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The New Art of Plant Acquisition

Forget the mega merger as a means to acquire new power plants. FERC’s new rules may offer a better path.

Fortnightly Magazine - June 2006

scenario in 11 of the 14 time periods studied, and only one screen failure in the spring peak season under the AEC scenario. 26 The post-transaction market in the spring peak season, however, is moderately concentrated, and Nevada Power’s market share is approximately 21 percent.

FERC approved the Nevada Power transaction, stating that it gave more weight to the AEC results, and the AEC failure in the spring peak market was neither highly concentrated, nor did Nevada Power have significant market share. 27 On a side note, Nevada Power does not have MBR authority to sell power in its own control area.

Transmission and Third Parties

FERC also reviews the potential adverse impact of a proposed acquisition on vertical market power with respect to transmission. The most common vertical market power concern is whether the transaction would create or enhance ability and incentive for a buyer to use its transmission system to raise electricity prices, or to frustrate entry in relevant wholesale electricity markets. A buyer that solely controls transmission facilities, i.e., an IOU, will fall under FERC’s vertical market-power concern radar screen. The commission is concerned about the efficacy of its open-access transmission tariff (OATT), created in 1996 to ensure non-discriminatory transmission access to all generators. 28

In the 2003 section 203 proceeding, Oklahoma Gas and Electric Co. (OG&E) and NRG McClain LLC sought FERC approval for OG&E’s acquisition of the McClain generating plant, which is located within OG&E’s service area. 29 The DPT results showed screen failures for six of the 10 time periods under the EC scenario, but the transaction passed the screen in all time periods under the AEC scenario. The applicants argued that AEC is the relevant measure because Oklahoma does not have retail choice, and OG&E retains a native-load obligation. However, an intervener in the proceeding claimed that the OG&E acquisition would “exacerbate” existing transmission constraints into, out of, and within, the OG&E control area. FERC found that this acquisition would unduly increase market concentration within OG&E’s control-area market, and required OG&E to add transmission capacity, among other measures, as a condition of approving the acquisition.

Unlike the OG&E/McClain case, the commission did not find a vertical market-power concern in the Nevada-Silverhawk proceeding. Nevada Power explained to the commission that many of the wholesale customers own their own transmission assets and, therefore, could not be foreclosed by Nevada Power. Under Nevada’s restructuring legislation, any eligible retail customer that seeks to purchase from an alternative supplier is entitled to a pro rata share of Nevada Power’s available import capability. Additionally, the proposed transaction would increase the available import capacity into Nevada Power by freeing up transmission now used for imports.

Control of Fuel Supplies

FERC is concerned if an applicant or its affiliates own or control upstream fuel supplies that could be used to harm competition in downstream wholesale electricity markets by raising rival costs. For example, a buyer of a baseload power plant who also owns or controls natural-gas pipeline firm capacity or storage facilities would have an incentive and the ability to raise natural-gas