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Exhibit 10(b)
1800 M Street, N.W. [MORGAN, LEWIS
Washington, D.C. 20036-5869 & BOCKIUS LLP LOGO]
202-467-7000 COUNSELORS AT LAW
Fax: 202-467-7176
April 21, 2000
Mr. David P. Boergers
Secretary
Federal Energy Regulatory Commission
888 First Street, N.E.
Washington, D.C. 20426
Re: Amended Filing in Docket No. ER00-1857-000
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Dear Mr. Boergers:
Enclosed for filing are six copies of the response of Split Rock Energy LLC
("Split Rock") and Minnesota Power, Inc. ("MP"), to the deficiency letter issued
on April 10, 2000, in regards to the above-referenced docket. Split Rock and MP
respectfully request that the Commission shorten the time for responding to this
filing, in an effort to permit Split Rock to become operational by May 1, 2000,
the beginning of the Mid-Continent Area Power Pool ("MAPP") summer season. There
have been no interventions to date in this proceeding.
I. BACKGROUND
On March 10, 2000, Split Rock submitted for filing an Application for
Market-Based Rate Authority ("Market Rate Application"), along with a
Market-Based Wholesale Power Sales Tariff ("Market Rate Tariff"). Split Rock is
a limited liability company formed pursuant to the laws of Minnesota by MP and
Great River Energy ("GRE"), a generation and transmission cooperative
(collectively Split Rock's "Members"). The Members formed Split Rock to schedule
and dispatch their combined generation resources to optimally meet their native
load needs and obligations under power sales contracts with third parties, and
to market their excess generation resources.
In its Market Rate Application, Split Rock requested authorization to engage in
wholesale bulk power sales at market-determined prices and to resell
transmission services. Split Rock indicated that it will sell power to its
Members and will buy the excess power of its Members
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for resale, at negotiated rates under the proposed Market Rate Tariff. Split
Rock will also purchase power from third parties as necessary to optimally serve
the Members' native load needs and obligations under power sales contracts.
Split Rock explained that it will function in much the same way as a
cooperative, in that it will not retain net revenues, but instead will
periodically disburse any profits to the Members. Split Rock's Market Rate
Application indicated that MP committed to treating revenues flowing through
Split Rock, the same as if the revenues were obtained directly by MP. In other
words, like a cooperative, Split Rock is owned by those who use its joint
dispatch and marketing services - MP and GRE - and any profits flow back to its
owners, MP and GRE. Again, MP has committed to treating revenues from Split Rock
as if they were earned within the utility. Due to the "cooperative-like"
structure of Split Rock vis-a-vis its Members, there is no need for Split Rock
to commit not to transact with its affiliates MP and GRE, nor is there a need
for a code of conduct to govern the interactions or relationships between Split
Rock and its Members.
On April 10, 2000, Mr. Michael C. McLaughlin, Director, Division of Corporate
Applications, issued a deficiency letter regarding Split Rock's Market Rate
Application. The letter requested that Split Rock provide additional information
about the affiliate relationships noted above. Specifically, the letter
requested that Split Rock explain why MP is a cooperative, and requested that
Split Rock respond to two scenarios specified in the letter.
II. SPLIT ROCK'S AMENDED FILING
Split Rock and its Members have spent considerable time and effort to ensure
that captive customers will not be adversely affected by affiliate transactions.
As explained in further detail below, Split Rock retains no profits at its
level, but rather regularly distributes any profits to its Members MP and GRE.
MP has expressly committed to treat revenues from Split Rock as if they were
earned within MP, and as such, there is no opportunity for such revenues to be
diverted to MP's shareholders. Ratepayers will benefit from the revenues in the
same manner as if such revenues were obtained directly by MP.
A. Transactions Between MP and Split Rock Will Not Adversely
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Affect MP's Ratepayers
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The deficiency letter first asks for a detailed explanation as to why MP is a
cooperative and how its customers are the cooperative's owners, and are not
captive ratepayers. MP is a traditional investor-owned utility, and neither
Split Rock nor MP contends that MP is a cooperative. Split Rock does contend
that Split Rock itself, although not a cooperative, is
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structured like a cooperative, and that this structure eliminates any concerns
about affiliate abuse.
In the traditional case where a power marketer is seeking to transact with its
affiliated public utility, the Commission is concerned that the power marketer
and the affiliated utility may transact in ways that result in a transfer of
benefits from the affiliated utility (and its ratepayers), to the affiliated
power marketer (and its shareholders). See, e.g., GS Electric Generating Corp.,
Inc., 81 FERC Paragraph 61,042 (1997). For example, the utility may purchase
power from its affiliated marketer at higher-than-market rates, or sell
power to its affiliated power marketer at lower-than-market rates - at the
expense of the utility's ratepayers - in exchange for other benefits which are
not passed on to the utility's ratepayers. See, e.g., Hinson Power Co., 72 FERC
Paragraph 61,190, at 61,911 (1995). In the case of cooperatives, however, this
concern is not present because the cooperative's owners are also its ratepayers;
thus, any profits or benefits inuring to the cooperative are passed through
automatically to the ratepayer/owners. See, e.g., Hinson, 72 FERC Paragraph
61,190, at 61,911.
Here, Split Rock is wholly-owned by its sole Members MP and GRE, who are also
the recipients of Split Rock's joint dispatch and power marketing services.
Split Rock is essentially a service entity for its Members. Split Rock does not
have any "shareholders" separate and apart from these Members.
Although Split Rock will sell power to its Members, all sales by Split Rock to a
Member will be priced based on Split Rock's cost, and Split Rock will not earn
any margins on power sales to Members. Because Split Rock will not earn any
margin on sales of power to MP, no revenues of MP will be diverted to Split
Rock. MP's ratepayers will thus be indifferent as to whether MP purchases power
from Split Rock, or directly from an unaffiliated third party.
Likewise, although Split Rock will also purchase power from its Members, all of
Split Rock's purchases from MP and GRE will be priced based on a transfer
pricing methodology agreed to and developed by the Members, which is intended to
track market prices. Split Rock may sell power purchased from MP or GRE, to
third parties at a price that differs slightly from the price paid by Split Rock
to MP or GRE. However, Split Rock will not retain any profits earned from such
transactions. Rather, all profits obtained by Split Rock will be regularly
distributed to its Members, MP and GRE.
Accordingly, Split Rock is structured like a cooperative, in that its
Member-owners are also its customers, and any profits earned by Split Rock will
be regularly disbursed to its Member-owners, MP and GRE. As noted, MP has
expressly committed to treat such revenues from Split Rock as if they were
revenues earned by MP. MP's ratepayers will not be adversely
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affected by Split Rock's involvement in transactions with its Members. Split
Rock is simply a joint dispatch and power marketing organization, created to
provide its Members with the economic benefits of jointly dispatching and
marketing their combined resources.
B. Examples of Transactions
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The letter also requests that Split Rock address two specific examples of
transactions and revenue flows. Split Rock will address each of these examples
in turn.
(1) Purchases by MP: "If MP purchases power at market-based rates from
Split Rock at a price that is above the prevailing market, explain why
this transaction will not adversely affect MP's captive ratepayers. In
your example, trace the stream of revenues from MP to Split Rock, back
to MP and its captive ratepayers."
The short answer is that MP's ratepayers and shareholders will be in precisely
the same position as if MP made the purchase from the market. Split Rock's
involvement in a purchase transaction for one of its Members is similar to that
of a broker. Split Rock purchases power and resells it to the Member at the same
price paid by Split Rock. There is no mark-up for such purchases, and Split
Rock's administrative and other non-power costs of the transaction are recovered
separately through its dispatch agreements with its Members. To the extent Split
Rock buys power at a price higher than a perceived market price, the result is
the same as if MP had made such a purchase itself. This should not occur,
however, as under the pricing methodology established by the Members, the
Members have the right to the lowest-cost energy purchased by Split Rock.
Accordingly, Split Rock will not earn any margins from sales to MP. The results
will be the same as if MP had entered into a transaction directly with a third
party, leaving MP's ratepayers indifferent as to whether MP purchases power from
Split Rock, or directly from unaffiliated third parties.
(2) Purchases by Split Rock: "If Split Rock purchases power at
market-based rates from MP at a price that is below the prevailing
market, explain why this transaction will not adversely affect MP's
captive ratepayers. In your example, trace the stream of revenues and
describe the impact this transaction will have on MP's captive
ratepayers."
The pricing methodology developed by the Members for purchases by Split Rock
from MP or GRE, combines a regional day-ahead market index with Split Rock's
actual market experience.
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Accordingly, the price paid by Split Rock to MP for power may differ from the
price obtained by Split Rock upon resale, because the market price will not
reflect the market index factor upon which the price paid by Split Rock to MP is
based.
In the event that the price paid by Split Rock to MP for power is below the
prevailing market price subsequently obtained by Split Rock, however, Split Rock
does not retain the difference. Rather, as discussed above in Section II.A, any
Split Rock profit will be disbursed to the Members, MP and GRE. Although a
portion of Split Rock profits from sales of power originally purchased from MP
may go to GRE, the sharing of profits will also work to MP's benefit: MP will
receive a similar share of any Split Rock profits obtained from sales of power
which Split Rock originally purchased from GRE. As noted, MP will treat such
disbursements from Split Rock as if they were obtained directly through MP as
utility revenues.
C. Overall Benefits of Split Rock
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Although the April 10, 2000 letter did not ask that MP or Split Rock describe
the anticipated benefits of Split Rock, Split Rock's activities are expected to
result in significant savings to MP's ratepayers. The economic dispatch of the
Members' combined generation resources will result in increased operational
efficiencies. Further, Split Rock will engage in marketing on behalf of its
Members, with the goal of optimizing the value of their resources. Split Rock
will also engage in power trading transactions with third parties, and MP will
receive its proportionate share of Split Rock's profits from its power trading
activities. As noted, MP has committed to treat all revenues obtained from Split
Rock as utility revenues. Overall, the Members anticipate that Split Rock's
economic dispatch, marketing, and power trading activities will result in
significant cost savings and economic benefits to MP, and to MP's ratepayers.
III. REQUEST FOR EXPEDITED NOTICE AND COMMENT PERIOD
As noted in the Market Rate Application, Split Rock and its Members desire Split
Rock to commence commercial operations on May 1, 2000, the beginning of the MAPP
summer season. Accordingly, Split Rock requested waiver of the standard 60-day
notice requirement to permit its Market Rate Tariff to become effective as a
rate schedule as of May 1, 2000. Such an effective date will allow Split Rock to
engage in transactions under the Market Rate Tariff as soon as it begins
operations, and to begin its joint dispatch and marketing functions on behalf of
the Members for the full upcoming MAPP summer season.
Split Rock respectfully requests that the Commission issue the attached notice
of amendment no later than April 24, 2000, and that the Commission provide that
comments must be received
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no later than April 28, 2000. This will allow the Commission to issue its order
as soon as possible.
A notice of filing of amendment suitable for publication in the Federal Register
and a copy of the notice on diskette are also included.
In the event additional information is needed, please contact either of the
undersigned.
Sincerely,
/s/ Kristina E. Beard
John D. McGrane
Kristina E. Beard
Attorneys for Minnesota Power, Inc., on behalf of Split Rock Energy LLC,
and Minnesota Power, Inc.
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UNITED STATES OF AMERICA
BEFORE THE
FEDERAL ENERGY REGULATORY COMMISSION
SPLIT ROCK ENERGY LLC ) DOCKET NO. ER00-1857-000
MINNESOTA POWER, INC. )
NOTICE OF FILING
(April , 2000)
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Take notice that on April 21, 2000, Split Rock Energy LLC, and Minnesota Power,
Inc., submitted an amendment to the Application of Split Rock Energy LLC, for
Market-Based Rate Authority, and Proposed Revisions to Minnesota Power, Inc.
Wholesale Coordination Service Tariff No. 2.
Any person desiring to be heard or to protest such filing should file a motion
to intervene or protest with the Federal Energy Regulatory Commission, 888 First
Street, N.E., Washington, D.C. 20426, in accordance with Rules 211 and 214 of
the Commission's regulations (18 C.F.R. Sections 385.211 and 385.214). All such
motions or protests should be filed on or before , 2000. Protests will
be considered by the Commission in determining the appropriate action to be
taken, but will not serve to make protestants parties to the proceeding. Any
person wishing to become a party must file a petition to intervene. Copies of
this filing are on file with the Commission and are available for public
inspection. This filing may also be viewed on the Internet at
http://www.ferc.fed.us/online/rims.htm (call 202-208-2222 for assistance).
David P. Boergers
Secretary
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CERTIFICATE OF SERVICE
I hereby certify that I have this day caused to be served the foregoing
document upon each person designated on the official service list compiled by
the Secretary in these proceedings.
Dated at Washington, D.C. this 21st day of April, 2000.
/s/ Kristina E. Beard
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Kristina E. Beard
Morgan, Lewis & Bockius LLP
1800 M Street, N.W.
Washington, D.C. 20036
