FERC on July 5 approved LS Power’s purchase of an 810-MW natural gas plant in central Pennsylvania despite some qualms from PJM’s Independent Market Monitor (EC24-42). 

The deal has LS Power setting up an affiliate, Hunterstown Gen Holdings, to buy the plant, which was owned by Kestrel Acquisition, a subsidiary of the investment firm Platinum Equity Partners. 

LS Power already owns 6,865 MW of electric generating capacity, but the merger would raise the Herfindahl-Hirschman Index (HHI) of market concentration by only 12 points, which is not meaningful when a market qualifies as concentrated starting at 1,000 points on the index, Kestrel said in its application. Once the deal closes, LS Power will control 7.17% of installed capacity, its analysis showed. 

The Monitor argued FERC should take into account different local markets, which are changing frequently along with transmission congestion and more accurately reflect the operation of PJM’s wholesale power markets. 

The merger increases LS Power’s structural market power in the aggregate energy market and the capacity markets as well, the Monitor said. It argued for some restrictions on LS Power’s bidding to get around those issues, which would have dealt with market power concerns. 

LS Power and Platinum argued the Monitor failed to show the deal is inconsistent with FERC policy or precedent and that its claims are based on a nonpublic dataset that is not available for evaluation. 

FERC agreed the Monitor failed to offer enough evidence that it should use smaller geographic markets based on congestion. Some of the constraints are in place for just 100 hours a year, which FERC has said is too low to show the persistence the commission requires for a new submarket to be considered. 

Others are well above that threshold, but FERC said the Monitor failed to provide enough information for the potential boundaries of a new submarket around the Nottingham transmission constraint in its analysis. The Monitor also used the three-pivotal-supplier test, which is important for market power in PJM, but FERC said it never has used it in a merger case.

Increasing LS Power’s market share from 6.71% to 7.17%, while increasing the HHI by just 6 points, shows the deal will have a limited impact on the aggregate energy market, FERC said. 

“With respect to the PJM IMM’s request that the commission impose behavioral mitigation measures, we decline to require the requested mitigation measures or to otherwise address general issues concerning the PJM markets in this proceeding,” FERC said. 

Broad arguments about the inadequacies of FERC’s merger review process and PJM’s market power mitigation are the basis for the Monitor’s requested behavioral limits. But “as the commission has previously found, arguments based on general concerns about certain elements of PJM’s market design that are not specific to a proposed transaction under review are beyond the scope of the commission’s review of the proposed transaction,” FERC said. 

None of the parties raised issues with the deal’s impact on vertical market power, rates or regulation, and the deal did not raise issues around cross-subsidization, the commission found. 

Commissioner Mark Christie concurred with the order, agreeing the deal satisfies FERC’s merger review process while also saying the Monitor highlighted a real issue. 

“Taken together, the PJM IMM’s evaluation and conclusion signal that the commission’s policy and regulations implementing [Federal Power Act] Section 203 may miss the forest for the trees and fail to see the larger impacts that transactions may have on the health of RTO markets,” Christie said. 

Christie added that he would welcome a review of FERC’s policies that implement Section 203.