On January 10, 2018, FERC issued an order in Monongahela Power Company (Docket No. EC17-88) addressing a request by Monongahela to purchase a large coal-fired plant from its affiliate, Allegheny Energy Supply Company, LLC. The applicant argued the purchase resulted from a request for proposal (RFP) process consistent with FERC’s previous rulings addressing prior affiliate transactions that resulted from RFPs in which FERC adopted four standards.

The requirements included:

  1. Transparency - the competitive solicitation process should be open and fair
  2. Definition - the product or products sought through the competitive solicitation should be precisely defined
  3. Evaluation - criteria should be standardized and applied equally to all bids and bidders
  4. Oversight - an independent third party should design the solicitation, administer bidding evaluate bids prior to the company’s selection

Protestors challenged various aspects of the RFP, contending the process failed to meet these standards and as a result favored the affiliate.

FERC agreed with several of the protestors’ concerns. First, FERC ruled by limiting the products to existing or new generation, and thereby excluding power purchase contracts, the applicant limited the number of potential respondents that could have offered viable products (such as long term PPAs), to meet the applicant’s supply needs. FERC said if there were factors favoring generation over PPAs, those could have been spelled out as evaluation factors. Second, FERC ruled restricting the generation to that located in the applicant’s transmission zone within PJM was improper and overly restrictive, again potentially limiting the field of viable competitors. Third, FERC ruled that limiting the financial evaluation to a 15-year net present value (NPV) calculation “excessively favors” older generation, such as that owned by the applicant’s affiliate, with low up-front costs but potentially higher O&M costs in later years. FERC suggested a better screen would have involved an NPV calculation of the total value of the proposal, including a terminal value (beyond the project period), to more “closely capture the comparable economics” of each proposal. Fourth, FERC found the “ease of integration” factor unduly favored the affiliates existing generation. And fifth, FERC found the applicant did not disclose the scoring criteria upfront, ruling the independent party should have allowed all parties “to see how each price and non-price factor would be weighed.”

Finally, FERC provided additional guidance to potential applicants. FERC said it generally would not second-guess load forecasts and need determinations made by the utility, and its state commission would not automatically find that a consulting firm failed the independence criteria simply because it had worked for an applicant on prior projects and did not agree with the applicant’s timing (bids due before the holidays), finding that “the week before the December holidays is a working week like any other.”

FERC’s order confirms that RFPs designed to enable affiliates to sell power or utility assets to the utility must carefully conform to the standards discussed above. Special care should be taken to ensure the RFP does not contain features that could appear to be designed to unfairly favor the affiliate and thus run afoul of FERC’s standards, as discussed in this case.