Cross-Subsidization Restrictions on Affiliate Transactions, 43072-43083 [E8-16870]

Agencies

• DEPARTMENT OF ENERGY
• Federal Energy Regulatory Commission

[Federal Register Volume 73, Number 143 (Thursday, July 24, 2008)]
[Rules and Regulations]
[Pages 43072-43083]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-16870]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 35

[Docket No. RM07-15-001; Order No. 707-A]


Cross-Subsidization Restrictions on Affiliate Transactions

Issued July 17, 2008.
AGENCY: Federal Energy Regulatory Commission, DOE.

ACTION: Final rule; order on rehearing.

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SUMMARY: The Federal Energy Regulatory Commission is granting rehearing 
and clarification, in part, of a final rule amending its regulations to 
codify restrictions on affiliate transactions between franchised public 
utilities that have captive customers, or that own or provide 
transmission service over jurisdictional transmission facilities, and 
their market-regulated power sales affiliates or non-utility 
affiliates.

DATES: Effective Date: This Final Rule; order on rehearing will become 
effective August 25, 2008.

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 43073]]

Paul Silverman (Legal Information), Office of the General Counsel, 
Federal Energy Regulatory Commission, 888 First Street, NE., 
Washington, DC 20426, (202) 502-8683,
Mosby Perrow (Legal Information), Office of the General Counsel, 
Federal Energy Regulatory Commission, 888 First Street, NE., 
Washington, DC 20426, (202) 502-6498,
Valerie Gill (Technical Information), Office of Energy Market 
Regulation, Federal Energy Regulatory Commission, 888 First Street, 
NE., Washington, DC 20426, (202) 502-8527,
Stuart Fischer (Technical Information), Office of Enforcement, Federal 
Energy Regulatory Commission, 888 First Street, NE., Washington, DC 
20426, (202) 502-8517.

SUPPLEMENTARY INFORMATION: 
Before Commissioners: Joseph T. Kelliher, Chairman; Suedeen G. 
Kelly, Marc Spitzer, Philip D. Moeller, and Jon Wellinghoff.

    Cross-Subsidization Restrictions on Affiliate; Docket No. 
Transactions RM07-15-001:

Order on Rehearing

Order No. 707-A

Issued July 17, 2008.

    1. Order No. 707 \1\ amended the Federal Energy Regulatory 
Commission's (Commission) regulations to codify restrictions on 
affiliate transactions between franchised public utilities that have 
captive customers or that own or provide transmission service over 
jurisdictional transmission facilities, and their market-regulated 
power sales affiliates or non-utility affiliates. These restrictions 
supplemented other restrictions the Commission has in place that apply 
to public utilities with market-based rates and to public utilities 
seeking merger approvals. In this order, we deny, in part, and grant, 
in part, the various requests for rehearing received by the Commission, 
and amend part 35 of our regulations accordingly.
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    \1\ Cross-Subsidization Restrictions on Affiliate Transactions, 
Order No. 707, 73 FR 11013 (Feb. 29, 2008), FERC Stats. & Regs. ] 
31,264, granting extension of time, 122 FERC ] 61,280 (2008).
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I. Background

    2. In the Affiliate Transactions Notice of Proposed Rulemaking, the 
Commission proposed to implement uniform affiliate restrictions that 
would be applicable to all franchised public utilities with captive 
customers and their market-regulated and non-utility affiliates and 
would address both power and non-power goods and services transactions 
between the utility and its affiliates.\2\ The proposed restrictions 
were based on those already imposed by the Commission in the context of 
certain section 203 and 205 approvals, but expanded the transactions 
and entities to which they apply.
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    \2\ Cross-Subsidization Restrictions on Affiliate Transactions, 
Notice of Proposed Rulemaking, 72 FR 41644 (July 31, 2007), FERC 
Stats. & Regs. ] 32,618 (2007).
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    3. Specifically, the Commission proposed to: (1) Require the 
Commission's approval of all wholesale power sales between a franchised 
public utility with captive customers and a market-regulated power 
sales affiliate; (2) require a franchised public utility with captive 
customers to provide non-power goods and services to a market-regulated 
power sales affiliate or a non-utility affiliate at a price that is the 
higher of cost or market price; (3) prohibit a franchised public 
utility with captive customers from purchasing non-power goods or 
services from a market-regulated power sales affiliate or a non-utility 
affiliate at a price above market price (with the exception of (4)); 
and (4) prohibit a franchised public utility with captive customers 
from receiving non-power goods and services from a centralized service 
company at a price above cost.
    4. The Commission stated that the restrictions would help it to 
meet the requirement of amended section 203(a)(4) of the Federal Power 
Act (FPA) \3\ that a transaction not result in the inappropriate cross-
subsidization of a non-utility associate company. The Commission 
further stated that the restrictions would help assure just and 
reasonable rates and the protection of captive customers for all public 
utilities pursuant to sections 205 and 206 of the FPA,\4\ irrespective 
of whether they needed approval of a section 203 transaction.
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    \3\ 16 U.S.C. 824b(a)(4).
    \4\ 16 U.S.C. 824d, 824e.
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    5. As the Commission stated in Order No. 707, its obligation to 
ensure that the rates, terms, and conditions of jurisdictional service 
are just, reasonable and not unduly discriminatory or preferential 
requires that it ensure that wholesale rates do not reflect costs that 
result from undue preferences granted to affiliates or that are 
imprudent or unreasonable as a result of affiliate transactions. The 
Commission described its long history of scrutinizing affiliate 
transactions for potential cross-subsidization and how in recent 
rulemakings and orders it has codified and expanded affiliate 
restrictions, both under its FPA section 205 and 206 rate authority (in 
the context of market-based rates) and under its FPA section 203 merger 
authority. The Commission then extended similar restrictions to all 
franchised public utilities that have captive customers, or that own or 
provide transmission service over jurisdictional transmission 
facilities.
    In particular, the Commission articulated restrictions on affiliate 
sales of electric energy by prohibiting wholesale sales of electric 
energy between a franchised public utility with captive customers and a 
market-regulated power sales affiliate without prior Commission 
authorization for the transaction under section 205 of the Federal 
Power Act.\5\ The Commission also promulgated three pricing 
restrictions on the sale of non-power goods and services.
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    \5\ 18 CFR 35.44(a).
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    6. First, the Commission provided that unless otherwise permitted 
by Commission rule or order, sales of any non-power goods or services 
by a franchised public utility that has captive customers or that owns 
or provides transmission service over jurisdictional transmission 
facilities, including sales made to or through its affiliated exempt 
wholesale generators or qualifying facilities, to a market-regulated 
power sales affiliate or non-utility affiliate must be at the higher of 
cost or market price.
    7. Second, the Commission provided that unless otherwise permitted 
by Commission rule or order, a franchised public utility that has 
captive customers or that owns or provides transmission service over 
jurisdictional transmission facilities, may not purchase or receive 
non-power goods and services from a market-regulated power sales 
affiliate or a non-utility affiliate at a price above market.
    8. Third, and as an exception to the restriction set forth 
immediately above, the Commission provided that a franchised public 
utility that has captive customers or that owns or provides 
transmission service over jurisdictional transmission facilities, may 
only purchase or receive non-power goods and services from a 
centralized service company at cost.\6\
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    \6\ Id.
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    9. The Commission also stated in Order No. 707 that the pricing 
rules would be prospective and would apply to any contracts, agreements 
or arrangements entered into on or after the effective date of the 
rule. The Commission explained that to the extent different pricing was 
in effect for any contract, agreement, or arrangement entered into 
prior to the effective date of Order No. 707, that pricing may

[[Page 43074]]

remain in effect, but the Commission may on its own motion, or upon 
complaint, institute a section 206 proceeding to determine whether the 
costs incurred by a public utility under pre-existing contracts, 
agreements or arrangements are just, reasonable and not unduly 
discriminatory or preferential.

II. Discussion

A. Affiliate Transaction Pricing Standards

    10. In Order No. 707, the Commission denied requests to permit 
franchised public utilities with captive customers to make sales of 
non-power goods and services at cost to market-regulated power sales 
affiliates or non-utility affiliates and instead required these sales 
to be at the higher of cost or market price. It reasoned that to adopt 
an at-cost pricing structure for these types of non-power transactions 
``would require a franchised public utility to sell to an affiliate at 
cost even when market prices are higher, thereby foregoing profits that 
the utility otherwise could have obtained by selling to a non-affiliate 
at a market price.'' \7\
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    \7\ Order No. 707, FERC Stats. & Regs. ] 31,264 at P 70.
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    11. The Commission also prohibited a franchised public utility with 
captive customers from purchasing non-power goods or services from a 
market-regulated power sales affiliate or a non-utility affiliate at a 
price above market price, with the exception of purchases from 
centralized service companies. In doing so, the Commission denied the 
New York State Public Service Commission's (New York Commission) 
request for a lower of cost or market standard for these types of 
transactions, finding that captive customers are not harmed by the 
franchised public utility paying above-cost charges if those charges 
are no higher than what they would pay non-affiliates for the same non-
power goods and services. In this regard, the Commission noted that 
nothing in the standard requiring that these purchases not be above 
market prevents the franchised public utility from paying less than the 
market price.\8\ The Commission further rejected requests that it defer 
to state utility commissions that apply different standards to intra-
system transactions to avoid inconsistent standards.\9\
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    \8\ Id. P 71.
    \9\ Id. P 74.
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1. Shared Corporate General Management and Administrative Services
Requests for Rehearing or Clarification
    12. Florida Power & Light Company and FPL Energy, LLC (FPL), 
Pacific Gas & Electric Company (PG&E), and Southern California Edison 
Company (SoCal Edison) each argue that Order No. 707 does not 
adequately address pricing for shared corporate general management and 
administrative services that a utility provides to other companies in a 
single-state holding company system without a centralized service 
company but that it does not offer to non-affiliates. The services in 
question are those akin to the services that a centralized service 
company provides in multi-state systems. PG&E identifies them as 
accounting, appraisal, call center, claims, computer, construction, 
communications, equipment, fleet, janitorial, legal, legislative, 
maintenance, payroll, personnel, realty, regulatory, supply, and 
technical services. FPL notes that the services in question are similar 
to those provided by a centralized service company, which the 
Commission has defined as one ``that provides services such as 
administrative, managerial, financial, accounting, recordkeeping, legal 
or engineering services, which are sold, furnished, or otherwise 
provided (typically for a charge) to other companies in the same 
holding company system.'' \10\ FPL states that in its system, the 
services in question are information technology and management; 
corporate communications systems; engineering and construction; \11\ 
finance and accounting; legal; human resources; auditing; environmental 
services; risk management; technical nuclear and power generation 
support services; and federal government affairs. FPL, PG&E and SoCal 
Edison maintain that intra-system sales of these services at cost 
should be permitted even when the system has no centralized service 
company.
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    \10\ The language cited is drawn from the definition of a 
centralized service company found in 18 CFR 367.1(a)(7).
    \11\ FPL notes that in its case ``engineering and construction'' 
services do not refer to the intra-corporate provision of parts or 
labor. It refers rather to oversight and planning functions 
effectively as an owner's representative. Actual engineering and 
construction services with respect to new plants are provided by 
third-party engineering and construction companies at negotiated 
rates.
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    13. FPL, PG&E and SoCal Edison first note that they do not make 
sales of these services to non-affiliates, and as a result market 
prices do not exist for them. SoCal Edison notes that the Commission 
acknowledged in Order No. 707 that it has recognized that defining a 
market price for these services is a ``speculative task'' when dealing 
with a centralized service company, but the Commission fails to 
recognize that the task is no less speculative where the system does 
not have a centralized service company. FPL states that many of the 
services at issue vary from location to location and provider to 
provider. In a system like its own, these services have been provided 
in-house for years, and the nature of the services as well as the 
manner in which they are provided reflect both the culture and 
technology choices made by the utility providing these services. 
Because the nature of a service is driven and structured primarily to 
meet the needs of the franchised public utility, it is virtually 
impossible to establish a market or a market price for it.
    14. SoCal Edison challenges the reasoning underlying the 
Commission's denial of at-cost pricing for general administrative 
services a franchised public utility provides to system companies, 
i.e., that this pricing standard would require a franchised public 
utility to sell to an affiliate at cost even when market prices are 
higher, thereby foregoing profits that the utility otherwise could have 
obtained by selling to a non-affiliate at a market price. SoCal Edison 
argues that where the utility is not making any market-based sales of 
these services, it is not ``foregoing'' any profits. It suggests that 
there is no evidence in the record for the Commission's assumption that 
utilities would forego profits if the Commission did not adopt a higher 
of cost or market standard, and thus, no basis for the Commission's 
rejection of an at-cost pricing structure. SoCal Edison contends that 
the Commission should acknowledge the distinction between goods and 
services developed for sale on the open market (for which affiliates 
should be charged the higher of cost or market price) and those 
services that are not intended for sale and can be provided to 
affiliates at their fully-loaded cost.\12\
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    \12\ SoCal Edison states that fully-loaded costs include the 
direct cost of each employee's time plus adders to cover indirect 
costs such as employee benefits and other overhead items.
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    15. FPL, PG&E and SoCal Edison argue that at-cost pricing in these 
circumstances (i.e., where the franchised public utility is a member of 
a single-state holding company and provides services only to 
affiliates, but not on the open market, and operates in a single-state 
context) leads to significant economies of scale. SoCal Edison states 
that while Order No. 707

[[Page 43075]]

recognizes the efficiencies and economies of scale that benefit captive 
customers when general administrative services are provided across an 
enterprise, instead of being duplicated by each separate entity within 
a holding company structure, the order fails to recognize similar 
efficiencies and economies of scale in a single-state context where the 
corporate structure does not include a formal centralized services 
company, but where a franchised utility often may provide similar in-
house corporate administrative services to the rest of the corporate 
enterprise.
    16. PG&E argues that at-cost provision of goods and services 
promotes economies of scale, and as long as the non-utility companies 
within a family are not charging more than the cost of the services, 
and the utilities involved are recovering their costs of providing any 
services they provide to others within the family, utility ratepayers 
will receive the cost advantages of the economies of scale from in-
house services and will be insulated from cross subsidizing other 
companies and their customers.
    17. FPL argues that customers will lose the benefit of established 
efficiencies, expertise, and economies of scale, with no real 
countervailing benefit if at-cost pricing cannot be used in these 
circumstances. FP&L asks the Commission to clarify that when companies 
in a holding company system supply to each other non-power goods or 
services comparable to those provided by a centralized service company, 
then those non-power goods and services may be provided at fully-loaded 
cost as a reasonable proxy for market price. FPL argues that a fully-
loaded cost standard has avoided the time and expense of formal 
requests for proposal procedures to ``market test'' in theory every 
provision of regularized and ongoing support services. An at-cost 
standard allows immediate use of shared corporate technical expertise 
in the most efficient and cost-effective manner.
    18. These commenters also argue that customers of franchised public 
utilities are protected from affiliate abuse when general 
administrative services are shared at their fully-loaded costs, i.e., 
costs designed to reflect the total corporate costs of providing a 
service. FP&L states that fully-loaded cost reflects the total cost to 
provide a particular service, including corporate overhead and other 
general expenses.\13\ Edison Electric Institute (EEI) argues that there 
should at least be a strong presumption that the at-cost standard is 
appropriate when dealing with services of this type, barring a 
Commission or ratepayer concern, which can be explored on a case-by-
case basis. It states that otherwise the new rules could be read to 
preclude even utility-to-centralized service company provision of such 
services at cost, requiring the services to be priced higher than at 
cost by one utility to the detriment of the customers of another 
utility that is a client of the centralized service company.
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    \13\ FPL states that these expenses include (1) salaries, 
incentives, commissions, bonuses, rewards; (2) insurance; (3) paid 
time off such as vacation, etc., (4) FICA and miscellaneous taxes; 
(5) retirement planning/401k; (6) office infrastructure (office 
space, furniture, utilities); (7) office equipment (computer, 
software, FAX, Printer, UPS, Copier, etc.); (8) telecom & internet; 
(9) operational/functional management and oversight; (10) human 
resources and administration; (11) finance and payroll; (12) 
miscellaneous fringe and welfare benefits; (13) training and 
education; and (14) travel expenses. FP&L states that it organizes 
costs into three categories: (a) ``direct costs,'' i.e., costs of 
resources used exclusively to provide services that are readily 
identifiable to an activity and used to indicate work that directly 
benefits a business unit other than the provider; (b) ``assigned 
costs'' or the costs of resources used jointly to provide both 
regulated and non-regulated activities that are apportioned using 
direct measures of cost causation; and (c) ``unattributable'' costs 
or costs of resources shared by both regulated and non-regulated 
activities for which no causal relationship exists. The costs in 
this final category are accumulated and allocated to both regulated 
and non-regulated activities using an affiliate management fee based 
on the ``Massachusetts Formula,'' which FPL says is a long-
recognized regulatory methodology of cost allocation.
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    19. SoCal Edison states that when affiliates are charged fully-
loaded cost for such services, the ability to leverage these services 
and gain economies of scale ultimately benefits the utility's 
customers.
    20. EEI states that there is an array of services that companies 
within the family can provide to one another at a substantial savings 
because of economies of scale and by keeping the services in-house 
rather than having to obtain the services in the market, where 
additional overhead and rates of return must be covered. EEI argues 
that the at-cost provisions of Order No. 707 should apply broadly to 
companies within a family of companies that provide services to each 
other of the type provided by centralized service companies, even where 
the system does not have a formal centralized service company. EEI 
states that there should be no distinction between utility and non-
utility affiliates to this extent. It maintains that a market price 
standard should apply only in cases where the seller makes external 
sales of these non-power services.
    21. EEI and PG&E also argue that the Commission has failed to 
address or to resolve the potential for conflict between the 
Commission's rules and state affiliate transaction and cross subsidy 
requirements that may apply to the same transactions.\14\ EEI argues 
that many states already have affiliate transaction provisions in 
place, and those provisions are specifically aimed at protecting 
captive retail customers. It maintains that the Commission should more 
fully accommodate the state provisions in this instance, as the 
Commission's final rule is aimed at protecting the same customers that 
state requirements seek to protect. EEI and PG&E argue that the states 
have a special interest in, and responsibility for, overseeing costs 
affecting these customers, and states have been fulfilling that role 
for many years.
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    \14\ National Grid USA (National Grid) makes a similar argument 
which we discuss separately below.
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    22. PG&E argues that the Commission should defer to state reviews 
and approvals of affiliate transactions in order to avoid unnecessary 
conflict. It argues that the Commission's approach to affiliate 
transactions fails to address or to resolve the potential for conflict 
between Commission requirements and state affiliate transaction and 
cross subsidy requirements that may apply to the same transactions. 
PG&E argues that to avoid conflict, the Commission should grant a 
blanket waiver of the final rule's requirements applicable within any 
state that already oversees affiliate transactions to protect against 
cross-subsidization, and the waiver should apply to company operations 
covered by the state provisions. PG&E maintains that waivers of this 
type would be consistent with waivers the Commission has authorized for 
single-state utilities in Order No. 667. EEI supports these waivers 
also. National Grid argues that if the Commission does not defer to 
state regulation, it should provide a process for public utilities to 
get a waiver of the Commission's regulations' for certain transactions 
based on a showing that those transactions are already subject to 
adequate regulation at the state level.
Commission Determination
    23. As discussed further below, we find the arguments in favor of 
permitting companies within a single-state holding company system that 
does not have a centralized service company to provide each other 
general administrative and management services at cost to be 
persuasive, and we will therefore grant rehearing on this

[[Page 43076]]

issue. Accordingly, we are revising our rules to permit affiliates 
within a single-state holding company system, as defined by our 
rules,\15\ that does not have a centralized service company to provide 
``at cost'' to other affiliates in the system the kinds of services 
typically provided by centralized service companies and the goods to 
support those services.\16\ We stress that this permission applies only 
to internal general administrative and management services and only to 
services in that category that are not provided to unaffiliated third 
parties. While our grant of rehearing necessarily applies also to 
charges for a limited set of goods in the form of supplies and 
equipment acquired to support administrative and management functions, 
as well as office space and other general overhead items, we note in 
particular that it does not apply to inputs to utility operations such 
as fuel supply, construction, or real estate \17\ that have a clearly 
identifiable market price,\18\ nor does it apply to the implementation 
of major projects that are easily susceptible to competitive bidding, 
such as construction projects.
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    \15\ 18 CFR 366.3(c)(1) (defining a single-state holding company 
as a holding company that derives no more than 13 percent of its 
public-utility company revenues from outside a single state). The 
definition exempts revenues derived from exempt wholesale 
generators, foreign utility companies, and qualifying facilities for 
these purposes.
    \16\ Section 367.1(a)(7) of the Commission's regulations defines 
a centralized service company as ``a service company that provides 
services such as administrative, managerial, financial, accounting, 
recordkeeping, legal or engineering services, which are sold, 
furnished, or otherwise provided (typically for a charge) to other 
companies in the same holding company system.'' This definition also 
states that ``[c]entralized service companies are different from 
other service companies that only provide a discrete good or 
service.''
    \17\ See Order No. 707, FERC Stats. & Regs. ] 31,264 at P 62 
n.57.
    \18\ We discuss the issue of fuel adjustment clauses further 
below.
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    24. There are several reasons why the Commission has concluded that 
it is appropriate to expand the use of at-cost pricing beyond the 
context of centralized service companies to also allow at-cost pricing 
for the provision of general and administrative services and the goods 
to support those services between members of a single-state holding 
company system where those members do not sell such goods or services 
to non-affiliates. First, as we stated in Order No. 707 with respect to 
the same types of services being provided by centralized service 
companies in multi-state systems, defining a market price for general 
and administrative services is a speculative task.\19\ The task is no 
more speculative in the context of a multi-state holding company with a 
centralized service company than in the context of a single-state 
holding company without a centralized service company. Thus, we agree 
that, when dealing with general administrative and management services, 
as a general matter the critical issue is the type of service involved, 
not whether it is supplied through a centralized service company or 
through a different type of system company.
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    \19\ Order No. 707, FERC Stats. & Regs. ] 31,264 at P 72.
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    25. Second, SoCal Edison points to our statement in Order No. 707 
that at-cost pricing ``would require a franchised public utility to 
sell to an affiliate at cost even when market prices are higher, 
thereby foregoing profits that the utility otherwise could have 
obtained by selling to a non-affiliate at a market price.'' \20\ We 
recognize that this statement concerning foregone profits does not 
apply where the utility does not provide those goods or services to 
non-affiliates. We therefore agree with SoCal Edison that where a 
utility is not making sales of a service to a non-affiliate, it cannot 
be said with certainty to be foregoing any profit.
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    \20\ Id. P 70.
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    26. Third, we recognize that efficiencies and economies of scale 
associated with providing these types of services and the goods to 
support those services between members within the single-state holding 
company system can benefit captive customers because the goods and 
services often can be provided less expensively, at cost, than if they 
were purchased from outside the system by individual system members. As 
a related matter, we do not believe it would serve the public interest 
to have rules that create an incentive for a single-state holding 
company to incur additional costs to set up a separate centralized 
service company (that would be allowed to use the at-cost pricing) to 
provide the very same services and the goods to support those services 
that could be provided more inexpensively, e.g., through the investor-
owned utility, without a centralized service company. While we believe 
that centralized service companies can facilitate regulatory oversight 
and generally favor their use, we also recognize that they may not be 
the most efficient or least-cost structure for some holding companies.
    27. Finally, we give weight to the fact that where services are 
provided within a single-state holding company context, there may be 
greater state regulatory authority to oversee these types of services 
transactions and the goods to support those services than in the multi-
state context, and this state oversight will serve to complement that 
of the Commission in protecting customers against inappropriate cross-
subsidization. We recognize that one of the risks of at-cost pricing is 
the potential for prices to be imposed that are substantially higher 
than the market price.\21\ As we stated in Order Nos. 667 and 707, the 
Commission will entertain complaints that at-cost pricing exceeds the 
market price.
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    \21\ See Order No. 707, FERC Stats. & Regs. ] 31,264 at P 73.
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    28. We recognize that many of the above considerations would also 
apply to general and administrative goods and services provided between 
members in multi-state holding companies that do not have centralized 
service companies. However, we are reluctant to grant a broad generic 
exception for those circumstances. The detailed accounting and 
reporting requirements applicable to centralized service companies 
greatly assists the Commission in regulating those entities in a multi-
state context where individual states may have less authority to help 
oversee affiliate transactions. We are willing, however, to consider 
requests for waiver on a case-by-case basis for at-cost pricing in the 
multi-state context, under the same circumstances as for single state 
holding companies (i.e., only for general and administrative services 
and the goods to support those services and only where members of the 
holding company do not sell such goods and services outside the holding 
company).\22\ This will allow the Commission to examine each situation 
to ensure that adequate regulatory oversight and protections are in 
place. The Commission acknowledges that many of the arrangements for 
the intrasystem sharing of administrative and management services under 
discussion here are long standing and, in part, have developed in 
response to state regulatory requirements. The Commission agrees with 
EEI, PG&E and others that the states have a special interest in these 
matters, and, as discussed above, that it is appropriate to take into 
account such state regulation in developing our policies in this area. 
Accordingly, the existence of state oversight and the desire to avoid 
conflict with state requirements is an important consideration in 
granting

[[Page 43077]]

rehearing and revising our rules as described above and in our 
willingness to consider case-by-case exceptions involving general and 
administrative services and the goods to support those services 
provided in the multi-state context. We do not want to require 
significant changes to settled practices when these practices are 
already subject to state oversight and where there is no showing that 
suggests these practices are leading to improper cross-subsidization. 
We believe that our grant of rehearing eliminates the potential for 
conflict between the Commission's rules and state affiliate transaction 
and cross subsidy requirements that may apply to the same transactions 
involving general and administrative services and the goods to support 
those services in a single-state holding company system. However, to 
the extent that any conflicts do arise, companies or state regulatory 
authorities may bring this to our attention on a case-by-case basis, 
and we will determine whether case-specific waivers are appropriate.
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    \22\ We do not anticipate that there would be very many multi-
state holding companies in this category since most, if not all, of 
the current multi-state holding companies are former registered 
holding companies under the Public Utility Holding Company Act of 
1935 that had centralized services companies and still have them.
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    29. Commenters have described procedures they use to ensure that 
customers of franchised public utilities are protected from affiliate 
abuse when general administrative and management services are shared 
among system companies. Our grant of rehearing is premised on the 
assumption that the at-cost sharing of general administrative and 
management services in single-state holding company systems will be 
conducted using rigorous accounting and cost-allocation procedures. It 
is also premised on the assumption that the at-cost standard will be 
applied in conjunction with measures for the fair and reasonable 
allocation of costs across system companies. In granting rehearing, we 
note that when at-cost principles are applied (whether in the context 
of multi-state holding companies or in the context of single-state 
holding company systems), the Commission historically has acted, and 
will continue to act, under sections 205 and 206, whether on an 
application, a complaint, or on our own motion, to ensure that 
inappropriate costs are not flowed through in jurisdictional rates.
    30. Accordingly, we will amend our regulations to provide that a 
company in a single-state holding company system, as defined in 18 CFR 
366.3(c)(1), may provide general administrative and management non-
power goods and services to, or receive such goods and services from, 
other companies in the same holding company system, at cost, provided 
that the only parties to transactions involving these non-power goods 
and services are affiliate or associate companies, as defined in 18 CFR 
366.1, of a holding company in the holding company system.
    31. We deny FPL's request for clarification that fully-loaded cost 
is a reasonable proxy for market price. First of all, we see no need to 
do so in light of our grant of rehearing above. Secondly, making fully-
loaded cost a proxy for market price unnecessarily clouds the 
distinction between at-cost and market pricing embodied in our rules.
2. Pricing Standards for Particular Affiliate Arrangements Requests for 
Rehearing or Clarification
    32. A number of requests for rehearing or clarification relate to 
the treatment of specific transactions or arrangements under our rules.
    33. PG&E argues that a ``no higher than the market price'' standard 
is inoperable for certain types of entities. It refers specifically to 
bankruptcy-remote special-purpose entities used to raise funds through 
a securitized financing. PG&E states that these entities are structured 
to operate independently and at arm's length from their parent so that 
their assets and liabilities would not be consolidated with those of 
the parent in the event of the parent's or utility's bankruptcy. PG&E 
argues that this approach lowers the cost of utility financing, but 
that the special-purpose entities must be fully reimbursed for their 
costs in order to secure a legal opinion in support of their bankruptcy 
remote status. PG&E also believes that the use of special-purpose 
entities to obtain accounts receivable financing might be inconsistent 
with the Commission's rules. These entities also must be able to 
recover their costs fully.
    34. Two holding companies with franchised public utility operations 
in more than one state seek clarification or rehearing on transactions 
specific to their individual operations. Xcel Energy Services Inc. 
(Xcel) argues that Order No. 707 does not expressly deal with the 
pricing for transactions between franchised public utilities. It states 
that its franchised operating companies entered into an umbrella 
agreement in 2000 that allows for incidental transactions in goods and 
services between the operating companies, such as short-term leases of 
coal rail cars done at cost. Xcel states that this at-cost arrangement 
was consistent with that at-cost principle mandated by the Securities 
and Exchange Commission (SEC) at the time. Xcel requests that its 
operating companies be allowed to continue these incidental 
transactions.
    35. Xcel and National Grid each argue that certain transactions 
between their respective franchised public utilities that are 
accomplished through their respective centralized service companies 
should be subject to at-cost principles. Xcel notes that the 
Commission's regulations do not account for non-power goods and 
services that a utility operating company provides to its centralized 
service company and whose costs may then be re-allocated to other 
franchised public utility operating companies. Xcel states that its 
franchised public utilities share certain information system assets in 
this way at cost and were permitted to do so at cost by the SEC. Xcel 
seeks clarification that it and its operating companies may request a 
waiver from the Order No. 707 rules to continue at-cost arrangements 
like this that pre-date EPAct 2005 and Order No. 707.
    36. National Grid argues that in Order No. 707 the Commission 
mischaracterized its comments as supporting at-cost pricing for all 
transactions among affiliates within a holding company system. National 
Grid states that it only proposed symmetrical pricing between 
franchised public utilities and centralized service companies--meaning 
all transactions involving centralized service companies would be 
priced at cost, no matter their direction. It contends that this 
pricing structure would comply with the affiliate rules included in the 
New York Commission's order on the merger between National Grid and 
Keyspan.
    37. National Grid argues that the same rationale for justifying at-
cost pricing for centralized service companies selling non-power goods 
and services to a franchised public utility should apply when a 
franchised public utility sells non-power goods and services to the 
centralized service company, i.e., economies of scale, difficulty 
defining market value, and the Commission's authority to find at-cost 
pricing unreasonable in specific instances. National Grid states that 
the Commission's decision to treat centralized service companies like 
other non-utility affiliates when purchasing goods or services from a 
utility affiliate creates accounting requirements that are much more 
difficult to implement than symmetrical pricing.
    38. National Grid maintains that while the Commission stated in 
Order No. 707 that ``stricter'' state standards would apply to 
affiliate transactions, the Commission's approach involves a narrow 
reading of that term that focuses entirely on price levels.\23\ 
National Grid

[[Page 43078]]

argues that a state's restrictions on affiliate transactions may be 
considered highly strict if they require all transactions involving 
regulated affiliates to be settled at fully-loaded cost. National Grid 
states that its operations currently are subject to strict at-cost 
requirements at the state level that apply to all companies deemed 
regulated, which includes service companies. It argues that inserting 
Commission price standards into this situation will upset arrangements 
made at the state level in merger proceedings and rate cases. National 
Grid thus maintains that applying the Commission's rules to 
transactions among regulated affiliates will depend on how the term 
``strict'' is to be interpreted in this context.
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    \23\ In Order No. 707, the Commission stated that ``to the 
extent a state has affiliate-pricing standards that are `stricter' 
than the Commission's then the stricter standard applies, as long as 
there is no conflict in complying with both the state's pricing 
standard and this Commission's pricing standard.'' Id. P 74.
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    39. National Grid proposes that, because of the special status of 
centralized service companies, it may be preferable to distinguish 
between regulated and non-regulated companies rather than between 
utilities and non-utilities, in that centralized service companies are 
regulated at both the state and federal levels. National Grid maintains 
that this would be consistent with the Commission's position that its 
policies should not preempt state rules.
    40. FirstEnergy Service Company (FirstEnergy) argues that the 
Commission should clarify that public utilities subject to regulation 
under Order No. 707 are free to request a waiver of one or more, but 
not all, of the Order No. 707 affiliate cross-subsidization 
restrictions. It maintains that this clarification will provide 
additional certainty when determining how best to comply with 
Commission regulation of affiliate cross-subsidization restrictions.
Commission Determination
    41. The Commission will defer responding to the issues raised by 
PG&E with respect to the implications of our affiliate pricing rules 
for special-purpose entities created for financing purposes, such as 
bankruptcy-remote entities. It appears from PG&E's brief discussion 
that this is a generic issue and that there may be a lack of clarity 
with respect to whether the Commission considers bankruptcy-remote 
entities to be providing ``services'' covered by the Order No. 707 
pricing restrictions. Accordingly, consistent with our goals of trying 
to clarify areas of confusion with respect to our regulations and 
providing greater regulatory certainty to the regulated community where 
possible, the Commission intends to obtain additional input from 
industry and others regarding the activities of bankruptcy-remote 
entities and their relationship to franchised public utilities, and 
thereafter to issue a guidance order with respect to whether the 
Commission considers these entities to be providing services covered by 
the rule and any related issues. In the interest of finalizing this 
rule, however, we will undertake such inquiries outside the context of 
this particular rulemaking.
    42. With respect to Xcel and National Grid's concerns, we will 
address on a case-by-case basis issues regarding transactions between 
affiliated franchised public utilities or between franchised public 
utilities that include intermediate transactions with centralized 
service companies. First, we will consider whether pricing or other 
restrictions need to be imposed on transactions between two or more 
franchised public utilities on a case-by-case basis. Such transactions 
are not covered by this rule, which applies only to transactions 
between franchised public utilities and either a market-regulated power 
sales affiliate or a non-utility affiliate.\24\ Second, to the extent 
that the requirements of this rule may be implicated because 
transactions for goods and services between franchised public utilities 
include intermediate transactions with a centralized service company, 
we clarify in response to National Grid and Xcel that a holding company 
and its operating companies may seek a waiver of the requirements of 
this rule on a case-by-case basis.
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    \24\ Transactions involving only two or more franchised public 
utilities may raise a different type of cross-subsidization issue 
(involving whether the customers of one franchised public utility 
would be subsidized at the expense of the customers of the other 
franchised public utility). The Commission will address such issues 
on a case-by-case basis, as appropriate, in the context of a section 
205 filing, a section 206 complaint, or a section 203 merger 
application.
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    43. In response to FirstEnergy, we clarify that public utilities 
subject to regulation under Order No. 707 are free to request a waiver 
of the Order No. 707 affiliate cross-subsidization restrictions.
3. Materiality Threshold
Request for Rehearing or Clarification
    44. EEI argues that, to avoid imposing an inappropriate burden 
while achieving the Commission's policy and regulatory goals, Order No. 
707 should incorporate materiality thresholds per class of transactions 
per provider of either $1 million or 1 percent of utility gross 
revenues, whichever is less, before the affiliate transaction 
preapproval and pricing requirements apply. It notes that the 
Commission recently proposed using thresholds in its notice of proposed 
rulemaking on FERC Form 1, 1-F, and 3-Q, and their use here will allow 
companies to avoid scrutinizing thousands of relatively minor 
transactions.
Commission Determination
    45. We will deny EEI's request for a materiality threshold for the 
application of the Order No. 707 rules. While we agree in principle 
that a materiality threshold may be appropriate, EEI has not fully 
explained how its proposal would function when applied. In particular, 
EEI has not explained what it means by a ``class'' of transactions, and 
the degree to which the threshold would apply in practice appears to 
depend, in part, on how broadly or narrowly a category is drawn. 
However, it may be appropriate for the Commission to revisit this issue 
after gaining additional experience with these rules.

B. Relationship of Pricing Restrictions to Other Commission Regulations

    46. A number of commenters argue that the rules adopted in Order 
No. 707 may conflict with other Commission regulations. We address each 
potential conflict raised by commenters.
1. PURPA Regulations
Request for Rehearing or Clarification
    47. EEI argues that the power transaction restrictions implemented 
in Order No. 707 should not apply to mandatory purchase obligation 
sales from qualifying facilities (QFs) under the Public Utility 
Regulatory Policies Act of 1978 (PURPA).\25\ It maintains that 
prohibiting affiliate power sales that are not first approved under FPA 
section 205 \26\ could, if taken literally, require pre-authorization 
for energy sales made by a QF with market-based rate authority to an 
affiliated utility with captive customers. EEI asserts that this could 
be the case even where the utility has a mandatory obligation under 
PURPA to purchase the energy. EEI believes that the Commission did not 
intend this result because there is no reason for additional review of 
sales

[[Page 43079]]

under a mandatory purchase agreement that is subject to Commission 
review.
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    \25\ 16 U.S.C. 824a-3.
    \26\ 18 CFR 35.44(a) (``Restriction on affiliate sales of 
electric energy. No wholesale sale of electric energy may be made 
between a franchised public utility with captive customers and a 
market-regulated power sales affiliate without first receiving 
Commission authorization for the transaction under section 205 of 
the Federal Power Act'').
---------------------------------------------------------------------------

Commission Determination
    48. The Commission agrees with EEI that it did not intend that the 
pre-authorization requirement in question would apply to QF sales under 
contracts based on a mandatory purchase obligation under PURPA where 
the QF has market-based rate authority. Accordingly, we clarify that 
the pre-authorization requirement does not apply to those sales.
2. Fuel Adjustment Clause Regulations
Request for Rehearing or Clarification
    49. EEI argues that to avoid conflicts, the non-power transaction 
provisions in the regulations implemented by Order No. 707 should be 
amended to exclude fuel purchases covered by the Commission's fuel 
adjustment clause regulations at 18 CFR 35.14(a)(7). It asserts that 
the new requirement could be read to apply to a purchase subject to the 
fuel adjustment clause regulations regardless of prior approval of the 
fuel price by a regulatory body. The new Sec.  35.44(b) applies a ``no 
higher than market'' ceiling to purchases of goods and services that 
may differ from fuel prices already authorized by a regulatory body and 
currently allowed for use under Sec.  35.14(a)(7). EEI argues that if 
Sec.  35.44(b) controls in such circumstances, it could require utility 
fuel subsidiaries to accept a lower price even if a higher price has 
been approved by a state regulatory body. EEI also argues that 
determining the market price for a specific, delivered fuel can be very 
difficult because differences in quality and transportation costs 
affect the price.
Commission Determination
    50. The Commission clarifies that the regulations issued under 
Order No. 707 pertaining to sales of non-power goods and services do 
not apply to fuel purchases covered by the Commission's fuel adjustment 
clause regulations. Those regulations incorporate extensive oversight 
measures, including a provision that fuel charges by affiliated 
companies that do not appear to be reasonable may result in the 
suspension of the fuel adjustment clause or an investigation under FPA 
section 206. Accordingly, we will amend our regulations to exempt from 
our affiliate pricing restrictions transactions for fuel where the 
price of fuel from a company-owned or controlled source is found or 
presumed under 18 CFR 35.14 to be reasonable and includable in the 
adjustment clause.
3. Market-Based Rate Regulations
Requests for Rehearing
    51. FirstEnergy notes that under Order No. 707, a public utility 
that received a waiver of the market-based rate affiliate restrictions 
based on a finding that it had no captive customers can be exempted 
from the new affiliate cross-subsidization restrictions by making an 
informational filing referencing that finding. FirstEnergy argues that 
there is no need to impose on public utilities that have received 
waivers of the market-based rate affiliate restrictions the additional 
burden of making an informational filing in order to avoid the 
application of duplicative Order No. 707 affiliate cross-subsidization 
restrictions.
    52. FirstEnergy also notes that while the Commission may have 
waived a public utility's market-based rate affiliate restrictions, the 
Commission may not have made an express ``finding'' as to whether the 
relevant public utility served captive customers, and it is thus 
unclear whether those public utilities will be entitled to rely on the 
Commission's waiver of market-based rate affiliate restrictions for 
purposes of the Order No. 707 affiliate restrictions. FirstEnergy 
maintains that the difficulty will be compounded by the unlikelihood of 
a Commission order in response to the informational filing or some 
other confirmation that the Commission has accepted or approved that 
filing.
    53. FirstEnergy argues that to the extent that affiliate cross-
subsidization compliance issues arise, it will be unclear whether the 
Commission's market-based rate affiliate restrictions, Order No. 707's 
affiliate cross-subsidization restrictions, or both, apply to a given 
transaction and to what effect. FirstEnergy argues that the Commission 
should delete the new restriction on affiliate sales of electric energy 
and rely instead on its existing market-based rate affiliate 
regulations to govern relevant wholesale sales of electric energy at 
market-based rates. In the alternative, FirstEnergy requests that the 
Commission clarify the relation between these two requirements.
Commission Determination
    54. We disagree with FirstEnergy that it is unnecessary to require 
public utilities that have received waivers of the market-based rate 
affiliate restrictions to make informational filings referencing that 
filing for purposes of the Order No. 707 regulations. The minimal 
burden this requirement might create does not outweigh the benefit in 
terms of administrative efficiency and transparency that would accrue 
to the industry and the Commission through this procedure.
    55. FirstEnergy expresses general concerns about the effect a 
Commission waiver of a public utility's market-based rate affiliate 
restrictions would have for purposes of Order No. 707. As the 
Commission explained in Order No. 697, ``where a seller demonstrates 
and the Commission agrees that it has no captive customers, the 
affiliate restrictions will not apply.'' \27\ We clarify that the 
informational filing with respect to Order No. 707 need only consist of 
a copy of, and a citation to, the Commission order finding that the 
public utility does not serve captive customers.\28\ Further Commission 
action on the issue thus would be unnecessary, absent any change in the 
facts on which the Commission's finding was based. This clarification 
that the informational filing consists of a copy of, and a citation to, 
the Commission's finding should adequately address FirstEnergy's 
concern that there might be an instance in which the Commission has not 
made an express finding on whether the public utility serves captive 
customers.
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    \27\ Market-Based Rates for Wholesale Sales of Electric Energy, 
Capacity and Ancillary Services by Public Utilities, Order No. 697, 
72 FR 39,904 (July 20, 2007), FERC Stats. & Regs. ] 31,252, at P 552 
(2007), clarified, 121 FERC ] 61,260 (2007), order on reh'g, Order 
No. 697-A, 73 Fed. Reg. 25,832 (May 7, 2008), FERC Stats. & Regs. ] 
31,268.
    \28\ The Commission does not intend to set these informational 
filings for notice and comment, or issue orders on them.
---------------------------------------------------------------------------

    56. The Commission denies FirstEnergy's requests to delete the new 
regulations and rely on existing pricing restrictions under its market-
based rate regulations. FirstEnergy has misinterpreted the scope and 
applicability of the regulations adopted in Order No. 707. As the 
Commission stated in Order No. 707, the restrictions imposed there are 
prophylactic and based on restrictions already imposed by the 
Commission in the context of certain section 203 and 205 approvals, but 
expand the transactions and entities to which they apply. The 
Commission recognized a regulatory gap and acted to expand the range of 
entities and transactions to which those restrictions apply to ensure 
that captive customers of franchised public utilities do not 
inappropriately cross-subsidize the activities of non-utility 
affiliates.
4. Order No. 667 Requirements
Requests for Rehearing
    57. FirstEnergy argues that Order No. 707 duplicates requirements 
set forth in the rules on Commission review of affiliate transactions 
and protection of

[[Page 43080]]

captive customers implemented in Order No. 667, which promulgates the 
Commission's regulations under the Public Utility Holding Company Act 
of 2005 (PUHCA 2005).\29\ It maintains that this could result in 
confusion and uncertainty. It will, for example, be unclear whether the 
new Order No. 707 regulations, the existing Order No. 667 pricing 
policy, or both will apply to issues arising in connection with 
centralized service companies. FirstEnergy also argues that it is 
unclear whether the Commission's grant of waiver of the Order No. 707 
regulations, including the regulation pertaining to service companies, 
would affect the regulatory requirements set forth in Order No. 667.
---------------------------------------------------------------------------

    \29\ Energy Policy Act of 2005, Public Law No. 109-58, secs. 
1261 et seq., 119 Stat. 594 (2005); Repeal of the Public Utility 
Holding Company Act of 1935 and Enactment of the Public Utility 
Holding Company Act of 2005, Order No. 667, FERC Stats. & Regs. ] 
31,197 (2005), order on reh'g, Order No. 667-A, FERC Stats. & Regs. 
] 31,213, order on reh'g, Order No. 667-B, FERC Stats. & Regs. ] 
31,224 (2006), order on reh'g, Order No. 667-C, 118 FERC ] 61,133 
(2007).
---------------------------------------------------------------------------

    58. FirstEnergy argues that to prevent confusion, the Commission 
should delete centralized service company at-cost requirements set 
forth in Order No. 707 and rely instead on its existing pricing policy 
set forth in Order No. 667 to regulate transactions with centralized 
service companies. Any codification of pricing policy for centralized 
service companies should be done in the Commission's regulations under 
PUHCA 2005. In the alternative, FirstEnergy requests that the 
Commission clarify the relation between the policies set forth in Order 
No. 667 and the regulations issued under Order No. 707 expressly 
applicable to centralized service companies.
Commission Determination
    59. We deny FirstEnergy's request that we delete centralized 
service company at-cost requirements set forth in Order No. 707 and 
rely instead on the existing pricing policy set forth in Order No. 667 
to regulate transactions with centralized service companies. While the 
Commission discussed service company issues at length in Order No. 667 
and Order No. 667-A, and stated that it would accept the use of an 
``at-cost'' standard for centralized service company non-power goods 
and services, it did not codify the standard in the PUHCA 2005 
requirements themselves. While the Commission's PUHCA 2005 regulations 
allow for Commission review of holding company system cost allocation 
for non-power goods and services, which is highly relevant to the 
general issue of cross-subsidization, those regulations do not codify 
affiliate pricing standards. Moreover, to the extent there is overlap 
between this rule and the pricing policy we announced in the preamble 
of Order No. 667 and Order No. 667-A, our regulations here are 
consistent because they apply the standard that was announced in Order 
No. 667. We therefore do not agree that Order No. 707 and Order No. 667 
are inappropriately duplicative, and we do not see the potential for 
conflict to which FirstEnergy alludes.

C. Captive Customers

    60. The regulations issued in Order No. 707 apply to franchised 
public utilities that have captive customers or that own or provide 
transmission service over jurisdictional transmission facilities. These 
regulations define captive customers as any wholesale or retail 
electric energy customers served by a franchised public utility under 
cost-based regulation.
Requests for Rehearing
    61. EEI argues that Order No. 707 should not treat wholesale 
customers that purchase electricity under competitive conditions as 
``captive customers.'' It states that the Commission's transmission 
open access rules generally provide competitive choice. EEI argues that 
given the widespread availability of choice at the wholesale level, it 
should be unusual for a wholesale customer to be captive and require 
the affiliate transaction pre-approval and pricing protections set out 
in Order No. 707. EEI states that while the Commission may want to 
allow individual wholesale customers to raise concerns in individual 
rate proceedings, it encourages the Commission not to treat all 
wholesale customers as presumptively captive, but instead to treat them 
as presumptively non-captive.
Commission Determination
    62. We do not agree with EEI's request in this regard. As stated in 
Order No. 707 and Order 697-A, wholesale customers may have choice, but 
the Commission will ``err on the broad side of the definition of 
captive customers.'' \30\ As the Commission noted, although we are 
erring on the side of a broad definition of captive customers, we 
recognize that there may be circumstances where customers fall within 
our definition but nevertheless there are sufficient protections in 
place to protect such customers against any risk of harm from 
transactions between the franchised public utility and its affiliates. 
We noted that it is possible that wholesale customers with fixed rate 
contracts would be adequately protected, but we explained that we are 
not prepared at this time to generically exclude such customers from 
the definition of captive customers. Instead, we will allow franchised 
public utilities, on a case-by-case basis, to seek a waiver of the 
affiliate restrictions if they feel that adequate protections are in 
place to protect any customers that fall under the ``captive customer'' 
definition. We see no reason to change this approach.
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    \30\ Order No. 707, FERC Stats. & Regs. ] 31,264 at P 43; see 
also Order No. 697-A, FERC Stats. & Regs. ] 31,268 at P 199.
---------------------------------------------------------------------------

D. Transmission Facilities

    63. In Order No. 707, the Commission made its restrictions on non-
power goods and services transactions applicable to franchised public 
utilities that own or provide transmission service over transmission 
facilities subject to the Commission's jurisdiction.
Requests for Rehearing
    64. National Grid and EEI argue Order No. 707 should not apply to 
franchised public utility companies that do not have captive customers 
simply because the utility companies own or provide service over 
jurisdictional transmission facilities. They argue that this issue did 
not receive proper notice and the Commission did not sufficiently 
expla