[Federal Register Volume 80, Number 17 (Tuesday, January 27, 2015)]
[Proposed Rules]
[Pages 4231-4239]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-01423]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 33

[Docket No. PL15-3-000]


Policy Statement on Hold Harmless Commitments

AGENCY: Federal Energy Regulatory Commission, DOE.

ACTION: Proposed policy statement.

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SUMMARY:  The Commission proposes, as a statement of policy, the 
following clarifications regarding hold harmless commitments offered by 
applicants as ratepayer protection mechanisms to mitigate adverse 
effects on rates that may result from transactions subject to section 
203 of the Federal Power Act (FPA). First, the Commission proposes to 
clarify the scope and definition of the costs that should be subject to 
hold harmless commitments. Second, the Commission proposes to clarify 
that applicants offering hold harmless commitments must implement 
controls and procedures to track the costs from which customers will be 
held harmless. The Commission also proposes to clarify the types of 
controls and procedures that applicants offering hold harmless 
commitments must implement. Third, the Commission proposes to no longer 
accept hold harmless commitments that are limited in duration. Fourth, 
the Commission proposes to clarify that applicants may demonstrate 
that, under certain circumstances, transactions will not have an 
adverse effect on rates without relying on hold harmless commitments or 
other ratepayer protection mechanisms.

DATES:  Comments on the proposed policy statement are due within March 
30, 2015.

FOR FURTHER INFORMATION CONTACT: 
Eric Olesh (Technical Information), Office of Energy Market Regulation, 
888 First Street NE., Washington, DC 20426, (202) 502-6524, 
<a href="/cdn-cgi/l/email-protection#83e6f1eae0adecefe6f0ebc3e5e6f1e0ade4ecf5"><span class="__cf_email__" data-cfemail="92f7e0fbf1bcfdfef7e1fad2f4f7e0f1bcf5fde4">[email protected]</span></a>.
Adam Batenhorst (Legal Information), Office of the General Counsel, 888 
First Street NE., Washington, DC 20426, (202) 502-6150, 
<a href="/cdn-cgi/l/email-protection#35545154581b575441505b5d5a47464175535047561b525a43"><span class="__cf_email__" data-cfemail="09686d6864276b687d6c6761667b7a7d496f6c7b6a276e667f">[email protected]</span></a>.
Olga Anguelova (Accounting Information), Office of Enforcement, 888 
First Street NE., Washington, DC 20426, (202) 502-8098, 
<a href="/cdn-cgi/l/email-protection#1d72717a7c337c737a687871726b7c5d7b786f7e337a726b"><span class="__cf_email__" data-cfemail="e986858e88c788878e9c8c85869f88a98f8c9b8ac78e869f">[email protected]</span></a>.

SUPPLEMENTARY INFORMATION:
    1. We propose, as a statement of policy, the following 
clarifications regarding hold harmless commitments offered by 
applicants as ratepayer protection mechanisms to mitigate adverse 
effects on rates that may result from transactions that are subject to 
section 203 of the Federal Power Act (FPA).\1\ First, we propose to 
clarify the scope and definition of the costs that should be subject to 
hold harmless commitments. Second, we propose to clarify that 
applicants offering hold harmless commitments must implement controls 
and procedures to track the costs from which customers will be held 
harmless. We also propose to clarify the types of controls and 
procedures that applicants offering hold harmless commitments must 
implement. Third, we propose to no longer accept hold harmless 
commitments that are limited in duration. Fourth, we propose to clarify 
that applicants may demonstrate that, under certain circumstances, 
transactions will not have an adverse effect on rates without relying 
on hold harmless commitments or other ratepayer protection mechanisms.
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    \1\ 16 U.S.C. 824b.
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I. Background

A. The Commission's Analysis of Proposed Transactions Under FPA Section 
203

    2. FPA section 203(a)(4) requires the Commission to approve a 
transaction if it determines that the transaction will be consistent 
with the public interest.\2\ The Commission has stated that its 
analysis of whether a transaction will be consistent with the public 
interest generally involves consideration of three factors: (1) The 
effect on competition; (2) the effect on rates; and (3) the effect on 
regulation.\3\ FPA section

[[Page 4232]]

203(a)(4) also requires the Commission to find that the 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 the Commission determines that the 
cross-subsidization, pledge, or encumbrance will be consistent with the 
public interest.'' \4\
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    \2\ 16 U.S.C. 824b(a)(4).
    \3\ See 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 30,111 (1996) 
(Merger Policy Statement), reconsideration denied, Order No. 592-A, 
79 FERC ] 61,321 (1997). See also FPA Section 203 Supplemental 
Policy Statement, 72 FR 42277 (Aug. 2, 2007), FERC Stats. & Regs. ] 
31,253 (2007). See also Revised Filing Requirements Under Part 33 of 
the Commission's Regulations, Order No. 642, 65 FR 70983 (Nov. 28, 
2000), FERC Stats. & Regs. ] 31,111 (2000), order on reh'g, Order 
No. 642-A, 94 FERC ] 61,289 (2001). See also 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).
    \4\ 16 U.S.C. 824b(a)(4). The Commission's regulations establish 
verification and information requirements for applicants that seek a 
determination that a transaction will not result in inappropriate 
cross-subsidization or a pledge or encumbrance of utility assets. 
See 18 CFR 33.2(j).
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    3. This proposed policy statement focuses on the second prong of 
the Commission's FPA section 203 analysis, the effect of a proposed 
transaction on rates. The Commission has stated that, when considering 
a proposed transaction's effect on rates, its focus ``is on the effect 
that a proposed transaction itself will have on rates, whether that 
effect is adverse, and whether any adverse effect will be offset or 
mitigated by benefits that are likely to result from the proposed 
transaction.'' \5\ Specifically, as relevant here, the Commission 
considers whether the transaction could result in an adverse effect on 
rates to wholesale requirements or transmission customers.
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    \5\ ITC Midwest LLC, 140 FERC ] 61,125, at P 19 (2012).
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    4. If an applicant's only customers are wholesale power sales 
customers served under market-based rates, then the transaction will 
have no adverse effect on rates for such customers.\6\ If, however, the 
transaction could result in an increase in rates and the wholesale 
power sales customers of the applicants are not served exclusively 
under market-based rates, or if the applicants have wholesale 
requirements or transmission customers, the Commission evaluates 
whether there are sufficient potential economic benefits that offset 
the projected increase in rates. If such benefits exist, the analysis 
of the effect on rates ends with a finding that there is no adverse 
effect on rates because of those offsetting economic benefits.\7\
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    \6\ Cinergy Corp., 140 FERC ] 61,180, at P 41 (2012) (citing 
Duquesne Light Holdings, Inc., 117 FERC ] 61,326, at P 25 (2006)) 
(``The Commission has previously stated that, when there are market-
based rates, the effect on rates is not of concern. The effect on 
rates is not of concern in these circumstances because market-based 
rates will not be affected by the seller's cost of service and, 
thus, will not be adversely affected by the Proposed 
Transaction.'').
    \7\ The Commission has found that there is no adverse effect on 
rates where, although costs may increase in one area of the 
utility's operations, lower costs are expected elsewhere. See, e.g., 
Bluegrass Generation Co., L.L.C., 139 FERC ] 61,094, at P 41 (2012) 
(finding no adverse effect on rates because increases in capacity 
charges would be offset by a savings in energy rates).
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    5. If a proposed transaction has the potential to increase 
wholesale rates, but there is no showing of quantifiable offsetting 
economic benefits, the Commission must determine whether ratepayers are 
sufficiently protected from the potential rate increase, or whether 
there are other non-quantifiable, offsetting benefits that would, 
nevertheless, support a finding that the proposed transaction is 
consistent with the public interest, regardless of the potential for a 
rate increase.\8\ When the Commission has considered such non-
quantifiable offsetting benefits, it has often been in the context of 
transactions that increase competition or enable more competitive 
markets, such as transactions resulting in the expansion of regional 
transmission organizations or the increase in transmission ownership by 
independent transmission companies.\9\
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    \8\ An increase in rates ``can still be consistent with the 
public interest if there are countervailing benefits that derive 
from the merger.'' Merger Policy Statement, FERC Stats. & Regs. ] 
31,044 at 30,114; see also ALLETE, Inc., 129 FERC ] 61,174, at P 19 
(2009) (``Our focus here is on the effect that the Proposed 
Transaction itself will have on rates, whether that effect is 
adverse, and whether any adverse effect2 will be offset or mitigated 
by benefits likely to result from the Proposed Transaction.'').
    \9\ See, e.g., ITC Midwest LLC, 133 FERC ] 61,169, at P 23 
(2010) (finding offsetting benefits because of the transfer of 
transmission assets to a standalone transmission company); ALLETE, 
129 FERC ] 61,174 at P 20 (finding that the advantages created in 
joining a regional transmission organization outweighed potential 
rate increase created by the different tax treatment of the assets 
after transfer); Ameren Servs. Co., 103 FERC ] 61,121, at P 23 
(2003) (finding that increasing a regional transmission 
organization's footprint would offset a rate increase); Rockland 
Elec. Co., 97 FERC ] 61,357, at 62,651 (2001) (finding that 
attracting more bidders and encouraging more competition offset a 
potential rate increase for locational marginal prices along a seam 
at times of peak demand).
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    6. Prior to the issuance of the Merger Policy Statement, the 
Commission had required applicants and intervenors to estimate the 
future costs and benefits of a transaction and then litigate the 
validity of those estimates. The Commission, however, eliminated those 
requirements in the Merger Policy Statement and established various 
mechanisms that applicants could implement to show that a merger would 
have no adverse effect on rates.\10\ As the Commission explained:
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    \10\ Merger Policy Statement, FERC Stats. & Regs. ] 31,044 at 
30,111 (``[I]n assessing the effect of a proposed merger on rates, 
we will no longer require applicants and intervenors to estimate the 
future costs and benefits of a merger and then litigate the validity 
of those estimates. Instead, we will require applicants to propose 
appropriate rate protection for customers.'').

    Merger applicants should propose ratepayer protection mechanisms 
to assure that customers are protected if the expected benefits do 
not materialize. The applicant bears the burden of proof to 
demonstrate that the customer will be protected. This puts the risk 
that the benefits will not materialize where it belongs--on the 
applicants.
    Furthermore, we believe that the most promising and expeditious 
means of addressing ratepayer protection is for the parties to 
negotiate an agreement on ratepayer protection mechanisms. The 
applicants should attempt to resolve the issue with customers even 
before filing, and should propose a mechanism as part of their 
filing. Even if these negotiations have not succeeded by the time of 
filing, the parties should continue to try to reach a settlement. 
What constitutes adequate ratepayer protection necessarily will 
depend on the particular circumstances of the merging utilities and 
their ratepayers, and we strongly encourage parties to minimize 
contentious issues and to resolve them without the time and expense 
of a formal hearing. Parties may not be able to reach an agreement 
on an appropriate ratepayer protection and the Commission may still 
be able to approve the merger. As mentioned earlier, this could 
occur either after a hearing or on the basis of parties' filings if 
we determine that the applicants' proposal sufficiently insulates 
the ratepayers from harm.\11\
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    \11\ Id. at 30, 123-24.

    7. The Commission then explained that it had previously accepted 
``a variety of hold harmless provisions,'' and that parties could 
consider those as well as ``other mechanisms if they appropriately 
address ratepayer concerns.'' \12\ Among the types of protection the 
Commission stated applicants could propose were the following:
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    \12\ Id. at 30, 124.

--Open season for wholesale customers--applicants agree to allow 
existing wholesale customers a reasonable opportunity to terminate 
their contracts (after notice) and switch suppliers. This allows 
customers to protect themselves from merger-related harm.
--General hold harmless provision--a commitment from the applicant 
that it will protect wholesale customers from any adverse rate 
effects resulting from the merger for a significant period of time 
following the merger. Such a provision must be enforceable and 
administratively manageable.

[[Page 4233]]

--Moratorium on increases in base rates (rate freeze)--applicants 
commit to freezing their rates for wholesale customers under certain 
tariffs for a significant period of time.
--Rate reduction--applicants make a commitment to file a rate 
decrease for their wholesale customers to cover a significant period 
of time.\13\

    \13\ Id. (footnotes omitted).
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    8. The Commission concluded that, although each mechanism would 
provide some benefit to ratepayers, in the majority of circumstances 
the most meaningful (and the most likely to give wholesale customers 
the earliest opportunity to take advantage of emerging competitive 
wholesale markets) was an open season provision.\14\ The Commission 
stated that if intervenors raised a substantial question as to the 
adequacy of a merger applicant's proposal, the parties should continue 
to pursue a settlement; if no agreement could be reached, the 
Commission explained it might decide the issue on the written record or 
set the issue for hearing.\15\
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    \14\ Id.
    \15\ Id.
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    9. Subsequently, in Order No. 642, the Commission promulgated 
regulations governing FPA section 203 applications and described the 
information applicants must submit regarding the effect of a proposed 
transaction on rates. In relevant part, the Commission stated:

    In the [Merger] Policy Statement, we determined that ratepayer 
protection mechanisms (e.g., open seasons to allow early termination 
of existing service contracts or rate freezes) may be necessary to 
protect the wholesale customers of merger applicants. . . .
    Thus, in the [Notice of Proposed Rulemaking] we proposed that 
all merger applicants demonstrate how wholesale ratepayers will be 
protected and that applicants will have the burden of proving that 
their proposed ratepayer protections are adequate. Specifically, we 
proposed that applicants must clearly identify what customer groups 
are covered (e.g., requirements customers, transmission customers, 
formula rate customers, etc.), what types of costs are covered, and 
the time period for which the protection will apply.\16\
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    \16\ Order No. 642, FERC Stats. & Regs. ] 31,111 at 31,914.

    10. The Commission adopted the proposals set forth in the Notice of 
Proposed Rulemaking and emphasized that if applicants did not offer any 
ratepayer protection mechanisms, they must explain how the proposed 
merger would provide adequate ratepayer protection.\17\
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    \17\ Id.
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B. Current Commission Practice Regarding Hold Harmless Commitments

    11. Over the last decade hold harmless commitments have become a 
common feature of FPA section 203 applications involving mergers of 
traditional franchised utilities or their upstream holding 
companies.\18\ More recently, some applicants have made hold harmless 
commitments in connection with transactions involving the acquisition 
or disposition of existing jurisdictional facilities, including in 
circumstances where the acquiring entity was a traditional franchised 
utility and entered into the transaction in order to satisfy resource 
adequacy requirements at the state level, to improve system reliability 
and/or meet other regulatory requirements.\19\
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    \18\ The Commission has also accepted other forms of ratepayer 
protection in lieu of or in addition to hold harmless commitments. 
See, e.g., Cinergy Services, Inc., 102 FERC ] 61,128, at P 33 (2003) 
(accepting rate freeze as rate mitigation); Vermont Yankee Nuclear 
Power Corp., 91 FERC ] 61,325, at 62,125 (2000) (accepting rate cap 
and an open season provision as mitigation); Cajun Elec. Power 
Coop., Inc., 90 FERC ] 61,309, at 62,005-06 (2000) (approving a 
transaction where current customers were allowed to keep their 
current contracts or choose from three different power purchasing 
agreements).
    \19\ See, e.g., FirstEnergy Generation Corp., 141 FERC ] 61,239, 
at PP 1, 16, 27-30 (2012) (FirstEnergy) (accepting a hold harmless 
commitment in an asset transaction where generation assets would be 
turned into assets to support transmission system upgrades in order 
to meet needs identified in a study by PJM Interconnection, L.L.C. 
following the retirement of other generating facilities); ITC 
Midwest, 140 FERC ] 61,125 at P 15; Int'l Transmission Co., 139 FERC 
] 61,003, at P 16 (2012).
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    12. The Commission has consistently accepted hold harmless 
commitments in which FPA section 203 applicants commit not to seek 
recovery of transaction-related costs in jurisdictional rates except to 
the extent that such costs are offset by transaction-related 
savings.\20\ Thus, hold harmless commitments typically focus on 
preventing recovery in rates of the costs incurred that are ``related'' 
to the transaction. The Commission has previously found that hold 
harmless commitments under which applicants commit not to seek to 
recover transaction-related costs except to the extent that such costs 
are exceeded by demonstrated transaction-related savings for a period 
of five years to be ``standard.'' \21\
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    \20\ NSTAR Advanced Energy Sys., Inc., 131 FERC ] 61,098, at P 
24 (2010) (``The Commission looks for assurances from public 
utilities that they hold customers harmless from these transaction-
related costs, to the extent they are not exceeded by cost savings 
arising from the transaction, for a significant period of time 
following the merger, not an indefinite period of time.'') (internal 
citation omitted); see also Cinergy, 140 FERC ] 61,180 at P 42; ITC 
Midwest, 140 FERC ] 61,125 at PP 21-22; Int'l Transmission, 139 FERC 
] 61,003 at P 17; BHE Holdings Inc., 133 FERC ] 61,231, at P 37 
(2010); cf. Sierra Pacific Power Co., 133 FERC ] 61,017, at P 14 
(2010) (accepting a commitment not to include any transaction-
related costs in its Commission-accepted open access transmission 
tariff).
    \21\ ITC Holdings Corp., 121 FERC ] 61,229, at P 128 (2007). 
Although five-year hold harmless commitments are most common, the 
Commission has also accepted three-year hold harmless commitments. 
Westar Energy, Inc., 104 FERC ] 61,170, at PP 16-17 (2003); Long 
Island Lighting Co., 82 FERC ] 61,129, at 61,463-65 (1998).
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    13. Although the Commission has relied on commitments to hold 
customers harmless from transaction-related costs to support findings 
of no adverse effects on rates, in many of these cases, these 
commitments have not included detailed definitions of transaction-
related costs or savings.\22\ Further, the Commission has only provided 
general guidance on the scope of these costs. In most orders addressing 
transactions in which the Commission has accepted hold harmless 
commitments, the Commission has explained that transaction-related 
costs are not just those costs related to consummating the proposed 
transaction, such as legal, investment advisory, accounting and 
financing costs. Rather, the Commission has stated that the costs 
subject to hold harmless commitments include all costs that are related 
to the transaction. The Commission, however, has never specified what 
these other costs may include.\23\ In more recent cases, the Commission 
has specified that transaction-related costs include costs, both 
capital and operating, incurred to achieve merger synergies.\24\ The 
Commission has also specifically noted that acquisition premiums, 
including

[[Page 4234]]

goodwill,\25\ are not considered part of transaction-related costs, and 
that recovery of such costs must be pursued through FPA section 205 
filings.\26\ The Commission has also explained that protection from 
transaction-related costs does not mean that consumers are necessarily 
insulated from any rate increase, such as those related to market 
conditions or those unrelated to the transaction,\27\ or unspecified or 
speculative costs that intervenors claim may result from a merger.\28\
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    \22\ See, e.g., Puget Energy, 123 FERC ] 61,050 at P 27 (``We 
accept Applicants' hold harmless commitment, which we interpret to 
include all merger-related costs, not only costs related to 
consummating the transaction. If Applicants seek to recover any 
merger-related costs in a subsequent section 205 filing, they must 
show quantifiable offsetting benefits.'') (citations and footnotes 
omitted); National Grid plc, 117 FERC ] 61,080, at P 54 (2006) 
(``Applicants have committed to hold ratepayers harmless from 
transaction-related costs in excess of transaction savings for a 
period of five years.'').
    \23\ ITC Holdings Corp., 143 FERC ] 61,256, at P 138 (2013); see 
also Cinergy, 140 FERC ] 61,180 at P 42; FirstEnergy Corp., 133 FERC 
] 61,222, at PP 62-63 (2010); NSTAR, 136 FERC ] 61,016, at PP 62-63 
(2011); PPL Corp., 133 FERC ] 61,083, at PP 26-27 (2010); Consumers 
Energy Co., 118 FERC ] 61,143, at P 33, order on clarification, 120 
FERC ] 61,091 (2007).
    \24\ See, e.g., Silver Merger Sub, Inc., 145 FERC ] 61,261, at P 
68 (2013) (``We interpret Applicants' hold harmless commitment to 
apply to all transaction-related costs, including costs related to 
consummating the Proposed Transaction and transition costs (both 
capital and operating) incurred to achieve merger synergies.''); 
Bangor Hydro Elec. Co., 144 FERC ] 61,030, at P 20 (2013) (same); 
Exelon Corp., 138 FERC ] 61,167, at P 118 (2012) (same).
    \25\ An acquisition premium is the excess of the total purchase 
price or consideration paid in the transaction over the historical 
cost of the net assets of the entity acquired.
    \26\ Exelon, 138 FERC ] 61,167 at P 118 (citing Merger Policy 
Statement, FERC Stats. & Regs. ] 31,044 at 30,126; Duke Energy Moss 
Landing LLC, 83 FERC ] 61,318 (1998), reh'g denied, 86 FERC ] 
61,227, at 61,816 (1999) (citing Mid-Louisiana Gas Co., 7 FERC ] 
61,316, at 61,682, reh'g denied, 8 FERC ] 61,227 (1979), aff'd sub 
nom. Transcon. Gas Pipe Line Corp. v. FERC, 652 F.2d 179 (D.C. Cir. 
1981)) (rate recovery of an existing facility is generally limited 
to the original cost of the facility)).
    \27\ BHE Holdings, 133 FERC ] 61,231 at P 36 (citing PNM 
Resources, Inc., 124 FERC ] 61,019, at P 43 (2008) (``Applicants are 
not required to apply a rate freeze and may propose rate increases 
under section 205 filings.'')); ITC Holdings, 121 FERC ] 61,229 at P 
124 (``[T]he Commission finds that any increased costs of ITC 
Midwest attributable to prudent transmission investment do not make 
the Transaction contrary to the public interest''); Boston 
Generating, LLC, 113 FERC ] 61,016, at P 26 (2005) (``In reviewing 
an application under section 203, the Commission looks at the 
effects of the transaction on rates, not at rate changes that may 
occur regardless of the transaction.'')); Jersey Central Power & 
Light Co., 87 FERC ] 61,014, at 61,039 (1999) (``The Commission does 
not require applicants under [s]ection 203 to insulate their 
customers from the rate effects of market forces. Accordingly, 
customers are not entitled in a [s]ection 203 proceeding to be held 
harmless from external factors such as rising market prices.''); 
Cincinnati Gas & Elec. Co., 64 FERC ] 61,237, at 62,686, 62,714 
(1993), reh'g denied, 69 FERC ] 61,005, order on clarification, 69 
FERC ] 61,088 (1994), reh'g denied, 71 FERC ] 61,380 (1995).
    \28\ Exelon Corp., 127 FERC ] 61,161, at P 102 (2009) (citing, 
inter alia, NorthWestern Corp., 117 FERC ] 61,100, at P 40 (2006) 
(finding speculative protestor's argument that the proposed 
transaction would result in a credit ratings downgrade and lead to 
higher rates or lower reliability)); Old Dominion Elec. Coop., 117 
FERC ] 61,313, at P 29 (2006) (affirming initial decision that ``the 
record supports the conclusion that the credit downgrade will not 
raise rates'').
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    14. With respect to recovering transaction-related costs, as noted 
earlier, the standard hold harmless commitment provides that applicants 
may not seek to recover in rates any transaction-related costs except 
to the extent that such costs are exceeded by demonstrated transaction-
related savings. The Commission recently clarified its policy on the 
recovery of transaction-related costs.\29\ As clarified, applicants may 
seek to recover transaction-related costs incurred prior to 
consummating a proposed transaction or those transaction-related costs 
incurred within the time period during which the hold harmless 
commitment applies by making certain filings.\30\ Specifically, 
applicants must submit a new filing under FPA section 205, and a 
concurrent informational filing in the relevant FPA section 203 
docket.\31\ Consistent with Commission precedent, in the FPA section 
205 filing, applicants must still: (1) Specifically identify the 
transaction-related costs they are seeking to recover; and (2) 
demonstrate that those costs are exceeded by the savings produced by 
the transaction.\32\ The Commission further clarified that it will not 
authorize the recovery of merger-related costs in an annual 
informational filing under existing formula rates. After noticing the 
new section 205 filing for public comment, the Commission will 
determine both if there is adequate support to show that recovery of 
merger-related costs is consistent with the hold harmless commitment 
and that the resulting new rate is just and reasonable in light of all 
the other factors underlying the proposed new rate.\33\ In accordance 
with the Merger Policy Statement, the Commission's approach places the 
burden of proof on applicants to demonstrate that customers are 
protected if the expected benefits do not materialize.\34\
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    \29\ Exelon Corp., 149 FERC ] 61,148 (2014) (Exelon-Pepco).
    \30\ Id. P 106.
    \31\ Id. P 105.
    \32\ Id. P 107.
    \33\ Id. P 106.
    \34\ Merger Policy Statement, FERC Stats. & Regs. ] 31,044 at 
30,123. See, e.g., Consol. Edison, Inc., 94 FERC ] 61,079, at 61,366 
(2001) (``customers do have the opportunity to scrutinize costs 
before they are included in NEPOOL's formula rate, and could 
therefore alert the Commission to costs that, contrary to 
Applicants' commitments here, might be merger-related. In such a 
situation, we read Applicants' commitment to require them to 
shoulder the burden of proof, and to justify their failure to 
identify the costs as merger-related.'') (citing BEC Energy, 88 FERC 
] 61,002, at 61,007 (1999); New England Power Co., 87 FERC ] 61,287, 
at 62,146 (1999)).
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II. Discussion

A. Purpose of Proposed Policy Statement

    15. Upon consideration of the Commission's experience regarding 
hold harmless commitments since issuance of the Merger Policy 
Statement, we believe that clarifying the Commission's policy regarding 
hold harmless commitments, a frequently proposed ratepayer protection 
mechanism in FPA section 203 applications, would be beneficial to 
applicants, customers, and interested persons. We note, however, that 
unless specifically discussed herein, we reaffirm the guidance provided 
in the Merger Policy Statement and subsequent precedent, and reiterate 
that applicants under FPA section 203 should propose ratepayer 
protection mechanisms that ensure that customers are protected from the 
adverse rate effects of a proposed transaction. Furthermore, the 
guidance here should not discourage applicants from working with 
interested parties to resolve contentious issues regarding appropriate 
ratepayer protection mechanisms prior to the submission of an 
application under FPA section 203. As the Commission stated in the 
Merger Policy Statement, ``the most promising and expeditious means of 
addressing ratepayer protection is for the parties to negotiate an 
agreement on ratepayer protection mechanisms.'' \35\ Accordingly, we 
continue to expect applicants under FPA section 203 to engage their 
customers, when appropriate, and discuss with them any potential 
adverse rate effects that may result from a proposed transaction under 
FPA section 203, and how those effects can be mitigated.
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    \35\ Merger Policy Statement, FERC Stats. & Regs. ] 31,044 at 
30,123.
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    16. In this proposed policy statement, we propose to provide 
greater clarity to and seek comment from interested persons regarding 
the following issues related to hold harmless commitments. First, we 
propose to clarify those costs to which hold harmless commitments will 
apply. Although the Commission has provided broad guidance regarding 
the costs that should be covered under hold harmless commitments, it 
has never defined those costs with much specificity, leading to 
inconsistency with respect to this issue. Below, we propose to provide 
additional guidance by clarifying the costs that the Commission 
considers to be transaction-related costs. These are also the 
transaction-related costs that the Commission will review if and when 
applicants make the requisite filing under FPA section 205 to attempt 
to recover those costs by showing that they have been offset by savings 
due to the transaction. Finally, although we identify specific 
categories of costs below, we continue to believe that the Commission's 
policy must remain flexible enough to permit a case-by-case 
determination of transaction-related costs, and that an attempt to 
articulate those costs precisely could have unintended consequences.
    17. Second, we propose to clarify that applicants offering hold 
harmless commitments must implement

[[Page 4235]]

appropriate internal controls and procedures to track those costs from 
which they have committed to hold their customers harmless and must 
describe such controls and procedures as a part of their FPA section 
203 applications and any section 205 filings.\36\ We believe that these 
controls and procedures will ensure the proper identification, 
accounting, and rate treatment of all transaction-related costs 
incurred prior to and subsequent to the announcement of a proposed 
transaction. Requiring applicants to explain how they will track costs 
related to a hold harmless commitment will improve the Commission's 
ability to ensure that there is a process in place to prevent those 
costs from being recovered in rates prior to the Commission approving 
the recovery of them at a later date under FPA section 205, and will 
also clarify for customers what types of costs are covered under a hold 
harmless commitment, as required by Commission precedent.\37\
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    \36\ The Commission has previously explained that applicants 
should ensure that they have appropriate internal controls and 
procedures to ensure the proper identification, accounting, and rate 
treatment for all transaction-related costs incurred prior to and 
subsequent to proposed transactions, including all transition costs 
incurred after a merger is consummated. See, e.g., ITC Holdings, 143 
FERC ] 61,256 at P 168; Silver Merger Sub, 145 FERC ] 61,261 at P 
78.
    \37\ See, e.g., Order No. 642, FERC Stats. & Regs. ] 31,111 at 
31,914 (``[A]pplicants must clearly identify what customer groups 
are covered (e.g., requirements customers, transmission customers, 
formula rate customers, etc.), what types of costs are covered, and 
the time period for which the protection will apply.'').
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    18. Third, we propose that, in order for a hold harmless commitment 
to provide adequate ratepayer protection, it should not be limited in 
duration. As discussed in further detail below, we are concerned that 
limiting the hold harmless commitment to a certain period (generally 
five years) raises the risk that transaction-related costs could be 
included in future formula rate billings without applicants making the 
showing of offsetting savings. Eliminating the time limit will ensure 
that transaction-related costs cannot be recovered from ratepayers at 
any time, unless applicants can demonstrate that there are offsetting 
transaction-related savings. This revised approach is consistent with 
the Merger Policy Statement, which emphasized that the burden of proof 
to demonstrate that customers will be protected should be on applicants 
and that applicants should also bear the risk that benefits will not 
materialize.\38\
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    \38\ Merger Policy Statement, FERC Stats. & Regs. ] 31,044 at 
30,123.
---------------------------------------------------------------------------

    19. Finally, we propose to clarify that applicants may demonstrate 
that, under certain circumstances, transactions will not have an 
adverse effect on rates without relying on hold harmless commitments or 
other ratepayer protection mechanisms. As noted above, some applicants 
have made hold harmless commitments in connection with transactions 
involving the acquisition or disposition of existing jurisdictional 
facilities where the acquiring entity was a traditional franchised 
utility and entering into the transaction in order to satisfy resource 
adequacy requirements at the state level, to improve system 
reliability, and/or meet other regulatory requirements.\39\ Hold 
harmless commitments may not be appropriate in these and other similar 
circumstances given that while these proposed transactions may have an 
effect on rates, that effect may not be adverse. Accordingly, as 
discussed in further detail below, we propose that under certain 
circumstances, applicants may show that a transaction will not have an 
adverse effect on rates without proposing additional ratepayer 
protection mechanisms.
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    \39\ See, e.g., FirstEnergy, 141 FERC ] 61,239, at PP 1, 16, 27-
30 (2012) (accepting a hold harmless commitment in an asset 
transaction where generation assets would be turned into assets to 
support transmission system upgrades in order to meet needs 
identified in a study by PJM Interconnection, L.L.C. following the 
retirement of other generating facilities); ITC Midwest, 140 FERC ] 
61,125 at P 15; Int'l Transmission Co., 139 FERC ] 61,003, at P 16 
(2012).
---------------------------------------------------------------------------

    20. Our intent is to apply any changes to our policy on hold 
harmless commitments on a prospective basis, for applications submitted 
after the Commission has issued a policy statement, and not alter 
existing hold harmless commitments accepted by the Commission or 
submitted in applications pending at the time the Commission issues the 
policy statement. We seek comments from interested persons on these 
proposals.

B. Revisions to the Commission's Policy on Hold Harmless Commitments

1. Identifying and Accounting for Transaction-Related Costs
    21. We propose to designate the following categories of costs as 
the transaction-related costs that should be subject to any hold 
harmless commitment. Accordingly, the costs set out below are those 
transaction-related costs from which customers must be held harmless 
and that may not be recovered from customers except to the extent 
exceeded by demonstrated savings.\40\ As noted above, although we 
propose to provide guidance in this proposed policy statement regarding 
how to identify transaction-related costs, we continue to believe that 
attempts to precisely articulate all such costs are not feasible. For 
example, while many direct costs of a transaction can be tracked with 
proper mechanisms and controls, other costs may be more difficult to 
classify. Accordingly, because each transaction is unique, the final 
determination of what transaction-related costs may be recovered by 
applicants will remain subject to a case-by-case analysis; 
specifically, this determination will be made if and when applicants 
propose to recover transaction-related costs and demonstrate offsetting 
savings in the subsequent FPA section 205 filing described previously 
by the Commission.
---------------------------------------------------------------------------

    \40\ We expect that applicants proposing to recover these costs 
would track and record them pursuant to the procedures established 
below. See infra section II.B.2.
---------------------------------------------------------------------------

    22. First, we propose that transaction-related costs include, but 
are not limited to, the following costs incurred to explore, agree to, 
and consummate a transaction:
    <bullet> The costs of securing an appraisal, formal written 
evaluation, or fairness opinions related to the transaction;
    <bullet> The costs of structuring the transaction, negotiating the 
structure of the transaction, and obtaining tax advice on the structure 
of the transaction;
    <bullet> The costs of preparing and reviewing the documents 
effectuating the transaction (e.g., the costs to transfer legal title 
of an asset, building permits, valuation fees, the merger agreement or 
purchase agreement and any related financing documents);
    <bullet> The internal labor costs of employees \41\ and the costs 
of external, third-party, consultants and advisors to evaluate 
potential merger transactions, and once a merger candidate has been 
identified, to negotiate merger terms, to execute financing and legal 
contracts, and to secure regulatory approvals; \42\
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    \41\ If the duties of employees are not solely dedicated to 
activities related to a transaction, internal labor costs deemed 
merger-related should be determined in a manner that is 
proportionally equal to the amount of time spent on the merger 
compared to other activities of the utility and tracked accordingly.
    \42\ Some of these costs are typically incurred prior to the 
announcement of a merger.
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    <bullet> The costs of obtaining shareholder approval (e.g., costs 
of proxy solicitation and special meeting of shareholders);
    <bullet> Professional service fees incurred in the transaction 
(e.g., fees for accountants, surveyors, engineers, and legal 
consultants); and

[[Page 4236]]

    <bullet> Installation, integration, testing, and set up costs 
related to ensuring the operability of facilities subject to the 
transaction
    23. Moreover, for transactions that are pursued but never completed 
(transactions that ultimately fail), their costs should not be 
recovered from ratepayers. In addition, we recognize that not every 
cost listed above will be found in every transaction.
    24. The second category of transaction-related costs relates to 
mergers, where, in addition to the transaction-related costs described 
above, parties typically also incur costs to integrate individuals and 
assets into the acquiring utility and costs to achieve merger 
synergies.\43\ These costs, which are sometimes referred to 
collectively as ``transition'' costs, are incurred after the 
transaction is consummated, often over a period of several years. These 
costs include both the internal costs of employees spending time 
working on transition issues, and external costs paid to consultants 
and advisers to reorganize and consolidate functions of the merging 
entities to achieve merger synergies. These costs may also include both 
capital items (e.g., a new computer system or software, or costs 
incurred to carry out mitigation commitments accepted by the Commission 
in approving the transaction to address competition issues, such as the 
cost of constructing new transmission lines, etc.) and expense items 
(e.g., costs to eliminate redundancies, combine departments, or 
maximize contracting efficiencies). We propose that transaction-related 
costs incurred to integrate the operations of merging companies 
include, but are not limited to, the following:
---------------------------------------------------------------------------

    \43\ Entities engaging in certain internal corporate 
restructuring and reorganizations, unrelated to complying with state 
law restructuring requirements, may seek to achieve similar cost 
savings or increased efficiencies as merging entities.
---------------------------------------------------------------------------

    <bullet> Engineering studies needed both prior to and after closing 
the merger;
    <bullet> Severance payments;
    <bullet> Operational integration costs;
    <bullet> Accounting and operating systems integration costs;
    <bullet> Costs to terminate any duplicative leases, contracts, and 
operations; and
    <bullet> Financing costs to refinance existing obligations in order 
to achieve operational and financial synergies.
    25. As above, this list of transition costs is not exhaustive, and 
may not include some material costs involved in the integration of two 
utilities after a merger. We propose to consider transition costs as 
transaction-related costs that should be subject to hold harmless 
commitments. We propose to assume that such transaction-related costs 
should be covered under hold harmless protection, though applicants 
will have an opportunity on a case-by-case basis to show why certain of 
those costs should not have to be covered under their hold harmless 
commitment based on their particular circumstances. Also, we propose to 
consider, on a case-by-case basis, whether other costs not discussed 
herein should be subject to hold harmless commitments.
    26. Additionally, we note that accounting journal entries related 
to a merger transaction may affect expense, asset, liability, or 
proprietary capital accounts used in the development of a public 
utility's rates. These accounting journal entries may originate from 
transaction-related costs recorded as an expense or capitalized as an 
asset. Additional accounting journal entries may originate from 
goodwill and fair value adjustments related to the purchase price paid 
for the acquired company. Merger transactions are accounted for by 
applying purchase accounting, which adjusts the assets and liabilities 
of the acquired entity to fair value and recognizes goodwill for the 
amount paid in excess of fair value.\44\ If the acquired company is a 
holding company, purchase accounting also provides for the fair value 
adjustments and goodwill to be recorded on the books of some, or all, 
of the acquired holding company's subsidiaries, which is commonly 
referred to as ``push-down'' accounting. Under appropriate 
circumstances, the Commission has allowed the fair value accounting 
adjustments and goodwill to be recorded on a public utility's books and 
reported in the FERC Form No. 1. Additionally, the Commission has 
required public utilities to maintain detailed accounting records and 
disclosures associated with such amounts so as to facilitate the 
evaluation of the effects of the transaction on common equity and other 
accounts in future periods if needed for ratemaking purposes.\45\ We 
believe that ratepayers should continue to be protected from adverse 
effects on rates stemming from accounting entries recording goodwill 
and fair value adjustments on a public utility's books and reported in 
FERC Form Nos. 1 or 1-F. This is consistent with our long-standing 
policy that acquisition premiums, including goodwill, must be excluded 
from jurisdictional rates absent a filing under FPA section 205 and 
Commission authorization granting recovery of specific costs.
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    \44\ Purchase accounting is also commonly referred to as 
acquisition accounting under generally accepted accounting 
principles in the United States. Purchase accounting is a formal 
accounting method for merger transactions which measures the assets 
and liabilities of the acquired entity at fair value and establishes 
goodwill for amounts paid in excess of fair value. See Accounting 
Standard Codification Section 805-10 (Fin. Accounting Standards Bd. 
2014), available at http://asc.fasb.org.
    \45\ Michigan Electric Transmission Co., LLC, 116 FERC ] 61,164, 
at PP 29-30 (2006); Niagara Mohawk Holdings Inc., 95 FERC ] 61,381, 
at 62,415, reh'g denied, 96 FERC ] 61,144 (2001); PPL, 133 FERC ] 
61,083 at P 39.
---------------------------------------------------------------------------

    27. Similarly, in the context of the acquisition of discrete assets 
by a utility, under the Commission's accounting regulations and rate 
precedent the excess purchase cost of utility plant over its 
depreciated original cost is an acquisition premium and is excluded 
from recovery through rates unless a showing of offsetting benefits is 
demonstrated in an FPA section 205 filing. In the past, applicants have 
proposed to include acquisition premiums as transaction-related costs 
subject to their proposed hold harmless commitments,\46\ and 
intervenors have requested that the Commission require applicants to 
include acquisition premiums as transaction-related costs.\47\ The 
Commission has not, and does not, consider acquisition premiums to be 
part of transaction-related costs. The recovery of acquisition premiums 
must be pursued through a separate FPA section 205 filing, whether or 
not a hold harmless commitment has been made.\48\ We do not believe 
that our proposed treatment of transaction-related costs here requires 
a change in the Commission's current practice with respect to 
acquisition premiums. We will continue to preclude recovery of 
acquisition premiums as part of transaction-related costs, and remind 
applicants that a showing of ``specific, measurable, and substantial 
benefits to ratepayers'' must be made in a subsequent FPA section 205 
proceeding in order to recover an acquisition premium.\49\
---------------------------------------------------------------------------

    \46\ See, e.g., Florida Power & Light Co., 145 FERC ] 61,018, at 
PP 53, 60 (2013); FirstEnergy, 141 FERC ] 61,239 at P 16 n.13.
    \47\ See, e.g., Silver Merger Sub, 145 FERC ] 61,261 at PP 61-
62.
    \48\ Exelon-Pepco, 149 FERC ] 61,148 at n.180; Silver Merger 
Sub, 145 FERC ] 61,261 at P 68; Florida Power & Light, 145 FERC ] 
61,018 at P 60; Exelon, 138 FERC ] 61,167 at P 118 (citing Merger 
Policy Statement, FERC Stats. & Regs. ] 31,044 at 30,126; Duke 
Energy Moss Landing, 83 FERC ] 61,318, reh'g denied, 86 FERC ] at 
61,816 (citing Mid-Louisiana Gas, 7 FERC ] 61,316, at 61,682, reh'g 
denied, 8 FERC ] 61,227, aff'd sub nom. Transcon. Gas Pipe Line Co. 
v. FERC, 652 F.2d 179 (D.C. Cir. 1981)) (rate recovery of an 
existing facility is generally limited to the original cost of the 
facility)).
    \49\ Duke Energy Progress, Inc., 149 FERC ] 61,220, at PP 67-68 
(2014) (reviewing Commission precedent requiring that acquisition 
adjustments may be recovered if the acquisition provides 
``measurable benefits'' that are ``tangible and nonspeculative,'' 
and allowing recovery of an acquisition adjustment where ``the 
acquisition provides specific, measurable, and substantial benefits 
to ratepayers'') (internal citations omitted).

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[[Page 4237]]

    28. We seek comments from interested persons on these proposals. In 
particular, we seek comments on the categories of costs, including 
transition costs, that are proposed to be transaction-related costs 
which should be subject to hold harmless protection. We also seek 
comments on the costs that should not be subject to hold harmless 
commitments.
2. Controls and Procedures to Track and Record Costs Related To Hold 
Harmless Commitments
    29. As noted above, applicants are required to describe in their 
FPA section 203 applications how they intend to protect ratepayers from 
transaction-related costs, consistent with their obligation to show 
that their transaction is consistent with the public interest.\50\ As 
contemplated in the Merger Policy Statement, a hold harmless commitment 
offered by applicants must be ``enforceable and administratively 
manageable.'' \51\ In creating an enforceable and administratively 
manageable commitment, applicants should provide assurances that 
transaction-related costs will be quantified, documented, and verified, 
and may not be recovered from ratepayers until applicants can 
demonstrate that savings, if any, offset the transaction-related costs 
they seek to recover. To this end, the Commission has required that 
applicants offering hold harmless commitments establish internal 
controls and/or tracking mechanisms.\52\ We propose additional guidance 
below regarding these requirements.
---------------------------------------------------------------------------

    \50\ See Order No. 642, FERC Stats. & Regs. ] 31,111 at 31,914.
    \51\ Merger Policy Statement, FERC Stats. & Regs. ] 31,044 at 
30,124.
    \52\ See Silver Merger Sub, 145 FERC ] 61,261 at P 78; ITC 
Holdings, 143 FERC ] 61,256 at P 168.
---------------------------------------------------------------------------

    30. First, we propose to clarify that all applicants offering hold 
harmless commitments should implement appropriate internal controls and 
procedures to ensure the proper identification, accounting, and rate 
treatment of all transaction-related costs incurred prior to and 
subsequent to the announcement of a proposed transaction, including all 
transition costs.
    31. Second, we propose that applicants offering hold harmless 
commitments should include, as part of their FPA section 203 
applications and any separate FPA section 205 filings, a detailed 
description of how they define, designate, accrue, and allocate 
transaction-related costs, and explain the criteria used to determine 
which costs are transaction-related. Applicants should specifically 
identify and describe their direct and indirect cost classifications, 
and the processes they use to functionalize, classify and allocate 
transaction-related costs. In addition, applicants should explain the 
types of transaction-related costs that will be recorded on their 
public utilities' books; how they determined the portion of these costs 
assigned to their public utilities; and how they classify these costs 
as non-operating, transmission, distribution, production, and other. 
Applicants should also describe their accounting procedures and 
practices, and how they maintain the underlying accounting data so that 
the allocation of transaction-related costs to the operating and non-
operating accounts of their public utilities is readily available and 
easily verifiable.
    32. We note that the Commission has, in the past, required 
applicants to submit their final accounting entries associated with 
transactions within six months of the date that the transaction is 
consummated.\53\ As a part of this accounting filing, we propose to 
require applicants subject to the Commission's accounting regulations 
to provide the accounting entries and amounts related to all 
transaction-related costs incurred as of the date of the accounting 
filing, along with narrative explanations describing the entries.
---------------------------------------------------------------------------

    \53\ See, e.g., Central Vermont Public Service Corp., 138 FERC ] 
61,161, at P 55 (2012).
---------------------------------------------------------------------------

    33. We seek comments on these proposals.
3. Time Limits on Hold Harmless Commitments
    34. The Commission previously stated in the Merger Policy Statement 
that a hold harmless commitment need only protect customers ``for a 
significant period of time following the merger.''\54\ However, in 
light of the proposed treatment of certain categories of costs 
discussed above, the Commission's experience auditing utilities that 
have made hold harmless commitments and concerns of protestors in 
previous FPA section 203 applications,\55\ we propose to reconsider 
whether hold harmless commitments that are limited to five years (or 
another specified period) adequately protect ratepayers from an adverse 
effect on rates. As part of this reconsideration, we believe that time-
limited hold harmless commitments may not adequately protect ratepayers 
from transaction-related costs. Therefore, we propose that there be no 
time limit on hold harmless commitments and that costs subject to hold 
harmless commitments cannot be recovered from ratepayers at any time 
(regardless of when such costs are incurred), absent a showing of 
offsetting savings in order to demonstrate no adverse effect on 
rates.\56\ This revised approach is consistent with the Merger Policy 
Statement, which emphasized that the burden of proof to demonstrate 
that customers will be protected should be on applicants, and that 
applicants should also bear the risk that benefits will not 
materialize.\57\
---------------------------------------------------------------------------

    \54\ Merger Policy Statement, FERC Stats. & Regs. ] 31,044 at 
30,124.
    \55\ See, e.g., PNM Resources, 124 FERC ] 61,019 at P 36 
(protestor alleging that the five-year limitation on recovery will 
simply result in the deferred recovery of transaction-related 
costs).
    \56\ Evidence of offsetting merger-related savings cannot be 
based on estimates or projections of future savings, but must be 
based on a demonstration of actual merger-related savings realized 
by jurisdictional customers. Exelon-Pepco, 149 FERC ] 61,148 at P 
107 (citing Audit Report of National Grid, USA, Docket No. FA09-10-
000 (Feb. 11, 2011) at 55; Ameren Corp., 140 FERC ] 61,034, at PP 
36-37 (2012)).
    \57\ Merger Policy Statement, FERC Stats. & Regs. ] 31,044 at 
30,123.
---------------------------------------------------------------------------

    35. Specifically, we are concerned that limiting the applicability 
of hold harmless commitments to specific time periods may create 
incentives for applicants to modify how they would otherwise seek to 
recover or account for recovery of certain transaction-related costs 
based on the time period. For example, an applicant could try to 
include transaction-related costs in formula rates without making a 
showing of offsetting savings if the costs, though incurred during the 
hold harmless period, do not enter the ratemaking process until after 
the hold harmless period expires. Moreover, whether or not any such 
incentives exist, certain transaction-related expenditures could be 
properly capitalized as an asset during the hold harmless period, but 
the recovery of the costs associated with that asset would occur only 
as the asset is depreciated over future periods that extend beyond the 
hold harmless period.
    36. Similarly, limiting the applicability of hold harmless 
commitments to specific time periods may incentivize applicants to 
delay incurring some types of transaction-related costs until after the 
hold harmless period expires. By waiting to incur costs subject to hold 
harmless commitments until after the expiration of the hold harmless 
period, applicants could attempt to include such costs in their future 
formula rate billings without making the showing of

[[Page 4238]]

offsetting savings required to justify recovery of such costs. In this 
regard, we believe that the focus of a hold harmless commitment should 
be on whether a cost is transaction-related, and not on when the cost 
is incurred.
    37. We seek comments on this proposal.
4. Transactions Without Adverse Effects on Rates
    38. As explained above, applicants under FPA section 203 must 
demonstrate that proposed transactions do not have an adverse effect on 
rates. In order to make this showing, applicants sometimes propose, and 
the Commission has accepted, hold harmless commitments. Pursuant to 
these hold harmless commitments, the Commission has held that customers 
must be held harmless from transaction-related costs unless and until 
applicants demonstrate offsetting transaction-related benefits--whether 
quantifiable cost savings or other non-quantifiable benefits.
    39. As noted above, some applicants have made hold harmless 
commitments in connection with transactions involving the acquisition 
or disposition of existing jurisdictional facilities where the 
acquiring entity was a traditional franchised utility and entering into 
the transaction in order to satisfy resource adequacy requirements at 
the state level, to improve system reliability, and/or meet other 
regulatory requirements.\58\ However, while customers in these examples 
may experience a rate increase due to the costs of the facilities, such 
rate effect may not necessarily be adverse because those costs were 
incurred to meet a governmental regulatory requirement. The Commission 
has held that, as a general matter of policy, ratepayers should bear 
the cost of utility service.\59\
---------------------------------------------------------------------------

    \58\ See, e.g., FirstEnergy, 141 FERC ] 61,239 at PP 1, 16, 27-
30 (accepting a hold harmless commitment in an asset transaction 
where generation assets would be turned into assets to support 
transmission system upgrades in order to meet needs identified in a 
study by PJM Interconnection, L.L.C. following the retirement of 
other generating facilities); ITC Midwest, 140 FERC ] 61,125 at P 
15; Int'l Transmission Co., 139 FERC ] 61,003, at P 16 (2012).
    \59\ See, e.g., Old Dominion Elec. Cooperative and N.C. Elec. 
Membership Corp. v. Va. Elec. and Power Co.,146 FERC ] 61,200 
(2014).
---------------------------------------------------------------------------

    40. Accordingly, we propose to clarify that applicants undertaking 
certain transactions to fulfill documented utility service needs need 
not propose ratepayer protection mechanisms such as a hold harmless 
commitment in an application under FPA section 203 in order to show 
that the transaction will not have an adverse effect on rates. We 
believe that applicants engaging in these types of transactions can 
make the requisite showing that, even though the proposed transaction 
may have an effect on rates, such effect on rates is not adverse.
    41. Examples of the transactions in which applicants may 
demonstrate no adverse effect on rates without offering a hold harmless 
commitment or other ratepayer protection mechanism would include the 
purchase of an existing generating plant or transmission facility that 
is needed to serve the acquiring company's customers or forecasted load 
within a public utility's existing footprint, in compliance with a 
resource planning process, or to meet specified North American Electric 
Reliability Corporation (NERC) standards. We propose that applicants 
seeking to demonstrate that a transaction will not have an adverse 
effect on rates for these or other reasons should provide supporting 
evidence and documentation which could include an explanation that the 
transaction is intended to serve existing customers or forecasted load 
within an existing footprint; to address a state commission order or 
directive requiring acquisition of specific assets; to address a need 
for a transmission facility, as established through a regional 
transmission planning process or as required to satisfy a NERC 
standard; or to address other state or federal regulatory requirements. 
For instance, in FirstEnergy, applicants requested approval from the 
Commission under FPA section 203 for an internal transfer of certain 
assets that would address significant reliability concerns, including a 
potential NERC violation, at a cost that was two-thirds that of the 
next possible solution.\60\ In that order, consistent with existing 
policy, the Commission accepted applicants' hold harmless commitment as 
it was offered. Under the clarification proposed herein, however, such 
a hold harmless commitment would not need to be offered in order to 
show that the transaction would not have an adverse effect on rates.
---------------------------------------------------------------------------

    \60\ FirstEnergy, 141 FERC ] 61,239 at P 5.
---------------------------------------------------------------------------

    42. Applicants may make a showing that a particular transaction 
does not have an adverse effect on rates based on other grounds, but 
the burden remains on applicants to show in their application for 
authorization under FPA section 203 that the costs, or a portion of the 
costs, related to such a transaction should be passed on to ratepayers. 
Further, applicants may provide the Commission with information to show 
the need to meet other regulatory requirements as a means to 
demonstrate that the effect on rates due to the transaction is not 
adverse. The Commission will carefully review such a showing before 
determining that a proposed transaction without any proposed ratepayer 
protection mechanism has no adverse effect on rates. We believe this 
approach is consistent with both the Merger Policy Statement and the 
Commission's policy that ratepayers should bear the costs of utility 
service. We seek comments on this proposal.

III. Comment Procedures

    43. We invite comments on this proposed policy statement within 
March 30, 2015.

IV. Document Availability

    44. 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 NE., Room 2A, 
Washington, DC 20426.
    45. From the Commission'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.
    46. User assistance is available for eLibrary and the Commission's 
Web site during normal business hours from FERC Online Support at (202) 
502-6652 (toll free at 1-866-208-3676) or email at 
<a href="/cdn-cgi/l/email-protection#02646770616d6c6e6b6c67717772726d707642646770612c656d74"><span class="__cf_email__" data-cfemail="54323126373b3a383d3a31272124243b262014323126377a333b22">[email protected]</span></a>, or the Public Reference Room at (202) 502-
8371, TTY (202) 502-8659. Email the Public Reference Room at 
<a href="/cdn-cgi/l/email-protection#700005121c19135e0215161502151e1315021f1f1d30161502135e171f06"><span class="__cf_email__" data-cfemail="09797c6b65606a277b6c6f6c7b6c676a6c7b666664496f6c7b6a276e667f">[email protected]</span></a>.

V. Information Collection Statement

    47. The Paperwork Reduction Act (PRA) \61\ requires each federal 
agency to seek and obtain Office of Management and Budget (OMB) 
approval before undertaking a collection of information directed to ten 
or more persons or contained in a rule of general applicability. OMB 
regulations require approval of certain information collection 
requirements imposed by agency rules.\62\ Upon approval of a 
collection(s) of information, OMB will

[[Page 4239]]

assign an OMB control number and an expiration date. Respondents 
subject to the filing requirements of an agency rule will not be 
penalized for failing to respond to these collections of information 
unless the collections of information display a valid OMB control 
number.
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    \61\ 44 U.S.C. 3501-3520.
    \62\ See 5 CFR 1320.
---------------------------------------------------------------------------

    The following table shows the Commission's estimates for the 
additional burden and cost, as contained in the Proposed Policy 
Statement:

                        Revisions, in the Proposed Policy Statement in Docket No. PL15-3
----------------------------------------------------------------------------------------------------------------
                                                                                Average burden
                                 Number and       Number of     Total number     hours & cost      Total burden
         Requirements              type of      responses per   of responses     per response     hours & total
                                 respondents     respondent                          \63\              cost
                                     (1)             (2)         (1) * (2) =          (4)           (3) * (4)
                                                                     (3)
----------------------------------------------------------------------------------------------------------------
FERC-519 (FPA Section 203                  18               1              18  20 hrs.; $1,410.  360 hrs.;
 Filings).                                                                                        $25,380.
FERC-516 (FPA Section 205,                  1               1          \64\ 1  103.26 hrs.;      103.26 hrs.;
 Rate and Tariff Filings).                                                      $7,279.83.        $7,279.83.
FERC-555, Record Retention...              18               1              18  4 hrs.; $282....  72 hrs.;
                                                                                                  $5,076.
                              ----------------------------------------------------------------------------------
    TOTAL....................  ..............  ..............  ..............  ................  535.26 hrs.;
                                                                                                  $37,735.83.
----------------------------------------------------------------------------------------------------------------

     
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    \63\ The hourly cost figures are based on data for salary plus 
benefits. We think industry is similarly situated to FERC in terms 
of the average cost of a full time employee, and we are using $70.50 
per hour for salary plus benefits.
    The estimates for cost per response are derived using the 
following formula: Average Burden Hours per Response * $70.50 per 
Hour = Average Cost per Response.
    \64\ We estimate that one FPA section 205 filing may be made 
annually subject to the Proposed Policy Statement.
---------------------------------------------------------------------------

    Title: FERC-519, Application under Federal Power Act Section 203; 
FERC-516, Electric Rate Schedules and Tariff Filings; and FERC-555, 
Preservation of Records for Public Utilities and Licensees, Natural Gas 
and Oil Pipeline Companies.
    Action: Revised Collections of Information.
    OMB Control No: 1902-0082 (FERC-519), 1902-0096 (FERC-516), and 
1902-0098 (FERC-555).
    Respondents: Business or other for profit, and not for profit 
institutions.
    Frequency of Responses: As needed and ongoing.
    Necessity of the Information: To protect ratepayers and to mitigate 
possible adverse effects on rates that may result from mergers or 
certain other transactions that are subject to section 203 of the FPA, 
we propose clarifications and additional information collection 
requirements related to hold harmless commitments offered by 
applicants.
    Internal review: The Commission has reviewed the changes included 
in the Proposed Policy Statement and has determined that the additional 
reporting and recordkeeping requirements are necessary.
    Interested persons may obtain information on the reporting 
requirements by contacting: Federal Energy Regulatory Commission, 888 
First Street NE., Washington, DC 20426 [Attention: Ellen Brown, Office 
of the Executive Director, email: <a href="/cdn-cgi/l/email-protection#c682a7b2a785aaa3a7b4a7a8a5a386a0a3b4a5e8a1a9b0"><span class="__cf_email__" data-cfemail="195d786d785a757c786b78777a7c597f7c6b7a377e766f">[email protected]</span></a>, Phone: (202) 
502-8663, fax: (202) 273-0873].

    By the Commission. Commissioner Honorable is voting present.

    Issued: January 22, 2015.
Nathaniel J. Davis, Sr.,
Deputy Secretary.
[FR Doc. 2015-01423 Filed 1-26-15; 8:45 am]
BILLING CODE 6717-01-P


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