The Federal Energy Regulatory Commission (“FERC” or “Commission”) has taken a major step in implementing the Energy Policy Act of 2005 (“EPAct”).  The Commission’s Notice of Proposed Rulemaking (“NOPR”) implements changes in its electric utility merger review authority.  This and other notable enhancements of FERC authority were included in the EPAct to balance repeal of the Public Utility Holding Company Act of 1935 and represent a setback for those in Congress who advocate reduction or elimination of FERC merger review authority.

Comments are due 30 days after Federal Register publication (approximately November 7).  Congress requires the Commission to act by February 8, 2006.

The Legislative Mandate

The EPAct amends Section 203 of the Federal Power Act which gives the Commission authority to review dispositions of jurisdictional “facilities,” including disposition through the merger of public utilities.  The Commission has typically considered whether a transaction’s effect on competition, rates, and regulation meets the “public interest” standard.  This is unlikely to exclude many important transactions, however.

The EPAct amends the criteria of FERC’s merger review in several ways.  Chiefly, amended Section 203 increases the threshold “value” of a reviewable transaction (including any sale of security interests) from $50,000 to $10 million.  The legislation extends the scope of FERC’s review to include transactions involving the purchase, lease, or acquisition of an “existing generation facility” that (i) has a value in excess of $10 million, and (ii) is used for interstate wholesale sales and over which the Commission has jurisdiction for ratemaking purposes.  FERC was previously barred from review of any disposition of generation facilities only.  Finally, the new law requires the Commission to address issues of cross-subsidization and to make specific findings that the proposed transaction will not result in subsidizing activities of a “non-utility associate company” or any encumbrance of utility assets for non-utility benefit.

Requests for Comment

The NOPR seeks specific public comment on the following items:

Definition of “Value”.  The new Section 203 increases the “value” threshold for review of a transaction from $50,000 to $10 million; yet, it does not define how to measure the “value” of an asset.  The Commission proposes to use a market valuation rather than the accounting or book value of the asset, if a market value can be readily determined.  Similarly, when a transaction involves the sale or transfer of securities, the Commission proposes to value those securities by their market value, with a rebuttable presumption that the market value is the agreed-upon price.  Further, when valuing “paper jurisdictional utilities” (usually entities that hold wholesale power contracts), the Commission proposes to value any wholesale contract by looking at the total expected contract revenues over the remaining life of the contract.  Finally, the Commission seeks comment on whether the current record-keeping requirements outside the Section 203 context (FERC Form 1 or Order No. 652 compliance) provide sufficient information to monitor compliance with Section 203.

Definition of “Existing Generation Facility”.  The Commission proposes to define “existing generation facility” as a generation facility that is operational at the time the transaction is consummated.  The Commission seeks comment on whether this is the correct point for determining whether a facility is an “existing generation facility”.

Definition of “Non-Utility Holding Company”.  The Commission defines a “non-utility holding company” as “any associate company in a holding company system other than a public utility or electric utility company that has wholesale or retail customers served under cost-based regulation,” for purposes of preventing potential cross-subsidization.  The breadth of this definition could restrict appropriate energy-related activities.

Cross-subsidization.  Proposed new regulations would require Section 203 applicants to include in their applications an explanation of how the transaction will not result in cross-subsidization of a non-utility holding company, or a showing that the transaction is otherwise in the public interest.  Further, the Commission seeks comment on any necessary additional safeguards against cross-subsidization.

Expedited Procedures for Considering Applications.  Proposed new regulations provide for expeditious consideration of uncontested non-merger Section 203 applications.  The Commission proposes to act within 180 days or, if the Commission does not act, the application will be deemed granted absent good cause shown.

Pending Rulemakings and Upcoming Proceedings:

• Rules concerning certification of the Electric Reliability Organization and Procedures for the Establishment, Approval and Enforcement of Electric Reliability Standards. (Docket No. RM05-30-000).  This is FERC’s major foray into mandatory rules for grid operations.  Comments are due on October 7, 2005.
  
  
• Repeal of the Public Utility Holding Company Act of 1935 and Enactment of the Public Utility Holding Company Act of 2005 (Docket No. RM05-32-000).  FERC must establish rules governing access to holding company books and records by December 8, 2005.  Comments are due on October 14, 2005.
  
  
• Preventing Undue Discrimination and Preference in Transmission Services (Docket No. RM05-25-000).  FERC seeks to reform and strengthen the requirements of the open access tariff established in Order No. 888.  This is not required by the EPAct.  Comments are due on November 22, 2005.
  
  
• Announcement will soon be made about the composition and agenda of the "Electric Energy Market Competition Task Force" established by Section 1815 of the EPAct. The Task Force is comprised of representatives of FERC,  the Departments of Energy, Justice, Agriculture, and the Federal Trade Commission and is charged with reporting to Congress in one year on its "study and analysis of competition within the wholesale and retail market for electric energy in the United States." The Task Force is required to solicit comments "from any advisory entity of the task force, the States, representatives of the electric power industry, and the public."  This work is expected to be coordinated by FERC and to begin with a request for public comment within the month.

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