On appeal from a Final Administrative Decision of the New Jersey Board of Public Utilities, Agency Docket No. EM07010026.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Before Judges Stern, Rodríguez and Waugh.
The Public Advocate, Division of Rate Counsel (PA), appeals from the September 17, 2007 final administrative determination of the Board of Public Utilities (BPU) which approved the sale of Jersey Central Power & Light's (JCP&L) generating facility in Forked River.
On January 17, 2007, JCP&L submitted a "verified petition" to the BPU seeking "approval of the sale" of its Forked River generating station to Forked River Power, LLC (FRP), and "a [w]aiver of the [a]dvertising [r]equirement set forth in N.J.A.C. 14:1-5.6(b)," which required that the sale be advertised. JCP&L proposed that "the net proceeds of the sale . . . be credited to reduce [its] Market Transition Charge [and] Non-Utility Generation charge ('MTC/NGC') deferred balance," in accordance with a prior restructuring order issued by the Board. In addition, JCP&L sought to recover operating losses incurred ninety days after the filing of the purchase and sale agreement, and that any such operating losses be applied to the net proceeds from the transaction. Furthermore, JCP&L sought to hold ratepayers responsible for any pre-sale environmental remediation costs. After a plenary hearing, the BPU approved the petition and sale.
Following an evidentiary hearing,*fn1 the BPU found that JCP&L had "substantially met the requirements" of both the Electric Discount and Energy Competition Act (EDECA), N.J.S.A. 48:3-59(c), and the Board's prevailing auction standards. The Board also approved the waiver of the advertising requirement; directed JCP&L to work with rate counsel and staff "in evaluating the best strategy for maximizing the value of the remaining land for the benefit of rate payers"; denied "the [c]ompany's request to recover operating losses incurred 90 days after the filing of the petition" and its request "to recover future environmental and remediation costs," and directed a future filing, "in the next NGC filing," of closing costs, thereby reserving on the application for assessment.
PA argues that "the Board's approval of the sale of Forked River as proposed by JCP&L did not meet the conditions for divestiture of utility generation assets set by the Legislature in the EDECA." Specifically, the PA asserts that the BPU failed to consider the impact of revenues which would flow from JCP&L's continued operation of the facility, the sale failed to comply with the Board's requirement for auctions, the determination that the sales price represented fair market value did not take into account the lack of "a competitive solicitation," and the "after-the-fact waiver of the advertisement requirements" was inappropriate.
Stated differently, the PA contends that the EDECA has not been complied with because full market value was not realized, the best interests of the ratepayers were not respected, and the auction standard, designed to achieve both full market value and the best interests of the ratepayers, was not honored. According to the PA, the BPU did not respect these three requirements, and he challenges both the approvals of the advertising waiver and the sale. The PA argues that the sale will generate an immediate $2,000,000 loss for the ratepayers, and ultimately cost the ratepayers as much as $66,000,000.
JCP&L is a subsidiary of GPU, Inc. Forked River is an 86 megawatt gas-fired combustion turbine power plant in Lacey and Ocean Townships. It was placed into service by JCP&L in 1989. According to the petition, "Forked River is essentially a peaking facility [that] operates a limited number of hours during the year, primarily due to its relatively high operating costs."
In light of the recommendations of the New Jersey Energy Master Plan Phase I report, in April 1997 the BPU issued a report recommending that New Jersey energy customers be given the ability to choose their electric power supplier directly and that electric utilities be allowed to sell their generation assets and functions. The BPU then directed New Jersey's four investor-owned utilities, including JCP&L, to submit a restructuring plan. GPU indicated its intention "to divest its fossil fuel and hydroelectric generation facilities." This led to BPU orders and decisions in May 1999 and March 2001 approving JCP&L's restructuring.
In the meantime, in February 1999 JCP&L filed a petition with the BPU seeking approval of the sale of its non-nuclear generation assets, including Forked River and other facilities, to Sithe Energies, Inc. On November 4, 1999, the BPU issued a decision and order approving the sale. Significantly, however, prior to closing, Sithe decided not to purchase Forked River, and the overall sales price of the agreement with Sithe was reduced by $15 million.
In April 2000, JCP&L entered into a "blackout agreement" with AmerGen Energy Company, LLC (AmerGen), which called for at least one combustion turbine of the Forked River plant to be made available to provide electric service to the Oyster Creek Nuclear Generating station, which AmerGen had purchased from JCP&L in July 2000, in the event of a station blackout or loss of energy supply. This was an effort to comply with the federal requirement that nuclear generating stations have appropriate arrangements in place in the event of a blackout. JCP&L received approximately $140,000 per year from this agreement.
After the restructuring orders, JCP&L continued its endeavor to sell Forked River as part of the divestiture of all of its generation assets. However, Forked River was one of two non-nuclear plants JCP&L could not sell as part of its 1999 divestiture. According to testimony before the BPU, JCP&L decided that, because of the blackout agreement and the plant's operating characteristics, Forked River's value as a "merchant facility" was limited and a "targeted search" for an interested buyer "would be more successful" than a general auction. The company was concerned that if an auction failed, there would be no market for a sale of the facility. JCP&L approached "fifteen potential purchasers" in an effort to sell Forked River, including AmerGen and its parent, Exelon Corporation. JCP&L then contacted "nine additional medium to small energy project developers and operators," only one of which, FRP, expressed any interest in purchasing the plant. FRP is a Delaware limited liability company owned by Maxim Power USA, Inc. (Maxim).*fn2
On December 20, 2006, JCP&L and FRP entered into a purchase and sale agreement providing for the sale of Forked River to FRP for $20 million, $5 million more than the value assigned when Sithe purchased the JCP&L generating plants after excepting Forked River. The sale to FRP included all the assets used or necessary for generation purposes, and for the ownership, operation and maintenance of Forked River. The sale conveyed 43.53 acres of the total 600 acre site, and FRP assumed all responsibilities for the ownership, operation and maintenance of Forked River, including post-closing environmental liabilities, operation failures, and the station blackout agreement. Pre-closing environmental liabilities were to remain JCP&L's responsibility. In accordance with the existing collective bargaining agreement, FRP was required to enter into a separate two-year agreement with the unions on the same terms as set forth in the existing collective bargaining agreement.
In addition, FRP agreed to enter into a ten-year tolling agreement with First Energy Solutions Corp. (First Energy), an affiliate of JCP&L, whereby First Energy agreed to make certain payments to FRP in exchange for the exclusive right to the capacity of Forked River, subject to Forked River's reliability and blackout agreement obligations. Maxim/FRP insisted on this arrangement in order to ensure that it would receive a certain level of revenue from the plant following its purchase from JCP&L.
Forked River was operating at a loss at the time of the agreement, having lost $2.6 million from 2003 to 2005. As projected, JCP&L's investment in the plant would not be fully recoverable until 2019. The amount of the total return on the plant investment will be approximately $25.5 million.
In conjunction with the sale, Michael Hyrnick, director of business development for First Energy, undertook a thirty-year discounted cash flow valuation of Forked River which, in his view, supported the $20 million figure as the plant's fair market value. Based on recent auction results, the capacity prices (i.e, fixed costs passed on to ratepayers) Forked River was eligible to receive were set at $72.15 per kilowatt hour, which was substantially higher than in prior years. Hyrnick utilized an eleven percent discount rate.
Hyrnick also made "a comparison to similar transactions [which] indicated that the Forked River sales price, which is about $232/kW is reasonable in relation to the sales prices in other transactions and should therefore be deemed to be a fair market value."*fn3 In addition, Hyrnick noted the $15 million deducted purchase price with respect to the proposed sale to Sithe, and a less than $10 million value suggested by JCP&L's "stranded cost proceeding," wherein the company indicated a stranded cost for Forked River of $23.2 million in relation to a net book value of $30.9 million. Also, Hyrnick did not believe a formal advertising of the sale was required because the previous efforts to sell Forked River, "which entailed contact with a wide range of potential purchasers," were the "functional equivalent of advertising."
Matthew Kahal, an economist engaged in energy and utility consulting, conducted a valuation analysis on behalf of the PA. Kahal claimed that the sale would result in a net loss to ratepayers of $2,000,000, once the $20,000,000 purchase price was reduced by the cost recovery of JCP&L's "net investment, certain expenses, and claimed income tax effects." Kahal concluded that ratepayers would obtain "greater benefits from JCP&L's retaining the plant and selling its output into the wholesale market" than from JCP&L's proposed sale. According to Kahal, "[t]he stranded cost/standard benefit impact on ratepayers from continued ownership will depend on the plant's net operating income . . . from selling power into the wholesale market as compared with [its] approximately $2 million per year in capital revenue requirements." Kahal noted that, although the plant-retention proposal would require a continuous capital revenue stream, ratepayers would receive a "stream of market net revenue," and he predicted that "capacity revenue [would] increase dramatically for Forked River compared to recent historic amounts."
Kahal estimated "a nominal ratepayer benefit of $66 million and a present value benefit (at a 7 percent consumer discount rate) of $32 million" to ratepayers compared to the $2 million loss if the plant were sold. Kahal claimed that the seven percent discount rate was the rate typically used for utilities. He based this value in large part on the "very robust capacity prices" included in Hyrnick's analysis.
Kahal conceded that "long-term projections of markets are inherently uncertain," and that the risks of lower capacity prices in the future were real. Thus, he conducted a second, more conservative, analysis which resulted in "a nominal benefit of $30 million and a present benefit of $14 million" to the ratepayers. Kahal did not do a traditional fair market value analysis, but rather compared the impact of retaining the plant versus the impact of selling it.
Kahal thought that JCP&L "did their best" in marketing Forked River because he believed the facility's sale was hampered by the blackout agreement. In addition, he stated that his analysis was essentially the same as Hyrnick's, except for the ...