2.8. To the extent that a federal or state regulatory agency mandates affiliate rules regarding pricing of transactions that deviate from this
general policy, affiliate transactions will be priced at the established valuation set forth by such agency. 1.2.9. No procurement with a fair market value in excess of $100,000 will be made by a regulated utility from a non-regulated business except through competitive bidding processes or as otherwise authorized by an appropriate state regulatory commission. Please refer to the Entergy System Policies and Procedures entitled Procurement for detailed information on Entergy procurement policies and procedures. 1.3. Other Transactions: 1.3.1. Any other transactions from non-regulated affiliates to regulated affiliates must receive prior approval by the Chief Accounting Officer so that the transactions can be properly billed. 2. Common Affiliate Transactions 2.1. Entergy Services, Inc. (ESI) a wholly owned subsidiary of Entergy Corporation that provides management, administrative, accounting, legal, engineering, and other services to the regulated and non-regulated subsidiaries of Entergy Corporation. ESI provides services on an "at cost" basis to the regulated affiliates, pursuant to the service agreements approved by the FERC. Also, in accordance with these provisions, ESI charges cost plus 5% for services provided to non-regulated entities. 2.2. Entergy Operating, Inc. (EOI) a wholly owned subsidiary of Entergy Corporation that provides nuclear management, operations, and maintenance services under contract for ANO, River Bend, Waterford 3, and Grand Gulf 1. The respective Operating Companies retain their ownership in the various nuclear units and pay directly or reimburse EOI for the costs associated with the operation and maintenance of these units. EOI may also provide services to Entergy s non-regulated nuclear affiliates. EOI provides services on an "at cost" basis, pursuant to the operating agreements approved by the FERC. Also in accordance with these provisions, EOI charges cost plus 5% for services provided to nonregulated entities. 2.3. Entergy Enterprises, Inc. (EEI) - a wholly owned subsidiary of Entergy Corporation that provides services to Entergy s non-regulated affiliates. 2.4. Entergy Nuclear Operations, Inc. (ENO) - is a nuclear management service company wholly owned by Entergy Corporation. It acts as agent, but not owner, of various nuclear plants in the Entergy system. 2.5. System Fuels, Inc. (SFI) a jointly owned subsidiary of EAI (35%), ELL through Entergy Louisiana Properties, LLC (33%), EMI (19%), and ENOI (13%), that implements and manages certain programs to procure, deliver, and store fuel supplies for those companies. 2.6. System Energy Resources, Inc. (SERI) a wholly owned subsidiary of Entergy Corporation that owns and leases an aggregate 90% undivided
interest in Grand Gulf 1 and bills capacity and other costs pursuant to a Unit Power Sales Agreement (UPSA) regulated by FERC. 2.6.1. Unit Power Sales Agreement (UPSA) SERI allocates capacity and energy (and related costs) to EAI (36%), ELL (33%), EMI (33%), and ENOI (17%). Each of these companies is obligated to make payments to SERI for its entitlement of capacity and energy on a full cost-of-service basis, regardless of the quantity of energy delivered. Payments under UPSA are SERI s only source of operating revenue. 2.7. System Agreement Under the terms of the System Agreement, an agreement regulated exclusively by FERC, costs are allocated among the regulated utilities based on Service Schedules. 2.8. Money Pool an inter-company borrowing arrangement designed to reduce the utility companies dependence on external short-term borrowings. ESI functions as a clearinghouse for the Money Pool by recording the impact of Money Pool transactions (both receivables and payables) in special deposits, with no impact from the clearinghouse function on ESI s financial statements. Please reference the Cash and Cash Equivalents policy for additional details. 3. Billing Authorizations 3.1. Billing Methodologies for ESI and EOI are authorized by the FERC and are designed to allow ESI and EOI to directly bill one affiliate or to allocate to more than one affiliate costs that cannot be directly assigned to a particular affiliate company. A billing allocation method may be comprised of one or more components, or cost drivers. The selection of an appropriate method is critical since such billings are subject to regulatory and auditor review. 3.2. Project codes are used to accumulate costs on a specific job, project, or functional basis for purposes of billing such costs to the appropriate affiliate company. Expenditures that do not pertain to performance of services by ESI or EOI should not be charged to an ESI or EOI project code. Instead, these expenditures should be charged directly by the vendor or supplier to the respective affiliate company. 4. Payment of Inter-Company Service Billings 4.1. The service agreements between Entergy service companies and their affiliates establish the guidelines for payment of inter-company billings as well as guidance by FERC under the PUHCA 05 act. It is important that these bills be paid on time to maintain regulatory compliance for payments between regulated and non-regulated Entergy affiliates. 4.2. This policy applies to all Entergy affiliates when billed by an Entergy service company through the inter-company billing process.
4.3. Inter-company service bills, resulting from the billing of non-power goods and services provided by Entergy service companies such as, ESI, EOI, EEI and ENO, to Entergy affiliates will be paid in full by each affiliate no later than 25 days after the close of the month in which the service billings took place. For example, services provided during the month of July, and posted to the general ledger system in that month, will be payable by the 25 th day of August. 4.4. Inter-company service bills are identifiable in the form of journal entries posted in the general ledger system. A paper invoice is not required to, nor will one, be submitted to the payee of an inter-company service bill, but instead billings for services rendered will be posted to the general ledger system and can be viewed by the payee 4.5. Any disputed charges will be investigated, and when appropriate, credited back to the client company as quickly as possible, ideally in the month following the billing. 5. Authority 5.1. The Public Utility Holding Company Act of 2005 (PUHCA 05) 5.2. Order Accepting Proposed Service Agreements issued December 12, 2006 by the Federal Energy Regulatory Commission (FERC), Docket No. ER07-38-000 5.3. Arkansas Public Service Commission 5.4. Louisiana Public Service Commission 5.5. Mississippi Public Service Commission 5.6. Council for the City of New Orleans 5.7. Public Utility Commission of Texas Texas Code of Conduct Project #20936 6. Responsibility 6.1. The Chief Accounting Officer has responsibility for approving all financial interactions between Entergy affiliate companies. 6.2. Finance Operations Center ISABill has responsibility for the application of approved intra-company policies, including maintenance of appropriate documentation and systems. 7. Definitions 7.1. Direct Cost The labor costs and expenses which can be identified through a work order system as being applicable to services performed for a single affiliate company. Costs incidental to or related to a directly charged item must be classified as direct costs.
7.2. Indirect Cost The costs of a general overhead nature such as general services, housekeeping costs, and other support costs which cannot be separately identified to a single affiliate company and, therefore, must be allocated. Costs incidental or related to indirect items should also be classified as an indirect cost. 7.3. Fully Allocated Costs The sum of the costs which can be directly identified with a particular service or product plus an appropriate allocation of indirect costs that cannot be directly identified with a particular service or product including, but not limited to, overhead costs, administrative and general costs, and taxes. 7.4. Market Based Rate Authority Authority granted by the FERC that allows certain approved affiliates to sell power based on market based pricing of approved wholesale sales of electric energy, capacity, and ancillary services. The FERC also requires utility affiliates with market based rate authority to prescribe to a code of conduct which includes restrictions on affiliate transactions noted in 1.1.4. 7.5. Regulated Utility and Regulated Affiliates any subsidiaries as Entergy currently has or will create whose activities and operations are primarily related to the domestic sale of electric energy at retail or at wholesale to affiliates, or the provision of services or goods thereto and whose costs are directly or indirectly recovered in retail rates. 7.6. Inter-Company Service Bill - Billings for the cost of services provided by Entergy service companies to Entergy affiliates are supplied through journal entries posted in the general ledger system. A paper invoice will not be generated. 7.7. Service Company - A company that provides services such as administrative, managerial, financial, accounting, record keeping, legal or engineering services, which are sold, furnished, or otherwise provided for a charge to other companies in the same holding system. Entergy Service companies include ESI, EOI, EEI, and ENO.