Feb. 13, 2010, Don Kreis: Not So Fast–N.Y. Public Service Commission Didn’t Reject Entergy Proposal; It Merely Steered Middle Ground

Don KreisThis article by Don Kreis originally appeared in vtdigger.org on February 13, 2010

Entergy’s quest to shed Vermont Yankee and the company’s five other nuclear power plants took something of a soap-operatic turn on Thursday in New York.

Regulators in New York and Vermont are all that stand between Entergy and its plan to spin off its nuclear fleet to a new company Entergy has created, called Enexus. The transaction as presently proposed would involve Enexus borrowing $3.5 billion from banks. Entergy would get $2.75 billion of that in cash and the nuclear plants would get a new owner that is much more leveraged, and thus a much riskier corporate entity, than the old one.

Just as the Vermont Public Service Board has the authority to reject the plan, so too is the Entergy-Enexus deal pending before the New York Public Service Commission. News reports emanating from Albany on Thursday suggested that the New York regulators had rejected the Enexus proposal, at least in its present form.

In fact, all the Public Service Commission did on Thursday was issue a press release. And one might reasonably conclude that the issuance was merely a new episode in a political drama that appears to be unfolding with Entergy and New York Attorney General Andrew Cuomo as major characters.

The Public Service Commission’s press release was admittedly quite a substantive issuance, expressing doubts about whether the Entergy-Enexus proposal meets the standard for approval under New York law. According to the press release, the Enexus deal is “problematic” because “the amount of debt leverage employed to finance Enexus is excessive when the business risks of this new merchant nuclear plant enterprise are considered.”

The New York regulators’ press release went on to suggests some changes that would make the Enexus proposal less problematic. They included trimming the Enexus debt to roughly $3 billion, which presumably would mean $500 million less cash to Entergy in exchange for the nuclear plants.

Two other suggestions came from the New York Public Service Board. One was that Enexus should “assure [its] long-term financial capabilities through maintenance of a specified bond rating or ratio of debt-to-equity market value.” Another was to “provide New York ratepayers some of the potential hedging benefits of nuclear power in periods of rising commodity prices.”

That last suggestion strongly resembles the deal cut in Vermont eight years ago, when Entergy bought Vermont Yankee and agreed to a long-term deal to sell roughly half the plant’s output to the state’s two major utilities, which formerly owned the majority interest in Vermont Yankee. The deal expires in two years and Entergy wants to replace it with a much smaller contract that is less favorable to the Vermont utilities and thus their customers.

The press release from the Public Service Commission in Albany looks like an effort to steer a middle ground between Cuomo and Enexus.

But the most noteworthy thing about the New York regulators’ press release is that it was just that: a press release, as opposed to a decision or even a recommended decision. The document cryptically references a “report” the agency received from unidentified “senior Staff.” But the report itself was not issued publicly and, indeed, the press release did not indicate whether the report was even delivered in writing.

This becomes more understandable when one considers last week’s submission to the commission by the office of New York Attorney General Andrew Cuomo. The AG urged the regulators to require the two administrative law judges handling the case to issue a written recommended decision or some other kind of formal report. The idea would be to subject those recommendations to public comment prior to a final decision by the five members of the New York Public Service Commission themselves.

Cuomo’s office is unabashedly hostile to proposed spin-off, which would include two nuclear facilities in New York: Indian Point, on the Hudson River just north of New York City, and FitzPatrick on Lake Ontario. To get a feel for Cuomo’s take on the proposal, here’s how the February 3 submission from his office summarizes it: “Entergy seeks to spin off several aging nuclear power plants to a new and debt-laded corporation whose only assets would be the plants themselves. Not only would this new corporation be heavily-indebted, it would be unique; no other corporation is exclusively built around aging nuclear reactors that operate in a ‘merchant’ [i.e., non-utility] power system.”

In these circumstances, the press release from the Public Service Commission in Albany looks like an effort to steer a middle ground between Cuomo and Enexus. Cuomo didn’t get his recommended decision, but he did get a written document on which to comment. Enexus and its progenitor got a warning to sweeten the deal.

The progenitor in question may be disinclined to do that. In his quarterly conference call with investment analysts earlier this month, Entergy CEO Wayne Leonard warned that an unfavorable ruling on the spin-off in New York would trigger “decisive actions to eliminate disynergies.” That’s nothing if not cryptic – “disynergy” is not in the dictionary, after all. But Leonard gave a hint of one possibility in an interview with Bloomberg News back in November.

According to Bloomberg, Leonard said that one option would involve Entergy keeping the nuclear plants and spinning off its un-risky regulated utility subsidiaries in Arkansas, Louisiana, Mississippi and Texas. This would achieve much the same effect as the Enexus deal – but, according to Leonard, since the nuclear plants in New York would not change hands the regulators in New York would have no ability to stop the deal. Entergy would presumably make a similar argument in Vermont.

The latest regulatory doings in New York point up the bind that such high-stakes proposals put state utility regulators. Leaving most electric and telephone companies in private hands reflects a policy choice to the effect that the private sector is better qualified than the government to run these systems. Thus regulators feel pressure not to veto the strategic business decisions those private actors propose. The regulators nevertheless have great leverage but their status as quasi-judicial decision-makers precludes using that leverage behind closed doors where business negotiations typically unfold.

The result is the kind of awkward public jousting reflected in this week’s press release from the New York Public Service Board. Much the same dynamic applied two years ago when regulators in Vermont, New Hampshire and Maine considered, extracted changes to, and then approved, Verizon’s plan to sell its landline phone network to Fairpoint Communications.

Like the proposed Entergy-Enexus deal, Verizon-Fairpoint involved one company walking away with a pile of cash and the other walking away with new assets, new responsibilities, and a pile of debt. Obviously, regulators do not want Enexus to end up in bankruptcy like Fairpoint did.

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