NRG Companies Complaint

20080627-5069 FERC PDF (Unofficial) 6/27/2008 3:18:59 PM

UNITED STATES OF AMERICA
BEFORE THE 
FEDERAL ENERGY REGULATORY COMMISSION

NRG Energy, Inc.,
Complainants

)
)
)
)
)
)
)

v.
Entergy Services, Inc.,
Respondent

Docket Nos.

EL08-______-000

COMPLAINT OF THE NRG COMPANIES
THAT ENTERGY’S TRANSMISSION RATES FORMULA THAT INCLUDES
EXECUTIVE BONUS PAY RELATED TO UNREGULATED MERCHANT
GENERATION IS NOT JUST AND REASONABLE
Pursuant to Sections 206 and 306 of the Federal Power Act, 16 U.S.C. §§ 824e
and 825e (2000), and Rules 206 and 306 of the Commission’s Rules of Practice and
Procedure, 18 C.F.R. §§ 385.206 and 385.306 (2007), NRG Energy, Inc. and its affiliated
companies 1 (collectively “NRG” or the “NRG Companies”) respectfully submit this
Complaint against Entergy Services, Inc. (“Entergy”). The complaint alleges that
Entergy’s May 30, 2008 annual transmission rate filing includes bonus compensation
paid to Entergy employees that should not be passed on to its transmission service
customers.
I.

INTRODUCTION

The formula rate utilized by Entergy to establish its Point-to-Point and Network
Service transmission service rates for 2008 allows Entergy to include millions of dollars
in bonus payments to Entergy employees that should not be passed on to transmission

1

The NRG Companies operating in the Entergy control area include Louisiana Generating LLC
(“LaGen”), Bayou Cove Peaking Power LLC, Big Cajun I Peaking Power LLC, NRG Sterlington
Power LLC, and NRG Power Marketing, LLC

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customers. NRG requests that the Commission find it is not just and reasonable to pass
these costs on to Entergy’s captive customers, and set the Entergy’s formula transmission
rates for hearing and settlement proceedings.
The rates filed by Entergy include bonuses:
1)

paid to employees based on the financial performance of the company,
including specifically the performance of the unregulated generation
units;

2)

that have no relation to the quality of the transmission service provided
by Entergy; and

3)

that are paid to employees that spend none of their time administering
the Entergy transmission system.

These bonuses are designed to provide Entergy executives with an incentive to increase
the company’s share price, which are largely driven by profits resulting from Entergy’s
unregulated generation assets. Thus, the bonuses that Entergy is passing through to
transmission customers are not tied to the quality of service provided to Entergy’s
regulated transmission customers and should instead be borne by Entergy shareholders.
Indeed, there is a perverse incentive for these executives to increase shareholder
profits by reducing investment in the transmission system, thereby lowering the quality of
the transmission service provided by Entergy. Further, since the existing rate formula
was established pursuant to settlement in 2000, changes in the industry have rendered the
existing rate unjust and unreasonable. First, Entergy has greatly increased the bonuses it
pays to its employees since 2000, so that these costs have become a significant rate
component. Second, revenues from the unregulated portion of Entergy’s business have
increased disproportionately to the increases in revenues resulting from the regulated
portion of the company, compared to when Entergy was solely a highly regulated
integrated utility.
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The result is that the existing formula transmission rates no longer accurately
distinguish between bonuses received by Entergy employees who are “shared” between
the company’s merchant generation and transmission functions. The current rates allow
Entergy to book one-half of the bonuses received by these shared employees to its
transmission rate base, even though the bonuses are distributed based on Entergy’s
profitability, which is largely driven by its unregulated power sales revenues. 2 The rates
thus do not reflect the current deregulated market, or adequately ensure that captive
transmission customers are not subsidizing Entergy’s non-regulated businesses.
NRG requests that the Commission find that it is unjust, unreasonable and unduly
discriminatory to pass employee bonuses through to Entergy’s transmission customers
and institute a hearing to determine whether Entergy’s existing transmission rate formula
results in unjust and reasonable rates.
II.

THE PARTIES

The NRG Companies are all wholly-owned subsidiaries of NRG Energy, Inc.
Bayou Cove Peaking Power LLC, Big Cajun I Peaking Power LLC, Louisiana
Generating LLC (“LaGen”), and NRG Sterlington Power LLC own approximately 2400
MW of generation facilities in Louisiana. LaGen generates and sells electricity at
wholesale to, among others, eleven rural electric cooperatives in Louisiana. 3 Through its
cooperative customers, LaGen serves a significant portion of the geographic area of the

2

As discussed in Section IV.C below, Entergy’s profits largely derive from its unregulated
nuclear plants and other non-transmission revenues.
3

The cooperative customers of LaGen include Beauregard Electric Cooperative, Inc., Claiborne
Electric Cooperative, Inc., Concordia Electric Cooperative, Inc., Dixie Electric Membership
Corporation, Jefferson Davis Electric Cooperative, Inc., Northeast Louisiana Power Cooperative,
Inc., Pointe Coupee Electric Membership Corporation, South Louisiana Electric Cooperative
Association, Southwest Louisiana Electric Membership Corporation, Valley Electric Membership
Corporation, and Washington-St. Tammany Electric Corp., Inc.

3

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State of Louisiana. NRG Power Marketing LLC is a power marketer that also engages in
wholesale transactions in the Entergy region. The NRG Companies are transmission
customers under the Entergy Open Access Transmission Tariff both on their own behalf
and on behalf of LaGen’s cooperative customers.
Entergy Services is the service company for Entergy Corporation, a registered
public utility holding company, organized under the laws of the State of Delaware, with
its principal place of business in New Orleans, Louisiana. The transmission service rates
charged by the Entergy Operating Companies are subject to the Commission’s
jurisdiction and are required to be just and reasonable and not unduly discriminatory.
III.

COMMUNICATIONS

Communications in connection with this filing should be addressed to:
Jennifer J. Vosburg
NRG Energy, Inc.
112 Telly Street
New Roads, LA 70760
Telephone: (225) 618-4489
Facsimile: (225) 618-4482
[email protected]

IV.

Abraham Silverman
NRG Energy, Inc.
211 Carnegie Center
Princeton, NJ 08540
Telephone: (609) 524-4696
Facsimile: (609) 524-4589
[email protected]

BACKGROUND

Entergy’s Open Access Transmission Tariff (“Tariff”) requires the company to
annually update its: (i) long-term and short-term firm point-to-point transmission service,
(ii) non-firm transmission service and (iii) network integration transmission service rates
(collectively “transmission rates”), based on the actual costs Entergy incurs for the
previous calendar year to provide transmission service to its customers. 4

4

See Entergy Services, Inc., 120 FERC ¶ 61,104 (2007).

4

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The current formula rate allows Entergy to recover in jurisdictional transmission
rates employee payroll expenses related to its operation of its transmission system. The
formula used to determine the rates was accepted by the Commission as part of a
settlement approved by the Commission in 2000. 5 Since 2000, Entergy has turned over
operation of its transmission service to the Independent Coordinator of Transmission
(“ICT”) and has reduced its role in administering the transmission system. During this
same period, transmission customers have experienced a serious decline in the quality
and reliability of transmission service throughout the Entergy system. At the same time,
Entergy’s profits resulting from its unregulated power sales into the organized markets
has greatly increased.
Entergy filed its 2008 rates on May, 30, 2008, in Docket No. ER08-1057-000, as
amended on June 6, 2006, in Docket No. ER08-1057-001. Under the Tariff, all parties
are allowed 120 days after Entergy’s rate filing to review Entergy’s 2008 rate filing, and
may either protest the inputs utilized by Entergy or challenge the formula rate itself. 6
NRG is challenging the rate formula in this Complaint and is also filing a protest of the
inputs filed concurrently in Docket Nos. ER08-1057-000 and -001. The Tariff
specifically provides that Entergy’s 2008 rates are subject to refund or surcharge until the
latest of: (1) the end of the 120-day review period, if at such time there is no outstanding,
unresolved complaint; (2) the final resolution of any complaint filed; or (3) the
completion of any required corrections. 7
V.

COMPLAINT

5

Entergy Services, Inc., Opinion No. 430, 85 FERC ¶ 61,163 (1998), order on reh'g, 91 FERC
¶ 61,153 (2000).

6

See Entergy Tariff, Attachment H, Appendix 1 at Section 5.

7

See id.

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A. The Current Entergy Rate Is Not Just And Reasonable Because It Passes
Non-Transmission Related Costs On To Transmission Customers.
The Federal Power Act requires that all jurisdictional rates are just and
reasonable, and not unduly discriminatory. 8 Entergy’s formula transmission service
rates, however, are not just and reasonable because they include bonus payments made to
Entergy employees to transmission customers in the transmission service revenue
requirements, without any evidence that these payments are related to the provision of
transmission service. 9
Importantly, the employee bonuses that Entergy is attempting to role into rate
base are not tied to improving the reliability of the transmission system or the quality of
the transmission service offered to customers. The bonus pay thus provides no incentive
for Entergy employees to better serve their transmission customers because the bonuses
are not designed to reward employees for running an efficient transmission system.
Instead, the bonus compensation is directly tied to factors such as the financial
performance of Entergy Corp and the price of the company’s stock. Incentives to
increase shareholder profitability are properly borne by Entergy’s shareholders and
should not be included in transmission rates.
Several state regulatory commissions have previously considered this issue and
directed Entergy to remove millions in bonus payments from their state jurisdictional
rates, finding that these bonuses provided no benefits to ratepayers. The Commission
should join these state regulatory bodies in finding that these employee bonuses provide

8

16 U.S.C. § 824d (2000).

9

See, e.g., Public Service Commission v. FERC, 813 F. 2d 448, 456 (D.C. Cir. 1987) (disallowing
costs in ratebase that provided no benefit to ratepayers).

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no benefits to transmission service customers, and should be born by Entergy’s
shareholders.
For example, the Arkansas Public Service Commission (“Arkansas PSC”)
directed Entergy to reduce the level of incentive pay and stock options included in retail
rates by over $21 million. 10 The Arkansas PSC found that many of the bonuses paid to
Entergy employees were tied exclusively “to financial performance [and] are clearly
designed to directly, materially, and measurably increase stockholder value[.]” 11 The
Arkansas PSC “did not find substantive evidence of any material benefit to ratepayers
attributable to those programs strictly tied to the stock prices of Entergy Corp.” 12
The Louisiana Public Service Commission (“Louisiana PSC”) likewise found that
$5 million in incentive compensation paid to Entergy executives based on the company’s
financial performance were not properly recoverable in retail rates. The Louisiana PSC
found that: 13
These bonuses are not directly linked to matters such as rate stability,
service quality, outage reductions, minimizing length of outages, reduction
in numbers of complaints and other such rate and service-related matters.
Since we conclude that the bonuses are unrelated to any benefits to
ratepayers, shareholders, and not customers, should bear the cost of these
incentive payments.

10

See In the Matter of the Application of Energy Arkansas, Inc. for Approval of Changes in Rates
for Retail Electric Service, Docket No. 06-101-U, Order No. 10, issued June 15, 2007.
11

Id. at p. 68 (emphasis in original).

12

Id.

13

See In re: Application of Entergy Louisiana, Inc. for a Change in its Rates and Charges so that
those Rates and Charges Will be Sufficient to Permit the Company to Recover All of its Costs,
and to Provide the Company with a Reasonable Opportunity to Earn an Increased Rate of Return
on its Rate Base that is Just and Reasonable and the Reflects Accurately the Company’s Cost of
Capital, Order No. U-20925 RRF 2004, issued May 18, 2005, at p. 3.

7

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The Commission should follow the reasoning of these state commissions and find that it
is not reasonable to include in transmission rates financial incentive payments to Entergy
executives based on factors other than the functioning of the transmission system.
Finally, including these bonus payments in 2008 transmission rates ensures that
transmission customers will be charged these new higher rates regardless of whether the
bonuses are earned or even paid out to Entergy employees.
B. The State Of The Transmission System Does Not Justify Bonus Payments
To Entergy Transmission Function Employees.
The current condition of the Entergy transmission system does not justify bonus
payments to Energy executives for their work on the transmission system. The
transmission system in Entergy suffers from numerous transmission constraints and lacks
sufficient infrastructure to even reliably fulfill its firm transmission service obligations.
LaGen, which is dependent on the Entergy transmission system to serve its native
load customers, has experienced first hand the problems with the Entergy transmission
system. For example, LaGen has noted a serious increase in Transmission Load Relief
orders (“TLRs”) ordered on the Entergy system in the past two years. While Level 5
TLRs used to be relatively rare, today they are a near weekly occurrence and are
seriously impacting LaGen’s reliability planning and its ability to responsibly meet its
native load obligations.
Based on NRG’s review of NERC TLR data, in 2007, there were 29 Level 5
TLRs issued on the Entergy system, resulting in the curtailment of over 47,000 MW of
firm transmission service, with LaGen absorbing almost 7,000 MW of those scheduled

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curtailments. 14 In the first five months of 2008, Entergy’s Independent Coordinator of
Transmission (“ICT”) has already issued 17 Level 5 TLRs curtailing more than 42,000
MW of firm transmission service. 15 These Entergy TLRs represent more than 18% of all
Level 5 TLRs called throughout the Eastern Interconnection in 2007, and over 21% of the
Level 5 TLRs called in the Eastern Interconnection in the first five months of 2008. 16
Equally alarming is the increase in redispatch of network resources experienced
by Entergy’s transmission customers in the five months of 2008. These redispatch
obligations are in addition to the schedule curtailments ordered by the ICT. NRG’s
review indicates that through May of this year, the ICT has already called for about
16,093 MW of redispatch of network resources, with LaGen contributing about 3,866
MW. This compares to the redispatch of only 2,933 MW of network resources
throughout the entirety of the Entergy region in 2007, including the redispatch of about
74 MW of LaGen’s network resources. Thus, the tag data reveals an escalating problem,
which has required LaGen to redispatch more of its network resources in the first four
months of 2008 than the entire Entergy system redispatched in 2007. 17 These escalating
14

Percentages were calculated from two separate areas of NERC website. Total number of level
5 TLRs across the interconnect are calculated from the data chart off trend data located at
following link:
www.nerc.com/pub/sys/all_updl/oc/scs/logs/trends.htm
The number of level 5 TLRs Entergy called were calculated by totaling the number of Level 5
TLRs reported in the NERC TLR logs found here:
http://www.nerc.com/~filez/Logs/tlrlogs.html
15

Id.

16

Notably, significant reliance on TLRs to manage congestion is not the rule in other Southern
regions of the Eastern Interconnection. For example, TLRs are rarely if ever used in the Duke
Power Company or Southern Company balancing authority areas. A review of the NERC TLR
logs available at: http://www.nerc.com/~filez/Logs/tlrlogs.html shows a comparative absence of
TLRs filed by the Duke and Southern Company systems.
17

By comparison, prior to 2007, Entergy never called more than 9 Level 5 TLRs in a single year.
In fact, between 2000 and 2006, Entergy called a total of 25 Level 5 TLRs. Id.

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transmission system problems are evidence that it is inappropriate for Entergy employees
to be receiving bonus compensation for the performance of the transmission system.
Additionally, the Entergy transmission system is now operated by the Southwest
Power Pool (“SPP”) in its role as the ICT. All network customers pay for the costs of the
ITC through their transmission rates. Because the ICT now bears a large portion of the
responsibility for the operation and functioning of the Entergy transmission system, it is
improper for transmission customers to be paying bonuses to Entergy employees who
now have a reduced roll in operating the transmission system.
C. Entergy’s Profits Result Largely From Non-Regulated Power Sales And
Not Their Transmission Function.
Many of the employees receiving bonus compensation are “shared” employees –
that is, they provide services in support of both Entergy’s non-regulated generation
function as well as duties related to the operation of the Entergy transmission system.
The existing formula rate, however, does not attempt to apportion the bonuses received
by these dual-function employees and instead allows one-half of all bonuses paid to these
shared employees to be rolled into transmission service rates. The current formula results
in Entergy’s transmission customers subsidizing the large bonuses paid to Entergy senior
managers for work that they do for the non-regulated generation side of the company.
Further, a large portion of Entergy’s profits for 2007 result from the operation of
its unregulated generation function, and not from the functioning of its transmission
system. For example, in 2007, Entergy’s unregulated nuclear units earned over $539
million in net income. 18 By contrast, the 2007 net income from all of Entergy’s other

18

Entergy 10-K filing at p. 2, available at:
http://www.shareholder.com/entergy/edgar.cfm?DocType=Annual,Quarterly&Year=&CIK=6598
4,1427437

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operations (including regulated and unregulated wholesale power sales, transmission
system revenues and retail utility operations) is $682 million. 19 Further, in its public
filing, Entergy attributes its record profits “primarily to higher earnings at Entergy
Nuclear[.]” 20 Thus, any bonuses based on Entergy’s financial performance result in
regulated transmission customers directly subsidizing the operations of Entergy’s
unregulated subsidiary. The formula rate currently on file, however, allows Entergy to
include bonuses paid to these employees in their imbedded transmission costs as if these
bonuses were made in recognition of the employee’s work on the Entergy transmission
system.
D. Compliance With The Commission’s Rules Regarding Complaints
Under Section 206, the Complainant is required to both demonstrate that the
existing rate is unjust and unreasonable or unduly discriminatory, as well as propose a
new lawful rate. 21 The NRG Companies propose that the Commission replace the
existing transmission service formula rate with a new rate that excludes bonus payments
to Entergy employees unless Entergy can show that the bonuses are paid based on
improved functioning of the Entergy transmission system. Certainly, any bonuses paid
on factors such as share price or on the company’s financial performance should be
excluded from transmission rate base.

19

Id.

20

Entergy recently reported that per share profits for the first quarter increased from $1.03 in
2007 to $1.55 per share for the same period in 2008. See April 16, 2008 First Quarter Earnings
Guidance, available at:
http://www.shareholder.com/entergy/releaseDetail.cfm?ReleaseID=304857.
21

16 U.S.C. § 824e(b) (2000).

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The Commission’s Rules and Regulations, 18 C.F.R. § 385.206 also require that
NRG address several additional factors that are not discussed in the body of this
Complaint.
The Pendancy Of Issues Involved In This Complaint Before The Commission Or
In Any Other Venue:
The transmission rates proposed by Entergy in its May 30, 2008 filing are pending
before the Commission in Docket Nos. ER08-1057-000 and -001, but are not pending in
any other venue to the best of NRG’s knowledge and belief.
NRG Has Not Attempted To Settle This Dispute:
Entergy’s position is that its current rate formula allows it to include bonus
compensation into its transmission rates. Entergy believes that its current rate formula
mandates inclusion of these costs. Thus, no settlement will occur unless the Commission
first institutes a Section 206 investigation into whether Entergy’s existing rate formula is
resulting in just and reasonable rates and set this matter for hearing and settlement judge
proceedings.
Effect Of This Complaint On Competition And The Harm To NRG:
The NRG Companies take transmission service from Entergy and are thus will be
required to pay the transmission service rates the Commission adopts in this proceeding.
Passing on employee bonus compensation that is not related to the functioning of the
transmission system harms competition by both increasing transmission rates and
insulating Entergy’s generation function from the full costs of its operations.
VI.

CONCLUSION

NRG requests that the Commission find that Entergy’s inclusion of bonus
compensation in the transmission rate base is not just and reasonable, and direct Entergy
to:
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(1) Replace the existing formula with a formula that excludes bonus
compensation paid to Entergy employees; and
(2) Recalculate its 2008 transmission rates without the bonus compensation
included in the payroll expenses.
The Commission should find that only payroll costs incurred by Entergy related to the
improved functioning of the Entergy transmission system should be included in
transmission rates. Currently, any benefits provided by these pay incentives accrue only
to Entergy shareholders and it is those shareholders that should bear those costs, not
Entergy’s transmission customers.
WHEREFORE, NRG requests that the Commission grant this complaint and
order Entergy to remove bonus compensation from its transmission rates.
Respectfully submitted,

__/s/ Abraham Silverman _
Jennifer J. Vosburg
NRG Energy, Inc.
112 Telly Street
New Roads, LA 70760
Telephone: (225) 618-4489
Facsimile: (225) 618-4482
[email protected]

Abraham Silverman
Senior Counsel - Regulatory
NRG Energy, Inc.
211 Carnegie Center Drive
Princeton, NJ 08540
Tel: 609.524.4696
Fax: 609.524.4589

Christopher C. O’Hara
Assistant General Counsel - Regulatory
NRG Energy, Inc.
211 Carnegie Center
Princeton, NJ 08540
June 27, 2008
Attorneys for the NRG Companies

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CERTIFICATE OF SERVICE
I hereby certify that the foregoing document has been served this day upon each
person designated on the official service list compiled by the Secretary in this proceeding.
Dated at Washington, DC this 27th day of June 2008.
/s/ Abraham Silverman
Abraham Silverman

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