AES Eastern wants court to terminate agreement with NYSEG

AES Eastern Energy LP, which along with related companies has been in Chapter 11 bankruptcy protection since December 2011, told the court May 14 that New York State Electric & Gas “has engaged in a crusade” against the company’s efforts to sell generating assets.

That crusade is “a transparent effort to extract accommodations from these estates to which it is not entitled,” said the May 14 filing. “These activities included the failed prosecution of a motion to change venue and oppositions to the Debtors’ settlement with its noteholders and the related motion to sell the Debtors’ two operating power plants. Ironically, this opposition amounts to nothing more than a game of chicken as the Debtors’ failure to consummate the sale of the operating plants would have a devastating impact on NYSEG.”

This case is being pursued in the U.S. Bankruptcy Court for the District of Delaware. AES Eastern and related companies are affiliates of AES Corp. (NYSE: AES).

The “genesis of this crusade” is an Interconnection Agreement, dated August 1998 and amended in May 1999, which governs, among other things, the operation and maintenance of joint use equipment, which is equipment owned by the Debtors but used by NYSEG in the operation of its power transmission system, located at each of the debtors’ six power plants, said AES Eastern.

“NYSEG is aware that the Debtors could never assume the Interconnection Agreement due to the enormous cost and lack of any benefit to the estates in doing so,” AES Eastern added. “While the Debtors have expressed a willingness to terminate the Interconnection Agreement in a manner that responsibly transfers the equipment back to NYSEG while allowing NYSEG to protect the integrity and reliability of the power grid, NYSEG has rebuffed such efforts and instead commenced a campaign to extract hold-up value and advantage over other creditors of these estates.”

On April 11, the court approved the sale of the Debtors’ coal-fired Somerset and Cayuga plants to the noteholders. Since then, the Debtors have been working diligently to close the transaction as soon as possible. One condition precedent to the closing is the receipt of approvals of the transfer from FERC and the New York Public Service Commission.

AES Eastern accuses NYSEG of trying to hold up approvals

“Despite the importance of the Sale to NYSEG, NYSEG elected to file a protest (the ‘Protest’) to the transfer application pending before FERC, requesting of FERC that it condition approval on the Debtors’ continued compliance with its obligations under the Interconnection Agreement as it relates to the four remaining Power Plants that are unrelated to the Sale,” said AES Eastern. “NYSEG is certain to file a similar request with the New York Public Service Commission. This action is nothing more than a collateral attack on this Court’s exclusive jurisdiction over the Interconnection Agreement and amounts to the assertion by NYSEG of affirmative claims against the Debtors. Furthermore, the Protest constitutes a willful violation of the automatic stay and a blatant bilateral attack on the Sale Order (defined herein) approving the transfer of the Somerset and Cayuga assets free and clear of all encumbrances, including the Interconnection Agreement.”

The “automatic stay” mentioned by AES Eastern is a stay on pending legal cases that a bankruptcy court routinely grants at the beginning of a bankruptcy case. This has the effect of channeling all legal disputes about the bankrupt company through the bankruptcy court.

The Debtors have engaged in numerous discussions with NYSEG in an effort to mitigate the impact of rejection of the Interconnection Agreement, said AES Eastern. NYSEG has chosen to take a parallel course to hold up the transfer of the Somerset and Cayuga plants, which requires the Debtors to stretch their already limited resources, it added.

“To the extent NYSEG’s Protest causes delay or succeeds in imposing unworkable conditions on the Somerset and Cayuga transaction, it risks scuttling the deal and forcing the Debtors to cease operations and drift into administrative insolvency,” wrote AES Eastern. “Despite the mischaracterizations of the Debtors’ intentions in NYSEG’s filings with FERC, the Debtors have taken all reasonable steps to ensure NYSEG can provide continuous and uninterrupted service to its customers, going so far as offering to transfer a parcel of their land at no cost to allow NYSEG to build a new facility to house its equipment.”

The filing added: “The Debtors can no longer sit by and wager their future viability on FERC’s recognition of the authority of this Court and the impropriety and improvidence of NYSEG’s actions. Accordingly, the Debtors must now seek authorization to reject the Interconnection Agreement and seek this Court’s assistance in determining the impact of such rejection on NYSEG’s rights and obligations. To be clear, the Debtors in no way wish to disturb the delivery of service to NYSEG’s customers. The sole question is whether the estates should be bearing the cost post-rejection.”

Two coal plants operating, four are shut

The Debtors, either directly or indirectly, control six coal-fired plants located in New York state. Currently, they actively operate only two of the six – Somerset and Cayuga – and sell the electricity generated by those plants, as well as unforced capacity and ancillary services, into the New York wholesale power market to utilities and other intermediaries under short-term agreements or directly in the spot market.

The Debtors want the court to: authorize the rejection of the Interconnection Agreement and related documents, effective as of the date of entry of the order; compel NYSEG to submit to the court a plan for the separation and removal of NYSEG equipment from the shut Westover, Greenidge, Hickling, and Jennison plants within 30 days of entry of such order and requiring NYSEG to reimburse the Debtors for all costs incurred in connection with the post-rejection operation and maintenance of the NYSEG equipment as of the date of rejection; and sanction NYSEG for its “willful violation” of the automatic stay.

“Because the Debtors anticipate winding down the Westover, Greenidge, Hickling, and Jennison Power Plants, the Interconnection Agreement is no longer of any value or utility to the estates,” the filing said. “Even with respect to the Somerset and Cayuga Power Plants, compliance with the terms of the Interconnection Agreement is burdensome and provides no corresponding benefit to the Debtors or to their estates. If the Debtors are unable to reject the Interconnection Agreement, the obligations imposed thereunder, which are currently a burden to the Debtors, would only continue to drain their liquidity. As part of their analysis of their financial obligations, the Debtors have determined that continuing to perform under the Interconnection Agreement is no longer beneficial, and the Debtors have, therefore, properly exercised their business judgment in seeking rejection of the Interconnection Agreement.”

NYSEG had filed no response with the court as of mid-day on May 16. NYSEG, a subsidiary of Iberdrola USA, serves 878,000 electricity customers and 261,000 natural gas customers across more than 40% of upstate New York.

Both Cayuga and Somerset are coal plants equipped with flue gas desulfurization equipment that allows them to burn relatively cheap medium- and-high-sulfur coal and to achieve relatively low fuel costs as compared to competitors, AES Eastern has told the court. They are among the largest facilities in the New York ISO. Somerset is a one-unit plant, dating from 1984, with 675 MW of capacity. The two-unit Cayuga plant, dating from 1955 and 1958, has a total of 306 MW of net capacity.

On the other hand, Jennison and Hickling were retired in 2002. In March 2011, to save money, AES Eastern said it put Westover and Greenidge into “protective lay-up” status, which means they are being maintained and can be restarted. Westover has two existing units, 7 and 8, with a combined net capacity of 126 MW, while Greenidge has two existing units, 3 and 4, with a combined 161 MW of net capacity.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.