# Appendix — Ratepayers Fight Back v. Middle South Energy, Inc. > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385018_1105%3A4 ## Record - **Collection:** Supreme Court brief - **Document type:** Appendix - **Published:** January 1, 1986 - **Citation:** 474 U.S. 1102 ## Text 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 > it > eje Rule + A case lant T ’ COMMERCE C request a rehea iy iie , 10 iT } fr Appeiiate t Lt [ the Btn 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 I I ee ee ee ee a a ee Oe ' | } fF t } j 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. 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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 --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385018_1105%3A4. Public record. Not legal advice.