The Federal Energy Regulatory Commission has denied a petition to sell the 1,054 MW New Harquahala gas-fired generating station in Arizona to Saddle Mountain Power, LLC. FERC determined that the applicants failed to mitigate adequately the market power that would result from combining the New Harquahala facility with approximately 1,167 MW of natural gas-fired generation at the Gila River power station that is owned by a Saddle Mountain affiliate.

The applicants conceded that combining the two plants would violate FERC's "delivered price test" market power screens for Arizona Public Service Company's balancing area, but proposed to mitigate market power through an Energy Management Agreement that would give a non-affiliate, Twin Eagle Resource Management, LLC, the right to dispatch the New Harquahala plant. The applicants also commited that New Harquahala would only enter into long-term agreements for energy or capacity from the New Harquahala facility that would begin at least one year after the execution date and obtain prior FERC approval for those sales.

FERC rejected the offer in light of the "dramatic failures" of the delivered price test screens, and FERC's concern that the Energy Management Agreement would not relinquish sufficient control over sales from the New Harquahala plant to Twin Eagle. FERC took special note that, under the agreement, New Harquahala would establish the facility's operating limits, dispatch and efficiency curves, and operating costs, and that Twin Eagle would have little discretion to deviate from the dispatch plan. These concerns, coupled with New Harquahala's continuing role as the operations and maintenance service provider, gave New Harquahala too much ongoing control in FERC's view.

FERC also worried that New Harquahala's role in establishing the dispatch model for the plant could give it access to market information that could be shared with the affiliated owner of the Gila River generating facilities, which could allow Gila River's owner to withhold output from the plant to drive up energy prices in the Arizona Public Service Company market.

FERC left the door open for the applicants to return with a better mitigation plan to address these concerns.

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