Entergy’s strategy related to its integration into MISO received another high hurdle this week. The Mississippi Public Service Commission (“MPSC”) denied the Joint Application to transfer ownership and control of Entergy Mississippi’s high voltage transmission system to a subsidiary of ITC Holding Corporation. In its joint application, Entergy and ITC provide several reasons for the transaction, including the need for major capital investment to modernize the transmission grid:

Utilities and their regulators are faced with the question of how best to manage the increasing and evolving requirements that will be imposed to modernize the transmission grid, particularly in the light of capital requirements also facing the generation and distribution functions. The  proposed ITC Transaction, for which approval is being sought in this Joint Application, is part of EMI’s solution to address these escalating requirements for new  capital investment.[1]

Entergy also said the transfer would facilitate and build on the benefits of the Day 2 wholesale market that will be available when Entergy joins MISO.

However, MPSC did not find those or other stated benefits compelling enough to approve the transaction. In fact, the Commission took 99 pages to opine on why the transfer of Entergy’s transmission assets to ITC is not in the best interest of Entergy Mississippi’s customers. A long and interesting read, this phrase from paragraph 5 of the Decision reflects the gist of the Commission’s sentiment regard the transaction,

…offers with certainty only significant cost to ratepayers and complete loss of this Commission’s rate jurisdiction over the transmission assets at issue.

Although the MPSC seems to think it can still happen[2], this decision, along with the SPP remand, places Entergy in an interesting position regarding the MISO integration.

[1] Joint Application, page 4.
[2] Paragraph 18 of the decision directs Entergy to work with staff and file an initial plan regarding transmission upgrades 90 days after Entergy’s integration into MISO.

In 2011, Entergy announced it would be joining the Midwest Independent Transmission System Operator (“MISO”). Entergy’s transmission lines are currently connected to both MISO and Southwest Power Pool’s (“SPP”) networks. In order to fully absorb Entergy’s electricity — which is based in Arkansas, Mississippi, Louisiana and Texas — MISO proposed transferring some of the electricity over SPP’s lines. Entergy’s Arkansas arm is scheduled to connect to the MISO network by the end of 2013. SPP objected and said the proposal violated a joint operating agreement that allowed MISO to use its lines only if it was moving electricity from a third party. Once MISO absorbs Entergy, SPP argued, the utility would no longer be a third party.

Section 5.2 of the Joint Operating Agreement is the center of the dispute:

Sharing Contract Path Capacity. If the Parties have contract paths to the same entity, the combined contract path capacity will be made available for use by both Parties. This will not create new contract paths for either Party that did not previously exist. SPP will not be able to deal directly with companies with which it does not physically or contractually interconnect and the [MISO] will not be able to deal directly with companies with which it does not physically or contractually interconnect.

SPP argues that an RTO cannot have a “contract path to” itself or to part of itself. Thus, once Entergy Arkansas joins MISO, Section 5.2 will no longer apply. After the parties negotiated for some time in vain, MISO petitioned FERC for a declaratory judgment on the interpretation of Section 5.2. FERC adopted MISO’s reading, finding that the term “contract path” was broad enough to encompass any physical or contractual interconnection, and that “entity” could include any operating entity, whether or not it was part of one of the RTOs. Order, 136 FERC ¶ 61,010 at PP 61-62; Order on Rehearing, 138 FERC ¶ 61,055

On appeal, SPP told the three-judge D.C. Circuit panel that FERC did not consider evidence that supported SPP’s interpretation of the joint operating agreement. The D.C. Circuit unanimously agreed, vacating FERC’s order and sending it back to the Commission to reconsider.

…we find that the Commission failed to provide a reasoned explanation for its decision. It leapt to an interpretation of one item of evidence without explaining its implicit rejection of alternative interpretations, and, equally without explanation (or at least adequate explanation), it disregarded evidence that the applicable law required it to consider. See Order on Petition for Declaratory Order, 136 FERC ¶ 61,010 (2011) (“Order”), rehearing denied, Order on Rehearing, 138 FERC ¶ 61,055 (2012) (“Order on Rehearing”). Accordingly, its decision was arbitrary and capricious, and we vacate and remand the orders. Opinion page 2.

Like most litigation, this underscores the importance of understanding when negotiating contract terms. You never know which clause will mean millions of dollars when the unanticipated occurs. In light of this dispute, I presume other transmission owners will review similiar language in their agreements.

Yesterday, Entergy announced plans to join the Midwest Independent System Operator (MISO). The New Orleans based utility had been evaluating its options regarding the best management structure for its transmission system, including proposals from the Southwest Power Pool (SPP) and MISO. The study done by Entergy included independent analysis of the savings and actual proposals from SPP and MISO on how certain costs would be shared. This evaluation summary shows that joining MISO could save customers more than $1 billion in power production costs for the 2013 to 2022 timeframe. While both MISO and SPP were assumed to have a Day 2 market, an advantage of joining MISO is that it has an operating Day 2 market today:

The analysis clearly shows there are compelling benefits to joining a regional transmission organization with substantial scale and a Day 2 market,” said J. Wayne Leonard, Entergy’s chairman and chief executive officer. He added, “An organized market design based upon centralized auction markets creates greater efficiencies than one that relies upon bilateral trading, particularly in electricity markets where some congestion is always present. We look forward to discussing in detail the benefits of joining MISO with regulators, their staffs and other stakeholders in the months ahead. As the analysis showed, MISO’s substantial scale and established market made it the clear choice for customer benefits.
Entergy Press Release, April 25, 2011

Given the anticipated departure of FirstEnergy and Duke Ohio, this decision by Entergy must have MISO execs doing the Second Line in Carmel. According to MISO’s news release, the integration of Entergy will create the largest RTO in the US. MISO is presenting to two half-day seminars on May 18 and 19, 2011, for those interested in meeting its leadership and learning more about the organization, its markets and its processes, including optional tours of its Carmel, IN control room. Given the concern about grid security, I question the appropriateness of an open invitation to view MISO’s control room. Hopefully the registration process is designed to carefully screen those allowed to tour the control room, although the invitation appears to be to any interested party.

Now that Entergy has made its decision, how hot will the battle between MISO and SPP over capacity sharing get? Initially, MISO requested expedited treatment to facilitate a decision by Entergy. Several parties opposed special treatment. FERC issued a notice stating that protests and motions are due May 9, 2011.

: We were recently contacted by a representative from MISO regarding the control room concerns who provided the following information:
“In response to your posting on the 26th entitled “Entergy Says Joining MISO Will Save Customers Over $1 Billion” regarding an “open invitation to view MISO’s control room,” I’d like to provide clarity on this matter. While the MISO informational seminars those days are open, tours of the Control Room are subject to the company’s Tour Policy and Security requirements. Tours are conducted from the Overlook, not the control room floor, and are granted on a case-by-case basis with attendees being notified by MISO whether a Control Room tour has been approved. No power marketers are allowed to tour MISO’s operations.” – MISO Representative, May 11, 2011
I thank MISO for this update.