Arizona Electric Ratepayers Take Notice:

Michael Giberson

Platt’s POWER reports that Arizona Public Service Company (APS) has reached an agreement with “merchant generators and others” that would allow the company – the largest regulated public utility in Arizona – to purchase five power plants from an unregulated corporate affiliate, Pinnacle West Energy Corp. (PWEC). Both APS and PWEC are subsidiaries of Pinnacle West Capital Corp. The purchase proposal is part of a rate case that APS has up at the Arizona Corporation Commission (ACC).

I’m not quite sure I would call it a trend, but there have been a number of these corporate reshufflings in the past year or two in which assets are being moved from unregulated merchant power companies into the sheltering embrace of an affiliated public utility. [See the extended entry for notes.] I guess it should be no surprise – volatility in the merchant power sector has raised capital costs for unregulated companies; the relative stability of a regulated rate-of-return looks attractive. I can see why the number crunchers at corporate HQ think this would be a good idea, but it is less obvious that ratepaying customers benefit from taking on these assets.

Typically, these moves are opposed by competing merchant power generators. If the regulated utility buys generating assets, that means fewer power purchases from competitive suppliers. But, as POWER reports:

Merchant generators signed off on the settlement because it bars APS from building new fossil fuel power plants before 2015, unless authorized by the ACC, and calls on the utility to issue a request for proposals for at least 1,000 MW by the end of next year. APS affiliates are blocked from taking part in the RFP. Separately, APS will issue an RFP next year for 100 MW in renewable resources.

Of course, regulated public utilities, like all companies, face a “make or buy” decision: Is it more economical for the company to generate the power itself, or buy the power it needs from other suppliers. It may just make sense for regulated power customers to have APS buy these generating plants.

But prices for a transaction between corporate affiliates always have to potential to be, as Lynne might say, a little hinky. I am not greatly reassured by the fact that the terms of the deal were worked out in negotiations with the company’s competitors. I am only very slightly reassured that ACC staff participated in the deal.

Some additional regulatory notes in the Extended Entry.

FERC discussed a few related proposals at it’s July 28, 2004 meeting, and in the process offered some policy guidance on steps companies can take to help these deals pass the smell test at the federal regulatory agency.

FERC reluctantly approved a proposed transfer of jurisdictional assets from Ameren Energy Generating Company (AEG) to its corporate affiliate Union Electric Company d/b/a AmerenUE (AmerenUE). While concluding that the deal technically satisfied Commission requirements for the review of affiliate transactions, FERC announced that it would expect a fully demonstration that the proposed deal would not harm competition. In particular, FERC said it would apply its Edgar standard, previously used to review power purchase agreements between affiliates, to asset transfers between affiliates as well. See Ameren Energy Generating Company and Union Electric Company, d/b/a AmerenUE, Docket Nos. EC03-53-000 and EC03-53-001. Order issued July 29, 2004.

On the other hand, Commissioners appeared practically overjoyed at the opportunity to approve power purchase agreements between unregulated merchant generator Allegheny Energy Supply Company, LLC and its regulated public utility affiliate, The Potomac Edison Company. Allegheny won the contracts to supply its affiliate by being among the low bidders in a state-commission supervised competitive request for proposal (RFP) process. The competitive RFP process pass FERC’s smell test with flying colors (if you’ll pardon the mixed metaphor). See Allegheny Energy Supply Company, Docket No. ER04-730-000. Issued July 29, 2004.

The negotiated buy off of the opponents (i.e., the former competitors) to the deal between Arizona Public Service and Pinnacle West Energy Corp. does not appear to be the sort of open, transparent, and clearly defined acquisition process with independent oversight that FERC recommended for these sorts of deals. It will be interesting to see how FERC views the APS/PWEC deal when it arrives for Commission review.

You can read a FERC press release concerning the above orders (and one other) here: Press Release.

3 thoughts on “Arizona Electric Ratepayers Take Notice:

  1. Overall the APS, the Ameren deal, and the OG+E deal are bad developments for merchant generators. Also, there seem to be a growing number of municipal electric utilities and electric cooperatives that issue RFPs for long-term power purchases only to return to the PUC and say, “it’s cheaper for us to build.” (Great River Energy in Minnesota comes to mind, also a muni or coop in Wisconsin).

  2. Utah Power has been involved in a dispute over an RFP process for a long term power purchase that it recently conducted. I think complaints are being examined (or have been examined, don’t know the status) at both the Utah PSC and FERC.

    One thing FERC did in its recent policy announcement was to say it would examine both affilate power purchases and affiliate asset transfers using similar guidelines. Commissioner Joseph Kelliher objected to this move, saying legal requirements for the two kinds of transactions differ, therefore the standards for review must differ. He may have a good point as a legal matter, but economically the two kinds of deals are comparable in many ways.

  3. As a renewable provider, we are a victim of unintended consequences, when it comes to arms length transactions of the utility and the holding company. We have an excellent wind site in AZ…a power purchase agreement with APS. PinnWest (APS parent) currently sells power to the area where we have our wind resource. They are not allowed to take the wind power and sell it to APS due to FERC regs. Therefore, a weird reg that prevents us from getting the wind to APS.

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