Policy Statement on Hold Harmless Commitments, 4231-4239 [2015-01423]
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pages one through five of the BE–180
survey and returning it to BEA. This
requirement is necessary to ensure
compliance with reporting requirements
and efficient administration of the Act
by eliminating unnecessary follow-up
contact.
(c) BE–180 definition of financial
services provider. The definition of
financial services provider used for this
survey is identical to the definition of
the term as used in the North American
Industry Classification System, United
States, 2012, Sector 52–Finance and
Insurance, and holding companies that
own or influence, and are principally
engaged in making management
decisions for these firms (part of Sector
55–Management of Companies and
Enterprises). For example, companies
and/or subsidiaries and other separable
parts of companies in the following
industries are defined as financial
services providers: Depository credit
intermediation and related activities
(including commercial banking, savings
institutions, credit unions, and other
depository credit intermediation); nondepository credit intermediation
(including credit card issuing, sales
financing, and other non-depository
credit intermediation); activities related
to credit intermediation (including
mortgage and nonmortgage loan brokers,
financial transactions processing,
reserve, and clearinghouse activities,
and other activities related to credit
intermediation); securities and
commodity contracts intermediation
and brokerage (including investment
banking and securities dealing,
securities brokerage, commodity
contracts and dealing, and commodity
contracts brokerage); securities and
commodity exchanges; other financial
investment activities (including
miscellaneous intermediation, portfolio
management, investment advice, and all
other financial investment activities);
insurance carriers; insurance agencies,
brokerages, and other insurance related
activities; insurance and employee
benefit funds (including pension funds,
health and welfare funds, and other
insurance funds); other investment
pools and funds (including open-end
investment funds, trusts, estates, and
agency accounts, real estate investment
trusts, and other financial vehicles); and
holding companies that own, or
influence the management decisions of,
firms principally engaged in the
aforementioned activities.
(d) Covered types of services. The BE–
180 survey covers the following types of
financial services transactions (sales or
purchases) between U.S. financial
companies and foreign persons:
Brokerage services related to equity
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transactions; other brokerage services;
underwriting and private placement
services; financial management services;
credit-related services, except credit
card services; credit card services;
financial advisory and custody services;
securities lending services; electronic
funds transfer services; and other
financial services.
(e) Due date. A fully completed and
certified BE–180 report, or qualifying
exemption claim with pages one
through five completed, is due to be
filed with BEA not later than October 1,
2015.
[FR Doc. 2015–01491 Filed 1–26–15; 8:45 am]
BILLING CODE 3510–06–P
DEPARTMENT OF ENERGY
Federal Energy Regulatory
Commission
18 CFR Part 33
[Docket No. PL15–3–000]
Policy Statement on Hold Harmless
Commitments
Federal Energy Regulatory
Commission, DOE.
ACTION: Proposed policy statement.
AGENCY:
The Commission proposes, as
a statement of policy, the following
clarifications regarding hold harmless
commitments offered by applicants as
ratepayer protection mechanisms to
mitigate adverse effects on rates that
may result from transactions subject to
section 203 of the Federal Power Act
(FPA). First, the Commission proposes
to clarify the scope and definition of the
costs that should be subject to hold
harmless commitments. Second, the
Commission proposes to clarify that
applicants offering hold harmless
commitments must implement controls
and procedures to track the costs from
which customers will be held harmless.
The Commission also proposes to clarify
the types of controls and procedures
that applicants offering hold harmless
commitments must implement. Third,
the Commission proposes to no longer
accept hold harmless commitments that
are limited in duration. Fourth, the
Commission proposes to clarify that
applicants may demonstrate that, under
certain circumstances, transactions will
not have an adverse effect on rates
without relying on hold harmless
commitments or other ratepayer
protection mechanisms.
DATES: Comments on the proposed
policy statement are due within March
30, 2015.
SUMMARY:
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4231
FOR FURTHER INFORMATION CONTACT:
Eric Olesh (Technical Information),
Office of Energy Market Regulation,
888 First Street NE., Washington, DC
20426, (202) 502–6524, eric.olesh@
ferc.gov.
Adam Batenhorst (Legal Information),
Office of the General Counsel, 888
First Street NE., Washington, DC
20426, (202) 502–6150,
adam.batenhorst@ferc.gov.
Olga Anguelova (Accounting
Information), Office of Enforcement,
888 First Street NE., Washington, DC
20426, (202) 502–8098,
olga.anguelova@ferc.gov.
SUPPLEMENTARY INFORMATION:
1. We propose, as a statement of
policy, the following clarifications
regarding hold harmless commitments
offered by applicants as ratepayer
protection mechanisms to mitigate
adverse effects on rates that may result
from transactions that are subject to
section 203 of the Federal Power Act
(FPA).1 First, we propose to clarify the
scope and definition of the costs that
should be subject to hold harmless
commitments. Second, we propose to
clarify that applicants offering hold
harmless commitments must implement
controls and procedures to track the
costs from which customers will be held
harmless. We also propose to clarify the
types of controls and procedures that
applicants offering hold harmless
commitments must implement. Third,
we propose to no longer accept hold
harmless commitments that are limited
in duration. Fourth, we propose to
clarify that applicants may demonstrate
that, under certain circumstances,
transactions will not have an adverse
effect on rates without relying on hold
harmless commitments or other
ratepayer protection mechanisms.
I. Background
A. The Commission’s Analysis of
Proposed Transactions Under FPA
Section 203
2. FPA section 203(a)(4) requires the
Commission to approve a transaction if
it determines that the transaction will be
consistent with the public interest.2 The
Commission has stated that its analysis
of whether a transaction will be
consistent with the public interest
generally involves consideration of
three factors: (1) The effect on
competition; (2) the effect on rates; and
(3) the effect on regulation.3 FPA section
1 16
U.S.C. 824b.
U.S.C. 824b(a)(4).
3 See Inquiry Concerning the Commission’s
Merger Policy Under the Federal Power Act: Policy
Statement, Order No. 592, 61 FR 68595 (Dec. 30,
2 16
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203(a)(4) also requires the Commission
to find that the transaction ‘‘will not
result in cross-subsidization of a nonutility associate company or the pledge
or encumbrance of utility assets for the
benefit of an associate company, unless
the Commission determines that the
cross-subsidization, pledge, or
encumbrance will be consistent with the
public interest.’’ 4
3. This proposed policy statement
focuses on the second prong of the
Commission’s FPA section 203 analysis,
the effect of a proposed transaction on
rates. The Commission has stated that,
when considering a proposed
transaction’s effect on rates, its focus ‘‘is
on the effect that a proposed transaction
itself will have on rates, whether that
effect is adverse, and whether any
adverse effect will be offset or mitigated
by benefits that are likely to result from
the proposed transaction.’’ 5
Specifically, as relevant here, the
Commission considers whether the
transaction could result in an adverse
effect on rates to wholesale
requirements or transmission customers.
4. If an applicant’s only customers are
wholesale power sales customers served
under market-based rates, then the
transaction will have no adverse effect
on rates for such customers.6 If,
however, the transaction could result in
an increase in rates and the wholesale
power sales customers of the applicants
are not served exclusively under
market-based rates, or if the applicants
have wholesale requirements or
transmission customers, the
1996), FERC Stats. & Regs. ¶ 31,044, at 30,111
(1996) (Merger Policy Statement), reconsideration
denied, Order No. 592–A, 79 FERC ¶ 61,321 (1997).
See also FPA Section 203 Supplemental Policy
Statement, 72 FR 42277 (Aug. 2, 2007), FERC Stats.
& Regs. ¶ 31,253 (2007). See also Revised Filing
Requirements Under Part 33 of the Commission’s
Regulations, Order No. 642, 65 FR 70983 (Nov. 28,
2000), FERC Stats. & Regs. ¶ 31,111 (2000), order on
reh’g, Order No. 642–A, 94 FERC ¶ 61,289 (2001).
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. 824b(a)(4). The Commission’s
regulations establish verification and information
requirements for applicants that seek a
determination that a transaction will not result in
inappropriate cross-subsidization or a pledge or
encumbrance of utility assets. See 18 CFR 33.2(j).
5 ITC Midwest LLC, 140 FERC ¶ 61,125, at P 19
(2012).
6 Cinergy Corp., 140 FERC ¶ 61,180, at P 41 (2012)
(citing Duquesne Light Holdings, Inc., 117 FERC
¶ 61,326, at P 25 (2006)) (‘‘The Commission has
previously stated that, when there are market-based
rates, the effect on rates is not of concern. The effect
on rates is not of concern in these circumstances
because market-based rates will not be affected by
the seller’s cost of service and, thus, will not be
adversely affected by the Proposed Transaction.’’).
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Commission evaluates whether there are
sufficient potential economic benefits
that offset the projected increase in
rates. If such benefits exist, the analysis
of the effect on rates ends with a finding
that there is no adverse effect on rates
because of those offsetting economic
benefits.7
5. If a proposed transaction has the
potential to increase wholesale rates,
but there is no showing of quantifiable
offsetting economic benefits, the
Commission must determine whether
ratepayers are sufficiently protected
from the potential rate increase, or
whether there are other nonquantifiable, offsetting benefits that
would, nevertheless, support a finding
that the proposed transaction is
consistent with the public interest,
regardless of the potential for a rate
increase.8 When the Commission has
considered such non-quantifiable
offsetting benefits, it has often been in
the context of transactions that increase
competition or enable more competitive
markets, such as transactions resulting
in the expansion of regional
transmission organizations or the
increase in transmission ownership by
independent transmission companies.9
6. Prior to the issuance of the Merger
Policy Statement, the Commission had
required applicants and intervenors to
estimate the future costs and benefits of
a transaction and then litigate the
validity of those estimates. The
Commission, however, eliminated those
requirements in the Merger Policy
7 The Commission has found that there is no
adverse effect on rates where, although costs may
increase in one area of the utility’s operations,
lower costs are expected elsewhere. See, e.g.,
Bluegrass Generation Co., L.L.C., 139 FERC
¶ 61,094, at P 41 (2012) (finding no adverse effect
on rates because increases in capacity charges
would be offset by a savings in energy rates).
8 An increase in rates ‘‘can still be consistent with
the public interest if there are countervailing
benefits that derive from the merger.’’ Merger Policy
Statement, FERC Stats. & Regs. ¶ 31,044 at 30,114;
see also ALLETE, Inc., 129 FERC ¶ 61,174, at P 19
(2009) (‘‘Our focus here is on the effect that the
Proposed Transaction itself will have on rates,
whether that effect is adverse, and whether any
adverse effect2 will be offset or mitigated by
benefits likely to result from the Proposed
Transaction.’’).
9 See, e.g., ITC Midwest LLC, 133 FERC ¶ 61,169,
at P 23 (2010) (finding offsetting benefits because
of the transfer of transmission assets to a standalone
transmission company); ALLETE, 129 FERC
¶ 61,174 at P 20 (finding that the advantages created
in joining a regional transmission organization
outweighed potential rate increase created by the
different tax treatment of the assets after transfer);
Ameren Servs. Co., 103 FERC ¶ 61,121, at P 23
(2003) (finding that increasing a regional
transmission organization’s footprint would offset a
rate increase); Rockland Elec. Co., 97 FERC
¶ 61,357, at 62,651 (2001) (finding that attracting
more bidders and encouraging more competition
offset a potential rate increase for locational
marginal prices along a seam at times of peak
demand).
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Statement and established various
mechanisms that applicants could
implement to show that a merger would
have no adverse effect on rates.10 As the
Commission explained:
Merger applicants should propose
ratepayer protection mechanisms to assure
that customers are protected if the expected
benefits do not materialize. The applicant
bears the burden of proof to demonstrate that
the customer will be protected. This puts the
risk that the benefits will not materialize
where it belongs—on the applicants.
Furthermore, we believe that the most
promising and expeditious means of
addressing ratepayer protection is for the
parties to negotiate an agreement on
ratepayer protection mechanisms. The
applicants should attempt to resolve the
issue with customers even before filing, and
should propose a mechanism as part of their
filing. Even if these negotiations have not
succeeded by the time of filing, the parties
should continue to try to reach a settlement.
What constitutes adequate ratepayer
protection necessarily will depend on the
particular circumstances of the merging
utilities and their ratepayers, and we strongly
encourage parties to minimize contentious
issues and to resolve them without the time
and expense of a formal hearing. Parties may
not be able to reach an agreement on an
appropriate ratepayer protection and the
Commission may still be able to approve the
merger. As mentioned earlier, this could
occur either after a hearing or on the basis
of parties’ filings if we determine that the
applicants’ proposal sufficiently insulates the
ratepayers from harm.11
7. The Commission then explained
that it had previously accepted ‘‘a
variety of hold harmless provisions,’’
and that parties could consider those as
well as ‘‘other mechanisms if they
appropriately address ratepayer
concerns.’’ 12 Among the types of
protection the Commission stated
applicants could propose were the
following:
—Open season for wholesale customers—
applicants agree to allow existing
wholesale customers a reasonable
opportunity to terminate their contracts
(after notice) and switch suppliers. This
allows customers to protect themselves
from merger-related harm.
—General hold harmless provision—a
commitment from the applicant that it will
protect wholesale customers from any
adverse rate effects resulting from the
merger for a significant period of time
following the merger. Such a provision
must be enforceable and administratively
manageable.
10 Merger Policy Statement, FERC Stats. & Regs.
¶ 31,044 at 30,111 (‘‘[I]n assessing the effect of a
proposed merger on rates, we will no longer require
applicants and intervenors to estimate the future
costs and benefits of a merger and then litigate the
validity of those estimates. Instead, we will require
applicants to propose appropriate rate protection
for customers.’’).
11 Id. at 30, 123–24.
12 Id. at 30, 124.
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—Moratorium on increases in base rates (rate
freeze)—applicants commit to freezing
their rates for wholesale customers under
certain tariffs for a significant period of
time.
—Rate reduction—applicants make a
commitment to file a rate decrease for their
wholesale customers to cover a significant
period of time.13
8. The Commission concluded that,
although each mechanism would
provide some benefit to ratepayers, in
the majority of circumstances the most
meaningful (and the most likely to give
wholesale customers the earliest
opportunity to take advantage of
emerging competitive wholesale
markets) was an open season
provision.14 The Commission stated that
if intervenors raised a substantial
question as to the adequacy of a merger
applicant’s proposal, the parties should
continue to pursue a settlement; if no
agreement could be reached, the
Commission explained it might decide
the issue on the written record or set the
issue for hearing.15
9. Subsequently, in Order No. 642, the
Commission promulgated regulations
governing FPA section 203 applications
and described the information
applicants must submit regarding the
effect of a proposed transaction on rates.
In relevant part, the Commission stated:
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In the [Merger] Policy Statement, we
determined that ratepayer protection
mechanisms (e.g., open seasons to allow
early termination of existing service contracts
or rate freezes) may be necessary to protect
the wholesale customers of merger
applicants. . . .
Thus, in the [Notice of Proposed
Rulemaking] we proposed that all merger
applicants demonstrate how wholesale
ratepayers will be protected and that
applicants will have the burden of proving
that their proposed ratepayer protections are
adequate. Specifically, we proposed that
applicants must clearly identify what
customer groups are covered (e.g.,
requirements customers, transmission
customers, formula rate customers, etc.),
what types of costs are covered, and the time
period for which the protection will apply.16
10. The Commission adopted the
proposals set forth in the Notice of
Proposed Rulemaking and emphasized
that if applicants did not offer any
ratepayer protection mechanisms, they
must explain how the proposed merger
would provide adequate ratepayer
protection.17
13 Id.
(footnotes omitted).
14 Id.
15 Id.
16 Order No. 642, FERC Stats. & Regs. ¶ 31,111 at
31,914.
17 Id.
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B. Current Commission Practice
Regarding Hold Harmless Commitments
11. Over the last decade hold
harmless commitments have become a
common feature of FPA section 203
applications involving mergers of
traditional franchised utilities or their
upstream holding companies.18 More
recently, some applicants have made
hold harmless commitments in
connection with transactions involving
the acquisition or disposition of existing
jurisdictional facilities, including in
circumstances where the acquiring
entity was a traditional franchised
utility and entered into the transaction
in order to satisfy resource adequacy
requirements at the state level, to
improve system reliability and/or meet
other regulatory requirements.19
12. The Commission has consistently
accepted hold harmless commitments in
which FPA section 203 applicants
commit not to seek recovery of
transaction-related costs in
jurisdictional rates except to the extent
that such costs are offset by transactionrelated savings.20 Thus, hold harmless
commitments typically focus on
preventing recovery in rates of the costs
incurred that are ‘‘related’’ to the
transaction. The Commission has
previously found that hold harmless
commitments under which applicants
commit not to seek to recover
18 The Commission has also accepted other forms
of ratepayer protection in lieu of or in addition to
hold harmless commitments. See, e.g., Cinergy
Services, Inc., 102 FERC ¶ 61,128, at P 33 (2003)
(accepting rate freeze as rate mitigation); Vermont
Yankee Nuclear Power Corp., 91 FERC ¶ 61,325, at
62,125 (2000) (accepting rate cap and an open
season provision as mitigation); Cajun Elec. Power
Coop., Inc., 90 FERC ¶ 61,309, at 62,005–06 (2000)
(approving a transaction where current customers
were allowed to keep their current contracts or
choose from three different power purchasing
agreements).
19 See, e.g., FirstEnergy Generation Corp., 141
FERC ¶ 61,239, at PP 1, 16, 27–30 (2012)
(FirstEnergy) (accepting a hold harmless
commitment in an asset transaction where
generation assets would be turned into assets to
support transmission system upgrades in order to
meet needs identified in a study by PJM
Interconnection, L.L.C. following the retirement of
other generating facilities); ITC Midwest, 140 FERC
¶ 61,125 at P 15; Int’l Transmission Co., 139 FERC
¶ 61,003, at P 16 (2012).
20 NSTAR Advanced Energy Sys., Inc., 131 FERC
¶ 61,098, at P 24 (2010) (‘‘The Commission looks for
assurances from public utilities that they hold
customers harmless from these transaction-related
costs, to the extent they are not exceeded by cost
savings arising from the transaction, for a
significant period of time following the merger, not
an indefinite period of time.’’) (internal citation
omitted); see also Cinergy, 140 FERC ¶ 61,180 at P
42; ITC Midwest, 140 FERC ¶ 61,125 at PP 21–22;
Int’l Transmission, 139 FERC ¶ 61,003 at P 17; BHE
Holdings Inc., 133 FERC ¶ 61,231, at P 37 (2010);
cf. Sierra Pacific Power Co., 133 FERC ¶ 61,017, at
P 14 (2010) (accepting a commitment not to include
any transaction-related costs in its Commissionaccepted open access transmission tariff).
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4233
transaction-related costs except to the
extent that such costs are exceeded by
demonstrated transaction-related
savings for a period of five years to be
‘‘standard.’’ 21
13. Although the Commission has
relied on commitments to hold
customers harmless from transactionrelated costs to support findings of no
adverse effects on rates, in many of
these cases, these commitments have
not included detailed definitions of
transaction-related costs or savings.22
Further, the Commission has only
provided general guidance on the scope
of these costs. In most orders addressing
transactions in which the Commission
has accepted hold harmless
commitments, the Commission has
explained that transaction-related costs
are not just those costs related to
consummating the proposed
transaction, such as legal, investment
advisory, accounting and financing
costs. Rather, the Commission has stated
that the costs subject to hold harmless
commitments include all costs that are
related to the transaction. The
Commission, however, has never
specified what these other costs may
include.23 In more recent cases, the
Commission has specified that
transaction-related costs include costs,
both capital and operating, incurred to
achieve merger synergies.24 The
Commission has also specifically noted
that acquisition premiums, including
21 ITC Holdings Corp., 121 FERC ¶ 61,229, at P
128 (2007). Although five-year hold harmless
commitments are most common, the Commission
has also accepted three-year hold harmless
commitments. Westar Energy, Inc., 104 FERC
¶ 61,170, at PP 16–17 (2003); Long Island Lighting
Co., 82 FERC ¶ 61,129, at 61,463–65 (1998).
22 See, e.g., Puget Energy, 123 FERC ¶ 61,050 at
P 27 (‘‘We accept Applicants’ hold harmless
commitment, which we interpret to include all
merger-related costs, not only costs related to
consummating the transaction. If Applicants seek to
recover any merger-related costs in a subsequent
section 205 filing, they must show quantifiable
offsetting benefits.’’) (citations and footnotes
omitted); National Grid plc, 117 FERC ¶ 61,080, at
P 54 (2006) (‘‘Applicants have committed to hold
ratepayers harmless from transaction-related costs
in excess of transaction savings for a period of five
years.’’).
23 ITC Holdings Corp., 143 FERC ¶ 61,256, at P
138 (2013); see also Cinergy, 140 FERC ¶ 61,180 at
P 42; FirstEnergy Corp., 133 FERC ¶ 61,222, at PP
62–63 (2010); NSTAR, 136 FERC ¶ 61,016, at PP 62–
63 (2011); PPL Corp., 133 FERC ¶ 61,083, at PP 26–
27 (2010); Consumers Energy Co., 118 FERC
¶ 61,143, at P 33, order on clarification, 120 FERC
¶ 61,091 (2007).
24 See, e.g., Silver Merger Sub, Inc., 145 FERC
¶ 61,261, at P 68 (2013) (‘‘We interpret Applicants’
hold harmless commitment to apply to all
transaction-related costs, including costs related to
consummating the Proposed Transaction and
transition costs (both capital and operating)
incurred to achieve merger synergies.’’); Bangor
Hydro Elec. Co., 144 FERC ¶ 61,030, at P 20 (2013)
(same); Exelon Corp., 138 FERC ¶ 61,167, at P 118
(2012) (same).
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goodwill,25 are not considered part of
transaction-related costs, and that
recovery of such costs must be pursued
through FPA section 205 filings.26 The
Commission has also explained that
protection from transaction-related costs
does not mean that consumers are
necessarily insulated from any rate
increase, such as those related to market
conditions or those unrelated to the
transaction,27 or unspecified or
speculative costs that intervenors claim
may result from a merger.28
14. With respect to recovering
transaction-related costs, as noted
earlier, the standard hold harmless
commitment provides that applicants
may not seek to recover in rates any
transaction-related costs except to the
extent that such costs are exceeded by
demonstrated transaction-related
savings. The Commission recently
clarified its policy on the recovery of
transaction-related costs.29 As clarified,
applicants may seek to recover
transaction-related costs incurred prior
25 An acquisition premium is the excess of the
total purchase price or consideration paid in the
transaction over the historical cost of the net assets
of the entity acquired.
26 Exelon, 138 FERC ¶ 61,167 at P 118 (citing
Merger Policy Statement, FERC Stats. & Regs.
¶ 31,044 at 30,126; Duke Energy Moss Landing LLC,
83 FERC ¶ 61,318 (1998), reh’g denied, 86 FERC
¶ 61,227, at 61,816 (1999) (citing Mid-Louisiana Gas
Co., 7 FERC ¶ 61,316, at 61,682, reh’g denied, 8
FERC ¶ 61,227 (1979), aff’d sub nom. Transcon. Gas
Pipe Line Corp. v. FERC, 652 F.2d 179 (D.C. Cir.
1981)) (rate recovery of an existing facility is
generally limited to the original cost of the facility)).
27 BHE Holdings, 133 FERC ¶ 61,231 at P 36
(citing PNM Resources, Inc., 124 FERC ¶ 61,019, at
P 43 (2008) (‘‘Applicants are not required to apply
a rate freeze and may propose rate increases under
section 205 filings.’’)); ITC Holdings, 121 FERC
¶ 61,229 at P 124 (‘‘[T]he Commission finds that any
increased costs of ITC Midwest attributable to
prudent transmission investment do not make the
Transaction contrary to the public interest’’); Boston
Generating, LLC, 113 FERC ¶ 61,016, at P 26 (2005)
(‘‘In reviewing an application under section 203,
the Commission looks at the effects of the
transaction on rates, not at rate changes that may
occur regardless of the transaction.’’)); Jersey
Central Power & Light Co., 87 FERC ¶ 61,014, at
61,039 (1999) (‘‘The Commission does not require
applicants under [s]ection 203 to insulate their
customers from the rate effects of market forces.
Accordingly, customers are not entitled in a
[s]ection 203 proceeding to be held harmless from
external factors such as rising market prices.’’);
Cincinnati Gas & Elec. Co., 64 FERC ¶ 61,237, at
62,686, 62,714 (1993), reh’g denied, 69 FERC
¶ 61,005, order on clarification, 69 FERC ¶ 61,088
(1994), reh’g denied, 71 FERC ¶ 61,380 (1995).
28 Exelon Corp., 127 FERC ¶ 61,161, at P 102
(2009) (citing, inter alia, NorthWestern Corp., 117
FERC ¶ 61,100, at P 40 (2006) (finding speculative
protestor’s argument that the proposed transaction
would result in a credit ratings downgrade and lead
to higher rates or lower reliability)); Old Dominion
Elec. Coop., 117 FERC ¶ 61,313, at P 29 (2006)
(affirming initial decision that ‘‘the record supports
the conclusion that the credit downgrade will not
raise rates’’).
29 Exelon Corp., 149 FERC ¶ 61,148 (2014)
(Exelon-Pepco).
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to consummating a proposed transaction
or those transaction-related costs
incurred within the time period during
which the hold harmless commitment
applies by making certain filings.30
Specifically, applicants must submit a
new filing under FPA section 205, and
a concurrent informational filing in the
relevant FPA section 203 docket.31
Consistent with Commission precedent,
in the FPA section 205 filing, applicants
must still: (1) Specifically identify the
transaction-related costs they are
seeking to recover; and (2) demonstrate
that those costs are exceeded by the
savings produced by the transaction.32
The Commission further clarified that it
will not authorize the recovery of
merger-related costs in an annual
informational filing under existing
formula rates. After noticing the new
section 205 filing for public comment,
the Commission will determine both if
there is adequate support to show that
recovery of merger-related costs is
consistent with the hold harmless
commitment and that the resulting new
rate is just and reasonable in light of all
the other factors underlying the
proposed new rate.33 In accordance with
the Merger Policy Statement, the
Commission’s approach places the
burden of proof on applicants to
demonstrate that customers are
protected if the expected benefits do not
materialize.34
II. Discussion
A. Purpose of Proposed Policy
Statement
15. Upon consideration of the
Commission’s experience regarding
hold harmless commitments since
issuance of the Merger Policy Statement,
we believe that clarifying the
Commission’s policy regarding hold
harmless commitments, a frequently
proposed ratepayer protection
mechanism in FPA section 203
applications, would be beneficial to
applicants, customers, and interested
persons. We note, however, that unless
30 Id.
P 106.
P 105.
32 Id. P 107.
33 Id. P 106.
34 Merger Policy Statement, FERC Stats. & Regs.
¶ 31,044 at 30,123. See, e.g., Consol. Edison, Inc.,
94 FERC ¶ 61,079, at 61,366 (2001) (‘‘customers do
have the opportunity to scrutinize costs before they
are included in NEPOOL’s formula rate, and could
therefore alert the Commission to costs that,
contrary to Applicants’ commitments here, might be
merger-related. In such a situation, we read
Applicants’ commitment to require them to
shoulder the burden of proof, and to justify their
failure to identify the costs as merger-related.’’)
(citing BEC Energy, 88 FERC ¶ 61,002, at 61,007
(1999); New England Power Co., 87 FERC ¶ 61,287,
at 62,146 (1999)).
31 Id.
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specifically discussed herein, we
reaffirm the guidance provided in the
Merger Policy Statement and
subsequent precedent, and reiterate that
applicants under FPA section 203
should propose ratepayer protection
mechanisms that ensure that customers
are protected from the adverse rate
effects of a proposed transaction.
Furthermore, the guidance here should
not discourage applicants from working
with interested parties to resolve
contentious issues regarding appropriate
ratepayer protection mechanisms prior
to the submission of an application
under FPA section 203. As the
Commission stated in the Merger Policy
Statement, ‘‘the most promising and
expeditious means of addressing
ratepayer protection is for the parties to
negotiate an agreement on ratepayer
protection mechanisms.’’ 35
Accordingly, we continue to expect
applicants under FPA section 203 to
engage their customers, when
appropriate, and discuss with them any
potential adverse rate effects that may
result from a proposed transaction
under FPA section 203, and how those
effects can be mitigated.
16. In this proposed policy statement,
we propose to provide greater clarity to
and seek comment from interested
persons regarding the following issues
related to hold harmless commitments.
First, we propose to clarify those costs
to which hold harmless commitments
will apply. Although the Commission
has provided broad guidance regarding
the costs that should be covered under
hold harmless commitments, it has
never defined those costs with much
specificity, leading to inconsistency
with respect to this issue. Below, we
propose to provide additional guidance
by clarifying the costs that the
Commission considers to be transactionrelated costs. These are also the
transaction-related costs that the
Commission will review if and when
applicants make the requisite filing
under FPA section 205 to attempt to
recover those costs by showing that they
have been offset by savings due to the
transaction. Finally, although we
identify specific categories of costs
below, we continue to believe that the
Commission’s policy must remain
flexible enough to permit a case-by-case
determination of transaction-related
costs, and that an attempt to articulate
those costs precisely could have
unintended consequences.
17. Second, we propose to clarify that
applicants offering hold harmless
commitments must implement
35 Merger Policy Statement, FERC Stats. & Regs.
¶ 31,044 at 30,123.
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appropriate internal controls and
procedures to track those costs from
which they have committed to hold
their customers harmless and must
describe such controls and procedures
as a part of their FPA section 203
applications and any section 205
filings.36 We believe that these controls
and procedures will ensure the proper
identification, accounting, and rate
treatment of all transaction-related costs
incurred prior to and subsequent to the
announcement of a proposed
transaction. Requiring applicants to
explain how they will track costs related
to a hold harmless commitment will
improve the Commission’s ability to
ensure that there is a process in place
to prevent those costs from being
recovered in rates prior to the
Commission approving the recovery of
them at a later date under FPA section
205, and will also clarify for customers
what types of costs are covered under a
hold harmless commitment, as required
by Commission precedent.37
18. Third, we propose that, in order
for a hold harmless commitment to
provide adequate ratepayer protection,
it should not be limited in duration. As
discussed in further detail below, we are
concerned that limiting the hold
harmless commitment to a certain
period (generally five years) raises the
risk that transaction-related costs could
be included in future formula rate
billings without applicants making the
showing of offsetting savings.
Eliminating the time limit will ensure
that transaction-related costs cannot be
recovered from ratepayers at any time,
unless applicants can demonstrate that
there are offsetting transaction-related
savings. This revised approach is
consistent with the Merger Policy
Statement, which emphasized that the
burden of proof to demonstrate that
customers will be protected should be
on applicants and that applicants
should also bear the risk that benefits
will not materialize.38
36 The Commission has previously explained that
applicants should ensure that they have appropriate
internal controls and procedures to ensure the
proper identification, accounting, and rate
treatment for all transaction-related costs incurred
prior to and subsequent to proposed transactions,
including all transition costs incurred after a merger
is consummated. See, e.g., ITC Holdings, 143 FERC
¶ 61,256 at P 168; Silver Merger Sub, 145 FERC
¶ 61,261 at P 78.
37 See, e.g., Order No. 642, FERC Stats. & Regs.
¶ 31,111 at 31,914 (‘‘[A]pplicants must clearly
identify what customer groups are covered (e.g.,
requirements customers, transmission customers,
formula rate customers, etc.), what types of costs are
covered, and the time period for which the
protection will apply.’’).
38 Merger Policy Statement, FERC Stats. & Regs.
¶ 31,044 at 30,123.
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19. Finally, we propose to clarify that
applicants may demonstrate that, under
certain circumstances, transactions will
not have an adverse effect on rates
without relying on hold harmless
commitments or other ratepayer
protection mechanisms. As noted above,
some applicants have made hold
harmless commitments in connection
with transactions involving the
acquisition or disposition of existing
jurisdictional facilities where the
acquiring entity was a traditional
franchised utility and entering into the
transaction in order to satisfy resource
adequacy requirements at the state level,
to improve system reliability, and/or
meet other regulatory requirements.39
Hold harmless commitments may not be
appropriate in these and other similar
circumstances given that while these
proposed transactions may have an
effect on rates, that effect may not be
adverse. Accordingly, as discussed in
further detail below, we propose that
under certain circumstances, applicants
may show that a transaction will not
have an adverse effect on rates without
proposing additional ratepayer
protection mechanisms.
20. Our intent is to apply any changes
to our policy on hold harmless
commitments on a prospective basis, for
applications submitted after the
Commission has issued a policy
statement, and not alter existing hold
harmless commitments accepted by the
Commission or submitted in
applications pending at the time the
Commission issues the policy statement.
We seek comments from interested
persons on these proposals.
B. Revisions to the Commission’s Policy
on Hold Harmless Commitments
1. Identifying and Accounting for
Transaction-Related Costs
21. We propose to designate the
following categories of costs as the
transaction-related costs that should be
subject to any hold harmless
commitment. Accordingly, the costs set
out below are those transaction-related
costs from which customers must be
held harmless and that may not be
recovered from customers except to the
extent exceeded by demonstrated
39 See, e.g., FirstEnergy, 141 FERC ¶ 61,239, at PP
1, 16, 27–30 (2012) (accepting a hold harmless
commitment in an asset transaction where
generation assets would be turned into assets to
support transmission system upgrades in order to
meet needs identified in a study by PJM
Interconnection, L.L.C. following the retirement of
other generating facilities); ITC Midwest, 140 FERC
¶ 61,125 at P 15; Int’l Transmission Co., 139 FERC
¶ 61,003, at P 16 (2012).
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savings.40 As noted above, although we
propose to provide guidance in this
proposed policy statement regarding
how to identify transaction-related
costs, we continue to believe that
attempts to precisely articulate all such
costs are not feasible. For example,
while many direct costs of a transaction
can be tracked with proper mechanisms
and controls, other costs may be more
difficult to classify. Accordingly,
because each transaction is unique, the
final determination of what transactionrelated costs may be recovered by
applicants will remain subject to a caseby-case analysis; specifically, this
determination will be made if and when
applicants propose to recover
transaction-related costs and
demonstrate offsetting savings in the
subsequent FPA section 205 filing
described previously by the
Commission.
22. First, we propose that transactionrelated costs include, but are not limited
to, the following costs incurred to
explore, agree to, and consummate a
transaction:
• The costs of securing an appraisal,
formal written evaluation, or fairness
opinions related to the transaction;
• The costs of structuring the
transaction, negotiating the structure of
the transaction, and obtaining tax advice
on the structure of the transaction;
• The costs of preparing and
reviewing the documents effectuating
the transaction (e.g., the costs to transfer
legal title of an asset, building permits,
valuation fees, the merger agreement or
purchase agreement and any related
financing documents);
• The internal labor costs of
employees 41 and the costs of external,
third-party, consultants and advisors to
evaluate potential merger transactions,
and once a merger candidate has been
identified, to negotiate merger terms, to
execute financing and legal contracts,
and to secure regulatory approvals; 42
• The costs of obtaining shareholder
approval (e.g., costs of proxy solicitation
and special meeting of shareholders);
• Professional service fees incurred in
the transaction (e.g., fees for
accountants, surveyors, engineers, and
legal consultants); and
40 We expect that applicants proposing to recover
these costs would track and record them pursuant
to the procedures established below. See infra
section II.B.2.
41 If the duties of employees are not solely
dedicated to activities related to a transaction,
internal labor costs deemed merger-related should
be determined in a manner that is proportionally
equal to the amount of time spent on the merger
compared to other activities of the utility and
tracked accordingly.
42 Some of these costs are typically incurred prior
to the announcement of a merger.
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• Installation, integration, testing, and
set up costs related to ensuring the
operability of facilities subject to the
transaction
23. Moreover, for transactions that are
pursued but never completed
(transactions that ultimately fail), their
costs should not be recovered from
ratepayers. In addition, we recognize
that not every cost listed above will be
found in every transaction.
24. The second category of
transaction-related costs relates to
mergers, where, in addition to the
transaction-related costs described
above, parties typically also incur costs
to integrate individuals and assets into
the acquiring utility and costs to achieve
merger synergies.43 These costs, which
are sometimes referred to collectively as
‘‘transition’’ costs, are incurred after the
transaction is consummated, often over
a period of several years. These costs
include both the internal costs of
employees spending time working on
transition issues, and external costs paid
to consultants and advisers to
reorganize and consolidate functions of
the merging entities to achieve merger
synergies. These costs may also include
both capital items (e.g., a new computer
system or software, or costs incurred to
carry out mitigation commitments
accepted by the Commission in
approving the transaction to address
competition issues, such as the cost of
constructing new transmission lines,
etc.) and expense items (e.g., costs to
eliminate redundancies, combine
departments, or maximize contracting
efficiencies). We propose that
transaction-related costs incurred to
integrate the operations of merging
companies include, but are not limited
to, the following:
• Engineering studies needed both
prior to and after closing the merger;
• Severance payments;
• Operational integration costs;
• Accounting and operating systems
integration costs;
• Costs to terminate any duplicative
leases, contracts, and operations; and
• Financing costs to refinance
existing obligations in order to achieve
operational and financial synergies.
25. As above, this list of transition
costs is not exhaustive, and may not
include some material costs involved in
the integration of two utilities after a
merger. We propose to consider
transition costs as transaction-related
costs that should be subject to hold
harmless commitments. We propose to
43 Entities engaging in certain internal corporate
restructuring and reorganizations, unrelated to
complying with state law restructuring
requirements, may seek to achieve similar cost
savings or increased efficiencies as merging entities.
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assume that such transaction-related
costs should be covered under hold
harmless protection, though applicants
will have an opportunity on a case-bycase basis to show why certain of those
costs should not have to be covered
under their hold harmless commitment
based on their particular circumstances.
Also, we propose to consider, on a caseby-case basis, whether other costs not
discussed herein should be subject to
hold harmless commitments.
26. Additionally, we note that
accounting journal entries related to a
merger transaction may affect expense,
asset, liability, or proprietary capital
accounts used in the development of a
public utility’s rates. These accounting
journal entries may originate from
transaction-related costs recorded as an
expense or capitalized as an asset.
Additional accounting journal entries
may originate from goodwill and fair
value adjustments related to the
purchase price paid for the acquired
company. Merger transactions are
accounted for by applying purchase
accounting, which adjusts the assets and
liabilities of the acquired entity to fair
value and recognizes goodwill for the
amount paid in excess of fair value.44 If
the acquired company is a holding
company, purchase accounting also
provides for the fair value adjustments
and goodwill to be recorded on the
books of some, or all, of the acquired
holding company’s subsidiaries, which
is commonly referred to as ‘‘pushdown’’ accounting. Under appropriate
circumstances, the Commission has
allowed the fair value accounting
adjustments and goodwill to be
recorded on a public utility’s books and
reported in the FERC Form No. 1.
Additionally, the Commission has
required public utilities to maintain
detailed accounting records and
disclosures associated with such
amounts so as to facilitate the
evaluation of the effects of the
transaction on common equity and other
accounts in future periods if needed for
ratemaking purposes.45 We believe that
ratepayers should continue to be
protected from adverse effects on rates
44 Purchase accounting is also commonly referred
to as acquisition accounting under generally
accepted accounting principles in the United States.
Purchase accounting is a formal accounting method
for merger transactions which measures the assets
and liabilities of the acquired entity at fair value
and establishes goodwill for amounts paid in excess
of fair value. See Accounting Standard Codification
Section 805–10 (Fin. Accounting Standards Bd.
2014), available at https://asc.fasb.org.
45 Michigan Electric Transmission Co., LLC, 116
FERC ¶ 61,164, at PP 29–30 (2006); Niagara
Mohawk Holdings Inc., 95 FERC ¶ 61,381, at 62,415,
reh’g denied, 96 FERC ¶ 61,144 (2001); PPL, 133
FERC ¶ 61,083 at P 39.
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stemming from accounting entries
recording goodwill and fair value
adjustments on a public utility’s books
and reported in FERC Form Nos. 1 or 1–
F. This is consistent with our longstanding policy that acquisition
premiums, including goodwill, must be
excluded from jurisdictional rates
absent a filing under FPA section 205
and Commission authorization granting
recovery of specific costs.
27. Similarly, in the context of the
acquisition of discrete assets by a utility,
under the Commission’s accounting
regulations and rate precedent the
excess purchase cost of utility plant
over its depreciated original cost is an
acquisition premium and is excluded
from recovery through rates unless a
showing of offsetting benefits is
demonstrated in an FPA section 205
filing. In the past, applicants have
proposed to include acquisition
premiums as transaction-related costs
subject to their proposed hold harmless
commitments,46 and intervenors have
requested that the Commission require
applicants to include acquisition
premiums as transaction-related costs.47
The Commission has not, and does not,
consider acquisition premiums to be
part of transaction-related costs. The
recovery of acquisition premiums must
be pursued through a separate FPA
section 205 filing, whether or not a hold
harmless commitment has been made.48
We do not believe that our proposed
treatment of transaction-related costs
here requires a change in the
Commission’s current practice with
respect to acquisition premiums. We
will continue to preclude recovery of
acquisition premiums as part of
transaction-related costs, and remind
applicants that a showing of ‘‘specific,
measurable, and substantial benefits to
ratepayers’’ must be made in a
subsequent FPA section 205 proceeding
in order to recover an acquisition
premium.49
46 See, e.g., Florida Power & Light Co., 145 FERC
¶ 61,018, at PP 53, 60 (2013); FirstEnergy, 141 FERC
¶ 61,239 at P 16 n.13.
47 See, e.g., Silver Merger Sub, 145 FERC ¶ 61,261
at PP 61–62.
48 Exelon-Pepco, 149 FERC ¶ 61,148 at n.180;
Silver Merger Sub, 145 FERC ¶ 61,261 at P 68;
Florida Power & Light, 145 FERC ¶ 61,018 at P 60;
Exelon, 138 FERC ¶ 61,167 at P 118 (citing Merger
Policy Statement, FERC Stats. & Regs. ¶ 31,044 at
30,126; Duke Energy Moss Landing, 83 FERC
¶ 61,318, reh’g denied, 86 FERC ¶ at 61,816 (citing
Mid-Louisiana Gas, 7 FERC ¶ 61,316, at 61,682,
reh’g denied, 8 FERC ¶ 61,227, aff’d sub nom.
Transcon. Gas Pipe Line Co. v. FERC, 652 F.2d 179
(D.C. Cir. 1981)) (rate recovery of an existing facility
is generally limited to the original cost of the
facility)).
49 Duke Energy Progress, Inc., 149 FERC ¶ 61,220,
at PP 67–68 (2014) (reviewing Commission
precedent requiring that acquisition adjustments
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28. We seek comments from
interested persons on these proposals.
In particular, we seek comments on the
categories of costs, including transition
costs, that are proposed to be
transaction-related costs which should
be subject to hold harmless protection.
We also seek comments on the costs that
should not be subject to hold harmless
commitments.
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2. Controls and Procedures to Track and
Record Costs Related To Hold Harmless
Commitments
29. As noted above, applicants are
required to describe in their FPA section
203 applications how they intend to
protect ratepayers from transactionrelated costs, consistent with their
obligation to show that their transaction
is consistent with the public interest.50
As contemplated in the Merger Policy
Statement, a hold harmless commitment
offered by applicants must be
‘‘enforceable and administratively
manageable.’’ 51 In creating an
enforceable and administratively
manageable commitment, applicants
should provide assurances that
transaction-related costs will be
quantified, documented, and verified,
and may not be recovered from
ratepayers until applicants can
demonstrate that savings, if any, offset
the transaction-related costs they seek to
recover. To this end, the Commission
has required that applicants offering
hold harmless commitments establish
internal controls and/or tracking
mechanisms.52 We propose additional
guidance below regarding these
requirements.
30. First, we propose to clarify that all
applicants offering hold harmless
commitments should implement
appropriate internal controls and
procedures to ensure the proper
identification, accounting, and rate
treatment of all transaction-related costs
incurred prior to and subsequent to the
announcement of a proposed
transaction, including all transition
costs.
31. Second, we propose that
applicants offering hold harmless
commitments should include, as part of
their FPA section 203 applications and
any separate FPA section 205 filings, a
may be recovered if the acquisition provides
‘‘measurable benefits’’ that are ‘‘tangible and
nonspeculative,’’ and allowing recovery of an
acquisition adjustment where ‘‘the acquisition
provides specific, measurable, and substantial
benefits to ratepayers’’) (internal citations omitted).
50 See Order No. 642, FERC Stats. & Regs.
¶ 31,111 at 31,914.
51 Merger Policy Statement, FERC Stats. & Regs.
¶ 31,044 at 30,124.
52 See Silver Merger Sub, 145 FERC ¶ 61,261 at P
78; ITC Holdings, 143 FERC ¶ 61,256 at P 168.
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detailed description of how they define,
designate, accrue, and allocate
transaction-related costs, and explain
the criteria used to determine which
costs are transaction-related. Applicants
should specifically identify and
describe their direct and indirect cost
classifications, and the processes they
use to functionalize, classify and
allocate transaction-related costs. In
addition, applicants should explain the
types of transaction-related costs that
will be recorded on their public
utilities’ books; how they determined
the portion of these costs assigned to
their public utilities; and how they
classify these costs as non-operating,
transmission, distribution, production,
and other. Applicants should also
describe their accounting procedures
and practices, and how they maintain
the underlying accounting data so that
the allocation of transaction-related
costs to the operating and non-operating
accounts of their public utilities is
readily available and easily verifiable.
32. We note that the Commission has,
in the past, required applicants to
submit their final accounting entries
associated with transactions within six
months of the date that the transaction
is consummated.53 As a part of this
accounting filing, we propose to require
applicants subject to the Commission’s
accounting regulations to provide the
accounting entries and amounts related
to all transaction-related costs incurred
as of the date of the accounting filing,
along with narrative explanations
describing the entries.
33. We seek comments on these
proposals.
3. Time Limits on Hold Harmless
Commitments
34. The Commission previously stated
in the Merger Policy Statement that a
hold harmless commitment need only
protect customers ‘‘for a significant
period of time following the merger.’’54
However, in light of the proposed
treatment of certain categories of costs
discussed above, the Commission’s
experience auditing utilities that have
made hold harmless commitments and
concerns of protestors in previous FPA
section 203 applications,55 we propose
to reconsider whether hold harmless
commitments that are limited to five
years (or another specified period)
adequately protect ratepayers from an
53 See, e.g., Central Vermont Public Service Corp.,
138 FERC ¶ 61,161, at P 55 (2012).
54 Merger Policy Statement, FERC Stats. & Regs.
¶ 31,044 at 30,124.
55 See, e.g., PNM Resources, 124 FERC ¶ 61,019 at
P 36 (protestor alleging that the five-year limitation
on recovery will simply result in the deferred
recovery of transaction-related costs).
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adverse effect on rates. As part of this
reconsideration, we believe that timelimited hold harmless commitments
may not adequately protect ratepayers
from transaction-related costs.
Therefore, we propose that there be no
time limit on hold harmless
commitments and that costs subject to
hold harmless commitments cannot be
recovered from ratepayers at any time
(regardless of when such costs are
incurred), absent a showing of offsetting
savings in order to demonstrate no
adverse effect on rates.56 This revised
approach is consistent with the Merger
Policy Statement, which emphasized
that the burden of proof to demonstrate
that customers will be protected should
be on applicants, and that applicants
should also bear the risk that benefits
will not materialize.57
35. Specifically, we are concerned
that limiting the applicability of hold
harmless commitments to specific time
periods may create incentives for
applicants to modify how they would
otherwise seek to recover or account for
recovery of certain transaction-related
costs based on the time period. For
example, an applicant could try to
include transaction-related costs in
formula rates without making a showing
of offsetting savings if the costs, though
incurred during the hold harmless
period, do not enter the ratemaking
process until after the hold harmless
period expires. Moreover, whether or
not any such incentives exist, certain
transaction-related expenditures could
be properly capitalized as an asset
during the hold harmless period, but the
recovery of the costs associated with
that asset would occur only as the asset
is depreciated over future periods that
extend beyond the hold harmless
period.
36. Similarly, limiting the
applicability of hold harmless
commitments to specific time periods
may incentivize applicants to delay
incurring some types of transactionrelated costs until after the hold
harmless period expires. By waiting to
incur costs subject to hold harmless
commitments until after the expiration
of the hold harmless period, applicants
could attempt to include such costs in
their future formula rate billings
without making the showing of
56 Evidence of offsetting merger-related savings
cannot be based on estimates or projections of
future savings, but must be based on a
demonstration of actual merger-related savings
realized by jurisdictional customers. Exelon-Pepco,
149 FERC ¶ 61,148 at P 107 (citing Audit Report of
National Grid, USA, Docket No. FA09–10–000 (Feb.
11, 2011) at 55; Ameren Corp., 140 FERC ¶ 61,034,
at PP 36–37 (2012)).
57 Merger Policy Statement, FERC Stats. & Regs.
¶ 31,044 at 30,123.
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offsetting savings required to justify
recovery of such costs. In this regard, we
believe that the focus of a hold harmless
commitment should be on whether a
cost is transaction-related, and not on
when the cost is incurred.
37. We seek comments on this
proposal.
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4. Transactions Without Adverse Effects
on Rates
38. As explained above, applicants
under FPA section 203 must
demonstrate that proposed transactions
do not have an adverse effect on rates.
In order to make this showing,
applicants sometimes propose, and the
Commission has accepted, hold
harmless commitments. Pursuant to
these hold harmless commitments, the
Commission has held that customers
must be held harmless from transactionrelated costs unless and until applicants
demonstrate offsetting transactionrelated benefits—whether quantifiable
cost savings or other non-quantifiable
benefits.
39. As noted above, some applicants
have made hold harmless commitments
in connection with transactions
involving the acquisition or disposition
of existing jurisdictional facilities where
the acquiring entity was a traditional
franchised utility and entering into the
transaction in order to satisfy resource
adequacy requirements at the state level,
to improve system reliability, and/or
meet other regulatory requirements.58
However, while customers in these
examples may experience a rate increase
due to the costs of the facilities, such
rate effect may not necessarily be
adverse because those costs were
incurred to meet a governmental
regulatory requirement. The
Commission has held that, as a general
matter of policy, ratepayers should bear
the cost of utility service.59
40. Accordingly, we propose to clarify
that applicants undertaking certain
transactions to fulfill documented
utility service needs need not propose
ratepayer protection mechanisms such
as a hold harmless commitment in an
application under FPA section 203 in
order to show that the transaction will
not have an adverse effect on rates. We
58 See, e.g., FirstEnergy, 141 FERC ¶ 61,239 at PP
1, 16, 27–30 (accepting a hold harmless
commitment in an asset transaction where
generation assets would be turned into assets to
support transmission system upgrades in order to
meet needs identified in a study by PJM
Interconnection, L.L.C. following the retirement of
other generating facilities); ITC Midwest, 140 FERC
¶ 61,125 at P 15; Int’l Transmission Co., 139 FERC
¶ 61,003, at P 16 (2012).
59 See, e.g., Old Dominion Elec. Cooperative and
N.C. Elec. Membership Corp. v. Va. Elec. and Power
Co.,146 FERC ¶ 61,200 (2014).
VerDate Sep<11>2014
17:42 Jan 26, 2015
Jkt 235001
believe that applicants engaging in these
types of transactions can make the
requisite showing that, even though the
proposed transaction may have an effect
on rates, such effect on rates is not
adverse.
41. Examples of the transactions in
which applicants may demonstrate no
adverse effect on rates without offering
a hold harmless commitment or other
ratepayer protection mechanism would
include the purchase of an existing
generating plant or transmission facility
that is needed to serve the acquiring
company’s customers or forecasted load
within a public utility’s existing
footprint, in compliance with a resource
planning process, or to meet specified
North American Electric Reliability
Corporation (NERC) standards. We
propose that applicants seeking to
demonstrate that a transaction will not
have an adverse effect on rates for these
or other reasons should provide
supporting evidence and documentation
which could include an explanation
that the transaction is intended to serve
existing customers or forecasted load
within an existing footprint; to address
a state commission order or directive
requiring acquisition of specific assets;
to address a need for a transmission
facility, as established through a
regional transmission planning process
or as required to satisfy a NERC
standard; or to address other state or
federal regulatory requirements. For
instance, in FirstEnergy, applicants
requested approval from the
Commission under FPA section 203 for
an internal transfer of certain assets that
would address significant reliability
concerns, including a potential NERC
violation, at a cost that was two-thirds
that of the next possible solution.60 In
that order, consistent with existing
policy, the Commission accepted
applicants’ hold harmless commitment
as it was offered. Under the clarification
proposed herein, however, such a hold
harmless commitment would not need
to be offered in order to show that the
transaction would not have an adverse
effect on rates.
42. Applicants may make a showing
that a particular transaction does not
have an adverse effect on rates based on
other grounds, but the burden remains
on applicants to show in their
application for authorization under FPA
section 203 that the costs, or a portion
of the costs, related to such a transaction
should be passed on to ratepayers.
Further, applicants may provide the
Commission with information to show
the need to meet other regulatory
requirements as a means to demonstrate
that the effect on rates due to the
transaction is not adverse. The
Commission will carefully review such
a showing before determining that a
proposed transaction without any
proposed ratepayer protection
mechanism has no adverse effect on
rates. We believe this approach is
consistent with both the Merger Policy
Statement and the Commission’s policy
that ratepayers should bear the costs of
utility service. We seek comments on
this proposal.
III. Comment Procedures
43. We invite comments on this
proposed policy statement within
March 30, 2015.
IV. Document Availability
44. 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 5:00 p.m.
Eastern time) at 888 First Street NE.,
Room 2A, Washington, DC 20426.
45. From the Commission’s Home
Page on the Internet, this information is
available on eLibrary. The full text of
this document is available on eLibrary
in PDF and Microsoft Word format for
viewing, printing, and/or downloading.
To access this document in eLibrary,
type the docket number excluding the
last three digits of this document in the
docket number field.
46. User assistance is available for
eLibrary and the Commission’s Web site
during normal business hours from
FERC Online Support at (202) 502–6652
(toll free at 1–866–208–3676) or email at
ferconlinesupport@ferc.gov, or the
Public Reference Room at (202) 502–
8371, TTY (202) 502–8659. Email the
Public Reference Room at public.
referenceroom@ferc.gov.
V. Information Collection Statement
47. The Paperwork Reduction Act
(PRA) 61 requires each federal agency to
seek and obtain Office of Management
and Budget (OMB) approval before
undertaking a collection of information
directed to ten or more persons or
contained in a rule of general
applicability. OMB regulations require
approval of certain information
collection requirements imposed by
agency rules.62 Upon approval of a
collection(s) of information, OMB will
61 44
60 FirstEnergy,
PO 00000
Frm 00012
141 FERC ¶ 61,239 at P 5.
Fmt 4702
Sfmt 4702
U.S.C. 3501–3520.
5 CFR 1320.
62 See
E:\FR\FM\27JAP1.SGM
27JAP1
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Federal Register / Vol. 80, No. 17 / Tuesday, January 27, 2015 / Proposed Rules
assign an OMB control number and an
expiration date. Respondents subject to
the filing requirements of an agency rule
will not be penalized for failing to
respond to these collections of
information unless the collections of
information display a valid OMB
control number.
The following table shows the
Commission’s estimates for the
additional burden and cost, as
contained in the Proposed Policy
Statement:
REVISIONS, IN THE PROPOSED POLICY STATEMENT IN DOCKET NO. PL15–3
Number and
type of
respondents
Number of
responses per
respondent
Total number
of responses
Average burden
hours & cost
per response 63
Total burden hours &
total cost
(1)
Requirements
(2)
(1) * (2) = (3)
(4)
(3) * (4)
FERC–519 (FPA Section 203 Filings) ..........
FERC–516 (FPA Section 205, Rate and
Tariff Filings).
FERC–555, Record Retention ......................
18
1
1
1
64 1
18
1
TOTAL ...................................................
........................
........................
asabaliauskas on DSK5VPTVN1PROD with PROPOSALS
Title: FERC–519, Application under
Federal Power Act Section 203; FERC–
516, Electric Rate Schedules and Tariff
Filings; and FERC–555, Preservation of
Records for Public Utilities and
Licensees, Natural Gas and Oil Pipeline
Companies.
Action: Revised Collections of
Information.
OMB Control No: 1902–0082 (FERC–
519), 1902–0096 (FERC–516), and 1902–
0098 (FERC–555).
Respondents: Business or other for
profit, and not for profit institutions.
Frequency of Responses: As needed
and ongoing.
Necessity of the Information: To
protect ratepayers and to mitigate
possible adverse effects on rates that
may result from mergers or certain other
transactions that are subject to section
203 of the FPA, we propose
clarifications and additional
information collection requirements
related to hold harmless commitments
offered by applicants.
Internal review: The Commission has
reviewed the changes included in the
Proposed Policy Statement and has
determined that the additional reporting
and recordkeeping requirements are
necessary.
Interested persons may obtain
information on the reporting
requirements by contacting: Federal
Energy Regulatory Commission, 888
63 The hourly cost figures are based on data for
salary plus benefits. We think industry is similarly
situated to FERC in terms of the average cost of a
full time employee, and we are using $70.50 per
hour for salary plus benefits.
The estimates for cost per response are derived
using the following formula: Average Burden Hours
per Response * $70.50 per Hour = Average Cost per
Response.
64 We estimate that one FPA section 205 filing
may be made annually subject to the Proposed
Policy Statement.
VerDate Sep<11>2014
17:42 Jan 26, 2015
Jkt 235001
18
18
20 hrs.; $1,410 ..........
103.26 hrs.;
$7,279.83.
4 hrs.; $282 ...............
360 hrs.; $25,380.
103.26 hrs.;
$7,279.83.
72 hrs.; $5,076.
........................
...................................
535.26 hrs.;
$37,735.83.
First Street NE., Washington, DC 20426
[Attention: Ellen Brown, Office of the
Executive Director, email:
DataClearance@ferc.gov, Phone: (202)
502–8663, fax: (202) 273–0873].
By the Commission. Commissioner
Honorable is voting present.
Issued: January 22, 2015.
Nathaniel J. Davis, Sr.,
Deputy Secretary.
[FR Doc. 2015–01423 Filed 1–26–15; 8:45 am]
BILLING CODE 6717–01–P
FEDERAL COMMUNICATIONS
COMMISSION
47 CFR Parts 2 and 90
[PS Docket Nos. 13–87, 06–229; WT Docket
No. 96–86, RM–11433, RM–11577; Report
No. 3013]
Petition for Reconsideration of Action
in Rulemaking Proceeding
Federal Communications
Commission.
ACTION: Petition for reconsideration.
AGENCY:
In this document, a Petition
for Reconsideration (Petition) has been
filed in the Commission’s Rulemaking
proceeding by Danielle Coffey, on behalf
of Telecommunications Industry
Association.
DATES: Oppositions to the Petition must
be filed on or before February 11, 2015.
Replies to an opposition must be filed
on or before February 23, 2015.
ADDRESSES: You may submit comments,
identified by PS Docket Nos. 13–87, 06–
229; WT Docket No. 96–86, by any of
the following methods:
• Federal Communications
Commission’s Web site: https://fjallfoss.
fcc.gov/ecfs2/. Follow the instructions
for submitting comments.
SUMMARY:
PO 00000
Frm 00013
Fmt 4702
Sfmt 4702
• People with Disabilities: Contact the
FCC to request reasonable
accommodations (accessible format
documents, sign language interpreters,
CART, etc.) by email: FCC504@fcc.gov
or phone: 202–418–0530 or TTY: 202–
418–0432.
FOR FURTHER INFORMATION CONTACT: John
A. Evanoff, Esq., Public Safety and
Homeland Security Bureau, (202) 418–
0848, email John.Evanoff@fcc.gov.
SUPPLEMENTARY INFORMATION: This is a
summary of Commission’s document,
Report No. 3013, released January 14,
2015. The full text of this document is
available for viewing and copying in
Room CY–B402, 445 12th Street SW.,
Washington, DC or may be purchased
from the Commission’s copy contractor,
Best Copy and Printing, Inc. (BCPI) (1–
800–378–3160). The Commission will
not send a copy of this Notice pursuant
to the Congressional Review Act, 5
U.S.C. 801(a)(1)(A) because this notice
does not have an impact on any rules of
particular applicability.
Subject: Proposed Amendments to the
Service Rules Governing Public Safety
Narrowband Operations in the 769–775/
799–805 MHz Bands (PS Docket No. 13–
87); National Public Safety
Telecommunications Council Petition
for Rulemaking on Aircraft Voice
Operations at 700 MHz (RM–11433);
National Public Safety
Telecommunications Council Petition
for Rulemaking to Revise 700 MHz
Narrowband Channel Plan (RM–11433);
Region 24 700 MHz Regional Planning
Committee Petition for Rulemaking (WT
Docket No. 96–86 and PS Docket No.
06–229); and State of Louisiana Petition
for Rulemaking (RM–11577), published
at 79 FR 71321, December 2, 2014, and
published pursuant to 47 CFR 1.429(e).
See also 47 CFR 1.4(b)(1) of the
Commission’s rules.
E:\FR\FM\27JAP1.SGM
27JAP1
Agencies
[Federal Register Volume 80, Number 17 (Tuesday, January 27, 2015)]
[Proposed Rules]
[Pages 4231-4239]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2015-01423]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF ENERGY
Federal Energy Regulatory Commission
18 CFR Part 33
[Docket No. PL15-3-000]
Policy Statement on Hold Harmless Commitments
AGENCY: Federal Energy Regulatory Commission, DOE.
ACTION: Proposed policy statement.
-----------------------------------------------------------------------
SUMMARY: The Commission proposes, as a statement of policy, the
following clarifications regarding hold harmless commitments offered by
applicants as ratepayer protection mechanisms to mitigate adverse
effects on rates that may result from transactions subject to section
203 of the Federal Power Act (FPA). First, the Commission proposes to
clarify the scope and definition of the costs that should be subject to
hold harmless commitments. Second, the Commission proposes to clarify
that applicants offering hold harmless commitments must implement
controls and procedures to track the costs from which customers will be
held harmless. The Commission also proposes to clarify the types of
controls and procedures that applicants offering hold harmless
commitments must implement. Third, the Commission proposes to no longer
accept hold harmless commitments that are limited in duration. Fourth,
the Commission proposes to clarify that applicants may demonstrate
that, under certain circumstances, transactions will not have an
adverse effect on rates without relying on hold harmless commitments or
other ratepayer protection mechanisms.
DATES: Comments on the proposed policy statement are due within March
30, 2015.
FOR FURTHER INFORMATION CONTACT:
Eric Olesh (Technical Information), Office of Energy Market Regulation,
888 First Street NE., Washington, DC 20426, (202) 502-6524,
eric.olesh@ferc.gov.
Adam Batenhorst (Legal Information), Office of the General Counsel, 888
First Street NE., Washington, DC 20426, (202) 502-6150,
adam.batenhorst@ferc.gov.
Olga Anguelova (Accounting Information), Office of Enforcement, 888
First Street NE., Washington, DC 20426, (202) 502-8098,
olga.anguelova@ferc.gov.
SUPPLEMENTARY INFORMATION:
1. We propose, as a statement of policy, the following
clarifications regarding hold harmless commitments offered by
applicants as ratepayer protection mechanisms to mitigate adverse
effects on rates that may result from transactions that are subject to
section 203 of the Federal Power Act (FPA).\1\ First, we propose to
clarify the scope and definition of the costs that should be subject to
hold harmless commitments. Second, we propose to clarify that
applicants offering hold harmless commitments must implement controls
and procedures to track the costs from which customers will be held
harmless. We also propose to clarify the types of controls and
procedures that applicants offering hold harmless commitments must
implement. Third, we propose to no longer accept hold harmless
commitments that are limited in duration. Fourth, we propose to clarify
that applicants may demonstrate that, under certain circumstances,
transactions will not have an adverse effect on rates without relying
on hold harmless commitments or other ratepayer protection mechanisms.
---------------------------------------------------------------------------
\1\ 16 U.S.C. 824b.
---------------------------------------------------------------------------
I. Background
A. The Commission's Analysis of Proposed Transactions Under FPA Section
203
2. FPA section 203(a)(4) requires the Commission to approve a
transaction if it determines that the transaction will be consistent
with the public interest.\2\ The Commission has stated that its
analysis of whether a transaction will be consistent with the public
interest generally involves consideration of three factors: (1) The
effect on competition; (2) the effect on rates; and (3) the effect on
regulation.\3\ FPA section
[[Page 4232]]
203(a)(4) also requires the Commission to find that the transaction
``will not result in cross-subsidization of a non-utility associate
company or the pledge or encumbrance of utility assets for the benefit
of an associate company, unless the Commission determines that the
cross-subsidization, pledge, or encumbrance will be consistent with the
public interest.'' \4\
---------------------------------------------------------------------------
\2\ 16 U.S.C. 824b(a)(4).
\3\ See Inquiry Concerning the Commission's Merger Policy Under
the Federal Power Act: Policy Statement, Order No. 592, 61 FR 68595
(Dec. 30, 1996), FERC Stats. & Regs. ] 31,044, at 30,111 (1996)
(Merger Policy Statement), reconsideration denied, Order No. 592-A,
79 FERC ] 61,321 (1997). See also FPA Section 203 Supplemental
Policy Statement, 72 FR 42277 (Aug. 2, 2007), FERC Stats. & Regs. ]
31,253 (2007). See also Revised Filing Requirements Under Part 33 of
the Commission's Regulations, Order No. 642, 65 FR 70983 (Nov. 28,
2000), FERC Stats. & Regs. ] 31,111 (2000), order on reh'g, Order
No. 642-A, 94 FERC ] 61,289 (2001). 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. 824b(a)(4). The Commission's regulations establish
verification and information requirements for applicants that seek a
determination that a transaction will not result in inappropriate
cross-subsidization or a pledge or encumbrance of utility assets.
See 18 CFR 33.2(j).
---------------------------------------------------------------------------
3. This proposed policy statement focuses on the second prong of
the Commission's FPA section 203 analysis, the effect of a proposed
transaction on rates. The Commission has stated that, when considering
a proposed transaction's effect on rates, its focus ``is on the effect
that a proposed transaction itself will have on rates, whether that
effect is adverse, and whether any adverse effect will be offset or
mitigated by benefits that are likely to result from the proposed
transaction.'' \5\ Specifically, as relevant here, the Commission
considers whether the transaction could result in an adverse effect on
rates to wholesale requirements or transmission customers.
---------------------------------------------------------------------------
\5\ ITC Midwest LLC, 140 FERC ] 61,125, at P 19 (2012).
---------------------------------------------------------------------------
4. If an applicant's only customers are wholesale power sales
customers served under market-based rates, then the transaction will
have no adverse effect on rates for such customers.\6\ If, however, the
transaction could result in an increase in rates and the wholesale
power sales customers of the applicants are not served exclusively
under market-based rates, or if the applicants have wholesale
requirements or transmission customers, the Commission evaluates
whether there are sufficient potential economic benefits that offset
the projected increase in rates. If such benefits exist, the analysis
of the effect on rates ends with a finding that there is no adverse
effect on rates because of those offsetting economic benefits.\7\
---------------------------------------------------------------------------
\6\ Cinergy Corp., 140 FERC ] 61,180, at P 41 (2012) (citing
Duquesne Light Holdings, Inc., 117 FERC ] 61,326, at P 25 (2006))
(``The Commission has previously stated that, when there are market-
based rates, the effect on rates is not of concern. The effect on
rates is not of concern in these circumstances because market-based
rates will not be affected by the seller's cost of service and,
thus, will not be adversely affected by the Proposed
Transaction.'').
\7\ The Commission has found that there is no adverse effect on
rates where, although costs may increase in one area of the
utility's operations, lower costs are expected elsewhere. See, e.g.,
Bluegrass Generation Co., L.L.C., 139 FERC ] 61,094, at P 41 (2012)
(finding no adverse effect on rates because increases in capacity
charges would be offset by a savings in energy rates).
---------------------------------------------------------------------------
5. If a proposed transaction has the potential to increase
wholesale rates, but there is no showing of quantifiable offsetting
economic benefits, the Commission must determine whether ratepayers are
sufficiently protected from the potential rate increase, or whether
there are other non-quantifiable, offsetting benefits that would,
nevertheless, support a finding that the proposed transaction is
consistent with the public interest, regardless of the potential for a
rate increase.\8\ When the Commission has considered such non-
quantifiable offsetting benefits, it has often been in the context of
transactions that increase competition or enable more competitive
markets, such as transactions resulting in the expansion of regional
transmission organizations or the increase in transmission ownership by
independent transmission companies.\9\
---------------------------------------------------------------------------
\8\ An increase in rates ``can still be consistent with the
public interest if there are countervailing benefits that derive
from the merger.'' Merger Policy Statement, FERC Stats. & Regs. ]
31,044 at 30,114; see also ALLETE, Inc., 129 FERC ] 61,174, at P 19
(2009) (``Our focus here is on the effect that the Proposed
Transaction itself will have on rates, whether that effect is
adverse, and whether any adverse effect2 will be offset or mitigated
by benefits likely to result from the Proposed Transaction.'').
\9\ See, e.g., ITC Midwest LLC, 133 FERC ] 61,169, at P 23
(2010) (finding offsetting benefits because of the transfer of
transmission assets to a standalone transmission company); ALLETE,
129 FERC ] 61,174 at P 20 (finding that the advantages created in
joining a regional transmission organization outweighed potential
rate increase created by the different tax treatment of the assets
after transfer); Ameren Servs. Co., 103 FERC ] 61,121, at P 23
(2003) (finding that increasing a regional transmission
organization's footprint would offset a rate increase); Rockland
Elec. Co., 97 FERC ] 61,357, at 62,651 (2001) (finding that
attracting more bidders and encouraging more competition offset a
potential rate increase for locational marginal prices along a seam
at times of peak demand).
---------------------------------------------------------------------------
6. Prior to the issuance of the Merger Policy Statement, the
Commission had required applicants and intervenors to estimate the
future costs and benefits of a transaction and then litigate the
validity of those estimates. The Commission, however, eliminated those
requirements in the Merger Policy Statement and established various
mechanisms that applicants could implement to show that a merger would
have no adverse effect on rates.\10\ As the Commission explained:
---------------------------------------------------------------------------
\10\ Merger Policy Statement, FERC Stats. & Regs. ] 31,044 at
30,111 (``[I]n assessing the effect of a proposed merger on rates,
we will no longer require applicants and intervenors to estimate the
future costs and benefits of a merger and then litigate the validity
of those estimates. Instead, we will require applicants to propose
appropriate rate protection for customers.'').
Merger applicants should propose ratepayer protection mechanisms
to assure that customers are protected if the expected benefits do
not materialize. The applicant bears the burden of proof to
demonstrate that the customer will be protected. This puts the risk
that the benefits will not materialize where it belongs--on the
applicants.
Furthermore, we believe that the most promising and expeditious
means of addressing ratepayer protection is for the parties to
negotiate an agreement on ratepayer protection mechanisms. The
applicants should attempt to resolve the issue with customers even
before filing, and should propose a mechanism as part of their
filing. Even if these negotiations have not succeeded by the time of
filing, the parties should continue to try to reach a settlement.
What constitutes adequate ratepayer protection necessarily will
depend on the particular circumstances of the merging utilities and
their ratepayers, and we strongly encourage parties to minimize
contentious issues and to resolve them without the time and expense
of a formal hearing. Parties may not be able to reach an agreement
on an appropriate ratepayer protection and the Commission may still
be able to approve the merger. As mentioned earlier, this could
occur either after a hearing or on the basis of parties' filings if
we determine that the applicants' proposal sufficiently insulates
the ratepayers from harm.\11\
---------------------------------------------------------------------------
\11\ Id. at 30, 123-24.
7. The Commission then explained that it had previously accepted
``a variety of hold harmless provisions,'' and that parties could
consider those as well as ``other mechanisms if they appropriately
address ratepayer concerns.'' \12\ Among the types of protection the
Commission stated applicants could propose were the following:
---------------------------------------------------------------------------
\12\ Id. at 30, 124.
--Open season for wholesale customers--applicants agree to allow
existing wholesale customers a reasonable opportunity to terminate
their contracts (after notice) and switch suppliers. This allows
customers to protect themselves from merger-related harm.
--General hold harmless provision--a commitment from the applicant
that it will protect wholesale customers from any adverse rate
effects resulting from the merger for a significant period of time
following the merger. Such a provision must be enforceable and
administratively manageable.
[[Page 4233]]
--Moratorium on increases in base rates (rate freeze)--applicants
commit to freezing their rates for wholesale customers under certain
tariffs for a significant period of time.
--Rate reduction--applicants make a commitment to file a rate
decrease for their wholesale customers to cover a significant period
of time.\13\
\13\ Id. (footnotes omitted).
---------------------------------------------------------------------------
8. The Commission concluded that, although each mechanism would
provide some benefit to ratepayers, in the majority of circumstances
the most meaningful (and the most likely to give wholesale customers
the earliest opportunity to take advantage of emerging competitive
wholesale markets) was an open season provision.\14\ The Commission
stated that if intervenors raised a substantial question as to the
adequacy of a merger applicant's proposal, the parties should continue
to pursue a settlement; if no agreement could be reached, the
Commission explained it might decide the issue on the written record or
set the issue for hearing.\15\
---------------------------------------------------------------------------
\14\ Id.
\15\ Id.
---------------------------------------------------------------------------
9. Subsequently, in Order No. 642, the Commission promulgated
regulations governing FPA section 203 applications and described the
information applicants must submit regarding the effect of a proposed
transaction on rates. In relevant part, the Commission stated:
In the [Merger] Policy Statement, we determined that ratepayer
protection mechanisms (e.g., open seasons to allow early termination
of existing service contracts or rate freezes) may be necessary to
protect the wholesale customers of merger applicants. . . .
Thus, in the [Notice of Proposed Rulemaking] we proposed that
all merger applicants demonstrate how wholesale ratepayers will be
protected and that applicants will have the burden of proving that
their proposed ratepayer protections are adequate. Specifically, we
proposed that applicants must clearly identify what customer groups
are covered (e.g., requirements customers, transmission customers,
formula rate customers, etc.), what types of costs are covered, and
the time period for which the protection will apply.\16\
---------------------------------------------------------------------------
\16\ Order No. 642, FERC Stats. & Regs. ] 31,111 at 31,914.
10. The Commission adopted the proposals set forth in the Notice of
Proposed Rulemaking and emphasized that if applicants did not offer any
ratepayer protection mechanisms, they must explain how the proposed
merger would provide adequate ratepayer protection.\17\
---------------------------------------------------------------------------
\17\ Id.
---------------------------------------------------------------------------
B. Current Commission Practice Regarding Hold Harmless Commitments
11. Over the last decade hold harmless commitments have become a
common feature of FPA section 203 applications involving mergers of
traditional franchised utilities or their upstream holding
companies.\18\ More recently, some applicants have made hold harmless
commitments in connection with transactions involving the acquisition
or disposition of existing jurisdictional facilities, including in
circumstances where the acquiring entity was a traditional franchised
utility and entered into the transaction in order to satisfy resource
adequacy requirements at the state level, to improve system reliability
and/or meet other regulatory requirements.\19\
---------------------------------------------------------------------------
\18\ The Commission has also accepted other forms of ratepayer
protection in lieu of or in addition to hold harmless commitments.
See, e.g., Cinergy Services, Inc., 102 FERC ] 61,128, at P 33 (2003)
(accepting rate freeze as rate mitigation); Vermont Yankee Nuclear
Power Corp., 91 FERC ] 61,325, at 62,125 (2000) (accepting rate cap
and an open season provision as mitigation); Cajun Elec. Power
Coop., Inc., 90 FERC ] 61,309, at 62,005-06 (2000) (approving a
transaction where current customers were allowed to keep their
current contracts or choose from three different power purchasing
agreements).
\19\ See, e.g., FirstEnergy Generation Corp., 141 FERC ] 61,239,
at PP 1, 16, 27-30 (2012) (FirstEnergy) (accepting a hold harmless
commitment in an asset transaction where generation assets would be
turned into assets to support transmission system upgrades in order
to meet needs identified in a study by PJM Interconnection, L.L.C.
following the retirement of other generating facilities); ITC
Midwest, 140 FERC ] 61,125 at P 15; Int'l Transmission Co., 139 FERC
] 61,003, at P 16 (2012).
---------------------------------------------------------------------------
12. The Commission has consistently accepted hold harmless
commitments in which FPA section 203 applicants commit not to seek
recovery of transaction-related costs in jurisdictional rates except to
the extent that such costs are offset by transaction-related
savings.\20\ Thus, hold harmless commitments typically focus on
preventing recovery in rates of the costs incurred that are ``related''
to the transaction. The Commission has previously found that hold
harmless commitments under which applicants commit not to seek to
recover transaction-related costs except to the extent that such costs
are exceeded by demonstrated transaction-related savings for a period
of five years to be ``standard.'' \21\
---------------------------------------------------------------------------
\20\ NSTAR Advanced Energy Sys., Inc., 131 FERC ] 61,098, at P
24 (2010) (``The Commission looks for assurances from public
utilities that they hold customers harmless from these transaction-
related costs, to the extent they are not exceeded by cost savings
arising from the transaction, for a significant period of time
following the merger, not an indefinite period of time.'') (internal
citation omitted); see also Cinergy, 140 FERC ] 61,180 at P 42; ITC
Midwest, 140 FERC ] 61,125 at PP 21-22; Int'l Transmission, 139 FERC
] 61,003 at P 17; BHE Holdings Inc., 133 FERC ] 61,231, at P 37
(2010); cf. Sierra Pacific Power Co., 133 FERC ] 61,017, at P 14
(2010) (accepting a commitment not to include any transaction-
related costs in its Commission-accepted open access transmission
tariff).
\21\ ITC Holdings Corp., 121 FERC ] 61,229, at P 128 (2007).
Although five-year hold harmless commitments are most common, the
Commission has also accepted three-year hold harmless commitments.
Westar Energy, Inc., 104 FERC ] 61,170, at PP 16-17 (2003); Long
Island Lighting Co., 82 FERC ] 61,129, at 61,463-65 (1998).
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13. Although the Commission has relied on commitments to hold
customers harmless from transaction-related costs to support findings
of no adverse effects on rates, in many of these cases, these
commitments have not included detailed definitions of transaction-
related costs or savings.\22\ Further, the Commission has only provided
general guidance on the scope of these costs. In most orders addressing
transactions in which the Commission has accepted hold harmless
commitments, the Commission has explained that transaction-related
costs are not just those costs related to consummating the proposed
transaction, such as legal, investment advisory, accounting and
financing costs. Rather, the Commission has stated that the costs
subject to hold harmless commitments include all costs that are related
to the transaction. The Commission, however, has never specified what
these other costs may include.\23\ In more recent cases, the Commission
has specified that transaction-related costs include costs, both
capital and operating, incurred to achieve merger synergies.\24\ The
Commission has also specifically noted that acquisition premiums,
including
[[Page 4234]]
goodwill,\25\ are not considered part of transaction-related costs, and
that recovery of such costs must be pursued through FPA section 205
filings.\26\ The Commission has also explained that protection from
transaction-related costs does not mean that consumers are necessarily
insulated from any rate increase, such as those related to market
conditions or those unrelated to the transaction,\27\ or unspecified or
speculative costs that intervenors claim may result from a merger.\28\
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\22\ See, e.g., Puget Energy, 123 FERC ] 61,050 at P 27 (``We
accept Applicants' hold harmless commitment, which we interpret to
include all merger-related costs, not only costs related to
consummating the transaction. If Applicants seek to recover any
merger-related costs in a subsequent section 205 filing, they must
show quantifiable offsetting benefits.'') (citations and footnotes
omitted); National Grid plc, 117 FERC ] 61,080, at P 54 (2006)
(``Applicants have committed to hold ratepayers harmless from
transaction-related costs in excess of transaction savings for a
period of five years.'').
\23\ ITC Holdings Corp., 143 FERC ] 61,256, at P 138 (2013); see
also Cinergy, 140 FERC ] 61,180 at P 42; FirstEnergy Corp., 133 FERC
] 61,222, at PP 62-63 (2010); NSTAR, 136 FERC ] 61,016, at PP 62-63
(2011); PPL Corp., 133 FERC ] 61,083, at PP 26-27 (2010); Consumers
Energy Co., 118 FERC ] 61,143, at P 33, order on clarification, 120
FERC ] 61,091 (2007).
\24\ See, e.g., Silver Merger Sub, Inc., 145 FERC ] 61,261, at P
68 (2013) (``We interpret Applicants' hold harmless commitment to
apply to all transaction-related costs, including costs related to
consummating the Proposed Transaction and transition costs (both
capital and operating) incurred to achieve merger synergies.'');
Bangor Hydro Elec. Co., 144 FERC ] 61,030, at P 20 (2013) (same);
Exelon Corp., 138 FERC ] 61,167, at P 118 (2012) (same).
\25\ An acquisition premium is the excess of the total purchase
price or consideration paid in the transaction over the historical
cost of the net assets of the entity acquired.
\26\ Exelon, 138 FERC ] 61,167 at P 118 (citing Merger Policy
Statement, FERC Stats. & Regs. ] 31,044 at 30,126; Duke Energy Moss
Landing LLC, 83 FERC ] 61,318 (1998), reh'g denied, 86 FERC ]
61,227, at 61,816 (1999) (citing Mid-Louisiana Gas Co., 7 FERC ]
61,316, at 61,682, reh'g denied, 8 FERC ] 61,227 (1979), aff'd sub
nom. Transcon. Gas Pipe Line Corp. v. FERC, 652 F.2d 179 (D.C. Cir.
1981)) (rate recovery of an existing facility is generally limited
to the original cost of the facility)).
\27\ BHE Holdings, 133 FERC ] 61,231 at P 36 (citing PNM
Resources, Inc., 124 FERC ] 61,019, at P 43 (2008) (``Applicants are
not required to apply a rate freeze and may propose rate increases
under section 205 filings.'')); ITC Holdings, 121 FERC ] 61,229 at P
124 (``[T]he Commission finds that any increased costs of ITC
Midwest attributable to prudent transmission investment do not make
the Transaction contrary to the public interest''); Boston
Generating, LLC, 113 FERC ] 61,016, at P 26 (2005) (``In reviewing
an application under section 203, the Commission looks at the
effects of the transaction on rates, not at rate changes that may
occur regardless of the transaction.'')); Jersey Central Power &
Light Co., 87 FERC ] 61,014, at 61,039 (1999) (``The Commission does
not require applicants under [s]ection 203 to insulate their
customers from the rate effects of market forces. Accordingly,
customers are not entitled in a [s]ection 203 proceeding to be held
harmless from external factors such as rising market prices.'');
Cincinnati Gas & Elec. Co., 64 FERC ] 61,237, at 62,686, 62,714
(1993), reh'g denied, 69 FERC ] 61,005, order on clarification, 69
FERC ] 61,088 (1994), reh'g denied, 71 FERC ] 61,380 (1995).
\28\ Exelon Corp., 127 FERC ] 61,161, at P 102 (2009) (citing,
inter alia, NorthWestern Corp., 117 FERC ] 61,100, at P 40 (2006)
(finding speculative protestor's argument that the proposed
transaction would result in a credit ratings downgrade and lead to
higher rates or lower reliability)); Old Dominion Elec. Coop., 117
FERC ] 61,313, at P 29 (2006) (affirming initial decision that ``the
record supports the conclusion that the credit downgrade will not
raise rates'').
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14. With respect to recovering transaction-related costs, as noted
earlier, the standard hold harmless commitment provides that applicants
may not seek to recover in rates any transaction-related costs except
to the extent that such costs are exceeded by demonstrated transaction-
related savings. The Commission recently clarified its policy on the
recovery of transaction-related costs.\29\ As clarified, applicants may
seek to recover transaction-related costs incurred prior to
consummating a proposed transaction or those transaction-related costs
incurred within the time period during which the hold harmless
commitment applies by making certain filings.\30\ Specifically,
applicants must submit a new filing under FPA section 205, and a
concurrent informational filing in the relevant FPA section 203
docket.\31\ Consistent with Commission precedent, in the FPA section
205 filing, applicants must still: (1) Specifically identify the
transaction-related costs they are seeking to recover; and (2)
demonstrate that those costs are exceeded by the savings produced by
the transaction.\32\ The Commission further clarified that it will not
authorize the recovery of merger-related costs in an annual
informational filing under existing formula rates. After noticing the
new section 205 filing for public comment, the Commission will
determine both if there is adequate support to show that recovery of
merger-related costs is consistent with the hold harmless commitment
and that the resulting new rate is just and reasonable in light of all
the other factors underlying the proposed new rate.\33\ In accordance
with the Merger Policy Statement, the Commission's approach places the
burden of proof on applicants to demonstrate that customers are
protected if the expected benefits do not materialize.\34\
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\29\ Exelon Corp., 149 FERC ] 61,148 (2014) (Exelon-Pepco).
\30\ Id. P 106.
\31\ Id. P 105.
\32\ Id. P 107.
\33\ Id. P 106.
\34\ Merger Policy Statement, FERC Stats. & Regs. ] 31,044 at
30,123. See, e.g., Consol. Edison, Inc., 94 FERC ] 61,079, at 61,366
(2001) (``customers do have the opportunity to scrutinize costs
before they are included in NEPOOL's formula rate, and could
therefore alert the Commission to costs that, contrary to
Applicants' commitments here, might be merger-related. In such a
situation, we read Applicants' commitment to require them to
shoulder the burden of proof, and to justify their failure to
identify the costs as merger-related.'') (citing BEC Energy, 88 FERC
] 61,002, at 61,007 (1999); New England Power Co., 87 FERC ] 61,287,
at 62,146 (1999)).
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II. Discussion
A. Purpose of Proposed Policy Statement
15. Upon consideration of the Commission's experience regarding
hold harmless commitments since issuance of the Merger Policy
Statement, we believe that clarifying the Commission's policy regarding
hold harmless commitments, a frequently proposed ratepayer protection
mechanism in FPA section 203 applications, would be beneficial to
applicants, customers, and interested persons. We note, however, that
unless specifically discussed herein, we reaffirm the guidance provided
in the Merger Policy Statement and subsequent precedent, and reiterate
that applicants under FPA section 203 should propose ratepayer
protection mechanisms that ensure that customers are protected from the
adverse rate effects of a proposed transaction. Furthermore, the
guidance here should not discourage applicants from working with
interested parties to resolve contentious issues regarding appropriate
ratepayer protection mechanisms prior to the submission of an
application under FPA section 203. As the Commission stated in the
Merger Policy Statement, ``the most promising and expeditious means of
addressing ratepayer protection is for the parties to negotiate an
agreement on ratepayer protection mechanisms.'' \35\ Accordingly, we
continue to expect applicants under FPA section 203 to engage their
customers, when appropriate, and discuss with them any potential
adverse rate effects that may result from a proposed transaction under
FPA section 203, and how those effects can be mitigated.
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\35\ Merger Policy Statement, FERC Stats. & Regs. ] 31,044 at
30,123.
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16. In this proposed policy statement, we propose to provide
greater clarity to and seek comment from interested persons regarding
the following issues related to hold harmless commitments. First, we
propose to clarify those costs to which hold harmless commitments will
apply. Although the Commission has provided broad guidance regarding
the costs that should be covered under hold harmless commitments, it
has never defined those costs with much specificity, leading to
inconsistency with respect to this issue. Below, we propose to provide
additional guidance by clarifying the costs that the Commission
considers to be transaction-related costs. These are also the
transaction-related costs that the Commission will review if and when
applicants make the requisite filing under FPA section 205 to attempt
to recover those costs by showing that they have been offset by savings
due to the transaction. Finally, although we identify specific
categories of costs below, we continue to believe that the Commission's
policy must remain flexible enough to permit a case-by-case
determination of transaction-related costs, and that an attempt to
articulate those costs precisely could have unintended consequences.
17. Second, we propose to clarify that applicants offering hold
harmless commitments must implement
[[Page 4235]]
appropriate internal controls and procedures to track those costs from
which they have committed to hold their customers harmless and must
describe such controls and procedures as a part of their FPA section
203 applications and any section 205 filings.\36\ We believe that these
controls and procedures will ensure the proper identification,
accounting, and rate treatment of all transaction-related costs
incurred prior to and subsequent to the announcement of a proposed
transaction. Requiring applicants to explain how they will track costs
related to a hold harmless commitment will improve the Commission's
ability to ensure that there is a process in place to prevent those
costs from being recovered in rates prior to the Commission approving
the recovery of them at a later date under FPA section 205, and will
also clarify for customers what types of costs are covered under a hold
harmless commitment, as required by Commission precedent.\37\
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\36\ The Commission has previously explained that applicants
should ensure that they have appropriate internal controls and
procedures to ensure the proper identification, accounting, and rate
treatment for all transaction-related costs incurred prior to and
subsequent to proposed transactions, including all transition costs
incurred after a merger is consummated. See, e.g., ITC Holdings, 143
FERC ] 61,256 at P 168; Silver Merger Sub, 145 FERC ] 61,261 at P
78.
\37\ See, e.g., Order No. 642, FERC Stats. & Regs. ] 31,111 at
31,914 (``[A]pplicants must clearly identify what customer groups
are covered (e.g., requirements customers, transmission customers,
formula rate customers, etc.), what types of costs are covered, and
the time period for which the protection will apply.'').
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18. Third, we propose that, in order for a hold harmless commitment
to provide adequate ratepayer protection, it should not be limited in
duration. As discussed in further detail below, we are concerned that
limiting the hold harmless commitment to a certain period (generally
five years) raises the risk that transaction-related costs could be
included in future formula rate billings without applicants making the
showing of offsetting savings. Eliminating the time limit will ensure
that transaction-related costs cannot be recovered from ratepayers at
any time, unless applicants can demonstrate that there are offsetting
transaction-related savings. This revised approach is consistent with
the Merger Policy Statement, which emphasized that the burden of proof
to demonstrate that customers will be protected should be on applicants
and that applicants should also bear the risk that benefits will not
materialize.\38\
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\38\ Merger Policy Statement, FERC Stats. & Regs. ] 31,044 at
30,123.
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19. Finally, we propose to clarify that applicants may demonstrate
that, under certain circumstances, transactions will not have an
adverse effect on rates without relying on hold harmless commitments or
other ratepayer protection mechanisms. As noted above, some applicants
have made hold harmless commitments in connection with transactions
involving the acquisition or disposition of existing jurisdictional
facilities where the acquiring entity was a traditional franchised
utility and entering into the transaction in order to satisfy resource
adequacy requirements at the state level, to improve system
reliability, and/or meet other regulatory requirements.\39\ Hold
harmless commitments may not be appropriate in these and other similar
circumstances given that while these proposed transactions may have an
effect on rates, that effect may not be adverse. Accordingly, as
discussed in further detail below, we propose that under certain
circumstances, applicants may show that a transaction will not have an
adverse effect on rates without proposing additional ratepayer
protection mechanisms.
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\39\ See, e.g., FirstEnergy, 141 FERC ] 61,239, at PP 1, 16, 27-
30 (2012) (accepting a hold harmless commitment in an asset
transaction where generation assets would be turned into assets to
support transmission system upgrades in order to meet needs
identified in a study by PJM Interconnection, L.L.C. following the
retirement of other generating facilities); ITC Midwest, 140 FERC ]
61,125 at P 15; Int'l Transmission Co., 139 FERC ] 61,003, at P 16
(2012).
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20. Our intent is to apply any changes to our policy on hold
harmless commitments on a prospective basis, for applications submitted
after the Commission has issued a policy statement, and not alter
existing hold harmless commitments accepted by the Commission or
submitted in applications pending at the time the Commission issues the
policy statement. We seek comments from interested persons on these
proposals.
B. Revisions to the Commission's Policy on Hold Harmless Commitments
1. Identifying and Accounting for Transaction-Related Costs
21. We propose to designate the following categories of costs as
the transaction-related costs that should be subject to any hold
harmless commitment. Accordingly, the costs set out below are those
transaction-related costs from which customers must be held harmless
and that may not be recovered from customers except to the extent
exceeded by demonstrated savings.\40\ As noted above, although we
propose to provide guidance in this proposed policy statement regarding
how to identify transaction-related costs, we continue to believe that
attempts to precisely articulate all such costs are not feasible. For
example, while many direct costs of a transaction can be tracked with
proper mechanisms and controls, other costs may be more difficult to
classify. Accordingly, because each transaction is unique, the final
determination of what transaction-related costs may be recovered by
applicants will remain subject to a case-by-case analysis;
specifically, this determination will be made if and when applicants
propose to recover transaction-related costs and demonstrate offsetting
savings in the subsequent FPA section 205 filing described previously
by the Commission.
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\40\ We expect that applicants proposing to recover these costs
would track and record them pursuant to the procedures established
below. See infra section II.B.2.
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22. First, we propose that transaction-related costs include, but
are not limited to, the following costs incurred to explore, agree to,
and consummate a transaction:
The costs of securing an appraisal, formal written
evaluation, or fairness opinions related to the transaction;
The costs of structuring the transaction, negotiating the
structure of the transaction, and obtaining tax advice on the structure
of the transaction;
The costs of preparing and reviewing the documents
effectuating the transaction (e.g., the costs to transfer legal title
of an asset, building permits, valuation fees, the merger agreement or
purchase agreement and any related financing documents);
The internal labor costs of employees \41\ and the costs
of external, third-party, consultants and advisors to evaluate
potential merger transactions, and once a merger candidate has been
identified, to negotiate merger terms, to execute financing and legal
contracts, and to secure regulatory approvals; \42\
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\41\ If the duties of employees are not solely dedicated to
activities related to a transaction, internal labor costs deemed
merger-related should be determined in a manner that is
proportionally equal to the amount of time spent on the merger
compared to other activities of the utility and tracked accordingly.
\42\ Some of these costs are typically incurred prior to the
announcement of a merger.
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The costs of obtaining shareholder approval (e.g., costs
of proxy solicitation and special meeting of shareholders);
Professional service fees incurred in the transaction
(e.g., fees for accountants, surveyors, engineers, and legal
consultants); and
[[Page 4236]]
Installation, integration, testing, and set up costs
related to ensuring the operability of facilities subject to the
transaction
23. Moreover, for transactions that are pursued but never completed
(transactions that ultimately fail), their costs should not be
recovered from ratepayers. In addition, we recognize that not every
cost listed above will be found in every transaction.
24. The second category of transaction-related costs relates to
mergers, where, in addition to the transaction-related costs described
above, parties typically also incur costs to integrate individuals and
assets into the acquiring utility and costs to achieve merger
synergies.\43\ These costs, which are sometimes referred to
collectively as ``transition'' costs, are incurred after the
transaction is consummated, often over a period of several years. These
costs include both the internal costs of employees spending time
working on transition issues, and external costs paid to consultants
and advisers to reorganize and consolidate functions of the merging
entities to achieve merger synergies. These costs may also include both
capital items (e.g., a new computer system or software, or costs
incurred to carry out mitigation commitments accepted by the Commission
in approving the transaction to address competition issues, such as the
cost of constructing new transmission lines, etc.) and expense items
(e.g., costs to eliminate redundancies, combine departments, or
maximize contracting efficiencies). We propose that transaction-related
costs incurred to integrate the operations of merging companies
include, but are not limited to, the following:
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\43\ Entities engaging in certain internal corporate
restructuring and reorganizations, unrelated to complying with state
law restructuring requirements, may seek to achieve similar cost
savings or increased efficiencies as merging entities.
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Engineering studies needed both prior to and after closing
the merger;
Severance payments;
Operational integration costs;
Accounting and operating systems integration costs;
Costs to terminate any duplicative leases, contracts, and
operations; and
Financing costs to refinance existing obligations in order
to achieve operational and financial synergies.
25. As above, this list of transition costs is not exhaustive, and
may not include some material costs involved in the integration of two
utilities after a merger. We propose to consider transition costs as
transaction-related costs that should be subject to hold harmless
commitments. We propose to assume that such transaction-related costs
should be covered under hold harmless protection, though applicants
will have an opportunity on a case-by-case basis to show why certain of
those costs should not have to be covered under their hold harmless
commitment based on their particular circumstances. Also, we propose to
consider, on a case-by-case basis, whether other costs not discussed
herein should be subject to hold harmless commitments.
26. Additionally, we note that accounting journal entries related
to a merger transaction may affect expense, asset, liability, or
proprietary capital accounts used in the development of a public
utility's rates. These accounting journal entries may originate from
transaction-related costs recorded as an expense or capitalized as an
asset. Additional accounting journal entries may originate from
goodwill and fair value adjustments related to the purchase price paid
for the acquired company. Merger transactions are accounted for by
applying purchase accounting, which adjusts the assets and liabilities
of the acquired entity to fair value and recognizes goodwill for the
amount paid in excess of fair value.\44\ If the acquired company is a
holding company, purchase accounting also provides for the fair value
adjustments and goodwill to be recorded on the books of some, or all,
of the acquired holding company's subsidiaries, which is commonly
referred to as ``push-down'' accounting. Under appropriate
circumstances, the Commission has allowed the fair value accounting
adjustments and goodwill to be recorded on a public utility's books and
reported in the FERC Form No. 1. Additionally, the Commission has
required public utilities to maintain detailed accounting records and
disclosures associated with such amounts so as to facilitate the
evaluation of the effects of the transaction on common equity and other
accounts in future periods if needed for ratemaking purposes.\45\ We
believe that ratepayers should continue to be protected from adverse
effects on rates stemming from accounting entries recording goodwill
and fair value adjustments on a public utility's books and reported in
FERC Form Nos. 1 or 1-F. This is consistent with our long-standing
policy that acquisition premiums, including goodwill, must be excluded
from jurisdictional rates absent a filing under FPA section 205 and
Commission authorization granting recovery of specific costs.
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\44\ Purchase accounting is also commonly referred to as
acquisition accounting under generally accepted accounting
principles in the United States. Purchase accounting is a formal
accounting method for merger transactions which measures the assets
and liabilities of the acquired entity at fair value and establishes
goodwill for amounts paid in excess of fair value. See Accounting
Standard Codification Section 805-10 (Fin. Accounting Standards Bd.
2014), available at https://asc.fasb.org.
\45\ Michigan Electric Transmission Co., LLC, 116 FERC ] 61,164,
at PP 29-30 (2006); Niagara Mohawk Holdings Inc., 95 FERC ] 61,381,
at 62,415, reh'g denied, 96 FERC ] 61,144 (2001); PPL, 133 FERC ]
61,083 at P 39.
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27. Similarly, in the context of the acquisition of discrete assets
by a utility, under the Commission's accounting regulations and rate
precedent the excess purchase cost of utility plant over its
depreciated original cost is an acquisition premium and is excluded
from recovery through rates unless a showing of offsetting benefits is
demonstrated in an FPA section 205 filing. In the past, applicants have
proposed to include acquisition premiums as transaction-related costs
subject to their proposed hold harmless commitments,\46\ and
intervenors have requested that the Commission require applicants to
include acquisition premiums as transaction-related costs.\47\ The
Commission has not, and does not, consider acquisition premiums to be
part of transaction-related costs. The recovery of acquisition premiums
must be pursued through a separate FPA section 205 filing, whether or
not a hold harmless commitment has been made.\48\ We do not believe
that our proposed treatment of transaction-related costs here requires
a change in the Commission's current practice with respect to
acquisition premiums. We will continue to preclude recovery of
acquisition premiums as part of transaction-related costs, and remind
applicants that a showing of ``specific, measurable, and substantial
benefits to ratepayers'' must be made in a subsequent FPA section 205
proceeding in order to recover an acquisition premium.\49\
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\46\ See, e.g., Florida Power & Light Co., 145 FERC ] 61,018, at
PP 53, 60 (2013); FirstEnergy, 141 FERC ] 61,239 at P 16 n.13.
\47\ See, e.g., Silver Merger Sub, 145 FERC ] 61,261 at PP 61-
62.
\48\ Exelon-Pepco, 149 FERC ] 61,148 at n.180; Silver Merger
Sub, 145 FERC ] 61,261 at P 68; Florida Power & Light, 145 FERC ]
61,018 at P 60; Exelon, 138 FERC ] 61,167 at P 118 (citing Merger
Policy Statement, FERC Stats. & Regs. ] 31,044 at 30,126; Duke
Energy Moss Landing, 83 FERC ] 61,318, reh'g denied, 86 FERC ] at
61,816 (citing Mid-Louisiana Gas, 7 FERC ] 61,316, at 61,682, reh'g
denied, 8 FERC ] 61,227, aff'd sub nom. Transcon. Gas Pipe Line Co.
v. FERC, 652 F.2d 179 (D.C. Cir. 1981)) (rate recovery of an
existing facility is generally limited to the original cost of the
facility)).
\49\ Duke Energy Progress, Inc., 149 FERC ] 61,220, at PP 67-68
(2014) (reviewing Commission precedent requiring that acquisition
adjustments may be recovered if the acquisition provides
``measurable benefits'' that are ``tangible and nonspeculative,''
and allowing recovery of an acquisition adjustment where ``the
acquisition provides specific, measurable, and substantial benefits
to ratepayers'') (internal citations omitted).
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[[Page 4237]]
28. We seek comments from interested persons on these proposals. In
particular, we seek comments on the categories of costs, including
transition costs, that are proposed to be transaction-related costs
which should be subject to hold harmless protection. We also seek
comments on the costs that should not be subject to hold harmless
commitments.
2. Controls and Procedures to Track and Record Costs Related To Hold
Harmless Commitments
29. As noted above, applicants are required to describe in their
FPA section 203 applications how they intend to protect ratepayers from
transaction-related costs, consistent with their obligation to show
that their transaction is consistent with the public interest.\50\ As
contemplated in the Merger Policy Statement, a hold harmless commitment
offered by applicants must be ``enforceable and administratively
manageable.'' \51\ In creating an enforceable and administratively
manageable commitment, applicants should provide assurances that
transaction-related costs will be quantified, documented, and verified,
and may not be recovered from ratepayers until applicants can
demonstrate that savings, if any, offset the transaction-related costs
they seek to recover. To this end, the Commission has required that
applicants offering hold harmless commitments establish internal
controls and/or tracking mechanisms.\52\ We propose additional guidance
below regarding these requirements.
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\50\ See Order No. 642, FERC Stats. & Regs. ] 31,111 at 31,914.
\51\ Merger Policy Statement, FERC Stats. & Regs. ] 31,044 at
30,124.
\52\ See Silver Merger Sub, 145 FERC ] 61,261 at P 78; ITC
Holdings, 143 FERC ] 61,256 at P 168.
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30. First, we propose to clarify that all applicants offering hold
harmless commitments should implement appropriate internal controls and
procedures to ensure the proper identification, accounting, and rate
treatment of all transaction-related costs incurred prior to and
subsequent to the announcement of a proposed transaction, including all
transition costs.
31. Second, we propose that applicants offering hold harmless
commitments should include, as part of their FPA section 203
applications and any separate FPA section 205 filings, a detailed
description of how they define, designate, accrue, and allocate
transaction-related costs, and explain the criteria used to determine
which costs are transaction-related. Applicants should specifically
identify and describe their direct and indirect cost classifications,
and the processes they use to functionalize, classify and allocate
transaction-related costs. In addition, applicants should explain the
types of transaction-related costs that will be recorded on their
public utilities' books; how they determined the portion of these costs
assigned to their public utilities; and how they classify these costs
as non-operating, transmission, distribution, production, and other.
Applicants should also describe their accounting procedures and
practices, and how they maintain the underlying accounting data so that
the allocation of transaction-related costs to the operating and non-
operating accounts of their public utilities is readily available and
easily verifiable.
32. We note that the Commission has, in the past, required
applicants to submit their final accounting entries associated with
transactions within six months of the date that the transaction is
consummated.\53\ As a part of this accounting filing, we propose to
require applicants subject to the Commission's accounting regulations
to provide the accounting entries and amounts related to all
transaction-related costs incurred as of the date of the accounting
filing, along with narrative explanations describing the entries.
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\53\ See, e.g., Central Vermont Public Service Corp., 138 FERC ]
61,161, at P 55 (2012).
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33. We seek comments on these proposals.
3. Time Limits on Hold Harmless Commitments
34. The Commission previously stated in the Merger Policy Statement
that a hold harmless commitment need only protect customers ``for a
significant period of time following the merger.''\54\ However, in
light of the proposed treatment of certain categories of costs
discussed above, the Commission's experience auditing utilities that
have made hold harmless commitments and concerns of protestors in
previous FPA section 203 applications,\55\ we propose to reconsider
whether hold harmless commitments that are limited to five years (or
another specified period) adequately protect ratepayers from an adverse
effect on rates. As part of this reconsideration, we believe that time-
limited hold harmless commitments may not adequately protect ratepayers
from transaction-related costs. Therefore, we propose that there be no
time limit on hold harmless commitments and that costs subject to hold
harmless commitments cannot be recovered from ratepayers at any time
(regardless of when such costs are incurred), absent a showing of
offsetting savings in order to demonstrate no adverse effect on
rates.\56\ This revised approach is consistent with the Merger Policy
Statement, which emphasized that the burden of proof to demonstrate
that customers will be protected should be on applicants, and that
applicants should also bear the risk that benefits will not
materialize.\57\
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\54\ Merger Policy Statement, FERC Stats. & Regs. ] 31,044 at
30,124.
\55\ See, e.g., PNM Resources, 124 FERC ] 61,019 at P 36
(protestor alleging that the five-year limitation on recovery will
simply result in the deferred recovery of transaction-related
costs).
\56\ Evidence of offsetting merger-related savings cannot be
based on estimates or projections of future savings, but must be
based on a demonstration of actual merger-related savings realized
by jurisdictional customers. Exelon-Pepco, 149 FERC ] 61,148 at P
107 (citing Audit Report of National Grid, USA, Docket No. FA09-10-
000 (Feb. 11, 2011) at 55; Ameren Corp., 140 FERC ] 61,034, at PP
36-37 (2012)).
\57\ Merger Policy Statement, FERC Stats. & Regs. ] 31,044 at
30,123.
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35. Specifically, we are concerned that limiting the applicability
of hold harmless commitments to specific time periods may create
incentives for applicants to modify how they would otherwise seek to
recover or account for recovery of certain transaction-related costs
based on the time period. For example, an applicant could try to
include transaction-related costs in formula rates without making a
showing of offsetting savings if the costs, though incurred during the
hold harmless period, do not enter the ratemaking process until after
the hold harmless period expires. Moreover, whether or not any such
incentives exist, certain transaction-related expenditures could be
properly capitalized as an asset during the hold harmless period, but
the recovery of the costs associated with that asset would occur only
as the asset is depreciated over future periods that extend beyond the
hold harmless period.
36. Similarly, limiting the applicability of hold harmless
commitments to specific time periods may incentivize applicants to
delay incurring some types of transaction-related costs until after the
hold harmless period expires. By waiting to incur costs subject to hold
harmless commitments until after the expiration of the hold harmless
period, applicants could attempt to include such costs in their future
formula rate billings without making the showing of
[[Page 4238]]
offsetting savings required to justify recovery of such costs. In this
regard, we believe that the focus of a hold harmless commitment should
be on whether a cost is transaction-related, and not on when the cost
is incurred.
37. We seek comments on this proposal.
4. Transactions Without Adverse Effects on Rates
38. As explained above, applicants under FPA section 203 must
demonstrate that proposed transactions do not have an adverse effect on
rates. In order to make this showing, applicants sometimes propose, and
the Commission has accepted, hold harmless commitments. Pursuant to
these hold harmless commitments, the Commission has held that customers
must be held harmless from transaction-related costs unless and until
applicants demonstrate offsetting transaction-related benefits--whether
quantifiable cost savings or other non-quantifiable benefits.
39. As noted above, some applicants have made hold harmless
commitments in connection with transactions involving the acquisition
or disposition of existing jurisdictional facilities where the
acquiring entity was a traditional franchised utility and entering into
the transaction in order to satisfy resource adequacy requirements at
the state level, to improve system reliability, and/or meet other
regulatory requirements.\58\ However, while customers in these examples
may experience a rate increase due to the costs of the facilities, such
rate effect may not necessarily be adverse because those costs were
incurred to meet a governmental regulatory requirement. The Commission
has held that, as a general matter of policy, ratepayers should bear
the cost of utility service.\59\
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\58\ See, e.g., FirstEnergy, 141 FERC ] 61,239 at PP 1, 16, 27-
30 (accepting a hold harmless commitment in an asset transaction
where generation assets would be turned into assets to support
transmission system upgrades in order to meet needs identified in a
study by PJM Interconnection, L.L.C. following the retirement of
other generating facilities); ITC Midwest, 140 FERC ] 61,125 at P
15; Int'l Transmission Co., 139 FERC ] 61,003, at P 16 (2012).
\59\ See, e.g., Old Dominion Elec. Cooperative and N.C. Elec.
Membership Corp. v. Va. Elec. and Power Co.,146 FERC ] 61,200
(2014).
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40. Accordingly, we propose to clarify that applicants undertaking
certain transactions to fulfill documented utility service needs need
not propose ratepayer protection mechanisms such as a hold harmless
commitment in an application under FPA section 203 in order to show
that the transaction will not have an adverse effect on rates. We
believe that applicants engaging in these types of transactions can
make the requisite showing that, even though the proposed transaction
may have an effect on rates, such effect on rates is not adverse.
41. Examples of the transactions in which applicants may
demonstrate no adverse effect on rates without offering a hold harmless
commitment or other ratepayer protection mechanism would include the
purchase of an existing generating plant or transmission facility that
is needed to serve the acquiring company's customers or forecasted load
within a public utility's existing footprint, in compliance with a
resource planning process, or to meet specified North American Electric
Reliability Corporation (NERC) standards. We propose that applicants
seeking to demonstrate that a transaction will not have an adverse
effect on rates for these or other reasons should provide supporting
evidence and documentation which could include an explanation that the
transaction is intended to serve existing customers or forecasted load
within an existing footprint; to address a state commission order or
directive requiring acquisition of specific assets; to address a need
for a transmission facility, as established through a regional
transmission planning process or as required to satisfy a NERC
standard; or to address other state or federal regulatory requirements.
For instance, in FirstEnergy, applicants requested approval from the
Commission under FPA section 203 for an internal transfer of certain
assets that would address significant reliability concerns, including a
potential NERC violation, at a cost that was two-thirds that of the
next possible solution.\60\ In that order, consistent with existing
policy, the Commission accepted applicants' hold harmless commitment as
it was offered. Under the clarification proposed herein, however, such
a hold harmless commitment would not need to be offered in order to
show that the transaction would not have an adverse effect on rates.
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\60\ FirstEnergy, 141 FERC ] 61,239 at P 5.
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42. Applicants may make a showing that a particular transaction
does not have an adverse effect on rates based on other grounds, but
the burden remains on applicants to show in their application for
authorization under FPA section 203 that the costs, or a portion of the
costs, related to such a transaction should be passed on to ratepayers.
Further, applicants may provide the Commission with information to show
the need to meet other regulatory requirements as a means to
demonstrate that the effect on rates due to the transaction is not
adverse. The Commission will carefully review such a showing before
determining that a proposed transaction without any proposed ratepayer
protection mechanism has no adverse effect on rates. We believe this
approach is consistent with both the Merger Policy Statement and the
Commission's policy that ratepayers should bear the costs of utility
service. We seek comments on this proposal.
III. Comment Procedures
43. We invite comments on this proposed policy statement within
March 30, 2015.
IV. Document Availability
44. 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 5:00 p.m. Eastern time) at 888 First Street NE., Room 2A,
Washington, DC 20426.
45. From the Commission's Home Page on the Internet, this
information is available on eLibrary. The full text of this document is
available on eLibrary in PDF and Microsoft Word format for viewing,
printing, and/or downloading. To access this document in eLibrary, type
the docket number excluding the last three digits of this document in
the docket number field.
46. User assistance is available for eLibrary and the Commission's
Web site during normal business hours from FERC Online Support at (202)
502-6652 (toll free at 1-866-208-3676) or email at
ferconlinesupport@ferc.gov, or the Public Reference Room at (202) 502-
8371, TTY (202) 502-8659. Email the Public Reference Room at
public.referenceroom@ferc.gov.
V. Information Collection Statement
47. The Paperwork Reduction Act (PRA) \61\ requires each federal
agency to seek and obtain Office of Management and Budget (OMB)
approval before undertaking a collection of information directed to ten
or more persons or contained in a rule of general applicability. OMB
regulations require approval of certain information collection
requirements imposed by agency rules.\62\ Upon approval of a
collection(s) of information, OMB will
[[Page 4239]]
assign an OMB control number and an expiration date. Respondents
subject to the filing requirements of an agency rule will not be
penalized for failing to respond to these collections of information
unless the collections of information display a valid OMB control
number.
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\61\ 44 U.S.C. 3501-3520.
\62\ See 5 CFR 1320.
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The following table shows the Commission's estimates for the
additional burden and cost, as contained in the Proposed Policy
Statement:
Revisions, in the Proposed Policy Statement in Docket No. PL15-3
----------------------------------------------------------------------------------------------------------------
Average burden
Number and Number of Total number hours & cost Total burden
Requirements type of responses per of responses per response hours & total
respondents respondent \63\ cost
(1) (2) (1) * (2) = (4) (3) * (4)
(3)
----------------------------------------------------------------------------------------------------------------
FERC-519 (FPA Section 203 18 1 18 20 hrs.; $1,410. 360 hrs.;
Filings). $25,380.
FERC-516 (FPA Section 205, 1 1 \64\ 1 103.26 hrs.; 103.26 hrs.;
Rate and Tariff Filings). $7,279.83. $7,279.83.
FERC-555, Record Retention... 18 1 18 4 hrs.; $282.... 72 hrs.;
$5,076.
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TOTAL.................... .............. .............. .............. ................ 535.26 hrs.;
$37,735.83.
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\63\ The hourly cost figures are based on data for salary plus
benefits. We think industry is similarly situated to FERC in terms
of the average cost of a full time employee, and we are using $70.50
per hour for salary plus benefits.
The estimates for cost per response are derived using the
following formula: Average Burden Hours per Response * $70.50 per
Hour = Average Cost per Response.
\64\ We estimate that one FPA section 205 filing may be made
annually subject to the Proposed Policy Statement.
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Title: FERC-519, Application under Federal Power Act Section 203;
FERC-516, Electric Rate Schedules and Tariff Filings; and FERC-555,
Preservation of Records for Public Utilities and Licensees, Natural Gas
and Oil Pipeline Companies.
Action: Revised Collections of Information.
OMB Control No: 1902-0082 (FERC-519), 1902-0096 (FERC-516), and
1902-0098 (FERC-555).
Respondents: Business or other for profit, and not for profit
institutions.
Frequency of Responses: As needed and ongoing.
Necessity of the Information: To protect ratepayers and to mitigate
possible adverse effects on rates that may result from mergers or
certain other transactions that are subject to section 203 of the FPA,
we propose clarifications and additional information collection
requirements related to hold harmless commitments offered by
applicants.
Internal review: The Commission has reviewed the changes included
in the Proposed Policy Statement and has determined that the additional
reporting and recordkeeping requirements are necessary.
Interested persons may obtain information on the reporting
requirements by contacting: Federal Energy Regulatory Commission, 888
First Street NE., Washington, DC 20426 [Attention: Ellen Brown, Office
of the Executive Director, email: DataClearance@ferc.gov, Phone: (202)
502-8663, fax: (202) 273-0873].
By the Commission. Commissioner Honorable is voting present.
Issued: January 22, 2015.
Nathaniel J. Davis, Sr.,
Deputy Secretary.
[FR Doc. 2015-01423 Filed 1-26-15; 8:45 am]
BILLING CODE 6717-01-P