Rates, Risk and Return: Emerging Themes in the Entergy Arkansas Rate Case

Written By Jill Balaster

On August 19, intervening parties representing different interests (residential consumers, businesses, hospitals and universities, federal facilities, renewable and advanced energy companies and the General Staff of the Arkansas Public Service Commission) filed testimony in Entergy Arkansas’ pending rate case, Docket No. 26-001-U. We have an overview of the case here.

Intervenors do not agree on every issue or even every ratemaking methodology. But taken together, the testimonies reveal recurring themes that the Arkansas Public Service Commission will weigh as it considers Entergy Arkansas’ request.

1. Multiple parties say Entergy is asking customers to pay too much.

Entergy Arkansas initially requested an increase of approximately $44.6 million in Arkansas retail revenues. Updated filing requirements later reflected a revenue deficiency of approximately $29.2 million. Several parties reviewing the company's finances reached substantially different conclusions.

The Arkansas Attorney General's Consumer Utility Rate Advocacy Division concluded that Entergy's requested increase was "significantly overstated." AG witness Greg Meyer testified that the office's analysis indicates Entergy should actually reduce its current revenues, stating that existing rates would otherwise continue to produce "excessive earnings." The AG proposed adjustments reducing Entergy's updated revenue deficiency by approximately $106.7 million. The Hospitals and Higher Education Group (HHEG), representing Arkansas hospitals and institutions of higher education including the University of Arkansas System, reached a similar conclusion, proposing approximately $120.5 million in adjustments converting Entergy's requested increase into a recommended $75.8 million rate decrease.

Adjustments proposed by the Attorney General and HHEG include everything from payroll and incentive compensation to storm costs, vegetation management, depreciation and Entergy's requested return on equity.

Commission Staff also rejects significant portions of Entergy's proposed rate changes. For example, Staff witness Jill Bishop recommends rejecting Entergy's proposed customer-class rate increases and instead setting rates based on Staff's cost-of-service analysis.

2. Affordability is front and center for all customers.

Electricity is not an optional expense. Everyone depends on reliable and affordable electricity.

AG witness Michael Deupree conducted an analysis of energy burden (the percentage of household income required to pay energy costs) for Entergy customers at different income levels. His analysis finds that households at the 15th income percentile and 20th percentile were above the 6% threshold for high energy burden. In reviewing the operation of Entergy's previous Formula Rate Plan, or FRP, Deupree finds that customer rates generally increased annually after the FRP was implemented in 2016 and that Entergy frequently reached or exceeded the statutory cap on annual increases. Deupree concluded that energy affordability "has been and continues to be a problem for many low and moderate-income Arkansans."

AAEA's testimony examines how Entergy's proposed rate design could affect commercial and agricultural customers. AAEA's testimony emphasizes that affordability cannot be judged solely by Entergy's systemwide average rate increase. The Commission should examine how costs are actually distributed among Arkansas businesses and individual customers, whether rate structures produce disproportionate impacts on seasonal and lower-use customers, and whether customers have meaningful opportunities to manage their bills. AAEA also argues that customers should not be required to pay costs sooner than necessary through excessive or insufficiently supported depreciation assumptions.

HHEG's participation demonstrates the same issue from another perspective: hospitals and universities are major electric customers, meaning changes in utility costs can ultimately affect institutions providing essential services throughout Arkansas.

3. Parties are questioning whether Entergy needs a higher shareholder return.

One of the clearest areas of agreement among intervening parties is opposition to the company's requested 9.9% return on equity (ROE). ROE represents the return shareholders are authorized to earn on the equity portion of the utility's investments.

AG witness Christopher Walters analyzed multiple financial models and estimated a reasonable ROE range of 8.80% to 9.90%, ultimately recommending no higher than 9.35%. In addressing Entergy’s financial risk, he testifies that Entergy has stronger credit ratings than the average of his comparable utility group and that its proposed equity ratio is higher than the proxy-group average. Walters also notes that authorized utility ROEs nationally have generally declined since 2009 and have remained below 10% for more than a decade.

HHEG likewise calls the requested 9.9% ROE excessive. Garrett used a 9.3% ROE in HHEG's revenue-requirement calculation, an adjustment that alone reduces HHEG's calculated revenue requirement by approximately $36.3 million.

Walmart also opposes the increase, examining recently authorized utility ROEs around the country and argues that the Commission should consider Entergy's risk-reducing regulatory mechanisms when determining an appropriate return.

4. Arkansas' expanding use of automatic recovery mechanisms is under scrutiny.

Arkansas has increasingly allowed utility costs to be recovered outside traditional rate cases through mechanisms such as formula rates and riders. Those tools can allow utilities to recover costs more quickly and reduce what regulators call regulatory lag, which is the period between when a utility incurs a cost and when it begins recovering that cost from customers. Arkansas' recently enacted Generating Arkansas Jobs Act (GAJA) creates another mechanism through which qualifying utility investments can begin generating customer charges during construction. Entergy is now proposing a new Formula Rate Plan 2.0, or FRP-2.

Walmart's testimony directly connects these mechanisms to Entergy's financial risk. Walmart notes that Entergy itself recognizes that the FRP reduces regulatory lag and that GAJA, layered on top of the FRP, reduces it further. Traditionally, investors finance construction and begin earning a return through customer rates once an asset becomes used and useful. Walmart argues that CWIP recovery changes that relationship: customers begin paying before receiving the benefit of the asset, shifting some construction and cost-recovery risk from investors to customers. Walmart recommends that the Commission consider that reduced risk when determining Entergy's appropriate ROE.

The Attorney General raises a related accountability question about the FRP. Deupree examined Entergy Arkansas' historical reliability performance alongside the recurring rate increases under the previous FRP. His testimony concludes that customer benefits from the mechanism have not been demonstrated through superior reliability performance. He points to other Entergy jurisdictions where formula rate plans contain performance mechanisms tying utility financial outcomes to customer price, customer satisfaction and reliability metrics. For example, Entergy Mississippi's FRP includes performance adjustments based on customer prices, satisfaction and reliability.

HHEG raises another version of the same concern. Garrett notes that Entergy proposes recovering 50% of certain short-term incentive compensation through base rates but could recover up to 100% through the FRP. He recommends prohibiting those FRP true-ups, illustrating how decisions about the FRP can determine not only when customers pay, but what costs ultimately flow through to them.

None of this means expedited recovery mechanisms are inherently inappropriate. They can provide utilities with timely cost recovery and support needed investment. But questions remain about customer protection.

A bigger conversation about Arkansas' energy future

The parties in this case represent very different constituencies, and their recommendations differ. Some even disagree sharply about technical questions such as how costs should be allocated among customer classes. But there are notable common threads: scrutiny of what customers are asked to pay; what customers receive in return, and the dispersement of financial risk between customers and utility shareholders.

Arkansas is entering a period of significant electricity demand growth and infrastructure investment. Reliable power will require investment, and utilities must be financially capable of making those investments. At the same time, Arkansas families, farmers and businesses must be able to afford the electricity that infrastructure produces. As the Commission considers Entergy Arkansas' request, the testimony filed by Staff and intervening parties highlights the importance of balance between making necessary investments and keeping rates affordable and fair.

Key filings referenced

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Jill Balaster
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