Sithe Energies, Inc., Dynegy New York Holdings, Inc., Exelon SGC, Inc., Exelon New England Power Marketing, L.P., RCSE LLC and Exres SHC, Inc
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STATE OF NEW YORK PUBLIC SERVICE COMMISSION At a session of the Public Service Commission held in the City of Albany on January 12, 2005 COMMISSIONERS PRESENT: William M. Flynn, Chairman Thomas J. Dunleavy Leonard A. Weiss Neal N. Galvin CASE 04-E-1364 - Sithe Energies, Inc., Dynegy New York Holdings, Inc., Exelon SGC, Inc., Exelon New England Power Marketing, L.P., RCSE LLC and ExRes SHC, Inc. – Joint Petition for a Declaratory Ruling Regarding Application of Public Service Law §70 and §83 to a Proposed Transfer of Indirect Ownership Interests in Sithe Energies. DECLARATORY RULING ON REVIEW OF STOCK TRANSFERS (Issued and Effective January 14, 2005) BY THE COMMISSION: BACKGROUND In a Joint Petition filed on November 4, 2005, Sithe Energies, Inc. (Sithe), Dynegy New York Holdings, Inc. (Dynegy), Exelon SGC, Inc. (Exelon SGC), Exelon New England Power Marketing (Exelon NPM), L.P., RCSE LLC (RCSE) and ExRes SHC, Inc. (ExRes) (collectively, the Joint Petitioners) request issuance of a Declaratory Ruling finding that the proposed transfer to Dynegy of stock in upstream owners of Sithe will not be reviewed or regulated under Public Service Law (PSL) §70 or PSL §83. No party responded to the petition within the 21-day period prescribed under the Commission's Rules of Procedure, 16 NYCRR §8.2(c). CASE 04-E-1364 THE JOINT PETITION The Joint Petitioners begin with a description of Sithe’s current ownership structure. ExRes owns 100% of Sithe indirectly, through intermediary stock corporations. ExRes, in turn, is owned by Exelon SHC and RCSE, with each holding a 50% interest. The former is an indirect subsidiary of Exelon Corporation (Exelon), a registered holding company that owns substantial electric generation and delivery assets. RCSE is controlled by Reservoir Capital Group, LLC (Reservoir), through a variety of ownership arrangements. Reservoir is a private investment fund that consists primarily of individual, family and institutional investors. Turning to Sithe's subsidiaries, the Joint Petitioners relate Sithe affiliates own and operate three electric generating facilities in New York that are subject to PSL §2(13) jurisdiction, two of which also provide steam service subject to PSL §2(22) jurisdiction. These generating affiliates, the Joint Petitioners state, sell their electric output at wholesale in a competitive market, and it has been determined that their electric and steam operations are subject to light regulation under the Public Service Law.1 The Joint Petitioners note that Sithe affiliates also own and operate other New York generators that currently are exempt from most regulation as qualifying cogeneration facilities under PSL §2(2-a) and the Public Utility Regulatory Policies Act of 1978. 1 Case 02-M-1034, Ag-Energy L.P., Order Providing For Lightened and Incidental Regulation and Granting a Certificate of Public Convenience and Necessity (issued November 25, 2002); Case 98-E-1961, Power City Partners, L.P., Order Providing for Lightened Regulation (issued September 30, 1999); Case 93-E-0272, Sithe/Independence Power Partners, L.P., Order Establishing Regulatory Regime (issued April 19, 1994). -2- CASE 04-E-1364 Describing Dynegy, the Joint Petitioners note its parents and affiliates own and operate a diverse portfolio of assets, including 11,885 MW of electric generating capacity and gas plants that process approximately 1.8 billion cubic feet of natural gas per day. In New York, Dynegy owns indirectly all of the interests in the 1,200 MW Roseton gas and oil fired generation facility and the 500 MW Danskammer coal, gas and oil- fired generation facility, both located in Newburgh, New York. The ownership transfer transaction, the Joint Petitioners relate, will be accomplished in two steps. First, Exelon NPM will acquire all of RCSE’s shares in ExRes. Nearly simultaneous with that transaction, Exelon NPM and Exelon SHC will transfer all of their shares and interests in ExRes to Dynegy, with the result that it will own all of ExRes. The Joint Petitioners note that the Exelon NPM purchase of RCSE’s interests in ExRes will go forward even in the unlikely event that the sale of shares and interests to Dynegy does not. It therefore requests that a finding be made that this first step transaction will not be reviewed or regulated under PSL §70 or §83, even in the event that the second step of the transaction is not consummated. Within 180 days after the transaction is completed, the Joint Petitioners relate, Dynegy may exercise an option imposing on Exelon SHC the responsibility for funding the operation of two of the Sithe facilities. Notwithstanding this contingent financial obligation, the Joint Petitioners stress, Dynegy will remain the indirect owner of the two facilities, and will control their operation until other arrangements are made for their disposition. According to the Joint Petitioners, the proposed transfers qualify for the presumption established in the -3- CASE 04-E-1364 Wallkill Order.2 There, it was decided that §70 regulation would not adhere to a transfer of ownership interests in parent entities upstream from the affiliates owning and operating New York competitive electric generation facilities, unless there was a potential for harm to the interests of captive utility ratepayers sufficient to override the presumption. The Wallkill presumption, the Joint Petitioners note, has also been applied to transfers of upstream ownership interests in lightly- regulated steam plant under §83.3 The Joint Petitioners maintain that the Wallkill presumption has been reaffirmed, and that their transactions should be exempted from further review because they resemble other transactions afforded an exemption from review through the presumption.4 In support of its contention that it satisfies the Wallkill presumption, the Joint Petitioners maintain that the transaction will not have any adverse effect on competition. The Joint Petitioners state they have examined the impact of the transfer on competition in energy, capacity and ancillary 2 Case 91-E-0305, Wallkill Generating Company, L.P. – Regulation, Order Establishing Regulatory Regime (issued April 11, 1994), pp. 9-10. 3 Case 02-M-1443, Sithe Independence Power Partners, L.P., Order Providing for Lightened and Incidental Regulation and Granting a Certificate of Public Convenience and Necessity (issued January 23, 2003). 4 Case 02-E-1184, Sithe Energies, Inc. and Apollo Energy, LLC, Declaratory Ruling on Review of Stock Transaction (issued March 26, 2002); Case 00-E-1585, Sithe Energies, Inc., Exelon (Fossil) Holdings, Inc., and Peco Energy Company, Order on Review of Stock Transfer and Other Transactions (issued November 16, 2000). -4- CASE 04-E-1364 services markets, and the analysis demonstrates that any impact on those markets would be minimal.5 According to the Joint Petitioners, the geographic market relevant to analyzing competitive impacts is that operated by New York Independent System Operator (NYISO), because it is the only market where both Dynegy and Sithe own generation. Dynegy and Sithe, the Joint Petitioners continue, currently own roughly 4% and 3%, respectively, of the 38,000 MW of generation operating in the NYISO market. With the NYISO market largely deconcentrated, the Joint Petitioners assert, the combination of these two market shares would result in only a marginal change in concentration, well below any threshold level for concern. Even if the market analysis were restricted to upstate New York, the Joint Petitioners claim, the outcome would remain much the same, because, again, the market is largely deconcentrated, and all of the Sithe units that Dynegy is acquiring are located on the unconstrained side of the Central- East interface. Other market power concerns, the Joint Petitioners contend, do not arise under these circumstances. They report that none of the parties to the transaction control transmission assets, fuel inputs to generation, or other critical facilities in the relevant NYISO market. Moreover, the Joint Petitioners maintain that competition in the NYISO market is robust, with few barriers to entry by new generators. As a result, the Joint Petitioners conclude the transaction will not lead to the exercise of market power, and that it falls within the scope of the Wallkill presumption. 5 The Joint Petitioners note their analysis of energy markets takes into account that Dynegy has already contracted for a substantial portion of Sithe’s output. -5- CASE 04-E-1364 DISCUSSION AND CONCLUSION Joint Petitioners have satisfied the Wallkill presumption, under which transactions involving parent entities upstream from the owners of wholesale generation facilities will be reviewed only if there is the potential for harm to captive New York ratepayers. No such potential is apparent here, based on the facts stated in the Joint Petition. Through the proposed transaction, Dynegy will acquire all of the interests in ExRes, a stock corporation. Following that acquisition, it will indirectly own all of the interests in Sithe. Because the transaction is accomplished through transfers of stock well upstream from Sithe, the electric and steam assets subject to PSL §2(13) and §2(22) jurisdiction remain within Sithe’s control. Sithe will continue to bear the risks associated with its organizational and financial arrangements after the transfer;6 as its new parent, Dynegy will assume responsibility for those risks as well. While a transaction that poses the potential for the exercise of market power would not qualify for treatment under the Wallkill presumption, the Joint Petitioners have shown the proposed transfer will not unduly increase horizontal market concentration within the relevant energy, capacity or ancillary services markets. The Joint Petitioners analyzed energy market concentration impacts by performing the widely-accepted Herfindahl-Hirschman Index (HHI) analysis for both NYISO and Upstate New York time-differentiated markets. This analysis supports the Joint Petitioners’ conclusion that the transaction is unlikely to result in anti-competitive effects. 6 A transfer of a direct interest in an entity that owns such assets would not qualify for the Wallkill presumption.