Document ID: FERC-2007-1308-0001
Agency: ferc
Document Type: Proposed Rule
Title: Cross-Subsidization Restrictions on Affiliate Transactions
Posted Date: 2007-07-31T04:00Z

[Federal Register: July 31, 2007 (Volume 72, Number 146)]
[Proposed Rules]               
[Page 41644-41649]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr31jy07-16]                         

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 35

[Docket No. RM07-15-000]

 
Cross-Subsidization Restrictions on Affiliate Transactions

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

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Federal Energy Regulatory Commission (Commission) is 
proposing to amend its regulations pursuant to sections 205 and 206 of 
the Federal Power Act to codify restrictions on affiliate transactions 
between franchised public utilities with captive customers and their 
market-regulated power sales affiliates or non-utility affiliates. The 
Commission seeks public comment on the rules and amended regulations 
proposed herein.

DATES: Comment Date: Comments are due August 30, 2007.

ADDRESSES: You may submit comments identified in Docket No. RM07-15-
000, by one of the following methods:
    Agency Web site: http://www.ferc.gov. Follow the instructions for 

submitting comments via the eFiling link found in the Comment 
Procedures section of the preamble.
    Mail: Commenters unable to file comments electronically must mail 
or hand deliver an original and 14 copies of their comments to the 
Federal Energy Regulatory Commission, Secretary of the Commission, 888 
First Street, NE., Washington, DC 20426. Please refer to the Comment 
Procedures section of the preamble for additional information on how to 
file paper comments.

FOR FURTHER INFORMATION CONTACT: Carla Urquhart (Legal Information), 
Office of the General Counsel, Federal Energy Regulatory Commission, 
888 First Street, NE., Washington, DC 20426, (202) 502-8496.
    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.
    Stuart Fischer (Technical Information), Office of Enforcement, 
Federal Energy Regulatory Commission, 888 First Street, NE., 
Washington, DC 20426, (202) 502-8517.

SUPPLEMENTARY INFORMATION: 

I. Introduction

    1. Pursuant to sections 205 and 206 of the Federal Power Act 
(FPA),\1\ the Commission is proposing to amend its regulations to 
revise Part 35 of Title 18 of the Code of Federal Regulations (CFR) to 
codify affiliate restrictions that would be applicable to all power and 
non-power goods and services transactions between franchised public 
utilities with captive customers and their market-regulated power sales 
and non-utility affiliates.\2\ The Commission's goal in proposing these 
prophylactic restrictions is to protect against inappropriate cross-
subsidization of market-regulated and unregulated activities by the 
captive customers of public utilities. The proposed restrictions are 
based upon those already imposed by the Commission in the context of 
certain FPA section 203 \3\ and 205 approvals, but expand the 
transactions and entities to which they apply.\4\ The Commission seeks 
public comment on the proposed rules.
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    \1\ 16 U.S.C. 824d, 824e.
    \2\ For purposes of this Notice of Proposed Rulemaking, a 
``market-regulated'' power sales affiliate means any power sales 
affiliate, other than a franchised public utility, whose power sales 
are regulated in whole or in part on a market basis. This would 
include, e.g., a power marketer, exempt wholesale generator, 
qualifying facility or other power seller affiliate permitted to 
make some or all of its power sales at market-based rates. A ``non-
utility'' affiliate would include an affiliate that is not in the 
power sales or transmission business, e.g., a coal mining company, 
construction company, real estate company, energy-related technology 
company, communications systems company, among others. While the 
Commission, in previous documents, has referred to both categories 
of affiliates as ``non-regulated,'' consistent with the discussion 
on cross-subsidization issues in our recent Market-Based Rate Final 
Rule, we believe the term ``market-regulated'' more accurately 
describes power sellers with market-based rates since they remain 
subject to regulation. Market-Based Rates For Wholesale Sales Of 
Electric Energy, Capacity And Ancillary Services By Public 
Utilities, Order No. 697, 72 FR 39903 (July 20, 2007), FERC Stats. & 
Regs. ] 31,252, at P 490 (2007) (Market-Based Rate Final Rule). 
Accordingly, we have modified our terminology in this Notice of 
Proposed Rulemaking.
    \3\ 16 U.S.C. 824b, amended by Energy Policy Act of 2005, Pub. 
L. 109-58, 1289, 119 Stat. 594, 982-83 (2005) (EPAct 2005).
    \4\ This Notice of Proposed Rulemaking is one of three actions 
being taken based on the Commission's experience implementing 
amended FPA section 203 and the Public Utility Holding Company Act 
of 2005, EPAct 2005, Pub. L. No. 109-58, 1261, et seq., 119 Stat. 
594, 972-78 (2005) (PUHCA 2005), as well as the record from the 
Commission's December 7, 2006 and March 8, 2007 technical 
conferences regarding Section 203 and PUHCA 2005. In addition, in 
separate orders, the Commission is concurrently issuing a section 
203 Supplemental Policy Statement, FPA Section 203 Supplemental 
Policy Statement, 120 FERC ] 61,060 (2007) (issued in Docket No. 
PL07-1-000), and a Notice of Proposed Rulemaking proposing to grant 
a limited blanket authorization for certain dispositions of 
jurisdictional facilities under FPA section 203(a)(1), Blanket 
Authorization Under FPA Section 203, 120 FERC ] 61,062 (2007) 
(issued in Docket No. RM07-21-000).
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II. Background

    2. The Commission requires public utilities to implement codes of 
conduct with regard to affiliate transactions where an entity seeks 
market-based rate authorization. The Commission also imposes codes of 
conduct on entities seeking merger authorization under section 203 of 
the FPA. The discussion below summarizes the Commission's existing 
practices in these two areas.

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

1. Historical Approach
    3. The Commission began considering proposals for market-based 
pricing of wholesale power sales and attendant cross-subsidy issues in 
1988. At that time, the Commission acted on market-based rate proposals 
filed by various wholesale suppliers on a case-by-case basis. In doing 
so, the Commission considered whether there was evidence of affiliate 
abuse or reciprocal dealing involving the seller or its affiliates.\5\ 
As the Commission explained, ``[t]he

[[Page 41645]]

Commission's concern with the potential for affiliate abuse is that a 
utility with a monopoly franchise may have an economic incentive to 
exercise market power through its affiliate dealings.'' \6\ The 
Commission also stated its concern that a franchised public utility and 
an affiliate may be able to transact in ways that transfer benefits 
from the captive customers of the franchised public utility to the 
affiliate and its shareholders.\7\ Where a franchised public utility 
makes a power sale to an affiliate, the Commission is concerned that 
such a sale could be made at a rate that is too low, in effect, 
transferring the difference between the market price and the lower rate 
from captive customers to the market-regulated affiliated entity. Where 
a power seller with market-based rates makes power sales to an 
affiliated franchised public utility, the concern is that such sales 
could be made at a rate that is too high, which would give an undue 
profit to the affiliated entity at the expense of the franchised public 
utility's captive customers.\8\ In determining whether to allow power 
sales affiliate transactions, the Commission, over time, has adopted 
several methods, all of which have focused on ensuring that captive 
customers are adequately protected against affiliate abuse.
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    \5\ See Heartland Energy Services Inc., 68 FERC ] 61,223, at 
62,062 (1994) (Heartland) (discussing the potential for abuse in the 
case of affiliated power marketers); Commonwealth Atlantic Limited 
Partnership, 51 FERC ] 61,368, at 62,245 (1990) (discussing 
potential for reciprocal dealing if a buyer agrees to pay more for 
power from a seller in return for that seller (or its affiliates) 
paying more for power from that buyer (or its affiliates)).
    The other three ``prongs'' of the Commission's ``four-prong'' 
analysis include: (1) Whether the seller and its affiliates lack, or 
have adequately mitigated, market power in generation; (2) whether 
the seller and its affiliates lack, or have adequately mitigated, 
market power in transmission; and (3) whether the seller or its 
affiliates can erect other barriers to entry. See Market-Based Rate 
Final Rule, FERC Stats. & Regs. ] 31,252 at P 7. These additional 
``prongs'' are not directly at issue in this proceeding.
    \6\ Boston Edison Company Re: Edgar Electric Energy Co., 55 FERC 
] 61,382, at 62,137 n.56 (1991) (Edgar). See also TECO Power 
Services Corp., 52 FERC ] 61,191, at 61,697 n.41, order on reh'g, 53 
FERC ] 61,202 (1990) (``The Commission has determined that self 
dealing may arise in transactions between affiliates because 
affiliates have incentives to offer terms to one another which are 
more favorable than those available to other market 
participants.'').
    \7\ See, e.g., Heartland, 68 FERC at 62,062.
    \8\ The Commission has found that a transaction between two non-
traditional utility affiliates (such as power marketers, exempt 
wholesale generators, or qualifying facilities) does not raise the 
same concern about cross-subsidization because neither has a 
franchised service territory and therefore has no captive customers. 
As the Commission has explained, no matter how sales are conducted 
between non-traditional affiliates, profits or losses ultimately 
affect only the shareholders. FirstEnergy Generation Corporation, 94 
FERC ] 61,177, at 61,613 (2001); USGen Power Services, L.P., 73 FERC 
] 61,302, at 61,846 (1995). With respect to affiliate power sales, 
the Commission has also developed guidelines on how to determine 
whether a transaction is above suspicion and captive customers are 
protected, as well as guidelines for competitive solicitation 
processes. See Edgar, 55 FERC at 62,167-69; Allegheny Energy Supply 
Company, LLC, 108 FERC ] 61,082, at 61,417 (2004).
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    4. Just as the Commission has expressed concern about the potential 
for affiliate abuse in connection with power sales between affiliates, 
it also has recognized that there may be a potential for affiliate 
abuse through other means, such as the pricing of non-power goods and 
services or the sharing of market information between affiliates.\9\ 
The same concerns about giving undue profits to affiliated 
``unregulated'' entities and shareholders, discussed above with respect 
to power sales, also apply with respect to non-power goods and services 
transactions.
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    \9\ See, e.g., Potomac Electric Power Company, 93 FERC ] 61,240, 
at 61,782 (2000); Heartland, 68 FERC at 62,062-63.
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    5. Accordingly, the Commission's policy for many years has been to 
require that, as a condition of market-based rate authorization, 
applicants adopt a code of conduct applicable to non-power goods and 
services transactions between regulated and non-regulated affiliated 
power sellers. The Commission has also required that applicants include 
a provision in their market-based rate tariffs prohibiting power sales 
between regulated and non-regulated affiliated power sellers without 
first receiving authorization of the transaction under section 205 of 
the FPA.\10\
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    \10\ Aquila, Inc., 101 FERC ] 61,331, at P 12 (2002).
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    6. The purpose of the market-based rate code of conduct is to 
safeguard against affiliate abuse by protecting against the possible 
diversion of benefits or profits from franchised public utilities 
(i.e., traditional public utilities with captive ratepayers) to an 
affiliated entity for the benefit of shareholders. The Commission has 
waived the market-based rate code of conduct requirement in cases where 
there are no captive customers, and thus no potential for affiliate 
abuse, or where the Commission finds that such customers are adequately 
protected against affiliate abuse.\11\ In such cases, however, the 
Commission directed the utilities to notify the Commission should they 
acquire captive customers in the future and expressly reserved the 
right to reimpose the market-based rate code of conduct requirement.
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    \11\ See, e.g., CMS Marketing, Services and Trading Co., 95 FERC 
] 61,308, at 62,051 (2001) (granting request for cancellation of 
code of conduct where wholesale contracts, as amended, ``cannot be 
used as a vehicle for cross-subsidization of affiliate power sales 
or sales of non-power goods and services''); Alcoa Inc., 88 FERC ] 
61,045, at 61,119 (1999) (waiving code of conduct requirement where 
there were no captive customers); Green Power Partners I LLC, 88 
FERC ] 61,005, at 61,010-11 (1999) (waiving code of conduct 
requirement where there are no captive wholesale customers and 
retail customers may choose alternative power suppliers under retail 
access program).
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2. The Market-Based Rate Final Rule
    7. In the Commission's recent Market-Based Rate Final Rule, among 
other things, the Commission codified in the regulations at 18 CFR part 
35, subpart H, an explicit requirement that any seller with market-
based rate authority must comply with the affiliate power sales 
restrictions and other affiliate restrictions. Compliance on an ongoing 
basis is a condition of retaining market-based rate authority. The 
Market-Based Rate Final Rule retains the policy that wholesale sales of 
power between a franchised public utility and any of its market-
regulated power sales affiliates must be pre-approved by the 
Commission. It also adopts uniform affiliate restrictions governing 
power sales, sales of non-power goods and services, separation of 
functions, and information sharing between franchised public utilities 
with captive customers and their market-regulated power sales 
affiliates.\12 \The power and non-power goods and services 
restrictions, however, apply only to transactions involving two power 
sellers. They do not apply to transactions between a franchised public 
utility and a non-utility affiliate.
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    \12\ Market-Based Rate Final Rule, FERC Stats. & Regs. ] 31,252 
at P 23.
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B. Affiliate Transactions Under Section 203

1. Before EPAct 2005
    8. The Commission has also addressed cross-subsidization issues in 
the context of section 203 merger applications. Prior to EPAct 2005, 
the Commission's policy was to condition its approval of certain 
section 203 mergers on the applicants' agreement to abide by certain 
restrictions on non-power goods and services transactions between a 
merged company's utility and non-utility or market-regulated 
subsidiaries. The condition was imposed on those mergers involving 
registered holding companies under the Public Utility Holding Company 
Act of 1935 \13\ in order to find that the merger would not adversely 
affect federal regulation.\14\ That requirement grew out of judicial 
determinations that, when a merger would create or involve a registered 
holding company, the actions of the Securities and Exchange Commission 
(SEC) may preclude the Commission from asserting jurisdiction over the 
non-power transactions between subsidiaries of that holding 
company.\15\ Under Ohio Power, if the

[[Page 41646]]

SEC approved an affiliate contract involving special purpose subsidiary 
goods or services at cost, the Commission had to allow pass-through of 
the costs in jurisdictional rates even if the public utility purchasing 
the goods or services could have obtained them at a lower market price 
from a non-affiliate.\16\ For over a decade following the Ohio Power 
decision, the Commission required that, to gain section 203 approval of 
a proposed merger without a hearing, if the transaction would create a 
registered holding company under the PUHCA 1935, applicants must agree 
to waive the Ohio Power immunity and abide by the Commission's policy 
on intra-system transactions for non-power goods and services.\17\
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    \13\ 16 U.S.C. 79a et seq. (PUHCA 1935). EPAct 2005 repealed 
PUHCA 1935. EPAct 2005, Pub. L. No. 109-58, 1263.
    \14\ See, e.g., Niagara Mohawk Holdings, Inc., 95 FERC ] 61,381, 
at 62,414, order on reh'g, 96 FERC ] 61,144 (2001).
    \15\ See Ohio Power Co. v. FERC, 954 F.2d 779, 782-86 (D.C. 
Cir.), cert. denied sub nom., Arcadia v. Ohio Power Co., 506 U.S. 
981 (1992) (Ohio Power).
    \16\ The Commission's policy since the mid-1990s has been that 
where the regulated public utility has provided non-power goods or 
services to the non-regulated affiliate, the public utility provides 
the goods or services at the higher of cost or market. A non-
regulated affiliate that sells non-power goods or services to an 
affiliate with captive customers may not sell at higher than market 
price. This is often referred to as the ``market'' standard. These 
standards were articulated in the Commission's 1996 Merger Policy 
Statement. Inquiry Concerning the Commission's Merger Policy Under 
the Federal Power Act: Policy Statement, Order No. 592, 61 FR 68595 
(Dec. 30, 1996), FERC Stats. & Regs. ] 31,044, at 30,124-25 (1996) 
(1996 Merger Policy Statement), reconsideration denied, Order No. 
592-A, 62 FR 33341 (June 19, 1997), 79 FERC ] 61,321 (1997).
    \17\ Public Service Company of Colorado, 75 FERC ] 61,325, at 
62,046 (1996); 1996 Merger Policy Statement, FERC Stats. & Regs. ] 
31,044 at 30,124-25.
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2. After EPAct 2005
    9. Because EPAct 2005 repealed PUHCA 1935, certain activities of 
previously-registered holding companies that were previously subject to 
SEC regulation, including intra-system affiliate transactions, are no 
longer exempt from this Commission's full regulatory review. In 
particular, the Commission's conditions and policies under FPA sections 
205 and 206 with respect to non-power goods and services transactions 
between holding company affiliates may now be applied to all public 
utilities that are members of holding companies, whether in the context 
of a section 203 merger proceeding or the context of a section 205-206 
rate proceeding.\18\ In addition, the Commission has authority to 
review allocation of service company costs among members of holding 
companies that have public utilities with captive customers.
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    \18\ The provisions of PUHCA 1935 that formed the basis for Ohio 
Power are no longer in effect, thus removing the Ohio Power 
limitation on our oversight of non-power transactions. Further, FPA 
section 318, which provided for SEC preemption in certain 
circumstances where there was a conflict between SEC PUHCA 1935 
regulation and Commission regulation, was repealed.
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    10. In the Order No. 669 rulemaking proceedings,\19\ which revised 
the Commission's regulations pursuant to amended section 203, the 
Commission continued its past approach with respect to affiliate abuse 
restrictions involving power and non-power goods and services 
transactions, in the context of section 203 applications.\20\ However, 
the Commission made two additional clarifications.
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    \19\ Transactions Subject to FPA Section 203, Order No. 669, 71 
FR 1348 (Jan. 6, 2006), FERC Stats. & Regs. ] 31,200 (2005), order 
on reh'g, Order No. 669-A, 71 FR 28422 (May 16, 2006), FERC Stats. & 
Regs. ] 31,214, order on reh'g, Order No. 669-B, 71 FR 42579 (July 
27, 2006), FERC Stats. & Regs. ] 31,225 (2006).
    \20\ Amended section 203(a)(4) does add to the Commission's 
merger analysis the explicit requirement that the Commission find 
that any proposed transaction will not result in cross-subsidization 
of a non-utility associate company or the pledge or encumbrance of 
utility assets for the benefit of an associate company, unless that 
cross-subsidization, pledge, or encumbrance will be consistent with 
the public interest.
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    11. First, in its implementation of regulations pursuant to PUHCA 
2005,\21\ the Commission discussed one exception to the traditional 
standards articulated in the 1996 Merger Policy Statement. In the Order 
No. 667 rulemaking proceeding,\22\ the Commission explained that there 
are two circumstances in which the at-cost or market standards may 
arise in the context of the Commission's jurisdictional 
responsibilities: (1) The Commission's review of the costs of non-power 
goods and services provided by a traditional, centralized service 
company to public utilities within the holding company system; and (2) 
when a service company that is a special-purpose company within a 
holding company provides non-power goods or services to one or more 
public utilities in the same holding company system. Under both 
scenarios, the similar concerns regarding affiliate abuse arise: 
``[w]hether the public utility's costs incurred in purchasing from the 
affiliate are prudently incurred and just and reasonable, and whether 
non-regulated affiliates purchasing non-power goods and services from 
the same special-purpose company are receiving preferential treatment 
vis-[agrave]-vis the public utility.'' \23\ In Order No. 667, the 
Commission exempted traditional, centralized service companies, which 
at that time were using the SEC's ``at-cost'' standard, from complying 
with the Commission's market standard for their sales of non-power 
goods and services to regulated affiliates and created a rebuttable 
presumption that costs incurred under at-cost pricing for such services 
are reasonable.\24\ However, with respect to non-power goods and 
services transactions between holding company affiliates other than 
traditional, centralized service companies, i.e., service companies 
that are non-regulated, special-purpose affiliates, such as a fuel 
supply company or a construction company, the Commission continued with 
its prior practice.\25\
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    \21\ PUHCA 2005 is primarily a books and records access statute 
and does not give the Commission any new substantive authorities, 
other than the requirement that the Commission review and authorize 
certain non-power goods and services cost allocations among holding 
company members upon request. EPAct 2005, Pub. L. No. 109-58, 1275.
    \22\ Repeal of the Public Utility Holding Company Act of 1935 
and Enactment of the Public Utility Holding Company Act of 2005, 
Order No. 667, 70 FR 75592 (Dec. 20, 2005), FERC Stats. & Regs. ] 
31,197 (2005), order on reh'g, Order No. 667-A, 71 FR 28446 (May 16, 
2006), FERC Stats. & Regs. ] 31,213, order on reh'g, Order No. 667-
B, 71 FR 42750 (July 28, 2006), FERC Stats. & Regs. ] 31,224 (2006), 
order on reh'g, 72 FR 8277 (Feb. 26, 2007), 118 FERC ] 61,133 
(2007).
    \23\ Order No. 667, FERC Stats. & Regs. ] 31,197 at P 168.
    \24\ Id. P 169.
    \25\ Order No. 667 states, in relevant part:
    First, with respect to sales from a public utility to a non-
regulated, affiliated special-purpose company, we agree * * * that 
the price should be no less than cost, i.e., the higher of cost or 
market; otherwise, a public utility could attempt to game the system 
and forego profits it could otherwise obtain by selling to a non-
affiliate, to the benefit of its non-regulated affiliate who 
receives a good or service at a below-market price. When the 
situation is reversed, i.e., the non-regulated, affiliated special-
purpose company is providing non-power goods and services to the 
public utility affiliate, the Commission will continue to apply its 
market standard. The non-regulated, affiliated special-purpose 
company may not sell to its public utility affiliate at a price 
above the market price. We believe that such transactions involving 
such non-regulated, affiliated special-purpose companies pose a 
greater risk of inappropriate cross-subsidization and adverse 
effects on jurisdictional rates.
    Id. P 171.
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    12. Second, in recent section 203 merger proceedings, the 
Commission has extended the applicability of the code of conduct 
restrictions previously applied only to registered holding companies. 
In National Grid plc,\26\ the Commission announced that it would 
require all merging parties to abide by a code of conduct containing 
specific provisions regarding power and non-power goods and services 
transactions between the utility subsidiaries and their affiliates:
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    \26\ 117 FERC ] 61,080 (2006) (National Grid).

    Implementation of the Code of Conduct for all utility 
subsidiaries of the merged company, as required by our decision 
here, will address both power and non-power goods and services 
transactions between the utility subsidiaries and their affiliates. 
The Code of Conduct to be implemented by the

[[Page 41647]]

merged company shall (1) require our approval of all power sales by 
a utility to an affiliate, (2) require a utility with captive 
customers to provide non-power goods or services to a non-utility or 
``non-regulated utility'' affiliate at a price that is the higher of 
cost or market price, (3) prohibit a non-utility or non-regulated 
utility affiliate from providing non-power goods or services to a 
utility affiliate with captive customers at a price above market 
price, and (4) prohibit a centralized service company from providing 
non-power services to a utility affiliate with captive customers at 
a price above cost. These requirements protect a utility's captive 
customers against inappropriate cross-subsidization of non-utility 
or non-regulated utility affiliates by ensuring that the utility 
with captive customers neither recovers too little for goods and 
services that the utility provides to an affiliate nor pays too much 
for goods and services that the utility receives from an affiliate. 
Implementation of these requirements provides a prophylactic 
mechanism to ensure that the merger will not result in cross-
subsidization of non-utility or non-regulated utility companies in 
the same holding company system and therefore meets the requirement 
of section 203(a)(4) that a merger not result in inappropriate 
cross-subsidization of a non-utility associate company.\27\
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    \27\ Id. P 66 (internal citations removed).

    13. While these affiliate restrictions are broad in terms of 
transactions covered (covering transactions between power sales 
affiliates as well as transactions between power sales affiliates and 
non-utility affiliates) and have been extended within the context of 
section 203 approvals, they do not apply to public utilities that do 
not need to seek section 203 merger approval.

III. Discussion

    14. Historically, section 205 rate review has been the primary 
mechanism by which the Commission disallowed as imprudent or unjust and 
unreasonable the costs incurred by a franchised public utility in 
purchasing power or non-power goods and services from a non-utility or 
power sales affiliate when the utility could have purchased such power 
or non-power goods and services from a non-affiliated entity. However, 
as discussed above, the Commission's policy over the years has been to 
develop prophylactic affiliate cross-subsidy restrictions in the 
context of blanket market-based rate authorizations under FPA section 
205 and merger proceedings under section 203. We believe prophylactic 
restrictions setting forth the standards under which affiliates may 
transact are superior to relying exclusively on after-the-fact rate 
reviews of costs already incurred. Further, it would be virtually 
impossible for the Commission to individually pre-approve every power 
and non-power goods and services transaction given the volume of 
transactions that occur on a daily basis. The affiliate restrictions 
the Commission has previously imposed in individual cases involving 
market-based rate applicants and merger applicants allow public 
utilities to know up-front the standards under which they may transact 
with affiliates; and, if they do not follow those standards, they are 
at risk for full refunds plus interest, or other remedial action.
    15. Accordingly, to provide better assurance against inappropriate 
cross-subsidization, we believe it is appropriate to continue imposing 
affiliate restrictions, to expand the coverage of those restrictions, 
and to codify them in our regulations. As noted above, there is a gap 
in coverage of the restrictions as they are currently imposed. 
Specifically, the restrictions imposed on section 205 market-based rate 
applicants do not cover non-power goods and services transactions 
between a franchised public utility and non-utilities; they cover only 
transactions between power sales affiliates and are imposed only on the 
market-based rate applicants. Additionally, while the restrictions 
imposed on section 203 applicants cover transactions between a 
franchised public utility and market-regulated power sales affiliates 
as well as non-utility affiliates, they apply only to merger 
applicants; they do not apply to other section 203 applicants and do 
not apply to public utilities that do not require any section 203 
authorization.\28\ Finally, while the preamble to Order No. 667 
discussed the Commission's pricing policy on affiliate non-power goods 
and services transactions, including pricing of non-power goods and 
services provided by centralized service companies, the pricing policy 
(which technically is a ratemaking policy rather than a PUHCA 2005 
issue) was not codified in the regulations.
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    \28\ See supra P 12.
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    16. To address this gap in coverage, the uniform affiliate 
restrictions that the Commission proposes to implement would be 
applicable to all franchised public utilities with captive customers 
and their market-regulated and non-utility affiliates and would address 
both power and non-power goods and services transactions between the 
utility and its affiliates. Specifically, they would: (1) Require the 
Commission's approval of all power sales by a franchised utility with 
captive customers to a market-regulated power sales affiliate; (2) 
require a franchised public utility with captive customers to provide 
non-power goods and services to a market-regulated power sales 
affiliate or a non-utility affiliate at a price that is the higher of 
cost or market price; (3) prohibit a franchised public utility with 
captive customers from purchasing non-power goods or services from a 
market-regulated power sales affiliate or a non-utility affiliate at a 
price above market price (with the exception of (4)); and (4) prohibit 
a franchised public utility with captive customers from receiving non-
power services from a centralized service company at a price above 
cost. These restrictions will help the Commission meet the requirement 
of amended section 203(a)(4) that a transaction not result in the 
inappropriate cross-subsidization of a non-utility associate company 
and, moreover, help us assure just and reasonable rates and the 
protection of captive customers for all public utilities pursuant to 
sections 205 and 206 of the FPA, irrespective of whether they need 
approval of a section 203 transactions.
    17. We note that there is overlap in the affiliate restrictions 
proposed herein and those that were recently adopted in the Market-
Based Rate Final Rule. However, as discussed above, those restrictions 
apply only to market-based rate applicants and only to transactions 
between power sales affiliates. The restrictions herein are consistent 
with, and in some instances mirror, those imposed in the Market-Based 
Rate Final Rule. We believe any overlap is appropriate and necessary to 
ensure that all franchised public utilities with captive customers have 
the same restrictions imposed on them. We also note that we are 
proposing one additional restriction that is not covered in the Market-
Based Rate Final Rule, but which has been imposed on section 203 merger 
applicants. That restriction would prohibit a centralized service 
company from providing non-power goods and services to a franchised 
public utility with captive customers at a price above cost. This 
implements the findings made in Order No. 667 and, by codifying it in 
the regulations along with the other affiliate restrictions, will 
eliminate any gaps in coverage and ensure uniformity in the 
restrictions being applied.
    18. The Commission seeks comments on these proposed affiliate 
cross-subsidy restrictions. We also seek comment on whether the 
Commission should impose any after-the-fact reporting requirements on 
transactions covered by the restrictions and, if so, what they should 
be. In this regard, we note that the Commission already receives 
reporting of public utility affiliate power sales transactions through 
Electric Quarterly

[[Page 41648]]

Reports and we see no need to duplicate existing power sales reporting. 
However, we are particularly interested in: Whether any reporting 
requirements regarding affiliate non-power goods and services 
transactions should be imposed; whether such reporting, if it were to 
be required, should be on a yearly basis or within some other time 
frame, and what specific information should be reported; whether states 
already require such reporting; and the burdens that any reporting 
requirements would impose. Although the Commission has authority to 
review such transactions through auditing and in individual section 205 
rate proceedings, we seek comment on the general usefulness of 
additional reporting requirements.

IV. Information Collection Statement

    19. The Office of Management and Budget's (OMB) regulations require 
that OMB approve information collection requirements imposed by agency 
rules.\29\ The Commission is proposing amendments to the Commission's 
regulations to codify restrictions on affiliate transactions between 
franchised public utilities with captive customers and their market-
regulated power sales affiliates or non-utility affiliates. The 
Commission is not imposing an information collection requirement upon 
the public. However, the Commission will submit for informational 
purposes only a copy of this rulemaking to OMB.
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    \29\ 5 CFR 1320.
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V. Environmental Analysis

    20. The Commission is required to prepare an Environmental 
Assessment or an Environmental Impact Statement for any action that may 
have a significant adverse effect on the human environment.\30\ The 
Commission has categorically excluded certain actions from this 
requirement as not having a significant effect on the human 
environment.\31\ The proposed regulations are categorically excluded as 
they address rate filings submitted under sections 205 and 206 of the 
FPA.\32\ Accordingly, no environmental assessment is necessary and none 
has been prepared in this NOPR.
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    \30\ Regulations Implementing the National Environmental Policy 
Act, Order No. 486, 52 FR 47897 (Dec. 17, 1987), FERC Stats. & 
Regs., Regulations Preambles, 1986-1990, ] 30,783 (1987).
    \31\ 18 CFR 380.4.
    \32\ See 18 CFR 380.4(a)(15).
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VI. Regulatory Flexibility Act Certification

    21. The Regulatory Flexibility Act of 1980 (RFA) \33\ requires 
agencies to prepare certain statements, descriptions, and analyses of 
proposed rules that will have significant economic impact on a 
substantial number of small entities.\34\ Agencies are not required to 
make such an analysis if a rule would not have such an effect.
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    \33\ 5 U.S.C. 601-12.
    \34\ The RFA definition of ``small entity'' refers to the 
definition provided in the Small Business Act, which defines a 
``small business concern'' as a business that is independently owned 
and operated and that is not dominant in its field of operation. 15 
U.S.C. 632. The Small Business Size Standards component of the North 
American Industry Classification System defines a small electric 
utility as one that, including its affiliates, is primarily engaged 
in the generation, transmission, and/or distribution of electric 
energy for sale and whose total electric output for the preceding 
fiscal year did not exceed 4 million MWh. 13 CFR 121.201.
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    22. The proposed rule will be applicable to franchised public 
utilities with captive customers. Most such companies regulated by the 
Commission do not fall within the RFA's definition of small entity.\35\ 
Therefore, the Commission certifies the proposed rule will not have a 
significant economic impact on a substantial number of small entities. 
As a result, no regulatory flexibility analysis is required.
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    \35\ 5 U.S.C. 601(3), citing to section 3 of the Small Business 
Act, 15 U.S.C. 632. Section 3 of the Small Business Act defines a 
``small-business concern'' as a business which is independently 
owned and operated and which is not dominant in its field of 
operation.
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VII. Comment Procedures

    23. The Commission invites interested persons to submit comments on 
the matters and issues proposed in this notice, including any related 
matters or alternative proposals that commenters may wish to discuss. 
Comments are due August 30, 2007. Comments must refer to Docket No. 
RM07-15-000, and must include the commenter's name, the organization 
they represent, if applicable, and their address in their comments. 
Comments may be filed either in electronic or paper format.
    24. Comments may be filed electronically via the eFiling link on 
the Commission's Web site at http://www.ferc.gov. The Commission 

accepts most standard word processing formats, but requests commenters 
to submit comments in a text-searchable format rather than a scanned 
image format. Commenters filing electronically do not need to make a 
paper filing. Commenters that are not able to file comments 
electronically must send an original and 14 copies of their comments 
to: Federal Energy Regulatory Commission, Secretary of the Commission, 
888 First Street, NE., Washington, DC 20426.
    25. All comments will be placed in the Commission's public files 
and may be viewed, printed, or downloaded remotely as described in the 
Document Availability section below. Commenters on this proposal are 
not required to serve copies of their comments on other commenters.

VIII. Document Availability

    26. In addition to publishing the full text of this document in the 
Federal Register, the Commission provides all interested persons an 
opportunity to view and/or print the contents of this document via the 
Internet through the Commission's Home Page (http://www.ferc.gov) and 

in the Commission's Public Reference Room during normal business hours 
(8:30 a.m. to 5 p.m. Eastern time) at 888 First Street, NE., Room 2A, 
Washington DC 20426.
    27. From the Commission's Home Page on the Internet, this 
information is available in the Commission's document management 
system, eLibrary. The full text of this document is available on 
eLibrary in PDF and Microsoft Word format for viewing, printing, and/or 
downloading. To access this document in eLibrary, type the docket 
number (excluding the last three digits of the docket number), in the 
docket number field.
    28. User assistance is available for eLibrary and the Commission's 
website during normal business hours. For assistance, please contact 
FERC Online Support at (202) 502-6652 (toll-free at 1-866-208-3676) or 
e-mail at ferconlinesupport@ferc.gov, or the Public Reference Room at 
(202) 502-8371, TTY (202) 502-8659. E-mail the Public Reference Room at 
public.referenceroom@ferc.gov.

List of Subjects in 18 CFR Part 35

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

    By direction of the Commission.
Kimberly D. Bose,
Secretary.

    In consideration of the foregoing, the Commission proposes to amend 
Part 35, Chapter I, Title 18, Code of Federal Regulations, as follows:

PART 35--FILING OF RATE SCHEDULES AND TARIFFS

    1. The authority citation for part 35 continues to read as follows:

    Authority: 16 U.S.C. 791a-825r, 2601-2645; 31 U.S.C. 9701; 42 
U.S.C. 7101-7352.

[[Page 41649]]

    2. Subpart I is added to read as follows:
Subpart I--Cross-Subsidization Restrictions on Affiliate Transactions
Sec.
35.43 Generally.
35.44 Protections against affiliate cross-subsidization.

Subpart I--Cross-Subsidization Restrictions on Affiliate 
Transactions

Sec.  35.43  Generally.

    (a) For purposes of this subpart:
    (1) Captive customers means any wholesale or retail electric energy 
customers served under cost-based regulation.
    (2) Franchised public utility means a public utility with a 
franchised service obligation under state law.
    (3) Market-regulated power sales affiliate means any power seller 
affiliate other than a franchised public utility, including a power 
marketer, exempt wholesale generator, qualifying facility or other 
power seller affiliate, whose power sales are regulated in whole or in 
part on a market-rate basis.
    (4) Non-utility affiliate means any affiliate that is not in the 
power sales or transmission business.
    (b) The provisions of this subpart apply to all franchised public 
utilities with captive customers.

Sec.  35.44  Protections against affiliate cross-subsidization.

    (a) Restriction on affiliate sales of electric energy. No wholesale 
sale of electric energy may be made between a franchised public utility 
with captive customers and a market-regulated power sales affiliate 
without first receiving Commission authorization for the transaction 
under section 205 of the Federal Power Act.
    (b) Non-power goods or services. (1) Unless otherwise permitted by 
Commission rule or order, sales of any non-power goods or services by a 
franchised public utility with captive customers, including sales made 
to or through its affiliated exempt wholesale generators or qualifying 
facilities, to a market-regulated power sales affiliate or non-utility 
affiliate, must be at the higher of cost or market price.
    (2) Unless otherwise permitted by Commission rule or order, and 
except as permitted by paragraph (b)(3) of this section, a franchised 
public utility with captive customers may not purchase or receive non-
power goods and services from a market-regulated power sales affiliate 
or a non-utility affiliate at a price above market.
    (3) A franchised public utility with captive customers may not 
purchase or receive non-power goods and services from a centralized 
service company at a price above cost.

 [FR Doc. E7-14618 Filed 7-30-07; 8:45 am]

BILLING CODE 6717-01-P