A deal for Ameren (NYSE: AEE) to sell its largely coal-fired merchant power assets in Illinois to Dynegy (NYSE: DYN), which already has coal-fired plants in the same state, poses no market power concerns and so should be approved by the Federal Energy Regulatory Commission.
That is the gist of a massive application, including attached asset sales agreements, that Ameren and Dynegy filed April 16 at FERC. The application was from, on the Ameren side, Ameren Energy Generating Co. (Ameren Generating), AmerenEnergy Resources Generating Co. (AERG), Ameren Energy Marketing Co. (Ameren Marketing), Electric Energy Inc. (EEInc), Midwest Electric Power Inc. (MEPI) and AmerenEnergy Medina Valley Cogen LLC (Medina Valley).
The companies said the to-be-sold assets would be turned over to Dynegy in a complex, multi-step transaction in which a special purpose subsidiary of Dynegy, Illinois Power Holdings LLC, will acquire all of the equity interests indirectly owned by Ameren in the so-called “Ameren Merchant Utilities.”
“The Transaction is consistent with the public interest, and the Applicants respectfully ask the Commission to promptly approve it,” the application said. “The Transaction will have no adverse impact on competition, rates, or regulation; nor will it result in any inappropriate cross-subsidization.”
The covered assets mostly supply power into MISO market
At the close of the transaction, Dynegy and the Ameren Merchant Utilities will only have overlapping ownership of generation within the very large geographic market of the Midwest ISO balancing authority area (BAA). As explained in the attached affidavit and analysis prepared by Julie Solomon of Navigant Consulting, the MISO market will remain unconcentrated in all relevant time periods and with respect to all relevant generation products following closing of the transaction, the companies told FERC.
Furthermore, the transaction does not raise any vertical market power issues, they added. Dynegy and its affiliates do not own any transmission grid facilities, and the Ameren Merchant Utilities and their affiliates have transferred operational control over their transmission grid facilities to MISO, or in one case have filed a stand-alone open access transmission tariff (OATT) with the commission. The applicants and their relevant affiliates do not control any other significant inputs to electric production.
Also, the transaction does not implicate any of the other public interest issues considered by the commission as part of its review of proposed mergers, the companies said. The transaction will have no adverse impact on rates because, with limited exceptions that would not raise commission concerns, the Ameren Merchant Utilities sell power at market-based rates.
“Given the absence of material issues raised by the Transaction, Applicants respectfully request that the Commission set a public notice period for this Application of 60 days and issue an order approving the Transaction on an expedited basis on or before July 15, 2013,” the companies said.
It’s all coal, except for 239 MW of gas-fired capacity at Joppa
The only generation Dynegy currently owns in MISO consists of baseload coal-fired generation in Illinois, the application noted. Of the 4,393 MW being acquired by Dynegy in this deal, the only non-baseload generation consists of the 239 MW of gas-fired, peaking generation associated with the Joppa facility. In considering the effect on competition of other transactions involving the acquisition of baseload generation, the commission has found that “withholding capacity would not raise prices by enough to generate sufficient additional revenues to offset the revenues that would be lost to Applicants from having to forgo sales from its low-cost generation.” Thus, it is unlikely that the generating assets being acquired by Dynegy would allow it to exercise a profitable withholding strategy, even if the MISO energy market did not remain unconcentrated after the transaction, the application added.
Dynegy does not currently possess any market power with respect to any other inputs to electricity generation. Through its acquisition of interests in the Ameren Merchant Utilities, Dynegy will acquire certain sites for generation capacity development, undeveloped coal and mineral rights at the Newton and Coffeen coal-fired facilities, and owned and leased rail cars used to deliver coal to the Newton, Coffeen, and other generating facilities owned by the Ameren Merchant Utilities.
Dynegy will also be acquiring:
- the Joppa and Eastern Railroad, a subsidiary of EEInc which owns a 3.9-mile rail line and operates and controls (by long-term lease or fee ownership) associated rail cars that transport coal to the Joppa facility; and
- the Coffeen and Western Railroad, a subsidiary of Ameren Generating, which owns a 0.48 mile rail line and operates and controls (by long-term lease or fee ownership) associated rail cars that transport coal to the Coffeen facility.
The companies said they will notify the U.S. Surface Transportation Board about this change in railroad ownership.
Solomon noted that the generating assets subject to the transaction include: Duck Creek (410 MW, coal), Coffeen (895 MW, coal), E.D. Edwards (650 MW, coal), Newton (1,197 MW, coal), and Joppa (1,241 MW, coal/gas). With the exception of 239 MW of gas-fired peaking generation at Joppa, all of the generation being acquired by Dynegy consists of baseload coal. The Duck Creek, Coffeen, E.D. Edwards and Newton facilities are located in the MISO balancing authority area. Joppa is located in its own BAA, called the Electric Energy BAA. EEInc’s limited transmission facilities are directly connected to MISO, to the Tennessee Valley Authority and to the Louisville Gas & Electric/Kentucky Utilities BAA.
Three additional generating facilities currently owned by the Ameren Merchant Utilities (Grand Tower and Gibson City located in MISO and Elgin located within the PJM Interconnection region) are involved in the transaction but are not being acquired by Dynegy. Prior to closing, these facilities will be acquired by AmerenEnergy Medina Valley Cogen LLC. Thus, Solomon’s analysis treats these three facilities as affiliated with Ameren both pre- and post-transaction.
“[N]early all of the generation being acquired and all of the generation owned by Dynegy in MISO consists of baseload coal-fired stations,” Solomon pointed out. “As the Commission has observed, such units are not well-suited for a withholding strategy – they tend to be on the flat part of the supply curve and withholding capacity would not raise prices sufficiently to offset lost revenues on foregone sales. About half of MISO’s current generation fleet consists of coal-fired generation.”
Dynegy currently has four baseload coal stations in MISO, each located in Illinois: Baldwin (1,785 MW); Havana (428 MW); Hennepin (285 MW); and Wood River (456 MW).