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Transmission asset purchase rejected, snagging GridLiance move into MISO

Transmission developer GridLiance Holdco's plan to expand into the Midcontinent ISO market hit a roadblock when the Federal Energy Regulatory Commission denied its application to purchase six transmission lines connecting an Illinois coal plant.

The commission based its rejection of the asset purchase on the adverse impacts the transaction would have on transmission rates in MISO without providing offsetting benefits.

The decision, however, was made "without prejudice," meaning the company can try again with a new application. FERC advised that any new filing include either ratepayer protections or offer a better demonstration of the acquisition's benefits that would offset the rate increase.

GridLiance said in a statement on Aug. 29 that it had received FERC's order late the day before.

"We are in the process of evaluating the order as well as our options and the timeline around those options," spokeswoman Vera Carley said.

GridLiance — through its GridLiance Heartland LLC subsidiary, an independent transco formed to operate transmission facilities within MISO's footprint — executed an asset purchase agreement with Electric Energy Inc., referred to as EEI, in August 2018 for transmission assets in Illinois and Kentucky with a net book value of $11.7 million.

Expansion into MISO

The deal represented "the first opportunity for the GridLiance transcos to expand their business model into MISO," the company said in a FERC filing. GridLiance, owned by private equity investor Blackstone Group Inc., was formed to partner with municipal and cooperative utilities on transmission projects.

The transmission assets at issue include six 161-kV transmission lines ranging from 8 to 10 miles in length each, two 161-kV substations and associated auxiliary equipment. Initially, the lines carried power from EEI's 1,002-MW Joppa Steam generating station in Joppa, Ill., to the U.S. Department of Energy's now-defunct uranium enrichment facility in Paducah, Ky.

The generation owner's limited set of transmission lines were disconnected from the Paducah facility and reconfigured in 2017 to connect with the MISO, Tennessee Valley Authority and Louisville Gas and Electric Co./Kentucky Utilities Co. grids.

Under the agreement, GridLiance would transfer functional control of four of the six acquired transmission lines to MISO for incorporation into MISO pricing zone 3A. Control of the other two lines would be retained by GridLiance until 2022 to accommodate an existing power supply agreement between an EEI affiliate and Kentucky Municipal Energy Agency, before transferring control to MISO as well.

GridLiance Heartland and EEI filed an application (EC19-42) with FERC Dec. 26, 2018, seeking authority under Section 203 of the Federal Power Act to close the deal.

In reviewing mergers and acquisitions, FERC considers the deal's effect on competition, rates and regulation, as well as whether the transaction would result in the inappropriate cross-subsidization of a nonutility associate company by a utility company, or in a pledge or encumbrance of utility assets for the benefit of an associate company.

Rate impact

In this case, FERC said it looked no further than the rate impact in its M&A analysis, finding that the "applicants have failed to demonstrate that the proposed transaction will not have an adverse effect on rates."

The applicants acknowledged that GridLiance's annual transmission revenue requirement for the assets would be $9.6 million, compared with $6.1 million if EEI were to retain ownership of the assets. But they argued that there would be offsetting benefits associated with "integrating the transmission assets into MISO and … due to GridLiance Heartland's ownership of the assets" that would counteract the rate increase on MISO Zone 3A customers.

But FERC said in its order that "the benefits from integration of the transmission assets into MISO would occur irrespective of the proposed transaction," so they were not considered to be offsetting benefits of the deal.

The record showed that Vistra Energy Corp., which owns an 80% interest in EEI, was transitioning several units at the Joppa coal plant into MISO and would have to transfer control of those transmission lines to the grid operator if the transaction were not consummated, to allow for the flow of power between the Joppa plant and MISO. Kentucky Utilities, a PPL Corp. subsidiary, owns the remaining 20% of EEI.

"Applicants do not offer any ratepayer protections to mitigate the acknowledged rate increase associated with GridLiance Heartland's ownership of the transmission assets," FERC said in the order.

Lacking evidence

Further, "applicants do not provide any details regarding specific actions that GridLiance Heartland intends to take or, indeed, could take, once it acquires the transmission assets that would produce any unique benefits to MISO's customers," FERC said.

The order noted that affiliate transco GridLiance West, which received FERC's approval in 2017 to acquire a high-voltage transmission system in southwestern Nevada, "provided specific evidence of its intent to develop upgrades on facilities that it had not yet acquired."

While the commission has recognized inherent, non-quantifiable benefits of the transco business model, FERC said "it is not enough to simply refer to the transco business model without providing additional support to demonstrate the specific benefits that a particular transco can provide."

Jasmin Melvin is a reporter for S&P Global Platts. S&P Global Platts and S&P Global Market Intelligence are owned by S&P Global Inc.