FERC Filings
MOTION OF THE ELECTRIC POWER SUPPLY ASSOCIATION FOR LEAVE TO INTERVENE, PROTEST AND CONSOLIDATE RELATED PROCEEDINGS FOR HEARING re: ENTERGY SERVICES, INC., EWO MARKETING, LP, ENTERGY POWER, INC.
PROTEST
EPSA has numerous concerns about these two additional filings by Entergy. As detailed in the protest of the February 28 Application, Entergy has failed to demonstrate that the proposed wholesale power purchase agreements between Entergy affiliates satisfy the just and reasonable standard of Section 205 of the Federal Power Act. As Entergy indicates in its applications, under EPI’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 absence of an arms-length relationship between affiliates and 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, and that the PPAs that were not subject to the RFP process are just and reasonable.
Three of the PPAs reflect the sale of generation that is currently participating exclusively in competitive wholesale markets by the power marketing affiliate (EPI) and by one of the operating companies, and the fourth PPA reflects a sale between affiliated regulated operating companies. All four agreements involve long-term or life-of-unit (LOU) power purchases to satisfy Entergy’s recently announced long-term resource plan. Two of the agreements are the result of an RFP process, and two of the agreements were secured outside of an RFP process. And it is apparent that these submittals and any subsequent Commission rulings could set the stage for additional affiliate transactions that are still waiting in the wings.
EPSA’s first concern, as previously stated in the protest of the February 28 Application, centers on the impartiality and objective evaluation of the RFP process conducted by ESI and on possible biases inherent in the selection factors and criteria utilized to evaluate the RFP submissions. Any bias within the RFP process could provide the Entergy subsidiaries with anticompetitive advantages in signing affiliate agreements and cause harm to Entergy’s competitors and, ultimately, its operating companies’ wholesale and retail ratepayers. Further, ESI requests market-based rate approval for these PPAs without any recognition of this Commission’s finding that Entergy has transmission and generation market power, which to date has remained essentially unmitigated. Due to the open questions on this particular evaluation process and its results, and the likelihood that decisions here may set a precedent for an RFP “blueprint” going forward, the Commission should not approve Entergy’s applications without a complete showing that the PPAs submitted are the product of a fully transparent, fair and non-discriminatory RFP process. These showings are best made for all the PPAs in a consolidated hearing before the Commission.
Second, these two applications raise additional concerns because they exemplify Entergy’s attempt to obscure the full impact of pending intra-corporate transactions by staggering the submission of numerous PPAs for Commission approval. All of these PPAs are tied directly or tangentially to one RFP process (Fall 2002 RFP) and all are intended to satisfy ESI’s System Strategic Supply Resource Plan for 2003-2012 (SSRP). By filing these agreements incrementally, the Commission is rendered unable to adequately or thoroughly assess the aggregate impact of the affiliate purchases on competition in Entergy Operating Companies’ control area. For this reason, all three PPA proceedings should be consolidated for consideration and set for hearing in order to properly vet the process and results of the Fall 2002 RFP.
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 reiterates its earlier endorsement of the use of competitive resource procurement; these processes should be required of public utilities when seeking capacity and energy resources. However, in this particular case, Entergy’s submittals raise 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 principal 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 the PPAs that won the RFP (Independence Steam Electric Station Unit 2) are indeed the legitimate winners or that the other PPAs that did not result from bids submitted in the RFP process (River Bend Nuclear Station or the Entergy solid-fuel units) meet the Commission’s standards for affiliate transactions entered into outside an RFP process. Simply put, there is no evidence in the record to allow parties to determine that the criteria set up for the RFP bids, the evaluation of the bids themselves or the non-RFP transactions are non-discriminatory or just and reasonable.
Clearly, even in circumstances where bidders’ identities are effectively masked, the winning and losing of RFPs turn largely on the selection factors and the weighting of those factors in assessing the bid responses. For example, the RFP process could include selection criteria, such as a requirement that generation be located in certain areas that can only be satisfied by the plants of one of the affiliate. Of interest here, in the Direct Testimony of David C. Harlan of Entergy Louisiana, Inc. before the Louisiana Public Service Commission, Mr. Harlan states, “The response to the Fall 2002 RFP included only one solid-fuel proposal from a currently available resource….The only solid-fuel proposal from an existing resources [sic] available for 2003, which was received by an Entergy Affiliate, was placed on the short list for long-term proposals…” However, it is not surprising that no other solid-fuel resources responded, given that the RFP was initiated in September, 2002, with bids due November 15, 2002. ESI knew that when it established its bidding criteria, and in particular its preference for solid-fuel, it would lead to a sufficiently narrow field of options, leaving only affiliated resources able to submit a satisfactory response two months later when bids were due.
Further, another condition to be satisfied by any bidder is “Secure Supply – The resource must qualify as a firm network resource for the purchasing companies.” The Commission should be wary of extremely narrow conditions that often can only be met by resources held by an affiliate. 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. “Legitimate” selection factors should not create a de facto bias for affiliate transactions.
The ability to design selection factors to build in a preference for affiliates is exacerbated in a system as large as Entergy’s. Conditions pertaining to the designation of network resources, economic dispatch modeling, Entergy’s GOL procedures and exemptions, access to transmission capacity, utilizing the ATC process and native load transmission reservations could all skew the results of any RFP, both as conditions thereof and as system parameters or shortcomings. Hence, the Commission must be especially diligent to ensure that the process for competitive bidding in Entergy’s market area is non-discriminatory and non-preferential, both in its design and its results.
Unfortunately, ESI 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 ESI’s RFP was part of a robust competitive process; the fact that the only winners announced to date from that RFP process 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. Here again, Entergy has made no attempt to address any impact on regional or general competition resulting from its numerous intra-corporate transfers. Yet it is precisely the situation in Entergy Operating Companies’ market area, and the possible cumulative impact of the Entergy PPAs on that market, that Cinergy is designed to address. In the Cinergy order, the Commission acknowledges that 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. 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.
B. ESI’s RFP Process May Serve as a Blueprint for Future RFPs
Due to the inherent incentives that may cause affiliate transactions to be more favorable to the utility/merchant company corporate family, the Commission must be especially vigilant 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.
Of special concern in these cases are the recent press reports and acknowledging statements in the two applications that Entergy intends to issue additional RFPs in the future, and will rely on the Fall 2002 RFP process as a model for those forthcoming RFPs. Hence, it is incumbent upon the Commission to ensure that this process is adequate, fair, non-discriminatory and non-preferential if it then serves as justification for affiliate agreements. Both of the March 31 Applications state:
The SSRP contemplates additional future resources for the Entergy System over the next decade, although not all of these resource additions have been identified at this time. Thus, the Operating Companies plan to issue additional RFPs in the future – using generally the same procedures utilized for the Fall 2002 RFP.
In each application, Entergy points out, “ESI recognizes that competitive affiliates may own or control such resources that could be used cost-effectively to meet retail customer needs.” To resolve the question of ESI’s ability to solicit and contract for resources from a competitive affiliate, Entergy relies on the Boston Edgar precedent, which Entergy states,
[Makes] clear that the Commission can properly authorize power sales from a competitive marketer to its affiliated franchised utility if the sale results from a fair, non-discriminatory, and properly structured RFP. Thus, as shown below, ESI designed and conducted the Fall 2002 RFP in accordance with the Boston Edgar principles. (Original emphasis)
Thus, it is clear that this RFP process is the linchpin to Entergy’s argument that these affiliate sales should be approved by the Commission. Hence, the Commission must exercise full oversight of this RFP process as both (1) the evidence that the PPAs are consistent with Commission standards for sales between affiliates, and (2) the model for future RFPs.
C. Entergy Has Filed in a Manner to Diminish the Aggregate Impact of the Affiliate Purchases
According to Entergy’s SSRP, filed with the Commission in testimony in EL01-88-000 this January, the Fall 2002 RFP resulted in four wholesale power purchase transactions with particular supply resources, all with ESI affiliates. Those four transactions have then been split out into several PPAs, which are being filed with the Commission in several different applications and over several months. Two PPAs were filed on February 28, 2003, in ER03-583-000. Four PPAs, filed in two separate applications and the subject of this protest, were filed on March 31, 2003, in ER03-681-000 and ER03-682-000. As noted in a footnote in each of the instant applications, “The filing of other PPAs involving ELI transactions have been temporarily delayed due to processing of the filings by the Louisiana Public Service Commission, but ESI expects to submit these to the Commission in the near future.”
According to EPSA’s calculations, the outstanding PPAs should involve 200 MW from the River Bend Nuclear Generation Station and 110 MW of base load capacity from EAI representing solid-fuel, base-load capacity from EAI coal and nuclear generating plants. Taken together, the various PPAs should represent over 825 MW of supply. When viewed in the aggregate, it is obvious that the impact of these purchases is extensive. Entergy, however, has obfuscated the impact to competition by filing a series of small-scale agreements which, on the surface and taken individually, might appear to require a less rigorous competitive analysis. Hence, it is imperative that the Entergy PPAs be consolidated and considered as a whole, stemming from the SSRP and the 2002 Fall RFP.
D. Two Of Four PPAs Are Not The Result Of Any RFP Process
ESI expressly disclosed to the market that in fulfilling the obligation of the Operating Companies…ESI would evaluate outside the RFP process the feasibility and cost-effectiveness of “non-retail rate base” Operating Company resources. At all times ESI sought to select from among the available resources those that provided the lowest reasonable cost for the Operating Companies’ ratepayers.
To substantiate comparability of the non-RFP agreements, an Entergy affidavit contains a table that shows, “based on the Fall 2002 RFP – the price terms in ENO-EGSI and ENO-EAI PPAs represent the market price and are competitive with prices for comparable and contemporaneous LOU services offered by non-affiliates in the region as evidenced when compared to the shortlisted LOU proposals described above.” (page 15) Based on this chart, Entergy asserts that the PPAs are “in the public interest and…will benefit retail ratepayers” is its only justification for these non-RFP, affiliate PPAs. The Commission’s requirements under Boston Edgar are much more demanding. Entergy must provide a vigorous assessment of price and non-price terms for transactions that it chose not even to submit to its RFP process, and that assessment must include sufficient detail to permit affected parties to verify that the transactions are not tainted by affiliate abuse. Moreover, as these are affiliate deals, they require an explicit showing that they do not affect competition (Cinergy), particularly since these LOU transactions will remove contestable load from the competitive marketplace for a very long time. Entergy’s support is clearly lacking in all respects.
E. 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 EPI, 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.” While Entergy may contest that the SMD NOPR is far afield from the subject PPAs, that is not the case. The proper and close evaluation of affiliate transactions, as requested here by EPSA, is another aspect of this progress towards robust, competitive markets. The SMD is an attempt to further eradicate undue discrimination in energy markets, just as Edgar set out to do years ago by delineating standards for review and the burden of proof for affiliate transactions.
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 ESI has conducted an RFP in this instance, the full process is not transparent based on the application. Specifically, ESI 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 ESI held a properly structured RFP process that 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 here 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.