maries thereof should be furnished); (2) a summary of consultation with agencies, and copies of correspondence and meeting notes verifying that such consultations took place during the past 6-month period; (3) an outline and summary of engineering, environmental, and other investigations to be conducted during the ensuing 6-month period to determine the feasibility of the project as delineated by article 1; (4) a summary of the consultations with the appropriate federal, state, and local agencies that will take place during the ensuing 6-month period as outlined by articles 7 and 9; and (5) an assessment of the feasibility of the project. The appropriate federal, state, and local agencies should be contacted pursuant to section 4.38 of the Commission's regulations, 18 C.F.R. § 4.38 (1987).

Article 9. The permittee, during the initial period of the permit, shall consult with the U.S. Fish and Wildlife Service of the Department of the Interior, the state fish and game agencies, and the National Marine Fisheries Service of the U.S. Department of Commerce if the project affects anadromous fish, to obtain their views and recommendations on studies to be conducted during the term of the permit to assess the effect that the proposed project might have on fish and wildlife resources, and the facilities or measures that may be needed to conserve and develop those resources. A copy of the report on the permittee's study shall be filed as part of the fish and wildlife exhibits or reports of any subsequent application for license.

Article 10. The Permittee shall, during the period of the permit, consult regularly with the City of Burlington Electric Department and the Winooski One Partnership on the proposed operation of Project No. 11033, and shall include determinations of the impacts of its proposed project on the City of Burlington Electric Department and the Winooski One Partnership's Chace Mill Project No. 2756 in its feasibility studies and any subsequent license application.

Appendix A

Notice of Application

(Issued October 19, 1990)

a. Type of Application: Preliminary Permit b. Project No.: 11033-000

c. Date Filed: October 19, 1990

d. Applicant: Chace Mill Hydro Watt Associ

ates

e. Name of Project: Chace Mill

f. Location: On the Winooski River in the Cities of Burlington and Winooski, Chittenden County, Vermont

g. Filed Pursuant to: Federal Power Act, 16 U.S.C. § § 791 (a) - 825(r)

h. Applicant Contact: Paul V. Nolan, 6219 North 19th Street, Arlington, VA 22205, (703) 534-5509

i. FERC Contact: Charles T. Raabe (tag), (202) 219-2811

j. Comment Date: February 7, 1991

k. Description of Project: The proposed project would consist of: (1) a rebuilt 6-foot-high, 170-foot-long timber crib or concrete dam; (2) a recreated reservoir having a surface area of less than 50 acres at a surface elevation of 154 feet m.s.l; (3) an existing intake; (4) two 20-footlong, 10-foot-diameter steel or concrete culvert penstocks; (5) a powerhouse containing two generating units with a total installed capacity of 3,000-kW; (6) a 75-foot-long, 100-foot-wide, 10-foot-deep tailrace; (7) a 500-foot-long, 4.16-kV transmission line; and (8) appurtenant facilities.

The applicant estimates that the average annual generation would be 9.0 GWh and that the cost of the studies under the permit would be $150,000. Project energy would be sold to a Vermont electric utility or to Vermont Power Exchange, Inc. A portion of the proposed project boundary for Project No. 11033 appears to lie within the approved project boundary for licensed Project No. 2756. However, the proposed project facilities would be mutually compatible. The existing facilities are owned by Green Mountain Power.

[Note: Remainder of notice omitted in printing.]

Letter Order

¶ 62,149

records of System Energy Resources, Inc., for the period January 1, 1984 through December

31, 1988. The examination was conducted to evaluate compliance with the Commission's accounting and reporting regulations included in the applicable Uniform System of Accounts, Annual Report FERC Form No. 1, and other related regulations. The examination included selective tests of the accounting records, review of the system of internal control, and other audit tests and procedures considered necessary under the circumstances.

The Division of Audits recommended corrective action on certain exceptions related to your Company's compliance with the Commission's accounting, financial reporting, and related regulations. The entries to record the adjustments to utility plant and other accounts are shown on Schedule No. 2 and the other compliance recommendations are shown on Schedule No. 3. The Company agreed to adopt the recommended corrective actions, except for Correcting Entry No. 3 on Schedule No. 2 and Compliance Exception Nos. 3 and 7 on Schedule No. 3. The recommended corrective actions, except for the disagreed matters, are approved and directed.

The Division of Audits reviewed your Company's accounting and financial statement presentation for income tax payments related to the alternative minimum tax. The Office of Chief Accountant has under current study the subject of accounting and financial reporting for the alternative minimum tax. Therefore, the Division of Audits did not recommend any changes to the Company's accounting procedures for recording and classifying the alternative minimum tax pending completion of the study.

The Company purchased most of its nuclear fuel materials from System Fuels, Inc. (SFI),

an affiliate. It based the transfer price for the purchased nuclear fuel materials on the "costs" that SFI incurred. The Division of Audits plans to begin an audit of SFI during 1991. Therefore, approval of your Company's accounting for nuclear fuel costs is reserved pending the results of the Division of Audits' examination of SFI.

Your Company agreed to recompute tariff billings and make refunds, with interest, of all amounts overcollected from customers due to the improper accounting practices noted on Schedule No. 3, Compliance Exceptions No. 2, 4, 5, 6, and 8. The Company will submit to the Secretary six copies of a report showing the full particulars of the refund calculations, including the names of the affected customers, the date refunds were made, and the amount of the refunds, with computed interest shown separately.

With respect to Correcting Entry No. 3 on Schedule No. 2 and Compliance Exception Nos. 3 and 7 on Schedule No. 3, your Company is hereby requested to notify the Commission in writing within 30 days from the date of this letter order as to whether it consents to dispose of the matters according to the hearing procedures provided in Part 41, Accounts, Records, and Memoranda, of the Commission's regulations under the Federal Power Act (18 C.F.R. § 41.1, et seq.).

The foregoing action is without prejudice to the Commission's right to require hereafter such adjustments as it may consider proper from additional information that may come to the Commission's attention.

Summary of Utility Plant and Related Accumulated Provisions for Depreciation and Amortization

-0

-o

Subtotal

4,225,416,545

6,942,742 3,244,039,001

62,467,072 226,230,995

69,409,814

69,409,814

༅། ཟ། ༣།༣

$(938,378,544) $(43,000,000)

34,142,512 $3,278,181,513

181,632,160 171,238,251 205,381,763 $ 397,470,246 $3,675,651,759

108

Accumulated Provision for Depreciation of Electric

301

186

Organization...

$26,010

$26,010

Schedule No. 3

Compliance Exceptions

The Company agreed to take appropriate corrective action on the following compliance matters, except for Item Nos. 3 and 7:

1. Accounting for Sale/Leaseback of Grand Gulf Unit No. 1

The Company's accounting and financial reporting to the Commission for sale/leaseback transactions related to a 11.5 percent undivided interest in Grand Gulf Unit No. 1 (Grand Gulf) was not consistent with the requirements of the Uniform System of Accounts.

A separate undivided interest in Grand Gulf was sold to each Owner Trustee and a separate but substantially identical lease was entered into with

Background

On December 28, 1988, the Company entered into agreements that resulted in the transfer of legal title for about 11.5 percent of its undivided interest in Grand Gulf. The arrangements are commonly referred to as "sales and leasebacks".

The Company entered into two participation agreements providing for the transfer of legal title for the undivided interest to an Owner Trustee, who was acting on behalf of certain equity investors.1 Simultaneously, the Company entered into a leaseback from the Owner Trustee, in which it received the right to use the facilities for a term not to exceed 26.5

respect to each undivided interest. The Owner Trustee and each Owner Participant were unaffiliated with the Company or any of its associated companies.

years, from 1989 to 2015. The Company received $500 million from the arrangements.

The leases were net leases, conferring on the Company all responsibility for operation, maintenance, insurance, taxes, assessments and other charges or liabilities related to the undivided interest, including, without limitation, decommissioning and rebuilding. The annual rental payments vary considerably from year to year, ranging from about $49 million initially, increasing to $71 million in 2000, with a high of about $79 million in 2004. The estimated annual rents to be paid under the lease total about $1.48 billion.

The Company is responsible for making any necessary modifications and additions to the undivided interest at its own cost.

After the transaction, the Company retained a 78.5 percent undivided ownership interest and a 11.5 percent leasehold interest in Grand Gulf.

In its accounts and financial reporting to the FERC the Company recorded the transactions as follows:

It reduced Account 101, Electric Plant in Service, by an amount equal to 11.5 percent of the original cost of the facilities sold and removed the previously recorded depreciation from Account 108, Accumulated Provision for Depreciation of Electric Utility Plant.

It deferred the gain on the disposition of the property in Account 253, Other Deferred Credits.

It reversed a portion of the deferred income taxes previously recorded and assigned the additional federal and state income taxes resulting from the transaction as a reduction of the deferred gain classified in Account 253.

● It classified about $9 million in fees paid in connection with the sale/leaseback transactions in Account 165, Prepayments.

• Each month it accrued rent expense for a portion of the semiannual lease payment by charging Account 931, Rents.

The Company included the amount accrued as rent expense in Account 931 as a component of operating expense for tariff billings under the Unit Power Sales Agreement (UPSA).

In reporting to its stockholders, the Company's parent, Entergy, reported the transactions as financings under the guidelines issued in Statement of Financial Accounting Standards No. 98, Accounting for Leases.2 Under financing accounting, Entergy continued to report the property as part of electric plant and to record depreciation and interest expense on the entire original cost of the Grand Gulf plant. It did not report a gain on the transactions. Furthermore, it reported the deferred income tax balances previously recorded in its accounts, increased by about $126 million to reflect the additional income taxes resulting from the transactions. Therefore, the balance sheet and income statement presentation for the sale and leaseback transactions did not agree with the financial statements the Company reported to the Commission.

Commission Accounting Requirements

Based upon the review of the circumstances surrounding the agreements, the Division of Audits concluded that the Company should have accounted for the sale/leaseback transactions as "financings" under the requirements of the Uniform System of Accounts.

The Company had a continued operating and financial interest in the portion of the property subject to the sale/leaseback transaction. The Company was responsible for all operating and maintenance costs, decommissioning costs, nuclear fuel costs, and other related operating costs for the 90 percent interest in the plant. Furthermore, it will have to incur the costs of future modifications or additions to the facilities.

In previous orders on sale and leaseback transactions with similar circumstances, the Commission stated its position that the nature of the transactions are "financings" and not "sales" of facilities subject to Commission jurisdiction. In an order issued to Pacific Power & Light Company, 3 FERC ¶ 61,119 (1978) the Commission stated:

.. [W]e concluded that the Parties' participation in the proposed transaction is not such that they should be deemed public utilities for the purpose of section 201(2) of the Act. It would be inconsistent with the intent of the Act to label the Parties as public utilities and include them within our juris

2. must have payment terms and provisions that demonstrate Lessor's initial and continuing investment in the property.

3. must have payment terms and provisions that transfer all of the other risks and rewards of ownership as demonstrated by the absence of any other continuing involvement by the Lessee.