122 FERC ¶ 61,155 

UNITED STATES OF AMERICA 

FEDERAL ENERGY REGULATORY COMMISSION 

18 CFR Part 35 

[Docket No. RM07-15-000; Order No. 707] 

Cross-Subsidization Restrictions on Affiliate Transactions 

(Issued February 21, 2008) 

AGENCY: Federal Energy Regulatory Commission. 

ACTION: Final Rule. 

SUMMARY: In this Final Rule, pursuant to sections 205 and 206 of the Federal Power 

Act, the Federal Energy Regulatory Commission (Commission) is amending its 

regulations to codify restrictions on affiliate transactions between franchised public 

utilities that have captive customers or that own or provide transmission service over 

jurisdictional transmission facilities, and their market-regulated power sales affiliates or 

non-utility affiliates. These restrictions will supplement other restrictions the 

Commission has in place to protect captive customers of franchised public utilities or 

transmission customers of franchised public utilities that own or provide transmission 

service over jurisdictional transmission facilities from inappropriate cross-subsidization 

of affiliates.

EFFECTIVE DATE: This Final Rule will become effective [Insert_Date days after 

publication in the FEDERAL REGISTER]. 

FOR FURTHER INFORMATION CONTACT: 
Docket No. RM07-15-000 - 2 - 

Carla Urquhart (Legal Information) 

Office of the General Counsel 

Federal Energy Regulatory Commission 

888 First Street, N.E. 

Washington, D.C. 20426 

(202) 502-8496

Roshini Thayaparan (Legal Information) 

Office of the General Counsel 

Federal Energy Regulatory Commission 

888 First Street, N.E. 

Washington, D.C. 20426 

(202) 502-6857

David Hunger (Technical Information) 

Office of Energy Market Regulation 

Federal Energy Regulatory Commission 

888 First Street, N.E. 

Washington, D.C. 20426 

(202) 502-8148

Stuart Fischer (Technical Information) 

Office of Enforcement 

Federal Energy Regulatory Commission 

888 First Street, N.E. 

Washington, D.C. 20426 

(202) 502-8517

SUPPLEMENTARY INFORMATION: 
122 FERC ¶ 61,155 

UNITED STATES OF AMERICA 

FEDERAL ENERGY REGULATORY COMMISSION 

Before Commissioners: Joseph T. Kelliher, Chairman; 

 Suedeen G. Kelly, Marc Spitzer, 

 Philip D. Moeller, and Jon Wellinghoff. 

Cross-Subsidization Restrictions on Affiliate 

Transactions 

Docket No. RM07-15-000 

ORDER NO. 707 

FINAL RULE 

(Issued February 21, 2008) 

1. On July 20, 2007, the Commission issued a Notice of Proposed Rulemaking to 

codify affiliate restrictions that would be applicable to all power and non-power goods 

and services transactions between franchised public utilities with captive customers and 

their market-regulated power sales and non-utility affiliates.1

 After receiving comments 

in response to the Affiliate Transactions NOPR, the Commission amends Part 35 of its 

regulations, pursuant to sections 205 and 206 of the Federal Power Act (FPA), to adopt 

such restrictions.2

 1

 Cross-Subsidization Restrictions on Affiliate Transactions, Notice of Proposed 

Rulemaking, 72 FR 41644 (July 31, 2007), FERC Stats. & Regs. ¶ 32,618 (2007) 

(Affiliate Transactions NOPR). 

2

 16 U.S.C. 824d, 824e. 
Docket No. RM07-15-000 - 2 - 

2. Finalization of this rulemaking is one of a number of steps the Commission has 

taken following the repeal of the Public Utility Holding Company Act of 19353

 to ensure 

that customers of franchised public utilities do not inappropriately cross-subsidize the 

activities of “non-regulated” affiliates, and are not otherwise financially harmed as a 

result of affiliate transactions and activities. The restrictions in this Final Rule will 

provide certainty to public utilities and customers with respect to the pricing standard that 

must be applied to certain affiliate transactions. While the Commission already has in 

place affiliate rules that apply to public utilities with market-based rates and to public 

utilities seeking merger approvals, the restrictions in this rule will supplement existing 

restrictions and will apply to all franchised public utilities that have captive customers or 

that own or provide transmission service over jurisdictional transmission facilities. Thus, 

they will strengthen the Commission’s ability to ensure that customers are protected 

against affiliate abuse and that rates remain just and reasonable. 

I. Background 

3. Under sections 205 and 206 of the FPA, the Commission must ensure that the 

rates, terms and conditions of jurisdictional service are just, reasonable and not unduly 

discriminatory or preferential. As part of the Commission’s obligation in administering 

this FPA standard, it ensures that wholesale customers’ rates do not reflect costs that are 

the result of undue preferences granted to affiliates or that are imprudent or unreasonable 

 3

 16 U.S.C. 79a et seq. (PUHCA 1935). 
Docket No. RM07-15-000 - 3 - 

as a result of affiliate transactions. The Commission has a long history of scrutinizing 

affiliate transactions for potential cross-subsidization and in recent rulemakings and 

orders it has codified and expanded affiliate restrictions, both under its FPA section 205-

206 rate authority (in the context of market-based rates) and under its FPA section 203 

merger authority. As discussed infra, pursuant to its FPA section 205-206 authority, in 

this Final Rule the Commission will extend similar restrictions to all franchised public 

utilities that have captive customers or that own or provide transmission service over 

jurisdictional transmission facilities. As historical backdrop, however, we first discuss 

our past and existing practices with respect to affiliate transactions in the context of 

market-based rates and mergers. 

A. Affiliate Transactions in the Context of Market-Based Rate

Authorizations

1. Historical Approach

4. The Commission began considering proposals for market-based pricing of 

wholesale power sales and attendant cross-subsidy issues in 1988. The Commission 

acted on market-based rate proposals filed by various wholesale suppliers on a case-bycase basis. In doing so, the Commission considered, among other things, whether there 
Docket No. RM07-15-000 - 4 - 

was evidence of affiliate abuse or reciprocal dealing involving the seller or its affiliates.4

 

As the Commission explained, “[t]he Commission’s concern with the potential for 

affiliate abuse is that a utility with a monopoly franchise may have an economic incentive 

to exercise market power through its affiliate dealings.”5

 The Commission also stated its 

concern that a franchised public utility and an affiliate may be able to transact in ways 

that transfer benefits from the captive customers of the franchised public utility to the 

affiliate and its shareholders.6

 Where a franchised public utility makes a power sale to an 

affiliate, the Commission is concerned that such a sale could be made at a rate that is too 

low, in effect, transferring the difference between the market price and the lower rate 

from captive customers to the market-regulated affiliated entity. Where a power seller 

with market-based rates makes power sales to an affiliated franchised public utility, the 

concern is that such sales could be made at a rate that is too high, which would give an 

 4

 See Heartland Energy Services Inc., 68 FERC ¶ 61,223, at 62,062 (1994) 

(Heartland) (discussing the potential for abuse in the case of affiliated power marketers); 

Commonwealth Atlantic Limited Partnership, 51 FERC ¶ 61,368, at 62,245 (1990) 

(discussing potential for reciprocal dealing if a buyer agrees to pay more for power from 

a seller in return for that seller (or its affiliates) paying more for power from that buyer 

(or its affiliates)). 

5

 Boston Edison Company Re: Edgar Electric Energy Co., 55 FERC ¶ 61,382, at 

62,137 n.56 (1991) (Edgar). See also TECO Power Services Corp., 52 FERC ¶ 61,191, 

at 61,697 n.41, order on reh’g, 53 FERC ¶ 61,202 (1990) (“The Commission has 

determined that self dealing may arise in transactions between affiliates because affiliates 

have incentives to offer terms to one another which are more favorable than those 

available to other market participants.”). 

6

 See, e.g., Heartland, 68 FERC at 62,062. 
Docket No. RM07-15-000 - 5 - 

undue profit to the affiliated entity at the expense of the franchised public utility’s captive 

customers.7

 In determining whether to allow power sales affiliate transactions, the 

Commission, over time, has adopted several methods, all of which have focused on 

ensuring that captive customers are adequately protected against affiliate abuse. 

5. Just as the Commission has expressed concern about the potential for affiliate 

abuse in connection with power sales between affiliates, it also has recognized that there 

may be a potential for affiliate abuse through other means, such as the pricing of nonpower goods and services or the sharing of market information between affiliates.8

 The 

same concerns about giving undue profits to affiliated market-regulated entities and their 

shareholders, discussed above with respect to power sales, also apply with respect to 

these interactions. 

 7

 The Commission has found that a transaction between two non-traditional utility 

affiliates (such as power marketers, exempt wholesale generators (EWGs), or qualifying 

facilities (QFs)) does not raise the same concern about cross-subsidization because 

neither has a franchised service territory and therefore has no captive customers. As the 

Commission has explained, no matter how sales are conducted between non-traditional 

affiliates, profits or losses ultimately affect only the shareholders. FirstEnergy 

Generation Corporation, 94 FERC ¶ 61,177, at 61,613 (2001); USGen Power Services, 

L.P., 73 FERC ¶ 61,302, at 61,846 (1995). With respect to affiliate power sales, the 

Commission has also developed guidelines on how to determine whether a transaction is 

above suspicion and captive customers are protected, as well as guidelines for 

competitive solicitation processes. See Edgar, 55 FERC at 62,167-69; Allegheny Energy 

Supply Company, LLC, 108 FERC ¶ 61,082, at 61,417 (2004). 

8

 See, e.g., Potomac Electric Power Company, 93 FERC ¶ 61,240, at 61,782 

(2000) (Potomac); Heartland, 68 FERC at 62,062-63. 
Docket No. RM07-15-000 - 6 - 

6. Accordingly, the Commission’s policy for many years had been to require that, as 

a condition of market-based rate authorization, applicants adopt a code of conduct 

applicable to non-power goods and services transactions and information sharing between 

regulated and non-regulated (market-regulated) affiliated power sellers. The Commission 

has also required that applicants include a provision in their market-based rate tariffs 

prohibiting power sales between regulated and non-regulated affiliated power sellers 

without first receiving authorization of the transaction under section 205 of the FPA.9

7. The purpose of the market-based rate code of conduct was to safeguard against 

affiliate abuse by protecting against the possible diversion of benefits or profits from 

franchised public utilities (i.e., traditional public utilities with captive ratepayers) to an 

affiliated entity for the benefit of shareholders. The Commission has waived the marketbased rate code of conduct requirement in cases where there are no captive customers, 

and thus no potential for affiliate abuse, or where the Commission finds that such 

customers are adequately protected against affiliate abuse.10 In such cases, however, the 

Commission directed the utilities to notify the Commission should they acquire captive 

 9

 Aquila, Inc., 101 FERC ¶ 61,331, at P 12 (2002). 

10 See, e.g., CMS Marketing, Services and Trading Co., 95 FERC ¶ 61,308, at 

62,051 (2001) (granting request for cancellation of code of conduct where wholesale 

contracts, as amended, “cannot be used as a vehicle for cross-subsidization of affiliate 

power sales or sales of non-power goods and services”); Alcoa Inc., 88 FERC ¶ 61,045, 

at 61,119 (waiving code of conduct requirement where there were no captive customers); 

Green Power Partners I LLC, 88 FERC ¶ 61,005, at 61,010-11 (1999) (waiving code of 

conduct requirement where there are no captive wholesale customers and retail customers 

may choose alternative power suppliers under retail access program). 
Docket No. RM07-15-000 - 7 - 

customers in the future and expressly reserved the right to reimpose the market-based rate 

code of conduct requirement. 

2. The Market-Based Rate Final Rule

8. In the Commission’s recent Market-Based Rate Final Rule,11 among other things, 

the Commission codified in the regulations at 18 CFR part 35, subpart H, an explicit 

requirement that any seller with market-based rate authority must comply with the 

affiliate power sales restrictions and other affiliate restrictions. Compliance on an 

ongoing basis is a condition of retaining market-based rate authority. The Market-Based 

Rate Final Rule retains the policy that wholesale sales of power between a franchised 

public utility and any of its market-regulated power sales affiliates must be pre-approved 

by the Commission. It also adopts uniform affiliate restrictions governing power sales, 

sales of non-power goods and services, separation of functions, and information sharing 

between franchised public utilities with captive customers and their market-regulated 

power sales affiliates.12 The power and non-power goods and services restrictions, 

however, apply only to transactions involving two power sellers. They do not apply to 

transactions between a franchised public utility and a non-utility affiliate. 

 11 Market-Based Rates For Wholesale Sales Of Electric Energy, Capacity and 

Ancillary Services by Public Utilities, Order No. 697, 72 FR 39904 (July 20, 2007), 

FERC Stats. & Regs. ¶ 31,252 (2007) (Market-Based Rate Final Rule). 

12 Id. P 23. 
Docket No. RM07-15-000 - 8 - 

B. Affiliate Transactions Under Section 203

1. Before the Energy Policy Act of 2005

9. The Commission has also addressed cross-subsidization issues in the context of 

section 203 merger applications. Prior to the Energy Policy Act of 2005,13 the 

Commission’s policy was to condition its approval of certain section 203 mergers on the 

applicants’ agreement to abide by certain restrictions on non-power goods and services 

transactions between a merged company’s utility and non-utility or market-regulated 

subsidiaries. The condition was imposed on those mergers involving registered holding 

companies under PUHCA 193514 in order to find that the merger would not adversely 

affect federal regulation.15 That requirement grew out of judicial determinations that, 

when a merger would create or involve a registered holding company, the actions of the 

Securities and Exchange Commission (SEC) may preclude the Commission from 

asserting jurisdiction over the non-power transactions between subsidiaries of that 

holding company.16 Under Ohio Power, if the SEC approved an affiliate contract 

involving special purpose subsidiary goods or services at cost, the Commission had to 

 13 Energy Policy Act of 2005, Pub. L. No. 109-58, 1289, 119 Stat. 594, 982-83 

(2005) (EPAct 2005). 

14 EPAct 2005 repealed PUHCA 1935. EPAct 2005, Pub. L. No. 109-58, 1263. 

15 See, e.g., Niagara Mohawk Holdings, Inc., 95 FERC ¶ 61,381, at 62,414, order 

on reh’g, 96 FERC ¶ 61,144 (2001). 

16 See Ohio Power Co. v. FERC, 954 F.2d 779, 782-86 (D.C. Cir.), cert. denied 

sub nom., Arcadia v. Ohio Power Co., 506 U.S. 981 (1992) (Ohio Power). 
Docket No. RM07-15-000 - 9 - 

allow pass-through of the costs in jurisdictional rates even if the public utility purchasing 

the goods or services could have obtained them at a lower market price from a nonaffiliate.17 For over a decade following the Ohio Power decision, the Commission 

required that, to gain section 203 approval of a proposed merger without a hearing, if the 

transaction would create a registered holding company under the PUHCA 1935, 

applicants must agree to waive the Ohio Power immunity and abide by the Commission’s 

policy on intra-system transactions for non-power goods and services.18

2. After EPAct 2005

10. Because EPAct 2005 repealed PUHCA 1935, certain activities of previouslyregistered holding companies that were previously subject to SEC regulation, including 

intra-system affiliate transactions, are no longer exempt from this Commission’s full 

regulatory review. In particular, the Commission’s conditions and policies under FPA 

 17 The Commission’s policy since the mid-1990s has been that where the regulated 

public utility has provided non-power goods or services to the non-regulated affiliate, the 

public utility provides the goods or services at the higher of cost or market. A nonregulated affiliate that sells non-power goods or services to an affiliate with captive 

customers may not sell at higher than market price. This is often referred to as the 

“market” standard. These standards were articulated in the Commission’s 1996 Merger 

Policy Statement. Inquiry Concerning the Commission’s Merger Policy Under the 

Federal Power Act: Policy Statement, Order No. 592, 61 FR 68595 (Dec. 30, 1996), 

FERC Stats. & Regs. ¶ 31,044, at 30,124-25 (1996) (1996 Merger Policy Statement), 

reconsideration denied, Order No. 592-A, 62 FR 33341 (June 19, 1997), 79 FERC 

¶ 61,321 (1997). 

18 Public Service Company of Colorado, 75 FERC ¶ 61,325, at 62,046 (1996) 

(PSC Colorado); 1996 Merger Policy Statement, FERC Stats. & Regs. ¶ 31,044 at 

30,124-25. 
Docket No. RM07-15-000 - 10 - 

sections 205 and 206 with respect to non-power goods and services transactions between 

holding company affiliates may now be applied to all public utilities that are members of 

holding companies, whether in the context of a section 203 merger proceeding or the 

context of a section 205-206 rate proceeding.19 In addition, the Commission has 

authority to review allocation of service company costs among members of holding 

companies that have public utilities with captive customers. 

11. In the Order No. 669 rulemaking proceedings,20 which revised the Commission’s 

regulations pursuant to amended section 203, the Commission continued its past 

approach with respect to affiliate abuse restrictions involving power and non-power 

goods and services transactions, in the context of section 203 applications.21 However, 

the Commission made two additional clarifications. 

 19 The provisions of PUHCA 1935 that formed the basis for Ohio Power are no 

longer in effect, thus removing the Ohio Power limitation on our oversight of non-power 

transactions. Further, FPA section 318, which provided for SEC preemption in certain 

circumstances where there was a conflict between SEC PUHCA 1935 regulation and 

Commission regulation, was repealed. 

20 Transactions Subject to FPA Section 203, Order No. 669, 71 FR 1348 (Jan. 6, 

2006), FERC Stats. & Regs. ¶ 31,200 (2005), order on reh’g, Order No. 669-A, 71 FR 

28422 (May 16, 2006), FERC Stats. & Regs. ¶ 31,214, order on reh’g, Order No. 669-B, 

71 FR 42579 (July 27, 2006), FERC Stats. & Regs. ¶ 31,225 (2006). 

21 Amended section 203(a)(4) adds to the Commission’s merger analysis the 

explicit requirement that the Commission find that any proposed transaction will not 

result in cross-subsidization of a non-utility associate company or the pledge or 

encumbrance of utility assets for the benefit of an associate company, unless that crosssubsidization, pledge, or encumbrance will be consistent with the public interest. 
Docket No. RM07-15-000 - 11 - 

12. First, in its implementation of regulations pursuant to PUHCA 2005,22 the 

Commission discussed one exception to the traditional standards articulated in the 1996 

Merger Policy Statement. In the Order No. 667 rulemaking proceeding,23 the 

Commission explained that there are two circumstances in which the at-cost or market 

standards may arise in the context of the Commission’s jurisdictional responsibilities: 

(1) the Commission’s review of the costs of non-power goods and services provided by a 

traditional, centralized service company to public utilities within the holding company 

system; and (2) when a service company that is a special-purpose company within a 

holding company provides non-power goods or services to one or more public utilities in 

the same holding company system. Under both scenarios, similar concerns regarding 

affiliate abuse arise: “[w]hether the public utility’s costs incurred in purchasing from the 

affiliate are prudently incurred and just and reasonable, and whether non-regulated 

affiliates purchasing non-power goods and services from the same special-purpose 

 22 PUHCA 2005 is primarily a books and records access statute and does not give 

the Commission any new substantive authorities, other than the requirement that the 

Commission review and authorize certain non-power goods and services cost allocations 

among holding company members upon request. EPAct 2005, Pub. L. No. 109-58, 1275. 

23 Repeal of the Public Utility Holding Company Act of 1935 and Enactment of 

the Public Utility Holding Company Act of 2005, Order No. 667, 70 FR 75592 (Dec. 20, 

2005), FERC Stats. & Regs. ¶ 31,197 (2005), order on reh’g, Order No. 667-A, 71 FR 

28446 (May 16, 2006), FERC Stats. & Regs. ¶ 31,213, order on reh’g, Order No. 667-B, 

71 FR 42750 (July 28, 2006), FERC Stats. & Regs. ¶ 31,224 (2006), order on reh’g, 

72 FR 8277 (Feb. 26, 2007), 118 FERC ¶ 61,133 (2007). 
Docket No. RM07-15-000 - 12 - 

company are receiving preferential treatment vis-à-vis the public utility.”24 In Order 

No. 667, the Commission exempted traditional, centralized service companies, which at 

that time were using the SEC’s “at-cost” standard, from complying with the 

Commission’s market standard for their sales of non-power goods and services to 

regulated affiliates.25 In determining that the at-cost standard was appropriate for 

traditional, centralized service companies, the Commission noted that centralized 

provision of the services provided by such companies (such as accounting, human 

resources, legal, tax, and other such services) benefits ratepayers through increased 

efficiency and economies of scale. Moreover, the Commission recognized that it is 

frequently difficult to define the market value of the specialized services provided by 

centralized service companies. On this basis, the Commission stated it would apply a 

rebuttable presumption that costs incurred under at-cost pricing of such services are 

reasonable.26 However, with respect to non-power goods and services transactions 

between holding company affiliates other than traditional, centralized service companies, 

i.e., service companies that are non-regulated, special-purpose affiliates, such as a fuel 

 24 Order No. 667, FERC Stats. & Regs. ¶ 31,197 at P 168. 

25 Id. P 169. 

26 Id. The Commission stated, however, that it would entertain complaints that atcost pricing for such services exceeds the market price, but complainants would have the 

burden of demonstrating that that is the case. 
Docket No. RM07-15-000 - 13 - 

supply company or a construction company, the Commission continued with its prior 

practice.27

13. Second, in recent section 203 merger proceedings, the Commission has extended 

the applicability of the code of conduct restrictions previously applied only to registered 

holding companies. In National Grid plc,

28 the Commission announced that it would 

require all merging parties to abide by a code of conduct containing specific provisions 

regarding power and non-power goods and services transactions between the utility 

subsidiaries and their affiliates: 

Implementation of the Code of Conduct for all utility 

subsidiaries of the merged company, as required by our 

decision here, will address both power and non-power goods 

and services transactions between the utility subsidiaries and 

their affiliates. The Code of Conduct to be implemented by 

the merged company shall (1) require our approval of all 

power sales by a utility to an affiliate, (2) require a utility 

with captive customers to provide non-power goods or 

 27 In Order No. 667, the Commission stated that, with respect to sales from a 

public utility to a non-regulated, affiliated special-purpose company, the price should be 

no less than cost, i.e., the higher of cost or market; otherwise, a public utility could 

attempt to game the system and forego profits it could otherwise obtain by selling to a 

non-affiliate, to the benefit of its non-regulated affiliate who receives a good or service at 

a below-market price. The Commission also stated that, when the situation is reversed, 

i.e., the non-regulated, affiliated special-purpose company is providing non-power goods 

and services to the public utility affiliate, the Commission will continue to apply its 

market standard. Accordingly, the non-regulated, affiliated special-purpose company 

may not sell to its public utility affiliate at a price above the market price. The 

Commission found that such transactions involving such non-regulated, affiliated specialpurpose companies pose a greater risk of inappropriate cross-subsidization and adverse 

effects on jurisdictional rates. Id. P 171. 

28 117 FERC ¶ 61,080 (2006) (National Grid). 
Docket No. RM07-15-000 - 14 - 

services to a non-utility or “non-regulated utility” affiliate at a 

price that is the higher of cost or market price, (3) prohibit a 

non-utility or non-regulated utility affiliate from providing 

non-power goods or services to a utility affiliate with captive 

customers at a price above market price, and (4) prohibit a 

centralized service company from providing non-power 

services to a utility affiliate with captive customers at a price 

above cost. These requirements protect a utility’s captive 

customers against inappropriate cross-subsidization of nonutility or non-regulated utility affiliates by ensuring that the 

utility with captive customers neither recovers too little for 

goods and services that the utility provides to an affiliate nor 

pays too much for goods and services that the utility receives 

from an affiliate. Implementation of these requirements 

provides a prophylactic mechanism to ensure that the merger 

will not result in cross-subsidization of non-utility or nonregulated utility companies in the same holding company 

system and therefore meets the requirement of 

section 203(a)(4) that a merger not result in inappropriate 

cross-subsidization of a non-utility associate company.29

14. While these affiliate restrictions are broad in terms of transactions covered 

(covering transactions between power sales affiliates as well as transactions between 

power sales affiliates and non-utility affiliates) and have been extended within the context 

of section 203 approvals, they do not apply to public utilities that do not need to seek 

section 203 merger approval. 

II. Affiliate Transactions NOPR

15. In the Affiliate Transactions NOPR, the Commission proposed to implement 

uniform affiliate restrictions that would be applicable to all franchised public utilities 

with captive customers and their market-regulated and non-utility affiliates and would 

 29 Id. P 66 (internal citations removed). 
Docket No. RM07-15-000 - 15 - 

address both power and non-power goods and services transactions between the utility 

and its affiliates.30 The Commission’s goal in proposing these prophylactic restrictions is 

to protect against inappropriate cross-subsidization of market-regulated and unregulated 

activities by the captive customers of franchised public utilities. The proposed 

restrictions are based upon those already imposed by the Commission in the context of 

certain section 203 and 205 approvals, but expand the transactions and entities to which 

they apply. 

16. Specifically, the proposed regulations would: (1) require the Commission’s 

approval of all wholesale sales between a franchised public utility with captive customers 

and a market-regulated power sales affiliate; (2) require a franchised public utility with 

captive customers to provide non-power goods and services to a market-regulated power 

sales affiliate or a non-utility affiliate at a price that is the higher of cost or market price; 

(3) prohibit a franchised public utility with captive customers from purchasing non-power 

 30 On July 20, 2007, the Commission took three actions based on the 

Commission’s experience implementing amended FPA section 203 and PUHCA 2005, as 

well as the record from the Commission’s December 7, 2006 and March 8, 2007 

technical conferences regarding section 203 and PUCHA 2005. In this docket, the 

Commission issued the Affiliate Transactions NOPR. In addition, in separate orders, the 

Commission issued a section 203 Supplemental Policy Statement, and a Notice of 

Proposed Rulemaking proposing additional blanket authorizations under section 203 of 

the FPA. FPA Section 203 Supplemental Policy Statement, 72 FR 42277 (Aug. 2, 2007), 

FERC Stats. & Regs. ¶ 31,253 (2007) (Supplemental Policy Statement), order on 

clarification and reconsideration, 122 FERC ¶ 61,157 (2008); Blanket Authorization 

Under FPA Section 203, Notice of Proposed Rulemaking, 72 FR 41640 (July 31, 2007), 

FERC Stats. & Regs. ¶ 32,619 (2007) (Blanket Authorization NOPR); see Blanket 

Authorization Under FPA Section 203, Order No.708, 122 FERC ¶ 61,156 (2008) 

(Blanket Authorization Final Rule). 
Docket No. RM07-15-000 - 16 - 

goods or services from a market-regulated power sales affiliate or a non-utility affiliate at 

a price above market price (with the exception of (4)); and (4) prohibit a franchised 

public utility with captive customers from receiving non-power goods and services from 

a centralized service company at a price above cost. The Commission stated that these 

restrictions would help the Commission meet the requirement of amended 

section 203(a)(4) that a transaction not result in the inappropriate cross-subsidization of a 

non-utility associate company and, moreover, help the Commission assure just and 

reasonable rates and the protection of captive customers for all public utilities pursuant to 

sections 205 and 206 of the FPA, irrespective of whether they need approval of a 

section 203 transaction. 

III. Procedural Matters

17. The Affiliate Transactions NOPR invited comments on the proposed regulations. 

Comments on the Affiliate Transactions NOPR were filed by: American Public Power 

Association and National Rural Electric Cooperative Association (APPA/NRECA); 

Edison Electric Institute (EEI); Entergy Services, Inc. (Entergy); Interstate Gas Supply, 

Inc. (IGS); National Grid USA (National Grid); New York State Public Service 

Commission (New York Commission); NiSource Inc. (NiSource); Occidental Power 

Marketing, L.P. (Occidental); Oklahoma Corporation Commission (Oklahoma 

Commission); Pacific Gas and Electric Company (PG&E); the Pinnacle West Companies 
Docket No. RM07-15-000 - 17 - 

(Pinnacle West)31; and San Diego Gas & Electric Company and Southern California Gas 

Company (Sempra).32

IV. Discussion

18. This Final Rule explains the Commission’s authority and jurisdiction under 

sections 205 and 206 of the FPA to regulate affiliate transactions to ensure that public 

utility rates are just, reasonable, and not unduly discriminatory or preferential. This Final 

Rule implements affiliate restrictions applicable to power sales and transactions for nonpower goods and services between franchised public utilities that have captive customers 

or that own or provide transmission service over jurisdictional transmission facilities, and 

their market-regulated and non-utility affiliates. 

A. General Matters

1. The Need for the Proposed Regulations

a. Comments

19. EEI argues that the Commission has not demonstrated a need for the proposed 

regulations. While EEI agrees that the Commission has been applying affiliate 

 31 For purposes of their filing, the Pinnacle West Companies include: Pinnacle 

West Marketing & Trading Co., LLC; Arizona Public Service Company; and APS 

Energy Services Company, Inc. 

32 Although unnecessary to preserve their rights to participate in a rulemaking 

proceeding, Allegheny Power and Allegheny Energy Supply Company, LLC filed a 

motion to intervene without comments. 
Docket No. RM07-15-000 - 18 - 

transactions restrictions in the context of section 203 and market-based rates,33 EEI 

argues that the Affiliate Transactions NOPR goes too far. EEI argues that the 

Commission does not provide any examples of the problems that the Commission has 

discovered in the pricing of utility-affiliate transactions that would warrant the expanded 

new regulations. EEI also argues that there is sufficient regulatory oversight by the 

Commission and state commissions, so this extension of policy is not warranted. 

20. Moreover, EEI argues that the Commission’s authority to regulate utility-affiliate 

transactions under sections 205 and 206 is limited to determining whether jurisdictional 

rates are just and reasonable. EEI argues that the Commission has not demonstrated why 

the proposed regulations are necessary to achieve a just and reasonable result. EEI also 

argues that the Affiliate Transactions NOPR indirectly proposes to regulate entities over 

which the Commission has no jurisdiction – EWGs, QFs, and non-utilities – by imposing 

constraints on the prices that utilities may pay these companies for non-power goods and 

services and the companies in turn must pay the utilities for such goods and services.34

 33 EEI asserts that the Affiliate Transactions NOPR states that the Commission 

currently waives market-based rate code of conduct requirements and allows transactions 

in cases where there are no captive customers or customers are protected against affiliate 

transactions, but that exception is not reflected in the Market-Based Rate Final Rule. 

34 EEI Comments at 6-7 (citing Sunray Mid-Continental Co. v. FPC, 364 U.S. 137, 

142 (1960); Altamont Gas Transmission Co. v. FERC, 92 F.3d 1239 (D.C. Cir. 1996); 

National Fuel Gas Supply Corp. v. FERC, 909 F.2d 1519 (D.C. Cir. 1990)). 
Docket No. RM07-15-000 - 19 - 

21. EEI also argues that the Commission’s adoption of the rules as a “prophylactic” 

measure ignores the wording of the Commission’s cross-subsidy authority under 

section 203 by failing to recognize that certain transactions may be in the public interest. 

b. Commission Determination

22. We disagree with EEI regarding the need for the proposed regulations or the 

Commission’s authority to enact them. Sections 205 and 206 of the FPA require the 

Commission to ensure that public utility rates are just, reasonable and not unduly 

discriminatory or preferential. A rate is not just and reasonable if it includes costs which 

the Commission finds are imprudently incurred or which require a customer to bear costs 

that are unreasonable. Further, the Commission must ensure that no public utility makes 

or grants an undue preference with respect to any transmission or sale subject to the 

Commission’s jurisdiction.35 The Commission has the authority to address these types of 

rate issues not only in individual cases, but also to set standards by rulemaking with 

respect to what costs will or will not be considered just and reasonable. The 

Commission’s experience makes clear the need for these types of restrictions and we 

believe they are particularly warranted in light of the repeal of PUHCA 1935 and our 

need to be vigilant with respect to holding companies and affiliate transactions. 

 35 Although section 203 of the FPA requires the Commission to recognize that 

certain cross-subsidization or pledges or encumbrances of utility assets can be in the 

public interest, the proposed regulations are set forth pursuant to the Commission’s 

authority under sections 205 and 206 of the FPA. 
Docket No. RM07-15-000 - 20 - 

23. As discussed above, the Commission has a long history of requiring public utilities 

to comply with affiliate restrictions where an entity seeks market-based rate authorization 

and in the context of seeking merger authorization under section 203 of the FPA. 

However, limiting affiliate restrictions to these two contexts leaves a regulatory gap. As 

the Affiliate Transactions NOPR explained, (1) restrictions on market-based rate 

applicants do not cover non-power goods and services transactions between a franchised 

public utility and non-utilities; they cover only transactions between power sales affiliates 

and are imposed on only the market-based rate applicants; (2) restrictions imposed on 

section 203 applicants only apply to merger applicants; (3) the pricing policy set forth in 

Order No. 667 regarding non-power goods and services provided by centralized service 

companies was not codified in the regulations; and (4) not all states regulate these types 

of transactions.36 The purpose of the proposed regulations therefore is to supplement 

existing affiliate restrictions to cover transactions between all franchised public utilities 

with captive customers and their non-utility affiliates. Just as the Commission has 

adopted regulations designed to prevent captive customers of franchised public utilities 

from inappropriately cross-subsidizing the activities of market-regulated affiliates (such 

as affiliated power marketers), so too the Commission wants to ensure that captive 

customers of franchised public utilities do not inappropriately cross-subsidize the 

activities of non-utility affiliates (such as an affiliated construction services firm, real 

 36 Affiliate Transactions NOPR, FERC Stats. & Regs. ¶ 32,618 at P 15. 
Docket No. RM07-15-000 - 21 - 

estate company, legal services companies, fuel supply companies, or other non-utility 

affiliates). For example, where a franchised public utility with captive customers 

transacts with an affiliated non-utility construction services firm, the Commission is 

concerned that the franchised public utility with captive customers not pay an abovemarket price for construction services provided by the affiliated construction firm. 

Otherwise, the public utility’s customers would be inappropriately cross-subsidizing the 

activities of the affiliate. Indeed, non-utility affiliates such as real estate companies, legal 

services companies, fuel supply companies or other companies selling non-power goods 

and services could provide similar opportunities for affiliate abuse and improper crosssubsidization. 

24. Finally, we disagree with EEI that the Affiliate Transactions NOPR indirectly 

proposes to regulate entities over which the Commission “has no jurisdiction” – EWGs, 

QFs, and non-utilities. As an initial matter, the Commission does, in fact, have certain 

jurisdiction over QFs, and most EWGs are jurisdictional public utilities. More 

importantly, however, the pricing rules we adopt here are rooted in our authority to 

impose pricing rules with respect to certain sales and purchases by public utilities 

(including EWGs) over whom we have rate jurisdiction under the FPA. These 

restrictions are tied directly to the reasonableness of public utility rates and the 

Commission has the statutory responsibility to protect captive customers from unjust and 

unreasonable rates. 
Docket No. RM07-15-000 - 22 - 

2. The Scope of the Proposed Regulations

a. Comments

25. Several commenters filed comments concerning the scope of the proposed 

regulations. APPA/NRECA ask that the Commission clarify that the regulations adopted 

in this proceeding do not preclude the Commission from imposing additional crosssubsidization restrictions on affiliate transactions as appropriate on a case-by-case basis. 

26. The Oklahoma Commission notes that the Commission stated that it would 

require all merging parties to abide by a code of conduct that has specific provisions 

regarding power and non-power goods and services transactions between the utility 

subsidiaries and their affiliates. The Oklahoma Commission urges to the Commission to 

continue to do so. The Oklahoma Commission also asks that the Commission add 

language that states that section 203 does not preempt applicable state law concerning 

reporting requirements, which would further protect the interest and authority of state 

commissions. 

27. IGS agrees with the Commission’s proposal to codify affiliate restrictions but 

suggests that the intent of the code of conduct requirement also includes preventing a 

utility or its affiliate from gaining unfair advantages in a market, thus impeding the 

development of a competitive market. IGS agrees that a code of conduct should be 

codified and expanded to apply to non-power goods and services, and that a code of 

conduct and related rules should also apply outside the context of merger situations. IGS 

also agrees that, even outside of the context of a merger, it is important that 
Docket No. RM07-15-000 - 23 - 

utility/affiliate code of conduct and related rules apply. IGS further agrees that it is 

appropriate for the code of conduct and related rules to apply to transactions involving 

non-power goods and services because, among other things, consumers may not be able 

to differentiate easily between affiliates and traditional regulated utility and where 

affiliates are provided preferential access and opportunities, competition is stifled. In 

addition, IGS argues that the same opportunity for abuse exists in the natural gas 

industry. It maintains that the same affiliate restriction concepts should be extended to 

natural gas utilities, and should be considered whenever the utility has an economic 

interest in the sale of the commodity or non-commodity goods or services. 

28. Occidental argues that the proposed regulations permit a utility to circumvent the 

affiliate transactions restrictions by simply conducting all of its market-based rate 

activities within its franchised public utility. Occidental asks that the Commission 

explicitly require that the functional attributes, rather than the arbitrary structure, of a 

utility be considered in determining compliance with the rule’s affiliate abuse restrictions. 

b. Commission Determination

29. We agree with APPA/NRECA that the pricing rules that we adopt in this 

proceeding do not preclude the Commission from imposing additional crosssubsidization restrictions on affiliate transactions, as appropriate, on a case-by-case basis. 

30. Regarding the Oklahoma Commission’s request that we continue to require all 

merging parties to abide by a code of conduct that has specific provisions regarding 

power and non-power goods and services transactions between the utility subsidiaries and 
Docket No. RM07-15-000 - 24 - 

their affiliates, although this rulemaking is not under section 203, as discussed supra, as a 

condition of section 203 authorization for mergers, we have already stated in the context 

of section 203 proceedings that we will continue to impose affiliate restrictions on 

entities seeking merger authorization under section 203 of the FPA. Further, we clarify 

that neither the rules we adopt here, nor the cross-subsidization restrictions imposed 

under section 203 of the FPA, preempt applicable state law concerning reporting 

requirements. 

31. We deny IGS’ request to expand the proposed regulations to include preventing a 

utility or its affiliate from gaining unfair advantage in a market. The scope of the 

proposed regulations is to protect against inappropriate cross-subsidization of affiliates by 

franchised public utilities with captive customers. We note, however, the cross-subsidy 

protections go a long way to preventing such unfair advantages since market-regulated or 

non-regulated companies may have an unfair competitive advantage in the marketplace if 

others bear some of their costs of doing business. 

32. We also deny IGS’ request to expand the scope of the proposed regulations to 

include the natural gas industry. As discussed above, the focus of this rulemaking is 

public utilities – specifically, franchised public utilities that have captive customers or 

that own or provide transmission service over jurisdictional transmission facilities. We 

find that there is an insufficient record to warrant including LDCs and interstate pipelines 

within the scope of the regulations at this time. 
Docket No. RM07-15-000 - 25 - 

33. Finally, we decline to revise the scope of the proposed regulations to address 

Occidental’s concern that the proposed regulations permit a utility to circumvent the 

affiliate transactions restrictions by simply conducting all of its market-based rate 

activities within its franchised public utility. We note that Occidental has raised this 

concern in its request for rehearing of the Market-Based Rate Final Rule. We find that 

this concern is more appropriately addressed on rehearing of that order. 

B. Specific Issues

1. Definitions

a. Captive Customers

i. Comments

34. Commenters seek a number of clarifications concerning the definition of “captive 

customers.” 

35. EEI and Pinnacle West ask the Commission to clarify that wholesale customers 

with fixed price contracts are not “captive customers” even if the contracts are costbased, because there is no risk of harm to such customers from utility-affiliate 

transactions. 

36. Occidental argues that the Commission should revise the definition of “captive 

customer” to not include wholesale customers. Occidental argues that the Commission 

clarified in the Market-Based Rate Final Rule that retail customers that have retail choice 

are not captive customers. Occidental maintains that wholesale customers, whether costbased or market-based, have alternatives and therefore, are not captive. Accordingly, 
Docket No. RM07-15-000 - 26 - 

Occidental argues that the definition of “captive customer” should be limited to retail 

customers served under cost-based regulation who do not have retail choice available, 

and should not include wholesale customers which have choices. 

37. EEI, National Grid, and Pinnacle West ask the Commission to clarify its definition 

of “captive customers” consistent with its use of the term in the preamble of the MarketBased Rate Final Rule. In this regard, they ask that the Commission clarify that retail 

customers in states with retail competition are not “captive customers” for purposes of 

the affiliate restrictions. Pinnacle West also states that the Commission clarified in Order 

No. 697 that, for companies the Commission has acknowledged in prior orders as not 

having captive customers, the affiliate transaction restrictions can be waived. It asks the 

Commission to provide the same clarification and exemptions in this proceeding. 

38. IGS, on the other hand, argues that the restrictions proposed in the Affiliate 

Transactions NOPR should not be waived for utilities simply because those utilities 

implement a retail choice program. IGS argues that the ability of a customer to purchase 

commodities from an alternative power supplier under a retail access program does not 

mean that these customers are not captive for purposes of receiving their distribution 

service under cost-based legislation. IGS also states that the restrictions should apply 

even if the retail customer has a competitive alternative available. It further argues that, 

as long as a utility is in the business of providing commodity service, there is an 

opportunity for abuse. 
Docket No. RM07-15-000 - 27 - 

39. EEI and National Grid also ask that the Commission clarify that “captive 

customers” do not include transmission customers, consistent with the Market-Based 

Rate Final Rule. By contrast, APPA/NRECA ask that the definition of “captive 

customers” be expanded to expressly include transmission customers. APPA/NRECA 

state that the Commission recognized in both the Order No. 669 series and the Order 

No. 667 series that transmission customers must be protected against cross-subsidization 

along with captive wholesale and retail customers. They note that the Commission 

adopted regulatory language in Order No. 669-A “to cover public utilities that own or 

provide transmission service over Commission-jurisdictional transmission facilities,” and 

ask that the Commission clarify the regulatory text in the Final Rule to ensure that the 

new generic cross-subsidization regulation explicitly protects transmission customers. 

40. APPA/NRECA also ask that the Commission confirm, consistent with the MarketBased Rate Final Rule, that the affiliate transactions rules do not apply to electric 

cooperatives. 

ii. Commission Determination

41. The term “captive customers” is used in a number of recently adopted 

Commission rules, including Order No. 667, Order No. 669, and the Market-Based Rate 

Final Rule. The Commission for many years had used this term in its orders without 

definition, but in both the Order No. 669 series and the Market-Based Rate Final Rule, 

the Commission included in the regulatory text a definition or description of “captive 

customers” as: “any wholesale or retail electric energy customers served under cost-
Docket No. RM07-15-000 - 28 - 

based regulation.”37 Based on the comments received, we recognize that there may be 

some ambiguity as to what types of customers are considered to be under “cost-based 

regulation” and we provide additional clarifications below. We also modify the 

definition to make clear that it is intended to refer to customers of franchised public 

utilities. First, however, we believe it is important to discuss the purpose of our 

definition and its focus on “cost-based regulation.” 

42. The Commission’s fundamental goal in categorizing certain customers as 

“captive” is to protect customers served by franchised public utilities from 

inappropriately subsidizing the market-regulated or non-utility affiliates of the franchised 

public utility or otherwise being financially harmed as a result of affiliate transactions 

and activities. In other words, we are concerned about the potential for the inappropriate 

transfer of benefits from such customers to the shareholders of the franchised public 

utility or its holding company.38 Where customers are served under market-based 

 37 Order No. 669-A, FERC Stats. & Regs. ¶ 31,214 at P 147; Market-Based Rate 

Final Rule, FERC Stats. & Regs. ¶ 31,252 at P 23; see also Order No. 667-A, FERC 

Stats. & Regs. ¶ 31,213 at n.35.

38 For example, if a market-regulated seller sells power to its affiliated franchised 

public utility at an above market price, the customers of the franchised public utility pay 

more than they need to for power and the affiliate makes a higher profit for the holding 

company’s shareholders. Similarly, if a franchised public utility sells temporarily excess 

fuel to its market-regulated power seller affiliate at a price below its cost, the customers 

of the franchised utility end up subsidizing the affiliate’s operating costs, to the benefit of 

shareholders and the detriment of the customers of the franchised utility. In other 

contexts, an extreme example would be a holding company that siphons funds from a 

franchised public utility to support its failing non-regulated affiliate company; again, this 

results in financial benefit to shareholders at the expense of customers. 
Docket No. RM07-15-000 - 29 - 

regulation as opposed to cost-based regulation, it is presumed that the seller has no 

market power over a customer and that the customer has a choice of suppliers; thus, there 

is less opportunity for a customer to involuntarily be in a situation in which its rates 

subsidize or support another entity. 

43. Under a regime of cost-based regulation, however, we cannot make these same 

assumptions. If a franchised public utility is selling at a wholesale cost-based rate under 

the FPA, the franchised utility seller may be in the position of potentially trying to flow 

through its cost-based rates costs that should instead be borne by its affiliates, i.e., 

potentially subsidizing the “non-regulated” activities of its market-regulated and nonutility affiliates to the detriment of the franchised public utility’s customer(s). While 

there is some merit to Occidental’s assertion that wholesale customers, by definition, 

have alternatives and that there is no obligation for a wholesale seller to sell to any buyer, 

nor for a buyer to buy from any particular seller, for the customer protection reasons 

stated above, we believe it is important to err on the side of a broad definition of captive 

customers. 

44. Although we are erring on the side of a broad definition of captive customers, we 

recognize that there may well be circumstances in which customers fall within our 

definition but nevertheless there are sufficient protections in place to protect such 

customers against any risk of harm from transactions between the franchised public 

utility and its affiliates. For example, it is possible, as advocated by EEI and Pinnacle 

West, that wholesale customers with fixed rate contracts would be adequately protected 
Docket No. RM07-15-000 - 30 - 

and that the affiliate restrictions of this rule should not apply to utilities whose customers 

all have fixed rate contracts with no fuel adjustment clause.39 We are not prepared at this 

time to generically exclude such customers from the definition of captive customers but 

instead will allow franchised public utilities, on a case-by-case basis, to seek a waiver of 

the affiliate restrictions. This will allow the Commission to closely examine the facts 

related to each franchised public utility. There may be circumstances other than fixed 

rate contracts in which we may be willing to waive the affiliate restrictions of this rule, 

but a public utility will need to demonstrate that there is no opportunity for wholesale 

customers of the franchised public utility to be harmed as a result of affiliate transactions. 

45. With respect to requested clarifications regarding retail customers in states with 

retail competition, consistent with our Market-Based Rate Final Rule, we clarify that 

customers with retail choice are not considered to be customers served under “cost-based 

regulation” and therefore are not considered captive customers. These customers have 

retail choice, i.e., by virtue of state law they can purchase at market-based rates from 

retail suppliers other than a franchised public utility.40 As the Commission explained in 

 39 The Commission would need to be assured that all wholesale customers of a 

franchised public utility have adequate fixed rate contracts, not just a sub-set of the 

customers. Further, because such contracts may have different expiration dates, the 

Commission might need to place temporal conditions on such a waiver. 

40 As further discussed in the Market-Based Rate Final Rule, the role of this 

Commission is not to evaluate the success or failure of a state’s retail choice program 

including whether sufficient choices are available for customers inclined to choose a 

different supplier. In this regard the states are best equipped to make such a 

determination and, if necessary, modify or otherwise revise their retail access programs 

 (continued) 
Docket No. RM07-15-000 - 31 - 

the Market-Based Rate Final Rule, in a regulatory regime in which retail customers have 

no ability to choose a supplier, they are considered captive because they must purchase 

from the local utility pursuant to rates set by a state or local regulatory authority. 

However, retail customers in retail choice states who choose to buy power from their 

local utility at cost-based rates as part of that utility’s provider-of-last resort obligation 

are not considered captive customers because, although they may choose not to do so, 

they have the ability to take service from a different supplier whose rates are set by the 

 

as they deem appropriate. Further, to the extent a retail customer in a retail choice state 

elects to be served by its local utility under provider-of-last resort obligations, the state or 

local rate setting authority, in determining just and reasonable cost-based retail rates, 

would in most circumstances be able to review the prudence of affiliate purchased power 

costs and disallow pass-through of costs incurred as a result of an affiliate undue 

preference. Market-Based Rate Final Rule, FERC Stats. & Regs. ¶ 31,252 at P 481. 

Also, we note that some states have chosen to impose their own affiliate restrictions in 

such circumstances. 
Docket No. RM07-15-000 - 32 - 

marketplace.41 We clarify, however, that if a state regulatory authority in a retail choice 

state does not believe retail customers are sufficiently protected and that our affiliate 

restrictions should apply to the local franchised public utility, it may file a petition for 

declaratory order to deem its retail customers to be captive customers for purposes of 

applying the affiliate restrictions.42

46. As a general matter, we also clarify that the definition of captive customers, and 

our interpretations of the term, are intended to be applied uniformly in implementing all 

of our rules. In connection with the affiliate restrictions adopted in the Market-Based 

Rate Final Rule, we clarified that those affiliate restrictions will not apply where a seller 

demonstrates, and the Commission agrees, that the seller has no captive customers.43 We 

also clarified that any sellers that have previously demonstrated and been found not to 

have captive customers, and therefore have received a waiver of the market-based rate 

code of conduct requirement in whole or in part, will not be required to request another 

waiver of the associated affiliate restrictions.44 We will adopt a similar approach with 

 41 Id. If the retail choice program is not available to all customers in the state, 

those customers that do not have retail choice would be considered captive customers of 

the franchised public utility that serves them, and our affiliate restrictions would apply to 

the franchised public utility. 

42 Under the Commission’s regulations, states are exempt from filing fees for 

petitions for declaratory order. 18 CFR 381.108. 

43 Market-Based Rate Final Rule, FERC Stats. & Regs. ¶ 31,252 at P 552. 

44 Id. P 551. 
Docket No. RM07-15-000 - 33 - 

regard to the cross-subsidization affiliate restrictions that we adopt in this Final Rule. If a 

utility makes a showing that it has no captive customers, and the Commission agrees, the 

affiliate cross-subsidization restrictions will not apply. If a public utility has received a 

finding that it has no captive customers for purposes of meeting the market-based rate 

affiliate restrictions, such filing will be deemed sufficient here. However, the utility must 

make an informational filing with the Commission stating that the affiliate restrictions we 

adopt in this Final Rule do not apply. 

47. Further, in considering the comments in this docket and in the Market-Based Rate 

Final Rule (pending rehearing), and in reviewing the use of the definition of captive 

customers in our other rules, we believe it appropriate to modify the definition of captive 

customers to make explicit what was only implicit in our earlier rules – that the definition 

is intended to apply to customers served by a franchised public utility under cost-based 

regulation. Accordingly, we will modify the term to mean: “any wholesale or retail 

electric energy customers served by a franchised public utility under cost-based 

regulation.”45

48. In response to clarification requests by APPA/NRECA that we modify our 

proposed regulatory text so that the affiliate restrictions apply not only to franchised 

 45 We recognize that this amended definition will result in redundancy in certain of 

our regulations since some regulations refer to “franchised public utilities with captive 

customers” and other regulations simply refer to “captive customers” without elaboration. 

However, we believe the amendment will eliminate possible confusion in future 

interpretations. 
Docket No. RM07-15-000 - 34 - 

public utilities that have captive customers but also to public utilities that own 

Commission-jurisdictional transmission facilities or provide Commission-jurisdictional 

transmission service, we will grant the request. Thus, the affiliate restrictions will apply 

where a franchised public utility has captive customers or owns or provides transmission 

service over Commission-jurisdictional transmission facilities. While some franchised 

public utilities have captive customers, others do not, although they own or provide 

transmission service over Commission-jurisdictional transmission facilities.46 The 

customers of these franchised public utilities also should not inappropriately be required 

to subsidize “non-regulated” activities of the affiliates of such utilities.47

49. Finally, we clarify that, consistent with the Market-Based Rate Final Rule, we 

will continue to treat electric cooperatives as not subject to the Commission’s affiliate 

abuse restrictions.48

 46 A public utility that has no captive power customers but that owns or provides 

transmission service over Commission-jurisdictional facilities may seek a waiver of the 

affiliate restrictions if it can demonstrate that transmission customers are adequately 

protected against inappropriate cross-subsidization. 

47 For example, if a franchised public utility owns transmission facilities and also 

owns a non-utility construction services firm, the public utility’s customers should not 

pay an above market price for construction services to upgrade transmission facilities. 

48 Market-Based Rate Final Rule, FERC Stats. & Regs. ¶ 31,252 at P 526. 
Docket No. RM07-15-000 - 35 - 

b. Non-Utility Affiliate

i. Definition of “Affiliate”

(a) Comments

50. PG&E asks the Commission to clarify the definition of “affiliate,” as used in the 

definition of non-utility affiliate.49 PG&E states that the Commission should clarify 

whether the proposed regulations use the definition of affiliate set forth in the PUHCA 

2005 regulations or some other definition. 

(b) Commission Determination

51. In response to PG&E’s request for clarification concerning the definition of 

affiliate in the proposed regulations, we have considered the use of the term affiliate in 

the context of the Affiliate Transactions NOPR, the Commission’s Standards of Conduct 

for Transmission Providers, and other precedent.50 We have also reviewed the affiliate 

definitions contained in both the PUHCA 1935 and PUHCA 2005 and have considered 

the fact that, with respect to certain affiliate preferences or advantages involving EWG 

rates and charges, we are specifically required by FPA section 21451 to use the definition 

contained in PUHCA 1935. After taking into account these differing definitions of 

affiliate (or, in some cases, no definition at all, as in the context raised by PG&E), and 

 49 As defined in the proposed regulations, “non-utility affiliate” means “any 

affiliate that is not in the power sales or transmission business.” 

50 See, e.g., Morgan Stanley Capital Group, Inc., 72 FERC ¶ 61,082, at 61,436-37 

(1995) (Morgan Stanley). 

51 16 U.S.C. 824m. 
Docket No. RM07-15-000 - 36 - 

recognizing the need to provide greater clarity and consistency in our rules, we believe it 

is important to try to adopt a more consistent definition in our various rules and also one 

that is sufficiently broad to allow us to adequately protect customers.52

52. Our goal is to have a more consistent definition of affiliate for purposes of both 

EWGs and non-EWGs to the extent possible, as well as to strengthen the Commission’s 

ability to ensure that customers are protected against affiliate abuse. Accordingly, having 

studied the clarity and scope of various definitions, we believe it appropriate to modify 

the definition proposed in the Affiliate Transactions NOPR to explicitly incorporate the 

PUHCA 1935 definition of affiliate for EWGs (rather than incorporate it by reference as 

previously has been done). We will also adopt the PUHCA 1935 definition of affiliate 

for non-EWGs, but with adjustments to reflect our previously-used 10 percent voting 

interest threshold for non-EWGs and to eliminate certain language not applicable or 

necessary in the context of the FPA. This is discussed more fully below. 

53. In the case of non-EWG public utilities, our past approach has been that a voting 

interest of 10 percent creates a rebuttable presumption of control for purposes of 

determining the existence of an affiliate relationship.53 For EWGs, on the other hand, 

section 214 of the FPA specifies that the term affiliate shall have the same meaning as 

provided in section 2(a) of PUHCA 1935 (which, inter alia, contains a five percent voting 

 52 For example, we adopt this definition of affiliate for purposes of section 203 of 

the FPA in the concurrent Blanket Authorization Final Rule. 

53 See Morgan Stanley, 72 FERC at 61,436-37; 18 CFR 358.3(b) and (c). 
Docket No. RM07-15-000 - 37 - 

interest test) for purposes of determining whether an electric utility is an affiliate of an 

EWG for purposes of evaluating EWG rates. Although PUHCA 2005 also contains a 

definition of affiliate, which has been incorporated in § 366.1 of our regulations, that 

definition is not the same as the definition contained in PUHCA 1935. Indeed, it is 

narrower than the definition contained in PUHCA 1935.54

54. In particular, the PUHCA 2005 definition defines affiliate of a company to mean 

“any company, 5 percent or more of the outstanding voting securities of which are 

owned, controlled, or held with power to vote, directly or indirectly, by such company.” 

The PUHCA 1935 definition, on the other hand, also defines as an affiliate of a specified 

company “any person that directly or indirectly owns, controls, or holds with power to 

vote, 5 per centum or more of the outstanding voting securities of such specified 

company” and “any individual who is an officer or director of such specified company, or 

of any company which is an affiliate thereof . . . .” In addition, the PUHCA 1935 

definition also includes in the definition of affiliate “any person or class of persons that 

the Commission determines, after appropriate notice and opportunity for hearing, to stand 

in such relation to such specified company that there is liable to be such an absence of 

arm’s-length bargaining in transactions between them as to make it necessary or 

 54 It is not clear whether some of the language from PUHCA 1935 was 

inadvertently omitted from the PUHCA 2005 definition or whether Congress thought a 

more narrow definition was appropriate with respect to a “books and records” access 

statute. In either case, the PUHCA 1935 definition provides a more “bright line” 

approach while still reserving the agency’s ability to deem an entity an affiliate based on 

specific circumstances, thus better ensuring the ability to protect customers. 
Docket No. RM07-15-000 - 38 - 

appropriate in the public interest or for the protection of investors or consumers that such 

person . . .” be treated as an affiliate. 

55. Because FPA section 214 directs the Commission to use the definition of affiliate 

that appears in PUHCA 1935 with respect to certain affiliate preferences affecting rates 

or charges of EWGs, we will revise the definition proposed in the Affiliate Transactions 

NOPR to be consistent with the PUHCA 1935 definition.55

56. We also will revise the definition of “affiliate” for purposes of non-EWGs utilities 

to be consistent with the definition of “affiliate” for EWGs, except to the extent we 

believe it may leave a gap in coverage or contains language not applicable to the FPA. 

The definition we adopt for non-EWGs essentially parallels the EWG definition (with 

certain exceptions that we discuss below), while retaining the 10 percent voting interest 

threshold contained in the current regulations. Use of the PUHCA 1935 definition for 

non-EWGs may capture under the definition of “affiliate” entities that otherwise would 

not have been treated as affiliates under the definition currently in place in the 

Commission’s regulations. We believe it is appropriate to adopt a broader definition, one 

that is largely consistent with the definition for EWGs, because it will strengthen the 

Commission’s ability to ensure that customers are protected against affiliate abuse. For 

example, the revised affiliate definition for non-EWGs will give the Commission the 

 55 Section 214 provides that no rate or charge of an EWG shall be lawful if, after 

notice and opportunity for hearing, the Commission finds that it resulted from any undue 

preference or advantage received from an electric utility that is an associate or affiliate of 

the EWG. 
Docket No. RM07-15-000 - 39 - 

ability to treat an entity as an affiliate of a company if, after notice and opportunity for 

hearing, the Commission finds that “there is liable to be such an absence of arm’s-length 

bargaining in transactions between them as to make it necessary or appropriate in the 

public interest or for the protection of investors or consumers” that such entity be treated 

as an affiliate. It also is consistent with other recent orders and rules (e.g., the 

Supplemental Policy Statement) in which we have provided greater clarity as to what is 

considered “control” of an entity. 

57. While the affiliate definition we adopt for non-EWGs essentially parallels the 

EWG definition, there are a number of exceptions. One exception is that the non-EWG 

definition also defines an affiliate of a specified company to include “any person that is 

under common control with such specified company.” This language is included in the 

definition of non-EWG affiliate that currently is in the Commission’s regulations and 

identifies an additional instance in which an entity will be deemed to be an affiliate of a 

specified company. On this basis, we believe it appropriate to include this language as 

part of the non-EWG definition. Because the “under common control with” language is 

not part of the PUCHA 1935 definition, however, we cannot also include it as part of the 

definition of affiliate for purposes of EWGs. We also include as part of the non-EWG 

affiliate definition a provision making clear that where a person owns, controls, or holds 

with power to vote less than 10 percent of the outstanding voting securities of a specified 

company, this creates a rebuttable presumption of lack of control. Although the PUHCA 

1935 definition does not contain a parallel provision with regard to the five percent 
Docket No. RM07-15-000 - 40 - 

threshold in the case of EWGs, we nevertheless believe that it is appropriate to include 

this rebuttable presumption as part of the non-EWG definition because it provides greater 

clarity concerning the circumstances in which an entity will be presumed not to be an 

affiliate. 

58. Another exception concerns the provision in the PUHCA 1935 definition that 

includes as an affiliate of a specified company “any individual who is an officer or 

director of such specified company, or of any company which is an affiliate thereof . . . .” 

We do not believe it necessary to include that language as part of the affiliate definition 

for non-EWGs because we already are including in the definition, a provision giving the 

Commission the ability to treat an entity as an affiliate if, after notice and opportunity for 

hearing, the Commission finds that there is liable to be an absence of arm’s-length 

bargaining in transactions between two entities.56

59. In sum, we believe that the definition of affiliate that we adopt in this Final Rule 

will provide greater clarity to public utilities and customers with respect to identifying 

which entities are considered to be affiliates for purposes of the regulations that we adopt 

in this Final Rule. 

 56 With respect to this provision, we note that we are omitting language 

referencing the duties, obligations and liabilities imposed by PUHCA 1935 since those 

are no longer applicable in light of repeal of PUHCA 1935. 
Docket No. RM07-15-000 - 41 - 

ii. Definition of “Non-Utility Affiliate”

(a) Comments

60. NiSource argues that the Commission should revise the definition of non-utility 

affiliate because it could inadvertently include state-regulated local distribution 

companies (LDCs) and Commission-regulated interstate pipelines because they are not in 

the power sales or transmission business. NiSource notes that the regulatory text strongly 

suggests that the Commission intended the definition of non-utility affiliate to apply only 

to “unregulated” entities. NiSource argues that this is important because any franchised 

public utility with captive customers would have to price sales of non-power goods and 

services to any non-utility affiliate at the higher of cost or market. NiSource argues that 

imposing this pricing requirement on LDCs and Commission-regulated interstate 

pipelines (as non-utility affiliates): (1) is inconsistent with the intent of the regulations, 

which is to prevent cross-subsidization of a “non-utility associate company” as derived 

from PUHCA 1935 and PUHCA 2005, (2) could conflict with state requirements, and 

(3) is unnecessary because the Commission and the states have ample authority to review 

such transactions. 

(b) Commission Determination

61. We agree with NiSource and clarify that the definition of non-utility affiliate does 

not apply to utility affiliates that sell or transport natural gas, such as LDCs, or 

Commission-regulated interstate pipelines. However, we will not foreclose the expansion 
Docket No. RM07-15-000 - 42 - 

of the definition of non-utility affiliate to include LDCs and/or interstate pipelines if 

circumstances warrant it in the future. 

2. Pricing Non-Power Affiliate Transactions

62. In the Affiliate Transactions NOPR, the Commission proposed to implement 

affiliate restrictions that would be applicable to transactions for non-power goods and 

services between franchised public utilities with captive customers and their marketregulated and non-utility affiliates. Specifically, the Commission proposed that: (1) a 

franchised public utility with captive customers that provides non-power goods and 

services to a market-regulated power sales affiliate or a non-utility affiliate should charge 

a price that is the higher of cost or market price; (2) a franchised public utility with 

captive customers should be prohibited from purchasing non-power goods and services at 

a price above market price from market-regulated power sales affiliates and non-utility 

affiliates, with the exception of centralized service companies;57 and (3) a franchised 

public utility with captive customers should be prohibited from buying non-power goods 

and services from a centralized service company at a price above cost.58 The Affiliate 

 57 Order No. 667 defines centralized service companies as performing generally 

corporate administration functions, such as accounting, human resources, legal and tax 

services, while special-purpose non-utility affiliates provide generally a single input to 

utility operations, such as fuel supply, construction or real estate. Order No. 667, FERC 

Stats. & Regs. ¶ 31,197 at P 171 n.178. 

58 Affiliate Transactions NOPR, FERC Stats. & Regs. ¶ 32,618 at P 16. 
Docket No. RM07-15-000 - 43 - 

Transactions NOPR indicated that each of the proposed restrictions was consistent with 

restrictions previously imposed in the 203-merger context.59

a. Comments

63. Several commenters suggest that the Commission’s proposal will raise prices 

within holding company systems by creating inefficiencies. Specifically, EEI, Entergy, 

NiSource and PG&E argue that the Commission should require at-cost pricing for all 

transactions within a holding company system regardless of whether the services are 

provided for or by the franchised public utility. They contend that an at-cost standard 

creates savings through economies of scale that apply whether the employee providing 

the non-power good or service is located in a centralized service company, a utility or 

another affiliate. In addition, they note that it is difficult to find a market price for 

affiliate transactions for such goods and services. 

64. EEI and PG&E further argue that requiring a utility to charge an affiliate the 

“higher of cost or market” would likely increase costs to both the utility and the affiliate 

by discouraging the efficient sharing of services. As a substitute for the “higher of cost 

or market” requirement for sales by a franchised public utility to an affiliate, they state 

that the Commission should allow the fully loaded cost to be a proxy for the market price 

for sales of non-power services by a utility to its affiliates. 

 59 See, e.g., National Grid, 117 FERC ¶ 61,080 at P 66. 
Docket No. RM07-15-000 - 44 - 

65. National Grid argues that at-cost pricing for sales of non-power goods and 

services provided by a franchised public utility to a centralized service company would 

be consistent with the Commission’s rationale for allowing at-cost pricing for sales in the 

opposite direction. It states that the Commission established at-cost pricing in Order No. 

667 to encourage centralization of certain services that provide economies of scale that 

benefit customers, and that these benefits occur whether a franchised public utility is 

buying or selling non-power goods or services to or from its centralized service company. 

It argues that requiring at-cost pricing for transactions from a centralized service 

company to a franchised public utility on the one hand, while requiring at-the-higher-ofcost-or-market pricing for transactions from a franchised public utility to a centralized 

service company on the other hand, creates a bifurcated-pricing structure that undermines 

efficient pricing within a holding company. It further argues that tracking which 

transactions are “at market” and which transactions are “at cost” adds a level of 

complexity to the accounting within holding companies, and identifying the market prices 

for certain non-power goods and services that may be sold by franchised public utilities 

to centralized service companies is difficult. 

66. In contrast, the New York Commission focuses on whether the Commission’s 

proposed pricing standards adequately protect captive customers from crosssubsidization. Specifically, it challenges the Commission’s proposal to prohibit a 

franchised public utility with captive customers from purchasing non-power goods and 

services at a price above market price from market-regulated power sales affiliates and 
Docket No. RM07-15-000 - 45 - 

non-utility affiliates, with the exception of centralized service companies. It asserts that 

this standard would allow utilities to purchase non-power goods or services from an 

affiliated entity at market prices and may allow holding companies to structure affiliate 

transactions so that utilities with captive customers would pay above-cost charges. It 

states that where an affiliate makes central purchases on behalf of several utilities, the 

affiliate will likely obtain discounts in the prices it pays due to the combined volume of 

purchases. The New York Commission contends, however, that the Commission’s 

proposal would allow the central purchasing affiliate to charge each utility up to the 

prevailing market price which otherwise would be incurred if the utilities made their own 

separate purchases, and the result would provide a source of affiliate cross-subsidization 

in an amount equivalent to the incremental purchase quantity discount. 

67. As an alternative, the New York Commission proposes that the Commission 

require utilities to record purchases of covered items from their affiliates at the lower of 

actual cost or market prices. It contends that this standard would protect captive utility 

customers against paying affiliates more than the affiliate’s actual costs. 

68. Commenters also made recommendations on the appropriate relationship between 

state and Commission affiliate-pricing standards. In particular, EEI, National Grid and 

Pinnacle West argue that, at the very least, the Commission should avoid unnecessary 

duplication or conflict with state provisions. In particular, EEI encourages the 

Commission to adopt deference to states in the cross-subsidy context, unless a state or 

holding company asks the Commission to apply uniform rules to avoid inconsistent 
Docket No. RM07-15-000 - 46 - 

standards that would trap legitimate costs. EEI suggests that the Commission adopt a 

procedure similar to the one it adopted in Order No. 667, in which a holding company 

system can apply to the Commission to impose consistent requirements that would 

eliminate the possibility of trapped costs. National Grid contends that inconsistencies 

between federal and state rules make implementation of both sets of rules impossible, 

particularly with respect to the day-to-day press of business within a utility holding 

company. It argues that deference to the states would minimize disruption of existing 

holding company accounting and reporting systems, cost-allocation manuals, and 

interaffiliate-transaction procedures built around state regulation. Pinnacle West states 

that, because state regulations typically address affiliate transactions, the Commission’s 

regulations could upset states’ efforts to ring fence utilities. 

b. Commission Determination

69. The Commission will adopt the pricing restrictions on transactions for non-power 

goods and services proposed in the Affiliate Transactions NOPR, with the exception of a 

modification to the restriction applicable to transactions with centralized service 

companies, to conform those restrictions to the language in our Order No. 667 

regulations. These are explained below. 

70. First, as proposed, a franchised public utility with captive customers that provides 

non-power goods and services to a market-regulated power sales affiliate or a non-utility 

affiliate will be required to sell at a price that is the higher of cost or market price. We 

will not adopt an at-cost pricing structure for these types of non-power transactions (as 
Docket No. RM07-15-000 - 47 - 

suggested by National Grid, EEI, NiSource, Entergy and PG&E) because it would require 

a franchised public utility to sell to an affiliate at cost even when market prices are 

higher, thereby foregoing profits that the utility otherwise could have obtained by selling 

to a non-affiliate at a market price. In such a scenario, the benefit would go to the 

market-regulated affiliate or non-utility affiliate who receives a good or service at a 

below-market price. We believe the benefits that captive customers will receive under 

this “higher of cost or market price” standard outweigh any savings that may (or may not) 

occur through the use of a uniform at-cost standard. 

71. Next, we will adopt the proposal in the Affiliate Transactions NOPR to prohibit a 

franchised public utility with captive customers from purchasing non-power goods or 

services from a market-regulated power sales affiliate or a non-utility affiliate at a price 

above market price (with the exception of transactions from centralized service 

companies, which are discussed below). In doing so, we deny the New York 

Commission’s request for a “lower of cost or market” standard for these types of 

transactions. As discussed above, the New York Commission argued that the “at a price 

above market price” standard would allow holding companies to structure affiliate 

transactions so that captive customers would pay above-cost charges. But captive 

customers are not harmed by the franchised public utility paying above-cost charges if 

those charges are no higher than what they would pay non-affiliates for the same nonpower goods and services. Moreover, nothing in the standard requiring that these 

purchases not be above market prevents the franchised public utility from paying less 
Docket No. RM07-15-000 - 48 - 

than the market price. The New York Commission, or any other state commission, can 

require a stricter standard for these transactions so long as the standards do not result in 

trapped costs in situations involving multi-state holding companies. If the state 

commission’s pricing standards for a franchised public utility’s purchases from an 

affiliate are stricter than the Commission’s (e.g., the state standard is lower of cost or 

market as opposed to market), then the stricter pricing standard would apply, as long as 

there is no conflict in complying with both the state’s pricing standard and this 

Commission’s pricing standard.60

72. Finally, with regard to centralized service companies, the Affiliate Transactions 

NOPR proposed that a franchised public utility with captive customers should be 

prohibited from purchasing or receiving non-power goods and services from a centralized 

service company at a price above cost. We will conform this standard to the language in 

Order No. 667, which is to require that such transactions occur “at cost.” While this is a 

change from the Affiliate Transactions NOPR, which proposed to prohibit such sales 

from centralized service companies at a price above cost, our intent in the Affiliate 

Transactions NOPR was to be consistent with Order No. 667,61 as well as the SEC’s atcost standard used prior to the repeal of PUHCA 1935. As we have previously stated, the 

at-cost pricing standard for transactions for non-power goods and services from 

 60 See 18 CFR 366.5. 

61 Order No. 667, FERC Stats. & Regs. ¶ 31,197 at P 169. 
Docket No. RM07-15-000 - 49 - 

centralized service companies to franchised public utilities with captive customers 

benefits ratepayers through economies of scale, and eliminates the speculative task of 

defining a market price in these instances.62

73. We recognize that one of the risks of at-cost pricing is the potential for prices to 

be imposed that are substantially higher than the market price. As we stated in Order 

No. 667, the Commission will entertain complaints that at-cost pricing exceeds the 

market price. Complainants would continue to have the burden of demonstrating the atcost price exceeded market price and, furthermore, any change in the price as a result of 

the complaint would be prospective. 

74. With regard to comments that the Commission’s affiliate-pricing standards may 

conflict with similar pricing rules at the state level, we are not convinced that the 

Commission should establish a general policy of deference to existing state rules. For 

many years, we have required restrictions on certain affiliate transactions for non-power 

goods and services in the context of both market-base rate authorizations and merger 

approval under section 203.63 As stated above, to the extent a state has affiliate-pricing 

standards that are “stricter” than the Commission’s then the stricter standard applies, as 

long as there is no conflict in complying with both the state’s pricing standard and this 

Commission’s pricing standard. 

 62 Id.

63 See, e.g., Potomac, 93 FERC at 61,782; Heartland, 68 FERC at 62,062-63; PSC

Colorado, 75 FERC at 62,046. 
Docket No. RM07-15-000 - 50 - 

3. Reporting Requirements

75. In the Affiliate Transactions NOPR, the Commission asked whether it should 

adopt any after-the-fact reporting requirements for transactions covered by the proposed 

regulations. 

a. Comments

76. Most commenters, including EEI, Entergy, PG&E, Pinnacle West and Sempra, 

argue that the Commission should not require after-the-fact reporting requirements. 

77. EEI argues that such reporting would be onerous given the number of transactions 

at issue, the fact that further reporting could include sensitive information and the 

Commission already collects large volumes of information from utilities and service 

companies. EEI also argues that if the Commission does adopt these regulations, it 

should clarify that utilities no longer need to include language that duplicates the 

regulations in their code of conduct as part of their individual tariffs. 

78. Pinnacle West and Sempra argue that additional reporting is not required because 

many states already require reporting of affiliate transactions (including the states in 

which they conduct business) and the Commission already collects affiliate power sales 

information through EQRs and market-based rate requirements. Sempra states that it 

does not object to additional reporting requirements provided that the entities subject to 

the requirements are authorized to submit the same information in the same format and in 

the same time period as is required under existing state requirements. 
Docket No. RM07-15-000 - 51 - 

79. PG&E encourages the Commission not to require additional reporting 

requirements for single-state holding companies. PG&E argues that such a requirement 

would be extraordinarily onerous. PG&E also argues that such a requirement would be 

duplicative because of Commission reporting requirements (EQRs and Form No. 3-Qs) 

and state requirements (where there is adequate state regulation of cross-subsidy issues). 

80. APPA/NRECA and the state commissions support after-the-fact reporting 

requirements. APPA/NRECA ask that the Commission adopt additional after-the-fact 

reporting requirements. APPA/NRECA state that the Commission should require the 

filing of affiliate agreements governing non-power goods and services and the filing of 

periodic reports of all affiliate transactions within holding company systems regardless of 

whether they involve a centralized service company, a single-purpose service company, a 

market-regulated power sales affiliate or a non-utility affiliate. APPA/NRECA assert that 

there is no question of the Commission’s statutory authority to require such reporting 

(citing the Commission’s analysis in Order No. 667). APPA/NRECA also note that, in 

Order No. 667, the Commission only requires traditional, centralized service companies 

in holding company systems to file annual reports containing certain information relating 

to affiliate transactions, but the Commission does not require any reporting for singlepurpose service companies or other associate companies in holding company systems. 

While APPA/NRECA acknowledge that a one-size-fits-all reporting scheme may not be 

appropriate, they believe additional reporting is required. As a suggestion, they offer that 

the Commission require each covered public utility to file a one-time compliance filing 
Docket No. RM07-15-000 - 52 - 

which would inform the Commission of its then-existing affiliate relationships and any 

exemptions from annual reporting requirements. APPA/NRECA admit that that sort of 

reporting regime is general, and ask that the Commission consider a further technical 

conference on this question. 

81. The Oklahoma Commission also recommends after-the-fact reporting, noting that 

its rules regarding affiliate information have been effective. The Oklahoma Commission 

suggests that the Commission allow state commissions the opportunity to review and 

comment on any post occurrence reporting (suggesting a 90-day review and comment 

period). 

82. The New York Commission also recommends reporting on affiliate transactions. 

The New York Commission recommends revisions to Form No. 1 and Form No. 2 to 

require utilities to describe, quantify, and provide the basis used to record each type of 

transaction with its affiliates. It argues that these reporting requirements are similar to 

those the Commission included in Form No. 60 for centralized service companies. 

b. Commission Determination

83. We believe that the current reporting regulations are adequate to ensure 

compliance with the proposed restrictions on affiliate transactions between franchised 

public utilities that have captive customers or that own or provide transmission service 

over jurisdictional transmission facilities and their market-regulated power sales affiliates 

or non-utility affiliates. In addition to the information gathered through Form No. 1, the 

Commission already collects affiliate power sales information from franchised public 
Docket No. RM07-15-000 - 53 - 

utilities through EQRs and market-based requirements. With regard to non-power goods 

and services, franchised public utilities that have captive customers or that own or 

provide transmission service over jurisdictional transmission facilities are covered by the 

existing record retention requirements in Parts 125 and 225 of the Commission’s 

regulations. Accordingly, there is no need to impose additional reporting requirements to 

ensure compliance with the proposed regulations. However, if the Commission finds that 

the existing requirements are inadequate, we will consider holding a technical conference 

to discuss what additional reporting requirements may be warranted. 

4. Effective Date

a. Comments

84. EEI and Entergy recommend that the application of any adopted regulations be 

prospective in nature and not affect any existing contracts. In its comments, EEI asserts 

that it would be “unjust and detrimental to the financial integrity” of holding companies 

for the Commission to retroactively void pricing arrangements to provide energy or nonpower goods and services.64

b. Commission Determination

85. In response to EEI’s request for clarification, we clarify that the pricing rules 

adopted herein are prospective and will apply to any contracts, agreements or 

arrangements entered into on or after the effective date of this Final Rule. To the extent 

 64 EEI Comments at 13. 
Docket No. RM07-15-000 - 54 - 

different pricing was in effect for any contract, agreement or arrangement entered into 

prior to the effective date of this Final Rule, such pricing may remain in effect; however, 

the Commission on its own motion, or upon complaint, may on a case-by-case basis 

institute a section 206 proceeding to determine whether the costs incurred by a public 

utility under such pre-existing contracts, agreements or arrangements are just, reasonable 

and not unduly discriminatory or preferential. We also note that many public utilities 

already have the same pricing restrictions in effect as a result of Commission orders 

approving mergers or market-based rates; these restrictions remain in place. 

V. Information Collection Statement

86. The Office of Management and Budget’s (OMB’s) regulations require that OMB 

approve certain information collection requirements imposed by agency rule.65 This 

Final Rule does not impose any additional information collection requirements. 

Therefore, the information collection regulations do not apply to this Final Rule. The 

Commission received 12 comments on the Affiliate Transactions NOPR and no entity 

specifically addressed the Commission’s information collection statement. The 

Commission will submit for informational purposes only a copy of this rulemaking to 

OMB. 

 65 5 CFR 1320.12. 
Docket No. RM07-15-000 - 55 - 

VI. Environmental Analysis

87. The Commission is required to prepare an Environmental Assessment or an 

Environmental Impact Statement for any action that may have a significant adverse effect 

on the human environment.66 The Commission has categorically excluded certain actions 

from this requirement as not having a significant effect on the human environment.67 The 

final rule is categorically excluded as it addresses rate filings submitted under 

sections 205 and 206 of the FPA.68 Accordingly, no environmental assessment is 

necessary and none has been prepared in this final rule. 

VII. Regulatory Flexibility Act

88. The Regulatory Flexibility Act of 1980 (RFA)69 generally requires a description 

and analysis of final rules that will have significant economic impact on a substantial 

number of small entities.70 Agencies are not required to make such an analysis if a rule 

would not have such an effect. 

 66 Regulations Implementing the National Environmental Policy Act, Order 

No. 486, 52 FR 47897 (Dec. 17, 1987), FERC Stats. & Regs., Regulations Preambles 

1986-1990 ¶ 30,783 (1987). 

67 18 CFR 380.4. 

68 See 18 CFR 380.4(a)(15). 

69 5 U.S.C. 601-12. 

70 The RFA definition of “small entity” refers to the definition provided in the 

Small Business Act, which defines a “small business concern” as a business that is 

independently owned and operated and that is not dominant in its field of operation. 

15 U.S.C. 632. The Small Business Size Standards component of the North American 

 (continued) 
Docket No. RM07-15-000 - 56 - 

89. The Final Rule is applicable to franchised public utilities that have captive 

customers or that own or provide transmission service over jurisdictional transmission 

facilities. Most such companies regulated by the Commission do not fall within the 

RFA’s definition of small entity.71 Therefore, the Commission certifies the Final Rule 

will not have a significant economic impact on a substantial number of small entities. As 

a result, no regulatory flexibility analysis is required. 

VIII. Document Availability

90. In addition to publishing the full text of this document in the Federal Register, the 

Commission provides all interested persons an opportunity to view and/or print the 

contents of this document via the Internet through FERC’s Home Page 

(http://www.ferc.gov) and in FERC’s Public Reference Room during normal business 

hours (8:30 a.m. to 5:00 p.m. Eastern time) at 888 First Street, N.E., Room 2A, 

Washington D.C. 20426. 

91. 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 

 

Industry Classification System defines a small electric utility as one that, including its 

affiliates, is primarily engaged in the generation, transmission, and/or distribution of 

electric energy for sale and whose total electric output for the preceding fiscal year did 

not exceed 4 million MWh. 13 CFR 121.201. 

71 5 U.S.C. 601(3), citing to section 3 of the Small Business Act, 15 U.S.C. 632. 

Section 3 of the Small Business Act defines a “small-business concern” as a business 

which is independently owned and operated and which is not dominant in its field of 

operation. 
Docket No. RM07-15-000 - 57 - 

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. 

92. User assistance is available for eLibrary and the FERC’s website during normal 

business hours from FERC Online Support at 202-502-6652 (toll free at 1-866-208-3676) 

or email at ferconlinesupport@ferc.gov, or the Public Reference Room at (202) 502-

8371, TTY (202)502-8659. E-mail the Public Reference Room at 

public.referenceroom@ferc.gov. 

IX. Effective Date and Congressional Notification

93. These regulations are effective [insert date 30 days from publication in 

FEDERAL REGISTER]. The Commission has determined, with the concurrence of the 

Administrator of the Office of Information and Regulatory Affairs of OMB, that this rule 

is not a “major rule” as defined in section 351 of the Small Business Regulatory 

Enforcement Fairness Act of 1996. 

List of subjects in 18 CFR Part 35

Electric power rates, Electric utilities, Reporting and recordkeeping requirements.

By the Commission. 

( S E A L ) 

 Kimberly D. Bose, 

 Secretary. 
 In consideration of the foregoing, the Commission amends part 35, Chapter I, Title 

18, Code of Federal Regulations, to read as follows: 

PART 35 – FILING OF RATE SCHEDULES AND TARIFFS. 

1. The authority citation for part 35 continues to read as follows: 

 Authority: 16 U.S.C. 791a-825r, 2601-2645; 31 U.S.C. 9701; 42 U.S.C. 7101-

7352. 

2. Subpart I is added to read as follows: 

Subpart I – Cross-Subsidization Restrictions on Affiliate Transactions 

Sec.

35.43 Generally. 

35.44 Protections against affiliate cross-subsidization. 

§ 35.43 Generally. 

 (a) For purposes of this subpart: 

 (1) Affiliate of a specified company means: 

 (i) For any person other than an exempt wholesale generator: 

 (A) Any person that directly or indirectly owns, controls, or holds with power to 

vote, 10 percent or more of the outstanding voting securities of the specified company; 

 (B) Any company 10 percent or more of whose outstanding voting securities 

are owned, controlled, or held with power to vote, directly or indirectly, by the specified 

company; 
Docket No. RM07-15-000 - 2 - 

 (C) Any person or class of persons that the Commission determines, after 

appropriate notice and opportunity for hearing, to stand in such relation to the specified 

company that there is liable to be an absence of arm’s-length bargaining in transactions 

between them as to make it necessary or appropriate in the public interest or for the 

protection of investors or consumers that the person be treated as an affiliate; and 

 (D) Any person that is under common control with the specified company. 

 (E) For purposes of paragraph (a)(1)(i), owning, controlling or holding with 

power to vote, less than 10 percent of the outstanding voting securities of a specified 

company creates a rebuttable presumption of lack of control. 

 (ii) For any exempt wholesale generator (as defined under § 366.1 of this 

chapter), consistent with section 214 of the Federal Power Act (16 U.S.C. 824m), which 

provides that “affiliate” will have the same meaning as provided in section 2(a) of the 

Public Utility Holding Company Act of 1935 (15 U.S.C. 79b(a)(11)): 

 (A) Any person that directly or indirectly owns, controls, or holds with power to 

vote, 5 percent or more of the outstanding voting securities of the specified company; 

 (B) Any company 5 percent or more of whose outstanding voting securities are 

owned, controlled, or held with power to vote, directly or indirectly, by the specified 

company; 

 (C) Any individual who is an officer or director of the specified company, or of 

any company which is an affiliate thereof under paragraph (a)(1)(ii)(A); and 
Docket No. RM07-15-000 - 3 - 

 (D) Any person or class of persons that the Commission determines, after 

appropriate notice and opportunity for hearing, to stand in such relation to the specified 

company that there is liable to be an absence of arm’s-length bargaining in transactions 

between them as to make it necessary or appropriate in the public interest or for the 

protection of investors or consumers that the person be treated as an affiliate. 

 (2) Captive customers means any wholesale or retail electric energy customers 

served by a franchised public utility under cost-based regulation. 

 (3) Franchised public utility means a public utility with a franchised service 

obligation under state law. 

 (4) Market-regulated power sales affiliate means any power seller affiliate 

other than a franchised public utility, including a power marketer, exempt wholesale 

generator, qualifying facility or other power seller affiliate, whose power sales are 

regulated in whole or in part on a market-rate basis. 

 (5) Non-utility affiliate means any affiliate that is not in the power sales or 

transmission business, other than a local gas distribution company or an interstate natural 

gas pipeline. 

 (b) The provisions of this subpart apply to all franchised public utilities that 

have captive customers or that own or provide transmission service over jurisdictional 

transmission facilities. 

§ 35.44 Protections against affiliate cross-subsidization. 
Docket No. RM07-15-000 - 4 - 

 (a) Restriction on affiliate sales of electric energy. No wholesale sale of 

electric energy may be made between a franchised public utility with captive customers 

and a market-regulated power sales affiliate without first receiving Commission 

authorization for the transaction under section 205 of the Federal Power Act. 

 (b) Non-power goods or services. 

 (1) Unless otherwise permitted by Commission rule or order, sales of any nonpower goods or services by a franchised public utility that has captive customers or that 

owns or provides transmission service over jurisdictional transmission facilities, 

including sales made to or through its affiliated exempt wholesale generators or 

qualifying facilities, to a market-regulated power sales affiliate or non-utility affiliate 

must be at the higher of cost or market price. 

 (2) Unless otherwise permitted by Commission rule or order, and except as 

permitted by paragraph (b)(3), a franchised public utility that has captive customers or 

that owns or provides transmission service over jurisdictional transmission facilities, may 

not purchase or receive non-power goods and services from a market-regulated power 

sales affiliate or a non-utility affiliate at a price above market. 

 (3) A franchised public utility that has captive customers or that owns or 

provides transmission service over jurisdictional transmission facilities, may only 

purchase or receive non-power goods and services from a centralized service company at 

cost.