By Amanda Durish Cook

Entergy must provide a clearer rationale before it will be allowed to include a line item for pension costs in its rate base, FERC ruled Thursday.

Relying on a 10-year-old order involving Southern Co., the commission ruled that Entergy is allowed to include prepaid and accrued employee pension costs in its rate base but must still justify and more clearly account for those costs before doing so (ER15-1436).

In a filing updating its formula rate in 2015, Entergy proposed to include prepaid and accrued pension costs for pension plans at its Gulf States Louisiana, Arkansas, Louisiana, Mississippi, New Orleans and Texas operating companies. Prepaid pension costs represent company contributions that exceed pension expenses “to meet the requirements of pension funding laws and rules,” while accrued pension costs are payments collected from ratepayers “in excess of what the utility has contributed to its pension plans,” which must be credited back to customers.

FERC sent Entergy’s transmission rate to settlement procedures in 2016, and a partial settlement left unresolved whether the operating companies could include the pension line item in their base rates. An administrative law judge in 2018 decided that Entergy hadn’t properly justified prepaid costs in the rate base because it did not show a net benefit to ratepayers or a “correlation between its prepaid pension costs and a reduction in transmission rates.”

But FERC last week rejected the ALJ’s reasoning while still disallowing the pension line item, saying Entergy’s accounting wasn’t properly justified — but not because the pension costs didn’t show customer benefit.

The commission said prepaid pension costs in rate bases are reasonable when the “pension expense recovered from ratepayers is less than its contributions to fund pension costs.” Likewise, it said accrued pension costs are also permissible.

“Entergy is not required to provide a policy statement or other documents describing how it exercises its pension funding discretion,” the commission said.

However, FERC found that “Entergy’s proposed formula for its qualified pension plans includes components that Entergy has not fully explained and that are not clearly appropriate to include in the calculation of prepaid and accrued pension costs for inclusion in rate base,” the commission said.

Entergy had proposed a formula that included using a funded status minus unrecognized gains and losses. But FERC said the company should calculate cumulative differences between its pension contributions and expenses each year.

The commission said Entergy failed to explain what constitutes “unrecognized gains and losses” and describe why it thought its proposed calculation would yield the “same result as calculating cumulative employer contributions and cumulative pension expense.”

“Without additional explanation, we are unable to evaluate whether unrecognized gains/losses are an appropriate component to include in the calculation of prepaid pension costs to be included in rate base,” the commission said.

It also pointed out that “employee contributions to a pension trust are not shareholder-financed funds that the utility has paid out of pocket.”

“Consequently, it would not be just and reasonable for Entergy to include amounts that employees contribute to pension plans in rate base and earn a return on such amounts,” FERC said.

Another Shot

While FERC ordered removal of the pension line item, it also urged Entergy to refile the line item formula when it could “adequately demonstrate” its proposal.

“If the commission approves the inclusion of that line item, Entergy would then be required under the MISO formula rate protocols to provide specific prepaid pension cost amounts in its annual formula rate informational updates,” FERC wrote. “Interested parties would be able to challenge the prudency of such amounts at that time. … Therefore, we find that Entergy does not need to quantify or support specific prepaid pension costs in this proceeding to establish a line item in its formula rate.”

Finally, the commission said Entergy also needed to explain why its rate included prepaid and accrued pension costs even for its non-qualified plans. Non-qualified pension plans are often used as an additional retirement savings for executives and are not governed by the Employee Retirement Income Security Act.

“There is insufficient evidence and explanation in the record to find that Entergy’s proposed inclusion of prepaid and accrued pension costs for its non-qualified pension plans in rate base is just and reasonable,” the commission concluded.