Rarely is a Louisiana Public Service Commission meeting as significant in scope as the discussion and vote Wednesday on two Entergy requests: that its customers pay for a $140-million mistake at nuclear power plant and permission to build a new natural gas-fueled plant.
Some of the giants of Louisiana industry have lined up in opposition to Entergy’s requests.
Atypically, the five PSC commissioners have been circumspect in conversations over the past weeks about their leanings on either issue.
They seem to agree that making customers pay for the mistake, in Commissioner Foster Campbell’s words, “rewards incompetence on the backs of everyday Mom and Pop consumers.”
On the other hand, Campbell included, they seem to also acknowledge the long-term consequences of their decisions Wednesday and in PSC Commissioner Scott Angelle’s words, “We can’t just go off half-cocked.”
The November 2010 discovery of “visible cracks and distortion” on key pieces of equipment to be installed at the Waterford 3 nuclear power plant launched a debate over money and principle. Entergy Louisiana LLC wants its 1 million customers to pay, including a profit.
Some of the utility’s largest customers counter that Entergy’s shareholders, not customers, should be responsible for a goof caused by contractors.
How the five elected members of the state Public Service Commission decide Wednesday on who pays for these cost overruns at the nuclear plant roughly across the river from the Bonnet Carré Spillway will set the precedent for what happens as the private utility embarks on a massive building campaign across Louisiana.
Entergy's second-quarter profit easily topped Wall Street's expectations, and the power comp…
Entergy officials told Wall Street investors in June that a cornerstone of its business strategy over the next few decades is to update and expand its fleet of electricity-making plants. One of the first of those new facilities – the $869 million combined-cycle generator fueled by natural gas – is included on Wednesday’s docket for PSC consideration.
Many, though not all, of the same industrial customers that reject Entergy’s plan to charge customers for the Waterford 3 cost overruns, also oppose the utility’s plans to build the new facility. They argue that during the vetting process, Entergy tailored its request for proposals to ensure that only building its own plant was the best option.
Entergy Louisiana President and CEO Phillip May, who wouldn’t comment on the Waterford 3 cost overruns, said the complaints about the new St. Charles Project sounded a lot like whining from companies which have their own power to sell and lost out.
May was one of the few involved in the two controversies willing to speak on the record. But nearly every expert, staffer, intervener, lobbyist and lawyer involved in both the Waterford 3 mistake and the new St. Charles Project filed testimony, briefs and reports with the PSC.
The Waterford 3 unit, which accounts for about 30 percent of Entergy Louisiana’s total generation, began operations in 1985. Hoping to extend the plant’s lifespan to about 2045, Entergy replaced the two aging steam generators with new 720-ton, 65-foot-long units. The cost was to be $511 million and the project was to be completed by 2011, according to PSC filings.
Entergy Corp. will transfer ownership of its James A. FitzPatrick Nuclear Power Plant in Scr…
Very generally, nuclear rods heat water that makes the steam that under pressure turns the turbines that make electricity. The generators sit inside the nuclear power plant's containment vessel and are radioactive.
In November 2007, Entergy hired Westinghouse, which now owns the company that designed the original steam generators. Westinghouse subcontracted with Equipos Nucleares S.A. of Spain to handle the fabrication.
On Nov. 24, 2010, after three days testing, Equipos Nucleares found that part of a layer of protective stainless steel, called “cladding,” had failed to bond with the container’s underlying carbon steel and caused “visible cracks and distortion,” according to expert testimony and Westinghouse’s internal review report. Left unrepaired, the situation could have undermined the stability of the nuclear fuel and possibly led to a catastrophic accident.
The units were redesigned, installed and went on line in December 2012 – 18 months late. Entergy and Westinghouse negotiated a settlement that covered some of the cost overruns. The final cost of the Replacement Project was $651.4 million or 26.6 percent more than the original calculations.
Entergy likens the mistake at Waterford 3 to one of those unexpected expenses of doing business that should be included in customer rates.
While the additional costs would add dimes to the monthly bills of most of Entergy’s residential customers, they are significant dollars to the refineries and petro-chemical manufacturers.
Entergy’s largest customers balked at paying for the mistake.
Most of those industrial users – including Air Liquide Large Industries, BASF Corp., Chevron, Dow and ExxonMobil – are represented by the Louisiana Energy Users Group, a Baton Rouge-based trade association. Others, like Marathon Petroleum Company and Bayou Steel, actively intervened to object to the PSC allowing the overrun to be added to the base rate. Wal-Mart Stores Inc., a huge commercial user of electricity, entered the case as an interested party.
Because private utilities are allowed to operate as a monopoly within their territory, the Louisiana Constitution gives the PSC authority to oversee business decisions that could translate into the rates that customers, who have no other choice, pay for their electricity.
Generally, utilities can charge the cost of making and transmitting electricity plus a predetermined profit of about 10 percent. Added to that “base rate” is the “fuel adjustment,” an additional charge that covers the cost of the fuel – natural gas, nuclear rods, etc. – used to run the generating plants to make electricity. That cost is passed through to the customer with no profit attached.
LEUG and Entergy’s big industrial customers argued that PSC already has determined that a utility company is responsible for the mistakes of its contractors.
The Louisiana Supreme Court, in upholding that principle, ruled in 1991 that the utility needs to demonstrate “a reasonable decision-making process” given the facts at the time of the mistake. “If the Company fails to carry its burden, it will be saddled with those replacement costs.”
Entergy counters those decisions were made in cases involving fuel adjustments and that the PSC had never applied the principle to contractors on a “major capital project.” Blaming “vendor negligence in this case also would create a policy that is likely to increase costs to customers in the future,” Entergy’s lawyers argued.
The utility is looking at building plants in Lake Charles and in east Texas in the near future. In the meantime, the PSC is scheduled to be asked Wednesday for permission to build a state-of-the-art generator using natural gas, at a cost of $868.6 million, in St. Charles Parish.
Some of the LEUG members – not all, for instance, Valero Refining New Orleans LLC – along with Occidental Chemical Corp., and Calpine Corp., argue that Entergy’s submissions supporting the need for new power and criteria were tailored to persuade regulators that allowing the utility to build its own new plants was the most affordable alternative.
The costs of Entergy building the plant itself are paid by its customers and would include a profit. If the utility bought power from a merchant, those costs are paid through “fuel adjustment” portion of the bill, on which Entergy could not earn a profit.
Oxy, for instance, argued the additional power Entergy sought could be obtained by “building additional transmission to increase power flows into the area.”
Entergy Louisiana CEO May said geographic constraints – the Gulf of Mexico and Lake Pontchartrain – limit the ability to move power into the southeastern portions of the state.
“We need new steel in the ground,” May said in an interview Friday. “Every aspect of this plant has been examined and scrutinized.”
May apologized for his anger when talking about how industrial clients waited until the project was ready for PSC approval before raising objections.
PSC staff agreed, writing in its brief: “The goal of Occidental and Calpine is transparent – to better position their respective generation for future purchase…”
(LEUG argues that at no earlier point in the process could presumptions be challenged, witnesses presented and cross-examined.)
An independent monitor oversaw each step of the multi-year process, checked the math and agreed with the decision for Entergy to build its own unit, he said.
The new St. Charles plant will cost about a third less to operate than the older plants it will displace, he said, adding that customers would save about $1.3 billion over the unit’s 30-year life.
May argued that in 2020, the full first year of operation, the typical residential customer using an average of 1,000 kilowatt hour of electricity (a typical homeowner uses about 1,300 kWh per month) will see a projected net increase of $1.92 on their monthly bill. But the average base rates will go down as the savings from fuel costs go up month after month.