Document ID: FERC-2007-1342-0001
Agency: ferc
Document Type: Rule
Title: FPA Section 203 Supplemental Policy Statement
Posted Date: 2007-08-02T04:00Z

[Federal Register: August 2, 2007 (Volume 72, Number 148)]
[Rules and Regulations]               
[Page 42277-42290]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr02au07-4]                         

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 33

[Docket No. PL07-1-000]

 
FPA Section 203 Supplemental Policy Statement

Issued July 20, 2007.
AGENCY: Federal Energy Regulatory Commission, DOE.

ACTION: Policy statement.

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SUMMARY: The Federal Energy Regulatory Commission is providing guidance 
regarding future implementation of section 203 of the Federal Power 
Act. In the Supplemental Policy Statement the Commission adopts 
policies and provides clarifications intended to continue the 
encouragement of beneficial utility industry investment while also 
providing for effective customer protections, including working in a 
complementary fashion with the states in protecting customers.

DATES: Effective Date: This Supplemental Policy Statement is effective 
July 20, 2007.

FOR FURTHER INFORMATION CONTACT: Carla Urquhart (Legal Information), 
Office of the General Counsel, Federal Energy Regulatory Commission, 
888 First Street, NE., Washington, DC 20426, (202) 502-8496.

[[Page 42278]]

    Roshini Thayaparan (Legal Information), Office of the General 
Counsel, Federal Energy Regulatory Commission, 888 First Street, NE., 
Washington, DC 20426, (202) 502-6857.
    David Hunger (Technical Information), Office of Energy Markets and 
Reliability, Federal Energy Regulatory Commission, 888 First Street, 
NE., Washington, DC 20426, (202) 502-8148.
    Andrew P. Mosier, Jr. (Technical Information), Office of Energy 
Markets and Reliability, Federal Energy Regulatory Commission, 888 
First Street, NE., Washington, DC 20426, (202) 502-6274.

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

FPA Section 203 Supplemental Policy Statement

    1. The Commission is issuing this Policy Statement as a supplement 
to the Commission's rulemakings issued in 2006 to implement provisions 
of the Energy Policy Act of 2005 \1\ and also as a supplement to its 
1996 Merger Policy Statement.\2\ The 2006 rulemakings addressed 
amendments to the Commission's corporate review authority under section 
203 of the Federal Power Act (FPA),\3\ the repeal of the Public Utility 
Holding Company Act of 1935 \4\ and the enactment of the Public Utility 
Holding Company Act of 2005.\5\ Based on our experience in implementing 
the new laws thus far, and on the two technical conferences in which 
industry participants and state commissioners provided input on key 
issues, including the protection of captive customers against 
inappropriate cross-subsidization and the need to provide sufficient 
flexibility to encourage industry investment that benefits customers, 
the Commission finds that it is appropriate to provide guidance in this 
Policy Statement regarding future implementation of section 203. We 
clarify that this Policy Statement supplements, and does not replace, 
any part of the Commission's 1996 Merger Policy Statement.
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    \1\ Pub. L. 109-58, 119 Stat. 594 (2005) (EPAct 2005).
    \2\ 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 (1996) (1996 Merger 
Policy Statement), reconsideration denied, Order No. 592-A, 62 FR 
33341 (June 19, 1997), 79 FERC ] 61,321 (1997).
    \3\ 16 U.S.C. 824b (2000), amended by EPAct 2005, Pub. L. No. 
109-58, 1289, 119 Stat. 594, 982-83 (2005). 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. 79a et seq. (PUHCA 1935).
    \5\ EPAct 2005, Pub. L. 109-58, 1261, et seq., 119 Stat. 594, 
972-78 (PUHCA 2005). See also Repeal of the Public Utility Holding 
Company Act of 1935 and Enactment of the Public Utility Holding 
Company Act of 2005, Order No. 667, 70 FR 75592 (Dec. 20, 2005), 
FERC Stats. & Regs. ] 31,197 (2005), order on reh'g, Order No. 667-
A, 71 FR 28446 (May 16, 2006), FERC Stats. & Regs. ] 31,213, order 
on reh'g, Order No. 667-B, 71 FR 42750 (July 28, 2006), FERC Stats. 
& Regs. ] 31,224 (2006), order on reh'g, Order No. 667-C, 72 FR 8277 
(Feb. 26, 2007), 118 FERC ] 61,133 (2007).
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    2. This Policy Statement is one of three actions being taken based 
on the Commission's experience implementing amended FPA section 203 and 
PUHCA 2005, as well as the record from the Commission's December 7, 
2006 and March 8, 2007 technical conferences regarding section 203 and 
PUHCA 2005. In addition, in separate orders, the Commission is 
concurrently issuing a Notice of Proposed Rulemaking proposing to grant 
a limited blanket authorization for certain dispositions of 
jurisdictional facilities under FPA section 203(a)(1) \6\ and a Notice 
of Proposed Rulemaking proposing to codify restrictions on affiliate 
transactions between franchised public utilities with captive customers 
and their market-regulated power sales affiliates or non-utility 
affiliates.\7\
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    \6\ Blanket Authorization Under FPA Section 203, 120 FERC ] 
61,062 (2007) (issued in Docket No. RM07-21-000) (Blanket 
Authorization NOPR).
    \7\ Cross-Subsidization Restrictions on Affiliate Transactions, 
120 FERC ] 61,061(2007) (issued in Docket No. RM07-15-000) 
(Affiliate Transactions NOPR).
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I. Background

    3. In 1996, the Commission issued the 1996 Merger Policy Statement 
updating and clarifying the Commission's procedures, criteria and 
policies concerning public utility mergers under section 203 of the 
FPA.\8\ The purpose of the 1996 Merger Policy Statement was to ensure 
that mergers are consistent with the public interest and to provide 
greater certainty and expedition in the Commission's analysis of merger 
applications. The 1996 Merger Policy Statement refined and modified the 
Commission's merger policy ``in light of dramatic and continuing 
changes in the electric power industry and corresponding changes in the 
regulation of that industry.'' \9\
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    \8\ Supra note 2.
    \9\ 1996 Merger Policy Statement, FERC Stats. & Regs. ] 31,044, 
at 30,110.
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    4. In the 1996 Merger Policy Statement, the Commission set out the 
three factors it generally considers when analyzing whether a proposed 
section 203 transaction \10\ is consistent with the public interest: 
effect on competition, effect on rates, and effect on regulation. In 
2000, the Commission issued the Filing Requirements Rule,\11\ which 
updated the filing requirements under 18 CFR Part 33 of the 
Commission's regulations for section 203 applications. Among other 
things, the Filing Requirements Rule codified the Commission's 
screening approach to quickly identify mergers that may raise 
horizontal competitive concerns, provided specific filing requirements 
consistent with Appendix A of the 1996 Merger Policy Statement, 
established guidelines for vertical competitive analysis, and set forth 
filing requirements for mergers that potentially raise vertical market 
power concerns. The revised filing requirements are in effect today, as 
recently modified (discussed below), and they assist the Commission in 
determining whether section 203 transactions are consistent with the 
public interest, provide more certainty to applicants regarding what 
showings must be made to satisfy the Commission's concerns under 
section 203, and expedite the Commission's review of such applications.
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    \10\ Although the Commission applies these factors to all 
section 203 transactions, not just mergers, the filing requirements 
and the level of detail required may differ. 1996 Merger Policy 
Statement, FERC States & Regs. ] 31,044, at 30,113 n.7. See also 18 
CFR 2.26 (codifying the 1996 Merger Policy Statement).
    \11\ Revised Filing Requirements Under Part 33 of the 
Commission's Regulations, Order No. 642, 65 FR 70984 (Nov. 28, 
2000), FERC Stats. & Regs. ] 31,111 (2000) (Filing Requirements 
Rule), order on reh'g, Order No. 642-A, 66 FR 16121 (Mar. 23, 2001), 
94 FERC ] 61,289 (2001) (codified at 18 CFR Part 33).
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    5. The scope of the Commission's section 203 review was expanded by 
EPAct 2005. Among other things, amended section 203: (1) Expands the 
Commission's review authority to include authority over certain holding 
company mergers and acquisitions, as well as certain public utility 
acquisitions of generating facilities; (2) requires that, prior to 
approving a disposition under section 203, the Commission must 
determine that the transaction would not result in inappropriate cross-
subsidization of non-utility affiliates or encumbrance of utility 
assets; \12\ and (3) imposes statutory deadlines for acting on

[[Page 42279]]

mergers and other jurisdictional transactions.
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    \12\ Section 203(a)(4) is not an absolute prohibition on the 
creoss-subsidization of a non-utility associate company or the 
pledge or encumbrance of utility assets for the benefit of an 
associate company. If the Commission determines that the cross-
subsidization, pledge or encumbrance will be consistent with the 
public interest, such action may be permitted.
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    6. Through the Order No. 669 rulemaking proceeding, the Commission 
promulgated regulations adopting certain modifications to 18 CFR 2.26 
and Part 33 to implement amended section 203. The Commission also 
provided blanket authorizations for certain transactions subject to 
section 203. These blanket authorizations were crafted to ensure that 
there is no harm to captive utility customers, but sought to 
accommodate investments in the electric utility industry by 
facilitating market liquidity. Some commenters in the rulemaking 
proceeding urged the Commission to grant additional blanket 
authorizations. Other commenters argued that the Commission should 
adopt additional generic rules to guard against inappropriate cross-
subsidization associated with the mergers. Certain commenters argued 
that the Commission should modify its competitive analysis for mergers, 
which has been in place for 10 years. The Commission stated that it 
would reevaluate these and other issues at a future technical 
conference on the Commission's section 203 regulations as well as 
certain issues raised in the Order No. 667 rulemaking proceeding 
implementing PUHCA 2005.
    7. On December 7, 2006, the Commission held a technical conference 
(December 7 Technical Conference) to discuss several of the issues that 
arose in the Order No. 667 and Order No. 669 rulemaking proceedings. 
The December 7 Technical Conference discussed a range of topics. The 
first panel discussed whether there are additional actions, under the 
FPA or the Natural Gas Act (NGA), that the Commission should take to 
supplement the protections against cross-subsidization that were 
implemented in the Order No. 667 and Order No. 669 rulemaking 
proceedings. The second panel discussed whether, and if so how, the 
Commission should modify its Cash Management Rule \13\ in light of 
PUHCA 2005, and whether the Commission should codify specific 
safeguards that must be adopted for cash management programs and money 
pool agreements and transactions. The third panel discussed whether 
modifications to the specific exemptions, waivers and blanket 
authorizations set forth in the Order No. 667 and Order No. 669 
rulemaking proceedings are warranted. Post-technical conference 
comments were accepted.
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    \13\ Regulation of Cash Management Practices, Order No. 634, 68 
FR 40500 (July 8, 2003), FERC Stats. & Regs. ] 31,145, revised, 
Order No. 634-A, 68 FR 61993 (Oct. 31, 2003), FERC Stats. & Regs. ] 
31,152 (2003) (Cash Management Rule).
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    8. On March 8, 2007, the Commission held a second technical 
conference (March 8 Technical Conference) to discuss whether the 
Commission's section 203 policy should be revised and, in particular, 
whether the Commission's Appendix A merger analysis is sufficient to 
identify market power concerns in today's electric industry market 
environment. The first panel discussed whether the Appendix A analysis 
is appropriate to analyze a merger's effect on competition, given the 
changes that have occurred in the industry (e.g., the development of 
Regional Transmission Organizations (RTOs)) and statutory changes 
(e.g., as a result of the repeal of PUHCA 1935 and new authorities 
given to the Commission in EPAct 2005). The second panel assessed the 
factors the Commission uses in reviewing mergers and the coordination 
between the Commission and other agencies (including state commissions) 
with merger review responsibility.

II. Discussion

    9. Based on the Commission's experiences thus far in implementing 
amended section 203, the input received through the Order No. 669 
rulemaking proceeding, and the comments received in response to the 
December 7 and March 8 Technical Conferences, the Commission finds that 
additional clarification and guidance regarding our section 203 policy 
are warranted. The Commission will provide certain clarifications and 
guidance concerning: (1) The information that must be filed as part of 
section 203 applications for transactions that do not raise cross-
subsidization concerns; (2) the types of applicant commitments and 
ring-fencing measures that, if offered, might address cross-
subsidization concerns; \14\ (3) the scope of blanket authorizations 
under sections 203(a)(1) and 203(a)(2); (4) what constitutes a 
disposition of control of jurisdictional facilities for purposes of 
section 203; and (5) the Commission's Appendix A analysis.
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    \14\ When ``cross-subsidization'' occurs, some of the costs of 
dealings between affiliated regulated and unregulated companies are 
borne by the regulated utility affiliate. The costs might be passed 
on to captive customers through the rates of the regulated 
affiliate. ``Ring-fencing'' employs various techniques to separate 
and protect the financial assets and ratings of the regulated 
utility from the business risks of other members of the holding 
company family, including bankruptcy of the parent or its 
affiliates. These techniques could preclude some types of 
transactions that involve cross-subsidization.
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    10. We note that amended section 203 and PUHCA 2005 did not become 
effective until February 2006. The Commission thus has had only 18 
months' experience under the new laws. Therefore, we will continue to 
monitor the issues that arise under section 203, including cross-
subsidization issues, and re-evaluate our regulatory approach as 
appropriate. The Commission's goals are to provide sufficient 
flexibility to adopt customer protections as needed, work in a 
complementary fashion with the states in protecting customers, 
appropriately address the need for regulatory certainty with respect to 
jurisdictional transactions, and address ways to allow beneficial 
utility industry investment that does not harm captive customers.\15\
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    \15\ As indicated below, the Commission does not propose actions 
on all of the issues raised by commenters. For example, the 
Commission is not proposing changes to its regulations that would 
require: (1) Codification of specific requirements for cash 
management programs and money pool agreements; (2) codification of 
additional information reporting requirements (through section 203 
applications or through routine reporting requirements); or (3) 
additional, generic actions pursuant to the Commission's NGA 
authority. Based on the types of filings made since Order Nos. 667 
and 669 became effective and the comments raised at the technical 
conferences, we do not believe further actions on these particular 
issues are warranted at this time. Moreover, we note that certain 
commenters recommended that the Commission provide a list on its 
website of all jurisdictional public utilities (including qualifying 
facilities and exempt wholesale generators), foreign utility 
companies, transmitting utilities, electric utilities, electric 
utility companies, and holding companies (as those terms are defined 
under EPAct 2005 and PUHCA 2005) for use by market participants in 
their regulatory compliance monitoring efforts and as they consider 
whether to acquire or hold the securities of companies, the 
acquisition or holding of which might or might not be subject to FPA 
section 203 or PUHCA 2005. While the Commission declines to rule on 
this issue in the context of a policy statement, it will explore the 
feasibility of making some of this information publicly available on 
its website.
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A. The Commission's Cross-Subsidization Concerns and Exhibit M 
Requirements

    11. At the December 7 Technical Conference, a number of commenters 
asserted that a vast majority of section 203 transactions pose no 
threat of cross-subsidization but nonetheless, the Commission's 
regulations require applicants to provide ``an explanation, with 
appropriate evidentiary support for such explanation * * * of how 
applicants are providing assurance * * * that the proposed transaction 
will not result in, at the time of the transaction or in the future, 
cross-subsidization of a non-utility associate company or pledge or 
encumbrance of utility assets for the benefit of an associate company * 
* *.'' \16\
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    \16\ The explanation, to be provided as Exhibit M to a section 
203 application, includes:
    ``Disclosure of existing pledges and/or encumbrances of utility 
assets; and a detailed showing that the transaction will not result 
in: any transfer of facilities between a traditional public utility 
associate company that has captive customers or that owns or 
provides transmission service over jurisdictional transmission 
facilities, and an associate company; any new issuance of securities 
by a traditional public utility associate company that has captive 
customers or that owns or provides transmission service over 
jurisdictional transmission facilities, for the benefit of an 
associate company; any new pledge or encumbrance of assets of a 
traditional public utility associate company that has captive 
customers or that owns or provides transmission service over 
jurisdictional transmission facilities, for the benefit of an 
associate company; or any new affiliate contract between a non-
utility associate company and a traditional public utility associate 
company that has captive customers or that owns or provides 
transmission service over jurisdictional transmission facilities, 
other than non-power goods and services agreements subject to review 
under sections 205 and 206 of the Federal Power Act; or if no such 
assurance can be provided, an explanation of how such cross-
subsidization, pledge, or encumbrance will be consistent with the 
public interest.'' 18 CFR 33.2(j)(1)-(2).

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[[Page 42280]]

    12. Several commenters argued that it is not clear how to provide 
the explanation required under Exhibit M for transactions in which 
cross-subsidization is not possible, is precluded by existing 
safeguards or is reduced to a very low possibility. Thus, they urged 
the Commission to establish criteria to identify ``safe harbors'' or 
classes of transactions that clearly do not raise cross-subsidization 
concerns. They contended that such an approach will enhance regulatory 
certainty by letting parties know up front that with these types of 
transactions, there is no risk of additional restrictions being imposed 
by the Commission.
    13. The Commission's focus generally has been on preventing a 
transfer of benefits from a public utility's captive customers to 
shareholders of the public utility's holding company due to an intra-
system transaction that involves electric power or energy, generation 
facilities, or non-power goods and services.\17\ Concerns arise in a 
number of circumstances, including where a market-regulated affiliate 
(e.g., a power seller with market-based rates) or a non-utility 
affiliate provides power or goods and services to a franchised public 
utility with captive customers, as well as the circumstance in which 
the franchised public utility with captive customers provides power or 
non-power goods and services to the market-regulated or non-utility 
affiliate. For instance, a franchised public utility with captive 
customers may purchase power from its marketing affiliate at a price 
above market or sell power to its marketing affiliate at below-market 
prices, thus transferring benefits from customers to shareholders of 
the holding company. Further, customers may be harmed if the franchised 
public utility purchases non-power goods and services from an affiliate 
at above-market prices or sells non-power goods and services to an 
affiliate at less than market value and seeks to recover the 
overcharges or the undercharges through rates for service to captive 
customers.\18\ Concerns may also arise with respect to intra-corporate 
financing transactions that may encumber franchised public utility 
assets in favor of a market-regulated or non-utility affiliate. The 
Commission's regulatory concern with this particular form of cross-
subsidization is with the potential adverse impact of the internal 
finance transaction on the rates of a franchised public utility with 
captive customers.
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    \17\ Order No. 669, FERC Stats. & Regs. ] 31,200 at P 147.
    \18\ Transactions Subject to FPA Section 203, 70 FR 58636 (Oct. 
7, 2005) FERC Stats. & Regs. ] 32,589 at P 47 (2005. In the 
concurrent Affiliate Transactions NOPR, supra note 7, the Commission 
is proposing to extend the affiliate abuse restrictions to apply to 
all franchised public utilities with captive customers and their 
market-regulated power sales affiliates and non-utility affiliates.
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1. ``Safe Harbors'' for Meeting Exhibit M Requirements for Certain 
Transactions
    14. Since the February 2006 effective date of the FPA section 203 
amendments, the Commission has gained sufficient experience in 
implementing the cross-subsidization provision of FPA section 203(a)(4) 
to provide policy guidance on the cross-subsidization demonstration 
required by Exhibit M. As described above, there are many instances 
where cross-subsidization can occur, but our focus is on the specific 
requirements under section 203(a)(4) and the Order No. 669 rulemaking 
proceeding--inappropriate cross-subsidization of non-utility or market-
regulated affiliates or the pledge or encumbrance of utility assets for 
the benefit of an associate company. The concern arises in a corporate 
structure that has at least one franchised public utility with captive 
customers and one or more non-utility affiliates or market-regulated 
utility affiliates (i.e., utilities regulated on a market rather than a 
cost basis). These types of relationships provide opportunities for 
cross-subsidization in routine transactions between affiliates in 
addition to more significant transactions such as transfers of utility 
assets, encumbrance of utility assets, new affiliate contracts, and 
issuance of securities by affiliates (that usually receive more public 
scrutiny or regulatory attention).
    15. Where these affiliate relationships do not exist, that is, 
where a transaction involves only market-regulated and/or non-utility 
affiliated entities or is a bona fide, arm's-length, bargained-for 
exchange, then the transaction is not likely to result in inappropriate 
cross-subsidization and the detailed explanation and evidentiary 
support required by Exhibit M may not be warranted.
    16. Accordingly, for purposes of compliance with Exhibit M, the 
Commission will recognize three classes of transactions that are 
unlikely to raise the cross-subsidization concerns described in the 
Order No. 669 rulemaking proceeding. These, in effect, are ``safe 
harbors'' for meeting the section 203 cross-subsidization 
demonstration, absent concerns identified by the Commission or evidence 
from interveners that there is a cross-subsidy problem based on the 
particular circumstances presented.
    17. The first class of transactions includes those transactions 
where the applicant shows that a franchised public utility with captive 
customers is not involved. If no captive customers are involved, then 
there is no potential for harm to customers. Therefore, compliance with 
Exhibit M could be a showing that no franchised public utility with 
captive customers \19\ is involved in the transaction.
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    \19\ The Commission has defined ``captive customers,'' for 
purposes of FPA section 203, to mean ``any wholesale or retaile 
electric energy customers served under cost-based regulation.'' 18 
CFR 33.1(b)(5).
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    18. The second class of transactions includes those transactions 
that are subject to review by a state commission. The Commission, in 
the context of specific mergers or other corporate transactions, 
intends to defer to state commissions where the state adopts or has in 
place ring-fencing measures to protect customers against inappropriate 
cross-subsidization or the encumbrance of utility assets for the 
benefit of the ``unregulated'' affiliates. Therefore, compliance with 
Exhibit M could be satisfied with a showing that the proposed 
transaction complies with specific state regulatory protections against 
inappropriate cross-subsidization by captive customers. If a state does 
not have the authority to impose cross-subsidization protections, 
however, the transaction would not qualify for this safe harbor.
    19. The third class of transactions are those involving only non-
affiliates. Where a franchised public utility transacts only with 
nonaffiliated entities, the potential for inappropriate cross-
subsidization of a non-utility associate company or the pledge or 
encumbrance of utility assets for the benefit of an associate company

[[Page 42281]]

generally is not present. Therefore, compliance with Exhibit M could be 
satisfied with a showing that a public utility transacts only with 
nonaffiliated entities. This category includes a transfer of assets 
between a public utility and non-affiliates, but does not include 
mergers with, or acquisitions of, public utilities.
    20. After review of a section 203 application relying on any of 
these ``safe harbors,'' if the Commission finds that the applicant has 
failed to make a sufficient showing that it meets the criteria 
described above, then the application will be deemed to be deficient 
and a new Exhibit M will be required.
2. Other Means of Addressing Cross-Subsidization Concerns
    21. Intra-corporate financing transactions may raise cross-
subsidization concerns if the assets of a franchised public utility 
with captive customers are used to finance its market-regulated utility 
affiliates or non-utility affiliates or their activities. In the 
December 7 Technical Conference, several commenters noted that their 
states had implemented ring-fencing measures to mitigate potential 
risks of cross-subsidization but that many states had not. These 
commenters suggested that the Commission implement safeguards to 
mitigate risks in the absence of state regulation (although not 
necessarily on a generic basis, relying on the states where the state 
has already taken such measures). Most commenters urged the Commission 
to continue to review whether potential mergers required additional 
protections on a case-by-case basis. Representatives of the state 
commissions, including the Oregon Public Utility Commission, Wisconsin 
Public Service Commission and Missouri Public Service Commission, 
recommended that the Commission only act where there is a demonstrable 
gap in state authority. None supported adoption of federal, mandatory 
ring-fencing conditions. Some commenters did not oppose the 
establishment of guidelines on the kinds of protections that might be 
appropriate in different cases.\20\
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    \20\ See, e.g., Comments of Clifford M. Naeve, December 7 
Technical Conference, Tr. 91-92; Comments of Joseph G. Sauvage, 
December 7 Technical Conference, Tr. 56-58.
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    22. American Public Power Association and the National Rural 
Electric Cooperative Association argued that the Commission adopt 
regulations with minimum cross-subsidization safeguards that would 
apply in all cases, and also provide an exhaustive menu of additional 
cross-subsidization safeguards, including ring-fencing measures, that 
applicants might propose or that the Commission might impose in 
appropriate cases. They proposed that the Commission codify its code of 
conduct requirements in the regulations and that these restrictions be 
made applicable to all traditional public utilities and their 
unregulated affiliates.
    23. The Commission agrees that it is appropriate to codify in our 
regulations code of conduct affiliate restrictions to prevent cross-
subsidization involving power and non-power goods and services 
transactions and to make those prophylactic restrictions applicable to 
all traditional (franchised) public utilities (not just public 
utilities seeking section 203 approval) and their transactions with 
power sellers as well as non-utility affiliates. Accordingly, 
contemporaneous with this Policy Statement, we are instituting a Notice 
of Proposed Rulemaking to do this. However, with respect to additional 
restrictions that may be appropriate for section 203 applicants, such 
as ring-fencing restrictions, the Commission does not believe it is 
necessary or appropriate to mandate generic one-size-fits-all 
protections for all section 203 applicants. Rather, the Commission will 
examine the facts and circumstances of each transaction and determine 
on a case-by-case basis whether additional protections against 
inappropriate cross-subsidization or encumbrances of utility assets are 
necessary. As noted above, part of our approach will involve review of 
whether state commissions have authority to impose cross-subsidy 
protections or have in place such protections. The Commission, as a 
general matter, intends to defer to state-adopted protections unless 
they can be shown to be inadequate to protect wholesale customers. This 
deference is appropriate because retail customers typically represent 
the vast majority of load served by a franchised public utility, and 
ring-fencing measures typically affect the entire corporation, thereby 
protecting both retail and wholesale customers. If it can be shown, 
however, that these measures are inadequate to protect wholesale 
customers in a given case, the Commission may adopt supplemental 
protections as appropriate. Finally, we emphasize that, consistent with 
section 203 and the Commission's regulations, all section 203 
applicants must demonstrate that a proposed transaction will not result 
in inappropriate cross-subsidization of non-utility associate companies 
or the inappropriate pledge or encumbrance of utility assets for the 
benefit of an associate company, either through meeting one of the safe 
harbor demonstrations, proposing its own ring-fencing or other 
protections to prevent cross-subsidization, or demonstrating that there 
are no potential cross-subsidy issues associated with the proposed 
transaction.
    24. With respect to guidance to applicants that do not make the 
``safe harbor'' demonstration or do not demonstrate that cross-subsidy 
issues are not present, one way to make the demonstration required by 
Exhibit M would be to propose ring-fencing measures. For example, a 
ring-fencing structure related to internal corporate financings, i.e., 
money pool or cash management transactions, could include some or all 
of the following elements depending on the circumstances: (1) The 
holding company participates in the money pool as a lender only and it 
does not borrow from the subsidiaries with captive customers; (2) where 
the holding company system includes more than one public utility, the 
money pool for subsidiaries with captive customers is separate from the 
money pool for all other subsidiaries; (3) all money pool transactions 
are short-term (one year or less), and payable on demand to the public 
utility; (4) the interest rate formula is set according to a known 
index and recognizes that internal and external funds may be loaned 
into the money pool; (5) loan transactions are made pro rata from those 
offering funds on the date of the transactions; (6) the formula for 
distributing interest income realized from the money pool to money pool 
members is publicly disclosed; and (7) the money pool administrator is 
required to maintain records of daily money pool transactions for 
examination by the Commission by transaction date, lender, borrower, 
amount, and interest rate(s).\21\ We clarify that the forms of ring-
fencing protections listed herein are simply examples of protections 
that the Commission would consider in evaluating proposed ring-fencing 
measures. Appropriate ring-fencing measures will depend on the facts 
presented and the specifics of an applicant's corporate structure and 
must be evaluated on a case-by-case basis. Further, as noted earlier, 
to the extent a state commission imposes specific ring-fencing 
measures, the Commission will defer to those measures absent evidence

[[Page 42282]]

that additional measures are needed to protect wholesale customers.
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    \21\ These ring-fencing measures are among those requirements 
typically approved by the Securities and Exchange Commission (SEC) 
and/or adopted by state commissions.
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    25. The Commission also notes that if it approves a transaction 
under section 203 (with or without ring-fencing measures), the 
Commission retains authority under section 203(b) to later impose 
additional cross-subsidy protections or modify any previously approved 
measures. Further, irrespective of any link to the section 203 
transaction, the Commission retains ongoing authority under section 206 
of the FPA \22\ to modify rates, contracts and practices that may 
result in inappropriate cross-subsidization or encumbrances of utility 
assets (and, if appropriate, to require new practices).
---------------------------------------------------------------------------

    \22\ 16 U.S.C. 824e.
---------------------------------------------------------------------------

3. Future Case-Specific Informational Filings
    26. Given that the Commission often issues its order in a section 
203 proceeding before the state proceedings are completed, the 
Commission may grant authorization under section 203 before the 
relevant state commission issues an order specifying any state-required 
cross-subsidy or ring fencing protections. In such circumstances, as 
appropriate, the Commission in the context of individual section 203 
authorizations will require applicants to file with the Commission a 
copy of any subsequent state orders. Such copy would be filed in the 
Commission's section 203 proceeding docket as an informational filing, 
and the applicant would also provide copies to the intervenors in the 
Commission's section 203 proceedings.

B. Blanket Authorizations Under Sections 203(a)(1) and 203(a)(2) and 
Clarifications Regarding Jurisdictional Transactions

    27. Through the Order No. 669 rulemaking proceeding, the Commission 
granted certain blanket authorizations on a generic basis under section 
203.\23\ Participants at the December 7 Technical Conference addressed 
whether additional blanket authorizations were warranted. Specifically, 
commenters discussed under what circumstances the Commission should 
grant a blanket authorization under section 203(a)(1) (which applies to 
public utilities' dispositions of jurisdictional facilities) to 
parallel the Order No. 669 blanket authorizations under section 
203(a)(2) (which, among other things, applies to holding companies' 
acquisitions of securities of public utilities with jurisdictional 
facilities). The section 203 blanket authorizations under Order No. 669 
allow a holding company to acquire the voting securities of a 
transmitting utility, an electric utility company, or a holding company 
in a holding company system that includes a transmitting utility or an 
electric utility company, if, after the acquisition, the holding 
company will own less than 10 percent of the outstanding voting 
securities. What most commenters seek is a parallel blanket 
authorization under section 203(a)(1) for the public utilities in such 
transactions to ``dispose'' of their facilities to the holding company, 
i.e., a blanket authorization for transactions that (1) involve or 
permit transfers (dispositions) of up to 10 percent of a public 
utility's voting stock, or (2) involve a transfer of up to 10 percent 
of the voting stock of a holding company that directly or indirectly 
owns or controls a public utility. Alternatively, they seek 
clarification that certain transactions are not jurisdictional.
---------------------------------------------------------------------------

    \23\ 18 CFR 33.1(c)
---------------------------------------------------------------------------

    28. Several commenters supported modification of the rules to grant 
such a parallel blanket authorization under 203(a)(1). In addition, 
Mirant Corporation (Mirant) argued that section 203(a)(1) should not 
apply at all to stock transactions in the secondary market involving 
the corporate parent. Mirant maintained that if the Commission 
continues to apply section 203(a)(1) to equity transfers of upstream 
ownership interests in public utilities that result in either a direct 
or indirect change in control over the underlying public utility, there 
would be a substantial and unnecessary overlap between sections 
203(a)(1) and 203(a)(2). The Goldman Sachs Group, Inc. (Goldman) added 
that financial investors need certainty on whether particular 
transactions in the secondary market would require prior Commission 
approval under section 203(a)(1). Goldman also argued for a blanket 
authorization under section 203(a)(2) for the acquisition of voting 
securities by firms acting in a fiduciary capacity.
    29. Edison Electric Institute (EEI) argued for a blanket 
authorization for internal corporate reorganizations under both 
sections 203(a)(1) and 203(a)(2) for transfer of assets from one non-
traditional utility subsidiary, such as an exempt wholesale generator, 
to another non-traditional utility subsidiary.
    30. The Financial Institutions Energy Group (FIEG) \24\ requested 
that the Commission clarify that transactions that do not affect 
control do not, in fact, require approval under section 203(a)(1). 
Alternatively, FIEG argued that there are several types of transactions 
under which no change of control is involved and, therefore, the 
Commission should provide blanket authorizations under both section 
203(a)(1) and section 203(a)(2). FIEG asserted that such transactions 
include: (1) Acquisitions of voting securities that would give the 
acquiring entity less than 10 percent ownership of outstanding voting 
securities; (2) acquisitions of up to 20 percent of the voting 
interests in a public utility where the acquirer is eligible to file 
with the SEC a Schedule 13G demonstrating no intent to exercise control 
over the entity whose securities are being acquired; (3) acquisitions 
involving securities held for lending, hedging, underwriting and/or 
fiduciary purposes. FIEG also argued that a blanket authorization 
should be granted for transactions in which a public utility or a 
holding company is acquiring or assigning a jurisdictional contract 
where the acquirer does not have captive customers and the contract 
does not convey control over the operation of a generation or 
transmission facility.
---------------------------------------------------------------------------

    \24\ Members of FIEG include: Bank of America, N.A, Barclays 
Bank PLC, Bear Energy LP, Citigroup Energy Inc., Credit Suisse 
Energy LLC (a subsidiary of Credit Suisse), Deutche Bank AG, J. Aron 
& Company (a subsidiary of The Goldman Sachs Group), JPMorgan Chase 
& Co., Lehman Brothers Commodity Services Inc. (a subsidiary of 
Lehman Brothers Holding Inc.), Merrill Lynch Commodities, Inc., 
Morgan Stanley Capital Group Inc., Soci[eacute]t[eacute] 
G[eacute]n[eacute]rale, and UBS Energy LLC (a subsidiary of UBS AG).
---------------------------------------------------------------------------

    31. In support of its requests for clarification and expanded 
blanket authorizations, FIEG states that shares and other interests in 
public utilities are bought, sold and traded on a regular basis and 
that an active market for a public utility's shares is important to its 
ability to raise capital. FIEG explains that if a passive or non-
controlling investor must seek prior Commission approval for 
transactions, the trading process is slowed, resulting in a less 
efficient market for the company's shares. According to FIEG, such 
inefficiencies chill participation in the industry and reduce needed 
market liquidity.
    32. Several commenters also urged the Commission to provide greater 
clarity on what constitutes a passive investment for which no 
Commission authorization is required under section 203(a)(1).
    33. The Commission agrees that greater industry investment and 
market liquidity are important goals. However, blanket authorizations 
under section 203 cannot be granted lightly, particularly generic 
authorizations. Because it is an ex ante determination as to the 
appropriateness of a category

[[Page 42283]]

of transactions under section 203 and a counterparty is not yet 
identified, a blanket authorization can be granted only when the 
Commission can be assured that the statutory standards will be met, 
including ensuring that the interests of captive customers are 
safeguarded and that public utility assets are protected under all 
circumstances. It is under this paradigm that we provide the following 
guidance with respect to the section 203 blanket authorizations.
    34. First, we will grant in part and deny in part requests for 
blanket authorizations under section 203(a)(1) to parallel those 
previously granted under section 203(a)(2). The Commission recognizes 
that, in some circumstances, the lack of a blanket authorization under 
section 203(a)(1) can lessen the practical effectiveness of the blanket 
authorizations previously granted under section 203(a)(2). Accordingly, 
in a Notice of Proposed Rulemaking issued contemporaneous with this 
Policy Statement, the Commission is proposing a limited blanket 
authorization under section 203(a)(1) under which a public utility 
would be ``pre-authorized'' to dispose of less than 10 percent of its 
securities to a public utility holding company but only if, after the 
disposition, the holding company and any associate or affiliated 
company in aggregate will own less than 10 percent of that public 
utility.\25\ The Commission believes that this narrow blanket 
authorization will provide appropriate relief to investors and at the 
same time ensure that utility assets and captive customers are 
protected.
---------------------------------------------------------------------------

    \25\ Blanket Authorization NOPR, supra note 6.
---------------------------------------------------------------------------

    35. The Commission will continue to consider broader requests for 
blanket authorizations under section 203(a)(1) on a case-specific 
basis,\26\ taking into account all other authorizations that have been 
granted and whether those authorizations, in conjunction with a blanket 
authorization under section 203(a)(1), would raise concerns. While the 
Commission, as discussed above, has determined that additional generic 
blanket authorizations for public utilities' dispositions of 
jurisdictional assets are not warranted at this time (other than the 
blanket authorizations discussed in the accompanying NOPR), we expect 
that in many circumstances individual blanket authorizations can be 
granted. Such an individual, situation-specific, ex ante blanket 
authorization will provide some of the certainty that is sought by the 
industry and investors. At the same time, this approach will allow the 
Commission to assess specific circumstances, to place time limits on 
blanket authorizations if appropriate (subject to possible renewal), to 
monitor industry activity, and to adapt the use of blanket 
authorizations over time as we gain further experience with financial 
institution investments in particular. Further, we do not rule out the 
possibility that groups of similarly situated holding companies, such 
as financial institutions, can make joint filings seeking common 
blanket authorizations under section 203(a)(1) or section 203(a)(2); 
however, they would need to clearly demonstrate on the record that 
there would be no adverse impact on captive customers or the public 
interest if the authorizations were granted.
---------------------------------------------------------------------------

    \26\ Order No. 669-A, FERC Stats. & Regs. ] 31,214 at P 103; 
Order No. 669-B, FERC Stats. & Regs. ] 31,225 at P 43.
---------------------------------------------------------------------------

    36. In response to requests that the Commission clarify that 
secondary market transactions involving public utilities do not require 
approval under section 203(a)(1)(A) (which provides that a public 
utility may not sell, lease ``or otherwise dispose'' of the whole of 
its jurisdictional facilities or any part hereof without prior 
Commission approval), we so clarify. Secondary market transactions, for 
purposes of this discussion, are purchases or sales of the securities 
of a public utility or its upstream holding company by a third-party 
investor. Thus, such transactions do not include the securities' 
initial issuance or reacquisition by the issuer. Thousands of shares of 
the stock of a public utility or public utility holding company may be 
traded on a daily basis by non-public utility third parties, 
particularly if the stock is widely held and publicly traded. As noted 
by Mirant, EEI and members of FIEG in their comments, neither a public 
utility holding company nor a public utility subsidiary of the holding 
company are themselves parties to these transactions and they cannot 
know in advance what trading will occur or whether direct or indirect 
``control'' over the public utility is being acquired. It would be 
virtually impossible in such circumstances for the public utility or 
holding company to know what is occurring before the fact and we do not 
interpret section 203(a)(1)(A) to be triggered for these secondary 
trades. Accordingly, neither public utilities nor public utility 
holding companies have an obligation to seek approval of a 
``disposition'' of public utility jurisdictional facilities for such 
trades.\27\
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    \27\ If the acquirer of securities in the secondary market is a 
public utility holding company, however, it may have an obligation 
to file for approval under section 203(a)(2). If the acquirer is 
another public utility, it may also have to file under section 
203(a)(1)(C) (no public utility may purchase securities of another 
public utility if over $10 million in value).
---------------------------------------------------------------------------

    37. In addition, we clarify that transactions that do not transfer 
control of a public utility do not fall within the ``or otherwise 
dispose'' language of section 203(a)(1)(A) and thus do not require 
approval under section 203(a)(1)(A) (assuming there is no sale or lease 
of the facilities). As indicated in our discussion of what constitutes 
a disposition of control for purposes of the Commission's section 203 
analysis,\28\ while the Commission cannot make an ex ante determination 
regarding what is control for purposes of the Commission's section 203 
analysis absent facts of a specific case, the Commission is setting 
forth herein certain guidelines regarding what has been deemed to be 
(or not to be) control. This clarification addresses many of the 
concerns raised by commenters regarding acquisitions involving 
securities held for lending, hedging, underwriting and/or fiduciary 
purposes. If such transactions do not result in a transfer of control 
and there is no sale or lease of the facilities taking place, then 
section 203(a)(1)(A) is not triggered. This should assist applicants in 
determining the need for prior authorization under section 203.
---------------------------------------------------------------------------

    \28\ See infra section II.C.
---------------------------------------------------------------------------

    38. With respect to the request for a generic blanket authorization 
for internal corporate reorganizations under both sections 203(a)(1) 
and 203(a)(2) for the transfer of assets from one non-traditional 
utility subsidiary \29\ to another non-traditional utility subsidiary, 
the Commission cannot be certain of the impact of such transactions on 
utility affiliates on a generic basis and, therefore, will not grant a 
blanket authorization at this time. The Commission will consider case-
specific blanket authorizations (with appropriate reporting 
requirements) on a case-by-case basis.
---------------------------------------------------------------------------

    \29\ For example, power marketers, exempt wholesale generators, 
or qualifying facilities.
---------------------------------------------------------------------------

    39. The Commission also denies the request for a generic blanket 
authorization under section 203(a)(2) for non-bank fiduciaries subject 
to the jurisdiction of the SEC. The Commission finds that we need 
further experience in this area before granting a blanket authorization 
on a generic basis. However, the Commission is willing to consider such 
requests on a holding company-specific basis or from similarly situated 
holding companies, such as similarly situated financial institutions. 
Any such applications would need to demonstrate in sufficient

[[Page 42284]]

detail that applicants would not be able to control public utilities 
and that there would be no adverse impact on captive customers or the 
public interest if the authorizations were granted. As discussed above 
with respect to section 203(a)(1) authorizations, this type of approach 
would allow the Commission to assess specific circumstances, to place 
time limits on blanket authorizations if appropriate (subject to 
possible renewal), to monitor industry activity, and to adapt the use 
of blanket authorizations over time as we gain further experience.
    40. Certain participants to the technical conferences argue that a 
blanket authorization under section 203(a)(1) should be granted for 
transactions in which a public utility or a holding company is 
acquiring or disposing of a jurisdictional contract where the acquirer 
does not have captive customers and the contract does not convey 
control over the operation of a generation or transmission facility. 
These commenters argue that because acquisition of these contracts 
cannot create competitive or rate concerns, the Commission should grant 
blanket authorization under section 203(a)(1) for such transactions. 
Because the specific request for blanket authorization may present 
concerns where the transferor has captive customers, we seek comment in 
the Blanket Authorization NOPR on whether a generic blanket 
authorization under section 203(a)(1) is warranted for the acquisition 
or disposition of a jurisdictional contract where neither the acquirer 
nor transferor has captive customers and the contract does not convey 
control over the operation of a generation or transmission facility.
    41. We also decline to grant a generic blanket authorization under 
sections 203(a)(1) and 203(a)(2) for acquisitions of up to 20 percent 
of the voting interests in a public utility where the acquirer is 
eligible to file with the SEC a Schedule 13G, which demonstrates no 
intent to exercise control over the entity whose securities are being 
acquired. While the Commission may consider eligibility to file a 
Schedule 13G with the SEC as part of an indication that an entity will 
not be able to assert control over a public utility, the Commission 
will not accept Schedule 13G eligibility as a definitive statement 
regarding control. The Commission will consider Schedule 13G 
eligibility as one factor in the analysis of whether an entity can 
assert control over a public utility.\30\
---------------------------------------------------------------------------

    \30\ See, e.g., Capital Research and Management Company, 116 
FERC ] 61,267 (2006).
---------------------------------------------------------------------------

C. Disposition of ``Control'' of Jurisdictional Facilities

    42. Several commenters have asked the Commission to provide 
guidance on what constitutes a disposition of ``control'' of 
jurisdictional facilities under section 203. Most recently, this 
request is being pressed by the investment community, which seeks 
further clarification regarding the scope of the Commission's 
regulatory authority, and greater regulatory certainty as to when 
section 203 review is required.
    43. We will provide guidance here, but emphasize that the 
determination of whether there is a disposition of control must be 
based on all circumstances. In other words, the decision must be made 
on a fact-specific basis. As discussed further below, while our case 
law under section 201 provides guidance on the factors that may result 
in control, no single factor or factors necessarily results in control. 
The electric industry remains a dynamic, developing industry, and no 
bright-line standard will encompass all relevant factors and 
possibilities that may occur now or in the future.\31\
---------------------------------------------------------------------------

    \31\ Market-Based Rates for Wholesale Sales of Electric Energy, 
Capacity and Ancillary Services by Public Utilities, Order No. 697, 
72 FR 39903 (July 20, 2007), FERC Stats. & Regs. ] 31,252, at P 174 
(2007) (Market-Based Rate Final Rule).
---------------------------------------------------------------------------

    44. We note that much of the Commission's precedent in this area 
was developed based on concerns that there could be a jurisdictional 
void if the Commission did not interpret broadly what constitutes a 
disposition of ``control'' of public utility facilities under FPA 
section 203. The Commission was particularly concerned about the 
creation of holding companies and holding company acquisitions that 
could result in an indirect change of control of the jurisdictional 
facilities of public utilities, without Commission review. In EPAct 
2005, however, Congress has filled any jurisdictional void involving 
public utility holding companies by amending section 203 to 
specifically give the Commission authority over certain holding company 
acquisitions and mergers involving FPA public utilities. Thus, the 
Commission's pre-EPAct 2005 precedent should be read with this context 
in mind.
1. Precedent Discussing Dispositions of Control
    45. Section 203 requires prior Commission approval if a public 
utility seeks to sell, lease, or otherwise dispose of jurisdictional 
facilities. As previously noted, the Commission has interpreted the 
``or otherwise dispose'' language of section 203(a)(1) to include 
transfers of ``control'' of jurisdictional facilities. Additionally, 
prior Commission approval is required for any public utility that seeks 
to directly or indirectly merge or consolidate the whole of its 
jurisdictional facilities, or any part thereof, with the facilities of 
another person, ``by any means whatsoever.'' \32\ As interpreted by the 
Commission, the requirement to obtain the Commission's approval under 
the ``merge or consolidate'' clause depends on whether the public 
utility's facilities are subject to the jurisdiction of the Commission 
and whether the transaction directly or indirectly would result in a 
change of ``control'' of the facilities.\33\
---------------------------------------------------------------------------

    \32\ While the section 203(a)(1) requirements for obtaining 
Commission authorization do not use the word ``control'' in the 
statutory text, section 203(a)(4) provides that the Commission must 
approve a proposed ``disposition, consolidation, acquisition, or 
change in control'' (emphasis added) if the statutory criteria are 
met.
    \33\ PDI Stoneman, Inc., 104 FERC ] 61,270, at P 13 (2003) (PDI 
Stoneman).
---------------------------------------------------------------------------

    46. In Enova Corporation, the Commission explained that the purpose 
of section 203 is to provide a mechanism for maintaining oversight of 
the facilities of public utilities and to prevent transfers of control 
over those facilities that would harm consumers or that would inhibit 
the Commission's ability to secure the maintenance of adequate service 
and the coordination in the public interest of jurisdictional 
facilities.\34\ The Commission determined that it cannot definitively 
identify every combination of entities or disposition of assets that 
may trigger jurisdiction under section 203, since it cannot anticipate 
every type of restructuring that might occur. The Commission stressed 
that its concern was with changes in control, including direct or 
indirect mergers that affect jurisdictional facilities. It said that it 
must be flexible in responding to industry restructuring if it is to 
discharge its statutory responsibility ``to secure the maintenance of 
adequate service and the coordination in the public interest of 
facilities subject to the jurisdiction of the Commission.'' \35\
---------------------------------------------------------------------------

    \34\ Enova Corporation, 79 FERC ] 61,107, at 61,489 (1997) 
(Enova) (citing pre-EPAct 2005 section 203(b)).
    \35\ Id. at 61,496.
---------------------------------------------------------------------------

    47. Noting in Enova that the FPA did not provide definitions for 
the terms ``dispose'' or ``control,'' the Commission stated that those 
terms should not be read narrowly because to do so would result in a 
jurisdictional void in which certain types of corporate transactions 
could escape Commission oversight. While section 203 applies to changes 
or transfers in the proprietary interests of

[[Page 42285]]

a public utility,\36\ not all transactions under section 203 involve a 
change in control of a public utility. If no change in control results 
from the transaction, it is not likely to adversely affect competition, 
rates or regulation, or result in cross-subsidization.
---------------------------------------------------------------------------

    \36\ See Atlantic City Electric Company v. FERC, 295 F.3d 1, 12 
(D.C. Cir. 2002).
---------------------------------------------------------------------------

    48. Our guidance concerning what constitutes a disposition of 
control of jurisdictional facilities for purposes of section 203 
requires a discussion of what constitutes control of a public utility 
since a public utility is a person that owns or operates jurisdictional 
facilities. In Enova, the Commission cited the definition of control 
that has been in its accounting regulations since 1937. Under that 
definition, control means:

the possession, directly or indirectly, of the power to direct or 
cause the direction of management and policies of a company, whether 
such power is exercised through one or more intermediary companies, 
or alone, or in conjunction with, or pursuant to an agreement, and 
whether such power is established through a majority or minority 
ownership or voting of securities, common directors, officers, or 
stockholders, voting trusts, holding trusts, associated companies, 
contract or any other direct or indirect means.\37\
---------------------------------------------------------------------------

    \37\ Enova, 79 FERC at 61,492 (citing 18 CFR Part 101, 
Definitions 5.B). This definition is identical to that found in the 
current regulations. In addition, for purposes of its Standards of 
Conduct for Transmission Providers, the Commission states that 
``control'' ``includes, but is not limited to, the possession, 
directly or indirectly and whether acting alone or in conjunction 
with others, of the authority to direct or cause the direction of 
the management or policies of a company.'' 18 CFR 358.3(c).

    49. The Commission has also discussed certain elements of control 
in cases concerning whether an entity is a public utility under section 
201.\38\ In those cases, the Commission linked ``decision-making'' and 
``dominion and control'' in determining whether an entity is a ``public 
utility.'' The Commission also noted that the reference to ``operates 
[jurisdictional] facilities'' in the definition of public utility in 
section 201(e) of the FPA refers ``to the person who has control and 
decision-making authority concerning the operation of facilities.'' 
\39\
---------------------------------------------------------------------------

    \38\ Section 201(b)(1) describes the activities that are subject 
to the jurisdiction of the Commission: ``* * * the transmission of 
electric energy in interstate commerce and * * * the sale of 
electric energy at wholesale in interstate commerce * * *'' The 
section further describes the facilities that are jurisdictional: 
``The Commission shall have jurisdiction over all facilities for 
such transmission or sale of electric energy, * * *'' with certain 
exceptions not relevant here. In section 201(e), the term ``public 
utility'' is defined as ``any person who owns or operates facilities 
subject to the jurisdiction of the Commission under this Part (other 
than facilities subject to such jurisdiction solely by reason of 
[certain specified FPA sections]).'' 16 U.S.C. 824, amended by EPAct 
2005, Pub. L. 109-58, 1295.
    \39\ Enova, 79 FERC at 61,492 (citing Bechtel Power Corp., 60 
FERC ] 61,156 (1992) (Bechtel Power)).
---------------------------------------------------------------------------

    50. In a case in which the Commission disclaimed jurisdiction under 
section 201(e) over financial institutions that took title to 
facilities as part of a leveraged lease transaction, the Commission 
based its decision that the lessor/owner was not a public utility under 
section 201 on the following factors (which it found in a previous but 
analogous situation): (1) The financial institutions that held legal 
title were not operating the facilities; (2) none of the parties taking 
title to the facilities were in the business of producing or selling 
electric power; and (3) all had a principal business other than that of 
a public utility.\40\ As part of its finding that the lessor/owner did 
not operate the facility, the Commission interpreted the word 
``operates'' as referring to the person who has control and decision-
making authority concerning the operation of the facility, i.e., not a 
person who merely performs specific services that are ordered and 
directed by another party.
---------------------------------------------------------------------------

    \40\ Bechtel Power, 60 FERC at 61,572 (citing Pacific Power & 
Light Co., 3 FERC ] 61,119 (1978); Public Service Company of New 
Mexico, 29 FERC ] 61,387 (1984); United Illuminating Company, 29 
FERC ] 61,270 (1984)).
---------------------------------------------------------------------------

    51. We note that ``control'' has been found even where that control 
is not absolute or unfettered. In a case involving a complex holding 
company corporate structure, the Commission deemed an investment 
adviser subsidiary to be a public utility because of its participation 
in wholesale transactions. The Commission found that the investment 
adviser had control over the wholesale contracts to be executed under 
the power marketer's market-based rate schedule because the combination 
of the following three factors translated into control: (1) The sole 
discretion to enter into contracts; (2) the exclusive ownership of the 
intellectual property on which contracts will be based; and (3) the 
intention that the investment adviser will recommend the contracts into 
which the power marketer subsidiary would enter.\41\
---------------------------------------------------------------------------

    \41\ D.E. Shaw Plasma Power, L.L.C., 102 FERC ] 61,265, at P 33 
(2003) (Shaw).
---------------------------------------------------------------------------

    52. The Commission cited its decisions in Bechtel and Shaw as 
providing guidance on whether a nominal manager of a generating company 
actually exercised sufficient control to be deemed the operator and, 
hence, a public utility.\42\ Based in part on those cases, in Beck, the 
Commission found that a manager was a controlling entity where he: (1) 
Effectively governed the physical operation of the jurisdictional 
facility; and (2) effectively served as the decision-maker in the sales 
of wholesale power. While the application in that case described a 
series of companies, at least five contracts (all of which either 
directly affected or were negotiated by the manager), and a trustee in 
addition to the manager, the Commission concluded that the manager was 
the controlling entity because he had the substantive decision-making 
authority regarding the jurisdictional assets, the market-based rate 
tariff and a full requirements purchase agreement. The Commission made 
this finding even though some of the manager's actions were subject to 
the approval of the trustee in certain circumstances, e.g., if the 
transaction exceeded $1 million in value.
---------------------------------------------------------------------------

    \42\ R.W. Beck Plant Management, Ltd., 109 FERC ] 61,315 (2004) 
(Beck).
---------------------------------------------------------------------------

    53. More recently, in the Market-Based Rate Final Rule, in 
providing guidance on what contractual arrangements convey control over 
a public utility, we explained that we will consider the totality of 
circumstances and attach the presumption of control when an entity can 
affect the ability of capacity to reach the market. We further 
explained that our guiding principle is that an entity controls the 
facilities of another when it controls the decision-making over sales 
of electric energy, including discretion as to how and when power 
generated by these facilities will be sold.\43\
---------------------------------------------------------------------------

    \43\ Market-Based Rate Final Rule, FERC Stats. & Regs. ] 31,252 
at P 176.
---------------------------------------------------------------------------

    54. Investments in public utilities that do not convey control may 
in some cases be considered to be passive investments not subject to 
section 203(a)(1)(A) (unless there is a sale or lease of the 
facilities). The Commission has found an investment to be passive if, 
among other things, (1) the acquired interest does not give the 
acquiring entity authority to manage, direct or control the day-to-day 
wholesale power sales activities, or the transmission in interstate 
commerce activities, of the jurisdictional entity;\44\ and (2) the 
acquired interest gives the acquiring entity only limited rights (e.g., 
veto and/or consent rights necessary to protect its economic investment 
interests, where those rights will not affect the ability of the 
jurisdictional public utility to conduct jurisdictional 
activities);\45\ and (3) the acquiring entity has a principal

[[Page 42286]]

business other than that of producing, selling, or transmitting 
electric power.\46\
---------------------------------------------------------------------------

    \44\ See Milford Power Company, LLC, 118 FERC ] 61,093, at P 35 
n.21 (2007).
    \45\ See Shaw, 102 FERC ] 61,265 at P 15.
    \46\ See Metropolitan Life Insurance Company, 113 FERC ] 61,300, 
at P 6 (2005).
---------------------------------------------------------------------------

    55. We emphasize that the circumstances that convey control in 
section 203 analysis vary depending on a variety of factors, including 
the transaction structure, the nature of voting rights and/or 
contractual rights and obligations conveyed in the transaction. For 
example, in PDI Stoneman, the Commission considered the acquisition of 
facilities through three transactions, over approximately seven years, 
in which the applicant's resulting ownership shares at issue at the end 
of each of the three transactions went from one-third to two-thirds to 
100 percent of the voting stock. The applicant claimed that control 
never vested until the third transaction because of a ``supermajority'' 
provision in the operating agreement that required approval by 80 
percent of the voting stock for a range of decisions, including the 
sale of electricity from the plant. The Commission focused on the 
market-based rate schedule and concluded that the first transaction may 
have transferred control over that jurisdictional asset because, even 
with one-third of the voting stock, the applicant had the authority to 
influence all significant decisions, including the sale of power from 
the plant. Further, the Commission ruled that the material change in 
the proportion of interests after the second transaction resulted in a 
change of control.\47\
---------------------------------------------------------------------------

    \47\ PDI Stoneman, 104 FERC ] 61,270 at P 15-17.
---------------------------------------------------------------------------

    56. While the purpose of the above discussion is to provide 
guidance on what, based on past precedent, constitutes a change of 
control for purposes of section 203, the burden remains upon the 
entities involved in a proposed transaction to decide whether they need 
to obtain Commission authorization under section 203 to undertake a 
proposed transaction.
2. General Guideline Regarding What Is Not a Transfer of Control
    57. Based on the industry's need for further guidance on what may 
or may not constitute a transfer of control of jurisdictional 
facilities under section 203, and for greater regulatory certainty in 
undertaking utility investments, the Commission's general policy in 
future cases will be to presume that a transfer of less than 10 percent 
of a public utility's holdings is not a transfer of control if: (1) 
After the transaction, the acquirer and its affiliates and associate 
companies, directly or indirectly, in aggregate will own less than 10 
percent of such public utility; and (2) the facts and circumstances do 
not indicate that such companies would be able to directly or 
indirectly exercise a controlling influence over the management or 
policies of the public utility. The Commission will apply this policy 
on a case-by-case basis. Further, if holding companies or other 
acquirers believe that facts and circumstances prevent them from 
exercising control even if they own 10 percent or more of a public 
utility, they may seek to make such a demonstration to the Commission.
    58. This 10 percent threshold is consistent with the definition of 
``holding company'' under section 1262(8)(A) of PUHCA 2005 (at which 
point a company may be in control of a subsidiary public utility). It 
is also consistent with the blanket authorization granted under section 
203(a)(2) in the Order No. 669 rulemaking proceeding, under which 
holding companies are pre-authorized to acquire up to 9.99 percent of 
voting securities of a public utility, as well as the proposed section 
203(a)(1) blanket authorization in the contemporaneous Notice of 
Proposed Rulemaking.\48\ Further, the Commission has employed a 
rebuttable presumption in the context of its Standards of Conduct for 
Transmission Providers that ownership of 10 percent or more of voting 
interests creates a rebuttable presumption of control.\49\
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    \48\ Blanket Authorization NOPR, supra note 6. In The Goldman 
Sachs Group, Inc., 114 FERC ] 61,118 (Goldman), order on reh'g, 115 
FERC ] 61,303 (2006), the Commission held that, under section 
203(a)(2), subsidiaries that are not themselves holding companies 
are not required to seek authorization from the Commission to 
purchase, acquire, or take ``covered'' securities. Covered 
securities relate to (1) acquisitions of securities worth more than 
$10 million, and (2) acquisitions of securities of a transmitting 
utility, an electric company, or a holding company in a holding 
company system that includes a transmitting utility, or an electric 
utility company. The Commission also held that subsidiaries' 
securities acquisitions are not attributable to the upstream holding 
company. Thus, the upstream holding company also is not required to 
seek section 203(a)(2) authorization for its subsidiaries' 
acquisitions. This does not mean that authorization may not be 
required under other provisions of section 203. For example, if a 
non-utility subsidiary acquires securities of a public utility, that 
public utility must obtain section 203(a)(1)(A) authorization if the 
transaction results in a transfer of control of facilities valued at 
more than $10 million. Further, if each of a number of non-utility 
subsidiaries acquires, for example, up to 9.99 percent of the same 
public utility (in order to avoid becoming a holding company and/or 
avoid a transfer of control to a single one of the subsidiaries), it 
is possible that the public utility disposition of securities to 
several companies under common control could, taken as a whole, 
result in a transfer of control. Finally, irrespective of the dollar 
amount of the transaction, an indirect merger or consolidation could 
occur and require approval under section 203(a)(1)(B). Goldman, 114 
FERC ] 61,118 at P 13-15. Thus, while the Commission's policy as a 
general matter will be to presume that a transfer of control is not 
likely where ownership in a public utility is less than 10 percent, 
the burden is on the entities to file under section 203 if this 
threshold is met. The Commission will continue to review the facts 
and circumstances of transactions on a case-by-case basis.
    \49\ 18 CFR 358.3(c).
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D. The Commission's Appendix A Analysis

1. Appendix A Policy and Case History
    59. The 1996 Merger Policy Statement uses an analytical screen 
(Appendix A analysis) to allow early identification of transactions 
that clearly do not raise competitive concerns.\50\ As discussed below, 
the Commission does not believe modifications to its Appendix A 
analysis are warranted at this time. However, the Commission will 
provide certain clarifications in light of the concerns raised by 
commenters in the Order No. 669 rulemaking proceeding and the March 8 
Technical Conference.
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    \50\ As part of the screen analysis, applicants must define the 
relevant products sold by the merging entities, identify the 
customers and potential suppliers in the geographic markets that are 
likely to be affected by the proposed transaction, and measure the 
concentration in those markets. Using the Delivered Price Test to 
identify alternative competing suppliers, the concentration of 
potential suppliers included in the defined market is then measured 
by the Herfindahl-Hirschman Index (HHI) and used as a screen to 
determine which transactions clearly do not raise market power 
concerns. 1996 Merger Policy Statement, FERC Stats. & Regs. ] 31,044 
at 30,119-20.
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    60. In horizontal mergers, if an applicant fails the Competitive 
Analysis Screen (one piece of the Appendix A analysis), the 
Commission's analysis focuses on the merger's effect on the merged 
firm's ability and incentive to withhold output in order to drive up 
the market price. The ability to withhold output depends on the amount 
of marginal capacity controlled by the merged firm, and the incentive 
to do so depends on the amount of infra-marginal capacity that could 
benefit from higher prices. For example, in a horizontal merger 
combining a company with significant baseload capacity with a company 
owning capacity on the margin under many season/load conditions, the 
theory of competitive harm would be that the combination of the 
``ability'' assets with one company's existing ``incentive'' assets 
would increase the likelihood of the company exercising market power. 
Proper mitigation would address the harm to competition by reducing the 
merged firm's ``ability'' assets or its ``incentive'' assets through 
divestiture or some other method. In Commonwealth Edison Company, we 
discussed both the ability and the incentive of the merged firm to

[[Page 42287]]

withhold output. We found that despite screen failures, the merger 
would not harm competition in the relevant wholesale markets and 
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therefore did not require any mitigation:

    An examination of market supply conditions shows three reasons 
why a profitable withholding strategy by ComEd would be unlikely: 
(a) For most hours during the year, the supply curve is relatively 
flat, so withholding capacity would not significantly raise the 
market price; (b) for those hours during which it could successfully 
raise the market price, ComEd would have to forgo sales from its 
low-cost nuclear capacity; and (c) ComEd's only generation is 
nuclear which is difficult to ramp down or up so as to withhold 
output during the most profitable time periods.\51\
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    \51\ Commonwealth Edison Company, 91 FERC ] 61,036, at 61,133 
n.42 (2000).

    61. The Commission also examines the possibility of competitive 
harm in vertical mergers. In the first stage of the analysis, the 
Commission requires applicants to calculate the post-merger 
concentration in both the upstream and downstream markets to determine 
whether the upstream and downstream markets are highly concentrated, 
because highly concentrated upstream and downstream markets are 
necessary, but not sufficient, conditions for a vertical foreclosure 
strategy to be effective. If both of those necessary conditions are 
present, then the second stage of the analysis focuses on whether the 
merger creates or enhances the ability or incentive of the merged firm 
to exercise vertical market power through vertical foreclosure or 
raising rivals' costs.\52\
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    \52\ See Filing Requirements Rule, FERC Stats. & Regs. ] 31,111 
at 31,910-11.
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    62. For example, in AEP/CSW, the Commission found--without relying 
solely on changes in HHI statistics--that the merger of two vertically 
integrated utilities with both transmission and generation assets would 
harm competition by enhancing the ability and incentive for the merged 
firm to use control of its transmission assets to frustrate 
competitors' access to relevant markets. The Commission therefore 
required that AEP turn over control of its transmission facilities to a 
Commission-approved Regional Transmission Operator and, in the interim, 
be subject to market monitoring by an independent entity and have an 
independent entity calculate and post the available transfer capacity 
on AEP's transmission system.\53\
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    \53\ American Electric Power Company and Central and Southwest 
Corporation, Opinion No. 442, 90 FERC ] 61,242, at 61,788-90 (AEP/
CSW ), order on reh'g, Opinion No. 442-A, 91 FERC ] 61,129 (2000), 
appeal denied sub nom., Wabash Valley Power Association, Inc. v. 
FERC, 268 F.3d 1105 (D.C. Cir. 2001).
---------------------------------------------------------------------------

    63. We will continue to analyze mergers (both horizontal and 
vertical) and other section 203 applications by focusing on a 
transaction's effect on the company's ability and incentive to exercise 
market power, and thus harm competition. We expect applicants and 
intervenors to frame their arguments in this manner.
2. Issues Raised at the March 8 Technical Conference
a. The Role of HHIs in the Appendix A Analysis
    64. Some commenters argued that the Commission was overly focused 
on the HHI statistic, which measures concentration, and asked that the 
Commission look at competitive effects of section 203 transactions that 
are not apparent from the assessment of concentration.\54\
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    \54\ See, e.g., Comments of Darren Bush, March 8 Technical 
Conference, Tr. 23; Comments of Mark Hegedus, March 8 Technical 
conference, Tr. 94-95; Comments of Diana Moss, March 8 Technical 
Conference, Tr. 101; Comments of Mark J. Niefer, March 8 Technical 
Conference, Tr. 108.
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    65. In fact, as noted above, the Commission does look beyond the 
change in HHI in its analysis of the effect on competition in both 
horizontal and vertical mergers. The change in HHI serves as a screen 
to identify those transactions that could potentially harm competition. 
If the screen is failed, then, as discussed in paragraph 59 above, the 
Commission examines the factors that could affect competition in the 
relevant market. Specifically, in these circumstances the Commission 
typically considers a case-specific theory of competitive harm, which 
includes, but is not limited to, an analysis of the merged firm's 
ability and incentive to withhold output in order to drive up prices. 
Again, and as noted above, the Commission has discussed its 
consideration of such factors in cases such as Commonwealth Edison 
Company. Further, the Filing Requirements Rule requires applicants 
failing the screen to address market conditions beyond the change in 
HHI:

    The facts of each case (e.g., market conditions, such as demand 
and supply elasticity, ease of entry and market rules, as well as 
technical conditions, such as the types of generation involved) 
determine whether the merger would harm competition. When there is a 
screen failure, applicants must provide evidence of relevant market 
conditions that indicate a lack of a competitive problem or they 
should propose mitigation.\55\
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    \55\ Filing Requirements Rule, FERC Stats. & Regs. ] 31, 111 at 
31, 897.

Moreover, even where an applicant passes the HHI screen, the Commission 
also considers intervenor theories of competitive harm.
b. Commission-Developed Computer Simulation Model
    66. Some commenters stated that the Commission should develop and 
internally run its own computer simulation model, similar to what is 
done by the U.S. Department of Justice (DOJ) and the Federal Trade 
Commission (FTC). Dr. Frankena asserted that using a computer 
simulation model would be more reliable than our alleged practice of 
relying exclusively on applicants to perform the current Appendix A 
analysis. Mr. Hegedus advocated the use of regional models in concert 
with the process the Commission proposed in the market-based rate 
rulemaking proceeding and other proceedings involving market power 
issues. Dr. Moss suggested using an in-house model in a more limited 
way, as a consistency check on submissions rather than as a formal 
evaluative tool. Dr. Neifer stated that models are among the many types 
of evidence the DOJ considers in evaluating a merger. For example, the 
DOJ uses simple models that evaluate the costs and benefits of the 
merger as well as more complex ones that model a firm's decision to 
operate a generating unit in the markets at issue.
    67. Other commenters argued that the costs for the Commission to 
develop and run its own computer simulation model would exceed any 
related benefits. Mr. Baliff argued that it would be difficult to use 
any model unless it were generally accepted, well known, and accessible 
to all so that applicants could know whether their proposed 
transactions passed muster. In addition, different models focus on 
different decisions--bidding decisions, supply decisions, pricing 
decisions--and some or all of these may be relevant. Mr. Hegedus argued 
that the Commission should develop regional models to analyze mergers 
based on the information available from its analyses of market-based 
rate authorizations and through its Office of Enforcement.
    68. We will not develop and run our own computer simulation model 
in lieu of or in addition to the Delivered Price Test model that we 
already require applicants to perform as part of the Competitive 
Analysis Screen. While advocates of computer simulation models believe 
that such models would more accurately analyze the effect on 
competition, and some believe they will allow better coordination with 
other Commission programs involving market

[[Page 42288]]

power issues, these advocates have not demonstrated how the 
Commission's use of an internal model would have altered any Commission 
determinations on previous section 203 applications. While the benefits 
of a Commission-internal computer simulation model have not been well-
defined or quantified, we believe that the costs of such a modeling 
requirement in time and resources to applicants, intervenors, and 
Commission staff would be likely to exceed any benefits.
    69. It also should be emphasized that those who advocate use of an 
internal modeling overlook important differences between Commission 
proceedings under section 203 and the processes used by the DOJ and the 
FTC to review mergers and acquisitions. The Commission's process of 
reviewing mergers and acquisitions under section 203 is a public one. 
An application is filed publicly, all interested parties have the 
ability to comment, and the Commission decides the case based on the 
public record. Our Appendix A analysis facilitates this public process 
by requiring the submission of a transparent market power study, using 
standardized assumptions and criteria, that is available for review and 
comment by all interested parties, including state commissions and 
customers, and, importantly, can be replicated by them in the limited 
time period available for public comment. Similarly, when mitigation 
measures are necessary in Commission proceedings, they are based on the 
public record and available for comment by all interested parties.
    70. By contrast, the DOJ and the FTC use largely informal and non-
public processes for reviewing transactions subject to their 
jurisdiction. Their meetings with applicants are not noticed to the 
public and are less formal in nature. This provides the DOJ and the FTC 
greater flexibility to use, among other things, internal modeling tools 
that may not be easily replicated or other methodological approaches 
that are stylized to an individual case. In DOJ and FTC proceedings, 
staff and applicants can engage in extensive informal communications to 
discuss and address data, methodological and other disputes that are 
associated with these more stylized approaches. Similarly, when 
mitigation is required, staff and applicants can design such mitigation 
measures in a non-public manner. In sum, these more informal processes, 
while entirely appropriate in the context of DOJ and FTC review of 
mergers and transactions, simply cannot be replicated by the Commission 
given the due process and other considerations relevant in proceedings 
under section 203 of the FPA.
    71. We also note that some commenters urging the Commission to 
develop and run its own internal computer simulation model are 
mistakenly assuming that the current process is flawed because 
applicants can file merger impact studies using their own methodologies 
and assumptions. On the contrary, in the 1996 Merger Policy Statement, 
in the Filing Requirements Rule and in many subsequent orders 
interpreting those issuances, the Commission has carefully set forth 
the requirements of how the Commission's adopted study methodology, the 
Delivered Price Test, must be performed and what assumptions the 
Commission will accept as reasonable. If applicants fail to perform the 
studies according to the Commission's prescribed methodology, or their 
studies are based on faulty assumptions or use questionable data 
inputs, then those studies are required to be amended or supplemented 
with additional data.\56\ In some cases the Commission has required 
that new studies be conducted which conform to the Commission's 
standards. Thus, contrary to the view of some commenters, neither the 
Commission nor intervenors are disadvantaged by our current policy of 
requiring applicants to perform the merger impact studies, nor is the 
Commission subject to manipulation by applicants who can allegedly game 
the studies to their own benefit. Studies which do not conform to the 
Commission's explicit requirements are either rejected or required to 
be revised until they do conform, and intervenors have opportunity in 
every merger proceeding to inform the Commission if they believe that 
something in the applicant's study is amiss.
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    \56\ For example, in Entergy Gulf States, Inc., Commission Staff 
was unable to verify the results of applicants' model performing the 
Competitive Analysis Screen, and sent the applicants a deficiency 
letter identifying the error in the input data and requiring the 
applicants to submit the corrected data. Entergy Gulf States, Inc., 
Docket No. EC07-70-000, at 1 (Apr. 6, 2007) (unpublished deficiency 
letter).
---------------------------------------------------------------------------

    72. Specifically, merger applicants must submit the model and all 
of the data inputs necessary for completing the Competitive Analysis 
Screen in any section 203 Application requiring a complete Appendix A 
analysis.\57\ In those cases, Commission staff reviews the data 
supplied and runs the applicants' models to check the accuracy of the 
results and the sensitivity of the results to changes in the underlying 
assumptions. In addition, the models and input data are available to 
intervenors in the proceeding, who can also verify the accuracy of the 
results and perform sensitivity tests.
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    \57\ In cases involving a de minimis amount of generation being 
combined in the relevant geographic market, applicants are not 
required to perform a complete Appendix A analysis.
---------------------------------------------------------------------------

    73. A complete Competitive Screen Analysis submission provides 
sufficient information to identify those transactions that may harm 
competition. The data submitted includes a valuable intermediate 
calculation: A supply curve of all the generators that can possibly 
serve the area, and whether those generators are dispatched given 
transmission constraints. Finding the supply curve requires an estimate 
of suppliers' generation costs, including fuel costs, operation and 
maintenance costs, heat rates, and emissions costs; competitive market 
prices; transmission prices; and transmission import constraints.\58\ 
Whether the Commission grants the merger application with or without 
conditions, rejects it, or sets it for hearing, the Commission can 
determine whether the application presents any competitive issues 
because the current Competitive Analysis Screen is sufficiently precise 
to make such a determination.
---------------------------------------------------------------------------

    \58\ See 1996 Merger Policy Statement, FERC Stats. & Regs. ] 
31,044 at 30,130-33 (discussion of the delivered price test).
---------------------------------------------------------------------------

    74. In summary, there has been no showing that a Commission-
internal computer simulation model is needed, both in light of these 
burdens as well as because the study that the Commission already 
requires applicants to perform is adequate to measure the potential for 
competitive harm associated with section 203 dispositions. And, as 
noted above, the Commission is diligent in ensuring that applicants 
conduct the Competitive Analysis Screen properly, including using 
reasonable assumptions and data inputs.
c. Adding Hart-Scott-Rodino Information to the Section 203 Record
    75. Some commenters suggested that the Commission require 
applicants to file all materials submitted to the DOJ and the FTC in 
their Hart-Scott-Rodino (HSR) filings. Other commenters noted that such 
a filing would create confidentiality concerns due to the public nature 
of the Commission's section 203 proceedings. We also share those 
concerns. Unlike the DOJ and the FTC, who can keep any of the 
information confidential, our proceedings require a public record, and 
our decisions must be based on evidence that is available to the 
parties

[[Page 42289]]

of record in the proceeding. We permit applicants to request 
confidentiality for certain documents and file a protective order to 
allow intervenors to view those documents. However, we cannot maintain 
the same degree of confidentiality as do the DOJ and the FTC.\59\ The 
HSR filings often contain highly sensitive proprietary documents such 
as the companies' price forecasts, pricing analyses, and pricing 
decisions.\60\ Access to such valuable commercial information could not 
only harm the merging companies, it could also harm competition in 
wholesale electricity markets by facilitating coordination by 
competitors, who would have a better understanding of each other's 
pricing strategies and competitive objectives.
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    \59\ As Mark J. Niefer noted, ``the [Antitrust] Division [of the 
DOJ] is precluded from sharing much of the information it gathers to 
analyze a merger'' and ``[e]xcept in very limited circumstances, 
information provided to the Division * * * may not be disclosed to 
others without the consent of the producing party.'' Comments of 
Mark J. Niefer, March 8 Technical Conference, Tr. 106-07.
    \60\ See Federal Trade Commission, Introductory Guide III to the 
Premerger Notification Program, Model Request for Additional 
Information and Documentary Material (Second Request) (revised May 
2007), available at http://www.ftc.gov/bc/hsr/introguides/guide3.pdf
.

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d. Alternatives to Trial-Type Hearings
    76. Some commenters suggested that the Commission use alternatives 
to trial-type evidentiary hearing procedures, including technical 
conferences and paper hearings with limited periods of discovery and 
additional data requests.
    77. Given the statutory deadlines faced by the Commission on 
section 203 applications,\61\ we believe that holding an evidentiary 
hearing generally will not be feasible, depending on the issues in 
dispute. Therefore, in cases that present complicated factual disputes, 
we will consider alternatives such as paper hearings with a limited 
period of discovery, so that we can develop a complete record.
---------------------------------------------------------------------------

    \61\ Under revised section 203, the Commission must act within 
180 days of a complete application, and with good cause may extend 
the deadline another 180 days. If not, the authorization is granted 
by law.
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e. Attribution of Generation Under Contract
    78. Some commenters also requested clarification on how generation 
under contract should be attributed in the analysis of market 
concentration. Specifically, they asked whether the generation should 
be attributed to the party with operational control of the generation 
facility or to the party with the economic interest in the capacity.
    79. The determination on whether a long-term generation contract 
should be attributed to the purchaser of power or the seller depends on 
the party with operational control, which depends upon the specific 
contract. Therefore, we have required that applicants file information 
about whether their long-term generation contracts confer operational 
control over generation resources to the purchaser. Our practice has 
been to attribute contracted capacity to the purchaser if such a 
contract confers operational control over the generation to the 
purchaser.\62\ We will continue this practice, and require applicants 
to file purchase and sales data, including information on whether the 
terms and conditions of purchase contracts confer operational control 
over generation to the purchaser. However, if an applicant fails the 
Competitive Analysis Screen, we will consider arguments regarding the 
ability and incentive of the merged firm to exercise market power, and 
therefore consider the merged firm's contractual positions as well as 
its physical control of generation.
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    \62\ See Filing Requirements Rule, FERC Stats. & Regs. ] 31,111 
at 31,888.
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III. Information Collection Statement

    80. The Office of Management and Budget's (OMB) regulations require 
that OMB approve certain information collection and data retention 
requirements imposed by agency rules.\63\ In this supplemental policy 
statement, the Commission is providing guidance regarding future 
implementation of FPA section 203. The Commission is not imposing any 
additional information collection requirement upon the public. The 
Commission is not proposing any changes to its current regulations. 
Accordingly, there should be no impact on the current reporting burden 
associated with an individual section 203 application. The Commission 
also does not expect the total number of section 203 applications to be 
affected by this Supplemental Policy Statement. However, the Commission 
will submit for informational purposes only a copy of this Supplemental 
Policy Statement to OMB.
---------------------------------------------------------------------------

    \63\ 5 CFR 1320.
---------------------------------------------------------------------------

    Burden Estimate: The Public Reporting and records retention burden 
for section 203 applications is as follows.
    Title: FERC-519, ``Application Under the Federal Power Act, Section 
203''.
    Action: Revised Collection.
    OMB Control No.: 1902-0082.
    The applicant will not be penalized for failure to respond to this 
information collection unless the information collection displays a 
valid OMB control number or the Commission has provided justification 
as to why the control number should not be displayed.
    Respondents: Businesses or other for profit.
    Frequency of Responses: N/A.
    Necessity of the Information: This Supplemental Policy Statement 
provides guidance regarding future implementation of FPA section 203. 
The Commission is not proposing any changes to its current regulations.
    Internal Review: The Commission has conducted an internal review of 
the public reporting burden associated with the collection of 
information and assured itself, by means of internal review, that there 
is specific, objective support for its existing information burden 
estimate.
    81. Interested persons may obtain information on the reporting 
requirements by contacting: Federal Energy Regulatory Commission, 888 
First Street, NE., Washington, DC, 20426 [Attention: Michael Miller, 
Office of the Executive Director, Phone (202) 502-8415, fax (202) 273-
0873, e-mail: michael.miller@ferc.gov]. Comments on the requirements of 
the Supplemental Policy Statement may also be sent to the Office of 
Information and Regulatory Affairs, Office of Management and Budget, 
Washington, DC 20503 [Attention: Desk Officer for the Federal Energy 
Regulatory Commission, fax (202) 395-7285, e-mail 
oira_submission@omb.eop.gov].

IV. Environmental Analysis

    82. The Commission is required to prepare an Environmental 
Assessment or an Environmental Impact Statement for any action that may 
have a significant adverse effect on the human environment.\64\ The 
Commission has categorically excluded certain actions from this 
requirement as not having a significant effect on the human 
environment.\65\ The Supplemental Policy Statement is categorically 
excluded as it addresses actions under section 203.\66\ Accordingly, no 
environmental assessment is necessary and none has been prepared in 
this Supplemental Policy Statement.
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    \64\ Regulations Implementing the National Environmental Policy 
Act, Order No. 486, 52 FR 47897 (Dec. 17, 1987), FERC Stats. & 
Regs., Regulations Preambles 1986-1990 ] 30,783 (1987).
    \65\ 18 CFR 380.4.
    \66\ See 18 CFR 380.4(a)(16).

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[[Page 42290]]

V. Regulatory Flexibility Act Certification

    83. The Regulatory Flexibility Act of 1980 (RFA) \67\ requires 
agencies to prepare certain statements, descriptions and analyses of 
proposed rules that will have a significant economic impact on a 
substantial number of small entities.\68\ However, the RFA does not 
define ``significant'' or ``substantial.'' Instead, the RFA leaves it 
up to an agency to determine the effect of its regulations on small 
entities.
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    \67\ 5 U.S.C. 601-12.
    \68\ The RFA definition of ``small entity'' refers to the 
definition provided in the Small Business Act, which defines a 
``small business concern'' as a business that is independently owned 
and operated and that is not dominant in its field of operation. 15 
U.S.C. 632. The Small Business Size Standards component of the North 
American Industry Classification System defines a small electric 
utility as one that, including its affiliates, is primarily engaged 
in the generation, transmission, and/or distribution of electric 
energy for sale and whose total electric output for the preceding 
fiscal year did not exceed 4 million MWh. 13 CFR 121.201.
---------------------------------------------------------------------------

    84. Most filing companies regulated by the Commission do not fall 
within the RFA's definition of small entity.\69\ Further, as noted 
above, the Supplemental Policy Statement does not propose any changes 
to the Commission's current regulations under section 203; therefore 
there is no change in how the Commission's regulations under section 
203 affect small entities. Therefore, the Commission certifies that the 
Supplemental Policy Statement will not have a significant economic 
impact on a substantial number of small entities. As a result, no 
regulatory flexibility analysis is required.
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    \69\ 5 U.S.C. 601(3), citing to section 3 of the Small Business 
Act, 15 U.S.C. 632. Section 3 of the Small Business Act defines a 
``small-business concern'' as a business which is independently 
owned and operated and which is not dominant in its field of 
operation.
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VI. Document Availability

    85. 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 p.m. Eastern time) at 888 First Street, NE., Room 2A, 
Washington DC 20426.
    86. From the Commission's Home Page on the Internet, this 
information is available in the Commission's document management 
system, eLibrary. The full text of this document is available on 
eLibrary in PDF and Microsoft Word format for viewing, printing, and/or 
downloading. To access this document in eLibrary, type the docket 
number (excluding the last three digits of the docket number), in the 
docket number field.
    87. User assistance is available for eLibrary and the Commission's 
website during normal business hours. For assistance, please contact 
FERC Online Support at (202) 502-6652 (toll-free at 1-866-208-3676) or 
e-mail at ferconlinesupport@ferc.gov, or the Public Reference Room at 
(202) 502-8371, TTY (202) 502-8659. E-mail the Public Reference Room at 
public.referenceroom@ferc.gov.

VII. Effective Date and Congressional Notification

    88. This Supplemental Policy Statement is effective July 20, 2007. 
The Commission has determined that, consistent with the discussion 
above with regard to information collection and the RFA, this policy 
statement also is not a ``major rule'' as defined in section 351 of the 
Small Business Regulatory Enforcement Fairness Act of 1996. The 
Commission will submit this Supplemental Policy Statement to both 
houses of Congress and to the General Accounting Office.

List of Subjects in 18 CFR Part 33

    Electric utilities, Reporting and recordkeeping requirements, 
Securities.

    By the Commission.
Kimberly D. Bose,
Secretary.
[FR Doc. E7-14956 Filed 8-1-07; 8:45 am]

BILLING CODE 6717-01-P