Talen Energy offers new package of power plants to sell to meet FERC mandate

Talen Energy (NYSE: TLN), citing changed circumstances, asked the Federal Energy Regulatory Commission on Sept. 25 to accept a third set of power plants that Talen would have to sell to meet a December 2014 FERC decision approving the creation of Talen.

In December 2014, FERC conditionally authorized, subject to mitigation, a multi-step transaction whereby the interests in PPL Energy Supply LLC’s public utility subsidiaries would be separated from PPL Corp. (NYSE: PPL), distributed to PPL Corp.’s shareowners, and combined with RJS Power Holdings LLC‘s public utility subsidiaries to form a new company, Talen Energy. Talen Energy agreed to be bound by the terms of this mitigation and the transaction was completed on June 1, 2015.

On Sept. 8, Talen Energy filed a motion to amend the mitigation plan to remove the generating facility owned by Bayonne Plant Holding LLC (Bayonne) from the two divestiture options approved by the commission because of changed circumstances at the Bayonne facility. Along with the Sept. 25 filing, Talen Energy has submitted a notice to withdraw the Sept. 8 motion. Talen Energy is replacing the Sept. 8 motion with this Sept. 25 motion.

Talen Energy wants to amend the mitigation plan to include a third divestiture option that combines certain assets from the two approved divestiture options and essentially is of equivalent size and effect as the commission-approved options. Under the proposed third divestiture option (Option 3), Talen Energy would divest the Ironwood plant, which is part of Option 1, as well as Crane, Holtwood, and Wallenpaupack, which are part of Option 2.

Under Option 3, Talen Energy would retain ownership of the remaining units from Options 1 and Options 2. Those units are owned by Sapphire Power Generation Holdings LLC (collectively called the “Sapphire Units”). The Sapphire Units will be offered into the PJM Interconnection energy market within the 5004/5004 submarket at cost-based offers if retained by Talen Energy. The Sapphire Units include the Bayonne facility, and by retaining ownership of the Bayonne facility, Option 3 would provide Talen Energy with the flexibility to deactivate the facility without having to remove it from the divesture options.

Talen argued that Option 3 will continue to ensure that the transaction has no adverse effect on horizontal market power and is consistent with the public interest. The additional optionality from Option 3 is warranted because it provides greater flexibility for potential buyers to bid on units they value most, will facilitate the implementation of the mitigation ordered by the commission, and addresses the changed circumstances that affect the Bayonne facility, the company added. Moreover, Option 3 provides slightly better market power mitigation than the removal of the Bayonne facility from Option 1 and Option 2 that Talen Energy had previously considered.

Talen Energy asked that the commission grant this motion to amend the mitigation on or before Nov. 30, 2015. Under the current mitigation plan, Talen Energy must enter into a binding agreement or agreements for divestiture of the assets subject to the selected mitigation option by June 1, 2016.

The Sapphire Units are owned by subsidiaries of Sapphire Power, which was controlled by Riverstone Holdings LLC prior to the close of the transaction. As a result of the transaction, the Sapphire Units are now indirect, wholly owned subsidiaries of Talen Energy. Each of the Sapphire Units is:

  • Bayonne is the owner of a natural gas-and distillate fuel oil-fired combined-cycle cogeneration facility located in Bayonne, New Jersey.
  • Camden is the owner of a natural gas- and distillate fuel oil-fired combined-cycle generating facility located in Camden, New Jersey.
  • Elmwood Park is the owner of a natural gas- and fuel oil-fired, combined-cycle facility located in Elmwood Park, New Jersey.
  • Newark Bay is the owner of a natural gas- and distillate fuel oil-fired combined-cycle facility located in Newark, New Jersey.
  • Pedricktown is the owner of a natural gas- and distillate fuel oil-fired combined-cycle facility located in Pedricktown, New Jersey.
  • York is the owner of a natural gas-fired combined-cycle facility located in York, Pennsylvania.

Steps taken for the retirement of the Bayonne facility

The Bayonne facility provides steam to International Matex Tank Terminals (IMTT), a subsidiary of Macquarie Infrastructure Co., to operate a tank terminal storage facility for oil and chemical products. The steam is used for tank heating. While Bayonne owns the plant and equipment associated with the Bayonne facility, it does not own the land on which the Bayonne facility is located. The land is owned by IMTT. Pursuant to a 1986 lease agreement, Bayonne leases the land from Bayonne Industries Inc. and IMTT-Bayonne, which are subsidiaries of IMTT.

The Lease Agreement expires by its own terms on Oct. 31, 2018, unless continued by mutual agreement of the parties. On Oct. 16, 2014, IMTT notified Bayonne and Riverstone that it does not intend to renew the Lease Agreement upon expiration. While Bayonne and Riverstone did initially attempt to negotiate an extension with IMTT and Macquarie, negotiations proved futile

The Lease Agreement requires that upon expiration of the lease, Bayonne must dismantle and remove the Bayonne facility by Nov. 1, 2019. On Nov. 17, 2014, following IMTT’s notice of intent not to renew the Lease Agreement, Bayonne, which was controlled by Riverstone at the time, notified PJM of its intent to deactivate the Bayonne facility as of Nov. 1, 2018. On Dec. 11, 2014, Bayonne received approval from PJM to deactivate the Bayonne facility as requested, and on Dec. 15, 2014, Bayonne received notification from the PJM Market Monitor that the decision to retire the Bayonne facility did not appear to raise market power issues.

In connection with the deactivation notice, on Nov. 17, 2014, Bayonne also asked PJM and the PJM Market Monitor for an exemption from the must-offer requirement for all PJM Base Residual Auctions (BRA) and Incremental Auctions (IAs) for the 2018/2019 through 2021/2022 Delivery Years. On Feb. 9, 2015, and Feb. 7, 2015, PJM and the PJM Market Monitor, respectively, agreed that Bayonne qualified for an exception to the must-offer requirement for the BRA for the 2018/2019 Delivery Year. On July 1, 2015, PJM and the PJM Market Monitor confirmed that Bayonne has been granted a must-offer exception for all PJM BRAs and IAs for the 2018/2019 through 2021/2022 Delivery Years.

While Bayonne has been granted exceptions to the must-offer requirement for the BRAs through the 2021/2022 Delivery Year, it cleared the BRAs held in 2012, 2013, and 2014 for the 2015/2016, 2016/2017 and 2017/2018 Delivery Years, respectively. Therefore, Bayonne is committed as a PJM Capacity Resource through May 31, 2018, the end of the 2017/2018 delivery year, and is required to offer its capacity into the PJM day-ahead energy market.

Talen Energy currently intends to deactivate the Bayonne facility on Oct. 31, 2018.

The new Option 3 features a 1,351-MW mix of gas, hydro and coal

The suggested Option 3 would require the divestiture of the following assets: Ironwood, 660 MW, combined cycle; Holtwood, 248 MW, hydro; Wallenpaupack, 44 MW, hydro; and Crane, 399 MW, coal.

“Since the Bayonne facility is present in both Option 1 and 2, Talen Energy seeks a modification that, as described above, is sufficient to ensure the Transaction continues to have no adverse effect on horizontal market power and is consistent with the public interest, while addressing the changing circumstances for Bayonne and preserving optionality and value for potential buyers,” said the company. “Option 3 is also aimed at avoiding unnecessary over-mitigation.”

The approved Option 1 (1,315 MW in total) is made up of:

  • Bayonne, 158 MW, Combined Cycle (CC)
  • Camden, 145 MW, CC
  • Elmwood Park, 65 MW, CC
  • Newark Bay, 120 MW, CC
  • Pedricktown, 118 MW, CC
  • York, 49 MW, CC
  • Ironwood, 660 MW, CC 

The approved Option 2 package (total of 1,346 MW), which overlaps with Option 1, is:

  • Bayonne, 158 MW, CC
  • Camden, 145 MW, CC
  • Elmwood Park, 65 MW, CC
  • Newark Bay, 120 MW, CC
  • Pedricktown, 118 MW, CC
  • York, 49 MW, CC
  • Holtwood, 248 MW, Hydro
  • Wallenpaupack, 44 MW, Hydro
  • Crane, 399 MW, Coal
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.