FERC’s decision last week to set for hearing a proposal by Oklahoma Gas & Electric Co. (OG&E) to purchase a majority stake in a power plant from an affiliate of NRG Energy “in no way concludes our efforts to pursue this acquisition and the savings that it will deliver to our customers,” OGE Energy’s chairman said.

NRG McClain LLC has agreed to sell its 77% interest in the McClain power plant in Newcastle, OK, to OG&E, an OGE Energy subsidiary, for $160 million. The Oklahoma Municipal Power Authority owns the remaining interest in the 520 MW combined cycle gas-fired plant. The McClain deal will add 400 MW of high-efficiency generating capacity to the OG&E system.

But FERC last week set for hearing the issue of the proper mitigation as a result of an increase in OG&E’s horizontal and vertical market power stemming from the deal. The plant is located in OG&E’s service territory.

“We are disappointed,” said Steven Moore, OGE Energy’s chairman. “We have yet to see an order from FERC outlining its concerns, but we are eager to begin the process of addressing the issues that the Commission has.”

The transaction, and the savings it makes possible for OG&E’s customers, are major components of OG&E’s customer savings and reliability plan, which was filed Oct. 31 with the Oklahoma Corporation Commission. “This acquisition holds great promise for our customers in the form of significant cost savings and improved reliability,” Moore said.

As part of a 2002 Oklahoma rate settlement agreement, OG&E guaranteed $75 million in customer savings over a three-year period after the acquisition of new generating capacity. Alternatively, the settlement called for the utility to reduce its rates by approximately $2 million per month if it did not acquire new generation by Jan. 1, 2004.

“We will promptly begin looking at all possible alternatives to avoid the $2 million monthly reduction,” Moore said. “We have made every effort to complete this acquisition. But now, because of today’s FERC delay, we may be unable to do so by year’s end.”

The McClain plant acquisition, announced Aug. 19, has received regulatory and procedural approvals from the U.S. Bankruptcy Court for the Southern District of New York, and antitrust clearance under the Hart-Scott-Rodino Act.

The Oklahoma Municipal Power Authority (OMPA) retains its 23% ownership interest in the McClain plant, which began electric production in June 2001 using two combined-cycle General Electric generating turbines fueled by natural gas.

A FERC staff member noted that OG&E has proposed to address mitigation through a transmission upgrade, which would reduce market concentration, but the upgrade will take around 18 months to complete. “The draft order finds that until this transmission upgrade is complete, interim mitigation is required,” the staff member said.

The order found that the acquisition would harm competition by increasing OG&E’s vertical market power related to the utility’s control of transmission facilities needed for access to wholesale markets. FERC found that OG&E has the ability to use the transmission system to frustrate competition in wholesale markets.

Intervenors in the case offered a number of proposals to mitigate OG&E’s vertical market power. FERC set for hearing the question of the appropriate means of mitigation.

“I’m persuaded that the question of appropriate mitigation, both interim and permanent, cannot be determined merely based on the record as it currently stands and that it’s appropriate for the draft order to direct a hearing into these issues,” said new FERC Commissioner Suedeen Kelly.

In a concurrence attached to the Commission’s final order in the case, FERC Commissioner Nora Brownell said that of the two types of market power, “the vertical market power problem is a more difficult and complex question.” She noted that OG&E has proposed to acquire NRG McClain to serve its native load in order to meet its obligation under a settlement agreement with the Oklahoma Corporation Commission. OG&E has approximately 5,700 MW of generation and 5,600 MW of peak native load.

“Given these facts, I struggle with what would be an appropriate vertical mitigation measure in this case,” wrote Brownell. “Further, mitigation of vertical market power raises industry-wide issues.” Brownell said that one generic issue is how any mitigation measures FERC may impose to eliminate vertical market power are compatible with regional decisionmaking on resource adequacy.

“Another generic issue is the range of mitigation tools we should consider,” Brownell said. She said that the “optimal solution” to vertical market power is membership in a regional transmission organization. “Lacking that, what is the appropriate mitigation? Should any vertically integrated utility that seeks to acquire any additional generation be subject to the same mitigation, or should the mitigation vary based on the circumstances? Are there mitigation measures other than those proposed by interveners that we should consider, for example, would a requirement for regional planning be appropriate?”

Brownell thinks that FERC “would benefit from an industry-wide debate to define the problem, gather the viewpoints from all segments of the industry and explore whether a generic approach is appropriate.”

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