FERC Filings
MOTION FOR LEAVE TO INTERVENE AND PROTEST OF THE ELECTRIC POWER SUPPLY ASSOCIATION re: CINERGY SERVICES, INC. ON BEHALF OF PSI ENERGY, INC., CINCAP MADISON, LLC AND CINCAP VII, LLC
PROTEST
A. BASIS FOR COMMISSION ACTION
For the reasons set forth below, EPSA believes that Cinergy has failed to demonstrate through evidence in this proceeding, as required by Section 203 of the Federal Power Act, that the proposed transaction is in the public interest. Accordingly, particularly given the affiliate nature of the transaction, EPSA requests that the Application should not be approved until such time as Cinergy satisfies its burden to show, through record evidence, that the proposed transaction will not unduly discriminate against unaffiliated wholesale suppliers to the detriment of wholesale competition in general, and PSI’s ratepayers in particular.
The Commission has recognized that discrimination against wholesale suppliers can come in many forms. An affiliated utility may try to sign an above-market contract with its affiliate. An affiliated utility may use its control of transmission lines to discriminate against wholesale suppliers in favor of its own generation. The proposed transfer here raises a concern as to whether it, too, poses another form of affiliate abuse, thus obligating this Commission to reject the present application just as it has rejected other efforts by utilities that discriminate against unaffiliated wholesale suppliers in favor of the utility’s own affiliate suppliers. Put simply, Cinergy has not presented an adequate case for the Commission’s concluding that the proposed transaction is not abusive.
Had PSI procured power directly from its wholesale affiliates, the agreement would plainly be subject to this Commission’s jurisdiction and rigorous scrutiny. As the Commission has stated on numerous occasions, transactions between traditional public utilities with captive customers, such as PSI, and affiliated wholesale power suppliers, such as CinCap Madison and CinCap VII, raise concerns of cross-subsidization and market power gained through the affiliate relationship.
The proposed transaction amounts effectively to the same thing. Indeed, Cinergy admits that the transaction here is being undertaken in order for its utility affiliate (PSI) to buy power from its wholesale affiliate, not through a bilateral power supply contract, but through the outright acquisition of these affiliates. But the affiliate concerns are exactly the same in each situation. And so too, therefore, should be the analysis as to whether the transaction should proceed. Hence, the Commission should demand, here, the same showings as it would were PSI simply to have contracted with its affiliates for long-term supply.
B. THE PROPOSED TRANSFER HAS NOT BEEN SHOWN TO BE IN THE PUBLIC INTEREST
In its Application, Cinergy states that PSI has “determined that the existing (and still increasing) demand for electricity on its utility system requires additional generating capacity as soon as practical.” Application at 1. In response to this need, Cinergy proposes to transfer approximately 712 MW of peaking capacity from its non-utility generation affiliates to its public utility operating company subsidiary. Presumably, PSI would subsequently ask the Indiana Utility Regulatory Commission’s approval to add the facilities to PSI’s rate base. Cinergy claims it “has determined that the transfer is the most expeditious, reliable, efficient and economic [method] of meeting the anticipated increasing demand for electricity” on the PSI system. Application at 5. Accordingly, Cinergy claims that the transfer is in the public interest, and should be approved under Section 203 of the Federal Power Act. Application at 7-12.
Section 203 of the Federal Power Act governs transfers or other dispositions of jurisdictional facilities and states that “if the Commission finds that the proposed disposition . . . will be consistent with the public interest, it shall approve the same.” 16 U.S.C. § 824b (2000). In its 1996 Merger Policy Statement, and again in Order No. 642, where it revised the filing requirements under Part 33 of its regulations, the Commission stated that if a proposed transfer of jurisdictional facilities does not adversely affect competition, rates or regulation, the Commission will find the transaction to be in the public interest.
Given the affiliate nature of the proposed transaction, and the absence of record evidence to the contrary in this proceeding, and because the proposed transaction potentially will harm competition and adversely affect rates for all Cinergy ratepayers, the Commission should find that the proposed transaction has not been shown to be in the public interest and should either reject the transfer or impose conditions to mitigate any adverse effect on competition or rates.
1. THE CINERGY PROPOSAL POTENTIALLY WILL HARM COMPETITION
Although Cinergy claims that “the transfer is the most expeditious, reliable, efficient and economic [method] of meeting the anticipated increasing demand for electricity” on the PSI system, it has produced no evidence that its plan to meet its capacity needs by transferring its wholesale generation units and associated facilities to an affiliated public utility is as, or more, reliable, efficient or economic than procuring such needs from the competitive wholesale market. Indeed, Cinergy cannot make this claim absent evidence that it submitted the transaction to a market test or other form of benchmark analysis. There is no evidence, for example, that it conducted a Request for Proposal (RFP) or other competitive solicitation. Nor has it presented any evidence that it otherwise meaningfully compared the benefits of the transfer to those available from competitive alternatives. It is known, however, that if the transfer were to occur, competitive suppliers would be prohibited from competing for more than 700 MW of PSI load.
Currently, numerous electric power suppliers are able, if provided the opportunity, to compete with CinCap Madison and CinCap VII for wholesale sales to PSI. If the Commission permits the transfer to go forward, these suppliers will have no opportunity to do so. Also, as discussed more fully below with respect to retail consumers, PSI also cannot claim that its ratepayers will be better off not having wholesale suppliers compete for their needs, absent an evidentiary showing.
Cinergy argues that the transfer will have no impact on competition because its non-discriminatory operation of its transmission system will not change, and because the transfer will not change generation market shares in its region. Application at 7. Cinergy also states that the Commission has routinely approved internal corporate transfers of jurisdictional facilities. Application at 8.
EPSA agrees that the transfer of generator facilities from Cinergy’s merchant generation affiliates to its public utility affiliate should not change the operation of its transmission system. Rather, the transfer would impact competition in the generation market, and thus the Commission precedent cited by Cinergy is not on point. In each of the cases cited by Cinergy, the applicant was separating competitive generation from other lines of business, thus enhancing, not impeding, competition. For example, in PP&L Resources, Inc., 90 FERC 61,203 (2000), PP&L proposed to separate its competitive electric power business, including its generation assets and power marketing business, from its transmission and distribution businesses. In Allegheny Energy Supply Co., 89 FERC 62,063 (1999), Allegheny Energy proposed to separate all of its generation assets from its transmission and distribution assets to accommodate electric restructuring in Pennsylvania. In Calpine Power Services Co., Calpine, which does not even own a public utility affiliate, proposed to reorganize its power and natural gas marketing activities within a single subsidiary company. None of these cases involved a transfer of affiliated generation to an affiliate utility operating company, and none involved the eventual addition of merchant generation facilities to utility rate base.
Unlike the cases cited in its Application, Cinergy proposes to remove generation from the wholesale market, which necessarily would have the effect of eliminating any opportunity for unaffiliated generators to compete for the load to be served by the affiliated units. Unquestionably, the contestable wholesale demand in the PSI region will be 700 MW smaller, but Cinergy has produced no evidence to support its claim that this removal will not adversely affect competition.
2. CINERGY HAS NOT SHOWN THAT ITS PROPOSAL WILL NOT ADVERSELY AFFECT RATEPAYERS
Cinergy also claims that the proposed transfer will have no adverse effect on retail or wholesale customers, because it cannot seek “to revise its wholesale native load customer base rates schedules to be effective prior to June 1, 2003.” Application at 9. This wholesale rate freeze, however, will protect ratepayers for no more than five months, as Cinergy hopes to complete the transfer by the end of 2002. After June 2003, ratepayers would incur the full cost of Cinergy’s proposal. The pending rate freeze, therefore, is for all practical purposes irrelevant.
What is clear, though, is that retail ratepayers could be harmed by permitting any utility to acquire new generation via what is, essentially, a sole source procurement from an affiliate. It is also clear that Cinergy’s application does not meet the “public interest” standard of Section 203 since it contains no analysis that the proposed transfer would truly benefit ratepayers. Indeed, unless Cinergy issues an RFP or otherwise attempts to seek to procure supplies at arms-length from non-affiliated suppliers, as EPSA believes it should be required to do under both state and federal law, it is hard to imagine how it could show that the transfer is a good deal for its ratepayers. In short, unless Cinergy can prove, via some form of market test, that the transfer is a “good deal” for its ratepayers, Cinergy has not met the Federal Power Act § 203 test that the transfer be shown to be in the public interest. It is Cinergy’s burden to show that it is.
The Commission recently approved a corporate reorganization proposed by Cinergy whereby it will transfer utility generation to an affiliate, ostensibly to separate retail generation from transmission and distribution service in order to accommodate retail electric restructuring. Cinergy Services, Inc., 98 FERC 61,306 (2002). It is EPSA’s understanding that part of the transaction will require ratepayers to pay stranded costs associated with Cinergy’s retail generation facilities. To require those retail ratepayers now to absorb the potentially above-market cost of the CinCap units, on top of the stranded costs associated with other facilities, appears to compound the harm of being foreclosed from receiving the benefits of potentially lower-priced competitive alternatives.
Cinergy claims that its ratepayers are protected, however, because it cannot pass increased costs on to retail or wholesale ratepayers without approval from the Indiana and Federal commissions. Indeed, it is true that the Commission has permitted mergers and other transfers of jurisdictional facilities where the applicants committed not to seek rate recovery of merger costs without regulatory approval or where any increased rates would have to be approved in a subsequent proceeding. However, this case is fundamentally different than the merger cases cited by Cinergy. The facilities proposed to be transferred here are not part of a merger expected to eventually lower overall operating costs, but instead are being sought in conjunction with a resource acquisition decision, the merits of which are completely unknown to, and utterly untested by, this Commission. Here, then, there simply is no reason to presume that ratepayers will not face higher costs if the proposed transfer is approved.
Had Cinergy issued an RFP and solicited bids from other suppliers, it could easily have determined which alternative was the most economical, efficient and reliable. For example, Southern California Edison issued a “Request for Offers” as recently as September 18, 2002, for service commencing in January 2003. Had Cinergy issued such an RFP, and the cost of the received bids all exceeded the cost of purchasing the facilities at issue in this proceeding, then Cinergy reasonably might have concluded that its preferred alternative was the best deal for ratepayers. To EPSA’s knowledge, it did not do so. Cinergy implicitly acknowledges that it does not know whether competitive alternatives would be cheaper than the proposed transfer. Cinergy asserts that “if PSI cannot, with certainty, factor [the CinCap] plants into its generation portfolio and resource plans for its 2003 peak demand needs by end of 2002, PSI will have to reserve and secure other, perhaps more costly or risk-laden, sources of generation. . .” Application at 2 (emphasis added).
Cinergy also could have attempted to justify the proposed affiliate transfer as the best deal for ratepayers by using a benchmark analysis, comparing the transfer to similar, contemporaneous power procurements. See, e.g., Ocean State Power II, 59 FERC 61,360 (1992), Order Denying Reh’g and Granting Clarification, 69 FERC 61,146 (1994). But Cinergy did not do this either.
Accordingly, before finding that the proposed transfer is in the public interest as required by §203, the Commission should require Cinergy to prove that its outright purchase of the affiliated facilities is a better deal for ratepayers than could have been offered by competitive alternatives. Whether or not this Commission believes it can directly order Cinergy to engage in a competitive procurement of its generation requirements, it unquestionably is within the Commission’s jurisdiction to conclude that, absent Cinergy’s doing so or otherwise supporting its case, Cinergy has failed to satisfy its burden of showing that the proposed transfer of jurisdictional facilities is in the public interest, as required under section 203.
3. THE COMMISSION SHOULD ACT NOW TO PREVENT POTENTIALLY SIGNIFICANT HARM TO WHOLESALE COMPETITION GENERALLY
In its recent Notice of Proposed Rulemaking regarding a standard wholesale electric market design (SMD NOPR), the Commission described a regime intended to “remedy remaining undue discrimination and establish a standardized transmission service and wholesale electric market design that will provide a level playing field for all entities that seek to participate in wholesale electric markets.” This regime relies on competitive bids to determine appropriate outcomes, because “[i]n a structurally competitive market, one with many buyers and sellers who cannot influence price, the market can assure an overall efficient outcome where prices indicate the value of additional supplies and conservation.” Id. at 390.
However, the competitive regime envisioned by the Commission relies primarily on long-term, bilateral contracts between buyers and sellers. Thus, in the SMD NOPR, the Commission stated that:
[c]entral to the Standard Market Design concept is its reliance on bilateral contracts entered into between buyers and sellers. The resource adequacy requirement strongly encourages such long-term contracts. The short-term spot markets . . . are intended to complement bilateral procurement. . . . We expect that market participants will strike an appropriate balance between bilateral contracts and spot market transactions. Efficient spot markets with appropriate price signals bring bilateral and spot market prices closer together, helping to assure customers of efficient bilateral markets. SMD NOPR at 10.
Cinergy’s proposal is in contrast to the Commission’s vision and goal of creating a level playing field for all suppliers based on long-term contracts.
First, as discussed above, no evidence has been presented that PSI considered competitive alternatives. Hence, there is no evidence that the transaction is the most reliable, efficient or economical alternative for satisfying PSI’s requirements. Indeed, by eliminating the opportunity for suppliers to enter into long-term bilateral contracts to supply the PSI load now contemplated to be served by the transferred facilities, the Cinergy proposal appears to be at odds with the Commission’s “central” reliance on bilateral contracts in its Standard Market Design. Surely, there can be no long-term bilateral contracts where there is no market for those contracts, and, just as surely, there will be no market if utilities are permitted to remove required capacity from the wholesale market. To ensure, then, that its Standard Market Design has any chance to succeed, the Commission must do whatever it can to ensure that utilities obtain as much capacity as possible through competitive bids and long-term market-tested contracts.
Second, by transferring facilities from its merchant affiliates to its vertically integrated utility, Cinergy has effectively transferred to PSI’s captive ratepayers all of its merchant plant risk and associated costs, apparently contrary to what was initially represented to this Commission. By developing the projects through CinCap Madison and CinCap VII instead of PSI, Cinergy avoided the obligations imposed on traditional utilities in exchange for the benefits of merchant generation, including the ability to sell into the wholesale market at market-based rates. Cinergy, not PSI’s ratepayers, however, assumed those economic risks when the plants were developed as merchant plants through merchant affiliates. Now, Cinergy’s proposed transfer of the facilities into rate base would avoid the risk assumed by other generators. This, too, prevents the level playing field envisioned by the Commission.
EPSA is concerned that the Cinergy proposal appears to be another example of a growing trend whereby utilities attempt, one way or another, to shift their affiliated suppliers’ competitive risks onto the utilities themselves. If these proposed transactions proceed, generation facilities currently operated, and initially developed, as merchant facilities would be shielded from the competitive market by virtue of their being included in an affiliated utility’s rate base.
In the face of these obvious obstacles to its competitive agenda, the Commission should take whatever action it can, now, to prevent significant future harm to wholesale generation markets by utility companies seeking unjustifiably to reduce wholesale competition by transferring merchant generation to affiliated utilities. In such situations, the Commission should not allow such transfers absent proof by the applicant that the chosen alternative is the most efficient and economical, either through a competitive solicitation process or other evidence that the requested transfer is superior to a “market” alternative.
Requiring Cinergy to submit its proposed transfer to a market test before receiving Commission approval will not infringe upon the rights of the Indiana commission presently to determine procurement policies and standards. It is this Commission’s responsibility to determine whether the transfer of jurisdictional facilities is in the public interest pursuant to Section 203 of the Federal Power Act. Inasmuch as the proposed transfer clearly has the potential to adversely affect wholesale competition, the Commission should not approve the transaction absent proof that the proposal is superior to market alternatives. A competitive solicitation is the most efficient way for Cinergy to satisfy this burden.