120 FERC ¶ 61,061 

UNITED STATES OF AMERICA 

FEDERAL ENERGY REGULATORY COMMISSION 

18 CFR Part 35 

(Docket No. RM07-15-000) 

Cross-Subsidization Restrictions on Affiliate Transactions

(July 20, 2007) 

AGENCY: Federal Energy Regulatory Commission. 

ACTION: Notice of Proposed Rulemaking. 

SUMMARY: The Federal Energy Regulatory Commission (Commission) is proposing 

to amend its regulations pursuant to sections 205 and 206 of the Federal Power Act to 

codify restrictions on affiliate transactions between franchised public utilities with 

captive customers and their market-regulated power sales affiliates or non-utility 

affiliates. The Commission seeks public comment on the rules and amended regulations 

proposed herein. 

COMMENT DATE: Comments are due [insert date that is 30 days after publication in 

the FEDERAL REGISTER]. 

ADDRESSES: You may submit comments identified in Docket No. RM07-15-000, by 

one of the following methods: 

• Agency Web Site: http://www.ferc.gov. Follow the instructions for submitting 

comments via the eFiling link found in the Comment Procedures section of the 

preamble. 
 

• Mail: Commenters unable to file comments electronically must mail or hand 

deliver an original and 14 copies of their comments to the Federal Energy 

Regulatory Commission, Secretary of the Commission, 888 First Street, N.E., 

Washington, D.C. 20426. Please refer to the Comment Procedures section of the 

preamble for additional information on how to file paper comments. 

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

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 Markets and Reliability 

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: 
UNITED STATES OF AMERICA 

FEDERAL ENERGY REGULATORY COMMISSION 

Cross-Subsidization Restrictions on Docket No. RM07-15-000 

Affiliate Transactions 

NOTICE OF PROPOSED RULEMAKING 

(July 20, 2007) 

I. Introduction

1. Pursuant to sections 205 and 206 of the Federal Power Act (FPA),1

 the 

Commission is proposing to amend its regulations to revise Part 35 of Title 18 of the 

Code of Federal Regulations (CFR) 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.2

 The Commission’s goal in proposing these prophylactic 

 1

 16 U.S.C. 824d, 824e. 

2

 For purposes of this Notice of Proposed Rulemaking, a “market-regulated” 

power sales affiliate means any power sales affiliate, other than a franchised public 

utility, whose power sales are regulated in whole or in part on a market basis. This would 

include, e.g., a power marketer, exempt wholesale generator, qualifying facility or other 

power seller affiliate permitted to make some or all of its power sales at market-based 

rates. A “non-utility” affiliate would include an affiliate that is not in the power sales or 

transmission business, e.g., a coal mining company, construction company, real estate 

company, energy-related technology company, communications systems company, 

among others. While the Commission, in previous documents, has referred to both 

categories of affiliates as “non-regulated,” consistent with the discussion on crosssubsidization issues in our recent Market-Based Rate Final Rule, we believe the term 

“market-regulated” more accurately describes power sellers with market-based rates 

since they remain subject to regulation. Market-Based Rates For Wholesale Sales Of 

 (continued...) 

 

 
Docket No. RM07-15-000 - 2 -

restrictions is to protect against inappropriate cross-subsidization of market-regulated and 

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

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

certain FPA section 2033

 and 205 approvals, but expand the transactions and entities to 

which they apply.4

 The Commission seeks public comment on the proposed rules. 

II. Background

2. The Commission requires public utilities to implement codes of conduct with 

regard to affiliate transactions where an entity seeks market-based rate authorization. 

The Commission also imposes codes of conduct on entities seeking merger authorization 

 

Electric Energy, Capacity And Ancillary Services By Public Utilities, Order No. 697, 

72 FR 39903 (July 20, 2007), FERC Stats. & Regs. ¶ 31,252, at P 490 (2007) (MarketBased Rate Final Rule). Accordingly, we have modified our terminology in this Notice 

of Proposed Rulemaking.

3

 16 U.S.C. 824b, amended by Energy Policy Act of 2005, Pub. L. No. 109-58, 

1289, 119 Stat. 594, 982-83 (2005) (EPAct 2005). 

4

 This Notice of Proposed Rulemaking is one of three actions being taken based on 

the Commission’s experience implementing amended FPA section 203 and the Public 

Utility Holding Company Act of 2005, EPAct 2005, Pub. L. No. 109-58, 1261, et seq., 

119 Stat. 594, 972-78 (2005) (PUHCA 2005), as well as the record from the 

Commission’s December 7, 2006 and March 8, 2007 technical conferences regarding 

Section 203 and PUHCA 2005. In addition, in separate orders, the Commission is 

concurrently issuing a section 203 Supplemental Policy Statement, FPA Section 203 

Supplemental Policy Statement, 120 FERC ¶ 61,060 (2007) (issued in Docket No. PL07-

1-000), and a Notice of Proposed Rulemaking proposing to grant a limited blanket 

authorization for certain dispositions of jurisdictional facilities under FPA section 

203(a)(1), Blanket Authorization Under FPA Section 203, 120 FERC ¶ 61,062 (2007) 

(issued in Docket No. RM07-21-000). 
Docket No. RM07-15-000 - 3 -

under section 203 of the FPA. The discussion below summarizes the Commission’s 

existing practices in these two areas. 

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

 Authorizations

 1. Historical Approach

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

wholesale power sales and attendant cross-subsidy issues in 1988. At that time, the 

Commission acted on market-based rate proposals filed by various wholesale suppliers 

on a case-by-case basis. In doing so, the Commission considered whether there was 

evidence of affiliate abuse or reciprocal dealing involving the seller or its affiliates.5

 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 

 5

 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)). 

The other three “prongs” of the Commission’s “four-prong” analysis include: 

(1) whether the seller and its affiliates lack, or have adequately mitigated, market power 

in generation; (2) whether the seller and its affiliates lack, or have adequately mitigated, 

market power in transmission; and (3) whether the seller or its affiliates can erect other 

barriers to entry. See Market-Based Rate Final Rule, FERC Stats. & Regs. ¶ 31,252 at 

P 7. These additional “prongs” are not directly at issue in this proceeding. 
Docket No. RM07-15-000 - 4 -

exercise market power through its affiliate dealings.”6

 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.7

 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 

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

customers.8

 In determining whether to allow power sales affiliate transactions, the 

 6

 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.”). 

7

 See, e.g., Heartland, 68 FERC at 62,062. 

8

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

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

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 

 (continued...) 

 

 
Docket No. RM07-15-000 - 5 -

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

ensuring that captive customers are adequately protected against affiliate abuse. 

4. 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.9

 The 

same concerns about giving undue profits to affiliated “unregulated” entities and 

shareholders, discussed above with respect to power sales, also apply with respect to nonpower goods and services transactions. 

5. Accordingly, the Commission’s policy for many years has 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 between regulated and nonregulated affiliated power sellers. The Commission has also required that applicants 

include a provision in their market-based rate tariffs prohibiting power sales between 

 

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). 

9

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

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

regulated and non-regulated affiliated power sellers without first receiving authorization 

of the transaction under section 205 of the FPA.10

6. The purpose of the market-based rate code of conduct is 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.11 In such cases, however, the 

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

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

code of conduct requirement. 

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

11 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 (1999) (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 -

 2. The Market-Based Rate Final Rule

7. In the Commission’s recent Market-Based Rate Final Rule, 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. 

 B. Affiliate Transactions Under Section 203

 1. Before EPAct 2005

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

section 203 merger applications. Prior to EPAct 2005, the Commission’s policy was to 

condition its approval of certain section 203 mergers on the applicants’ agreement to 

 12 Market-Based Rate Final Rule, FERC Stats. & Regs. ¶ 31,252 at P 23. 
Docket No. RM07-15-000 - 8 -

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 the Public 

Utility Holding Company Act of 193513 in order to find that the merger would not 

adversely affect federal regulation.14 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.15 Under Ohio Power, if the SEC approved an 

affiliate contract involving special purpose subsidiary goods or services at cost, the 

Commission had to 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 non-affiliate.16 For over a decade following the Ohio Power

 13 16 U.S.C. 79a et seq. (PUHCA 1935). EPAct 2005 repealed PUHCA 1935. 

EPAct 2005, Pub. L. No. 109-58, 1263. 

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

on reh’g, 96 FERC ¶ 61,144 (2001). 

15 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). 

16 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 

 (continued...) 

 

 
Docket No. RM07-15-000 - 9 -

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.17

 2. After EPAct 2005

9. 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 

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 

 

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). 

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

1996 Merger Policy Statement, FERC Stats. & Regs. ¶ 31,044 at 30,124-25. 
Docket No. RM07-15-000 - 10 -

context of a section 205-206 rate proceeding.18 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. 

10. In the Order No. 669 rulemaking proceedings,19 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.20 However, 

the Commission made two additional clarifications. 

 18 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. 

19 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). 

20 Amended section 203(a)(4) does add 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 -

11. First, in its implementation of regulations pursuant to PUHCA 2005,21 the 

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

Merger Policy Statement. In the Order No. 667 rulemaking proceeding,22 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, the 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 

 21 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. 

22 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.”23 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 

and created a rebuttable presumption that costs incurred under at-cost pricing for such 

services are reasonable.24 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 supply company or a construction company, the Commission continued with its 

prior practice.25

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

24 Id. P 169. 

25 Order No. 667 states, in relevant part: 

First, with respect to sales from a public utility to a nonregulated, affiliated special-purpose company, we agree ... 

that 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. 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. The 

non-regulated, affiliated special-purpose company may not 

sell to its public utility affiliate at a price above the market 

 (continued...) 

 

 
Docket No. RM07-15-000 - 13 -

12. 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,

26 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 

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 

 

price. We believe that such transactions involving such nonregulated, affiliated special-purpose companies pose a greater 

risk of inappropriate cross-subsidization and adverse effects 

on jurisdictional rates. 

Id. P 171. 

26 117 FERC ¶ 61,080 (2006) (National Grid). 
Docket No. RM07-15-000 - 14 -

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 crosssubsidization of a non-utility associate company.27

13. 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. 

III. Discussion

14. Historically, section 205 rate review has been the primary mechanism by which 

the Commission disallowed as imprudent or unjust and unreasonable the costs incurred 

by a franchised public utility in purchasing power or non-power goods and services from 

a non-utility or power sales affiliate when the utility could have purchased such power or 

non-power goods and services from a non-affiliated entity. However, as discussed above, 

the Commission’s policy over the years has been to develop prophylactic affiliate crosssubsidy restrictions in the context of blanket market-based rate authorizations under FPA 

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

section 205 and merger proceedings under section 203. We believe prophylactic 

restrictions setting forth the standards under which affiliates may transact are superior to 

relying exclusively on after-the-fact rate reviews of costs already incurred. Further, it 

would be virtually impossible for the Commission to individually pre-approve every 

power and non-power goods and services transaction given the volume of transactions 

that occur on a daily basis. The affiliate restrictions the Commission has previously 

imposed in individual cases involving market-based rate applicants and merger applicants 

allow public utilities to know up-front the standards under which they may transact with 

affiliates; and, if they do not follow those standards, they are at risk for full refunds plus 

interest, or other remedial action. 

15. Accordingly, to provide better assurance against inappropriate cross-subsidization, 

we believe it is appropriate to continue imposing affiliate restrictions, to expand the 

coverage of those restrictions, and to codify them in our regulations. As noted above, 

there is a gap in coverage of the restrictions as they are currently imposed. Specifically, 

the restrictions imposed on section 205 market-based rate applicants do not cover nonpower goods and services transactions between a franchised public utility and nonutilities; they cover only transactions between power sales affiliates and are imposed only 

on the market-based rate applicants. Additionally, while the restrictions imposed on 

section 203 applicants cover transactions between a franchised public utility and marketregulated power sales affiliates as well as non-utility affiliates, they apply only to merger 
Docket No. RM07-15-000 - 16 -

applicants; they do not apply to other section 203 applicants and do not apply to public 

utilities that do not require any section 203 authorization.28 Finally, while the preamble 

to Order No. 667 discussed the Commission’s pricing policy on affiliate non-power 

goods and services transactions, including pricing of non-power goods and services 

provided by centralized service companies, the pricing policy (which technically is a 

ratemaking policy rather than a PUHCA 2005 issue) was not codified in the regulations. 

16. To address this gap in coverage, the uniform affiliate restrictions that the 

Commission proposes to implement would be applicable to all franchised public utilities 

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

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

and its affiliates. Specifically, they would: (1) require the Commission’s approval of all 

power sales by a franchised utility with captive customers to 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 services from a centralized service company at a 

 28 See supra P 12. 
Docket No. RM07-15-000 - 17 -

price above cost. These restrictions will help the Commission meet the requirement of 

amended section 203(a)(4) that a transaction not result in the inappropriate crosssubsidization of a non-utility associate company and, moreover, help us 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 transactions. 

17. We note that there is overlap in the affiliate restrictions proposed herein and those 

that were recently adopted in the Market-Based Rate Final Rule. However, as discussed 

above, those restrictions apply only to market-based rate applicants and only to 

transactions between power sales affiliates. The restrictions herein are consistent with, 

and in some instances mirror, those imposed in the Market-Based Rate Final Rule. We 

believe any overlap is appropriate and necessary to ensure that all franchised public 

utilities with captive customers have the same restrictions imposed on them. We also 

note that we are proposing one additional restriction that is not covered in the MarketBased Rate Final Rule, but which has been imposed on section 203 merger applicants. 

That restriction would prohibit a centralized service company from providing non-power 

goods and services to a franchised public utility with captive customers at a price above 

cost. This implements the findings made in Order No. 667 and, by codifying it in the 

regulations along with the other affiliate restrictions, will eliminate any gaps in coverage 

and ensure uniformity in the restrictions being applied. 

18. The Commission seeks comments on these proposed affiliate cross-subsidy 

restrictions. We also seek comment on whether the Commission should impose any 
Docket No. RM07-15-000 - 18 -

after-the-fact reporting requirements on transactions covered by the restrictions and, if so, 

what they should be. In this regard, we note that the Commission already receives 

reporting of public utility affiliate power sales transactions through Electric Quarterly 

Reports and we see no need to duplicate existing power sales reporting. However, we are 

particularly interested in: whether any reporting requirements regarding affiliate nonpower goods and services transactions should be imposed; whether such reporting, if it 

were to be required, should be on a yearly basis or within some other time frame, and 

what specific information should be reported; whether states already require such 

reporting; and the burdens that any reporting requirements would impose. Although the 

Commission has authority to review such transactions through auditing and in individual 

section 205 rate proceedings, we seek comment on the general usefulness of additional 

reporting requirements. 

IV. Information Collection Statement

19. The Office of Management and Budget’s (OMB) regulations require that OMB 

approve information collection requirements imposed by agency rules.29 The 

Commission is proposing amendments to the Commission’s regulations to codify 

restrictions on affiliate transactions between franchised public utilities with captive 

customers and their market-regulated power sales affiliates or non-utility affiliates. The 

Commission is not imposing an information collection requirement upon the public. 

 29 5 CFR 1320. 
Docket No. RM07-15-000 - 19 -

However, the Commission will submit for informational purposes only a copy of this 

rulemaking to OMB. 

V. Environmental Analysis

20. 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.30 The Commission has categorically excluded certain actions 

from this requirement as not having a significant effect on the human environment.31 The 

proposed regulations are categorically excluded as they address rate filings submitted 

under sections 205 and 206 of the FPA.32 Accordingly, no environmental assessment is 

necessary and none has been prepared in this NOPR. 

VI. Regulatory Flexibility Act Certification

21. The Regulatory Flexibility Act of 1980 (RFA)33 requires agencies to prepare 

certain statements, descriptions, and analyses of proposed rules that will have significant 

 30 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). 

31 18 CFR 380.4. 

32 See 18 CFR 380.4(a)(15). 

33 5 U.S.C. 601-12. 
Docket No. RM07-15-000 - 20 -

economic impact on a substantial number of small entities.34 Agencies are not required 

to make such an analysis if a rule would not have such an effect. 

22. The proposed rule will be applicable to franchised public utilities with captive 

customers. Most such companies regulated by the Commission do not fall within the 

RFA’s definition of small entity.35 Therefore, the Commission certifies the proposed rule 

will not have a significant economic impact on a substantial number of small entities. As 

a result, no regulatory flexibility analysis is required. 

VII. Comment Procedures

23. The Commission invites interested persons to submit comments on the matters and 

issues proposed in this notice, including any related matters or alternative proposals that 

commenters may wish to discuss. Comments are due [insert date 30 days from 

publication in the FEDERAL REGISTER]. Comments must refer to Docket No. 

RM07-15-000, and must include the commenter’s name, the organization they represent, 

 34 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 

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. 

35 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 - 21 -

if applicable, and their address in their comments. Comments may be filed either in 

electronic or paper format. 

24. Comments may be filed electronically via the eFiling link on the Commission’s 

web site at http://www.ferc.gov. The Commission accepts most standard word 

processing formats, but requests commenters to submit comments in a text-searchable 

format rather than a scanned image format. Commenters filing electronically do not need 

to make a paper filing. Commenters that are not able to file comments electronically 

must send an original and 14 copies of their comments to: Federal Energy Regulatory 

Commission, Secretary of the Commission, 888 First Street, N.E., Washington, D.C., 

20426. 

25. All comments will be placed in the Commission’s public files and may be viewed, 

printed, or downloaded remotely as described in the Document Availability section 

below. Commenters on this proposal are not required to serve copies of their comments 

on other commenters. 

VIII. Document Availability

26. 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 the Commission’s Home Page 

(http://www.ferc.gov) and in the Commission’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. 
Docket No. RM07-15-000 - 22 -

27. From the Commission’s Home Page on the Internet, this information is available 

in the Commission’s document management system, 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 the docket number), in the docket number field. 

28. User assistance is available for eLibrary and the Commission’s website during 

normal business hours. For assistance, please contact FERC Online Support at (202) 

502-6652 (toll-free at 1-866-208-3676) or e-mail 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. 

List of subjects in 18 CFR Part 35

Electric power rates, Electric utilities, Reporting and recordkeeping requirements.

 By direction of the Commission. 

 Kimberly D. Bose, 

 Secretary. 

 
Docket No. RM07-15-000 - 23 -

In consideration of the foregoing, the Commission proposes to amend Part 35, Chapter I, 

Title 18, Code of Federal Regulations, 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) Captive customers means any wholesale or retail electric energy customers 

served under cost-based regulation. 

 (2) Franchised public utility means a public utility with a franchised service 

obligation under state law. 

 (3) 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. 
Docket No. RM07-15-000 - 24 -

 (4) Non-utility affiliate means any affiliate that is not in the power sales or 

transmission business. 

 (b) The provisions of this subpart apply to all franchised public utilities with 

captive customers. 

§ 35.44 Protections against affiliate cross-subsidization. 

 (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 with captive customers, 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 subsection (b)(3), a franchised public utility with captive customers 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 with captive customers may not purchase or 

receive non-power goods and services from a centralized service company at a price 

above cost.