FERC Moves to Clarify Rules on Merger Reviews and Cross-Subsidy Restrictions

On July 20, the Federal Energy Regulatory Commission (FERC) issued three orders designed to provide additional clarity and guidance concerning FERC’s merger and corporate review policies, and to strengthen its protections against unauthorized cross-subsidization of affiliates by regulated utilities.  These orders build on rules issued in 2006 (see Van Ness Feldman Issue Alerts dated January 6, 2006 and April 27, 2006) to implement the expanded merger and corporate review authority granted by FERC under the Energy Policy Act of 2005.  The orders include:

•  a policy statement that provides guidance on FERC’s review of applications submitted under § 203 of the Federal Power Act (FPA);
• a notice of proposed rulemaking (NOPR) proposing to codify pricing restrictions for affiliate transactions; and
• a NOPR proposing to codify a limited blanket authorization under FPA § 203(a)(1) and requesting comments on whether certain other blanket authorizations should be granted under § 203(a)(1). 

Comments on the NOPRs will be due 30 days from publication in the Federal Register.

Supplemental Policy Statement  

FERC issued a policy statement that clarifies its earlier rules implementing changes to the  FPA § 203 made by the Energy Policy Act of 2005.   

Under FERC’s rules implementing the Energy Policy Act changes, an applicant under § 203 must submit an Exhibit M containing a detailed showing that the proposed transaction will not result in cross-subsidization of non-utility affiliates.  The policy statement establishes “safe harbors” with respect to Exhibit M for three classes of transactionsthat are unlikely to raise cross-subsidization issues:   (1) transactions where no franchised public utility with captive customers is involved; (2) transactions governed by specific state regulatory protections against inappropriate cross-subsidization (such as ring-fencing measures); and (3) transactions where a public utility transacts only with non-affiliated entities.  For other transactions, FERC explains that § 203 applicants may satisfy the cross-subsidy restrictions by proposing ring-fencing measures. 

The policy statement also provides guidance as to what constitutes a “disposition of control” when companies transfer holdings between affiliates, and affirms its longstanding position that disposition of control is a fact-specific analysis.  FERC states that its general policy will be to presume that a transfer of less than 10% of a public utility’s holdings will not be considered a transfer of control if:  (1) after the transfer the acquiring company and its affiliates, directly or indirectly and in aggregate, will own less than 10% of such public utility and (2) the facts and circumstances do not indicate that such companies will be able to exercise a controlling influence over the management or policies of the public utility.  FERC will apply this policy on a case-by-case basis.  The policy statement also clarifies how § 203 applies to purchases or sales of securities of a public utility in the secondary market.

NOPR on Cross-Subsidization

One of the NOPRs proposes to codify pricing restrictions on sales of power and non-power goods and services between franchised public utilities with captive customers and their non-franchised utility affiliates.  The proposed rule would require FERC approval of all power sales between a franchised utility with captive customers and a market-regulated power sales affiliate.  The proposed rule would also require such franchised utilities to provide non-power goods and services to affiliates at a price that is the higher of cost or market price.  Additionally, the proposal would prohibit franchised utilities with captive customers from purchasing non-power goods and services from a non-franchised utility affiliate at above the market price.  Lastly, FERC proposes to prohibit a franchised public utility with captive customers from receiving non-power goods and services from a centralized service company at a price above cost.  FERC notes the overlap between these proposed restrictions and restrictions already applied to sellers with market-based rates and restrictions imposed under FPA § 203, but concludes that the proposed rule is necessary to ensure that consistent requirements are applicable to all franchised public utilities. 

One of the NOPRs proposes to codify pricing restrictions on sales of power and non-power goods and services between franchised public utilities with captive customers and their non-franchised utility affiliates.The proposed rule would require FERC approval of all power sales between a franchised utility with captive customers and a market-regulated power sales affiliate.The proposed rule would also require such franchised utilities to provide non-power goods and services to affiliates at a price that is the higher of cost or market price.Additionally, the proposal would prohibit franchised utilities with captive customers from purchasing non-power goods and services from a non-franchised utility affiliate at above the market price.Lastly, FERC proposes to prohibit a franchised public utility with captive customers from receiving non-power goods and services from a centralized service company at a price above cost.FERC notes the overlap between these proposed restrictions and restrictions already applied to sellers with market-based rates and restrictions imposed under FPA § 203, but concludes that the proposed rule is necessary to ensure that consistent requirements are applicable to all franchised public utilities.

NOPR on Blanket Authorization

The second FERC NOPR proposes to provide an additional limited blanket authorization under FPA § 203(a)(1), allowing a public utility, without prior FERC authorization, to dispose of less than 10% of its voting securities to a public utility holding company if the transaction will result in the holding company and its affiliates owning in the aggregate less than 10% of the public utility.  The NOPR also requests comments on whether certain other blanket authorizations currently granted under § 203(a)(2) should be granted under § 203(a)(1).

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