FPA Section 203 Supplemental Policy Statement, 42277-42290 [E7-14956]
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Federal Register / Vol. 72, No. 148 / Thursday, August 2, 2007 / Rules and Regulations
streamline procedures. NFA cites
Commission Rules under 17 CFR Part
10, which allows for service of
documents by fax in enforcement
proceedings. In addition, it cites its own
rules governing arbitration, compliance
and disciplinary cases as allowing
service by both fax and e-mail. Thus,
NFA asserts, to allow service by fax and
e-mail in Part 171 would make the
process more efficient.
After reviewing NFA’s proposed
amended language and its justifications
for the proposal, the Commission has
decided to adopt NFA’s request in its
entirety. Amending the 17 CFR 171.9(b)
to allow for service by fax and e-mail
will(a) enhance the efficiency of
proceedings under Part 171; and (b)
comport with the various capabilities of
today’s changing world.
Related Matters
A. No Notice Is Required Under 5 U.S.C.
553
The Commission has determined that
this amendment to Part 171 is exempt
from the provisions of the
Administrative Procedure Act, 5 U.S.C.
553, which generally require notice of
proposed rulemaking and provide other
opportunities for public participation.
However, 5 U.S.C. 553 gives an agency
discretion not to provide notice for
‘‘rules of agency organization,
procedure, or practice.’’ Notice and
public procedure are unnecessary in
this case. The proposed amendment, if
made effective immediately, will
actually promote efficiency and
facilitate the Commission’s core
mission. For the above reasons, the
notice requirements under 5 U.S.C. 553
are inapplicable.
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B. Regulatory Flexibility Act
The Regulatory Flexibility Act
(‘‘RFA’’), 5 U.S.C. 601 et seq., requires
agencies with rulemaking authority to
consider the impact those rules will
have on small businesses. With respect
to persons seeking Commission reviews
of NFA adjudicatory decisions, the
amendments will impose no additional
regulatory burden. Commission review
of NFA disciplinary and membership
denial actions has been carried out
pursuant to 17 CFR Part 171 since 1990.
These amendments to 17 CFR 171.9(b)
do not present any significant changes
and will in fact ease the regulatory
burden by providing more options,
greater certainty and predictability
concerning manners of service under
Part 171. Accordingly, the Acting
Chairman, on behalf of the Commission,
hereby certifies, pursuant to 5 U.S.C.
605(b), that the amendments will not
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have a significant economic impact on
a substantial number of small
businesses.
C. Paperwork Reduction Act
The amendments to Part 171 rules do
not impose a burden within the
meaning and intent of the Paperwork
Reduction Act of 1980, 44 U.S.C. 3501,
et seq.
D. Cost-Benefit Analysis
Section 15(a) of the Commodity
Exchange Act, 7 U.S.C. 19(a), requires
the Commission to consider the costs
and benefits of its action before issuing
a new regulation. Section 15(a) further
specifies that costs and benefits shall be
evaluated in light of five broad areas of
market and public concern: (1)
Protection of market participants and
the public; (2) efficiency,
competitiveness, and financial integrity
of futures markets; (3) price discovery;
(4) sound risk management practices;
and (5) other public interest
considerations. Accordingly, the
Commission can, in its discretion, give
greater weight to any one of the five
enumerated areas of concern and can, in
its discretion, determine that
notwithstanding its costs, a particular
rule is necessary or appropriate to
protect the public interest or to
effectuate any of the provisions, or
accomplish any of the purposes, of the
Commodity Exchange Act.
The amendments to Part 171 will not
create any significant change in the
Commission’s appellate process or
impose new burdens or costs thereon. In
fact, the amendments should enhance
the protection of market participants
and the public by making service more
certain, faster and cheaper.
After considering these above factors,
the Commission has determined to
amend Part 171, as set forth below.
List of Subjects in 17 CFR Part 171
Administrative practice and
procedure, Commodity exchanges,
Commodity futures.
In consideration of the following, and
pursuant to authority contained in the
Commodity Exchange Act, the
Commission hereby amends chapter I of
title 17 of the Code of Federal
Regulations to read as follows:
I
PART 171–RULES RELATING TO
REVIEW OF NATIONAL FUTURES
ASSOCIATION DECISIONS IN
DISCIPLINARY, MEMBERSHIP DENIAL,
REGISTRATION AND MEMBER
RESPONSIBILITY ACTIONS
1. The authority citation for Part 171
continues to read as follows:
I
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Authority: 7 U.S.C. 4a, 12a, and 21.
2. Section 171.9 is amended by
revising paragraph (b) to read as follows:
I
§ 171.9
Service
*
*
*
*
*
(b) Manner of Service: Service may be
made by personal delivery (effective
upon receipt), mail (effective upon
deposit), facsimile (effective upon
receipt) or electronic mail (effective
upon receipt). When service is effected
by mail, the time within which the
person served may respond thereto shall
be increased by five days. Parties who
consent to accepting service of
documents by electronic means in the
underlying NFA action also consent to
accepting service by the same means in
proceedings under this Part 171.
*
*
*
*
*
Issued in Washington, DC on the 26th of
July 2007, by the Commission.
Eileen A. Donovan,
Acting Secretary of the Commission.
[FR Doc. E7–14922 Filed 8–1–07; 8:45 am]
BILLING CODE 6351–01–P
DEPARTMENT OF ENERGY
Federal Energy Regulatory
Commission
18 CFR Part 33
[Docket No. PL07–1–000]
FPA Section 203 Supplemental Policy
Statement
Issued July 20, 2007.
Federal Energy Regulatory
Commission, DOE.
ACTION: Policy statement.
AGENCY:
SUMMARY: The Federal Energy
Regulatory Commission is providing
guidance regarding future
implementation of section 203 of the
Federal Power Act. In the Supplemental
Policy Statement the Commission
adopts policies and provides
clarifications intended to continue the
encouragement of beneficial utility
industry investment while also
providing for effective customer
protections, including working in a
complementary fashion with the states
in protecting customers.
DATES: Effective Date: This
Supplemental Policy Statement is
effective July 20, 2007.
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.
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Federal Register / Vol. 72, No. 148 / Thursday, August 2, 2007 / Rules and Regulations
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.
Andrew P. Mosier, Jr. (Technical
Information), Office of Energy Markets
and Reliability, Federal Energy
Regulatory Commission, 888 First
Street, NE., Washington, DC 20426,
(202) 502–6274.
SUPPLEMENTARY INFORMATION:
Before Commissioners: Joseph T. Kelliher,
Chairman; Suedeen G. Kelly, Marc Spitzer,
Philip D. Moeller, and Jon Wellinghoff.
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FPA Section 203 Supplemental Policy
Statement
1. The Commission is issuing this
Policy Statement as a supplement to the
Commission’s rulemakings issued in
2006 to implement provisions of the
Energy Policy Act of 2005 1 and also as
a supplement to its 1996 Merger Policy
Statement.2 The 2006 rulemakings
addressed amendments to the
Commission’s corporate review
authority under section 203 of the
Federal Power Act (FPA),3 the repeal of
the Public Utility Holding Company Act
of 1935 4 and the enactment of the
Public Utility Holding Company Act of
2005.5 Based on our experience in
implementing the new laws thus far,
and on the two technical conferences in
which industry participants and state
commissioners provided input on key
1 Pub. L. 109–58, 119 Stat. 594 (2005) (EPAct
2005).
2 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 (1996) (1996
Merger Policy Statement), reconsideration denied,
Order No. 592–A, 62 FR 33341 (June 19, 1997), 79
FERC ¶ 61,321 (1997).
3 16 U.S.C. 824b (2000), amended by EPAct 2005,
Pub. L. No. 109–58, 1289, 119 Stat. 594, 982–83
(2005). See also 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).
4 16 U.S.C. 79a et seq. (PUHCA 1935).
5 EPAct 2005, Pub. L. 109–58, 1261, et seq., 119
Stat. 594, 972–78 (PUHCA 2005). See also 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, Order No. 667–C, 72 FR 8277 (Feb. 26, 2007),
118 FERC ¶ 61,133 (2007).
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issues, including the protection of
captive customers against inappropriate
cross-subsidization and the need to
provide sufficient flexibility to
encourage industry investment that
benefits customers, the Commission
finds that it is appropriate to provide
guidance in this Policy Statement
regarding future implementation of
section 203. We clarify that this Policy
Statement supplements, and does not
replace, any part of the Commission’s
1996 Merger Policy Statement.
2. This Policy Statement is one of
three actions being taken based on the
Commission’s experience implementing
amended FPA section 203 and 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
Notice of Proposed Rulemaking
proposing to grant a limited blanket
authorization for certain dispositions of
jurisdictional facilities under FPA
section 203(a)(1) 6 and a Notice of
Proposed Rulemaking proposing to
codify restrictions on affiliate
transactions between franchised public
utilities with captive customers and
their market-regulated power sales
affiliates or non-utility affiliates.7
I. Background
3. In 1996, the Commission issued the
1996 Merger Policy Statement updating
and clarifying the Commission’s
procedures, criteria and policies
concerning public utility mergers under
section 203 of the FPA.8 The purpose of
the 1996 Merger Policy Statement was
to ensure that mergers are consistent
with the public interest and to provide
greater certainty and expedition in the
Commission’s analysis of merger
applications. The 1996 Merger Policy
Statement refined and modified the
Commission’s merger policy ‘‘in light of
dramatic and continuing changes in the
electric power industry and
corresponding changes in the regulation
of that industry.’’ 9
4. In the 1996 Merger Policy
Statement, the Commission set out the
three factors it generally considers when
analyzing whether a proposed section
6 Blanket Authorization Under FPA Section 203,
120 FERC ¶ 61,062 (2007) (issued in Docket No.
RM07–21–000) (Blanket Authorization NOPR).
7 Cross-Subsidization Restrictions on Affiliate
Transactions, 120 FERC ¶ 61,061(2007) (issued in
Docket No. RM07–15–000) (Affiliate Transactions
NOPR).
8 Supra note 2.
9 1996 Merger Policy Statement, FERC Stats. &
Regs. ¶ 31,044, at 30,110.
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203 transaction 10 is consistent with the
public interest: effect on competition,
effect on rates, and effect on regulation.
In 2000, the Commission issued the
Filing Requirements Rule,11 which
updated the filing requirements under
18 CFR Part 33 of the Commission’s
regulations for section 203 applications.
Among other things, the Filing
Requirements Rule codified the
Commission’s screening approach to
quickly identify mergers that may raise
horizontal competitive concerns,
provided specific filing requirements
consistent with Appendix A of the 1996
Merger Policy Statement, established
guidelines for vertical competitive
analysis, and set forth filing
requirements for mergers that
potentially raise vertical market power
concerns. The revised filing
requirements are in effect today, as
recently modified (discussed below),
and they assist the Commission in
determining whether section 203
transactions are consistent with the
public interest, provide more certainty
to applicants regarding what showings
must be made to satisfy the
Commission’s concerns under section
203, and expedite the Commission’s
review of such applications.
5. The scope of the Commission’s
section 203 review was expanded by
EPAct 2005. Among other things,
amended section 203: (1) Expands the
Commission’s review authority to
include authority over certain holding
company mergers and acquisitions, as
well as certain public utility
acquisitions of generating facilities; (2)
requires that, prior to approving a
disposition under section 203, the
Commission must determine that the
transaction would not result in
inappropriate cross-subsidization of
non-utility affiliates or encumbrance of
utility assets; 12 and (3) imposes
statutory deadlines for acting on
10 Although the Commission applies these factors
to all section 203 transactions, not just mergers, the
filing requirements and the level of detail required
may differ. 1996 Merger Policy Statement, FERC
States & Regs. ¶ 31,044, at 30,113 n.7. See also 18
CFR 2.26 (codifying the 1996 Merger Policy
Statement).
11 Revised Filing Requirements Under Part 33 of
the Commission’s Regulations, Order No. 642, 65
FR 70984 (Nov. 28, 2000), FERC Stats. & Regs.
¶ 31,111 (2000) (Filing Requirements Rule), order
on reh’g, Order No. 642–A, 66 FR 16121 (Mar. 23,
2001), 94 FERC ¶ 61,289 (2001) (codified at 18 CFR
Part 33).
12 Section 203(a)(4) is not an absolute prohibition
on the creoss-subsidization of a non-utility
associate company or the pledge or encumbrance of
utility assets for the benefit of an associate
company. If the Commission determines that the
cross-subsidization, pledge or encumbrance will be
consistent with the public interest, such action may
be permitted.
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mergers and other jurisdictional
transactions.
6. Through the Order No. 669
rulemaking proceeding, the Commission
promulgated regulations adopting
certain modifications to 18 CFR 2.26
and Part 33 to implement amended
section 203. The Commission also
provided blanket authorizations for
certain transactions subject to section
203. These blanket authorizations were
crafted to ensure that there is no harm
to captive utility customers, but sought
to accommodate investments in the
electric utility industry by facilitating
market liquidity. Some commenters in
the rulemaking proceeding urged the
Commission to grant additional blanket
authorizations. Other commenters
argued that the Commission should
adopt additional generic rules to guard
against inappropriate crosssubsidization associated with the
mergers. Certain commenters argued
that the Commission should modify its
competitive analysis for mergers, which
has been in place for 10 years. The
Commission stated that it would
reevaluate these and other issues at a
future technical conference on the
Commission’s section 203 regulations as
well as certain issues raised in the Order
No. 667 rulemaking proceeding
implementing PUHCA 2005.
7. On December 7, 2006, the
Commission held a technical conference
(December 7 Technical Conference) to
discuss several of the issues that arose
in the Order No. 667 and Order No. 669
rulemaking proceedings. The December
7 Technical Conference discussed a
range of topics. The first panel
discussed whether there are additional
actions, under the FPA or the Natural
Gas Act (NGA), that the Commission
should take to supplement the
protections against cross-subsidization
that were implemented in the Order No.
667 and Order No. 669 rulemaking
proceedings. The second panel
discussed whether, and if so how, the
Commission should modify its Cash
Management Rule 13 in light of PUHCA
2005, and whether the Commission
should codify specific safeguards that
must be adopted for cash management
programs and money pool agreements
and transactions. The third panel
discussed whether modifications to the
specific exemptions, waivers and
blanket authorizations set forth in the
Order No. 667 and Order No. 669
rulemaking proceedings are warranted.
13 Regulation of Cash Management Practices,
Order No. 634, 68 FR 40500 (July 8, 2003), FERC
Stats. & Regs. ¶ 31,145, revised, Order No. 634–A,
68 FR 61993 (Oct. 31, 2003), FERC Stats. & Regs.
¶ 31,152 (2003) (Cash Management Rule).
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Post-technical conference comments
were accepted.
8. On March 8, 2007, the Commission
held a second technical conference
(March 8 Technical Conference) to
discuss whether the Commission’s
section 203 policy should be revised
and, in particular, whether the
Commission’s Appendix A merger
analysis is sufficient to identify market
power concerns in today’s electric
industry market environment. The first
panel discussed whether the Appendix
A analysis is appropriate to analyze a
merger’s effect on competition, given
the changes that have occurred in the
industry (e.g., the development of
Regional Transmission Organizations
(RTOs)) and statutory changes (e.g., as a
result of the repeal of PUHCA 1935 and
new authorities given to the
Commission in EPAct 2005). The
second panel assessed the factors the
Commission uses in reviewing mergers
and the coordination between the
Commission and other agencies
(including state commissions) with
merger review responsibility.
II. Discussion
9. Based on the Commission’s
experiences thus far in implementing
amended section 203, the input received
through the Order No. 669 rulemaking
proceeding, and the comments received
in response to the December 7 and
March 8 Technical Conferences, the
Commission finds that additional
clarification and guidance regarding our
section 203 policy are warranted. The
Commission will provide certain
clarifications and guidance concerning:
(1) The information that must be filed as
part of section 203 applications for
transactions that do not raise crosssubsidization concerns; (2) the types of
applicant commitments and ringfencing measures that, if offered, might
address cross-subsidization concerns; 14
(3) the scope of blanket authorizations
under sections 203(a)(1) and 203(a)(2);
(4) what constitutes a disposition of
control of jurisdictional facilities for
purposes of section 203; and (5) the
Commission’s Appendix A analysis.
10. We note that amended section 203
and PUHCA 2005 did not become
14 When ‘‘cross-subsidization’’ occurs, some of
the costs of dealings between affiliated regulated
and unregulated companies are borne by the
regulated utility affiliate. The costs might be passed
on to captive customers through the rates of the
regulated affiliate. ‘‘Ring-fencing’’ employs various
techniques to separate and protect the financial
assets and ratings of the regulated utility from the
business risks of other members of the holding
company family, including bankruptcy of the
parent or its affiliates. These techniques could
preclude some types of transactions that involve
cross-subsidization.
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effective until February 2006. The
Commission thus has had only 18
months’ experience under the new laws.
Therefore, we will continue to monitor
the issues that arise under section 203,
including cross-subsidization issues,
and re-evaluate our regulatory approach
as appropriate. The Commission’s goals
are to provide sufficient flexibility to
adopt customer protections as needed,
work in a complementary fashion with
the states in protecting customers,
appropriately address the need for
regulatory certainty with respect to
jurisdictional transactions, and address
ways to allow beneficial utility industry
investment that does not harm captive
customers.15
A. The Commission’s CrossSubsidization Concerns and Exhibit M
Requirements
11. At the December 7 Technical
Conference, a number of commenters
asserted that a vast majority of section
203 transactions pose no threat of crosssubsidization but nonetheless, the
Commission’s regulations require
applicants to provide ‘‘an explanation,
with appropriate evidentiary support for
such explanation * * * of how
applicants are providing assurance
* * * that the proposed transaction will
not result in, at the time of the
transaction or in the future, crosssubsidization of a non-utility associate
company or pledge or encumbrance of
utility assets for the benefit of an
associate company * * *.’’ 16
15 As indicated below, the Commission does not
propose actions on all of the issues raised by
commenters. For example, the Commission is not
proposing changes to its regulations that would
require: (1) Codification of specific requirements for
cash management programs and money pool
agreements; (2) codification of additional
information reporting requirements (through
section 203 applications or through routine
reporting requirements); or (3) additional, generic
actions pursuant to the Commission’s NGA
authority. Based on the types of filings made since
Order Nos. 667 and 669 became effective and the
comments raised at the technical conferences, we
do not believe further actions on these particular
issues are warranted at this time. Moreover, we note
that certain commenters recommended that the
Commission provide a list on its website of all
jurisdictional public utilities (including qualifying
facilities and exempt wholesale generators), foreign
utility companies, transmitting utilities, electric
utilities, electric utility companies, and holding
companies (as those terms are defined under EPAct
2005 and PUHCA 2005) for use by market
participants in their regulatory compliance
monitoring efforts and as they consider whether to
acquire or hold the securities of companies, the
acquisition or holding of which might or might not
be subject to FPA section 203 or PUHCA 2005.
While the Commission declines to rule on this issue
in the context of a policy statement, it will explore
the feasibility of making some of this information
publicly available on its website.
16 The explanation, to be provided as Exhibit M
to a section 203 application, includes:
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12. Several commenters argued that it
is not clear how to provide the
explanation required under Exhibit M
for transactions in which crosssubsidization is not possible, is
precluded by existing safeguards or is
reduced to a very low possibility. Thus,
they urged the Commission to establish
criteria to identify ‘‘safe harbors’’ or
classes of transactions that clearly do
not raise cross-subsidization concerns.
They contended that such an approach
will enhance regulatory certainty by
letting parties know up front that with
these types of transactions, there is no
risk of additional restrictions being
imposed by the Commission.
13. The Commission’s focus generally
has been on preventing a transfer of
benefits from a public utility’s captive
customers to shareholders of the public
utility’s holding company due to an
intra-system transaction that involves
electric power or energy, generation
facilities, or non-power goods and
services.17 Concerns arise in a number
of circumstances, including where a
market-regulated affiliate (e.g., a power
seller with market-based rates) or a nonutility affiliate provides power or goods
and services to a franchised public
utility with captive customers, as well
as the circumstance in which the
franchised public utility with captive
customers provides power or non-power
goods and services to the marketregulated or non-utility affiliate. For
instance, a franchised public utility
with captive customers may purchase
power from its marketing affiliate at a
price above market or sell power to its
marketing affiliate at below-market
prices, thus transferring benefits from
‘‘Disclosure of existing pledges and/or
encumbrances of utility assets; and a detailed
showing that the transaction will not result in: any
transfer of facilities between a traditional public
utility associate company that has captive
customers or that owns or provides transmission
service over jurisdictional transmission facilities,
and an associate company; any new issuance of
securities by a traditional public utility associate
company that has captive customers or that owns
or provides transmission service over jurisdictional
transmission facilities, for the benefit of an
associate company; any new pledge or
encumbrance of assets of a traditional public utility
associate company that has captive customers or
that owns or provides transmission service over
jurisdictional transmission facilities, for the benefit
of an associate company; or any new affiliate
contract between a non-utility associate company
and a traditional public utility associate company
that has captive customers or that owns or provides
transmission service over jurisdictional
transmission facilities, other than non-power goods
and services agreements subject to review under
sections 205 and 206 of the Federal Power Act; or
if no such assurance can be provided, an
explanation of how such cross-subsidization,
pledge, or encumbrance will be consistent with the
public interest.’’ 18 CFR 33.2(j)(1)–(2).
17 Order No. 669, FERC Stats. & Regs. ¶ 31,200 at
P 147.
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customers to shareholders of the
holding company. Further, customers
may be harmed if the franchised public
utility purchases non-power goods and
services from an affiliate at abovemarket prices or sells non-power goods
and services to an affiliate at less than
market value and seeks to recover the
overcharges or the undercharges
through rates for service to captive
customers.18 Concerns may also arise
with respect to intra-corporate financing
transactions that may encumber
franchised public utility assets in favor
of a market-regulated or non-utility
affiliate. The Commission’s regulatory
concern with this particular form of
cross-subsidization is with the potential
adverse impact of the internal finance
transaction on the rates of a franchised
public utility with captive customers.
1. ‘‘Safe Harbors’’ for Meeting Exhibit M
Requirements for Certain Transactions
14. Since the February 2006 effective
date of the FPA section 203
amendments, the Commission has
gained sufficient experience in
implementing the cross-subsidization
provision of FPA section 203(a)(4) to
provide policy guidance on the crosssubsidization demonstration required by
Exhibit M. As described above, there are
many instances where crosssubsidization can occur, but our focus is
on the specific requirements under
section 203(a)(4) and the Order No. 669
rulemaking proceeding—inappropriate
cross-subsidization of non-utility or
market-regulated affiliates or the pledge
or encumbrance of utility assets for the
benefit of an associate company. The
concern arises in a corporate structure
that has at least one franchised public
utility with captive customers and one
or more non-utility affiliates or marketregulated utility affiliates (i.e., utilities
regulated on a market rather than a cost
basis). These types of relationships
provide opportunities for crosssubsidization in routine transactions
between affiliates in addition to more
significant transactions such as transfers
of utility assets, encumbrance of utility
assets, new affiliate contracts, and
issuance of securities by affiliates (that
usually receive more public scrutiny or
regulatory attention).
15. Where these affiliate relationships
do not exist, that is, where a transaction
involves only market-regulated and/or
18 Transactions Subject to FPA Section 203, 70 FR
58636 (Oct. 7, 2005) FERC Stats. & Regs. ¶ 32,589
at P 47 (2005. In the concurrent Affiliate
Transactions NOPR, supra note 7, the Commission
is proposing to extend the affiliate abuse
restrictions to apply to all franchised public utilities
with captive customers and their market-regulated
power sales affiliates and non-utility affiliates.
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non-utility affiliated entities or is a bona
fide, arm’s-length, bargained-for
exchange, then the transaction is not
likely to result in inappropriate crosssubsidization and the detailed
explanation and evidentiary support
required by Exhibit M may not be
warranted.
16. Accordingly, for purposes of
compliance with Exhibit M, the
Commission will recognize three classes
of transactions that are unlikely to raise
the cross-subsidization concerns
described in the Order No. 669
rulemaking proceeding. These, in effect,
are ‘‘safe harbors’’ for meeting the
section 203 cross-subsidization
demonstration, absent concerns
identified by the Commission or
evidence from interveners that there is
a cross-subsidy problem based on the
particular circumstances presented.
17. The first class of transactions
includes those transactions where the
applicant shows that a franchised public
utility with captive customers is not
involved. If no captive customers are
involved, then there is no potential for
harm to customers. Therefore,
compliance with Exhibit M could be a
showing that no franchised public
utility with captive customers 19 is
involved in the transaction.
18. The second class of transactions
includes those transactions that are
subject to review by a state commission.
The Commission, in the context of
specific mergers or other corporate
transactions, intends to defer to state
commissions where the state adopts or
has in place ring-fencing measures to
protect customers against inappropriate
cross-subsidization or the encumbrance
of utility assets for the benefit of the
‘‘unregulated’’ affiliates. Therefore,
compliance with Exhibit M could be
satisfied with a showing that the
proposed transaction complies with
specific state regulatory protections
against inappropriate crosssubsidization by captive customers. If a
state does not have the authority to
impose cross-subsidization protections,
however, the transaction would not
qualify for this safe harbor.
19. The third class of transactions are
those involving only non-affiliates.
Where a franchised public utility
transacts only with nonaffiliated
entities, the potential for inappropriate
cross-subsidization of a non-utility
associate company or the pledge or
encumbrance of utility assets for the
benefit of an associate company
19 The Commission has defined ‘‘captive
customers,’’ for purposes of FPA section 203, to
mean ‘‘any wholesale or retaile electric energy
customers served under cost-based regulation.’’ 18
CFR 33.1(b)(5).
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generally is not present. Therefore,
compliance with Exhibit M could be
satisfied with a showing that a public
utility transacts only with nonaffiliated
entities. This category includes a
transfer of assets between a public
utility and non-affiliates, but does not
include mergers with, or acquisitions of,
public utilities.
20. After review of a section 203
application relying on any of these ‘‘safe
harbors,’’ if the Commission finds that
the applicant has failed to make a
sufficient showing that it meets the
criteria described above, then the
application will be deemed to be
deficient and a new Exhibit M will be
required.
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2. Other Means of Addressing CrossSubsidization Concerns
21. Intra-corporate financing
transactions may raise crosssubsidization concerns if the assets of a
franchised public utility with captive
customers are used to finance its
market-regulated utility affiliates or
non-utility affiliates or their activities.
In the December 7 Technical
Conference, several commenters noted
that their states had implemented ringfencing measures to mitigate potential
risks of cross-subsidization but that
many states had not. These commenters
suggested that the Commission
implement safeguards to mitigate risks
in the absence of state regulation
(although not necessarily on a generic
basis, relying on the states where the
state has already taken such measures).
Most commenters urged the
Commission to continue to review
whether potential mergers required
additional protections on a case-by-case
basis. Representatives of the state
commissions, including the Oregon
Public Utility Commission, Wisconsin
Public Service Commission and
Missouri Public Service Commission,
recommended that the Commission only
act where there is a demonstrable gap in
state authority. None supported
adoption of federal, mandatory ringfencing conditions. Some commenters
did not oppose the establishment of
guidelines on the kinds of protections
that might be appropriate in different
cases.20
22. American Public Power
Association and the National Rural
Electric Cooperative Association argued
that the Commission adopt regulations
with minimum cross-subsidization
safeguards that would apply in all cases,
20 See, e.g., Comments of Clifford M. Naeve,
December 7 Technical Conference, Tr. 91–92;
Comments of Joseph G. Sauvage, December 7
Technical Conference, Tr. 56–58.
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and also provide an exhaustive menu of
additional cross-subsidization
safeguards, including ring-fencing
measures, that applicants might propose
or that the Commission might impose in
appropriate cases. They proposed that
the Commission codify its code of
conduct requirements in the regulations
and that these restrictions be made
applicable to all traditional public
utilities and their unregulated affiliates.
23. The Commission agrees that it is
appropriate to codify in our regulations
code of conduct affiliate restrictions to
prevent cross-subsidization involving
power and non-power goods and
services transactions and to make those
prophylactic restrictions applicable to
all traditional (franchised) public
utilities (not just public utilities seeking
section 203 approval) and their
transactions with power sellers as well
as non-utility affiliates. Accordingly,
contemporaneous with this Policy
Statement, we are instituting a Notice of
Proposed Rulemaking to do this.
However, with respect to additional
restrictions that may be appropriate for
section 203 applicants, such as ringfencing restrictions, the Commission
does not believe it is necessary or
appropriate to mandate generic onesize-fits-all protections for all section
203 applicants. Rather, the Commission
will examine the facts and
circumstances of each transaction and
determine on a case-by-case basis
whether additional protections against
inappropriate cross-subsidization or
encumbrances of utility assets are
necessary. As noted above, part of our
approach will involve review of
whether state commissions have
authority to impose cross-subsidy
protections or have in place such
protections. The Commission, as a
general matter, intends to defer to stateadopted protections unless they can be
shown to be inadequate to protect
wholesale customers. This deference is
appropriate because retail customers
typically represent the vast majority of
load served by a franchised public
utility, and ring-fencing measures
typically affect the entire corporation,
thereby protecting both retail and
wholesale customers. If it can be shown,
however, that these measures are
inadequate to protect wholesale
customers in a given case, the
Commission may adopt supplemental
protections as appropriate. Finally, we
emphasize that, consistent with section
203 and the Commission’s regulations,
all section 203 applicants must
demonstrate that a proposed transaction
will not result in inappropriate crosssubsidization of non-utility associate
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42281
companies or the inappropriate pledge
or encumbrance of utility assets for the
benefit of an associate company, either
through meeting one of the safe harbor
demonstrations, proposing its own ringfencing or other protections to prevent
cross-subsidization, or demonstrating
that there are no potential cross-subsidy
issues associated with the proposed
transaction.
24. With respect to guidance to
applicants that do not make the ‘‘safe
harbor’’ demonstration or do not
demonstrate that cross-subsidy issues
are not present, one way to make the
demonstration required by Exhibit M
would be to propose ring-fencing
measures. For example, a ring-fencing
structure related to internal corporate
financings, i.e., money pool or cash
management transactions, could include
some or all of the following elements
depending on the circumstances: (1)
The holding company participates in
the money pool as a lender only and it
does not borrow from the subsidiaries
with captive customers; (2) where the
holding company system includes more
than one public utility, the money pool
for subsidiaries with captive customers
is separate from the money pool for all
other subsidiaries; (3) all money pool
transactions are short-term (one year or
less), and payable on demand to the
public utility; (4) the interest rate
formula is set according to a known
index and recognizes that internal and
external funds may be loaned into the
money pool; (5) loan transactions are
made pro rata from those offering funds
on the date of the transactions; (6) the
formula for distributing interest income
realized from the money pool to money
pool members is publicly disclosed; and
(7) the money pool administrator is
required to maintain records of daily
money pool transactions for
examination by the Commission by
transaction date, lender, borrower,
amount, and interest rate(s).21 We
clarify that the forms of ring-fencing
protections listed herein are simply
examples of protections that the
Commission would consider in
evaluating proposed ring-fencing
measures. Appropriate ring-fencing
measures will depend on the facts
presented and the specifics of an
applicant’s corporate structure and must
be evaluated on a case-by-case basis.
Further, as noted earlier, to the extent a
state commission imposes specific ringfencing measures, the Commission will
defer to those measures absent evidence
21 These ring-fencing measures are among those
requirements typically approved by the Securities
and Exchange Commission (SEC) and/or adopted by
state commissions.
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that additional measures are needed to
protect wholesale customers.
25. The Commission also notes that if
it approves a transaction under section
203 (with or without ring-fencing
measures), the Commission retains
authority under section 203(b) to later
impose additional cross-subsidy
protections or modify any previously
approved measures. Further,
irrespective of any link to the section
203 transaction, the Commission retains
ongoing authority under section 206 of
the FPA 22 to modify rates, contracts and
practices that may result in
inappropriate cross-subsidization or
encumbrances of utility assets (and, if
appropriate, to require new practices).
jlentini on PROD1PC65 with RULES
3. Future Case-Specific Informational
Filings
26. Given that the Commission often
issues its order in a section 203
proceeding before the state proceedings
are completed, the Commission may
grant authorization under section 203
before the relevant state commission
issues an order specifying any staterequired cross-subsidy or ring fencing
protections. In such circumstances, as
appropriate, the Commission in the
context of individual section 203
authorizations will require applicants to
file with the Commission a copy of any
subsequent state orders. Such copy
would be filed in the Commission’s
section 203 proceeding docket as an
informational filing, and the applicant
would also provide copies to the
intervenors in the Commission’s section
203 proceedings.
B. Blanket Authorizations Under
Sections 203(a)(1) and 203(a)(2) and
Clarifications Regarding Jurisdictional
Transactions
27. Through the Order No. 669
rulemaking proceeding, the Commission
granted certain blanket authorizations
on a generic basis under section 203.23
Participants at the December 7
Technical Conference addressed
whether additional blanket
authorizations were warranted.
Specifically, commenters discussed
under what circumstances the
Commission should grant a blanket
authorization under section 203(a)(1)
(which applies to public utilities’
dispositions of jurisdictional facilities)
to parallel the Order No. 669 blanket
authorizations under section 203(a)(2)
(which, among other things, applies to
holding companies’ acquisitions of
securities of public utilities with
jurisdictional facilities). The section 203
22 16
23 18
U.S.C. 824e.
CFR 33.1(c)
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blanket authorizations under Order No.
669 allow a holding company to acquire
the voting securities of a transmitting
utility, an electric utility company, or a
holding company in a holding company
system that includes a transmitting
utility or an electric utility company, if,
after the acquisition, the holding
company will own less than 10 percent
of the outstanding voting securities.
What most commenters seek is a
parallel blanket authorization under
section 203(a)(1) for the public utilities
in such transactions to ‘‘dispose’’ of
their facilities to the holding company,
i.e., a blanket authorization for
transactions that (1) involve or permit
transfers (dispositions) of up to 10
percent of a public utility’s voting stock,
or (2) involve a transfer of up to 10
percent of the voting stock of a holding
company that directly or indirectly
owns or controls a public utility.
Alternatively, they seek clarification
that certain transactions are not
jurisdictional.
28. Several commenters supported
modification of the rules to grant such
a parallel blanket authorization under
203(a)(1). In addition, Mirant
Corporation (Mirant) argued that section
203(a)(1) should not apply at all to stock
transactions in the secondary market
involving the corporate parent. Mirant
maintained that if the Commission
continues to apply section 203(a)(1) to
equity transfers of upstream ownership
interests in public utilities that result in
either a direct or indirect change in
control over the underlying public
utility, there would be a substantial and
unnecessary overlap between sections
203(a)(1) and 203(a)(2). The Goldman
Sachs Group, Inc. (Goldman) added that
financial investors need certainty on
whether particular transactions in the
secondary market would require prior
Commission approval under section
203(a)(1). Goldman also argued for a
blanket authorization under section
203(a)(2) for the acquisition of voting
securities by firms acting in a fiduciary
capacity.
29. Edison Electric Institute (EEI)
argued for a blanket authorization for
internal corporate reorganizations under
both sections 203(a)(1) and 203(a)(2) for
transfer of assets from one nontraditional utility subsidiary, such as an
exempt wholesale generator, to another
non-traditional utility subsidiary.
30. The Financial Institutions Energy
Group (FIEG) 24 requested that the
24 Members of FIEG include: Bank of America,
N.A, Barclays Bank PLC, Bear Energy LP, Citigroup
Energy Inc., Credit Suisse Energy LLC (a subsidiary
of Credit Suisse), Deutche Bank AG, J. Aron &
Company (a subsidiary of The Goldman Sachs
Group), JPMorgan Chase & Co., Lehman Brothers
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Commission clarify that transactions
that do not affect control do not, in fact,
require approval under section
203(a)(1). Alternatively, FIEG argued
that there are several types of
transactions under which no change of
control is involved and, therefore, the
Commission should provide blanket
authorizations under both section
203(a)(1) and section 203(a)(2). FIEG
asserted that such transactions include:
(1) Acquisitions of voting securities that
would give the acquiring entity less
than 10 percent ownership of
outstanding voting securities; (2)
acquisitions of up to 20 percent of the
voting interests in a public utility where
the acquirer is eligible to file with the
SEC a Schedule 13G demonstrating no
intent to exercise control over the entity
whose securities are being acquired; (3)
acquisitions involving securities held
for lending, hedging, underwriting and/
or fiduciary purposes. FIEG also argued
that a blanket authorization should be
granted for transactions in which a
public utility or a holding company is
acquiring or assigning a jurisdictional
contract where the acquirer does not
have captive customers and the contract
does not convey control over the
operation of a generation or
transmission facility.
31. In support of its requests for
clarification and expanded blanket
authorizations, FIEG states that shares
and other interests in public utilities are
bought, sold and traded on a regular
basis and that an active market for a
public utility’s shares is important to its
ability to raise capital. FIEG explains
that if a passive or non-controlling
investor must seek prior Commission
approval for transactions, the trading
process is slowed, resulting in a less
efficient market for the company’s
shares. According to FIEG, such
inefficiencies chill participation in the
industry and reduce needed market
liquidity.
32. Several commenters also urged the
Commission to provide greater clarity
on what constitutes a passive
investment for which no Commission
authorization is required under section
203(a)(1).
33. The Commission agrees that
greater industry investment and market
liquidity are important goals. However,
blanket authorizations under section
203 cannot be granted lightly,
particularly generic authorizations.
Because it is an ex ante determination
as to the appropriateness of a category
Commodity Services Inc. (a subsidiary of Lehman
Brothers Holding Inc.), Merrill Lynch Commodities,
´ ´
Inc., Morgan Stanley Capital Group Inc., Societe
´ ´
Generale, and UBS Energy LLC (a subsidiary of UBS
AG).
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Federal Register / Vol. 72, No. 148 / Thursday, August 2, 2007 / Rules and Regulations
of transactions under section 203 and a
counterparty is not yet identified, a
blanket authorization can be granted
only when the Commission can be
assured that the statutory standards will
be met, including ensuring that the
interests of captive customers are
safeguarded and that public utility
assets are protected under all
circumstances. It is under this paradigm
that we provide the following guidance
with respect to the section 203 blanket
authorizations.
34. First, we will grant in part and
deny in part requests for blanket
authorizations under section 203(a)(1) to
parallel those previously granted under
section 203(a)(2). The Commission
recognizes that, in some circumstances,
the lack of a blanket authorization under
section 203(a)(1) can lessen the practical
effectiveness of the blanket
authorizations previously granted under
section 203(a)(2). Accordingly, in a
Notice of Proposed Rulemaking issued
contemporaneous with this Policy
Statement, the Commission is proposing
a limited blanket authorization under
section 203(a)(1) under which a public
utility would be ‘‘pre-authorized’’ to
dispose of less than 10 percent of its
securities to a public utility holding
company but only if, after the
disposition, the holding company and
any associate or affiliated company in
aggregate will own less than 10 percent
of that public utility.25 The Commission
believes that this narrow blanket
authorization will provide appropriate
relief to investors and at the same time
ensure that utility assets and captive
customers are protected.
35. The Commission will continue to
consider broader requests for blanket
authorizations under section 203(a)(1)
on a case-specific basis,26 taking into
account all other authorizations that
have been granted and whether those
authorizations, in conjunction with a
blanket authorization under section
203(a)(1), would raise concerns. While
the Commission, as discussed above,
has determined that additional generic
blanket authorizations for public
utilities’ dispositions of jurisdictional
assets are not warranted at this time
(other than the blanket authorizations
discussed in the accompanying NOPR),
we expect that in many circumstances
individual blanket authorizations can be
granted. Such an individual, situationspecific, ex ante blanket authorization
will provide some of the certainty that
is sought by the industry and investors.
25 Blanket
Authorization NOPR, supra note 6.
No. 669–A, FERC Stats. & Regs. ¶ 31,214
at P 103; Order No. 669–B, FERC Stats. & Regs.
¶ 31,225 at P 43.
26 Order
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At the same time, this approach will
allow the Commission to assess specific
circumstances, to place time limits on
blanket authorizations if appropriate
(subject to possible renewal), to monitor
industry activity, and to adapt the use
of blanket authorizations over time as
we gain further experience with
financial institution investments in
particular. Further, we do not rule out
the possibility that groups of similarly
situated holding companies, such as
financial institutions, can make joint
filings seeking common blanket
authorizations under section 203(a)(1)
or section 203(a)(2); however, they
would need to clearly demonstrate on
the record that there would be no
adverse impact on captive customers or
the public interest if the authorizations
were granted.
36. In response to requests that the
Commission clarify that secondary
market transactions involving public
utilities do not require approval under
section 203(a)(1)(A) (which provides
that a public utility may not sell, lease
‘‘or otherwise dispose’’ of the whole of
its jurisdictional facilities or any part
hereof without prior Commission
approval), we so clarify. Secondary
market transactions, for purposes of this
discussion, are purchases or sales of the
securities of a public utility or its
upstream holding company by a thirdparty investor. Thus, such transactions
do not include the securities’ initial
issuance or reacquisition by the issuer.
Thousands of shares of the stock of a
public utility or public utility holding
company may be traded on a daily basis
by non-public utility third parties,
particularly if the stock is widely held
and publicly traded. As noted by
Mirant, EEI and members of FIEG in
their comments, neither a public utility
holding company nor a public utility
subsidiary of the holding company are
themselves parties to these transactions
and they cannot know in advance what
trading will occur or whether direct or
indirect ‘‘control’’ over the public utility
is being acquired. It would be virtually
impossible in such circumstances for
the public utility or holding company to
know what is occurring before the fact
and we do not interpret section
203(a)(1)(A) to be triggered for these
secondary trades. Accordingly, neither
public utilities nor public utility
holding companies have an obligation to
seek approval of a ‘‘disposition’’ of
public utility jurisdictional facilities for
such trades.27
27 If the acquirer of securities in the secondary
market is a public utility holding company,
however, it may have an obligation to file for
approval under section 203(a)(2). If the acquirer is
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37. In addition, we clarify that
transactions that do not transfer control
of a public utility do not fall within the
‘‘or otherwise dispose’’ language of
section 203(a)(1)(A) and thus do not
require approval under section
203(a)(1)(A) (assuming there is no sale
or lease of the facilities). As indicated in
our discussion of what constitutes a
disposition of control for purposes of
the Commission’s section 203
analysis,28 while the Commission
cannot make an ex ante determination
regarding what is control for purposes of
the Commission’s section 203 analysis
absent facts of a specific case, the
Commission is setting forth herein
certain guidelines regarding what has
been deemed to be (or not to be) control.
This clarification addresses many of the
concerns raised by commenters
regarding acquisitions involving
securities held for lending, hedging,
underwriting and/or fiduciary purposes.
If such transactions do not result in a
transfer of control and there is no sale
or lease of the facilities taking place,
then section 203(a)(1)(A) is not
triggered. This should assist applicants
in determining the need for prior
authorization under section 203.
38. With respect to the request for a
generic blanket authorization for
internal corporate reorganizations under
both sections 203(a)(1) and 203(a)(2) for
the transfer of assets from one nontraditional utility subsidiary 29 to
another non-traditional utility
subsidiary, the Commission cannot be
certain of the impact of such
transactions on utility affiliates on a
generic basis and, therefore, will not
grant a blanket authorization at this
time. The Commission will consider
case-specific blanket authorizations
(with appropriate reporting
requirements) on a case-by-case basis.
39. The Commission also denies the
request for a generic blanket
authorization under section 203(a)(2) for
non-bank fiduciaries subject to the
jurisdiction of the SEC. The
Commission finds that we need further
experience in this area before granting a
blanket authorization on a generic basis.
However, the Commission is willing to
consider such requests on a holding
company-specific basis or from
similarly situated holding companies,
such as similarly situated financial
institutions. Any such applications
would need to demonstrate in sufficient
another public utility, it may also have to file under
section 203(a)(1)(C) (no public utility may purchase
securities of another public utility if over $10
million in value).
28 See infra section II.C.
29 For example, power marketers, exempt
wholesale generators, or qualifying facilities.
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detail that applicants would not be able
to control public utilities and that there
would be no adverse impact on captive
customers or the public interest if the
authorizations were granted. As
discussed above with respect to section
203(a)(1) authorizations, this type of
approach would allow the Commission
to assess specific circumstances, to
place time limits on blanket
authorizations if appropriate (subject to
possible renewal), to monitor industry
activity, and to adapt the use of blanket
authorizations over time as we gain
further experience.
40. Certain participants to the
technical conferences argue that a
blanket authorization under section
203(a)(1) should be granted for
transactions in which a public utility or
a holding company is acquiring or
disposing of a jurisdictional contract
where the acquirer does not have
captive customers and the contract does
not convey control over the operation of
a generation or transmission facility.
These commenters argue that because
acquisition of these contracts cannot
create competitive or rate concerns, the
Commission should grant blanket
authorization under section 203(a)(1) for
such transactions. Because the specific
request for blanket authorization may
present concerns where the transferor
has captive customers, we seek
comment in the Blanket Authorization
NOPR on whether a generic blanket
authorization under section 203(a)(1) is
warranted for the acquisition or
disposition of a jurisdictional contract
where neither the acquirer nor
transferor has captive customers and the
contract does not convey control over
the operation of a generation or
transmission facility.
41. We also decline to grant a generic
blanket authorization under sections
203(a)(1) and 203(a)(2) for acquisitions
of up to 20 percent of the voting
interests in a public utility where the
acquirer is eligible to file with the SEC
a Schedule 13G, which demonstrates no
intent to exercise control over the entity
whose securities are being acquired.
While the Commission may consider
eligibility to file a Schedule 13G with
the SEC as part of an indication that an
entity will not be able to assert control
over a public utility, the Commission
will not accept Schedule 13G eligibility
as a definitive statement regarding
control. The Commission will consider
Schedule 13G eligibility as one factor in
the analysis of whether an entity can
assert control over a public utility.30
30 See, e.g., Capital Research and Management
Company, 116 FERC ¶ 61,267 (2006).
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C. Disposition of ‘‘Control’’ of
Jurisdictional Facilities
42. Several commenters have asked
the Commission to provide guidance on
what constitutes a disposition of
‘‘control’’ of jurisdictional facilities
under section 203. Most recently, this
request is being pressed by the
investment community, which seeks
further clarification regarding the scope
of the Commission’s regulatory
authority, and greater regulatory
certainty as to when section 203 review
is required.
43. We will provide guidance here,
but emphasize that the determination of
whether there is a disposition of control
must be based on all circumstances. In
other words, the decision must be made
on a fact-specific basis. As discussed
further below, while our case law under
section 201 provides guidance on the
factors that may result in control, no
single factor or factors necessarily
results in control. The electric industry
remains a dynamic, developing
industry, and no bright-line standard
will encompass all relevant factors and
possibilities that may occur now or in
the future.31
44. We note that much of the
Commission’s precedent in this area
was developed based on concerns that
there could be a jurisdictional void if
the Commission did not interpret
broadly what constitutes a disposition
of ‘‘control’’ of public utility facilities
under FPA section 203. The
Commission was particularly concerned
about the creation of holding companies
and holding company acquisitions that
could result in an indirect change of
control of the jurisdictional facilities of
public utilities, without Commission
review. In EPAct 2005, however,
Congress has filled any jurisdictional
void involving public utility holding
companies by amending section 203 to
specifically give the Commission
authority over certain holding company
acquisitions and mergers involving FPA
public utilities. Thus, the Commission’s
pre-EPAct 2005 precedent should be
read with this context in mind.
1. Precedent Discussing Dispositions of
Control
45. Section 203 requires prior
Commission approval if a public utility
seeks to sell, lease, or otherwise dispose
of jurisdictional facilities. As previously
noted, the Commission has interpreted
the ‘‘or otherwise dispose’’ language of
31 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 174
(2007) (Market-Based Rate Final Rule).
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section 203(a)(1) to include transfers of
‘‘control’’ of jurisdictional facilities.
Additionally, prior Commission
approval is required for any public
utility that seeks to directly or indirectly
merge or consolidate the whole of its
jurisdictional facilities, or any part
thereof, with the facilities of another
person, ‘‘by any means whatsoever.’’ 32
As interpreted by the Commission, the
requirement to obtain the Commission’s
approval under the ‘‘merge or
consolidate’’ clause depends on whether
the public utility’s facilities are subject
to the jurisdiction of the Commission
and whether the transaction directly or
indirectly would result in a change of
‘‘control’’ of the facilities.33
46. In Enova Corporation, the
Commission explained that the purpose
of section 203 is to provide a
mechanism for maintaining oversight of
the facilities of public utilities and to
prevent transfers of control over those
facilities that would harm consumers or
that would inhibit the Commission’s
ability to secure the maintenance of
adequate service and the coordination
in the public interest of jurisdictional
facilities.34 The Commission
determined that it cannot definitively
identify every combination of entities or
disposition of assets that may trigger
jurisdiction under section 203, since it
cannot anticipate every type of
restructuring that might occur. The
Commission stressed that its concern
was with changes in control, including
direct or indirect mergers that affect
jurisdictional facilities. It said that it
must be flexible in responding to
industry restructuring if it is to
discharge its statutory responsibility ‘‘to
secure the maintenance of adequate
service and the coordination in the
public interest of facilities subject to the
jurisdiction of the Commission.’’ 35
47. Noting in Enova that the FPA did
not provide definitions for the terms
‘‘dispose’’ or ‘‘control,’’ the Commission
stated that those terms should not be
read narrowly because to do so would
result in a jurisdictional void in which
certain types of corporate transactions
could escape Commission oversight.
While section 203 applies to changes or
transfers in the proprietary interests of
32 While the section 203(a)(1) requirements for
obtaining Commission authorization do not use the
word ‘‘control’’ in the statutory text, section
203(a)(4) provides that the Commission must
approve a proposed ‘‘disposition, consolidation,
acquisition, or change in control’’ (emphasis added)
if the statutory criteria are met.
33 PDI Stoneman, Inc., 104 FERC ¶ 61,270, at P 13
(2003) (PDI Stoneman).
34 Enova Corporation, 79 FERC ¶ 61,107, at
61,489 (1997) (Enova) (citing pre-EPAct 2005
section 203(b)).
35 Id. at 61,496.
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a public utility,36 not all transactions
under section 203 involve a change in
control of a public utility. If no change
in control results from the transaction,
it is not likely to adversely affect
competition, rates or regulation, or
result in cross-subsidization.
48. Our guidance concerning what
constitutes a disposition of control of
jurisdictional facilities for purposes of
section 203 requires a discussion of
what constitutes control of a public
utility since a public utility is a person
that owns or operates jurisdictional
facilities. In Enova, the Commission
cited the definition of control that has
been in its accounting regulations since
1937. Under that definition, control
means:
the possession, directly or indirectly, of the
power to direct or cause the direction of
management and policies of a company,
whether such power is exercised through one
or more intermediary companies, or alone, or
in conjunction with, or pursuant to an
agreement, and whether such power is
established through a majority or minority
ownership or voting of securities, common
directors, officers, or stockholders, voting
trusts, holding trusts, associated companies,
contract or any other direct or indirect
means.37
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49. The Commission has also
discussed certain elements of control in
cases concerning whether an entity is a
public utility under section 201.38 In
those cases, the Commission linked
‘‘decision-making’’ and ‘‘dominion and
control’’ in determining whether an
entity is a ‘‘public utility.’’ The
Commission also noted that the
reference to ‘‘operates [jurisdictional]
facilities’’ in the definition of public
utility in section 201(e) of the FPA
36 See Atlantic City Electric Company v. FERC,
295 F.3d 1, 12 (D.C. Cir. 2002).
37 Enova, 79 FERC at 61,492 (citing 18 CFR Part
101, Definitions 5.B). This definition is identical to
that found in the current regulations. In addition,
for purposes of its Standards of Conduct for
Transmission Providers, the Commission states that
‘‘control’’ ‘‘includes, but is not limited to, the
possession, directly or indirectly and whether
acting alone or in conjunction with others, of the
authority to direct or cause the direction of the
management or policies of a company.’’ 18 CFR
358.3(c).
38 Section 201(b)(1) describes the activities that
are subject to the jurisdiction of the Commission:
‘‘* * * the transmission of electric energy in
interstate commerce and * * * the sale of electric
energy at wholesale in interstate commerce * * *’’
The section further describes the facilities that are
jurisdictional: ‘‘The Commission shall have
jurisdiction over all facilities for such transmission
or sale of electric energy, * * *’’ with certain
exceptions not relevant here. In section 201(e), the
term ‘‘public utility’’ is defined as ‘‘any person who
owns or operates facilities subject to the jurisdiction
of the Commission under this Part (other than
facilities subject to such jurisdiction solely by
reason of [certain specified FPA sections]).’’ 16
U.S.C. 824, amended by EPAct 2005, Pub. L. 109–
58, 1295.
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refers ‘‘to the person who has control
and decision-making authority
concerning the operation of
facilities.’’ 39
50. In a case in which the
Commission disclaimed jurisdiction
under section 201(e) over financial
institutions that took title to facilities as
part of a leveraged lease transaction, the
Commission based its decision that the
lessor/owner was not a public utility
under section 201 on the following
factors (which it found in a previous but
analogous situation): (1) The financial
institutions that held legal title were not
operating the facilities; (2) none of the
parties taking title to the facilities were
in the business of producing or selling
electric power; and (3) all had a
principal business other than that of a
public utility.40 As part of its finding
that the lessor/owner did not operate
the facility, the Commission interpreted
the word ‘‘operates’’ as referring to the
person who has control and decisionmaking authority concerning the
operation of the facility, i.e., not a
person who merely performs specific
services that are ordered and directed by
another party.
51. We note that ‘‘control’’ has been
found even where that control is not
absolute or unfettered. In a case
involving a complex holding company
corporate structure, the Commission
deemed an investment adviser
subsidiary to be a public utility because
of its participation in wholesale
transactions. The Commission found
that the investment adviser had control
over the wholesale contracts to be
executed under the power marketer’s
market-based rate schedule because the
combination of the following three
factors translated into control: (1) The
sole discretion to enter into contracts;
(2) the exclusive ownership of the
intellectual property on which contracts
will be based; and (3) the intention that
the investment adviser will recommend
the contracts into which the power
marketer subsidiary would enter.41
52. The Commission cited its
decisions in Bechtel and Shaw as
providing guidance on whether a
nominal manager of a generating
company actually exercised sufficient
control to be deemed the operator and,
hence, a public utility.42 Based in part
39 Enova, 79 FERC at 61,492 (citing Bechtel Power
Corp., 60 FERC ¶ 61,156 (1992) (Bechtel Power)).
40 Bechtel Power, 60 FERC at 61,572 (citing
Pacific Power & Light Co., 3 FERC ¶ 61,119 (1978);
Public Service Company of New Mexico, 29 FERC
¶ 61,387 (1984); United Illuminating Company, 29
FERC ¶ 61,270 (1984)).
41 D.E. Shaw Plasma Power, L.L.C., 102 FERC
¶ 61,265, at P 33 (2003) (Shaw).
42 R.W. Beck Plant Management, Ltd., 109 FERC
¶ 61,315 (2004) (Beck).
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on those cases, in Beck, the Commission
found that a manager was a controlling
entity where he: (1) Effectively governed
the physical operation of the
jurisdictional facility; and (2) effectively
served as the decision-maker in the
sales of wholesale power. While the
application in that case described a
series of companies, at least five
contracts (all of which either directly
affected or were negotiated by the
manager), and a trustee in addition to
the manager, the Commission
concluded that the manager was the
controlling entity because he had the
substantive decision-making authority
regarding the jurisdictional assets, the
market-based rate tariff and a full
requirements purchase agreement. The
Commission made this finding even
though some of the manager’s actions
were subject to the approval of the
trustee in certain circumstances, e.g., if
the transaction exceeded $1 million in
value.
53. More recently, in the MarketBased Rate Final Rule, in providing
guidance on what contractual
arrangements convey control over a
public utility, we explained that we will
consider the totality of circumstances
and attach the presumption of control
when an entity can affect the ability of
capacity to reach the market. We further
explained that our guiding principle is
that an entity controls the facilities of
another when it controls the decisionmaking over sales of electric energy,
including discretion as to how and
when power generated by these
facilities will be sold.43
54. Investments in public utilities that
do not convey control may in some
cases be considered to be passive
investments not subject to section
203(a)(1)(A) (unless there is a sale or
lease of the facilities). The Commission
has found an investment to be passive
if, among other things, (1) the acquired
interest does not give the acquiring
entity authority to manage, direct or
control the day-to-day wholesale power
sales activities, or the transmission in
interstate commerce activities, of the
jurisdictional entity;44 and (2) the
acquired interest gives the acquiring
entity only limited rights (e.g., veto and/
or consent rights necessary to protect its
economic investment interests, where
those rights will not affect the ability of
the jurisdictional public utility to
conduct jurisdictional activities);45 and
(3) the acquiring entity has a principal
43 Market-Based Rate Final Rule, FERC Stats. &
Regs. ¶ 31,252 at P 176.
44 See Milford Power Company, LLC, 118 FERC
¶ 61,093, at P 35 n.21 (2007).
45 See Shaw, 102 FERC ¶ 61,265 at P 15.
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business other than that of producing,
selling, or transmitting electric power.46
55. We emphasize that the
circumstances that convey control in
section 203 analysis vary depending on
a variety of factors, including the
transaction structure, the nature of
voting rights and/or contractual rights
and obligations conveyed in the
transaction. For example, in PDI
Stoneman, the Commission considered
the acquisition of facilities through
three transactions, over approximately
seven years, in which the applicant’s
resulting ownership shares at issue at
the end of each of the three transactions
went from one-third to two-thirds to 100
percent of the voting stock. The
applicant claimed that control never
vested until the third transaction
because of a ‘‘supermajority’’ provision
in the operating agreement that required
approval by 80 percent of the voting
stock for a range of decisions, including
the sale of electricity from the plant.
The Commission focused on the marketbased rate schedule and concluded that
the first transaction may have
transferred control over that
jurisdictional asset because, even with
one-third of the voting stock, the
applicant had the authority to influence
all significant decisions, including the
sale of power from the plant. Further,
the Commission ruled that the material
change in the proportion of interests
after the second transaction resulted in
a change of control.47
56. While the purpose of the above
discussion is to provide guidance on
what, based on past precedent,
constitutes a change of control for
purposes of section 203, the burden
remains upon the entities involved in a
proposed transaction to decide whether
they need to obtain Commission
authorization under section 203 to
undertake a proposed transaction.
2. General Guideline Regarding What Is
Not a Transfer of Control
57. Based on the industry’s need for
further guidance on what may or may
not constitute a transfer of control of
jurisdictional facilities under section
203, and for greater regulatory certainty
in undertaking utility investments, the
Commission’s general policy in future
cases will be to presume that a transfer
of less than 10 percent of a public
utility’s holdings is not a transfer of
control if: (1) After the transaction, the
acquirer and its affiliates and associate
companies, directly or indirectly, in
aggregate will own less than 10 percent
46 See Metropolitan Life Insurance Company, 113
FERC ¶ 61,300, at P 6 (2005).
47 PDI Stoneman, 104 FERC ¶ 61,270 at P 15–17.
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of such public utility; and (2) the facts
and circumstances do not indicate that
such companies would be able to
directly or indirectly exercise a
controlling influence over the
management or policies of the public
utility. The Commission will apply this
policy on a case-by-case basis. Further,
if holding companies or other acquirers
believe that facts and circumstances
prevent them from exercising control
even if they own 10 percent or more of
a public utility, they may seek to make
such a demonstration to the
Commission.
58. This 10 percent threshold is
consistent with the definition of
‘‘holding company’’ under section
1262(8)(A) of PUHCA 2005 (at which
point a company may be in control of
a subsidiary public utility). It is also
consistent with the blanket
authorization granted under section
203(a)(2) in the Order No. 669
rulemaking proceeding, under which
holding companies are pre-authorized to
acquire up to 9.99 percent of voting
securities of a public utility, as well as
the proposed section 203(a)(1) blanket
authorization in the contemporaneous
Notice of Proposed Rulemaking.48
48 Blanket Authorization NOPR, supra note 6. In
The Goldman Sachs Group, Inc., 114 FERC ¶
61,118 (Goldman), order on reh’g, 115 FERC ¶
61,303 (2006), the Commission held that, under
section 203(a)(2), subsidiaries that are not
themselves holding companies are not required to
seek authorization from the Commission to
purchase, acquire, or take ‘‘covered’’ securities.
Covered securities relate to (1) acquisitions of
securities worth more than $10 million, and (2)
acquisitions of securities of a transmitting utility, an
electric company, or a holding company in a
holding company system that includes a
transmitting utility, or an electric utility company.
The Commission also held that subsidiaries’
securities acquisitions are not attributable to the
upstream holding company. Thus, the upstream
holding company also is not required to seek
section 203(a)(2) authorization for its subsidiaries’
acquisitions. This does not mean that authorization
may not be required under other provisions of
section 203. For example, if a non-utility subsidiary
acquires securities of a public utility, that public
utility must obtain section 203(a)(1)(A)
authorization if the transaction results in a transfer
of control of facilities valued at more than $10
million. Further, if each of a number of non-utility
subsidiaries acquires, for example, up to 9.99
percent of the same public utility (in order to avoid
becoming a holding company and/or avoid a
transfer of control to a single one of the
subsidiaries), it is possible that the public utility
disposition of securities to several companies under
common control could, taken as a whole, result in
a transfer of control. Finally, irrespective of the
dollar amount of the transaction, an indirect merger
or consolidation could occur and require approval
under section 203(a)(1)(B). Goldman, 114 FERC ¶
61,118 at P 13–15. Thus, while the Commission’s
policy as a general matter will be to presume that
a transfer of control is not likely where ownership
in a public utility is less than 10 percent, the
burden is on the entities to file under section 203
if this threshold is met. The Commission will
continue to review the facts and circumstances of
transactions on a case-by-case basis.
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Further, the Commission has employed
a rebuttable presumption in the context
of its Standards of Conduct for
Transmission Providers that ownership
of 10 percent or more of voting interests
creates a rebuttable presumption of
control.49
D. The Commission’s Appendix A
Analysis
1. Appendix A Policy and Case History
59. The 1996 Merger Policy Statement
uses an analytical screen (Appendix A
analysis) to allow early identification of
transactions that clearly do not raise
competitive concerns.50 As discussed
below, the Commission does not believe
modifications to its Appendix A
analysis are warranted at this time.
However, the Commission will provide
certain clarifications in light of the
concerns raised by commenters in the
Order No. 669 rulemaking proceeding
and the March 8 Technical Conference.
60. In horizontal mergers, if an
applicant fails the Competitive Analysis
Screen (one piece of the Appendix A
analysis), the Commission’s analysis
focuses on the merger’s effect on the
merged firm’s ability and incentive to
withhold output in order to drive up the
market price. The ability to withhold
output depends on the amount of
marginal capacity controlled by the
merged firm, and the incentive to do so
depends on the amount of inframarginal capacity that could benefit
from higher prices. For example, in a
horizontal merger combining a company
with significant baseload capacity with
a company owning capacity on the
margin under many season/load
conditions, the theory of competitive
harm would be that the combination of
the ‘‘ability’’ assets with one company’s
existing ‘‘incentive’’ assets would
increase the likelihood of the company
exercising market power. Proper
mitigation would address the harm to
competition by reducing the merged
firm’s ‘‘ability’’ assets or its ‘‘incentive’’
assets through divestiture or some other
method. In Commonwealth Edison
Company, we discussed both the ability
and the incentive of the merged firm to
49 18
CFR 358.3(c).
part of the screen analysis, applicants must
define the relevant products sold by the merging
entities, identify the customers and potential
suppliers in the geographic markets that are likely
to be affected by the proposed transaction, and
measure the concentration in those markets. Using
the Delivered Price Test to identify alternative
competing suppliers, the concentration of potential
suppliers included in the defined market is then
measured by the Herfindahl-Hirschman Index (HHI)
and used as a screen to determine which
transactions clearly do not raise market power
concerns. 1996 Merger Policy Statement, FERC
Stats. & Regs. ¶ 31,044 at 30,119–20.
50 As
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withhold output. We found that despite
screen failures, the merger would not
harm competition in the relevant
wholesale markets and therefore did not
require any mitigation:
An examination of market supply
conditions shows three reasons why a
profitable withholding strategy by ComEd
would be unlikely: (a) For most hours during
the year, the supply curve is relatively flat,
so withholding capacity would not
significantly raise the market price; (b) for
those hours during which it could
successfully raise the market price, ComEd
would have to forgo sales from its low-cost
nuclear capacity; and (c) ComEd’s only
generation is nuclear which is difficult to
ramp down or up so as to withhold output
during the most profitable time periods.51
61. The Commission also examines
the possibility of competitive harm in
vertical mergers. In the first stage of the
analysis, the Commission requires
applicants to calculate the post-merger
concentration in both the upstream and
downstream markets to determine
whether the upstream and downstream
markets are highly concentrated,
because highly concentrated upstream
and downstream markets are necessary,
but not sufficient, conditions for a
vertical foreclosure strategy to be
effective. If both of those necessary
conditions are present, then the second
stage of the analysis focuses on whether
the merger creates or enhances the
ability or incentive of the merged firm
to exercise vertical market power
through vertical foreclosure or raising
rivals’ costs.52
62. For example, in AEP/CSW, the
Commission found—without relying
solely on changes in HHI statistics—that
the merger of two vertically integrated
utilities with both transmission and
generation assets would harm
competition by enhancing the ability
and incentive for the merged firm to use
control of its transmission assets to
frustrate competitors’ access to relevant
markets. The Commission therefore
required that AEP turn over control of
its transmission facilities to a
Commission-approved Regional
Transmission Operator and, in the
interim, be subject to market monitoring
by an independent entity and have an
independent entity calculate and post
the available transfer capacity on AEP’s
transmission system.53
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51 Commonwealth
Edison Company, 91 FERC ¶
61,036, at 61,133 n.42 (2000).
52 See Filing Requirements Rule, FERC Stats. &
Regs. ¶ 31,111 at 31,910–11.
53 American Electric Power Company and Central
and Southwest Corporation, Opinion No. 442, 90
FERC ¶ 61,242, at 61,788–90 (AEP/CSW ), order on
reh’g, Opinion No. 442–A, 91 FERC ¶ 61,129 (2000),
appeal denied sub nom., Wabash Valley Power
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63. We will continue to analyze
mergers (both horizontal and vertical)
and other section 203 applications by
focusing on a transaction’s effect on the
company’s ability and incentive to
exercise market power, and thus harm
competition. We expect applicants and
intervenors to frame their arguments in
this manner.
2. Issues Raised at the March 8
Technical Conference
a. The Role of HHIs in the Appendix A
Analysis
64. Some commenters argued that the
Commission was overly focused on the
HHI statistic, which measures
concentration, and asked that the
Commission look at competitive effects
of section 203 transactions that are not
apparent from the assessment of
concentration.54
65. In fact, as noted above, the
Commission does look beyond the
change in HHI in its analysis of the
effect on competition in both horizontal
and vertical mergers. The change in HHI
serves as a screen to identify those
transactions that could potentially harm
competition. If the screen is failed, then,
as discussed in paragraph 59 above, the
Commission examines the factors that
could affect competition in the relevant
market. Specifically, in these
circumstances the Commission typically
considers a case-specific theory of
competitive harm, which includes, but
is not limited to, an analysis of the
merged firm’s ability and incentive to
withhold output in order to drive up
prices. Again, and as noted above, the
Commission has discussed its
consideration of such factors in cases
such as Commonwealth Edison
Company. Further, the Filing
Requirements Rule requires applicants
failing the screen to address market
conditions beyond the change in HHI:
The facts of each case (e.g., market
conditions, such as demand and supply
elasticity, ease of entry and market rules, as
well as technical conditions, such as the
types of generation involved) determine
whether the merger would harm competition.
When there is a screen failure, applicants
must provide evidence of relevant market
conditions that indicate a lack of a
competitive problem or they should propose
mitigation.55
Association, Inc. v. FERC, 268 F.3d 1105 (D.C. Cir.
2001).
54 See, e.g., Comments of Darren Bush, March 8
Technical Conference, Tr. 23; Comments of Mark
Hegedus, March 8 Technical conference, Tr. 94–95;
Comments of Diana Moss, March 8 Technical
Conference, Tr. 101; Comments of Mark J. Niefer,
March 8 Technical Conference, Tr. 108.
55 Filing Requirements Rule, FERC Stats. & Regs.
¶ 31, 111 at 31, 897.
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Moreover, even where an applicant
passes the HHI screen, the Commission
also considers intervenor theories of
competitive harm.
b. Commission-Developed Computer
Simulation Model
66. Some commenters stated that the
Commission should develop and
internally run its own computer
simulation model, similar to what is
done by the U.S. Department of Justice
(DOJ) and the Federal Trade
Commission (FTC). Dr. Frankena
asserted that using a computer
simulation model would be more
reliable than our alleged practice of
relying exclusively on applicants to
perform the current Appendix A
analysis. Mr. Hegedus advocated the use
of regional models in concert with the
process the Commission proposed in the
market-based rate rulemaking
proceeding and other proceedings
involving market power issues. Dr. Moss
suggested using an in-house model in a
more limited way, as a consistency
check on submissions rather than as a
formal evaluative tool. Dr. Neifer stated
that models are among the many types
of evidence the DOJ considers in
evaluating a merger. For example, the
DOJ uses simple models that evaluate
the costs and benefits of the merger as
well as more complex ones that model
a firm’s decision to operate a generating
unit in the markets at issue.
67. Other commenters argued that the
costs for the Commission to develop and
run its own computer simulation model
would exceed any related benefits. Mr.
Baliff argued that it would be difficult
to use any model unless it were
generally accepted, well known, and
accessible to all so that applicants could
know whether their proposed
transactions passed muster. In addition,
different models focus on different
decisions—bidding decisions, supply
decisions, pricing decisions—and some
or all of these may be relevant. Mr.
Hegedus argued that the Commission
should develop regional models to
analyze mergers based on the
information available from its analyses
of market-based rate authorizations and
through its Office of Enforcement.
68. We will not develop and run our
own computer simulation model in lieu
of or in addition to the Delivered Price
Test model that we already require
applicants to perform as part of the
Competitive Analysis Screen. While
advocates of computer simulation
models believe that such models would
more accurately analyze the effect on
competition, and some believe they will
allow better coordination with other
Commission programs involving market
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power issues, these advocates have not
demonstrated how the Commission’s
use of an internal model would have
altered any Commission determinations
on previous section 203 applications.
While the benefits of a Commissioninternal computer simulation model
have not been well-defined or
quantified, we believe that the costs of
such a modeling requirement in time
and resources to applicants, intervenors,
and Commission staff would be likely to
exceed any benefits.
69. It also should be emphasized that
those who advocate use of an internal
modeling overlook important
differences between Commission
proceedings under section 203 and the
processes used by the DOJ and the FTC
to review mergers and acquisitions. The
Commission’s process of reviewing
mergers and acquisitions under section
203 is a public one. An application is
filed publicly, all interested parties have
the ability to comment, and the
Commission decides the case based on
the public record. Our Appendix A
analysis facilitates this public process
by requiring the submission of a
transparent market power study, using
standardized assumptions and criteria,
that is available for review and
comment by all interested parties,
including state commissions and
customers, and, importantly, can be
replicated by them in the limited time
period available for public comment.
Similarly, when mitigation measures are
necessary in Commission proceedings,
they are based on the public record and
available for comment by all interested
parties.
70. By contrast, the DOJ and the FTC
use largely informal and non-public
processes for reviewing transactions
subject to their jurisdiction. Their
meetings with applicants are not
noticed to the public and are less formal
in nature. This provides the DOJ and the
FTC greater flexibility to use, among
other things, internal modeling tools
that may not be easily replicated or
other methodological approaches that
are stylized to an individual case. In
DOJ and FTC proceedings, staff and
applicants can engage in extensive
informal communications to discuss
and address data, methodological and
other disputes that are associated with
these more stylized approaches.
Similarly, when mitigation is required,
staff and applicants can design such
mitigation measures in a non-public
manner. In sum, these more informal
processes, while entirely appropriate in
the context of DOJ and FTC review of
mergers and transactions, simply cannot
be replicated by the Commission given
the due process and other
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considerations relevant in proceedings
under section 203 of the FPA.
71. We also note that some
commenters urging the Commission to
develop and run its own internal
computer simulation model are
mistakenly assuming that the current
process is flawed because applicants
can file merger impact studies using
their own methodologies and
assumptions. On the contrary, in the
1996 Merger Policy Statement, in the
Filing Requirements Rule and in many
subsequent orders interpreting those
issuances, the Commission has carefully
set forth the requirements of how the
Commission’s adopted study
methodology, the Delivered Price Test,
must be performed and what
assumptions the Commission will
accept as reasonable. If applicants fail to
perform the studies according to the
Commission’s prescribed methodology,
or their studies are based on faulty
assumptions or use questionable data
inputs, then those studies are required
to be amended or supplemented with
additional data.56 In some cases the
Commission has required that new
studies be conducted which conform to
the Commission’s standards. Thus,
contrary to the view of some
commenters, neither the Commission
nor intervenors are disadvantaged by
our current policy of requiring
applicants to perform the merger impact
studies, nor is the Commission subject
to manipulation by applicants who can
allegedly game the studies to their own
benefit. Studies which do not conform
to the Commission’s explicit
requirements are either rejected or
required to be revised until they do
conform, and intervenors have
opportunity in every merger proceeding
to inform the Commission if they
believe that something in the applicant’s
study is amiss.
72. Specifically, merger applicants
must submit the model and all of the
data inputs necessary for completing the
Competitive Analysis Screen in any
section 203 Application requiring a
complete Appendix A analysis.57 In
those cases, Commission staff reviews
the data supplied and runs the
applicants’ models to check the
56 For example, in Entergy Gulf States, Inc.,
Commission Staff was unable to verify the results
of applicants’ model performing the Competitive
Analysis Screen, and sent the applicants a
deficiency letter identifying the error in the input
data and requiring the applicants to submit the
corrected data. Entergy Gulf States, Inc., Docket No.
EC07–70–000, at 1 (Apr. 6, 2007) (unpublished
deficiency letter).
57 In cases involving a de minimis amount of
generation being combined in the relevant
geographic market, applicants are not required to
perform a complete Appendix A analysis.
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accuracy of the results and the
sensitivity of the results to changes in
the underlying assumptions. In
addition, the models and input data are
available to intervenors in the
proceeding, who can also verify the
accuracy of the results and perform
sensitivity tests.
73. A complete Competitive Screen
Analysis submission provides sufficient
information to identify those
transactions that may harm competition.
The data submitted includes a valuable
intermediate calculation: A supply
curve of all the generators that can
possibly serve the area, and whether
those generators are dispatched given
transmission constraints. Finding the
supply curve requires an estimate of
suppliers’ generation costs, including
fuel costs, operation and maintenance
costs, heat rates, and emissions costs;
competitive market prices; transmission
prices; and transmission import
constraints.58 Whether the Commission
grants the merger application with or
without conditions, rejects it, or sets it
for hearing, the Commission can
determine whether the application
presents any competitive issues because
the current Competitive Analysis Screen
is sufficiently precise to make such a
determination.
74. In summary, there has been no
showing that a Commission-internal
computer simulation model is needed,
both in light of these burdens as well as
because the study that the Commission
already requires applicants to perform is
adequate to measure the potential for
competitive harm associated with
section 203 dispositions. And, as noted
above, the Commission is diligent in
ensuring that applicants conduct the
Competitive Analysis Screen properly,
including using reasonable assumptions
and data inputs.
c. Adding Hart-Scott-Rodino
Information to the Section 203 Record
75. Some commenters suggested that
the Commission require applicants to
file all materials submitted to the DOJ
and the FTC in their Hart-Scott-Rodino
(HSR) filings. Other commenters noted
that such a filing would create
confidentiality concerns due to the
public nature of the Commission’s
section 203 proceedings. We also share
those concerns. Unlike the DOJ and the
FTC, who can keep any of the
information confidential, our
proceedings require a public record, and
our decisions must be based on
evidence that is available to the parties
58 See 1996 Merger Policy Statement, FERC Stats.
& Regs. ¶ 31,044 at 30,130–33 (discussion of the
delivered price test).
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Federal Register / Vol. 72, No. 148 / Thursday, August 2, 2007 / Rules and Regulations
of record in the proceeding. We permit
applicants to request confidentiality for
certain documents and file a protective
order to allow intervenors to view those
documents. However, we cannot
maintain the same degree of
confidentiality as do the DOJ and the
FTC.59 The HSR filings often contain
highly sensitive proprietary documents
such as the companies’ price forecasts,
pricing analyses, and pricing
decisions.60 Access to such valuable
commercial information could not only
harm the merging companies, it could
also harm competition in wholesale
electricity markets by facilitating
coordination by competitors, who
would have a better understanding of
each other’s pricing strategies and
competitive objectives.
d. Alternatives to Trial-Type Hearings
76. Some commenters suggested that
the Commission use alternatives to trialtype evidentiary hearing procedures,
including technical conferences and
paper hearings with limited periods of
discovery and additional data requests.
77. Given the statutory deadlines
faced by the Commission on section 203
applications,61 we believe that holding
an evidentiary hearing generally will
not be feasible, depending on the issues
in dispute. Therefore, in cases that
present complicated factual disputes,
we will consider alternatives such as
paper hearings with a limited period of
discovery, so that we can develop a
complete record.
e. Attribution of Generation Under
Contract
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78. Some commenters also requested
clarification on how generation under
contract should be attributed in the
analysis of market concentration.
Specifically, they asked whether the
generation should be attributed to the
party with operational control of the
generation facility or to the party with
the economic interest in the capacity.
59 As Mark J. Niefer noted, ‘‘the [Antitrust]
Division [of the DOJ] is precluded from sharing
much of the information it gathers to analyze a
merger’’ and ‘‘[e]xcept in very limited
circumstances, information provided to the
Division * * * may not be disclosed to others
without the consent of the producing party.’’
Comments of Mark J. Niefer, March 8 Technical
Conference, Tr. 106–07.
60 See Federal Trade Commission, Introductory
Guide III to the Premerger Notification Program,
Model Request for Additional Information and
Documentary Material (Second Request) (revised
May 2007), available at https://www.ftc.gov/bc/hsr/
introguides/guide3.pdf.
61 Under revised section 203, the Commission
must act within 180 days of a complete application,
and with good cause may extend the deadline
another 180 days. If not, the authorization is
granted by law.
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79. The determination on whether a
long-term generation contract should be
attributed to the purchaser of power or
the seller depends on the party with
operational control, which depends
upon the specific contract. Therefore,
we have required that applicants file
information about whether their longterm generation contracts confer
operational control over generation
resources to the purchaser. Our practice
has been to attribute contracted capacity
to the purchaser if such a contract
confers operational control over the
generation to the purchaser.62 We will
continue this practice, and require
applicants to file purchase and sales
data, including information on whether
the terms and conditions of purchase
contracts confer operational control over
generation to the purchaser. However, if
an applicant fails the Competitive
Analysis Screen, we will consider
arguments regarding the ability and
incentive of the merged firm to exercise
market power, and therefore consider
the merged firm’s contractual positions
as well as its physical control of
generation.
III. Information Collection Statement
80. The Office of Management and
Budget’s (OMB) regulations require that
OMB approve certain information
collection and data retention
requirements imposed by agency
rules.63 In this supplemental policy
statement, the Commission is providing
guidance regarding future
implementation of FPA section 203. The
Commission is not imposing any
additional information collection
requirement upon the public. The
Commission is not proposing any
changes to its current regulations.
Accordingly, there should be no impact
on the current reporting burden
associated with an individual section
203 application. The Commission also
does not expect the total number of
section 203 applications to be affected
by this Supplemental Policy Statement.
However, the Commission will submit
for informational purposes only a copy
of this Supplemental Policy Statement
to OMB.
Burden Estimate: The Public
Reporting and records retention burden
for section 203 applications is as
follows.
Title: FERC–519, ‘‘Application Under
the Federal Power Act, Section 203’’.
Action: Revised Collection.
OMB Control No.: 1902–0082.
62 See Filing Requirements Rule, FERC Stats. &
Regs. ¶ 31,111 at 31,888.
63 5 CFR 1320.
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42289
The applicant will not be penalized
for failure to respond to this information
collection unless the information
collection displays a valid OMB control
number or the Commission has
provided justification as to why the
control number should not be
displayed.
Respondents: Businesses or other for
profit.
Frequency of Responses: N/A.
Necessity of the Information: This
Supplemental Policy Statement
provides guidance regarding future
implementation of FPA section 203. The
Commission is not proposing any
changes to its current regulations.
Internal Review: The Commission has
conducted an internal review of the
public reporting burden associated with
the collection of information and
assured itself, by means of internal
review, that there is specific, objective
support for its existing information
burden estimate.
81. Interested persons may obtain
information on the reporting
requirements by contacting: Federal
Energy Regulatory Commission, 888
First Street, NE., Washington, DC, 20426
[Attention: Michael Miller, Office of the
Executive Director, Phone (202) 502–
8415, fax (202) 273–0873, e-mail:
michael.miller@ferc.gov]. Comments on
the requirements of the Supplemental
Policy Statement may also be sent to the
Office of Information and Regulatory
Affairs, Office of Management and
Budget, Washington, DC 20503
[Attention: Desk Officer for the Federal
Energy Regulatory Commission, fax
(202) 395–7285, e-mail
oira_submission@omb.eop.gov].
IV. Environmental Analysis
82. 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.64 The Commission has
categorically excluded certain actions
from this requirement as not having a
significant effect on the human
environment.65 The Supplemental
Policy Statement is categorically
excluded as it addresses actions under
section 203.66 Accordingly, no
environmental assessment is necessary
and none has been prepared in this
Supplemental Policy Statement.
64 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).
65 18 CFR 380.4.
66 See 18 CFR 380.4(a)(16).
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Federal Register / Vol. 72, No. 148 / Thursday, August 2, 2007 / Rules and Regulations
V. Regulatory Flexibility Act
Certification
83. The Regulatory Flexibility Act of
1980 (RFA) 67 requires agencies to
prepare certain statements, descriptions
and analyses of proposed rules that will
have a significant economic impact on
a substantial number of small entities.68
However, the RFA does not define
‘‘significant’’ or ‘‘substantial.’’ Instead,
the RFA leaves it up to an agency to
determine the effect of its regulations on
small entities.
84. Most filing companies regulated
by the Commission do not fall within
the RFA’s definition of small entity.69
Further, as noted above, the
Supplemental Policy Statement does not
propose any changes to the
Commission’s current regulations under
section 203; therefore there is no change
in how the Commission’s regulations
under section 203 affect small entities.
Therefore, the Commission certifies that
the Supplemental Policy Statement will
not have a significant economic impact
on a substantial number of small
entities. As a result, no regulatory
flexibility analysis is required.
VI. Document Availability
85. 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 (https://
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.
86. 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
67 5
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.
69 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.
jlentini on PROD1PC65 with RULES
68 The
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16:10 Aug 01, 2007
Jkt 211001
in eLibrary, type the docket number
(excluding the last three digits of the
docket number), in the docket number
field.
87. 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.
VII. Effective Date and Congressional
Notification
88. This Supplemental Policy
Statement is effective July 20, 2007. The
Commission has determined that,
consistent with the discussion above
with regard to information collection
and the RFA, this policy statement also
is not a ‘‘major rule’’ as defined in
section 351 of the Small Business
Regulatory Enforcement Fairness Act of
1996. The Commission will submit this
Supplemental Policy Statement to both
houses of Congress and to the General
Accounting Office.
List of Subjects in 18 CFR Part 33
Electric utilities, Reporting and
recordkeeping requirements, Securities.
By the Commission.
Kimberly D. Bose,
Secretary.
[FR Doc. E7–14956 Filed 8–1–07; 8:45 am]
BILLING CODE 6717–01–P
DEPARTMENT OF HEALTH AND
HUMAN SERVICES
Food and Drug Administration
21 CFR Part 522
Implantation or Injectable Dosage
Form New Animal Drugs;
Oxytetracycline Hydrochloride
Injection
AGENCY:
Food and Drug Administration,
HHS.
ACTION:
Final rule.
SUMMARY: The Food and Drug
Administration (FDA) is amending the
animal drug regulations to reflect
approval of an abbreviated new animal
drug application (ANADA) filed by
Norbrook Laboratories, Ltd. The
ANADA provides for use of an
oxytetracycline hydrochloride injectable
solution in beef cattle, beef calves,
nonlactating dairy cattle, and dairy
PO 00000
Frm 00020
Fmt 4700
Sfmt 4700
calves for the treatment of various
bacterial diseases.
DATES: This rule is effective August 2,
2007.
FOR FURTHER INFORMATION CONTACT: John
K. Harshman, Center for Veterinary
Medicine (HFV–104), Food and Drug
Administration, 7500 Standish Pl.,
Rockville, MD 20855, 301–827–0169, email: john.harshman@fda.hhs.gov.
SUPPLEMENTARY INFORMATION: Norbrook
Laboratories, Ltd., Station Works,
Newry BT35 6JP, Northern Ireland, filed
ANADA 200–452 that provides for use
of OXYTET 10 (oxytetracycline
hydrochloride) Injection in beef cattle,
beef calves, nonlactating dairy cattle,
and dairy calves for the treatment of
various bacterial diseases. Norbrook
Laboratories, Ltd.’s OXYTET 10
Injection is approved as a generic copy
of Boehringer Ingelheim Vetmedica,
Inc.’s, MEDAMYCIN Injectable
approved under NADA 108–963. The
ANADA is approved as of June 27, 2007,
and the regulations are amended in 21
CFR 522.1662a to reflect the approval.
In accordance with the freedom of
information provisions of 21 CFR part
20 and 21 CFR 514.11(e)(2)(ii), a
summary of safety and effectiveness
data and information submitted to
support approval of this application
may be seen in the Division of Dockets
Management (HFA–305), Food and Drug
Administration, 5630 Fishers Lane, rm.
1061, Rockville, MD 20852, between 9
a.m. and 4 p.m., Monday through
Friday.
FDA has determined under 21 CFR
25.33(a)(1) that this action is of a type
that does not individually or
cumulatively have a significant effect on
the human environment. Therefore,
neither an environmental assessment
nor an environmental impact statement
is required.
This rule does not meet the definition
of ‘‘rule’’ in 5 U.S.C. 804(3)(A) because
it is a rule of ‘‘particular applicability.’’
Therefore, it is not subject to the
congressional review requirements in 5
U.S.C. 801–808.
List of Subjects in 21 CFR Part 522
Animal drugs.
I Therefore, under the Federal Food,
Drug, and Cosmetic Act and under
authority delegated to the Commissioner
of Food and Drugs and redelegated to
the Center for Veterinary Medicine, 21
CFR part 522 is amended as follows:
PART 522—IMPLANTATION OR
INJECTABLE DOSAGE FORM NEW
ANIMAL DRUGS
1. The authority citation for 21 CFR
part 522 continues to read as follows:
I
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]]>Agencies
[Federal Register Volume 72, Number 148 (Thursday, August 2, 2007)]
[Rules and Regulations]
[Pages 42277-42290]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-14956]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF ENERGY
Federal Energy Regulatory Commission
18 CFR Part 33
[Docket No. PL07-1-000]
FPA Section 203 Supplemental Policy Statement
Issued July 20, 2007.
AGENCY: Federal Energy Regulatory Commission, DOE.
ACTION: Policy statement.
-----------------------------------------------------------------------
SUMMARY: The Federal Energy Regulatory Commission is providing guidance
regarding future implementation of section 203 of the Federal Power
Act. In the Supplemental Policy Statement the Commission adopts
policies and provides clarifications intended to continue the
encouragement of beneficial utility industry investment while also
providing for effective customer protections, including working in a
complementary fashion with the states in protecting customers.
DATES: Effective Date: This Supplemental Policy Statement is effective
July 20, 2007.
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.
[[Page 42278]]
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.
Andrew P. Mosier, Jr. (Technical Information), Office of Energy
Markets and Reliability, Federal Energy Regulatory Commission, 888
First Street, NE., Washington, DC 20426, (202) 502-6274.
SUPPLEMENTARY INFORMATION:
Before Commissioners: Joseph T. Kelliher, Chairman; Suedeen G.
Kelly, Marc Spitzer, Philip D. Moeller, and Jon Wellinghoff.
FPA Section 203 Supplemental Policy Statement
1. The Commission is issuing this Policy Statement as a supplement
to the Commission's rulemakings issued in 2006 to implement provisions
of the Energy Policy Act of 2005 \1\ and also as a supplement to its
1996 Merger Policy Statement.\2\ The 2006 rulemakings addressed
amendments to the Commission's corporate review authority under section
203 of the Federal Power Act (FPA),\3\ the repeal of the Public Utility
Holding Company Act of 1935 \4\ and the enactment of the Public Utility
Holding Company Act of 2005.\5\ Based on our experience in implementing
the new laws thus far, and on the two technical conferences in which
industry participants and state commissioners provided input on key
issues, including the protection of captive customers against
inappropriate cross-subsidization and the need to provide sufficient
flexibility to encourage industry investment that benefits customers,
the Commission finds that it is appropriate to provide guidance in this
Policy Statement regarding future implementation of section 203. We
clarify that this Policy Statement supplements, and does not replace,
any part of the Commission's 1996 Merger Policy Statement.
---------------------------------------------------------------------------
\1\ Pub. L. 109-58, 119 Stat. 594 (2005) (EPAct 2005).
\2\ 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 (1996) (1996 Merger
Policy Statement), reconsideration denied, Order No. 592-A, 62 FR
33341 (June 19, 1997), 79 FERC ] 61,321 (1997).
\3\ 16 U.S.C. 824b (2000), amended by EPAct 2005, Pub. L. No.
109-58, 1289, 119 Stat. 594, 982-83 (2005). See also 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).
\4\ 16 U.S.C. 79a et seq. (PUHCA 1935).
\5\ EPAct 2005, Pub. L. 109-58, 1261, et seq., 119 Stat. 594,
972-78 (PUHCA 2005). See also 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, Order No. 667-C, 72 FR 8277
(Feb. 26, 2007), 118 FERC ] 61,133 (2007).
---------------------------------------------------------------------------
2. This Policy Statement is one of three actions being taken based
on the Commission's experience implementing amended FPA section 203 and
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 Notice of Proposed Rulemaking proposing to grant
a limited blanket authorization for certain dispositions of
jurisdictional facilities under FPA section 203(a)(1) \6\ and a Notice
of Proposed Rulemaking proposing to codify restrictions on affiliate
transactions between franchised public utilities with captive customers
and their market-regulated power sales affiliates or non-utility
affiliates.\7\
---------------------------------------------------------------------------
\6\ Blanket Authorization Under FPA Section 203, 120 FERC ]
61,062 (2007) (issued in Docket No. RM07-21-000) (Blanket
Authorization NOPR).
\7\ Cross-Subsidization Restrictions on Affiliate Transactions,
120 FERC ] 61,061(2007) (issued in Docket No. RM07-15-000)
(Affiliate Transactions NOPR).
---------------------------------------------------------------------------
I. Background
3. In 1996, the Commission issued the 1996 Merger Policy Statement
updating and clarifying the Commission's procedures, criteria and
policies concerning public utility mergers under section 203 of the
FPA.\8\ The purpose of the 1996 Merger Policy Statement was to ensure
that mergers are consistent with the public interest and to provide
greater certainty and expedition in the Commission's analysis of merger
applications. The 1996 Merger Policy Statement refined and modified the
Commission's merger policy ``in light of dramatic and continuing
changes in the electric power industry and corresponding changes in the
regulation of that industry.'' \9\
---------------------------------------------------------------------------
\8\ Supra note 2.
\9\ 1996 Merger Policy Statement, FERC Stats. & Regs. ] 31,044,
at 30,110.
---------------------------------------------------------------------------
4. In the 1996 Merger Policy Statement, the Commission set out the
three factors it generally considers when analyzing whether a proposed
section 203 transaction \10\ is consistent with the public interest:
effect on competition, effect on rates, and effect on regulation. In
2000, the Commission issued the Filing Requirements Rule,\11\ which
updated the filing requirements under 18 CFR Part 33 of the
Commission's regulations for section 203 applications. Among other
things, the Filing Requirements Rule codified the Commission's
screening approach to quickly identify mergers that may raise
horizontal competitive concerns, provided specific filing requirements
consistent with Appendix A of the 1996 Merger Policy Statement,
established guidelines for vertical competitive analysis, and set forth
filing requirements for mergers that potentially raise vertical market
power concerns. The revised filing requirements are in effect today, as
recently modified (discussed below), and they assist the Commission in
determining whether section 203 transactions are consistent with the
public interest, provide more certainty to applicants regarding what
showings must be made to satisfy the Commission's concerns under
section 203, and expedite the Commission's review of such applications.
---------------------------------------------------------------------------
\10\ Although the Commission applies these factors to all
section 203 transactions, not just mergers, the filing requirements
and the level of detail required may differ. 1996 Merger Policy
Statement, FERC States & Regs. ] 31,044, at 30,113 n.7. See also 18
CFR 2.26 (codifying the 1996 Merger Policy Statement).
\11\ Revised Filing Requirements Under Part 33 of the
Commission's Regulations, Order No. 642, 65 FR 70984 (Nov. 28,
2000), FERC Stats. & Regs. ] 31,111 (2000) (Filing Requirements
Rule), order on reh'g, Order No. 642-A, 66 FR 16121 (Mar. 23, 2001),
94 FERC ] 61,289 (2001) (codified at 18 CFR Part 33).
---------------------------------------------------------------------------
5. The scope of the Commission's section 203 review was expanded by
EPAct 2005. Among other things, amended section 203: (1) Expands the
Commission's review authority to include authority over certain holding
company mergers and acquisitions, as well as certain public utility
acquisitions of generating facilities; (2) requires that, prior to
approving a disposition under section 203, the Commission must
determine that the transaction would not result in inappropriate cross-
subsidization of non-utility affiliates or encumbrance of utility
assets; \12\ and (3) imposes statutory deadlines for acting on
[[Page 42279]]
mergers and other jurisdictional transactions.
---------------------------------------------------------------------------
\12\ Section 203(a)(4) is not an absolute prohibition on the
creoss-subsidization of a non-utility associate company or the
pledge or encumbrance of utility assets for the benefit of an
associate company. If the Commission determines that the cross-
subsidization, pledge or encumbrance will be consistent with the
public interest, such action may be permitted.
---------------------------------------------------------------------------
6. Through the Order No. 669 rulemaking proceeding, the Commission
promulgated regulations adopting certain modifications to 18 CFR 2.26
and Part 33 to implement amended section 203. The Commission also
provided blanket authorizations for certain transactions subject to
section 203. These blanket authorizations were crafted to ensure that
there is no harm to captive utility customers, but sought to
accommodate investments in the electric utility industry by
facilitating market liquidity. Some commenters in the rulemaking
proceeding urged the Commission to grant additional blanket
authorizations. Other commenters argued that the Commission should
adopt additional generic rules to guard against inappropriate cross-
subsidization associated with the mergers. Certain commenters argued
that the Commission should modify its competitive analysis for mergers,
which has been in place for 10 years. The Commission stated that it
would reevaluate these and other issues at a future technical
conference on the Commission's section 203 regulations as well as
certain issues raised in the Order No. 667 rulemaking proceeding
implementing PUHCA 2005.
7. On December 7, 2006, the Commission held a technical conference
(December 7 Technical Conference) to discuss several of the issues that
arose in the Order No. 667 and Order No. 669 rulemaking proceedings.
The December 7 Technical Conference discussed a range of topics. The
first panel discussed whether there are additional actions, under the
FPA or the Natural Gas Act (NGA), that the Commission should take to
supplement the protections against cross-subsidization that were
implemented in the Order No. 667 and Order No. 669 rulemaking
proceedings. The second panel discussed whether, and if so how, the
Commission should modify its Cash Management Rule \13\ in light of
PUHCA 2005, and whether the Commission should codify specific
safeguards that must be adopted for cash management programs and money
pool agreements and transactions. The third panel discussed whether
modifications to the specific exemptions, waivers and blanket
authorizations set forth in the Order No. 667 and Order No. 669
rulemaking proceedings are warranted. Post-technical conference
comments were accepted.
---------------------------------------------------------------------------
\13\ Regulation of Cash Management Practices, Order No. 634, 68
FR 40500 (July 8, 2003), FERC Stats. & Regs. ] 31,145, revised,
Order No. 634-A, 68 FR 61993 (Oct. 31, 2003), FERC Stats. & Regs. ]
31,152 (2003) (Cash Management Rule).
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8. On March 8, 2007, the Commission held a second technical
conference (March 8 Technical Conference) to discuss whether the
Commission's section 203 policy should be revised and, in particular,
whether the Commission's Appendix A merger analysis is sufficient to
identify market power concerns in today's electric industry market
environment. The first panel discussed whether the Appendix A analysis
is appropriate to analyze a merger's effect on competition, given the
changes that have occurred in the industry (e.g., the development of
Regional Transmission Organizations (RTOs)) and statutory changes
(e.g., as a result of the repeal of PUHCA 1935 and new authorities
given to the Commission in EPAct 2005). The second panel assessed the
factors the Commission uses in reviewing mergers and the coordination
between the Commission and other agencies (including state commissions)
with merger review responsibility.
II. Discussion
9. Based on the Commission's experiences thus far in implementing
amended section 203, the input received through the Order No. 669
rulemaking proceeding, and the comments received in response to the
December 7 and March 8 Technical Conferences, the Commission finds that
additional clarification and guidance regarding our section 203 policy
are warranted. The Commission will provide certain clarifications and
guidance concerning: (1) The information that must be filed as part of
section 203 applications for transactions that do not raise cross-
subsidization concerns; (2) the types of applicant commitments and
ring-fencing measures that, if offered, might address cross-
subsidization concerns; \14\ (3) the scope of blanket authorizations
under sections 203(a)(1) and 203(a)(2); (4) what constitutes a
disposition of control of jurisdictional facilities for purposes of
section 203; and (5) the Commission's Appendix A analysis.
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\14\ When ``cross-subsidization'' occurs, some of the costs of
dealings between affiliated regulated and unregulated companies are
borne by the regulated utility affiliate. The costs might be passed
on to captive customers through the rates of the regulated
affiliate. ``Ring-fencing'' employs various techniques to separate
and protect the financial assets and ratings of the regulated
utility from the business risks of other members of the holding
company family, including bankruptcy of the parent or its
affiliates. These techniques could preclude some types of
transactions that involve cross-subsidization.
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10. We note that amended section 203 and PUHCA 2005 did not become
effective until February 2006. The Commission thus has had only 18
months' experience under the new laws. Therefore, we will continue to
monitor the issues that arise under section 203, including cross-
subsidization issues, and re-evaluate our regulatory approach as
appropriate. The Commission's goals are to provide sufficient
flexibility to adopt customer protections as needed, work in a
complementary fashion with the states in protecting customers,
appropriately address the need for regulatory certainty with respect to
jurisdictional transactions, and address ways to allow beneficial
utility industry investment that does not harm captive customers.\15\
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\15\ As indicated below, the Commission does not propose actions
on all of the issues raised by commenters. For example, the
Commission is not proposing changes to its regulations that would
require: (1) Codification of specific requirements for cash
management programs and money pool agreements; (2) codification of
additional information reporting requirements (through section 203
applications or through routine reporting requirements); or (3)
additional, generic actions pursuant to the Commission's NGA
authority. Based on the types of filings made since Order Nos. 667
and 669 became effective and the comments raised at the technical
conferences, we do not believe further actions on these particular
issues are warranted at this time. Moreover, we note that certain
commenters recommended that the Commission provide a list on its
website of all jurisdictional public utilities (including qualifying
facilities and exempt wholesale generators), foreign utility
companies, transmitting utilities, electric utilities, electric
utility companies, and holding companies (as those terms are defined
under EPAct 2005 and PUHCA 2005) for use by market participants in
their regulatory compliance monitoring efforts and as they consider
whether to acquire or hold the securities of companies, the
acquisition or holding of which might or might not be subject to FPA
section 203 or PUHCA 2005. While the Commission declines to rule on
this issue in the context of a policy statement, it will explore the
feasibility of making some of this information publicly available on
its website.
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A. The Commission's Cross-Subsidization Concerns and Exhibit M
Requirements
11. At the December 7 Technical Conference, a number of commenters
asserted that a vast majority of section 203 transactions pose no
threat of cross-subsidization but nonetheless, the Commission's
regulations require applicants to provide ``an explanation, with
appropriate evidentiary support for such explanation * * * of how
applicants are providing assurance * * * that the proposed transaction
will not result in, at the time of the transaction or in the future,
cross-subsidization of a non-utility associate company or pledge or
encumbrance of utility assets for the benefit of an associate company *
* *.'' \16\
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\16\ The explanation, to be provided as Exhibit M to a section
203 application, includes:
``Disclosure of existing pledges and/or encumbrances of utility
assets; and a detailed showing that the transaction will not result
in: any transfer of facilities between a traditional public utility
associate company that has captive customers or that owns or
provides transmission service over jurisdictional transmission
facilities, and an associate company; any new issuance of securities
by a traditional public utility associate company that has captive
customers or that owns or provides transmission service over
jurisdictional transmission facilities, for the benefit of an
associate company; any new pledge or encumbrance of assets of a
traditional public utility associate company that has captive
customers or that owns or provides transmission service over
jurisdictional transmission facilities, for the benefit of an
associate company; or any new affiliate contract between a non-
utility associate company and a traditional public utility associate
company that has captive customers or that owns or provides
transmission service over jurisdictional transmission facilities,
other than non-power goods and services agreements subject to review
under sections 205 and 206 of the Federal Power Act; or if no such
assurance can be provided, an explanation of how such cross-
subsidization, pledge, or encumbrance will be consistent with the
public interest.'' 18 CFR 33.2(j)(1)-(2).
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[[Page 42280]]
12. Several commenters argued that it is not clear how to provide
the explanation required under Exhibit M for transactions in which
cross-subsidization is not possible, is precluded by existing
safeguards or is reduced to a very low possibility. Thus, they urged
the Commission to establish criteria to identify ``safe harbors'' or
classes of transactions that clearly do not raise cross-subsidization
concerns. They contended that such an approach will enhance regulatory
certainty by letting parties know up front that with these types of
transactions, there is no risk of additional restrictions being imposed
by the Commission.
13. The Commission's focus generally has been on preventing a
transfer of benefits from a public utility's captive customers to
shareholders of the public utility's holding company due to an intra-
system transaction that involves electric power or energy, generation
facilities, or non-power goods and services.\17\ Concerns arise in a
number of circumstances, including where a market-regulated affiliate
(e.g., a power seller with market-based rates) or a non-utility
affiliate provides power or goods and services to a franchised public
utility with captive customers, as well as the circumstance in which
the franchised public utility with captive customers provides power or
non-power goods and services to the market-regulated or non-utility
affiliate. For instance, a franchised public utility with captive
customers may purchase power from its marketing affiliate at a price
above market or sell power to its marketing affiliate at below-market
prices, thus transferring benefits from customers to shareholders of
the holding company. Further, customers may be harmed if the franchised
public utility purchases non-power goods and services from an affiliate
at above-market prices or sells non-power goods and services to an
affiliate at less than market value and seeks to recover the
overcharges or the undercharges through rates for service to captive
customers.\18\ Concerns may also arise with respect to intra-corporate
financing transactions that may encumber franchised public utility
assets in favor of a market-regulated or non-utility affiliate. The
Commission's regulatory concern with this particular form of cross-
subsidization is with the potential adverse impact of the internal
finance transaction on the rates of a franchised public utility with
captive customers.
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\17\ Order No. 669, FERC Stats. & Regs. ] 31,200 at P 147.
\18\ Transactions Subject to FPA Section 203, 70 FR 58636 (Oct.
7, 2005) FERC Stats. & Regs. ] 32,589 at P 47 (2005. In the
concurrent Affiliate Transactions NOPR, supra note 7, the Commission
is proposing to extend the affiliate abuse restrictions to apply to
all franchised public utilities with captive customers and their
market-regulated power sales affiliates and non-utility affiliates.
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1. ``Safe Harbors'' for Meeting Exhibit M Requirements for Certain
Transactions
14. Since the February 2006 effective date of the FPA section 203
amendments, the Commission has gained sufficient experience in
implementing the cross-subsidization provision of FPA section 203(a)(4)
to provide policy guidance on the cross-subsidization demonstration
required by Exhibit M. As described above, there are many instances
where cross-subsidization can occur, but our focus is on the specific
requirements under section 203(a)(4) and the Order No. 669 rulemaking
proceeding--inappropriate cross-subsidization of non-utility or market-
regulated affiliates or the pledge or encumbrance of utility assets for
the benefit of an associate company. The concern arises in a corporate
structure that has at least one franchised public utility with captive
customers and one or more non-utility affiliates or market-regulated
utility affiliates (i.e., utilities regulated on a market rather than a
cost basis). These types of relationships provide opportunities for
cross-subsidization in routine transactions between affiliates in
addition to more significant transactions such as transfers of utility
assets, encumbrance of utility assets, new affiliate contracts, and
issuance of securities by affiliates (that usually receive more public
scrutiny or regulatory attention).
15. Where these affiliate relationships do not exist, that is,
where a transaction involves only market-regulated and/or non-utility
affiliated entities or is a bona fide, arm's-length, bargained-for
exchange, then the transaction is not likely to result in inappropriate
cross-subsidization and the detailed explanation and evidentiary
support required by Exhibit M may not be warranted.
16. Accordingly, for purposes of compliance with Exhibit M, the
Commission will recognize three classes of transactions that are
unlikely to raise the cross-subsidization concerns described in the
Order No. 669 rulemaking proceeding. These, in effect, are ``safe
harbors'' for meeting the section 203 cross-subsidization
demonstration, absent concerns identified by the Commission or evidence
from interveners that there is a cross-subsidy problem based on the
particular circumstances presented.
17. The first class of transactions includes those transactions
where the applicant shows that a franchised public utility with captive
customers is not involved. If no captive customers are involved, then
there is no potential for harm to customers. Therefore, compliance with
Exhibit M could be a showing that no franchised public utility with
captive customers \19\ is involved in the transaction.
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\19\ The Commission has defined ``captive customers,'' for
purposes of FPA section 203, to mean ``any wholesale or retaile
electric energy customers served under cost-based regulation.'' 18
CFR 33.1(b)(5).
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18. The second class of transactions includes those transactions
that are subject to review by a state commission. The Commission, in
the context of specific mergers or other corporate transactions,
intends to defer to state commissions where the state adopts or has in
place ring-fencing measures to protect customers against inappropriate
cross-subsidization or the encumbrance of utility assets for the
benefit of the ``unregulated'' affiliates. Therefore, compliance with
Exhibit M could be satisfied with a showing that the proposed
transaction complies with specific state regulatory protections against
inappropriate cross-subsidization by captive customers. If a state does
not have the authority to impose cross-subsidization protections,
however, the transaction would not qualify for this safe harbor.
19. The third class of transactions are those involving only non-
affiliates. Where a franchised public utility transacts only with
nonaffiliated entities, the potential for inappropriate cross-
subsidization of a non-utility associate company or the pledge or
encumbrance of utility assets for the benefit of an associate company
[[Page 42281]]
generally is not present. Therefore, compliance with Exhibit M could be
satisfied with a showing that a public utility transacts only with
nonaffiliated entities. This category includes a transfer of assets
between a public utility and non-affiliates, but does not include
mergers with, or acquisitions of, public utilities.
20. After review of a section 203 application relying on any of
these ``safe harbors,'' if the Commission finds that the applicant has
failed to make a sufficient showing that it meets the criteria
described above, then the application will be deemed to be deficient
and a new Exhibit M will be required.
2. Other Means of Addressing Cross-Subsidization Concerns
21. Intra-corporate financing transactions may raise cross-
subsidization concerns if the assets of a franchised public utility
with captive customers are used to finance its market-regulated utility
affiliates or non-utility affiliates or their activities. In the
December 7 Technical Conference, several commenters noted that their
states had implemented ring-fencing measures to mitigate potential
risks of cross-subsidization but that many states had not. These
commenters suggested that the Commission implement safeguards to
mitigate risks in the absence of state regulation (although not
necessarily on a generic basis, relying on the states where the state
has already taken such measures). Most commenters urged the Commission
to continue to review whether potential mergers required additional
protections on a case-by-case basis. Representatives of the state
commissions, including the Oregon Public Utility Commission, Wisconsin
Public Service Commission and Missouri Public Service Commission,
recommended that the Commission only act where there is a demonstrable
gap in state authority. None supported adoption of federal, mandatory
ring-fencing conditions. Some commenters did not oppose the
establishment of guidelines on the kinds of protections that might be
appropriate in different cases.\20\
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\20\ See, e.g., Comments of Clifford M. Naeve, December 7
Technical Conference, Tr. 91-92; Comments of Joseph G. Sauvage,
December 7 Technical Conference, Tr. 56-58.
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22. American Public Power Association and the National Rural
Electric Cooperative Association argued that the Commission adopt
regulations with minimum cross-subsidization safeguards that would
apply in all cases, and also provide an exhaustive menu of additional
cross-subsidization safeguards, including ring-fencing measures, that
applicants might propose or that the Commission might impose in
appropriate cases. They proposed that the Commission codify its code of
conduct requirements in the regulations and that these restrictions be
made applicable to all traditional public utilities and their
unregulated affiliates.
23. The Commission agrees that it is appropriate to codify in our
regulations code of conduct affiliate restrictions to prevent cross-
subsidization involving power and non-power goods and services
transactions and to make those prophylactic restrictions applicable to
all traditional (franchised) public utilities (not just public
utilities seeking section 203 approval) and their transactions with
power sellers as well as non-utility affiliates. Accordingly,
contemporaneous with this Policy Statement, we are instituting a Notice
of Proposed Rulemaking to do this. However, with respect to additional
restrictions that may be appropriate for section 203 applicants, such
as ring-fencing restrictions, the Commission does not believe it is
necessary or appropriate to mandate generic one-size-fits-all
protections for all section 203 applicants. Rather, the Commission will
examine the facts and circumstances of each transaction and determine
on a case-by-case basis whether additional protections against
inappropriate cross-subsidization or encumbrances of utility assets are
necessary. As noted above, part of our approach will involve review of
whether state commissions have authority to impose cross-subsidy
protections or have in place such protections. The Commission, as a
general matter, intends to defer to state-adopted protections unless
they can be shown to be inadequate to protect wholesale customers. This
deference is appropriate because retail customers typically represent
the vast majority of load served by a franchised public utility, and
ring-fencing measures typically affect the entire corporation, thereby
protecting both retail and wholesale customers. If it can be shown,
however, that these measures are inadequate to protect wholesale
customers in a given case, the Commission may adopt supplemental
protections as appropriate. Finally, we emphasize that, consistent with
section 203 and the Commission's regulations, all section 203
applicants must demonstrate that a proposed transaction will not result
in inappropriate cross-subsidization of non-utility associate companies
or the inappropriate pledge or encumbrance of utility assets for the
benefit of an associate company, either through meeting one of the safe
harbor demonstrations, proposing its own ring-fencing or other
protections to prevent cross-subsidization, or demonstrating that there
are no potential cross-subsidy issues associated with the proposed
transaction.
24. With respect to guidance to applicants that do not make the
``safe harbor'' demonstration or do not demonstrate that cross-subsidy
issues are not present, one way to make the demonstration required by
Exhibit M would be to propose ring-fencing measures. For example, a
ring-fencing structure related to internal corporate financings, i.e.,
money pool or cash management transactions, could include some or all
of the following elements depending on the circumstances: (1) The
holding company participates in the money pool as a lender only and it
does not borrow from the subsidiaries with captive customers; (2) where
the holding company system includes more than one public utility, the
money pool for subsidiaries with captive customers is separate from the
money pool for all other subsidiaries; (3) all money pool transactions
are short-term (one year or less), and payable on demand to the public
utility; (4) the interest rate formula is set according to a known
index and recognizes that internal and external funds may be loaned
into the money pool; (5) loan transactions are made pro rata from those
offering funds on the date of the transactions; (6) the formula for
distributing interest income realized from the money pool to money pool
members is publicly disclosed; and (7) the money pool administrator is
required to maintain records of daily money pool transactions for
examination by the Commission by transaction date, lender, borrower,
amount, and interest rate(s).\21\ We clarify that the forms of ring-
fencing protections listed herein are simply examples of protections
that the Commission would consider in evaluating proposed ring-fencing
measures. Appropriate ring-fencing measures will depend on the facts
presented and the specifics of an applicant's corporate structure and
must be evaluated on a case-by-case basis. Further, as noted earlier,
to the extent a state commission imposes specific ring-fencing
measures, the Commission will defer to those measures absent evidence
[[Page 42282]]
that additional measures are needed to protect wholesale customers.
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\21\ These ring-fencing measures are among those requirements
typically approved by the Securities and Exchange Commission (SEC)
and/or adopted by state commissions.
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25. The Commission also notes that if it approves a transaction
under section 203 (with or without ring-fencing measures), the
Commission retains authority under section 203(b) to later impose
additional cross-subsidy protections or modify any previously approved
measures. Further, irrespective of any link to the section 203
transaction, the Commission retains ongoing authority under section 206
of the FPA \22\ to modify rates, contracts and practices that may
result in inappropriate cross-subsidization or encumbrances of utility
assets (and, if appropriate, to require new practices).
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\22\ 16 U.S.C. 824e.
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3. Future Case-Specific Informational Filings
26. Given that the Commission often issues its order in a section
203 proceeding before the state proceedings are completed, the
Commission may grant authorization under section 203 before the
relevant state commission issues an order specifying any state-required
cross-subsidy or ring fencing protections. In such circumstances, as
appropriate, the Commission in the context of individual section 203
authorizations will require applicants to file with the Commission a
copy of any subsequent state orders. Such copy would be filed in the
Commission's section 203 proceeding docket as an informational filing,
and the applicant would also provide copies to the intervenors in the
Commission's section 203 proceedings.
B. Blanket Authorizations Under Sections 203(a)(1) and 203(a)(2) and
Clarifications Regarding Jurisdictional Transactions
27. Through the Order No. 669 rulemaking proceeding, the Commission
granted certain blanket authorizations on a generic basis under section
203.\23\ Participants at the December 7 Technical Conference addressed
whether additional blanket authorizations were warranted. Specifically,
commenters discussed under what circumstances the Commission should
grant a blanket authorization under section 203(a)(1) (which applies to
public utilities' dispositions of jurisdictional facilities) to
parallel the Order No. 669 blanket authorizations under section
203(a)(2) (which, among other things, applies to holding companies'
acquisitions of securities of public utilities with jurisdictional
facilities). The section 203 blanket authorizations under Order No. 669
allow a holding company to acquire the voting securities of a
transmitting utility, an electric utility company, or a holding company
in a holding company system that includes a transmitting utility or an
electric utility company, if, after the acquisition, the holding
company will own less than 10 percent of the outstanding voting
securities. What most commenters seek is a parallel blanket
authorization under section 203(a)(1) for the public utilities in such
transactions to ``dispose'' of their facilities to the holding company,
i.e., a blanket authorization for transactions that (1) involve or
permit transfers (dispositions) of up to 10 percent of a public
utility's voting stock, or (2) involve a transfer of up to 10 percent
of the voting stock of a holding company that directly or indirectly
owns or controls a public utility. Alternatively, they seek
clarification that certain transactions are not jurisdictional.
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\23\ 18 CFR 33.1(c)
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28. Several commenters supported modification of the rules to grant
such a parallel blanket authorization under 203(a)(1). In addition,
Mirant Corporation (Mirant) argued that section 203(a)(1) should not
apply at all to stock transactions in the secondary market involving
the corporate parent. Mirant maintained that if the Commission
continues to apply section 203(a)(1) to equity transfers of upstream
ownership interests in public utilities that result in either a direct
or indirect change in control over the underlying public utility, there
would be a substantial and unnecessary overlap between sections
203(a)(1) and 203(a)(2). The Goldman Sachs Group, Inc. (Goldman) added
that financial investors need certainty on whether particular
transactions in the secondary market would require prior Commission
approval under section 203(a)(1). Goldman also argued for a blanket
authorization under section 203(a)(2) for the acquisition of voting
securities by firms acting in a fiduciary capacity.
29. Edison Electric Institute (EEI) argued for a blanket
authorization for internal corporate reorganizations under both
sections 203(a)(1) and 203(a)(2) for transfer of assets from one non-
traditional utility subsidiary, such as an exempt wholesale generator,
to another non-traditional utility subsidiary.
30. The Financial Institutions Energy Group (FIEG) \24\ requested
that the Commission clarify that transactions that do not affect
control do not, in fact, require approval under section 203(a)(1).
Alternatively, FIEG argued that there are several types of transactions
under which no change of control is involved and, therefore, the
Commission should provide blanket authorizations under both section
203(a)(1) and section 203(a)(2). FIEG asserted that such transactions
include: (1) Acquisitions of voting securities that would give the
acquiring entity less than 10 percent ownership of outstanding voting
securities; (2) acquisitions of up to 20 percent of the voting
interests in a public utility where the acquirer is eligible to file
with the SEC a Schedule 13G demonstrating no intent to exercise control
over the entity whose securities are being acquired; (3) acquisitions
involving securities held for lending, hedging, underwriting and/or
fiduciary purposes. FIEG also argued that a blanket authorization
should be granted for transactions in which a public utility or a
holding company is acquiring or assigning a jurisdictional contract
where the acquirer does not have captive customers and the contract
does not convey control over the operation of a generation or
transmission facility.
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\24\ Members of FIEG include: Bank of America, N.A, Barclays
Bank PLC, Bear Energy LP, Citigroup Energy Inc., Credit Suisse
Energy LLC (a subsidiary of Credit Suisse), Deutche Bank AG, J. Aron
& Company (a subsidiary of The Goldman Sachs Group), JPMorgan Chase
& Co., Lehman Brothers Commodity Services Inc. (a subsidiary of
Lehman Brothers Holding Inc.), Merrill Lynch Commodities, Inc.,
Morgan Stanley Capital Group Inc., Soci[eacute]t[eacute]
G[eacute]n[eacute]rale, and UBS Energy LLC (a subsidiary of UBS AG).
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31. In support of its requests for clarification and expanded
blanket authorizations, FIEG states that shares and other interests in
public utilities are bought, sold and traded on a regular basis and
that an active market for a public utility's shares is important to its
ability to raise capital. FIEG explains that if a passive or non-
controlling investor must seek prior Commission approval for
transactions, the trading process is slowed, resulting in a less
efficient market for the company's shares. According to FIEG, such
inefficiencies chill participation in the industry and reduce needed
market liquidity.
32. Several commenters also urged the Commission to provide greater
clarity on what constitutes a passive investment for which no
Commission authorization is required under section 203(a)(1).
33. The Commission agrees that greater industry investment and
market liquidity are important goals. However, blanket authorizations
under section 203 cannot be granted lightly, particularly generic
authorizations. Because it is an ex ante determination as to the
appropriateness of a category
[[Page 42283]]
of transactions under section 203 and a counterparty is not yet
identified, a blanket authorization can be granted only when the
Commission can be assured that the statutory standards will be met,
including ensuring that the interests of captive customers are
safeguarded and that public utility assets are protected under all
circumstances. It is under this paradigm that we provide the following
guidance with respect to the section 203 blanket authorizations.
34. First, we will grant in part and deny in part requests for
blanket authorizations under section 203(a)(1) to parallel those
previously granted under section 203(a)(2). The Commission recognizes
that, in some circumstances, the lack of a blanket authorization under
section 203(a)(1) can lessen the practical effectiveness of the blanket
authorizations previously granted under section 203(a)(2). Accordingly,
in a Notice of Proposed Rulemaking issued contemporaneous with this
Policy Statement, the Commission is proposing a limited blanket
authorization under section 203(a)(1) under which a public utility
would be ``pre-authorized'' to dispose of less than 10 percent of its
securities to a public utility holding company but only if, after the
disposition, the holding company and any associate or affiliated
company in aggregate will own less than 10 percent of that public
utility.\25\ The Commission believes that this narrow blanket
authorization will provide appropriate relief to investors and at the
same time ensure that utility assets and captive customers are
protected.
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\25\ Blanket Authorization NOPR, supra note 6.
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35. The Commission will continue to consider broader requests for
blanket authorizations under section 203(a)(1) on a case-specific
basis,\26\ taking into account all other authorizations that have been
granted and whether those authorizations, in conjunction with a blanket
authorization under section 203(a)(1), would raise concerns. While the
Commission, as discussed above, has determined that additional generic
blanket authorizations for public utilities' dispositions of
jurisdictional assets are not warranted at this time (other than the
blanket authorizations discussed in the accompanying NOPR), we expect
that in many circumstances individual blanket authorizations can be
granted. Such an individual, situation-specific, ex ante blanket
authorization will provide some of the certainty that is sought by the
industry and investors. At the same time, this approach will allow the
Commission to assess specific circumstances, to place time limits on
blanket authorizations if appropriate (subject to possible renewal), to
monitor industry activity, and to adapt the use of blanket
authorizations over time as we gain further experience with financial
institution investments in particular. Further, we do not rule out the
possibility that groups of similarly situated holding companies, such
as financial institutions, can make joint filings seeking common
blanket authorizations under section 203(a)(1) or section 203(a)(2);
however, they would need to clearly demonstrate on the record that
there would be no adverse impact on captive customers or the public
interest if the authorizations were granted.
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\26\ Order No. 669-A, FERC Stats. & Regs. ] 31,214 at P 103;
Order No. 669-B, FERC Stats. & Regs. ] 31,225 at P 43.
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36. In response to requests that the Commission clarify that
secondary market transactions involving public utilities do not require
approval under section 203(a)(1)(A) (which provides that a public
utility may not sell, lease ``or otherwise dispose'' of the whole of
its jurisdictional facilities or any part hereof without prior
Commission approval), we so clarify. Secondary market transactions, for
purposes of this discussion, are purchases or sales of the securities
of a public utility or its upstream holding company by a third-party
investor. Thus, such transactions do not include the securities'
initial issuance or reacquisition by the issuer. Thousands of shares of
the stock of a public utility or public utility holding company may be
traded on a daily basis by non-public utility third parties,
particularly if the stock is widely held and publicly traded. As noted
by Mirant, EEI and members of FIEG in their comments, neither a public
utility holding company nor a public utility subsidiary of the holding
company are themselves parties to these transactions and they cannot
know in advance what trading will occur or whether direct or indirect
``control'' over the public utility is being acquired. It would be
virtually impossible in such circumstances for the public utility or
holding company to know what is occurring before the fact and we do not
interpret section 203(a)(1)(A) to be triggered for these secondary
trades. Accordingly, neither public utilities nor public utility
holding companies have an obligation to seek approval of a
``disposition'' of public utility jurisdictional facilities for such
trades.\27\
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\27\ If the acquirer of securities in the secondary market is a
public utility holding company, however, it may have an obligation
to file for approval under section 203(a)(2). If the acquirer is
another public utility, it may also have to file under section
203(a)(1)(C) (no public utility may purchase securities of another
public utility if over $10 million in value).
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37. In addition, we clarify that transactions that do not transfer
control of a public utility do not fall within the ``or otherwise
dispose'' language of section 203(a)(1)(A) and thus do not require
approval under section 203(a)(1)(A) (assuming there is no sale or lease
of the facilities). As indicated in our discussion of what constitutes
a disposition of control for purposes of the Commission's section 203
analysis,\28\ while the Commission cannot make an ex ante determination
regarding what is control for purposes of the Commission's section 203
analysis absent facts of a specific case, the Commission is setting
forth herein certain guidelines regarding what has been deemed to be
(or not to be) control. This clarification addresses many of the
concerns raised by commenters regarding acquisitions involving
securities held for lending, hedging, underwriting and/or fiduciary
purposes. If such transactions do not result in a transfer of control
and there is no sale or lease of the facilities taking place, then
section 203(a)(1)(A) is not triggered. This should assist applicants in
determining the need for prior authorization under section 203.
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\28\ See infra section II.C.
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38. With respect to the request for a generic blanket authorization
for internal corporate reorganizations under both sections 203(a)(1)
and 203(a)(2) for the transfer of assets from one non-traditional
utility subsidiary \29\ to another non-traditional utility subsidiary,
the Commission cannot be certain of the impact of such transactions on
utility affiliates on a generic basis and, therefore, will not grant a
blanket authorization at this time. The Commission will consider case-
specific blanket authorizations (with appropriate reporting
requirements) on a case-by-case basis.
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\29\ For example, power marketers, exempt wholesale generators,
or qualifying facilities.
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39. The Commission also denies the request for a generic blanket
authorization under section 203(a)(2) for non-bank fiduciaries subject
to the jurisdiction of the SEC. The Commission finds that we need
further experience in this area before granting a blanket authorization
on a generic basis. However, the Commission is willing to consider such
requests on a holding company-specific basis or from similarly situated
holding companies, such as similarly situated financial institutions.
Any such applications would need to demonstrate in sufficient
[[Page 42284]]
detail that applicants would not be able to control public utilities
and that there would be no adverse impact on captive customers or the
public interest if the authorizations were granted. As discussed above
with respect to section 203(a)(1) authorizations, this type of approach
would allow the Commission to assess specific circumstances, to place
time limits on blanket authorizations if appropriate (subject to
possible renewal), to monitor industry activity, and to adapt the use
of blanket authorizations over time as we gain further experience.
40. Certain participants to the technical conferences argue that a
blanket authorization under section 203(a)(1) should be granted for
transactions in which a public utility or a holding company is
acquiring or disposing of a jurisdictional contract where the acquirer
does not have captive customers and the contract does not convey
control over the operation of a generation or transmission facility.
These commenters argue that because acquisition of these contracts
cannot create competitive or rate concerns, the Commission should grant
blanket authorization under section 203(a)(1) for such transactions.
Because the specific request for blanket authorization may present
concerns where the transferor has captive customers, we seek comment in
the Blanket Authorization NOPR on whether a generic blanket
authorization under section 203(a)(1) is warranted for the acquisition
or disposition of a jurisdictional contract where neither the acquirer
nor transferor has captive customers and the contract does not convey
control over the operation of a generation or transmission facility.
41. We also decline to grant a generic blanket authorization under
sections 203(a)(1) and 203(a)(2) for acquisitions of up to 20 percent
of the voting interests in a public utility where the acquirer is
eligible to file with the SEC a Schedule 13G, which demonstrates no
intent to exercise control over the entity whose securities are being
acquired. While the Commission may consider eligibility to file a
Schedule 13G with the SEC as part of an indication that an entity will
not be able to assert control over a public utility, the Commission
will not accept Schedule 13G eligibility as a definitive statement
regarding control. The Commission will consider Schedule 13G
eligibility as one factor in the analysis of whether an entity can
assert control over a public utility.\30\
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\30\ See, e.g., Capital Research and Management Company, 116
FERC ] 61,267 (2006).
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C. Disposition of ``Control'' of Jurisdictional Facilities
42. Several commenters have asked the Commission to provide
guidance on what constitutes a disposition of ``control'' of
jurisdictional facilities under section 203. Most recently, this
request is being pressed by the investment community, which seeks
further clarification regarding the scope of the Commission's
regulatory authority, and greater regulatory certainty as to when
section 203 review is required.
43. We will provide guidance here, but emphasize that the
determination of whether there is a disposition of control must be
based on all circumstances. In other words, the decision must be made
on a fact-specific basis. As discussed further below, while our case
law under section 201 provides guidance on the factors that may result
in control, no single factor or factors necessarily results in control.
The electric industry remains a dynamic, developing industry, and no
bright-line standard will encompass all relevant factors and
possibilities that may occur now or in the future.\31\
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\31\ 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 174
(2007) (Market-Based Rate Final Rule).
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44. We note that much of the Commission's precedent in this area
was developed based on concerns that there could be a jurisdictional
void if the Commission did not interpret broadly what constitutes a
disposition of ``control'' of public utility facilities under FPA
section 203. The Commission was particularly concerned about the
creation of holding companies and holding company acquisitions that
could result in an indirect change of control of the jurisdictional
facilities of public utilities, without Commission review. In EPAct
2005, however, Congress has filled any jurisdictional void involving
public utility holding companies by amending section 203 to
specifically give the Commission authority over certain holding company
acquisitions and mergers involving FPA public utilities. Thus, the
Commission's pre-EPAct 2005 precedent should be read with this context
in mind.
1. Precedent Discussing Dispositions of Control
45. Section 203 requires prior Commission approval if a public
utility seeks to sell, lease, or otherwise dispose of jurisdictional
facilities. As previously noted, the Commission has interpreted the
``or otherwise dispose'' language of section 203(a)(1) to include
transfers of ``control'' of jurisdictional facilities. Additionally,
prior Commission approval is required for any public utility that seeks
to directly or indirectly merge or consolidate the whole of its
jurisdictional facilities, or any part thereof, with the facilities of
another person, ``by any means whatsoever.'' \32\ As interpreted by the
Commission, the requirement to obtain the Commission's approval under
the ``merge or consolidate'' clause depends on whether the public
utility's facilities are subject to the jurisdiction of the Commission
and whether the transaction directly or indirectly would result in a
change of ``control'' of the facilities.\33\
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\32\ While the section 203(a)(1) requirements for obtaining
Commission authorization do not use the word ``control'' in the
statutory text, section 203(a)(4) provides that the Commission must
approve a proposed ``disposition, consolidation, acquisition, or
change in control'' (emphasis added) if the statutory criteria are
met.
\33\ PDI Stoneman, Inc., 104 FERC ] 61,270, at P 13 (2003) (PDI
Stoneman).
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46. In Enova Corporation, the Commission explained that the purpose
of section 203 is to provide a mechanism for maintaining oversight of
the facilities of public utilities and to prevent transfers of control
over those facilities that would harm consumers or that would inhibit
the Commission's ability to secure the maintenance of adequate service
and the coordination in the public interest of jurisdictional
facilities.\34\ The Commission determined that it cannot definitively
identify every combination of entities or disposition of assets that
may trigger jurisdiction under section 203, since it cannot anticipate
every type of restructuring that might occur. The Commission stressed
that its concern was with changes in control, including direct or
indirect mergers that affect jurisdictional facilities. It said that it
must be flexible in responding to industry restructuring if it is to
discharge its statutory responsibility ``to secure the maintenance of
adequate service and the coordination in the public interest of
facilities subject to the jurisdiction of the Commission.'' \35\
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\34\ Enova Corporation, 79 FERC ] 61,107, at 61,489 (1997)
(Enova) (citing pre-EPAct 2005 section 203(b)).
\35\ Id. at 61,496.
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47. Noting in Enova that the FPA did not provide definitions for
the terms ``dispose'' or ``control,'' the Commission stated that those
terms should not be read narrowly because to do so would result in a
jurisdictional void in which certain types of corporate transactions
could escape Commission oversight. While section 203 applies to changes
or transfers in the proprietary interests of
[[Page 42285]]
a public utility,\36\ not all transactions under section 203 involve a
change in control of a public utility. If no change in control results
from the transaction, it is not likely to adversely affect competition,
rates or regulation, or result in cross-subsidization.
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\36\ See Atlantic City Electric Company v. FERC, 295 F.3d 1, 12
(D.C. Cir. 2002).
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48. Our guidance concerning what constitutes a disposition of
control of jurisdictional facilities for purposes of section 203
requires a discussion of what constitutes control of a public utility
since a public utility is a person that owns or operates jurisdictional
facilities. In Enova, the Commission cited the definition of control
that has been in its accounting regulations since 1937. Under that
definition, control means:
the possession, directly or indirectly, of the power to direct or
cause the direction of management and policies of a company, whether
such power is exercised through one or more intermediary companies,
or alone, or in conjunction with, or pursuant to an agreement, and
whether such power is established through a majority or minority
ownership or voting of securities, common directors, officers, or
stockholders, voting trusts, holding trusts, associated companies,
contract or any other direct or indirect means.\37\
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\37\ Enova, 79 FERC at 61,492 (citing 18 CFR Part 101,
Definitions 5.B). This definition is identical to that found in the
current regulations. In addition, for purposes of its Standards of
Conduct for Transmission Providers, the Commission states that
``control'' ``includes, but is not limited to, the possession,
directly or indirectly and whether acting alone or in conjunction
with others, of the authority to direct or cause the direction of
the management or policies of a company.'' 18 CFR 358.3(c).
49. The Commission has also discussed certain elements of control
in cases concerning whether an entity is a public utility under section
201.\38\ In those cases, the Commission linked ``decision-making'' and
``dominion and control'' in determining whether an entity is a ``public
utility.'' The Commission also noted that the reference to ``operates
[jurisdictional] facilities'' in the definition of public utility in
section 201(e) of the FPA refers ``to the person who has control and
decision-making authority concerning the operation of facilities.''
\39\
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\38\ Section 201(b)(1) describes the activities that are subject
to the jurisdiction of the Commission: ``* * * the transmission of
electric energy in interstate commerce and * * * the sale of
electric energy at wholesale in interstate commerce * * *'' The
section further describes the facilities that are jurisdictional:
``The Commission shall have jurisdiction over all facilities for
such transmission or sale of electric energy, * * *'' with certain
exceptions not relevant here. In section 201(e), the term ``public
utility'' is defined as ``any person who owns or operates facilities
subject to the jurisdiction of the Commission under this Part (other
than facilities subject to such jurisdiction solely by reason of
[certain specified FPA sections]).'' 16 U.S.C. 824, amended by EPAct
2005, Pub. L. 109-58, 1295.
\39\ Enova, 79 FERC at 61,492 (citing Bechtel Power Corp., 60
FERC ] 61,156 (1992) (Bechtel Power)).
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50. In a case in which the Commission disclaimed jurisdiction under
section 201(e) over financial institutions that took title to
facilities as part of a leveraged lease transaction, the Commission
based its decision that the lessor/owner was not a public utility under
section 201 on the followi
