FERC Filings
MOTION FOR LEAVE TO INTERVENE AND PROTEST OF THE ELECTRIC POWER SUPPLY ASSOCIATION re: ENTERGY SERVICES INC. AND EWO MARKETING LP
PROTEST
EPSA opposes Commission approval of the instant Application as submitted because Entergy has failed to demonstrate that the proposed wholesale power purchase agreements between ESI, a marketing subsidiary that acts as agent for the Entergy public utility entities, and EWOM, an affiliated marketing company with market-based rate authority, satisfy the just and reasonable standard of Section 205 of the Federal Power Act. As Entergy indicates in its application, under EWOM’s market-based rate tariff, sales to affiliates with a franchised service territory must receive prior approval by the Commission in a Section 205 proceeding. The reason for this condition is to protect customers of Entergy Operating Companies from the lack of an arms-length relationship between affiliates and for the potential for anticompetitive conduct. With this in mind, the review of the solicitation of the PPAs in question must be sufficiently rigorous to ensure that the RFP was conducted and evaluated in a transparent, fair and non-discriminatory fashion.
In this case, both PPAs are between a regulated operating company and an unregulated power marketing affiliate selling power from affiliated unregulated generation. The transactions envision a “call” option on up to 206 MW of capacity from the RS Cogen facility in Lake Charles, Louisiana – 50% of which is owned by an Entergy affiliate. This is the first of four affiliate transactions that Entergy has announced in its long-term resource plan. One of the remaining three was apparently bid into the same RFP described in this submittal, while the other two were agreed to outside the RFP process. While the instant PPAs cover a three-year period, the other affiliate transactions are very long-term. Accordingly, this submittal and the Commission’s rulings in this proceeding set the stage for a series of affiliate transactions that are waiting in the wings.
A. The Entire RFP Process Must Be Transparent, Fair and Non-Discriminatory
In its application for approval of the affiliate PPAs, Entergy provides some details on the procedures under which the RFP was conducted last fall and states that, in its view, the process was fair and non-discriminatory. EPSA fully endorses the use of competitive resource procurement and believes that these processes should be required of public utilities when seeking capacity and energy resources. However, in this particular case, Entergy’s submittal raises many questions as to whether its procurement process was implemented in a transparent, open and non-discriminatory manner.
The application includes an affidavit of Dr. Susan F. Tierney, a principle at Lexecon, Inc., an independent entity selected to monitor Entergy’s RFP process. Although Dr. Tierney’s affidavit attests to certain procedures intended to ensure the independence of the RFP process, there is no objective quantification in the submittal which establishes clearly that the RS Cogen is indeed the legitimate winner. Furthermore, in Dr. Tierney’s testimony she states that she did not evaluate “technical specifications” of the RFP. Therefore, there is no evidence in the record to allow parties to determine that either the criteria set up for the RFP bids, or the evaluation of the bids themselves, are non-discriminatory or just and reasonable.
Clearly, even in circumstances where bidder’s identities are effectively masked, the winning and losing of RFPs turn largely on the selection factors and the weighting of those factors in assessing bid responses. For example, the RFP could include selection criteria, such as a requirement that generation be located in certain areas, that can only be satisfied by the plants of the affiliate. Or the selection criteria could specify certain types of generation, e.g. peaking units, only held by the affiliate. Also, while the RS Cogen presumably has no current entitlement to transmission capacity on the Entergy system, affiliate responders may have been permitted use of transmission capacity reserved to serve the utility’s native load growth or future network resource designation, while unaffiliated responders are generally unable to prequalify their projects as network resources. Thus, while these may be legitimate selection factors, there is the potential to apply them in a manner that creates a bias for affiliate transactions. Unfortunately, Entergy has chosen not to submit transparent information on either the selection criteria of the RFP or how they were applied in the bid evaluation process. Both the Commission and parties to the RFP must be able to verify that Entergy’s RFP was part of a robust competitive process; the fact that the only winners announced to date from that RFP are affiliates only serves to raise flags that this process may have been discriminatory.
As the Commission pointed out in its recent Cinergy order, affiliate transactions can pose problems for the competitive procurement process and the development of robust, competitive regional marketplaces. A corporate entity may have incentives to enter into transactions – even transactions that are not competitive and would not be viable on a stand-alone basis – if it can capture value for the corporate entity as a whole. In a recent presentation at the Morgan Stanley Global Energy Conference in New York City, Gale Klappa, the CFO of Southern Company, touted such advantages enjoyed by his own company. He explained that Southern Company, “has taken the risk out of the competitive electricity business.” This reflects in large measure Southern Power’s favored position on the Southern system, i.e., its ability to use Southern’s 30,000 MW of regulated generation for replacement power and Southern Power’s participation with its regulated affiliates in economic dispatch and reserve sharing arrangements through the Southern system agreement, benefits that are unavailable to Southern Power’s competitors. It should come as no surprise, either, that Southern Power sells 78% of its capacity to the Southern utilities under long-term contracts as a result of “competitive” bidding processes.
However, while merchants do not have the option of relying on the resources of their regulated affiliates, the merchants are well-versed in managing that risk and should be given a fair, non-discriminatory, transparent opportunity to compete on a level playing field with utility affiliates to meet load demand – particularly within the control areas where this Commission has already determined that the incumbent utility has market power. As was demonstrated in the rise of the independent power business twenty years ago, with fair bidding rules merchant generators can build projects less expensively and more efficiently, while protecting utility consumers from operational risk and cost overruns.
While Mr. Klappa’s comments do not speak to this specific Entergy application, they do underscore the existence of inherent incentives for entering into affiliate transactions of this type. In light of those incentives that may cause affiliate transactions to be more favorable to the utility/merchant company corporate family, the Commission must be especially diligent in requiring transparent and demonstrably fair processes for power purchase bidding and selection, whether short (weekly, monthly or seasonal), intermediate or long-term. Some bidding programs may, perhaps inadvertently, give undue advantage to affiliates and, in fact, have the effect of entrenching the undue discrimination exercised by vertically integrated utilities without appropriate mitigation. Hence, the Commission must exert its jurisdiction and require demonstrably competitive bid solicitation and evaluation processes be performed by jurisdictional utility companies. As discussed in the next section of this protest, the Commission’s policies acknowledge that affiliate transactions are not arms-length and, therefore, are reasonably accompanied by a rebuttable presumption of affiliated preference. For this reason, Entergy should be required to demonstrate that the PPAs with its merchant affiliates, like the PPA here contemplated with the affiliated RS Cogen facility, are the best alternatives identified through an RFP process that is transparent and fair from beginning to end and that the employed selection factors were both unbiased and properly implemented.
B. Entergy Has Not Met the Burden of Proof Established by the Commission for Approval of Affiliate Transactions
As the Commission has stated on numerous occasions, transactions between traditional public utilities with captive customers, such as those represented by ESI, and an affiliated power supplier, like EWOM, raise concerns of cross-subsidization and market power abuse gained through the affiliate relationship. In Boston Edison Company Re: Edgar Electric Energy Company, 55 FERC 61,382 (1991) (Edgar), the Commission held that, in analyzing market rate transactions between an affiliated buyer and seller, it must ensure that the buyer has chosen the lowest-cost supplier from among the options presented, taking into account both price and non-price terms. Stated another way, the Commission must ensure that the buyer has not preferred its affiliate without justification.
Since the issuance of Edgar, the Commission has remained involved in an intensive process to eradicate undue discrimination from energy markets. Most recently, the Commission took further steps and issued its Notice of Proposed Rulemaking regarding a standard wholesale electric market design (SMD NOPR). In the SMD NOPR, the Commission described a regime intended to provide price benefits to ratepayers by “remedy[ing] remaining undue discrimination and establish[ing] 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.” Indeed, the Commission has long recognized that all ratepayers will benefit from, and in fact will be harmed by the absence of, a level playing field for all market participants. The Commission 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.” As part of this progress towards robust, competitive markets, the Commission must continue to closely examine affiliate transactions and require that such transactions meet the standards and burden of proof set out years ago in Edgar.
In Edgar, the Commission noted that it may be possible for a utility to demonstrate that it had not unduly favored its affiliate through a market test, which uses a bid or benchmark analysis to determine whether the transaction in question was one that could have resulted through arms-length negotiations between an unaffiliated buyer and seller. As Entergy acknowledges in its application, the Commission presented three means (which it stated were nonexclusive) to demonstrate lack of affiliate abuse: 1) evidence of direct head-to-head competition between the affiliated seller and competing unaffiliated suppliers in either a formal solicitation or in an informal negotiation process; 2) evidence of the prices that nonaffiliated buyers were willing to pay the affiliated seller for similar services; or 3) benchmark evidence of market value, based on both price and non-price terms and conditions, of contemporaneous sales made by nonaffiliated sellers for similar services in the relevant market.
In Ocean State II, the Commission approved a contract between a public utility and its affiliate based solely on “benchmark” testimony. There, the Commission explained that several factors must be considered when performing and reviewing a benchmark analysis: 1) the relevant market; 2) the contemporaneousness of the benchmark evidence; and 3) comparability. In addition, the Commission will review the non-price terms of the contract.
In Ocean State II, the Commission defined the relevant market as the market for long-term bulk power, presumably the same product (or at least one of the same products) at issue in this proceeding, and noted that the market consists of all sellers capable of supplying the relevant product to the buyer or set of buyers. The pertinent benchmark evidence consisted of all contracts for comparable delivery to, and negotiated in, the relevant market during the period in which the purchasing utility decided to enter into a contract with its affiliate.
The Commission also required a comparative analysis of non-price terms, including availability guarantees, fuel price risks, development and regulatory risk, inflation, taxes, and purchase and renewal options. Indeed, because benchmark comparisons necessarily involve “projections of formula variables (e.g., fuel cost, plant factors and economic indices) over the life of the project, . . . [t]he assumptions underlying these projections and the significance ascribed to non-price factors are critical to the analysis.” Hence, in Ocean State II, the Applicant made price comparisons by making certain “stated assumptions” with regard to fuel price escalation, inflation rates, O&M expenses, availability factors and capacity factors so that the price of each benchmark contract could be restated in mills/kWh based on these common assumptions.
While Entergy has conducted an RFP in this instance, the full process is not transparent based on the application. Specifically, Entergy must supply sufficient information so that the Commission and RFP participants can verify the objectivity and fairness of the RFP process and evaluation. It is not possible to tell whether Entergy held a properly structured RFP process which met all of the standards expressed in Edgar. Merely conducting a blind bidding program does not satisfy the tenets of a fair, non-discriminatory, transparent bidding process, and there is no information in the application on the entire process outside of the testimony of Dr. Tierney on the solicitation and handling of the bids. The information submitted by Entergy is simply insufficient to demonstrate that the RFP process meets the Commission’s stringent requirements for approval of market-based affiliate power sales. Entergy has not shown that the contract was the result of a competitive solicitation process providing for direct head-to-head competition with unaffiliated sellers or that the affiliate contract is equivalent, both on price and non-price terms, to other agreements entered into in the same relevant product market at the same time as the affiliate contract.
C. Entergy’s Market Power precludes it from Receiving Market-Based Rates without Significant Mitigation Conditions
Further complicating this particular case is the question of Entergy’s existing transmission and generation market power. As the Commission determined in its SMA Order, Entergy possesses generation market power within its control area market. The Commission initially imposed stringent mitigation measures on Entergy, e.g., requirements to engage in spot market transactions with other market participants and to contract with an independent party to administer its OASIS. The Commission later stayed most of these mitigation measures and Entergy’s compliance with the remaining measures has never been fully enforced. This means that the benefits of these mitigation measures have not been available to merchant generators who have developed and are developing projects that can provide competitive alternatives to Entergy’s plan of action to enter into multiple affiliate deals. Entergy’s application here for market-based rate approval to engage in affiliate transactions does not address this issue in any manner, and its request for market-based rate approval for the PPAs is thus unreasonable and unjust. Any approval of PPAs between Entergy affiliates should be conditioned on meaningful and significant market power mitigation, as deemed necessary in the SMA Order and because Entergy has market power. Other examples of acceptable mitigation could include: mandatory RTO membership; mandatory network access service for all generation; independent operation of the transmission system; independently-operated, control-area-wide, security-constrained economic dispatch of all generation (whether affiliated or non-affiliated); and /or comprehensive standard market design requirements.