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FERC signs off on private investor buyout of Calpine

A plan by a group of investors to buy Calpine Corp. for $5.6 billion in cash gained a key approval Feb. 21 when federal regulators signed off on the proposal. The Federal Energy Regulatory Commission determined that the proposed transaction met all of its merger approval requirements, including that the deal does not raise any significant market power concerns.

Less than a decade after emerging from bankruptcy, Calpine in August 2017 agreed to a buyout offer by a consortium of investors led by Energy Capital Partners, Access Industries and the Canada Pension Plan Investment Board. The deal would move the company's ownership of about 26,000 MW of mostly natural gas-fired capacity into private hands.

Energy Capital Partners, or ECP, has been among the power sector's more aggressive private equity funds in recent years. The fund also owns a 15% equity interest in Dynegy Inc. The acquisition of Calpine would give ECP control over a sizable wholesale power fleet across the Northeast, California and Texas as well as retail services offered by Calpine Energy Services and Champion Energy Services.

Nevertheless, FERC found that ECP's control of that fleet will not allow it to exercise market power in the regions in which it operates, including the ISO New England, PJM Interconnection, New York ISO, California ISO and Midcontinent ISO.

ECP, which is owned by six individuals, told the commission that it does not own or control any traditional franchised utilities with captive customers. ECP and its affiliates also do not own or control any substantial transmission facilities, and none of ECP's owners control 10% or more of the voting equity interest in any electric generation, transmission or distribution facilities, or any other input to power production in the United States, according to the filing.

The applicants told FERC that before the proposed transaction closes, ECP's wholly owned subsidiary, Terawatt Holdings, will reduce its number of shares of Dynegy common stock from 14.88% to less than 10% and one of ECP's owners will resign from the Dynegy board of directors.

While the applicants claimed that combining the generation that is controlled by ECP with the generation assets of Calpine does not raise any market power concerns, Public Citizen said they should have included Dynegy's generation assets in their competitive analysis. Even though ECP will have less than a 10% ownership interest in Dynegy post-transaction, the group argued that ECP still will have a significant material stake in Dynegy's operations.

FERC disagreed, citing its policy of presuming that a transfer of less than 10% of a utility's holdings does not transfer control of that utility if the acquirer will own less than 10% of that utility post-transaction and no other factors indicate the companies will be able to control the utility. Such is the case here, FERC determined.

The commission found that the proposed transaction meets its other merger approval standards as well, including not having the potential to adversely impact rates or regulation or result in cross-subsidization. (FERC docket EC17-182)