FERC recently issued an order conditionally accepting an offer of settlement previously filed by Oklahoma Gas & Electric Co. (OG&E), clearing the way for the utility to move forward with its efforts to buy a majority stake in an Oklahoma power plant from NRG McClain.

The Commission directed OG&E to beef up a proposed market monitoring plan in order to ensure mitigation of possible market power.

NRG McClain has agreed to sell its 77% interest in the plant in Newcastle, OK, to OG&E for $160 million. The Oklahoma Municipal Power Authority (OMPA) owns the remaining interest in the 520 MW combined cycle gas-fired plant.

FERC in December 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 company’s plans to purchase the stake in the McClain plant.

Following that order, OG&E in March filed an offer of settlement at the Commission intended to resolve the issues set for hearing in FERC’s order. The offer of settlement proposed permanent and interim mitigation to address the adverse effect on competition that could result from the transaction.

First, as a permanent mitigation measure, OG&E said it would construct a 600 MW “bridge” between InterGen’s Redbud Energy Project and OG&E’s control area. InterGen’s Redbud facility, a 1,200 MW plant located in Luther, OK, is eligible to obtain that additional available transmission capacity (ATC), as well as other potential suppliers.

According to OG&E, the 600 MW bridge will consist primarily of an upgrade to OG&E’s Draper Substation. OG&E said it would begin construction of the 600 MW bridge as soon as the Commission approved the transaction and estimated that the bridge can be completed within 11 months.

OG&E’s offer to upgrade its system to create 600 MW of ATC does not mean that InterGen or any other supplier is guaranteed 600 MW of ATC or that InterGen will have guaranteed firm transmission service under the utility’s open access transmission tariff to sell to customers, because those wholesale customers and anyone that sells power to them are not currently guaranteed either ATC or firm transmission service from the McClain facility.

Second, as a permanent mitigation measure, OG&E will construct a transmission upgrade at its Ft. Smith interconnection with Entergy Corp.’s transmission system.

Third, as an interim mitigation measure, during the period between the Commission’s approval of the transaction and the completion of the 600 MW bridge, OG&E will redispatch — at no cost to InterGen — OG&E’s generating units to enable the Redbud facility to sell power (not to exceed 600 MW in the aggregate and subject to reliability constraints) to any wholesale customer in the OG&E control area that InterGen obtains during that period.

Fourth, as an interim mitigation measure, OG&E said it would establish an independent market monitor to address vertical market power concerns until the Southwest Power Pool (SPP) regional transmission organization (RTO) is calculating and posting ATC, as OG&E proposed in a Jan. 20 rehearing request.

OG&E said its proposal for an independent market monitor would be expanded from the Jan. 20 rehearing request to provide that the monitor will oversee OG&E’s calculation of ATC and total transmission capacity (TTC) and would provide that data to the SPP RTO.

In its July 2 order, FERC first addressed horizontal market power issues. The Commission said that as a result of the 600 MW bridge, any attempt by OG&E to exercise horizontal market power “would be no more successful than it would have been absent the transaction, because the reduction in supply is offset by an alternate supply that customers can reach to avoid the attempted price increase. Thus, we find that the 600 MW bridge is an appropriate structural remedy to the possible permanent horizontal market power problems posed by the transaction.”

At the same time, FERC noted that this does not address the horizontal market problems that exist in the interim until the 600 MW bridge is operational. In addition to long-term mitigation, the Commission has also stated that mitigation of a market power problem must be in place at the time a transaction is consummated.

FERC said OG&E’s proposed market monitoring plan is “a good start, but [we] find that the proposed plan might not be a fully effective remedy.” Therefore, the Commission will require that the scope of OG&E’s market monitoring plan be expanded.

Specifically, the independent market monitor must directly notify the Commission of any structural or operational problems that could prevent OG&E’s horizontal and vertical market power from being properly mitigated. The market monitor must prepare and submit to the Commission a quarterly report within 10 days of the end of each quarter until the 600 MW bridge is completed.

That report must summarize its analysis and evaluation of market events that result in a significant increase in wholesale prices or the foreclosure of competition to rival suppliers and any other such anticompetitive conduct. “In addition, because our timely awareness of, and response to, any transaction-related anticompetitive effects resulting from the operation of OG&E’s transmission system would be greatly limited by the filing of only quarterly reports, the market monitor must submit to the Commission any such other reports if the market monitor concludes that OG&E is implementing the redispatch plan in a manner that hinders competition. Such reports will be provided to the Commission promptly upon completion without waiting for the periodic quarterly report.”

The order also addresses vertical market power issues. “The Commission finds that the combination of the 600 MW bridge and the hiring of an independent market monitor to monitor, among other things, OG&E’s actions with regard to the new ATC from the 600 MW bridge and the transmission available from OG&E’s redispatch offer will mitigate the increase in vertical market power resulting from the transaction,” FERC said.

“Accordingly, we find that the OG&E offer of settlement, as modified, puts in place sufficient mitigation measures that alleviate the market power effects of the transaction and therefore resolves the issues set for hearing in the Dec. 18 order.”

In a concurrence attached to the decision, FERC Chairman Pat Wood said he wished FERC “could have crafted an economic dispatch solution to be in place prior to consummation of this merger to more effectively mitigate market power and promptly bring efficiency benefits to customers.”

Wood said that in many ways this case “is like the scores of others that have been reviewed under this Commission’s standard merger analysis. The challenge here was to find appropriate mitigation to be put in place at the time the merger is consummated. Each region and each case presents different mitigation options.”

As a general matter, Wood said he agrees “with the antitrust agencies’ advice frequently given to FERC, which is that structural remedies are far more effective than behavioral remedies. This order appropriately relies primarily on transmission upgrades which will improve the structure of the market. However, it also relies in part on market monitoring for a brief period of time to mitigate market power. I do not put much weight on monitoring to remedy the increase in market power from a merger because all it can do is identify a problem which then cannot be solved.”

Wood said a “preferable approach would incorporate an open regional economic dispatch process at this time.” Economic dispatch is the process used in all electric systems to turn on and run generators in merit order, beginning with the lowest-cost resources and moving up the generation stack when load is higher, Wood noted. “It is a key determinant of which suppliers are in or out of the market on a day to day basis.”

He said an open dispatch “would ensure that both affiliated and non affiliated resources are able to provide service on the basis of merit and least cost to customers. Economic dispatch would directly prevent foreclosure from the market. True economic dispatch over a region (as contrasted to dispatch just within a single utility) increases efficiency and lowers wholesale and retail customers’ bills.”

The FERC chairman said the “record before us included proposals for regional economic dispatch. I regret that we were unable to craft such an approach.”

At the same time, Wood added that he is encouraged by the comments of the Oklahoma Corporation Commission staff indicating that they recognize the direct and substantial effects that economic dispatch may have on Oklahoma’s jurisdictional retail ratepayers. “I believe that the active leadership of the state commission will lead to the development of a long-term dispatch solution that saves customers money,” Wood said. “I offer our services to the Oklahoma Corporation Commission in pursuing that end.”

He also noted favorably that OG&E is a member of SPP, the nation’s latest RTO. “I believe that to achieve true regionwide benefits, both timely transmission expansion (which we are getting in this case) and economically efficient dispatch of all available generation resources can best be managed under the RTO.”

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