On March 7, 2013, the Federal Energy Regulatory Commission ("FERC") issued an order denying a request for authorization pursuant to Section 203 of the Federal Power Act for Wayzata Investment Partners, LLC ("Wayzata") to acquire an indirect interest in New Harquahala Generating Company, LLC ("New Harquahala"), which owns a 1,054 megawatt ("MW") gas-fired, combined-cycle facility located in the Arizona Public Service Company ("APS") balancing authority area. FERC's order is significant because it represents one of the few instances where FERC has denied Section 203 authorization.
New Harquahala and the other applicants ("Applicants") conceded that the proposed transaction presented competitive concerns due to Wayzata's indirect interest in 1,167 MWs at the Gila River natural gas-fired facility located in the APS balancing authority area. In order to mitigate these concerns, the Applicants proposed to require New Harquahala to enter into an Energy Management Agreement ("EMA") with an independent third party, Twin Eagle Resource Management, LLC ("Twin Eagle"). Pursuant to the EMA, Twin Eagle would have had responsibility for economic dispatch and execution of short-term transactions for capacity and energy from New Harquahala's facility. The Applicants explained that Twin Eagle would be required to follow certain dispatch and operating parameters, which would be set by New Harquahala, when engaging in such activities. New Harquahala also would have retained the ability to enter into long-term contracts for the sale of capacity or energy. The Applicants argued that these measures eliminated any competitive concerns because the facility either would be controlled by Twin Eagle in accordance with the EMA or committed pursuant to long-term agreements.
FERC found that the Applicants had failed to demonstrate that the transaction would not have an adverse effect on competition within the APS balancing authority area. FERC noted that the proposed transaction resulted in "dramatic" failures of FERC's Competitive Analysis Screen, which were of particular concern because, as combined-cycle natural gas-fired facilities, both the New Harquahala facility and the Gila River facility "would have a similar dispatch cost and could be available at a similar point on the supply curve." FERC further found that the Applicants' proposed mitigation measures did not address the competitive concerns presented by the transaction. FERC held that the Applicants had failed to demonstrate that the EMA would transfer control over the New Harquahala facility to Twin Eagle. In coming to this conclusion, FERC relied on the fact that New Harquahala retained responsibility for establishing the facility's operating and dispatch parameters and retained the right to enter into long-term sales from the facility. In addition, since New Harquahala would continue to dictate the dispatch model for the facility, FERC found that New Harquahala's affiliates would be in a position to use their knowledge about New Harquahala's dispatch plan to engage in anticompetitive conduct at the Gila River facility. Accordingly, FERC denied the Applicants' request for Section 203 authorization without prejudice to the Applicants making a new filing proposing alternative mitigation measures.