Mergers & Acquisitions
PECO + UNICOM. The Federal Energy Regulatory Commission OK'd the merger of PECO Energy and Commonwealth Edison, to form Exelon, though it admitted that the deal would boost the merged company's control of generation capacity in the ComEd destination market far above acceptable levels, as defined in the commission's Appendix A screen measuring market power.
The FERC explained that the merged company would have little potential to manipulate prices by withholding capacity from markets, since almost all of the merged company's economic generating capacity would be made up of low-cost but inflexible base-load nuclear plants, which would be difficult to ramp up or ramp down quickly.
Meanwhile, on March 24, PECO submitted a merger settlement agreement to the Pennsylvania PUC that set numerous benchmarks and performance standards for reliability and service quality in that state, but that would not apply in Illinois, which has no authority to review the deal, because essentially it represents a takeover of Unicom by PECO.
The settlement proposal in Pennsylvania prompted Illinois commission chairman Richard Mathias on April 17 to fire off letters to John Rowe, the president and CEO of ComEd, and to company executive Carl Croskey, asking whether the merged company would apply the Pennsylvania reliability standards in Illinois as well, and demanding an explanation of how ComEd would correct its "numerous power outages" and use common indexes such as SAIFI, CAIDI, and MAIFI to gauge reliability performance in Illinois.
The letter to Rowe showed that Mathias was clearly frustrated that Pennsylvania regulators were running the show: "It is interesting to note that if this transaction closes, Illinois electric utilities serving well over 90 percent of Illinois consumers will have been sold to out-of-state companies."
AEP + C&SW. To comply with the FERC's March 15 order approving their merger (which imposed conditions on membership in a regional transmission organization), American Electric Power and Central and South West signed an agreement authorizing the Southwest Power Pool to post data on AEP's OASIS node, showing SPP's independent calculations of short- and long-term ATC (available transmission capacity) on the AEP grid, and also to have SPP process all requests for transmission service under AEP's open-access transmission tariff.
In addition, AEP has hired Douglas R. Bohi of Charles River Associates to lead a team in developing a plan to monitor any anticompetitive effects stemming from the merger, until the merged utility joins a fully functional RTO. The team will monitor at least seven distinct indicators:
- . Hourly output of AEP generating resources;
- Transmission limits and deratings on AEP flowgates or other facilities showing constraints within the last two years;
- Hourly power flows over flowgates and constrained grid facilities;
- Generation redispatch actions by AEP to manage grid congestion;
- For both generation and transmission facilities;
- Comparisons showing the effects of AEP action to manage congestion or impose TLR curtailments (transmission loading relief) on wholesale power transactions involving AEP and its affiliated marketers; and
- . Effects of such AEP action (see previous item) on the level of transactions and prices in the market as a whole.
Bohi served previously as chief economist and director of the office of economic policy at the FERC. His team will submit semi-annual reports to the commission.
Lyonnaise + United Water Resources. Connecticut regulators OK'd the acquisition of United Water Resources Inc., the nation's second-largest water services company, by Lyonnaise American Holding Company Inc., a subsidiary of the French company Suez Lyonnaise des Eaux.
NEES + EUA. Regulators in Massachusetts OK'd the merger between New England Electric System and Eastern Utilities Associates.
Distribution rates will be capped for five years, through February 2005. Then rates would be adjusted annually, through 2009, using an index of average distribution rates in New England, New York, New Jersey, and Pennsylvania.
Leveraged Buyouts. In reviewing Warren Buffet's leveraged buyout of MidAmerican Energy Holdings Co., the Iowa board declined to attach conditions to protect utility ratepayers from the cost of any acquisition premium, which some say could exceed $1 billion. It said the question was best left to a future rate case.
Nuke Plant Premium. The New York Power Authority trustees on March 28 approved the sale of NYPA's Indian Point 3 and James A. FitzPatrick nuclear power plants to Entergy Corp. of New Orleans for $967 million, a record for the United States nuclear industry. The payment of $536 per kilowatt is almost four times greater than the previous high for a nuclear plant transaction and is comparable to those for recent sales of fossil-fueled power plants.
Hydro Expansion. Claiming that there are 21,300 megawatts of potential hydropower that could be developed without building a single new dam, Rep. John Shadegg (R-Ariz.) said that the future of hydropower rests in its expansion.
"Hydropower will only survive if it expands; otherwise, the loss of generation capacity in each license renewal will slowly but surely reduce the amount of hydropower produced," he said, addressing the National Hydropower Association's annual conference on April 4.
QF Contracts. A federal appeals court ruled that federal law does not preempt electric utilities from enforcing a "regulatory-out" clause against qualifying cogeneration facilities (QFs) to require a renegotiation of the price of power if regulators later bar the utility from recovering the cost of power purchased from the QF.
Emissions Allowances. A federal appeals court ruled that an industrial customer of an electric utility did not qualify under the Clean Air Act as a "joint owner" of a utility power plant, and thus was not entitled to receive a share of emissions allowances, because the customer had not reserved energy from a specified generating unit, nor agreed to pay a proportional amount of unit-specific operating costs.
Outage Liability. A Texas appeals court affirmed a trial court decision granting class action certification for customers of Entergy Gulf States Inc. in connection with power outages triggered by a January 1997 ice storm.
Gas Manufacturing Sites. An Illinois appellate court affirmed a circuit court's ruling in favor of four families who lived near the site of a former gas manufacturing facility and who sought compensatory and punitive damages for negligence and nuisance from Central Illinois Public Service Co., after a child in each family was afflicted with neuroblastoma, a cancer of the peripheral nervous system.
The court rejected the utility's argument that because there was no known cause of neuroblastoma, and because the carcinogens found at the site had not been linked directly to the affliction, the testimony of an expert witness on toxicology and epidemiology was inadmissible.
It said that under Illinois law, "[W]hen the cause or etiology of a specific disease is not known, or is otherwise unclear, proof of causation is not quite as stringent." It added that on a statistical basis, "The fact that four Christian County children developed neuroblastoma within the span of a little over two years is overwhelming."
Pro Forma Tariffs. The FERC extended the deadline for natural gas pipelines to file tariff sheets to comply with Order 637, issued Feb. 9, so that shippers who take service from multiple pipelines can comment more effectively on the filed tariffs.
The FERC set a staggered schedule, with 33 pipelines required to file by June 15 (including ANR, Columbia, El Paso, and Kinder Morgan), another 33 by July 17 (Iroquois, Maritimes & Northeast, Natural Gas Pipeline Co., and Northern Border), and the last 34 by Aug. 15 (Tennessee, Texas Eastern, Transco, Trunkline, and Williams).
Service Changes. A federal appeals court remanded a FERC order regarding gas pipeline service classifications, finding no need to require Transcontinental Gas Pipeline Corp. to hold an "open season" to allow customers receiving "essentially firm" transportation with a volumetric charge (ever since it dropped bundled commodity service following Order 636) to choose between interruptible service or a new two-part firm service with separate usage and reservation charges.
The court questioned why customers, "having already elected firm service, must now be asked, 'Firm service - is that your final answer?'"
Judge Randolph dissented, saying that customers still needed to choose between one- and two-part service.
Pipeline Competitors. A federal appeals court ruled that the FERC need not treat as mutually exclusive two competing projects to construct natural gas gathering pipelines in the Gulf of Mexico, nor review them in a single consolidated case.
The case involved ANR Pipeline Co., which sought to build a gathering line from "Block 207" to Garden City, La., and block a competing project by affiliates of Manta Ray Offshore Gathering Co.
Global Climate Change. Sen. Frank H. Murkowski (R-Alaska) held hearings March 30 on two bills (S. 1776, S. 882) that urge voluntary emission reductions rather than concerted government action to address the possibility of global climate change, but Dr. Daniel Lashof, senior scientist at the Natural Resources Defense Council, said that most electric utility industry claims of reductions in CO2 emissions from power plants are "fanciful," as they reflect only a switch to nuclear power.
In their paper, "Less Than Meets the Eye: An Analysis of Greenhouse Gas Emission 'Reductions' Reported by Electric Utilities," released by NRDC in March, Lashof and David Hawkins summarized their findings based on voluntary reports of emissions reductions submitted by electric utilities under sec. 1605b of the Energy Policy Act of 1992:
- CO2 emission from electric power plants increased by more than 15 percent between 1990 and 1998.
- Utilities reported 120 million tons of emission reductions for 1998, which, given the continuing increases in actual emissions during the 1990s, "is not plausible."
- . For those utility companies reporting the largest CO2 reductions and identifying the source of such reductions, some 90 percent of the reductions were attributable to greater nuclear output.
- Only a small fraction of reported emission reductions are attributable to improvements in heat rates at coal-fired power plants.
- If heat-rate improvements at coal-fired units are accompanied by increased dispatch, then system-wide emission are likely to increase, rather than fall.
Gen. Richard Lawson, president and CEO of the National Mining Association, countered that a consortium of U.S. and Canadian coal interests and researchers at the Los Alamos laboratory (known as the Zero Emission Coal Alliance, or ZECA) plans within five years to release a pilot project using a technology that would create hydrogen from a coal-water slurry for use in fuel cells, producing a "pure stream" of CO2 that could be permanently sequestered through a chemical reaction with magnesium oxide.
For testimony of other witnesses, from the Department of Energy, Environmental Protection Agency, Edison Electric Institute, Electric Power Research Institute, National Academy of Sciences, and others, see http://energy.senate. gov/hearings.
Electric System Reliability. Sen. Murkowski also held hearings April 11 on S.2098, the Electric Power Market Competition and Reliability Act, where General Counsel David Cook of the North American Electric Reliability Council repeated findings of a recent NERC survey that several control area operators in the Eastern Interconnection were "leaning" on the interconnection during nine peak hours (i.e., selling energy that they didn't have).
Cook cited Cinergy as "the most serious." As he noted, "Cinergy's 'Inadvertent Interchange,' a measure of the difference between Cinergy's generation plus scheduled purchases and sales, ranged from minus 79 megawatts to minus 1,656 MW during the nine hours, averaging more than 1,000 MW. ... During the nine-hour NERC survey, the lowest frequency noted was 59.9524 hertz. ... Under-frequency load shedding begins at 59.82 Hz, with about 10 percent of every control area's customer load automatically disconnected with no warning to customers."
License Renewal. A federal appeals court turned down a bid by an advocacy group to review a decision by the Nuclear Regulatory Commission that had denied permission to the group to intervene in the relicensing case for the Calvert Cliffs, Md. nuclear plant, after the group had failed to meet a deadline that had already been extended once, and after the NRC clearly had announced a policy of not granting extensions except in "unavoidable and extreme circumstances."
Earlier, on March 23, the NRC had announced that it had renewed the operating licenses for the two units of the Calvert Cliffs plant for an additional 20 years, the first license extensions granted to a commercial nuclear plant.
Distributed Generation. On April 12, led by staffers Jay Morse and Anthony Mazy, the Office of Ratepayer Advocates of the California PUC filed its phase I testimony in the PUC's current rulemaking on distributed generation, predicting that DG increasingly will cause California's electric utility industry to "honeycomb" into an Internet-based network of macro and local micro-markets - but that monopoly power likely will increase.
The ORA said it was "intrigued" that DG projects could bid against expansion of the transmission and distribution grid, "placing T&D expansion in the marketplace." It urged a separate dispatch of distribution and distributed generation, and claimed that utility ownership of DG facilities would violate accounting rules at both the PUC and the FERC.
"The question before the PUC," said the ORA, " is whether the supply of local generation service to compensate for inadequate distribution capacity is going to be considered a generation function or a bundled distribution function, as some utilities propose." Other parties filing comments included Enron, TURN, NewEnergy, and the three regulated utilities, San Diego Gas & Electric, Pacific Gas & Electric, and Southern California Edison.
Retail Electric Choice. Effective April 6, the Ohio PUC adopted electric restructuring rules concerning certification of competitive providers , nuclear decommissioning compliance , minimum competitive standards for retail electric service and reliability , electric utility market monitoring , safety standards , rules for long-term forecasts , and alternative dispute resolution .
Water Utility Risk. Connecticut regulators authorized Connecticut-American Water Co. to raise rates, but it rejected a proposed 0.5 percent adder to return on equity (above the authorized 10.65 percent), given the company's positive financial performance, "as illustrated by its lack of need for rate relief for over four years." .
Billing Systems. With retail choice in electricity set to begin in Delaware in October, state regulators opened a docket to review billing services and procedures at Delmarva Power & Light Co., prompted by hundreds of complaints filed by customers, for such things as overbilling and failure to notify customers of direct debits against accounts. The PSC will examine whether the company's troubled new "C3" billing system can handle the added demands of a competitive regime.
Michigan Retail Access. After observing the first three rounds of bidding by electric customers seeking to join the state's voluntary program for retail electric choice, the Michigan PSC modified procedures to bar winning bidders from forfeiting a higher-priced bid to activate a lower-priced bid. If the holder of a winning bid forfeits rights to any capacity under that bid, all losing bids will be disqualified.
Computer Modeling. Nevada Power Co. has asked the Nevada PUC to approve a change in its population forecasts computer model for its 2000 Resource Plan from "MODELER" to "REMI," because REMI, it says, is more sophisticated, less expensive, and has become the standard model for population forecasts. The plan is scheduled to be filed at the PUC on or before July 1, 2000.
Electric Retail Choice. With the state legislature having adopted its plan for electric retail choice on March 11, the West Virginia PSC is soliciting comments on various issues, including (1) supplier licensing rules, (2) codes of conduct, (3) separation of generation from transmission and distribution, (4) consumer protection, and (5) distributed generation and interconnection standards. It plans to issue proposed rules by August.
Electronic Data. Initial comments are due May 19 at the Arkansas PSC on a proceeding to set rules governing the electronic exchange of data. A public hearing is set for June 27, with a final ruling due on or before Aug. 14.
Alabama Restructuring. In April the Alabama PSC was set to open the first round of public hearings on electric utility restructuring.
Transmission & ISOs
California ISO Tariffs. On April 10 the California Independent System Operator filed its 660-page answering brief in the ISO's massive tariff case at the FERC, addressing scores of the hundreds of so-called "unresolved issues" that have been left pending since the ISO submitted a proposed clarification amendment to its tariff in July 1998.
The brief deals with at least 15 separate categories of issues, and each category in turn can contain a dozen or more discrete issues: (1) ancillary services, (2) voltage support, (3) ISO dispatch authority, (4) the inter-zonal congestion management regime, (5) recognition of pre-existing contract rights for transmission services, (6) market monitoring, (7) metering, (8) metered subsystems, (9) outages, (10) portfolio bidding, (11) the ISO's relationship with the Power Exchange, (12) scheduling coordinators, (13) settlements, (14) transmission pricing and losses, and (15) the ISO's transmission control agreement.
Issue No. 298, regarding congestion management, is typical: "Is the 3000-bus model adopted by the ISO for prices and decisions on inter-zonal access anticompetitive, unjust or unreasonable, or should the ISO adopt a simplified commercial 15-bus model, which treats all resources within a zone identically on a zonal basis?"
And the question of pre-existing contract rights was made more complicated on March 24, when the Western Power Trading Forum filed a complaint against the ISO , charging that the ISO's grid management charge is excessive and anticompetitive, due in part, says WPTF, "to the subsidy that the ISO affords holders of existing contracts."
But the ISO downplays the complexity, saying that "The actual number of issues truly in dispute in this proceeding is smaller [than 100] because in some instances the issues have been resolved."
NY ISO Prices. Just three days after Niagara Mohawk filed a complaint alleging collusive conduct in New York's market for generation reserves, the New York Independent System Operator asked the FERC for authority to suspend market-based bids for 10-minute nonsynchronized reserves (NSRs), citing its own evidence of market distortions.
The ISO request notes that market shares for NSR capacity in New York are highly concentrated and suggests that beginning Jan. 29, producers withheld NSR capacity from markets, driving NSR prices above prices for spinning reserves, which should not ordinarily occur, since spinning reserve denotes a higher quality of resource. FERC Docket ER00-1969-000, March 27, 2000.
MAPP + MAIN. Representatives at MAPP (Mid-Continent Area Power Pool) and MAIN (Mid- America Interconnected Network) signed a memorandum of understanding to merge the reliability functions of the two organizations - just a month after MAPP's corporate contractor (MAPPCOR) concluded agreements to combine with the Midwest Independent System Operator.
The newly merged MAPP/MAIN regional reliability organization (RRO) would be organized to match structures envisioned in legislation proposed to restructure the North American Electric Reliability Council (NERC) as an "organization" (i.e., "NAERO").
Source & Sink Tagging. The electric industry is up in arms over Entergy's proposed "Attachment M" - an amendment to its transmission tariff that would require all customers to supply valid source and sink data for each grid transaction.
Entergy's proposal also would bar transmission customers from designating fictitious source and sink data, which occurs when customers string together two or more segmented power movements to achieve a complete transaction, a technique that allows transmission customers to hide the identities of energy buyers and sellers.
In their joint protest (one of many), Enron Power Marketing and ELCON (the Electricity Consumers Resource Council) argued that the North American Electric Reliability Council as a matter of policy has rejected Entergy's idea. Further, Enron and ELCON say that Attachment M would impose burdens only on point-to-point transactions and would deny commercial advantages enjoyed by competitors of Entergy and transmission-dependent utilities that operate within a load-only or a generation-only control area.
Studies & Reports
FERC's Self Review. In a report issued in March, "State of the Markets 2000," the FERC admitted that it needs better methods to evaluate market power in utility merger cases, and called for more performance measurement tools that can define the extent and quality of customer access to commodity and transportation markets.
At the same time, the commission released its annual performance report for fiscal year 1999 - the first one required under the Government Performance and Results Act.
Taken together, the two reports offer insights and admissions by the FERC of new realities in markets and policy: (1) it is locational differences in gas commodity prices, and not costs, that should drive prices for pipeline transportation; (2) gas price spikes seen in the winter of 1995-1996 most likely were caused by the inexperience of marketers and traders, rather than any policy defect; and (3) the commission has not yet figured out how to balance environmental concerns with other needs in gas pipeline certification cases.
Plant Construction. A report released March 13 by the staff of the California Energy Commission concluded that if eleven large power plants were put into service in the state between 2001 and 2003, available generation would take care of load growth for much of the decade.
But the report also suggested that wholesale electric prices would fall short of revenues needed to support the new plants - whether or not construction was spread out as far into the future as 2008.
Since over 40 plants are currently proposed for construction in California, with at least 19 serious candidates for completion, the study suggests that developers will need other alternative income sources, higher market prices, or lower plant costs than assumed under staff's analysis.
Fuel Mix. A study conducted by the Electric Power Research Institute found that under the "current policy," if future restrictions on carbon dioxide, nitrogen oxides, and sulfur dioxide are put into place, electricity derived from coal would decline from over 50 percent today to less than 10 percent by 2020.
Over the same period, said EPRI, natural gas generation would increase from 15 percent to about 60 percent, requiring $160 billion in new investment in gas-fired generation to meet domestic needs.
"Our study revealed that even if this initial shift from coal to gas could be accomplished, reliance on natural gas for electricity generation could not be maintained at such a high level for an extended period of time," said Dr. Gordon Hester, EPRI manager for the study, "Energy-Environment Policy Integration and Coordination."
Appliance Efficiency Standards. Swift adoption of appliance efficiency standards would reduce dramatically the nation's energy demand, saving consumers $14 billion a year by 2020, according to a new report by the Appliance Standards Awareness Project.
According to ASAP, the standards it has recommended to the U.S. Department of Energy would eliminate the need for 64 large power plants by 2010, and 180 plants by 2020, while cutting 31 million metric tons of carbon pollution each year, including 90,000 metric tons of nitrogen oxide and 350,000 metric tons of sulfur dioxide.
AllConnect.com, which assists customers in selecting and connecting their utility and communications services, has been selected as the exclusive integrated content supplier of these consumer services for movecentral.com, a Boston-based provider of on- and offline move-related services to customers of its corporate clients. The agreement will allow visitors to the movecentral.com site to tap into all of the services offered by AllConnect.com, whose free service identifies available service plans from name-brand providers, helps the consumer select the right plans, and then processes the orders.
Southern Co. Energy Marketing and Utility.com have entered into a partnership to provide Southern's wholesale electricity to Utility.com's customers via the Internet, making Southern the preferred wholesale electricity provider to the Internet utility company. Southern Co. Energy Marketing also has taken an equity stake in Utility.com, with the right to make an additional investment in subsequent private financings.
TXU has reached an agreement to sell its majority interest in a Mexico City gas distribution system to Gas Natural and Hidroelectrica del Cantabrico for $68 million. The agreement is expected to close later this year, subject to regulatory approval. Gas Natural will become operator when the transaction is completed. "Mexico City is a growing, vibrant market. However, the operation in Mexico City is not consistent with our overall corporate strategy," said Brian Dickie, TXU Emerging Businesses Group president.
Atlantic Renewable Energy Corp., in combination with International Wind Corp. and Citizens for Pennsylvania's Future, have announced a green power offering from the Mill Run wind project located in Fayette County, Pa. Mill Run Windpower LLC has issued a request for proposals to entities interested in submitting bids to purchase green power, green certificates, and/or emission reduction credits that will be generated by the 15.6-megawatt Mill Run project.
Utility Collaborations. In late March a consortium of 15 leading U.S. electric and gas companies announced plans to launch an Internet market for procurement of energy industry goods, services, and supplies. PricewaterhouseCoopers will assist with development and technology selection for the group, which includes American Electric Power, Cinergy, Duke Energy, Edison International, Entergy, FirstEnergy, FPL, PG&E Corp., Public Service Enterprise Group, Reliant, Sempra, Southern Co., TXU, and Unicom.
Two weeks later, on April 13, a six-member consortium of energy utilities (AEP, Duke, El Paso, Reliant) and affiliated marketers (Aquila, Southern Energy Marketing) said they would follow with an Internet-based platform for trading energy, both business-to-business and over the counter.
Antitrust Oversight. On April 7, the Federal Trade Commission issued new antitrust guidelines to help the agency evaluate collaborations among competitors, including joint ventures and strategic alliances. The guidelines will apply to buying collaborations, whereby participants centralize the process of ordering or procurement, which the FTC said may "facilitate collusion by standardizing [the] participants' costs or enhancing the ability to project or monitor a participant's output level through knowledge of its input purchases." www.ftc.gov/opa/2000/04/collguidelines.htm.
On June 6-7, the FTC will hold a public workshop on alternative dispute resolution for consumer transactions in the "borderless online marketplace." 65 Fed. Reg. 18032, April 6, 2000.
Electric Restructuring. October 2002 would be the start date for electric retail choice in Iowa under restructuring legislation introduced by the House Commerce and Regulation Committee. The legislature had until mid-April, when the session ended, to work on the bill, tagged House File 2530. An amendment requiring that 8 percent of the state's power come from renewable sources by 2011, initiated by Gov. Thomas Vilsack, was defeated in committee.
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Mergers & Acquisitions