Billions of dollars of merchant power debt tied to aging, largely coal-fired, power plants is subject to escalating financial stress and attracting increasing attention from hedge fund investors.  Recent public examples include Energy Future Holdings (TXU), EME Homer City and Astoria Generating.  To a large extent, current merchant power economics and future prospects are driven by overall power demand and natural gas prices insofar as natural gas plants currently have a price advantage in many competitive power pools they have not previously enjoyed.  Thus, investment decisions regarding debt related to coal-fired merchant plants will certainly be influenced by the investor’s view as to the persistence of low-cost natural gas as well as future demand recovery.  However, the value prospects for coal-fired and other legacy plants is also being significantly impacted by certain impending, highly contested and still spinning regulatory actions, and it is critical that hedge fund managers consider this regulatory roulette in their merchant power debt investment decisions.  In a guest article, Howard L. Siegel, a partner at Brown Rudnick LLP, where he is a member of the firm’s Bankruptcy and Corporate Restructuring Group and its Energy, Utilities and Environmental Practice Group, analyzes the key regulatory considerations impacting the outcomes of investments by hedge funds in the debt of merchant power projects.