Hearings and Business Meetings
SD-366 Energy Committee Hearing Room 10:00 AM
Mr. Curtis Hebert
CURT HÉBERT, JR.
EXECUTIVE VICE PRESIDENT
COMMITTEE OF ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
OCTOBER 6, 2005
Good morning. I am Curt Hébert, Jr., Executive Vice President of Entergy Corporation, and I appreciate the opportunity to appear this morning on behalf of Entergy, its CEO Wayne Leonard, and the thousands of Entergy employees who have been working tirelessly since late August to respond to the destruction wrought by hurricanes Katrina and Rita. I've never been more proud to represent Entergy than I am today. As I sit before you, thousands of dedicated Entergy employees are basically working non-stop to restore service to the more than 1.8 million of our customers whose lives have been disrupted, many permanently, by Katrina and Rita. Entergy's employees have been joined by thousands of other, equally committed personnel from our sister utilities throughout the region and the nation. We have come together on a scale unprecedented in American history -- as a company and as an industry -- to meet this challenge.
The purpose of my testimony is three-fold. First, I summarize the devastating effect of these catastrophic storms on our infrastructure. Second, I summarize our efforts to date in restoring service and the unique challenges being faced by the City of New Orleans. Finally, I discuss what federal financial assistance is needed so that our restoration efforts can be completed successfully.
The Effects of the Storms
The two hurricanes and the flooding that resulted when the levees in southeastern Louisiana failed were more devastating than any natural disaster previously experienced in this country. The effects on the energy industry and upon the utilities in the area, whose customers are severely burdened by the loss of their jobs, homes, and property, have been unusually severe. This emotional and financial stress will have a damaging and long lasting effect upon the economy of the Gulf South region, including particularly the City of New Orleans.
These unprecedented events require an immediate federal response so that utilities such as Entergy can promptly and efficiently address the massive damage and destruction that has occurred. This assistance must take the form of federal legislation that provides immediate financial aid to the electric and gas utilities affected by Katrina and Rita in order to ensure that storm restoration and recovery occur timely and without imposing additional financial burdens on the citizens of these areas.
By any measure, Hurricane Katrina is the most costly and one of the most deadly hurricanes to strike the United States in recorded history. Hurricane Andrew, the previous benchmark, carved a much narrower path of destruction across south Florida in 1992. During Andrew, one of the hardest hit areas was Homestead, Florida. Of 26,000 homes in Homestead, 7,500 were destroyed completely. By comparison (and without minimizing the impact on the good people of Homestead), all 26,000 homes in St. Bernard Parish, Louisiana have been lost, along with the destruction of much of the housing stock of the City of New Orleans and large segments of the Mississippi Gulf Coast. In the area of southeast Louisiana that Entergy serves, nearly 170,000 homes or businesses were damaged so badly that those structures will not be able to accept electric service for an extended period of time. This will severely restrict the long-term recovery and economic prosperity of the region.
The effect of these hurricanes on the energy industry is a matter of national importance that can be measured by economic barometers. In contrast, the effect of the storms on the citizens of the Gulf Coast region will be measured by their suffering and the loss of their families, their belongings, their homes, their businesses, and their jobs. Helping the people of this region rebuild must be our main focus at this time, and I am here today to request your support of our efforts.
Katrina devastated the electric utility infrastructure across much of the Gulf Coast region. Katrina was so large that it affected about 90,000 square miles – an area equal to the size of Great Britain. At the height of the service outages due to Katrina, Entergy lost:
• 1.1 million customers in Louisiana and Mississippi (previous Entergy customer outage record was 290,000)
• Virtually all generation in southeast Louisiana was lost or had to be isolated from the grid to protect the ability of the equipment to return to service;
• Approximately 3,000 miles of transmission lines;
• 30,000 miles of distribution lines;
• 263 substations;
• 1,560 feeder lines were damaged; and
• 14,500 poles were damaged or broken.
One distinguishing characteristic of Katrina was the flooding of mammoth proportion. Although hurricanes frequently result in high winds and heavy rain, Katrina left many areas of southeast Louisiana flooded with several feet of water for several weeks when the levee system failed. Although other areas of the United States are susceptible to flooding, in the case of Katrina, the impacted area in southeast Louisiana became an extension of the gulf for nearly a month, a condition that has not occurred elsewhere in the U.S. during modern times.
On the heels of the destruction and flooding of Katrina, a strong category four storm, Hurricane Rita, a strong category three storm, inflicted significant additional damage to the Gulf Coast region, a critically important natural gas producing region. At the height of the service outages due to Rita,
• An additional 766,400 customers experienced power outages in Texas and Louisiana:
• Another 3,400 MW of generation was damaged or had to be taken out of service to protect vital equipment;
• Over 3,800 miles of transmission lines were lost;
• 344 substations were damaged; and
• 11,500 utility poles were damaged or broken.
In responding to both storms, utility restoration efforts were swift, well-planned and of a scope that is unprecedented – just as two severe hurricanes hitting roughly the same area of the Gulf Coast region within weeks of one another is unprecedented – just as the pervasive submersion of large segments of southeast Louisiana for weeks at a time is unprecedented. In response, Entergy mobilized more than 13,000 utility lineman and other workers and hundreds of millions of dollars have and will be spent to get the lights back on as safely and quickly as possible.
While responding to the storms, Entergy remained in daily contact with the Department of Energy, providing daily reports and briefings. As a result of these communications, situation reports were posted by the U.S. Department of Energy, Office of Electricity Delivery & Energy Reliability under Energy Emergencies: Hurricane on its website at: www.electricity.doe.gov/program/electric_oat.cfm?section=divisions&level2=home.
While much work remains to be done, restoration efforts have been quite successful outside of the flood zone. Many of the customers who have lost service as a result of Katrina and who are capable of receiving service have been restored, and more than 75 percent of the customers who lost service as a result of Rita have been reenergized. However, it is slow and difficult going in New Orleans and the other hardest hit areas of the Gulf Coast, such as Beaumont and Port Arthur, Texas, and Lake Charles, Louisiana.
Entergy has spent considerable resources to restore service to ten refineries that it serves in the Beaumont/Port Arthur, Lake Charles and New Orleans area. Many of these refineries suffered significant damage to their facilities and the transmission lines and substations that serve these facilities fared no better. However, as of early this week, transmission paths were established to seven of these facilities and at least one substation was energized at each of these refineries, enabling them to take clean up/restoration power. Entergy is in constant contact with each of these customers and stands ready to provide power to meet site specific start-up schedules. These refineries have an aggregate refining capacity of 2.27 million barrels of crude per day and therefore are very important nationally as well as regionally.
Rita also caused interruption at two DOE Strategic Petroleum Reserve sites that we successfully restored several days ago. Similarly, Entergy quickly restored service following Katrina to critical shipping ports, including the Port of New Orleans. In fact, the City’s Command Center in the Hyatt Hotel and the Port of New Orleans were among the first facilities to receive power following that storm’s landfall.
As a final example, Katrina halted activity at a fuel depot in Collins, Mississippi, which is outside of the Entergy service territory. Because of its critical importance to the energy industry in the region, Entergy provided immediate assistance to restore electricity to this facility. Attached is a summary of those events which highlight the exceptional service of the men and women on the frontlines of the restoration battle.
Entergy’s emergency response and operational restoration efforts in the devastated region have been vital to the recovery effort. It has given confidence and hope to citizens throughout the region that we can rebuild. It is clear to me from seeing firsthand the commitment of the hearts, minds and souls of these men and women directly involved in the restoration, that our employees will do anything to help our customers and our neighbors. The cost of these efforts has been staggering. Entergy estimates that storm related and business continuity costs from Katrina at between $750 million and $1.1 billion. Estimates of restoration costs for repair or replacement of Entergy’s electric system damaged by Rita are in the range of $400 to $550 million.
The Unique Challenges Faced by New Orleans
Katrina not only presented the problems attendant to a hurricane; its rain and wind, combined with the failure of the levee system in southeast Louisiana, damaged as many as 170,000 homes and businesses in the area so severely that they cannot be re-energized until some combination of demolition, reconstruction, and inspection occurs – a process which may take many months. The utility subsidiary that serves New Orleans, Entergy New Orleans ("ENO"), has been especially hard hit:
• From an infrastructure perspective, ENO’s electric and gas system sustained massive damage.
• From a customer perspective, due to the unprecedented flooding, many tens of thousands of homes and businesses in the City have been underwater for weeks. These structures cannot simply be repaired after being submerged for so long. As a result, the City has lost a large segment of its housing stock, and ENO has lost the vast majority of its customer base.
• From a financial perspective, current estimates of the cost to restore ENO’s system for gas and electric service range from $325 million to $475 million – an amount that exceeds the total amount invested to provide those utility services in New Orleans on the day before Katrina came ashore.
Clearly, the confluence of events following Katrina caused an immediate and severe deterioration in ENO’s financial condition in the days following Katrina. ENO’s revenues, the continuity of which is vital to pay timely fuel, purchased power, and restoration costs, disappeared overnight. And because of ENO’s relatively small size, it quickly hit short-term borrowing limits pursuant to SEC orders, and its debt was downgraded by rating agencies to below investment grade.
Also, ENO was unable to access capital markets to raise new debt, because simple steps, like due diligence could not be completed timely, ENO is unable to provide revenue projections assure a revenue source sufficient to demonstrate its ability to service new debt given the uncertainty surrounding the timing and size of the return of its customer base.
Faced with a severe and immediate need for cash to continue its restoration efforts, ENO filed and obtained Chapter 11 bankruptcy protection on September 23, 2005. This filing allowed Entergy Corporation, ENO’s parent, to provide up to $100 million in short-term, debtor-in-possession financing so that ENO can make currently due payments while continuing to restore service as areas of New Orleans rebuild and recover.
But this is only a temporary stop-gap measure. It will take many times this amount to reconstitute ENO in a manner that is able to provide reliable service to its customers. To understand this, consider the following comparative data:
Table 1. Entergy New Orleans Comparative Data – All Amounts Approximate
Pre Katrina Post Katrina % Change
Electric Customers 190,000(1) 60,000 - 75,000(2) (68)% - (60)%
Annual Non-Fuel Electric Revenues $316M(1) $90-120M(2) (72)% - (62)%
Average Annual Storm Restoration Cost $2M(3) $325-475M +16,000% - +24,000%
Average Annual Storm Restoration Cost per Customer $11(3) $4,300- $7,900(4) +39,000% - +72,000%
(1)based on 2004 actuals
(2)estimated based on 115,000-130,000 customers unable to take service for extended period of time per September 30, 2005 press release [A process that could take many months or years]
(3)cost estimated based on last 5 years; average per customer based on 2004 customer count
(4)cost estimated based on Katrina restoration; average per customer based on post Katrina customer count
As a regulated utility that has devoted its property to public use, Entergy operates under a cost-of-service regime. As such, ENO is not entitled to unregulated profits, but it is entitled under well-established law to the opportunity to recover from its customers all of its costs, including its storm restoration costs. This traditional cost recovery approach has been used in response to past hurricanes and ice storms and has raised customer bills. But the magnitude of those cost increases was manageable. That would not be the case for the level of destruction caused by Katrina and Rita.
These storms, coming as they did one after the other, and accompanied by massive, long-term flooding, require a different approach. Even under the best of circumstances, it is difficult to see how these customers, many of whom live in some of this nation's poorest neighborhoods, could bear the loss of their belongings, homes, and jobs, and also bear the cost of the restoration of the utility system. This problem is particularly acute given the extent of the devastation to hundreds of thousands of homes and businesses throughout the Gulf Coast region. In addition to bearing that cost, the cost of restoration will also be unprecedented.
Entergy estimates that electric rates in New Orleans would have to more than double to keep ENO operating during the period 2006 to 2008. This is due to a combination of the extraordinarily high restoration costs in absolute terms (+16,000% - +24,000% higher than average for that company over the last five years) and the fact that the customer base among which restoration costs would be spread is significantly lower. On a per customer basis, the cost of Katrina would be $4,300 to $7,900, a level that is unaffordable given the below-national-average income of citizens in New Orleans’ citizens before the storms. Clearly, the federal government must provide alternative means of funding the restoration and the cost of rebuilding one of the exceptional areas in the United States, the City of New Orleans and the Gulf Coast region.
Some may ask, “Why should the federal government take a role different from the one it has taken for years through its well-established programs for natural disaster and emergency management?” The answer, I believe, is four-fold:
1. Unprecedented levels of damage and destruction caused by Hurricanes Katrina and Rita;
2. Unprecedented flooding for an unprecedented period of time resulted from levee failures in and around the New Orleans area;
3. Unprecedented displacement of a large number of people for an indeterminate period of time. This includes a very significant portion of the population of the City of New Orleans and virtually the entire population of St. Bernard Parish.
4. The extraordinary level of poverty among large segments of the population of the region – citizens who would be required to pay the cost of restoration through regulated utility rates if federal assistance is not provided to protect them from this unaffordable burden.
In short, the potential rate effects of the enormous restoration costs and the loss of customer base will stifle any form of economic development – much less full recovery -- if the federal government does not intervene. In such a scenario, the rates for power services – electricity and gas – will be so abnormally high that no industry will locate here or bring new jobs that are the engine of economic recovery and growth.
We cannot let that happen. The City of New Orleans and the Mississippi Gulf Coast have too much economic, social, and cultural importance to the nation. We urge you at the federal level to do everything that can be done to reduce the burden on customers who already have lost so much, and to restore safe and reliable utility service.
The Need for Federal Assistance
We must put in place immediate, direct federal assistance for utilities serving the Gulf Coast region, particularly ENO, which, unlike municipal utilities or cooperatives, are not eligible under the Stafford Act for emergency financial assistance to pay for restoration and rebuilding costs under existing federal law. There are several ways in which the Congress can help those who were hardest hit by Katrina and Rita.
For example, enactment of the Privately Owned Utility System Restoration Act of 2005 (modeled after the post-9/11 Relief Act provided for the Airline industry ) would provide financial compensation to electric and gas utilities to recover the direct costs resulting from Hurricanes Katrina and Rita for plant, equipment and restoration costs, as well as providing financial compensation through 2007 to cover the incremental losses for those companies which have significant and sustained loss of customers. A provision providing compensation for direct and incremental costs is included in the Landrieu/Vitter “Pelican Bill” (S.1765 & S.1766), which was introduced in the Senate on September 22, 2005 and referred to the Senate Committee on Finance.
We would also urge the Congress to consider other federal legislative efforts to provide financial relief to help utilities such as Entergy and Entergy New Orleans rebuild the Gulf Coast region.
Another approach to providing financial assistance is through the Department of Housing and Urban Development under the Community Development Block Grant (CDBG) program. Community Development Block Grants appear to be a viable approach to providing direct federal assistance to utilities. Congress used CDBG funds to provide direct assistance to Consolidated Edison (and other utilities) following the September 11, 2001 terrorist attacks.
These grants, if funded and dispersed on a timely basis, can significantly mitigate costs that would otherwise be passed through to utility customers. Entergy strongly recommends that the CDBG program be modified to fit the extraordinary circumstances resulting from Katrina and Rita. For instance, Entergy is recommending to Congress that the CDBG program and funds by tailoring language to directly target electric and gas utility companies so that there is no "battle" among other service providers (phone, cable, etc) for such grants. Funding for these other entities should be done separately so as to not impede financial assistance to electric and gas companies. Restoring electric and gas service is simply too important to the City, region and the national economy.
Additionally, Congress must streamline the CDBG fund distribution process. Entergy recommends that Congress itself must set specific statutory timetables and periods during which the CDBG funds must be distributed.
Finally, Congress must recognize the special and unique circumstances of New Orleans generally, and ENO specifically. As noted earlier, New Orleans is home to some of the poorest citizens in the country. This has always presented special challenges for ENO. That challenge has become exponentially more difficult as a result of the significant and perhaps sustained loss of ENO’s customer base as a result of hurricane Katrina and Rita, and the associated flooding. Simply put, increasing electric rates to cover storm and on-going costs would place far too great a burden on those customers remaining or returning to the City, and is therefore not a viable alternative.
Thus, in order to recognize these unprecedented conditions, Entergy recommends that Congress implement a means of direct federal assistance, perhaps through CDBG funds, that can be used for those electric and gas companies that have and will continue to suffer as result of this dramatic and potentially sustained loss of customers.
To ensure that only those utility companies in such dire straights are eligible for such relief, Congress must also establish specific eligibility requirements for such federal compensation. One approach would be to limit this relief to a company that has seen its customer level return to no more than 80% of its pre-Katrina/Rita levels.
A third alternative for providing federal relief is through a waiver of the Stafford Act. The Federal government has intervened with immediate financial assistance to utilities on the north shore of Lake Pontchartrain (electric cooperatives) that were impacted by hurricane Katrina, but has not and cannot do so for the privately-owned utilities on the south shore of the lake without Congressional intervention. Who can seriously claim that customers of utilities on the north shore deserve aid and protection against crippling rate effects, but those on the south shore – many of whom have been commanded not to return to their homes for the last month due to flooding – do not? In this time of need, such disparate treatment cannot be justified.
This disparate treatment stems from the fact that privately-owned utilities are not eligible to receive financial assistance from the Federal Emergency Management Agency due to a statutory prohibition on such funding in the Robert T. Stafford Disaster Relief and Emergency Assistance Act. A waiver of this provision was included in the “Pelican Bill” (S.1765 & S.1766), and the need and basis for such a waiver of the Stafford Act is clear in my view. This type of waiver would provide direct assistance for infrastructure restoration of a critical national interest and for immediate and permanent relief of these customers who are beset with massive losses due to these storms. The rates, terms and conditions of service to customers are heavily regulated by state and local regulatory authorities (i.e. the Mississippi Public Service Commission, the Louisiana Public Service Commission and the Council of the City of New Orleans). One of the key features of utility regulation is that the utility and its shareholders are entitled to charge only the rates set by the government, in exchange for which they are given the opportunity to recover all of their costs of doing business – including their cost of capital. Without assurance that investors will obtain a return on their investments, the investors will not provide the funds necessary to finance the restoration.
Without direct federal assistance, the customers remaining on the utilities’ systems will face enormous rate increases. This would cripple any hope of economic recovery for the region and discourage people from returning as utility rates in those areas would be unacceptably high. Such rates would initiate a regulatory “death spiral,” from which there is no means of recovery. For the City of New Orleans, this is a potential doomsday scenario. Even if there were a foreseeable and significant customer base for ENO, something that no reasonable person could confidently predict will occur even in three to ten years, the rate increases to the remaining and returning customers would be unsustainable. Without federal intervention, these costs will cripple the City’s and the region’s economy for decades and render the local utility unable to restore this vital infrastructure. We strongly urge that Congress pass such a waiver immediately. President Bush committed the country to rebuild the City of New Orleans in his September 15th speech from historic Jackson Square. The ultimate economic and social recovery of the City will be difficult and made even harder if there is not a commercially viable local electric and gas utility. Yet without direct federal aid, a company such as ENO that has sustained such a significant erosion of its customer base cannot maintain safe and reliable on-going operations and provide the necessary foundation for the City's economic restoration and growth.
You have seen the pictures of the devastation, but this isn’t about pictures or devastation; it is about the recovery, about the future and about hope. The City of New Orleans can only have a future if it can obtain the federal financial assistance necessary to rebuild its infrastructure. Obviously, that infrastructure includes that of the electric and gas utility that serves the City and its citizens.
We ask for your assistance so that we can continue to help one of this country's great Cities get back on its feet.
Collins, MS Fuel Depot Event Summary
Hurricane Katrina knocked power out to millions of customers in MS and LA. The outages impacted all classes of customers especially energy sector facilities such as refineries, pipelines and fuel depots. This led to a gasoline crisis in the midst of restoration efforts. One such facility was a fuel depot located in Collins, MS in the Mississippi Power Company (MPCo) service area. A portion of that facility is served from the west by South Mississippi Electric Power Association (SMEPA), but an overwhelming majority of the facility is served by MPCo from the South. SMEPA was able to reenergize its portion a day after the storm, but this only supplied power to a few of the facilities in this large complex.
Mississippi Power Company’s distribution facilities were brought up in quick time, but transmission facilities that served this facility from the South were badly damaged. MPCo, recognizing the importance of this facility, considered providing power from a different route from the east and immediately began work to provide this interim fix.
Four days after the storm on Friday, September 2nd, Entergy’s Transmission group received a call from Southern Company’s transmission group requesting assistance. The damage to MPCo’s transmission facilities were much worse than originally thought and it became apparent that it would take too much time to rebuild their transmission facilities to serve the fuel depot in Collins. While surveying the area by helicopter the Southern Transmission group assessed a 230 kV transmission interconnection segment south of the Mississippi border in Louisiana just north of Bogalusa, LA that belonged to Entergy Louisiana. Southern believed it would be quicker to repair this damaged transmission tie and feed power into the Collins Fuel Depot by tying into the Southern/MPCo transmission system that ran from the MS/LA border through Hattiesburg, MS North to Collins.
In addition, EMI had received calls from MEMA, FEMA and DoE asking if there was anyway they could help with restoring power to the fuel depot in Collins. They identified this as a high priority in helping to resolve the fuel crisis that was mounting in the area.
Entergy had previously assessed this transmission tie and given it a low priority to repair since it was only an interconnection tie and was not used to directly serve any Entergy customers. After receiving the call Entergy recognized the importance the Collins fuel depot meant to the growing fuel crisis and immediately began diverting resources working on restoration in Mississippi to this very isolated transmission tie located in Louisiana marshlands.
While the damage to these transmission facilities were less than those experienced by MPCo, they were still significant. The transmission line in question ran some 20 miles north of Bogalusa, LA to the MS border. The assessment identified a dozen broken arms, three spans of transmission lines downed and three transmission structures along a 4 mile stretch of marshlands. Furthermore, the location of the downed structures were in an in accessible area and after discussion with surrounding landowners, Entergy soon realized that a two mile road would have to be cut through dense forest to the damaged structures. Workers also soon learned that the structures were so badly damaged it would take weeks to reconstruct the towers so engineers began looking for alternatives. The plan they came up with, airlift three transmission structures from existing transmission facilities on dry ground into the marshlands.
Work got underway on Saturday, September 3rd, first priority cutting the two mile long road through dense forest. The next challenges involved locating existing transmission structures and a helicopter capable of lifting 7,000 lbs. A sky crane was located in Oregon, but it would be a week before it was available. A call was placed to the Mississippi National Guard who gladly provided a Chinook, capable of lifting 10,000 lbs, to assist with the restoration.
After working through numerous resource and environmental challenges, this team of 120 Entergy personnel and contractors completed restoration by Saturday, September 10. An event that should have taken weeks to complete was completed in days. Through the use of ingenuity and creativity these individuals helped resolve a fuel supply crisis that was hampering restoration efforts in Mississippi.
Mississippi Section of
Adams Creek – Hattiesburg