FERC Filings
MOTION FOR LEAVE TO INTERVENE AND PROTEST OF THE ELECTRIC POWER SUPPLY ASSOCIATION re AMEREN ENERGY GENERATING COMPANY AND UNION ELECTRIC COMPANY D/B/A AMEREN UE
PROTEST
A. Introduction and Basis for Commission Action
EPSA opposes the instant Application because Ameren has failed to demonstrate that the proposed transfer of facilities from its merchant affiliate to its regulated utility affiliate satisfies the public interest standard of Section 203 of the Federal Power Act. The transfer would allow Ameren’s generation facilities, currently operated as independent merchant facilities, to be subsumed into a regulated entity and thereby shielded from market forces by virtue of their presumed future inclusion in the affiliated utility’s rate base.
Practically speaking, there is little difference between the contemplated transaction and AmerenUE entering into a long-term power supply arrangement with AEG with a term equal to the useful life of the facilities to be transferred. The Commission requires procedural safeguards for a long-term contract of as short as a year to protect ratepayers against affiliate abuse, and should require no less for a power supply arrangement that will endure for decades.
As the Commission already noted in Cinergy, any shift of jurisdictional facilities and associated generation from the competitive wholesale market into a regime of guaranteed cost-recovery unduly discriminates against unaffiliated wholesale suppliers who cannot use a vertically-integrated affiliate’s regulated rate base to guarantee cost recovery. And any such discriminatory and unequal treatment of affiliated Exempt Wholesale Generators (EWGs) will, therefore, undermine the development and operation of competitive markets overall in direct opposition to Commission policy and the Federal Power Act. To be sure, the protection of competition lies at the very heart of the Commission’s concerns raised generally in the Standard Market Design NOPR (SMD NOPR); and its fear that competition was being eroded prompted the Commission to raise its very pointed concerns in Cinergy, where it approved the proposed disposition, but stated,
[The Commission] has concerns about the possible implications of affiliate transactions of the type proposed here for the competitive process in general and for the region's wholesale competition. The ability of a franchised utility to assume its affiliated merchant's generation when market demand declines gives the affiliated merchant a "safety net" that merchant generators not affiliated with a franchised utility lack. The existence of such a "safety net" may affect the incentive of new merchant generators to invest in new facilities and, given the likelihood of recovery of capital investment through rate base treatment, gives the franchised utility a competitive advantage in making market-based sales of the plants' generation that is not available to merchant generators unaffiliated with franchise utilities. The safety net could, therefore, be a barrier to entry that harms the competitive process in general and raises prices to customers in the long run because affiliated merchant generation with a safety net option will not be subject to the price discipline of a competitive market. . . . Recognizing PSI's need to acquire secure supplies, the Commission will not withhold approval of this transaction on competitive grounds. However, in light of the generic concerns raised by this case, the Commission will in the future modify its approach to analyzing competitive effects of intra-corporate transactions of this nature.
Indeed, 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 or its affiliates’ generation. The proposed transfer here raises a concern as to whether it, too, poses yet another form of affiliate abuse. In its Application, Ameren states that the proposed transfer is simply an intra-company transfer of assets that will have no adverse effect on competition, rates or regulation, thereby fulfilling the three-pronged test utilized by the Commission to determine if a proposed transfer of jurisdictional facilities meets the statutory standard of FPA Section 203. However, this proposed transaction will harm wholesale competition, will likely increase rates and is not in the public interest.
Ameren claims that the transfer of the facilities at issue here is intended to enable AmerenUE, a regulated utility and an affiliate of AEG, to procure an additional 548 MW of generation capacity to provide AmerenUE’s customers with:
[A] reliable source of energy and capacity on a timely basis, as required by minimum generating reserve requirements established by AmerenUE’s regional reliability council. Further, it will protect AmerenUE’s customers from the potential volatility associated with purchasing needed power in the market.
However, rather than avoiding the spot market by undertaking a competitive wholesale power procurement, and by entering into a long-term bilateral contract, AmerenUE proposes to acquire its requirements through the outright acquisition of its affiliated exempt wholesale generation facilities. Clearly, though, this transaction at least raises serious affiliate concerns, so it at least should be scrutinized as closely as any other affiliate transaction that is potentially subject to affiliate abuse. Accordingly, EPSA respectfully requests that the Commission demand the same showings as it would were AmerenUE to have contracted directly with its affiliates for long-term supply.
In sum, for the reasons set forth below, because Ameren has not shown through record evidence that the proposed transaction does not result from affiliate abuse, it has not shown it to be in the public interest, and the Application, therefore, must be denied. Alternatively, if the Commission is to consider Ameren’s evidence, it should do so in the context of a trial-type evidentiary hearing in which all parties will be afforded the opportunity to take discovery and to closely examine the evidence submitted by Ameren in support of its Application.
B. The Ameren Proposal Will Harm Competition
As justification that the proposed transaction will have no adverse effects on competition, Ameren argues,
[t]his transaction will involve only the intra-corporate transfer of facilities and will not result in any changes in concentration in generation markets or any other applicable markets. The Commission, in other proceedings involving similar transactions, has recognized that this type of transfer does not present any competitive concerns. In addition, the Commission has determined that the competitive screen required by Order No. 642 is not required for intra-company transfers.
This unsupported assertion is the extent of the Applicants’ proof that the contemplated transfer will not adversely impact competition. Ameren wholly ignores the concerns raised by the Commission in Cinergy, and instead relies on Commission precedents that are in no way similar to the proposed transfer here. In each of the cases cited by Ameren, 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 GenHoldings I, L.L.C., 96 FERC 61,140 at 61,602 (2000), PG&E Generating proposed to reorganize a number of independent generation entities within a single subsidiary company. Neither of these cases involved a transfer of merchant generation to an affiliated utility operating company, and neither involved the eventual addition of merchant generation facilities to a utility’s rate base. Indeed, when Ameren initially transferred the facilities at issue in this proceeding from its regulated entity to AEG, it promoted competition by separating regulated and unregulated facilities. By reversing the original transfer, Ameren is harming competition.
Though the Ameren and Cinergy cases involve intra-corporate transfers, they are nearly opposite in intent and impact from previous intra-corporate transfers approved by the Commission. Contrary to the cases cited in its Application, here Ameren proposes to essentially remove generation from the wholesale market, which would eliminate any opportunity for unaffiliated generators to compete for the load proposed to be served by the affiliated units, thus quashing wholesale competition. Unquestionably, the contestable wholesale demand in the Ameren region will be 548 MW smaller after the proposed transfer of generation assets (if approved). However, Ameren has produced no evidence to support its claim that this removal will not adversely affect competition or that this proposal is the result of, or otherwise would compare favorably with the results of, a transparent competitive solicitation. Hence, despite Ameren’s assertions, the proposed transfer will impact competition in the generation market.
1. The Commission traditionally applies a “market test” in order to determine if affiliate contracts are in the public interest
As the Commission has stated on numerous occasions, transactions between traditional public utilities with captive customers, such as AmerenUE, and an affiliated power supplier, like AEG, raise concerns of cross-subsidization and market power 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.
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. Specifically, 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.
The Commission first reviewed an affiliate contract justified on the basis of head-to-head competition in Aquila Energy Marketing Corp., 87 FERC 61,217 (1999) (“Aquila”). In Aquila, the Commission approved proposed contracts between a utility and its affiliated power marketer based on its review of the RFP process used by the utility to solicit bids for capacity and energy. Since Aquila, the Commission has approved other affiliate contracts where the contracts arose out of a fully transparent RFP process. It is clear that affiliate contracts that result from a fair, contemporaneous RFP process can be accepted by the Commission.
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.
2. Ameren’s evidence is inadequate
As shown above, to obtain Commission approval of a AmerenUE-AEG contract, the parties would have to either demonstrate that the contract was the result of a competitive solicitation 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.
Clearly, Ameren cannot rely on the former justification, as the sole purpose of its filing in this proceeding apparently is to evade direct competition. And Ameren likewise cannot justify its proposal based on competitive benchmarks. Ameren claims that a Request for Proposals (RFP) it conducted in 2001 demonstrates that its current proposal is “comparable to” the market. The Commission should reject this assertion. First, Ameren relies on a two-year-old RFP, the results of which it asserts are confidential. Thus, neither EPSA nor any other intervenor presently can determine whether the bids submitted were “comparable” to the proposed transfer. Furthermore, market conditions have changed significantly since 2001, and the RFP results are suspect at best.
Second, Ameren appears to rely on its unsupported analysis of the RFP results, including its projection of market prices beyond 2011. Obviously, if Ameren’s analysis or projections are wrong, the RFP is additionally meaningless in determining if the proposed transfer is comparable to the market. And EPSA cannot determine if the analysis is reasonable, because Ameren claims its analysis is confidential. Ameren should either conduct a new, updated and transparent solicitation or submit some other form of probative market evidence.
In short, Ameren is attempting to convince the Commission that the proposed transaction is in the public interest based on a comparison with non-contemporaneous bids for what were likely different products and with vastly different non-price terms, submitted two years earlier under vastly different circumstances. Ameren does so even though it knows, presumably, that had it compared the merits of its proposal with the results of a fair, contemporaneous RFP, Commission approval could have been a much simpler matter. Hence, because it chose neither of the Commission-approved means of justifying its affiliate deal, the Commission must conclude that Ameren has failed to meet its burden of proving that the transfer is equivalent or superior to market alternatives and, therefore, in the public interest.
C. The Ameren Proposal Is Unduly Discriminatory
In its Notice of Proposed Rulemaking regarding a standard wholesale electric market design (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.”
The competitive regime envisioned by the Commission also relies significantly 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.
Ameren’s proposal, however, rejects the Commission’s vision and its goal of creating a level playing field for all suppliers based on long-term contracts.
First, as previously stated, there is only broad, conclusory testimony in the Application to the effect that AmerenUE adequately considered competitive alternatives, including purchases of capacity and energy from non-affiliated suppliers, before electing to acquire its affiliated merchant generation. Setting aside the fact that any transaction between affiliates is inherently suspect and deserving of heightened scrutiny, Commission acceptance of this transaction necessarily would result in more than 548 MW of required needs being removed from the wholesale market, notwithstanding the absence of any reasonable basis for concluding, much less any guarantee, that the transaction is the most reliable, efficient or economical alternative for satisfying AmerenUE’s requirements.
Second, the Ameren proposal would unquestionably eliminate any opportunity for suppliers to enter into long-term bilateral contracts to supply the AmerenUE load now contemplated to be served by the transferred facilities. As such, the Ameren proposal conflicts 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. Similarly, there can be no functional market if utilities are permitted to build merchant generation based on a desire to compete with other suppliers, but then allowed to remove that same generation from the market when market conditions change. 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.
Third, allowing a public utility to eliminate wholesale competition for a portion of its power requirements by moving merchant generation into rate base is particularly inappropriate where, as here, the utility is to be a member of a Commission-approved RTO, in this case the Midwest ISO. The Commission’s RTO efforts, like its Standard Market Design initiative, are designed, among other things, to increase wholesale competition by eliminating transmission and other barriers, thereby permitting all economic wholesale generation the opportunity to compete to ultimately supply load. By moving merchant generation into its regulated entity and, ultimately into utility rate base, Ameren undermines the whole point of creating RTOs in the first place.
Fourth, by transferring facilities from its merchant affiliates to its vertically integrated utility, Ameren has effectively transferred all of its merchant plant risk and associated costs from its stakeholders and investors to AmerenUE’s captive ratepayers. By operating the projects through AEG instead of AmerenUE, Ameren avoided the obligations imposed on traditional utilities in exchange for the benefits of merchant generation, which includes the ability to sell into the wholesale market at market-based rates. But concomitant with these benefits was the corresponding risk that merchant generators would be unable to recover their costs. Ameren and its stakeholders and investors, not AmerenUE’s ratepayers, assumed these risks by operating the plants as merchant plants through merchant affiliates. Now, Ameren wants to transfer those same facilities to its regulated entity and, presumably, eventually into the regulated affiliate’s rate base, thus avoiding the risk assumed by other non-affiliated generators. This further prevents the level playing field envisioned by the Commission, and is precisely the harm warned about and predicted by the Commission in Cinergy.
Fifth, as the Commission clearly and correctly recognized in Cinergy, were Ameren allowed to ensure its unregulated affiliate a greater likelihood of fixed cost recovery than is the case for non-affiliated suppliers, this would necessarily distort market forces, favor affiliated suppliers, and allow vertically integrated utilities to subsidize the market risk of their affiliated generation investments. As a result, even those affiliated generators that are more costly than non-affiliated merchant generators would nonetheless win out over the otherwise less-costly alternatives, thereby creating a significant barrier to new entry and harming captive utility ratepayers, solely due to the protection afforded by being owned by affiliates of vertically integrated utilities.
The Commission, therefore, should reject Ameren’s attempt to arbitrage the regulated and unregulated generation markets on the backs of its captive utility ratepayers. Ameren wants the benefits of the unregulated wholesale market when conditions are good and the opportunity to rely on the protection of the regulated market when conditions are less so, effectively placing all risk on its ratepayers while transferring all benefit to its shareholders and other investors.
In sum, as stated in Cinergy, while intra-corporate transactions by their nature have traditionally not raised concerns over market concentration or deleterious impacts to competition under the current standards applied by the Commission, this surely is no longer the case now. Thus, the Commission noted its “concerns about the possible implications of affiliated transactions of the type proposed here for the competitive process in general and for the region’s wholesale competition.” These concerns are every bit as present here.
D. The Commission Must Act Now to Prevent Potentially Significant Harm to Wholesale Competition
The Commission must protect the public interest by maintaining vigorous and robust wholesale competition. Because the type of transfer proposed by Ameren will dramatically limit wholesale competition, particularly if mimicked by other affiliated entities, the Commission must act now to definitively establish its policy regarding those affiliate transactions that may impact competitive markets. For the sake of ensuring that there continues to be a meaningful opportunity for existing wholesale suppliers to compete, and the appropriate incentives for potential suppliers to enter the market, the Commission can no longer defer on this issue. The Commission itself recognized in Cinergy that “[t]he ability of a franchised utility to assume its affiliated merchant’s generation when market demand declines gives the affiliated merchant a ‘safety net’ that merchant generators not affiliated with a franchised utility lack.” For this reason, the Commission noted that the attendant generic concerns raised by that transaction require that the Commission will “in the future modify its approach to analyzing competitive effects of intra-corporate transactions of this nature.” Now is the time for the Commission to act on this promise and to protect captive ratepayers and wholesale competition from potential affiliate abuse.
E. The Commission Should Reject The Application Outright Or, At A Minimum, Set This Matter For Hearing
In the face of the obvious obstacles that the instant Application poses to its competitive agenda, the Commission should take whatever action it can, now, to prevent any significant future harm to wholesale generation markets caused by utility holding companies seeking unjustifiably to transfer merchant generation to their affiliated utilities. EPSA believes that the Cinergy order could not be more clear. Transactions of the sort proposed here at least have the very real potential to reduce competitive pressure, create barriers to entry, and distort market forces. Hence, EPSA respectfully submits that in order to ensure against such effects, the Commission should not approve any transfer of merchant generation to a regulated utility affiliate, without its insisting on receiving the same evidence it would require were it to evaluate a cost-based contract between those affiliates; i.e., proof that the chosen alternative is the most efficient and economical, either through a transparent competitive solicitation process or through other evidence that the requested transfer is clearly equivalent or superior to any “market” alternative. As the Commission has repeatedly and correctly stated, vigorous, robust wholesale competition is plainly in the public interest. Now, however, Ameren wishes to dramatically limit wholesale competition, and to create a precedent that easily could be followed throughout the country, to the detriment of wholesale competition and ratepayers everywhere.
It is this Commission’s exclusive responsibility to determine whether the transfer of jurisdictional facilities is in the public interest pursuant to the Federal Power Act. Inasmuch as the proposed transfer will clearly impair wholesale competition and not benefit ratepayers, the Commission should, accordingly, reject the Application. If, however, the Commission does not do so, EPSA urges that this matter be set for an evidentiary trial-type hearing, similar to what the Commission often has required in conjunction with its review of other types of affiliate transactions. Again, the stakes here simply are too high to justify proceeding without closely scrutinizing the Applicants’ proposal.