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Merchant plants snub the market, using native load to create their own private rate base.
Fortnightly Magazine - April 15 2003

It would essentially guarantee recovery to NRG of all fixed costs, including back-payment of outages for ordinary maintenance that NRG said it had deferred over the past year or so because it could not afford the cost.

As you might expect, the power producers that still have faith in markets are up in arms.

Describing the Ameren deal, EPSA Policy Vice President Julie Simon says clearly: "The transfer would allow Ameren's … independent merchant generation 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."

In Connecticut, the consumer counsel warns of the possibility ("hardly remote or fanciful," he says) that the state's entire wholesale energy market could soon consist entirely of generation plants subsidized by RMR contracts: "It may be that some units … merit RMR status … but the company's entire fleet?"

And lawyer Stephen Teichler, a veteran of ISO/SMD wars in the Midwest and New England, says NRG's ploy would reverse our ordinary notions of New England Market Rule 1, designed to mitigate market power:

"The applicants [NRG] would stand that purpose on its head: If a generator has market power, it is entitled to a price floor while retaining the right to collect higher market prices."

This Trend Is Especially Troubling Because Regulators-Federal And State-Seem So Willing To Comply.

In the Midwest, Richard Voytas, Ameren's manager of corporate analysis, said his company was only looking for the least-cost way of satisfying the demand of Missouri regulators to bolster the generation infrastructure available to Missouri's electric utility ratepayers. Forget, for the moment, that you could characterize the Ameren deal as a regulated utility using subsidized ratepayer money to bail out a corporate affiliate that invested too heavily in speculative assets, when instead the utility could have just signed a limited-term purchased power contract.

Voytas says the Missouri commission staff "expressed a concern with power purchases and showed a preference toward AmerenUE owning hard assets." But Voytas adds that Ameren issued a request for proposals and discovered that its transfer prices for Pinkneyville ($511/kW) and Kinmundy ($415/kW) fell within the same range of other recent, nearby plant transfers. But his data included the questionable Cinergy-PSI Henry plant deal, at $637/kW. Without that figure, the Ameren price would have compared unfavorably to prices like $353/kW (for the Neenan plant sold by Mirant to Alliant), or $465/kW (for the DePere plant sold by Calpine to Wisconsin Pub. Service).

EPSA counters that if FERC were to treat these unit sales as long-term purchased power contracts, the prices would fail the strict just-and-reasonable test traditionally applied to transactions between affiliates.

What's More, These Deals Are Bad For Markets.

NRG justified its cost-recovery contract in New England by showing that historical prices would not allow it to cover costs, but intervenors in that case complain that we should wait for new price data. After all, it's been just six weeks since ISO New England launched its SMD on March 1, complete with locational marginal pricing, which changes everything.