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FEBRUARY 25, 1987




This is an appeal from an order issued by the Mississippi Public Service Commission (MPSC) on September 16, 1985, in which Mississippi Power & Light Company (MP&L) was granted the largest rate increase it has ever requested, based on the costs associated with the Grand Gulf I Nuclear Power Plant (Grand Gulf). In granting the increase, on September 16, 1985, the MPSC found that MP&L had a revenue deficiency of and granted an additional increase of $326,547,000.00, despite the fact that it had granted MP&L an increase of $44,671,544.00 in June, 1985. Collection of the $326,587,000.00 increase was ordered over a ten year period.

The Mississippi Attorney General and the Mississippi Legal Services Coalition (MLSC) have appealed, assigning as error:

 1) The adoption of retail rates to pay Grand Gulf expenses without first determining that the expenses were prudently incurred;

 2) Substantive ex parte communications between the MPSC and other parties to this cause;

 3) The ultra vires act of the MPSC in adopting prospective rates to go into effect in the future without regard to whether they will then be just, reasonable, and nondiscriminatory;

 4) The failure to join Middle South Utilities and Middle South Energy, Inc. as parties to this cause;

 5) The adoption of rates without substantial evidence to support the utilization of a projected test year;

 6) MP&L's estoppel from seeking reimbursement of expenses greater than that originally represented to the MPSC when the Certificate of Need was issued;

 7) Intervention of resident security holders;

 8) Failure of the MPSC to follow procedural orders in conducting the rate hearing;

 9) Adopting rates without substantial evidence of need; and

 10) Allowing rates to reflect Grand Gulf costs that are not just and reasonable.

 We find that Assignments 1, 4 and 7 have merit. Because MP&L and its sister and parent companies have used the jurisdictional relationship between state and federal regulatory agencies to completely evade a prudency review of Grand Gulf costs by either agency, we reverse and remand this case to the MPSC for further proceedings.


 Middle South Utilities, Inc. (MSU) consists of four operating companies (companies that actually generate electricity) and two service companies. The operating companies are: Arkansas Power & Light Company (AP&L),

 Louisiana Power & Light Company (LP&L), Mississippi Power & Light Company (MP&L), and New Orleans Public Service, Inc. (NOPSI). The service companies are: Middle South Services, Inc. (MSS), which provides technical and professional services to the operating companies, and Middle South Energy, Inc. (MSEI), formed in 1973 to finance the Grand Gulf project. In July, 1986, after the hearings before the MPSC in this case, MSEI changed its name to System Energy Resources, Inc. (SERI).

 The operating companies all issue common, (the only voting) stock, preferred (non voting) stock, and bonds. All of the common stock of each operating company, however, is held by MSU. The Chief Executive Officer of MSU, by voting the common stock of each operating company, is solely empowered to elect all of the directors for each operating company, and these directors then elect the officers of their companies. One important function of the Chief Executive Officers of the operating companies is to sit on the Operating Committee, which makes major system-wide decisions. Thus, the Operating Committee's decisions are made by officers all of whom are completely under the control of the Chief Executive Officer of MSU.

 The MSU subsidiaries operate as an integrated system. Although the companies generally own their own power plants, they pool their generated electricity. This electricity is coordinated among the operating companies in response to their needs. A dispatching facility in Pine Bluff, Arkansas, allocates the energy produced by all of the companies, with each company meeting its needs first with the lowest cost energy that it can produce. If a company needs more energy than it can produce, it is allocated higher cost energy from the other operating companies. When the entire system produces more energy than it can use, the excess energy may be sold off the system.

 In addition to sharing energy, the operating companies also share in the cost of energy-producing capacity. The method of allocating the cost of capacity has changed, by agreement of the operating companies, since the construction of Grand Gulf was authorized by the MPSC in 1974, and this change is one of the primary issues of this litigation.

 In 1973, MSU and its subsidiaries reached an agreement which equalized the ownership costs of generating capacity throughout the MSU system. In that agreement, companies owning capacity in excess of that required to meet their needs were referred to as" long "companies. Companies requiring additional capacity to meet their needs were referred to

 as" short "companies. Under the concept of equalization, short companies had to share in the costs of the generating units owned by the long companies. The short companies' allocation was calculated on the basis of the costs of the long companies' most recently installed generating units, called" participation units. "

 When the 1973 System Agreement became effective, MSU was planning the Grand Gulf Nuclear Station. The original plan was to build one nuclear plant at the Grand Gulf site, under the management and control of MP&L, and one plant in Louisiana, under the control of NOPSI. However, the NOPSI site proved unsuitable, and MP&L, alone, could not finance a nuclear generating plant; therefore, MSEI (now SERI) was formed to provide financing for two nuclear generating plants at Grand Gulf.

 In 1974, the MPSC issued its" Order Granting Certificate of Public Convenience and Necessity "authorizing the construction of Grand Gulf. MSEI, the actual owner of the proposed two-unit facility, joined MP&L as a petitioner. The Order reflected the understanding of all of the parties involved that the 1973 Agreement would be amended to include MSEI as a party.

 We cannot stress enough the implications of this agreement embodied in the 1974 Order. MSEI is not an operating company; therefore, it does not require any generating capacity for itself. Under the 1973 Agreement, it would always be a long company, with excess capacity to allocate among the short companies. Grand Gulf, its most recently installed generating unit, would become MSEI's participation unit, from which the costs to the short companies would be calculated.

 At the time that the Certificate of Need was granted, it was projected that Mississippi's demand for power would increase to the point where MP&L would utilize about 38% of Grand Gulf. That demand has not materialized, and MP&L remains a long company. Under the 1973 Agreement, it would not be required to share in the allocation of costs of Grand Gulf unless and until it required additional capacity to meet its needs. Even if the increased consumption had materialized however, and MP&L had become a short company, it would have had to pay costs associated with Grand Gulf only to the extent that it required additional capacity.

 In the later 1970's, MSU management began to have concern about the 1973 Agreement. Since the demand forecasts showed that MP&L and AP&L were long companies, and would

 remain so for some time, they would not need to purchase capacity until the planned nuclear plants had been greatly depreciated. Thus, they would not be required to bear the brunt of the costs of nuclear construction, as would the short companies. MSU's Operating Committee, consisting of the Chief Executive Officers of AP&L, LP&L, MP&L and NOPSI, studied the situation for several years, and, in the 1980, voted to adopt a new system agreement.

 The new agreement, referred to throughout these proceedings as the 1982 System Agreement, eliminated the participation unit concept. Instead, the companies were to implement the use of" intermediate Generating Units, "defined as oil and gas burning units, to allocate the cost of capacity. The rationale for the change was as follows: Nuclear units, with their high fixed costs and low fuel costs, are run around the clock to provide the operating companies with base capacity. Oil and gas units, with their low fixed costs and high fuel costs, are primarily operated to provide reserve capacity: for instance, on hot summer days. Thus, excess capacity is more likely to have come from the operation of oil and gas burning, rather than nuclear, generating units. The effect of this change was that capacity allocated to companies in the MSU system was calculated on the cost of the generating oil and gas units, at a fraction of the cost of nuclear energy.

 MSEI had no oil and gas burning units and was not a party to the 1982 System Agreement. It required however, a methodology for the allocation of the cost of the nuclear capacity at Grand Gulf. To that end, MSEI entered into a Unit Power Sales Agreement (UPSA) with the operating companies. The UPSA allocated Grand Gulf 1 among the operating companies as follows:

 LP&L 38.57% MP&L 31.63% NOPSI 29.80% AP&L 0.00%

 The UPSA was not filed with the MPSC. However, it was filed with the Federal Energy Regulatory Commission (FERC) in Docket No. ER82-616-000. The 1982 System Agreement was filed with the FERC in Docket No. ER82-483-000.

 At about the same time that they agreed on the UPSA, the MSU operating companies and MSEI entered into a Power Purchase Advance Payment Agreement. This agreement provided that the companies would pay MSEI in advance for Grand Gulf power. The payments, which totalled $12,500,000.00 per month

 for all of the companies, were to be made from January, 1984, through December, 1985, or whenever Grand Gulf became operational. Eighteen payments were made under this agreement; MP&L paid 33% of the total. The agreement provided that on the date that Grand Gulf became operational, and for eleven months thereafter, the companies would be reimbursed for 4% of the outstanding balance of the advances. The companies would get 8 ...

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