FERC Adopts New Rules for Utility Mergers, Acquisitions, and Asset Dispositions

On December 23, 2005, the Federal Energy Regulatory Commission (FERC or Commission) issued a final rule (Order No. 669) implementing its authority under § 203 of the Federal Power Act (FPA), as amended by § 1289 of the Energy Policy Act of 2005 (EPAct 2005), to review public utility mergers, acquisitions, and asset dispositions; and holding company mergers and acquisitions.

Despite a new threshold of $10 million for most transactions subject to FERC approval under § 203, the amendments — and FERC’s interpretation of them in its new rules — substantially expand FERC’s authority over acquisitions of utility securities and generation facilities, dispositions of assets, and mergers and consolidations by public utilities and utility holding companies. The expanded § 203 jurisdiction intersects with FERC’s administration of the Public Utility Holding Company Act of 2005 (PUHCA 2005), which also was enacted by EPAct 2005. “Holding company” is defined by FERC to include not only companies that own traditional utilities, but also those that own only Foreign Utility Companies (FUCOs), Exempt Wholesale Generators (EWGs), or Qualifying Facilities (QFs). The amendments also add a new factor – cross-subsidization – to § 203’s public interest equation. FERC’s new rules attempt to mitigate the extended reach of Commission review by granting blanket § 203 authorizations for certain types of transactions deemed to be consistent with the fundamental purposes of the FPA.

EPAct 2005’s Amendment of Section 203

Since 1935, § 203 of the FPA has required prior FERC authorization of a jurisdictional public utility’s sale, disposition, merger, or consolidation of facilities that are subject to FERC’s jurisdiction under § 201(b) of the FPA, and of the acquisition of securities of a public utility by another public utility. That jurisdiction was limited to facilities used for the wholesale sale of electricity or the transmission of electricity in interstate commerce, and did not include generation or local distribution facilities. As amended, § 203:

• Extends FERC’s § 203 jurisdiction to jurisdictional public utility acquisitions of existing generation facilities valued above $10 million that are used for wholesale sales subject to FERC’s ratemaking jurisdiction;
• Defines “holding company” to have the meaning given in PUHCA 2005: a company that directly or indirectly owns, controls or holds with the power to vote 10 percent or more of the voting securities of a “public utility company,” which PUHCA 2005 defines to include an “electric utility company.” PUHCA 2005 in turn defines “electric utility company” to include any company that owns or operates facilities used for the generation, transmission or distribution of electric energy for sale;
• Grants FERC express jurisdiction to authorize the acquisition by holding companies in a “holding company system that includes a transmitting utility or an electric utility,” of any security valued above $10 million of another such holding company, transmitting utility, or electric utility company. FERC authorization is also required before a holding company may “by any means whatsoever, directly or indirectly, merge or consolidate with” any such companies valued in excess of $10 million;
• Increases the monetary threshold for FERC jurisdiction over dispositions of a portion of a public utility’s jurisdictional facilities from $50,000 to $10 million;
• Adopts a new monetary threshold of $10 million for FERC jurisdiction over the acquisition of securities of a public utility by another public utility;
• Adds to FERC’s public interest determination a required finding that the transaction will not result in cross-subsidization or the pledge or encumbrance of utility assets for the benefit of an associate company, unless such cross-subsidization, pledge, or encumbrance is itself consistent with the public interest; and
• Requires that FERC grant or deny a completed application within 180 days of its submission, a period that FERC may extend for no more than an additional 180 days.

Holding Companies

FERC’s review under its new rules implementing § 203(a)(2) extends to mergers and acquisitions by all holding companies, including companies that are holding companies solely because of their ownership of FUCOs, EWGs, or QFs; or that are holding companies solely because of their ownership of an “electric utility company” that is not a public utility subject to FERC’s jurisdiction. PUHCA 2005 defines “electric utility company” to include any company that owns or operates facilities used for the generation, transmission, or distribution of electric energy for sale. Thus, FERC has concluded, even companies owning only utilities that sell or transmit electric energy exclusively in intrastate commerce or that engage solely in retail sales or distribution functions are holding companies for purposes of § 203(a)(2), notwithstanding § 201(b)’s limitations on FERC’s jurisdiction.

Blanket Authorizations for Certain Holding Company Acquisitions

Order No. 669 recognizes that certain holding company acquisitions, particularly those involving companies that are holding companies solely because of their ownership of non-jurisdictional utility assets, present few regulatory concerns under the FPA. Order No. 669 therefore grants a blanket § 203 authorization for holding company acquisitions of:

• Securities of a company that owns, operates, or controls only facilities used solely for transmission and/or sales of electricity in intrastate commerce;
• Securities of a company that owns, operates, or controls only facilities used solely for local distribution and/or sales of electric energy at retail regulated by a state commission;
• Securities in an internal corporate reorganization not involving a public utility with captive customers and presenting no cross-subsidization issues;
• Non-voting securities (e.g., debt, passive ownership interests);
• Voting securities, such that total holdings do not exceed 9.9 percent of the total outstanding voting securities, subject to furnishing FERC the same transaction information provided to the Securities and Exchange Commission (SEC);
• Securities of a subsidiary company within the holding company system (including cash management programs and intra-corporate financing arrangements); and
• FUCOs, but subject to special conditions if the holding company system has captive customers in the United States.

The new blanket authorizations apply only to holding company transactions subject to § 203(a)(2). Specific authorization under § 203(a)(1) must be obtained for a jurisdictional public utility’s sale or disposition of jurisdictional facilities, merger or consolidation of facilities with those of another person, acquisition of public utility securities, or acquisition of generation used for interstate sales.

Valuation for § 203 Thresholds

The new $10 million threshold applicable to various transactions requires a valuation methodology. For transactions between non-affiliates, Order No. 669 adopts a rebuttable presumption that market value determines the threshold. For sales of physical assets between affiliates, value will be determined by the original (undepreciated) cost of the facilities. A wholesale contract sold by one affiliate to another will be valued at the total expected nominal contract revenues over the remaining life of the contract. For sales of securities between affiliates, value will be market price or, if the securities are thinly traded, derived from the value of the company.

Generation Facilities

Amended § 203(a)(1)(D) requires FERC approval of acquisitions by a jurisdictional public utility of any “existing generation facility” used for interstate wholesale sales of electricity over which the Commission has rate jurisdiction. The new rules define such a facility to mean a generation facility that is operational – that is, capable of producing power – at the time the transaction closes and control of the facility changes hands. Order No. 669 also establishes a presumption that a generator is used for wholesale sales. Applicants may overcome this presumption with substantial evidence showing that a generator is used exclusively for retail sales.

Revised Merger Analysis

EPAct 2005 adds a new factor – prevention of subsidization of holding company transactions by utility customers – to FERC’s analysis of the public interest under § 203. Order No. 669 implements the new statutory factor by requiring that applications include a new Exhibit M explaining, with appropriate evidentiary support, why the proposed transaction will not result in inappropriate cross-subsidization by utility customers of non-utility associate companies or inappropriate pledges or encumbrances for the benefit of such companies. In lieu of such an explanation, FERC may accept, on a case-by-case basis, specific verifications in Exhibit M that the proposed merger does not result in cross-subsidization or pledges or encumbrances that would burden customers.

Prior to the amendments, FERC’s public interest analysis focused on three factors: (1) the effect on competition; (2) the effect on rates; and (3) the effect on state and federal regulation. In reviewing the effect on competition, FERC will continue to use its existing competitive screen (Appendix A analysis). In assessing effects on state regulation, FERC also will continue to defer to state approvals. FERC’s review of effects on federal regulation concerned shifts of jurisdiction from FERC to the SEC under the PUHCA of 1935. EPAct 2005’s repeal of that statute eliminates this concern. Order No. 669 therefore deletes the review of impact on federal regulation from the Commission’s § 203 rules.