Michigan Cuts PPA Buyout Financing Request

Despite having previously announced that it might shut down its Palisades nuclear power plant in Michigan as soon as 2018, Entergy Nuclear Palisades, LLC issued a statement at the end of September saying that it had decided to continue to operate the facility through the spring of 2022, which date coincides with the terminus of an existing power purchase agreement (PPA) it has with Consumers Energy Company. 

Entergy's change of heart appeared to have been prompted by an order from the Michigan Public Service Commission the prior week that had denied a significant portion of a securitization plan proposed by Consumers Energy through which to finance its early withdrawal from the PPA. Both Entergy and Consumers Energy deemed the amount authorized by the commission for the buyout to be too low to be economic, such that both parties opted to postpone closure of the plant until the current PPA expires. 

The Palisades station was built by Consumers Energy and began service in 1973. In 2007, however, the utility sold the plant to Entergy and signed a longterm PPA to procure the output of the plant through 2022, which was the unit's originally projected year of retirement. Subsequently, though, Consumers Energy determined that the pricing terms of the PPA had become excessive and were well above prices available on the open market. As a result, it reached consensus with Entergy to retire the plant early, in 2018, with Consumers Energy making a one-time payment to buy out the remaining years of the now above-market PPA. 

According to Consumers Energy, the buyout obligation was set at the difference between the contract value of the remaining term of the PPA and a forecasted market value of replacement capacity and energy that the utility might be required to purchase under a variety of scenarios, which included the impact of the retirement of the Palisades facility. Consumers Energy and Entergy arrived at a figure of $344 million as an estimate of that differential and agreed to split the amount equally, resulting in a one-time payment by Consumers of $172 million. The utility thereupon sought commission approval of a $172 million securitization plan, plus a further $12.6 million in transaction costs. 

Although the utility claimed that the other $172 million would accrue to the benefit of ratepayers, the commission deemed the requested financing amount to be too high. It limited the utility's authority to issue its proposed securitization bonds to just $142,151,600, inclusive of roughly $5.5 million in transaction costs. That left the actual payment due Entergy under the commission's plan at only $136.65 million. 

In explaining its position, the commission said that in the course of reviewing the prudence of the proposed buyout terms, it had found that even if Consumers Energy no longer receives power from Palisades, recent forecasts indicated that the Midwest would continue to have adequate electricity supplies over the next five years. Such availability notwithstanding, however, the commission strongly emphasized the importance of Consumers Energy proceeding to expeditiously secure electric capacity sufficient to replace the 800 megawatts of power it presently gets through the Palisades contract. 

Responding to that point, Consumers Energy informed the commission that it had already explored various replacement options. As examples, it cited to enhanced demand response efforts within its commercial and industrial classes, accelerated expansion of its Cross Winds Energy Park, and institution of measures aimed at reducing energy waste. The utility also committed to continuing to operate its older generation plants to supply power during periods of high customer demand. In addition, the company said it would increase capacity at its coal- and industrial waste-fired Filer City plant and buy another existing natural gas plant, which currently is owned by an unregulated Consumers Energy affiliate. 

After scrutinizing the method used by the two companies in setting the buyout payment, the commission concluded that there was insufficient documentation to support the amount of savings that Consumers Energy had estimated would inure to ratepayers. The commission stated that such forecasts should include two primary options: (1) building or acquiring a generating asset, or (2) purchasing the electricity from the market. But, the commission said, the replacement power strategy proposed by Consumers Energy was too uncertain and limited in scope to assure that the buyout was the best course of action for customers. 

In addition to finding that the companies had overstated the value of the buyout to ratepayers, the commission also found that the utility's proposal would shift substantial new risk onto ratepayers. In support of that finding, it pointed to observations made by other parties that while Consumers Energy investors will see greater opportunities for earnings and Entergy will see a large cash payment, ratepayers will be facing proportionately more risk offloaded by the two companies. 

The commission likewise noted that Consumers Energy does not earn a return on the Palisades PPA, but if the company replaces the Palisades capacity with new utility-owned assets, such as a natural gas power plant, investors will earn regulated returns on that plant, as it will be recognized in rate base. The commission also expressed concern about the cost implications associated with Consumers Energy potentially having to acquire additional capacity to meet the needs of choice load returning to bundled service or obtaining capacity service under the state's new electric power reliability mechanism, which addresses the long-term adequacy of Michigan's electric resources. In that respect, the commission conceded that Consumers Energy appears to be on track to implement certain replacement options such as demand response, energy waste reduction, and wind farm projects. However, the commission said, many options for replacing the bulk of the Palisades capacity are still under consideration with no definitive program yet in place. 

The commission told the utility that if it elects to proceed with the planned PPA buyout, those customers who currently obtain their electric supply from a competitive provider will not be required to help fund the buyout. Re Consumers Energy Co., Case No. U-18250, Sept. 22, 2017 (Mich.P.S.C.).