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Friday,

January 6, 2006

Part III

Department of
Energy
Federal Energy Regulatory Commission

18 CFR Parts 2 and 33


Transactions Subject to FPA Section 203;
Final Rule
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1348 Federal Register / Vol. 71, No. 4 / Friday, January 6, 2006 / Rules and Regulations

DEPARTMENT OF ENERGY (Merger Review Reform), of Title XII Phillip Nicholson (Technical
(Electricity Modernization Act of 2005), Information), Office of Markets,
Federal Energy Regulatory of the Energy Policy Act of 2005 (EPAct Tariffs and Rates—West, Federal
Commission 2005), Public Law 109–58, 119 Stat. 594 Energy Regulatory Commission, 888
(2005), the Federal Energy Regulatory First Street, NE., Washington, DC,
18 CFR Parts 2 and 33 Commission (Commission) amends 18 20426. (202) 502–8240.
[Docket No. RM05–34–000; Order No. 669] CFR 2.26 and 18 CFR part 33 to Jan Macpherson (Legal Information),
implement amended section 203 of the Office of the General Counsel, Federal
Transactions Subject to FPA Section Federal Power Act (FPA).1 Energy Regulatory Commission, 888
203 DATES: Effective Date: This Final Rule First Street, NE., Washington, DC
will become effective on February 8, 20426. (202) 502–8921.
Issued December 23, 2005. James Akers (Technical Information),
2006.
AGENCY: Federal Energy Regulatory Office of Markets, Tariffs and Rates—
Commission. FOR FURTHER INFORMATION CONTACT:
Sarah McWane (Legal Information), West, Federal Energy Regulatory
ACTION: Final rule. Commission, 888 First Street, NE.,
Office of the General Counsel, Federal
SUMMARY: Under Subtitle G (Market Energy Regulatory Commission, 888 Washington, DC 20426. (202) 502–
Transparency, Enforcement, and First Street, NE., Washington, DC 8101.
Consumer Protection), section 1289 20426. (202) 502–8372. SUPLEMENTARY INFORMATION:

TABLE OF CONTENTS
Paragraph Nos.

I. Introduction ................................................................................................................................................................................... 1.
II. Background .................................................................................................................................................................................. 5.
A. Commission Merger Policy Before Effective Date of Amended FPA Section 203 ............................................................. 5.
B. Section 203 As Amended By EPAct 2005 .......................................................................................................................... 15.
C. Notice of Proposed Rulemaking on Transactions Subject to FPA Section 203 ................................................................. 25.
III. Discussion .................................................................................................................................................................................. 27.
A. Amendments to 18 CFR Part 33 ......................................................................................................................................... 27.
1. Section 33.1(a)—Applicability .............................................................................................................................................. 28.
2. Section 33.1(b)—Definitions of ‘‘Associate Company,’’ ‘‘Holding Company,’’ ‘‘Holding Company System,’’ ‘‘Transmitting
Utility,’’ and ‘‘Electric Utility Company’’ ................................................................................................................................. 33.
3. Section 33.1(b)—Definition of ‘‘Existing Generation Facility’’ .............................................................................................. 74.
4. Section 33.1(b)—Definition of ‘‘Non-Utility Associate Company’’ ........................................................................................ 88.
5. Section 33.1(b)—Definition of ‘‘Value’’ ................................................................................................................................. 94.
6. Compliance with Section 203 ............................................................................................................................................... 127.
7. Cash Management Arrangements, Intra-Holding Company System Financing, Securities Under Amended Section 203,
and Blanket Authorizations ................................................................................................................................................... 133.
8. Section 33.2(j)—General Information Requirements Regarding Cross-Subsidization ........................................................ 146.
9. Section 33.11—Commission Procedures for Consideration of Applications under Section 203 of the FPA ..................... 172.
B. Amendments to 18 CFR 2.26—The Merger Policy Statement ........................................................................................... 195.
1. Comments ............................................................................................................................................................................ 198.
2. Commission Determination .................................................................................................................................................. 202.
IV. Information Collection Statement ............................................................................................................................................... 203.
V. Environmental Analysis ............................................................................................................................................................... 207.
VI. Regulatory Flexibility Act Certification ....................................................................................................................................... 208.
VII. Document Availability ................................................................................................................................................................ 210.
VIII. Effective Date and Congressional Notification ........................................................................................................................ 213.

Before Commissioners: Joseph T. Kelliher, scope of section 203 to include expeditious consideration of
Chairman; Nora Mead Brownell, and transactions involving certain transfers applications for the approval of
Suedeen G. Kelly. of generation facilities and certain dispositions, consolidations, or
I. Introduction holding companies’ transactions with a acquisitions under section 203.
value in excess of $10 million; (3) limits 2. As discussed below, on October 3,
1. On August 8, 2005, the Energy the Federal Energy Regulatory
Policy Act of 2005 (EPAct 2005) 2 was 2005, the Commission issued a notice of
Commission’s (Commission) review of a proposed rulemaking (NOPR) in which
signed into law. Section 1289 (Merger
public utility’s acquisition of securities it proposed certain modifications to 18
Review Reform) of Title XII, Subtitle G
of another public utility to transactions CFR 2.26 and 18 CFR part 33 to
(Market Transparency, Enforcement,
greater than $10 million; (4) requires implement amended section 203.5
and Consumer Protection),3 of EPAct
2005 amends section 203 of the Federal that the Commission, when reviewing Numerous comments were filed by a
Power Act (FPA).4 Amended section proposed section 203 transactions, variety of entities.
203: (1) Increases (from $50,000 to examine cross-subsidization and 3. In this Final Rule, the Commission
greater than $10 million) the value pledges or encumbrances of utility adopts some of the proposals in the
threshold for certain transactions being assets; and (5) directs the Commission
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subject to section 203; (2) extends the to adopt, by rule, procedures for the

1 16U.S.C. 824b (2000). 3 EPAct 2005 §§ 1281 et seq. 5 Transactions Subject to FPA Section 203, 70 FR
2 Energy Policy Act of 2005, Pub. L. No. 109–58, 4 16 U.S.C. 824b (2000). 58,636 (October 7, 2005), FERC Stats. & Regs.
119 Stat. 594 (2005). ¶ 32,589 (2005).

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Federal Register / Vol. 71, No. 4 / Friday, January 6, 2006 / Rules and Regulations 1349

NOPR as well as many of the issues raised in this proceeding, Statement adopts the Department of
commenters’ recommendations. including the appropriateness of the Justice (DOJ)/Federal Trade Commission
Specifically, this Final Rule: blanket authorizations granted herein (FTC) 1992 Horizontal Merger
(1) Implements the new applicability and whether additional steps are needed Guidelines (Guidelines) 11 as the
of amended section 203 of the FPA; to protect against cross-subsidization analytical framework for examining
(2) Grants blanket authorizations for and pledges or encumbrance of utility horizontal market power concerns. The
certain types of transactions, including assets. Merger Policy Statement also uses an
foreign utility acquisitions by holding analytical screen (Appendix A analysis)
II. Background
companies, intra-holding company to allow early identification of
system financing and cash management A. Commission Merger Policy Before transactions that clearly do not raise
arrangements, certain internal corporate Effective Date of Amended FPA Section competitive concerns.12 As part of the
reorganizations, and certain investments 203 screen analysis, applicants must define
in transmitting utilities and electric 5. Section 203 of the FPA 8 currently the relevant products sold by the
utility companies; provides that: No public utility shall merging entities, identify the customers
(3) Adopts many of the NOPR’s sell, lease or otherwise dispose of the and potential suppliers in the
proposed defined terms, including whole of its facilities subject to the geographic markets that are likely to be
‘‘electric utility company,’’ ‘‘holding jurisdiction of the Commission, or any affected by the proposed transaction,
company,’’ and ‘‘non-utility associate part thereof of a value in excess of and measure the concentration in those
company,’’ but clarifies the application $50,000, or by any means whatsoever, markets. Using the Delivered Price Test
of these terms to certain entities; directly or indirectly, merge or to identify alternative competing
(4) Amends the proposed definition of consolidate such facilities or any part suppliers, the concentration of potential
‘‘existing generation facility;’ thereof with those of any other person, suppliers included in the defined
(5) Adopts a simpler rule than was or purchase, acquire, or take any market is then measured by the
proposed in the NOPR with respect to security of any other public utility, Herfindahl-Hirschman Index (HHI) and
the determination of ‘‘value’’ as it without first having secured an order of used as a screen to determine which
applies to various section 203 the Commission authorizing it to do so. transactions clearly do not raise market
transactions; The Commission shall approve such power concerns.
(6) Clarifies and refines the NOPR’s transactions if they are ‘‘consistent with
proposal with respect to a section 203 9. The Commission stated in the
the public interest.’’ Merger Policy Statement that it will
applicant’s obligation to file evidentiary 6. In 1996, the Commission issued the
support to demonstrate that a proposed examine the second factor, the effect on
Merger Policy Statement 9 updating and
transaction will not result in cross- rates, by focusing on customer
clarifying the Commission’s procedures,
subsidization of a non-utility associate protections designed to insulate
criteria, and policies concerning public
company or pledge or encumbrance of consumers from any harm resulting
utility mergers. The purpose of the
utility assets for the benefit of an from the transaction.13
Merger Policy Statement was to ensure
associate company; and that mergers are consistent with the 10. The Merger Policy Statement set
(7) Adopts the NOPR’s proposal that public interest and to provide greater forth a third factor for examination, the
the Commission provide expeditious certainty and expedition in the effect on regulation. This includes both
consideration of completed applications Commission’s analysis of merger state regulation and the Commission’s
for the approval of transactions that are applications. regulation, including any potential shift
not contested, do not involve mergers, 7. The Merger Policy Statement sets in regulation from the Commission to
and are consistent with Commission out three factors the Commission the Securities and Exchange
precedent. generally considers when analyzing Commission (SEC) due to a transaction
4. Our goal is to carry out the whether a proposed section 203 creating a registered public utility
expanded authorities and requirements transaction 10 is consistent with the holding company under the Public
contained in the new section 203 public interest: Effect on competition; Utility Holding Company Act of 1935
amendments to ensure that all effect on rates; and effect on regulation. (PUHCA 1935).14 The Merger Policy
jurisdictional transactions subject to 8. With respect to the first factor, the Statement explained that, unless
section 203 are consistent with the effect on competition, the Merger Policy applicants commit themselves to abide
public interest and at the same time by this Commission’s policies with
ensure that our rules do not impede than one year after PUHCA 2005 becomes effective regard to affiliate transactions involving
day-to-day business transactions or to evaluate whether additional exemptions,
different reporting requirements, or other regulatory
non-power goods and services, we will
stifle timely investment in transmission actions need to be considered. The Commission’s set the issue of the effect on regulation
and generation infrastructure. We regulations implementing PUHCA 2005 take effect for hearing.15
believe we have accomplished this on February 8, 2006.
result with the rules herein. However, at 8 EPAct 2005’s amendments to FPA section 203
11 U.S. Department of Justice and Federal Trade

the technical conference we announced take effect on February 8, 2006. We will generally Commission, Horizontal Merger Guidelines, 57 FR
refer to EPAct 2005’s amended section 203 of the
in our final rule implementing the 41,552 (1992), revised, 4 Trade Reg. Rep. (CCH)
FPA as ‘‘amended’’ or ‘‘new’’ section 203. All other
¶ 13,104 (Apr. 8, 1997).
Public Utility Holding Company Act of references to FPA section 203 are as it exists now. 12 Merger Policy Statement at 30,119–20.
2005 (PUHCA 2005),6 to be held within 9 Inquiry Concerning the Commission’s Merger
13 See id. at 30,121–24.
the next year,7 we will also address Policy Under the Federal Power Act: Policy
14 15 U.S.C. 79a et seq. (2000).
Statement, Order No. 592, 61 FR 68,595 (Dec. 30,
1996), FERC Stats. & Regs. ¶ 31,044 (1996), 15 Merger Policy Statement at 30,125; see also
6 EPAct 2005 sections 1261 et seq. Repeal of the
reconsideration denied, Order No. 592–A, 62 FR Atlantic City Electric Co. and Delmarva Power &
Public Utility Holding Company Act of 1935 and 33,340 (June 19, 1997), 79 FERC ¶ 61,321 (1997) Light Co., 80 FERC ¶ 61,126 at 61,412, order
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Enactment of the Public Utility Holding Company (Merger Policy Statement). denying reh’g, 81 FERC ¶ 61,173 (1997). With
Act of 2005, Order No. 667, FERC Stats. & Regs. 10 Although the Commission applies these factors respect to a transaction’s effect on state regulation,
¶ 31,197 (2005) (PUHCA 2005 Final Rule). to all section 203 transactions, not just mergers, the where the state commissions have authority to act
7 PUHCA 2005 Final Rule at P 17. Specifically, in filing requirements and the level of detail required on the transaction, the Commission stated that it
the PUHCA Final Rule, the Commission stated that may differ. Id. at 30,113 n.7. See also 18 CFR 2.26 intends to rely on them to exercise their authority
we intend to hold a technical conference no later (2005) (codifying the Merger Policy Statement). to protect state interests.

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1350 Federal Register / Vol. 71, No. 4 / Friday, January 6, 2006 / Rules and Regulations

11. The Commission later issued the having secured an order of the rules shall identify classes of
Filing Requirements Rule,16 a final rule Commission authorizing it to do so: (A) transactions, or specify criteria for
updating the filing requirements under Sell, lease, or otherwise dispose of the transactions, that normally meet the
18 CFR part 33 of the Commission’s whole of its facilities subject to the standards established in paragraph (4).
regulations for section 203 applications. jurisdiction of the Commission, or any The Commission shall provide
The Filing Requirements Rule part thereof of a value in excess of $10 expedited review for such transactions.
implements the Merger Policy million; (B) merge or consolidate, The Commission shall grant or deny any
Statement and provides detailed directly or indirectly, such facilities or other application for approval of a
guidance to applicants for preparing any part thereof with those of any other transaction not later than 180 days after
applications. The revised filing person, by any means whatsoever; (C) the application is filed. If the
requirements also assist the Commission purchase, acquire, or take any security Commission does not act within 180
in determining whether section 203 with a value in excess of $10 million of days, such application shall be deemed
transactions are consistent with the any other public utility; or (D) purchase, granted unless the Commission finds,
public interest, provide more certainty, lease, or otherwise acquire an existing based on good cause, that further
and expedite the Commission’s generation facility: (i) That has a value consideration is required to determine
handling of such applications. in excess of $10 million; and (ii) that is whether the proposed transaction meets
12. Further, the Filing Requirements used for interstate wholesale sales and the standards of paragraph (4) and
Rule codified the Commission’s over which the Commission has issues an order tolling the time for
screening approach, provided specific jurisdiction for ratemaking purposes. acting on the application for not more
filing requirements consistent with 17. Section 203(a)(2) adds the entirely than 180 days, at the end of which
Appendix A of the Commission’s new requirement that no holding additional period the Commission shall
Merger Policy Statement, established company in a holding company system grant or deny the application.
guidelines for vertical competitive that includes a transmitting utility or an 21. Section 203(a)(6), which is also
analysis, and set forth filing electric utility shall purchase, acquire, new, provides that for purposes of this
requirements for mergers that may raise or take any security with a value in subsection, the terms ‘‘associate
vertical market power concerns. excess of $10 million of, or, by any company,’’ ‘‘holding company,’’ and
13. The Filing Requirements Rule also means whatsoever, directly or ‘‘holding company system’’ have the
reduced the information burden for indirectly, merge or consolidate with, a meaning given those terms in PUHCA
transactions that clearly raise no transmitting utility, an electric utility 2005.
competitive concerns. The Commission company, or a holding company in a 22. Section 1289(b) provides that the
explained that for certain transactions, holding company system that includes a amendments made by this section shall
abbreviated filing requirements are transmitting utility, or an electric utility take effect six months after the date of
appropriate because it is relatively easy company, with a value in excess of $10 enactment of EPAct 2005, or February 8,
to determine that they will not harm million without prior Commission 2006. This is the same date on which
competition and, thus, a full-fledged authorization. the repeal of PUHCA 1935 and
horizontal screen analysis or vertical 18. Like the existing section 203(a), enactment of the PUHCA 2005, are to
competitive analysis is not required.17 amended section 203(a)(3) provides that take effect.20
14. The Commission stated in the upon receipt of an application for such 23. Section 1289(c) provides that the
Filing Requirements Rule that it approval, the Commission shall give amendments made by subsection (a)
intended to continue processing section reasonable notice in writing to the shall not apply to any section 203
203 applications expeditiously, with a Governor and state commission of each application that was filed on or before
goal of issuing an initial order for most of the states in which the physical the date of enactment of EPAct 2005.
mergers within 150 days of a completed property affected is situated, and to 24. Section 203(b) of the FPA remains
application.18 Further, the Commission such other persons as it may deem unchanged.21
stated that it intended to continue advisable.
processing uncontested non-merger 19. Amended section 203(a)(4) states C. Notice of Proposed Rulemaking on
applications within 60 days of filing and that after notice and opportunity for Transactions Subject to FPA Section
protested non-merger applications hearing, the Commission shall approve 203
within 90 days of filing.19 the proposed disposition, consolidation, 25. On October 7, 2005, the
acquisition, or change in control if it Commission’s NOPR on Transactions
B. Section 203 as Amended by EPAct
finds that the transaction will be Subject to FPA Section 203 was
2005
consistent with the public interest. It published in the Federal Register.22 As
15. EPAct 2005 revises section 203(a) also specifically provides that the discussed in more detail below, in the
of the FPA as follows: Commission must find that the
16. Amended section 203(a)(1) states transaction will not result in cross- 20 Id. §§ 1261, 1274. PUHCA 2005 Final Rule at
that no public utility shall, without first subsidization of a non-utility associate P 1.
21 Section 203(b) states:
company or pledge or encumbrance of
16 Revised Filing Requirements Under Part 33 of The Commission may grant any application for an
the Commission’s Regulations, Order No. 642, 65
utility assets for the benefit of an order under this section in whole or in part and
FR 70,983 (Nov. 28, 2000), FERC Stats. & Regs., July associate company, unless that cross- upon such terms and conditions as it finds
1996–Dec. 2000 ¶ 31,111 (2000), order on reh’g, subsidization, pledge, or encumbrance necessary or appropriate to secure the maintenance
Order No. 642–A, 66 FR 16,121 (Mar. 23, 2001), 94 will be consistent with the public of adequate service and the coordination in the
FERC ¶ 61,289 (2001) (codified at 18 CFR Part 33 public interest of facilities subject to the
(2005)) (Filing Requirements Rule). interest. jurisdiction of the Commission. The Commission
17 Filing Requirements Rule at 31,902 & 31,907. 20. Section 203(a)(5) adds the entirely may from time to time for good cause shown make
The Commission clarified that, if it later determined new requirement that the Commission such orders supplemental to any order made under
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that a filing raised competitive issues, the shall: By rule, adopt procedures for the this section as it may find necessary or appropriate.
Commission would evaluate those issues and direct 22 70 FR 58,636 (October 7, 2005). On October 19,
the applicant to submit any data needed to satisfy
expeditious consideration of
2005, an errata notice was published in the Federal
the Commission’s concerns. Id. at n.79. applications for the approval of Register (70 FR 60,748), correcting Paragraph 1,
18 Id. at 31,873. dispositions, consolidations, or footnote 4 of the NOPR to refer to February 8, 2006,
19 Id. at 31,876. acquisitions, under this section. Such as opposed to February 3, 2006.

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NOPR the Commission proposed to types of transactions. Commenters also amended section 203(a)(1)(B): ‘‘No
revise 18 CFR part 33 and 18 CFR 2.26 express concern over any potential public utility shall * * * merge or
of its rules to implement amended overlap between the Commission’s consolidate, directly or indirectly, such
section 203 of the FPA. Comments were scope of review under amended section facilities [facilities subject to the
due on or before November 7, 2005.23 203 and the scope of review by state jurisdiction of the Commission] or any
26. This Final Rule will be effective commissions. They state that the part thereof with those of any other
on the date on which amended section Commission should not use its new person, by any means whatsoever.’’ This
203 of the FPA takes effect, February 8, section 203 authority to preempt state provision, on its face, does not impose
2006. regulatory authority over rates and a dollar threshold on mergers or
III. Discussion approvals of utility mergers and consolidations and proposed section
acquisitions. 33.1(a)(1)(ii) is consistent with the
A. Amendments to 18 CFR Part 33 30. Electric Power Supply Association statutory provision. While Congress
27. In the NOPR, the Commission (EPSA) requests that the Commission included a $10 million threshold for
proposed to amend 18 CFR part 33 by: modify the text of proposed section amended subsections 203(a)(1)(A), (C),
Revising the title to read ‘‘Applications 33.1(a)(1)(ii) to clarify that any merger (D), and 203(a)(2) (dispositions of
Under Federal Power Act Section 203;’’ or consolidation must exceed the $10 jurisdictional facilities; acquisitions of
amending section 33.1(a) to clarify what million threshold before section 203 securities of public utilities; purchases
transactions are subject to amended filing approval is required. It states that of existing generation facilities; holding
section 203 and part 33 as a result of the Commission should not alter its past company acquisitions), Congress clearly
amended sections 203(a)(1)(A)–(D) and practice of applying the statutory dollar did not adopt a monetary threshold for
(a)(2) of the FPA; adding a new threshold to all types of transactions mergers and consolidations in amended
subsection 33.1(b) that defines certain requiring section 203 approval, subsection 203(a)(1)(B). We note that
new terms used in amended section 203 including mergers and acquisitions. ‘‘[w]here Congress includes particular
that are not defined in EPAct 2005; EPSA explains that the mergers and language in one section of a statute but
adding a new subsection 33.2(j) to acquisitions clause of the currently omits it in another section of the same
implement amended section 203(a)(4) effective section 203 and section 203 as Act, it is generally presumed that
regarding cross-subsidization and amended by EPAct 2005 are Congress acts intentionally and
pledge or encumbrance issues; and substantially the same and do not purposely in the disparate inclusion or
adding new sections 33.11(a) and (b) to specify a value amount. EPSA points exclusion.’’ 26 In light of the
implement amended section 203(a)(5) out, however, that although the unambiguous statutory language, we are
regarding the Commission’s procedures currently effective statutory language, not convinced by EPSA’s unsupported
for the consideration of applications like the newly enacted EPAct 2005 assertion that the failure to include a
under section 203 of the FPA. language, did not codify the monetary monetary threshold as to mergers and
threshold with respect to mergers and consolidations was an ‘‘oversight’’ and
1. Section 33.1(a)—Applicability consolidations, for decades the that ‘‘Congress did not intend to change
28. Proposed section 33.1(a) clarifies Commission’s regulations (section [the currently effective] statutory and
what transactions are subject to 33.1(a)(2)) have required section 203 regulatory structure.’’ 27 While our
amended section 203 and part 33 as a applications for mergers, consolidations regulations previously applied a dollar
result of amended sections 203(a)(1)(A)– and acquisitions only if they meet the
threshold to mergers and
(D) and (a)(2) of the FPA.24 $50,000 threshold (which on February
consolidations, such an approach is no
8, 2006 will become $10 million). EPSA
a. Comments longer tenable, since it is inconsistent
states that the NOPR provides no reason
with the plain language of amended
29. Several commenters raise for the Commission to change its
section 203. Thus, we will not revise
concerns, described in more detail interpretation of section 203.
section 33.1(a)(1)(ii) to include a $10
below, regarding the applicability of
b. Commission Determination million threshold.
amended section 203 to transactions
involving foreign utility companies 31. Most of the concerns regarding the 2. Section 33.1(b)—Definitions of
(FUCOs), qualifying facilities (QFs), applicability of amended section 203 ‘‘Associate Company,’’ ‘‘Holding
exempt wholesale generators (EWGs),25 involve new section 203(a)(2) and the Company,’’ ‘‘Holding Company
rural electric cooperatives, local Commission’s proposed definitions of System,’’ ‘‘Transmitting Utility,’’ and
distribution companies, stand-alone ‘‘electric utility company’’ and ‘‘holding ‘‘Electric Utility Company’’
generation and retail sales, as well as company.’’ Accordingly, these
intrastate transactions, i.e., transactions comments are discussed in greater detail 33. As noted above, section 203(a)(2)
wholly within the Electric Reliability in those sections below. Similarly, adds an entirely new requirement to the
Council of Texas (ERCOT), Alaska, or concerns regarding any potential FPA:
Hawaii. They generally argue that overlap between the scope of review of No holding company in a holding company
Congress did not intend to expand the Commission under amended section system that includes a transmitting utility or
significantly the Commission’s 203 and that of state commissions are an electric utility shall purchase, acquire, or
jurisdiction under amended section 203 also discussed with the proposed take any security with a value in excess of
definition of ‘‘electric utility company,’’ $10 million of, or, by any means whatsoever,
and, therefore, did not convey to the
below. directly or indirectly, merge or consolidate
Commission jurisdiction over these with, a transmitting utility, an electric utility
32. We reject EPSA’s request that we
company, or a holding company in a holding
23 The commenters are listed in an appendix to revise proposed section 33.1(a)(1)(ii) to company system that includes a transmitting
this order. clarify that any merger or consolidation utility, or an electric utility company, with a
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24 Because proposed section 33.1(a) is almost


must also exceed a monetary threshold value in excess of $10 million without first
identical, with minor exceptions, to amended before section 203 filing approval is
sections 203(a)(1)(A)–(D) and (a)(2), which are
summarized in section II.B. above and set forth in required. The plain language of 26 Russello v. United States, 464 U.S. 16, 23

the regulatory text, we will not recite that text here. amended section 203(a)(1)(B) does not (1983) (internal citations omitted).
25 PUHCA 2005 § 1266(a). permit such an interpretation. Under 27 EPSA Comments at 5.

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having secured an order of the Commission while the term ‘‘electric utility’’ is used the Commission should exempt from
authorizing it to do so. once in amended section 203(a)(2) and review a holding company’s acquisition
a. Definition of ‘‘Electric Utility ‘‘electric utility company’’ is used twice, of a FUCO where the holding company
Company’’ the terms should be read similarly and has no captive U.S. ratepayers.
should not affect the interpretation of 39. Several commenters argue that if
34. The scope of amended section the section. Accordingly, commenters the PUHCA 2005 definition of ‘‘electric
203(a)(2) turns in large part on the assert that it is reasonable to read the utility company’’ is adopted in the Final
Commission’s interpretation of the term term ‘‘electric utility company,’’ not as Rule, the definition should incorporate
‘‘electric utility company’’ which, in used in PUHCA 2005, where the term the exemptions to that definition set
turn, affects whether an entity is a includes foreign utility companies, but forth in the PUHCA 2005, including the
holding company subject to section rather to have the same meaning as exemption for FUCOs.34
203(a)(2). The FPA does not include a ‘‘electric utility,’’ which is defined in 40. As indicated above, commenters
definition of ‘‘electric utility company’’ the FPA as ‘‘a person or Federal or State argue that part II of the FPA applies to
and the Commission proposed that the agency * * * that sells electric interstate commerce; therefore, section
term, as used in amended section energy.’’ 30 They argue that the use of 203 should not be read to extend to
203(a)(2), have the same meaning as in the term ‘‘electric utility’’ in the FPA transactions that are not in interstate
PUHCA 2005, which is ‘‘any company and in the Public Utility Regulatory commerce.35 Several commenters object
that owns or operates facilities used for to the proposed definition of ‘‘electric
Policies Act of 1978 (PURPA) 31 makes
the generation, transmission, or utility company’’ if it includes
clear that ‘‘electric utilities’’ are
distribution of electric energy for transactions typically reserved for state
domestic entities (i.e., ones selling
sale.’’ 28 commission consideration (including
electricity in the U.S.), not foreign.32
i. Comments 37. Similarly, EEI, Entergy, E.ON, transactions involving local distribution
PNM, and Progress Energy maintain companies, stand-alone generation,
35. The proposed definition of retail sales and exclusively intrastate
‘‘electric utility company’’ was one of that, in order to be consistent with the
Commission’s FPA jurisdiction, the transactions), which the commenters
the most commented-on issues in the maintain are beyond the Commission’s
NOPR. While certain commenters, Commission should define an ‘‘electric
utility company’’ as ‘‘a person that sells jurisdiction.36
including the American Public Power 41. Specifically, Chairman Barton
Association and the National Rural electric energy in interstate commerce.’’
Suez states that, based on an analysis of maintains that Congress did not intend
Electric Cooperative Association to give the Commission jurisdiction over
(APPA/NRECA), Indiana Utility and the legislative purpose behind
EPAct 2005, the Commission should mergers in ERCOT. EEI, as supported by
Regulatory Commission (Indiana E.ON, PNM, and Progress Energy,
Commission), and Southern Company exempt the acquisition of foreign utility
assets by jurisdictional holding maintains that its alternative definition
Services, Inc. (Southern Companies), for ‘‘electric utility company,’’ which is
support the Commission’s adoption of companies without captive customers
by adding the word ‘‘jurisdictional’’ ‘‘a person that sells electric energy in
the PUHCA 2005 definition of ‘‘electric interstate commerce,’’ would properly
utility company,’’ several commenters before ‘‘transmitting utility’’ and
‘‘electric utility company’’ at the end of exclude local distribution companies
expressed concerns about the scope of from the Commission’s authority under
the Commission’s jurisdiction under the proposed section 33.1(a)(2).
38. Other commenters add that the amended section 203.
proposed definition. Specifically, they 42. Further, many commenters are
Commission did not have jurisdiction
object to the proposed definition of the concerned that the proposed definition
over foreign acquisitions before EPAct
term ‘‘electric utility company’’ or seek of ‘‘electric utility company’’ applies to
2005 and that nothing in EPAct 2005
clarification as to what types of entities QFs.37 ACC, EPSA, GE EFS, and
explicitly gives the Commission
are considered ‘‘electric utility Independent Sellers ask that the
jurisdiction over foreign acquisitions.
companies,’’ for purposes of amended Commission clarify that QFs continue to
Commenters assert that Commission
section 203(a)(2), to determine whether be exempt from the Commission’s
jurisdiction over foreign acquisitions is
or not they must seek section 203 section 203 authority. ACC asks the
contrary to Congressional intent and
approval. Commission to exclude QFs that are not
36. Many commenters argue that poor public policy, because Commission
affiliated with traditional utilities,
Congress did not intend to give the review will become an impediment to
transmission providers, or other non-QF
Commission jurisdiction over U.S. investment in foreign entities and
power producers in order to ensure that
acquisitions of foreign companies.29 may discourage international
the parent companies of such QFs are
Certain commenters assert that if investment in the U.S. utility industry.33
not subject to amended section 203.
Congress had intended the PUHCA 2005 They assert that the Commission should 43. Similarly, EPSA, GE EFS, and
definition to apply to ‘‘electric utility not review the numerous and/or routine Independent Sellers request that we
company’’ as used in amended section foreign transactions that are not exclude a QF’s upstream owners from
203(a)(2), it would have said so as it did connected to the Commission’s role of Commission oversight under amended
for the other terms listed in amended overseeing U.S. wholesale electric 203. They state that section 210(e) of
section 203(a)(6). They explain that, markets and the public interest. Certain
commenters maintain that, at minimum, 34 E.g., EEI, Entergy, E.ON, Independent Sellers,

28 EPAct 2005 § 1262(5). National Grid, Progress Energy, and Scottish Power
30 EPAct 2005 1291(b)(22). (citing, e.g., PUHCA 2005 §§ 1264 & 1266).
29 E.g., Congressman Joe Barton (Chairman
31 16 U.S.C. 824a–3 (2000). 35 See, e.g., Chairman Barton Comments at 3.
Barton), The AES Corporation (AES), Edison
32 See, e.g., AES Comments at 5. For example, 36 E.g., Chairman Barton, EEI, Hawaiian Electric
Electric Institute (EEI), Entergy Services, Inc.
(Entergy), E.ON AG (E.ON), EPSA, GE Energy AES states that, unless ‘‘electric utility’’ is Company, Inc. (HECO), National Association of
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Financial Services (GE EFS), Cogentrix Energy, Inc. implicitly defined only to include domestic entities, Regulatory Utility Commissioners (NARUC),
and The Goldman Sachs Group, Inc. (Independent the provisions of sections 111–117 of PURPA, National Grid, PNM, and Progress Energy.
Sellers), National Grid USA (National Grid), PNM which relate in part to the actions of state 37 E.g., American Chemistry Counsel (ACC),

Resources, Inc. (PNM), Progress Energy, Inc. commissions as they affect ‘‘electric utilities,’’ APPA/NRECA, EPSA, GE EFS, Independent Sellers,
(Progress Energy), Scottish Power plc (Scottish become a complete non sequitur. and Transmission Access Policy Study Group
Power), and SUEZ Energy North America (Suez). 33 E.g., E.ON, Chairman Barton, and Suez. (TAPSG).

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PURPA 38 supports this finding. owning utilities is consistent with the amended section 203 (‘‘associate
Independent Sellers also maintain that public interest. company,’’ ‘‘holding company,’’ and
Congressional testimony suggests that ‘‘holding company system’’) are to have
ii. Commission Determination
amended 203(a)(2) should regulate only the same meanings given those terms in
transactions of holding companies with 47. A number of commenters make PUHCA 2005, but does not address
public utilities in their holding various arguments to support the ‘‘electric utility company.’’ Thus there is
company systems.39 contention that the term ‘‘electric utility
Congressional silence as to the meaning
44. Several commenters, including GE company,’’ as used in amended section
of the term. We are therefore left to
EFS and Morgan Stanley Capital Group 203(a)(2), should not have the same
meaning contained in PUHCA 2005. As apply a reasonable meaning to the term
Inc. (Morgan Stanley), express concern in light of the simultaneous
about whether the proposed definition discussed in greater detail below, we
have carefully considered this issue and amendments to FPA section 203 and
of ‘‘electric utility company’’ includes enactment of PUHCA 2005.
EWGs. Morgan Stanley agrees with the will retain the NOPR’s proposed
use of the PUHCA 2005 definition of definition of the term. Additionally, we 50. One of the arguments commenters
‘‘electric utility company,’’ stating that continue to believe that the most raise in seeking an alternative definition
applying the same definition in both reasonable interpretation of section of ‘‘electric utility company,’’ is that
statutes accords with traditional 203(a)(2) is that it applies to purchases ‘‘nothing compels’’ the Commission to
principles of statutory construction. or acquisitions of foreign utility use the PUHCA 2005 definition of the
However, it asks the Commission to companies. However, consistent with term.44 We agree that such a result is not
construe that definition consistent with Congressional intent, we do not want to ‘‘compelled,’’ because the term is
the exemptions set forth in PUHCA impede foreign investments and we will ambiguous. However, in determining
2005; this would exempt EWGs. grant blanket authorizations of foreign what Congress might have meant by
45. APPA/NRECA seek clarification utility company acquisitions subject to ‘‘electric utility company,’’ the only
that ‘‘a State, any political subdivision certain conditions to protect U.S. reference points the Commission has in
of a State, or any agency, authority or captive customers. We also offer further the context of federal electric utility
instrumentality of a State or political clarifications below regarding the regulatory terminology is the meaning of
subdivision of a State’’ is not an application of the definition of ‘‘electric
the term as used in PUHCA 1935 and in
‘‘electric utility company’’ under utility company’’ in specific
PUHCA 2005.45 Further, while certain
amended section 203(a)(2). circumstances and provide blanket
commenters maintain that Congress
46. Finally, the Energy Program of authorizations for certain transactions.
48. As noted above, new section intended to use the term ‘‘electric
Public Citizen, Inc. (Public Citizen) asks utility’’ instead of ‘‘electric utility
the Commission to interpret its 203(a)(2) provides:
company’’ in section 203(a)(2), there is
jurisdiction under amended FPA section No holding company in a holding company
system that includes a transmitting utility or no reliable legislative history to support
203 more extensively. It argues that this conclusion and, moreover, we do
certain ‘‘suspect’’ categories of utility an electric utility shall purchase, acquire, or
take any security with a value in excess of not believe that proper statutory
owners are not addressed in the NOPR $10,000,000 of, or, by any means whatsoever, construction permits us to simply
or in current merger policy. These directly or indirectly, merger or consolidate substitute a term that Congress did not
include investment banks, electric with, a transmitting utility, an electric utility use.46 Additionally, as discussed below,
equipment suppliers, natural gas system company, or a holding company in a holding
company system that includes a transmitting substitution of the FPA term ‘‘electric
owners, oil companies, and construction
and other ‘‘service’’ companies. Public utility, or an electric utility company, with a utility’’ would not by itself resolve the
Citizen also states that the Commission value in excess of $10,000,000 * * *.42 issue as sought by commenters.
must formulate a policy as to how it will Canons of statutory construction require 51. We conclude that the most
protect American ratepayers if foreign that effect be given to every term used reasonable interpretation of ‘‘electric
holding companies are allowed to in a statute.43 In new section 203(a)(2), utility company,’’ as used in section
acquire, or continue to own, U.S. public Congress uses the term ‘‘electric utility’’ 203(a)(2) of the FPA, particularly in
utilities. Public Citizen criticizes the (already defined in the FPA) one time, light of the fact that section 203(a)(2)
SEC’s practice of allowing foreign and the term ‘‘electric utility company’’ will become effective simultaneous with
holding companies to declare their own (undefined in the FPA, but defined in the repeal of PUHCA 1935 and
domestic utilities to be FUCOs under both PUHCA 1935 and PUHCA 2005) enactment of PUHCA 2005, is the
section 33 of PUHCA 1935, even though two times in the same sentence. We meaning in PUHCA 2005: ‘‘any
Congress did not intend to provide for cannot ignore the fact that Congress company that owns or operates facilities
this.40 Public Citizen asks for greater used two different terms within the used for the generation, transmission, or
protections for domestic ratepayers same sentence. Had Congress intended distribution of electric energy for sale.’’
given the absence of a requirement for ‘‘electric utility’’ to be used in three We also find that it is reasonable to
‘‘registration for foreign holding places instead of one, it would have
companies and comprehensive PUHCA done so. 44 Commenters’ alternative proposed definitions

1935 regulation of their financial 49. However, the precise meaning of are also discussed below in the specific context of
transaction with their U.S. public the term ‘‘electric utility company’’ is the requested exemptions of foreign transactions.
utilities.’’ 41 It also states that the not clear. It is not a defined term in the 45 While both the FPA and PURPA contain

FPA. Amended section 203(a)(6) definitions of ‘‘electric utility,’’ neither contains a


Commission should require a strong definition of ‘‘electric utility company.’’
showing that acquisition by a foreign provides that certain other terms used in 46 See, e.g., Indiana Michigan Power Co. v. Dept.

company without any experience in of Energy, 88 F.3d 1272, 1276 (DC Cir. 1996)
42 EPAct 2005 1289(a). (vacating an agency’s decision where the agency’s
43 See Reiter v. Sonotone Corp., 442 U.S. 330, 339 ‘‘treatment of [a] statute is not an interpretation but
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38 16 U.S.C. 824a–3 (2000). Section 210(e) (1979) (finding that settled principles of statutory a rewrite’’); United States v. Plaza Health
provides certain exemptions for cogeneration and construction require giving ‘‘effect, if possible, to Laboratories, Inc., 3 F.3d 643, 655 (2nd Cir. 1993),
small power producers. every word Congress used’’); see also 2A Statutes cert. denied sub nom. United States v. Villegas, 512
39 Independent Sellers Comments at 9.
and Statutory Construction § 46.06 (N. Singer 6th U.S. 1245 (1994) (‘‘neither agencies nor courts
40 Public Citizen Comments at 10.
Ed. 2000 Revision) (a statute must be construed so should rewrite the statute to be more ‘reasonable’
41 Id. at 10–11. that no part will be void or insignificant). * * * than Congress intended’’).

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interpret section 203(a)(2) as applying to would require us to write into the transmission in interstate commerce, we
foreign utility acquisitions, in light of statute words that are not there.50 nevertheless conclude that commenters
the legitimate concern that there be 53. We also reject the alternative, have raised valid concerns and that
federal oversight to ensure that U.S. proposed by Suez, by which the there would be no benefit from the
captive customers do not cross- Commission would exclude foreign Commission’s case-by-case evaluation of
subsidize foreign transactions and that acquisitions by jurisdictional holding certain transactions under section
U.S. utility assets used to serve captive companies without captive customers 203(a)(2).51
customers are not encumbered in order by adding the word ‘‘jurisdictional’’ 56. Our core jurisdiction under part II
to support foreign acquisitions. The before ‘‘transmitting utility’’ and of the FPA continues to be transmission
legislative history relevant to new ‘‘electric utility company’’ at the end of and sales for resale of electric energy in
section 203(a)(2) evidences this proposed section 33.1(a)(2) (which interstate commerce and we believe that
concern.47 However, the legislative reflects new section 203(a)(2)). Congress a major impetus behind section
history also makes clear that the in other provisions of the FPA, 203(a)(2) was to clarify the
provision was not intended to impede including section 203, has specifically Commission’s jurisdiction over mergers
foreign investments, particularly where limited certain authorizations to of holding companies that own public
there are no U.S. captive customers that jurisdictional facilities, but chose not to utilities as defined in the FPA.52
could be affected. Accordingly, we will do so in section 203(a)(2). We do not However, the fact is that the language in
interpret ‘‘electric utility company’’ to believe it is appropriate to insert into section 203(a)(2) does more than
include foreign utility companies, but, the statute modifiers that Congress did address this issue, and we must
as discussed infra, we will grant blanket not include. implement the provision in a way that
authorizations for certain foreign 54. A number of commenters raised recognizes the expansion of authority,
acquisitions, with conditions to protect concerns about the definition of yet retains our primary focus on
U.S. customers. ‘‘electric utility company’’ and the interstate wholesale energy markets and
applicability of the Commission’s does not interfere unduly with historical
52. We reject commenters’ specific
authority under amended section 203 to state jurisdiction. Accordingly, we
alternatives to the proposed definition
transactions wholly within ERCOT, conclude that it is consistent with the
of ‘‘electric utility company.’’ We do not
Alaska, or Hawaii, transactions public interest to grant blanket
believe that those proposed alternative
involving QFs, local distribution authorizations in the Final Rule for the
definitions properly resolve the issue as
companies, stand-alone generation, following:
to whether amended section 203(a)(2)
retail sales and other intrastate (1) Section 203(a)(2) purchases or
applies to acquisitions of foreign utility
transactions. Several of these acquisitions by holding companies of
companies. As noted above, the term
commenters rely on the argument, as companies that own, operate, or control
‘‘electric utility company’’ is defined in stated above, that Congress did not facilities used solely for transmission or
PUHCA 2005 as ‘‘any company that intend to expand significantly the sales of electric energy in intrastate
owns or operates facilities used for the Commission’s jurisdiction and, commerce; and
generation, transmission, or distribution therefore, did not convey to the (2) Section 203(a)(2) purchases or
of electric energy for sale.’’ 48 In Commission jurisdiction over acquisitions by holding companies of
contrast, ‘‘electric utility’’ (which some transactions typically reserved for state facilities used solely for local
commenters would have us substitute) commission consideration. Others argue distribution and/or sales at retail
is defined in the FPA, as modified by for exemptions from the definition of regulated by a state commission.
EPAct 2005, as ‘‘a person or Federal or ‘‘electric utility company.’’ 57. We conclude that these blanket
State agency * * * that sells electric 55. While we do not believe it is authorizations are consistent with the
energy.’’ 49 Neither of these terms, on its reasonable to interpret section 203(a)(2) public interest for several reasons. First,
face, is limited to domestic transactions as being limited solely to holding the identified categories do not raise
or even to interstate transactions. company acquisitions and mergers concerns with respect to competitive
‘‘Electric utility,’’ as defined in the FPA, involving wholesale sales or wholesale markets for sales in interstate
both pre- and post-EPAct 2005, means commerce or protection of wholesale
persons that sell electric energy. Thus, 50 In fact, the key FPA provisions in which the captive customers served by
we reject the argument that the term ‘‘electric utility’’ is used are sections 210 and Commission-regulated public utilities—
Commission should insert the term 211. Section 210, both pre- and post-EPAct 2005, matters within this Commission’s core
‘‘electric utility’’ into section 203(a)(2) permits the Commission to order an
interconnection with the facilities of persons that
responsibility and expertise. Second, to
and then re-define it to mean persons sell energy in interstate or intrastate commerce. The the extent these categories raise
that sell electric energy ‘‘in interstate current interconnection between ERCOT and the competitive issues in intrastate
commerce.’’ Not only has the modifier interstate grid was pursuant to a Commission order commerce, i.e., in ERCOT, Hawaii, and
in ‘‘interstate commerce’’ not been under sections 210 and 211 of the FPA. See Central
Power & Light Co., 17 FERC ¶ 61,078 (1981), order
Alaska,53 those issues are within the
included in the FPA definition of on reh’g, 18 FERC ¶ 61,100 (1982). Although
‘‘electric utility’’ either pre- or post- commenters are correct that most of part II of the 51 An acquisition or merger involving ‘‘any

EPAct 2005, but these commenters FPA is limited to interstate commerce, Congress has company that owns or operates facilities used for
made specific exceptions in certain FPA provisions, the generation, transmission, or distribution of
and that includes the definition of ‘‘electric utility.’’ electric energy for sale’’ is not on its face limited
47 The only legislative history on this issue is a
Cf. Indiana Michigan Power Co. v. Dept. of Energy, to interstate facilities.
colloquy between Senators Bingaman and 88 F.3d 1272, 1276 (DC Cir. 1996) (‘‘The [agency’s] 52 Illinois Power Co., 67 FERC ¶ 61,136 (1994)
Domenici, Ranking Member and Chairman, treatment of this statute is not an interpretation but (noting that the Commission does not have
respectively, of the Senate Committee on Energy a rewrite.’’); United States v. Plaza Health jurisdiction over public holding company mergers
and Natural Resources. See Senate Floor Statements Laboratories, Inc., 3 F.3d 643, 655 (2nd Cir. 1993) or consolidations, but concluding that, ordinarily,
by Senators Bingaman (D–NM) and Domenici (R– (stating ‘‘neither agencies nor courts should rewrite when public utility holding companies merge, an
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NM), H.R. 6, Energy Policy Act of 2005, 151 Cong. the statute to be more ‘reasonable’ * * * than indirect merger involving their public utility
Rec. S9359 (July 29, 2005) (discussing concerns Congress intended’’); Newman v. Love, 962 F.2d subsidiaries also takes place, and that Commission
regarding Commission approval of certain foreign 1008, 1013 (Fed. Cir. 1992) (rejecting an agency’s approval under section 203 would be required).
transactions outside of the United States). ‘‘attempt to rewrite’’ a statute to contain costs or to 53 Similarly, although not raised by commenters,
48 EPAct 2005 § 1262(5).
avoid what it views as an inappropriate allocation the blanket authorization would apply to any
49 Id. § 1291(b)(22). of benefits). organized Territory of the United States.

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expertise of, and more appropriately this could preclude review of certain proposed transaction to ensure it is
addressed by, state commissions. Third, acquisitions of securities of EWGs or consistent with the public interest.
to the extent retail competition and QFs even by holding companies whose Moreover, Public Citizen will have an
retail ratepayer protection issues are systems contain traditional public opportunity to present its concerns in
raised by a holding company acquisition utilities with transmission facilities these specific cases.
of local distribution or other retail and/or captive customers. We do not b. Definitions of ‘‘Associate Company,’’
facilities, these issues also are within believe that such transactions should be ‘‘Holding Company,’’ ‘‘Holding
the expertise of, and more appropriately excluded from review under section 203 Company System,’’ and ‘‘Transmitting
addressed by, state commissions. We and conclude that it is reasonable to Utility’’
will thus grant the identified blanket interpret the statute not to exclude
authorizations and not impose any type them.55 We recognize the arguments of 62. In the NOPR, the Commission
of filing requirement with respect to some commenters that we should not explained that the term ‘‘transmitting
such transactions. apply section 203(a)(2) to holding utility’’ is already defined in amended
58. In response to the request of company acquisitions of securities of section 3 of the FPA 57 as ‘‘an entity
APPA/NRECA that we clarify that ‘‘a EWGs and QFs, or at a minimum should (including an entity described in section
State, any political subdivision of a not apply it to such acquisitions by 201(f)) that owns, operates, or controls
State, or any agency, authority or holding companies that are holding facilities used for the transmission of
instrumentality of a State or political companies solely by virtue of owning or electric energy—(A) in interstate
subdivision of a State’’ is not an controlling one or more EWGs, FUCOs, commerce; (B) for the sale of electric
‘‘electric utility company’’ under or QFs, because it would impede energy at wholesale.’’ 58
amended section 203(a)(2), and investments in QFs and EWGs or result 63. The Commission also proposed
therefore, not subject to amended in unnecessary regulation of upstream that, consistent with amended section
section 203, we clarify that even if a 203(a)(6), the terms ‘‘associate
owners of QFs and EWGs.56 In response,
governmental entity were to meet the company,’’ ‘‘holding company,’’ and
we believe the blanket authorizations
definitions of ‘‘electric utility company’’ ‘‘holding company system’’ shall have
granted herein for certain holding
or ‘‘holding company,’’ section 203(a)(2) the meaning given those terms in
company acquisitions of non-voting
would not impose on the governmental PUHCA 2005.59
securities and up to 9.9 percent of
entity any filing requirements under voting securities in electric utility i. Comments
section 203. This is discussed in further companies will adequately address the
detail infra. However, if a non- 64. No comments were filed
concerns raised. To the extent specifically in response to these
governmental public utility holding additional blanket authorizations are
company were to seek to acquire a proposed definitions of ‘‘transmitting
needed or appropriate, we will consider utility,’’ ‘‘associate company,’’ or
governmental utility (e.g., a municipal those on a case-by-case basis.
utility) that owns interstate transmission ‘‘holding company system.’’ However,
61. Public Citizen makes broad several commenters object to the
facilities or facilities used for wholesale comments on the scope of the
sales in interstate commerce (and thus proposed definition of ‘‘holding
Commission’s jurisdiction and the company’’ or seek exemption from that
meets the definitions of ‘‘electric utility standards articulated in the
company’’), and turn it into a private definition for purposes of amended
Commission’s existing merger policy. section 203(a)(2). They seek to limit the
company subsidiary, then section We reject the request that we treat
203(a)(2) should apply to the public scope of the Commission’s definition of
various types of utility owners or ‘‘holding company.’’ 60 Amended
utility holding company’s acquisition.
transactions as ‘‘suspect.’’ As discussed section 203(a)(2) provides explicitly, for
While no section 203 filing requirement
below, the Commission is adopting the the first time, that ‘‘holding companies’’
would be imposed on the governmental
definition of ‘‘holding company’’ as must seek Commission approval prior to
entity, it would be imposed on the
required by amended section 203(a)(6), certain mergers and acquisitions.
private entity.
59. We reject commenters’ request and is adopting a definition of ‘‘electric Commenters seek clarification as to the
that we explicitly exclude QFs and utility company’’ that is reasonable, in types of entities that meet the definition
EWGs from the definition of ‘‘electric light of the statutory construction of of ‘‘holding company’’ to confirm
utility company.’’ Regardless of their amended section 203 and Congressional whether or not they will be subject to
status under PUHCA 2005, the silence. We note that several of the this new filing requirement.
exemptions set forth under PUHCA scenarios discussed by Public Citizen in 65. GE EFS asks the Commission to
2005 are not dispositive as to the scope its comments fall under the construe the term ‘‘holding company’’ to
of the Commission’s amended FPA Commission’s amended section 203 include only companies that own
section 203 authority. These PUHCA authority, as clarified herein. As with all traditional utilities and that would have
2005 exemptions are set forth in the such transactions under its review, the been deemed to be holding companies
context of federal access to books and Commission will carefully examine the under PUHCA 1935. This would
records and, more importantly, unlike exclude companies that are holding
PUHCA 2005, FPA section 203 does not
55 We note that a holding company acquisition of
companies only by virtue of owning
securities of an EWG would in some circumstances QFs, EWGs, or FUCOs. Industrial
give us any express authority to exempt trigger section 203 review in any event by virtue of
persons or classes of transactions.54 section 203(a)(1). This is because the EWG could
57 16
60. Additionally, were the well be a public utility and, to the extent the U.S.C. 796 (2000).
58 NOPR at P 38 (citing EPAct 2005
Commission to interpret ‘‘electric utility holding company acquired ‘‘control’’ of the EWG,
we would construe the EWG to be ‘‘disposing’’ of 1291(b)(1)(B)(23)).
company’’ for purposes of FPA section its jurisdictional facilities and thus required to file 59 Id. at P 39 (citing EPAct 2005 1262(2), (8), &
203(a)(2) not to include EWGs or QFs, for approval under section 203(a). A similar (9)).
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situation involving acquisition of securities of a QF 60 E.g., GE EFS, HECO, Independent Sellers, and
54 While QFs themselves currently are exempt would not trigger section 203 review, since QFs the Electricity Consumers Resource Council, the
from section 203’s filing requirements by virtue of currently are exempted from FPA section 203 filing American Iron and Steel Institute, the American
the Commission’s PURPA regulations, PURPA does requirements by the Commission’s PURPA Chemistry Council, and the PJM Industrial
not give us authority to exempt holding companies regulations. Customer Coalition (collectively, Industrial
that own QFs. 56 See, e.g., GE EFS and Independent Sellers. Consumers).

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Consumers also seek to limit the ‘‘holding company.’’ Amended section owning new electric generation that
definition of ‘‘holding company,’’ asking 203(a)(6) mandates that the term have not yet begun commercial
the Commission to clarify that ‘‘holding company’’ shall have the operation.
‘‘industrials and other entities whose meaning provided in PUHCA 2005. This 73. We grant APPA/NRECA’s request
on-site generation investment meets the statutory directive is unambiguous. that the Commission clarify that a state
statutory definition of EWGs’ are not 70. The Commission therefore rejects or any political subdivision of a state or
included in the definition.61 requests for clarification that only agency thereof is not a ‘‘holding
Independent Sellers asks the companies that own traditional utilities, company’’ under amended section
Commission to confirm that a ‘‘holding and not those that own solely FUCOs, 203(a)(2). While the definition of
company,’’ for purposes of amended EWGs and/or QFs, should be deemed holding company possibly could be
section 203(a), does not include entities ‘‘holding companies’’ under amended construed to include governmental
owning new electric generation facilities section 203. ‘‘Holding Company’’ in entities or electric power cooperatives,
that have not yet begun commercial PUHCA 2005, as reflected in the rules we believe a more reasonable
operation. adopted herein, means ‘‘any company interpretation is that Congress did not
66. APPA/NRECA seek clarification that directly or indirectly owns, intend to give the Commission authority
that ‘‘a State, any political subdivision controls, or holds, with the power to over acquisitions by such entities.
of a State, or any agency, authority or vote, 10 percent or more of the Section 201(f) of the FPA 65 excludes
instrumentality of a State or political outstanding voting securities of a public from most FPA part II provisions
subdivision of a State,’’ does not meet utility company or of a holding
governmental entities and electric
the definition of ‘‘holding company.’’ 62 company of any public utility company;
power cooperatives financed by the
It also seeks clarification that rural * * *’’ 64 There is no limitation within
Rural Electrification Act of 1936,66 and
electric cooperatives are not ‘‘holding the plain words of this definition that
there is no indication that Congress
companies’’ under amended section can be read to exclude holding
intended to impose any section 203
203(a)(2). companies that own or control EWGs,
filing requirements on such entities.
67. HECO seeks clarification that an FUCOs, or QFs. Additionally, even
Accordingly, we will not interpret
entity that meets the definition of under PUHCA 2005, persons that own
section 203(a)(2) to apply to
holding company for purposes of or control only EWGs, FUCOs, or QFs
governmental entities and electric
section 203(a)(2) solely because it is the are considered holding companies but
power cooperatives.
upstream owner of an electric utility are explicitly exempted from PUHCA
company that is not a public utility 2005 by section 1266. There is no 3. Section 33.1(b)—Definition of
under FPA, and that is not otherwise similar exemption in amended section ‘‘Existing Generation Facility’’
subject to Commission jurisdiction 203 and we conclude that it is
reasonable to interpret section 203(a)(2) 74. The Commission proposed that
under any other provision of part II of subsection 33.1(b) would define
the FPA, will not be subject to the review to include acquisitions of
generation or transmission facilities or ‘‘existing generation facility’’ for section
Commission’s merger authority. HECO 203 purposes as a generation facility
explains that this would exclude from companies by holding companies
owning only FUCOs, QFs, and/or EWGs. that is operational at the time the
the Commission’s jurisdiction under transaction is consummated.67 The
section 203(a)(2) acquisitions of holding 71. In response to the clarification
sought by HECO, as indicated above, Commission stated that, as reflected in
companies with subsidiaries located proposed section 33.1(a)(1)(iv)(b), if
only in Hawaii, Alaska, ERCOT, and amended section 203(a)(6) mandates the
adoption of the PUHCA 2005 definition such a generation facility is intended to
foreign countries. HECO contends that be used in whole or in part for
Commission oversight of holding of ‘‘holding company.’’ That definition
includes the upstream owners of an wholesale sales in interstate commerce
company acquisitions in this context is by a public utility, it is subject to our
not necessary to protect the public electric utility company that is not a
public utility under the FPA and that is jurisdiction for ratemaking purposes
interest. and thus is covered under amended
not otherwise subject to Commission
ii. Commission Determination ratemaking jurisdiction under part II of section 203(a)(1)(D). The Commission
68. Because the term ‘‘transmitting the FPA. As discussed above regarding explained that, although the statute
utility’’ is already defined in amended the definition of ‘‘electric utility refers to a facility that ‘‘is’’ used for
section 3 of the FPA and amended company,’’ we have concluded that this wholesale sales (and over which the
section 203(a)(6) provides that the terms definition is not limited to interstate Commission has jurisdiction for
‘‘associated company’’ and ‘‘holding commerce. Therefore, holding ratemaking purposes), we believed that
company system’’ shall have the companies that own ‘‘electric utility a reasonable interpretation is that the
meaning provided in PUHCA 2005, the companies’’ whose businesses are solely provision would apply to newly
Final Rule adopts them, as set forth in intrastate technically fall under constructed facilities that have already
the NOPR.63 We also note that no amended section 203(a)(2). However, we been energized at the time the
commenters oppose these proposed agree that reviewing transactions transaction is consummated and are
definitions. involving Hawaii, Alaska, and ERCOT intended to be used in whole or in part
69. The Final Rule also adopts the would involve matters outside our for wholesale sales in interstate
NOPR’s proposed definition of the term expertise and the core focus of part II of commerce by public utilities. The
the FPA, and therefore we have granted Commission also noted that if it can be
61 Industrial Consumers Comments at 6. blanket authorizations, as discussed demonstrated that a facility is used
62 APPA/NRECA Comments at 18. above. exclusively for retail sales, then
63 We note that, prior to EPAct 2005, the FPA 72. As requested by Independent amended section 203(a)(1)(D) does not
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term ‘‘transmitting utility’’ was not limited to Sellers, we clarify that a ‘‘holding apply.
entities that own or operate transmission facilities company,’’ for purposes of amended
used ‘‘in interstate commerce.’’ EPAct 2005,
however, modified the definition to, among other section 203(a), does not include entities 65 16U.S.C. 824(f) (2000).
66 7U.S.C. 901 et seq.
things, limit it to facilities used in interstate
commerce. 64 EPAct 2005 1262(8). 67 NOPR at P 37.

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a. Comments transfers of facilities removed from ascertain. Southern is also concerned


75. The definition of ‘‘existing service and from the Commission’s that the ‘‘intent’’ language would
generation facility’’ drew extensive accounting and thus are not physically introduce confusion as to the
comment from state regulatory or otherwise capable of making jurisdictional status of transfers of
commissions, traditional public wholesale sales. facilities that are merely under
78. Although all commenters agree construction. Chairman Barton
utilities, public/cooperative entities and
that section 203 review should questions whether requiring only an
retail customer and other groups.
76. One comment raised by EEI and encompass facilities that are intent to use facilities in interstate
Progress Energy is that the Commission ‘‘operational,’’ they disagree as to how commerce will unduly burden potential
should construe the term ‘‘existing’’ to to define ‘‘operational’’ and ‘‘ability to transactions and results in unnecessary
mean only facilities that existed as of make sales.’’ They also disagree as to the review, particularly when, after the
the date of enactment of EPAct 2005 point in time at which a jurisdictional facilities are placed in service, the
determination is to be made, Commission has authority under FPA
(August 8, 2005). They claim that had
particularly for substantially completed sections 205 68 and 206 69 over the
Congress meant to apply amended
plants that are at or near the facility and its rates. Although not
section 203 to facilities that become
‘‘operational stage.’’ APPA/NRECA specifically referring to either the
operational after August 8, 2005, it
finds the Commission’s proposed ‘‘intent’’ language or the ‘‘exclusive use
would have used different language.
approach reasonable, but is concerned for retail sales’’ language, the North
APPA/NRECA takes the decidedly
that defining a facility on the basis of Carolina Utilities Commission (North
opposite view that applying amended
whether the facility is energized may Carolina Commission) emphasizes that
section 203 only to facilities that existed
allow companies to evade section 203 nothing in amended section 203(a)(1)(D)
when EPAct 2005 was enacted would
by delaying the interconnection process. expands the Commission’s jurisdiction
eventually mean the demise of section NASUCA shares this concern, asserting to include generation resource adequacy
203 review, without any indication that that whether the plant is producing for retail service; EPAct 2005 expressly
Congress intended such a result. electricity at the time of the transaction
77. Most commenters focused on the reserves authority over generation
is irrelevant to whether section 203 resource adequacy to the states. It urges
term ‘‘existing’’ in its operational and
jurisdiction should apply. NARUC, that the final rule recognize this
temporal context, as reflected in the
Progress Energy, and Southern limitation.
NOPR’s proposal to assert jurisdiction Companies take the view that for a 81. Other commenters, such as Utility
over transfers of facilities that ‘‘are generation facility to be deemed Workers Union of America, AFL–CIO
operational at the time the transaction is ‘‘operational,’’ it must be interconnected (UWUA) and APPA/NRECA, generally
consummated.’’ Commenters generally and synchronized with the system so support the ‘‘intent’’ language. APPA/
focused on whether the facilities are in that it is capable of making wholesale NRECA and TAPSG, however, believe
the construction or development stage, sales. Other commenters suggest that a that a very high standard should be set
at or near ‘‘operation,’’ or in retired or facility actually be in service and for demonstrating that a facility is
mothballed status. Contrary to most making jurisdictional sales. Most exclusively used for retail sales. TAPSG
commenters, Kentucky Public Service commenters agree with the points out that utilities do not ordinarily
Commission (Kentucky Commission) Commission’s proposal that the dispatch their units separately for
and National Association of State Utility jurisdictional determination should be wholesale sales and retail sales. Both
Consumer Advocates (NASUCA) would made on the basis of whether the facility commenters also contend that amended
have the Commission assert jurisdiction is operational, or is projected to be section 203 should apply to facilities
over transfers of facilities that are under operational when the transaction is (or that received an exemption initially
construction or development. NASUCA is expected) to be consummated. from section 203 on the basis of retail
argues that section 203 should apply if NARUC, however, suggests that the use only but that later are used for
the facilities have received any kind of jurisdictional determination should be wholesale sales. Owners of such
federal or state permit or have applied made on the basis of whether the facility facilities should be subject to the
for market-based rate authority or is operational at the time the underlying Commission’s expanded penalty
generator interconnection status with an transaction agreement has been entered authority. APPA/NRECA and TAPSG
independent system operator (ISO) or into and submitted for Commission argue that the Commission should
regional transmission organization approval. explicitly state that section 203 approval
(RTO). It contends that such facilities 79. Wisconsin Electric Power is required for the acquisition of a QF;
are already influencing the market, Company (Wisconsin Electric) expresses they ask us to clarify that QFs may be
particularly if they are being sold to concern regarding the application of the ‘‘existing generation facilities’’ under
provide future capacity or ancillary term ‘‘operational.’’ It requests that the amended section 203(a)(1)(D).
services. By the same token, NASUCA Commission clarify either that
and TAPSG want us to assert ‘‘consummated’’ refers to when the b. Commission Determination
jurisdiction over transfers of units that transaction, as defined by the lease and 82. The Commission will clarify and
are mothballed or retired, especially if associated commitments, is executed or modify a number of aspects of its
the units can be brought back on line that ‘‘operational’’ is restricted to proposal for determining whether a
and retain the permits or authorities. operations in the ordinary course of the generation facility is an existing
FirstEnergy Service Company business of the non-acquiring party. generation facility for purposes of
(FirstEnergy) recommends that the 80. EEI and Ameren Services amended section 203(a)(1)(D). We will
Commission clarify its rules to deal with Company (Ameren) argue that the also address other questions raised by
a mothballed facility that is slated to be ‘‘intent’’ language in proposed section commenters with regard to the NOPR.
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refurbished and with a facility that is 33.1(a)(1)(iv)(b) exceeds the statutory 83. Initially, the Commission will
shut down where the site and authority of amended section reject EEI’s and Progress Energy’s
equipment has been sold. Neither 203(a)(1)(D)(ii). They also insist that an
FirstEnergy nor Progress Energy believe ‘‘intent’’ standard is unworkable 68 16 U.S.C. 824d (2000).
that section 203 should apply to because ‘‘intent’’ would be difficult to 69 16 U.S.C. 824e (2000).

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1358 Federal Register / Vol. 71, No. 4 / Friday, January 6, 2006 / Rules and Regulations

argument that ‘‘existing generation in the development or construction company in a holding company system
facility’’ should be construed to stage. However, an ‘‘existing generation other than a public utility or electric
encompass only those generation facility’’ would include a mothballed utility company that has wholesale or
facilities in existence as of the date of facility, so long as the facility was retail customers served under cost-based
enactment of EPAct 2005 (i.e., August 8, operational at any time before the regulation.71 Therefore, we proposed
2005). They submit that any other transaction is consummated. that a non-utility associate company
interpretation would effectively write 86. With regard to the issue of would include, for example, a power
‘‘existing’’ out of the statute and that if wholesale versus retail sales, the marketer, a generator that does not have
Congress had intended amended section Commission will eliminate the language captive customers, a gas marketer, a fuel
203 to apply to generation facilities that ‘‘intended to be’’ from proposed section supply company or other company that
come into existence after August 8, 33.1(a)(1)(iv)(b). We agree with some provides inputs to power production, or
2005, it would have used plainly commenters that ‘‘intent’’ is difficult to a company that is involved in business
different language. We do not agree. discern and could introduce activities not related to the generation,
First, such an interpretation is not, as unnecessary confusion about plants that transmission, distribution, or sale of
Progress Energy suggests, required as a are under construction and clearly not electricity.72 This definition is relevant
textual matter. Congress could have, but being used for wholesale sales. Rather, because of the new section 203(a)(4)
chose not to, use the term ‘‘existing on the Commission will adopt a rebuttable requirement that we find that a
the effective date of this Act.’’ Rather, it presumption that amended section proposed transaction does not result in
simply used the term ‘‘existing.’’ 203(a) applies to the transfer of any inappropriate cross-subsidization or
Second, such an interpretation would existing generation facility unless the pledge or encumbrance of utility assets.
make little sense. It would eventually utility can demonstrate with substantial The Commission sought comment on
write amended section 203(a)(1)(D) out evidence that the generator is used whether it should use a narrower
of existence as pre-EPAct 2005 exclusively for retail sales. In our definition, for example, whether we
generation facilities are retired and only experience, utilities do not ordinarily should define a ‘‘non-utility associate
post-EPAct 2005 generation facilities separate the dispatch of their plants for company’’ as a company that is in a
remain. There is only a brief mention of retail sales and wholesale sales; rather, business not related to the generation,
the term ‘‘existing,’’ without any they dispatch all their units on an transmission, distribution, or sale of
explanation, in the legislative history of integrated basis to serve all load (retail electricity.
amended section 203. However, the and wholesale). Therefore a utility
proposing an unusual procedure by a. Comments
legislative history suggests that Congress
intended for the Commission to not only which it dispatches certain plants 89. Many state commissions and other
continue, but to expand our review of ‘‘only’’ for retail load will have the commenters from the industry agree that
activities that would affect wholesale burden to demonstrate that any the Commission’s proposed broad
competition and ratepayers.70 particular generating facility will never definition of ‘‘non-utility associate
Therefore, we reject EEI’s and Progress be used to make wholesale sales. company’’ should be adopted in order to
Energy’s argument. 87. Finally, in response to afford the greatest protection against
84. The Commission adopts the commenters’ requests that section 203 cross-subsidization, as Congress
NOPR’s proposal that an ‘‘existing approval be required for the acquisition intended in EPAct 2005.73 Indiana
generation facility’’ is a generation of a QF, we clarify that if a public utility Commission and NARUC explain that
facility that is operational at or before acquires an existing generation facility the cross-subsidization of an entity
the time the transaction is used for Commission-jurisdictional involved in a business unrelated to the
consummated. However, we are deleting sales, whether a QF or any other type of electric industry and the cross-
language in proposed section generation facility, the transaction is subsidization of an entity involved in
33.1(a)(iv)(b) stating that section 203 subject to section 203. Although certain ‘‘unregulated,’’ electricity-related
applies if the generation facility ‘‘is QFs themselves are exempted from any activities are equally inappropriate. On
intended to be used’’ in whole or in part filing requirements under section 203 by the other hand, FirstEnergy and
for wholesale sales in interstate virtue of our PURPA regulations, this Southern Companies urge the
commerce by a public utility. Below we does not mean that public utilities that Commission to adopt the narrower
explain various aspects of this acquire QFs are exempt. Additionally, definition.
there is no limitation in amended 90. American Electric Power Service
definition.
85. We note first that ‘‘the time the section 203(a)(1)(D) on the type of Corporation (AEP) asserts that both the
transaction is consummated’’ refers to generation facilities that trigger section Commission’s broader definition
the point in time when the transaction 203 review, if they are used for proposed in the NOPR and the narrower
actually closes and control of the facility interstate wholesale sales and the definition (proposed as an alternative)
changes hands. The Commission will Commission has jurisdiction over them are unnecessarily broad, ensnaring
construe ‘‘operational’’ to mean a for ratemaking purposes. Further, even companies that are providing essentially
generation facility for which if the Commission had the discretion to ancillary services to the regulated utility
construction is complete (i.e., it is exempt QF acquisitions from section and that thus present no risk of cross-
capable of producing power). An 203 review, we do not think it would be subsidization. AEP maintains that
‘‘existing generation facility’’ would not necessarily consistent with the public amended section 203(a)(4) is simply
include generation plants that are only interest to do so in light of EPAct 2005’s designed to ensure that a transaction
elimination of QF ownership does not result in cross-subsidization,
70 See, e.g., Senate Floor Statement by Senator restrictions.
71 NOPR at P 44.
Bingaman (D–NM), H.R. 6, Energy Policy Act of
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2005, Congressional Record at S9258 (July 28, 2005) 4. Section 33.1(b)—Definition of ‘‘Non- 72 These are examples only. This list is not
(stating that ‘‘in the area of electric utility mergers, Utility Associate Company’’ intended to be exhaustive.
we have expanded the jurisdiction of [the 73 E.g., APPA/NRECA, Indiana Commission,

Commission] over mergers involving existing


88. The Commission proposed to Kentucky Commission, NARUC, NASUCA, and
generation plants; that is, plants that are in interpret the term ‘‘non-utility associate New Jersey Board of Public Utilities (New Jersey
existence at the time the merger takes place.’’). company’’ to mean any associate Board).

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which, by definition, only occurs when marketer, a generator that does not have as used in amended section 203(a)(2)) as
a competitive affiliate of the utility is captive customers, a gas marketer, a fuel ‘‘market value.’’ We stated that in most
unduly enriched by use of regulated supply company or company that instances market value would be
assets. AEP states that the Commission provides inputs to power production, or reflected in the transaction price for
has already defined these energy a company that is involved in business transactions between non-affiliates.
affiliate companies in the Standards of activities not related to the generation, 97. Turning to how to value paper
Conduct,74 and states that we should transmission, distribution or sale of jurisdictional facilities, the Commission
define a ‘‘non-utility associate electricity. proposed that the value of any
company’’ by adopting the same wholesale contract included in the
5. Section 33.1(b)—Definition of
definition used to describe an ‘‘energy transaction would be based on total
‘‘Value’’
affiliate’’ in 18 CFR 358.3(d). expected contract revenues over the
94. In the NOPR, the Commission remaining life of the contract.79 We
b. Commission Determination proposed to generally rely on a ‘‘market noted that market value was an
91. We agree with the majority of the value’’ approach for determining alternative approach and that it could be
commenters that the NOPR’s proposed whether asset transfers, with the based on the price or consideration paid
broader definition of the term ‘‘non- exception of wholesale contracts, meet for the contract.
utility associate company’’ is the value threshold necessary to require 98. The Commission proposed to
reasonable. Our goal in defining this approval under amended section 203. define the ‘‘value’’ of a security, as
term is to ensure that public utilities This would base value on expected discussed in amended sections
with captive customers do not cross- future earnings or profits over the life of 203(a)(1)(C) and (a)(2), as the market
subsidize ‘‘non-regulated’’ associate the asset. This is in contrast to our price at the time the security is
companies, i.e., companies that are not current regulations, which define value acquired.80 For transactions between
subject to traditional cost-based as original cost undepreciated as non-affiliated companies, the
regulation.75 As it relates to this defined in the Commission’s Uniform Commission proposed to rebuttably
objective, there is no difference between System of Accounts; in other words the presume that the market value is the
the propriety of cross-subsidizing amount paid for installing an original agreed-upon transaction price. We
associate energy companies that are not plant and equipment and additions sought comments on how to determine
subject to traditional cost-based thereto.77 As described below, the value for security transactions involving
regulation versus an entity that is Commission proposed certain measures affiliates if the securities are not widely
involved in a business completely of value for each of four types of asset
traded. Further, the Commission sought
unrelated to the energy industry. Since transactions, inviting comment and
comments as to whether it should give
the purpose is to protect customers, suggestions for alternative approaches.
95. Specifically, the Commission particular weight to evidence of non-
whether the company inappropriately affiliate transactions involving either
subsidized is an associate company in proposed that section 33.1(b) would
define ‘‘value,’’ as applied to non-affiliated buyers or sellers of
the energy industry or not is irrelevant. securities of similarly situated utilities
92. We disagree with AEP’s jurisdictional facilities and existing
generation facilities (addressed by or assets.
contention that cross-subsidization
occurs only when using traditionally amended subsections 203(a)(1)(A) and a. Comments on Definition of ‘‘Value’’
regulated assets to subsidize a (D)), as the market value of such as Applied to Transmission and
competitive affiliate of the utility facilities.78 The Commission recognized Generation Facilities
company. Congress was concerned with that determining the market value of
99. Nearly all commenters support the
the potential for abuse when a transmission facilities could be difficult
use of market value. Most commenters
traditionally regulated public utility in some instances. We proposed that, in
support using transaction price to
(i.e., one that is subject to the the absence of a readily ascertainable
measure market value in most
Commission’s traditional cost-based market value, original cost
situations.81
regulation) subsidizes an ‘‘unregulated’’ undepreciated would be used. For
100. APPA/NRECA and TAPSG
affiliate company within the same transactions involving transfers of
contend that market value should be
holding company system. Defining a facilities between non-affiliates, the
replaced by ‘‘fair’’ market value. They
non-utility associate company based on Commission stated that market value
recommend that the Commission
whether or not that ‘‘unregulated’’ will, in most circumstances, be reflected
measure ‘‘fair’’ market value based on
affiliate company is a competitor of the in the transaction price. For transactions
standards to be adopted by the Financial
utility company is too narrow to prevent between affiliates, the Commission
Accounting Standards Board that use
abuses; consequently, the Standards of recognized that we cannot assume that
both a market approach and an income
Conduct definition of an ‘‘energy market value will be reflected in
approach. Because the market value
affiliate’’ is not appropriate here.76 transaction price. We suggested
standard could introduce some
93. Accordingly, we will adopt the undepreciated original cost as a possible
broader definition of a ‘‘non-utility alternative measure of value. 79 Id.at P 32.
associate company,’’ which is any 96. The Commission also proposed 80 Id.at P 33.
associate company in a holding that section 33.1(b) would define 81 Chairman Barton does not take a position on

company system other than a public ‘‘value,’’ with respect to a merger or the appropriate measure of value, but believes that
utility or electric utility company that consolidation with a transmitting the Commission should consider whether the use
of market value, by bringing more transactions
has wholesale or retail customers served utility, an electric utility company, or a under section 203, will unnecessarily increase
under cost-based regulation. A non- holding company in a holding company regulatory burden because of the potential for
utility associate company would system that includes a transmitting disputes concerning the market value of
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include, among others, a power utility, or an electric utility company, transactions. He also suggests that some utilities
will make section 203 filings needlessly to show the
with a value in excess of $10 million, Commission that section 203 does not apply. He
74 18 CFR part 358 (2005). notes that undepreciated original cost value is a
75 NOPR at P 42. 77 18 CFR 33.1(b) (2005). simple way to value transactions. Chairman Barton
76 18 CFR 358.3(d). 78 NOPR at P 30. Comments at 6.

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1360 Federal Register / Vol. 71, No. 4 / Friday, January 6, 2006 / Rules and Regulations

uncertainty into the process, FirstEnergy assets or generation assets. EEI proposes b. Comments on Definition of ‘‘Value’’
urges the Commission to provide clear determining the transaction price for the as Applied to Transmitting Utilities,
guidance to the industry and the jurisdictional transmission facilities or Electric Utility Companies, or Holding
investment community explaining how generation facilities based on their Companies
a market value standard would be used relative net book value (original cost 106. Nearly all commenters support
in certain situations. It suggests that we depreciated). the market value approach as measured
create a ‘‘safe harbor’’ that clearly by the transaction price to determine the
103. Commenters differ significantly
defines methods and components used value of a transaction involving
to assess market value. EEI argues that as to the appropriate measure of value
where the transaction is between transmitting utilities, electric utility
when a state commission has reviewed companies, or holding companies.
or made a determination of value for a affiliates. As a first backstop in
scenarios involving affiliated NASUCA proposes the higher of market
particular transaction, a company value or original cost undepreciated to
should be able to rely on that value for transactions, several commenters
limit the possibility that a merger of two
purposes of determining value under contend that transaction price is still a independent transmission companies
section 203; the company should not reasonable measure of market value, would escape review. It also asserts that
have to pay penalties if the Commission provided that the transaction price is market value is not necessarily the same
later determines that the value of the shown to be consistent with the results as market price. FirstEnergy believes
transaction exceeds $10 million. of an Edgar-type analysis or that the transaction price should reflect
101. Virtually all commenters independent valuation process.84 only the value of the underlying
recognize that a market value standard, However, other commenters, including jurisdictional or generation facilities.
particularly one based on transaction the New Jersey Board, NASUCA, and The Commission should also establish
price, may need to be modified or even APPA/NRECA, would compare a market other parameters for determining the
replaced in some circumstances. As value or ‘‘fair’’ market value with market price, such as the point in time
explained below, these circumstances original cost undepreciated and select at which the determination is to be
involve transactions that include non- the higher of the two. They argue that made, such as the date of the agreement,
jurisdictional facilities in addition to the Commission must evaluate the the date of filing of the application, or
jurisdictional facilities or generation widest possible range of transactions to the date of consummation of the
facilities; transactions where market determine the public interest transaction. To the extent the
value may not be ascertainable; and implications of transactions; utilities Commission does not adopt transaction
transactions not conducted at arms’- will attempt to understate value and price, FirstEnergy urges the Commission
length (such as affiliate transactions). thereby avoid section 203 review. to otherwise specifically define market
Alternative suggested measures of value and specify safe harbor standards.
market value or value are the following: 104. When a market-based
(1) Market value as determined by determination of value is not possible or c. Comments on Definition of ‘‘Value’’
market-based results of an Edgar-type practical, commenters are divided, as Applied to Paper Jurisdictional
analysis 82 or independent valuation mainly between original cost Facilities
process; (2) original cost undepreciated; undepreciated and net book value. 107. Many commenters, including
(3) the higher of market value or original Commenters who advocate the use of state commissions and consumer groups
cost undepreciated; and (4) net book net book value urge the Commission to generally favor total expected revenues
value (original cost depreciated). reject any use of original cost over the contract’s remaining life as the
102. Focusing first on transactions undepreciated, particularly for non- appropriate measure of value for
between non-affiliates, many affiliate transactions, since it does not transfers of wholesale contracts.86 This
commenters agree that, in most reflect the deterioration (wear) of the is regardless of whether affiliates or
circumstances, transaction price is the facility.85 Rather, they would encourage non-affiliates are involved. Revenues
appropriate measure of market value.83 the use of net book value, since it is the will be a function of quantities of
EEI, Duke Energy Corporation and basis of transmission rates. supply and thus are an indirect measure
Cinergy Corp. (Duke/Cinergy), and of the contract’s contribution to market
Progress Energy urge the Commission to 105. Other commenters suggest a supply, in much the same way that the
rebuttably presume that market value is modification of the original cost value of generation assets will be related
the agreed-on transaction price. EEI, undepreciated and net book value to generator size. These commenters
Duke/Cinergy, Entergy, and FirstEnergy, concepts. Missouri Public Utilities also point out that a revenues approach
argue that the market value Commission (Missouri Commission) would be much easier to apply than an
determination should be based only on would rely on reproduction cost (the expected net profits standard, which
the value of jurisdictional transmission costs of replicating the same plant today can be unpredictable on the basis of
assets or generation assets. They state with the same assets and same varying assumptions and is likely to be
that a single transaction price will not technology). As a proxy for this measured inaccurately.
measure the market value for a measure, Missouri Commission suggests 108. Constellation adds that the use of
transaction that also includes assets that the original cost could be escalated nominal revenues avoids confidentiality
other than jurisdictional transmission by appropriate wholesale price indices. issues raised by how buyers and sellers
Scottish Power would adjust net book value contracts on the basis of
82 Boston Edison Co. Re: Edgar Electric Energy
value by converting it to current dollars. transaction price. This is particularly
Co., 55 FERC ¶ 61,382 (1991) (Edgar). The Edgar true where it is necessary to determine
standard of review is designed to prevent affiliate
abuse and to ensure prices that are consistent with
value for individual contracts that are
part of a portfolio of contracts and non-
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competitive outcomes. 84 E.g., EEI, Duke/Cinergy, TAPSO, Indiana


83 E.g., Indiana Commission, Kentucky

Commission, New Jersey Board, International Commission, Kentucky Commission, Progress 86 NARUC, Missouri Commission, the Public

Transmission Company (International Energy, and Scottish Power. Utilities Commission of Ohio (Ohio Commission),
85 E.g., EEI, Ameren, Progress Energy, Southern
Transmission), EPSA, Scottish Power, TAPSG, and APPA/NRECA, NASUCA, and Constellation Energy
UWUA. Companies, and Duke/Cinergy. Group Inc. (Constellation).

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jurisdictional assets. Some commenters Commission’s proposal to value security considering the comments of numerous
point out that in some instances, for transactions between non-affiliates at parties, we remain convinced that
individual contracts, the seller may market value. Nearly all appear to market value is, in most instances, the
actually pay the buyer and the buyer accept our proposal to rebuttably most effective and reasonable approach
may have the option to buy the power presume that price is the appropriate (both for potential section 203
at a market price, which may be lower measure of market value. FirstEnergy applicants and for the Commission) to
than contract price. Thus, the requests, however, that the Commission determine which asset transfers,
transaction price would either be provide more specificity as to which particularly those that involve
negative or much smaller than under a price is relevant, i.e., the agreed-to-price acquisitions of physical facilities or
revenues approach. This would increase or a publicly traded price, and as to securities, require section 203 approval.
the likelihood that the transaction what is meant by time of the 114. As one commenter suggests,
would not fall under section 203. transaction—the time of agreement or however, using market value as the
109. On the other hand, many the time of consummation. FirstEnergy measurement standard is not
commenters urge the Commission to also asks whether the transaction value straightforward in all circumstances. For
adopt transaction price as the measure used should take into consideration the example, where the transaction involves
of value.87 They contend that value is fact that non-regulated assets may be a single asset subject to section 203
closely tied to expected profits, which included in the transaction as well. EEI being purchased and sold between non-
considers supply costs, unlike the and International Transmission argue affiliates, the agreed-upon price for the
revenue approach, and thus will be that to give regulatory certainty to the transaction is a straightforward measure
more accurately reflected in transaction transacting parties, the relevant price of market value. However, there may be
price than in revenues. FirstEnergy should be the agreed-to price. non-affiliate transactions that include a
comments that a revenues approach 112. EEI suggests that for securities bundle of assets, both assets subject to
would be difficult to apply if the transactions between affiliated parties, section 203 and assets not subject to
contract rates are not fixed. If the market price is reasonable when the section 203, so that the transaction price
Commission decides not to use securities are widely traded. However, does not reflect the market value of only
transaction price, commenters suggest a several parties support assessing market the assets subject to section 203.
variety of other measures, including value based on an application of Edgar Another example involves transactions
discounted value of future cash flows standards, particularly when the between affiliates where the agreed-
reduced by obligations, net present securities are not widely traded. On the upon price for the exchange will not
value of non-fuel revenues, and other hand, FirstEnergy and NASUCA necessarily reflect market value. In both
expected profits. contend that an Edgar approach will not instances, other measures of market
110. For affiliate transactions, many of work well because any group of non- value would be required.
affiliate transactions will be vastly 115. It is important that the
these same commenters generally agree
different in terms and other factors that Commission provide as much guidance
that transaction price is appropriate if it
affect value or price. When Edgar-type as possible to those contemplating
is supported by Edgar-type evidence.
evidence is not available, EEI and business transactions regarding how the
However, another measure favored by
Ameren propose certain formulaic determination of value should be made
EEI, Entergy, and Duke/Cinergy would
measures involving company-specific and thus deciding whether section 203
apply ‘‘mark to market’’ pricing 88 to
variables; 90 NARUC suggests that the review is required. Such guidance will
determine the value of a contract
Commission simply use paid-in capital enhance parties’ certainty and will also
between affiliates. Entergy, citing Order
equity. Indiana Commission suggests contribute stability to investment
No. 627,89 asserts that the Commission decision-making by utilities and non-
has taken the same approach in that an affiliate transaction be
constructed to evade section 203 utilities alike.
requiring utilities to report in Form 1 116. For transfers of physical facilities
changes to the fair market value of jurisdiction could be used to subsidize
a non-jurisdictional affiliate, but (transmission and generation facilities)
certain derivative instruments and the Commission will adopt market value
activities. Southern Companies asserts that
transaction thresholds are so low there as the appropriate measure of value.
d. Comments on Definition of ‘‘Value’’ will no meaningful opportunities to When a transaction occurs between non-
as Applied to Securities in Excess of $10 evade jurisdiction by such means. affiliates, the Commission will
Million rebuttably presume that market value is
e. Commission Determination the transaction price. The most obvious
111. Generally all of the commenters complicating factor in applying this test
113. The Commission notes the
from the various segments of the is the need to consider only the value
widespread support for using a market
industry, including regulatory of the facilities subject to section 203;
value approach (where feasible). After
commissions, public power, and many transactions will include other
customer groups, support the 90 For example, EEI proposes that, for securities assets not subject to section 203 as well.
87 E.g.,
that are not widely traded, the Commission should However, in such situations, the
EEI, First Energy, Ameren, Duke/Cinergy, allow companies to utilize the Edgar guidelines. If
Entergy, International Transmission, EPSA,
acquiring entity will probably have
the Edgar guidelines are not applicable to a
Independent Sellers, Scottish Power, Morgan particular case, EEI suggests the following: For
made a valuation analysis of the
Stanley, Indiana Commission, and Missouri equity securities, a three part determination should constituent parts of the transaction in
Commission. be utilized to determine value: (i) Determining the order to guide its negotiations and/or
88 In this context, ‘‘mark to market’’ refers to the
value of the company that is the issuer of the equity properly record the value of those
process whereby the book value or collateral value securities based on the depreciated net book value
of an asset such as a multiyear contract or power of the company’s assets; (ii) determining the
facilities on its balance sheet. Almost
purchase agreement is adjusted to reflect current fraction of the securities at issue by dividing the certainly included in that analysis will
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market value for the applicable period. number of equity securities involved in the be a valuation of the physical facilities.
89 Accounting and Reporting of Financial transaction by the total number of outstanding In transactions involving both facilities
Instruments, Comprehensive Income, Derivatives equity securities for the company; and (iii)
and Hedging Activities, Order No. 627, 67 FR multiplying (i) by (ii) (i.e., the value of the company
subject to section 203 and facilities not
67,691 (Oct. 10, 2002), FERC Stats. & Regs. ¶ 32,558 multiplied by the fraction of the equity securities subject to section 203, companies
(2002). at issue). EEI Comments at 11. should rely on such valuations in

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deciding whether to file for section 203 120. With respect to determining Thus, FirstEnergy asks how market
approval. value to be applied to transfers of price should be defined—a publicly
117. If separate valuations of the wholesale contracts between non- traded price or the price ultimately
physical assets were not performed, affiliates, the Commission will agreed on. It also asked the Commission
companies should rely on original cost rebuttably presume that market value is to clarify the meaning of ‘‘at the time the
undepreciated. Several commenters the transaction price. This is consistent security is acquired.’’ Specifically, does
urge the Commission to reject the use of with our use of market value and this language refer to the point in time
original cost undepreciated and adopt, transaction price for other types of asset an agreement is entered into or the
instead, net book value. Our current transfers. As with transfers of physical actual time of consummation of the
regulations use original cost facilities, when assets not subject to transaction?
undepreciated as the appropriate section 203 are included in the 123. The Commission is mindful of
measurement standard and we will transaction, the acquiring entity should the need to provide parties as much
continue to use that standard in rely on its valuation of the contracts regulatory certainty as possible with
applying amended section 203. component included in transaction respect to decisions as to whether
Although net book value is a valuation price. The market valuation should be section 203 approval is required for a
method commonly used to establish consistent with the value the applicant particular transaction. In this case, the
cost-based rates, most generating places on the contract for purposes of its Commission finds that greater
facilities today sell power at market audited financial statements and in regulatory certainty is provided by
rates, and their market value is driven keeping with generally accepted relying on the agreed-to transaction
primarily by factors unrelated to the accounting principle (GAAP) price at the time the transacting parties
book depreciation of the facility. For requirements. One commenter has enter into an agreement. However, the
example, many highly depreciated coal- expressed confidentiality concerns Commission will reject the argument
fired assets have commanded significant about valuations for individual that the value of securities transactions
premiums in generation divestitures. contracts as part of a portfolio of should be adjusted to reflect the fact
Hence, we believe that the continued contracts that could likely arise if a that not all of the assets underlying the
use of original cost undepreciated is utility’s decision not to file for section value of the securities are jurisdictional
preferable to net book value. 203 approval was challenged. We facilities or generation facilities.
believe that any such concerns can be Amended section 203 does not permit
118. We also cannot rely on
addressed through our procedures that any such interpretation, as it applies to
transaction price as a measure of market
provide confidential treatment to certain the purchase of the ‘‘security * * * of
value when a transaction involving
proprietary materials.91 Furthermore, a * * * public utility,’’ not to the
physical facilities occurs between
we note that any measurement standard ‘‘securities applicable to the
affiliates. Instead, here too we will
(such as projected revenue stream) jurisdictional facilities of a public
adopt original cost undepreciated. The
could also raise concerns over utility.’’
alternatives to transaction price most 124. For securities transactions
confidentiality in certain circumstances.
frequently supported by commenters 121. The issue of how to value between affiliates, however, an agreed-
include: (1) Value based on an Edgar- contract transfers between affiliates is on transaction price will not necessarily
type analysis (market value), (2) original more difficult to resolve, since a be consistent with market price. For that
cost undepreciated, (3) the higher of transaction price, if it exists at all, will reason, if the securities are widely
market value or original cost not necessarily reflect market value. For traded, the Commission will require that
depreciated, and (4) net book value. As affiliate transfers of contracts, we agree affiliates value the transaction based on
discussed above, as between the choices with one commenter that total expected the market price at the time the
of original cost undepreciated and net contract revenues are a simple, objective securities are acquired. If the securities
book value, the Commission believes way to assess value and to provide are not widely traded, we will adopt, in
that original cost undepreciated is increased certainty as to the need for a a slightly modified manner, EEI’s
preferable and should continue to be section 203 filing. We therefore adopt suggestion. For equity securities, we
used. this standard for valuing jurisdictional will utilize a three-part determination to
119. The Edgar analysis is applied in contracts between affiliates. determine value: (i) Determining the
section 205 proceedings to determine 122. Amended sections 203(a)(1)(C) value of the company that is the issuer
whether purchases from an affiliate are and (a)(2) define the Commission’s of the equity securities based on the
reasonable in light of other alternatives. jurisdiction over certain acquisitions of total undepreciated book value of the
The analysis is not intended to provide securities by public utilities and holding company’s assets; (ii) determining the
a bright-line easy-to-apply test of companies. With respect to securities fraction of the securities at issue by
whether jurisdiction to approve a transactions between non-affiliates, the dividing the number of equity securities
particular transaction exists in the first Commission will adopt transaction involved in the transaction by the total
place. Rather, the analysis is often price, as explained more fully herein, number of outstanding equity securities
highly contentious and is used to for the acquisition of securities by either for the company; and (iii) multiplying
determine the justness and a public utility or a holding company. (i) by (ii) (i.e., the value of the company
reasonableness of a particular The Commission recognizes that the multiplied by the fraction of the equity
transaction, not for determining whether NOPR was not entirely clear as to how securities at issue). This method for
jurisdiction exists to review it in the to determine the ‘‘transaction price.’’ securities transactions that are not
first place. The Commission believes Although we stated that the value of a widely traded is consistent with our use
that, for purposes of section 203 security would be defined as the market of original cost undepreciated to
applicability, a valuation based on price at the time the security is measure value for transactions between
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original cost depreciated will be simpler acquired, we also stated that the market affiliates involving physical assets.
and less ambiguous than one based on value would be rebuttably presumed to 125. Amended section 203(a)(2)
Edgar, particularly when most be the agreed-on transaction price. addresses holding company mergers or
transactions will clearly exceed $10 consolidations with a transmitting
million by any reasonable measure. 91 18 CFR 1.36 (2005). utility, an electric utility company, or a

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Federal Register / Vol. 71, No. 4 / Friday, January 6, 2006 / Rules and Regulations 1363

holding company in a holding company of an abundance of caution, whenever possibility that section 203 approval
system that includes a transmitting there is a reasonable possibility that was legally required. In this way, parties
utility, or an electric utility company, section 203 approval is legally required, have sought to remove regulatory
with a value in excess of $10 million. in order to remove regulatory uncertainty from a transaction, as an
Regarding transactions between non- uncertainty from a transaction, as an entire transaction can be placed at risk
affiliates, market value will be the entire transaction can be placed at risk if required regulatory approvals are not
transaction price or consideration paid, if required regulatory approvals are not obtained. This incentive is even greater
as provided for in the agreement obtained. now that EPAct 2005 has authorized
between the transacting entities. As 129. However, some commenters civil penalties for violating statutory
with securities, we note there is no suggest that the Commission’s current requirements.97
statutory provision or legislative history record-keeping and reporting 132. Although the majority of
to suggest that the transaction price requirements are the minimum commenters assert that the current
should be adjusted to reflect the fact necessary for section 203 purposes and requirements are adequate, a few
that non-jurisdictional assets are also should not be reduced. NARUC states suggest that these requirements should
involved, and so we will not allow for that our existing record-keeping and be considered the minimum necessary
such an adjustment. reporting requirements are adequate as for section 203 purposes and should not
126. For mergers or consolidations they pertain to mergers. However, be reduced. We agree, and note that the
involving affiliates, transaction price NARUC suggests that Commission NOPR did not propose to reduce our
will not be an acceptable basis for review of merger applications could be current requirements. We merely asked
establishing value. Several commenters enhanced by requiring the applicant to whether our existing record keeping and
recommend the use of an Edgar-type file pro forma consolidated financial reporting requirements, outside the
analysis to arrive at a market value. reports showing the projected financial section 203 context, provide an
However, the Edgar approach is not a position of the merged entity after the adequate basis for monitoring
practical approach to applying the $10 proposed transaction.96 jurisdictional entities’ determinations of
million jurisdictional threshold for the 130. APPA/NRECA assert that the when a section 203 application is
reasons discussed above. Therefore, the Commission’s existing record-keeping required. We believe that those
Commission will, instead, use the book and reporting requirements do not requirements, as well as other publicly
cost of all of a company’s assets to provide sufficient information on fair available information (e.g., financial
measure the value of mergers or market value for the Commission to statements filed with the SEC), will give
consolidations of affiliated companies.92 ensure that companies are not interested entities enough information
improperly transacting without filing for to allow them to monitor compliance
6. Compliance With Section 203 approval. They state that the with section 203. For example, under
127. Given the increased significance Commission should update our SEC disclosure requirements, publicly
of valuation of a transaction under reporting requirements, including traded entities must disclose material
amended section 203, the Commission requiring applicants to adhere to GAAP transactions such as mergers or asset
solicited comments on whether our principles for valuation determinations acquisitions. Most of these transactions
existing recordkeeping and reporting and to justify exemption from section will easily exceed the $10 million
requirements, outside the section 203 203 under both a cost and market value threshold, so the public will be on
context, will allow us and the public to method of valuation. As for reporting notice of transactions that likely should
effectively monitor jurisdictional requirements that might enable the be submitted to the Commission for
entities’ determinations of when a Commission and the public to police approval under section 203. We will
section 203 application is required. For compliance with section 203, APPA/ therefore not adopt the suggestions of
example, the Commission asked ‘‘do NRECA suggest that the Commission NARUC and APPA/NRECA that we
FERC Form 1s or Order No. 652 93 should consider requiring public impose new and burdensome disclosure
market-based rate change in status utilities to file annual reports of all requirements for purposes of monitoring
reports provide sufficient information to transactions with a value exceeding, for compliance with section 203.
monitor compliance with section example, $5 million, to enable the
203?’’ 94 Commission to enforce the $10 million 7. Cash Management Arrangements,
standard. Intra-Holding Company System
a. Comments Financing, Securities Under Amended
128. Many commenters believe that b. Commission Determination Section 203, and Blanket Authorizations
the Commission’s existing record- 131. Most commenters state that the 133. The NOPR did not specifically
keeping and reporting requirements will Commission’s existing record-keeping address these issues, but we received
be enough.95 Some note that parties and reporting requirements are comments on them. We note that
often seek section 203 authorization out adequate. We agree and we will not section 203(a)(2) adds the entirely new
adopt any additional compliance requirement that no holding company in
92 Book cost, as used here, refers to original book
requirements at this time. We intend to a holding company system that includes
cost.
93 Reporting Requirement for Changes in Status
keep our regulations as straightforward a transmitting utility or an electric
for Public Utilities with Market-Based Rate as possible so as not to increase utility shall purchase, acquire, or take
Authority, Order No. 652, 70 FR 8,253 (Feb. 18, regulatory burden on the industry while any security with a value in excess of
2005), FERC Stats. & Regs. ¶ 31,175, order on reh’g, at the same time adequately monitoring
111 FERC ¶ 61,413 (2005).
$10 million of, or, by any means
94 NOPR at P 35.
jurisdictional entities’ determinations of whatsoever, directly or indirectly, merge
95 E.g., Kentucky Commission, NARUC, when section 203 applies to their or consolidate with, a transmitting
Oklahoma Commission, Ameren, Constellation, EEI, transaction. The Commission agrees that utility, an electric utility company, or a
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FirstEnergy, Progress Energy, and Southern parties have often sought section 203 holding company in a holding company
Companies. Some commenters argue that the authorization out of an abundance of
Commission’s existing record-keeping and reporting system that includes a transmitting
requirements, including the information supplied caution because of a reasonable
under the FERC Form 1, Order No. 652, and Change 97 See 16 U.S.C. 825o–1 (2000), as amended by

in Status reports, are more than adequate. 96 NARUC Comments at 7–8. EPAct 2005 1284(e).

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1364 Federal Register / Vol. 71, No. 4 / Friday, January 6, 2006 / Rules and Regulations

utility, or an electric utility company, equity infusions in excess of $10 million unable or unwilling to so clarify, the
with a value in excess of $10 million undertaken by an upper tier company to Commission should request a
without Commission authorization. fund a lower tier holding company, conforming amendment from Congress.
intermediate holding company, or 139. Transmission Agency of
a. Comments
public utility company within the same
134. Many commenters, including Northern California (TANC) urges the
holding company system. It states that
EEI, Duke/Cinergy, and Entergy, request Commission to modify its Cash
the purpose of these financial
that the Commission clarify that it will transactions is to fund the capital and Management Rule to apply to public
continue to interpret section 203 to not operating requirements of the lower tier utility holding companies, which would
apply to cash management 98 and other entities and, thus, that these add an additional layer of protection to
financing arrangements routinely used transactions do not raise any cross- utilities and their customers.
in utility holding company systems. subsidization issues. MidAmerican b. Commission Determination
Thus, they request that the Commission explains that the utility company would
continue to distinguish between the still need to obtain Commission 140. As noted above, amended section
acquisition of voting securities and authorization under section 204 for the 203(a)(2) expands the Commission’s
other instruments that confer control, issuance of its own securities. authority to include mergers,
which is subject to review under section 136. Further, MidAmerican urges the acquisitions, and purchases of
203, and the acquisition of loans and Commission to grant another blanket securities 100 of over $10 million
other financial instruments that do not authorization for the infusion of capital involving holding companies within
confer control. They state that the by a passive investor through the
issuance of these should remain subject certain holding company systems. A
acquisition of holding company or
to section 204 of the FPA 99 and relevant major part of the Commission’s past
public utility company securities,
state law, but should not require section including debt and equity securities, practice in reviewing section 203
203 approval. EEI, Duke/Cinergy, and subject to an aggregate limitation that transactions has been to determine
Entergy also explain that cash the passive investor acquire less than whether a particular merger or
management rules are already in place ten percent of voting equity securities. acquisition results in a single entity
to monitor any potential cross- It explains that one of the main having control over transmission or
subsidization concerns for these types of objectives of repealing PUHCA 1935 generation resources that would allow it
financial arrangements. Furthermore, was to encourage additional investment exercise market power. This would also
they assert that requiring prior approval in the energy infrastructure by non- be a concern under the new section
under section 203 for cash management traditional, or passive investors (who 203(a)(2) provision.
arrangements would impair the ability make significant capital infusions in the 141. However, as several commenters
of holding companies and their public utility industry either as lenders or suggest, there are several classes of
utility subsidiaries to manage their equity investors), because existing transactions covered by amended
short-term financing needs efficiently. investors are not providing sufficient section 203(a)(2) that will not harm
Applying section 203 to all intra-system money. There is no need for passive
financings would be contrary to competition or captive customers. These
investors to follow the traditional
Congress’ intent and would create include: (1) Routine cash management
section 203 approval process. It states
significant burdens for the Commission that passive investments will not have transactions and intra-holding company
and utilities alike. Alternatively, should any adverse effects on competition, system financing transactions; (2)
the Commission determine that section rates, or regulation, and will not result acquisition of non-voting securities (in
203 applies to cash management in cross-subsidization. MidAmerican any amount); 101 and (3) acquisition of
programs, they request that the proposes that, to ensure that a passive voting securities that would give the
Commission allow companies to seek investor will not be able to exercise acquiring entity not more than 9.9
pre-approval (similar to the pre- control through ownership of a voting percent ownership of the outstanding
approval process and reporting equity security, the passive investor be voting securities. For these transactions,
requirements adopted for cash limited to an ownership interest of less the Commission finds that it is
management agreements) or blanket than ten percent of voting securities. consistent with the public interest to
authorization. Further, MidAmerican states that when issue a blanket authorization in this
135. MidAmerican Energy Holdings an investor acquires the debt or equity Final Rule, for the reasons discussed
Company (MidAmerican) also urges the securities of an entity that has a de below.
Commission to grant a blanket minimis interest in an electric utility
authorization for intra-holding company company, we should grant the blanket 100 The term ‘‘security’’ is defined in FPA section
system financings, contributions, or authorization. 3(16) as ‘‘any note, stock, treasury stock, bond,
137. MidAmerican suggests that the debenture, or other evidence of indebtedness of a
98 While there are several different types of cash Commission require those who receive corporation * * *.’’
management programs, a cash management program 101 We note, however, that it is possible, in some
these types of blanket authorizations to
generally involves pooling the cash resources of circumstances, for non-voting securities to convey
several affiliated companies into a ‘‘money pool.’’
report their transactions within 45 days sufficient ‘‘veto’’ rights over management actions as
Affiliates can then borrow against the funds in the of the closing of the transactions. to convey ‘‘control’’ that triggers section 203. The
pool, often at below market rates. Additionally, the 138. Many commenters, including Commission has addressed similar issues for
parent company is often able to achieve a higher EPSA and Independent Sellers, request purposes of evaluating independence of entities
rate of return on its money pool investments than that the Commission clarify that the that ask for RTO status, and the SEC considered
any single affiliate could on its own. For a more similar issues through its ‘‘no action’’ letter process
detailed discussion of cash management programs. term ‘‘securities,’’ as used in amended in applying PUHCA 1935. We anticipate that our
See Regulation of Cash Management Practices, section 203(a), means only ‘‘voting treatment of such issues under amended section
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Order No. 634, 68 FR 40,500 (July 8, 2003), III FERC securities,’’ as that term is defined in 203 will generally be consistent with these
Stats. & Regs. ¶ 31,145 (June 26, 2003), Order No. section 1262(17) of PUHCA 2005, and precedents. If uncertainty exists as to whether
634–A, 68 FR 61,993 (Oct. 31, 2003), FERC Stats. significant veto rights could convey control, entities
& Regs. ¶ 31,152 (Oct. 23, 2003) (Cash Management does not apply, for example, to debt or should seek a ruling from the Commission to
Rule). other nonvoting securities. determine whether section 203 approval is
99 16 U.S.C. 824c (2000). Alternatively, if the Commission is required.

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Federal Register / Vol. 71, No. 4 / Friday, January 6, 2006 / Rules and Regulations 1365

i. Cash Management Programs and Intra- superior to the one-size-fits-all approach with the public interest and
Holding Company Financing advocated by TANC. Congressional intent in repealing the
Arrangements restrictions of PUHCA 1935 and
ii. Purchases of Non-Voting Securities
142. As several commenters note, encouraging incentives for additional
by a Qualifying Holding Company
cash management programs, money investment. We will, however,
144. We agree with the majority of condition the blanket authorization by
pools, and other intra-holding company
commenters that there is no need for requiring the purchaser of such
financing arrangements are a routine case-by-case examination of the
and important tool used by many large securities to provide the Commission,
purchase by a holding company of non- not more than 45 days after the
companies to lower the cost of capital voting securities of a public utility or of
for their regulated subsidiaries and to purchase, with the same information on
another holding company under the same basis that the holding
improve the rate of return the holding amended section 203. The purchase of
company and its subsidiaries can get on company now provides to the SEC.107
such securities generally does not We will issue notices of these filings for
their money.102 The Commission does convey control and hence does not grant
not intend to make it more difficult for informational purposes only.
the purchasing holding company
companies to take advantage of these additional market power, harm 8. Section 33.2(j)—General Information
types of transactions. Since the competitive markets, or otherwise Requirements Regarding Cross-
companies participating in a cash disadvantage captive customers.105 This Subsidization
management-type agreement are already is consistent with the intent of Congress 146. In the NOPR, the Commission
affiliated, allowing the transfer of funds that EPAct 2005 increase outside proposed that new section 33.2(j) would
between such companies does not investment in the utility sector while implement section 203(a)(4) by
generally present competitive problems. protecting customers.106 As requiring applicants to explain how
Thus, we find that it is consistent with MidAmerican notes, the issuance of they are providing assurance that the
the public interest to grant a blanket securities by a jurisdictional company is proposed transaction will not result in
authorization to allow holding also governed by section 204 of the FPA. a cross-subsidization of a non-utility
companies and their subsidiaries to take Thus, for the purposes of amended associate company or a pledge or
part in intra-system cash management- section 203, we find that it is consistent encumbrance of utility assets for the
type programs, subject to the discussion with the public interest to grant a benefit of an associate company. We
below. blanket authorization for the purchase proposed to require appropriate
143. TANC suggests that the by a holding company of any amount of evidentiary support for that explanation.
Commission modify its Cash non-voting securities of a public utility We proposed that if no such assurance
Management Rule to cover holding or of another holding company. We will can be provided, applicants must
companies themselves. Currently, the grant this blanket authorization and will explain how such cross-subsidization,
Cash Management Rule only covers the not impose any type of filing pledge, or encumbrance will be
cash management practices of a holding requirement with respect to such consistent with the public interest.108
company’s public utility subsidiaries.103 transactions. This explanation would be Exhibit M to
We disagree with TANC that additional the applicant’s section 203 application.
generic cash management rules iii. Purchases of Voting Securities
The Commission sought comment on
governing holding companies are Amounting to 9.9 Percent or Less of
what evidence parties should be
necessary at this time to safeguard Outstanding Voting Securities
required to submit to support any
consumers. The focus of amended 145. As commenters note, a number of explanation offered under this
section 203 is partly to prevent investors would like to invest in the subsection.
inappropriate cross-subsidization, or utility sector, but have been prevented 147. The Commission noted that it
encumbrances or pledges of utility from doing so by the fear that they has sought to guard against potential
assets by public utility subsidiaries. would become subject to regulation by
Applicants must adopt sufficient the SEC as well as this Commission. To 107 Accordingly, the Commission directs that the

safeguards, including any necessary remedy this problem, a number of purchaser of such securities file with the
Commission copies of SEC schedules 13D, 13G, and
cash management controls (such as commenters suggest giving a blanket 13F. SEC schedule 13D is required to be filed by
restrictions on upstream transfers of section 203 approval to institutional any entity acquiring beneficial ownership of more
funds, ring fencing, etc.), to prevent any investors within holding company than 5 percent of a class of a company’s securities.
cross-subsidization between holding systems purchasing less than 10 percent The schedule 13D filing requires, among other
things, a statement of the purpose(s) of the
companies and their new subsidiaries of the outstanding voting securities. acquisition of the securities of the issuer and a
prior to receiving section 203 approval. Commenters note that the SEC has description of any plans or proposals the reporting
Such safeguards ensure that consumers traditionally given blanket approval to a person may have that relate to or would result in
holding company in a holding company the acquisition of additional securities of the issuer;
are protected, while permitting any extraordinary corporate transactions, such as a
companies the flexibility to system purchasing up to 9.9 percent of merger, reorganization or liquidation of the issuer
competitively manage their cost of outstanding voting securities of a public or its affiliates; and any changes in the board of
capital via a cash management program. utility or a holding company covered by directors or management of the issuer. Schedule
the statute. We agree that this approach 13G is the same form, but is used when the person
On balance, the Commission believes or entity is making the purchase for investment
that the flexibility provided by this makes sense and that it is consistent only. Institutional investment managers who
approach, combined with our existing exercise investment discretion over $100 million or
cash management policies,104 is 105 See Cash Management Rule at P 29 (discussing more must report their holdings on SEC schedule
exception for non-voting interests that convey 13F. We note that these schedules required for a
significant veto rights). grant of blanket authorization under section
102 See,e.g., EEI Comments at 27–31. 106 See, e.g., Senate Floor Statement by Senators 203(a)(2) should impose only a de minimis burden
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103 SeeCash Management Rule at P 29. Domenici (R–NM), H.R. 6, Energy Policy Act of on the holding company, since we are requiring
104 We also note that under our existing Cash 2005, 151 Cong. Rec. S9256 (July 28, 2005) (stating merely the same information that is filed with the
Management Rule, changes to existing or new cash that ‘‘this should bring much more capital SEC. Should the SEC change its reporting
management agreements (including money pool investment into the utility companies that make up requirements, this information must continue to be
arrangements and other internal corporate financing this powerful institution, this entity called the grid filed with the Commission.
arrangements) must be filed with the Commission. of the United States.’’). 108 NOPR at P 45.

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1366 Federal Register / Vol. 71, No. 4 / Friday, January 6, 2006 / Rules and Regulations

cross-subsidization and affiliate abuse approvals; a utility shall not incur any additional conditions or a new
when it reviews applications for cost- additional indebtedness, issue any evidentiary requirement to ensure that
based or market-based rate authority additional securities, or pledge any transactions are consistent with the
under section 205 of the FPA 109 or assets to finance any part of a merger of public interest.114 They assert that the
dispositions of jurisdictional facilities holding companies without prior Commission already has in ways to
under section 203 involving public regulatory approvals; all debt at the guard against cross-subsidization or
utilities (or their affiliates) with captive holding company level shall be non- pledging or encumbering of utility
customers.110 We also noted that the recourse to the utility; and the assets, including: (1) Cash management
Commission has cash management rules Commission should develop a process rules; (2) code of conduct restrictions;
to monitor proprietary capital ratios and for periodic audits of inter-company (3) prior approval for certain power
money lending or other financial transactions to be conducted in transactions; (4) access to, and auditing
arrangements that can harm regulated appropriate instances, as well as of, books and records; (5) expanded
companies.111 We stated that our procedures for compliance monitoring, jurisdiction under EPAct 2005 with
primary focus has been on preventing a investigation, and complaints of cross- regard to books, accounts, and records;
transfer of benefits from a traditional subsidization and affiliate abuse. (6) standards of conduct; and (7) the
public utility’s captive customers to 149. The Oklahoma Corporation application of Edgar standards to ensure
shareholders of the public utility’s Commission (Oklahoma Commission) that the sale price is not higher than
holding company due to an intra-system proposes that applicants provide: A would have been paid to a non-affiliate.
transaction that involves power or report of the nature of affiliates’
energy, generation facilities, or non- operations; description of the business 154. Duke/Cinergy, EEI, PNM, and
power goods and services. Thus, in light intended to be done by subsidiaries; and Entergy assert that the Commission
of the Congress’ clear directive in EPAct an explanation and detailed rationale of should allow applicants to avoid a
2005 that the Commission make any plans to make any material change detailed examination of cross-
findings regarding cross-subsidization in investment policy, business, subsidization and encumbrance
and the pledge or encumbrance of corporate structure, or management. concerns by making four verifications
utility assets in a section 203 order, we 150. New Jersey Board states that it is on a case-by-case basis that address
sought comments on what additional not clear that proposed section 33.2(j) those issues. These verifications would
safeguards or conditions may need to be requires applicants to provide enable the Commission to quickly
placed on section 203 transactions. evidentiary support when claiming that determine whether a transaction is
Specifically, the Commission solicited a cross-subsidization, pledge, or consistent with the public interest. The
comments on the adequacy of its encumbrance is consistent with the verifications would be that the
present policies preventing affiliate public interest. Therefore, it proposes transaction results in: (1) No transfers of
abuse and cross-subsidization, and that the text be revised to state ‘‘An facilities between a traditional utility
whether conditions such as those explanation, with appropriate associate company with wholesale or
imposed by state commissions may evidentiary support for such retail customers served under cost-based
need to be imposed on section 203 explanation (to be identified as Exhibit rates and an associate company; (2) no
transactions. The Commission also M to this application):’’.113 new issuance of securities by traditional
sought comment on whether additional 151. To mitigate cross-subsidization utility associate companies with
conditions should be placed on section risks to ratepayers, other commenters wholesale or retail customers served
203 approvals to ensure that there is no propose structural conditions on under cost-based rates for the benefit of
pledge or encumbrance that harms mergers of entities that include both an associate company; (3) no new
utility customers. public utility and non-utility pledge or encumbrance of assets of a
businesses, as the facts require. This traditional utility associate company
a. Comments
could include the separation of public with wholesale or retail customers
148. Many commenters generally utility business within companies that served under cost-based regulation for
support the Commission’s proposal but also engage in non-utility business and the benefit of an associate company; (4)
recommend additional conditions or the separation of a public utility’s books no new affiliate contracts between non-
safeguards. They agree that the and records from those of non-utility utility associate companies and
Commission should impose specific affiliates. traditional utility associate companies
conditions or safeguards to protect 152. Finally, Southern Companies with wholesale or retail customers
against unfair competitive practices, request that when a public utility served under cost-based rates, other
cross-subsidization, and affiliate predominately serves customers at retail than system allocation agreements
abuse.112 Some recommend that the but has some jurisdictional facilities, the subject to review under EPAct 2005
Commission consider such protections Commission accept as sufficient a section 1275(b).115 In cases where an
on a case-by-case basis in consultation showing that the public utility applicant applicant is unable to make one or more
with affected state commissions. is subject to general supervision by a of the accepted verifications, these
Proposed conditions include, for state commission that has authority to commenters state that the applicant
example: Utility company subsidiaries review the transaction, and that such should bear the burden of submitting
shall not loan any funds (or advance any state commission approval is predicated sufficient information in Exhibit M to
credit or indemnity) to the holding upon a finding that the transaction will demonstrate that there is no cross-
company without appropriate regulatory not impair the performance of public subsidization issue or, if there is, that
service obligations or result in cross- the transaction is consistent with the
109 16 U.S.C. 824d (2000). subsidy burdening utility assets or public interest.
110 See, e.g., Sierra Pacific, 95 FERC ¶ 61,193; service.
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Boston Edison Co., 80 FERC ¶ 61,274 (1997).


111 NOPR at P 46.
153. Other commenters generally state 114 E.g., Duke/Cinergy, Entergy, EEI, AEP,
112 E.g., NARUC, New Jersey Board, Ohio that there is no need to impose Ameren, FirstEnergy, Progress Energy, International
Commission, Oklahoma Commission, Indiana Transmission, National Grid, and Scottish Power.
Commission, APPA/NRECA, TANC, TAPSG, 113 New Jersey Board Comments at 6 (emphasis in 115 See, e.g., EEI Comments at 20–21; Entergy

NASUCA, and UWUA. original). Comments at 8; Duke/Cinergy Comments at 7.

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155. Some commenters generally traditional public utilities with captive efficiently centralized support services
oppose imposing additional conditions ratepayers. for utility and non-utility associate
or safeguards beyond or that would 160. In addition, Kentucky companies within a holding company;
conflict with those imposed by state Commission, APPA/NRECA, and therefore, a pricing system based on
commissions. Many commenters believe TAPSG comment that the Commission market prices would not be appropriate.
that the Commission’s current policies should require as part of a section 203
application the disclosure of all existing b. Commission Determination
are more than adequate to address state
commission conditions and that the and/or future pledges and future 164. The Commission will adopt, with
Commission already imposes most of encumbrances of utility assets. They the modification explained below, our
these conditions directly.116 state that applicants should have to proposal to require section 203
156. Oklahoma Commission suggests explain how these existing pledges or applicants to include an explanation of
that the Commission allow state encumbrances do not harm utility either: (1) How they are providing
commissions to continue to exercise customers. However, International assurances that the proposed transaction
their autonomous authority in Transmission and FirstEnergy do not will not result in cross-subsidization or
addressing possible affiliate abuse and believe that all existing pledges and improper pledges or encumbrances of
cross-subsidization. Kentucky encumbrances should be disclosed in utility assets; or (2) if such results
Commission states that any additional section 203 applications because this would occur, how those results are
conditions imposed by the Commission would be inconsistent with section consistent with the public interest. We
should complement, not nullify or 33.11(b)(3) of the regulations, which believe that this approach meets
preempt, those imposed by state assumes that corporate reorganizations Congress’ concern regarding cross-
can occur that do not present cross- subsidization in section 203
commissions.
subsidization issues. transactions. As we explained in the
157. International Transmission states 161. Missouri Commission states that NOPR, the Commission has previously
that because independent transmission the Commission should require, as a adopted a number of policies to address
companies, by definition, are not condition of approving mergers, the affiliate abuse and cross-subsidization
affiliated with market participants, application of a ‘‘lower of’’ or ‘‘higher activities as it carries out its section 203
concerns regarding transmission- of’’ ‘‘cost or market value’’ standard. and 205 responsibilities. Amended
specific cross-subsidization that distort TANC states that requiring associate and section 203, however, clearly shows that
energy markets are minimized. National affiliated companies to file cost Congress intended that cross-
Grid states that the Commission should allocation agreements with the subsidization and related concerns
impose a merger condition only when it Commission will help prevent excessive should be a focal point of the
finds a proposed transaction, taken as a costs for non-power goods and services Commission’s section 203 analysis.
whole, is inconsistent with the public from being charged to utility companies 165. We also agree with commenters
interest. Scottish Power states that the and their customers. With regard to cost that certain protections may be
Commission should allow applicants to allocations for non-power goods and necessary, on a case-by-case basis, in
provide their own ways to demonstrate services, TANC asserts that the dual order to protect against cross-
that there is no potential for cross- approach of a ‘‘lower of cost or market’’ subsidization, pledge or encumbrance of
subsidization, on a case-by-case basis. standard has the advantage of ensuring utility assets, and affiliate abuse. We
158. FirstEnergy contends that a that utilities and customers will not be note that commenters who generally
requirement that applications harmed by an affiliate company support the Commission’s proposal, as
demonstrate that each company within relationship, regardless of whether well as some who generally do not
a holding company system is unaffected market price exceeds costs for the non-
support the proposal, advocate a case-
by cross-subsidization would inundate power goods or services, or vice versa.
by-case approach. Commenters suggest
the Commission with information that 162. AEP encourages the Commission
to retain the ‘‘at cost’’ standard for intra- many valid conditions that applicants
has no real import. If the Commission might propose or that the Commission
requires such an evidentiary showing, it system non-power goods and services
transactions due to the added cost, might impose under revised FPA
must clearly define the types of section 203(a)(4). However, many of
evidentiary support that would be burden, and inconsistencies that would
be created otherwise. It explains that the these conditions may not be appropriate
necessary and provide guidance on the to every section 203 transaction.
types of activities that typically would expense and effort of implementing a
‘‘lower of cost or market’’ standard to 166. In our Merger Policy Statement,
result in a pledge or encumbrance and the Commission explained that, in
those that will be consistent with the the wide range of routine service
company administrative and determining whether a merger is
public interest. FirstEnergy states that consistent with the public interest, one
conditions should be placed on section professional services would be
immense, would result in lost of the factors we consider is the effect
203 approvals only when the the proposed merger will have on rates.
Commission finds that a pledge or efficiencies and, ultimately, would
produce higher rates for regulated The Commission’s main objective in
encumbrance is not consistent with the applying this factor is to protect captive
public interest. ratepayers. AEP states that the at-cost
standard is a fair, verifiable, and customers who are served under cost-
159. Finally, Independent Sellers based rates that could be adversely
request that the Commission adopt a workable.117
163. National Grid states that the affected by a section 203 transaction.118
rebuttable presumption that no
opportunity for cross-subsidization Commission should continue to allow 118 Customers charged under market-based rates

exists when a transaction involves only the use of the SEC’s ‘‘at no more than escape the potentially deleterious effects of cross-
entities that are not affiliated with cost’’ standard for pricing of intra- subsidization, or pledge or encumbrance of utility
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company transactions involving service assets, because the prices are constrained by
companies. It explains that such competition, regardless of the seller’s costs. In
116 E.g., Duke/Cinergy, EEI, Entergy, AEP, contrast, captive customers (who pay cost-based
Ameren, Progress Energy, PNM, FirstEnergy, companies were created to allow rates) require protection. See, e.g., Alpena Power
International Transmission, National Grid, and Generation, L.L.C., 110 FERC ¶ 61,199, at P 17
Scottish Power (citing NOPR at P 52.). 117 AEP Comments at 6–7. Continued

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The new provision in amended section the applicant commits that it will traditional utility associate companies
203(a)(4) concerning cross-subsidization protect wholesale customers from any with wholesale or retail customers
is rooted in similar concerns. In our adverse rate effects resulting from the served under cost-based regulation for
Merger Policy Statement, we held that transaction for a significant period of the benefit of an associate company; (3)
an applicant that wishes to avoid a time following the transaction; or a new pledges or encumbrances of assets
hearing on rate issues should submit a moratorium on increases in base rates of a traditional utility associate
commitment that adequately protects (rate freeze), where the applicant company with wholesale or retail
captive customers, such as a hold commits to freezing its rates for customers served under cost-based
harmless commitment or an open wholesale customers under a certain regulation for the benefit of an associate
season. Also, as part of our policy tariff for a significant period of time.121 company; (4) new affiliate contracts
authorizing market-based rates for The Commission will address the between non-utility associate companies
traditional public utilities or their adequacy of the proposed mechanisms and traditional utility associate
affiliates, we have required that these on a case-by-case basis. Furthermore, we companies with wholesale or retail
utilities adopt a code of conduct that agree that any additional conditions customers served under cost-based
addresses both power and non-power imposed by the Commission would regulation, other than non-power goods
transactions between them.119 We complement, not nullify, those imposed and services agreements subject to
believe that these types of commitments by state commissions. review under sections 205 and 206 of
also can, in appropriate circumstances, 168. What constitutes adequate the FPA.
address concerns regarding the potential ratepayer protection will depend on the 170. We also agree with New Jersey
that a merger may permit cross- particular circumstances of the Board that proposed section 33.2(j) does
subsidization. We will therefore require transaction. Should parties be unable to not clearly require appropriate
applicants to offer protections to their reach an agreement on ratepayer evidentiary support for the explanation
captive customers that address the protection, the Commission may still be in Exhibit M. We will therefore revise
potential for cross-subsidization. We able to approve the transaction on the the text to read: ‘‘An explanation, with
also note that, in addition to any such basis of the parties’ filings if we appropriate evidentiary support for such
commitments, we have continuing determine that the proposal protects explanation (to be identified as Exhibit
jurisdiction over the rates of public ratepayers from harm, or after imposing M to this application): * * *’’ Further,
utilities under section 205 by which to conditions specific to the particular the Commission will monitor and
further protect captive customers. circumstances. periodically audit, where appropriate, to
167. In sum, the concern about cross- 169. We also agree with commenters ensure that applicants abide by their
subsidization is principally a concern that certain verifications in an commitments in Exhibit M and any
over the effect of a transaction on rates. application under amended section 203 requirements contained in Commission
Accordingly, applicants proposing could streamline the approval process orders.
transactions under section 203 should by avoiding a detailed examination of 171. With regard to comments on the
proffer ratepayer protection mechanisms cross-subsidization and encumbrance ‘‘at cost’’ standard versus the ‘‘market’’
to assure that captive customers are concerns. Such verifications, considered standard for transactions involving non-
protected from the effects of cross- on a case-by-case basis in light of the power goods and services, we note that
subsidization. The applicant bears the given transaction, and explanations the Commission addressed this issue in
burden of proof to demonstrate that relating to those verifications, as well as the PUHCA 2005 rulemaking.122
customers will be protected.120 other explanations of how the
9. Section 33.11—Commission
Applicants should attempt to resolve transaction will not result in cross-
Procedures for Consideration of
the matter with customers before filing. subsidization, pledge, or encumbrance
Applications Under Section 203 of the
Among the types of protection of utility assets for the benefit of an
FPA
mechanisms that could be proposed by associate company ‘‘ or if it does result
applicants are: A general hold harmless in such, an explanation of how such 172. In the NOPR, the Commission
provision, which must be enforceable cross-subsidization, pledge, or proposed new subsections 33.11(a) and
and administratively manageable, where encumbrance will be consistent with the (b) to implement amended section
public interest ‘‘ is to be included as 203(a)(5). Specifically, subsection
(2005) (finding affiliate abuse concerns were Exhibit M to the application. 33.11(a) provides that the Commission
addressed with respect to market-based rate Accordingly, along with any protection will act on a completed application for
authority because, among other factors, there were approval of a transaction (i.e., an
no captive customers); Pinnacle West Capital Corp.,
mechanisms as discussed above, we
95 FERC ¶ 61,300, at 62,024 (2001) (‘‘The focus of may accept on a case-by-case basis, in application that meets the requirements
the Commission’s affiliate abuse concerns in cases lieu of or in addition to any other of Part 33), not later than 180 days after
involving sales between affiliates at market-based explanation, the following four the completed application is filed.123 If
rates thus is protection of captive customers.’’); the Commission does not act within 180
Connectiv Energy Supply, Inc., 91 FERC ¶ 61,076, verifications. The application may
at 61,268 (2000) (‘‘As the Commission has verify that the proposed transaction days, such application shall be deemed
explained in previous cases, there is a concern does not result in, at the time of the granted unless the Commission finds,
whenever a public utility can transact with an transaction or in the future: (1) Transfers based on good cause, that further
affiliated power marketer in such a way as to
transfer benefits from a power sale from captive of facilities between a traditional utility consideration is required and issues an
ratepayers to its shareholders.’’); The Detroit Edison associate company with wholesale or
Co., 84 FERC ¶ 61,197 (1998) (the Commission 122 PUHCA 2005 Final Rule at P 166–73.
retail customers served under cost-based
places no restrictions on power marketer 123 As explained in the Merger Policy Statement,
transactions with affiliates that do not have captive
regulation and an associate company;
a complete application is one that describes the
customers). (2) new issuances of securities by merger being proposed and that contains all the
119 NOPR at P 48 and 49. information necessary to explain how the merger is
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120 See Central Vermont Pub. Serv. Corp., 39 121 These protection mechanisms are offered only consistent with the public interest, including an
FERC ¶ 61,295, at 61,960 (1987) (stating that in as examples. Whether these types of protection evaluation of the merger’s effect on competition,
cases where the Commission finds sufficient mechanisms are appropriate in a particular case rates, and regulation. Merger Policy Statement at
potential for abuse, the Commission may will depend on the circumstances and the details 30,127. The Commission’s review process will
disapprove the transaction or place appropriate of the transaction in question. See, e.g., Merger begin when the application is deemed to be
conditions on it). Policy Statement at 30,121–24. complete.

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order tolling the time for acting on the same time protecting U.S. captive should receive expedited review, even if
application for not more than 180 days, customers. all of the criteria in section 33.11(b) of
at the end of which additional period 176. Further, the Commission stated the proposed regulations are not met.
the Commission shall grant or deny the that it expects to have a 60-day notice Many commenters recommend that, for
application, as required by amended period for section 203 applications that all four of the categories, the
section 203 of the FPA.124 involve, contain, or require a Commission automatically approve the
173. Proposed subsection 33.11(b) competitive analysis per the part 33 and application upon filing an informational
would provide for the expeditious a 21-day notice period for all other report where the applicants make
consideration of completed section 203 section 203 applications, except for certain verifications.128
applications that are not contested, are certain applications that may raise
179. With respect to proposed section
not mergers, and are consistent with cross-subsidization concerns. The
33.11(b)(4), commenters had a variety of
Commission precedent, because they Commission stated that it expects to
responses on the procedures that the
should typically meet the standards have a 60-day notice period for
Commission might adopt, or safeguards
established in section 203(a)(4).125 applications that seek authorization to
174. The Commission also stated that it might require, to expedite or pre-
transfer ownership of a generation plant
it could not provide a comprehensive approve transactions involving the
from one affiliate or associate company
description of all the classes or types of acquisition of a FUCO by a holding
to another company within the same
transactions that will receive the company with no captive customers in
corporate structure and for other
expedited review. However, the applications that may raise cross- the U.S. Many commenters request that
Commission proposed that transactions subsidization or pledge or encumbrance the Commission not adopt any rules or
that would generally warrant expedited issues.127 policies that would impose undue
review include: (1) A disposition of only regulatory burdens on holding
a. Comments companies that seek to invest in foreign
transmission facilities, particularly
those that both before and after the 177. Many commenters, including utility companies.
transaction remain under the functional TAPSG and UWUA, support the 180. Many traditional public utility
control of a Commission-approved RTO Commission’s proposal regarding the commenters and others generally
or independent system operator; (2) criteria for expedited consideration support a 30-day expedited review or
transfers involving generation facilities (applications that are not contested, are pre-approval for transactions involving
of a size that do not require an not mergers, and are consistent with acquisitions of FUCOs.129 Commenters
Appendix A analysis; (3) internal Commission precedent). APPA/NRECA suggest that the Commission
corporate reorganizations that do not and TANC, however, caution that automatically approve the application
present cross-subsidization issues; and uncontested section 203 applications when the applicant provides certain
(4) the acquisition of a foreign utility should still be reviewed to ensure they cross-subsidization verifications (similar
company by a holding company with no are consistent with Commission to those listed in EEI’s comments), as
captive customers in the United precedent. International Transmission well as assurances that the transaction
States.126 notes that limiting expedited review to will have no adverse effect on
175. With respect to the latter non-merger transactions is inconsistent competition, rates, and regulation, if the
category, the Commission recognized with the Commission’s recognition in filing is verified by a duly authorized
that amended section 203’s requirement the NOPR that not all merger corporate official of the holding
for regulatory approval could have a transactions require the same level of company.130 The transaction should be
chilling effect on investment— analysis. Oklahoma Commission deemed approved upon making such
particularly if the transaction were suggests that state commissions take informational filing.
subjected to a lengthy regulatory review. over initial transaction review and that
the Commission adopt a role of 181. State commission commenters,
The Commission noted that such a including NARUC, Ohio Commission,
transaction would not cause competitive appellate review where there are
disagreements between state and New Jersey Board, generally suggest
concerns in the United States and, that, in order to protect domestic
further, that there would be no concerns commissions and the applicant.
178. TAPSG and UWUA agree with customers while expediting or pre-
about cross-subsidization that harms approving foreign utility transactions,
captive customers in the United States. the Commission’s proposal not to
provide a comprehensive description of the Commission should consider
In addition, the Commission stated that reviewing the financial condition and
even with respect to the acquisition of the classes or types of transactions that
generally fall into the expedited review credit ratings of the acquiring utility
a foreign utility company by a holding holding company and its operating
company with captive customers in the category. However, TANC suggests that
the Commission adopt an exhaustive list utility companies, or require applicants
United States, there may be safeguards to submit service agreements, codes of
that allow expedited approval of such of section 203 transactions that are
transactions. Thus, the Commission eligible for expedited review to provide
128 See EEI Comments at 22–23. For example, one
sought comment on procedures the customers with the utmost protection
verification that EEI proposes is that the proposed
Commission might adopt, or safeguards and certainty. International transaction results in no transfers of facilities
it might require, to pre-approve or Transmission recommends that, in order between a traditional utility associate company
expedite such transactions while at the to encourage investment in independent with wholesale or retail customers served under
transmission, dispositions, cost-based regulation and an associate company.
Thus, a transaction that results in a transfer of
124 NOPR at P 56. consolidations, or acquisitions by facilities into or out of a traditional utility with
125 Id.at P 57. independent transmission companies captive customers could not qualify for automatic
126 NOPR at P 59. The Commission noted that approval.
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129 E.g., EEI, Duke/Cinergy, Entergy, AEP,


PUHCA 1935 exempted from its requirements 127 NOPR at P 64–64. The Commission explained

certain acquisitions of foreign utility companies by that not included in this category are transactions Progress Energy, Ameren, AES, EPSA, Scottish
a holding company with operations in the United that merely change upstream ownership interests Power, and E.ON.
States. 15 U.S.C. 33 (2000); 17 CFR 250.57 (2005). held by parent companies of public utilities or 130 E.g., EEI Comments at 22–23, 25–26; National

However, amended section 203 appears to provide transactions that do not alter the terms of power Grid Comments at 20–22; AES Comments at 15–19;
no such exemption. supply or power supply costs for captive customers. EPSA Comments at 8–9.

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1370 Federal Register / Vol. 71, No. 4 / Friday, January 6, 2006 / Rules and Regulations

conduct, and affiliate rules.131 They acquisition, the Commission should act details of the proposed transaction,
recommend that the Commission also expeditiously in certain circumstances, including testimony.
conduct a cursory ‘‘due diligence’’ setting a 30-day comment period and
b. Commission Determination
review of historical information from issuing an order no later than 30 days
annual FERC Form 1 filings by the thereafter. Southern Companies requests 188. The Commission adopts the
holding company’s operating utility that the Commission provide guidance proposed criteria for expedited
companies to examine trends in the regarding when an Appendix A analysis consideration in section 33.11(b).
holding company’s investment in its is required. Expedited consideration will be
domestic operating utilities and in their 185. With regard to proposed section available for applications that are not
quality of service. The Commission 33.11(b)(3), EEI, Entergy, and Duke/ contested, are not mergers, and are
could get this information from state Cinergy support expedited procedures consistent with Commission precedent.
regulatory commissions. or pre-approval for internal corporate With respect to APPA/NRECA and
182. Some commenters are cautious of reorganizations that do not present TANC’s concerns that the Commission
the Commission’s proposed expedited cross-subsidization issues. National should review even uncontested section
procedures for approving the Grid, however, requests expedited 203 applications to ensure that they are
acquisition of FUCOs. TAPSG states that procedures or pre-approval for internal consistent with Commission precedent,
the Commission should not decide in reorganizations that do involve we note that the Commission has always
the abstract how reviews of such mergers.133 It requests that the reviewed section 203 applications,
transactions can be expedited. Public Commission facilitate all internal regardless of whether they are
Citizen urges the Commission to protect corporate reorganizations that do not contested.
domestic ratepayers by requiring that a either introduce new third-party 189. Further, while some commenters
strong showing be made that such a interests or cross-subsidization issues, recommend that the regulations contain
transaction is consistent with the public which are routine aspects of a an exhaustive list of the types of
interest and by evaluating whether company’s financial operations, and do transactions that would generally
attempts by off-shore companies to not need to be disrupted by formal warrant expedited review, we continue
acquire or hold controlling shares in proceedings, however expedited, under to believe that doing so could exclude
U.S. public utilities can be found to be section 203. transactions that may warrant expedited
consistent with the public interest. 186. EEI, Entergy, and Duke/Cinergy, review, but that are not listed. Thus, as
183. With respect to proposed section state that the Commission could discussed below, we will not adopt an
33.11(b)(1) and expedited procedures streamline the process further by exhaustive list of such transactions. The
for a disposition of transmission granting blanket authorizations, for Commission will not expressly provide
facilities only (particularly those that FUCO acquisitions involving holding expedited review for mergers or
both before and after the transaction companies that do not have captive acquisitions involving independent
remain under the functional control of customers in the U.S. and for internal transmission companies, as suggested
a Commission-approved RTO or ISO), corporate reorganizations involving by International Transmission, as
TANC comments that expedited review public utility and holding company review of such cases would be more
should be used only where the facilities systems that do not involve traditional appropriately addressed on an
will remain under the functional control utility companies with captive individual basis.135
of the same Commission-approved RTO customers.134 190. Commenters have raised many
or ISO after the transaction is 187. Several commenters also made
valid arguments regarding the
completed. TANC also states that suggestions regarding notice periods
Commission’s four proposed categories
transmission-only dispositions should and complete applications. Many
of transactions generally warranting
receive expedited review only when commenters support the Commission’s
expedited review. We will adopt the
they involve entities that are non- expected notice periods. However, some
NOPR’s proposal in section 33.11(b)(1)
dominant market participants. APPA/ commenters recommend that, except in
and will generally provide expedited
NRECA argues that dispositions of simple cases, the Commission provide
review for a disposition of only
transmission-only facilities should not for a 60-day notice period. They suggest
transmission facilities, particularly
generally receive expedited review. that the applicant bear the burden of
184. With respect to proposed section those that both before and after the
demonstrating that a shorter notice
33.11(b)(2) and expedited procedures transaction remain under the functional
period is appropriate. TAPSG and
for transfers involving generation control of a Commission-approved RTO
UWUA recommend that, where
facilities of a size that do not require an or ISO. We note APPA/NRECA’s
applications are not complete, the
Appendix A analysis, many traditional concern that the consolidation of
Commission should issue deficiency
public utility commenters suggest that control of jurisdictional facilities should
letters. TAPSG also suggests that the
such expedited review be extended to be carefully evaluated under section 203
Commission not deem an application
include all transactions that do not and TANC’s argument that expedited
complete until after it has reviewed any
require an Appendix A analysis. They review should be limited to those
interventions or protests, since they may
recommend revising the proposed facilities that will remain under the
identify deficiencies in the application.
regulations to state: ‘‘transactions that functional control of the same
UWUA recommends that the 180-day
do not require an Appendix A Commission-approved RTO or ISO after
clock on section 203 applications
analysis.’’ 132 They also state that, even the transaction is completed. However,
should not begin to run until a complete
in cases where an Appendix A analysis application has been submitted. It states 135 We note that although the Filing Requirements
is required for a generation facility that merger applicants should have an Rule provided that applicants for a transaction
increased responsibility to submit involving only transmission facilities need not
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131 See, e.g., NARUC Comments at 15–16; Ohio


complete applications that are provide a competitive analysis under §§ 33.3 or 33.4
Commission Comments at 8–9; New Jersey Board of the Commission’s regulations, it also states that
Comments at 9–10. supported with full explanations of the if the Commission determines that a filing
132 See, e.g., EEI Comments at 24–26; Duke/ nonetheless raises competitive issues, the
133 National Grid Comments at 33.
Cinergy Comments at 10–11; Entergy Comments at Commission will evaluate those issues. Filing
9–11. 134 See, e.g., EEI Comments at 26–27. Requirements Rule at 31,902.

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we believe that ISOs and RTOs are pro- corporate reorganizations that do not section 203 applications that involve,
competitive and are effective at present cross-subsidization issues and contain, or require a competitive
preventing market power abuse because that do not involve a traditional public analysis per the revised filing
they have Commission-approved utility with captive customers. requirements, and a 21-day notice
market-monitoring and mitigation 193. With respect to the last category, period for all other section 203
measures in place. Further, we continue proposed section 33.11(b)(4), we will applications, except those that may raise
to believe that, as stated in the Filing not adopt the NOPR’s proposal to cross-subsidization concerns. We will
Requirements Rule, ‘‘the standards set expedite review for transactions not formalize this policy by rule, so that
forth in Order No. 2000 136 require involving the acquisition of a FUCO by we can be flexible to deal with varying
extensive information from RTO a holding company with no captive circumstances. This will allow us to
applicants that we believe will customers in the U.S. Instead, we will protect against some commenters’
demonstrate whether the proposal is in grant a blanket authorization for any concerns that the public notice period
the public interest. It also has been our holding company in a holding company would be ‘‘unnecessarily short-
experience that anticompetitive effects system that includes a transmitting circuited,’’ and ensure that it will only
are unlikely to arise with regard to utility or an electric utility company to be streamlined as appropriate.
internal corporate reorganizations or acquire a foreign utility company.
However, if such holding company or B. Amendments to 18 CFR 2.26—The
transactions that only involve the
any of its affiliates, its subsidiaries, or Merger Policy Statement
disposition of transmission
facilities.’’ 137 For these reasons, we associate companies within the holding 195. When the Commission considers
adopt section 33.11(b)(1) as proposed in company system have captive customers a proposed transaction’s effect on
the NOPR. in the United States, the authorization is federal regulation, section 2.26(e)(1)
191. With respect to proposed section conditioned on the holding company states that ‘‘[w]here the merged entity
33.11(b)(2), the Commission will adopt verifying by a duly authorized corporate would be part of a registered public
commenters’ proposal and expand that official of the holding company that the utility holding company, if applicants
section to generally provide expedited proposed transaction will not have any do not commit in their application to
review for ‘‘transactions that do not adverse effect on competition, rates, or abide by this Commission’s policies
require an Appendix A analysis.’’ On regulation, and will not result in, at the with regard to affiliate transactions, the
further consideration, the Commission time of the transaction or in the future: Commission will set the issue for a trial-
finds that it is not necessary to limit the (1) Any transfer of facilities between a type hearing.’’
transactions that will receive expedited traditional utility associate company 196. However, in the NOPR, the
review based on the amount of with wholesale or retail customers Commission explained that because
generation that is being transferred in served under cost-based regulation and EPAct 2005 repeals PUHCA 1935,138
the transaction. First, we note that the an associate company; (2) any new activities of registered holding
amount as well as the type of generation issuance of securities by traditional companies that were previously subject
involved can have different market utility associate companies with to SEC regulation, including inter-
power consequences, depending on the wholesale or retail customers served company transactions, will no longer be
situation, in different markets. Second, under cost-based regulation for the exempt from this Commission’s
our current regulations, which allow benefit of an associate company; (3) any regulation once PUHCA 1935 repeal
applicants to file an abbreviated new pledge or encumbrance of assets of takes effect on February 8, 2006.139
competitive analysis (e.g., an analysis a traditional utility associate company Thus, the Commission stated that there
that does not include an Appendix A with wholesale or retail customers is no longer a concern about any
analysis) in certain circumstances, served under cost-based regulation for potential shift in regulation from this
permit us to seek additional information the benefit of an associate company; or Commission to the SEC under the effect
if it is needed to allow us to evaluate the (4) any new affiliate contracts between of regulation factor, and proposed to
effects of the transaction. Therefore, non-utility associate companies and delete section 2.26(e)(1).140
although in the first instance the traditional utility associate companies 197. Proposed new subsection 2.26(f)
applicant must decide whether to with wholesale or retail customers would state that the Commission will
perform a full-fledged analysis, it is the served under cost-based regulation, not approve a transaction that will
Commission that ultimately decides other than non-power goods and result in cross-subsidization of a non-
whether such analysis is necessary and services agreements subject to review utility associate company or pledge or
thus whether the filing qualifies for under sections 205 and 206 of the FPA. encumbrance of utility assets for the
expedited review. Such transactions will be deemed benefit of an associate company unless
192. With respect to proposed section approved only upon making a filing of that cross-subsidization, pledge, or
33.11(b)(3), we agree with commenters these verifications. encumbrance will be consistent with the
that internal corporate reorganizations 194. Regarding notice periods, the public interest.
that do not present cross-subsidization Final Rule adopts the NOPR approach. 1. Comments
issues are unlikely to cause Some commenters recommend that the
Commission’s default rule for all section 198. Commenters did not specifically
anticompetitive effects. Thus, instead of
203 applications should be to provide address the Commission’s proposed
providing expedited review for this
the public 60 days to submit comments, section 2.26(e) and (f) amendments.
category, the Commission is granting a
and that the applicants should bear the However, some recommend that the
blanket authorization for internal
burden or demonstrating that a shorter Commission rethink its current merger
136 Regional Transmission Organizations, Order notice is appropriate. However, the policy and make important decisions as
No. 2000, 65 FR 809 (Jan. 6, 2000), FERC Stats. & Commission finds that the NOPR notice
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138 EPAct 2005 § 1263.


Regs. ¶ 31,089, at 31,108 (1999), order on reh’g, periods will allow us to continue
Order No. 2000–A, 65 FR 12,088 (Mar. 8, 2000), processing section 203 applications
139 See 17 CFR part 250 (2005).
FERC Stats. & Regs. ¶ 31,092 (2000), aff’d sub nom. 140 NOPR at P 67. However, the Commission
Public Utility District No. 1 of Snohomish County, quickly to allow reasonable business reiterated that applicants are still required to
Washington v. FERC, 272 F.3d 607 (DC Cir. 2001). goals to be met. Accordingly, we expect address whether the transaction will have any other
137 Filing Requirements Rule at 31,902. to have a 60-day notice period for effect on the Commission’s regulation.

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1372 Federal Register / Vol. 71, No. 4 / Friday, January 6, 2006 / Rules and Regulations

to what ‘‘consistent with the public notification, and should require substantially under amended section
interest’’ means in light of amended applicants to submit supply curve 203. The Commission received 42
section 203 and the repeal of PUHCA analyses for each relevant market. comments on its NOPR and only GE
1935. Some comment that the EFS specifically addressed its estimates.
2. Commission Determination
Commission should broaden its public GE EFS notes that the ‘‘Information
interest inquiry to consider ratepayer 202. With respect to commenters’ Collection Statement’’ in the NOPR
benefits on an application-specific basis; specific concerns regarding the states that ‘‘the Commission does not
namely, applicants could propose an Commission’s merger policy, we are not expect the total number of section 203
open season guarantee under which persuaded at this time to change our applications under amended section 203
their existing wholesale requirements current policies. Our standard of review to increase substantially.’’ 146 GE EFS
customers could terminate their is flexible enough to consider any comments that, unless the Commission
contracts if the applicants request a rate changes in market structure that limits the overly broad scope of its
increase affecting those customers for ultimately result from the EPAct 2005 proposed rules, the Commission will be
the first five years after the merger is and the repeal of PUHCA 1935. burdened with applications for
consummated. However, once the Commission has acquisitions of securities of QFs, which
199. Ohio Commission comments that gained more experience in evaluating heretofore were exempted from section
the Commission should consider factors section 203 applications under the new 203.147 As noted above, we believe that
in addition to those listed in section statute, we may consider reevaluating the blanket authorizations granted
2.26(b). It recommends that the our merger policy in general. herein for certain holding company
Commission require that a holding Accordingly, we adopt the proposal set acquisitions of non-voting securities and
company secure a letter of endorsement, forth in the NOPR with respect to up to 9.9 percent of voting securities in
or order, from any affected state amended sections 2.26(e) and (f). electric utility companies will
regulatory commission in which the adequately address GE EFS’ concerns.
IV. Information Collection Statement
holding company has utility operations. To the extent additional blanket
It states that a similar endorsement 203. Office of Management and authorizations are needed or
requirement is used by the SEC to Budget (OMB) regulations require that appropriate, we will consider those on
implement Rule 53 141 regarding OMB approve certain reporting and a case-by-case basis. Thus, we believe
authority for registered holding recordkeeping requirements (collections that we have lessened the burden on
company financings in connection with of information) imposed by an applicants subject to the requirements of
the acquisition of exempt wholesale agency.143 The information collection amended section 203, including for
generators. requirements in this Final Rule are applicants seeking to acquire securities
200. Commenters also explain that, in identified under the Commission’s data of QFs. Therefore, the Commission will
light of amended section 203, the collection, FERC–519, ‘‘Applications retain its initial estimates.
Commission should expect numerous Under Federal Power Act Section 203.’’ The Commission is submitting a copy
section 203 applications seeking Under section 3507(d) of the Paperwork of this Final Rule to OMB for review
approval of ‘‘cross-country’’ (or Reduction Act of 1995,144 the reporting and approval. In their notice of
interstate) mergers. They state that the requirements in this rulemaking will be December 9, 2005, OMB took no action
Commission’s current method for submitted to OMB for review. on the NOPR, instead deferring their
evaluating the effect of a proposed 204. Respondents subject to the filing approval until review of the Final Rule.
electric utility merger on competition, requirements of this Final Rule will not Title: FERC–519, Applications Under
the Appendix A analysis, was be penalized for failing to respond to Federal Power Act Section 203.
developed when cross-country electric this collection of information unless the Action: Proposed Information
utility mergers were not common, collection of information displays a Collection.
because of PUHCA 1935. The ‘‘impact valid OMB control number. ‘‘Display’’ is OMB Control No: 1902–0082.
on competition’’ horizontal screen defined as publishing the OMB control Respondents: Businesses or other for
analysis looks primarily at whether number in regulations, guidelines, forms profit.
competition will be lessened in the or other issuances in the Federal Necessity of the Information: The
‘‘common’’ markets where the merger Register (for example, in the preamble information collected under the
applicants operate. They state that or regulatory text for the Final Rule requirements of FERC–519 is used by
continued use of the Appendix A containing the information the Commission to implement section
analysis alone may result in substantial collection).145 203 of the Federal Power Act and the
industry consolidation. Public Reporting Burden: In the Code of Federal Regulations under 18
201. TAPSG asserts that the NOPR, the Commission stated that the CFR part 33 and 18 CFR 2.26. This Final
Commission almost exclusively relies regulations that it proposed should have Rule is limited to implementing
on the HHI aspect of the Appendix A a minimal impact on the current amended section 203 of the FPA, which
analysis and fails to examine the other reporting burden associated with an directs the Commission to adopt a rule
competitive effects of a transaction. It individual application, as they would to do so. Further, this Final Rule does
comments that the Commission should not substantially change the filing not substantially change the current
require applicants to submit documents requirements with which section 203 filing requirements or regulations that
and data, beyond those needed to applicants must currently comply. applicants must comply with for
perform the Appendix A analysis, Further, the Commission stated that it transactions subject to FPA section 203.
205. Interested persons may obtain
including the kinds of information did not expect the total number of
information on this information
submitted to the antitrust agencies as section 203 applications to increase
collection by contacting the following:
part of the initial Hart-Scott-Rodino 142
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Rodino filing requirements and described in 16 CFR Federal Energy Regulatory Commission,
141 17 CFR 250.53 (2005). part 803 (2005). 888 First Street, NE., Washington, DC
142 TAPSG explains that the Hart-Scott-Rodino 143 5 CFR 1320.11 (2005).
144 44 U.S.C. 3507(d) (2000). 146 NOPR at P 70.
notification is a far more limited submission
required of all utilities subject to the Hart-Scott- 145 See 1 CFR 21.35; 5 CFR 1320.3(f)(3). 147 GE EFS Comments at 2.

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Federal Register / Vol. 71, No. 4 / Friday, January 6, 2006 / Rules and Regulations 1373

20426, Attention: Michael Miller, implements section 203 of the FPA. In VIII. Effective Date and Congressional
Officer of the Executive Director, phone: particular, the rule increases the value Notification
(202) 502–8415, fax: (202) 273–0873, e- threshold for filing a section 203 213. This Final Rule will take effect
mail: michael.miller@ferc.gov. application with the Commission from on February 8, 2006. The Commission
206. Comments concerning this transactions in excess of $50,000 to has determined, with the concurrence of
information collection can be sent to the transactions in excess of $10 million the Administrator of the Office of
Office of Management and Budget, (under amended section 203 of the Information and Regulatory Affairs of
Office of Information and Regulatory FPA). Further, the RFA directs agencies OMB, that this rule is not a major rule
Affairs, Washington, DC 20503 to consider four regulatory alternatives within the meaning of section 251 of the
[Attention: Desk Officer for the Federal to be considered in a rulemaking to Small Business Regulatory Enforcement
Energy Regulatory Commission, phone: lessen the impact on small entities: Fairness Act of 1996.152 The
(202) 395–4650, fax: (202) 395–7285]. Tiering or establishment of different Commission will submit this Final Rule
V. Environmental Analysis compliance or reporting requirements to both houses of Congress and the
for small entities, classification, General Accountability Office.153
207. The Commission is required to consolidation, clarification or
prepare an Environmental Assessment simplification of compliance and List of Subjects
or an Environmental Impact Statement reporting requirements, performance 18 CFR Part 2
for any action that may have a rather than design standards, and
significant adverse effect on the human Administrative practice and
exemptions. In this Final Rule, the procedure; Electric power; Natural gas;
environment.148 The Commission Commission has adopted tiering, and
concludes that neither an Pipelines; Reporting and recordkeeping
classification and simplification by requirements
Environmental Assessment or an classifying the types of holding
Environmental Impact Statement is acquisitions that qualify for a grant of 18 CFR Part 33
required for this Final Rule under
blanket approval under section Electric utilities; Reporting and
section 380.4(a)(2)(ii) of the Commission
203(a)(2). Further, the rule does not recordkeeping requirements; Securities
regulations, which provides a
substantially change the current
‘‘categorical exclusion for rules that do By Order of the Commission.
requirements and regulations that
not substantively change the effect of Magalie R. Salas,
applicants must comply with for
legislation.’’149 Secretary.
transactions subject to FPA section 203.
VI. Regulatory Flexibility Act Therefore, the Commission certifies that ■In consideration of the foregoing, the
Certification this rule will not have a significant Commission amends Chapter I, Title 18,
impact on a substantial number of small Code of Federal Regulations, as follows:
208. The Regulatory Flexibility Act of
1980 (RFA)150 generally requires a entities.
PART 2—GENERAL POLICY AND
description and analysis of final rules VII. Document Availability INTERPRETATIONS
that will have a significant economic
impact on a substantial number of small 210. In addition to publishing the full ■ 1. The authority citation for part 2 is
entities.151 The Commission is not text of this document in the Federal revised to read as follows:
required to make such analyses if a rule Register, the Commission provides all Authority: 5 U.S.C. 601; 15 U.S.C. 717–
would not have such an effect. interested persons an opportunity to 717w, 3301–3432; 16 U.S.C. 792–825y, 2601–
209. The Commission adheres to its view and/or print the contents of this 2645; 42 U.S.C. 4321–4361, 7101–7352; Pub.
certification in the NOPR that this document via the Internet through L. No. 109–58, 119 Stat. 594.2.
rulemaking will not have a significant FERC’s Home Page (http://www.ferc.gov) ■ 2. Section 2.26 is amended by revising
economic impact upon a substantial and in FERC’s Public Reference Room paragraph (e) and by adding paragraph
number of small entities. As stated in during normal business hours (8:30 a.m. (f) to read as follows:
the NOPR, EPAct 2005 directs the to 5 p.m. Eastern time) at 888 First
Commission to issue a rule adopting Street, NE., Room 2A, Washington, DC § 2.26. Policies concerning review of
procedures for the expeditious 20426. applications under section 203.
consideration of applications for the 211. From the Commission’s Home * * * * *
approval of dispositions, consolidations, Page on the Internet, this information is (e) Effect on regulation. (1) Where the
or acquisition, under this section. In available in the Commission’s document affected state commissions have
accordance with this directive, this rule management system, eLibrary. The full authority to act on the transaction, the
text of this document is available on Commission will not set for hearing
148 Order No. 486, Regulations Implementing the
eLibrary in PDF and Microsoft Word whether the transaction would impair
National Environmental Policy Act, 52 FR 47,897 effective regulation by the state
(Dec. 17, 1987), FERC Stats. & Regs. ¶ 30,783 (1987). format for viewing, printing, and/or
149 18 CFR 380.4(a)(2)(ii) (2005). downloading. To access this document commissions. The application should
150 5 U.S.C. 601–12. in eLibrary, type ‘‘RM05–34’’ in the state whether the state commissions
151 The RFA definition of ‘‘small entity’’ refers to
docket number field. have this authority.
the definition provided in the Small Business Act, (2) Where the affected state
which defines a ‘‘small business concern’’ as a 212. User assistance is available for commissions do not have authority to
business that is independently owned and operated eLibrary and the FERC’s Web site during act on the transaction, the Commission
and that is not dominant in its field of operation. normal business hours. For assistance,
15 U.S.C. 632. The Small Business Size Standards
may set for hearing the issue of whether
component of the North American Industry
please contact FERC Online Support at the transaction would impair effective
Classification System defines a small electric utility 1–866–208–3676 (toll free) or 202–502– state regulation.
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as one that, including its affiliates, is primarily 6652 (e-mail at (f) Under section 203(a)(4) of the
engaged in the generation, transmission, and/or FERCOnlineSupport@FERC.gov), or the
distribution of electric energy for sale and whose
Federal Power Act (16 U.S.C. 824b), in
total electric output for the preceding fiscal years
Public Reference Room at 202–502–
did not exceed 4 million MWh. 13 CFR 121.201 8371, TTY 202–502–8659 (e-mail at 152 See 5 U.S.C. 804(2).
(2005). public.referenceroom@ferc.gov). 153 See 5 U.S.C. 801(a)(1)(A).

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1374 Federal Register / Vol. 71, No. 4 / Friday, January 6, 2006 / Rules and Regulations

reviewing a proposed transaction (1) Existing generation facility means undepreciated book value of the
subject to section 203, the Commission a generation facility that is operational company’s assets;
will also consider whether the proposed at or before the time the section 203 (B) Determining the fraction of the
transaction will result in cross- transaction is consummated. ‘‘The time securities at issue by dividing the
subsidization of a non-utility associate the transaction is consummated’’ means number of equity securities involved in
company or pledge or encumbrance of the point in time when the transaction the transaction by the total number of
utility assets for the benefit of an actually closes and control of the facility outstanding equity securities for the
associate company, unless that cross- changes hands. ‘‘Operational’’ means a company; and
subsidization, pledge, or encumbrance generation facility for which (C) Multiplying the value determined
will be consistent with the public construction is complete (i.e., it is in paragraph (b)(3)(iii)(A) of this section
interest. capable of producing power). The by the value determined in paragraph
Commission will rebuttably presume (b)(3)(iii)(B) of this section (i.e., the
PART 33—APPLICATIONS UNDER that section 203(a) applies to the value of the company multiplied by the
FEDERAL POWER ACT SECTION 203 transfer of any existing generation fraction of the equity securities at issue).
facility unless the utility can (4) The terms associate company,
■ 3. The authority citation for part 33 is demonstrate with substantial evidence electric utility company, foreign utility
revised to read as follows: that the generator is used exclusively for company, holding company, and
Authority: 16 U.S.C. 791a–825r, 2601– retail sales. holding company system have the
2645; 31 U.S.C. 9701; 42 U.S.C. 7101–7352; (2) Non-utility associate company meaning given those terms in the Public
Pub. L. No. 109–58, 119 Stat. 594. means any associate company in a Utility Holding Company Act of 2005.
holding company system other than a The term holding company does not
■ 4. The heading of part 33 is revised to public utility or electric utility company include: A State, any political
read as set forth above. that has wholesale or retail customers subdivision of a State, or any agency,
■ 5. Section 33.1 is revised to read as served under cost-based regulation. authority or instrumentality of a State or
follows: (3) Value when applied to: political subdivision of a State; or an
(i) Transmission facilities, generation electric power cooperative.
§ 33.1. Applicability, definitions, and
facilities, transmitting utilities, electric (c) Blanket Authorizations. (1) Any
blanket authorizations.
utility companies, and holding holding company in a holding company
(a) Applicability. (1) The requirements companies, means the market value of system that includes a transmitting
of this part will apply to any public the facilities or companies for utility or an electric utility is granted a
utility seeking authorization under transactions between non-affiliated blanket authorization under section
section 203 of the Federal Power Act to: companies; the Commission will 203(a)(2) of the Federal Power Act to
(i) Sell, lease, or otherwise dispose of rebuttably presume that the market purchase, acquire, or take any security
the whole of its facilities subject to the value is the transaction price. For of:
jurisdiction of the Commission, or any transactions between affiliated (i) A transmitting utility or company
part thereof of a value in excess of $10 companies, value means original cost that owns, operates, or controls only
million; undepreciated, as defined in the facilities used solely for transmission in
(ii) Merge or consolidate, directly or Commission’s Uniform System of intrastate commerce and/or sales of
indirectly, such facilities or any part Accounts prescribed for public utilities electric energy in intrastate commerce;
thereof with those of any other person, and licensees in part 101 of this chapter, (ii) A transmitting utility or company
by any means whatsoever; or original book cost, as applicable; that owns, operates, or controls only
(iii) Purchase, acquire, or take any (ii) Wholesale contracts, means the facilities used solely for local
security with a value in excess of $10 market value for transactions between distribution and/or sales of electric
million of any other public utility; or non-affiliated companies; the energy at retail regulated by a state
(iv) Purchase, lease, or otherwise Commission will rebuttably presume commission; or
acquire an existing generation facility: that the market value is the transaction (iii) A transmitting utility or company
(A) That has a value in excess of $10 price. For transactions between if the transaction involves an internal
million; and affiliated companies, value means total corporate reorganization that does not
(B) That is used in whole or in part expected nominal contract revenues present cross-subsidization issues and
for wholesale sales in interstate over the remaining life of the contract; does not involve a traditional public
commerce by a public utility. and utility with captive customers.
(2) The requirements of this part shall (iii) Securities, means market value (2) Any holding company in a holding
also apply to any holding company in for transactions between non-affiliated company system that includes a
a holding company system that includes companies; the Commission will transmitting utility or an electric utility
a transmitting utility or an electric rebuttably presume that the market is granted a blanket authorization under
utility if such holding company seeks to value is the agreed-upon transaction section 203(a)(2) of the Federal Power
purchase, acquire, or take any security price. For transactions between Act to purchase, acquire, or take:
with a value in excess of $10 million of, affiliated companies, value means (i) Any non-voting security (that does
or, by any means whatsoever, directly or market value if the securities are widely not convey sufficient veto rights over
indirectly, merge or consolidate with, a traded, in which case the Commission management actions so as to convey
transmitting utility, an electric utility will rebuttably presume that market control) in a transmitting utility, an
company, or a holding company in a value is the market price at which the electric utility company, or a holding
holding company system that includes a securities are being traded at the time company in a holding company system
transmitting utility, or an electric utility the transaction occurs; if the securities that includes a transmitting utility or an
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company, with a value in excess of $10 are not widely traded, market value is electric utility company; or
million. determined by: (ii) Any voting security in a
(b) Definitions. For the purposes of (A) Determining the value of the transmitting utility, an electric utility
this part, as used in section 203 of the company that is the issuer of the equity company, or a holding company in a
Federal Power Act (16 U.S.C. 824b) securities based on the total holding company system that includes a

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transmitting utility or an electric utility with wholesale or retail customers § 33.11. Commission procedures for the
company if, after the acquisition, the served under cost-based regulation for consideration of applications under section
holding company will own less than 10 the benefit of an associate company; 203 of the FPA.
percent of the outstanding voting (C) Any new pledge or encumbrance (a) The Commission will act on a
securities; or of assets of a traditional utility associate completed application for approval of a
(iii) Any security of a subsidiary transaction (i.e., one that is consistent
company with wholesale or retail
company within the holding company with the requirements of this part) not
customers served under cost-based
system. later than 180 days after the completed
(3) The blanket authorizations granted regulation for the benefit of an associate
application is filed. If the Commission
under paragraph (c)(2) of this section are company; or
does not act within 180 days, such
subject to the conditions that the (D) Any new affiliate contracts application shall be deemed granted
holding company shall not: between non-utility associate companies unless the Commission finds, based on
(i) Borrow from any electric utility and traditional utility associate good cause, that further consideration is
company subsidiary in connection with companies with wholesale or retail required to determine whether the
such acquisition; or customers served under cost-based proposed transaction meets the
(ii) Pledge or encumber the assets of regulation, other than non-power goods standards of section 203(a)(4) of the FPA
any electric utility company subsidiary and services agreements subject to and issues, by the 180th day, an order
in connection with such acquisition; review under sections 205 and 206 of tolling the time for acting on the
(4) A holding company granted the Federal Power Act. application for not more than 180 days,
blanket authorizations in section (c)(2) at the end of which additional period
shall provide the Commission with the (iii) A transaction by a holding
company subject to the conditions in the Commission shall grant or deny the
same information, on the same basis, application.
that the holding company provides to paragraphs (c)(5)(i) and (ii) of this
section will be deemed approved only (b) The Commission will provide for
the Securities and Exchange
upon filing the information required in the expeditious consideration of
Commission in connection with any
paragraphs (c)(5)(i) and (ii) of this completed applications for the approval
securities purchased, acquired or taken
section. of transactions that are not contested, do
pursuant to this section.
not involve mergers, and are consistent
(5) Any holding company in a holding ■ 6. Section 33.2 is amended to add with Commission precedent. The
company system that includes a paragraph (j) to read as follows: transactions that would generally
transmitting utility or an electric utility
warrant expedited review include:
is granted a blanket authorization under § 33.2. Contents of application—general
section 203(a)(2) of the Federal Power information requirements. (1) A disposition of only transmission
Act to acquire a foreign utility company. facilities, particularly those that both
* * * * * before and after the transaction remain
However, if such holding company or
(j) An explanation, with appropriate under the functional control of a
any of its affiliates, its subsidiaries, or
evidentiary support for such Commission-approved regional
associate companies within the holding
explanation (to be identified as Exhibit transmission organization or
company system have captive customers
M to the application): independent system operator; and
in the United States, the authorization is
conditioned on the holding company (1) Of how applicants are providing (2) Transactions that do not require an
verifying by a duly authorized corporate assurance that the proposed transaction Appendix A analysis.1
official of the holding company that the will not result in cross-subsidization of Note: The following appendix will not
proposed transaction: a non-utility associate company or appear in the Code of Federal Regulations.
(i) Will not have any adverse effect on pledge or encumbrance of utility assets
competition, rates, or regulation; and for the benefit of an associate company; Appendix List of Intervenors and
(ii) Will not result in, at the time of or Commenters
the transaction or in the future: (2) If no such assurance can be Intervenors
(A) Any transfer of facilities between provided, an explanation of how such California Public Utilities Commission.
a traditional utility associate company cross-subsidization, pledge, or Edison Mission Energy, Edison Mission
with wholesale or retail customers encumbrance will be consistent with the Marketing & Trading, Inc., and Midwest
served under cost-based regulation and public interest. Generation EME, LLC.
an associate company; Public Service Commission of Wisconsin.
(B) Any new issuance of securities by ■ 7. Section 33.11 is added to read as Public Utilities Commission of Ohio.
traditional utility associate companies follows: Southern California Edison Company.

COMMENTERS
Acronym Name

ACC ................................................. American Chemistry Counsel.


AEP ................................................. American Electric Power Service Corporation.
AES ................................................. The AES Corporation.
Ameren ............................................ Ameren Services Company.
APPA/NRECA ................................. American Public Power Association and the National Rural Electric Cooperative Association.
Chairman Barton ............................. Congressman Joe Barton.
Constellation ................................... Constellation Energy Group Inc.
Duke/Cinergy .................................. Duke Energy Corporation and Cinergy Corporation.
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EEI .................................................. Edison Electric Institute.

1 Inquiry Concerning the Commission’s Merger 1996), FERC Stats. & Regs. ¶ 31,044 (1996), 33,340 (June 19, 1997), 79 FERC ¶ 61,321 (1997)
Policy Under the Federal Power Act: Policy reconsideration denied, Order No. 592–A, 62 FR (Merger Policy Statement).
Statement, Order No. 592, 61 FR 68,595 (Dec. 30,

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1376 Federal Register / Vol. 71, No. 4 / Friday, January 6, 2006 / Rules and Regulations

COMMENTERS—Continued
Acronym Name

Entergy ............................................ Entergy Services, Inc.


E.ON ............................................... E.ON AG.
EPSA ............................................... Electric Power Supply Association.
FirstEnergy ...................................... FirstEnergy Service Company.
GE EFS ........................................... GE Energy Financial Services.
HECO .............................................. Hawaiian Electric Company, Inc.
Independent Sellers ........................ Cogentrix Energy, Inc. and The Goldman Sachs Group, Inc.
Indiana Commission ....................... Indiana Utility Regulatory Commission.
Industrial Consumers ...................... Electricity Consumers Resource Council, the American Iron and Steel Institute, the American Chemistry
Council, and the PJM Industrial Customer Coalition.
International Transmission .............. International Transmission Company.
Kentucky Commission .................... Kentucky Public Service Commission.
MidAmerican ................................... MidAmerican Energy Holdings Company.
Missouri Commission ...................... Missouri Public Utilities Commission.
Morgan Stanley ............................... Morgan Stanley Capital Group Inc.
NAFC .............................................. National Alliance for Fair Competition.
NARUC ........................................... National Association of Regulatory Utility Commissioners.
NASUCA ......................................... National Association of State Utility Consumer Advocates.
National Grid ................................... National Grid USA.
New Jersey Board .......................... New Jersey Board of Public Utilities.
North Carolina Commission ............ North Carolina Utilities Commission.
Ohio Commission ............................ Public Utilities Commission of Ohio.
Oklahoma Commission ................... Oklahoma Corporation Commission.
PNM ................................................ PNM Resources, Inc.
Progress Energy ............................. Progress Energy, Inc.
Public Citizen .................................. Energy Program of Public Citizen, Inc.
Scottish Power ................................ Scottish Power plc.
Southern Companies ...................... Southern Company Services, Inc.
Suez ................................................ SUEZ Energy North America.
TANC .............................................. Transmission Agency of Northern California.
TAPSG ............................................ Transmission Access Policy Study Group.
UWUA ............................................. Utility Workers Union of America, AFL–CIO.
Wisconsin Electric ........................... Wisconsin Electric Power Company.
Xcel ................................................. Xcel Energy Services, Inc.

[FR Doc. 06–77 Filed 1–5–06; 8:45 am]


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