Tuesday, December 09, 2008

Buffet asks NY PSC to Approve Acquisition of Three New York Nuclear Power Stations; Takeover of Constellation Questioned at FERC

PSC Merger Approval Requested
On October 17, 2008, MidAmerican Energy Holdings Company filed a petition with the PSC seeking a declaratory ruling that the New York PSC has no jurisdiction to review its proposed acquisition of three New York nuclear power stations with capacity totaling 2259 MW. According to NYISO data, in many hours of the year these power stations make more than 10% of the power used in all of New York State.

The power plants are Nine Mile One and Nine Mile Two, nuclear power plants in Oswego that were divested by Niagara Mohawk Power Corporation when it agreed to "restructure" to align with the "1996 vision order" of the New York PSC, and the Ginna nuclear power station on the shore of Lake Ontario near Rocheser, divested for similar reasons by Rochester Gas & Electric. Nine Mile One is one of the two oldest operating nuclear power plants in the country. The Long Island Power Authority (LIPA) owns 18% of Nine Mile Two.

Mid American Energy Holdings Company, a utility holding company in turn controlled by Berkshire Hathaway, an investment holding company, in turn controlled by Warren Buffet, is seeking to acquire the nuclear plants from the current owner, Constellation Energy, a huge utility holding company. The value of Constellation plummeted earlier this fall, apparently due to losses of unregulated energy trading subsidiaries that had dealings with Lehman Brothers. See Do Trading and Power Operations Mix? The Case of Constellation Energy Group 2008, MIT Sloan School of Management, Nov. 7, 2008; Constellation Explosion: Background of a Financial Disaster, EnergyBiz, Nov./Dec/ 2008.

Under its recent precedents, it appears that the New York PSC will need to approve any change in control of the nuclear plants, even though they are styled as ownership changes at the holding company level. Anticipating rejection of its claim that the PSC lacks jurisdiction to review the ownership change, MidAmerican requests "expedited Commission approval, without modification or condition" if the PSC exercises its jurisdiction.

In other words, MidAmerican wants a rubber stamp "OK" from the New York PSC.
A worthwhile goal would be to insist that the output of these plants, for which billions of dollars were paid by ratepayers before they were sold by Niagara Mohawk, be available in long term contracts at reasonable rates, rather than at prices based on what the dysfunctional NYISO spot markets will bear.

MidAmerican also asks the PSC to continue its indulgence of so-called "light regulation" of the power plants. Under its "light regulation " doctrine, the PSC purportedly relieved owners of divested power plants of the traditional and longstanding statutory duty of electric companies to provide retail service at just and reasonable rates subject to PSC review. The PSC instead grants "lightly regulated" status whenever power plant owners simply declare their intention to sell only at wholesale. This has been the fiction that enables them to escape their state law duty to serve the public and state rate regulation so that they fall only under FERC jurisdiction over their wholesale sales.

FERC in turn has a de facto deregulation regime which allows electricity from these plants to be sold at "market-based rates," which are unfiled, and unreviewed for reasonableness. See, See No Evil: FERC Refuses to Examine Gaming of RTO/ISO Electricity Spot Markets. As a result, power from low operating cost nuclear plants can receive stratospheric rates - and profits - for the owners, when the power is sold at prices set in or influenced by the NYISO spot markets. The NYISO market design pays all sellers the price that "clears" the market, normally set in most hours by much more expensive natural gas-fired power plants. See Supreme Court Leaves Fundamental Questions About FERC Market Rate Scheme Unanswered. More than half the power in the state is sold in the NYISO next day and real time spot markets, and much of the remainder is sold at prices indexed to or influenced by these markets. See It was the [NYISO] Market.

The New York PSC has not yet issued any notices inviting public comment and has issued no rulings in the merger case filed by MidAmerican, which is NYPSC Case No. 08-E-1249.

The FERC Merger Proceeding
There is also a pending FERC proceeding to review the acquisition, which involves multiple power plants and utility assets in several other states, including Maryland. The case has been put on an accellerated schedule with no hearings.

Public Citizen has filed a protest in the FERC merger proceeding, tracing the history of the utilty industry since the bankruptcy of 53 utility holding companies in the 1930's Depression. It asks FERC to review of the reasons for Constellation's failure, the role of the affiliates with market rates, and questions whether allowing further concentration of the utility business in the hands of ever-larger holding companies will lead to entities "too big to fail," whose eventual collapse will again require future public bailouts.

Public Citizen also questions the rush to a decision without evidentiary hearings, pointing out the market power risks to consumers of allowing even more utility industry concentration, and asking FERC to review the reasonableness of wholesale electric rates now being charged by Constellation to its affiliated local utility in Maryland, Baltimore Gas & Electric.

Another Buyer in the Wings?
Electricite de France, the giant French utility which operates many nuclear plants and which already owns a significant part of Constellation's stock, is also seeking to acquire it. According to the New York Times
The French utility, which already owns 9.5 percent of Constellation, said it wanted to form a 50-50 venture with Constellation's nuclear power business in the United States.

The offer for half the nuclear unit is almost as much as Mr. Buffett had agreed to pay for the entire company in September.
See French Bid Disrupts Warren Buffett's Offer for U.S. Utility.

The Board Directors of Constellation announced it authorized discussions with EdF on December 8, 2008.

Stay tuned.

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