**InfoCast Speech:**

Thanks for opportunity to address FERC's new jurisdiction over Holding
Company and Interstate Utility M&A Transactions.

The comments that I will make represent my **own personal views** -- not
those of the Commission. As a former investment banker, a
non-Commissioner and non-lawyer, I will do my best to cover the
sometimes over-lawyered topic of PUHCA reform and its implications for
power m&a activity. In the time I have (and because of the very real
risks of combining too much detail with post-prandial digestion) I will
limit my remarks to a high level discussion of the new FERC authority's
intersection with your interests as m&a practitioners, and end with a
whirlwind tour of other Commission EPAct implementation efforts.

EPAct 2005 has popularly been described as having repealed the Public
Utility Holding Company Act of 1935. **Repeal is the wrong word** -
PUHCA **reform** is more accurate -- as many of its elements (though
restructured) have survived.

Despite rumblings about energy costs in general and power costs in
particular, and questions about the trajectory of retail competition, as
was true of the nation's last major piece of energy legislation, the
EPAct of 1992, EPAct 2005 continued support for competitive wholesale
energy markets.

Two significant FERC orders implemented EPAct's instructions for the
Commission. The first, which I will not dwell on, implemented PUHCA
2005, and the second, which I will focus on, updated and expanded FERC
merger authority under Section 203 of the Federal Power Act.

**Some history:** PUHCA and what is now the Federal Power Act were both
enacted as part of the Public Utility Act of 1935 in reaction to the
spectacular collapse of Samuel **Insull's** empire. (Parallel to
Sarbanes-Oxley's reaction to Enron and WorldCom) PUHCA has been
characterized as a law intended to protect both **ratepayers** and
**investors** --

-   it was drafted to do so in the **absence or near nascence** of
    securities and accounting laws, and of much state or Federal
    regulatory authority -- to ensure just and reasonable rates, protect
    against cross-subsidization, and review the impact of mergers.

-   It was largely administered by the SEC.

Advocates of PUHCA reform -- including the Commission, believed that
sufficient customer and investor protections exist today without PUHCA
'35

Much ink has been spilled and time spent discussing the '35 acts
influence in:

-   **Encouraging generation concentration** because of its
    **integration** requirement

-   **Discouraging transmission investment** because of its **single
    region** requirement.

EPAct 2005 replaced PUHCA 1935 with PUHCA 2005 -- it did away with the
integration and geographic regional requirements of the '35 Act (and
gives you all the opportunity through mergers and acquisitions to prove
whether those restrictions were truly **barriers** or just **convenient
excuses**. What PUHCA '05 does beyond allowing the **SEC to depart** the
scene -- without apparent reluctance: is

-   Provide FERC and state **access to books and records** of holding
    companies and their members -- with a **mandatory exemption** for
    holding companies that only hold Exempt wholesale generators (or
    EWGs), Qualifying Facilities (QFs) or foreign utility companies
    (FUCOs).

-   Allow certain holding companies or states to obtain
    **FERC-authorized cost allocations for non-power goods** and
    services provided by associate companies (or those without captive
    customers) to public utility members in holding companies.

-   PUHCA 2005 is most important in the M&A context because it **retains
    the definitions of PUHCA 1935** and these definitions are generally
    (though not exclusively) used by the Commission in
    **implementation** **our new merger authorities** under EPAct.
    Definitions determine the breadth of that authority - Or put another
    way You may not be concerned about quarterly and annual filings --
    but you will want to know if you need our approval for a
    transaction.

FERC implemented its new merger regs through Order 669 which was issued
right before Christmas and which w**ent into effect February 8^th^** at
the same time as PUHCA 2005 **Six months to the day after EPAct was made
law**.

Goal of the order are to allow - transactions consistent with the
**public interest** that do **not impede day-to-day business deals** or
**stifle timely investment in transmission and generation
infrastructure.**

I would observation that combination of PUHCA 2005 and updated merger
authority are largely a customer or consumer focused package -- that
leave it to the Securities and Exchange acts to focus on investor
protection.

EPAct as relates to M&A.

-   Extended FERC jurisdiction to **generation only acquisitions and
    leases**: no more FERC-pretzel transactions structured to avoid
    jurisdiction -- of the sort that I had described at prior Infocast
    conferences.

-   **Raised minimum threshold value** triggering Commission review from
    \$50,000 to \$10 million

-   Required that Commission to set up **expedited processes** for
    merger review. We must review all mergers within 180 days (or if
    needed with one 180 day extension). Non merger applications are to
    be reviewed within 60 days if not contested and 90 days if
    contested. We have provided for expedited review for transmission
    only transactions within regional transmission organizations as well
    as mergers that do not require Appendix A -- (Appendix A's are the
    concentration analyses -- replete with HHIs - that I will address in
    a bit more detail later).

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-   **Cross-subsidization: A totally new requirement.** Final Rule calls
    for Section 203 merger applicants to explain in a new Appendix M how
    they will ensure the proposed transaction will not result in
    cross-subsidization of a non-utility associate company or pledge or
    encumbrance of utility assets for the benefit of an associate
    company, unless that cross-subsidization, pledge or encumbrance will
    be consistent with the public interest.

    -   Concern is that **captive ratepayers not be used to subsidize**
        other activities, or that assets they paid for in rates are
        **encumbered** to finance those non utility activities or
        investments.

    -   The Commission will review this on a **case-by-case basis**.

    -   This was a contentious issue -- with many arguing that the
        Commission should create more explicit standards --

**Definitions matter**: for merger review purposes definitions of
"associate company", "electric utility company, foreign utility company,
holding company and holding company system have meaning given in PUHCA
2005.

-   Important to understand what counts as a:

    -   Electric utility company: "**any company that owns or operates
        facilities used for the Generation, Transmission or Distribution
        of electric energy for sale"** --

        -   Definition **does not apply to a state**; any political
            subdivisions of a state, and any agency, authority or
            instrumentality of a state or political subdivision of a
            state, or an electric power cooperative (unless a
            transaction were transferring these entities or their assets
            into jurisdictional "private" hands.

    -   This means that the Commission has authority over most
        transactions. And we will look at most transactions - Despite
        arguments, **the Commission refused to exclude QFs or EWGs**
        from the definition of \"electric utility company.\" for the
        purposes of merger review even if it did so for books and
        records purposes.

    -   We define an **existing generation facility** as a generation
        facility that is **operational** on date of or before a
        transactional closes -- meaning that if **construction is
        complete** (and the facility is capable of producing power).

        -   Commission rebuttably presumes that it will review **all**
            generation transfers unless the utility can demonstrate that
            the generator is used **exclusively** for retail sales.

        -   Operational definition includes both **QF** and
            **moth-balled** facilities.

    -   How do we measure the \$10 million value for triggering FERC
        jurisdiction:

        -   for **non-affiliate asset transactions**: market value =
            rebuttably presume **transaction price**

        -   for **affiliate asset transactions**: **original cost
            undepreciated**

        -   For **non-affiliate** **contracts**: **transaction price**.

        -   For **affiliate** **contracts**: **contract revenues** over
            life of contract.

-   We have discussed the public interest -- what about the part about
    not impeding investment and transactions in the normal course? In
    many cases where the Commission has jurisdiction it provides
    **Blanket authorizations** for transactions that meet certain
    conditions:

    -   **For foreign utility acquisitions** -- US holding companies
        buying outside US -- not other way round. And this only under
        certain conditions - cross-subsidization findings and
        determination that a transaction won't result in a regulated
        utility subsidizing a non-utility affiliate

    -   **Intra-holding company system financing** and **cash
        management** arrangements

    -   certain **internal corporate reorganizations**

    -   Acquisitions by holding companies of **non-voting securities**
        -- this includes debt and could include convertibles, unless
        these securities confer significant veto or other rights.

    -   Acquisitions by holding companies **up to 9.9% of voting
        securities** of transmitting utilities and electric utility
        companies.

    -   In deference to the states -- Holdco acquisitions of companies
        if target is only to be involved in **intrastate commerce**, and
        facilities used solely in **local distribution and/or sales at
        retail regulated by a state commission**.

I should note that there have been **multiple requests for rehearing**
of the Final Rule and requests for clarification of issues in the rule.

I have told **you what has changed** with EPAct 2005. **Now let me tell
you what has not** - in evaluating M&A transactions over which it has
jurisdiction, the Commission's primary concern is not maximization of
investor/seller return **but the public interest**. **While EPAct
added** new consideration in looking at cross subsidization and
encumbrance. It has been at least since merger policy statement of 1996
the Comm's charge to judge the effect of a transaction on **rates,
regulation and competition.**

As Chairman Kelliher has noted on many occasions, there is **not a
silent agenda** for merger approvals.

Looking to the Commission's record on three major combinations suggest
that our analytical framework is consistently applied:

-   Exelon/PSEG

-   Duke/Cinergy

-   MidAmerican/PacifiCorp

-   *Currently have before us and can't address merits of
    FPL/Constellation.*

None were set for hearing as there were no material questions of fact.

We follow DOJ/FTC guidelines to measure effect of **competition** of a
transaction -- this centers upon **changes in concentration** of a
proposed transaction, as measured by changes in HHI's from pre
transaction levels using a delivered price. Filed by applicants in an
Appendix A.

-   Note that the delivered price test is not the same as the two
    initial screens used by the Commission in determining the right to
    sell under Market Based Rates.

Depends on how concentrated the market was before and level of
ownership/control of the purchaser (and all other participants in the
market) pre and post-transaction. When markets involve higher levels of
pre-transaction concentration the tests raises flags more quickly for
changes of concentration.

-   In Exelon/PSEG -- we accepted the applicants' proposed mitigation as
    we found that it kept increases in concentrations to levels
    consistent with the merger guidelines.

    -   Exelon still needs to make a compliance filing when they
        finalize sale to units to make sure that conformed with level of
        generation and virtual divestiture that they represented would
        occur.

-   **Transactions can be large and not involve significant changes in
    concentration** - financial players or merchants making acquisitions
    that do not have high levels of concentration pre-transaction have
    received Commission approval for acquisitions even when there are
    large numbers of MWs involved --

    -   Maitlin Patterson's acquisition of DENA's assets in the
        Southeast and

The areas of debate are still the same for mergers. Inevitable
questions:

-   Relevant **market** -- control area and neighbors? RTO or ISO?

-   Relevant **products**, energy, capacity, ancillary services,

-   Relevant **customers**. How concerned about vertical market power --
    gas to power?

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-   Some have said FERC does not matter any more because we have
    approved transactions in a timely manner -- but this depends on the
    deal and on the application and proposed mitigation.

EPAct 2005's passage left the FERC with a long-list of new work and a
tall order of areas in which to implement new regulations -- they
include

-   **mandatory reliability** standards,

-   authority and expeditious consideration of **LNG import facility
    siting**,

-   **transmission rate reform** to incent investment (and Transco
    formation) as well as requirement to create Long Term FTRs for Load
    Serving Entities

-   **backstop transmission siting** of DOE designated national interest
    transmission corridors,

-   **Market manipulation rules** -- would remiss as part of market
    oversight and investigations not to mention Commission's stricter
    policing and enforcement and enhanced penalty authority --
    explicitly modeled on SEC anti-fraud enforcement. Apply to all
    market participants -- including MUNIs or power administrations.

-   No time to address changes and general **scaleback of PURPA** or the
    many others

We are on target for doing all that we need to do for EPAct
implementation on time.

Chairman also has non-EPAct priorities; among them is consideration of
**OATT Reform**.

Happy to answer questions.