Document ID: FERC-2008-1291-0001
Agency: ferc
Document Type: Proposed Rule
Title: Market-Based Rates for Wholesale Sales of Electric Energy, Capacity and Ancillary Services by Public Utilities; Order Requesting Supplemental Comments
Posted Date: 2008-09-05T04:00Z

[Federal Register: September 5, 2008 (Volume 73, Number 173)]
[Proposed Rules]               
[Page 51744-51747]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr05se08-12]                         

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Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

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[[Page 51744]]

DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 35

[Docket No. RM04-7-005]

 
Market-Based Rates for Wholesale Sales of Electric Energy, 
Capacity and Ancillary Services by Public Utilities; Order Requesting 
Supplemental Comments

Issued August 29, 2008.
AGENCY: Federal Energy Regulatory Commission.

ACTION: Order Requesting Supplemental Comments.

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SUMMARY: The Federal Energy Regulatory Commission (Commission), in 
response to requests for rehearing of Order No. 697-A, intends to 
revise the definition of the term ``affiliate'' adopted in Order No. 
697-A and codified in the Commission's regulations, and seeks 
supplemental comments on this issue.

DATES: Comments are due October 20, 2008.

FOR FURTHER INFORMATION CONTACT:
Michelle Barnaby (Technical Information), Office of Energy Market 
Regulation, Federal Energy Regulatory Commission, 888 First Street, 
NE., Washington, DC 20426, (202) 502-8407.
Paul Silverman (Legal Information), Office of the General Counsel, 
Federal Energy Regulatory Commission, 888 First Street, NE., 
Washington, DC 20426, (202) 502-8683.
Paige Bullard (Legal Information), Office of the General Counsel, 
Federal Energy Regulatory Commission, 888 First Street, NE., 
Washington, DC 20426, (202) 502-6462.

SUPPLEMENTARY INFORMATION:

Before Commissioners: Joseph T. Kelliher, Chairman; Suedeen G. 
Kelly, Marc Spitzer, Philip D. Moeller, and Jon Wellinghoff.

Order Requesting Supplemental Comments

    1. The Federal Energy Regulatory Commission (Commission) intends to 
revise the definition of the term ``affiliate'' adopted in Order No. 
697-A and codified in Sec.  35.36(a)(9) of the Commission's 
regulations,\1\ in response to issues raised in requests for rehearing 
of Order No. 697-A.\2\ To ensure a complete record and full opportunity 
of all parties to comment on a revised definition of ``affiliate'' in 
this docket, the Commission is seeking supplemental comments on this 
issue.
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    \1\ 18 CFR 35.36(a)(9).
    \2\ Market-Based Rates for Wholesale Sales of Electric Energy, 
Capacity and Ancillary Services by Public Utilities, Order No. 697, 
FERC Stats. & Regs. ] 31,252, clarified, 121 FERC ] 61,260 (2007), 
order on reh'g, Order No. 697-A, 73 FR 25832 (May 7, 2008), FERC 
Stats. & Regs. ] 31,268, clarified, 124 FERC ] 61,055 (2008).
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I. Background

    2. In Order No. 697-A, the Commission clarified that it would 
define the term ``affiliate'' for purposes of Order No. 697 and the 
affiliate restrictions adopted in Sec.  35.39 of its regulations as 
that term is used in the regulations adopted in the Affiliate 
Transactions Final Rule.\3\ The Commission stated that it was taking 
this action in light of its goal to have a more consistent definition 
of affiliate for purposes of both exempt wholesale generators (EWGs) 
and non-EWGs to the extent possible, as well as to strengthen the 
Commission's ability to ensure that customers are protected.
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    \3\ Cross-Subsidization Restrictions on Affiliate Transactions, 
Order No. 707, 73 FR 11013 (Feb. 29, 2008), FERC Stats. & Regs. ] 
31,264 (Feb. 21, 2008) (Affiliate Transactions Final Rule), order on 
rehearing, Order No. 707-A, 73 FR 43072 (July 24, 2008), FERC Stats. 
& Regs. ] 31,272 (2008).
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    3. The Commission explained that in the Affiliate Transactions 
Final Rule, it considered the use of the term affiliate in the context 
of the Affiliate Transactions Notice of Proposed Rulemaking, the 
Commission's Standards of Conduct for Transmission Providers, and other 
precedent.\4\ In particular, the Commission considered its order in the 
1995 Morgan Stanley case, in which it adopted distinct definitions of 
affiliate for EWGs and non-EWGs. The Commission noted there that 
section 214 of the Federal Power Act (FPA) required use of the Public 
Utility Holding Company Act of 1935 (PUHCA 1935) definition of 
affiliate to determine whether an electric utility is an affiliate of 
an EWG for purposes of evaluating EWG rates for wholesale sales of 
electric energy. The Commission thus stated in Morgan Stanley that the 
PUHCA 1935 definition of affiliate would apply to EWGs for matters 
arising under Part II of the FPA.\5\ For all other public utilities, 
the Commission adopted a definition that in essence treats all 
companies under the common control of another company, as well as that 
controlling company, as affiliates. The Commission also stated in 
Morgan Stanley that a ten percent or greater voting interest creates a 
rebuttable presumption of control.\6\ After reviewing the precedent 
established in Morgan Stanley, the Commission in the Affiliate 
Transactions Final Rule also reviewed FPA section 214 as revised by 
EPAct 2005 as well as the affiliate definitions contained in both PUHCA 
1935 \7\ and the Public Utility Holding Company Act of 2005 (PUHCA 
2005).\8\
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    \4\ Order No. 697-A, FERC Stats. & Regs. ] 31,268 at P 182 
(citing Morgan Stanley Capital Group, Inc., 72 FERC ] 61,082, at 
61,436-37 (1995) (Morgan Stanley)).
    \5\ Morgan Stanley, 72 FERC ] 61,082 at 61,436-37.
    \6\ Id. The Commission did this by adopting the definition of an 
affiliate found in its Standards of Conduct for Interstate 
Pipelines.
    \7\ 15 U.S.C. 79a et seq. PUHCA 1935 defines an affiliate as:
    (a) Any person that directly or indirectly owns, controls or 
holds with the power to vote, 5 per centum or more of the 
outstanding voting securities of such specified company;
    (b) Any company 5 per centum or more of whose outstanding voting 
securities are owned, controlled, or held with the power to vote, 
directly or indirectly, by such specified company;
    (c) Any individual who is an officer or director of such 
specified company, or of any company which is an affiliate thereof 
under clause (a) of this paragraph; and
    (d) Any person or class of persons that the [Securities and 
Exchange Commission] determines, after appropriate notice and 
opportunity for hearing, to stand in such relation to such specified 
company that there is liable to be such an absence of arm's-length 
bargaining in transactions between them as to make it necessary or 
appropriate in the public interest or for the protection of 
investors or consumers that such person be subject to the 
obligation, duties, and liabilities imposed in this title upon 
affiliates of a company.
    \8\ EPAct 2005 at 1261 et seq. Prior to its amendment by the 
Energy Policy Act of 2005, section 214 of the FPA, 16 U.S.C. 824m, 
read as follows:
    No rate or charge received by an exempt wholesale generator for 
the sale of electric energy shall be lawful under section 824d of 
this title if, after notice and opportunity for hearing, the 
Commission finds that such rate or charge results from the receipt 
of any undue preference or advantage from an electric utility which 
is an associate company or an affiliate of the exempt wholesale 
generator. For purposes of this section, the terms ``associate 
company'' and ``affiliate'' shall have the same meaning as provided 
in section 2(a) of the Public Utility Holding Company Act of 1935.
    EPAct 2005 amended section 214 of the FPA by substituting the 
reference to the PUHCA 1935 definition of affiliate with a reference 
to the PUHCA 2005 definition. PUHCA 2005 defines an affiliate of a 
specified company as any company in which the specified company has 
a five percent or greater voting interest. Thus, as revised by EPAct 
2005, the only EWG affiliate sales that are subject to FPA section 
214 are sales by an EWG to a company in which it owns a five percent 
or greater voting interest.

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[[Page 51745]]

    4. In Order No. 697-A, the Commission explained that after taking 
into account these differing definitions, and recognizing the need to 
provide greater clarity and consistency in its rules, the Commission 
found in the Affiliate Transactions Final Rule that it was important to 
try to adopt a more consistent definition in its various rules and also 
one that is sufficiently broad to allow the Commission to protect 
customers adequately.\9\ The Commission further explained that on this 
basis, the definition of affiliate as adopted in the Affiliate 
Transactions Final Rule explicitly incorporated the PUHCA 1935 
definition of an affiliate for EWGs, which uses a five percent voting 
interest threshold, rather than incorporate it by reference, as 
previously had been done. The definition in the Affiliate Transactions 
Final Rule also adopted a parallel definition of affiliate for non-
EWGs, but with adjustments to reflect the ten percent voting interest 
threshold for non-EWGs that was utilized up to that time and to 
eliminate certain language not applicable or necessary in the context 
of the FPA. The Commission in Order No. 697-A then adopted in this rule 
the same definition of ``affiliate'' that it had adopted in the 
Affiliate Transactions Final Rule.
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    \9\ Order No. 697-A, FERC Stats. & Regs. ] 31,268 at P 182.
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II. Requests for Rehearing

    5. The Electric Power Supply Association (EPSA), the Mirant 
Entities (Mirant) \10\ and Reliant Energy, Inc. (Reliant) (together, 
petitioners) submitted requests for rehearing of the Commission's 
determination in Order No. 697-A to codify in its market-based rate 
regulations a definition of affiliate that distinguishes between EWGs 
and non-EWGs.\11\ They argue that the Commission erred in adopting a 
separate definition for EWGs.\12\
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    \10\ The Mirant Entities are Mirant California, LLC, Mirant 
Delta, LLC, Mirant Potrero, LLC, Mirant Canal, LLC, Mirant Kendal, 
LLC, Mirant Bowline, LLC, Mirant Lovett, LLC, Mirant Chalk Point, 
LLC, Mirant Mid-Atlantic, LLC, Mirant Potomac River, LLC, and Mirant 
Energy Trading, LLC.
    \11\ Other issues have been raised on rehearing of Order No. 
697-A and will be addressed in a subsequent order.
    \12\ EPSA Rehearing Request at 5 (citing Order No. 697-A, FERC 
Stats. & Regs. ] 31,268 at P 182-83); Mirant Rehearing Request at 6-
7; Reliant Rehearing Request at 2-3.
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    6. EPSA states that a five percent ownership threshold for EWGs 
imposes substantially greater burdens on EWGs and achieves no useful 
regulatory purpose. EPSA contends that the Commission has provided no 
reasoned explanation for using a definition derived from PUHCA 1935 
that imposes greater burdens, including change in status reporting 
obligations, on EWGs than those imposed on other market-based rate 
sellers. EPSA maintains that if the Commission is going to promulgate a 
definition of affiliate for market-based rate purposes, it should apply 
to EWGs the definition adopted in Order No. 697-A for non-EWGs, which 
uses a ten percent ownership threshold.\13\ EPSA also argues that the 
Commission's promulgation of a separate definition of affiliate for 
EWGs was a violation of the notice requirements of the Administrative 
Procedure Act because the Commission did not signal any intent to do so 
either in the market-based rate notice of proposed rulemaking or in 
Order No. 697 and did not afford interested parties an opportunity to 
comment on the regulatory text.\14\
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    \13\ EPSA Rehearing Request at 19.
    \14\ Id. at 5-6, 13-15 (citing 5 U.S.C. 553(b)(3)).
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    7. Reliant similarly argues that placing disparate burdens on 
companies simply because they do or do not hold EWG status is arbitrary 
and capricious and not in the public interest. According to Reliant, 
the Commission has provided no reasonable basis to maintain two 
different definitions for determining affiliates of EWGs and non-EWGs. 
Reliant asserts that the only reason that the Commission previously had 
adopted a narrower affiliate definition under the market-based rate 
program for EWG utilities was its prior belief that FPA section 214 did 
not provide sufficient discretion to the Commission to use a different 
definition.\15\ However, Reliant states that the Commission effectively 
recognized in Order No. 697-A that it is not required by statute to use 
the FPA section 214 definition of affiliate for purposes beyond the 
narrow scope of section 214 and that, for purposes outside of section 
214, it has discretion to adopt an affiliate definition for EWGs that 
is different from that contained in section 214.\16\ Reliant argues 
that the Commission must not be arbitrary and capricious in the 
exercise of that discretion.
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    \15\ Reliant Rehearing Request at 13.
    \16\ Id. at 9.
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    8. Reliant states that it supports the Commission's goal of using 
consistent affiliate definitions for all FPA public utilities, but it 
asserts that the use of different standards for EWGs and non-EWGs for 
FPA purposes (other than the narrow situations that might arise under 
section 214 of the FPA) does not achieve that consistency.\17\ Reliant 
submits that the Commission has consistently recognized in 
administering its market-based rate program that the relevant inquiry 
with respect to affiliate relations pertains to control, i.e., whether 
a market-based rate seller is controlled by another entity or whether a 
market-based rate seller and other sellers are under common control of 
the same entity. It notes that the Commission has consistently 
concluded that the starting point for assessing control is based on a 
standard that begins with the ownership of ten percent or more of a 
company's voting securities.\18\ According to Reliant, a lower five 
percent standard for EWGs casts too broad a net, with the result being 
that EWG public utilities and their owners may be required to impute 
affiliation at thresholds significantly below the ten percent standard 
applicable to non-EWG utilities. Reliant submits that the Commission 
has not explained how this disparate treatment of EWGs is necessary or 
appropriate for assessing market power or other purposes under its 
market-based rate program.
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    \17\ Id. at 11.
    \18\ Id. at 15.
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    9. Reliant therefore argues that the Commission should grant 
rehearing and eliminate the PUHCA 1935 definition for EWG affiliates 
and use the same definition of affiliate for EWGs that it has adopted 
in Order No. 697-A for non-EWG utilities, which Reliant describes as 
based on a control standard.\19\
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    \19\ Id. at 17.
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    10. Mirant raises similar arguments. It maintains that the 
Commission provided no basis for adopting a five percent voting 
interest affiliate test for EWGs when the test for non-EWGs is ten 
percent. Mirant argues that the five percent voting interest standard 
that has its origin in FPA section 214 applies only to evaluation of 
EWG rates and has no relevance to an analysis of control over 
generation or the events that should trigger a change in status filing. 
Mirant contends that this rulemaking

[[Page 51746]]

concerns both the measure of a seller's ability to exercise market 
power and the facts that warrant reporting of ``changes in status'' in 
a seller's market-based rate docket.\20\ It states that the requirement 
that market-based rate sellers report changes in status is based not on 
the Commission's concern for the rates and charges of the EWG, but on 
the Commission's need to be informed of the potential exercise of 
market power through the ownership or control of generation or 
transmission. Mirant therefore requests that the Commission analyze the 
issue in light of the purposes behind change in status filings and find 
that there is no basis for distinguishing between EWGs and non-EWGs in 
this context.\21\
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    \20\ Mirant Rehearing Request at 9.
    \21\ Id.
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III. Discussion

    11. We have carefully considered the legal and policy arguments 
petitioners have raised on rehearing in opposition to a separate 
definition of affiliate for EWGs. Mirant and Reliant argue that, 
although section 214 of the FPA requires the Commission to apply a five 
percent standard to certain transactions involving EWGs, the Commission 
is not required to use a five percent standard in a definition of 
affiliate developed for the general task of assessing market 
concentration and market power.\22\ Petitioners argue instead that the 
Commission should apply the same standard in its market-based rate 
regulations to EWGs and non-EWGs for purposes of determining 
affiliation. Having again analyzed FPA section 214, and irrespective of 
any Commission precedent to the contrary, we agree that a reasonable 
interpretation of FPA section 214 is that it does not require the 
Commission to use a five percent threshold affiliate test for EWGs for 
all purposes under Part II of the FPA, and in particular for purposes 
of analyzing market concentration and market power.\23\ We also find 
the arguments in support of a single definition of affiliate, 
applicable to both EWGs and non-EWGs, to be persuasive. Upon 
reconsideration, therefore, we believe that using the same definition 
for EWGs as for non-EWGs is appropriate and that the definition the 
Commission adopted in Order No. 697-A for non-EWG utilities would not 
affect the substance of the Commission's analysis of market power 
issues. This definition is based on the structure of the PUHCA 1935 
definition, but modified in several ways, including use of a ten 
percent threshold instead of five percent.
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    \22\ Id. at 8-9; Reliant Rehearing Request at 9, 11.
    \23\ Section 214 uses a five percent affiliate threshold with 
respect to determining whether the jurisdictional rates of an EWG 
are the result of a preference or advantage of an affiliate of the 
EWG. While an analysis of market power relates to an EWG's rates, it 
does not involve the specific issue of whether an EWG has received 
an undue preference or advantage with respect to a particular 
wholesale sale.
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    12. Accordingly, the Commission intends to revise the definition of 
affiliate in Sec.  35.36(a)(9) of its regulations to delete the 
separate definition for EWGs and to revise the non-EWG part of the 
definition to delete the phrase ``other than an exempt wholesale 
generator.'' Specifically, the revised definition of affiliate in Sec.  
35.36(a)(9) would provide that an affiliate of a specified company 
means: (a) Any person that directly or indirectly owns, controls, or 
holds with power to vote, 10 percent or more of the outstanding voting 
securities of the specified company; (b) Any company 10 percent or more 
of whose outstanding voting securities are owned, controlled, or held 
with power to vote, directly or indirectly, by the specified company; 
(c) Any person or class of persons that the Commission determines, 
after appropriate notice and opportunity for hearing, to stand in such 
relation to the specified company that there is liable to be an absence 
of arm's-length bargaining in transactions between them as to make it 
necessary or appropriate in the public interest or for the protection 
of investors or consumers that the person be treated as an affiliate; 
and (d) Any person that is under common control with the specified 
company. For purposes of paragraph (a)(9)(i), owning, controlling or 
holding with power to vote, less than 10 percent of the outstanding 
voting securities of a specified company creates a rebuttable 
presumption of lack of control.
    13. We believe this revision will result in fair and consistent 
treatment of jurisdictional sellers. Before taking final action in 
response to the rehearing comments, however, we seek supplemental 
comments on the proposed revised definition of affiliate in Sec.  
35.36(a)(9) as discussed above.

IV. Information Collection Statement

    14. The Office of Management and Budget (OMB) regulations require 
that OMB approve certain reporting and recordkeeping (information 
collections) imposed by an agency.\24\ Order No. 697's revisions to the 
information collection requirements for market-based rate sellers were 
approved under OMB Control Nos. 1902-0234. Order No. 697-A clarified 
aspects of the existing information collection requirements for the 
market-based rate program, but did not add to those requirements. While 
this order requests comments on the Commission's proposal to revise the 
definition of affiliate in Sec.  35.36(a)(9) of the Commission's 
regulations, it does not add to the existing information collection 
requirements for the market-based rate program. Accordingly, a copy of 
this order will be sent to OMB for informational purposes only.
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    \24\ 5 CFR 1320.12.
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V. Regulatory Flexibility Act

    15. The Regulatory Flexibility Act of 1980 \25\ generally requires 
either a description and analysis of a rule that will have a 
significant economic impact on a substantial number of small entities 
or a certification that the rule will not have a significant economic 
impact on a substantial number of small entities.\26\ In this order, 
the Commission seeks comment on a revised definition of affiliate in 
Sec.  35.36(a)(9) of its regulations, which would apply to EWGs the 
definition based on a ten percent voting interest adopted in Order No. 
697-A for non-EWGs, rather than using the definition adopted in Order 
No. 697-A for EWGs, which is based on a five percent voting interest. 
Public utilities seeking and currently possessing market-based rate 
authority are currently required to comply with the Commission's 
regulations with regard to the definition of affiliate at Sec.  
36.36(a)(9) and the revised definition would decrease the number of 
entities considered to be affiliates of EWG public utilities. The 
Commission therefore concludes that a revised definition of affiliate 
in Sec.  35.36(a)(9) should not have a significant economic impact on a 
substantial number of small entities.
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    \25\ 5 U.S.C. 601-612.
    \26\ 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 that is independently owned 
and operated and that is not dominant in its field of operation. 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 four million MWh. 13 CFR 121.201.
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VI. Document Availability

    16. 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

[[Page 51747]]

during normal business hours (8:30 a.m. to 5 p.m. Eastern time) at 888 
First Street, NE., Room 2A, Washington DC 20426.
    17. From FERC's Home Page on the Internet, this information is 
available on eLibrary. The full text of this document is available on 
eLibrary in PDF and Microsoft Word format for viewing, printing, and/or 
downloading. To access this document in eLibrary, type the docket 
number excluding the last three digits of this document in the docket 
number field.
    18. User assistance is available for eLibrary and the FERC's Web 
site during normal business hours from 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 the Commission.
Kimberly D. Bose,
Secretary.
[FR Doc. E8-20546 Filed 9-4-08; 8:45 am]

BILLING CODE 6717-01-P