FERC Filings
MOTION FOR LEAVE TO INTERVENE AND PROTEST OF THE ELECTRIC POWER SUPPLY ASSOCIATION re: SOUTHERN POWER COMPANY
PROTEST
A. Southern Has Not Demonstrated that its Affiliate Transactions Do Not Adversely Effect Competition
Southern has filed its Application for Commission approval “in accordance with the Commission’s requirements for affiliate market-based rate sales, as articulated in Boston Edison Company Re: Edgar Electric Energy Company, 55 FERC 61,382 (1991) (“Edgar”).” However, consistent with the Commission’s recent statements in Cinergy, Southern Power must also demonstrate, through record evidence, that their proposal does not allow Southern to unfairly and preferentially withhold market share for energy and capacity and harm competition in Southern’s market area. Hence, these long-term PPAs must meet not only the Boston Edgar requirements for affiliate market-based rate sales, but they must also meet the Cinergy requirement as to the transactions’ effect on competition.
In the Cinergy case, the transaction in question was filed pursuant to Section 203 of the FPA for authorization to transfer jurisdictional interconnection facilities associated with generating assets owned by unregulated wholesale entities to a public utility entity. While Southern’s Application here is filed pursuant to Section 205 of the FPA, the principles at issue are exactly the same. In each case, the transactions involve an intra-corporate arrangement that will dampen competition. The Commission’s concerns for the effect of the transaction on competition generally and on the region's wholesale competitive market should be the same.
The Commission holds transactions between affiliated entities to particularly stringent standards because any discriminatory, preferential or unequal treatment of affiliated generation can undermine the development and operation of competitive markets overall, in direct opposition to Commission policy and the Federal Power Act. This must hold true whether the transaction involves the transfer of generation facilities or agreements for long-term power purchases. Customers of Southern Power must be protected against the absence of an arms-length relationship between affiliates and the potential for anticompetitive conduct. 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 very pointed concerns in Cinergy, where it approved the proposed disposition of facilities between entities, 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. . . . 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. [Emphasis added.]
In the Cinergy order, the Commission noted that affiliate transactions can pose problems for the competitive procurement process and the development of robust, competitive regional marketplaces. Southern Power has made no attempt to address any impact on regional or general competition resulting from these two large intra-corporate transfers. Yet it is precisely the situation in Southern’s market area, and the possible impact of the Southern PPAs on that market, that Cinergy is designed to address. 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.
The Commission must protect the public interest by maintaining vigorous and robust wholesale competition. Because the PPAs entered into by Southern Power affiliates may dramatically limit wholesale competition, the Commission must ensure a level playing field for all competitors, especially in the context of generation owned by or affiliated with transmission owners. The Commission itself recognized in Cinergy 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 to protect captive ratepayers and wholesale competition from potential affiliate abuse.
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, 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. In fact, while this case differs from Cinergy in that it does not contemplate transfer of existing assets, it merits at least as much concern, given that the contracts awarded would appear to be the economic basis for new construction. Certainly in a region characterized as having an abundance of relatively new generation – much of which is now considered to represent excess supply – the Commission must explore the circumstances of contract awards which would seem to serve as the basis for new generation by the affiliate of a transmission owner.
B. Southern’s Market Power Significantly Impacts the Commission’s Approval of the PPAs
Further complicating this particular case is the question of Southern’s existing transmission and generation market power. As the Commission determined in its SMA Order, Southern possesses generation market power within its control area market. Southern’s application here for market-based rate approval to engage in affiliate transactions does not address this issue in any manner. Adding to these concerns, the McIntosh PPAs represent not only long-term, market-based power supply arrangements between affiliates, but also represent agreements that underlie the construction of two new generation units by Southern Power in its own territory. It is also unclear what preferences were awarded to Southern Power with respect to its use of the transmission system. For example, Southern’s OASIS indicates that the merchant arm of the Southern operating companies made a reservation for 1200 MW of network transmission service associated with the McIntosh units at issue here in 1999, well before the execution of the PPAs. In addition to concerns about the exercise of transmission market power, the addition of generation units owned by Southern can only result in increased generation market power in its market area, and should concomitantly increase the Commission’s concerns regarding Southern’s PPAs.
In a recent presentation at the Morgan Stanley Global Energy Conference in New York City, Gale Klappa, the CFO of Southern Company at the time, touted the market 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 percent of its capacity to the Southern utilities under long-term contracts as a result of “competitive” bidding processes.
Mr. Klappa’s comments underscore the existence of inherent incentives for entering into affiliate transactions. 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 its requirements for affiliate transactions. The Commission’s policies acknowledge that affiliate transactions are not arms-length and, therefore, are reasonably accompanied by a rebuttable presumption of affiliated preference. Hence, it is particularly imperative in this case that the Commission be vigilant in its oversight of these agreements. Until the Applicant has made a showing that this proposed transaction will not harm wholesale competition, EPSA opposes the instant application as not in the public interest and requests that the Application, therefore, be denied.
If the PPAs between Southern affiliates are approved, they should be conditioned on meaningful and significant market power mitigation, as deemed necessary in the SMA Order because Southern has market power. 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.