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It is sometimes said that history is “one damned thing after another.” This famous adage is an apt description of how the 2005 hurricane season affected New Orleans. Hurricanes Katrina and Rita, along with the failures of the city’s flood-control system, devastated much of New Orleans and, along with it, the city’s electric and gas infrastructure. Although other cities have coped with significant damage to their utility systems after natural disasters, no other modern American city has faced a loss of service to its entire system coupled with long-term displacement of its population. The unprecedented devastation caused by these natural disasters was met with a response from the federal government that appeared inversely proportional to the problem. Although billions of dollars in federal aid flowed to the Gulf Coast, legislative limitations on disaster-response funding prevented the investor-owned utilities serving New Orleans from receiving even a dime of that money. As a result, Entergy New Orleans, the city’s primary electric and gas utility, began a Chapter 11 bankruptcy proceeding in the midst of its monumental restoration effort. That left the city and the people of New Orleans in a difficult position, but various measures — financial, political, and legal — are helping to rebuild the energy infrastructure. CLOSE COOPERATION With no immediate federal aid in sight and an urgent need to restore service to let the city’s rebuilding begin, close cooperation between the utility and its regulator was essential. The New Orleans City Council possesses the authority of a state-level regulator of utility rates and service in New Orleans. Entergy New Orleans provides gas service to the entire city and electric service to all but the city’s West Bank, which is served by Entergy Louisiana. Both are subsidiaries of Entergy Corp., a Fortune 500 company with headquarters in New Orleans. In the days and months after the hurricanes, the council set three regulatory priorities. First, the council ensured that the city’s electric and gas utilities had adequate funding to restore service as fast as possible. Second, it began an effort to shield the city’s ratepayers from bearing the brunt of the utilities’ storm restoration costs, which surpassed half a billion dollars. Because only a fraction of the city’s pre-Katrina population have returned and forecasters think it will be many years before the full population is restored, those who have returned could be faced with a doubling of rates if the full restoration costs are not mitigated. Accordingly, the council is seeking federal community-development block grants to pay for the restoration costs. Finally, with the city’s primary utility in bankruptcy, the council committed to help restore the financial health of Entergy New Orleans so it can again provide reliable and affordable service. LEGAL REBUILDING A semiannual report by the Edison Electric Institute revealed that for several years, New Orleans ratepayers have had among the lowest utility bills in the region and have received strong system reliability. The council’s objective is to emerge from the hurricanes in the same position. Accordingly, the council has directed its utility advisers, led by the attorneys of Sullivan & Worcester’s D.C. energy practice group, to accomplish that goal. Thus far, we have taken the following steps:
• Katrina Lobbying Sees a Shift in Focus (March 27, 2006)• Helping Others, Helping Themselves (January 9, 2006)• In the Wake of Katrina (November 28, 2005)• Learning From Katrina (November 7, 2005)• After the Deluge, Tax Relief? (October 17, 2005)• Reed Smith Attorneys Help Inmates Displaced by Katrina (October 10, 2005)

1. We established a process that keeps the lines of communication open among the regulator, its advisers, and the company and that tries to cut through the red tape. Under normal circumstances, utility regulation is characterized by laborious proceedings that usually involve extensive rate filings and lengthy public hearings. Disaster response requires much swifter reactions from the utility as well as from its governmental regulator. At a time when the regulator’s feedback was more important than ever, we developed processes to permit the utility to make requests of the regulator and receive feedback and approvals within days (if not hours). Within weeks of Katrina making landfall, while parts of the city remained underwater, the City Council held a public hearing to enact emergency regulatory measures. 2. In the days after Hurricane Katrina and the subsequent levee failures that placed 80 percent of the city underwater, it became apparent that the city’s energy needs would be a fraction of its previous requirements for a considerable time. The council thus enacted emergency measures to slash the operating costs of Entergy New Orleans. These measures included the temporary sale of low-cost power, which the city was entitled to receive under long-term purchase agreements. Given the city’s diminished need for power, Entergy New Orleans was able to sell this surplus power at a profit and generate cash that was used for restoration. The council also authorized the unwinding, or sale, of gas-hedging contracts that were no longer needed. These contracts were acquired at a price below the current market value of gas and, therefore, generated millions of dollars that were also used for restoration. As storm costs mounted for Entergy New Orleans and ratepayers remained displaced, the utility faced a growing cash-flow crisis. The sale of power and gas-hedging contracts proved vital to ensuring that the utility had adequate cash to continue its restoration effort. In addition, the City Council protected ratepayers from incurring unneeded costs. 3. One of the most important steps when dealing with a catastrophe of this magnitude is to obtain federal assistance. The Robert T. Stafford Disaster Relief and Emergency Assistance Act provides the legal authority for the Federal Emergency Management Agency to use federal funds to assist states and local communities after the president files a declaration of disaster. The Stafford Act, however, applies only to public entities. Had the New Orleans utility system been municipally owned, it would have been entitled to reimbursement for its storm-related costs. But it was an investor-owned utility, and thus under the act, FEMA could not reimburse it for the costs of restoration. In regions where a large investor-owned utility has a small portion of its system damaged, a small surcharge added onto the bills of its entire customer base generates the funds to pay for restoration. This normally has little effect on the utility’s customers. With Entergy New Orleans, the entire customer base lost power and was displaced, so a small surcharge is not an option. One estimate is that Entergy New Orleans would need a rate increase of 140 percent to restore its system. In the past few years, Congress has recognized this problem and twice trumped the Stafford Act. The first exception was to compensate utilities in the Northeast after devastating ice storms in 1998; the second was after the terrorist attacks of Sept. 11. In the latter case, Congress authorized the Department of Housing and Urban Development to provide $783 million in disaster assistance for businesses (including utilities) damaged by the Sept. 11 attacks. Congress directed the money to be distributed through the Lower Manhattan Development Corp., a subsidiary of a state public-benefit corporation. An initial $250 million was allocated to reimburse utilities for uncompensated costs of restoring temporary and emergency service. An additional allocation of $500 million was aimed at permanent repairs and rebuilding to “help utility firms while developing an improved system to attract new businesses to the area.” ConEdison, the investor-owned utility providing electric and gas service to the affected area, has already received $61 million and is awaiting word on its request for an additional $156 million. The New Orleans City Council and its advisers have visited the White House, walked the halls of Congress, and, as part of a unified regional lobbying effort, successfully secured community-development block grant funds for the region. But with overwhelming needs for those funds, including compensation of homeowners whose houses were destroyed, it is unclear whether any funds will be devoted to utility restoration. STREAMLINING PROCESS 4. The City Council passed a series of other measures. It streamlined the permitting process for homeowners who rewired their homes’ electrical systems. It actively participated in the bankruptcy proceeding of Entergy New Orleans, which resulted in a $200 million debtor-in-possession loan from its parent, Entergy Corp., so the local subsidiary could continue restoration. It suspended bill collection while ratepayers were displaced. In addition, the council worked with the utility to develop flexible payment options for ratepayers. 5. In the future, a securitization measure likely will be needed to ensure that a New Orleans utility can get protection from storm damage without unduly burdening ratepayers. Under such a measure, a utility would issue bonds to fund restoration work after a disaster, and the regulator would adopt a rate covenant committing to set rates at a level sufficient to pay debt service on the bonds. In essence, the rate covenant would be the security for the bonds, guaranteeing that the utility would have revenue to support them and reassuring lenders about loaning to a utility with a past bankruptcy. Such financing would let the utility spread out the cost of storm restoration over an extended period of time and avoid an overwhelming immediate impact on ratepayers. It is a local saying in New Orleans that “Come hell or high water — and we’ve had both — the city will rebuild.” The foundation of any rebuilding is reliable and affordable utility service. The quick actions of the New Orleans City Council enabled restoration to take place despite a number of hurdles, including the bankruptcy of the local utility. The continued effort to mitigate present and future storm restoration costs must — and will — remain a centerpiece of the city’s rebuilding to promote a sustainable climate for ratepayers.

Sullivan & Worcester has served as lead adviser and trial counsel to the New Orleans City Council on utility regulatory matters for more than 20 years. Clinton A. Vince is the managing partner of the D.C. office of the firm and director of the firm’s energy practice group. Michael G. Sherman is an associate in the energy practice group in the D.C. office.

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