Appendix — Ratepayers Fight Back v. Middle South Energy, Inc.

Supreme Court, U.S

FILED

: IN TUE DEC 12 1985

|

J nF Ps JR. |

SPANIO

SUPREME COUR OF ‘hE UN ii ED CER TES px ws =

OCTORER TERA, 1955

7

No. 80-395

RATEPAYERG FIGHT BACK,

PETITIONER

¥

MIDDLE SOUTH ENERGY, UNC.,

ARKANSAS POWER & LIGHT CO.

ARNANSAS PUBLIC SERVICE

COMMIS SSION ATTORNEY GENERAT,

OF ARKANSAS,

RESPONDENTS

APPENDIX 106 MEMORANCDU OF RESPONDEN'!

ARKANSAS PUBLIC SERVICFK COMMISSION

IN RESPONSE TO Pet LTTION FOR A

WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

POR THD EIGHTH CIRCUIT

' Vincent Foster, J?

; webster 4. Hebbel]

Counse! cf Record

ROSE LAW FERM

A Professional Association

tau East FOQUrTh Strect

Dittle Rock, 4rkansi3s T2234

(XG) 278-9231

ae

BEST AVAILABLE COPY |

Walter W. Nixon, III

Special Counsel to Arkansas

Public Service Commission

Hale, Ward, Young, Green &

Morley

One Broadway River Center

628 West Broadway, Suite 300

North Little Rock, Arkansas

72114

(501) 376-4000

TABLE OF CONTENTS

APSC Exhibit A--Petition for

Rehearing By Panel and Suggestion for

Rehearing En Banc by the

Eighth Circuit Court of

Appeals, Docket Nos.

84-2356-EA, 84-2409,

84-2410, and 84-2480

APSC Exhibit B--Stipulation and

Settlement Agreement in APSC

Document No. 84-249-U

APSC Exhibit C--Arkansas Public

Service Commission Order No. 26

in Docket No. 84-249-U

APSC EX. A

IN THE UNITED STATES COURT OF APPEALS

FOR THE EIGHTH CIRCUIT

NOS. 84-2356-EA, 84-249,

84-2410, AND 84-2480

MIDDLE SOUTH ENERGY, INC. and

ARKANSAS POWER AND LIGHT COMPANY,

Appellees

vs.

ARKANSAS PUBLIC SERVICE COMMISSION;

ROBERT E. JOHNSTON, COMMISSIONER;

PATRICIA S. QUALLS, COMMISSIONER;

and JAMES W. DANIEL, COMMISSIONER

and

ATTORNEY GENERAL OF ARKANSAS;

RATEPAYERS FIGHT BACK,

Appellants

Appeal From

United States District Court

For the Eastern District of Arkansas

Western Division

HONORABLE HENRY WOODS

District Judge

PETITION FOR REHEARING BY PANEL

AND SUGGESTION FOR REHEARING EN BANC

VINCENT FOSTER, JR.

CAROL S. ARNOLD

ROSE LAW FIRM

A Professional Association

120 East Fourth Street

Little Rock Arkansas 72201

,

(S501) 375-9131

STATEMENT OF COUNSEL

I express a belief, based on a

reasoned and studied professional

judgment, that the decision 1S contrary

n

o the following decisions of the Supreme

Court of the United States and that

consideration by the full Court ls

necessary to secure ind maintain

uniformity ft lecisions in this Court

These Supreme Court lecisions include:

New England Power Co. v. New Hampshire,

i55 U.S. 331 (1982); ind Ark. Electric

perative Corp. r Arkansas Public

service Commission 161 U.S. 375 (1983).

[ also express a belief, based on a

reasoned and studied professional

judgment, that this ippeal involves a

yuestion of exceptional importance: Does

the Commerce Clause permit the State of

Ark as to regulate the securities and

evidences of indebtedness of a = public

utility operating within its borders?

Vincent Foster, Jc.

Carol S. Arnold

Attorneys of Record

for Arkansas Public

Service Commission

and Its Commissioners

STATEMENT OF THE CASE

This appeal is from the judgment of

the District Court of the Eastern

District of Arkansas entered on

September 14, 1984, permanently erjoining

Appellant Arkansas Public Service

Commission ("APSC or “the Commission")

and its individual commissioners from

conducting an administrative proceeding

involving financing documents executed by

Appellee, Arkansas Power & Light Company

("AP&L").

AP&L is a public utility operating in

Arkansas and is a wholly-owned subsidiary

of Middle South Utilities, Inc. ("MSU").

MSU is a holding company subject to the

Public Utility Holding Company Act of

1935, 15 U.S.C. § 79 et seq. In

February, 1974, MSU organized a

subsidiary, Middle South’ Energy, Inc.

("MSE"), to facilitate the financing and

-l- 0476d

construction of a two-unit nuclear

generating plant to be located in Port

Gibson, Mississippi (hereafter “the Grand

Gulf project"). The sole asset of MSE, a

wholly-owned subsidiary of MSU, is a 90%

undivided interest in the Grand Gulf

Project. The capacity of Grand Gulf has

been allocated among AP&L and MSU's

affiliate operating companies in

Louisiana and Mississippi by an order of

the Federal Energy Regulatory Commission

(“Fame Ps

The financing of the Grand Gulf

Project was accomplished through a series

of agreements involving MSU, MSE, AP&L,

MSU's other affiliated operating

companies, and third party lenders.

These agreements were filed with the

Securities and Exchange Commission

"aa. 2 as required by the Holding

Company Act. Although AP&L executed a

-2- 0476d

t seek ipproval f mny f these

iWgreements lth the APS( required Dy

Arkansas law. Ark. Stat. Ann. § 73-255

n August : 84, tne APS( nit ced

1 proceeding directing AP&L *t ippear and

show cause why the iqreement Dilgati J

AP&I in connection itn tne rand ult

project should not be held id t the

yrounds” that AP&L taiied t eek prio!

approval t these igreements C1 the

proceeding, and AP&L submitted he

requested documents and written testimony

to the APSC. Before the hearing took

place, MSE filed suit in District Court

to enjoin the Commission cro

proceeding. The District Court entered

}udaqment enjyoining the Arkansas

Commission from proceeding, and this

appeal followed.

After reviewing the briefs of the

parties and hearing oral arguments, the

panel' entered its opinion and judgment

on August 23, 1985. The Court of Appeals

affirmed the District Court's judgment,

holding that the Arkansas Commission's

action constituted a direct and

substantial burden on interstate

commerce. Middle South Energy Inc. v.

Arkansas Public Service Commission, et

al., Slip Op. No. 82-2409, 84-2410,

84-2480 (8th Circuit, August 23, 1985).

Because the Arkansas Commission holds the

good faith belief that the Court's

decision conflicts with Supreme Court

cases interpreting the Commerce Clause,

Appellants now petition for rehearing of

‘The panel consisted of Circuit

Judges Gibson and Ross and Senior

District Judge Meredith.

-4- 0476d

tne

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Rule

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case

lant

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COMMERCE C

request a rehea

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Procedure

GUMENT

Ce

LAUSE |

STATE OF ARKANSAS TO

THE SECURITIES AND E

F INDEBTEDNESS OF

POWER & LIGHT (<

A. ‘he Show-Cause }

Neutra in Ther mpact

The Arkansas ( nissi

tatute to authorize t

‘urities ind evidences

publi< itilities perat

ite, and ni Lssuances

thout the ¢ nission's

at Ann. S§ 73-254,

pl.) rhe APSC shar

risdiction over the secu

a .

ari

the

27 ’

sit

7?

ered

' ‘

-

iit

+ hs

iit

ide

with the SEC under the Public Utility

Holding Company Act, which provides:

Nothing in this chapter

: shall ,-e & affect

the jurisdiction of any

other commission ... of

any state or political

subdivision of any state,

over any person, security

or contract, insofar as

such jurisdiction does not

conflict with the provision

of this chapter or any

rule, regulation, or order

thereunder. 15 U.S.C. §79u.

The Holding Company Act further prohibits

the SEC from approving any acquisition of

securities “unless it appears to the

satisfaction of the Commission that such

state laws as may apply in respect of

such acquisition have been comp lied

with.” 15 U.S.C. §79)(€)

The SEC has specifically recognized

the APSC's authority over AP&L'S

financial commitments in connection with

the Grand Gulf project. Middle South

Utilities, Inc., SEC Holding Company Act

-6- 0476d

Release No. 23495 (November 23, 1984).

In addition, by enacting the concurrent

jurisdiction terms of the Holding Company

Act, “Congress recognized that state

securites regulation would have some

effect on federal regulation of

interstate rates and had no intent to

eliminate that effect." Indiana and

Michigan Power Company v. State of

Michigan, 279 N.W.2d 450 (Mich. 1979).

The issue presented to this Court was

the difficult question of whether the

APSC was preempted from reviewing AP&L's

financing obligations by the Federal

Power Act, as the District Court found,

or whether the APSC. and the SEC share

exclusive jurisdiction over the

agreements.

The Court, however, avoided resolving

the preemption question and instead

applied a Commerce Clause analysis,

-7- 0476d

finding that the Arkansas Commission had

a discriminatory purpose. "Arkansas

seeks to close its borders’ to

high-cost electricity,” the Court

concluded, and this creates “a preference

for citizens in the regulatory

jurisdiction gained at the expense of

out-of-state customers." Opinion, at 23.

The District Court below never made

any such finding as to the intent or

purpose of the APSC. The APSC,

represented at trial by its staff

attorneys, was not on notice that it

Should present evidence on this issue or

that it might later be charged by an

appellate court with discriminatory

intent. Only one witness was presented

to the District Court, he being an

economic witness offered by MSE. There

was not one word of testimony by this

witness or anyone else on the intent of

-B- 0476d

the APSC. The judge asked no questions

about the APSC's purposes. No questions

were asked about intent on

cross-examination. The entire hearing

took less than an afternoon and _ the

transcript is only 73 pages long. The

Court can scan the transcript and find

not a word regarding the APSC's purpose.

MSE's Complaint filed in the District

Court is also silent on the issue. While

the jurisdictional paragraph gives 3

passing nod to the commerce clause, the

Complaint never alleges that the APSC

proceeding was motivated by

discriminatory intent or purpose.

This Court apparentiy made its novel

finding as to the APSC’*s' purposes. by

referring to the massive exhibits which

AP&L and MSE placed into evidence at

trial. These consist of the financing

documents themselves, but also include

-9- 0476d

public filings, pleadings, newspaper

articles, and the iike. With the benercit

of hindsight, the APSC's trial attorneys

would in all likelihood challenge this

attempt to load up the record since the

District Court hearing was clearly

directed at the preemption issue alone.

This Court's finding of

discriminatory intent is the starting

point of its entire Commerce Clause

analysis. Since this issue is critical,

a constitutional interpretation of this

magnitude should be based on ae fully

developed record. The APSC should have

the opportunity to rebut any allegation

of discriminatory intent and address the

issue fully. By leaping to the

conclusion it reached, this Court not

only second guessed the district court

judge and misunderstood certain evidence,

but its opinion distorts the well

-l10- 0476d

established construction of the Commerce

Clause.

The Court's misinterpretation begins

with its erroneous assumption that the

financing agreements which AP&L_ signed

govern the transmission of Grand Gulf

power into Louisiana, Mississippi, and

Arkansas.

A look at the documents in the record

will show that they do not control the

allocation or transmission of Grand Gulf

electricity. In East, none of the

documents were ever filed with the FERC,

the federal agency responsible for the

regulation of the wholesale sale and

transmission of power in interstate

commerce. 16 0. 8.Ge § 824(a). The

documents which the APSC sought to review

included (1) the Availability Agreement

of June 21, 1984, wherein AP&L and the

other operating companies in effect

-li- 0476d

ale

agreed to reimburse MSE for the cost of

construction of the Grand Gulf Project to

provide collateral for the financing of

Grand Gulf; (2) the Second Amendment to

Availability Agreement, wherein AP&L

assumed the obligation to pay for a 17.1%

share of Grand Gulf costs whether or not

the project ever generated or sold any

electricity; and (3) a series of

assignments of the Availability Agreement

whereby AP&L and the other operating

companies consented to make payments in

the form of unsecured “advances” to MSE

or to pay funds directly to the lenders

in the event MSE’ defaulted in its

payments and the FERC or another

regulatory authority prohibited the

operating companies from making payments

under the Availability

-l2- 0476d

9f the capacity of the Grand Gulf project

would not have been diminished. Nothing

the APSC could have done in the

show-cause proceeding would interfere

with the FERC-ordered allocation of power

between Arkansas, MissisSsippl, and

Louisilana.

The APSC did argue before the FERC

that Arkansas did not need Grand Gulf

Capacity, and the APSC was’ concerned

with the economic impact on Arkansas of

Grand Gulf. AP&L also was concerned and

tried to persuade the FERC to allocate

all the Grand Gulf Capacity to

Mississippi and Louisiana because

Arkansas did not need Grand Gulf, as

AP&L's counsel admitted in oral argument

to this Court.

The stand taken by the APSC and AP&L

in the FERC proceedings, however, does

not constitute discrimination against the

other states, and their positions before

-14- 0476d

the FERC on allocation have nothing to do

with this appeal. Significantly, no

party from Mississippi Or Louisiana

attempted to intervene at any stage of

the case. Aside from several Arkansas

intervenors, the only other party

involved in this appeal was a group of

MSE bondholders who did not argue that

the APSC discriminated against

out-of-state investors or interfered with

interstate commerce.

The show-cause proceeding undertaken

by the APSC was directed solely at AP&L,

an Arkansas utility. Regulatory agencies

in Louisiana or Mississippi are entitled

to regulate utilities within their

jurisdiction as well. Mississippi, for

example, granted the Original

certificates of need for the Grand Gulf

project and currently has undertaken a

proceeding to revoke the certificates of

-15- 0476d

Unit Two of the project.

The exercise of a state's regulatory

authority over the securities of public

utilities within its borders’ has_ been

held not to discriminate against

interstate commerce. In Baltimore Gas &

Electric Co. v. Heintz, 760 F.2d 1408

(4th Cir. 1985), the Court addressed the

impact of a state statute which

restricted the acquisition of stocks and

bonds of Maryland utilities. A Maryland

utility, seventy percent of whose shares

were owned by investors outside the

state, proposed a Share-for-share

exchange of all its stock for shares in a

newly formed holding company, a

transaction which would be prohibited by

the state statute. The Fourth Circuit

Court of Appeals held inter alia that the

Maryland statute was not designed to

favor local commerce because it imposed

-16- 0476d

no unique burden on interstate commerce.

The statute “regulates evenhandedly,”™ and

the minimal burden it imposed was

Outweighed “by the state's interest in

protecting the consumers of the products

of public utilities." 760 F.2d 1408,

Because of the Court's erroneous

assumption that the APSC's proceeding

interfered with the interstate

transmission of power, the Court's

construction of the Commerce Clause is

far broader than the Supreme Court

intended in New England Power Company v.

New Hampshire, 455 U.S. 331 (1982). In

that case, the New Hampshire commission

issued an order, discriminatory on its

| face, which restricted the export of

cheap hydroelectric power generated

| Within the state. New England Power sued

to enjoin the Commission's order. In

-l7- 0476d

contrast to the case on appeal, the

attorneys general from Massachusetts and

Rhode Island intervened and argued that

the New Hampshire order discriminated

against and interfered with interstate

commerce. The Supreme Court agreed and

held that New Hampshire “sought to

restrict the flow of privately owned and

produced electricity in interstate

commerce, in a manner inconsistent with

the Commerce Clause." 455 U.S. 331, 344.

In reaching this conclusion, the

Court relied on aeseries of Commerce

Clause cases which struck down facially

discriminatory state legislation which

conferred upon state residents a

preference to the state's natural

resources and restricted the flow of

products across state lines. The Court

stated that “(T]hese cases stand for the

basic principle that a ‘state is without

-18- 0476d

power to prevent privately owned articles

of trade from being shipped and sold in

interstate commerce on the grounds that

they are required to satisfy local

demands or because they are needed by the

people of the State.'" 433 U.S. 393i,

338, quoting Philadelphia v. New Jersey,

437 U.S. 619, 627.

This Court's decision throws’ this

line of Commerce Clause cases into

confusion. The APSC show-cause

proceeding did not restrict the flow of

any product crossing any state line, but

rather was directed at AP&L's financial

commitments. No “articles of trade"

being shipped or sold in interstate

commerce were involved, only the

financial obligations of an _ Arkansas

utility.

The record of the APSC's show-cause

proceeding does not evidence

{= 0476d

discrimination against out-of-state

products. Nothing in New England Power

or established Commerce Clause analysis

prohibits this lawful exercise of State

authority.

B. Any Impact of the Show-Cause

Proceeding on Interstate Commerce is

Incidental Only.

As the Court recognized, the

regulation of utilities is one of the

most important functions of the police

power of the states. Ark. Electric

Cooperative Corp. v. Arkansas Public

Service Commission, 461 U.S. 375 (1983).

Specifically, a state has a “very

substantial interest in the issuance of

securities under its laws by a company

Organized and operating" within that

state. Indiana Michigan Power Co. Vv.

State of Michigan, 275 N.W.2d 400

(1979). Arkansas thus has a legitimate

-20- 0476d

iia ia

local interest in seeing that its utility

regulatory laws are enforced and in

protecting the financial integrity of the

utilities within its borders.

This Court has recognized the states'

interest in regulation of local public

utilities in South Dakota Public

Utilities v. F.E.R.C., 690 F.2d 674 (8th

Cir. 1982). There the Wisconsin Public

ervice Commission denied a permit to

ep)

construct a nuclear generating plant

which had been permitted by an order of

the Nuclear Regulatory Commission.

Representatives of South Dakota and

Minnesota argued that Wisconsin's actions

burdened interstate commerce and cited

New England Power. This Court, noting

that the Wisconsin Commission's’ denial

turned on lack of need for the nuclear

plant, economic disbenefits, and

superiority of alternate means of

-21- 0476d

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generation, found that the “circumstances

in the New England Power case to be so

substantially different that ‘< is

inapplicable," and flatly rejected the

Commerce Clause argument. 690 F.2d 674,

678.

Similarly, the APSC review of the

financing documents in question focused

on AP&L'S participation in the financing

of the Grand Gulf Project, a matter

relevant to the utility's financial

well-being. As in the case of

Wisconsin's7 denial of a construction

permit, this is a matter of local concern

only.

Since the APSC had not even begun its

hearings, no direct impact of the

Show-cause proceeding had occurred on

interstate commerce or anywhere else.

The impact of APSC's exercise of

jurisdiction over the documents

-22- 0476d

ae

evidencing AP&L's' financing obligation

would be at most incidental. Evidence at

trial was that the markets were uncertain

and that there was unrest among investors

about MSU stock. Such incidental effects

are not the type of discrimination

forbidden by the Commerce Clause.

Baltimore Gas & Electric Co. v. Heintz,

760 F.2d 1408 (4th Cir. 1985).

Evenhanded state regulation of a

legitimate local public interest is

upheld if its effects on interstate

commerce are incidental, unless the

burden imposed on interstate commerce is

excessive’ in relation to the local

benefits. Pike v. Bruce Church, 397 U.S.

137 (1970).

The Supreme Court recently found that

a State's interest in regulating its

utilities outweighed any burden on

interstate commerce. In Arkansas

-23- 0476d

Electric Cooperative Corp. v. Arkansas

Public Service Commission, 461 U.S. 375

(1983), the APSC asserted regulatory

jurisdiction over the wholesale rates

charged by the Arkansas Electric

Cooperative Corporation ("“AECC") to its

member retail distributors located in the

state. Although the AECC purchased most

of its energy from power plants’ located

within the state, its facilities were

tied to an interstate grid. After

finding that federal law did not preempt

state regulation of power cooperatives,

the Supreme Court held that regulation of

AECC's wholesale rates by the State of

Arkansas did not impose an impermissible

burden on interstate commerce. Because

state regulation was within the scope of

legitimate local interests and had only

an incidental effect on the price

structure of the interstate grid, the

-24- 0476d

APSC's assertion of jurisdiction “offends

neither the Supremacy Clause nor the

Commerce Clause.“ 461 U.S. 375.

Similarly, Arkansas‘ interest in

regulating the securities of a utility

within its border outweighs any

incidental impact on eeebivats in other

states. If the Court's opinion is

allowed to stand, utilities in Arkansas

and other states as well will be invited

to avoid = state regulation of their

securities. Any public offering by and

most financial arrangements of a major

utility will involve some impact outside

the state because of the national markets

where investors from around the country

deal. This Court's Commerce Clause

analysis will leave the states powerless

to scrutinize or regulate any of these

arrangements.

The financial stability of AP&L is

-25- 0476d

essential if the public is to be served

with electric service at a just and

reasonable rate. Arkansas sought to

achieve this end by securing APS&L's

compliance with state law governing its

securities and evidences of indebteness,

and the state's interest in pursuing this

lawful exercise of the authority by the

APSC outweighs any incidental burdens on

interstate commerce that may result.

-26- 0476d

CERTIFICATE OF SERVICE

I, Carol S. Arnold, do hereby certify

that I mailed a copy of the above and

foregoing Petition for Rehearing and

Suggestion for Rehearing En Banc to:

Mr. Michael Thompson

2000 First Commercial Building

Little Rock, Arkansas 72201

Mr. Jerry D. Jackson

1000 Savers Federal Building

Little Rock, Arkansas 72201

Mr. Steve L. Riggs

P. O. Box 551, Little Rock

Arkansas 72203

Mr. Robert Wood

Attorney General's Office

Justice Building

Little Rock, Arkansas 72201

Mr. Jay T. Youngdahl

2101 Main Street

P. O. Box 6030

Little Rock, Arkansas 72216

Mr. Louis H. Willenken

Lewis, Willenken, Reid & Priest

40 West 57th Street

New York, New York 10010

Mr. N. M. Morton, Jr.

Wright, Lindsey & Jennings

2200 Worthen Bank Building

Little Rock, Arkansas 72201

on this 5th day of September, 1985.

/s/

Carol S. Arnold

-27- 0476d

APSC EX. B

ARKANSAS PUBLIC SERVICE COMMISSION

IN THE MATTER OF THE

APPLICATION OF ARKANSAS

POWER & LIGHT COMPANY

FOR APPROVAL OF CHANGES

IN RATES APPLICABLE DOCKET NO.

TO RESIDENTIAL, GENERAL 84-249-U

SERVICE, INDUSTRIAL,

AND OTHER RETAIL ELECTRIC

SERVICE

IN THE MATTER OF )

THE APPLICATION OF REYNOLDS )

METALS COMPANY FOR ) DOCKET NO.

INTERPRETATION OF AGREEMENT ) 85-198-U

FOR ELECTRIC SERVICE )

STIPULATION AND

SETTLEMENT AGREEMENT

The Arkansas Public Service

Commission Staff he tS ok Arkansas

Electric Energy Consumers ("AEEC"),

Southern Cotton Ginners Association

("SCGA"), Attorney General Steve Clerk

ee. ae Reynolds Metals Company

("Reynolds") and Arkansas Power & Light

Company ("AP&L" Or “the Company” )

(hereinafter collectively referred to as

“Parties") consent and agree to the

following terms in settlement of all

issues pending before the Arkansas

Public Service Commission ("“Commission"

or “APSC") in the aforementioned dockets

and in the additional proceedings

specified herein:

hs AP&L will be permitted to

implement effective for bills’ rendered

on and after September 9, 1985, a new

Rate Schedule Rider ("Rate Schedule

Rider M33" or “Rider M33"), in the form

attached hereto as Exhibit 1, to recover

costs associated with the Grand Gulf

nuclear plant ("Grand Gulf"), a ninety

percent -share of which is owned by

Middle South Energy, Inc. ("MSE").

Under, the provisions of Rate Schedule

Rider M33, all costs associated with

Grand Gulf Unit 1 incurred by AP&L will

be retained, deferred or recovered by

AP&L as follows:

a. Effective on September l,

1985, AP&L will permanently retain the

Arkansas retail allocation of the

proportions of the costs associated with

its allocated share of the power

available to MSE from Grand Gulf Unit l,

as shown in Table I set forth below

which proportions are stated in terms of

percentages of MSE's share of Grand Gulf

Unit 1 (“Retained Share"). The Arkansas

retail portion of such costs associated

with the Retained Share will not. be

recovered from AP&L's' Arkansas- retail

customers under Rate Schedule Rider M33.

TABLE I

Year Retained Share*

l &. 326

2 4.77%

~~

Ul em OV NO

~J] MN

©

INN HDD WWI

NM Nh s~J NM sJ NO

NP NF NOP HO Qh qh? gh? gh?

r

“SY

ae

~~ i

0 and all

3

4

5

6

7

8

9

l

succeeding years

*Retained Share shown is expressed

on a total company basis

The proportionate reductions in revenues

from AP&L'sS Arkansas retail customers

under this Subparagraph will be

permanent and will never be recovered

From AP&L's Arkansas’ retail customers

except as provided in paragraph 3 of

this Agreement. Provided, however,

should MSE Subsequently execute a

settlement agreement which results in a

permanent reduction in the charges to

AP&L from that which MSE would otherwise

be entitled to collect in accordance

with FERC Opinion No. 234 dated June 13,

1985, such permanent reduction will

first be applied to reduce on a dollar-

-4-

for-dollar basis the Retained Share as

set forth in this’ paragraph. In the

event such permanent reduction in

charges by MSE exceeds the Retained

Share provided in this paragraph, the

Current Recovery Share described in

subparagraph (1l)(c) of this Agreement

will be reduced to the extent of such

excess.

b. Effective on September 9,

1985, and terminating on August 3l,

1995, AP&L will defer or inventory the

Arkansas retail allocation of the

proportions of the costs associated with

its allocated share of the power

available to MSE from Grand Gulf Unit l,

as shown in Table II set forth below

which proportions are stated in terms of

percentages of MSE's share of Grand Gulf

Unit 1 (“Inventory Share"). The costs

deferred and accrued in the Inventory

Share will not be recovered from AP&L's

Arkansas retail customers during’ the

aforesaid ten-year period except as

provided in paragraph 2 and paragraph 3

of this Agreement.

TABLE II

Inventory Share*

a

@

@

L a |

14.88%

14.23%

13.78%

10.53%

7.88%

6.63%

5.18%

4.72%

4.28%

4.08%

RPFwWoOs aU & WN e

0

*Inventory Share shown is

expressed on a total company basis

Provided, however, should MSE

subsequently execute 2 settlement

agreement containing an inventory or

deferral plan which results in a

reduction of the charges to AP&L from

that which MSE would otherwise be

entitled to collect in accordance with

FERC Opinion No. 234 dated June 13,

1985, such reduction due to an inventory

or deferral plan by MSE will first be

applied on a dollar-for-dollar basis to

reduce the Inventory Share as set forth

in this paragraph. In the event such

reduction in charges to AP&L resulting

from a MSE inventory or deferral plan

ex-eeds the Inventory Share provided in

this subparagraph, the Current Recovery

Share will be reduced to the extent of

such excess. It is further agreed that

AP&L shall be permitted to recover on a

current basis the incremental cost of

financing the deferral of the Inventory

Share shown in Table II above, as

provided in the attached Rider M33. The

cost of financing incurred to _ finance

the Inventory Share and the phase-in of

a portion of the Current Recovery Share

=Fe

which is recovered under Rider M33 will

not be utilized to calculate the

Company's revenue requirements recovered

through the Company's other rate

schedules. Beginning in year eleven

(11), the Company shall be allowed to

include the balance of costs accumulated

in the Inventory Share (which are

accumulated during the period

September l, 1985 through August 3l,

1995, and until such time as these costs

are reflected in Arkansas retail rates

on a current recovery basis) in its rate

base for determining its Arkansas retail

revenue requirements. In addition, the

Company shall amortize on a level basis

and recover through its’ retail rates

such accumulated costs over the

remaining depreciable life of Grand Gulf

Unit 1 or such shorter period of time as

the Commission may subsequently

determine to be appropriate.

=e

F

C. Commencing with all bills

rendered on and after September 9, 1985,

AP&L wili be permitted to recover the

Arkansas retail portion of all costs

associated with the proportions of its

allocated share of the power available

to MSE from Grand Gulf Unit l on a

Current basis in accordance with the

terms and provisions of Rider M33, as

shown in Table III set forth below which

proportions are stated in terms of

percentages of MSE's share of Grand Gulf

Unit 1 (“Current Recovery Share"):

TABLE III

Year Current Recovery Share*

16.80%

17.00%

17.00%

19.80%

22.00%

22.80%

23.80%

23.80%

23.80%

24.00%

rFPWOONDA UW BWN FE

oO

|

ll and all 28.08%

succeeding years

*Current Recovery Share shown is

expressed on a total company basis

A portion of Grand Gulf Unit 1 costs to

be recovered from AP&L customers

pursuant to this subparagraph (c) will

be phased in over a ten-year period in

accordance with the phase-in methodology

set forth in the attached Rider M33.

é. In the event any customer

of AP&L ceases to be a customer of AP&L

Or reduces consumption or demand before

the Company has’ fully recovered the

costs accumulated and deferred in either

the Inventory Share or the phase-in plan

with respect to the Current Recovery

Share as described in subparagraph (c)

of this paragraph l, the parties agree

that: (a) no attempt will be made to

impose any charge or penalty on_ such

customer as a result of the customer's

«Ox

withdrawal from the system before

completion of the recovery of such costs

and (b) all deferred amounts will be

recovered from all Arkansas retail

customers then and thereafter receiving

service on the AP&L system.

e. The parties stipulate and

agree that the Arkansas retail portion

of the costs associated with Grand Gulf

Unit 1 will be determined using the

production demand related allocation

methodology approved or utilized by the

Commission in establishing Arkansas

retail rates. Beginning September 9,

1985, this production demand related

allocation factor to be used will be

88.59 percent which is the production

demand related allocation factor for

interim use under this Agreement pending

final order in the docket established

pursuant to paragraph 6 of this

alin

Agreement. The parties further agree

that the allocation factor established

in that docket may be redetermined by

the Commission in any subsequent rate

proceedings involving AP&L. Any such

subsequent change in this allocation

factor would be incorporated in the next

update of costs recovered in Rider M33

as provided under the terms of Rider M33

and will be utilized prospectively. It

is understood that this production

demand allocation factor was derived

using 4 cost allocation methodology

which is disputed by some of the parties

and the agreement by any party to the

use of this factor on an interim basis

Shall not be deemed as acceptance of

this factor or the methodology by which

it was derived for other purposes.

2. The parties recognize and agree

that the Company's agreement to defer

oh 2a

the recovery of a portion of the costs

incurred for Grand Gulf Unit 1 (the

Inventory Share), as provided in

Subparagraph 1(b) of this Agreement, or

to phase in the recovery of any portion

of the Current Recovery Share as

provided in subparagraph (1l)(c) of this

Agreement (hereinafter collectively

referred to as Deferred Grand Gulf

costs) is contingent upon the conditions

set forth in subparagraph 2(a) and 2(b)

as set forth below:

a. The Company's agreement to

defer or phase-in a portion of the Grand

Gulf costs as provided in this Agreement

is conditioned upon the Company's

ability to finance such deferral on

reasonable terms and the Company agrees

that it will use its best efforts to

secure such financing.

al3q

i) The parties agree that in

the event the Company is not able to

finance all or any portion of the

Deferred Grand Gulf costs on reasonable

terms because of (1) inadequate interest

coverage ratios or other restrictions

contained in the Company's mortgage or

charter, (2) policies, rules or

regulations of the Securities and

Exchange Commission, Internal Revenue

Service, or any other state or federal

agency which is aplicable to the

Company, (3) restrictions or

requirements contained in any

legislative enactments after the date of

this Agreement, (4) changes in

accounting standards, policies or

procedures adopted by the Financial

Accounting Standards Board (FASB) or the

FERC, or changes in the application of

existing standards, policies by the FASB

or FERC, (5) other restrictions upon the

, a

i iceterrinniieienei eee

Company's ability to finance because of

inadequate revenues or earnings, then in

such event: (a) the Inventory Share

will be reduced, after thirty (30) days

notice to the Commission and the office

of the Attorney General, to the extent

of the Company's inability to finance

the deferral of such costs on reasonable

terms during the period of such

inability to bitanen: and the percentage

Or amount of the costs to be recovered

Currently from customers (Current

Recovery Share) as set forth in

subparagraph (l)(c) of this Agreement

will be increased to the extent

necessary to recover, on a current

basis, the costs which would otherwise

have been allocated to the _ Inventory

Share but for the Company's inability to

finance, and (b) the proportion of the

ate

costs in the Current Recovery Share

which would be deferred under the

phase-in plan as set forth in Rider M33

will be reduced to the extent of the

Company's inability to finance the

deferral of such costs on reasonable

terms and the Company will be permitted

to amend Rider M33 to recover such costs

from its Arkansas retail customers on a

current basis.

11) If, during the thirty (30)

day notice period set forth in paragraph

2(a)(i) above, any party shall disagree

with the Company's contention that it is

unable to finance all or any portion of

such deferral on reasonable terms, any

such party shall have the right to file

a petition with the Commission seeking a

determination as to whether the Company

is unable to finance such deferrals on

reasonable terms because of any of the

alé<

reasons set forth in subparagraph (a)(i)

of this paragraph. The Company agrees

that it shall have the burden of proof

to establish the existence of = such

inability to finance in any such

proceeding before the Commission. Any

party to the proceeding before the

Commission who is aggrieved by the

Commission's order determining whether

an inability to finance in any _ such

proceeding before the Commission. Any

party to the proceeding before’ the

Commission who is aggrieved by the

Commission's order determining whether

an inability to finance exists’) shall

have the right to seek rehearing and

judicial review in accordance with Act

231 of 1973 as amended, (Ark Stat. Ann.

Section 73-229.1).

b. The Company's agreement to

defer or phase-in a portion of the Grand

oy

Gulf costs as provided in this Agreement

is also conditioned upon the Company's

ability to record on its books, on a

Current basis, the deferral of any Grand

Gulf costs under applicable accounting

Standards adopted or required by the

FASB or the _ FERC. In the event the

Company is not able to record on its

books, on a current basis, the deferral

of any Grand Gulf costs because of

changes in accounting standards,

policies or procedures by the FASB or

FERC, or changes in the application of

existing standards, policies or

procedures by the FASB or _ FERC, the

parties agree to use their best efforts

to negotiate a mutually acceptable

amendment to this Agreement which will

modify the Agreement to reflect such

changes in accounting standards adopted

Or required by the FASB or the FERC.

ai@=

Unless an amendment to this Agreement

which is mutually acceptable to the

parties is achieved and approved by the

Commission, after public notice and

hearing, within ninety (90) days after

such change occurs, this Agreement will

terminate except that all costs

associated with Grand Gulf Unit 1 which

have been defered by AP&L prior to the

termination of this Agreement will be

recovered in accordance with the

provisions of this Agreement. The

parties agree that if either AEEC or

SCGA, or any successor association, is

no longer in existence at the time any

such negotiations are commenced, it will

be sufficient compliance with the

provisions of this paragraph if their

attorneys of record in this proceeding,

Cr their successors, are given

appropriate notice of, and an

=i.

opportunity to participate in, any such

negotiations.

3. The parties agree that:

a. AP&L shall have the right

to sell the Capacity and energy

available from its Retained Share to

third parties, (as used in this

Agreement, Third Parties shall not

include AP&L'S wholesale customers)

without any restrictions or other

requirements, and the acceptance of this

Settlement Agreement by the Commission

Shall constitute approval of any such

sales made or to be made by AP&L from

its Retained Share during the time that

Grand Gulf Unit 1 is in commercial

service. In the event AP&L is not able

to sell the Capacity and energy

available from its Retained Share to

third parties, it shall have the right

to sell the energy available from such

=2@<

Capacity to AP&L retail customers at a

price equal to AP&L's avoided energy

cost.

b. AP&L's avoided energy cost

will be equal to the avoided energy cost

as filed with the Commission pursuant to

AP&L*s Cogeneration Service Rider M23 or

any superseding rate schedule.

CG. All proceeds from such

Sales of capacity or energy from AP&L

customers shall accrue to the sole

benefit of the Company's’ stockholders

and shall not be used to reduce the

determination of the appropriate revenue

requirement to be recovered from the

Company's customer.

d. AP&L agrees that any sale

of Capacity and energy from AP&L'‘'s

allocation of MSE's share of Grand Gulf

Unit .O third parties during’ the

ten-year period between September, 1985

aSie

and August 31, 1995, will be allocated

between the Retained Share and the

Inventory Share in the following manrer:

1) fifty (50) percent of

the capacity and/or energy sold (not to

exceed the amount of capacity allocated

to the Retained Share) wil be considered

to be a sale of capacity and/or energy

from the Retained Share and the proceeds

of such sale would accrue to the sole

benefit of the Company's stockholder and

shall not be used to reduce the

determination of the appropriate revenue

requirements to be recovered from the

Company's customers.

ii) the remainder of the

Capacity and/or energy sold will be

considered to be a sale from the

Inventory Share and the proceeds of such

sale shall be applied to reduce the

costs allocated to the Inventory Share

a

for the year in which such sale is made

in accordance with paragraph 4 of this

Agreement. Provided, however, the

Commission shall have the option to

determine that such sale will not be

made from the Inventory Share in which

event the sale will be considered to be

a sale solely from the Retained Share

(to the extent of the capacity allocated

to the Retained Share) and the proceeds

applied as set forth in subparagraph

3(d) (i) above.

4. Any energy available to AP&L

from the Inventory Share shall be sold

to AP&L Arkansas retail customers at

AP&L‘s avoided energy cost as defined in

Subparagraph 3(b) of this agreement or

any such energy may be sold to third

parties if such energy can be sold for

more than AP&L'‘s avoided energy cost.

All revenues resulting from the sale of

he

energy from the Inventory Share to AP&l

customers or to third parties in excess

of the variable costs of producing that

energy shall be applied to reduce the

Inventory Share. Variable costs. shall

not inc lude depreciation expense

Calculated on ae units-of-production or

imilar method.

0)

a< In settlement of all other

issues in APSC Docket No. 84-249-U, the

parties agree as follows:

a. [In addition to the

implementation of Rider M33 in

accordance with this Agreement, AP&L

shall be permitted to increase its

Arkansas retail rates, effective

September 93, 1985, by $52 million on a

total company basis and to implement new

rate schedules applicable to its

Arkansas retail customers designed to

produce an Arkansas retail revenue

requirement, ex Reynolds, of

$787,857,000 as set forth on the

attached Exhibit 2.

b. The presently approved fuel

adjustment clause (FAC) now on file as

Rate Schedule Rider M-27 shall remain in

full force and effect until changed by

order of the Commission, after hearing,

in a general rate proceeding of AP&L.

Provided, however, that for purposes of

administration and calculation of the

FAC the appropriate base cost of fuel

and purchased power expense included in

the Company's base rates (the "B

Factor™) shall be i3.232 mills/kwh.

Provided, however, in the event

Waterford 3 is placed in commercial

operation prior to March 1, 1986, the

“s- Factor would revert to 15.232

mills/kwh.

@. The parties agree that the

\\appropriate rate of return on equity for

the Company is 14.9% and this return on

equity should be approved by the

Commission for AP&L in this proceeding.

It is recognized and agreed that the

appropriate rate of return on equity for

AP&L may be redetermined by the

Commission in subsequent retail rate

proceedings involving AP&L.

d. The parties recognize and

agree that the stipulated Arkansas

retail revenue requirement set forth in

subparagraph 5(a) above reflects an

excess capacity adjustment which denies

the Company a current return on 969

megawatts of generating Capacity,

reflecting an investment of $215,107,000

allocated to the Arkansas retail

customers. The parties agree that the

Company should be allowed to earn a full

deferred return on the investment in

such capacity, which return will be

a 2G

capitalized and recorded on the

Company's books in a manner similar to

an allowance for funds used during

construction (AFUDC) using a

Capitalization rate of 14.344 =percent

which will result in a monthly deferral

of $2,571,000. This capitalized return

will be accrued and deferred on the

Company's books until the Commission

issues an order in the Company's next

application for a general retail rate

increase Or until July he 1987,

whichever first occurs, at which time

the Company will be permitted to ‘recover

the amount Capitalized and deferred,

amortized on a level basis over a ten

(1) year period, commencing on the date

new rates are implemented in accordance

with the Commission's order in the

Company's next application for a general

retail rate increase or on July 1, 1987,

whichever first occurs.

e. The parties recognize that

the Agreement for sale of White Blufé

capacity by APSL to Louisiana Power x

Light Company (LP&L) and New Orleans

Public Service Inc. (NOPSI) dated

October 28, 1982 (Unit Power Purchase

Agreement), will terminate upon the

commercial operation of LP&L's Waterford

3 nuclear unit. Inasmuch as AP&L should

be allowed to place into effect a new

Rate Schedule Rider M32 (Rider M32), in

the form attached hereto 45 Exhibit 3.

Commencing on the date Waterford 3 is

placed in commercial operation, or March

1, 1986, whichever is later, AP&L would

be permitted to recover additional

revenues from its Arkansas retail

customers, under the provisions of Rider

M32, until such time as new base rate

-28-

schedules are approved by the Commission

which permit AP&L to recover revenues

adequate to offset the revenue loss to

AP&L resulting from the termination of

the UPSA.

6. The amount of any revenue

increases provided for in this

Settlement Agreement shall be

apportioned among all classes of

customers in a manner designed to

produce a proportionate revenue increase

for all customer classes in substantial

accordance with the rate structure

approved by the Commission in Docket No.

84-199-U. The parties agree that this

Settlement Agreement does not resclve on

a permanent’- basis any issues with

respect to cost allocation or rate

design in Docket 84-249-U and that the

proceedings for the Commission's

consideration of such issues’ shall be

~i oe

transferred to a new Docket to be

established by the Commission for

resolution of such issues. The parties

agree that any issues raised by any

party to the proceedings in such new

Docket with respect to cost allocation

Or rate design should be resolved by a

Final order of the Commission issued on

Or before March 3l, 1986. Any order of

the Commission in such new docket which

Orders a different allocation or rate

design from that reflected in the rates

approved in accordance with this

Settlement Agreement shall be applied

prospectively only.

ws All of the aforementioned

parties except AP&L agree to take such

action as may be necessary to

voluntarily dismiss without prejudice,

terminate or withdraw their

interventions in the following

«30-

litigation concerning AP&L to the extent

they have the ability ‘o do so.

a. MSE vs. APSC

U.S. Court of Appeals for

the Eighth Circuit, Nos.

84-2409, 84-2410, 84-2480

and 84-2356

b. APSC Docket No. 83-206-U

c. APSC Docket No. 84-040-OII

d. APSC Docket No. 84-041-0II

e. APSC Docket No. 84-190-U

f. APSC Docket No. 84-199-U

g. APSC Docket No. 85-003

h. APSC Docket No. 85-137-A

i. SEC Dockets 70-6892, 70-6906,

70-7021 and 70-7026

j}. APSC v. SEC

U.S. Court of Appeals for the

D.C. Circuit, No. 85-1138

AP&L agrees to take such action as may

be necessary to voluntarily dismiss

without prejudice, or terminate the

following litigation concerning the APSC

Or other parties:

ati<

king

ler

rne

ipproving this set

Lf will (a)

prejudice, termi

necessary

eee

its intervention in the litigation listed

above in which the Commission is a party

Or participant and that it will not

refile or reinstitute such litigation as

long as this Agreement remains in effect,

and (b) take such action as may. 0be

necessary to close the Commission Dockets

listed above. The continued

effectiveness of this Settlement

Agreement is also expressly contingent

upon the Commission taking such action as

may be necessary to terminate or dismiss

such proceedings. It is further agreed

that the parties to this agreement who

are also parties to the FERC litigation

in FERC Dockets ER82-483-000 and

ER82-616-000 will continue to vigorously

pursue petitions for rehearing or

judicial review of the FERC's decision in

said dockets. Any reduction or increase

in AP&L's allocated share of Grand Gulf

a33-

+ >

~

-

+

+

A +

>

-

> >

> >

_

-

=

r>

nXre

>

r¢

_+

sh

,?

wD

AP&L

~

8. The par

application filed by

85-159-U will be

without any

beyond the

conditions applicable

by AP&L in

applications.

9 r he

pi

nitigate the impact

yn low and moderate i

proposed by AP&L in

this docket on

connection with an

proposal, will be

recognized by the

able to offer this

reduction in

Unit 1l costs as

(1)(a) of

that this

gualificati

custom

previous

Oogram

Tt

June

parties

program

revenues

provided

this Agreement

program will

ties agree that the

APAL in APSC Docket

approved as filed

on I iction

ary tr standard

to irders »btained

S [

Lnancing

desiaqned to

Grand Gulf

costs

ncome customers,

its Motion fi

6, 1985, in

earlier settlement

adopted. it is

that AP&L

LS

because of the

of Grand Gulf

in subparagraph

and it is agreed

a

—

no

an

additional reduction in revenues to AP&L

beyond that resulting from AP&L's

agreement to absorb that portion of the

costs associated with Grand Gulf Unit l

allocated to the Retained Share as

provided in subparagraph (1)(a) of this

Agreement.

10. The parties agree that no

additional rate increases Or rate

reductions for AP&L's Arkansas”~ retail

customers will become effective prior to

the earlier of the following dates: (1)

that date which is seventeen (17) months

after the termination of the Unit Power

Purchase Agreement between AP&L, LP&L and

NOPSI dated October 28, 1982, with

respect to the short-term sale of White

Bluff capacity or (2) July 1, 1987,

whichever first occurs, but in any event

no earlier than April l, 1987, except

for: (a) rate changes resulting from a

atin

determination by the Commission that such

change in rates is justified because of

the existence of an immediate and

impelling necessity (excluding any

consideration of the costs associated

with Grand Gulf Unit 1 or any current or

deferred recovery of such costs’ under

Rider M33) pursuant to Subsection (b) of

Section 18 of Act 324 of 1935, as amended

[Ark. Stat. Ann. Section 73-217(b)], (b)

rate changes provided for under the terms

of this Agreement, (c) rate changes

obtained through applications under

Act 310 of 1981, as amended, (d) rate

changes to reflect revised estimates of

decommissioning expense currently

recovered under Rate Schedule Rider M29,

(e) rate changes applicable solely to

Reynolds under the Agreement for Electric

Service between AP&L and Reynolds, or (f)

rate changes under any other-= special

be

contract applicable to any Arkansas

retail customer, including but not

limited to, any incentive rate contract

between the Company and any Arkansas

retail customer. Provided, however, each

of the parties except AP&L reserves the

right to file a petition with the

Commission seeking a reduction in AP&L's

Arkansas retail rates if the Company's

return on year-end equity exceeds 16.0%

on its Arkansas retail business

(excluding any consideration of the costs

associated with Grand Gulf Unit 1 or any

Current or deferred recovery of such

costs under Rider M33) utilizing a

forward-looking test period, as adjusted,

as defined in Ark. Stat. Ann. Section

73-217.5, and also adjusted to remove the

effects of any non-recurring conditions

occurring during the test period. For

purposes of this paragraph it is agreed

=%8a

that: (a) increases or decreases in

revenues to the Company through the

operation of the Company's fuel

adjustment clause (Rate Schedule Rider

M-27), (b) surcharge recoveries resulting

from the appeal of the Commission's order

in Docket No. 81-144-U, or (c) changes in

individual rate schedules or the filing

of new tariffs not involving a general

rate increase would not be considered a

rate increase or rate reduction.

ll. Should any operating

company subsidiary of Middle South

Utilities, Inc. enter into a settlement

agreement which is approved (or allowed

to become effective) by the appropriate

regulatory authority where such approval

would be required in order for the

Agreement to become effective, wherein

the other operating company agrees to

absorb a reduction in the stockholder'‘s

at@q

recovery of costs associated with Grand

Gulf Unit 1 which is proportionately

greater than the reduction provided in

this Settlement Agreement, the reduction

in the recovery of costs associated with

Grand Gulf Unit 1 provided in this

Agreement will be increased so as _ to

result in a_reduction in the_- costs

recovered by the stockholder which is

proportionate to that agreed to by the

other operating company.

212. AP&L'sS present share of

Grand Gulf Unit 1 and the - percentage

allocations contained in paragraph 1 will

not be changed due to the bankruptcy or

insolvency of another operating company

subsidiary of Middle South Utilities, Inc.

13. This Settlement Agreement

is made upon the explicit understanding

that it constitutes a negotiated

settlement in the public interest.

-40-

Nothing herein shall constitute an

admission of any claim, defense, rule or

interpretation of law, allegation of

fact, principle or method of ratemaking

or cost of service determination or

design of rate schedule, or terms or

conditions of service, or the application

of any rule or interpretation of law,

that may underlie, or be perceived to

underlie, this Settlement Agreement.

14. This Settlement Agreement

is expressly contingent upon its approval

by the APSC without modification. The

various provisions” of the Settlement

Agreement are not severable except that

the invalidity or unenforceability of

paragraph 12 of this Agreement shall not

affect the remaining provisions hereof.

All parties will cooperate’ fully in

seeking acceptance and approval by the

APSC of the Settlement Agreement and will

a@ia

support its approval in all respects

without modification in any further

proceedings which may be ordered, yt

appeals taken, with regard to this

Settlement Agreement.

tF The terms of this

Settlement Agreement shall be otfered to

all other AP&L customers and to the

Public Service Commission of Missouri, as

soon as practicable following the

approval ot this Agreement by the

Commission.

16. In the event the Commission

does not accept, adopt and approve this

Settlement Agreement in its entirety and

without modification on or before

September 9, 1985, or in the event the

rate schedules agreed to herein do not

become effective for service rendered in

accordance with the provisions contained

herein on or before September 9, 1985:

=423@

(a) this Settlement Agreement shall be

void and of no effect and no party shall

be bound by any of the provisions or

agreements herein contained; (b) all

parties shall in that event be deemed to

have reserved all their respective rights

and remedies in these proceedings; and

(c) this Settlement Agreement shall not

be a part of the record in any

proceedings, and ali discussions and

negotiations with respect to the

Settlement Agreement shall be privileged

and confidential.

17. The parties recognize and

agree that the Statement of Financial

Accounting Standards No. 71 (FASB No. 71)

requires that any deferred amounts

related to deferred returns or deferred

cost recovery must be assured of recovery

: without possibility of review in the

future or the deferral will not be

recordable for financial accounting

purposes. The parties further agree that

this Settlement Agreement is conditioned

upon the Commission's including in its

order approving this Settlement Agreement

such provisions aS may be necessary in

order to assure future collection of all

amounts representing a deferred return or

deferred recovery of Grand Gulf costs as

provided under the terms of this

Settlement Agreement and Rider M33.

Further, such order should approve the

necessary accounting entries (as

reflected in Exhibit 4) to accomplish

such deferrals on the Company's books.

is. This Agreement may be

amended, supplemented or modified only by

a written amendment executed by AP&L, the

Staff, Reynolds, and the AG and approved

by the Commission after public notice and

hearing. If, subsequent to the approval

aie

of this Agreement by the Commission, (4a)

any provisions of this Agreement are

subsequently altered or modified by the

Commission Or (b) the Commission

establishes new rates for AP&L which are

inconsistent with the provisions of this

Agreement, without the mutual consent or

agreement of AP&L, the Staff, the AG, and

Reynolds, this Agreement shall

terminate. It is the intent of the

parties that if the Agreement is

terminated under the provisions of this

paragraph, all rights and remedies, both

legal and equitable, that existed prior

to this Agreement, shall be restored to

all of the parties to this Agreement in

the event it is terminated under the

provisions'7 of the paragraph including

AP&L's right to claim that it should be

allowed to recover any costs which have

been allocated to the Retained Share and

aS

not recovered by AP&L in reliance upon

the other provisions of this Agreement.

19. As to the allocation and

recovery of Grand Gulf costs, AP&L and

Reynolds acknowledge and agree that the

Agreement For Electric Service between

them approved by the Commission in Docket

No. 82-314-U shall be interpreted and

administered in a manner consistent with

the terms of this Agreement. Should any

inconsistency or conflict arise between

the terms of the Agreement For Electric

Service and the terms of this Agreement,

AP&L and Reynolds acknowledge and agree

that the terms of this Agreement shall

control, it being the intention of this

paragraph to effect equivalent treatment

of Grand Gulf cost recovery among

Reynolds and other ratepayers in all

respects. In consideration herefor,

Reynolds agrees that, upon approval of

a6

this Agreement by the Commission it shall

promptly take such steps as are necessary

to accomplish the dismissal of its

petition filed with the Commission in

Docket No. 85-198-U and agrees that it

will not refile or reinstitute such

litigation so long as this Agreement

remains in effect.

DATED this Sth day of September, 1985.

ARKANSAS PUBLIC SERVICE

COMMISSION STAFF

By: /s/

/s/

Steve Clark

Attorney General of Arkansas

ARKANSAS ELECTRIC ENERGY

CUSTOMERS

By: /s/

SOUTHERN COTTON GINNERS

ASSOCIATION

By: /s/

a@Pa

|

|

REYNOLDS METALS COMPANY

By: /s/

ARKANSAS POWER & LIGHT

COMPANY

By: /s/

The Arkansas Public Service

Commission does hereby accept and approve

the terms of the above Settlement

Agreement and agrees to enter an order

consistent therewith this _— day of

September, 1985.

ARKANSAS PUBLIC SERVICE

COMMISSTON

/not signed/

Chairman

/not signed/

Commissioner

/not signed/

Commissioner

-48-

ATTEST:

/not signed/

Secretary

-49-

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DOCK

PAGE

ET NOS. 84-249-U and 85-198-U

«220

That can't be good for the

public interest; that might in

ways that can't be quantified

cost _us_ more than even having

a full share today of Grand

Gulf costs.

As I see the case in federal

court, even if what I just

told you is wrong, even if we

were to win in front of Judge

Waters . . . and he were to

find that this Commission is

not preempted in conducting a

prudency review, what’ we've

won is the right to litigate

the prudency issue, which of

course we've already done ..

. we've certainly won the

right to have that issue go to

at least the Arkansas Supreme

Court and probably to .. .

the U.S. Supreme Court. . .

Again, it's a long, protracted

struggle. It's expensive in

more ways than one...

Whatever doubts you might have

about this settlement, and I'm

sure there are many, I would

ask you to weigh them against

the doubts. . eabout the

outcome of litigation. ..

both sides are in a situation

that if we get everything we

want litigating it. . we lose.

DOCKET NOS. 84-249-U and 85-198-U

PAGE -23-

On the otherhand, there is

almost an in terrorem aspect

of bankrupting them .. . I

am not willing to go into the

quicksand of the Bankruptcy

Court with rates for Arkansas

Power & Light, but if we win

everything, I fear that's what

would happen.

You can evaluate the risks of

litigation on various scales.

I think that for both sides

the risks are high. IT think

that they are, to be frank,

somewhat higher for the

ratepayer than they are _ for

AP&L, and I say that because,

as I mentioned before, we have

to win twice. We have to

convince the federal system

that there's no- preemption

barring us from going ahead

and doing a prudency review.

Then we have to convince the

Commission and then we have to

make it stick in the next

court system that there was

imprudence here.

The Company only has to win

once. Therefore, I say to you

that their litigative position

is slightly better than ours.

The risks of litigation for us

are slightly greater - -

bearing in mind that we are in

if not a hostile at least what

DOCK

PAGE

ET NOS. 84-249-U and 85-198-U

o2ge

is clearly an unfriendly

federal appellate circuit on

this issue.

I have concluded that the

stockholder hit that we've

been calling it, the retained

share, represents something

that I could in good

conscience recommend to my

clieits as a proxy for a

prudency adjustment of an

excess capacity charge, one

that distributes

responsibility in a degree

that I believe is within the

range of reasonableness --

although it is certainly not

as much as I would attempt to

prove if we litigated this

matter and certainly not as

much as I think I could prove

if we litigated it, but it is

within the range of

reasonableness, and given

that, I can not only recommend

it to my clients, but I can

recommend it to you. From the

litigative vantage point,

then, and bearing in mind the

practical realities of the

marketplace, I can recommend

to you honestly that you

approve this settlement = and

put this controversy behind us.

DOCKET NOS. 84-249-U and 85-198-U

PAGE -25-

I think that our care_ for

reversing FERC on the law is a

strong case. I believe that

we can achieve some

modification of that decision,

and I am hopeful that we can

achieve a complete reversal.

Tf this settlement is

approved, we can turn our

attention to what I think is

really the important fight,

the one that we've got the

best chance to win, and you'll

notice that appeals in that

case have been filed in the

D.C. Circuit and not the

Eighth. [Emphasis added]

It is important to keep in mind the

stated intentions of AP&L in_- the

pending federal litigation. During the

hearing on the Stipulation, Chairman

Johnston addressed the following

inquiry to AP&L's attorney, Mr. Jerry

Jackson:

Mr. Jackson, as I understand

it. . . the position of AP&L

is that if this Commission

DOCKET NOS. 84-249-U and 85-198-U

PAGE -26-

rejects the settlement

proposal, that under federal

law, it is not within’ the

discretion of this Commission

to so reject and that under

federal preemption and the

so-called Narragansett

Doctrine or the series of

cases arising out of

Narragansett that this

Commission must pass’7 through

100 percent of the cost and

that AP&L would seek to

litigate that question in

federal District Court. Is

that a correct interpretation?

MR. JACKSON: Mr. Chairman, .

- «That is our position that

we have taken throughout these

proceedings.

Our position is simply that if

the Commission does not

[accept] the settlement .. .

then it is our intent to press

our claims in the pending case

before the U.S. District Court

to secure what we believe is

the relief that we're entitled

to under the law, and that is

100 percent recovery of the

cost related to Grand Gulf.

Also, we firmly believe that

the law is clear on the

Federal Power Act, as we've

stated before. That this

DOCKET NOS. 84-249-U and 85-198-U

PAGE -27-

Commission really doesn't have

discretion in this particular

area. This area is preempted

by the Federal Power Act,

which invests in the FERC the

sole, exclusive, and

preemptive jurisdiction with

respect to matters involving

interstate sales of power in

interstate commerce.

[Federal] Judge Woods'

decision was very clear in his

oral findings from the Bench

that the states don't have any

authority with respect to the

pass-through of costs. The

FERC has addressed that

issue. And the Eighth Circuit

in affirming Judge Woods on

impact -- or interference on

interstate commerce grounds

stated that the states do not

have the authority to

essentially erect 3 fence

around their boundaries to

keep the Grand Gulf costs out.

So, Mr. Chairman, we believe

we have a very, very strong

legal position. That if this

Commission rejects the

settlement and does not permit

the full recovery of Grand

Gulf costs, then we believe

that the federal court has no

alternative but to find that

this Commission should have

DOCKET NOS. 84-249-U and 85-198-U

PAGE -28-

allowed full recovery and will

issue an order requiring full

100 rcent of these costs.

[Emphasis added].

Therefore, it appears that we are

faced with the unenviable decision of

whether to gamble in the federal courts

where we have already received clear

signals that restrict our discretion

regardless of the merits of the issues

under state law or to approve a

Stipulation urged upon us by all of the

parties hereto. It is a gross

understatement to say that this is a

difficult decision. It is a bitter

pill to swallow to say that Arkansans

must shoulder any of the burden of

Grand Gulf. Yet it appears that we

must now swallow that bitter pill.

DOCKET NOS. 84-249-U and 85-198-U

PAGE -29-

In considering the Stipulation

filed by the Parties, the Commissioners

have been forced to make certain

assumptions as to future events and the

underlying premises of the

Stipulation. The very length and

complexity of the various proceedings,

which have led up to this Stipulation

render it a practical impossibility for

any one document to address and dispose

of all conceivable assumptions’ and

eventualities. Assuredly, each of the

parties who were engaged in the

negotiations have relied upon various

assumptions in agreeing to the final

product. Had we the luxury of time, we

might wish to delve into those

assumptions. However, time is not a

luxury we have been afforded = and,

DOCKET NOS. 84-249-U and 85-198-U

PAGE -30-

therefore, we must make our own

assumptions about existing ambiguities,

as well as future events. The

Commission deems it necessary to point

out some, though by no means all, of

the assumptions which, of necessity we

have made in reaching our decision.

During the hearing of this matter

senior officials of AP&L have addressed

a number of cost-cutting or

belt-tightening measures that have been

implemented by the Company in

recognition of and in response to its

depressed financial circumstances.

Measures undertaken or proposed by the

Company in an effort to conserve cash,

reduce expenses or otherwise improve

its financial condition include but are

not limited to the following: efforts

DOCKET NOS. 84-249-U and 85-198-U

PAGE -3l-

to measure and improve the productivity

of its employees; the development of a

more economical customer billing

program; severely restricting or

delaying construction projects to the

greatest extent that is reasonable;

cash conservation practices in the

areas of travel restrictions,

contributions, dues and fees deferment

or deletion; a hiring freeze and

conservative policy on promotions;

frugality in executive Salaries;

reduction in legal fees; reduction in

interest-free deposits at financial

institutions; reduction in the_- work

force through attrition; the possible

implementation of a Materials

Management Information System;

restrictions on advertising

DOCKET NOS. 84-249-U and 85-198-U

PAGE -32-

expenditures; the elimination or

cut-back of Company programs that are

presently unnecessary; and efforts to

otherwise reduce general operation and

maintenance expenses.

We assume that the Stipulation

contemplates an ongoing voluntary

effort on the part of AP&L to continue

to pursue such austerity or

cost-cutting measures in order to

strenaqthen its financial position,

thereby improving the probability of

AP&L's continued ability to finance the

deferral or phase-in of a portion of

the Grand Gulf 1 costs as provided for

in the Stipulation. The continuation

of such measures further appears to be

imminently reasonable in light of the

sacrifices which the Company's

DOCKET NOS. 84-249-U and 85-198-U

PAGE -33-

ratepayers are now being called upon to

make. The continuation of such

measures appears to be ae reasonable

course of action on the Company's part

as it endeavors to maintain its ability

to finance the deferral or phase-in.

In the same vein we also assume that

AP&L will exercise conservative

restraint and fiscal responsibility in

its consideration of future dividend

payments and will maintain a dividend

policy which will enhance its ability

to finance deferrals. Additionally we

assume that the Company's plan to

relocate its corporate offices to the

new Capitol Towers office building will

produce a net economic benefit to the

Company. Further, we assume that the

Company will maintain its pension funds

DOCKET NOS. 84-249-U and 85-198-U

PAGE -34-

at a reasonable level, i.e. not

overfunded.

Grand Gulf Unit 2 is not addressed

either directly or indirectly in the

Stipulation; therefore, we can only

assume that any future decisions

regarding the cancellation or

completion of Unit 2 will not affect

the Stipulation nor will the

Stipulation have an effect upon future

requlatory treatment of the costs

associated with Unit 2. By omission

the Stipulation leaves unresolved those

issues relating to the future

regulatory treatment of Unit 2.

The Stipulation has as its

foundation a myriad of economic and

engineering assumptions, projections

and forecasts which extend over a

DOCKET NOS. 84-249-U and 85-198-U

PAGE -35-

considerable period of time. Our

acceptance of the Stipulation is,

therefore, based not only upon the

sworn testimony é..ji representation of

the parties but also upon our

assumption that the underlying

projections and forecasts made oy the

parties are and will prove to 0be

reasonably accurate.

This Stipulation is directed to

AP&L and seeks to allow AP&L to remain

financially viable, which would allow

AP&L to finance the deferred Grand Gulf

costs included in the Stipulation. The

Commission assumes that AP&L will only

be able to renegotiate or terminate the

Stipulation on the basis of inadequate

revenues or earnings, if AP&L itself

has inadequate revenues or earnings,

DOCKET NOS. 84-249-U and 85-198-U

PAGE -36-

not if a sister or parent compény has

inadequate revenues or earnings. The

Commission further assumes’ that’ the

funds paid by Arkansas ratepayers will

not be used to subsidize Louisiana or

Mississippi ratepayers or assume the

obligations of MSU operating companies

to the extent that ratepayers in those

states fail to bear their proportionate

share of Grand Gulf l.

The Commission intends to pursue

vigorously the appeals from the FERC

decision in Opinion No. 234. We assume

that AP&L will make a_e proportionate

adjustment to the Retained Share,

Inventory Share, and Current Recovery

Share of Grand Gulf 1 costs in order to

flow through any refunds’ or rate

reductions ordered by the FERC or any

DOCKET NOS. 84-249-U and 85-198-U

PAGE -37-

court as a result of the appeals of

Opinion No. 234 or any other Grand Gulf

l-related action initiated at the

FERC. For example, if a court reversed

Opinion No. 234 and ordered MSE _ to

decrease future rates to AP&L

sufficiently to recoup past

overcharges, AP&L would adjust retail

rates to reflect that order.

Similarly, if any court ordered a stay

of Opinion No. 234 after AP&L_ had

collected rates for Grand Gulf 1, AP&L

would adjust retail rates to reflect

that stay.

We are confronted with a

Stipulation agreement to end, though

not decide, the many thorny’ issues

pending in this Docket. The

stipulation is presented for our review

DOCKET NOS. 84-249-U and 85-198-U

PAGE -38- .

and approval, specifically contingent

upon our approval without

modification. Our only options are to

"take it or leave it," although in this

instance we take some comfort from the

fact that the terms of the Stipulation

were reached through long hours of hard

bargaining and tough negotiations

between AP&L and all other parties. We

have not previously been presented a

settlement in which any parties other

than MSU and its _ subsidiaries’ had

participated in negotiations.

The Stipulation and the preceding

negotiations bring to mind the

Statement "He who arises from the table

of compromise thinking he has won, has

lost." While we cannot speak to the

thought processes of any of the parties

DOCKET NOS. 84-249-U and 85-198-U

PAGE -39-

actually at the table of compromise,

the Commissioners are fully aware in

accepting the Stipulation that we have

not won nor have the people of Arkansas

won; neither have we lost. We have

accepted a Stipulation which we believe

to be in the public interest.

Hopefully, we have put an end to years

of costly litigation, to the potential

for federal courts to further encroach

upon the state's right to set retail

electric rates and to the uncertainty

of possible bankruptcy proceedings. We

have enhanced the ability for all the

parties to fully devote our time and

resources to overturning the unjust

decision of the FERC which engendered

the present situation.

DOCKET NOS. 84-249-U and 85-198-U

PAGE -40-

The Commission spent many _ long

hours reviewing the Stipulation = and

approximately three hundred pages of

documents, tables and charts’ sumitted

with it. We held a public hearing of

approximately four hours duration,

during which comments were heard from

nineteen citizens and testimony from

six witnesses. Fifteen members of the

public spoke in support of the

settlement and the witnesses for the

parties testified in support of the

settlement. We have spent hours

deliberating and reviewing the

Stipulation, the transcript, as_ well

as, drafting our opinion.

We have been presented with this

Stipulation at the “eleventh hour." We

are urged by all parties, parties who

DOCKET NOS. 84-249-U and 85-198-U

PAGE -41l-

have been bitter adversaries in this

docket, to accept this Stipulation. We

accept the Stipulation in the spirit in

which it was presented to us, as the

best of two bad alternatives. In

approving it, we find that it produces

rates which are in the public interest

under the circumstances at this time.

We do not by accepting the Stipulation

abdicate our authority to set just and

reasonable rates nor do we in any way

deregulate AP&L now or for the duration

of this Stipulation.

Therefore, based upon the sworn

testimony and representation of the

parties hereto, including the

assumption that the projections

supporting the Stipulation are and will

prove to be reasonably accirate; based

DOCKET NOS. 84-249-U and 85-198-U

PAGE -42-

upon the current status of the law in

the 8th Circuit and recognizing that

the law concerning preemption of the

state's role in this matter is

unsettled; based upon the present

apparent enforceability of the FERC

order, unless and until it is reversed

or modified; based upon the current

financial condition of AP&L; and, based

upon the other presently existing

circumstances aS we appreciate them, we

accept the Stipulation as a reasonable

conclusion of this Docket. By

accepting this Stipulation, we neither

address nor decide the other

controversial issues presented to us in

this Docket.

IT IS, THEREFORE, ORDERED:

DOCKET NOS. 84-249-U and 85-198-U

PAGE -43-

Le That the Stipulation entered

into between Arkansas Power & Light

Company, the Staff of the Arkansas

Public Service Commission, Steve Clark,

Attorney General of Arkansas, Reynolds

Metals Company, Arkansas Electric

Energy Consumers, and Southern Cotton

Ginners Association, as filed herein,

including Rate Schedule Rider M33 and

Rate Schedule Rider M32, is’ hereby

accepted, and approved.

2. That for purposes of

implementing the Stipulation entered

into by the parties in this proceeding,

the revised rate schedules filed by

Arkansas Power & Light Company in

Docket No. 84-249-U, be, and the same

are, hereby disapproved and the Company

is authorized to file in lieu thereof

DOCKET NOS. 84-249-U and 85-198-U

PAGE -44-

revised rate schedules consistent with

the Stipulation. We find and determine

that rate schedules consistent with our

findings herein will be the just and

reasonable rate or rates to be charged

by AP&L for its service in Arkansas.

3. That the revised rate

schedules to be filed for Commission

approval pursuant to this Order, shall

be effective for service rendered on

and after September 9, 1985.

4. That the accounting entries

submitted with the Stipulation, which

assure future collection of any

deferred costs under the phase-in and

inventory provisions of Rider M33 as

well as the deferred return on excess

capacity, and Rate Schedule Rider M32,

are approved.

DOCKET NOS. 84-249-U and 85-198-U

PAGE -45-

BY ORDER OF THE COMMISSION

This 9th day of September, 1985.

/s/

Dr. Robert E. Johnston, Chairman

/s/

James W. Daniel, Commissioner

/s/

Patricia S. Qualls, Commissioner

/s/

Melinda Mills

Secretary of the Commission