Federal Energy Regulatory Commission, DOE.
Final rule; order on rehearing.
In this order on rehearing, the Federal Energy Regulatory Commission (Commission) affirms its determinations in part and grants rehearing in part of Order No. 708. Order No. 708 amended the Commission's regulations to establish blanket authorizations under section 203 of the Federal Power Act to facilitate investment in the electric industry and, at the same time, ensure that public utility customers are adequately protected from any adverse effects of such transactions.
This final rule; order on rehearing will become effective August 25, 2008.
1. This order addresses requests for rehearing and clarification of Order No. 708.
2. Based on comments to the Blanket Authorization Notice of Proposed Rulemaking,
3. Fifth, a public utility was granted a blanket authorization under FPA section 203(a)(1) for the acquisition or disposition of a jurisdictional contract where neither the acquirer nor transferor has captive customers or owns or provides transmission service over jurisdictional transmission facilities, the contract does not convey control over the operation of a generation or transmission facility, the parties to the transaction are neither affiliates nor associate companies, and the acquirer is a public utility.
4. Order No. 708 was published in the
5. As discussed below, parties seek rehearing and/or clarification with respect to: (1) Extending the blanket authorization under 18 CFR 33.1(c)(12) to cover public utility dispositions, not just to certain holding companies but also to non-holding companies; (2) the blanket authorization in 18 CFR 33.1(c)(16) pertaining to the transfer of jurisdictional contracts; (3) the definition and/or scope of hedging activities permitted under 18 CFR 33.1(c)(10); (4) the determination in Order No. 708 not to impose additional reporting requirements related to the new blanket authorizations; and (5) clarification of the existing blanket authorization under 18 CFR 33.1(6) (authorization of internal reorganization not affecting a traditional public utility) identified in the Supplemental Policy Statement.
6. In Order No. 708, the Commission adopted the proposed blanket authorization from the Blanket Authorization NOPR without modification.
7. Financial Group requests rehearing of the Commission's decision declining to extend the blanket certificate to cover public utility dispositions to non-holding companies under 18 CFR 33.1(c)(12), subject to the same “in aggregate” limitations imposed on transfers to holding companies. Financial Group argues that the distinction between holding companies and non-holding companies is immaterial since the same benefits of reducing regulatory burdens and
8. Financial Group argues that the concern underlying the Commission's refusal to extend the blanket certificate to cover public utility dispositions to non-holding companies could be addressed without the need for issuing such blanket authorizations on a case-by-case basis. Financial Group proposes reporting requirements for transactions involving non-holding companies that it says should be at least as helpful to the Commission as the preexisting reporting requirements applicable to holding companies.
9. As a preliminary matter, and upon further consideration, we do not consider Financial Group's request to be beyond the scope of the Blanket Authorization NOPR. In general, the Commission is permitted to learn from comments submitted during its rulemaking process.
10. Substantively, the distinction in 18 CFR 33.1(c)(12) between holding companies and non-holding companies is not determinative as to whether a particular transaction is consistent with the public interest, particularly if the “in aggregate” 10 percent limitation is in place to ensure that there is no likely opportunity for a transfer of control of a public utility. Moreover, expanding the 18 CFR 33.1(c)(12) blanket authorization to include non-holding companies would reduce regulatory burdens and encourage investment without causing harm to competition or captive customers. With such an expansion, however, it is important for the Commission and the public to monitor these activities. As the Commission stated in Order No. 708, although there is a presumption that less than 10 percent of a utility's shares will not result in a change of control, this presumption is rebuttable.
11. Specifically, the Commission will amend its regulations in 18 CFR 33.1(c)(12) to also authorize a public utility to transfer its outstanding voting securities to any person other than a holding company if, after the transfer, such person and any of its associate or affiliate companies will own less than 10 percent of the outstanding voting interests of such public utility. In addition, the Commission will adopt a reporting requirement for entities that transact under this blanket authorization. In order to properly tailor additional reporting requirements, however, we will issue concurrently with this order a request for supplemental comments that will seek comments on the narrow issue of the scope and form of the reporting requirements under the expanded blanket authorization. The expanded blanket authorization under 18 CFR 33.1(c)(12) will not become effective until a Commission decision on reporting requirements becomes effective. We further note that the Commission retains its jurisdiction under section 203(b) of the FPA to issue further orders as appropriate with respect to transactions authorized under blanket authority.
12. Order No. 708 extended a blanket authorization under FPA section 203(a)(1) for the acquisition and disposition of jurisdictional contracts where neither the acquirer nor the transferor has captive customers or owns or provides transmission service over jurisdictional transmission facilities, the contract does not convey control over the operation of a generation or transmission facility, the parties to the transaction are neither associate nor affiliate companies, and the acquirer is a public utility.
13. APPA/NRECA argues that the Commission has not shown how this blanket authorization is consistent with the public interest. If the blanket authorization is not retracted, APPA/NRECA asks the Commission to narrow its scope by excluding contracts in
14. Further, APPA/NRECA claims that this blanket authorization itself could undermine LSEs' bargaining power and their ability to enforce their contractual rights. It notes that many standard power contracts contain “boilerplate” language that requires a buyer's consent for the transfer of a contract not to be “unreasonably withheld.” It argues that if the Commission grants this blanket authorization on the basis that it is consistent with the public interest, sellers could then argue that it is unreasonable for a buyer to withhold its consent for a given transfer. Thus, APPA/NRECA claims that this blanket authorization could force LSEs to bargain for stronger prohibitions limiting assignment in their contracts at the likely expense of other contract features and to enforce such language by litigation when necessary.
15. EPSA and EEI request the removal of the clause “the parties to the transaction are neither associate nor affiliate companies” from the blanket authorization granted in 18 CFR 33.1(c)(16). EPSA and EEI state that the clause was added in Order No. 708 without being previously proposed in the Blanket Authorization NOPR or sought by any commenter. In addition, both EPSA and EEI argue that the clause conflicts with the blanket orders that the Commission granted in Order No. 669–A.
16. EPSA also argues that the clause “and the acquirer is a public utility” should be removed. EPSA argues that there is no concern regarding competition or cross-subsidization when one affiliate transfers a wholesale contract to another affiliate, as long as the affiliates involved are not themselves traditional public utilities with captive customers. EPSA also maintains that the clause creates an unnecessary burden on the Commission and unnecessary delay and costs for the applicants.
17. EEI requests that if rehearing is not granted, the Commission specify that 18 CFR 33.1(c)(16) does not override other blanket authorizations or require approval of a transaction if another blanket authorization such as 18 CFR 33.1(c)(11) (authorizing the transfers of wholesale market-based rate contracts to other affiliates) applies.
18. APPA/NRECA raised no new arguments on rehearing, and its request that the blanket authorization in 18 CFR 33.1(c)(16) be retracted or modified is denied.
19. We found in Order No. 708 that the transfer of a wholesale power contract which does not provide for the transfer of control of generation or transmission cannot affect horizontal or vertical market power. In addition, we note that Order No. 708 added a condition to address, in part, the concerns raised by APPA/NRECA.
20. The Commission grants EPSA's and EEI's requests to remove the clause “the parties to the transaction are neither associate nor affiliate companies” from 18 CFR 33.1(c)(16). EPSA and EEI have convincingly explained why the clause is inappropriate. In particular, where neither the acquirer nor the transferor has captive customers or owns or provides transmission service over jurisdictional transmission facilities, and the contract does not convey control over the operation of a generation or transmission facility, the price of the jurisdictional contract's transfer does not affect the rates of captive customers or transmission customers and therefore has no rate or cross-subsidization impact affecting captive generation customers or transmission customers.
21. EPSA's request to remove from 18 CFR 33.1(c)(16) the clause “and the acquirer is a public utility” is denied. Order No. 708 added this clause because of the possibility of a jurisdictional contract being transferred to a non-jurisdictional entity, in which case the Commission would lose the ability to regulate the contract and parties involved.
22. In Order No. 708, the Commission extended to public utilities a blanket authorization to transfer securities to holding companies that have blanket authorizations to acquire public utility securities under FPA section 203(a)(2) for certain underwriting or hedging purposes.
23. APPA/NRECA argues that this blanket authorization is contrary to the law and that the Commission should only allow such transactions on a case-by-case basis, with full disclosure of the specific business arrangements being contemplated. Because the Commission did not define “hedging transaction(s),” APPA/NRECA contends that the Commission cannot reasonably determine that the authorization is consistent with the public interest. It further argues that this blanket authorization, like the parallel blanket authorization under FPA section 203(a)(2), does not assure that the hedging transaction is only incidental to the acquirer's main business, since the blanket authorization does not require that the hedging transaction relate to the utility, power or energy business. APPA/NRECA believes that ratepayers should not be exposed to the complex and risky transactions sometimes undertaken by financial market participants to the harm of innocent third parties.
24. While the Commission agrees with APPA/NRECA's general proposition that electric ratepayers should not be exposed to unnecessary harm caused by risky transactions of financial market participants, we disagree that the blanket authorizations previously granted to holding companies in Order No. 669–A (18 CFR 33.1(c)(10)), or the parallel authorization granted to public utilities in Order No. 708 (18 CFR 33.1(c)(15)), will cause such harm.
25. Nor do we believe that the authorization in Order No. 708 is contrary to law. These authorizations are limited, and any hedging in public utility securities that is within the scope of section 203 is allowed only to the extent that it falls under one of the Commission's blanket authorizations or a specific authorization granted by the Commission on a case-by-case basis. Specifically, an existing condition in 18 CFR 33.1(c)(10)(ii) limits the voting ability of the entity acquiring securities for hedging purposes, so transactions under the new blanket authorizations should not result in a change in control of a public utility. Furthermore, the first part of the blanket authorization, 18 CFR 33.1(c)(10)(i), concerns underwriting and is directed at financial entities such as a bank, investment bank, or broker/dealer that engages in underwriting activities that may involve public utilities, but this authorization also has a 10 percent limitation and is subject to a reporting requirement. It is unlikely that the acquirers in the hedging transactions authorized would be public utilities because most holding companies are not also public utilities as most do not operate jurisdictional facilities. In fact, we are unaware of any public utility with captive customers that engages in hedging transactions involving the securities of other public utilities.
26. In addition, it should be noted that states oversee cost recovery associated with their franchised public utilities' hedging activities involving purchases of power or fuel as part of an overall purchasing strategy in the interests of ratepayers. We think it would be unlikely that a state regulatory body would authorize the recovery from ratepayers of the costs incurred by one public utility to engage in hedging activities concerning the securities of another public utility. We further note that the Commission is not making any finding as to whether the costs associated with such hedging are appropriately recovered in rates.
27. We reject APPA/NRECA's request to deny any blanket authority for hedging transactions. APPA/NRECA's arguments, in large part, are a collateral attack of Order No. 669–A. Order No. 669–A determined that a blanket authorization under FPA section 203(a)(2), involving hedging for holding companies was in the public interest because such a blanket authorization would not give the acquiring entity additional market power or enable it to undermine competition or disadvantage captive customers. The Commission agreed that the blanket authority would promote the public interest by bringing more capital investment to the utility industry. The Commission also found that the condition removing the holder's power to vote the securities held for hedging purposes to the extent they are 10 percent or more of the securities in the class outstanding, even though the amount held for hedging is not limited, would address its concerns regarding control.
28. Further, the Commission will not codify a definition of “hedging” in this proceeding. This decision is based in part on our observation that hedging activities may be accomplished in a variety of ways and defining hedging may inappropriately limit it or may create situations that are inconsistent with usage by other government agencies. In general, hedging is an approach to risk management that uses
29. In Order No. 708, the Commission declined to impose additional reporting requirements in connection with the new blanket authorizations.
30. It also asks the Commission to impose a requirement that public utilities certify their continued compliance with any “in aggregate” limitation in light of each new transaction. APPA/NRECA argues that, since the only reporting requirement is under 18 CFR 33.1(c)(2), a transfer of control in a public utility could occur over a series of transactions without the Commission's knowledge. Accordingly, APPA/NRECA asserts that the Commission cannot be sure that it is being provided with all the information necessary to ensure that a transfer of control does not occur.
31. APPA/NRECA has not presented any convincing reason to impose additional reporting requirements at this time and therefore its request for rehearing is denied. We first point out that APPA/NRECA is incorrect that there are no reporting requirements under 18 CFR 33.1(c)(9) (authorization of certain activities by a company regulated by the Board of Governors of the Federal Reserve Bank or by the Comptroller of the Currency) and 18 CFR 33.1(c)(10) (authorization for a holding company to engage in certain underwriting and hedging activities).
32. APPA/NRECA was correct in stating that 18 CFR 33.1(c)(8) (authorization for a person being a holding company solely with respect to EWGs, FUCOs, or QFs to acquire the securities of additional EWGs, FUCOs, or QFs) does not include a reporting requirement. The parallel authorization to public utilities under 18 CFR 33.1(c)(13), however, limits the acquiring holding company and its affiliates to less than 10 percent of the outstanding voting securities of the public utility. As we stated in Order No. 708, we believe this protection ensures that this blanket authorization is in the public interest.
33. The Commission does not, however, foreclose the possibility of imposing additional reporting requirements in the future, should circumstances change and it become apparent that additional reporting requirements would help us better monitor industry transactions that could adversely affect public utilities or their captive customers or transmission customers. We also note that, as discussed above, the Commission is concurrently issuing a supplemental request for comments on the narrow issue of reporting requirements for the extension of 18 CFR 33.1(c)(12) to cover public utility dispositions to non-holding companies.
34. In the Supplemental Policy Statement,
35. EEI requests that the Commission clarify that the internal corporate reorganization of non-traditional public utilities, such as a merger or consolidation, in which a single entity survives the transaction does not constitute the “transfer of assets” that the Commission has excluded from the blanket authorization. It argues that the Commission made clear in Order No. 669–A that the blanket authorization covers internal corporate reorganizations of non-traditional utilities whether they are accomplished through the acquisition of securities or through a merger or consolidation. It also argues that internal corporate reorganizations of non-traditional utilities in the form of mergers and consolidations will not cause an anticompetitive effect or present cross-subsidization issues because, in such transactions, ownership control over the assets will simply go from indirect to direct. EEI also notes that in reorganizations in which only one of the transacting entities survives the transaction, such as a merger or consolidation, ownership of jurisdictional assets by the surviving entity is assumed by law.
36. EEI maintains that the Commission's concern over the transfer of assets in a reorganization applies not to internal corporate reorganizations of non-traditional utilities in the form of mergers and consolidations, but to the contrasting type of reorganization where
37. We grant EEI's request for clarification that the blanket authorization in 18 CFR 33.1(c)(6) applies to transactions involving the transfer of assets from one non-traditional utility subsidiary (
38. The Office of Management and Budget (OMB) regulations require that OMB approve certain information collection requirements imposed by an agency.
39. In addition to publishing the full text of this document in the
40. From FERC's Home Page on the Internet, this information is available on eLibrary. The full text of this document is available on eLibrary in PDF and Microsoft Word format for viewing, printing, and/or downloading. To access this document in eLibrary, type the docket number excluding the last three digits of this document in the docket number field.
41. User assistance is available for eLibrary and FERC's Web site during normal business hours from FERC Online Support at 202–502–6652 (toll free at 1–866–208–3676) or e-mail at
42. These revisions in this order on rehearing are effective August 25, 2008.
Electric utilities, Reporting and recordkeeping requirements, Securities.
By the Commission.
16 U.S.C. 791a–825r, 2601–2645; 31 U.S.C. 9701; 42 U.S.C. 7101–7352; Pub. L. 109–58, 119 Stat. 594.
(c) * * *
(12) A public utility is granted a blanket authorization under section 203(a)(1) of the Federal Power Act to transfer its outstanding voting securities to:
(i) any holding company granted blanket authorizations in paragraph (c)(2)(ii) of this section if, after the transfer, the holding company and any of its associate or affiliate companies in aggregate will own less than 10 percent of the outstanding voting interests of such public utility; or
(ii) any person other than a holding company if, after the transfer, such person and any of its associate or affiliate companies in aggregate will own less than 10 percent of the outstanding voting interests of such public utility.
(16) A public utility is granted a blanket authorization under section 203(a)(1) of the Federal Power Act for the acquisition or disposition of a jurisdictional contract where neither the acquirer nor transferor has captive customers or owns or provides transmission service over jurisdictional transmission facilities, the contract does not convey control over the operation of a generation or transmission facility, and the acquirer is a public utility.