Cross-Subsidization Restrictions on Affiliate Transactions, 41644-41649 [E7-14618]

Download as PDF 41644 Federal Register / Vol. 72, No. 146 / Tuesday, July 31, 2007 / Proposed Rules (c) * * * (12) A public utility is granted a blanket authorization under section 203(a)(1) of the Federal Power Act to transfer its outstanding voting securities to any holding company granted blanket authorizations in paragraph (c)(2)(ii) of this section if, after the transfer, the holding company and any of its associate or affiliate companies in aggregate will own less than 10 percent of the outstanding voting interests of such public utility. [FR Doc. E7–14619 Filed 7–30–07; 8:45 am] BILLING CODE 6717–01–P DEPARTMENT OF ENERGY Energy Regulatory Commission, 888 First Street, NE., Washington, DC 20426, (202) 502–8496. Roshini Thayaparan (Legal Information), Office of the General Counsel, Federal Energy Regulatory Commission, 888 First Street, NE., Washington, DC 20426, (202) 502–6857. David Hunger (Technical Information), Office of Energy Markets and Reliability, Federal Energy Regulatory Commission, 888 First Street, NE., Washington, DC 20426, (202) 502–8148. Stuart Fischer (Technical Information), Office of Enforcement, Federal Energy Regulatory Commission, 888 First Street, NE., Washington, DC 20426, (202) 502–8517. Federal Energy Regulatory Commission SUPPLEMENTARY INFORMATION: 18 CFR Part 35 I. Introduction [Docket No. RM07–15–000] 1. Pursuant to sections 205 and 206 of the Federal Power Act (FPA),1 the Commission is proposing to amend its regulations to revise Part 35 of Title 18 of the Code of Federal Regulations (CFR) to codify affiliate restrictions that would be applicable to all power and nonpower goods and services transactions between franchised public utilities with captive customers and their marketregulated power sales and non-utility affiliates.2 The Commission’s goal in proposing these prophylactic restrictions is to protect against inappropriate cross-subsidization of market-regulated and unregulated activities by the captive customers of public utilities. The proposed restrictions are based upon those already imposed by the Commission in Cross-Subsidization Restrictions on Affiliate Transactions July 20, 2007. Federal Energy Regulatory Commission, DOE. ACTION: Notice of proposed rulemaking. rmajette on PROD1PC64 with PROPOSALS AGENCY: SUMMARY: The Federal Energy Regulatory Commission (Commission) is proposing to amend its regulations pursuant to sections 205 and 206 of the Federal Power Act to codify restrictions on affiliate transactions between franchised public utilities with captive customers and their market-regulated power sales affiliates or non-utility affiliates. The Commission seeks public comment on the rules and amended regulations proposed herein. DATES: Comment Date: Comments are due August 30, 2007. ADDRESSES: You may submit comments identified in Docket No. RM07–15–000, by one of the following methods: Agency Web site: http://www.ferc.gov. Follow the instructions for submitting comments via the eFiling link found in the Comment Procedures section of the preamble. Mail: Commenters unable to file comments electronically must mail or hand deliver an original and 14 copies of their comments to the Federal Energy Regulatory Commission, Secretary of the Commission, 888 First Street, NE., Washington, DC 20426. Please refer to the Comment Procedures section of the preamble for additional information on how to file paper comments. FOR FURTHER INFORMATION CONTACT: Carla Urquhart (Legal Information), Office of the General Counsel, Federal VerDate Aug<31>2005 14:56 Jul 30, 2007 Jkt 211001 U.S.C. 824d, 824e. purposes of this Notice of Proposed Rulemaking, a ‘‘market-regulated’’ power sales affiliate means any power sales affiliate, other than a franchised public utility, whose power sales are regulated in whole or in part on a market basis. This would include, e.g., a power marketer, exempt wholesale generator, qualifying facility or other power seller affiliate permitted to make some or all of its power sales at market-based rates. A ‘‘nonutility’’ affiliate would include an affiliate that is not in the power sales or transmission business, e.g., a coal mining company, construction company, real estate company, energy-related technology company, communications systems company, among others. While the Commission, in previous documents, has referred to both categories of affiliates as ‘‘non-regulated,’’ consistent with the discussion on cross-subsidization issues in our recent Market-Based Rate Final Rule, we believe the term ‘‘market-regulated’’ more accurately describes power sellers with market-based rates since they remain subject to regulation. Market-Based Rates For Wholesale Sales Of Electric Energy, Capacity And Ancillary Services By Public Utilities, Order No. 697, 72 FR 39903 (July 20, 2007), FERC Stats. & Regs. ¶ 31,252, at P 490 (2007) (Market-Based Rate Final Rule). Accordingly, we have modified our terminology in this Notice of Proposed Rulemaking. PO 00000 1 16 2 For Frm 00005 Fmt 4702 Sfmt 4702 the context of certain FPA section 203 3 and 205 approvals, but expand the transactions and entities to which they apply.4 The Commission seeks public comment on the proposed rules. II. Background 2. The Commission requires public utilities to implement codes of conduct with regard to affiliate transactions where an entity seeks market-based rate authorization. The Commission also imposes codes of conduct on entities seeking merger authorization under section 203 of the FPA. The discussion below summarizes the Commission’s existing practices in these two areas. A. Affiliate Transactions in the Context of Market-Based Rate Authorizations 1. Historical Approach 3. The Commission began considering proposals for market-based pricing of wholesale power sales and attendant cross-subsidy issues in 1988. At that time, the Commission acted on marketbased rate proposals filed by various wholesale suppliers on a case-by-case basis. In doing so, the Commission considered whether there was evidence of affiliate abuse or reciprocal dealing involving the seller or its affiliates.5 As the Commission explained, ‘‘[t]he 3 16 U.S.C. 824b, amended by Energy Policy Act of 2005, Pub. L. 109–58, 1289, 119 Stat. 594, 982– 83 (2005) (EPAct 2005). 4 This Notice of Proposed Rulemaking is one of three actions being taken based on the Commission’s experience implementing amended FPA section 203 and the Public Utility Holding Company Act of 2005, EPAct 2005, Pub. L. No. 109– 58, 1261, et seq., 119 Stat. 594, 972–78 (2005) (PUHCA 2005), as well as the record from the Commission’s December 7, 2006 and March 8, 2007 technical conferences regarding Section 203 and PUHCA 2005. In addition, in separate orders, the Commission is concurrently issuing a section 203 Supplemental Policy Statement, FPA Section 203 Supplemental Policy Statement, 120 FERC ¶ 61,060 (2007) (issued in Docket No. PL07–1–000), and a Notice of Proposed Rulemaking proposing to grant a limited blanket authorization for certain dispositions of jurisdictional facilities under FPA section 203(a)(1), Blanket Authorization Under FPA Section 203, 120 FERC ¶ 61,062 (2007) (issued in Docket No. RM07–21–000). 5 See Heartland Energy Services Inc., 68 FERC ¶ 61,223, at 62,062 (1994) (Heartland) (discussing the potential for abuse in the case of affiliated power marketers); Commonwealth Atlantic Limited Partnership, 51 FERC ¶ 61,368, at 62,245 (1990) (discussing potential for reciprocal dealing if a buyer agrees to pay more for power from a seller in return for that seller (or its affiliates) paying more for power from that buyer (or its affiliates)). The other three ‘‘prongs’’ of the Commission’s ‘‘four-prong’’ analysis include: (1) Whether the seller and its affiliates lack, or have adequately mitigated, market power in generation; (2) whether the seller and its affiliates lack, or have adequately mitigated, market power in transmission; and (3) whether the seller or its affiliates can erect other barriers to entry. See Market-Based Rate Final Rule, FERC Stats. & Regs. ¶ 31,252 at P 7. These additional ‘‘prongs’’ are not directly at issue in this proceeding. E:\FR\FM\31JYP1.SGM 31JYP1 Federal Register / Vol. 72, No. 146 / Tuesday, July 31, 2007 / Proposed Rules rmajette on PROD1PC64 with PROPOSALS Commission’s concern with the potential for affiliate abuse is that a utility with a monopoly franchise may have an economic incentive to exercise market power through its affiliate dealings.’’ 6 The Commission also stated its concern that a franchised public utility and an affiliate may be able to transact in ways that transfer benefits from the captive customers of the franchised public utility to the affiliate and its shareholders.7 Where a franchised public utility makes a power sale to an affiliate, the Commission is concerned that such a sale could be made at a rate that is too low, in effect, transferring the difference between the market price and the lower rate from captive customers to the marketregulated affiliated entity. Where a power seller with market-based rates makes power sales to an affiliated franchised public utility, the concern is that such sales could be made at a rate that is too high, which would give an undue profit to the affiliated entity at the expense of the franchised public utility’s captive customers.8 In determining whether to allow power sales affiliate transactions, the Commission, over time, has adopted several methods, all of which have focused on ensuring that captive customers are adequately protected against affiliate abuse. 4. Just as the Commission has expressed concern about the potential for affiliate abuse in connection with power sales between affiliates, it also has recognized that there may be a potential for affiliate abuse through other means, such as the pricing of non6 Boston Edison Company Re: Edgar Electric Energy Co., 55 FERC ¶ 61,382, at 62,137 n.56 (1991) (Edgar). See also TECO Power Services Corp., 52 FERC ¶ 61,191, at 61,697 n.41, order on reh’g, 53 FERC ¶ 61,202 (1990) (‘‘The Commission has determined that self dealing may arise in transactions between affiliates because affiliates have incentives to offer terms to one another which are more favorable than those available to other market participants.’’). 7 See, e.g., Heartland, 68 FERC at 62,062. 8 The Commission has found that a transaction between two non-traditional utility affiliates (such as power marketers, exempt wholesale generators, or qualifying facilities) does not raise the same concern about cross-subsidization because neither has a franchised service territory and therefore has no captive customers. As the Commission has explained, no matter how sales are conducted between non-traditional affiliates, profits or losses ultimately affect only the shareholders. FirstEnergy Generation Corporation, 94 FERC ¶ 61,177, at 61,613 (2001); USGen Power Services, L.P., 73 FERC ¶ 61,302, at 61,846 (1995). With respect to affiliate power sales, the Commission has also developed guidelines on how to determine whether a transaction is above suspicion and captive customers are protected, as well as guidelines for competitive solicitation processes. See Edgar, 55 FERC at 62,167–69; Allegheny Energy Supply Company, LLC, 108 FERC ¶ 61,082, at 61,417 (2004). VerDate Aug<31>2005 14:56 Jul 30, 2007 Jkt 211001 power goods and services or the sharing of market information between affiliates.9 The same concerns about giving undue profits to affiliated ‘‘unregulated’’ entities and shareholders, discussed above with respect to power sales, also apply with respect to non-power goods and services transactions. 5. Accordingly, the Commission’s policy for many years has been to require that, as a condition of marketbased rate authorization, applicants adopt a code of conduct applicable to non-power goods and services transactions between regulated and nonregulated affiliated power sellers. The Commission has also required that applicants include a provision in their market-based rate tariffs prohibiting power sales between regulated and nonregulated affiliated power sellers without first receiving authorization of the transaction under section 205 of the FPA.10 6. The purpose of the market-based rate code of conduct is to safeguard against affiliate abuse by protecting against the possible diversion of benefits or profits from franchised public utilities (i.e., traditional public utilities with captive ratepayers) to an affiliated entity for the benefit of shareholders. The Commission has waived the market-based rate code of conduct requirement in cases where there are no captive customers, and thus no potential for affiliate abuse, or where the Commission finds that such customers are adequately protected against affiliate abuse.11 In such cases, however, the Commission directed the utilities to notify the Commission should they acquire captive customers in the future and expressly reserved the right to reimpose the market-based rate code of conduct requirement. 2. The Market-Based Rate Final Rule 7. In the Commission’s recent MarketBased Rate Final Rule, among other things, the Commission codified in the regulations at 18 CFR part 35, subpart H, 9 See, e.g., Potomac Electric Power Company, 93 FERC ¶ 61,240, at 61,782 (2000); Heartland, 68 FERC at 62,062–63. 10 Aquila, Inc., 101 FERC ¶ 61,331, at P 12 (2002). 11 See, e.g., CMS Marketing, Services and Trading Co., 95 FERC ¶ 61,308, at 62,051 (2001) (granting request for cancellation of code of conduct where wholesale contracts, as amended, ‘‘cannot be used as a vehicle for cross-subsidization of affiliate power sales or sales of non-power goods and services’’); Alcoa Inc., 88 FERC ¶ 61,045, at 61,119 (1999) (waiving code of conduct requirement where there were no captive customers); Green Power Partners I LLC, 88 FERC ¶ 61,005, at 61,010–11 (1999) (waiving code of conduct requirement where there are no captive wholesale customers and retail customers may choose alternative power suppliers under retail access program). PO 00000 Frm 00006 Fmt 4702 Sfmt 4702 41645 an explicit requirement that any seller with market-based rate authority must comply with the affiliate power sales restrictions and other affiliate restrictions. Compliance on an ongoing basis is a condition of retaining marketbased rate authority. The Market-Based Rate Final Rule retains the policy that wholesale sales of power between a franchised public utility and any of its market-regulated power sales affiliates must be pre-approved by the Commission. It also adopts uniform affiliate restrictions governing power sales, sales of non-power goods and services, separation of functions, and information sharing between franchised public utilities with captive customers and their market-regulated power sales affiliates.12 The power and non-power goods and services restrictions, however, apply only to transactions involving two power sellers. They do not apply to transactions between a franchised public utility and a nonutility affiliate. B. Affiliate Transactions Under Section 203 1. Before EPAct 2005 8. The Commission has also addressed cross-subsidization issues in the context of section 203 merger applications. Prior to EPAct 2005, the Commission’s policy was to condition its approval of certain section 203 mergers on the applicants’ agreement to abide by certain restrictions on nonpower goods and services transactions between a merged company’s utility and non-utility or market-regulated subsidiaries. The condition was imposed on those mergers involving registered holding companies under the Public Utility Holding Company Act of 1935 13 in order to find that the merger would not adversely affect federal regulation.14 That requirement grew out of judicial determinations that, when a merger would create or involve a registered holding company, the actions of the Securities and Exchange Commission (SEC) may preclude the Commission from asserting jurisdiction over the non-power transactions between subsidiaries of that holding company.15 Under Ohio Power, if the 12 Market-Based Rate Final Rule, FERC Stats. & Regs. ¶ 31,252 at P 23. 13 16 U.S.C. 79a et seq. (PUHCA 1935). EPAct 2005 repealed PUHCA 1935. EPAct 2005, Pub. L. No. 109–58, 1263. 14 See, e.g., Niagara Mohawk Holdings, Inc., 95 FERC ¶ 61,381, at 62,414, order on reh’g, 96 FERC ¶ 61,144 (2001). 15 See Ohio Power Co. v. FERC, 954 F.2d 779, 782–86 (D.C. Cir.), cert. denied sub nom., Arcadia E:\FR\FM\31JYP1.SGM Continued 31JYP1 41646 Federal Register / Vol. 72, No. 146 / Tuesday, July 31, 2007 / Proposed Rules SEC approved an affiliate contract involving special purpose subsidiary goods or services at cost, the Commission had to allow pass-through of the costs in jurisdictional rates even if the public utility purchasing the goods or services could have obtained them at a lower market price from a non-affiliate.16 For over a decade following the Ohio Power decision, the Commission required that, to gain section 203 approval of a proposed merger without a hearing, if the transaction would create a registered holding company under the PUHCA 1935, applicants must agree to waive the Ohio Power immunity and abide by the Commission’s policy on intra-system transactions for non-power goods and services.17 rmajette on PROD1PC64 with PROPOSALS 2. After EPAct 2005 9. Because EPAct 2005 repealed PUHCA 1935, certain activities of previously-registered holding companies that were previously subject to SEC regulation, including intrasystem affiliate transactions, are no longer exempt from this Commission’s full regulatory review. In particular, the Commission’s conditions and policies under FPA sections 205 and 206 with respect to non-power goods and services transactions between holding company affiliates may now be applied to all public utilities that are members of holding companies, whether in the context of a section 203 merger proceeding or the context of a section 205–206 rate proceeding.18 In addition, the Commission has authority to review allocation of service company costs among members of holding companies v. Ohio Power Co., 506 U.S. 981 (1992) (Ohio Power). 16 The Commission’s policy since the mid-1990s has been that where the regulated public utility has provided non-power goods or services to the nonregulated affiliate, the public utility provides the goods or services at the higher of cost or market. A non-regulated affiliate that sells non-power goods or services to an affiliate with captive customers may not sell at higher than market price. This is often referred to as the ‘‘market’’ standard. These standards were articulated in the Commission’s 1996 Merger Policy Statement. Inquiry Concerning the Commission’s Merger Policy Under the Federal Power Act: Policy Statement, Order No. 592, 61 FR 68595 (Dec. 30, 1996), FERC Stats. & Regs. ¶ 31,044, at 30,124–25 (1996) (1996 Merger Policy Statement), reconsideration denied, Order No. 592–A, 62 FR 33341 (June 19, 1997), 79 FERC ¶ 61,321 (1997). 17 Public Service Company of Colorado, 75 FERC ¶ 61,325, at 62,046 (1996); 1996 Merger Policy Statement, FERC Stats. & Regs. ¶ 31,044 at 30,124– 25. 18 The provisions of PUHCA 1935 that formed the basis for Ohio Power are no longer in effect, thus removing the Ohio Power limitation on our oversight of non-power transactions. Further, FPA section 318, which provided for SEC preemption in certain circumstances where there was a conflict between SEC PUHCA 1935 regulation and Commission regulation, was repealed. VerDate Aug<31>2005 14:56 Jul 30, 2007 Jkt 211001 that have public utilities with captive customers. 10. In the Order No. 669 rulemaking proceedings,19 which revised the Commission’s regulations pursuant to amended section 203, the Commission continued its past approach with respect to affiliate abuse restrictions involving power and non-power goods and services transactions, in the context of section 203 applications.20 However, the Commission made two additional clarifications. 11. First, in its implementation of regulations pursuant to PUHCA 2005,21 the Commission discussed one exception to the traditional standards articulated in the 1996 Merger Policy Statement. In the Order No. 667 rulemaking proceeding,22 the Commission explained that there are two circumstances in which the at-cost or market standards may arise in the context of the Commission’s jurisdictional responsibilities: (1) The Commission’s review of the costs of non-power goods and services provided by a traditional, centralized service company to public utilities within the holding company system; and (2) when a service company that is a specialpurpose company within a holding company provides non-power goods or services to one or more public utilities in the same holding company system. Under both scenarios, the similar concerns regarding affiliate abuse arise: ‘‘[w]hether the public utility’s costs incurred in purchasing from the affiliate are prudently incurred and just and 19 Transactions Subject to FPA Section 203, Order No. 669, 71 FR 1348 (Jan. 6, 2006), FERC Stats. & Regs. ¶ 31,200 (2005), order on reh’g, Order No. 669–A, 71 FR 28422 (May 16, 2006), FERC Stats. & Regs. ¶ 31,214, order on reh’g, Order No. 669–B, 71 FR 42579 (July 27, 2006), FERC Stats. & Regs. ¶ 31,225 (2006). 20 Amended section 203(a)(4) does add to the Commission’s merger analysis the explicit requirement that the Commission find that any proposed transaction will not result in crosssubsidization of a non-utility associate company or the pledge or encumbrance of utility assets for the benefit of an associate company, unless that crosssubsidization, pledge, or encumbrance will be consistent with the public interest. 21 PUHCA 2005 is primarily a books and records access statute and does not give the Commission any new substantive authorities, other than the requirement that the Commission review and authorize certain non-power goods and services cost allocations among holding company members upon request. EPAct 2005, Pub. L. No. 109–58, 1275. 22 Repeal of the Public Utility Holding Company Act of 1935 and Enactment of the Public Utility Holding Company Act of 2005, Order No. 667, 70 FR 75592 (Dec. 20, 2005), FERC Stats. & Regs. ¶ 31,197 (2005), order on reh’g, Order No. 667–A, 71 FR 28446 (May 16, 2006), FERC Stats. & Regs. ¶ 31,213, order on reh’g, Order No. 667–B, 71 FR 42750 (July 28, 2006), FERC Stats. & Regs. ¶ 31,224 (2006), order on reh’g, 72 FR 8277 (Feb. 26, 2007), 118 FERC ¶ 61,133 (2007). PO 00000 Frm 00007 Fmt 4702 Sfmt 4702 reasonable, and whether non-regulated affiliates purchasing non-power goods and services from the same specialpurpose company are receiving ` preferential treatment vis-a-vis the public utility.’’ 23 In Order No. 667, the Commission exempted traditional, centralized service companies, which at that time were using the SEC’s ‘‘at-cost’’ standard, from complying with the Commission’s market standard for their sales of non-power goods and services to regulated affiliates and created a rebuttable presumption that costs incurred under at-cost pricing for such services are reasonable.24 However, with respect to non-power goods and services transactions between holding company affiliates other than traditional, centralized service companies, i.e., service companies that are non-regulated, special-purpose affiliates, such as a fuel supply company or a construction company, the Commission continued with its prior practice.25 12. Second, in recent section 203 merger proceedings, the Commission has extended the applicability of the code of conduct restrictions previously applied only to registered holding companies. In National Grid plc,26 the Commission announced that it would require all merging parties to abide by a code of conduct containing specific provisions regarding power and nonpower goods and services transactions between the utility subsidiaries and their affiliates: Implementation of the Code of Conduct for all utility subsidiaries of the merged company, as required by our decision here, will address both power and non-power goods and services transactions between the utility subsidiaries and their affiliates. The Code of Conduct to be implemented by the 23 Order No. 667, FERC Stats. & Regs. ¶ 31,197 at P 168. 24 Id. P 169. 25 Order No. 667 states, in relevant part: First, with respect to sales from a public utility to a non-regulated, affiliated special-purpose company, we agree * * * that the price should be no less than cost, i.e., the higher of cost or market; otherwise, a public utility could attempt to game the system and forego profits it could otherwise obtain by selling to a non-affiliate, to the benefit of its non-regulated affiliate who receives a good or service at a below-market price. When the situation is reversed, i.e., the non-regulated, affiliated specialpurpose company is providing non-power goods and services to the public utility affiliate, the Commission will continue to apply its market standard. The non-regulated, affiliated specialpurpose company may not sell to its public utility affiliate at a price above the market price. We believe that such transactions involving such nonregulated, affiliated special-purpose companies pose a greater risk of inappropriate crosssubsidization and adverse effects on jurisdictional rates. Id. P 171. 26 117 FERC ¶ 61,080 (2006) (National Grid). E:\FR\FM\31JYP1.SGM 31JYP1 Federal Register / Vol. 72, No. 146 / Tuesday, July 31, 2007 / Proposed Rules merged company shall (1) require our approval of all power sales by a utility to an affiliate, (2) require a utility with captive customers to provide non-power goods or services to a non-utility or ‘‘non-regulated utility’’ affiliate at a price that is the higher of cost or market price, (3) prohibit a nonutility or non-regulated utility affiliate from providing non-power goods or services to a utility affiliate with captive customers at a price above market price, and (4) prohibit a centralized service company from providing non-power services to a utility affiliate with captive customers at a price above cost. These requirements protect a utility’s captive customers against inappropriate crosssubsidization of non-utility or non-regulated utility affiliates by ensuring that the utility with captive customers neither recovers too little for goods and services that the utility provides to an affiliate nor pays too much for goods and services that the utility receives from an affiliate. Implementation of these requirements provides a prophylactic mechanism to ensure that the merger will not result in cross-subsidization of non-utility or non-regulated utility companies in the same holding company system and therefore meets the requirement of section 203(a)(4) that a merger not result in inappropriate crosssubsidization of a non-utility associate company.27 rmajette on PROD1PC64 with PROPOSALS 13. While these affiliate restrictions are broad in terms of transactions covered (covering transactions between power sales affiliates as well as transactions between power sales affiliates and non-utility affiliates) and have been extended within the context of section 203 approvals, they do not apply to public utilities that do not need to seek section 203 merger approval. III. Discussion 14. Historically, section 205 rate review has been the primary mechanism by which the Commission disallowed as imprudent or unjust and unreasonable the costs incurred by a franchised public utility in purchasing power or non-power goods and services from a non-utility or power sales affiliate when the utility could have purchased such power or non-power goods and services from a non-affiliated entity. However, as discussed above, the Commission’s policy over the years has been to develop prophylactic affiliate crosssubsidy restrictions in the context of blanket market-based rate authorizations under FPA section 205 and merger proceedings under section 203. We believe prophylactic restrictions setting forth the standards under which affiliates may transact are superior to relying exclusively on after-the-fact rate reviews of costs already incurred. Further, it would be virtually impossible for the Commission to individually pre-approve every power 27 Id. and non-power goods and services transaction given the volume of transactions that occur on a daily basis. The affiliate restrictions the Commission has previously imposed in individual cases involving market-based rate applicants and merger applicants allow public utilities to know up-front the standards under which they may transact with affiliates; and, if they do not follow those standards, they are at risk for full refunds plus interest, or other remedial action. 15. Accordingly, to provide better assurance against inappropriate crosssubsidization, we believe it is appropriate to continue imposing affiliate restrictions, to expand the coverage of those restrictions, and to codify them in our regulations. As noted above, there is a gap in coverage of the restrictions as they are currently imposed. Specifically, the restrictions imposed on section 205 market-based rate applicants do not cover non-power goods and services transactions between a franchised public utility and nonutilities; they cover only transactions between power sales affiliates and are imposed only on the market-based rate applicants. Additionally, while the restrictions imposed on section 203 applicants cover transactions between a franchised public utility and marketregulated power sales affiliates as well as non-utility affiliates, they apply only to merger applicants; they do not apply to other section 203 applicants and do not apply to public utilities that do not require any section 203 authorization.28 Finally, while the preamble to Order No. 667 discussed the Commission’s pricing policy on affiliate non-power goods and services transactions, including pricing of non-power goods and services provided by centralized service companies, the pricing policy (which technically is a ratemaking policy rather than a PUHCA 2005 issue) was not codified in the regulations. 16. To address this gap in coverage, the uniform affiliate restrictions that the Commission proposes to implement would be applicable to all franchised public utilities with captive customers and their market-regulated and nonutility affiliates and would address both power and non-power goods and services transactions between the utility and its affiliates. Specifically, they would: (1) Require the Commission’s approval of all power sales by a franchised utility with captive customers to a market-regulated power sales affiliate; (2) require a franchised public utility with captive customers to provide non-power goods and services P 66 (internal citations removed). VerDate Aug<31>2005 14:56 Jul 30, 2007 Jkt 211001 28 See PO 00000 supra P 12. Frm 00008 Fmt 4702 Sfmt 4702 41647 to a market-regulated power sales affiliate or a non-utility affiliate at a price that is the higher of cost or market price; (3) prohibit a franchised public utility with captive customers from purchasing non-power goods or services from a market-regulated power sales affiliate or a non-utility affiliate at a price above market price (with the exception of (4)); and (4) prohibit a franchised public utility with captive customers from receiving non-power services from a centralized service company at a price above cost. These restrictions will help the Commission meet the requirement of amended section 203(a)(4) that a transaction not result in the inappropriate crosssubsidization of a non-utility associate company and, moreover, help us assure just and reasonable rates and the protection of captive customers for all public utilities pursuant to sections 205 and 206 of the FPA, irrespective of whether they need approval of a section 203 transactions. 17. We note that there is overlap in the affiliate restrictions proposed herein and those that were recently adopted in the Market-Based Rate Final Rule. However, as discussed above, those restrictions apply only to market-based rate applicants and only to transactions between power sales affiliates. The restrictions herein are consistent with, and in some instances mirror, those imposed in the Market-Based Rate Final Rule. We believe any overlap is appropriate and necessary to ensure that all franchised public utilities with captive customers have the same restrictions imposed on them. We also note that we are proposing one additional restriction that is not covered in the Market-Based Rate Final Rule, but which has been imposed on section 203 merger applicants. That restriction would prohibit a centralized service company from providing non-power goods and services to a franchised public utility with captive customers at a price above cost. This implements the findings made in Order No. 667 and, by codifying it in the regulations along with the other affiliate restrictions, will eliminate any gaps in coverage and ensure uniformity in the restrictions being applied. 18. The Commission seeks comments on these proposed affiliate cross-subsidy restrictions. We also seek comment on whether the Commission should impose any after-the-fact reporting requirements on transactions covered by the restrictions and, if so, what they should be. In this regard, we note that the Commission already receives reporting of public utility affiliate power sales transactions through Electric Quarterly E:\FR\FM\31JYP1.SGM 31JYP1 41648 Federal Register / Vol. 72, No. 146 / Tuesday, July 31, 2007 / Proposed Rules Reports and we see no need to duplicate existing power sales reporting. However, we are particularly interested in: Whether any reporting requirements regarding affiliate non-power goods and services transactions should be imposed; whether such reporting, if it were to be required, should be on a yearly basis or within some other time frame, and what specific information should be reported; whether states already require such reporting; and the burdens that any reporting requirements would impose. Although the Commission has authority to review such transactions through auditing and in individual section 205 rate proceedings, we seek comment on the general usefulness of additional reporting requirements. IV. Information Collection Statement 19. The Office of Management and Budget’s (OMB) regulations require that OMB approve information collection requirements imposed by agency rules.29 The Commission is proposing amendments to the Commission’s regulations to codify restrictions on affiliate transactions between franchised public utilities with captive customers and their market-regulated power sales affiliates or non-utility affiliates. The Commission is not imposing an information collection requirement upon the public. However, the Commission will submit for informational purposes only a copy of this rulemaking to OMB. V. Environmental Analysis rmajette on PROD1PC64 with PROPOSALS 20. The Commission is required to prepare an Environmental Assessment or an Environmental Impact Statement for any action that may have a significant adverse effect on the human environment.30 The Commission has categorically excluded certain actions from this requirement as not having a significant effect on the human environment.31 The proposed regulations are categorically excluded as they address rate filings submitted under sections 205 and 206 of the FPA.32 Accordingly, no environmental assessment is necessary and none has been prepared in this NOPR. 29 5 CFR 1320. 30 Regulations Implementing the National Environmental Policy Act, Order No. 486, 52 FR 47897 (Dec. 17, 1987), FERC Stats. & Regs., Regulations Preambles, 1986–1990, ¶ 30,783 (1987). 31 18 CFR 380.4. 32 See 18 CFR 380.4(a)(15). VerDate Aug<31>2005 14:56 Jul 30, 2007 Jkt 211001 VI. Regulatory Flexibility Act Certification 21. The Regulatory Flexibility Act of 1980 (RFA) 33 requires agencies to prepare certain statements, descriptions, and analyses of proposed rules that will have significant economic impact on a substantial number of small entities.34 Agencies are not required to make such an analysis if a rule would not have such an effect. 22. The proposed rule will be applicable to franchised public utilities with captive customers. Most such companies regulated by the Commission do not fall within the RFA’s definition of small entity.35 Therefore, the Commission certifies the proposed rule will not have a significant economic impact on a substantial number of small entities. As a result, no regulatory flexibility analysis is required. VII. Comment Procedures 23. The Commission invites interested persons to submit comments on the matters and issues proposed in this notice, including any related matters or alternative proposals that commenters may wish to discuss. Comments are due August 30, 2007. Comments must refer to Docket No. RM07–15–000, and must include the commenter’s name, the organization they represent, if applicable, and their address in their comments. Comments may be filed either in electronic or paper format. 24. Comments may be filed electronically via the eFiling link on the Commission’s Web site at http:// www.ferc.gov. The Commission accepts most standard word processing formats, but requests commenters to submit comments in a text-searchable format rather than a scanned image format. Commenters filing electronically do not need to make a paper filing. Commenters that are not able to file comments electronically must send an original and 14 copies of their comments to: Federal Energy Regulatory U.S.C. 601–12. RFA definition of ‘‘small entity’’ refers to the definition provided in the Small Business Act, which defines a ‘‘small business concern’’ as a business that is independently owned and operated and that is not dominant in its field of operation. 15 U.S.C. 632. The Small Business Size Standards component of the North American Industry Classification System defines a small electric utility as one that, including its affiliates, is primarily engaged in the generation, transmission, and/or distribution of electric energy for sale and whose total electric output for the preceding fiscal year did not exceed 4 million MWh. 13 CFR 121.201. 35 5 U.S.C. 601(3), citing to section 3 of the Small Business Act, 15 U.S.C. 632. Section 3 of the Small Business Act defines a ‘‘small-business concern’’ as a business which is independently owned and operated and which is not dominant in its field of operation. PO 00000 33 5 34 The Frm 00009 Fmt 4702 Sfmt 4702 Commission, Secretary of the Commission, 888 First Street, NE., Washington, DC 20426. 25. All comments will be placed in the Commission’s public files and may be viewed, printed, or downloaded remotely as described in the Document Availability section below. Commenters on this proposal are not required to serve copies of their comments on other commenters. VIII. Document Availability 26. In addition to publishing the full text of this document in the Federal Register, the Commission provides all interested persons an opportunity to view and/or print the contents of this document via the Internet through the Commission’s Home Page (http:// www.ferc.gov) and in the Commission’s Public Reference Room during normal business hours (8:30 a.m. to 5 p.m. Eastern time) at 888 First Street, NE., Room 2A, Washington DC 20426. 27. From the Commission’s Home Page on the Internet, this information is available in the Commission’s document management system, eLibrary. The full text of this document is available on eLibrary in PDF and Microsoft Word format for viewing, printing, and/or downloading. To access this document in eLibrary, type the docket number (excluding the last three digits of the docket number), in the docket number field. 28. User assistance is available for eLibrary and the Commission’s website during normal business hours. For assistance, please contact FERC Online Support at (202) 502–6652 (toll-free at 1–866–208–3676) or e-mail at ferconlinesupport@ferc.gov, or the Public Reference Room at (202) 502– 8371, TTY (202) 502–8659. E-mail the Public Reference Room at public.referenceroom@ferc.gov. List of Subjects in 18 CFR Part 35 Electric power rates, Electric utilities, Reporting and recordkeeping requirements. By direction of the Commission. Kimberly D. Bose, Secretary. In consideration of the foregoing, the Commission proposes to amend Part 35, Chapter I, Title 18, Code of Federal Regulations, as follows: PART 35—FILING OF RATE SCHEDULES AND TARIFFS 1. The authority citation for part 35 continues to read as follows: Authority: 16 U.S.C. 791a–825r, 2601– 2645; 31 U.S.C. 9701; 42 U.S.C. 7101–7352. E:\FR\FM\31JYP1.SGM 31JYP1 Federal Register / Vol. 72, No. 146 / Tuesday, July 31, 2007 / Proposed Rules receive non-power goods and services from a centralized service company at a price above cost. 2. Subpart I is added to read as follows: Subpart I—Cross-Subsidization Restrictions on Affiliate Transactions Sec. 35.43 Generally. 35.44 Protections against affiliate crosssubsidization. [FR Doc. E7–14618 Filed 7–30–07; 8:45 am] BILLING CODE 6717–01–P SOCIAL SECURITY ADMINISTRATION Subpart I—Cross-Subsidization Restrictions on Affiliate Transactions § 35.43 [Docket No. SSA 2007–0053] Generally. (a) For purposes of this subpart: (1) Captive customers means any wholesale or retail electric energy customers served under cost-based regulation. (2) Franchised public utility means a public utility with a franchised service obligation under state law. (3) Market-regulated power sales affiliate means any power seller affiliate other than a franchised public utility, including a power marketer, exempt wholesale generator, qualifying facility or other power seller affiliate, whose power sales are regulated in whole or in part on a market-rate basis. (4) Non-utility affiliate means any affiliate that is not in the power sales or transmission business. (b) The provisions of this subpart apply to all franchised public utilities with captive customers. rmajette on PROD1PC64 with PROPOSALS § 35.44 Protections against affiliate crosssubsidization. (a) Restriction on affiliate sales of electric energy. No wholesale sale of electric energy may be made between a franchised public utility with captive customers and a market-regulated power sales affiliate without first receiving Commission authorization for the transaction under section 205 of the Federal Power Act. (b) Non-power goods or services. (1) Unless otherwise permitted by Commission rule or order, sales of any non-power goods or services by a franchised public utility with captive customers, including sales made to or through its affiliated exempt wholesale generators or qualifying facilities, to a market-regulated power sales affiliate or non-utility affiliate, must be at the higher of cost or market price. (2) Unless otherwise permitted by Commission rule or order, and except as permitted by paragraph (b)(3) of this section, a franchised public utility with captive customers may not purchase or receive non-power goods and services from a market-regulated power sales affiliate or a non-utility affiliate at a price above market. (3) A franchised public utility with captive customers may not purchase or VerDate Aug<31>2005 14:56 Jul 30, 2007 20 CFR Parts 404, 405, and 416 Jkt 211001 RIN 0960–AG54 Compassionate Allowances AGENCY: Social Security Administration (SSA). Advance notice of proposed rulemaking. ACTION: Under titles II and XVI of the Social Security Act (the Act), we pay benefits to individuals who meet our rules for entitlement and have medically determinable physical or mental impairments that are severe enough to meet the definition of disability in the Act. The rules for determining disability can be very complicated, but some individuals have such serious medical conditions that their conditions obviously meet our disability standards. To address these individuals’ needs, we strive to provide not only responsive, but also compassionate, public service that ensures the most severely disabled in our society who meet the Act’s requirements are awarded benefits quickly. To that end, we are investigating methods of making ‘‘compassionate allowances’’ by quickly identifying individuals with obvious disabilities. The purpose of this notice is to give you an opportunity to send us comments about what standards we should use for compassionate allowances, methods we might use to identify compassionate allowances, and suggestions for how to implement those standards and methods. DATES: To be sure that your comments are considered, we must receive them by October 1, 2007. ADDRESSES: You may give us your comments by: Internet through the Federal eRulemaking Portal at http:// www.regulations.gov; e-mail to regulations@ssa.gov; telefax to (410) 966–2830; or letter to the Commissioner of Social Security, P.O. Box 17703, Baltimore, MD 21235–7703. You may also deliver them to the Office of Regulations, Social Security Administration, 960 Altmeyer Building, 6401 Security Boulevard, Baltimore, MD 21235–6401, between 8 a.m. and 4:30 p.m. on regular business days. SUMMARY: PO 00000 Frm 00010 Fmt 4702 Sfmt 4702 41649 Comments are posted on the Federal eRulemaking Portal, or you may inspect them on regular business days by making arrangements with the contact person shown in this preamble. FOR FURTHER INFORMATION CONTACT: James Julian, Director, Office of Compassionate Allowances and Listings Improvements, Social Security Administration, 4470 Annex Building, 6401 Security Boulevard, Baltimore, MD 21235–6401, (410) 965–4015. For information on eligibility or filing for benefits, call our national toll-free number 1–800–772–1213 or TTY 1– 800–325–0778, or visit our Internet Web site, Social Security Online, at http:// www.socialsecurity.gov. SUPPLEMENTARY INFORMATION: Electronic Version The electronic file of this document is available on the date of publication in the Federal Register at http:// www.gpoaccess.gov/fr/index.html. Sequential Evaluation Process for Determining Disability We use a five-step ‘‘sequential evaluation process’’ to decide whether an individual is disabled, but will stop at any point in the process at which we are able to make a disability determination. At step one, we determine whether an individual is currently engaged in substantial gainful activity. If not, we then move to step two and determine whether the individual has a ‘‘severe’’ impairment or combination of impairments significantly limiting the ability to perform basic work activities. At step three, we compare the individual’s impairment(s) to those in the Listing of Impairments in appendix 1 of subpart P of part 404 of our regulations (listing). If the impairment does not meet or equal in severity a listing, at step four, we assess the individual’s residual functional capacity to determine if the individual can do any past relevant work. Finally, at step five, we determine whether other work exists in significant numbers that such an individual can perform, considering the individual’s residual functional capacity, age, education, and work experience. We use different sequential evaluation processes for children and for individuals already receiving benefits when we determine whether they are still disabled. See §§ 404.1594, 416.924, 416.994, and 416.994a of our regulations. E:\FR\FM\31JYP1.SGM 31JYP1

Agencies

[Federal Register Volume 72, Number 146 (Tuesday, July 31, 2007)]
[Proposed Rules]
[Pages 41644-41649]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-14618]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 35

[Docket No. RM07-15-000]


Cross-Subsidization Restrictions on Affiliate Transactions

July 20, 2007.
AGENCY: Federal Energy Regulatory Commission, DOE.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Federal Energy Regulatory Commission (Commission) is 
proposing to amend its regulations pursuant to sections 205 and 206 of 
the Federal Power Act to codify restrictions on affiliate transactions 
between franchised public utilities with captive customers and their 
market-regulated power sales affiliates or non-utility affiliates. The 
Commission seeks public comment on the rules and amended regulations 
proposed herein.

DATES: Comment Date: Comments are due August 30, 2007.

ADDRESSES: You may submit comments identified in Docket No. RM07-15-
000, by one of the following methods:
    Agency Web site: http://www.ferc.gov. Follow the instructions for 
submitting comments via the eFiling link found in the Comment 
Procedures section of the preamble.
    Mail: Commenters unable to file comments electronically must mail 
or hand deliver an original and 14 copies of their comments to the 
Federal Energy Regulatory Commission, Secretary of the Commission, 888 
First Street, NE., Washington, DC 20426. Please refer to the Comment 
Procedures section of the preamble for additional information on how to 
file paper comments.

FOR FURTHER INFORMATION CONTACT: Carla Urquhart (Legal Information), 
Office of the General Counsel, Federal Energy Regulatory Commission, 
888 First Street, NE., Washington, DC 20426, (202) 502-8496.
    Roshini Thayaparan (Legal Information), Office of the General 
Counsel, Federal Energy Regulatory Commission, 888 First Street, NE., 
Washington, DC 20426, (202) 502-6857.
    David Hunger (Technical Information), Office of Energy Markets and 
Reliability, Federal Energy Regulatory Commission, 888 First Street, 
NE., Washington, DC 20426, (202) 502-8148.
    Stuart Fischer (Technical Information), Office of Enforcement, 
Federal Energy Regulatory Commission, 888 First Street, NE., 
Washington, DC 20426, (202) 502-8517.

SUPPLEMENTARY INFORMATION: 

I. Introduction

    1. Pursuant to sections 205 and 206 of the Federal Power Act 
(FPA),\1\ the Commission is proposing to amend its regulations to 
revise Part 35 of Title 18 of the Code of Federal Regulations (CFR) to 
codify affiliate restrictions that would be applicable to all power and 
non-power goods and services transactions between franchised public 
utilities with captive customers and their market-regulated power sales 
and non-utility affiliates.\2\ The Commission's goal in proposing these 
prophylactic restrictions is to protect against inappropriate cross-
subsidization of market-regulated and unregulated activities by the 
captive customers of public utilities. The proposed restrictions are 
based upon those already imposed by the Commission in the context of 
certain FPA section 203 \3\ and 205 approvals, but expand the 
transactions and entities to which they apply.\4\ The Commission seeks 
public comment on the proposed rules.
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    \1\ 16 U.S.C. 824d, 824e.
    \2\ For purposes of this Notice of Proposed Rulemaking, a 
``market-regulated'' power sales affiliate means any power sales 
affiliate, other than a franchised public utility, whose power sales 
are regulated in whole or in part on a market basis. This would 
include, e.g., a power marketer, exempt wholesale generator, 
qualifying facility or other power seller affiliate permitted to 
make some or all of its power sales at market-based rates. A ``non-
utility'' affiliate would include an affiliate that is not in the 
power sales or transmission business, e.g., a coal mining company, 
construction company, real estate company, energy-related technology 
company, communications systems company, among others. While the 
Commission, in previous documents, has referred to both categories 
of affiliates as ``non-regulated,'' consistent with the discussion 
on cross-subsidization issues in our recent Market-Based Rate Final 
Rule, we believe the term ``market-regulated'' more accurately 
describes power sellers with market-based rates since they remain 
subject to regulation. Market-Based Rates For Wholesale Sales Of 
Electric Energy, Capacity And Ancillary Services By Public 
Utilities, Order No. 697, 72 FR 39903 (July 20, 2007), FERC Stats. & 
Regs. ] 31,252, at P 490 (2007) (Market-Based Rate Final Rule). 
Accordingly, we have modified our terminology in this Notice of 
Proposed Rulemaking.
    \3\ 16 U.S.C. 824b, amended by Energy Policy Act of 2005, Pub. 
L. 109-58, 1289, 119 Stat. 594, 982-83 (2005) (EPAct 2005).
    \4\ This Notice of Proposed Rulemaking is one of three actions 
being taken based on the Commission's experience implementing 
amended FPA section 203 and the Public Utility Holding Company Act 
of 2005, EPAct 2005, Pub. L. No. 109-58, 1261, et seq., 119 Stat. 
594, 972-78 (2005) (PUHCA 2005), as well as the record from the 
Commission's December 7, 2006 and March 8, 2007 technical 
conferences regarding Section 203 and PUHCA 2005. In addition, in 
separate orders, the Commission is concurrently issuing a section 
203 Supplemental Policy Statement, FPA Section 203 Supplemental 
Policy Statement, 120 FERC ] 61,060 (2007) (issued in Docket No. 
PL07-1-000), and a Notice of Proposed Rulemaking proposing to grant 
a limited blanket authorization for certain dispositions of 
jurisdictional facilities under FPA section 203(a)(1), Blanket 
Authorization Under FPA Section 203, 120 FERC ] 61,062 (2007) 
(issued in Docket No. RM07-21-000).
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II. Background

    2. The Commission requires public utilities to implement codes of 
conduct with regard to affiliate transactions where an entity seeks 
market-based rate authorization. The Commission also imposes codes of 
conduct on entities seeking merger authorization under section 203 of 
the FPA. The discussion below summarizes the Commission's existing 
practices in these two areas.

A. Affiliate Transactions in the Context of Market-Based Rate 
Authorizations

1. Historical Approach
    3. The Commission began considering proposals for market-based 
pricing of wholesale power sales and attendant cross-subsidy issues in 
1988. At that time, the Commission acted on market-based rate proposals 
filed by various wholesale suppliers on a case-by-case basis. In doing 
so, the Commission considered whether there was evidence of affiliate 
abuse or reciprocal dealing involving the seller or its affiliates.\5\ 
As the Commission explained, ``[t]he

[[Page 41645]]

Commission's concern with the potential for affiliate abuse is that a 
utility with a monopoly franchise may have an economic incentive to 
exercise market power through its affiliate dealings.'' \6\ The 
Commission also stated its concern that a franchised public utility and 
an affiliate may be able to transact in ways that transfer benefits 
from the captive customers of the franchised public utility to the 
affiliate and its shareholders.\7\ Where a franchised public utility 
makes a power sale to an affiliate, the Commission is concerned that 
such a sale could be made at a rate that is too low, in effect, 
transferring the difference between the market price and the lower rate 
from captive customers to the market-regulated affiliated entity. Where 
a power seller with market-based rates makes power sales to an 
affiliated franchised public utility, the concern is that such sales 
could be made at a rate that is too high, which would give an undue 
profit to the affiliated entity at the expense of the franchised public 
utility's captive customers.\8\ In determining whether to allow power 
sales affiliate transactions, the Commission, over time, has adopted 
several methods, all of which have focused on ensuring that captive 
customers are adequately protected against affiliate abuse.
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    \5\ See Heartland Energy Services Inc., 68 FERC ] 61,223, at 
62,062 (1994) (Heartland) (discussing the potential for abuse in the 
case of affiliated power marketers); Commonwealth Atlantic Limited 
Partnership, 51 FERC ] 61,368, at 62,245 (1990) (discussing 
potential for reciprocal dealing if a buyer agrees to pay more for 
power from a seller in return for that seller (or its affiliates) 
paying more for power from that buyer (or its affiliates)).
    The other three ``prongs'' of the Commission's ``four-prong'' 
analysis include: (1) Whether the seller and its affiliates lack, or 
have adequately mitigated, market power in generation; (2) whether 
the seller and its affiliates lack, or have adequately mitigated, 
market power in transmission; and (3) whether the seller or its 
affiliates can erect other barriers to entry. See Market-Based Rate 
Final Rule, FERC Stats. & Regs. ] 31,252 at P 7. These additional 
``prongs'' are not directly at issue in this proceeding.
    \6\ Boston Edison Company Re: Edgar Electric Energy Co., 55 FERC 
] 61,382, at 62,137 n.56 (1991) (Edgar). See also TECO Power 
Services Corp., 52 FERC ] 61,191, at 61,697 n.41, order on reh'g, 53 
FERC ] 61,202 (1990) (``The Commission has determined that self 
dealing may arise in transactions between affiliates because 
affiliates have incentives to offer terms to one another which are 
more favorable than those available to other market 
participants.'').
    \7\ See, e.g., Heartland, 68 FERC at 62,062.
    \8\ The Commission has found that a transaction between two non-
traditional utility affiliates (such as power marketers, exempt 
wholesale generators, or qualifying facilities) does not raise the 
same concern about cross-subsidization because neither has a 
franchised service territory and therefore has no captive customers. 
As the Commission has explained, no matter how sales are conducted 
between non-traditional affiliates, profits or losses ultimately 
affect only the shareholders. FirstEnergy Generation Corporation, 94 
FERC ] 61,177, at 61,613 (2001); USGen Power Services, L.P., 73 FERC 
] 61,302, at 61,846 (1995). With respect to affiliate power sales, 
the Commission has also developed guidelines on how to determine 
whether a transaction is above suspicion and captive customers are 
protected, as well as guidelines for competitive solicitation 
processes. See Edgar, 55 FERC at 62,167-69; Allegheny Energy Supply 
Company, LLC, 108 FERC ] 61,082, at 61,417 (2004).
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    4. Just as the Commission has expressed concern about the potential 
for affiliate abuse in connection with power sales between affiliates, 
it also has recognized that there may be a potential for affiliate 
abuse through other means, such as the pricing of non-power goods and 
services or the sharing of market information between affiliates.\9\ 
The same concerns about giving undue profits to affiliated 
``unregulated'' entities and shareholders, discussed above with respect 
to power sales, also apply with respect to non-power goods and services 
transactions.
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    \9\ See, e.g., Potomac Electric Power Company, 93 FERC ] 61,240, 
at 61,782 (2000); Heartland, 68 FERC at 62,062-63.
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    5. Accordingly, the Commission's policy for many years has been to 
require that, as a condition of market-based rate authorization, 
applicants adopt a code of conduct applicable to non-power goods and 
services transactions between regulated and non-regulated affiliated 
power sellers. The Commission has also required that applicants include 
a provision in their market-based rate tariffs prohibiting power sales 
between regulated and non-regulated affiliated power sellers without 
first receiving authorization of the transaction under section 205 of 
the FPA.\10\
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    \10\ Aquila, Inc., 101 FERC ] 61,331, at P 12 (2002).
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    6. The purpose of the market-based rate code of conduct is to 
safeguard against affiliate abuse by protecting against the possible 
diversion of benefits or profits from franchised public utilities 
(i.e., traditional public utilities with captive ratepayers) to an 
affiliated entity for the benefit of shareholders. The Commission has 
waived the market-based rate code of conduct requirement in cases where 
there are no captive customers, and thus no potential for affiliate 
abuse, or where the Commission finds that such customers are adequately 
protected against affiliate abuse.\11\ In such cases, however, the 
Commission directed the utilities to notify the Commission should they 
acquire captive customers in the future and expressly reserved the 
right to reimpose the market-based rate code of conduct requirement.
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    \11\ See, e.g., CMS Marketing, Services and Trading Co., 95 FERC 
] 61,308, at 62,051 (2001) (granting request for cancellation of 
code of conduct where wholesale contracts, as amended, ``cannot be 
used as a vehicle for cross-subsidization of affiliate power sales 
or sales of non-power goods and services''); Alcoa Inc., 88 FERC ] 
61,045, at 61,119 (1999) (waiving code of conduct requirement where 
there were no captive customers); Green Power Partners I LLC, 88 
FERC ] 61,005, at 61,010-11 (1999) (waiving code of conduct 
requirement where there are no captive wholesale customers and 
retail customers may choose alternative power suppliers under retail 
access program).
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2. The Market-Based Rate Final Rule
    7. In the Commission's recent Market-Based Rate Final Rule, among 
other things, the Commission codified in the regulations at 18 CFR part 
35, subpart H, an explicit requirement that any seller with market-
based rate authority must comply with the affiliate power sales 
restrictions and other affiliate restrictions. Compliance on an ongoing 
basis is a condition of retaining market-based rate authority. The 
Market-Based Rate Final Rule retains the policy that wholesale sales of 
power between a franchised public utility and any of its market-
regulated power sales affiliates must be pre-approved by the 
Commission. It also adopts uniform affiliate restrictions governing 
power sales, sales of non-power goods and services, separation of 
functions, and information sharing between franchised public utilities 
with captive customers and their market-regulated power sales 
affiliates.\12 \The power and non-power goods and services 
restrictions, however, apply only to transactions involving two power 
sellers. They do not apply to transactions between a franchised public 
utility and a non-utility affiliate.
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    \12\ Market-Based Rate Final Rule, FERC Stats. & Regs. ] 31,252 
at P 23.
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B. Affiliate Transactions Under Section 203

1. Before EPAct 2005
    8. The Commission has also addressed cross-subsidization issues in 
the context of section 203 merger applications. Prior to EPAct 2005, 
the Commission's policy was to condition its approval of certain 
section 203 mergers on the applicants' agreement to abide by certain 
restrictions on non-power goods and services transactions between a 
merged company's utility and non-utility or market-regulated 
subsidiaries. The condition was imposed on those mergers involving 
registered holding companies under the Public Utility Holding Company 
Act of 1935 \13\ in order to find that the merger would not adversely 
affect federal regulation.\14\ That requirement grew out of judicial 
determinations that, when a merger would create or involve a registered 
holding company, the actions of the Securities and Exchange Commission 
(SEC) may preclude the Commission from asserting jurisdiction over the 
non-power transactions between subsidiaries of that holding 
company.\15\ Under Ohio Power, if the

[[Page 41646]]

SEC approved an affiliate contract involving special purpose subsidiary 
goods or services at cost, the Commission had to allow pass-through of 
the costs in jurisdictional rates even if the public utility purchasing 
the goods or services could have obtained them at a lower market price 
from a non-affiliate.\16\ For over a decade following the Ohio Power 
decision, the Commission required that, to gain section 203 approval of 
a proposed merger without a hearing, if the transaction would create a 
registered holding company under the PUHCA 1935, applicants must agree 
to waive the Ohio Power immunity and abide by the Commission's policy 
on intra-system transactions for non-power goods and services.\17\
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    \13\ 16 U.S.C. 79a et seq. (PUHCA 1935). EPAct 2005 repealed 
PUHCA 1935. EPAct 2005, Pub. L. No. 109-58, 1263.
    \14\ See, e.g., Niagara Mohawk Holdings, Inc., 95 FERC ] 61,381, 
at 62,414, order on reh'g, 96 FERC ] 61,144 (2001).
    \15\ See Ohio Power Co. v. FERC, 954 F.2d 779, 782-86 (D.C. 
Cir.), cert. denied sub nom., Arcadia v. Ohio Power Co., 506 U.S. 
981 (1992) (Ohio Power).
    \16\ The Commission's policy since the mid-1990s has been that 
where the regulated public utility has provided non-power goods or 
services to the non-regulated affiliate, the public utility provides 
the goods or services at the higher of cost or market. A non-
regulated affiliate that sells non-power goods or services to an 
affiliate with captive customers may not sell at higher than market 
price. This is often referred to as the ``market'' standard. These 
standards were articulated in the Commission's 1996 Merger Policy 
Statement. Inquiry Concerning the Commission's Merger Policy Under 
the Federal Power Act: Policy Statement, Order No. 592, 61 FR 68595 
(Dec. 30, 1996), FERC Stats. & Regs. ] 31,044, at 30,124-25 (1996) 
(1996 Merger Policy Statement), reconsideration denied, Order No. 
592-A, 62 FR 33341 (June 19, 1997), 79 FERC ] 61,321 (1997).
    \17\ Public Service Company of Colorado, 75 FERC ] 61,325, at 
62,046 (1996); 1996 Merger Policy Statement, FERC Stats. & Regs. ] 
31,044 at 30,124-25.
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2. After EPAct 2005
    9. Because EPAct 2005 repealed PUHCA 1935, certain activities of 
previously-registered holding companies that were previously subject to 
SEC regulation, including intra-system affiliate transactions, are no 
longer exempt from this Commission's full regulatory review. In 
particular, the Commission's conditions and policies under FPA sections 
205 and 206 with respect to non-power goods and services transactions 
between holding company affiliates may now be applied to all public 
utilities that are members of holding companies, whether in the context 
of a section 203 merger proceeding or the context of a section 205-206 
rate proceeding.\18\ In addition, the Commission has authority to 
review allocation of service company costs among members of holding 
companies that have public utilities with captive customers.
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    \18\ The provisions of PUHCA 1935 that formed the basis for Ohio 
Power are no longer in effect, thus removing the Ohio Power 
limitation on our oversight of non-power transactions. Further, FPA 
section 318, which provided for SEC preemption in certain 
circumstances where there was a conflict between SEC PUHCA 1935 
regulation and Commission regulation, was repealed.
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    10. In the Order No. 669 rulemaking proceedings,\19\ which revised 
the Commission's regulations pursuant to amended section 203, the 
Commission continued its past approach with respect to affiliate abuse 
restrictions involving power and non-power goods and services 
transactions, in the context of section 203 applications.\20\ However, 
the Commission made two additional clarifications.
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    \19\ Transactions Subject to FPA Section 203, Order No. 669, 71 
FR 1348 (Jan. 6, 2006), FERC Stats. & Regs. ] 31,200 (2005), order 
on reh'g, Order No. 669-A, 71 FR 28422 (May 16, 2006), FERC Stats. & 
Regs. ] 31,214, order on reh'g, Order No. 669-B, 71 FR 42579 (July 
27, 2006), FERC Stats. & Regs. ] 31,225 (2006).
    \20\ Amended section 203(a)(4) does add to the Commission's 
merger analysis the explicit requirement that the Commission find 
that any proposed transaction will not result in cross-subsidization 
of a non-utility associate company or the pledge or encumbrance of 
utility assets for the benefit of an associate company, unless that 
cross-subsidization, pledge, or encumbrance will be consistent with 
the public interest.
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    11. First, in its implementation of regulations pursuant to PUHCA 
2005,\21\ the Commission discussed one exception to the traditional 
standards articulated in the 1996 Merger Policy Statement. In the Order 
No. 667 rulemaking proceeding,\22\ the Commission explained that there 
are two circumstances in which the at-cost or market standards may 
arise in the context of the Commission's jurisdictional 
responsibilities: (1) The Commission's review of the costs of non-power 
goods and services provided by a traditional, centralized service 
company to public utilities within the holding company system; and (2) 
when a service company that is a special-purpose company within a 
holding company provides non-power goods or services to one or more 
public utilities in the same holding company system. Under both 
scenarios, the similar concerns regarding affiliate abuse arise: 
``[w]hether the public utility's costs incurred in purchasing from the 
affiliate are prudently incurred and just and reasonable, and whether 
non-regulated affiliates purchasing non-power goods and services from 
the same special-purpose company are receiving preferential treatment 
vis-[agrave]-vis the public utility.'' \23\ In Order No. 667, the 
Commission exempted traditional, centralized service companies, which 
at that time were using the SEC's ``at-cost'' standard, from complying 
with the Commission's market standard for their sales of non-power 
goods and services to regulated affiliates and created a rebuttable 
presumption that costs incurred under at-cost pricing for such services 
are reasonable.\24\ However, with respect to non-power goods and 
services transactions between holding company affiliates other than 
traditional, centralized service companies, i.e., service companies 
that are non-regulated, special-purpose affiliates, such as a fuel 
supply company or a construction company, the Commission continued with 
its prior practice.\25\
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    \21\ PUHCA 2005 is primarily a books and records access statute 
and does not give the Commission any new substantive authorities, 
other than the requirement that the Commission review and authorize 
certain non-power goods and services cost allocations among holding 
company members upon request. EPAct 2005, Pub. L. No. 109-58, 1275.
    \22\ Repeal of the Public Utility Holding Company Act of 1935 
and Enactment of the Public Utility Holding Company Act of 2005, 
Order No. 667, 70 FR 75592 (Dec. 20, 2005), FERC Stats. & Regs. ] 
31,197 (2005), order on reh'g, Order No. 667-A, 71 FR 28446 (May 16, 
2006), FERC Stats. & Regs. ] 31,213, order on reh'g, Order No. 667-
B, 71 FR 42750 (July 28, 2006), FERC Stats. & Regs. ] 31,224 (2006), 
order on reh'g, 72 FR 8277 (Feb. 26, 2007), 118 FERC ] 61,133 
(2007).
    \23\ Order No. 667, FERC Stats. & Regs. ] 31,197 at P 168.
    \24\ Id. P 169.
    \25\ Order No. 667 states, in relevant part:
    First, with respect to sales from a public utility to a non-
regulated, affiliated special-purpose company, we agree * * * that 
the price should be no less than cost, i.e., the higher of cost or 
market; otherwise, a public utility could attempt to game the system 
and forego profits it could otherwise obtain by selling to a non-
affiliate, to the benefit of its non-regulated affiliate who 
receives a good or service at a below-market price. When the 
situation is reversed, i.e., the non-regulated, affiliated special-
purpose company is providing non-power goods and services to the 
public utility affiliate, the Commission will continue to apply its 
market standard. The non-regulated, affiliated special-purpose 
company may not sell to its public utility affiliate at a price 
above the market price. We believe that such transactions involving 
such non-regulated, affiliated special-purpose companies pose a 
greater risk of inappropriate cross-subsidization and adverse 
effects on jurisdictional rates.
    Id. P 171.
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    12. Second, in recent section 203 merger proceedings, the 
Commission has extended the applicability of the code of conduct 
restrictions previously applied only to registered holding companies. 
In National Grid plc,\26\ the Commission announced that it would 
require all merging parties to abide by a code of conduct containing 
specific provisions regarding power and non-power goods and services 
transactions between the utility subsidiaries and their affiliates:
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    \26\ 117 FERC ] 61,080 (2006) (National Grid).

    Implementation of the Code of Conduct for all utility 
subsidiaries of the merged company, as required by our decision 
here, will address both power and non-power goods and services 
transactions between the utility subsidiaries and their affiliates. 
The Code of Conduct to be implemented by the

[[Page 41647]]

merged company shall (1) require our approval of all power sales by 
a utility to an affiliate, (2) require a utility with captive 
customers to provide non-power goods or services to a non-utility or 
``non-regulated utility'' affiliate at a price that is the higher of 
cost or market price, (3) prohibit a non-utility or non-regulated 
utility affiliate from providing non-power goods or services to a 
utility affiliate with captive customers at a price above market 
price, and (4) prohibit a centralized service company from providing 
non-power services to a utility affiliate with captive customers at 
a price above cost. These requirements protect a utility's captive 
customers against inappropriate cross-subsidization of non-utility 
or non-regulated utility affiliates by ensuring that the utility 
with captive customers neither recovers too little for goods and 
services that the utility provides to an affiliate nor pays too much 
for goods and services that the utility receives from an affiliate. 
Implementation of these requirements provides a prophylactic 
mechanism to ensure that the merger will not result in cross-
subsidization of non-utility or non-regulated utility companies in 
the same holding company system and therefore meets the requirement 
of section 203(a)(4) that a merger not result in inappropriate 
cross-subsidization of a non-utility associate company.\27\
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    \27\ Id. P 66 (internal citations removed).

    13. While these affiliate restrictions are broad in terms of 
transactions covered (covering transactions between power sales 
affiliates as well as transactions between power sales affiliates and 
non-utility affiliates) and have been extended within the context of 
section 203 approvals, they do not apply to public utilities that do 
not need to seek section 203 merger approval.

III. Discussion

    14. Historically, section 205 rate review has been the primary 
mechanism by which the Commission disallowed as imprudent or unjust and 
unreasonable the costs incurred by a franchised public utility in 
purchasing power or non-power goods and services from a non-utility or 
power sales affiliate when the utility could have purchased such power 
or non-power goods and services from a non-affiliated entity. However, 
as discussed above, the Commission's policy over the years has been to 
develop prophylactic affiliate cross-subsidy restrictions in the 
context of blanket market-based rate authorizations under FPA section 
205 and merger proceedings under section 203. We believe prophylactic 
restrictions setting forth the standards under which affiliates may 
transact are superior to relying exclusively on after-the-fact rate 
reviews of costs already incurred. Further, it would be virtually 
impossible for the Commission to individually pre-approve every power 
and non-power goods and services transaction given the volume of 
transactions that occur on a daily basis. The affiliate restrictions 
the Commission has previously imposed in individual cases involving 
market-based rate applicants and merger applicants allow public 
utilities to know up-front the standards under which they may transact 
with affiliates; and, if they do not follow those standards, they are 
at risk for full refunds plus interest, or other remedial action.
    15. Accordingly, to provide better assurance against inappropriate 
cross-subsidization, we believe it is appropriate to continue imposing 
affiliate restrictions, to expand the coverage of those restrictions, 
and to codify them in our regulations. As noted above, there is a gap 
in coverage of the restrictions as they are currently imposed. 
Specifically, the restrictions imposed on section 205 market-based rate 
applicants do not cover non-power goods and services transactions 
between a franchised public utility and non-utilities; they cover only 
transactions between power sales affiliates and are imposed only on the 
market-based rate applicants. Additionally, while the restrictions 
imposed on section 203 applicants cover transactions between a 
franchised public utility and market-regulated power sales affiliates 
as well as non-utility affiliates, they apply only to merger 
applicants; they do not apply to other section 203 applicants and do 
not apply to public utilities that do not require any section 203 
authorization.\28\ Finally, while the preamble to Order No. 667 
discussed the Commission's pricing policy on affiliate non-power goods 
and services transactions, including pricing of non-power goods and 
services provided by centralized service companies, the pricing policy 
(which technically is a ratemaking policy rather than a PUHCA 2005 
issue) was not codified in the regulations.
---------------------------------------------------------------------------

    \28\ See supra P 12.
---------------------------------------------------------------------------

    16. To address this gap in coverage, the uniform affiliate 
restrictions that the Commission proposes to implement would be 
applicable to all franchised public utilities with captive customers 
and their market-regulated and non-utility affiliates and would address 
both power and non-power goods and services transactions between the 
utility and its affiliates. Specifically, they would: (1) Require the 
Commission's approval of all power sales by a franchised utility with 
captive customers to a market-regulated power sales affiliate; (2) 
require a franchised public utility with captive customers to provide 
non-power goods and services to a market-regulated power sales 
affiliate or a non-utility affiliate at a price that is the higher of 
cost or market price; (3) prohibit a franchised public utility with 
captive customers from purchasing non-power goods or services from a 
market-regulated power sales affiliate or a non-utility affiliate at a 
price above market price (with the exception of (4)); and (4) prohibit 
a franchised public utility with captive customers from receiving non-
power services from a centralized service company at a price above 
cost. These restrictions will help the Commission meet the requirement 
of amended section 203(a)(4) that a transaction not result in the 
inappropriate cross-subsidization of a non-utility associate company 
and, moreover, help us assure just and reasonable rates and the 
protection of captive customers for all public utilities pursuant to 
sections 205 and 206 of the FPA, irrespective of whether they need 
approval of a section 203 transactions.
    17. We note that there is overlap in the affiliate restrictions 
proposed herein and those that were recently adopted in the Market-
Based Rate Final Rule. However, as discussed above, those restrictions 
apply only to market-based rate applicants and only to transactions 
between power sales affiliates. The restrictions herein are consistent 
with, and in some instances mirror, those imposed in the Market-Based 
Rate Final Rule. We believe any overlap is appropriate and necessary to 
ensure that all franchised public utilities with captive customers have 
the same restrictions imposed on them. We also note that we are 
proposing one additional restriction that is not covered in the Market-
Based Rate Final Rule, but which has been imposed on section 203 merger 
applicants. That restriction would prohibit a centralized service 
company from providing non-power goods and services to a franchised 
public utility with captive customers at a price above cost. This 
implements the findings made in Order No. 667 and, by codifying it in 
the regulations along with the other affiliate restrictions, will 
eliminate any gaps in coverage and ensure uniformity in the 
restrictions being applied.
    18. The Commission seeks comments on these proposed affiliate 
cross-subsidy restrictions. We also seek comment on whether the 
Commission should impose any after-the-fact reporting requirements on 
transactions covered by the restrictions and, if so, what they should 
be. In this regard, we note that the Commission already receives 
reporting of public utility affiliate power sales transactions through 
Electric Quarterly

[[Page 41648]]

Reports and we see no need to duplicate existing power sales reporting. 
However, we are particularly interested in: Whether any reporting 
requirements regarding affiliate non-power goods and services 
transactions should be imposed; whether such reporting, if it were to 
be required, should be on a yearly basis or within some other time 
frame, and what specific information should be reported; whether states 
already require such reporting; and the burdens that any reporting 
requirements would impose. Although the Commission has authority to 
review such transactions through auditing and in individual section 205 
rate proceedings, we seek comment on the general usefulness of 
additional reporting requirements.

IV. Information Collection Statement

    19. The Office of Management and Budget's (OMB) regulations require 
that OMB approve information collection requirements imposed by agency 
rules.\29\ The Commission is proposing amendments to the Commission's 
regulations to codify restrictions on affiliate transactions between 
franchised public utilities with captive customers and their market-
regulated power sales affiliates or non-utility affiliates. The 
Commission is not imposing an information collection requirement upon 
the public. However, the Commission will submit for informational 
purposes only a copy of this rulemaking to OMB.
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    \29\ 5 CFR 1320.
---------------------------------------------------------------------------

V. Environmental Analysis

    20. The Commission is required to prepare an Environmental 
Assessment or an Environmental Impact Statement for any action that may 
have a significant adverse effect on the human environment.\30\ The 
Commission has categorically excluded certain actions from this 
requirement as not having a significant effect on the human 
environment.\31\ The proposed regulations are categorically excluded as 
they address rate filings submitted under sections 205 and 206 of the 
FPA.\32\ Accordingly, no environmental assessment is necessary and none 
has been prepared in this NOPR.
---------------------------------------------------------------------------

    \30\ Regulations Implementing the National Environmental Policy 
Act, Order No. 486, 52 FR 47897 (Dec. 17, 1987), FERC Stats. & 
Regs., Regulations Preambles, 1986-1990, ] 30,783 (1987).
    \31\ 18 CFR 380.4.
    \32\ See 18 CFR 380.4(a)(15).
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VI. Regulatory Flexibility Act Certification

    21. The Regulatory Flexibility Act of 1980 (RFA) \33\ requires 
agencies to prepare certain statements, descriptions, and analyses of 
proposed rules that will have significant economic impact on a 
substantial number of small entities.\34\ Agencies are not required to 
make such an analysis if a rule would not have such an effect.
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    \33\ 5 U.S.C. 601-12.
    \34\ The RFA definition of ``small entity'' refers to the 
definition provided in the Small Business Act, which defines a 
``small business concern'' as a business that is independently owned 
and operated and that is not dominant in its field of operation. 15 
U.S.C. 632. The Small Business Size Standards component of the North 
American Industry Classification System defines a small electric 
utility as one that, including its affiliates, is primarily engaged 
in the generation, transmission, and/or distribution of electric 
energy for sale and whose total electric output for the preceding 
fiscal year did not exceed 4 million MWh. 13 CFR 121.201.
---------------------------------------------------------------------------

    22. The proposed rule will be applicable to franchised public 
utilities with captive customers. Most such companies regulated by the 
Commission do not fall within the RFA's definition of small entity.\35\ 
Therefore, the Commission certifies the proposed rule will not have a 
significant economic impact on a substantial number of small entities. 
As a result, no regulatory flexibility analysis is required.
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    \35\ 5 U.S.C. 601(3), citing to section 3 of the Small Business 
Act, 15 U.S.C. 632. Section 3 of the Small Business Act defines a 
``small-business concern'' as a business which is independently 
owned and operated and which is not dominant in its field of 
operation.
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VII. Comment Procedures

    23. The Commission invites interested persons to submit comments on 
the matters and issues proposed in this notice, including any related 
matters or alternative proposals that commenters may wish to discuss. 
Comments are due August 30, 2007. Comments must refer to Docket No. 
RM07-15-000, and must include the commenter's name, the organization 
they represent, if applicable, and their address in their comments. 
Comments may be filed either in electronic or paper format.
    24. Comments may be filed electronically via the eFiling link on 
the Commission's Web site at http://www.ferc.gov. The Commission 
accepts most standard word processing formats, but requests commenters 
to submit comments in a text-searchable format rather than a scanned 
image format. Commenters filing electronically do not need to make a 
paper filing. Commenters that are not able to file comments 
electronically must send an original and 14 copies of their comments 
to: Federal Energy Regulatory Commission, Secretary of the Commission, 
888 First Street, NE., Washington, DC 20426.
    25. All comments will be placed in the Commission's public files 
and may be viewed, printed, or downloaded remotely as described in the 
Document Availability section below. Commenters on this proposal are 
not required to serve copies of their comments on other commenters.

VIII. Document Availability

    26. In addition to publishing the full text of this document in the 
Federal Register, the Commission provides all interested persons an 
opportunity to view and/or print the contents of this document via the 
Internet through the Commission's Home Page (http://www.ferc.gov) and 
in the Commission's Public Reference Room during normal business hours 
(8:30 a.m. to 5 p.m. Eastern time) at 888 First Street, NE., Room 2A, 
Washington DC 20426.
    27. From the Commission's Home Page on the Internet, this 
information is available in the Commission's document management 
system, eLibrary. The full text of this document is available on 
eLibrary in PDF and Microsoft Word format for viewing, printing, and/or 
downloading. To access this document in eLibrary, type the docket 
number (excluding the last three digits of the docket number), in the 
docket number field.
    28. User assistance is available for eLibrary and the Commission's 
website during normal business hours. For assistance, please contact 
FERC Online Support at (202) 502-6652 (toll-free at 1-866-208-3676) or 
e-mail at ferconlinesupport@ferc.gov, or the Public Reference Room at 
(202) 502-8371, TTY (202) 502-8659. E-mail the Public Reference Room at 
public.referenceroom@ferc.gov.

List of Subjects in 18 CFR Part 35

    Electric power rates, Electric utilities, Reporting and 
recordkeeping requirements.

    By direction of the Commission.
Kimberly D. Bose,
Secretary.

    In consideration of the foregoing, the Commission proposes to amend 
Part 35, Chapter I, Title 18, Code of Federal Regulations, as follows:

PART 35--FILING OF RATE SCHEDULES AND TARIFFS

    1. The authority citation for part 35 continues to read as follows:

    Authority: 16 U.S.C. 791a-825r, 2601-2645; 31 U.S.C. 9701; 42 
U.S.C. 7101-7352.


[[Page 41649]]


    2. Subpart I is added to read as follows:
Subpart I--Cross-Subsidization Restrictions on Affiliate Transactions
Sec.
35.43 Generally.
35.44 Protections against affiliate cross-subsidization.

Subpart I--Cross-Subsidization Restrictions on Affiliate 
Transactions


Sec.  35.43  Generally.

    (a) For purposes of this subpart:
    (1) Captive customers means any wholesale or retail electric energy 
customers served under cost-based regulation.
    (2) Franchised public utility means a public utility with a 
franchised service obligation under state law.
    (3) Market-regulated power sales affiliate means any power seller 
affiliate other than a franchised public utility, including a power 
marketer, exempt wholesale generator, qualifying facility or other 
power seller affiliate, whose power sales are regulated in whole or in 
part on a market-rate basis.
    (4) Non-utility affiliate means any affiliate that is not in the 
power sales or transmission business.
    (b) The provisions of this subpart apply to all franchised public 
utilities with captive customers.


Sec.  35.44  Protections against affiliate cross-subsidization.

    (a) Restriction on affiliate sales of electric energy. No wholesale 
sale of electric energy may be made between a franchised public utility 
with captive customers and a market-regulated power sales affiliate 
without first receiving Commission authorization for the transaction 
under section 205 of the Federal Power Act.
    (b) Non-power goods or services. (1) Unless otherwise permitted by 
Commission rule or order, sales of any non-power goods or services by a 
franchised public utility with captive customers, including sales made 
to or through its affiliated exempt wholesale generators or qualifying 
facilities, to a market-regulated power sales affiliate or non-utility 
affiliate, must be at the higher of cost or market price.
    (2) Unless otherwise permitted by Commission rule or order, and 
except as permitted by paragraph (b)(3) of this section, a franchised 
public utility with captive customers may not purchase or receive non-
power goods and services from a market-regulated power sales affiliate 
or a non-utility affiliate at a price above market.
    (3) A franchised public utility with captive customers may not 
purchase or receive non-power goods and services from a centralized 
service company at a price above cost.

 [FR Doc. E7-14618 Filed 7-30-07; 8:45 am]
BILLING CODE 6717-01-P