Policy Statement, 33502-33518 [2016-12426]
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33502
Federal Register / Vol. 81, No. 102 / Thursday, May 26, 2016 / Notices
Dated: May 20, 2016.
Kimberly D. Bose,
Secretary.
SUPPLEMENTARY INFORMATION:
[FR Doc. 2016–12411 Filed 5–25–16; 8:45 am]
BILLING CODE 6717–01–P
DEPARTMENT OF ENERGY
Federal Energy Regulatory
Commission
[Docket No. PL15–3–000]
Policy Statement
Federal Energy Regulatory
Commission, DOE.
ACTION: Policy Statement.
AGENCY:
The Commission adopts the
following policies regarding future
implementation of 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 clarifies
the scope and definition of the costs that
should be subject to hold harmless
commitments. Second, the Commission
adopts the proposal that applicants
offering hold harmless commitments
should implement controls and
procedures to track the costs from
which customers will be held harmless.
The Commission identifies the types of
controls and procedures that applicants
offering hold harmless commitments
should implement. Third, the
Commission declines to adopt its
proposal to no longer accept hold
harmless commitments that are limited
in duration. Fourth, the Commission
clarifies that, in connection with certain
types of FPA section 203 transactions,
an applicant may be able to demonstrate
that the transaction will not have an
adverse effect on rates without the need
to make any hold harmless
commitment.
DATES: This policy statement will
become effective August 24, 2016.
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.
Noah Monick (Legal Information), Office
of the General Counsel, 888 First
Street NE., Washington, DC 20426,
(202) 502–8299, noah.monick@
ferc.gov.
Olga Anguelova (Accounting
Information), Office of Enforcement,
888 First Street NE., Washington, DC
20426, (202) 502–8098,
olga.anguelova@ferc.gov.
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SUMMARY:
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Policy Statement
1. The Commission issues this Policy
Statement to provide guidance regarding
future implementation of 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
2. On January 22, 2015, the
Commission proposed guidance in four
areas pertaining to hold harmless
commitments: (1) The scope and
definition of the costs that should be
subject to hold harmless commitments;
(2) controls and procedures to track the
costs from which customers will be held
harmless; (3) whether to no longer
accept hold harmless commitments that
are limited in duration; and (4)
clarification that, in certain cases, an
applicant may be able to demonstrate
that a proposed transaction will not
have an adverse effect on rates without
the need to make any hold harmless
commitment or offer any other form of
ratepayer protection mechanism.2 We
adopt, clarify, and withdraw, in part,
the proposals in the Proposed Policy
Statement as explained in further detail
below.
3. First, we adopt, as general
guidance, the lists of transaction-related
costs and transition costs that should be
subject to any hold harmless
commitment, as proposed in the
Proposed Policy Statement, and provide
additional clarifications regarding
transition costs, capital costs, labor
costs, and the costs of transactions that
are not consummated. Second, we
adopt, in part, the proposal regarding
establishing controls and procedures for
transaction-related costs subject to any
hold harmless commitment. Third, we
withdraw our proposal to no longer
accept hold harmless commitments that
are limited in duration and clarify that
we will continue to accept hold
harmless commitments that are time
limited to support a Commission
finding that a proposed transaction will
have no adverse effect on rates. Fourth,
we clarify that consistent with the
Merger Policy Statement, a hold
harmless commitment is one of several
forms of ratepayer protection that an
applicant can offer to address any
potential adverse effect on rates, and
that hold harmless commitments may be
unnecessary for some categories of
1 16
U.S.C. 824b (2012).
Statement on Hold Harmless
Commitments, Proposed Policy Statement, 80 FR
4231 (Jan. 27 2015), 150 FERC ¶ 61,031 (2015)
(Proposed Policy Statement).
2 Policy
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transactions if an applicant can
otherwise demonstrate that a proposed
transaction will have no adverse effect
on rates.
I. Background
A. The Commission’s Analysis of
Proposed Transactions Under FPA
Section 203
4. FPA section 203(a)(4) requires the
Commission to approve proposed
dispositions, consolidations,
acquisitions, or changes in control if it
determines that the proposed
transaction will be consistent with the
public interest.3 The Commission’s
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.4 Before
granting authorization, FPA section
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.’’ 5
5. The Proposed Policy Statement
focused on the second prong of the
Commission’s FPA section 203 analysis,
specifically, the effect of a proposed
transaction on rates. As explained in the
Proposed Policy Statement, the
Commission has stated that, when
considering a proposed transaction’s
effect on rates, the Commission’s focus
‘‘is on the effect that a proposed
transaction itself will have on rates,
whether that effect is adverse, and
3 16
U.S.C. 824b(a)(4) (2012).
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).
5 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).
4 See
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whether any adverse effect will be offset
or mitigated by benefits that are likely
to result from the proposed
transaction.’’ 6 As relevant here, the
Commission considers whether the
transaction could result in an adverse
effect on rates to wholesale
requirements or transmission customers.
6. Generally, the Commission may
find that a transaction will have no
adverse effect on rates if an applicant
demonstrates that there is no
mechanism that would enable the
applicant to recover costs related to the
transaction in wholesale power or
transmission rates, either because
existing contracts would not allow such
costs to be passed through to customers
or, in the case of market-based rates, the
transaction can have no adverse impact
on wholesale rates.7 In addition, in
cases in which the proposed transaction
may have an effect on rates, the
Commission may nevertheless be able to
find that the transaction will not have
an adverse effect on rates if the
applicant has demonstrated that there
are offsetting benefits. Finally, the
Commission may base its finding that a
transaction will not have an adverse
effect on rates in whole or in part on an
applicant’s offer of specific ratepayer
protections, such as a hold harmless
commitment.
7. 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.8 Similarly,
if an applicant is unable to pass through
transaction-related costs because its
existing contracts do not allow for such
pass through, then the transaction will
have no adverse effect on rates for such
customers.9 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 benefits to ratepayers that
would offset any potential rate impact.
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6 Proposed
Policy Statement, 150 FERC ¶ 61,031
at P 3 (quoting ITC Midwest LLC, 140 FERC
¶ 61,125, at P 19 (2012)).
7 See Exelon Corp., 149 FERC ¶ 61,148, at P 105
(2014).
8 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.’’).
9 See, e.g., Public Service Co. of New Mexico, 153
FERC ¶ 61,377, at P 39 (2015); NRG Energy
Holdings, Inc., 146 FERC ¶ 61,196, at P 87 (2014).
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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.10
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.11 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.12
8. 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, instead, established
various ratepayer protection
mechanisms that an applicant could
10 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).
11 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 effect will be offset or mitigated by benefits
likely to result from the Proposed Transaction.’’).
12 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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offer to insulate customers from any
possible rate effects attributable to a
proposed transaction.13
9. 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.’’ 14 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.
—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.15
10. 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.16
11. 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
13 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.’’).
14 Id. at 30,124.
15 Id. (footnotes omitted).
16 Id.
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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.17
12. 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.18
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B. Current Commission Practice
Regarding Hold Harmless Commitments
13. 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.19 More
recently, hold harmless commitments
have been made in connection with
transactions by traditional franchised
utilities to acquire jurisdictional
facilities in order to satisfy resource
adequacy requirements at the state level,
to improve system reliability and/or
meet other regulatory requirements.20
14. 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 transaction17 Order No. 642, FERC Stats. & Regs. ¶ 31,111 at
31,914.
18 Id.
19 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).
20 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).
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related savings.21 Thus, hold harmless
commitments typically focus on
preventing recovery in rates of the costs
incurred that are ‘‘related’’ to the
transaction.22 Although the Commission
has relied on commitments to hold
customers harmless from transactionrelated costs to support findings of no
adverse effects on rates, these
commitments generally have not
included detailed definitions of the
transaction-related costs that are
covered by the applicant’s hold
harmless commitment or identified the
categories of savings that the transaction
is expected to produce.23
C. Proposed Policy Statement
15. On January 22, 2015, the
Commission issued a Proposed Policy
Statement on Hold Harmless
Commitments to attempt to address: (1)
Concerns of parties that may believe
hold harmless commitments offer
insufficient protection; (2) instances in
which hold harmless commitments may
not be necessary; and (3) confusion over
the scope and coverage of hold harmless
commitments.
16. The Proposed Policy Statement
focused on the matter of what should
constitute an acceptable hold harmless
commitment to demonstrate that
21 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).
22 An applicant may seek to recover transactionrelated 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. Specifically, an applicant must
submit a new filing under FPA section 205 and a
concurrent informational filing in the relevant FPA
section 203 docket. In the FPA section 205 filing,
an applicant must: (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. Exelon
Corp., 149 FERC ¶ 61,148 at PP 105–107.
23 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.’’).
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ratepayers will be adequately protected
from any rate effects of a transaction.
The Commission identified several
general areas to address including: (1)
The scope and definition of the costs
that should be subject to hold harmless
commitments; (2) controls and
procedures to track the costs from
which customers will be held harmless;
(3) the acceptance of hold harmless
commitments that are limited in
duration; and (4) clarification that, if
applicants are otherwise able to
demonstrate that a proposed transaction
will not have an adverse effect on rates,
then there is no need for applicants to
make hold harmless commitments or
offer other ratepayer protection
mechanisms. The Proposed Policy
Statement did not propose to provide
guidance on what categories of savings
related to a proposed transaction may be
used in a subsequent section 205 filing
to justify recovery of transaction-related
costs. These issues will be considered
on a case-by-case basis.
D. Comments
17. Comments were filed by American
Electric Power Company, Inc. (AEP);
American Public Power Association and
the National Rural Electric Cooperative
Association (collectively, APPA and
NRECA); Edison Electric Institute (EEI);
Electric Power Supply Association
(EPSA); Louisville Gas and Electric
Company and Kentucky Utilities
Company (collectively, Kentucky
Utilities); South Central MCN, LLC and
Midcontinent MCN, LLC (collectively,
Transmission-Only Companies);
Southern Company Services, Inc. as
agent for Alabama Power Company,
Georgia Power Company, Gulf Power
Company, and Mississippi Power
Company (collectively, Southern
Company); Transmission Access Policy
Study Group; and Transmission
Dependent Utility Systems
(Transmission Dependent Utilities).
18. We discuss specific concerns
raised by commenters below.
II. Discussion
A. Scope and Definition of TransactionRelated Costs
1. Proposal
19. The Commission’s experience has
been that applicants generally do not
attempt to define what costs are
subsumed in the term ‘‘transactionrelated costs,’’ and that this may lead to
later disagreement over which costs are
or are not covered by the applicant’s
hold harmless commitment. In the
Proposed Policy Statement, therefore,
the Commission set forth guidelines for
costs subject to hold harmless
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commitments offered by FPA section
203 applicants.24 Specifically, the
Commission proposed that 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
transaction-related savings.25 The
Commission proposed to provide
guidance in the Proposed Policy
Statement regarding how to identify
transaction-related costs, and
acknowledged that attempts to precisely
articulate all such costs are not feasible.
20. First, the Commission proposed
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 26 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; 27
• the costs of obtaining shareholder
approval (e.g., the costs of proxy
solicitation and special meetings of
shareholders);
• professional service fees incurred in
the transaction (e.g., fees for
accountants, surveyors, engineers, and
legal consultants); and
• installation, integration, testing, and
set up costs related to ensuring the
operability of facilities subject to the
transaction.
21. Moreover, the Commission stated
that, for transactions that are pursued
24 See Proposed Policy Statement, 150 FERC
¶ 61,031 at PP 21–28.
25 We expect that applicants proposing to recover
these costs would track and record them pursuant
to the procedures established below. See infra PP
66–69.
26 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.
27 Some of these costs are typically incurred prior
to the announcement of a merger.
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but never completed (transactions that
ultimately fail), transaction-related costs
should not be recovered from
ratepayers. The Commission also
recognized that not every cost listed
above will be found in every
transaction,28 and that the final
determination of what transactionrelated costs may be recovered by
applicants will remain subject to caseby-case analysis.
22. The Commission stated that there
is a second category of transactionrelated costs related to mergers, where,
in addition to the costs to consummate
the transaction described above, parties
typically also incur costs to integrate the
operations and assets of the merging
companies in order to achieve merger
synergies.29 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)
and expense items (e.g., costs to
eliminate redundancies, combine
departments, or maximize contracting
efficiencies). The Commission proposed
that such transition 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.30
23. The Commission stated that this
list of transition costs is not exhaustive,
and may include other categories of
28 Proposed
Policy Statement, 150 FERC ¶ 61,031
at P 23.
29 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.
30 Proposed Policy Statement, 150 FERC ¶ 61,031
at P 24.
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costs incurred or paid in connection
with the integration of two utilities after
a merger. Thus, the Commission
proposed to consider transition costs as
transaction-related costs that should be
subject to hold harmless commitments
on a case-by-case basis and that such
transaction-related costs should be
covered under hold harmless protection,
although noting that applicants will
have an opportunity to show why
certain of those costs should not be
considered transaction-related costs
under their hold harmless commitment
based on their particular circumstances.
Also, the Commission proposed to
consider, on a case-by-case basis,
whether other costs not discussed
herein should be subject to hold
harmless commitments.
24. Additionally, the Commission
noted 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.31
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.32 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
31 Id.
P 26.
32 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), http://asc.fasb.org.
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accounts in future periods if needed for
ratemaking purposes.33 The
Commission stated that it believed 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 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.
25. Finally, the Commission stated, in
the context of FPA section 203
transactions involving the acquisition of
discrete assets (e.g., an existing power
plant) 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.34 The Commission
stated that it has not, and does not,
consider acquisition premiums to be
part of transaction-related costs and, as
such, it did not believe that the
proposed treatment of transactionrelated costs required a change in the
Commission’s current practice with
respect to acquisition premiums.
Therefore, the Commission stated it will
continue to preclude recovery of
acquisition premiums as part of
transaction-related costs, and reminded
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, whether or not a hold
harmless commitment has been made.35
2. Comments
a. General Comments
26. As a general matter, many
commenters support the Commission’s
intent to provide additional guidance
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33 PPL
Corp., 133 FERC ¶ 61,083, at P 39 (2010);
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).
34 Proposed Policy Statement, 150 FERC ¶ 61, 031
at P 27.
35 Id. (citing 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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and clarity to the costs covered by hold
harmless commitments.36 For example,
EEI generally supports the list of costs
that the Commission proposes to
consider as transaction-related costs
covered by a hold harmless commitment
as long as individual applicants
continue to have the flexibility to tailor
what is covered by the hold harmless
commitment to their individual
circumstances.37 EEI also states that the
Commission should explicitly confirm
that hold harmless commitments only
apply to transaction-related costs.38
27. Several commenters support the
full list of transaction-related costs the
Commission enumerated.39 For
example, APPA and NRECA support the
scope of the costs outlined in the
Proposed Policy Statement. APPA and
NRECA list the following benefits likely
to emerge from the Commission’s
clarifications including: (1) Fewer
protests of FPA section 203
applications; (2) more streamlined FPA
section 203 proceedings; (3) improved
ratepayer protections; (4) more
consistent Commission orders; (5) easier
enforcement and administration in
Commission orders; (6) fewer
compliance issues and complaints
regarding cost recovery; (7) greater
assurance of recovery of costs; and (8)
lower financing costs due to more
regulatory certainty.40
28. At the same time, APPA and
NRECA agree that the proposed list of
costs is not definitive or determinative
and that ‘‘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.’’ 41
APPA and NRECA and the
Transmission Dependent Utilities
suggest that applicants should bear the
ultimate burden to show the adequacy
of their hold harmless commitment.42
The Transmission Dependent Utilities
request that the Commission confirm
that, in making its case-by-case
determinations as to additional costs
that will be subject to particular hold
36 See AEP Comments at 2; APPA and NRECA
Comments at 8; EEI Comments at 2; Kentucky
Utilities Comments at 2; Southern Company
Comments at 5; Transmission Access Policy Study
Group Comments at 1;Transmission Dependent
Utilities Comments at 3.
37 EEI Comments at 13.
38 Id.
39 APPA and NRECA Comments at 9;
Transmission Access Policy Study Group
Comments at 3; Transmission Dependent Utilities
Comments at 3–4.
40 APPA and NRECA Comments at 7–8.
41 Id. at 8 (citing Proposed Policy Statement, 150
FERC ¶ 61,031 at P 21). See also Transmission
Dependent Utilities Comments at 4.
42 APPA and NRECA Comments at 9;
Transmission Dependent Utilities Comments at 4.
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harmless commitments, the Commission
will not limit its consideration only to
consummation and transition costs but
it will consider ‘‘any rate increase that
results from a transaction.’’ 43
29. APPA and NRECA also state that
they remain skeptical that utility
mergers benefit customers in the form of
lower wholesale energy prices or lower
transmission rates and assert that
empirical evidence supports their
view.44 They state that the evidence for
the electric industry mergers is mixed at
best and shows that merger benefits do
not pan out and are not passed on to
consumers.45 Therefore, APPA and
NRECA state that the Commission
should be vigilant in enforcing hold
harmless commitments.46
30. Other commenters suggest the
Commission take a different approach
than an enumerated list of transactionrelated and transition costs. For
example, the Kentucky Utilities state
that the Proposed Policy Statement
should utilize ‘‘a more neutral’’
approach in its guidance as to whether
transaction-related costs should be
subject to a hold harmless commitment
and that, if the transaction meets direct
operating or regulatory compliance
needs, any offered hold harmless
commitment should not be assumed to
cover ‘‘nearly all’’ transaction/transition
costs.47 Instead, the Kentucky Utilities
suggest that the Commission should
recognize that covered costs should be
based on a fair and reasonable analysis
of the specific facts or circumstances of
the transaction.48
31. Several commenters support the
Commission’s current policy regarding
treatment of acquisition premiums.49
Finally, Transmission Access Policy
Study Group states that the Commission
should not be dissuaded from adopting
its proposal based on speculative
contentions that these measures will
chill investment.50
b. Transition Costs
32. EEI and AEP request that the
Commission provide greater clarity as to
the scope and definition of transition
43 Transmission
Dependent Utilities Comments at
4.
44 APPA and NRECA Comments at 6–7 (citing
John Kwoka, Merger Control, and Remedies: A
Retrospective Analysis of U.S. Policy 104, 126, 148,
155–56, 231 (2015)).
45 Id.
46 Id. at 7.
47 Kentucky Utilities Comments at 6.
48 Id.
49 APPA and NRECA Comments at 9;
Transmission Access Policy Study Group
Comments at 3–4; Transmission Dependent Utilities
Comments at n.8.
50 Transmission Access Policy Study Group
Comments at 4.
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costs. Both caution that the Proposed
Policy Statement does not distinguish
transition costs from other ongoing
business activities that merging entities
may undergo that are unrelated to the
merger but are also seeking to increase
efficiency.51 EEI notes that the lack of
distinction could lead companies to
postpone otherwise beneficial
investments to avoid those investments
being viewed as transaction-related
costs.52
33. Furthermore, AEP states that over
time the costs of ongoing business as a
public utility and transition costs will
become harder to differentiate,53 and
EEI cautions that a broad definition
risks creating uncertainty about
recovery of prudently-incurred costs.54
Both are specifically concerned that
post-integration engineering studies will
be included as transition costs and they
assert that doing so will discourage
utilities from undertaking studies that
are prudent or beneficial to ratepayers.55
Finally, AEP questions the
Commission’s basis for generally
including transition costs as transactionrelated costs because: (1) Applicants
generally commit to hold customers
harmless from costs directly incurred to
effectuate the transaction and (2) the
Proposed Policy Statement does not cite
a case in which the Commission has
formally adopted a rule requiring the
inclusion of transition costs as
transaction-related costs.56
c. Capital Costs
34. AEP and EEI assert that the costs
of any assets used to provide utility
service on an ongoing basis belong in
rate base and should not be excluded
from the rate base because they may be
a transaction cost.57 Both assert that
capital assets could be built to increase
efficiencies, they will benefit customers,
and the costs should be fully
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51 AEP
Comments at 5–6 (giving the examples of
‘‘engineering studies,’’ ‘‘operating systems
integration costs,’’ and ‘‘operational integration
costs’’); EEI Comments at 13–14 (giving the example
of investments in new information technology
systems, which could be timed coincidently with a
merger and not incurred primarily for the purpose
of integration, and, therefore, should not be
considered subject to a hold harmless commitment).
See also Kentucky Utilities Comments at 7
(cautioning that entities may also engage in nontransaction related refinancing and renegotiation of
vendor contracts that could be considered transition
costs under a broad definition and that only an
incremental or non-utility component of those costs
should be considered a transaction-related cost).
52 EEI Comments at 14.
53 See AEP Comments at 5 (stating that over time
these costs ‘‘will have an increasingly diminished
nexus to the merger itself’’).
54 See EEI Comments at 14.
55 See AEP Comments at 6; EEI Comments at 18.
56 See AEP Comments at 4–5.
57 See id. at 7; EEI Comments at 16.
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recoverable.58 AEP asserts that the test
for whether these capital costs should
be included should be the same as it has
always been: ‘‘are the facilities used and
useful by the utility’s customers and
were the costs of the facilities prudently
incurred in connection with the
provision of utility service.’’ 59 AEP
states that this is consistent with the
general principle that ratepayers should
bear the cost of utility service.60
35. AEP states that making capital
costs subject to a hold harmless
commitment raises further issues of how
the policy will be implemented,
including tracking and recovery of costs
and future interconnection of generating
facilities.61 AEP states that the
Commission has approved settlements
in the past that did not include new
transmission as a transition cost;
instead, the Commission waited to
address it in a future proceeding, which
AEP asserts is the appropriate course for
capital costs.62
36. Furthermore, EEI and AEP state
that hold harmless commitments should
not apply to costs related to new
facilities that are constructed at the
Commission’s direction or approval to
mitigate market power concerns raised
by a merger transaction.63 Both assert
that these assets provide utility service,
and therefore benefits, to customers and
should not be excluded from recovery as
transaction costs just because the assets
were included in mitigation strategies.64
EEI suggests that new facilities that raise
competition or rate concerns may be
addressed through protection
mechanisms other than a hold harmless
commitment and that doing so would
reduce implementation problems
regarding the tracking of costs and
recovery of related costs.65
37. EEI asserts that the Commission
should recognize that costs related to
transactions undertaken as part of
normal operations, such as to align
ownership of an asset with a
maintenance or reliability compliance
obligation, or a transaction involving
acquisition of a small, discrete
transmission asset from a distribution58 See AEP Comments at 7 (giving the example of
new more efficient facilities enabled by the
combined entities’ larger size); EEI Comments at
16–17 (giving the example of a new operations
center).
59 AEP Comments at 7.
60 Id. (citing Proposed Policy Statement, 150
FERC ¶ 61,031 at P 39).
61 Id. at 8, n.1.
62 Id. at 8 (citing Pub. Serv. Co. of Colo., 78 FERC
¶ 61,267, at 62,139 (1997)).
63 See id.; EEI Comments at 11, 17.
64 See AEP Comments at 8; EEI Comments at 16.
65 EEI Comments at 17–18 (suggesting providing
customers with a first call right on the increased
available transmission capacity).
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33507
only entity, should not be subject to
exclusion from rates under a hold
harmless commitment.66
d. Internal Labor Costs
38. AEP, EEI, and Southern Company
all suggest that the Commission should
clarify that internal labor costs that are
subject to a hold harmless commitment
should include only incremental costs
caused by the merger that would not
otherwise be incurred.67 They contend
that, if an employee was already
employed by the merging or acquiring
entities at the time the transaction was
announced, the employee’s salary
should not be treated as a transactionrelated cost because any assignments
related to the transaction would be
performed in addition to other duties,
with no additional compensation.68
Furthermore, EEI contends that the full
cost of an employee’s salary should
continue be fully recoverable because
the salary is prudently incurred to serve
existing customers.69 AEP and Southern
Company assert that excluding nonincremental employee costs would
result in unmerited rate reductions for
customers of merging entities 70 and
state that tracking labor costs will be
burdensome and subject employees to
endless tracking requirements.71
Finally, AEP and Southern Company
both state that the Proposed Policy
Statement cites no precedent to support
including non-incremental internal
labor costs as transaction-related costs
subject to a hold harmless
commitment.72 AEP asserts that
Commission precedent can reasonably
be read to mean that hold harmless
commitments only apply to incremental
internal costs.73
66 Id.
at 17.
AEP Comments at 11; EEI Comments at 15–
16; Southern Company Comments at 6–8. See also
Kentucky Utilities Comments at 7 (cautioning that
hold harmless commitments should only apply to
incremental costs in general).
68 See AEP Comments at 11–12; EEI Comments at
16; Southern Company Comments at 7. Southern
Company recognizes that some employees may
receive additional compensation due to a merger
and does not object to incremental compensation or
the costs of new staff brought on to effectuate the
transaction being treated as incremental transaction
costs. Southern Company Comments at 7–8.
69 EEI Comments at 16.
70 See AEP Comments at 11–12; Southern
Company Comments at 7.
71 See AEP Comments at 13; Southern Company
Comments at 9.
72 AEP Comments at 12; Southern Company
Comments at 8.
73 AEP Comments at 12 (citing Ameren Energy
Generating Co., 145 FERC ¶ 61,034, at P 97 n.99
(2013) (Ameren)).
67 See
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e. Costs of Transactions That Are Not
Completed and Costs Incurred Prior to
Announcement
39. AEP and EEI do not agree with the
Commission’s statement that costs
related to transactions that are never
completed should not be recovered from
ratepayers.74 Both assert that there are
sound business reasons that a firm may
choose not to pursue a transaction and
that excluding recovery of such costs
may improperly punish a firm for
abandoning a transaction that was not
ultimately in the best interest of its
customers or discourage a firm from
exploring transactions.75 EEI asserts that
past Commission policy did not exclude
recovery of such costs and that it is
difficult to ascertain when ‘‘normal
business decisions’’ become
transactions that are being ‘‘pursued.’’ 76
Furthermore, EEI asserts that the
proposal will require tracking of costs
with more specificity than is required
by the Commission’s current accounting
rules.77
40. Southern Company asks for a
clarification of the treatment of costs
related to failed acquisitions. It states
that a clarification that this statement is
applicable only to the merger context
would be useful because transactionrelated costs relating to failed attempts
to acquire specific generation and
transmission facilities to fulfill a need,
such as a need to serve load reliably,
should be recoverable in a utility’s costof-service.78 Southern Company
provides an example of a Request For
Proposals (RFP) for long-term capacity
that results in ten bidders and
negotiations are pursued with two of the
bidders, one offering a 20-year power
purchase agreement and another
offering to sell an existing generating
unit. If negotiations fail with the bidder
that happens to be an existing generator,
Southern states that transaction-related
costs associated with the potential
purchase should not be deemed
‘‘unrecoverable,’’ as the threat of such
an action could skew the RFP results.79
Southern states that such costs are
merely the routine costs of capacity
procurement efforts. Therefore,
74 Id. at 14 (citing Proposed Policy Statement, 150
FERC ¶ 61,031 at P 23); EEI Comments at 15.
75 See AEP Comments at 14–15 (stating that a
utility may not have completed a transaction for
which it incurred preliminary costs: (1) Because the
current owner decides to abandon the transaction;
(2) based on the results of due diligence review; (3)
because it determined a self-built project could be
built at lower cost; or (4) because a lower-cost
option becomes available from another seller); EEI
Comments at 15.
76 EEI Comments at 15.
77 Id.
78 Southern Company Comments at 4–5.
79 Id. at 5.
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Southern Company states that ‘‘[t]he
Commission should clarify that such
costs, to the extent prudently-incurred,
are permitted to be recovered in
wholesale power rates.’’ 80
41. EEI and EPSA contend that the
Commission should not require
inclusion of costs incurred prior to the
announcement of a transaction because
doing so would be premature,
burdensome, and costly.81 EEI states
that long-term strategic planning,
including investigating potential
transactions, is part of the routine daily
operations of any company and should
not be singled out for separate tracking,
which it asserts would be unwieldy and
misleading because staff would
conceivably have to bill their time
separately for every potential project or
transaction they analyze, just in case
that project or transaction came to
fruition.82 EEI states that the burden of
this proposal exceeds the benefits due to
the number of transactions that may be
explored and could provide a
disincentive for companies to
investigate transactions that could
ultimately benefit customers.83
f. Request for Guidance on Savings
42. EEI suggests that the Commission
should provide useful guidance by
adding some discussion to the Policy
Statement regarding the scope and
definition of transaction-related savings
or benefits.84 EEI states that, as part of
this guidance, the Commission should
specify ‘‘that hold harmless costs from
a purchase can be netted against
benefits from a future sale, so that if the
future sale produces net benefits those
can be used to offset the prior
purchase’s costs, thereby reducing or
eliminating costs to be tracked under a
hold harmless commitment for the prior
sale.’’ 85 EEI states that ‘‘[t]his would
allow companies that engage in multiple
transactions over time to ensure that
customers are not charged the costs net
of the benefits of [multiple] transactions
taken together. ’’ 86
3. Commission Determination
43. We adopt in part the policy set
forth in the Proposed Policy Statement
regarding what kinds of costs are
typically transaction-related costs
covered by a hold harmless
80 Id.
81 See EEI Comments at 14; EPSA Comments at
4–6 (‘‘Such a requirement is tantamount to asking
a couple who are only on a second date to pick out
their wedding china pattern.’’).
82 EEI Comments at 14.
83 Id. at 14–15.
84 Id. at 18.
85 Id.
86 Id.
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commitment. As described above,
comments received in response to the
Proposed Policy Statement were
generally supportive of the
Commission’s proposals. Accordingly,
we adopt, and will consider, as general
guidance, the proposed list of
transaction-related costs including:
• 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 87 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; 88
• the costs of obtaining shareholder
approval (e.g., the costs of proxy
solicitation and special meetings of
shareholders);
• professional service fees incurred in
the transaction (e.g., fees for
accountants, surveyors, engineers, and
legal consultants); and
• installation, integration, testing, and
set up costs related to ensuring the
operability of facilities subject to the
transaction.
44. Further, we will adopt, and will
consider, as general guidance, the
proposed subset of transaction-related
costs—transition costs—to include the
following when incurred to integrate
operations:
• 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.
45. We will continue to consider hold
harmless commitments on a case-by87 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.
88 Some of these costs are typically incurred prior
to the announcement of a merger.
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case basis and, as such, applicants may
propose that their hold harmless
commitment cover specific transactionrelated costs in addition to those listed
above, if they can demonstrate that
those certain cost categories may be
properly included or excluded from
their hold harmless commitment
without an adverse effect on rates. The
burden remains on applicants to show
that any offered hold harmless
commitment will meet the
Commission’s standard that the
proposed transaction does not have an
adverse effect on rates.
46. We decline to adopt the
Transmission Dependent Utilities’
request that we consider any rate
increase that results from a transaction
to be a transaction-related cost subject to
an applicant’s hold harmless
commitment. This goes beyond our
standard on adverse effects on rates as
an increase in rates ‘‘can still be
consistent with the public interest if
there are countervailing benefits that
derive from the merger.’’ 89 The
adoption of the Transmission
Dependent Utilities request would
curtail an applicant’s ability to craft
suitable ratepayer protection
mechanisms and limit the Commission’s
ability to authorize transactions where
rate increases are offset by the benefits
of the transaction. We continue to
believe that the guidance related to
transaction-related costs set out in this
Policy Statement does not require a
change in the Commission’s current
practice with respect to acquisition
premiums. Therefore, 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, whether or not a
hold harmless commitment has been
made.
47. To provide further clarity, we
discuss below, in detail, the following
topics: (a) Transition costs; (b) capital
costs; (c) internal labor costs; (d) costs
of transactions that are not completed
and costs incurred prior to
announcement; and (e) requests for
guidance on savings.
a. Transition Costs
48. We will continue to consider
transition costs as a subset of
89 Merger Policy Statement, FERC Stats. & Regs.
¶ 31,044 at 30,114; see, e.g., Bluegrass Generation
Co., L.L.C., 139 FERC ¶ 61,094 at P 41 (finding no
adverse effect on rates because increases in capacity
charges would be offset by a savings in energy
rates).
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transaction-related costs. We are
unconvinced by commenters’ assertions
that the line distinguishing costs
incurred in connection with the normal
business activities of a public utility and
costs incurred to integrate operations
and assets of two previously unaffiliated
companies is difficult to discern or too
burdensome to track. We acknowledge
that the classification of a specific cost
is fact specific and requires judgment in
some cases. Nevertheless, to the extent
there are categories of transition costs
listed herein that applicants do not
consider transaction-related based on
transaction specific circumstances,
applicants are free to demonstrate in the
FPA section 203 proceeding that these
costs should not be considered
transaction-related. We acknowledge
AEP’s concern that the Commission has
not adopted a formal rule regarding the
treatment and definition of transition
costs for purposes of a hold harmless
commitment. However, the Commission
has stated that transaction-related costs,
in the context of a hold harmless
commitment, include transition costs.90
In this Policy Statement, we provide
additional guidance as to what those
costs are. Further, if an applicant
categorizes costs as transaction-related
out of an abundance of caution because
there is uncertainty regarding the nexus
between the cost and the transaction,
the Commission’s policy provides for
the recovery of such costs with a
demonstration of offsetting benefits
should the transaction produce savings
or other synergies.91 This policy should
not discourage beneficial investment by
applicants following completion of a
Commission-authorized transaction, but
rather should encourage documentation
90 See, e.g., Union Power Partners, L.P., 154 FERC
¶ 61,149, at P 63 (2016) (‘‘We interpret Purchaser’s
hold harmless commitment to apply to all
transaction-related costs, including costs related to
consummating the Proposed Transaction and
transition costs, incurred prior to the
consummation of the Proposed Transaction, or in
the five years after the Proposed Transaction’s
consummation.’’) (emphasis added); Exelon Corp.,
138 FERC ¶ 61,167, at P 118 (2012) (‘‘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 related synergies.’’)
(emphasis added).
91 Merger Policy Statement, FERC Stats. & Regs.
¶ 31,044 at 30,123 (noting that an increase in rates
‘‘can be consistent with the public interest if there
are countervailing benefits that derive from the
transaction’’); Pennsylvania Electric Co., 154 FERC
¶ 61,109 at P 48 (‘‘The Commission has established
that, where applicants make hold harmless
commitments in the context of FPA section 203
transactions, in order to recover transaction-related
costs, applicants must demonstrate offsetting
benefits at the time they apply to recover those
costs.’’).
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33509
and tracking of those costs and related
savings.
b. Capital Costs
49. We also clarify that whether or not
capital costs, including capital costs
related to mitigation, should be
considered transaction-related costs that
should be subject to an applicant’s hold
harmless commitment can be
considered on a case-by-case basis
either upfront in the FPA section 203
proceeding, or when an applicant seeks
to recover such costs in an FPA section
205 proceeding.92 In this regard, we
recognize that it would be inappropriate
to adopt a general policy that all capital
costs, including capital costs related to
mitigation, are subject to an applicant’s
hold harmless commitment. Applicants
may incur capital costs for facilities that
are used and useful and provide service
to customers. Conversely, applicants
may also incur capital costs as a direct
requirement of the transaction, which
are not used and useful until a later
point in time. An inquiry into whether
these costs are used and useful or
otherwise prudently incurred would
require a fact specific inquiry, which is
more appropriately handled on a caseby-case basis rather than under a
generally applicable policy.
50. In general, capital costs unrelated
to the transaction are not subject to an
applicant’s hold harmless commitment.
For example, applicants may be able to
demonstrate that certain capital projects
were already in the preliminary stages
of construction or development prior to
the merger announcement and would be
completed whether or not the
transaction is ever consummated. If
adequately documented, we agree that
such capital costs should not be subject
to an applicant’s hold harmless
commitment.
51. As guidance, we are principally
concerned about three categories of
capital costs directly tied to the
transaction that may negatively impact
customer rates: (1) The capital costs of
facilities that are constructed as part of
an applicant’s commitment to mitigate
competition concerns that have been
identified in the Commission’s
authorization; (2) the costs of replacing
any equipment or facility of merging
companies, prior to the end of its useful
life, if such action was the direct
consequence of a transaction; and (3)
the transition costs of integrating the
previously separate systems. Generally,
these costs will be considered
transaction-related costs subject to an
applicant’s hold harmless commitment
92 Proposed Policy Statement, 150 FERC ¶ 61,031
at PP 21–25.
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unless applicants demonstrate offsetting
benefits, or offer ratepayer protections
other than a hold harmless commitment,
in their FPA section 203 application.
52. While applicants may present
their case-by-case analysis when they
seek to recover capital costs in an FPA
section 205 proceeding, we advise
applicants to present a clear case in
their FPA section 203 application to
avoid uncertainty when possible.
Therefore, we advise applicants to
clearly state which known capital costs
related to the transaction will be
included or excluded from a hold
harmless commitment at the time of
their FPA section 203 application.
Further, we advise applicants to clearly
explain a process for determining which
capital costs—that may be unknown at
the time of the application but are
related to the transaction and
determined at a future date—will be
included or excluded from a hold
harmless commitment at the time of
their FPA section 203 application.
Similarly, we advise applicants to
explain the treatment of operation and
maintenance costs incurred in relation
to transaction-related capital costs if the
related plant asset meets the used and
useful criterion in providing utility
service, the Commission may consider
exclusion of such costs from the hold
harmless commitment. A clear
explanation in the FPA section 203
application of the treatment of capital
costs will aid the Commission and third
parties in understanding how a
transaction will not have an adverse
effect on rates both in considering the
application and in future related
proceedings, including any future FPA
section 205 filing to show transactionrelated savings.
53. Finally, we note that capital costs
incurred for documented utility need,
including those for reliability, such as
transmission upgrades, that are related
to a transaction may offer similar
benefits to the transactions discussed
below where a hold harmless
commitment may not be necessary for a
showing of no adverse effect on rates.93
In such cases, applicants may
demonstrate that such capital costs are
not transaction-related costs subject to
their hold harmless commitment by
showing such costs have offsetting
benefits or otherwise showing that these
capital costs have no adverse effect on
rates.
c. Internal Labor Costs
54. We will adopt the proposal to
include both internal and external labor
costs related to a transaction as
93 See
infra PP 92–95.
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transaction-related costs. The
Commission’s concern is that an
applicant will use its existing
employees to both perform normal
utility activities as well as transactionrelated activities and not make a
distinction between the two activities.
As a result, the applicant would recover
transaction-related labor costs without
demonstrating that they are offset by
benefits. Thus, an appropriate labor cost
allocation is needed to ensure the
applicant’s ratepayers are not paying for
transaction-related activities without a
showing of offsetting benefits.
55. The Commission declines to adopt
AEP’s reading of Commission precedent
in Ameren as limiting transactionrelated internal labor costs to
incremental internal labor costs.94 In
Ameren the Commission stated that the
applicant must file its accounting for
any costs incurred to effectuate the
transaction which ‘‘may include, but are
not limited to, internal labor costs, legal,
consulting, and professional services
incurred to effectuate the
transaction.’’ 95 This statement directing
accounting entries to be filed does not
impact the scope of transaction-related
costs subject to the applicant’s hold
harmless commitment, and thus, cannot
be construed to mean that hold harmless
commitments only apply to incremental
labor costs.
56. Commenters’ arguments that labor
costs for existing employees that
perform additional transaction-related
tasks but receive no additional
incremental salary should not be subject
to hold harmless commitment are
misplaced. Imposing additional
transaction-related tasks on existing
employees without additional
compensation does not relieve
applicants from general ratemaking
principles, which require that employee
costs follow the employees’ assigned
tasks.96 Employees’ time should be
allocated in proportion to the tasks
performed. Otherwise, ratepayers will
bear transaction-related costs without
offsetting benefits. Therefore, it is the
Commission’s policy that applicants
support the allocation of the labor costs
for salaried employees who work on
both normal business activities in
providing utility service and on
transaction-related activities with
appropriate supporting documentation
(e.g., approved time sheets detailing the
94 Ameren,
145 FERC ¶ 61,034 at P 97, n.99.
95 Id.
96 See, e.g., Final Audit Report: Audit of Formula
Rates, Transmission Incentives, and Demand
Response at Baltimore Gas and Electric Company,
Docket No. FA13–13–000 at 17–18 (2015) (noting
inappropriate recovery of internal labor costs in
transmission rates).
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allocation of actual time worked on
utility, transaction, and other non-utility
activities). To the extent applicants are
unable or unwilling to track internal
employees time related to a transaction,
applicants should consider and propose
other ratepayer protection mechanisms.
d. Costs of Transactions That Are Not
Completed and Costs Incurred Prior to
Announcement
57. As for costs related to transactions
that are pursued but never completed,
we clarify our statement that such
‘‘costs should not be recovered from
ratepayers.’’ 97 Instead those costs are
subject to the Commission’s general
rate-making principles under FPA
sections 205 and 206 and the
Commission’s accounting precedent.98
With respect to EEI’s comment
regarding activities in the early stages of
a transaction that are undertaken in the
course of normal business, we note that
only those activities related to the
transaction for which the hold harmless
commitment was made necessitate
separate tracking. In terms of tracking
expenses prior to the announcement of
a transaction, we note that a hold
harmless commitment only applies
where the Commission issues an order
accepting such a commitment. Expenses
for transactions that do not reach that
point are subject to the Commission’s
ordinary ratemaking principles.
Moreover, if a transaction that is the
subject of a hold harmless commitment
is not consummated, there would
presumably never be any transactionrelated savings that could offset
transaction-related costs.
58. In addition, we clarify that while
all costs related to the acquisition of an
existing facility required to serve load or
transmission customers, including costs
associated with bids for other facilities
that were incurred as a part of routine
capacity procurement efforts, will be
considered transaction-related costs if
an applicant makes a hold harmless
commitment, as we have noted in the
preceding paragraphs, capital costs of
facilities that are used and useful and
provide service to customers would
normally be recoverable in rates under
general ratemaking principles, unless
the capital costs fall within one of the
categories discussed above (e.g., capital
costs related to mitigation measures), in
which case they would be subject to the
97 Proposed Policy Statement, 150 FERC ¶ 61,031
at P 23.
98 The costs incurred to consummate a merger
transaction are considered to be nonoperational in
nature and, to the extent recorded on a
jurisdictional entity’s books, should be included in
a non-operating expense account—Account 426.5,
Other Deductions. 18 CFR pt. 101 (2015).
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applicant’s hold harmless commitment.
Moreover, under our accounting rules,
when electric plant constituting an
operating system is purchased, the costs
of acquisition, including expenses
incidental thereto, are properly
includible in electric plant and charged
to Account 102, Electric Plant
Purchased or Sold.99 Thus, in the
situation Southern Company posits, the
real question is what portion of the costs
associated with an RFP process,
including costs incurred pursuing bids
that are ultimately unsuccessful, would
be properly includible in the costs of the
facility that is acquired. To the extent all
or some portion of those costs are
included in the cost of the facility that
is acquired, and assuming that the
facility is used and useful and provides
service to customers, they would
normally be recoverable as capital costs
associated with that facility and,
therefore, not be subject to any hold
harmless commitment that is made.
e. Request for Guidance on Savings
59. Regarding transaction-related
savings, we decline to allow the netting
of benefits from future transactions
against the transaction-related costs of
past transactions, as EEI suggests. The
Commission has previously confined its
analysis regarding the effect on rates to
the transaction that is the subject of the
application.100 Applicants are not
required to create separate records to
measure savings if they do not intend to
recover transaction-related costs from
ratepayers. Furthermore, we decline to
speculate on the scope and definition of
transaction-related savings that
applicants may offer in a subsequent
FPA section 205 filing in order to
recover transaction-related costs
covered by a hold harmless commitment
given that we have received a limited
number of FPA section 205 filings
seeking to recover transaction-related
costs by showing offsetting savings.
Applicants may choose the most
appropriate method to calculate savings
so long as the savings can be shown to
result from the transaction. We will
review these filings on a case-by-case
basis.
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B. Controls and Procedures To Track
and Record Costs Related to Hold
Harmless Commitments
1. Proposal
60. In the Proposed Policy Statement
the Commission proposed to clarify that
99 18
CFR pt. 101 (2015).
BHE Holdings, Inc., 133 FERC ¶ 61,231 at
P 40 (focusing on ‘‘costs related to the instant
transaction for purposes of the Commission’s
section 203 analysis’’).
100 See
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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.101
61. Specifically, the Commission
noted that 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.102 As
contemplated in the Merger Policy
Statement, a hold harmless commitment
offered by applicants must be
‘‘enforceable and administratively
manageable.’’ 103 Therefore the
Commission proposed that 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.104 In the Proposed Policy
Statement, the Commission proposed
the following additional guidance
regarding these requirements.
62. First, the Commission proposed 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.105
63. Second, the Commission proposed
that applicants offering hold harmless
commitments should include, as part of
their FPA section 203 applications and
any separate FPA section 205 filings
seeking to recover transaction-related
101 Proposed Policy Statement, 150 FERC
¶ 61,031 at P 29.
102 See Order No. 642, FERC Stats. & Regs.
¶ 31,111 at 31,914.
103 Merger Policy Statement, FERC Stats. & Regs.
¶ 31,044 at 30,124.
104 See Silver Merger Sub, Inc., 145 FERC
¶ 61,261, at P 78 (2013); ITC Holdings Corp., 143
FERC ¶ 61,256, at P 168 (2013).
105 Proposed Policy Statement, 150 FERC
¶ 61,031 at P 30.
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33511
costs, 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.106
64. The Commission noted that it had,
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.107 The Commission
proposed to require applicants subject
to the Commission’s accounting
regulations to provide, as a part of this
accounting filing, the accounting entries
and amounts related to all transactionrelated costs incurred as of the date of
the accounting filing, along with
narrative explanations describing the
entries.108
2. Comments
65. EEI requests clarifications and
changes related to the Commission’s
proposed accounting treatment. EEI
encourages the Commission to have
applicants ‘‘simply identify succinctly
how they plan to categorize and handle
the costs, in conformance with the
Uniform System of Accounts . . . .’’ 109
EEI asserts that applicants should be
able to rely on the accounting systems
they already have in place without
having to explain the design and use of
those systems, as their accounting
practices are already overseen by the
Commission.110 EEI asserts the
Commission should specify that if
transaction costs are reasonably
projected to be minor or below a certain
106 Id.
P 31.
e.g., Central Vermont Public Service
Corp., 138 FERC ¶ 61,161, at P 55 (2012).
108 Proposed Policy Statement, 150 FERC
¶ 61,031 at P 32.
109 EEI Comments at 19.
110 Id.
107 See,
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threshold, the costs need not be tracked,
as the cost of tracking them would
exceed the benefit.111 EEI also
encourages the Commission to extend
the deadline for submitting accounting
to one year rather than six months as the
information may take more than six
months to be verified and the extra time
would lead to a more complete filing.112
66. Noting that the Commission seeks
to require applicants to track and record
costs that may be incurred even prior to
a public announcement of any proposed
transaction, EPSA states it does not
understand how the Commission can
recognize that it can be challenging to
accurately track, record and categorize
all transaction-related costs but also
require applicants to keep accurate
accounting of such information,
particularly in the early stages of a
negotiation.113 EPSA states the
proposed requirement is not only
premature, but extremely difficult to
implement, administratively
burdensome, and costly.114 EPSA states
that this requirement is more
appropriate after a public
announcement of a transaction.
Therefore, EPSA requests that the
Commission not require tracking of
transaction-related costs incurred prior
to the announcement of a transaction.115
67. APPA and NRECA, Transmission
Access Policy Study Group, and
Transmission Dependent Utilities
support the Commission’s proposed
tracking requirements.116 Specifically,
APPA and NRECA support the
Commission’s proposal that the internal
controls and procedures should be
detailed in the FPA section 203
applications and any related FPA
section 205 rate filing.117 Transmission
Access Policy Study Group states that
internal controls are both feasible and
essential and are good housekeeping,
consistent with the practice of regulated
utilities to operate pursuant to systems
of accounts and fundamental to
honoring hold harmless
commitments.118 Transmission
Dependent Utilities support the tracking
requirements because the clarifications
will help ensure that transaction-related
costs will be quantified, documented,
and verified and ensure that transaction111 Id.
112 Id.
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113 EPSA
Comments at 6.
114 Id.
115 Id.
116 APPA and NRECA Comments at 10–11;
Transmission Access Policy Study Group
Comments at 1, 4; Transmission Dependent Utilities
Comments at 7.
117 APPA and NRECA Comments at 10.
118 Transmission Access Policy Study Group
Comments at 4.
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related costs will not be recovered from
ratepayers until applicants demonstrate
offsetting savings.119 Transmission
Dependent Utilities assert that these
requirements will result in fewer
compliance difficulties, will reduce
disputes about cost recovery, and will
simplify the Commission’s
administration of hold harmless
conditions by providing a clearer
picture of each public utility’s
compliance efforts.120
3. Commission Determination
68. We will withdraw the
Commission’s proposal requiring
applicants to describe their accounting
procedures and practices, and how they
maintain the underlying accounting
data for the transaction. As EEI
suggested, applicants should be able to
rely on their accounting systems
without having to explain the design
and use of those systems in the FPA
section 203 filing. However, we will
adopt the Commission’s proposal
regarding establishing controls and
procedures for transaction-related costs
subject to the hold harmless
commitment, regardless of the projected
amount of the costs of the transaction.
We will also adopt the proposal that
applicants offering hold harmless
commitments should include in the
FPA section 203 application a
description of how they define,
designate, accrue, and allocate
transaction-related costs. Applicants
should also explain the criteria used to
determine which costs are transactionrelated.
69. Applicants that make a hold
harmless commitment must make clear,
at minimum, what they are committing
to and have the ability to record and
track such costs. A well-documented
methodology and system to account for
such costs also facilitates uniformity in
practice and reduces confusion in how
the hold harmless commitments are
applied. Additionally, if applicants
choose to seek recovery of those costs in
a separate FPA section 205 filing, proper
documentation is necessary for
determining the appropriateness of the
recovery. Moreover, proper
documentation of these costs will
provide for the avoidance of ongoing
litigation which has been voiced as a
concern by commenters.121
70. We will continue to require that
applicants submit their final accounting
entries associated with transactions
119 Transmission
120 Id.
121 See, e.g., AEP Comments at 10; EEI Comments
at 7, 10; Southern Company Comments at 9, 12.
Frm 00054
C. Time Limits on Hold Harmless
Commitments
1. Proposed Policy Statement
Recommendations
72. The Commission proposed to
reconsider whether a hold harmless
commitment that is limited to five years
or another specified time period
adequately protects ratepayers from an
adverse effect on rates.122 Specifically,
in light of the proposed treatment of
certain categories of costs as transactionrelated for purposes of any hold
harmless commitment, the
Commission’s experience auditing
utilities that have made hold harmless
commitments, and concerns of
protestors in previous FPA section 203
applications,123 the Commission
Dependent Utilities Comments
at 7.
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within six months of the date that the
transaction is consummated. We will
also adopt the Commission’s proposal to
require applicants subject to the
Commission’s accounting regulations to
provide, as a part of this accounting
filing, the amounts related to all
transaction-related costs incurred as of
the date of the accounting filing. The
final accounting entries and amounts
related to transaction-related costs allow
the Commission to scrutinize how
applicants record the transaction at the
time of consummation and apply the
criteria to identify transaction-related
costs as of the accounting filing date.
The filing does not necessarily reflect all
transaction-related costs as they
typically continue to be incurred well
after the merger. Given that applicants
should have controls and procedures in
place to track these costs in a timely
manner, six months should be adequate
for filing the accounting entries. If
additional time is needed, applicants
may file a request for extension
including the reasons for the requested
additional time.
71. We clarify that irrespective of the
date that a transaction is announced,
companies required to follow the
Commission’s accounting regulations
must have appropriate controls and
procedures in place to track transactionrelated costs to ensure compliance.
Specifically, the Commission’s longstanding policy is that costs incurred to
effectuate a merger are non-operating in
nature, and they should be recorded in
Account 426.5, Other Deductions.
Accordingly, absent a change in the
Commission’s accounting requirements,
these costs should be tracked when they
are incurred.
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122 Proposed Policy Statement, 150 FERC ¶ 61,031
at P 34.
123 See, e.g., PNM Resources, Inc., 124 FERC
¶ 61,019, at P 36 (2008) (protestor alleging that the
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proposed to reconsider whether hold
harmless commitments that are limited
to five years (or another specified
period) adequately protect ratepayers
from any adverse effect on rates. As part
of this reconsideration, the Commission
stated that it believed that time-limited
hold harmless commitments may not
adequately protect ratepayers from
transaction-related costs. Therefore, the
Commission proposed 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.124 The
Commission stated that 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.125
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2. Comments
73. Many commenters suggest that the
Commission should continue to accept
time limited hold harmless
commitments.126 They contend that the
Commission has not shown that there is
any evidence that applicants have
purposely deferred costs past the end of
the five-year period or otherwise evaded
review that requires a change in current
policy.127 Furthermore, they assert that,
if the Commission is concerned that
time-limited hold harmless
commitments may lead an applicant to
delay incurring or recovering a
transaction’s costs until after the hold
harmless period expires, the
Commission already has tools and
protections to adequately protect
customers.128 Furthermore, AEP states
five-year limitation on recovery will simply result
in the deferred recovery of transaction-related
costs).
124 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 Corp.,
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)).
125 Merger Policy Statement, FERC Stats. & Regs.
¶ 31,044 at 30,123.
126 See EEI Comments at 6; EPSA Comments at 4;
Kentucky Utilities Comments at 3–4; Southern
Company Comments at 9.
127 See generally AEP Comments at 8–9; EEI
Comments at 6; Southern Company Comments at
9–10.
128 See generally AEP Comments at 9 (asserting
current accounting, auditing, and ratemaking
practices are adequate); EEI Comments at 9–10
(stating that current accounting rules address the
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that the change in policy would be a
reversal of the Merger Policy Statement
and put the Commission back in the
position of weighing the costs and
benefits of mergers.129 Commenters
contend that the Commission should
not adopt this policy, which will
unnecessarily burden applicants at the
expense of transactions that benefit
customers.130 They generally assert that
the change in policy will discourage
mergers, which they believe will harm
customers and deter infrastructure
investment.131
74. Commenters explain that the
Commission’s concerns are unwarranted
because it is in the applicant’s financial
interest to complete integration as soon
as possible to ensure a quick transition
and capture synergies.132 Furthermore,
they assert that the integration of the
operations of merging utilities generally
occurs in the first few years after a
merger.133 They also assert that the costs
associated with tracking these costs
indefinitely will be burdensome and
significant.134 Commenters caution that
an indefinite hold harmless
commitment could incentivize entities
to not pursue elimination of duplicative
services and costs, which would reduce
benefits to ratepayers, because the costs
of such activity may be considered
transition costs in perpetuity and,
therefore, be unrecoverable.135
75. Commenters also state that any
change to the Commission’s practice of
accepting hold harmless commitments
that are limited in duration will
undermine regulatory certainty.136 They
state that without a time limit the
Commission creates the unnecessary
risk of future litigation in which there
may be attempts by protesters or the
Commission to link future costs back to
a previous transaction, no matter how
unrelated to a transaction, and that any
entity that had a merger or transaction
would then need to disprove that
assertion.137 Commenters assert that
Commission’s concerns regarding deferral of
recovery); Southern Company Comments at 11
(suggesting that the Commission’s policy related to
the recovery of regulatory assets is sufficient).
129 See AEP Comments at 11.
130 See EEI Comments at 6; EPSA Comments at 4.
131 See EEI Comments at 10–11; EPSA Comments
at 4.
132 See generally AEP Comments at 9; EEI
Comments at 8, 10.
133 AEP Comments at 9; Southern Company at
10–11.
134 EPSA Comments at 4; Southern Company
Comments at 12 (stating that in addition to the cost
of new systems, all current and future employees
would have to be trained to recognize and track the
costs).
135 See EEI Comments at 8; EPSA Comments at 5.
136 EEI Comments at 6.
137 See AEP Comments at 10 (worrying that an
open-ended commitment will spawn multiple look
PO 00000
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33513
without regulatory certainty investors
will be unwilling to commit funds or
will increase the costs of the funds they
do commit, which will have an adverse
effect on the costs and on the viability
of transactions and utility valuations.138
As to transaction-related capital costs,
Southern Company also asserts that one
would expect that at some point in time,
used and useful investments should and
would be included in rates, and if the
Commission wishes to exclude certain
assets from recovery it should use a
more targeted approach than extending
the hold harmless period for all
transaction-related costs.139 Others state
that a transaction must be considered
closed at some point in order for there
to be closure for both accounting and
ratemaking purposes 140 and requiring
an open ended hold harmless
commitment could deter ‘‘beneficial
consolidation.’’ 141 EEI states that the
Commission’s current standard provides
ample protection for customers while
also providing regulatory certainty,
which is essential in a constantly
changing industry.142
76. Commenters further explain that it
will be difficult to determine if costs are
transaction-related the further in time
entities get from the transaction because
of intervening events 143 and a changing
regulatory and technological
environment,144 and that it will be
difficult to untangle these costs in rates
from the entity’s general ongoing
operations.145 They caution that the
further in time one gets from a
transaction the more difficult it will
become to determine what is and is not
a transition cost.146 AEP suggests that
the Commission could remedy this
problem either by accepting timelimited hold harmless provisions or
limiting the scope of transition costs to
the activities required to integrate the
companies once their merger is
consummated.147
77. AEP also notes that a hold
harmless commitment with no limit on
duration raises questions like: (1) How
back proceedings); EEI Comments at 7, 10 (asserting
that this will create an inappropriate evidentiary
burden on applicants that may also be impossible
to overcome); Kentucky Utilities Comments at 3;
Southern Company Comments at 10, 12–13.
138 See AEP Comments at 10, n.3; EEI Comments
at 7.
139 See Southern Company Comments at 11–12.
140 See AEP Comments at 10; Southern Company
Comments at 12.
141 Southern Company Comments at 12.
142 EEI Comments at 7.
143 See id. at 6.
144 See Kentucky Utilities Comments at 3.
145 See AEP Comments at 10; EEI Comments at 7.
146 See Kentucky Utilities Comments at 3;
Southern Company Comments at 13.
147 AEP Comments at 10.
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do you measure how much of a cost
incurred 15 years after a merger was
attributable to merger ‘‘integration’’ as
opposed to normal utility operations; (2)
if merger ‘‘integration’’ costs can still be
incurred decades after the transaction
closed, can merger ‘‘savings’’ still be
accruing over that same period; (3) how
do you measure those savings; and (4)
would companies need to maintain
shadow books for the unmerged
companies for the rest of time to prove
the savings that resulted from the
merger? 148
78. EEI asserts that a time-limited
commitment is consistent with U.S.
generally accepted accounting
principles, which recognize that
transactions end when all costs, assets,
and liabilities have been recorded.149
EEI states that the Commission should
recognize that there is a finite transition
period following a transaction and five
years is a reasonable time frame in
which one could expect that a company
would complete its transition and
integration.150 EEI asserts that the
Commission should also recognize a
commitment of less than five years may
be appropriate for ‘‘relatively minor’’
transactions and that an indefinite hold
harmless commitment is simply
unreasonable.151
79. APPA and NRECA, Transmission
Access Policy Study Group, and the
Transmission Dependent Utilities
support the Commission’s proposal not
to accept time-limited hold harmless
commitments.152 These commenters
state that the Commission should focus
on whether a cost is transaction-related,
not on when it was incurred or when
recovery is sought.153
80. APPA and NRECA state that
unlimited duration hold harmless
commitments will not impose a
significant additional burden on
applicants because most transition costs
are incurred in the first few years after
the merger is consummated.154
Furthermore, to the extent that a longer
commitment may lead to an additional
burden on applicants, APPA and
NRECA state that this burden is
reasonable because it would mean that
transaction-related costs continued to be
incurred and offsetting merger savings
148 Id.
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149 EEI
150 Id.
Comments at 8.
at 9.
151 Id.
152 APPA and NRECA Comments at 11;
Transmission Access Policy Study Group
Comments at 2; Transmission Dependent Utilities
Comments at 8.
153 APPA and NRECA Comments at 11;
Transmission Dependent Utilities Comments at
7–8.
154 APPA and NRECA Comments at 11.
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failed to materialize.155 Transmission
Dependent Utilities state that timelimited commitments provide
incentives for utilities to make
inefficient spending and rate recovery
decisions while failing to provide full
protection to ratepayers.156 Therefore,
Transmission Dependent Utilities assert
that eliminating any time limit on a
hold harmless commitment is in the
public interest because it will bring
greater certainty to the electric markets
regarding costs subject to recovery in
the future.157
3. Commission Determination
81. After careful consideration of the
comments, we withdraw our proposal to
no longer accept time-limited hold
harmless commitments and will
continue to accept hold harmless
commitments that are time limited as a
method to show no adverse effect on
rates. We agree with certain commenters
that there is a tradeoff between the
articulation of transaction-related costs
adopted in section II.A above 158 and the
duration of a hold harmless
commitment, as there is less of a nexus
between activities that are identified as
transition costs and the transaction as
time passes. While the Commission
intends to ensure that ratepayers are
adequately protected from potential
adverse effects on rates, a hold harmless
commitment must also be
administratively manageable.
82. As some commenters note, as time
passes, it becomes more difficult to
distinguish actions taken, and related
expenditures, to integrate the operations
and assets of newly-merged companies
from the conduct of an applicant’s
normal business activities, and it
becomes more difficult to determine
which costs share a nexus with the
transaction and should thus be subject
to an offered hold harmless
commitment. Future actions, such as
engineering studies, taken in the normal
course of business need to be
distinguished from those undertaken to
effectuate the transaction for the
duration of the hold harmless
commitment. If we were to adopt the
proposal to no longer accept timelimited hold harmless commitments,
applicants may be required to make
these distinctions years removed from a
transaction. As both commenters who
support and oppose time limits on any
hold harmless commitment recognize,
the majority of these costs are incurred
155 Id.
156 Transmission
Dependent Utilities Comments
at 7.
157 Id.
158 See
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Frm 00056
Fmt 4703
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in the first five years after the closing of
the transaction. At this time we do not
find that there is sufficient evidence to
conclude that applicants are indeed
incurring substantial transaction-related
costs after five years.
83. Therefore, we find that the
articulation of transaction-related costs
set forth in section II.A above, paired
with the incentive of applicants to
achieve integration and transaction
related synergies as soon as possible,
adequately protect ratepayers while
providing applicants with regulatory
certainty that a time-limited hold
harmless commitment will not result in
endless litigation regarding costs
incurred after a transaction is
consummated. We intend hold harmless
commitments to avoid protracted
litigation while at the same time
protecting customers from the uncertain
costs incurred to complete transactions.
84. In response to EEI’s view that a
commitment of less than five years may
be appropriate for what EEI terms
‘‘relatively minor’’ transactions, as we
stated in the Proposed Policy Statement,
the Commission has found 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.’’ 159 While applicants may
nevertheless propose hold harmless
commitments of any number of years,
we caution that applicants retain the
burden of demonstrating that proposed
ratepayer protections are adequate.160
Applicants must adequately support
and demonstrate that any commitment
they propose provides adequate
ratepayer protection when compared to
other ratepayer protection mechanisms,
including the offer of a five year hold
harmless period that has become the
norm in the industry.
D. Transactions Without an Adverse
Effect on Rates
1. Proposed Policy Statement
Recommendations
85. The Commission noted in the
Proposed Policy Statement that some
applicants have made hold harmless
commitments in connection with
159 Proposed Policy Statement, 150 FERC ¶ 61,031
at P 12 (citing 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. Id. n.21 (citing 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)).
160 Order No. 642, FERC Stats. & Regs. ¶ 31,111
at 31,914.
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transactions involving the acquisition of
existing jurisdictional facilities where
the acquiring entity is a traditional
franchised utility and is 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.161 Furthermore, the
Commission noted that, 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 stated that it has held
that, as a general matter of policy,
ratepayers should bear the cost of utility
service.162
86. The Commission proposed to
clarify that applicants undertaking
certain types of transactions to fulfill
documented utility service needs may
not need to offer a hold harmless
commitment in order to show that the
transaction does not have an adverse
effect on rates.163 Specifically, the
Commission stated that it believed 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.
87. The Commission noted several
examples of transactions in which
applicants may demonstrate no adverse
effect on rates without offering a hold
harmless commitment or other ratepayer
protection mechanism, including 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. The
Commission proposed 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
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161 Proposed
Policy Statement, 150 FERC ¶ 61,031
at P 39. 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.
162 See, e.g., Old Dominion Elec. Cooperative and
N.C. Elec. Membership Corp. v. Va. Elec. and Power
Co.,146 FERC ¶ 61,200 (2014).
163 Proposed Policy Statement, 150 FERC ¶ 61,031
at P 40.
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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.164 Under the clarification
proposed therein, however, the
Commission stated that 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.
88. The Commission proposed that
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, the
Commission proposed that 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 proposed that
it would carefully review such a
showing before determining that a
proposed transaction without any
proposed ratepayer protection
mechanism has no adverse effect on
rates.
2. Comments
89. Several commenters support the
Commission’s proposal that hold
harmless commitments may not be
necessary for certain categories of
transactions when undertaken to
provide utility service for which
ratepayers should bear cost
responsibility.165 Several parties
recommend that the Commission more
directly and clearly acknowledge that
hold harmless commitments are not
always necessary and that the Proposed
Policy Statement does not mandate their
inclusion in every FPA section 203
application.166 EEI states that each
transaction is unique and suggests that
the need for and role of a hold harmless
164 Id.
P 41.
AEP Comments at 13; EEI Comments at
12; EPSA Comments at 3; Kentucky Utilities
Comments at 4; Southern Company Comments at 3;
Transmission-Only Companies Comments at 1.
166 See EEI Comments at 11 (contending that it is
not clear how the different sections of the document
interact); Kentucky Utilities Comments at 5.
165 See
PO 00000
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Fmt 4703
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33515
commitment will vary.167 Additionally,
commenters request that the
Commission clarify that the
circumstances articulated in the
Proposed Policy Statement for when a
hold harmless commitment may not be
necessary are not exclusive or
comprehensive,168 and that the
examples given were intended to be
illustrative and will be interpreted
broadly.169
90. Other commenters request that the
Commission clarify that it does not
intend to identify certain categories of
transactions that do not have an adverse
effect on rates or transactions that do
not require ratepayer protection
mechanisms.170 These commenters seek
confirmation that the Commission is
stating only that applicants may make a
showing for any FPA section 203
transaction that there is no adverse
effect on rates based on case-specific
evidence, and as such those applicants
need not offer a hold harmless
commitment if they have otherwise met
their burden of proof to make such a
demonstration.171 Furthermore, APPA
and NRECA urge the Commission to
proceed with caution and avoid
reducing the requirement of showing no
adverse effect on rates to an exercise
where any claimed, non-quantifiable
benefits from a transaction are
determined to outweigh rate
increases.172
91. Similarly, the Transmission
Dependent Utilities also urge the
Commission not to exempt certain
transactions from the requirement to
adopt ratepayer protection mechanisms
and state that the proposal undercuts
the other ratepayer protection
mechanisms proposed in the Proposed
Policy Statement.173 They assert that the
Commission should not adopt the
proposal because: (1) Practically any
asset transaction could meet the
Commission’s proposed standard as
nearly any such transaction could be
deemed necessary to serve existing or
forecasted load or to satisfy at least one
federal or state regulatory requirement;
(2) wholesale customers may derive no
167 EEI Comments at 11–12 (suggesting additional
exemptions such as a transaction where the benefits
outweigh any potential negative effects, or those
negative effects may be de minimis).
168 EPSA Comments at 3; Southern Company
Comments at 4.
169 Kentucky Utilities Comments at 5.
170 See APPA and NRECA Comments at 12;
Transmission Access Policy Study Group
Comments at 6.
171 See APPA and NRECA Comments at 12–13;
Transmission Access Policy Study Group
Comments at 8–9.
172 APPA and NRECA Comments at 14.
173 See Transmission Dependent Utilities
Comments at 8–9.
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benefits from transactions that satisfy
state resource adequacy requirements;
(3) FPA section 215 174 prohibits
reliability standards from including any
requirement to enlarge such facilities or
to construct new transmission capacity
or generation capacity and therefore, the
Commission should not grant a special
exemption from adopting ratepayer
protection mechanisms to utilities that
purchase facilities in order to comply
with NERC standards; and (4) the
premise that an increase in rates may
not be adverse because of the reason for
the transaction is flawed.175 The
Transmission Dependent Utilities state
that no such exemption is needed
because to the extent that such a
transaction provides for benefits to
wholesale ratepayers, applicants should
be able to demonstrate such benefits or
savings exceed the transaction-related
costs.176
92. Some commenters also identified
other types of transactions that may
have a rate impact, but not one that is
adverse, and therefore should not
require any additional ratepayer
protection. These commenters request
that the Commission clarify that, in
addition to transactions involving
purchases of existing generation
facilities, a hold harmless commitment
may also be unnecessary in connection
with: (1) Purchases of existing
transmission facilities that provide
benefits, such as added capacity or
increased reliability; 177 (2) transactions
consummated under a blanket
authorization; 178 (3) transactions that
involve necessary contract rights or
other jurisdictional assets, rather than
physical facilities; 179 (4) transactions
undertaken in order to comply with any
other federal or state regulatory
framework; 180 (5) transactions with ‘‘no
identified or reasonably de minimis
costs, such as internal reorganizations or
restructurings;’’ 181 (6) transactions
involving the transfer of non-energized
turn-key facilities; 182 and (7)
acquisitions of non-jurisdictional
transmission assets by a transmissiononly company.183
174 16
U.S.C. 824o(a)(3) (2012).
Transmission Dependent Utilities
Comments at 9–10.
176 See id. at 11.
177 Southern Company Comments at 3.
178 EEI Comments at 12.
179 Kentucky Utilities Comments at 5.
180 Id. at 5–6 (including environmental, antitrust,
market power regulation, energy efficiency
standards, or portfolio standards).
181 Id. at 6.
182 See AEP Comments at 14; Southern Company
Comments at 4.
183 Transmission-Only Companies Comments at
1. The Transmission-Only Companies explain that
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175 See
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93. EPSA requests that the
Commission reaffirm its policy that
there is no adverse effect on rates and
that no hold harmless commitment is
required where an applicant’s costbased rates do not allow for automatic
pass-through of transaction-related costs
because applicants can only recover
transaction-related costs through a filing
under FPA section 205 in such
circumstances.184 EPSA also asks that
the Commission recognize that
particular types of rate schedules,
including schedules and agreements for
reliability must run, reactive power/
voltage control, and restoration services,
do not allow for automatic pass-through
of costs.185
3. Commission Determination
94. We clarify that the Commission
does not intend to exempt classes of
transactions that require authorization
under FPA section 203 from the
requirement to make a showing of no
adverse effect on rates. Our intention is
to make it clear that, under the Merger
Policy Statement, a hold harmless
commitment is just one of several
ratepayer protection mechanisms that
may be appropriate in a given case, but
that a hold harmless commitment (or
other ratepayer protection) may be
unnecessary for some categories of
transactions.186 In addition, we reaffirm
that a hold harmless commitment is not
a requirement for an FPA section 203
application; in cases in which some
form of ratepayer protection may be
appropriate, applicants may offer other
forms of ratepayer protection to
demonstrate that the transaction has no
adverse effect on rates.187 This
observation does not relieve applicants
of their obligation to demonstrate that
the proposed transaction does not have
an adverse effect on rates based on the
circumstances of their transaction or to
offer ratepayer protection mechanisms
their business model itself carries benefits and will
further Commission policy. Id. at 5–6.
184 EPSA Comments at 3 (citing NRG Energy
Holdings, 146 FERC ¶ 61,196 at P 87).
185 Id. at 3–4.
186 See, e.g., Pub. Serv. Co. of New Mexico, 153
FERC ¶ 61,377 at P 39 (finding that there was no
adverse effect on wholesale requirements customers
because those customers receive service under longterm, Commission-approved contracts with stated
rates whose terms would not change a result of the
proposed transaction and cannot change absent a
filing under FPA section 205 with the Commission
to change those rates); NRG Energy Holdings, 146
FERC ¶ 61,196 at P 87 (finding that there was no
adverse effect on wholesale rate because applicants
would continue to make wholesale sales at marketbased rates or at cost-based rates, under which
applicants had no ability to pass through any
increased costs resulting from the proposed
transaction).
187 Merger Policy Statement, FERC Stats. & Regs.
¶ 31,044 at 30,123–24.
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where appropriate.188 Further, the
burden of demonstrating that any given
transaction presents no adverse effect on
rates continues to lie with the
applicants.189
95. For example, certain rate
schedules do not contain a mechanism
that would allow an applicant to pass
on transaction-related costs.190
Although it would be unnecessary to
make any hold harmless commitment in
connection with such a transaction, the
applicant would nonetheless have to
demonstrate how the rate schedule
precludes passing on transaction-related
costs to customers. Furthermore, if
applicants believe the transaction for
which they seek approval provides
needed benefits to customers, they may
choose to make such a showing.
96. The transactions we identified in
the Proposed Policy Statement (i.e.,
documented utility needs such as 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 NERC
standards), were only illustrative, and
not intended to be an all-inclusive list.
As a result, we do not adopt the
suggestion by some commenters that the
Commission identify other types of
transactions that may not require a hold
harmless commitment. We emphasize
that, in all cases, applicants have the
burden of demonstrating that a
proposed transaction will have no
adverse effect on rates. A hold harmless
commitment or other form of ratepayer
protection is only called for in those
instances where an applicant cannot
otherwise meet this burden.
97. Finally, we note that the
Transmission Dependent Utilities
misapprehend the statement in the
Proposed Policy Statement regarding
transactions involving acquisitions of
existing facilities to fulfill a NERC
reliability standard. Nothing in this
Policy Statement requires an entity to
acquire or invest in facilities. Instead,
this Policy Statement states that if an
entity acquires a facility to fulfill a
requirement of a NERC reliability
standard and it seeks approval under
FPA section 203 for that transaction, the
188 See
id.
at 30,123.
190 See, e.g., Pub. Serv. Co. of New Mexico, 153
FERC ¶ 61,377 at P 39 (finding that there was no
adverse effect on wholesale requirements customers
because those customers receive service under longterm, Commission-approved contracts with stated
rates whose terms would not change a result of the
proposed transaction and cannot change absent a
filing under FPA section 205 with the Commission
to change those rates).
189 Id.
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entity may present evidence that the
transaction’s effect on rates is not an
adverse effect on rates instead of
offering a hold harmless commitment.
E. Other Issues Raised
1. Comments
98. EEI states that the Commission’s
FPA section 203 analysis already
protects customers well.191 EEI asserts
that the Commission’s current
regulations and guidance already ensure
that the proper information to examine
and address potential effects on
customers and markets is required to be
provided to the Commission.192 EEI
states that it appreciates the
Commission’s goal of providing clarity,
but it encourages modification of the
proposal so that any policy the
Commission adopts ‘‘puts use of the
commitments in perspective within the
[FPA] section 203 process and is fair
and workable.’’ 193 EEI asserts that the
structure of the Proposed Policy
Statement does not clearly identify what
the text of the proposed policy is, which
it asserts is essential for readers to
understand and comment on the
proposal.194 EEI further asserts that
given the fundamental changes it
suggested to the Proposed Policy
Statement, the Commission should
respond to those suggestions, re-notice
the statement and provide a chance for
entities to provide additional
feedback.195
99. EEI and EPSA ask the Commission
to clarify that it will not apply any new
requirements set out in this Policy
Statement to pending or previouslyapproved section 203 transactions, even
if there is a subsequent related FPA
section 205 filing.196 EEI states that
parties have structured pending or
previous transactions based on the thenapplicable review process and it would
be ‘‘manifestly unfair’’ to apply new
conditions on parties after they have
submitted their applications.197 EPSA
states that its members and other market
participants seek clarity that any such
filings would not be evaluated against
any new requirements or policies
implemented in a final Policy
Statement, but under the policies in
existence at the time the relevant
transaction was approved.198
2. Commission Determination
100. We will apply all changes
contained in this Policy Statement on a
prospective basis, effective 90 days after
publication of this Policy Statement in
the Federal Register, for applications
submitted on and after that effective
date. The guidance herein does not alter
existing hold harmless commitments
accepted by the Commission nor does it
modify hold harmless commitments in
applications pending at the time of
issuance of this Policy Statement.
Finally, we decline EEI’s request that
the Commission refine and reissue the
Proposed Policy Statement to allow for
additional feedback. The Policy
Statement has incorporated and
addressed suggestions by commenters,
clarifies the scope and definition of the
costs that should be subject to hold
harmless commitments, and provides
general guidance to be implemented on
a case-by-case basis.
III. Information Collection Statement
101. The Paperwork Reduction Act
(PRA) 199 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.200 Upon approval of a
collection(s) of information, OMB will
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 numbers. The following table
shows the Commission’s estimates for
the additional burden and cost,201 as
contained in the Policy Statement:
REVISIONS, IN THE 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
Total burden hours & total
cost
(1)
Requirements
(2)
(1) * (2) = (3)
(4)
(3) * (4)
FERC–519 (FPA Section 203 Filings) 202.
FERC–516 (FPA Section 205,
Rate and Tariff Filings).
FERC–555, Record Retention .......
18
1
18
20 hrs.; $1,440 .................
360 hrs.; $25,920.
1
1
203 1
103.26 hrs.; $7,434.72 .....
103.26 hrs.; $7,434.72.
18
1
18
4 hrs.; $288 ......................
72 hrs.; $5,184.
Total ........................................
........................
........................
........................
...........................................
535.26 hrs.; $38,538.72.
sradovich on DSK3TPTVN1PROD with NOTICES
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.
191 EEI
Comments at 3
at 5.
193 Id. at 6.
194 Id. at 20.
195 Id.
196 Id.; EPSA Comments at 6.
197 EEI Comments at 20.
198 EPSA Comments at 6–7.
199 44
U.S.C. 3501–3520.
5 CFR 1320.
201 The hourly cost figures are based on data for
salary plus benefits. The Commission staff thinks
that industry is similarly situated to FERC in terms
of the average cost of a full time employee.
Therefore, we are using the 2015 FERC hourly
average for salary plus benefits of $72 per hour.
192 Id.
VerDate Sep<11>2014
18:47 May 25, 2016
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.
200 See
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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
202 Commission staff estimates that, due to the
Policy Statement, 18 of the FPA Section 203 filings
will take 20 additional burden hours. The estimated
number of filings is not changing.
203 Commission staff estimates that one FPA
section 205 filing may be made annually subject to
the Policy Statement.
E:\FR\FM\26MYN1.SGM
26MYN1
33518
Federal Register / Vol. 81, No. 102 / Thursday, May 26, 2016 / Notices
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
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].
IV. Document Availability
sradovich on DSK3TPTVN1PROD with NOTICES
102. 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
FERC’s Home Page (http://
www.ferc.gov) and in FERC’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.
103. From FERC’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.
104. User assistance is available for
eLibrary and the FERC’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.
By the Commission.
Issued: May 19, 2016.
Nathaniel J. Davis, Sr.,
Deputy Secretary.
[FR Doc. 2016–12426 Filed 5–25–16; 8:45 am]
BILLING CODE 6717–01–P
(866) 208–3676 (toll free). For TTY, call
(202) 502–8659.
Comment Date: 5:00 p.m. Eastern
Time on May 25, 2016.
DEPARTMENT OF ENERGY
Federal Energy Regulatory
Commission
[Docket No. EL00–95–291; EL00–98–263]
San Diego Gas & Electric Company v.
Sellers of Energy and Ancillary
Services Into Markets Operated by the
California Independent System
Operator Corporation and the
California Power Exchange;
Investigation of Practices of the
California Independent System
Operator and the California Power
Exchange; Notice of Compliance Filing
Take notice that on May 4, 2016, the
California Independent System Operator
Corporation submitted its Refund Rerun
Compliance Filing pursuant to the
Federal Energy Regulatory
Commission’s (Commission) July 15,
2011 Order Accepting Compliance
Filings and Providing Guidance.1
Any person desiring to intervene or to
protest this filing must file in
accordance with Rules 211 and 214 of
the Commission’s Rules of Practice and
Procedure (18 CFR 385.211, 385.214).
Protests will be considered by the
Commission in determining the
appropriate action to be taken, but will
not serve to make protestants parties to
the proceeding. Any person wishing to
become a party must file a notice of
intervention or motion to intervene, as
appropriate. Such notices, motions, or
protests must be filed on or before the
comment date. On or before the
comment date, it is not necessary to
serve motions to intervene or protests
on persons other than the Applicant.
The Commission encourages
electronic submission of protests and
interventions in lieu of paper using the
‘‘eFiling’’ link at http://www.ferc.gov.
Persons unable to file electronically
should submit an original and 5 copies
of the protest or intervention to the
Federal Energy Regulatory Commission,
888 First Street NE., Washington, DC
20426.
This filing is accessible on-line at
http://www.ferc.gov, using the
‘‘eLibrary’’ link and is available for
review in the Commission’s Public
Reference Room in Washington, DC.
There is an ‘‘eSubscription’’ link on the
Web site that enables subscribers to
receive email notification when a
document is added to a subscribed
docket(s). For assistance with any FERC
Online service, please email
FERCOnlineSupport@ferc.gov, or call
1 San Diego Gas & Elec. Co. v. Sellers of Energy
and Ancillary Servs., 136 FERC ¶ 61,036 (2011).
VerDate Sep<11>2014
18:47 May 25, 2016
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Dated: May 20, 2016.
Kimberly D. Bose,
Secretary.
[FR Doc. 2016–12409 Filed 5–25–16; 8:45 am]
BILLING CODE 6717–01–P
DEPARTMENT OF ENERGY
Federal Energy Regulatory
Commission
[Project No. 14776–000]
Town of Payson, AZ; Notice of
Application Accepted for Filing and
Soliciting Comments, Motions To
Intervene, Protests,
Recommendations, and Terms and
Conditions
Take notice that the following
hydroelectric application has been filed
with the Commission and is available
for public inspection.
a. Type of Application: Conduit
Exemption.
b. Project No.: 14776–000.
c. Date filed: April 20, 2016.
d. Applicant: Town of Payson, AZ.
e. Name of Project: C.C. Cragin Raw
Water Supply Line Small Conduit
Hydroelectric Project.
f. Location: The proposed C.C. Cragin
Raw Water Supply Line Small Conduit
Hydroelectric Project would be located
on the Payson Water supply line in Gila
County, Arizona.
g. Filed Pursuant to: Federal Power
Act 16 U.S.C. 791a–825r.
h. Applicant Contact: Mr. LaRon
Garrett, Payson Public Works, 303
Beeline Hwy, Payson, AZ 85541; phone
(928) 474–5242, lgarrett@
ci.payson.az.us.
i. FERC Contact: Robert Bell, (202)
502–6062, robert.bell@ferc.gov.
j. Status of Environmental Analysis:
This application is ready for
environmental analysis at this time, and
the Commission is requesting
comments, reply comments,
recommendations, terms and
conditions, and prescriptions.
k. Deadline for filing responsive
documents: The Commission directs,
pursuant to section 4.34(b) of the
Regulations (see Order No. 533, issued
May 8, 1991, 56 FR 23,108 (May 20,
1991)) that all comments, motions to
intervene, protests, recommendations,
terms and conditions, and prescriptions
concerning the application be filed with
the Commission: 60 days from the
issuance of this notice. All reply
E:\FR\FM\26MYN1.SGM
26MYN1
Agencies
[Federal Register Volume 81, Number 102 (Thursday, May 26, 2016)]
[Notices]
[Pages 33502-33518]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-12426]
-----------------------------------------------------------------------
DEPARTMENT OF ENERGY
Federal Energy Regulatory Commission
[Docket No. PL15-3-000]
Policy Statement
AGENCY: Federal Energy Regulatory Commission, DOE.
ACTION: Policy Statement.
-----------------------------------------------------------------------
SUMMARY: The Commission adopts the following policies regarding future
implementation of 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 clarifies the scope and
definition of the costs that should be subject to hold harmless
commitments. Second, the Commission adopts the proposal that applicants
offering hold harmless commitments should implement controls and
procedures to track the costs from which customers will be held
harmless. The Commission identifies the types of controls and
procedures that applicants offering hold harmless commitments should
implement. Third, the Commission declines to adopt its proposal to no
longer accept hold harmless commitments that are limited in duration.
Fourth, the Commission clarifies that, in connection with certain types
of FPA section 203 transactions, an applicant may be able to
demonstrate that the transaction will not have an adverse effect on
rates without the need to make any hold harmless commitment.
DATES: This policy statement will become effective August 24, 2016.
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.
Noah Monick (Legal Information), Office of the General Counsel, 888
First Street NE., Washington, DC 20426, (202) 502-8299,
noah.monick@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:
Policy Statement
1. The Commission issues this Policy Statement to provide guidance
regarding future implementation of 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\
---------------------------------------------------------------------------
\1\ 16 U.S.C. 824b (2012).
---------------------------------------------------------------------------
2. On January 22, 2015, the Commission proposed guidance in four
areas pertaining to hold harmless commitments: (1) The scope and
definition of the costs that should be subject to hold harmless
commitments; (2) controls and procedures to track the costs from which
customers will be held harmless; (3) whether to no longer accept hold
harmless commitments that are limited in duration; and (4)
clarification that, in certain cases, an applicant may be able to
demonstrate that a proposed transaction will not have an adverse effect
on rates without the need to make any hold harmless commitment or offer
any other form of ratepayer protection mechanism.\2\ We adopt, clarify,
and withdraw, in part, the proposals in the Proposed Policy Statement
as explained in further detail below.
---------------------------------------------------------------------------
\2\ Policy Statement on Hold Harmless Commitments, Proposed
Policy Statement, 80 FR 4231 (Jan. 27 2015), 150 FERC ] 61,031
(2015) (Proposed Policy Statement).
---------------------------------------------------------------------------
3. First, we adopt, as general guidance, the lists of transaction-
related costs and transition costs that should be subject to any hold
harmless commitment, as proposed in the Proposed Policy Statement, and
provide additional clarifications regarding transition costs, capital
costs, labor costs, and the costs of transactions that are not
consummated. Second, we adopt, in part, the proposal regarding
establishing controls and procedures for transaction-related costs
subject to any hold harmless commitment. Third, we withdraw our
proposal to no longer accept hold harmless commitments that are limited
in duration and clarify that we will continue to accept hold harmless
commitments that are time limited to support a Commission finding that
a proposed transaction will have no adverse effect on rates. Fourth, we
clarify that consistent with the Merger Policy Statement, a hold
harmless commitment is one of several forms of ratepayer protection
that an applicant can offer to address any potential adverse effect on
rates, and that hold harmless commitments may be unnecessary for some
categories of transactions if an applicant can otherwise demonstrate
that a proposed transaction will have no adverse effect on rates.
I. Background
A. The Commission's Analysis of Proposed Transactions Under FPA Section
203
4. FPA section 203(a)(4) requires the Commission to approve
proposed dispositions, consolidations, acquisitions, or changes in
control if it determines that the proposed transaction will be
consistent with the public interest.\3\ The Commission's 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.\4\ Before granting authorization, FPA section 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.''
\5\
---------------------------------------------------------------------------
\3\ 16 U.S.C. 824b(a)(4) (2012).
\4\ 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).
\5\ 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. The Proposed Policy Statement focused on the second prong of the
Commission's FPA section 203 analysis, specifically, the effect of a
proposed transaction on rates. As explained in the Proposed Policy
Statement, the Commission has stated that, when considering a proposed
transaction's effect on rates, the Commission's focus ``is on the
effect that a proposed transaction itself will have on rates, whether
that effect is adverse, and
[[Page 33503]]
whether any adverse effect will be offset or mitigated by benefits that
are likely to result from the proposed transaction.'' \6\ As relevant
here, the Commission considers whether the transaction could result in
an adverse effect on rates to wholesale requirements or transmission
customers.
---------------------------------------------------------------------------
\6\ Proposed Policy Statement, 150 FERC ] 61,031 at P 3 (quoting
ITC Midwest LLC, 140 FERC ] 61,125, at P 19 (2012)).
---------------------------------------------------------------------------
6. Generally, the Commission may find that a transaction will have
no adverse effect on rates if an applicant demonstrates that there is
no mechanism that would enable the applicant to recover costs related
to the transaction in wholesale power or transmission rates, either
because existing contracts would not allow such costs to be passed
through to customers or, in the case of market-based rates, the
transaction can have no adverse impact on wholesale rates.\7\ In
addition, in cases in which the proposed transaction may have an effect
on rates, the Commission may nevertheless be able to find that the
transaction will not have an adverse effect on rates if the applicant
has demonstrated that there are offsetting benefits. Finally, the
Commission may base its finding that a transaction will not have an
adverse effect on rates in whole or in part on an applicant's offer of
specific ratepayer protections, such as a hold harmless commitment.
---------------------------------------------------------------------------
\7\ See Exelon Corp., 149 FERC ] 61,148, at P 105 (2014).
---------------------------------------------------------------------------
7. 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.\8\ Similarly, if an
applicant is unable to pass through transaction-related costs because
its existing contracts do not allow for such pass through, then the
transaction will have no adverse effect on rates for such customers.\9\
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 benefits to ratepayers that
would offset any potential rate impact. 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.\10\
---------------------------------------------------------------------------
\8\ 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.'').
\9\ See, e.g., Public Service Co. of New Mexico, 153 FERC ]
61,377, at P 39 (2015); NRG Energy Holdings, Inc., 146 FERC ]
61,196, at P 87 (2014).
\10\ 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).
---------------------------------------------------------------------------
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.\11\ 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.\12\
---------------------------------------------------------------------------
\11\ 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 effect will be offset or mitigated
by benefits likely to result from the Proposed Transaction.'').
\12\ 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).
---------------------------------------------------------------------------
8. 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, instead, established
various ratepayer protection mechanisms that an applicant could offer
to insulate customers from any possible rate effects attributable to a
proposed transaction.\13\
---------------------------------------------------------------------------
\13\ 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.'').
---------------------------------------------------------------------------
9. 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.'' \14\ Among the types of protection the
Commission stated applicants could propose were the following:
---------------------------------------------------------------------------
\14\ 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.
--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.\15\
---------------------------------------------------------------------------
\15\ Id. (footnotes omitted).
10. 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.\16\
---------------------------------------------------------------------------
\16\ Id.
---------------------------------------------------------------------------
11. 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
[[Page 33504]]
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.\17\
---------------------------------------------------------------------------
\17\ Order No. 642, FERC Stats. & Regs. ] 31,111 at 31,914.
12. 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.\18\
---------------------------------------------------------------------------
\18\ Id.
---------------------------------------------------------------------------
B. Current Commission Practice Regarding Hold Harmless Commitments
13. 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.\19\ More recently, hold harmless commitments have been made
in connection with transactions by traditional franchised utilities to
acquire jurisdictional facilities in order to satisfy resource adequacy
requirements at the state level, to improve system reliability and/or
meet other regulatory requirements.\20\
---------------------------------------------------------------------------
\19\ 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).
\20\ 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).
---------------------------------------------------------------------------
14. 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.\21\ Thus, hold harmless commitments typically focus on
preventing recovery in rates of the costs incurred that are ``related''
to the transaction.\22\ Although the Commission has relied on
commitments to hold customers harmless from transaction-related costs
to support findings of no adverse effects on rates, these commitments
generally have not included detailed definitions of the transaction-
related costs that are covered by the applicant's hold harmless
commitment or identified the categories of savings that the transaction
is expected to produce.\23\
---------------------------------------------------------------------------
\21\ 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).
\22\ An applicant 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. Specifically, an applicant must submit a new filing under
FPA section 205 and a concurrent informational filing in the
relevant FPA section 203 docket. In the FPA section 205 filing, an
applicant must: (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.
Exelon Corp., 149 FERC ] 61,148 at PP 105-107.
\23\ 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.'').
---------------------------------------------------------------------------
C. Proposed Policy Statement
15. On January 22, 2015, the Commission issued a Proposed Policy
Statement on Hold Harmless Commitments to attempt to address: (1)
Concerns of parties that may believe hold harmless commitments offer
insufficient protection; (2) instances in which hold harmless
commitments may not be necessary; and (3) confusion over the scope and
coverage of hold harmless commitments.
16. The Proposed Policy Statement focused on the matter of what
should constitute an acceptable hold harmless commitment to demonstrate
that ratepayers will be adequately protected from any rate effects of a
transaction. The Commission identified several general areas to address
including: (1) The scope and definition of the costs that should be
subject to hold harmless commitments; (2) controls and procedures to
track the costs from which customers will be held harmless; (3) the
acceptance of hold harmless commitments that are limited in duration;
and (4) clarification that, if applicants are otherwise able to
demonstrate that a proposed transaction will not have an adverse effect
on rates, then there is no need for applicants to make hold harmless
commitments or offer other ratepayer protection mechanisms. The
Proposed Policy Statement did not propose to provide guidance on what
categories of savings related to a proposed transaction may be used in
a subsequent section 205 filing to justify recovery of transaction-
related costs. These issues will be considered on a case-by-case basis.
D. Comments
17. Comments were filed by American Electric Power Company, Inc.
(AEP); American Public Power Association and the National Rural
Electric Cooperative Association (collectively, APPA and NRECA); Edison
Electric Institute (EEI); Electric Power Supply Association (EPSA);
Louisville Gas and Electric Company and Kentucky Utilities Company
(collectively, Kentucky Utilities); South Central MCN, LLC and
Midcontinent MCN, LLC (collectively, Transmission-Only Companies);
Southern Company Services, Inc. as agent for Alabama Power Company,
Georgia Power Company, Gulf Power Company, and Mississippi Power
Company (collectively, Southern Company); Transmission Access Policy
Study Group; and Transmission Dependent Utility Systems (Transmission
Dependent Utilities).
18. We discuss specific concerns raised by commenters below.
II. Discussion
A. Scope and Definition of Transaction-Related Costs
1. Proposal
19. The Commission's experience has been that applicants generally
do not attempt to define what costs are subsumed in the term
``transaction-related costs,'' and that this may lead to later
disagreement over which costs are or are not covered by the applicant's
hold harmless commitment. In the Proposed Policy Statement, therefore,
the Commission set forth guidelines for costs subject to hold harmless
[[Page 33505]]
commitments offered by FPA section 203 applicants.\24\ Specifically,
the Commission proposed that 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 transaction-related savings.\25\ The
Commission proposed to provide guidance in the Proposed Policy
Statement regarding how to identify transaction-related costs, and
acknowledged that attempts to precisely articulate all such costs are
not feasible.
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\24\ See Proposed Policy Statement, 150 FERC ] 61,031 at PP 21-
28.
\25\ We expect that applicants proposing to recover these costs
would track and record them pursuant to the procedures established
below. See infra PP 66-69.
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20. First, the Commission proposed 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 \26\ 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; \27\
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\26\ 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.
\27\ 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., the
costs of proxy solicitation and special meetings of shareholders);
professional service fees incurred in the transaction
(e.g., fees for accountants, surveyors, engineers, and legal
consultants); and
installation, integration, testing, and set up costs
related to ensuring the operability of facilities subject to the
transaction.
21. Moreover, the Commission stated that, for transactions that are
pursued but never completed (transactions that ultimately fail),
transaction-related costs should not be recovered from ratepayers. The
Commission also recognized that not every cost listed above will be
found in every transaction,\28\ and that the final determination of
what transaction-related costs may be recovered by applicants will
remain subject to case-by-case analysis.
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\28\ Proposed Policy Statement, 150 FERC ] 61,031 at P 23.
---------------------------------------------------------------------------
22. The Commission stated that there is a second category of
transaction-related costs related to mergers, where, in addition to the
costs to consummate the transaction described above, parties typically
also incur costs to integrate the operations and assets of the merging
companies in order to achieve merger synergies.\29\ 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) and expense
items (e.g., costs to eliminate redundancies, combine departments, or
maximize contracting efficiencies). The Commission proposed that such
transition costs incurred to integrate the operations of merging
companies include, but are not limited to, the following:
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\29\ 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.
---------------------------------------------------------------------------
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.\30\
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\30\ Proposed Policy Statement, 150 FERC ] 61,031 at P 24.
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23. The Commission stated that this list of transition costs is not
exhaustive, and may include other categories of costs incurred or paid
in connection with the integration of two utilities after a merger.
Thus, the Commission proposed to consider transition costs as
transaction-related costs that should be subject to hold harmless
commitments on a case-by-case basis and that such transaction-related
costs should be covered under hold harmless protection, although noting
that applicants will have an opportunity to show why certain of those
costs should not be considered transaction-related costs under their
hold harmless commitment based on their particular circumstances. Also,
the Commission proposed to consider, on a case-by-case basis, whether
other costs not discussed herein should be subject to hold harmless
commitments.
24. Additionally, the Commission noted 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.\31\ 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.\32\ 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
[[Page 33506]]
accounts in future periods if needed for ratemaking purposes.\33\ The
Commission stated that it believed 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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\31\ Id. P 26.
\32\ 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), http://asc.fasb.org.
\33\ PPL Corp., 133 FERC ] 61,083, at P 39 (2010); 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).
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25. Finally, the Commission stated, in the context of FPA section
203 transactions involving the acquisition of discrete assets (e.g., an
existing power plant) 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.\34\ The
Commission stated that it has not, and does not, consider acquisition
premiums to be part of transaction-related costs and, as such, it did
not believe that the proposed treatment of transaction-related costs
required a change in the Commission's current practice with respect to
acquisition premiums. Therefore, the Commission stated it will continue
to preclude recovery of acquisition premiums as part of transaction-
related costs, and reminded 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, whether or not a hold harmless commitment has been
made.\35\
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\34\ Proposed Policy Statement, 150 FERC ] 61, 031 at P 27.
\35\ Id. (citing 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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2. Comments
a. General Comments
26. As a general matter, many commenters support the Commission's
intent to provide additional guidance and clarity to the costs covered
by hold harmless commitments.\36\ For example, EEI generally supports
the list of costs that the Commission proposes to consider as
transaction-related costs covered by a hold harmless commitment as long
as individual applicants continue to have the flexibility to tailor
what is covered by the hold harmless commitment to their individual
circumstances.\37\ EEI also states that the Commission should
explicitly confirm that hold harmless commitments only apply to
transaction-related costs.\38\
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\36\ See AEP Comments at 2; APPA and NRECA Comments at 8; EEI
Comments at 2; Kentucky Utilities Comments at 2; Southern Company
Comments at 5; Transmission Access Policy Study Group Comments at
1;Transmission Dependent Utilities Comments at 3.
\37\ EEI Comments at 13.
\38\ Id.
---------------------------------------------------------------------------
27. Several commenters support the full list of transaction-related
costs the Commission enumerated.\39\ For example, APPA and NRECA
support the scope of the costs outlined in the Proposed Policy
Statement. APPA and NRECA list the following benefits likely to emerge
from the Commission's clarifications including: (1) Fewer protests of
FPA section 203 applications; (2) more streamlined FPA section 203
proceedings; (3) improved ratepayer protections; (4) more consistent
Commission orders; (5) easier enforcement and administration in
Commission orders; (6) fewer compliance issues and complaints regarding
cost recovery; (7) greater assurance of recovery of costs; and (8)
lower financing costs due to more regulatory certainty.\40\
---------------------------------------------------------------------------
\39\ APPA and NRECA Comments at 9; Transmission Access Policy
Study Group Comments at 3; Transmission Dependent Utilities Comments
at 3-4.
\40\ APPA and NRECA Comments at 7-8.
---------------------------------------------------------------------------
28. At the same time, APPA and NRECA agree that the proposed list
of costs is not definitive or determinative and that ``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.'' \41\ APPA and NRECA and the Transmission
Dependent Utilities suggest that applicants should bear the ultimate
burden to show the adequacy of their hold harmless commitment.\42\ The
Transmission Dependent Utilities request that the Commission confirm
that, in making its case-by-case determinations as to additional costs
that will be subject to particular hold harmless commitments, the
Commission will not limit its consideration only to consummation and
transition costs but it will consider ``any rate increase that results
from a transaction.'' \43\
---------------------------------------------------------------------------
\41\ Id. at 8 (citing Proposed Policy Statement, 150 FERC ]
61,031 at P 21). See also Transmission Dependent Utilities Comments
at 4.
\42\ APPA and NRECA Comments at 9; Transmission Dependent
Utilities Comments at 4.
\43\ Transmission Dependent Utilities Comments at 4.
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29. APPA and NRECA also state that they remain skeptical that
utility mergers benefit customers in the form of lower wholesale energy
prices or lower transmission rates and assert that empirical evidence
supports their view.\44\ They state that the evidence for the electric
industry mergers is mixed at best and shows that merger benefits do not
pan out and are not passed on to consumers.\45\ Therefore, APPA and
NRECA state that the Commission should be vigilant in enforcing hold
harmless commitments.\46\
---------------------------------------------------------------------------
\44\ APPA and NRECA Comments at 6-7 (citing John Kwoka, Merger
Control, and Remedies: A Retrospective Analysis of U.S. Policy 104,
126, 148, 155-56, 231 (2015)).
\45\ Id.
\46\ Id. at 7.
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30. Other commenters suggest the Commission take a different
approach than an enumerated list of transaction-related and transition
costs. For example, the Kentucky Utilities state that the Proposed
Policy Statement should utilize ``a more neutral'' approach in its
guidance as to whether transaction-related costs should be subject to a
hold harmless commitment and that, if the transaction meets direct
operating or regulatory compliance needs, any offered hold harmless
commitment should not be assumed to cover ``nearly all'' transaction/
transition costs.\47\ Instead, the Kentucky Utilities suggest that the
Commission should recognize that covered costs should be based on a
fair and reasonable analysis of the specific facts or circumstances of
the transaction.\48\
---------------------------------------------------------------------------
\47\ Kentucky Utilities Comments at 6.
\48\ Id.
---------------------------------------------------------------------------
31. Several commenters support the Commission's current policy
regarding treatment of acquisition premiums.\49\ Finally, Transmission
Access Policy Study Group states that the Commission should not be
dissuaded from adopting its proposal based on speculative contentions
that these measures will chill investment.\50\
---------------------------------------------------------------------------
\49\ APPA and NRECA Comments at 9; Transmission Access Policy
Study Group Comments at 3-4; Transmission Dependent Utilities
Comments at n.8.
\50\ Transmission Access Policy Study Group Comments at 4.
---------------------------------------------------------------------------
b. Transition Costs
32. EEI and AEP request that the Commission provide greater clarity
as to the scope and definition of transition
[[Page 33507]]
costs. Both caution that the Proposed Policy Statement does not
distinguish transition costs from other ongoing business activities
that merging entities may undergo that are unrelated to the merger but
are also seeking to increase efficiency.\51\ EEI notes that the lack of
distinction could lead companies to postpone otherwise beneficial
investments to avoid those investments being viewed as transaction-
related costs.\52\
---------------------------------------------------------------------------
\51\ AEP Comments at 5-6 (giving the examples of ``engineering
studies,'' ``operating systems integration costs,'' and
``operational integration costs''); EEI Comments at 13-14 (giving
the example of investments in new information technology systems,
which could be timed coincidently with a merger and not incurred
primarily for the purpose of integration, and, therefore, should not
be considered subject to a hold harmless commitment). See also
Kentucky Utilities Comments at 7 (cautioning that entities may also
engage in non-transaction related refinancing and renegotiation of
vendor contracts that could be considered transition costs under a
broad definition and that only an incremental or non-utility
component of those costs should be considered a transaction-related
cost).
\52\ EEI Comments at 14.
---------------------------------------------------------------------------
33. Furthermore, AEP states that over time the costs of ongoing
business as a public utility and transition costs will become harder to
differentiate,\53\ and EEI cautions that a broad definition risks
creating uncertainty about recovery of prudently-incurred costs.\54\
Both are specifically concerned that post-integration engineering
studies will be included as transition costs and they assert that doing
so will discourage utilities from undertaking studies that are prudent
or beneficial to ratepayers.\55\ Finally, AEP questions the
Commission's basis for generally including transition costs as
transaction-related costs because: (1) Applicants generally commit to
hold customers harmless from costs directly incurred to effectuate the
transaction and (2) the Proposed Policy Statement does not cite a case
in which the Commission has formally adopted a rule requiring the
inclusion of transition costs as transaction-related costs.\56\
---------------------------------------------------------------------------
\53\ See AEP Comments at 5 (stating that over time these costs
``will have an increasingly diminished nexus to the merger
itself'').
\54\ See EEI Comments at 14.
\55\ See AEP Comments at 6; EEI Comments at 18.
\56\ See AEP Comments at 4-5.
---------------------------------------------------------------------------
c. Capital Costs
34. AEP and EEI assert that the costs of any assets used to provide
utility service on an ongoing basis belong in rate base and should not
be excluded from the rate base because they may be a transaction
cost.\57\ Both assert that capital assets could be built to increase
efficiencies, they will benefit customers, and the costs should be
fully recoverable.\58\ AEP asserts that the test for whether these
capital costs should be included should be the same as it has always
been: ``are the facilities used and useful by the utility's customers
and were the costs of the facilities prudently incurred in connection
with the provision of utility service.'' \59\ AEP states that this is
consistent with the general principle that ratepayers should bear the
cost of utility service.\60\
---------------------------------------------------------------------------
\57\ See id. at 7; EEI Comments at 16.
\58\ See AEP Comments at 7 (giving the example of new more
efficient facilities enabled by the combined entities' larger size);
EEI Comments at 16-17 (giving the example of a new operations
center).
\59\ AEP Comments at 7.
\60\ Id. (citing Proposed Policy Statement, 150 FERC ] 61,031 at
P 39).
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35. AEP states that making capital costs subject to a hold harmless
commitment raises further issues of how the policy will be implemented,
including tracking and recovery of costs and future interconnection of
generating facilities.\61\ AEP states that the Commission has approved
settlements in the past that did not include new transmission as a
transition cost; instead, the Commission waited to address it in a
future proceeding, which AEP asserts is the appropriate course for
capital costs.\62\
---------------------------------------------------------------------------
\61\ Id. at 8, n.1.
\62\ Id. at 8 (citing Pub. Serv. Co. of Colo., 78 FERC ] 61,267,
at 62,139 (1997)).
---------------------------------------------------------------------------
36. Furthermore, EEI and AEP state that hold harmless commitments
should not apply to costs related to new facilities that are
constructed at the Commission's direction or approval to mitigate
market power concerns raised by a merger transaction.\63\ Both assert
that these assets provide utility service, and therefore benefits, to
customers and should not be excluded from recovery as transaction costs
just because the assets were included in mitigation strategies.\64\ EEI
suggests that new facilities that raise competition or rate concerns
may be addressed through protection mechanisms other than a hold
harmless commitment and that doing so would reduce implementation
problems regarding the tracking of costs and recovery of related
costs.\65\
---------------------------------------------------------------------------
\63\ See id.; EEI Comments at 11, 17.
\64\ See AEP Comments at 8; EEI Comments at 16.
\65\ EEI Comments at 17-18 (suggesting providing customers with
a first call right on the increased available transmission
capacity).
---------------------------------------------------------------------------
37. EEI asserts that the Commission should recognize that costs
related to transactions undertaken as part of normal operations, such
as to align ownership of an asset with a maintenance or reliability
compliance obligation, or a transaction involving acquisition of a
small, discrete transmission asset from a distribution-only entity,
should not be subject to exclusion from rates under a hold harmless
commitment.\66\
---------------------------------------------------------------------------
\66\ Id. at 17.
---------------------------------------------------------------------------
d. Internal Labor Costs
38. AEP, EEI, and Southern Company all suggest that the Commission
should clarify that internal labor costs that are subject to a hold
harmless commitment should include only incremental costs caused by the
merger that would not otherwise be incurred.\67\ They contend that, if
an employee was already employed by the merging or acquiring entities
at the time the transaction was announced, the employee's salary should
not be treated as a transaction-related cost because any assignments
related to the transaction would be performed in addition to other
duties, with no additional compensation.\68\ Furthermore, EEI contends
that the full cost of an employee's salary should continue be fully
recoverable because the salary is prudently incurred to serve existing
customers.\69\ AEP and Southern Company assert that excluding non-
incremental employee costs would result in unmerited rate reductions
for customers of merging entities \70\ and state that tracking labor
costs will be burdensome and subject employees to endless tracking
requirements.\71\ Finally, AEP and Southern Company both state that the
Proposed Policy Statement cites no precedent to support including non-
incremental internal labor costs as transaction-related costs subject
to a hold harmless commitment.\72\ AEP asserts that Commission
precedent can reasonably be read to mean that hold harmless commitments
only apply to incremental internal costs.\73\
---------------------------------------------------------------------------
\67\ See AEP Comments at 11; EEI Comments at 15-16; Southern
Company Comments at 6-8. See also Kentucky Utilities Comments at 7
(cautioning that hold harmless commitments should only apply to
incremental costs in general).
\68\ See AEP Comments at 11-12; EEI Comments at 16; Southern
Company Comments at 7. Southern Company recognizes that some
employees may receive additional compensation due to a merger and
does not object to incremental compensation or the costs of new
staff brought on to effectuate the transaction being treated as
incremental transaction costs. Southern Company Comments at 7-8.
\69\ EEI Comments at 16.
\70\ See AEP Comments at 11-12; Southern Company Comments at 7.
\71\ See AEP Comments at 13; Southern Company Comments at 9.
\72\ AEP Comments at 12; Southern Company Comments at 8.
\73\ AEP Comments at 12 (citing Ameren Energy Generating Co.,
145 FERC ] 61,034, at P 97 n.99 (2013) (Ameren)).
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[[Page 33508]]
e. Costs of Transactions That Are Not Completed and Costs Incurred
Prior to Announcement
39. AEP and EEI do not agree with the Commission's statement that
costs related to transactions that are never completed should not be
recovered from ratepayers.\74\ Both assert that there are sound
business reasons that a firm may choose not to pursue a transaction and
that excluding recovery of such costs may improperly punish a firm for
abandoning a transaction that was not ultimately in the best interest
of its customers or discourage a firm from exploring transactions.\75\
EEI asserts that past Commission policy did not exclude recovery of
such costs and that it is difficult to ascertain when ``normal business
decisions'' become transactions that are being ``pursued.'' \76\
Furthermore, EEI asserts that the proposal will require tracking of
costs with more specificity than is required by the Commission's
current accounting rules.\77\
---------------------------------------------------------------------------
\74\ Id. at 14 (citing Proposed Policy Statement, 150 FERC ]
61,031 at P 23); EEI Comments at 15.
\75\ See AEP Comments at 14-15 (stating that a utility may not
have completed a transaction for which it incurred preliminary
costs: (1) Because the current owner decides to abandon the
transaction; (2) based on the results of due diligence review; (3)
because it determined a self-built project could be built at lower
cost; or (4) because a lower-cost option becomes available from
another seller); EEI Comments at 15.
\76\ EEI Comments at 15.
\77\ Id.
---------------------------------------------------------------------------
40. Southern Company asks for a clarification of the treatment of
costs related to failed acquisitions. It states that a clarification
that this statement is applicable only to the merger context would be
useful because transaction-related costs relating to failed attempts to
acquire specific generation and transmission facilities to fulfill a
need, such as a need to serve load reliably, should be recoverable in a
utility's cost-of-service.\78\ Southern Company provides an example of
a Request For Proposals (RFP) for long-term capacity that results in
ten bidders and negotiations are pursued with two of the bidders, one
offering a 20-year power purchase agreement and another offering to
sell an existing generating unit. If negotiations fail with the bidder
that happens to be an existing generator, Southern states that
transaction-related costs associated with the potential purchase should
not be deemed ``unrecoverable,'' as the threat of such an action could
skew the RFP results.\79\ Southern states that such costs are merely
the routine costs of capacity procurement efforts. Therefore, Southern
Company states that ``[t]he Commission should clarify that such costs,
to the extent prudently-incurred, are permitted to be recovered in
wholesale power rates.'' \80\
---------------------------------------------------------------------------
\78\ Southern Company Comments at 4-5.
\79\ Id. at 5.
\80\ Id.
---------------------------------------------------------------------------
41. EEI and EPSA contend that the Commission should not require
inclusion of costs incurred prior to the announcement of a transaction
because doing so would be premature, burdensome, and costly.\81\ EEI
states that long-term strategic planning, including investigating
potential transactions, is part of the routine daily operations of any
company and should not be singled out for separate tracking, which it
asserts would be unwieldy and misleading because staff would
conceivably have to bill their time separately for every potential
project or transaction they analyze, just in case that project or
transaction came to fruition.\82\ EEI states that the burden of this
proposal exceeds the benefits due to the number of transactions that
may be explored and could provide a disincentive for companies to
investigate transactions that could ultimately benefit customers.\83\
---------------------------------------------------------------------------
\81\ See EEI Comments at 14; EPSA Comments at 4-6 (``Such a
requirement is tantamount to asking a couple who are only on a
second date to pick out their wedding china pattern.'').
\82\ EEI Comments at 14.
\83\ Id. at 14-15.
---------------------------------------------------------------------------
f. Request for Guidance on Savings
42. EEI suggests that the Commission should provide useful guidance
by adding some discussion to the Policy Statement regarding the scope
and definition of transaction-related savings or benefits.\84\ EEI
states that, as part of this guidance, the Commission should specify
``that hold harmless costs from a purchase can be netted against
benefits from a future sale, so that if the future sale produces net
benefits those can be used to offset the prior purchase's costs,
thereby reducing or eliminating costs to be tracked under a hold
harmless commitment for the prior sale.'' \85\ EEI states that ``[t]his
would allow companies that engage in multiple transactions over time to
ensure that customers are not charged the costs net of the benefits of
[multiple] transactions taken together. '' \86\
---------------------------------------------------------------------------
\84\ Id. at 18.
\85\ Id.
\86\ Id.
---------------------------------------------------------------------------
3. Commission Determination
43. We adopt in part the policy set forth in the Proposed Policy
Statement regarding what kinds of costs are typically transaction-
related costs covered by a hold harmless commitment. As described
above, comments received in response to the Proposed Policy Statement
were generally supportive of the Commission's proposals. Accordingly,
we adopt, and will consider, as general guidance, the proposed list of
transaction-related costs including:
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 \87\ 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; \88\
---------------------------------------------------------------------------
\87\ 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.
\88\ Some of these costs are typically incurred prior to the
announcement of a merger.
---------------------------------------------------------------------------
the costs of obtaining shareholder approval (e.g., the
costs of proxy solicitation and special meetings of shareholders);
professional service fees incurred in the transaction
(e.g., fees for accountants, surveyors, engineers, and legal
consultants); and
installation, integration, testing, and set up costs
related to ensuring the operability of facilities subject to the
transaction.
44. Further, we will adopt, and will consider, as general guidance,
the proposed subset of transaction-related costs--transition costs--to
include the following when incurred to integrate operations:
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.
45. We will continue to consider hold harmless commitments on a
case-by-
[[Page 33509]]
case basis and, as such, applicants may propose that their hold
harmless commitment cover specific transaction-related costs in
addition to those listed above, if they can demonstrate that those
certain cost categories may be properly included or excluded from their
hold harmless commitment without an adverse effect on rates. The burden
remains on applicants to show that any offered hold harmless commitment
will meet the Commission's standard that the proposed transaction does
not have an adverse effect on rates.
46. We decline to adopt the Transmission Dependent Utilities'
request that we consider any rate increase that results from a
transaction to be a transaction-related cost subject to an applicant's
hold harmless commitment. This goes beyond our standard on adverse
effects on rates as an increase in rates ``can still be consistent with
the public interest if there are countervailing benefits that derive
from the merger.'' \89\ The adoption of the Transmission Dependent
Utilities request would curtail an applicant's ability to craft
suitable ratepayer protection mechanisms and limit the Commission's
ability to authorize transactions where rate increases are offset by
the benefits of the transaction. We continue to believe that the
guidance related to transaction-related costs set out in this Policy
Statement does not require a change in the Commission's current
practice with respect to acquisition premiums. Therefore, 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, whether or not a hold harmless commitment has
been made.
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\89\ Merger Policy Statement, FERC Stats. & Regs. ] 31,044 at
30,114; see, e.g., Bluegrass Generation Co., L.L.C., 139 FERC ]
61,094 at P 41 (finding no adverse effect on rates because increases
in capacity charges would be offset by a savings in energy rates).
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47. To provide further clarity, we discuss below, in detail, the
following topics: (a) Transition costs; (b) capital costs; (c) internal
labor costs; (d) costs of transactions that are not completed and costs
incurred prior to announcement; and (e) requests for guidance on
savings.
a. Transition Costs
48. We will continue to consider transition costs as a subset of
transaction-related costs. We are unconvinced by commenters' assertions
that the line distinguishing costs incurred in connection with the
normal business activities of a public utility and costs incurred to
integrate operations and assets of two previously unaffiliated
companies is difficult to discern or too burdensome to track. We
acknowledge that the classification of a specific cost is fact specific
and requires judgment in some cases. Nevertheless, to the extent there
are categories of transition costs listed herein that applicants do not
consider transaction-related based on transaction specific
circumstances, applicants are free to demonstrate in the FPA section
203 proceeding that these costs should not be considered transaction-
related. We acknowledge AEP's concern that the Commission has not
adopted a formal rule regarding the treatment and definition of
transition costs for purposes of a hold harmless commitment. However,
the Commission has stated that transaction-related costs, in the
context of a hold harmless commitment, include transition costs.\90\ In
this Policy Statement, we provide additional guidance as to what those
costs are. Further, if an applicant categorizes costs as transaction-
related out of an abundance of caution because there is uncertainty
regarding the nexus between the cost and the transaction, the
Commission's policy provides for the recovery of such costs with a
demonstration of offsetting benefits should the transaction produce
savings or other synergies.\91\ This policy should not discourage
beneficial investment by applicants following completion of a
Commission-authorized transaction, but rather should encourage
documentation and tracking of those costs and related savings.
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\90\ See, e.g., Union Power Partners, L.P., 154 FERC ] 61,149,
at P 63 (2016) (``We interpret Purchaser's hold harmless commitment
to apply to all transaction-related costs, including costs related
to consummating the Proposed Transaction and transition costs,
incurred prior to the consummation of the Proposed Transaction, or
in the five years after the Proposed Transaction's consummation.'')
(emphasis added); Exelon Corp., 138 FERC ] 61,167, at P 118 (2012)
(``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 related synergies.'')
(emphasis added).
\91\ Merger Policy Statement, FERC Stats. & Regs. ] 31,044 at
30,123 (noting that an increase in rates ``can be consistent with
the public interest if there are countervailing benefits that derive
from the transaction''); Pennsylvania Electric Co., 154 FERC ]
61,109 at P 48 (``The Commission has established that, where
applicants make hold harmless commitments in the context of FPA
section 203 transactions, in order to recover transaction-related
costs, applicants must demonstrate offsetting benefits at the time
they apply to recover those costs.'').
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b. Capital Costs
49. We also clarify that whether or not capital costs, including
capital costs related to mitigation, should be considered transaction-
related costs that should be subject to an applicant's hold harmless
commitment can be considered on a case-by-case basis either upfront in
the FPA section 203 proceeding, or when an applicant seeks to recover
such costs in an FPA section 205 proceeding.\92\ In this regard, we
recognize that it would be inappropriate to adopt a general policy that
all capital costs, including capital costs related to mitigation, are
subject to an applicant's hold harmless commitment. Applicants may
incur capital costs for facilities that are used and useful and provide
service to customers. Conversely, applicants may also incur capital
costs as a direct requirement of the transaction, which are not used
and useful until a later point in time. An inquiry into whether these
costs are used and useful or otherwise prudently incurred would require
a fact specific inquiry, which is more appropriately handled on a case-
by-case basis rather than under a generally applicable policy.
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\92\ Proposed Policy Statement, 150 FERC ] 61,031 at PP 21-25.
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50. In general, capital costs unrelated to the transaction are not
subject to an applicant's hold harmless commitment. For example,
applicants may be able to demonstrate that certain capital projects
were already in the preliminary stages of construction or development
prior to the merger announcement and would be completed whether or not
the transaction is ever consummated. If adequately documented, we agree
that such capital costs should not be subject to an applicant's hold
harmless commitment.
51. As guidance, we are principally concerned about three
categories of capital costs directly tied to the transaction that may
negatively impact customer rates: (1) The capital costs of facilities
that are constructed as part of an applicant's commitment to mitigate
competition concerns that have been identified in the Commission's
authorization; (2) the costs of replacing any equipment or facility of
merging companies, prior to the end of its useful life, if such action
was the direct consequence of a transaction; and (3) the transition
costs of integrating the previously separate systems. Generally, these
costs will be considered transaction-related costs subject to an
applicant's hold harmless commitment
[[Page 33510]]
unless applicants demonstrate offsetting benefits, or offer ratepayer
protections other than a hold harmless commitment, in their FPA section
203 application.
52. While applicants may present their case-by-case analysis when
they seek to recover capital costs in an FPA section 205 proceeding, we
advise applicants to present a clear case in their FPA section 203
application to avoid uncertainty when possible. Therefore, we advise
applicants to clearly state which known capital costs related to the
transaction will be included or excluded from a hold harmless
commitment at the time of their FPA section 203 application. Further,
we advise applicants to clearly explain a process for determining which
capital costs--that may be unknown at the time of the application but
are related to the transaction and determined at a future date--will be
included or excluded from a hold harmless commitment at the time of
their FPA section 203 application. Similarly, we advise applicants to
explain the treatment of operation and maintenance costs incurred in
relation to transaction-related capital costs if the related plant
asset meets the used and useful criterion in providing utility service,
the Commission may consider exclusion of such costs from the hold
harmless commitment. A clear explanation in the FPA section 203
application of the treatment of capital costs will aid the Commission
and third parties in understanding how a transaction will not have an
adverse effect on rates both in considering the application and in
future related proceedings, including any future FPA section 205 filing
to show transaction-related savings.
53. Finally, we note that capital costs incurred for documented
utility need, including those for reliability, such as transmission
upgrades, that are related to a transaction may offer similar benefits
to the transactions discussed below where a hold harmless commitment
may not be necessary for a showing of no adverse effect on rates.\93\
In such cases, applicants may demonstrate that such capital costs are
not transaction-related costs subject to their hold harmless commitment
by showing such costs have offsetting benefits or otherwise showing
that these capital costs have no adverse effect on rates.
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\93\ See infra PP 92-95.
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c. Internal Labor Costs
54. We will adopt the proposal to include both internal and
external labor costs related to a transaction as transaction-related
costs. The Commission's concern is that an applicant will use its
existing employees to both perform normal utility activities as well as
transaction-related activities and not make a distinction between the
two activities. As a result, the applicant would recover transaction-
related labor costs without demonstrating that they are offset by
benefits. Thus, an appropriate labor cost allocation is needed to
ensure the applicant's ratepayers are not paying for transaction-
related activities without a showing of offsetting benefits.
55. The Commission declines to adopt AEP's reading of Commission
precedent in Ameren as limiting transaction-related internal labor
costs to incremental internal labor costs.\94\ In Ameren the Commission
stated that the applicant must file its accounting for any costs
incurred to effectuate the transaction which ``may include, but are not
limited to, internal labor costs, legal, consulting, and professional
services incurred to effectuate the transaction.'' \95\ This statement
directing accounting entries to be filed does not impact the scope of
transaction-related costs subject to the applicant's hold harmless
commitment, and thus, cannot be construed to mean that hold harmless
commitments only apply to incremental labor costs.
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\94\ Ameren, 145 FERC ] 61,034 at P 97, n.99.
\95\ Id.
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56. Commenters' arguments that labor costs for existing employees
that perform additional transaction-related tasks but receive no
additional incremental salary should not be subject to hold harmless
commitment are misplaced. Imposing additional transaction-related tasks
on existing employees without additional compensation does not relieve
applicants from general ratemaking principles, which require that
employee costs follow the employees' assigned tasks.\96\ Employees'
time should be allocated in proportion to the tasks performed.
Otherwise, ratepayers will bear transaction-related costs without
offsetting benefits. Therefore, it is the Commission's policy that
applicants support the allocation of the labor costs for salaried
employees who work on both normal business activities in providing
utility service and on transaction-related activities with appropriate
supporting documentation (e.g., approved time sheets detailing the
allocation of actual time worked on utility, transaction, and other
non-utility activities). To the extent applicants are unable or
unwilling to track internal employees time related to a transaction,
applicants should consider and propose other ratepayer protection
mechanisms.
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\96\ See, e.g., Final Audit Report: Audit of Formula Rates,
Transmission Incentives, and Demand Response at Baltimore Gas and
Electric Company, Docket No. FA13-13-000 at 17-18 (2015) (noting
inappropriate recovery of internal labor costs in transmission
rates).
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d. Costs of Transactions That Are Not Completed and Costs Incurred
Prior to Announcement
57. As for costs related to transactions that are pursued but never
completed, we clarify our statement that such ``costs should not be
recovered from ratepayers.'' \97\ Instead those costs are subject to
the Commission's general rate-making principles under FPA sections 205
and 206 and the Commission's accounting precedent.\98\ With respect to
EEI's comment regarding activities in the early stages of a transaction
that are undertaken in the course of normal business, we note that only
those activities related to the transaction for which the hold harmless
commitment was made necessitate separate tracking. In terms of tracking
expenses prior to the announcement of a transaction, we note that a
hold harmless commitment only applies where the Commission issues an
order accepting such a commitment. Expenses for transactions that do
not reach that point are subject to the Commission's ordinary
ratemaking principles. Moreover, if a transaction that is the subject
of a hold harmless commitment is not consummated, there would
presumably never be any transaction-related savings that could offset
transaction-related costs.
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\97\ Proposed Policy Statement, 150 FERC ] 61,031 at P 23.
\98\ The costs incurred to consummate a merger transaction are
considered to be nonoperational in nature and, to the extent
recorded on a jurisdictional entity's books, should be included in a
non-operating expense account--Account 426.5, Other Deductions. 18
CFR pt. 101 (2015).
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58. In addition, we clarify that while all costs related to the
acquisition of an existing facility required to serve load or
transmission customers, including costs associated with bids for other
facilities that were incurred as a part of routine capacity procurement
efforts, will be considered transaction-related costs if an applicant
makes a hold harmless commitment, as we have noted in the preceding
paragraphs, capital costs of facilities that are used and useful and
provide service to customers would normally be recoverable in rates
under general ratemaking principles, unless the capital costs fall
within one of the categories discussed above (e.g., capital costs
related to mitigation measures), in which case they would be subject to
the
[[Page 33511]]
applicant's hold harmless commitment. Moreover, under our accounting
rules, when electric plant constituting an operating system is
purchased, the costs of acquisition, including expenses incidental
thereto, are properly includible in electric plant and charged to
Account 102, Electric Plant Purchased or Sold.\99\ Thus, in the
situation Southern Company posits, the real question is what portion of
the costs associated with an RFP process, including costs incurred
pursuing bids that are ultimately unsuccessful, would be properly
includible in the costs of the facility that is acquired. To the extent
all or some portion of those costs are included in the cost of the
facility that is acquired, and assuming that the facility is used and
useful and provides service to customers, they would normally be
recoverable as capital costs associated with that facility and,
therefore, not be subject to any hold harmless commitment that is made.
---------------------------------------------------------------------------
\99\ 18 CFR pt. 101 (2015).
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e. Request for Guidance on Savings
59. Regarding transaction-related savings, we decline to allow the
netting of benefits from future transactions against the transaction-
related costs of past transactions, as EEI suggests. The Commission has
previously confined its analysis regarding the effect on rates to the
transaction that is the subject of the application.\100\ Applicants are
not required to create separate records to measure savings if they do
not intend to recover transaction-related costs from ratepayers.
Furthermore, we decline to speculate on the scope and definition of
transaction-related savings that applicants may offer in a subsequent
FPA section 205 filing in order to recover transaction-related costs
covered by a hold harmless commitment given that we have received a
limited number of FPA section 205 filings seeking to recover
transaction-related costs by showing offsetting savings. Applicants may
choose the most appropriate method to calculate savings so long as the
savings can be shown to result from the transaction. We will review
these filings on a case-by-case basis.
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\100\ See BHE Holdings, Inc., 133 FERC ] 61,231 at P 40
(focusing on ``costs related to the instant transaction for purposes
of the Commission's section 203 analysis'').
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B. Controls and Procedures To Track and Record Costs Related to Hold
Harmless Commitments
1. Proposal
60. In the Proposed Policy Statement the Commission proposed 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.\101\
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\101\ Proposed Policy Statement, 150 FERC ] 61,031 at P 29.
---------------------------------------------------------------------------
61. Specifically, the Commission noted that 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.\102\ As contemplated in the Merger Policy Statement, a
hold harmless commitment offered by applicants must be ``enforceable
and administratively manageable.'' \103\ Therefore the Commission
proposed that 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.\104\ In the Proposed Policy
Statement, the Commission proposed the following additional guidance
regarding these requirements.
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\102\ See Order No. 642, FERC Stats. & Regs. ] 31,111 at 31,914.
\103\ Merger Policy Statement, FERC Stats. & Regs. ] 31,044 at
30,124.
\104\ See Silver Merger Sub, Inc., 145 FERC ] 61,261, at P 78
(2013); ITC Holdings Corp., 143 FERC ] 61,256, at P 168 (2013).
---------------------------------------------------------------------------
62. First, the Commission proposed 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.\105\
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\105\ Proposed Policy Statement, 150 FERC ] 61,031 at P 30.
---------------------------------------------------------------------------
63. Second, the Commission proposed that applicants offering hold
harmless commitments should include, as part of their FPA section 203
applications and any separate FPA section 205 filings seeking to
recover transaction-related costs, 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.\106\
---------------------------------------------------------------------------
\106\ Id. P 31.
---------------------------------------------------------------------------
64. The Commission noted that it had, 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.\107\ The Commission proposed to require applicants subject
to the Commission's accounting regulations to provide, as a part of
this accounting filing, 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.\108\
---------------------------------------------------------------------------
\107\ See, e.g., Central Vermont Public Service Corp., 138 FERC
] 61,161, at P 55 (2012).
\108\ Proposed Policy Statement, 150 FERC ] 61,031 at P 32.
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2. Comments
65. EEI requests clarifications and changes related to the
Commission's proposed accounting treatment. EEI encourages the
Commission to have applicants ``simply identify succinctly how they
plan to categorize and handle the costs, in conformance with the
Uniform System of Accounts . . . .'' \109\ EEI asserts that applicants
should be able to rely on the accounting systems they already have in
place without having to explain the design and use of those systems, as
their accounting practices are already overseen by the Commission.\110\
EEI asserts the Commission should specify that if transaction costs are
reasonably projected to be minor or below a certain
[[Page 33512]]
threshold, the costs need not be tracked, as the cost of tracking them
would exceed the benefit.\111\ EEI also encourages the Commission to
extend the deadline for submitting accounting to one year rather than
six months as the information may take more than six months to be
verified and the extra time would lead to a more complete filing.\112\
---------------------------------------------------------------------------
\109\ EEI Comments at 19.
\110\ Id.
\111\ Id.
\112\ Id.
---------------------------------------------------------------------------
66. Noting that the Commission seeks to require applicants to track
and record costs that may be incurred even prior to a public
announcement of any proposed transaction, EPSA states it does not
understand how the Commission can recognize that it can be challenging
to accurately track, record and categorize all transaction-related
costs but also require applicants to keep accurate accounting of such
information, particularly in the early stages of a negotiation.\113\
EPSA states the proposed requirement is not only premature, but
extremely difficult to implement, administratively burdensome, and
costly.\114\ EPSA states that this requirement is more appropriate
after a public announcement of a transaction. Therefore, EPSA requests
that the Commission not require tracking of transaction-related costs
incurred prior to the announcement of a transaction.\115\
---------------------------------------------------------------------------
\113\ EPSA Comments at 6.
\114\ Id.
\115\ Id.
---------------------------------------------------------------------------
67. APPA and NRECA, Transmission Access Policy Study Group, and
Transmission Dependent Utilities support the Commission's proposed
tracking requirements.\116\ Specifically, APPA and NRECA support the
Commission's proposal that the internal controls and procedures should
be detailed in the FPA section 203 applications and any related FPA
section 205 rate filing.\117\ Transmission Access Policy Study Group
states that internal controls are both feasible and essential and are
good housekeeping, consistent with the practice of regulated utilities
to operate pursuant to systems of accounts and fundamental to honoring
hold harmless commitments.\118\ Transmission Dependent Utilities
support the tracking requirements because the clarifications will help
ensure that transaction-related costs will be quantified, documented,
and verified and ensure that transaction-related costs will not be
recovered from ratepayers until applicants demonstrate offsetting
savings.\119\ Transmission Dependent Utilities assert that these
requirements will result in fewer compliance difficulties, will reduce
disputes about cost recovery, and will simplify the Commission's
administration of hold harmless conditions by providing a clearer
picture of each public utility's compliance efforts.\120\
---------------------------------------------------------------------------
\116\ APPA and NRECA Comments at 10-11; Transmission Access
Policy Study Group Comments at 1, 4; Transmission Dependent
Utilities Comments at 7.
\117\ APPA and NRECA Comments at 10.
\118\ Transmission Access Policy Study Group Comments at 4.
\119\ Transmission Dependent Utilities Comments at 7.
\120\ Id.
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3. Commission Determination
68. We will withdraw the Commission's proposal requiring applicants
to describe their accounting procedures and practices, and how they
maintain the underlying accounting data for the transaction. As EEI
suggested, applicants should be able to rely on their accounting
systems without having to explain the design and use of those systems
in the FPA section 203 filing. However, we will adopt the Commission's
proposal regarding establishing controls and procedures for
transaction-related costs subject to the hold harmless commitment,
regardless of the projected amount of the costs of the transaction. We
will also adopt the proposal that applicants offering hold harmless
commitments should include in the FPA section 203 application a
description of how they define, designate, accrue, and allocate
transaction-related costs. Applicants should also explain the criteria
used to determine which costs are transaction-related.
69. Applicants that make a hold harmless commitment must make
clear, at minimum, what they are committing to and have the ability to
record and track such costs. A well-documented methodology and system
to account for such costs also facilitates uniformity in practice and
reduces confusion in how the hold harmless commitments are applied.
Additionally, if applicants choose to seek recovery of those costs in a
separate FPA section 205 filing, proper documentation is necessary for
determining the appropriateness of the recovery. Moreover, proper
documentation of these costs will provide for the avoidance of ongoing
litigation which has been voiced as a concern by commenters.\121\
---------------------------------------------------------------------------
\121\ See, e.g., AEP Comments at 10; EEI Comments at 7, 10;
Southern Company Comments at 9, 12.
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70. We will continue to require that applicants submit their final
accounting entries associated with transactions within six months of
the date that the transaction is consummated. We will also adopt the
Commission's proposal to require applicants subject to the Commission's
accounting regulations to provide, as a part of this accounting filing,
the amounts related to all transaction-related costs incurred as of the
date of the accounting filing. The final accounting entries and amounts
related to transaction-related costs allow the Commission to scrutinize
how applicants record the transaction at the time of consummation and
apply the criteria to identify transaction-related costs as of the
accounting filing date. The filing does not necessarily reflect all
transaction-related costs as they typically continue to be incurred
well after the merger. Given that applicants should have controls and
procedures in place to track these costs in a timely manner, six months
should be adequate for filing the accounting entries. If additional
time is needed, applicants may file a request for extension including
the reasons for the requested additional time.
71. We clarify that irrespective of the date that a transaction is
announced, companies required to follow the Commission's accounting
regulations must have appropriate controls and procedures in place to
track transaction-related costs to ensure compliance. Specifically, the
Commission's long-standing policy is that costs incurred to effectuate
a merger are non-operating in nature, and they should be recorded in
Account 426.5, Other Deductions. Accordingly, absent a change in the
Commission's accounting requirements, these costs should be tracked
when they are incurred.
C. Time Limits on Hold Harmless Commitments
1. Proposed Policy Statement Recommendations
72. The Commission proposed to reconsider whether a hold harmless
commitment that is limited to five years or another specified time
period adequately protects ratepayers from an adverse effect on
rates.\122\ Specifically, in light of the proposed treatment of certain
categories of costs as transaction-related for purposes of any hold
harmless commitment, the Commission's experience auditing utilities
that have made hold harmless commitments, and concerns of protestors in
previous FPA section 203 applications,\123\ the Commission
[[Page 33513]]
proposed to reconsider whether hold harmless commitments that are
limited to five years (or another specified period) adequately protect
ratepayers from any adverse effect on rates. As part of this
reconsideration, the Commission stated that it believed that time-
limited hold harmless commitments may not adequately protect ratepayers
from transaction-related costs. Therefore, the Commission proposed 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.\124\ The Commission stated that 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.\125\
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\122\ Proposed Policy Statement, 150 FERC ] 61,031 at P 34.
\123\ See, e.g., PNM Resources, Inc., 124 FERC ] 61,019, at P 36
(2008) (protestor alleging that the five-year limitation on recovery
will simply result in the deferred recovery of transaction-related
costs).
\124\ 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 Corp., 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)).
\125\ Merger Policy Statement, FERC Stats. & Regs. ] 31,044 at
30,123.
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2. Comments
73. Many commenters suggest that the Commission should continue to
accept time limited hold harmless commitments.\126\ They contend that
the Commission has not shown that there is any evidence that applicants
have purposely deferred costs past the end of the five-year period or
otherwise evaded review that requires a change in current policy.\127\
Furthermore, they assert that, if the Commission is concerned that
time-limited hold harmless commitments may lead an applicant to delay
incurring or recovering a transaction's costs until after the hold
harmless period expires, the Commission already has tools and
protections to adequately protect customers.\128\ Furthermore, AEP
states that the change in policy would be a reversal of the Merger
Policy Statement and put the Commission back in the position of
weighing the costs and benefits of mergers.\129\ Commenters contend
that the Commission should not adopt this policy, which will
unnecessarily burden applicants at the expense of transactions that
benefit customers.\130\ They generally assert that the change in policy
will discourage mergers, which they believe will harm customers and
deter infrastructure investment.\131\
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\126\ See EEI Comments at 6; EPSA Comments at 4; Kentucky
Utilities Comments at 3-4; Southern Company Comments at 9.
\127\ See generally AEP Comments at 8-9; EEI Comments at 6;
Southern Company Comments at 9-10.
\128\ See generally AEP Comments at 9 (asserting current
accounting, auditing, and ratemaking practices are adequate); EEI
Comments at 9-10 (stating that current accounting rules address the
Commission's concerns regarding deferral of recovery); Southern
Company Comments at 11 (suggesting that the Commission's policy
related to the recovery of regulatory assets is sufficient).
\129\ See AEP Comments at 11.
\130\ See EEI Comments at 6; EPSA Comments at 4.
\131\ See EEI Comments at 10-11; EPSA Comments at 4.
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74. Commenters explain that the Commission's concerns are
unwarranted because it is in the applicant's financial interest to
complete integration as soon as possible to ensure a quick transition
and capture synergies.\132\ Furthermore, they assert that the
integration of the operations of merging utilities generally occurs in
the first few years after a merger.\133\ They also assert that the
costs associated with tracking these costs indefinitely will be
burdensome and significant.\134\ Commenters caution that an indefinite
hold harmless commitment could incentivize entities to not pursue
elimination of duplicative services and costs, which would reduce
benefits to ratepayers, because the costs of such activity may be
considered transition costs in perpetuity and, therefore, be
unrecoverable.\135\
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\132\ See generally AEP Comments at 9; EEI Comments at 8, 10.
\133\ AEP Comments at 9; Southern Company at 10-11.
\134\ EPSA Comments at 4; Southern Company Comments at 12
(stating that in addition to the cost of new systems, all current
and future employees would have to be trained to recognize and track
the costs).
\135\ See EEI Comments at 8; EPSA Comments at 5.
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75. Commenters also state that any change to the Commission's
practice of accepting hold harmless commitments that are limited in
duration will undermine regulatory certainty.\136\ They state that
without a time limit the Commission creates the unnecessary risk of
future litigation in which there may be attempts by protesters or the
Commission to link future costs back to a previous transaction, no
matter how unrelated to a transaction, and that any entity that had a
merger or transaction would then need to disprove that assertion.\137\
Commenters assert that without regulatory certainty investors will be
unwilling to commit funds or will increase the costs of the funds they
do commit, which will have an adverse effect on the costs and on the
viability of transactions and utility valuations.\138\ As to
transaction-related capital costs, Southern Company also asserts that
one would expect that at some point in time, used and useful
investments should and would be included in rates, and if the
Commission wishes to exclude certain assets from recovery it should use
a more targeted approach than extending the hold harmless period for
all transaction-related costs.\139\ Others state that a transaction
must be considered closed at some point in order for there to be
closure for both accounting and ratemaking purposes \140\ and requiring
an open ended hold harmless commitment could deter ``beneficial
consolidation.'' \141\ EEI states that the Commission's current
standard provides ample protection for customers while also providing
regulatory certainty, which is essential in a constantly changing
industry.\142\
---------------------------------------------------------------------------
\136\ EEI Comments at 6.
\137\ See AEP Comments at 10 (worrying that an open-ended
commitment will spawn multiple look back proceedings); EEI Comments
at 7, 10 (asserting that this will create an inappropriate
evidentiary burden on applicants that may also be impossible to
overcome); Kentucky Utilities Comments at 3; Southern Company
Comments at 10, 12-13.
\138\ See AEP Comments at 10, n.3; EEI Comments at 7.
\139\ See Southern Company Comments at 11-12.
\140\ See AEP Comments at 10; Southern Company Comments at 12.
\141\ Southern Company Comments at 12.
\142\ EEI Comments at 7.
---------------------------------------------------------------------------
76. Commenters further explain that it will be difficult to
determine if costs are transaction-related the further in time entities
get from the transaction because of intervening events \143\ and a
changing regulatory and technological environment,\144\ and that it
will be difficult to untangle these costs in rates from the entity's
general ongoing operations.\145\ They caution that the further in time
one gets from a transaction the more difficult it will become to
determine what is and is not a transition cost.\146\ AEP suggests that
the Commission could remedy this problem either by accepting time-
limited hold harmless provisions or limiting the scope of transition
costs to the activities required to integrate the companies once their
merger is consummated.\147\
---------------------------------------------------------------------------
\143\ See id. at 6.
\144\ See Kentucky Utilities Comments at 3.
\145\ See AEP Comments at 10; EEI Comments at 7.
\146\ See Kentucky Utilities Comments at 3; Southern Company
Comments at 13.
\147\ AEP Comments at 10.
---------------------------------------------------------------------------
77. AEP also notes that a hold harmless commitment with no limit on
duration raises questions like: (1) How
[[Page 33514]]
do you measure how much of a cost incurred 15 years after a merger was
attributable to merger ``integration'' as opposed to normal utility
operations; (2) if merger ``integration'' costs can still be incurred
decades after the transaction closed, can merger ``savings'' still be
accruing over that same period; (3) how do you measure those savings;
and (4) would companies need to maintain shadow books for the unmerged
companies for the rest of time to prove the savings that resulted from
the merger? \148\
---------------------------------------------------------------------------
\148\ Id.
---------------------------------------------------------------------------
78. EEI asserts that a time-limited commitment is consistent with
U.S. generally accepted accounting principles, which recognize that
transactions end when all costs, assets, and liabilities have been
recorded.\149\ EEI states that the Commission should recognize that
there is a finite transition period following a transaction and five
years is a reasonable time frame in which one could expect that a
company would complete its transition and integration.\150\ EEI asserts
that the Commission should also recognize a commitment of less than
five years may be appropriate for ``relatively minor'' transactions and
that an indefinite hold harmless commitment is simply
unreasonable.\151\
---------------------------------------------------------------------------
\149\ EEI Comments at 8.
\150\ Id. at 9.
\151\ Id.
---------------------------------------------------------------------------
79. APPA and NRECA, Transmission Access Policy Study Group, and the
Transmission Dependent Utilities support the Commission's proposal not
to accept time-limited hold harmless commitments.\152\ These commenters
state that the Commission should focus on whether a cost is
transaction-related, not on when it was incurred or when recovery is
sought.\153\
---------------------------------------------------------------------------
\152\ APPA and NRECA Comments at 11; Transmission Access Policy
Study Group Comments at 2; Transmission Dependent Utilities Comments
at 8.
\153\ APPA and NRECA Comments at 11; Transmission Dependent
Utilities Comments at 7-8.
---------------------------------------------------------------------------
80. APPA and NRECA state that unlimited duration hold harmless
commitments will not impose a significant additional burden on
applicants because most transition costs are incurred in the first few
years after the merger is consummated.\154\ Furthermore, to the extent
that a longer commitment may lead to an additional burden on
applicants, APPA and NRECA state that this burden is reasonable because
it would mean that transaction-related costs continued to be incurred
and offsetting merger savings failed to materialize.\155\ Transmission
Dependent Utilities state that time-limited commitments provide
incentives for utilities to make inefficient spending and rate recovery
decisions while failing to provide full protection to ratepayers.\156\
Therefore, Transmission Dependent Utilities assert that eliminating any
time limit on a hold harmless commitment is in the public interest
because it will bring greater certainty to the electric markets
regarding costs subject to recovery in the future.\157\
---------------------------------------------------------------------------
\154\ APPA and NRECA Comments at 11.
\155\ Id.
\156\ Transmission Dependent Utilities Comments at 7.
\157\ Id.
---------------------------------------------------------------------------
3. Commission Determination
81. After careful consideration of the comments, we withdraw our
proposal to no longer accept time-limited hold harmless commitments and
will continue to accept hold harmless commitments that are time limited
as a method to show no adverse effect on rates. We agree with certain
commenters that there is a tradeoff between the articulation of
transaction-related costs adopted in section II.A above \158\ and the
duration of a hold harmless commitment, as there is less of a nexus
between activities that are identified as transition costs and the
transaction as time passes. While the Commission intends to ensure that
ratepayers are adequately protected from potential adverse effects on
rates, a hold harmless commitment must also be administratively
manageable.
---------------------------------------------------------------------------
\158\ See supra PP 44-58.
---------------------------------------------------------------------------
82. As some commenters note, as time passes, it becomes more
difficult to distinguish actions taken, and related expenditures, to
integrate the operations and assets of newly-merged companies from the
conduct of an applicant's normal business activities, and it becomes
more difficult to determine which costs share a nexus with the
transaction and should thus be subject to an offered hold harmless
commitment. Future actions, such as engineering studies, taken in the
normal course of business need to be distinguished from those
undertaken to effectuate the transaction for the duration of the hold
harmless commitment. If we were to adopt the proposal to no longer
accept time-limited hold harmless commitments, applicants may be
required to make these distinctions years removed from a transaction.
As both commenters who support and oppose time limits on any hold
harmless commitment recognize, the majority of these costs are incurred
in the first five years after the closing of the transaction. At this
time we do not find that there is sufficient evidence to conclude that
applicants are indeed incurring substantial transaction-related costs
after five years.
83. Therefore, we find that the articulation of transaction-related
costs set forth in section II.A above, paired with the incentive of
applicants to achieve integration and transaction related synergies as
soon as possible, adequately protect ratepayers while providing
applicants with regulatory certainty that a time-limited hold harmless
commitment will not result in endless litigation regarding costs
incurred after a transaction is consummated. We intend hold harmless
commitments to avoid protracted litigation while at the same time
protecting customers from the uncertain costs incurred to complete
transactions.
84. In response to EEI's view that a commitment of less than five
years may be appropriate for what EEI terms ``relatively minor''
transactions, as we stated in the Proposed Policy Statement, the
Commission has found 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.'' \159\ While
applicants may nevertheless propose hold harmless commitments of any
number of years, we caution that applicants retain the burden of
demonstrating that proposed ratepayer protections are adequate.\160\
Applicants must adequately support and demonstrate that any commitment
they propose provides adequate ratepayer protection when compared to
other ratepayer protection mechanisms, including the offer of a five
year hold harmless period that has become the norm in the industry.
---------------------------------------------------------------------------
\159\ Proposed Policy Statement, 150 FERC ] 61,031 at P 12
(citing 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.
Id. n.21 (citing 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)).
\160\ Order No. 642, FERC Stats. & Regs. ] 31,111 at 31,914.
---------------------------------------------------------------------------
D. Transactions Without an Adverse Effect on Rates
1. Proposed Policy Statement Recommendations
85. The Commission noted in the Proposed Policy Statement that some
applicants have made hold harmless commitments in connection with
[[Page 33515]]
transactions involving the acquisition of existing jurisdictional
facilities where the acquiring entity is a traditional franchised
utility and is 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.\161\
Furthermore, the Commission noted that, 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 stated that it has held that, as a general
matter of policy, ratepayers should bear the cost of utility
service.\162\
---------------------------------------------------------------------------
\161\ Proposed Policy Statement, 150 FERC ] 61,031 at P 39. 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.
\162\ See, e.g., Old Dominion Elec. Cooperative and N.C. Elec.
Membership Corp. v. Va. Elec. and Power Co.,146 FERC ] 61,200
(2014).
---------------------------------------------------------------------------
86. The Commission proposed to clarify that applicants undertaking
certain types of transactions to fulfill documented utility service
needs may not need to offer a hold harmless commitment in order to show
that the transaction does not have an adverse effect on rates.\163\
Specifically, the Commission stated that it believed 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.
---------------------------------------------------------------------------
\163\ Proposed Policy Statement, 150 FERC ] 61,031 at P 40.
---------------------------------------------------------------------------
87. The Commission noted several examples of transactions in which
applicants may demonstrate no adverse effect on rates without offering
a hold harmless commitment or other ratepayer protection mechanism,
including 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. The
Commission proposed 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.\164\ Under the clarification proposed
therein, however, the Commission stated that 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.
---------------------------------------------------------------------------
\164\ Id. P 41.
---------------------------------------------------------------------------
88. The Commission proposed that 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, the Commission proposed that 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 proposed
that it would carefully review such a showing before determining that a
proposed transaction without any proposed ratepayer protection
mechanism has no adverse effect on rates.
2. Comments
89. Several commenters support the Commission's proposal that hold
harmless commitments may not be necessary for certain categories of
transactions when undertaken to provide utility service for which
ratepayers should bear cost responsibility.\165\ Several parties
recommend that the Commission more directly and clearly acknowledge
that hold harmless commitments are not always necessary and that the
Proposed Policy Statement does not mandate their inclusion in every FPA
section 203 application.\166\ EEI states that each transaction is
unique and suggests that the need for and role of a hold harmless
commitment will vary.\167\ Additionally, commenters request that the
Commission clarify that the circumstances articulated in the Proposed
Policy Statement for when a hold harmless commitment may not be
necessary are not exclusive or comprehensive,\168\ and that the
examples given were intended to be illustrative and will be interpreted
broadly.\169\
---------------------------------------------------------------------------
\165\ See AEP Comments at 13; EEI Comments at 12; EPSA Comments
at 3; Kentucky Utilities Comments at 4; Southern Company Comments at
3; Transmission-Only Companies Comments at 1.
\166\ See EEI Comments at 11 (contending that it is not clear
how the different sections of the document interact); Kentucky
Utilities Comments at 5.
\167\ EEI Comments at 11-12 (suggesting additional exemptions
such as a transaction where the benefits outweigh any potential
negative effects, or those negative effects may be de minimis).
\168\ EPSA Comments at 3; Southern Company Comments at 4.
\169\ Kentucky Utilities Comments at 5.
---------------------------------------------------------------------------
90. Other commenters request that the Commission clarify that it
does not intend to identify certain categories of transactions that do
not have an adverse effect on rates or transactions that do not require
ratepayer protection mechanisms.\170\ These commenters seek
confirmation that the Commission is stating only that applicants may
make a showing for any FPA section 203 transaction that there is no
adverse effect on rates based on case-specific evidence, and as such
those applicants need not offer a hold harmless commitment if they have
otherwise met their burden of proof to make such a demonstration.\171\
Furthermore, APPA and NRECA urge the Commission to proceed with caution
and avoid reducing the requirement of showing no adverse effect on
rates to an exercise where any claimed, non-quantifiable benefits from
a transaction are determined to outweigh rate increases.\172\
---------------------------------------------------------------------------
\170\ See APPA and NRECA Comments at 12; Transmission Access
Policy Study Group Comments at 6.
\171\ See APPA and NRECA Comments at 12-13; Transmission Access
Policy Study Group Comments at 8-9.
\172\ APPA and NRECA Comments at 14.
---------------------------------------------------------------------------
91. Similarly, the Transmission Dependent Utilities also urge the
Commission not to exempt certain transactions from the requirement to
adopt ratepayer protection mechanisms and state that the proposal
undercuts the other ratepayer protection mechanisms proposed in the
Proposed Policy Statement.\173\ They assert that the Commission should
not adopt the proposal because: (1) Practically any asset transaction
could meet the Commission's proposed standard as nearly any such
transaction could be deemed necessary to serve existing or forecasted
load or to satisfy at least one federal or state regulatory
requirement; (2) wholesale customers may derive no
[[Page 33516]]
benefits from transactions that satisfy state resource adequacy
requirements; (3) FPA section 215 \174\ prohibits reliability standards
from including any requirement to enlarge such facilities or to
construct new transmission capacity or generation capacity and
therefore, the Commission should not grant a special exemption from
adopting ratepayer protection mechanisms to utilities that purchase
facilities in order to comply with NERC standards; and (4) the premise
that an increase in rates may not be adverse because of the reason for
the transaction is flawed.\175\ The Transmission Dependent Utilities
state that no such exemption is needed because to the extent that such
a transaction provides for benefits to wholesale ratepayers, applicants
should be able to demonstrate such benefits or savings exceed the
transaction-related costs.\176\
---------------------------------------------------------------------------
\173\ See Transmission Dependent Utilities Comments at 8-9.
\174\ 16 U.S.C. 824o(a)(3) (2012).
\175\ See Transmission Dependent Utilities Comments at 9-10.
\176\ See id. at 11.
---------------------------------------------------------------------------
92. Some commenters also identified other types of transactions
that may have a rate impact, but not one that is adverse, and therefore
should not require any additional ratepayer protection. These
commenters request that the Commission clarify that, in addition to
transactions involving purchases of existing generation facilities, a
hold harmless commitment may also be unnecessary in connection with:
(1) Purchases of existing transmission facilities that provide
benefits, such as added capacity or increased reliability; \177\ (2)
transactions consummated under a blanket authorization; \178\ (3)
transactions that involve necessary contract rights or other
jurisdictional assets, rather than physical facilities; \179\ (4)
transactions undertaken in order to comply with any other federal or
state regulatory framework; \180\ (5) transactions with ``no identified
or reasonably de minimis costs, such as internal reorganizations or
restructurings;'' \181\ (6) transactions involving the transfer of non-
energized turn-key facilities; \182\ and (7) acquisitions of non-
jurisdictional transmission assets by a transmission-only company.\183\
---------------------------------------------------------------------------
\177\ Southern Company Comments at 3.
\178\ EEI Comments at 12.
\179\ Kentucky Utilities Comments at 5.
\180\ Id. at 5-6 (including environmental, antitrust, market
power regulation, energy efficiency standards, or portfolio
standards).
\181\ Id. at 6.
\182\ See AEP Comments at 14; Southern Company Comments at 4.
\183\ Transmission-Only Companies Comments at 1. The
Transmission-Only Companies explain that their business model itself
carries benefits and will further Commission policy. Id. at 5-6.
---------------------------------------------------------------------------
93. EPSA requests that the Commission reaffirm its policy that
there is no adverse effect on rates and that no hold harmless
commitment is required where an applicant's cost-based rates do not
allow for automatic pass-through of transaction-related costs because
applicants can only recover transaction-related costs through a filing
under FPA section 205 in such circumstances.\184\ EPSA also asks that
the Commission recognize that particular types of rate schedules,
including schedules and agreements for reliability must run, reactive
power/voltage control, and restoration services, do not allow for
automatic pass-through of costs.\185\
---------------------------------------------------------------------------
\184\ EPSA Comments at 3 (citing NRG Energy Holdings, 146 FERC ]
61,196 at P 87).
\185\ Id. at 3-4.
---------------------------------------------------------------------------
3. Commission Determination
94. We clarify that the Commission does not intend to exempt
classes of transactions that require authorization under FPA section
203 from the requirement to make a showing of no adverse effect on
rates. Our intention is to make it clear that, under the Merger Policy
Statement, a hold harmless commitment is just one of several ratepayer
protection mechanisms that may be appropriate in a given case, but that
a hold harmless commitment (or other ratepayer protection) may be
unnecessary for some categories of transactions.\186\ In addition, we
reaffirm that a hold harmless commitment is not a requirement for an
FPA section 203 application; in cases in which some form of ratepayer
protection may be appropriate, applicants may offer other forms of
ratepayer protection to demonstrate that the transaction has no adverse
effect on rates.\187\ This observation does not relieve applicants of
their obligation to demonstrate that the proposed transaction does not
have an adverse effect on rates based on the circumstances of their
transaction or to offer ratepayer protection mechanisms where
appropriate.\188\ Further, the burden of demonstrating that any given
transaction presents no adverse effect on rates continues to lie with
the applicants.\189\
---------------------------------------------------------------------------
\186\ See, e.g., Pub. Serv. Co. of New Mexico, 153 FERC ] 61,377
at P 39 (finding that there was no adverse effect on wholesale
requirements customers because those customers receive service under
long-term, Commission-approved contracts with stated rates whose
terms would not change a result of the proposed transaction and
cannot change absent a filing under FPA section 205 with the
Commission to change those rates); NRG Energy Holdings, 146 FERC ]
61,196 at P 87 (finding that there was no adverse effect on
wholesale rate because applicants would continue to make wholesale
sales at market-based rates or at cost-based rates, under which
applicants had no ability to pass through any increased costs
resulting from the proposed transaction).
\187\ Merger Policy Statement, FERC Stats. & Regs. ] 31,044 at
30,123-24.
\188\ See id.
\189\ Id. at 30,123.
---------------------------------------------------------------------------
95. For example, certain rate schedules do not contain a mechanism
that would allow an applicant to pass on transaction-related
costs.\190\ Although it would be unnecessary to make any hold harmless
commitment in connection with such a transaction, the applicant would
nonetheless have to demonstrate how the rate schedule precludes passing
on transaction-related costs to customers. Furthermore, if applicants
believe the transaction for which they seek approval provides needed
benefits to customers, they may choose to make such a showing.
---------------------------------------------------------------------------
\190\ See, e.g., Pub. Serv. Co. of New Mexico, 153 FERC ] 61,377
at P 39 (finding that there was no adverse effect on wholesale
requirements customers because those customers receive service under
long-term, Commission-approved contracts with stated rates whose
terms would not change a result of the proposed transaction and
cannot change absent a filing under FPA section 205 with the
Commission to change those rates).
---------------------------------------------------------------------------
96. The transactions we identified in the Proposed Policy Statement
(i.e., documented utility needs such as 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 NERC standards), were only illustrative,
and not intended to be an all-inclusive list. As a result, we do not
adopt the suggestion by some commenters that the Commission identify
other types of transactions that may not require a hold harmless
commitment. We emphasize that, in all cases, applicants have the burden
of demonstrating that a proposed transaction will have no adverse
effect on rates. A hold harmless commitment or other form of ratepayer
protection is only called for in those instances where an applicant
cannot otherwise meet this burden.
97. Finally, we note that the Transmission Dependent Utilities
misapprehend the statement in the Proposed Policy Statement regarding
transactions involving acquisitions of existing facilities to fulfill a
NERC reliability standard. Nothing in this Policy Statement requires an
entity to acquire or invest in facilities. Instead, this Policy
Statement states that if an entity acquires a facility to fulfill a
requirement of a NERC reliability standard and it seeks approval under
FPA section 203 for that transaction, the
[[Page 33517]]
entity may present evidence that the transaction's effect on rates is
not an adverse effect on rates instead of offering a hold harmless
commitment.
E. Other Issues Raised
1. Comments
98. EEI states that the Commission's FPA section 203 analysis
already protects customers well.\191\ EEI asserts that the Commission's
current regulations and guidance already ensure that the proper
information to examine and address potential effects on customers and
markets is required to be provided to the Commission.\192\ EEI states
that it appreciates the Commission's goal of providing clarity, but it
encourages modification of the proposal so that any policy the
Commission adopts ``puts use of the commitments in perspective within
the [FPA] section 203 process and is fair and workable.'' \193\ EEI
asserts that the structure of the Proposed Policy Statement does not
clearly identify what the text of the proposed policy is, which it
asserts is essential for readers to understand and comment on the
proposal.\194\ EEI further asserts that given the fundamental changes
it suggested to the Proposed Policy Statement, the Commission should
respond to those suggestions, re-notice the statement and provide a
chance for entities to provide additional feedback.\195\
---------------------------------------------------------------------------
\191\ EEI Comments at 3
\192\ Id. at 5.
\193\ Id. at 6.
\194\ Id. at 20.
\195\ Id.
---------------------------------------------------------------------------
99. EEI and EPSA ask the Commission to clarify that it will not
apply any new requirements set out in this Policy Statement to pending
or previously-approved section 203 transactions, even if there is a
subsequent related FPA section 205 filing.\196\ EEI states that parties
have structured pending or previous transactions based on the then-
applicable review process and it would be ``manifestly unfair'' to
apply new conditions on parties after they have submitted their
applications.\197\ EPSA states that its members and other market
participants seek clarity that any such filings would not be evaluated
against any new requirements or policies implemented in a final Policy
Statement, but under the policies in existence at the time the relevant
transaction was approved.\198\
---------------------------------------------------------------------------
\196\ Id.; EPSA Comments at 6.
\197\ EEI Comments at 20.
\198\ EPSA Comments at 6-7.
---------------------------------------------------------------------------
2. Commission Determination
100. We will apply all changes contained in this Policy Statement
on a prospective basis, effective 90 days after publication of this
Policy Statement in the Federal Register, for applications submitted on
and after that effective date. The guidance herein does not alter
existing hold harmless commitments accepted by the Commission nor does
it modify hold harmless commitments in applications pending at the time
of issuance of this Policy Statement. Finally, we decline EEI's request
that the Commission refine and reissue the Proposed Policy Statement to
allow for additional feedback. The Policy Statement has incorporated
and addressed suggestions by commenters, clarifies the scope and
definition of the costs that should be subject to hold harmless
commitments, and provides general guidance to be implemented on a case-
by-case basis.
III. Information Collection Statement
101. The Paperwork Reduction Act (PRA) \199\ 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.\200\ Upon approval of a
collection(s) of information, OMB will 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 numbers. The following table shows the
Commission's estimates for the additional burden and cost,\201\ as
contained in the Policy Statement:
---------------------------------------------------------------------------
\199\ 44 U.S.C. 3501-3520.
\200\ See 5 CFR 1320.
\201\ The hourly cost figures are based on data for salary plus
benefits. The Commission staff thinks that industry is similarly
situated to FERC in terms of the average cost of a full time
employee. Therefore, we are using the 2015 FERC hourly average for
salary plus benefits of $72 per hour.
Revisions, in the Policy Statement in Docket No. PL15-3
--------------------------------------------------------------------------------------------------------------------------------------------------------
Number and Number of
Requirements type of responses per Total number Average burden hours & cost per Total burden hours & total cost
respondents respondent of responses response
(1) (2) (1) * (2) = (4)................................ (3) * (4)
(3)
--------------------------------------------------------------------------------------------------------------------------------------------------------
FERC-519 (FPA Section 203 18 1 18 20 hrs.; $1,440.................... 360 hrs.; $25,920.
Filings) \202\.
FERC-516 (FPA Section 205, Rate 1 1 \203\ 1 103.26 hrs.; $7,434.72............. 103.26 hrs.; $7,434.72.
and Tariff Filings).
FERC-555, Record Retention..... 18 1 18 4 hrs.; $288....................... 72 hrs.; $5,184.
------------------------------------------------------------------------------------------------------------------------
Total...................... .............. .............. .............. ................................... 535.26 hrs.; $38,538.72.
--------------------------------------------------------------------------------------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\202\ Commission staff estimates that, due to the Policy
Statement, 18 of the FPA Section 203 filings will take 20 additional
burden hours. The estimated number of filings is not changing.
\203\ Commission staff estimates that one FPA section 205 filing
may be made annually subject to the Policy Statement.
---------------------------------------------------------------------------
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
[[Page 33518]]
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 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].
IV. Document Availability
102. 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 FERC's Home Page (http://www.ferc.gov) and in FERC'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.
103. From FERC'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.
104. User assistance is available for eLibrary and the FERC'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.
By the Commission.
Issued: May 19, 2016.
Nathaniel J. Davis, Sr.,
Deputy Secretary.
[FR Doc. 2016-12426 Filed 5-25-16; 8:45 am]
BILLING CODE 6717-01-P