124 FERC ¶ 61,047 

UNITED STATES OF AMERICA 

FEDERAL ENERGY REGULATORY COMMISSION 

18 CFR Part 35 

(Docket No. RM07-15-001; Order No. 707-A) 

Cross-Subsidization Restrictions on Affiliate Transactions 

(Issued July 17, 2008) 

AGENCY: Federal Energy Regulatory Commission. 

ACTION: Final Rule; Order on Rehearing. 

SUMMARY: The Federal Energy Regulatory Commission is granting rehearing and 

clarification, in part, of a final rule 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. 

EFFECTIVE DATE: This order on rehearing will become effective [Insert_Date 30 

days after publication in the FEDERAL REGISTER]. 

FOR FURTHER INFORMATION CONTACT: 

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 

Paul Silverman (Legal Information) 

Office of the General Counsel 
Docket No. RM07-15-001 - 2 - 

Federal Energy Regulatory Commission 

888 First Street, N.E. 

Washington, D.C. 20426 

(202) 502-8683 

Mosby Perrow (Legal Information) 

Office of the General Counsel 

Federal Energy Regulatory Commission 

888 First Street, N.E. 

Washington, D.C. 20426 

(202) 502-6498 

Valerie Gill (Technical Information) 

Office of Energy Market Regulation 

Federal Energy Regulatory Commission 

888 First Street, N.E. 

Washington, D.C. 20426 

(202) 502-8527 

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:
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. RM07-15-001 

ORDER ON REHEARING 

ORDER NO. 707-A 

(Issued July 17, 2008) 

1. Order No. 7071

 amended the Federal Energy Regulatory Commission’s 

(Commission) 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 supplemented other restrictions the 

Commission has in place that apply to public utilities with market-based rates and to 

public utilities seeking merger approvals. In this order, we deny, in part, and grant, in 

part, the various requests for rehearing received by the Commission, and amend Part 35 

of our regulations accordingly. 

 1

 Cross-Subsidization Restrictions on Affiliate Transactions, Order No. 707, 

73 FR 11013 (Feb. 29, 2008), FERC Stats. & Regs. ¶ 31,264, granting extension of time, 

122 FERC ¶ 61,280 (2008). 
Docket No. RM07-15-001 - 2 - 

I. Background

2. In the Affiliate Transactions Notice of Proposed Rulemaking, 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 nonutility affiliates and would address both power and non-power goods and services 

transactions between the utility and its affiliates.2

 The proposed restrictions were based 

on those already imposed by the Commission in the context of certain section 203 and 

205 approvals, but expanded the transactions and entities to which they apply. 

3. Specifically, the Commission proposed to: (1) require the Commission’s approval 

of all wholesale power 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 

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. 

 2

 Cross-Subsidization Restrictions on Affiliate Transactions, Notice of Proposed 

Rulemaking, 72 FR 41644 (July 31, 2007), FERC Stats. & Regs. ¶ 32,618 (2007). 
Docket No. RM07-15-001 - 3 - 

4. The Commission stated that the restrictions would help it to meet the requirement 

of amended section 203(a)(4) of the Federal Power Act (FPA)3

 that a transaction not 

result in the inappropriate cross-subsidization of a non-utility associate company. The 

Commission further stated that the restrictions would help assure just and reasonable 

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

205 and 206 of the FPA,4

 irrespective of whether they needed approval of a section 203 

transaction. 

5. As the Commission stated in Order No. 707, its obligation to ensure that the rates, 

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

discriminatory or preferential requires that it ensure that wholesale rates do not reflect 

costs that result from undue preferences granted to affiliates or that are imprudent or 

unreasonable as a result of affiliate transactions. The Commission described its long 

history of scrutinizing affiliate transactions for potential cross-subsidization and how in 

recent rulemakings and orders it has codified and expanded affiliate restrictions, both 

under its FPA section 205 and 206 rate authority (in the context of market-based rates) 

and under its FPA section 203 merger authority. The Commission then extended similar 

restrictions to all franchised public utilities that have captive customers, or that own or 

provide transmission service over jurisdictional transmission facilities. 

 3

 16 U.S.C. 824b(a)(4). 

4

 16 U.S.C. 824d, 824e. 
Docket No. RM07-15-001 - 4 - 

In particular, the Commission articulated restrictions on affiliate sales of electric energy 

by prohibiting wholesale sales of electric energy between a franchised public utility with 

captive customers and a market-regulated power sales affiliate without prior Commission 

authorization for the transaction under section 205 of the Federal Power Act.5

 The 

Commission also promulgated three pricing restrictions on the sale of non-power goods 

and services. 

6. First, the Commission provided that unless otherwise permitted by Commission 

rule or order, sales of any non-power 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 nonutility affiliate must be at the higher of cost or market price. 

7. Second, the Commission provided that unless otherwise permitted by Commission 

rule or order, 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. 

8. Third, and as an exception to the restriction set forth immediately above, the 

Commission provided that a franchised public utility that has captive customers or that 

 5

 18 CFR 35.44(a). 
Docket No. RM07-15-001 - 5 - 

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.6

9. The Commission also stated in Order No. 707 that the pricing rules would be 

prospective and would apply to any contracts, agreements or arrangements entered into 

on or after the effective date of the rule. The Commission explained that to the extent 

different pricing was in effect for any contract, agreement, or arrangement entered into 

prior to the effective date of Order No. 707, that pricing may remain in effect, but the 

Commission may on its own motion, or upon complaint, institute a section 206 

proceeding to determine whether the costs incurred by a public utility under pre-existing 

contracts, agreements or arrangements are just, reasonable and not unduly discriminatory 

or preferential. 

II. Discussion

A. Affiliate Transaction Pricing Standards

10. In Order No. 707, the Commission denied requests to permit franchised public 

utilities with captive customers to make sales of non-power goods and services at cost to 

market-regulated power sales affiliates or non-utility affiliates and instead required these 

sales to be at the higher of cost or market price. It reasoned that to adopt an at-cost 

pricing structure for these types of non-power transactions “would require a franchised 

 6

 Id.
Docket No. RM07-15-001 - 6 - 

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 nonaffiliate at a market price.”7

 

11. The Commission also prohibited 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 

purchases from centralized service companies. In doing so, the Commission denied the 

New York State Public Service Commission’s (New York Commission) request for a 

lower of cost or market standard for these types of transactions, finding that 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. In this regard, the Commission noted that nothing in the 

standard requiring that these purchases not be above market prevents the franchised 

public utility from paying less than the market price.8

 The Commission further rejected 

requests that it defer to state utility commissions that apply different standards to intrasystem transactions to avoid inconsistent standards.9

 

 7

 Order No. 707, FERC Stats. & Regs. ¶ 31,264 at P 70. 

8

 Id. P 71. 

9

 Id. P 74. 
Docket No. RM07-15-001 - 7 - 

1. Shared Corporate General Management and Administrative 

Services 

Requests for Rehearing or Clarification

12. Florida Power & Light Company and FPL Energy LLC (FPL), Pacific Gas & 

Electric Company (PG&E), and Southern California Edison Company (SoCal Edison) 

each argue that Order No. 707 does not adequately address pricing for shared corporate 

general management and administrative services that a utility provides to other 

companies in a single-state holding company system without a centralized service 

company but that it does not offer to non-affiliates. The services in question are those 

akin to the services that a centralized service company provides in multi-state systems. 

PG&E identifies them as accounting, appraisal, call center, claims, computer, 

construction, communications, equipment, fleet, janitorial, legal, legislative, 

maintenance, payroll, personnel, realty, regulatory, supply, and technical services. FPL 

notes that the services in question are similar to those provided by a centralized service 

company, which the Commission has defined as one “that provides services such as 

administrative, managerial, financial, accounting, recordkeeping, legal or engineering 

services, which are sold, furnished, or otherwise provided (typically for a charge) to other 

companies in the same holding company system.”10 FPL states that in its system, the 

services in question are information technology and management; corporate 

 10 The language cited is drawn from the definition of a centralized service 

company found in 18 CFR 367.1(a)(7). 
Docket No. RM07-15-001 - 8 - 

communications systems; engineering and construction;11 finance and accounting; legal; 

human resources; auditing; environmental services; risk management; technical nuclear 

and power generation support services; and federal government affairs. FPL, PG&E and 

SoCal Edison maintain that intra-system sales of these services at cost should be 

permitted even when the system has no centralized service company. 

13. FPL, PG&E and SoCal Edison first note that they do not make sales of these 

services to non-affiliates, and as a result market prices do not exist for them. SoCal 

Edison notes that the Commission acknowledged in Order No. 707 that it has recognized 

that defining a market price for these services is a “speculative task” when dealing with a 

centralized service company, but the Commission fails to recognize that the task is no 

less speculative where the system does not have a centralized service company. FPL 

states that many of the services at issue vary from location to location and provider to 

provider. In a system like its own, these services have been provided in-house for years, 

and the nature of the services as well as the manner in which they are provided reflect 

both the culture and technology choices made by the utility providing these services. 

Because the nature of a service is driven and structured primarily to meet the needs of the 

 11 FPL notes that in its case “engineering and construction” services do not refer to 

the intra-corporate provision of parts or labor. It refers rather to oversight and planning 

functions effectively as an owner’s representative. Actual engineering and construction 

services with respect to new plants are provided by third-party engineering and 

construction companies at negotiated rates. 
Docket No. RM07-15-001 - 9 - 

franchised public utility, it is virtually impossible to establish a market or a market price 

for it. 

14. SoCal Edison challenges the reasoning underlying the Commission’s denial of atcost pricing for general administrative services a franchised public utility provides to 

system companies, i.e., that this pricing standard 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. SoCal Edison argues that where the utility is not making any market-based sales of 

these services, it is not “foregoing” any profits. It suggests that there is no evidence in 

the record for the Commission’s assumption that utilities would forego profits if the 

Commission did not adopt a higher of cost or market standard, and thus, no basis for the 

Commission’s rejection of an at-cost pricing structure. SoCal Edison contends that the 

Commission should acknowledge the distinction between goods and services developed 

for sale on the open market (for which affiliates should be charged the higher of cost or 

market price) and those services that are not intended for sale and can be provided to 

affiliates at their fully-loaded cost.12

15. FPL, PG&E and SoCal Edison argue that at-cost pricing in these circumstances 

(i.e., where the franchised public utility is a member of a single-state holding company 

 12 SoCal Edison states that fully-loaded costs include the direct cost of each 

employee’s time plus adders to cover indirect costs such as employee benefits and other 

overhead items. 
Docket No. RM07-15-001 - 10 - 

and provides services only to affiliates, but not on the open market, and operates in a 

single-state context) leads to significant economies of scale. SoCal Edison states that 

while Order No. 707 recognizes the efficiencies and economies of scale that benefit 

captive customers when general administrative services are provided across an enterprise, 

instead of being duplicated by each separate entity within a holding company structure, 

the order fails to recognize similar efficiencies and economies of scale in a single-state 

context where the corporate structure does not include a formal centralized services 

company, but where a franchised utility often may provide similar in-house corporate 

administrative services to the rest of the corporate enterprise. 

16. PG&E argues that at-cost provision of goods and services promotes economies of 

scale, and as long as the non-utility companies within a family are not charging more than 

the cost of the services, and the utilities involved are recovering their costs of providing 

any services they provide to others within the family, utility ratepayers will receive the 

cost advantages of the economies of scale from in-house services and will be insulated 

from cross subsidizing other companies and their customers. 

17. FPL argues that customers will lose the benefit of established efficiencies, 

expertise, and economies of scale, with no real countervailing benefit if at-cost pricing 

cannot be used in these circumstances. FP&L asks the Commission to clarify that when 

companies in a holding company system supply to each other non-power goods or 

services comparable to those provided by a centralized service company, then those nonpower goods and services may be provided at fully-loaded cost as a reasonable proxy for 
Docket No. RM07-15-001 - 11 - 

market price. FPL argues that a fully-loaded cost standard has avoided the time and 

expense of formal requests for proposal procedures to “market test” in theory every 

provision of regularized and ongoing support services. An at-cost standard allows 

immediate use of shared corporate technical expertise in the most efficient and costeffective manner. 

18. These commenters also argue that customers of franchised public utilities are 

protected from affiliate abuse when general administrative services are shared at their 

fully-loaded costs, i.e., costs designed to reflect the total corporate costs of providing a 

service. FP&L states that fully-loaded cost reflects the total cost to provide a particular 

service, including corporate overhead and other general expenses.13 Edison Electric 

Institute (EEI) argues that there should at least be a strong presumption that the at-cost 

 13 FPL states that these expenses include (1) salaries, incentives, commissions, 

bonuses, rewards; (2) insurance; (3) paid time off such as vacation, etc., (4) FICA and 

miscellaneous taxes; (5) retirement planning/401k; (6) office infrastructure (office space, 

furniture, utilities); (7) office equipment (computer, software, FAX, Printer, UPS, Copier, 

etc.); (8) telecom & internet; (9) operational/functional management and oversight; 

(10) human resources and administration; (11) finance and payroll; (12) miscellaneous 

fringe and welfare benefits; (13) training and education; and (14) travel expenses. FP&L 

states that it organizes costs into three categories: (a) “direct costs,” i.e., costs of 

resources used exclusively to provide services that are readily identifiable to an activity 

and used to indicate work that directly benefits a business unit other than the provider; 

(b) “assigned costs” or the costs of resources used jointly to provide both regulated and 

non-regulated activities that are apportioned using direct measures of cost causation; and 

(c) “unattributable” costs or costs of resources shared by both regulated and nonregulated activities for which no causal relationship exists. The costs in this final 

category are accumulated and allocated to both regulated and non-regulated activities 

using an affiliate management fee based on the “Massachusetts Formula,” which FPL 

says is a long-recognized regulatory methodology of cost allocation. 
Docket No. RM07-15-001 - 12 - 

standard is appropriate when dealing with services of this type, barring a Commission or 

ratepayer concern, which can be explored on a case-by-case basis. It states that otherwise 

the new rules could be read to preclude even utility-to-centralized service company 

provision of such services at cost, requiring the services to be priced higher than at cost 

by one utility to the detriment of the customers of another utility that is a client of the 

centralized service company. 

19. SoCal Edison states that when affiliates are charged fully-loaded cost for such 

services, the ability to leverage these services and gain economies of scale ultimately 

benefits the utility’s customers. 

20. EEI states that there is an array of services that companies within the family can 

provide to one another at a substantial savings because of economies of scale and by 

keeping the services in-house rather than having to obtain the services in the market, 

where additional overhead and rates of return must be covered. EEI argues that the atcost provisions of Order No. 707 should apply broadly to companies within a family of 

companies that provide services to each other of the type provided by centralized service 

companies, even where the system does not have a formal centralized service company. 

EEI states that there should be no distinction between utility and non-utility affiliates to 

this extent. It maintains that a market price standard should apply only in cases where the 

seller makes external sales of these non-power services. 

21. EEI and PG&E also argue that the Commission has failed to address or to resolve 

the potential for conflict between the Commission’s rules and state affiliate transaction 
Docket No. RM07-15-001 - 13 - 

and cross subsidy requirements that may apply to the same transactions.14 EEI argues 

that many states already have affiliate transaction provisions in place, and those 

provisions are specifically aimed at protecting captive retail customers. It maintains that 

the Commission should more fully accommodate the state provisions in this instance, as 

the Commission’s final rule is aimed at protecting the same customers that state 

requirements seek to protect. EEI and PG&E argue that the states have a special interest 

in, and responsibility for, overseeing costs affecting these customers, and states have 

been fulfilling that role for many years. 

22. PG&E argues that the Commission should defer to state reviews and approvals of 

affiliate transactions in order to avoid unnecessary conflict. It argues that the 

Commission’s approach to affiliate transactions fails to address or to resolve the potential 

for conflict between Commission requirements and state affiliate transaction and cross 

subsidy requirements that may apply to the same transactions. PG&E argues that to 

avoid conflict, the Commission should grant a blanket waiver of the final rule’s 

requirements applicable within any state that already oversees affiliate transactions to 

protect against cross-subsidization, and the waiver should apply to company operations 

covered by the state provisions. PG&E maintains that waivers of this type would be 

consistent with waivers the Commission has authorized for single-state utilities in Order 

 14 National Grid USA (National Grid) makes a similar argument which we discuss 

separately below. 
Docket No. RM07-15-001 - 14 - 

No. 667. EEI supports these waivers also. National Grid argues that if the Commission 

does not defer to state regulation, it should provide a process for public utilities to get a 

waiver of the Commission’s regulations` for certain transactions based on a showing that 

those transactions are already subject to adequate regulation at the state level. 

Commission Determination

23. As discussed further below, we find the arguments in favor of permitting 

companies within a single-state holding company system that does not have a centralized 

service company to provide each other general administrative and management services 

at cost to be persuasive, and we will therefore grant rehearing on this issue. Accordingly, 

we are revising our rules to permit affiliates within a single-state holding company 

system, as defined by our rules,15 that does not have a centralized service company to 

provide “at cost” to other affiliates in the system the kinds of services typically provided 

by centralized service companies and the goods to support those services.16 We stress 

 15 18 CFR 366.3(c)(1) (defining a single-state holding company as a holding 

company that derives no more than 13 percent of its public-utility company revenues 

from outside a single state). The definition exempts revenues derived from exempt 

wholesale generators, foreign utility companies, and qualifying facilities for these 

purposes. 

16 Section 367.1(a)(7) of the Commission’s regulations defines a centralized 

service company as “a service company that provides services such as administrative, 

managerial, financial, accounting, recordkeeping, legal or engineering services, which are 

sold, furnished, or otherwise provided (typically for a charge) to other companies in the 

same holding company system.” This definition also states that “[c]entralized service 

companies are different from other service companies that only provide a discrete good 

or service.” 
Docket No. RM07-15-001 - 15 - 

that this permission applies only to internal general administrative and management 

services and only to services in that category that are not provided to unaffiliated third 

parties. While our grant of rehearing necessarily applies also to charges for a limited set 

of goods in the form of supplies and equipment acquired to support administrative and 

management functions, as well as office space and other general overhead items, we note 

in particular that it does not apply to inputs to utility operations such as fuel supply, 

construction, or real estate17 that have a clearly identifiable market price,18 nor does it 

apply to the implementation of major projects that are easily susceptible to competitive 

bidding, such as construction projects. 

24. There are several reasons why the Commission has concluded that it is appropriate 

to expand the use of at-cost pricing beyond the context of centralized service companies 

to also allow at-cost pricing for the provision of general and administrative services and 

the goods to support those services between members of a single-state holding company 

system where those members do not sell such goods or services to non-affiliates. First, as 

we stated in Order No. 707 with respect to the same types of services being provided by 

centralized service companies in multi-state systems, defining a market price for general 

and administrative services is a speculative task.19 The task is no more speculative in the 

 17 See Order No. 707, FERC Stats. & Regs. ¶ 31,264 at P 62 n.57. 

18 We discuss the issue of fuel adjustment clauses further below. 

19 Order No. 707, FERC Stats. & Regs. ¶ 31,264 at P 72. 
Docket No. RM07-15-001 - 16 - 

context of a multi-state holding company with a centralized service company than in the 

context of a single-state holding company without a centralized service company. Thus, 

we agree that, when dealing with general administrative and management services, as a 

general matter the critical issue is the type of service involved, not whether it is supplied 

through a centralized service company or through a different type of system company. 

25. Second, SoCal Edison points to our statement in Order No. 707 that at-cost pricing 

“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.”20 We recognize that this statement 

concerning foregone profits does not apply where the utility does not provide those goods 

or services to non-affiliates. We therefore agree with SoCal Edison that where a utility is 

not making sales of a service to a non-affiliate, it cannot be said with certainty to be 

foregoing any profit. 

26. Third, we recognize that efficiencies and economies of scale associated with 

providing these types of services and the goods to support those services between 

members within the single-state holding company system can benefit captive customers 

because the goods and services often can be provided less expensively, at cost, than if 

they were purchased from outside the system by individual system members. As a 

related matter, we do not believe it would serve the public interest to have rules that 

 20 Id. P 70. 
Docket No. RM07-15-001 - 17 - 

create an incentive for a single-state holding company to incur additional costs to set up a 

separate centralized service company (that would be allowed to use the at-cost pricing) to 

provide the very same services and the goods to support those services that could be 

provided more inexpensively, e.g., through the investor-owned utility, without a 

centralized service company. While we believe that centralized service companies can 

facilitate regulatory oversight and generally favor their use, we also recognize that they 

may not be the most efficient or least-cost structure for some holding companies. 

27. Finally, we give weight to the fact that where services are provided within a 

single-state holding company context, there may be greater state regulatory authority to 

oversee these types of services transactions and the goods to support those services than 

in the multi-state context, and this state oversight will serve to complement that of the 

Commission in protecting customers against inappropriate cross-subsidization. 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.21 As we stated in Order Nos. 667 and 

707, the Commission will entertain complaints that at-cost pricing exceeds the market 

price. 

28. We recognize that many of the above considerations would also apply to general 

and administrative goods and services provided between members in multi-state holding 

companies that do not have centralized service companies. However, we are reluctant to 

 21 See Order No. 707, FERC Stats. & Regs. ¶ 31,264 at P 73. 
Docket No. RM07-15-001 - 18 - 

grant a broad generic exception for those circumstances. The detailed accounting and 

reporting requirements applicable to centralized service companies greatly assists the 

Commission in regulating those entities in a multi-state context where individual states 

may have less authority to help oversee affiliate transactions. We are willing, however, 

to consider requests for waiver on a case-by-case basis for at-cost pricing in the multistate context, under the same circumstances as for single state holding companies (i.e., 

only for general and administrative services and the goods to support those services and 

only where members of the holding company do not sell such goods and services outside 

the holding company).22 This will allow the Commission to examine each situation to 

ensure that adequate regulatory oversight and protections are in place. The Commission 

acknowledges that many of the arrangements for the intrasystem sharing of 

administrative and management services under discussion here are long standing and, in 

part, have developed in response to state regulatory requirements. The Commission 

agrees with EEI, PG&E and others that the states have a special interest in these matters, 

and, as discussed above, that it is appropriate to take into account such state regulation in 

developing our policies in this area. Accordingly, the existence of state oversight and the 

desire to avoid conflict with state requirements is an important consideration in granting 

 22 We do not anticipate that there would be very many multi-state holding 

companies in this category since most, if not all, of the current multi-state holding 

companies are former registered holding companies under the Public Utility Holding 

Company Act of 1935 that had centralized services companies and still have them. 
Docket No. RM07-15-001 - 19 - 

rehearing and revising our rules as described above and in our willingness to consider 

case-by-case exceptions involving general and administrative services and the goods to 

support those services provided in the multi-state context. We do not want to require 

significant changes to settled practices when these practices are already subject to state 

oversight and where there is no showing that suggests these practices are leading to 

improper cross-subsidization. We believe that our grant of rehearing eliminates the 

potential for conflict between the Commission’s rules and state affiliate transaction and 

cross subsidy requirements that may apply to the same transactions involving general and 

administrative services and the goods to support those services in a single-state holding 

company system. However, to the extent that any conflicts do arise, companies or state 

regulatory authorities may bring this to our attention on a case-by-case basis, and we will 

determine whether case-specific waivers are appropriate. 

29. Commenters have described procedures they use to ensure that customers of 

franchised public utilities are protected from affiliate abuse when general administrative 

and management services are shared among system companies. Our grant of rehearing is 

premised on the assumption that the at-cost sharing of general administrative and 

management services in single-state holding company systems will be conducted using 

rigorous accounting and cost-allocation procedures. It is also premised on the 

assumption that the at-cost standard will be applied in conjunction with measures for the 

fair and reasonable allocation of costs across system companies. In granting rehearing, 

we note that when at-cost principles are applied (whether in the context of multi-state 
Docket No. RM07-15-001 - 20 - 

holding companies or in the context of single-state holding company systems), the 

Commission historically has acted, and will continue to act, under sections 205 and 206, 

whether on an application, a complaint, or on our own motion, to ensure that 

inappropriate costs are not flowed through in jurisdictional rates. 

30. Accordingly, we will amend our regulations to provide that a company in a singlestate holding company system, as defined in 18 CFR 366.3(c)(1), may provide general 

administrative and management non-power goods and services to, or receive such goods 

and services from, other companies in the same holding company system, at cost, 

provided that the only parties to transactions involving these non-power goods and 

services are affiliate or associate companies, as defined in 18 CFR 366.1, of a holding 

company in the holding company system. 

31. We deny FPL’s request for clarification that fully-loaded cost is a reasonable 

proxy for market price. First of all, we see no need to do so in light of our grant of 

rehearing above. Secondly, making fully-loaded cost a proxy for market price 

unnecessarily clouds the distinction between at-cost and market pricing embodied in our 

rules. 

2. Pricing Standards for Particular Affiliate Arrangements

Requests for Rehearing orClarification

32. A number of requests for rehearing or clarification relate to the treatment of 

specific transactions or arrangements under our rules. 
Docket No. RM07-15-001 - 21 - 

33. PG&E argues that a “no higher than the market price” standard is inoperable for 

certain types of entities. It refers specifically to bankruptcy-remote special-purpose 

entities used to raise funds through a securitized financing. PG&E states that these 

entities are structured to operate independently and at arm’s length from their parent so 

that their assets and liabilities would not be consolidated with those of the parent in the 

event of the parent’s or utility’s bankruptcy. PG&E argues that this approach lowers the 

cost of utility financing, but that the special-purpose entities must be fully reimbursed for 

their costs in order to secure a legal opinion in support of their bankruptcy remote status. 

PG&E also believes that the use of special-purpose entities to obtain accounts receivable 

financing might be inconsistent with the Commission’s rules. These entities also must be 

able to recover their costs fully. 

34. Two holding companies with franchised public utility operations in more than one 

state seek clarification or rehearing on transactions specific to their individual operations. 

Xcel Energy Services Inc. (Xcel) argues that Order No. 707 does not expressly deal with 

the pricing for transactions between franchised public utilities. It states that its franchised 

operating companies entered into an umbrella agreement in 2000 that allows for 

incidental transactions in goods and services between the operating companies, such as 

short-term leases of coal rail cars done at cost. Xcel states that this at-cost arrangement 

was consistent with that at-cost principle mandated by the Securities and Exchange 

Commission (SEC) at the time. Xcel requests that its operating companies be allowed to 

continue these incidental transactions. 
Docket No. RM07-15-001 - 22 - 

35. Xcel and National Grid each argue that certain transactions between their 

respective franchised public utilities that are accomplished through their respective 

centralized service companies should be subject to at-cost principles. Xcel notes that the 

Commission’s regulations do not account for non-power goods and services that a utility 

operating company provides to its centralized service company and whose costs may then 

be re-allocated to other franchised public utility operating companies. Xcel states that its 

franchised public utilities share certain information system assets in this way at cost and 

were permitted to do so at cost by the SEC. Xcel seeks clarification that it and its 

operating companies may request a waiver from the Order No. 707 rules to continue atcost arrangements like this that pre-date EPAct 2005 and Order No. 707. 

36. National Grid argues that in Order No. 707 the Commission mischaracterized its 

comments as supporting at-cost pricing for all transactions among affiliates within a 

holding company system. National Grid states that it only proposed symmetrical pricing 

between franchised public utilities and centralized service companies—meaning all 

transactions involving centralized service companies would be priced at cost, no matter 

their direction. It contends that this pricing structure would comply with the affiliate 

rules included in the New York Commission’s order on the merger between National 

Grid and Keyspan. 

37. National Grid argues that the same rationale for justifying at-cost pricing for 

centralized service companies selling non-power goods and services to a franchised 

public utility should apply when a franchised public utility sells non-power goods and 
Docket No. RM07-15-001 - 23 - 

services to the centralized service company, i.e., economies of scale, difficulty defining 

market value, and the Commission’s authority to find at-cost pricing unreasonable in 

specific instances. National Grid states that the Commission’s decision to treat 

centralized service companies like other non-utility affiliates when purchasing goods or 

services from a utility affiliate creates accounting requirements that are much more 

difficult to implement than symmetrical pricing. 

38. National Grid maintains that while the Commission stated in Order No. 707 that 

“stricter” state standards would apply to affiliate transactions, the Commission’s 

approach involves a narrow reading of that term that focuses entirely on price levels.23 

National Grid argues that a state’s restrictions on affiliate transactions may be considered 

highly strict if they require all transactions involving regulated affiliates to be settled at 

fully-loaded cost. National Grid states that its operations currently are subject to strict atcost requirements at the state level that apply to all companies deemed regulated, which 

includes service companies. It argues that inserting Commission price standards into this 

situation will upset arrangements made at the state level in merger proceedings and rate 

cases. National Grid thus maintains that applying the Commission’s rules to transactions 

 23 In Order No. 707, the Commission stated that “to the extent a state has affiliatepricing 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.” Id. P 74. 
Docket No. RM07-15-001 - 24 - 

among regulated affiliates will depend on how the term “strict” is to be interpreted in this 

context. 

39. National Grid proposes that, because of the special status of centralized service 

companies, it may be preferable to distinguish between regulated and non-regulated 

companies rather than between utilities and non-utilities, in that centralized service 

companies are regulated at both the state and federal level. National Grid maintains that 

this would be consistent with the Commission’s position that its policies should not 

preempt state rules. 

40. FirstEnergy Service Company (FirstEnergy) argues that the Commission should 

clarify that public utilities subject to regulation under Order No. 707 are free to request a 

waiver of one or more, but not all, of the Order No. 707 affiliate cross-subsidization 

restrictions. It maintains that this clarification will provide additional certainty when 

determining how best to comply with Commission regulation of affiliate crosssubsidization restrictions. 

Commission Determination

41. The Commission will defer responding to the issues raised by PG&E with respect 

to the implications of our affiliate pricing rules for special-purpose entities created for 

financing purposes, such as bankruptcy-remote entities. It appears from PG&E’s brief 

discussion that this is a generic issue and that there may be a lack of clarity with respect 

to whether the Commission considers bankruptcy-remote entities to be providing 

“services” covered by the Order No. 707 pricing restrictions . Accordingly, consistent 
Docket No. RM07-15-001 - 25 - 

with our goals of trying to clarify areas of confusion with respect to our regulations and 

providing greater regulatory certainty to the regulated community where possible, the 

Commission intends to obtain additional input from industry and others regarding the 

activities of bankruptcy-remote entities and their relationship to franchised public 

utilities, and thereafter to issue a guidance order with respect to whether the Commission 

considers these entities to be providing services covered by the rule and any related 

issues. In the interest of finalizing this rule, however, we will undertake such inquiries 

outside the context of this particular rulemaking. 

42. With respect to Xcel and National Grid’s concerns, we will address on a case-bycase basis issues regarding transactions between affiliated franchised public utilities or 

between franchised public utilities that include intermediate transactions with centralized 

service companies. First, we will consider whether pricing or other restrictions need to 

be imposed on transactions between two or more franchised public utilities on a case-bycase basis. Such transactions are not covered by this rule, which applies only to 

transactions between franchised public utilities and either a market-regulated power sales 

affiliate or a non-utility affiliate.24 Second, to the extent that the requirements of this rule 

 24 Transactions involving only two or more franchised public utilities may raise a 

different type of cross-subsidization issue (involving whether the customers of one 

franchised public utility would be subsidized at the expense of the customers of the other 

franchised public utility). The Commission will address such issues on a case-by-case 

basis, as appropriate, in the context of a section 205 filing, a section 206 complaint, or a 

section 203 merger application. 
Docket No. RM07-15-001 - 26 - 

may be implicated because transactions for goods and services between franchised public 

utilities include intermediate transactions with a centralized service company, we clarify 

in response to National Grid and Xcel that a holding company and its operating 

companies may seek a waiver of the requirements of this rule on a case-by-case basis. 

43. In response to FirstEnergy, we clarify that public utilities subject to regulation 

under Order No. 707 are free to request a waiver of the Order No. 707 affiliate crosssubsidization restrictions. 

3. Materiality Threshold 

Request for Rehearing or Clarification

44. EEI argues that, to avoid imposing an inappropriate burden while achieving the 

Commission’s policy and regulatory goals, Order No. 707 should incorporate materiality 

thresholds per class of transactions per provider of either $1 million or 1 percent of utility 

gross revenues, whichever is less, before the affiliate transaction preapproval and pricing 

requirements apply. It notes that the Commission recently proposed using thresholds in 

its notice of proposed rulemaking on FERC Form 1, 1-F, and 3-Q, and their use here will 

allow companies to avoid scrutinizing thousands of relatively minor transactions. 

Commission Determination

45. We will deny EEI’s request for a materiality threshold for the application of the 

Order No. 707 rules. While we agree in principle that a materiality threshold may be 

appropriate, EEI has not fully explained how its proposal would function when applied. 

In particular, EEI has not explained what it means by a “class” of transactions, and the 
Docket No. RM07-15-001 - 27 - 

degree to which the threshold would apply in practice appears to depend, in part, on how 

broadly or narrowly a category is drawn. However, it may be appropriate for the 

Commission to revisit this issue after gaining additional experience with these rules. 

B. Relationship of Pricing Restrictions to Other Commission Regulations

46. A number of commenters argue that the rules adopted in Order No. 707 may 

conflict with other Commission regulations. We address each potential conflict raised by 

commenters. 

1. PURPA Regulations

Request for Rehearing or Clarification

47. EEI argues that the power transaction restrictions implemented in Order No. 707 

should not apply to mandatory purchase obligation sales from qualifying facilities (QFs) 

under the Public Utility Regulatory Policies Act of 1978 (PURPA).25 It maintains that 

prohibiting affiliate power sales that are not first approved under FPA section 20526

could, if taken literally, require pre-authorization for energy sales made by a QF with 

market-based rate authority to an affiliated utility with captive customers. EEI asserts 

that this could be the case even where the utility has a mandatory obligation under 

 25 16 U.S.C. 824a-3. 

26 18 CFR 35.44(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”). 
Docket No. RM07-15-001 - 28 - 

PURPA to purchase the energy. EEI believes that the Commission did not intend this 

result because there is no reason for additional review of sales under a mandatory 

purchase agreement that is subject to Commission review. 

Commission Determination

48. The Commission agrees with EEI that it did not intend that the pre-authorization 

requirement in question would apply to QF sales under contracts based on a mandatory 

purchase obligation under PURPA where the QF has market-based rate authority. 

Accordingly, we clarify that the pre-authorization requirement does not apply to those 

sales. 

2. Fuel Adjustment Clause Regulations

 Request for Rehearing or Clarification

49. EEI argues that to avoid conflicts, the non-power transaction provisions in the 

regulations implemented by Order No. 707 should be amended to exclude fuel purchases 

covered by the Commission’s fuel adjustment clause regulations at 18 CFR 35.14(a)(7). 

It asserts that the new requirement could be read to apply to a purchase subject to the fuel 

adjustment clause regulations regardless of prior approval of the fuel price by a 

regulatory body. The new § 35.44(b) applies a “no higher than market” ceiling to 

purchases of goods and services that may differ from fuel prices already authorized by a 

regulatory body and currently allowed for use under § 35.14(a)(7). EEI argues that if 

§ 35.44(b) controls in such circumstances, it could require utility fuel subsidiaries to 

accept a lower price even if a higher price has been approved by a state regulatory body. 
Docket No. RM07-15-001 - 29 - 

EEI also argues that determining the market price for a specific, delivered fuel can be 

very difficult because differences in quality and transportation costs affect the price. 

Commission Determination

50. The Commission clarifies that the regulations issued under Order No. 707 

pertaining to sales of non-power goods and services do not apply to fuel purchases 

covered by the Commission’s fuel adjustment clause regulations. Those regulations 

incorporate extensive oversight measures, including a provision that fuel charges by 

affiliated companies that do not appear to be reasonable may result in the suspension of 

the fuel adjustment clause or an investigation under FPA section 206. Accordingly, we 

will amend our regulations to exempt from our affiliate pricing restrictions transactions 

for fuel where the price of fuel from a company-owned or controlled source is found or 

presumed under 18 CFR 35.14 to be reasonable and includable in the adjustment clause. 

3. Market-Based Rate Regulations

Requests for Rehearing

51. FirstEnergy notes that under Order No. 707, a public utility that received a waiver 

of the market-based rate affiliate restrictions based on a finding that it had no captive 

customers can be exempted from the new affiliate cross-subsidization restrictions by 

making an informational filing referencing that finding. FirstEnergy argues that there is 

no need to impose on public utilities that have received waivers of the market-based rate 

affiliate restrictions the additional burden of making an informational filing in order to 
Docket No. RM07-15-001 - 30 - 

avoid the application of duplicative Order No. 707 affiliate cross-subsidization 

restrictions. 

52. FirstEnergy also notes that while the Commission may have waived a public 

utility’s market-based rate affiliate restrictions, the Commission may not have made an 

express “finding” as to whether the relevant public utility served captive customers, and it 

is thus unclear whether those public utilities will be entitled to rely on the Commission’s 

waiver of market-based rate affiliate restrictions for purposes of the Order No. 707 

affiliate restrictions. FirstEnergy maintains that the difficulty will be compounded by the 

unlikelihood of a Commission order in response to the informational filing or some other 

confirmation that the Commission has accepted or approved that filing. 

53. FirstEnergy argues that to the extent that affiliate cross-subsidization compliance 

issues arise, it will be unclear whether the Commission’s market-based rate affiliate 

restrictions, Order No. 707’s affiliate cross-subsidization restrictions, or both, apply to a 

given transaction and to what effect. FirstEnergy argues that the Commission should 

delete the new restriction on affiliate sales of electric energy and rely instead on its 

existing market-based rate affiliate regulations to govern relevant wholesale sales of 

electric energy at market-based rates. In the alternative, FirstEnergy requests that the 

Commission clarify the relation between these two requirements. 
Docket No. RM07-15-001 - 31 - 

Commission Determination

54. We disagree with FirstEnergy that it is unnecessary to require public utilities that 

have received waivers of the market-based rate affiliate restrictions to make 

informational filings referencing that filing for purposes of the Order No. 707 regulations. 

The minimal burden this requirement might create does not outweigh the benefit in terms 

of administrative efficiency and transparency that would accrue to the industry and the 

Commission through this procedure. 

55. FirstEnergy expresses general concerns about the effect a Commission waiver of a 

public utility’s market-based rate affiliate restrictions would have for purposes of Order 

No. 707. As the Commission explained in Order No. 697, “where a seller demonstrates 

and the Commission agrees that it has no captive customers, the affiliate restrictions will 

not apply.”27 We clarify that the informational filing with respect to Order No. 707 need 

only consist of a copy of, and a citation to, the Commission order finding that the public 

utility does not serve captive customers.28 Further Commission action on the issue thus 

would be unnecessary, absent any change in the facts on which the Commission’s finding 

 27 Market-Based Rates for Wholesale Sales of Electric Energy, Capacity and 

Ancillary Services by Public Utilities, Order No. 697, 72 FR 39,904 (July 20, 2007), 

FERC Stats. & Regs. ¶ 31,252, at P 552 (2007), clarified, 121 FERC ¶ 61,260 (2007), 

order on reh’g, Order No. 697-A, 73 Fed. Reg. 25,832 (May 7, 2008), FERC Stats. & 

Regs. ¶ 31,268. 

28 The Commission does not intend to set these informational filings for notice and 

comment, or issue orders on them. 
Docket No. RM07-15-001 - 32 - 

was based. This clarification that the informational filing consists of a copy of, and a 

citation to, the Commission’s finding should adequately address FirstEnergy’s concern 

that there might be an instance in which the Commission has not made an express finding 

on whether the public utility serves captive customers. 

56. The Commission denies FirstEnergy’s requests to delete the new regulations and 

rely on existing pricing restrictions under its market-based rate regulations. FirstEnergy 

has misinterpreted the scope and applicability of the regulations adopted in Order 

No. 707. As the Commission stated in Order No. 707, the restrictions imposed there are 

prophylactic and based on restrictions 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. The Commission recognized a regulatory gap and acted to expand the 

range of entities and transactions to which those restrictions apply to ensure that captive 

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

activities of non-utility affiliates. 

 

4. Order No. 667 Requirements

Requests for Rehearing

57. FirstEnergy argues that Order No. 707 duplicates requirements set forth in the 

rules on Commission review of affiliate transactions and protection of captive customers 

implemented in Order No. 667, which promulgates the Commission’s regulations under 
Docket No. RM07-15-001 - 33 - 

the Public Utility Holding Company Act of 2005 (PUHCA 2005).29 It maintains that this 

could result in confusion and uncertainty. It will, for example, be unclear whether the 

new Order No. 707 regulations, the existing Order No. 667 pricing policy, or both will 

apply to issues arising in connection with centralized service companies. FirstEnergy 

also argues that it is unclear whether the Commission’s grant of waiver of the Order No. 

707 regulations, including the regulation pertaining to service companies, would affect 

the regulatory requirements set forth in Order No. 667. 

58. FirstEnergy argues that to prevent confusion, the Commission should delete 

centralized service company at-cost requirements set forth in Order No. 707 and rely 

instead on its existing pricing policy set forth in Order No. 667 to regulate transactions 

with centralized service companies. Any codification of pricing policy for centralized 

service companies should be done in the Commission’s regulations under PUHCA 2005. 

In the alternative, FirstEnergy requests that the Commission clarify the relation between 

the policies set forth in Order No. 667 and the regulations issued under Order No. 707 

expressly applicable to centralized service companies. 

Commission Determination

 29 Energy Policy Act of 2005, Pub. L. No. 109-58, secs. 1261 et seq., 119 Stat. 594 

(2005); Repeal of the Public Utility Holding Company Act of 1935 and Enactment of the 

Public Utility Holding Company Act of 2005, Order No. 667, FERC Stats. & Regs. 

¶ 31,197 (2005), order on reh’g, Order No. 667-A, FERC Stats. & Regs. ¶ 31,213, order 

on reh’g, Order No. 667-B, FERC Stats. & Regs. ¶ 31,224 (2006), order on reh’g, Order 

No. 667-C, 118 FERC ¶ 61,133 (2007). 
Docket No. RM07-15-001 - 34 - 

59. We deny FirstEnergy’s request that we delete centralized service company at-cost 

requirements set forth in Order No. 707 and rely instead on the existing pricing policy set 

forth in Order No. 667 to regulate transactions with centralized service companies. 

While the Commission discussed service company issues at length in Order No. 667 and 

Order No. 667-A, and stated that it would accept the use of an “at-cost” standard for 

centralized service company non-power goods and services, it did not codify the standard 

in the PUHCA 2005 requirements themselves. While the Commission’s PUHCA 2005 

regulations allow for Commission review of holding company system cost allocation for 

non-power goods and services, which is highly relevant to the general issue of crosssubsidization, those regulations do not codify affiliate pricing standards. Moreover, to 

the extent there is overlap between this rule and the pricing policy we announced in the 

preamble of Order No. 667 and Order No. 667-A, our regulations here are consistent 

because they apply the standard that was announced in Order No. 667. We therefore do 

not agree that Order No. 707 and Order No. 667 are inappropriately duplicative, and we 

do not see the potential for conflict to which FirstEnergy alludes. 

C. Captive Customers

60. The regulations issued in Order No. 707 apply to franchised public utilities that 

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

transmission facilities. These regulations define captive customers as any wholesale or 

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

regulation. 
Docket No. RM07-15-001 - 35 - 

Requests for Rehearing

61. EEI argues that Order No. 707 should not treat wholesale customers that purchase 

electricity under competitive conditions as “captive customers.” It states that the 

Commission’s transmission open access rules generally provide competitive choice. EEI 

argues that given the widespread availability of choice at the wholesale level, it should be 

unusual for a wholesale customer to be captive and require the affiliate transaction preapproval and pricing protections set out in Order No. 707. EEI states that while the 

Commission may want to allow individual wholesale customers to raise concerns in 

individual rate proceedings, it encourages the Commission not to treat all wholesale 

customers as presumptively captive, but instead to treat them as presumptively noncaptive. 

Commission Determination

62. We do not agree with EEI’s request in this regard. As stated in Order No. 707 and 

Order 697-A, wholesale customers may have choice, but the Commission will “err on the 

broad side of the definition of captive customers.”30 As the Commission noted, although 

we are erring on the side of a broad definition of captive customers, we recognize that 

there may be circumstances where customers fall within our definition but nevertheless 

there are sufficient protections in place to protect such customers against any risk of harm 

 30 Order No. 707, FERC Stats. & Regs. ¶ 31,264 at P 43; see also Order No. 697-

A, FERC Stats. & Regs. ¶ 31,268 at P 199. 
Docket No. RM07-15-001 - 36 - 

from transactions between the franchised public utility and its affiliates. We noted that it 

is possible that wholesale customers with fixed rate contracts would be adequately 

protected, but we explained that we are not prepared at this time to generically exclude 

such customers from the definition of captive customers. Instead, we will allow 

franchised public utilities, on a case-by-case basis, to seek a waiver of the affiliate 

restrictions if they feel that adequate protections are in place to protect any customers that 

fall under the “captive customer” definition. We see no reason to change this approach. 

D. Transmission Facilities

63. In Order No. 707, the Commission made its restrictions on non-power goods and 

services transactions applicable to franchised public utilities that own or provide 

transmission service over transmission facilities subject to the Commission’s jurisdiction. 

Requests for Rehearing

64. National Grid and EEI argue Order No. 707 should not apply to franchised public 

utility companies that do not have captive customers simply because the utility 

companies own or provide service over jurisdictional transmission facilities. They argue 

that this issue did not receive proper notice and the Commission did not sufficiently 

explain what EEI claims is a dramatic expansion in the scope of the rule that was not 

discussed in the proposed rule. They also argue that the Commission already has 

oversight of such companies under FPA sections 205 and 206, and the expansion is 

therefore unnecessary. 
Docket No. RM07-15-001 - 37 - 

65. EEI encourages the Commission to delete the provision that makes the new 

regulations applicable to public utilities that do not have captive customers but simply 

own or provide service over jurisdictional transmission facilities. EEI asserts that if the 

Commission does not do this, it should discuss the reasons for not doing so and invite 

further public comment. 

66. Similarly, EEI argues that franchised public utilities that have received a waiver of 

the market-based rate affiliate restrictions because they have no captive customers but 

that own, or provide service over, jurisdictional transmission facilities should not have to 

seek a waiver or make an informational filing to avoid Order No. 707 pricing restrictions. 

EEI states if a further waiver or informational filing is required, the Commission should 

clarify the showing required to secure a waiver or what the informational filing must 

contain. 

Commission Determination

67. We deny EEI’s request to delete the provision. As a preliminary matter, we 

disagree that there has been insufficient notice that these rules would apply to franchised 

public utility companies providing service over jurisdictional transmission facilities. 

While due process and the Administrative Procedure Act impose an obligation on 

agencies to provide adequate notice of issues to be considered,31 that obligation is 

 31 Public Service Commission of the Commonwealth of Kentucky v. FERC, 397 

F.3d 1004 (D.C. Cir. 2005), citing Williston Basin Interstate Pipeline Co. v. FERC, 165 

F.3d 54 (D.C. Cir. 1999); see 5 U.S.C. 554(b)(3). 
Docket No. RM07-15-001 - 38 - 

satisfied in this rulemaking by providing the terms or substance of the proposed rule and 

a description of the subjects and issues involved.32 The coverage in Order No. 707 of 

franchised public utilities that provide service over jurisdictional transmission facilities 

was a logical outgrowth of the Affiliate Transactions Notice of Proposed Rulemaking and 

its purpose, i.e., to expand the coverage of the affiliate restrictions established in the 

context of blanket market-based rate authorizations and our merger proceedings and to 

codify them in our regulations. Indeed, the American Public Power Association (APPA) 

and the National Rural Electric Cooperative Association (NRECA) specifically raised the 

issue in response to the Affiliate Transactions Notice of Proposed Rulemaking, arguing 

that the Commission should clarify the regulatory text in the final rule to ensure that, 

consistent with existing Commission affiliate cross-subsidization policy and the 

Commission’s existing FPA section 203 and PUHCA 2005 regulations, the new generic 

cross-subsidization regulation explicitly protects transmission customers.33 The 

Administrative Procedure Act “does not require an agency to publish in advance every 

precise proposal which it may ultimately adopt as a rule,” and this is particularly true 

when proposals are adopted in response to comments from participants in the rulemaking 

 32 See 5 U.S.C. 553(b)(3). 

33 APPA/NRECA Sept. 6, 2007 Comment at 5-7. 
Docket No. RM07-15-001 - 39 - 

proceeding.34 Order No. 707 thus does not unduly change the scope of this proceeding. 

In any event, the parties’ ability to seek rehearing resolves any due process issues. 

68. Regarding the substance of the commenters’ arguments, as noted in Order 

No. 707, some franchised public utilities do not have captive customers, but own or 

provide transmission service over jurisdictional transmission facilities,35 and customers of 

such franchised public utilities are entitled to the same customer protection as those that 

are considered captive customers. Transmission customers should not have to bear the 

costs of inappropriate cross-subsidization. This provision was added to the Exhibit M 

requirement in Order No. 669-A, protecting customers of such franchised public utilities 

from cross-subsidization in the merger context. The addition of the language here allows 

for the continued protection of these customers beyond the confines of our decisions 

under FPA section 203. Finally, while we recognize that the Commission oversees 

transmission rates under sections 205 and 206, the affiliate pricing rules are preventative 

in nature, allowing for greater protection of such customers. Thus, in order to grant 

waiver of the Order No. 707 regulations, the Commission would need to be assured that 

the transmission customers of these franchised public utilities that do not have captive 

customers do not bear the costs of inappropriate cross-subsidization. 

 34 Daniel Int’l Corp. v. OSHA, 656 F.2d 925, 932 (4th Cir. 1981). 

35 Order No. 707, FERC Stats. & Regs. ¶ 31,264 at P 48. 
Docket No. RM07-15-001 - 40 - 

69. In response to EEI’s request that we specify what further action would be required 

to obtain a waiver, the public utility would need to demonstrate that the transmission 

customers of a franchised public utility that does not have captive customers do not bear 

the costs of inappropriate cross-subsidization. 

E. Reporting Requirements

70. In the Affiliate Transactions Notice of Proposed Rulemaking, the Commission 

asked whether it should adopt any after-the-fact reporting requirements for transactions 

covered by the proposed regulations. In Order No. 707, the Commission concluded that 

its current reporting regulations are adequate to ensure compliance with the new 

regulations. The Commission also noted that in addition to the information gathered 

through Form No. 1, it already collects affiliate power sales information from franchised 

public utilities through EQRs and market-based rate requirements. In addition, the 

Commission’s existing record retention requirements in Parts 125 and 225 of its 

regulations already apply to transactions involving non-power goods and services. 

Request for Rehearing

71. APPA and NRECA maintain that Order No. 707 inappropriately relies on existing 

record-retention requirements that do not mandate any reporting. APPA and NRECA 

note that Order No. 667 requires centralized service companies in holding company 

systems to file annual reports on FERC Form No. 60 that contain certain information 

on affiliate transactions. But they contend that neither Order No. 667 nor new Order 

No. 707 requires filings by single-purpose service companies or other associate 
Docket No. RM07-15-001 - 41 - 

companies. They argue that this leaves the Commission, state regulators, wholesale and 

transmission customers, and the public with a significant information gap when it comes 

to evaluating whether cross-subsidization is in fact occurring. 

Commission Determination

72. The Commission continues to believe that no additional reporting requirements are 

necessary at this time. We note that the Commission’s regulations already provide that, 

unless otherwise exempted or granted a waiver, every service company in a holding 

company system, including a special-purpose company (e.g., a fuel supply company or a 

construction company), that does not file a FERC Form No. 60 must instead file a 

narrative description of the service company’s functions during the prior calendar year.36

Moreover, the Commission has a longstanding practice of relying on its section 205 and 

206 ratemaking reviews to disallow passing non-power goods and services costs through 

jurisdictional rates if those costs are not just and reasonable or are inappropriately 

allocated. It relies on section 205 rate reviews and on its audit function to deter 

inappropriate allocation of costs. This is the longstanding, traditional approach to this 

issue and the reason why record retention requirements are important. There is no 

evidence that existing practices are not effective. Finally, given the potential scope of the 

information in question, the Commission is not prepared to impose new reporting 

 36 18 CFR 366.23 (describing FERC-61). 
Docket No. RM07-15-001 - 42 - 

requirements without a demonstrated need for such reporting and a record to support a 

finding that a reporting system would not create unnecessary burdens. 

F. Grandfathered Agreements

73. The Commission clarified in Order No. 707 that the new pricing rules are 

prospective and will apply to any contracts, agreements or arrangements entered into on 

or after the effective date of the order. To the extent different pricing was in effect for 

any contract, agreement or arrangement entered into prior to the effective date, the 

Commission stated it may remain in effect. But the Commission also stated that it could 

on its own motion, or upon complaint, institute a section 206 proceeding to determine in 

specific instances whether costs incurred by a public utility under grandfathered 

contracts, agreements or arrangements are just, reasonable and not unduly discriminatory 

or preferential. 

Request for Rehearing

74. FPL asks the Commission to clarify that the Commission’s position on this issue 

covers all existing arrangements where affiliates provide non-power goods and services 

equivalent to those that would be provided by a centralized service company. FPL argues 

that the Order No. 707 restrictions do not by their terms supersede the Order No. 697 

restrictions on affiliate transactions, and the Commission should seek consistency in its 

regulations on these matters. FPL argues that the Commission should clarify that the 

grandfathering language in Order No. 707 also applies with respect to the requirements of 
Docket No. RM07-15-001 - 43 - 

Order No. 697 where existing inter-affiliate transactions involving non-power goods and 

services are comparable to those provided by a centralized service company. 

75. APPA and NRECA contend that the new rules should be applied prospectively to 

all transactions occurring after the effective date of Order No. 707. They state that the 

Commission undermined the purpose and effect of Order No. 707 by generically 

exempting all affiliate transactions occurring under contracts, agreements, and 

arrangements made before the rule’s effective date. They argue that this will permit 

transactions that violate the new regulations to continue for the entire term of a long-term 

affiliate contract, delaying the rule’s effectiveness for years, in some cases. APPA and 

NRECA also maintain that a public utility otherwise covered by the new restrictions can 

move quickly to execute prior to the effective date a new long-term agreement with its 

affiliates that violates the new restrictions. 

76. APPA and NRECA maintain that the Commission’s sole justification for its action 

was that it would be unjust and detrimental to the financial integrity of holding 

companies to void pricing arrangements retroactively. APPA and NRECA argue that the 

Commission offered no evidence to support this claim, and this absence of evidence 

stands in contrast to the extensive and explicit justification of the need for pricing 

restrictions to protect the captive customers and transmission customers of public 

utilities. They thus argue that the Commission’s action is arbitrary and capricious 

because the Commission failed to provide a rational connection between the facts found 

and the choice made. 
Docket No. RM07-15-001 - 44 - 

77. APPA and NRECA maintain that grandfathering existing agreements violates the 

Commission’s statutory mandate under section 206. They argue that, to the extent the 

Commission’s position rests on a finding that pre-existing affiliate contacts are not 

“unjust, unreasonable, unduly discriminatory or preferential,” Order No. 707 does not 

support such a finding with any evidence, or explain how such a finding squares with the 

Commission’s basic findings on the need for the new rules. 

Commission Determination

78. In response to FPL’s request that the Commission clarify that the grandfathering 

language in Order No. 707 also applies with respect to the requirements of Order 

No. 697, we do not believe that this proceeding is the proper place to address the 

requirements of Order No. 697. We note that Order No. 697 establishes its own 

procedures seeking waivers of its requirements. As the Commission stated in its order of 

March 25, 2008 in this docket, the Commission’s grandfathering of preexisting contracts, 

agreements and arrangements was only for purposes of compliance with this rule.37 The 

Commission noted that to the extent public utilities were required to comply with the 

same or similar pricing restrictions pursuant to a merger order or in conjunction with a 

market-based rate authorization, our action to make Order No. 707 compliance 

prospective only did not change any such obligations under other orders or rules. In other 

words, pricing restrictions imposed pursuant to a merger order, a market-based rate 

 

37 Cross-Subsidization Restrictions on Affiliate Transactions, 122 FERC ¶ 61,280 at n.5 

(2008). 
Docket No. RM07-15-001 - 45 - 

authorization order or the Commission’s market-based rate rules are not within the scope 

of Order No. 707 and, consequently, the Order No. 707 grandfathering provision does not 

relieve a public utility of its obligations under other orders and rules with respect to 

contracts, agreements or arrangements entered into prior to March 31, 2008. 

79. We disagree with APPA and NRECA that our new rules should be applied 

prospectively to all transactions (as opposed to all agreements) entered into after the 

effective date of Order No. 707. Many or most of the agreements in question were 

approved or sanctioned by the SEC and/or state commissions, and the Commission will 

not lightly modify previously approved contracts or arrangements. To the extent such 

action is appropriate, we will act pursuant to FPA section 206 on a case-by-case basis. 

We are not permitting improper cross-subsidization by permitting existing contracts to 

remain in effect. Issues that may arise under these contracts will always be subject to our 

authority under FPA section 206. We reject the claim that the continuing effect of these 

pre-existing contracts violates our mandate under section 206. Nothing in the new rules 

limits or qualifies our powers and duties under that section, and the Commission’s 

position on preexisting agreements in no way rests on a generic finding that these 

agreements are not unjust, unreasonable, unduly discriminatory or preferential. 

80. We also disagree that we are facilitating abuse by allowing companies to enter into 

potentially abusive contracts before the effective date of these regulations and that would 

remain in effect after the effective date. Our powers with respect to these contracts are 

no different than they are with respect to contracts that already exist. As we stated in 
Docket No. RM07-15-001 - 46 - 

Order No. 707, the Commission on its own motion, or upon complaint, may on a case-bycase 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. As we further noted in Order 

No. 707, 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. 

III. Document Availability

81. 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. 

82. From FERC's Home Page on the Internet, this information is available on 

eLibrary. The full text of this document is available on eLibrary in PDF and Microsoft 

Word format for viewing, printing, and/or downloading. To access this document in 

eLibrary, type the docket number excluding the last three digits of this document in the 

docket number field. 

83. 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) 
Docket No. RM07-15-001 - 47 - 

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. 

IV. Effective Date and Congressional Notification

84. Changes to Order No. 707 adopted in this order on rehearing will become effective 

[insert date 30 days from publication in the FEDERAL REGISTER.]

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. 
Docket No. RM07-15-001 - 48 - 

 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 for 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. Amend § 35.44 as follows: 

(a) revise paragraph (a) to add a sentence at the end of the paragraph; 

(b) revise paragraphs (b)(1) and (b)(2); and 

(c) add paragraph (b)(4) and paragraph (c) 

§ 35.44. Protections against affiliate cross-subsidization. 

* * * * * 

(a) * * * This requirement does not apply to energy sales from a qualifying 

facility, as defined by 18 CFR 292.101, made under market-based rate authority granted 

by the Commission. 

(b) Non-power goods or services. 

(b)(1) Unless otherwise permitted by Commission rule or order, and except as 

permitted by paragraph (b)(4) of this section, sales of any non-power 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 
Docket No. RM07-15-001 - 49 - 

through its affiliated exempt wholesale generators or qualifying facilities, to a marketregulated 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 paragraphs (b)(3) and (b)(4) of this section, 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. 

* * * * * 

(4) A company in a single-state holding company system, as defined in 

§ 366.3(c)(1) of this chapter, may provide general administrative and management nonpower goods and services to, or receive such goods and services from, other companies in 

the same holding company system, at cost, provided that the only parties to transactions 

involving these non-power goods and services are affiliates or associate companies, as 

defined in § 366.1 of this chapter, of a holding company in the holding company system. 

(c) Exemption for price under fuel adjustment clause regulations. Where the price 

of fuel from a company-owned or controlled source is found or presumed under § 35.14 

to be reasonable and includable in the adjustment clause, transactions involving that fuel 

shall be exempt from the affiliate price restrictions in § 35.44(b).