Sale of OK power plant to MA-based Intergen raises questions at OK

Journal Record, The (Oklahoma City), Aug 3, 2005 by Janice Francis-Smith

A company that has been fighting for a larger role in Oklahoma's electricity market is changing ownership, raising questions about arguments the company has made at the Oklahoma Corporation Commission.

The Redbud power plant in Luther, Okla., will have a new parent company, pending approval of the sale by the Federal Energy Regulatory Commission.

The plant's parent company, Massachusetts-based Intergen, was owned as a joint venture of The Royal Dutch/Shell Group and Bechtel Group. Shell and Bechtel announced Thursday an agreement to sell Intergen's North American assets to Kelson Energy, a boutique holding company formed by officials from Orion Power, with the backing of New York investment management company Harbert Management.

Shell and Bechtel had announced in April the sale of Intergen's international assets to AIG Highstar Capital II LP and The Ontario Teachers' Pension Plan. Executives at Shell, which held the majority of ownership in InterGen, said the company sold Intergen as part of a plan to focus more on oil and gas exploration.

The sale takes place at a holding company level, from one company to another, and it will not change any of the contracts or relationships that each of the plants have at the local level, said Jeff Leichman, spokesman for the transaction. All of the staff and all the contracts that are in place and all of the activities that are going on will not change. Who the parent company is will change. Instead of the parent company being Intergen, which was jointly owned- the parent company will be Kelson Holdings, but there are no changes at the local level.

Intergen has been an active party at the Corporation Commission, intervening in several cases involving electricity utility Oklahoma Gas and Electric Co. Intergen said OG&E has resisted purchasing power from the independent power producer, even though the Redbud plant can produce electricity more efficiently than many of OG&E's older facilities.

That means ratepayers are not getting the best deal, said Orlando Martinez, director of origination and Chad Wagner, vice president of regular affairs for Intergen. Ratepayers bear 100 percent of the cost of fuel, and OG&E's older facilities use more fuel than the Redbud plant, said the Intergen executives.

Wagner said the utility has no regulatory incentive to get the best deal.

When OG&E buys power from us, they pass the cost of that power directly on to consumers - it's a pure pass-through, so ratepayers pay that and shareholders don't get any benefit, said Wagner. If OG&E runs their own plant or buys a plant like they did with McClain, they get to rate-base that cost. As a utility, OG&E is guaranteed a certain rate-of-return on their investments, and so assets the company uses for power generation are included in the formula used to determine the rates customers pay for electricity.

Brian Alford, spokesman for OG&E, said the sale of Intergen's assets casts a shadow of doubt over the company's proceedings at the Corporation Commission.

You have a company that is financially strapped, as indicated by this recent buyout, that is looking for a way to salvage its investment and its assets, said Alford. And they want to do it on the backs of OG&E's customers.

When Intergen began construction on the Redbud plant in 2001, it appeared that Oklahoma was going to join other states in deregulating its electricity market, which would have made it much easier for the plant to sell its power. But by the time the plant became operational in late 2003, it was clear that was no longer the case, and the Redbud plant, capable of generating 1,220-megawatts - or enough to provide power to 1 million households - needed to work with OG&E to get its power on the grid.

While OG&E does look to independent generation companies to purchase power during peak demand times, the utility has rejected some of Redbud's offers for various reasons, such as the length of the contracts being offered, said Alford.

However, as a member of a new regional transmission organization, OG&E will likely be purchasing more power from independent companies in the future, said Alford. In October, the Federal Energy Regulatory Commission recognized Southwest Power Pool as a regional transmission organization, with authority to determine how electricity is passed along the grid in all or parts of eight Southwestern states, including Oklahoma. Other such organizations have adopted as policy that member utilities purchase the least expensive power available at any given time.