RG&E Seeks to Terminate Divestiture Plan for Remaining Fossil Generation

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January 20, 2011

Rochester Gas and Electric has recommended that the New York PSC terminate its fossil generation divestiture plan, due to, "the unsatisfactory results in the indicative bid stage of the auction and the unattractiveness of the assets."

RG&E was required to divest its fossil assets as part of its acquisition by Iberdrola (07-M-0906).  Included in the divestiture plan are two 18-MW peaking units, which would have to be removed from their current location by any buyer; the 62-MW RG&E Allegany Station, which requires $2 million in upgrade costs; the RG&E Russell Station Site, whose existing power plant may not run due to environmental restrictions and would need to be repowered; and affiliate Cayuga Energy's 62-MW merchant Carthage plant.

The divestiture plan included an auction for all of the assets bundled together, and set an offer floor of their net book value.  RG&E reported that it received no conforming bids and only one timely non-conforming indicative bid, which: (1) did not include offers for the Russell site or the peaking units, (2) which was priced substantially below the floor prices for the Allegany Station and Carthage Energy, and (3) which, most notably, "was contingent upon execution of long-term capacity contracts and other nonconforming bid terms and conditions."

"Now that the value of the assets has been tested through the first stage of the auction of all the assets, termination of the Divestiture Plan must be considered. As discussed above, the assets to be divested are not attractive to qualified bidders.  Those that are operating are dispatched infrequently.  Russell is the site of a former coal plant and has residual environmental conditions that must be monitored.  The peakers are at the end of their useful lives and, if sold, must be moved from their present locations. Allegany will require costly repairs that would be uneconomic to make," RG&E said in explaining its preferred option of terminating the divestiture plan.

Other options suggested by RG&E include (1) auctioning groups of assets (e.g. the Allegany/Carthage units together, the peakers together, etc.) in separate processes, (2) re-auctioning selected assets and terminating the divestiture plan for others, or (3) suspending the divestiture plan until market conditions improve.

If the divestiture plan is terminated or suspended, RG&E proposed the following:

1. RG&E's Peaking Units - RG&E would continue operation of these units under rate regulation until such time as the units would not provide a benefit to customers because of repairs or projected operating costs.  At that time, the unit or units would be shut and sold for salvage.

2. RG&E's Russell Station Site - RG&E will file a plan for the demolition and disposal of the Russell structures, including an estimate of the cost of completing the work, within six months of the Commission's order on the current petition, and will petition the Commission for recovery of prudently incurred expenditures for the demolition and disposal work to the extent the costs exceed the amount already accrued for decommissioning

3. RG&E's Allegany Station - RG&E would continue operation of the Allegany Station under rate regulation until such time as Allegany would not provide a five year projected positive benefit to customers because of repairs or projected operating costs.  At that time, the unit would be shut and sold for salvage or placed in long term storage.  At current market rates, Allegany would be shut down at the time the anticipated $2 million in repairs is needed

4. Cayuga Energy's Carthage Station - Cayuga Energy would continue operating Carthage Station as a merchant plant.

The Independent Power Producers of New York opposed RG&E's recommendation to terminate the divestiture plan, arguing that the plan was flawed by bundling all of the assets together, and because environmental remediation, rehabilitation, or demolition costs for certain sites were not included in assessing the book value of the assets, which established the price floor for the auction.

"[T]he Commission's Approval Order does not contemplate that the auction process could be terminated without a sale of these assets.  To the contrary, the Commission expressly held in the Approval Order that the Petitioners' fossil assets must be divested to comply with the Commission's vertical market power policies and to permit the merger to proceed," IPPNY said.

"In their Petition, Petitioners are very candid that it is unlikely current market prices would justify a repowering investment at the Russell Station site.  Yet, to IPPNY's knowledge and belief, RG&E is still pursuing a 325 MW gas-fired repowering of [the] site.  As RG&E is prohibited from owning fossil generation, there is no reason why RG&E should be pursuing a repowering.  The Commission should order RG&E to withdraw its repowering proposal from the New York Independent System Operator interconnection queue and prohibit RG&E from recovering any costs related to a repowering from ratepayers," IPPNY said.

"In addition, Petitioners admit that the economics of the continued operation of Allegany and Carthage by a merchant generator are marginal at best.  To the extent RG&E operates these plants at a loss, it is artificially depressing capacity prices, to the detriment of the competitive market.  The Commission should investigate whether Allegany is earning revenues adequate to justify its continued operation, and, if it is not, to disallow any expenses associated with this plant," IPPNY added.

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