UNITED STATES OF AMERICA 

FEDERAL ENERGY REGULATORY COMMISSION 

18 CFR Part 35 

(Docket No. PL05-11-000) 

Policy Statement Regarding Evaluation of Independent Ownership and Operation of 

Transmission 

(Issued June 27, 2005) 

AGENCY: Federal Energy Regulatory Commission. 

ACTION: Policy Statement. 

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

this Policy Statement to clarify the ownership structures that could qualify for passive 

ownership in regards to independent ownership and operation. 

EFFECTIVE DATE: The Policy Statement will become effective immediately. 

FOR FURTHER INFORMATION CONTACT: 

Sebastian Tiger (Technical Information) 

Office of Market Oversight and Investigations 

Federal Energy Regulatory Commission 

888 First Street, N.E. 

Washington, D.C. 20426 

(202) 502-6079 

Andre Goodson (Legal Information) 

Office of the General Counsel 

Federal Energy Regulatory Commission 

888 First Street, N.E. 

Washington, D.C. 20426 

 (202) 502-8560 

SUPPLEMENTARY INFORMATION: 
UNITED STATES OF AMERICA 

FEDERAL ENERGY REGULATORY COMMISSION 

Before Commissioners: Pat Wood, III, Chairman; 

 Nora Mead Brownell, Joseph T. Kelliher, 

 and Suedeen G. Kelly. 

Policy Statement Regarding Evaluation of Independent 

Ownership and Operation of Transmission 

Docket No. PL05-11-000 

Policy Statement 

(Issued June 27, 2005) 

 I. Introduction

1. The Commission is issuing this Policy Statement to provide clarity and remove 

barriers to the formation of independent transmission companies. Specifically, the Policy 

Statement clarifies that the Commission would be willing to accept proposals from 

independent transmission companies (ITCs) which have market participants as passive 

minority equity owners. On various occasions, the Commission has allowed innovative 

rate treatments both to facilitate the creation of ITCs and to stimulate investment in 

transmission infrastructure by ITCs. 1

 

 1

 These incentive proposals include: enhanced returns on equity, within the zone 

of reasonableness; hypothetical or imputed capital structures; recovery of deferred 

income tax liabilities; cost deferrals; Construction Work in Progress (CWIP) in rate base; 

accelerated book depreciation; and expensing of pre-certification costs associated with 

new transmission. In addition, the Commission is willing to consider further incentives 

for independent transmission companies, among which are 100 percent recovery of 

CWIP, 100 percent recovery of abandoned plant costs, and accelerated depreciation. See 

Michigan Electric Transmission Co., LLC, 105 FERC ¶ 61,214 (2003) (METC) ; ITC

Holdings Corp., 102 FERC ¶ 61,182, reh’g denied, 104 FERC ¶ 61,033 (2003); 

American Transmission Co. and Midwest Independent Transmission Operator, Inc., 

105 FERC ¶ 61,388 (2003), order dismissing reh’g as moot, providing clarification and

approving uncontested settlement, 107 FERC ¶ 61,117 (2004) (ATC). 
Docket No. PL05-11-000 - 2 -

2. The Policy Statement describes a non-exclusive list of the factors which the 

Commission will consider when evaluating rate proposals by ITCs to ensure that passive 

ownership does not affect the independent operation, planning and construction of their 

transmission systems. The Commission will evaluate the merits of such proposals on an 

individual basis. 

3. The Commission recently demonstrated additional flexibility in a case involving 

the initial public offering of shares in an ITC that allows for the potential that market 

participants could purchase a small percentage of its shares in the public equity markets. 

In ITC Holdings II,

2

 the order authorizing the disposition of jurisdictional facilities and 

confirming the independence of ITC Holdings, the Commission confirmed that 

International Transmission would continue to be independent of market participants and 

remain eligible for innovative rate treatment after a change in ownership is effected 

through an initial public offering of its shares. International Transmission adopted certain 

safeguards to ensure its continued independence, including limits on potential ownership 

by market participants as well as a corporate governance structure that assures that 

market participants that do purchase limited stakes in the company would not be able to 

influence its independent operation. Several commenters at an April 22, 2005 technical 

conference at the Commission noted that allowing market participant sellers to retain a 

passive ownership stake in stand-alone transmission companies (with appropriate 

safeguards to ensure their independence) could facilitate transactions creating such standalone transmission companies as ITCs.3

II. Factors the Commission Will Evaluate in Determining if Market Participants 

Are Passive Equity Owners in Proposed Independent Transmission 

Companies 

4. In this Policy Statement, the Commission is identifying a non-exclusive list of the 

relevant considerations that it intends to take into account in evaluating if market 

participants are truly passive owners in any application for incentive rate treatment filed 

by ITCs or stand-alone transmission companies under section 205 of the Federal Power 

 2 ITC Holdings Corp. and International Transmission Co., 111 FERC ¶ 61,149 

(2005) (ITC Holdings II). 

3 E.g., Transmission Independence and Investment, Docket No. AD05-5-000, Tr. 

190-91 (Paul McCoy, Trans-Elect, Inc. (Trans-Elect)); Tr. 195-97 (Dale Landgren, 

American Transmission Company); Docket No. AD05-5-000, Supplemental Comments 

of Trans-Elect at 3-4; Supplemental Comments of National Grid USA at 18-19. 
Docket No. PL05-11-000 - 3 -

 

Act (FPA).4

 These factors include: 

• the percentage ownership held by market participants; 

• composition of the board of directors and the responsibilities and rights of the 

board; 

• the corporate governance structure of the applicant; 

• the nature of the applicant’s capital investment planning and policies; 

• the relationship, if any, of capital investment policies with those governing capital 

contributions or dividend reinvestment by passive equity holders; 

• the role of executive compensation agreements and other management incentives 

in shaping independent operation and investment decisions; and 

• the nature and strictness of limits on contractual service and legacy relationships 

with ex-affiliates that are market participants. 

5. In evaluating any proposed passive ownership structure in an ITC application, the 

Commission will focus on the ability of the applicant to operate free of market participant 

control or influence. When determining if an applicant could qualify as an ITC, the 

Commission will consider proposals involving passive minority participation of up to 

49 percent ownership by a single market participant. In addition, as in ATC, the 

Commission would be willing to consider applications in which multiple market 

participants owned greater than 49 percent of the applicant’s equity. The Commission is 

concerned about the level of voting control (if any) held by market participants. In ITC 

Holdings II, for example, the applicants committed to prohibit a market participant that 

does acquire five percent or more of any class of ITC Holdings’ stock from voting, giving 

consent in respect of, or directing or controlling five percent or more of ITC Holdings 

stock, in order to limit direct or indirect voting control over the applicant. The 

Commission will continue to use this standard in evaluating ITC applicants with passive 

ownership. In determining the applicant’s level of independence from market participant 

control or influence to determine if it should qualify as an ITC, the Commission will also 

consider the applicant’s governance structure and any rights that could allow market 

participant owners to directly or indirectly affect the applicant’s operation, planning or 

investment decisions. 

4

 16 U.S.C. § 824d (2000). 
Docket No. PL05-11-000 - 4 -

 

6. Evaluation of the ITC applicant’s board of directors will weigh the representation 

(if any) by market participants, and consider factors such as the composition and 

responsibilities of the board committees (e.g., compensation, audit and investment 

committees) and the extent and nature of corporate actions for which company 

management must obtain prior board approval. We appreciate the need for market 

participant representation to consider significant business decisions such as a sale of or 

merger of the company. However, the Commission will review the need (if present) for 

management to seek board approval in the normal course of operations for capital 

investments above a certain size. The degree to which market participant board members 

have granular knowledge of or ability to influence individual investment decisions would 

influence the appropriateness of allowing incentive rate treatments. 

7. The Commission will consider the potential role that equity holders that are 

market participants play in financing ongoing investments by the independent 

transmission company, to gauge if there is a risk that those equity holders could frustrate 

investment in transmission infrastructure either by disapproving a plan or by denying 

capital to projects in the plan. 

8. In evaluating the independence of applicants, the Commission will review 

executive compensation and deferred compensation plans to understand if those plans 

involve financial interests in market participants that would be inconsistent with 

independent operation, planning and expansion of the applicant’s transmission system.5

 

 

5

 In discussing independence, the Commission has previously highlighted the 

importance of separation from financial interests in market participants. See Regional 

Transmission Organizations, Order No. 2000, 65 Fed. Reg. 809 (Jan. 6, 2000), FERC 

Statutes & Regulations, Regulations Preambles July 1996-December 2000 ¶ 31,089 

(1999), order on reh'g, Order No. 2000-A, 65 Fed. Reg. 12,088 (Mar. 8, 2000), FERC 

Statutes & Regulations, Regulations Preambles July 1996-December 2000 ¶ 31,092 

(2000), aff'd sub nom. Public Utility District. No. 1 of Snohomish County, Washington v. 

FERC, 272 F.3d 607 (D.C. Cir. 2001), where the Commission stated: 

We reaffirm the NOPR proposal that the RTO, its employees and any nonstakeholder directors must not have any financial interests in market 

participants. As noted in the NOPR, our focus will be on current financial 

interests. Since this principle raises a number of specific issues, especially 

with respect to pension rights and benefits, we will continue our current 

policy of implementing this principle on a case-by-case basis. 

Order No. 2000 at 31,063. 
Docket No. PL05-11-000 - 5 -

9. In evaluating the applicability of incentive rate treatment for structures allowing 

equity interests by market participants, the Commission will not limit its consideration to 

passive participation by integrated sellers who wish to retain a financial stake. The 

Commission will also consider ownership structures that facilitate participation by 

municipalities, cooperatives, and other transmission dependent users of the grid to the 

degree that corporate governance structures provide for independent operation, planning 

and investment. The Commission has approved the creation of a stand-alone 

transmission company, and allowed innovative rate treatments, for American 

Transmission Company (ATC), which is jointly-owned by investor-owned utilities which 

contributed their systems, and by public power customers which contributed cash in 

return for equity stakes in ATC with limited voting and governance rights.6

 The 

Commission remains comfortable that the governance structure of ATC allows some 

degree of participation by market participants, but ensures the operational and managerial 

independence of the stand-alone transmission company. 

Document Availability

10. 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. 

 

6 See American Transmission Co. and Midwest Independent Transmission 

Operator, Inc., 105 FERC ¶ 61,388 at P 24-31 (2003) (allowing ATC to apply innovative 

rate treatment, but only to projects that are accepted by Midwest ISO’s Transmission 

Expansion Plan, and providing that ATC’s incentive rates could remain effective only so 

long as ATC remains a member of Midwest ISO), order dismissing reh’g as moot, 

providing clarification and approving uncontested settlement, 107 FERC ¶ 61,117 (2004) 

(ATC), which is also discussed further in the Appendix to this Policy Statement; see also

Docket No. AD05-5-000, Tr. 195-96 (Dale Landgren, ATC) (“Our form of governance is 

a variation on passive ownership in that the larger owners each have a seat on our board 

along with independent members. ATC demonstrates that this form of governance does 

not inhibit us from operating independently from market participants, which is after all 

the real objective.”). Further, each ATC board member has one vote per owner, 

regardless of their size. Docket No. AD05-5-000, Tr. 196 (Dale Landgren, ATC). 
Docket No. PL05-11-000 - 6 -

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

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. 

12. User assistance is available for eLibrary and the FERC's website during normal 

business hours from our Help line, toll-free at (866) 208-3676 or for TTY, contract (202) 

502-8659. The Public Reference Room may be reached at (202) 502-8371, or by e-mail 

at, public.referenceroom@ferc.gov 

Effective Date

13. This Policy Statement is effective immediately. 

By the Commission. 

( S E A L ) 

 Magalie R. Salas, 

 Secretary.