E-10: Commissioner Clements’ Dissent in Southern Power Company, Docket No. ER23-150-000

Docket No. ER23-150-000

I dissent because the Commission’s Order authorizes affiliate transactions between Southern Power Company (Southern) and Georgia Power Company (Georgia Power), despite evidence that Georgia Power may have designed a Request for Proposals (RFP) process in a manner that preferred its affiliates, and without adequate demonstration by Southern that the RFP was designed in a manner that was not unduly discriminatory and preferential.  Rather than accepting Southern’s request to receive market rather than cost-based rates, I would have set the matter for hearing to examine issues of material fact necessary to determine whether the transactions reflect affiliate abuse.  

While the Commission’s Order approving Southern’s request is voluminous, it uncritically repeats many of Southern and Georgia Power’s claims and relies almost exclusively on the approval of the transactions by the Georgia Public Service Commission (Georgia Commission) and the conclusion of Accion Group, LLC (Accion Group)[1] that they were competitive.  In my view, the Commission’s responsibility to protect consumers against affiliate abuse demands more than this.  Assessing whether Southern should receive market rather than cost-based rates for these transactions is the responsibility of this Commission, not the State.  Without more information, the Commission cannot reasonably conclude that Georgia Power’s RFP did not favor its affiliates.  In the face of a substantial body of evidence suggesting the potential for affiliate preference, as well as facially implausible claims by Southern and Georgia Power to justify RFP design choices that may have been critical to the selection of affiliate contracts, I believe we have an obligation to ask the hard questions to truly assess whether these transactions are competitive.  The Commission’s approval of Southern’s request without adequate review harms Georgia Power’s customers by potentially subjecting them to rates well in excess of costs.

Background

Georgia Power contracted with affiliated existing gas resources in lieu of non-affiliated projects

The Commission’s Order approves market-based rate contracts resulting from an RFP issued by Georgia Power “to ensure reliability of the Georgia Power system in the face of retiring coal and fuel-oil fired generation facilities.”[2]  Georgia Power conducted a “Capacity RFP” soliciting between 1000 and 3000 MW of firm capacity in response to a stipulation of its approved 2019 Integrated Resource Plan.[3]  The RFP sought firm capacity resources, and specified particularized requirements for combustion turbines, combined cycle turbines, battery energy storage systems, and battery energy storage systems paired with a renewable resource.[4]

Georgia Power ultimately selected six Power Purchase Agreements (PPAs) for a total capacity of 2,356 MW,[5] of which five of the PPAs, representing roughly 2000 MW of capacity, are with its affiliates.[6]  Accion Group served as the Independent Evaluator (IE) for the RFP.  Its report explains that the winning bids were selected from amongst 70 total bids, and “over 6,000 MW of Unique Capacity Proposals.”[7]  While the RFP was not restricted to existing gas facilities,[8] all 4,400 MW of Unique Capacity that was selected for a “Competitive Tier” (a finalist round that preceded the final selection of contracts), consisted of existing gas facilities.[9]   The RFP was nominally open to stand-alone storage and solar plus storage resources, but the IE Report does not summarize the relative amount of bids received from different technology types, making it difficult to assess on this record how many MW of bids were received from such resources and the extent to which the inclusion of such resources was integral to Accion Group’s determination that the solicitation was competitive.

Statutory background

The Commission’s duty to ensure just, reasonable, and not unduly discriminatory rates, in reviewing the affiliate contracts filed by Southern, is to ensure that they were truly selected on a competitive basis without affiliate preference.  As the Commission stated in Boston Edison Company Re: Edgar Electric Energy Company, “where affiliates are entering agreements for which approval of market-based rates is sought, it is essential that ratepayers be protected and that transactions be above suspicion in order to ensure that the market is not distorted.”[10]  These circumstances warrant a skeptical review because “[w]here a traditional utility is buying from an affiliate not subject to cost-of-service regulation, the buyer has an incentive to favor its affiliate even if the affiliate is not the least-cost supplier, because the higher profits can accrue to the seller’s shareholders.”[11]  Southern has a cost-based rate tariff,[12] but here they are seeking to enter into the relevant transactions pursuant to market-based rates,[13] which allow Southern to capture profits potentially well in excess of the relevant resources’ costs.

To receive such authorization, Southern carries the burden of demonstrating that the contracts at issue do not reflect affiliate abuse, and it can do so by demonstrating that  “(1) the solicitation or negotiation was designed and implemented without undue preference for the affiliate, (2) the analysis of the bids or responses did not favor the affiliate, particularly with respect to evaluation of nonprice factors, and (3) the affiliate was selected based on some reasonable combination of price and nonprice factors.”[14] 

The Commission’s seminal order in Allegheny Energy Supply Co., LLC,[15] sets forth the general guidelines by which the Commission evaluates whether the applicant has made such a demonstration.  The Allegheny approach examines four facets of the relevant transaction(s): (1) transparency, (2) the definition of the products sought, (3) the process by which bids were evaluated, and (4) oversight of the contracting process.[16]  Most relevant here is the “definition” prong of the evaluation.  As the Commission explained in Allegheny, “[t]he product or products sought through the RFP should be defined in a manner that is clear and nondiscriminatory.”[17]  Further, “[a]n RFP should not be written to exclude products that can appropriately fill the issuing company’s objectives.  This is particularly critical if such exclusions tend to favor affiliates.”[18]

Importantly, “the guidelines set forth in Allegheny are guidelines, not a bright-line test.”[19]  The Commission’s underlying duty under the Federal Power Act is to ensure just and reasonable and not unduly discriminatory rates, and as such “the underlying principle [of] the Edgar criteria is that no affiliate should receive undue preference during any stage of the process.”[20]  The context and facts of the relevant transactions are important, and where an applicant’s “request for authorization to make affiliate sales as a result of [an] RFP raises issues of material fact that cannot be resolved based on the record before” the Commission, a hearing is appropriate in order to determine whether the RFP “satisfies [the Commission’s] affiliate abuse concerns.”[21]

Southern has not demonstrated that it did not favor its affiliates

Based on the record in this proceeding, the Commission cannot reasonably conclude that the RFP was conducted in a manner that did not favor Georgia Power’s affiliates.  While the record is not complete, several facts suggest that Georgia Power may have designed the RFP in a manner aimed at preferencing existing gas plants owned by its affiliates.  Most significantly, the RFP incorporated three highly questionable assumptions.  First, it restricted the pool of eligible bidders by limiting proposals to those consisting of 100 MW or more of capacity.[22]  Protesters argue that this “‘had the effect of removing an estimated seventy-four solar projects (with storage or storage-capable) from contention in the bidding,’” as ‘[f]ew solar + storage projects in 2019 exceeded the 100 MW size limitation.’”[23]  Second, Georgia Power evaluated the capacity offers of solar plus storage resources using a framework that essentially counted only the energy storage component of those resources.[24]  This evaluation ran contrary to Georgia Power’s own capacity evaluation methodology set forth in its Integrated Resource Plan (IRP).[25]  And third, Georgia Power evaluated the bids of gas resources using an average of “low” and “moderate” gas price forecasts, without accounting for the possibility of high gas prices.[26]

In approving Southern’s request for authorization of affiliate transactions despite these questionable features of the RFP, the Order applies the Allegheny guidelines in a perfunctory fashion that loses sight of the “underlying principle . . . that no affiliate should receive undue preference during any stage of the RFP.”[27]  In doing so, it fails to ensure that the relevant transactions are “above suspicion.”[28]  In my view, the Federal Power Act demands more, and the Commission does not have the information it needs to conclude that the transactions at issue in this case were not the product of affiliate abuse. 

Southern has not demonstrated that the RFP was consistent with Allegheny’s definition guideline

In concluding that Georgia Power’s solicitation was consistent with the Commission’s definition guideline, the Order focuses on the fact “that bidders understood its qualification criteria and bid evaluation methods, and that relevant criteria were clearly defined.”[29]  But competition rules can be clear and yet still skewed in a manner designed to favor affiliates.  For example, the Commission obviously should not approve an affiliate transaction pursuant to an RFP that explicitly seeks power from affiliated companies, or that boosts the evaluation scores of bids from affiliates, no matter how clear such a rule is.  

Here, the crux of the definition inquiry is whether the RFP was “written to exclude products that can appropriately fill the issuing company’s objectives.”[30]  Georgia Power’s objective was to ensure reliability even as certain resources on its system retired, yet it appears to have written the RFP in a manner that excluded certain resources capable of meeting that objective.  First, while resources under 100 MW could clearly contribute to Georgia Power’s resource adequacy needs, it excluded them from the RFP.[31]  Protesters contend that this size requirement eliminated 74 solar plus storage projects from contention, and that “few” projects remained that were above the size threshold.[32]

In my view, the majority accepts Georgia Power’s claims that such resources would present “operational and transactional concerns” without applying adequate scrutiny to those claims to assess whether these asserted reasons are in fact pretextual.[33]  The Order points to generic statements regarding Accion Group’s assessment that the process was fair,[34] and repeats dubious claims from Georgia Power, such as its assertion that “[there are] difficulties in operating many small units in lieu of larger units.”[35]  But there is reason for skepticism, and the majority’s credulous approach leaves potential affiliate abuse unchecked.  A hearing is necessary to apply more scrutiny to these claims.

For instance, is there in fact a reasonable engineering basis behind Georgia Power’s assertion that operating many smaller plants would be challenging?  More than a decade ago, the Commission described Southern Companies’ sophisticated power pooling arrangement as “provid[ing] for the coordinated and integrated operation of the generating facilities and resources owned, contractually controlled, and operated by the Southern Operating Companies . . . using a centralized economic dispatch model.”[36]  Georgia Power provides no technical or factual support to back up its claim that it would encounter many “difficulties in operating many small units in lieu of larger units,”[37] and it is hard to fathom that it could not carry out the basic task of dispatching, for example, a 50 MW power plant when needed, given that grid operators across the country routinely do so without issue.  

Nor does the claim that evaluation of bids from many resources would be costly or unworkable make intuitive sense, as the RFP required fees from bidders to ensure that ratepayers would not bear the costs of administrating the RFP.  As the IE Report details, “[e]ach Bidder was required to submit with each Bid Proposal a non-refundable fee of fifteen thousand dollars ($15,000).”[38]  These fees were assessed on a uniform basis for each applicant and were not indexed according to the capacity of the proposed resource.[39]  And to the extent the costs of transacting with a greater number of smaller resources would truly impose costs for Georgia Power, why could it not simply factor those costs into its method of evaluating the offers from bidders rather than imposing a categorical bar on resources below a certain size?  The Order also repeats Georgia Power’s assertion that smaller projects would likely be more expensive.[40]  But the entire point of the competitive RFP process is to determine which resources are most competitive.  Protesters contend that “many of these projects could very well have cost less than the prevailing Southern Power gas facilities,” but “Georgia Power’s upfront disqualification of their bids ensured that it would not have to compare their costs.”[41]  Notably, the claim that smaller resources would not be economical lies in direct tension with Georgia Power’s assertion that such resources would impose transactional costs, as Georgia Power would only be “negotiating, and managing multiples of contracts” if bids from smaller resources emerged as the winners of its RFP.[42] 

The Commission’s approach of unquestioning acceptance invites manipulation of the Allegheny framework.  Given the reality that companies are exceedingly unlikely to explicitly discriminate in favor of affiliates, the Commission’s proper role should be to scrutinize the asserted rationale behind any RFP design choice that may in practice favor affiliates, to establish whether that asserted rationale is supported by the facts or is instead merely a pretext.  Here, for example, the Commission cannot establish that “operational concerns” were a reasonable, non-discriminatory basis to narrow the scope of the RFP without building a deeper record on the company’s grid operations framework to assess whether in fact the company will have difficulty operating resources below 100 MW.[43]  The Commission had a minimum obligation to hold a hearing given its knowledge of Georgia Power’s sophisticated grid operations process and the logical intuition that any concerns with regard to the transactional costs of entering into arrangements with a greater number of resources could have easily been accounted for in the RFP.

Similarly, Georgia Power’s RFP design seems to have sharply diminished the competitiveness of non-affiliated solar plus storage resources, potentially scoring their capacity as less valuable in meeting Georgia Power’s resource adequacy needs than suggested by Georgia Power’s own capacity valuation framework employed at the time.  Georgia Power defined the “firm capacity” required under the RFP as capacity deliverable “for the duration of any period of guaranteed commitment pursuant to the Company’s scheduling instructions.”[44]  Under this approach “[t]he capacity value brought by” the solar component of a “project during its peak generation period (say 10 AM to 4PM) is disregarded.”[45]  Instead, such projects are evaluated only based on “the size of the project’s battery,” even though a relatively smaller battery would generally be combined with a significantly larger solar array to deliver more capacity value to Georgia Power’s customers.[46]  Importantly, Georgia Power’s own approach to valuing capacity at the time it conducted the RFP appears not to arbitrarily discount the capacity value of solar plus storage in this manner.  As the company describes in its 2022 IRP, it “completes capacity equivalence studies” to “ensure that resources that contribute to the Company’s Target Reserve Margin are assigned the appropriate capacity value or reliability benefit.”[47]  While Georgia Power has since developed a more sophisticated Effective Load Carrying Capability (ELCC) capacity valuation framework for energy storage and renewable resources based on a recently completed study, even at the time the RFP was issued, it employed an “Incremental Capacity Equivalent (‘ICE’) Factor” to evaluate such resources, which Georgia Power describes as “a form of ELCC.”[48]

Without more information providing a sound basis for Georgia Power’s questionable decision to deviate from its own capacity valuation framework, it is difficult to understand how the majority blesses this RFP design choice as not unduly favoring Georgia Power’s affiliates.  The Order appears to credulously accept Georgia Power’s claim that “smaller, non-dispatchable resources would not have met the company’s objectives because they lacked adequate ‘capacity firmness and dispatchability’ to replace the large quantity of retiring coal units that currently fulfilled that need.’”[49]  But nothing in the record suggests that a resource’s smaller size renders it unreliable such that it could not be aggregated together with other resources responding to the RFP to replace the retiring units.  Nor has Georgia Power identified any unique reliability needs beyond resource adequacy which would require a different capacity accreditation framework that demands a higher level of dispatchability than the method it typically uses.  A hearing would appropriately gather more information on Georgia Power’s approach to ensuring reliability to assess whether the product definition choice in the RFP was a reasonable strategy to meet the company's needs, or instead an effort to favor its affiliates.

In arguing that the Commission may grant discretion to Georgia Power to frame its RFP in a manner it sees fit, without asking further questions despite the apparent favoritism towards its affiliate, Southern points to a separate case where the Commission approved an affiliate sales request despite its technology-specific nature.[50]  But that case provides no support for the Commission’s questions-free approval here.  There, at the time the RFP was conducted, “none of NIPSCO’s affiliates participated in the RFP.”[51]  Moreover, NIPSCO did not score the offers itself, as Georgia Power has done here.  That task was left to Charles River Associates, the consultant retained to administer the RFP, who “evaluated the bids independently of NIPSCO.”[52]  Allowing discretion to segregate the RFPs by technology type was appropriate in that case because that decision was not indicative in any way of affiliate abuse.  By contrast, Georgia Power’s decisions to exclude resources below 100 MW,[53] and to ignore the capacity value of the renewable component of combination resources, both clearly favored the affiliated existing gas resources that Georgia Power itself chose in response to the RFP. 

The Commission’s Order states that Georgia Power should have “some discretion” in framing its own objectives, and given that discretion, “seek[ing] specific products intended to fill specific needs, in and of itself, does not mean that the solicitation description is inconsistent with the definition guideline and does not indicate undue affiliate preference.”[54]  But providing some discretion should not equate to a blank check for a company to define products in a manner that quite clearly risks favoring affiliates.  Where the rationale underlying the RFP’s product definition choice is reliability need, the Commission should at least scrutinize that rationale by examining whether the definition aligns with the company’s own framework for ensuring reliability. 

The underlying principle that no affiliate should receive undue preference required closer scrutiny of the RFP process

Further, the context of this solicitation suggests that greater scrutiny was required.  More information is needed to understand the full details of the response to the RFP, but Georgia Power’s affiliates appear to have owned the vast majority of relevant existing gas resources, whereas its competitors are likely to have offered the vast majority of solar plus storage resources competing with those existing gas plants.[55]  In this context, focusing solely on whether the RFP “clearly specif[ies] the price and non-price criteria under which the bids are evaluated”[56] is not sufficient to guard against affiliate preference.  Where the affiliated and non-affiliated offers are largely composed of different technology types, clarity of evaluation criteria alone is not enough to prevent affiliate preference because evaluation criteria could be clear yet unduly favorable to the affiliate’s resource type.[57] 

Georgia Power’s use of potentially skewed gas price forecasts illustrates this point.  Georgia Power analyzed the “system benefits of each bid” using a framework that calculated projected variable costs by averaging across four scenarios: two with a “low” gas price forecast, and two with a “moderate” gas price forecast.[58]  To the extent a reasonable forecast would have also symmetrically factored in the potential for “high” gas prices alongside the low gas price forecast, then using the skewed framework would favor gas resources responding to the solicitation as more economical.  This in turn would favor affiliates of Georgia Power if, as it appears, they were more likely to present gas resources.[59]  By granting the affiliate transaction request instead of asking more questions to assess whether the facially questionable use of these gas forecasts was merited, the Order fails to uphold the “underlying principle . . . that no affiliate should receive undue preference during any stage of the process,”[60] and treats the Allegheny framework as a bright-line, check-the-box exercise rather than as guidelines for analyzing the underlying question whether the contracts have been demonstrated to be above suspicion, as Edgar instructs.[61]

Moreover, beyond the gas price forecasts used, there were several other aspects of the RFP evaluation framework that held the potential for favoritism toward affiliated gas resources, for which more information is needed to assess whether the evaluation framework was fair.  For example, in evaluating offers from solar plus storage resources, Georgia Power “assumed one dispatch per day of the storage device.”[62]  The rationale behind this assumption is unclear given the physical reality that multiple dispatches per device could occur within the same day.   

In addition, Accion Group states that [t]ransmission constraints” were “a significant consideration in evaluations” of resources bidding into the RFP, “especially with the distributed nature of independent sources.”[63]  While Accion Group states that transmission interconnection costs were analyzed for bidders using a uniform verification process,[64] the IE Report does not provide underlying data on which the Commission could base a conclusion that these costs applied to bids was accurate.  And accuracy is critical to ensuring fairness in this case because non-affiliated storage plus solar projects would likely have significant transmission costs, while Georgia Power’s affiliated existing assets likely would not.[65]  

Further, the documents in the record do not clearly explain how the energy arbitrage and ancillary services value of energy storage resources were accounted for.  Concerningly, Accion Group’s report states that it “found that the production cost model was [initially] giving little to no value to ancillary services for storage.”[66]  Yet the approved RFP documents quite clearly state that “Ancillary Services . . . will contribute to the total production cost.”[67]  While the report states that the methods “were adjusted to ensure energy arbitrage and ancillary service values were included in the evaluation,”[68] little detail is given as to what method was used, preventing the Commission from independently assessing its validity.  Further, Accion Group “recommends the Company move to a more sophisticated production cost model in future RFPs,”[69] implying that even the adjusted model used may not be accurate.

Finally, Georgia Power reserved a right to consider non-price attributes, such as the “development and operational experience” of the bidder, or “[p]ortfolio and technology diversity,” but did not clearly delineate how these attributes would be considered.[70] 

Given these myriad ways that Georgia Power could have conceivably favored its affiliates, one would expect the Commission to examine the bid data itself to confirm the transactions to be above suspicion, as it has done in previous circumstances where opaque factors such as transmission costs have played a significant role in the results.[71]  Yet the Commission has made no such request for examination, and Protesters reasonably complain that the Commission cannot have conducted a “fulsome review of the RFP process” given the lack of “a full accounting of the bids received in response to the RFP and Georgia Power’s quantitative analysis of those bids that led to its selection of Southern.”[72]  Beyond asking questions to assess the validity of Georgia Power’s asserted rationales behind its product definition, a hearing should have been instituted to gather basic data on all issues of material fact necessary to examine whether affiliates were preferred, including “bidder identity, resource type, transaction type, megawatt amount, and bid price,” as well as “Georgia Power’s quantitative evaluation of each bid, including transmission cost calculations.”[73]  As discussed elsewhere in this dissent, a hearing is necessary to evaluate other material facts relevant to assessing the arguments that the parties have made.[74]

Holding a hearing in this case would not infringe on the authority of the Georgia Public Service Commission

Holding a hearing in this case would not infringe on the Georgia Public Service Commission’s choices regarding the State’s preferred resource mix, or exceed FERC’s jurisdiction under the Federal Power Act.  Had the Georgia Commission sought to meet the relevant capacity needs using only existing gas resources, they could have easily provided for that in adjudicating Georgia Power’s 2019 IRP.  But they did not do so, and instead expressly allowed for the accommodation of bids from other resources.  Given that choice, Georgia Power’s design of the RFP could have created an illusion of competition without truly offering it, if in fact Georgia Power’s affiliates were destined to be selected in the RFP based on a skewed evaluation framework for those eligible resources.[75]

While it is of course true that the Georgia Commission approved the RFP, such RFP approval is typical of transactions for which applicants request affiliate transaction authorization from the Commission.[76]  Indeed, the Maryland Public Service Commission had supervised the RFP process underlying the transaction at issue in Allegheny, yet this did not exempt it from FERC review.[77]  And outside the Georgia Commission’s approval of the RFP documents, Southern has not pointed to a single regulatory directive that required the product sought to be defined in the manner Georgia Power chose.[78]  As discussed above, Georgia Power’s resource adequacy framework, regulated by the Georgia Commission, appears to be in tension with the approach taken in the RFP.[79]

If mere approval by a state regulator were sufficient to shield a choice made in the RFP from federal scrutiny, then the entire Allegheny framework would make little sense and FERC could not possibly fulfill its responsibility to protect consumers from affiliate abuse.  While the majority points to Georgia Power’s claim that “capacity procurement” falls under state jurisdiction,[80] the issues here include Georgia Power justifying affiliate-favoring choices based on facially implausible transactional and operational rationales without further supporting evidence, and establishing one method of capacity accreditation in a general regulatory context while applying a different, inconsistent framework in the context of an RFP that appears to favor its affiliates.  The Commission has a proper role in scrutinizing these issues because they raise affiliate abuse concerns, a matter that that falls to this Commission to evaluate.  

Similarly, Georgia Power argues that questioning Georgia Power’s dispatchable product definition “is a novel interpretation . . . that would wade into a state’s regulation of a utility’s purchasing practices in determining the appropriate type of resources required to provide reliable retail electric service.”[81]  But to characterize a Commission decision questioning the product definition as potentially unduly favorable to Georgia Power’s affiliates as an inappropriate regulation of a utility’s purchases is mere sleight of hand.  Any application of the Allegheny definition principle rejecting a request for authorization to sell would impact the purchasing utility, because the sale and purchase are two sides of the same coin.  Requiring a more precise definition, for example, restricts the purchasing utility’s ability to contract for a broader, less defined set of products. 

An RFP such as the one at issue here is naturally subject to regulation by both the state regulator and FERC.  While the state regulator makes policy choices such as determining the appropriate resource mix, FERC has the duty to ensure that the rates are just and reasonable and not unduly discriminatory, which in this context requires ensuring that the sales contracts with affiliates are above suspicion before authorizing market-based rates.[82]  Here, given the unique context that the RFP allowed many technologies to offer, and the fact that Georgia Power’s affiliates appear to have offered in primarily with one technology type while its competitors primarily offered another, the Commission’s regulation of affiliate abuse required examining the reasonableness of any RFP choice that favored the affiliate technology while excluding or disfavoring competitors.

Importantly, even if the Commission ultimately concluded that the contracts at issue here have not been demonstrated to be just and reasonable and not unduly discriminatory, that would not restrict the ability of the Georgia Commission to direct Georgia Power to enter into contracts with any level of firmness it may desire, including the level of firmness described in the RFP.  All it does is ensure the justness and reasonableness of rates for such contracts.  Absent a competitive solicitation demonstrating the rates to be truly competitive, Georgia Power remains free to enter into cost-based rates with its affiliates. 

For these reasons, I respectfully dissent.