There is no guarantee that affiliates of Public Service Enterprise Group (NYSE: PEG) will operate coal-fired units they own at the Powerton and Joliet plants in Illinois if they get control of those units from bankrupt Midwest Generation (MWG).
That was one of the arguments made by those PSEG affiliates, known collectively as the Owner-Lessors, in July 22 arguments filed at the Federal Energy Regulatory Commission.
MWG and various affiliates, including Edison Mission Energy, have been in Chapter 11 bankruptcy protection since December 2012. For years, MWG has leased coal-fired capacity at Powerton and Joliet from the PSEG affiliates, which have names like Nesbitt Asset Recovery Series P-1 and Powerton Trust II. The bankruptcy court has lately allowed MWG extra time to decide whether to accept or reject its leases on these coal-fired facilities while MWG negotiates possible new lease terms with the PSEG companies and a possible turnover of these leased facilities to a third party or parties.
On May 6, MWG submitted an application at FERC seeking expedited consideration to potentially transfer control of these coal-fired facilities. In the application, MWG asked the commission to authorize its disposal of control over the facilities if the decision is to not continue with the leases. The application did not identify any entity that is willing and able to accept a transfer of control – or to operate – the facilities if the application is approved, the PSEG companies said.
On June 14, the Owner-Lessors protested the “unwarranted” request for expedited action and requested that the commission reject the application in its entirety, or in the alternative, requested the commission to defer consideration on the application until multiple issues that could negatively affect the public interest are resolved.
In its answer, MWG contended that it was not required to either identify the entity to whom control would be transferred or represent that such entity was willing and able to operate the facilities.
Nowhere in here is a guarantee these coal units will run, says PSEG
“The Owner-Lessors have no obligation to operate the Facilities,” said the PSEG companies in their July 22 response. “The competition analysis provided by MWG in the Application is founded on the unjustified assumption that the Owner-Lessors will operate the Facilities and sell the electric output into the market identified by MWG. The Application fails to mention that the Owner-Lessors have no obligation to operate the Facilities, whether contractual, statutory or otherwise. The Application’s competitive analysis does not evaluate the competitive impact of the transaction proposed by MWG if the Facilities are removed from service, as the Protest explains is the most likely outcome. For instance, depending on MWG’s plans for its other generating facilities in the market, the proposed transaction may (depending on MWG’s plan with respect to its Joliet unit 6) contribute to a competitor being removed from the market. None of these matters have been addressed by the Application.”
Joliet 6 is the lone Joliet coal unit that is not covered by the lease agreements and is controlled directly by MWG.
The MWG answer states that “all of the operational concerns and issues identified…can and will be resolved” prior to Oct. 1, 2013, if the Owner-Lessors engage in meaningful transition discussions. “The Owner-Lessors disagree,” said the July 22 answer. “For the reasons set forth in the Protest, the Owner-Lessors do not believe the Facilities can practically be operated separately and independently from other electric generating units controlled by MWG, including the co-located Joliet unit 6.”
MWG contends that most of the uncertainties surrounding the facilities’ operation are within the Owner-Lessors’ responsibility and control. “The Owner-Lessors disagree,” said the July 22 answer. “As outlined in the Protest, the Certificate Holders, acting through the Pass-Through Trustee, could assert the right to direct the Lease Indenture Trustee to foreclose on the Owner-Lessors’ interests in the Facilities and dispose of the Facilities. Similarly, the necessary filings required by PJM to shut the Facilities down are likewise outside of the Owner-Lessors’ control.”
The commission’s resources would best be served by waiting until a comprehensive transaction with an identified counter-party and a reasonable likelihood of consummation emerges, said the PSEG companies. “At the present time, there are no exigent circumstances present that would necessitate consideration, especially not expedited consideration, of the Application,” they added. “The [MWG] Answer argues that the Bankruptcy Court’s extension of time ‘does not render the issue of the potential transfer of the Facilities in any way moot.’ The Owner-Lessors are not arguing that the matter is moot; they simply believe it is unripe for decision at the present time.”
In June 2000, the commission authorized, among other things: the sale by MWG to the Owner-Lessors of certain FERC-jurisdictional facilities associated with the Powerton Station, a 1,538 MW coal-fired facility; and Units 7 and 8, comprising 1,036 MW, of the Joliet Station, a 1,358 MW coal-fired facility; and the lease of these facilities back to MWG.