Document ID: FERC-2007-1308-0002
Agency: ferc
Document Type: Rule
Title: Cross-Subsidization Restrictions on Affiliate Transactions
Posted Date: 2008-02-29T05:00Z

[Federal Register: February 29, 2008 (Volume 73, Number 41)]
[Rules and Regulations]               
[Page 11013-11026]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29fe08-13]                         

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 35

[Docket No. RM07-15-000; Order No. 707]

 
Cross-Subsidization Restrictions on Affiliate Transactions

Issued February 21, 2008.
AGENCY: Federal Energy Regulatory Commission, Department of Energy.

ACTION: Final rule.

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SUMMARY: In this Final Rule, pursuant to sections 205 and 206 of the 
Federal Power Act, the Federal Energy Regulatory Commission 
(Commission) is amending its regulations to codify restrictions on 
affiliate transactions between franchised public utilities that have 
captive customers or that own or provide transmission service over 
jurisdictional transmission facilities, and their market-regulated 
power sales affiliates or non-utility affiliates. These restrictions 
will supplement other restrictions the Commission has in place to 
protect captive customers of franchised public utilities or 
transmission customers of franchised public utilities that own or 
provide transmission service over jurisdictional transmission 
facilities from inappropriate cross-subsidization of affiliates.

DATES: Effective Date: This Final Rule will become effective March 31, 
2008.

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

Final Rule

    1. On July 20, 2007, the Commission issued a Notice of Proposed 
Rulemaking 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.\1\ After receiving 
comments in response to the Affiliate Transactions NOPR, the Commission 
amends Part 35 of its regulations, pursuant to sections

[[Page 11014]]

205 and 206 of the Federal Power Act (FPA), to adopt such 
restrictions.\2\
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    \1\ Cross-Subsidization Restrictions on Affiliate Transactions, 
Notice of Proposed Rulemaking, 72 FR 41644 (July 31, 2007), FERC 
Stats. & Regs. ] 32,618 (2007) (Affiliate Transactions NOPR).
    \2\ 16 U.S.C. 824d, 824e.
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    2. Finalization of this rulemaking is one of a number of steps the 
Commission has taken following the repeal of the Public Utility Holding 
Company Act of 1935 \3\ to ensure that customers of franchised public 
utilities do not inappropriately cross-subsidize the activities of 
``non-regulated'' affiliates, and are not otherwise financially harmed 
as a result of affiliate transactions and activities. The restrictions 
in this Final Rule will provide certainty to public utilities and 
customers with respect to the pricing standard that must be applied to 
certain affiliate transactions. While the Commission already has in 
place affiliate rules that apply to public utilities with market-based 
rates and to public utilities seeking merger approvals, the 
restrictions in this rule will supplement existing restrictions and 
will apply to all franchised public utilities that have captive 
customers or that own or provide transmission service over 
jurisdictional transmission facilities. Thus, they will strengthen the 
Commission's ability to ensure that customers are protected against 
affiliate abuse and that rates remain just and reasonable.
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    \3\ 16 U.S.C. 79a et seq. (PUHCA 1935).
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I. Background

    3. Under sections 205 and 206 of the FPA, the Commission must 
ensure that the rates, terms and conditions of jurisdictional service 
are just, reasonable and not unduly discriminatory or preferential. As 
part of the Commission's obligation in administering this FPA standard, 
it ensures that wholesale customers' rates do not reflect costs that 
are the result of undue preferences granted to affiliates or that are 
imprudent or unreasonable as a result of affiliate transactions. The 
Commission has a long history of scrutinizing affiliate transactions 
for potential cross-subsidization and in recent rulemakings and orders 
it has codified and expanded affiliate restrictions, both under its FPA 
section 205-206 rate authority (in the context of market-based rates) 
and under its FPA section 203 merger authority. As discussed infra, 
pursuant to its FPA section 205-206 authority, in this Final Rule the 
Commission will extend similar restrictions to all franchised public 
utilities that have captive customers or that own or provide 
transmission service over jurisdictional transmission facilities. As 
historical backdrop, however, we first discuss our past and existing 
practices with respect to affiliate transactions in the context of 
market-based rates and mergers.

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

1. Historical Approach
    4. The Commission began considering proposals for market-based 
pricing of wholesale power sales and attendant cross-subsidy issues in 
1988. 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, among other things, whether there was evidence 
of affiliate abuse or reciprocal dealing involving the seller or its 
affiliates.\4\ As the Commission explained, ``[t]he 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.'' \5\ 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.\6\ 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.\7\ 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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    \4\ 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)).
    \5\ 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.'').
    \6\ See, e.g., Heartland, 68 FERC at 62,062.
    \7\ The Commission has found that a transaction between two non-
traditional utility affiliates (such as power marketers, exempt 
wholesale generators (EWGs), or qualifying facilities (QFs)) 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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    5. 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.\8\ 
The same concerns about giving undue profits to affiliated market-
regulated entities and their shareholders, discussed above with respect 
to power sales, also apply with respect to these interactions.
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    \8\ See, e.g., Potomac Electric Power Company, 93 FERC ] 61,240, 
at 61,782 (2000) (Potomac); Heartland, 68 FERC at 62,062-63.
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    6. Accordingly, the Commission's policy for many years had 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 and information sharing between regulated and 
non-regulated (market-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.\9\
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    \9\ Aquila, Inc., 101 FERC ] 61,331, at P 12 (2002).
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    7. The purpose of the market-based rate code of conduct was 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

[[Page 11015]]

for affiliate abuse, or where the Commission finds that such customers 
are adequately protected against affiliate abuse.\10\ 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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    \10\ 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 (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
    8. In the Commission's recent Market-Based Rate Final Rule,\11\ 
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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    \11\ Market-Based Rates For Wholesale Sales Of Electric Energy, 
Capacity and Ancillary Services by Public Utilities, Order No. 697, 
72 FR 39904 (July 20, 2007), FERC Stats. & Regs. ] 31,252 (2007) 
(Market-Based Rate Final Rule).
    \12\ Id. P 23.
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B. Affiliate Transactions Under Section 203

1. Before the Energy Policy Act of 2005
    9. The Commission has also addressed cross-subsidization issues in 
the context of section 203 merger applications. Prior to the Energy 
Policy Act of 2005,\13\ 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 PUHCA 1935 \14\ in 
order to find that the merger would not adversely affect federal 
regulation.\15\ 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.\16\ 
Under Ohio Power, if the 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.\17\ 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.\18\
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    \13\ Energy Policy Act of 2005, Pub. L. 109-58, 1289, 119 Stat. 
594, 982-83 (2005) (EPAct 2005).
    \14\ EPAct 2005 repealed PUHCA 1935. EPAct 2005, Pub. L. 109-58, 
1263.
    \15\ See, e.g., Niagara Mohawk Holdings, Inc., 95 FERC ] 61,381, 
at 62,414, order on reh'g, 96 FERC ] 61,144 (2001).
    \16\ 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).
    \17\ 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).
    \18\ Public Service Company of Colorado, 75 FERC ] 61,325, at 
62,046 (1996) (PSC Colorado); 1996 Merger Policy Statement, FERC 
Stats. & Regs. ] 31,044 at 30,124-25.
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2. After EPAct 2005
    10. 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.\19\ 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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    \19\ 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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    11. In the Order No. 669 rulemaking proceedings,\20\ 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.\21\ However, 
the Commission made two additional clarifications.
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    \20\ 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).
    \21\ Amended section 203(a)(4) adds 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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    12. First, in its implementation of regulations pursuant to PUHCA 
2005,\22\ the Commission discussed one exception to the traditional 
standards articulated in the 1996 Merger Policy Statement. In the Order 
No. 667

[[Page 11016]]

rulemaking proceeding,\23\ 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, 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.'' 
\24\ 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.\25\ In determining that the at-cost standard was 
appropriate for traditional, centralized service companies, the 
Commission noted that centralized provision of the services provided by 
such companies (such as accounting, human resources, legal, tax, and 
other such services) benefits ratepayers through increased efficiency 
and economies of scale. Moreover, the Commission recognized that it is 
frequently difficult to define the market value of the specialized 
services provided by centralized service companies. On this basis, the 
Commission stated it would apply a rebuttable presumption that costs 
incurred under at-cost pricing of such services are reasonable.\26\ 
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.\27\
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    \22\ 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, Public Law 109-58, 1275.
    \23\ 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).
    \24\ Order No. 667, FERC Stats. & Regs. ] 31,197 at P 168.
    \25\ Id. P 169.
    \26\ Id. The Commission stated, however, that it would entertain 
complaints that at-cost pricing for such services exceeds the market 
price, but complainants would have the burden of demonstrating that 
that is the case.
    \27\ In Order No. 667, the Commission stated that, with respect 
to sales from a public utility to a non-regulated, affiliated 
special-purpose company, 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. The Commission also stated that, 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. Accordingly, the non-regulated, affiliated special-
purpose company may not sell to its public utility affiliate at a 
price above the market price. The Commission found 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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    13. 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,\28\ 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:

    \28\ 117 FERC ] 61,080 (2006) (National Grid).
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    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 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.\29\

    \29\ Id. P 66 (internal citations removed).
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    14. 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.

II. Affiliate Transactions NOPR

    15. In the Affiliate Transactions NOPR, the Commission proposed to 
implement uniform affiliate restrictions that 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.\30\ 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 franchised public utilities. The proposed 
restrictions are based upon those already imposed by the Commission in 
the context of certain section 203 and 205 approvals, but expand the 
transactions and entities to which they apply.
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    \30\ On July 20, 2007, the Commission took three actions 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 PUCHA 2005. In this docket, the Commission issued the 
Affiliate Transactions NOPR. In addition, in separate orders, the 
Commission issued a section 203 Supplemental Policy Statement, and a 
Notice of Proposed Rulemaking proposing additional blanket 
authorizations under section 203 of the FPA. FPA Section 203 
Supplemental Policy Statement, 72 FR 42277 (Aug. 2, 2007), FERC 
Stats. & Regs. ] 31,253 (2007) (Supplemental Policy Statement), 
order on clarification and reconsideration, 122 FERC ] 61,157 
(2008); Blanket Authorization Under FPA Section 203, Notice of 
Proposed Rulemaking, 72 FR 41640 (July 31, 2007), FERC Stats. & 
Regs. ] 32,619 (2007) (Blanket Authorization NOPR); see Blanket 
Authorization Under FPA Section 203, Order No. 708, 122 FERC ] 
61,156 (2008) (Blanket Authorization Final Rule).
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    16. Specifically, the proposed regulations would: (1) Require the 
Commission's approval of all wholesale sales between a franchised 
public utility with captive customers and a market-regulated power 
sales affiliate; (2)

[[Page 11017]]

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 goods and services from a centralized service company at a price 
above cost. The Commission stated that these restrictions would 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 the Commission 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 
transaction.

III. Procedural Matters

    17. The Affiliate Transactions NOPR invited comments on the 
proposed regulations. Comments on the Affiliate Transactions NOPR were 
filed by: American Public Power Association and National Rural Electric 
Cooperative Association (APPA/NRECA); Edison Electric Institute (EEI); 
Entergy Services, Inc. (Entergy); Interstate Gas Supply, Inc. (IGS); 
National Grid USA (National Grid); New York State Public Service 
Commission (New York Commission); NiSource Inc. (NiSource); Occidental 
Power Marketing, L.P. (Occidental); Oklahoma Corporation Commission 
(Oklahoma Commission); Pacific Gas and Electric Company (PG&E); the 
Pinnacle West Companies (Pinnacle West);\31\ and San Diego Gas & 
Electric Company and Southern California Gas Company (Sempra).\32\
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    \31\ For purposes of their filing, the Pinnacle West Companies 
include: Pinnacle West Marketing & Trading Co., LLC; Arizona Public 
Service Company; and APS Energy Services Company, Inc.
    \32\ Although unnecessary to preserve their rights to 
participate in a rulemaking proceeding, Allegheny Power and 
Allegheny Energy Supply Company, LLC filed a motion to intervene 
without comments.
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IV. Discussion

    18. This Final Rule explains the Commission's authority and 
jurisdiction under sections 205 and 206 of the FPA to regulate 
affiliate transactions to ensure that public utility rates are just, 
reasonable, and not unduly discriminatory or preferential. This Final 
Rule implements affiliate restrictions applicable to power sales and 
transactions for non-power goods and services between franchised public 
utilities that have captive customers or that own or provide 
transmission service over jurisdictional transmission facilities, and 
their market-regulated and non-utility affiliates.

A. General Matters

1. The Need for the Proposed Regulations
    a. Comments
    19. EEI argues that the Commission has not demonstrated a need for 
the proposed regulations. While EEI agrees that the Commission has been 
applying affiliate transactions restrictions in the context of section 
203 and market-based rates,\33\ EEI argues that the Affiliate 
Transactions NOPR goes too far. EEI argues that the Commission does not 
provide any examples of the problems that the Commission has discovered 
in the pricing of utility-affiliate transactions that would warrant the 
expanded new regulations. EEI also argues that there is sufficient 
regulatory oversight by the Commission and state commissions, so this 
extension of policy is not warranted.
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    \33\ EEI asserts that the Affiliate Transactions NOPR states 
that the Commission currently waives market-based rate code of 
conduct requirements and allows transactions in cases where there 
are no captive customers or customers are protected against 
affiliate transactions, but that exception is not reflected in the 
Market-Based Rate Final Rule.
---------------------------------------------------------------------------

    20. Moreover, EEI argues that the Commission's authority to 
regulate utility-affiliate transactions under sections 205 and 206 is 
limited to determining whether jurisdictional rates are just and 
reasonable. EEI argues that the Commission has not demonstrated why the 
proposed regulations are necessary to achieve a just and reasonable 
result. EEI also argues that the Affiliate Transactions NOPR indirectly 
proposes to regulate entities over which the Commission has no 
jurisdiction--EWGs, QFs, and non-utilities--by imposing constraints on 
the prices that utilities may pay these companies for non-power goods 
and services and the companies in turn must pay the utilities for such 
goods and services.\34\
---------------------------------------------------------------------------

    \34\ EEI Comments at 6-7 (citing Sunray Mid-Continental Co. v. 
FPC, 364 U.S. 137, 142 (1960); Altamont Gas Transmission Co. v. 
FERC, 92 F.3d 1239 (D.C. Cir. 1996); National Fuel Gas Supply Corp. 
v. FERC, 909 F.2d 1519 (D.C. Cir. 1990)).
---------------------------------------------------------------------------

    21. EEI also argues that the Commission's adoption of the rules as 
a ``prophylactic'' measure ignores the wording of the Commission's 
cross-subsidy authority under section 203 by failing to recognize that 
certain transactions may be in the public interest.
    b. Commission Determination
    22. We disagree with EEI regarding the need for the proposed 
regulations or the Commission's authority to enact them. Sections 205 
and 206 of the FPA require the Commission to ensure that public utility 
rates are just, reasonable and not unduly discriminatory or 
preferential. A rate is not just and reasonable if it includes costs 
which the Commission finds are imprudently incurred or which require a 
customer to bear costs that are unreasonable. Further, the Commission 
must ensure that no public utility makes or grants an undue preference 
with respect to any transmission or sale subject to the Commission's 
jurisdiction.\35\ The Commission has the authority to address these 
types of rate issues not only in individual cases, but also to set 
standards by rulemaking with respect to what costs will or will not be 
considered just and reasonable. The Commission's experience makes clear 
the need for these types of restrictions and we believe they are 
particularly warranted in light of the repeal of PUHCA 1935 and our 
need to be vigilant with respect to holding companies and affiliate 
transactions.
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    \35\ Although section 203 of the FPA requires the Commission to 
recognize that certain cross-subsidization or pledges or 
encumbrances of utility assets can be in the public interest, the 
proposed regulations are set forth pursuant to the Commission's 
authority under sections 205 and 206 of the FPA.
---------------------------------------------------------------------------

    23. As discussed above, the Commission has a long history of 
requiring public utilities to comply with affiliate restrictions where 
an entity seeks market-based rate authorization and in the context of 
seeking merger authorization under section 203 of the FPA. However, 
limiting affiliate restrictions to these two contexts leaves a 
regulatory gap. As the Affiliate Transactions NOPR explained, (1) 
restrictions on 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 on only the market-based rate applicants; 
(2) restrictions imposed on section 203 applicants only apply to merger 
applicants; (3) the pricing policy set forth in Order No. 667 regarding 
non-power goods and services provided by centralized service companies 
was not codified in the regulations; and (4) not all states regulate 
these types of

[[Page 11018]]

transactions.\36\ The purpose of the proposed regulations therefore is 
to supplement existing affiliate restrictions to cover transactions 
between all franchised public utilities with captive customers and 
their non-utility affiliates. Just as the Commission has adopted 
regulations designed to prevent captive customers of franchised public 
utilities from inappropriately cross-subsidizing the activities of 
market-regulated affiliates (such as affiliated power marketers), so 
too the Commission wants to ensure that captive customers of franchised 
public utilities do not inappropriately cross-subsidize the activities 
of non-utility affiliates (such as an affiliated construction services 
firm, real estate company, legal services companies, fuel supply 
companies, or other non-utility affiliates). For example, where a 
franchised public utility with captive customers transacts with an 
affiliated non-utility construction services firm, the Commission is 
concerned that the franchised public utility with captive customers not 
pay an above-market price for construction services provided by the 
affiliated construction firm. Otherwise, the public utility's customers 
would be inappropriately cross-subsidizing the activities of the 
affiliate. Indeed, non-utility affiliates such as real estate 
companies, legal services companies, fuel supply companies or other 
companies selling non-power goods and services could provide similar 
opportunities for affiliate abuse and improper cross-subsidization.
---------------------------------------------------------------------------

    \36\ Affiliate Transactions NOPR, FERC Stats. & Regs. ] 32,618 
at P 15.
---------------------------------------------------------------------------

    24. Finally, we disagree with EEI that the Affiliate Transactions 
NOPR indirectly proposes to regulate entities over which the Commission 
``has no jurisdiction''--EWGs, QFs, and non-utilities. As an initial 
matter, the Commission does, in fact, have certain jurisdiction over 
QFs, and most EWGs are jurisdictional public utilities. More 
importantly, however, the pricing rules we adopt here are rooted in our 
authority to impose pricing rules with respect to certain sales and 
purchases by public utilities (including EWGs) over whom we have rate 
jurisdiction under the FPA. These restrictions are tied directly to the 
reasonableness of public utility rates and the Commission has the 
statutory responsibility to protect captive customers from unjust and 
unreasonable rates.
2. The Scope of the Proposed Regulations
    a. Comments
    25. Several commenters filed comments concerning the scope of the 
proposed regulations. APPA/NRECA ask that the Commission clarify that 
the regulations adopted in this proceeding do not preclude the 
Commission from imposing additional cross-subsidization restrictions on 
affiliate transactions as appropriate on a case-by-case basis.
    26. The Oklahoma Commission notes that the Commission stated that 
it would require all merging parties to abide by a code of conduct that 
has specific provisions regarding power and non-power goods and 
services transactions between the utility subsidiaries and their 
affiliates. The Oklahoma Commission urges to the Commission to continue 
to do so. The Oklahoma Commission also asks that the Commission add 
language that states that section 203 does not preempt applicable state 
law concerning reporting requirements, which would further protect the 
interest and authority of state commissions.
    27. IGS agrees with the Commission's proposal to codify affiliate 
restrictions but suggests that the intent of the code of conduct 
requirement also includes preventing a utility or its affiliate from 
gaining unfair advantages in a market, thus impeding the development of 
a competitive market. IGS agrees that a code of conduct should be 
codified and expanded to apply to non-power goods and services, and 
that a code of conduct and related rules should also apply outside the 
context of merger situations. IGS also agrees that, even outside of the 
context of a merger, it is important that utility/affiliate code of 
conduct and related rules apply. IGS further agrees that it is 
appropriate for the code of conduct and related rules to apply to 
transactions involving non-power goods and services because, among 
other things, consumers may not be able to differentiate easily between 
affiliates and traditional regulated utility and where affiliates are 
provided preferential access and opportunities, competition is stifled. 
In addition, IGS argues that the same opportunity for abuse exists in 
the natural gas industry. It maintains that the same affiliate 
restriction concepts should be extended to natural gas utilities, and 
should be considered whenever the utility has an economic interest in 
the sale of the commodity or non-commodity goods or services.
    28. Occidental argues that the proposed regulations permit a 
utility to circumvent the affiliate transactions restrictions by simply 
conducting all of its market-based rate activities within its 
franchised public utility. Occidental asks that the Commission 
explicitly require that the functional attributes, rather than the 
arbitrary structure, of a utility be considered in determining 
compliance with the rule's affiliate abuse restrictions.
    b. Commission Determination
    29. We agree with APPA/NRECA that the pricing rules that we adopt 
in this proceeding do not preclude the Commission from imposing 
additional cross-subsidization restrictions on affiliate transactions, 
as appropriate, on a case-by-case basis.
    30. Regarding the Oklahoma Commission's request that we continue to 
require all merging parties to abide by a code of conduct that has 
specific provisions regarding power and non-power goods and services 
transactions between the utility subsidiaries and their affiliates, 
although this rulemaking is not under section 203, as discussed supra, 
as a condition of section 203 authorization for mergers, we have 
already stated in the context of section 203 proceedings that we will 
continue to impose affiliate restrictions on entities seeking merger 
authorization under section 203 of the FPA. Further, we clarify that 
neither the rules we adopt here, nor the cross-subsidization 
restrictions imposed under section 203 of the FPA, preempt applicable 
state law concerning reporting requirements.
    31. We deny IGS' request to expand the proposed regulations to 
include preventing a utility or its affiliate from gaining unfair 
advantage in a market. The scope of the proposed regulations is to 
protect against inappropriate cross-subsidization of affiliates by 
franchised public utilities with captive customers. We note, however, 
the cross-subsidy protections go a long way to preventing such unfair 
advantages since market-regulated or non-regulated companies may have 
an unfair competitive advantage in the marketplace if others bear some 
of their costs of doing business.
    32. We also deny IGS' request to expand the scope of the proposed 
regulations to include the natural gas industry. As discussed above, 
the focus of this rulemaking is public utilities--specifically, 
franchised public utilities that have captive customers or that own or 
provide transmission service over jurisdictional transmission 
facilities. We find that there is an insufficient record to warrant 
including LDCs and interstate pipelines within the scope of the 
regulations at this time.
    33. Finally, we decline to revise the scope of the proposed 
regulations to address Occidental's concern that the proposed 
regulations permit a utility to circumvent the affiliate transactions 
restrictions by simply conducting all of

[[Page 11019]]

its market-based rate activities within its franchised public utility. 
We note that Occidental has raised this concern in its request for 
rehearing of the Market-Based Rate Final Rule. We find that this 
concern is more appropriately addressed on rehearing of that order.

B. Specific Issues

1. Definitions
    a. Captive Customers
    i. Comments
    34. Commenters seek a number of clarifications concerning the 
definition of ``captive customers.''
    35. EEI and Pinnacle West ask the Commission to clarify that 
wholesale customers with fixed price contracts are not ``captive 
customers'' even if the contracts are cost-based, because there is no 
risk of harm to such customers from utility-affiliate transactions.
    36. Occidental argues that the Commission should revise the 
definition of ``captive customer'' to not include wholesale customers. 
Occidental argues that the Commission clarified in the Market-Based 
Rate Final Rule that retail customers that have retail choice are not 
captive customers. Occidental maintains that wholesale customers, 
whether cost-based or market-based, have alternatives and therefore, 
are not captive. Accordingly, Occidental argues that the definition of 
``captive customer'' should be limited to retail customers served under 
cost-based regulation who do not have retail choice available, and 
should not include wholesale customers which have choices.
    37. EEI, National Grid, and Pinnacle West ask the Commission to 
clarify its definition of ``captive customers'' consistent with its use 
of the term in the preamble of the Market-Based Rate Final Rule. In 
this regard, they ask that the Commission clarify that retail customers 
in states with retail competition are not ``captive customers'' for 
purposes of the affiliate restrictions. Pinnacle West also states that 
the Commission clarified in Order No. 697 that, for companies the 
Commission has acknowledged in prior orders as not having captive 
customers, the affiliate transaction restrictions can be waived. It 
asks the Commission to provide the same clarification and exemptions in 
this proceeding.
    38. IGS, on the other hand, argues that the restrictions proposed 
in the Affiliate Transactions NOPR should not be waived for utilities 
simply because those utilities implement a retail choice program. IGS 
argues that the ability of a customer to purchase commodities from an 
alternative power supplier under a retail access program does not mean 
that these customers are not captive for purposes of receiving their 
distribution service under cost-based legislation. IGS also states that 
the restrictions should apply even if the retail customer has a 
competitive alternative available. It further argues that, as long as a 
utility is in the business of providing commodity service, there is an 
opportunity for abuse.
    39. EEI and National Grid also ask that the Commission clarify that 
``captive customers'' do not include transmission customers, consistent 
with the Market-Based Rate Final Rule. By contrast, APPA/NRECA ask that 
the definition of ``captive customers'' be expanded to expressly 
include transmission customers. APPA/NRECA state that the Commission 
recognized in both the Order No. 669 series and the Order No. 667 
series that transmission customers must be protected against cross-
subsidization along with captive wholesale and retail customers. They 
note that the Commission adopted regulatory language in Order No. 669-A 
``to cover public utilities that own or provide transmission service 
over Commission-jurisdictional transmission facilities,'' and ask that 
the Commission clarify the regulatory text in the Final Rule to ensure 
that the new generic cross-subsidization regulation explicitly protects 
transmission customers.
    40. APPA/NRECA also ask that the Commission confirm, consistent 
with the Market-Based Rate Final Rule, that the affiliate transactions 
rules do not apply to electric cooperatives.
    ii. Commission Determination
    41. The term ``captive customers'' is used in a number of recently 
adopted Commission rules, including Order No. 667, Order No. 669, and 
the Market-Based Rate Final Rule. The Commission for many years had 
used this term in its orders without definition, but in both the Order 
No. 669 series and the Market-Based Rate Final Rule, the Commission 
included in the regulatory text a definition or description of 
``captive customers'' as: ``any wholesale or retail electric energy 
customers served under cost-based regulation.'' \37\ Based on the 
comments received, we recognize that there may be some ambiguity as to 
what types of customers are considered to be under ``cost-based 
regulation'' and we provide additional clarifications below. We also 
modify the definition to make clear that it is intended to refer to 
customers of franchised public utilities. First, however, we believe it 
is important to discuss the purpose of our definition and its focus on 
``cost-based regulation.''
---------------------------------------------------------------------------

    \37\ Order No. 669-A, FERC Stats. & Regs. ] 31,214 at P 147; 
Market-Based Rate Final Rule, FERC Stats. & Regs. ] 31,252 at P 23; 
see also Order No. 667-A, FERC Stats. & Regs. ] 31,213 at n.35.
---------------------------------------------------------------------------

    42. The Commission's fundamental goal in categorizing certain 
customers as ``captive'' is to protect customers served by franchised 
public utilities from inappropriately subsidizing the market-regulated 
or non-utility affiliates of the franchised public utility or otherwise 
being financially harmed as a result of affiliate transactions and 
activities. In other words, we are concerned about the potential for 
the inappropriate transfer of benefits from such customers to the 
shareholders of the franchised public utility or its holding 
company.\38\ Where customers are served under market-based regulation 
as opposed to cost-based regulation, it is presumed that the seller has 
no market power over a customer and that the customer has a choice of 
suppliers; thus, there is less opportunity for a customer to 
involuntarily be in a situation in which its rates subsidize or support 
another entity.
---------------------------------------------------------------------------

    \38\ For example, if a market-regulated seller sells power to 
its affiliated franchised public utility at an above market price, 
the customers of the franchised public utility pay more than they 
need to for power and the affiliate makes a higher profit for the 
holding company's shareholders. Similarly, if a franchised public 
utility sells temporarily excess fuel to its market-regulated power 
seller affiliate at a price below its cost, the customers of the 
franchised utility end up subsidizing the affiliate's operating 
costs, to the benefit of shareholders and the detriment of the 
customers of the franchised utility. In other contexts, an extreme 
example would be a holding company that siphons funds from a 
franchised public utility to support its failing non-regulated 
affiliate company; again, this results in financial benefit to 
shareholders at the expense of customers.
---------------------------------------------------------------------------

    43. Under a regime of cost-based regulation, however, we cannot 
make these same assumptions. If a franchised public utility is selling 
at a wholesale cost-based rate under the FPA, the franchised utility 
seller may be in the position of potentially trying to flow through its 
cost-based rates costs that should instead be borne by its affiliates, 
i.e., potentially subsidizing the ``non-regulated'' activities of its 
market-regulated and non-utility affiliates to the detriment of the 
franchised public utility's customer(s). While there is some merit to 
Occidental's assertion that wholesale customers, by definition, have 
alternatives and that there is no obligation for a wholesale seller to 
sell to any buyer, nor for a buyer to buy from any particular seller, 
for the customer protection reasons stated above, we believe it is 
important to err on the side of a broad definition of captive 
customers.

[[Page 11020]]

    44. Although we are erring on the side of a broad definition of 
captive customers, we recognize that there may well be circumstances in 
which customers fall within our definition but nevertheless there are 
sufficient protections in place to protect such customers against any 
risk of harm from transactions between the franchised public utility 
and its affiliates. For example, it is possible, as advocated by EEI 
and Pinnacle West, that wholesale customers with fixed rate contracts 
would be adequately protected and that the affiliate restrictions of 
this rule should not apply to utilities whose customers all have fixed 
rate contracts with no fuel adjustment clause.\39\ We are not prepared 
at this time to generically exclude such customers from the definition 
of captive customers but instead will allow franchised public 
utilities, on a case-by-case basis, to seek a waiver of the affiliate 
restrictions. This will allow the Commission to closely examine the 
facts related to each franchised public utility. There may be 
circumstances other than fixed rate contracts in which we may be 
willing to waive the affiliate restrictions of this rule, but a public 
utility will need to demonstrate that there is no opportunity for 
wholesale customers of the franchised public utility to be harmed as a 
result of affiliate transactions.
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    \39\ The Commission would need to be assured that all wholesale 
customers of a franchised public utility have adequate fixed rate 
contracts, not just a sub-set of the customers. Further, because 
such contracts may have different expiration dates, the Commission 
might need to place temporal conditions on such a waiver.
---------------------------------------------------------------------------

    45. With respect to requested clarifications regarding retail 
customers in states with retail competition, consistent with our 
Market-Based Rate Final Rule, we clarify that customers with retail 
choice are not considered to be customers served under ``cost-based 
regulation'' and therefore are not considered captive customers. These 
customers have retail choice, i.e., by virtue of state law they can 
purchase at market-based rates from retail suppliers other than a 
franchised public utility.\40\ As the Commission explained in the 
Market-Based Rate Final Rule, in a regulatory regime in which retail 
customers have no ability to choose a supplier, they are considered 
captive because they must purchase from the local utility pursuant to 
rates set by a state or local regulatory authority. However, retail 
customers in retail choice states who choose to buy power from their 
local utility at cost-based rates as part of that utility's provider-
of-last resort obligation are not considered captive customers because, 
although they may choose not to do so, they have the ability to take 
service from a different supplier whose rates are set by the 
marketplace.\41\ We clarify, however, that if a state regulatory 
authority in a retail choice state does not believe retail customers 
are sufficiently protected and that our affiliate restrictions should 
apply to the local franchised public utility, it may file a petition 
for declaratory order to deem its retail customers to be captive 
customers for purposes of applying the affiliate restrictions.\42\
---------------------------------------------------------------------------

    \40\ As further discussed in the Market-Based Rate Final Rule, 
the role of this Commission is not to evaluate the success or 
failure of a state's retail choice program including whether 
sufficient choices are available for customers inclined to choose a 
different supplier. In this regard the states are best equipped to 
make such a determination and, if necessary, modify or otherwise 
revise their retail access programs as they deem appropriate. 
Further, to the extent a retail customer in a retail choice state 
elects to be served by its local utility under provider-of-last 
resort obligations, the state or local rate setting authority, in 
determining just and reasonable cost-based retail rates, would in 
most circumstances be able to review the prudence of affiliate 
purchased power costs and disallow pass-through of costs incurred as 
a result of an affiliate's undue preference. Market-Based Rate Final 
Rule, FERC Stats. & Regs. ] 31,252 at P 481. Also, we note that some 
states have chosen to impose their own affiliate restrictions in 
such circumstances.
    \41\ Id. If the retail choice program is not available to all 
customers in the state, those customers that do not have retail 
choice would be considered captive customers of the franchised 
public utility that serves them, and our affiliate restrictions 
would apply to the franchised public utility.
    \42\ Under the Commission's regulations, states are exempt from 
filing fees for petitions for declaratory order. 18 CFR 381.108.
---------------------------------------------------------------------------

    46. As a general matter, we also clarify that the definition of 
captive customers, and our interpretations of the term, are intended to 
be applied uniformly in implementing all of our rules. In connection 
with the affiliate restrictions adopted in the Market-Based Rate Final 
Rule, we clarified that those affiliate restrictions will not apply 
where a seller demonstrates, and the Commission agrees, that the seller 
has no captive customers.\43\ We also clarified that any sellers that 
have previously demonstrated and been found not to have captive 
customers, and therefore have received a waiver of the market-based 
rate code of conduct requirement in whole or in part, will not be 
required to request another waiver of the associated affiliate 
restrictions.\44\ We will adopt a similar approach with regard to the 
cross-subsidization affiliate restrictions that we adopt in this Final 
Rule. If a utility makes a showing that it has no captive customers, 
and the Commission agrees, the affiliate cross-subsidization 
restrictions will not apply. If a public utility has received a finding 
that it has no captive customers for purposes of meeting the market-
based rate affiliate restrictions, such filing will be deemed 
sufficient here. However, the utility must make an informational filing 
with the Commission stating that the affiliate restrictions we adopt in 
this Final Rule do not apply.
---------------------------------------------------------------------------

    \43\ Market-Based Rate Final Rule, FERC Stats. & Regs. ] 31,252 
at P 552.
    \44\ Id. P 551.
---------------------------------------------------------------------------

    47. Further, in considering the comments in this docket and in the 
Market-Based Rate Final Rule (pending rehearing), and in reviewing the 
use of the definition of captive customers in our other rules, we 
believe it appropriate to modify the definition of captive customers to 
make explicit what was only implicit in our earlier rules--that the 
definition is intended to apply to customers served by a franchised 
public utility under cost-based regulation. Accordingly, we will modify 
the term to mean: ``any wholesale or retail electric energy customers 
served by a franchised public utility under cost-based regulation.'' 
\45\
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    \45\ We recognize that this amended definition will result in 
redundancy in certain of our regulations since some regulations 
refer to ``franchised public utilities with captive customers'' and 
other regulations simply refer to ``captive customers'' without 
elaboration. However, we believe the amendment will eliminate 
possible confusion in future interpretations.
---------------------------------------------------------------------------

    48. In response to clarification requests by APPA/NRECA that we 
modify our proposed regulatory text so that the affiliate restrictions 
apply not only to franchised public utilities that have captive 
customers but also to public utilities that own Commission-
jurisdictional transmission facilities or provide Commission-
jurisdictional transmission service, we will grant the request. Thus, 
the affiliate restrictions will apply where a franchised public utility 
has captive customers or owns or provides transmission service over 
Commission-jurisdictional transmission facilities. While some 
franchised public utilities have captive customers, others do not, 
although they own or provide transmission service over Commission-
jurisdictional transmission facilities.\46\ The customers of these 
franchised public utilities also should not inappropriately be required 
to subsidize ``non-regulated'' activities of the affiliates of such 
utilities.\47\
---------------------------------------------------------------------------

    \46\ A public utility that has no captive power customers but 
that owns or provides transmission service over Commission-
jurisdictional facilities may seek a waiver of the affiliate 
restrictions if it can demonstrate that transmission customers are 
adequately protected against inappropriate cross-subsidization.
    \47\ For example, if a franchised public utility owns 
transmission facilities and also owns a non-utility construction 
services firm, the public utility's customers should not pay an 
above market price for construction services to upgrade transmission 
facilities.

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[[Page 11021]]

    49. Finally, we clarify that, consistent with the Market-Based Rate 
Final Rule, we will continue to treat electric cooperatives as not 
subject to the Commission's affiliate abuse restrictions.\48\
---------------------------------------------------------------------------

    \48\ Market-Based Rate Final Rule, FERC Stats. & Regs. ] 31,252 
at P 526.
---------------------------------------------------------------------------

    b. Non-Utility Affiliate
    i. Definition of ``Affiliate''
    (a) Comments
    50. PG&E asks the Commission to clarify the definition of 
``affiliate,'' as used in the definition of non-utility affiliate.\49\ 
PG&E states that the Commission should clarify whether the proposed 
regulations use the definition of affiliate set forth in the PUHCA 2005 
regulations or some other definition.
---------------------------------------------------------------------------

    \49\ As defined in the proposed regulations, ``non-utility 
affiliate'' means ``any affiliate that is not in the power sales or 
transmission business.''
---------------------------------------------------------------------------

    (b) Commission Determination
    51. In response to PG&E's request for clarification concerning the 
definition of affiliate in the proposed regulations, we have considered 
the use of the term affiliate in the context of the Affiliate 
Transactions NOPR, the Commission's Standards of Conduct for 
Transmission Providers, and other precedent.\50\ We have also reviewed 
the affiliate definitions contained in both the PUHCA 1935 and PUHCA 
2005 and have considered the fact that, with respect to certain 
affiliate preferences or advantages involving EWG rates and charges, we 
are specifically required by FPA section 214 \51\ to use the definition 
contained in PUHCA 1935. After taking into account these differing 
definitions of affiliate (or, in some cases, no definition at all, as 
in the context raised by PG&E), and recognizing the need to provide 
greater clarity and consistency in our rules, we believe it is 
important to try to adopt a more consistent definition in our various 
rules and also one that is sufficiently broad to allow us to adequately 
protect customers.\52\
---------------------------------------------------------------------------

    \50\ See, e.g., Morgan Stanley Capital Group, Inc., 72 FERC ] 
61,082, at 61,436-37 (1995) (Morgan Stanley).
    \51\ 16 U.S.C. 824m.
    \52\ For example, we adopt this definition of affiliate for 
purposes of section 203 of the FPA in the concurrent Blanket 
Authorization Final Rule.
---------------------------------------------------------------------------

    52. Our goal is to have a more consistent definition of affiliate 
for purposes of both EWGs and non-EWGs to the extent possible, as well 
as to strengthen the Commission's ability to ensure that customers are 
protected against affiliate abuse. Accordingly, having studied the 
clarity and scope of various definitions, we believe it appropriate to 
modify the definition proposed in the Affiliate Transactions NOPR to 
explicitly incorporate the PUHCA 1935 definition of affiliate for EWGs 
(rather than incorporate it by reference as previously has been done). 
We will also adopt the PUHCA 1935 definition of affiliate for non-EWGs, 
but with adjustments to reflect our previously-used 10 percent voting 
interest threshold for non-EWGs and to eliminate certain language not 
applicable or necessary in the context of the FPA. This is discussed 
more fully below.
    53. In the case of non-EWG public utilities, our past approach has 
been that a voting interest of 10 percent creates a rebuttable 
presumption of control for purposes of determining the existence of an 
affiliate relationship.\53\ For EWGs, on the other hand, section 214 of 
the FPA specifies that the term affiliate shall have the same meaning 
as provided in section 2(a) of PUHCA 1935 (which, inter alia, contains 
a five percent voting interest test) for purposes of determining 
whether an electric utility is an affiliate of an EWG for purposes of 
evaluating EWG rates. Although PUHCA 2005 also contains a definition of 
affiliate, which has been incorporated in Sec.  366.1 of our 
regulations, that definition is not the same as the definition 
contained in PUHCA 1935. Indeed, it is narrower than the definition 
contained in PUHCA 1935.\54\
---------------------------------------------------------------------------

    \53\ See Morgan Stanley, 72 FERC at 61,436-37; 18 CFR 358.3(b) 
and (c).
    \54\ It is not clear whether some of the language from PUHCA 
1935 was inadvertently omitted from the PUHCA 2005 definition or 
whether Congress thought a more narrow definition was appropriate 
with respect to a ``books and records'' access statute. In either 
case, the PUHCA 1935 definition provides a more ``bright line'' 
approach while still reserving the agency's ability to deem an 
entity an affiliate based on specific circumstances, thus better 
ensuring the ability to protect customers.
---------------------------------------------------------------------------

    54. In particular, the PUHCA 2005 definition defines affiliate of a 
company to mean ``any company, 5 percent or more of the outstanding 
voting securities of which are owned, controlled, or held with power to 
vote, directly or indirectly, by such company.'' The PUHCA 1935 
definition, on the other hand, also defines as an affiliate of a 
specified company ``any person that directly or indirectly owns, 
controls, or holds with power to vote, 5 per centum or more of the 
outstanding voting securities of such specified company'' and ``any 
individual who is an officer or director of such specified company, or 
of any company which is an affiliate thereof * * *.'' In addition, the 
PUHCA 1935 definition also includes in the definition of affiliate 
``any person or class of persons that the Commission determines, after 
appropriate notice and opportunity for hearing, to stand in such 
relation to such specified company that there is liable to be such an 
absence of arm's-length bargaining in transactions between them as to 
make it necessary or appropriate in the public interest or for the 
protection of investors or consumers that such person * * *'' be 
treated as an affiliate.
    55. Because FPA section 214 directs the Commission to use the 
definition of affiliate that appears in PUHCA 1935 with respect to 
certain affiliate preferences affecting rates or charges of EWGs, we 
will revise the definition proposed in the Affiliate Transactions NOPR 
to be consistent with the PUHCA 1935 definition.\55\
---------------------------------------------------------------------------

    \55\ Section 214 provides that no rate or charge of an EWG shall 
be lawful if, after notice and opportunity for hearing, the 
Commission finds that it resulted from any undue preference or 
advantage received from an electric utility that is an associate or 
affiliate of the EWG.
---------------------------------------------------------------------------

    56. We also will revise the definition of ``affiliate'' for 
purposes of non-EWGs utilities to be consistent with the definition of 
``affiliate'' for EWGs, except to the extent we believe it may leave a 
gap in coverage or contains language not applicable to the FPA. The 
definition we adopt for non-EWGs essentially parallels the EWG 
definition (with certain exceptions that we discuss below), while 
retaining the 10 percent voting interest threshold contained in the 
current regulations. Use of the PUHCA 1935 definition for non-EWGs may 
capture under the definition of ``affiliate'' entities that otherwise 
would not have been treated as affiliates under the definition 
currently in place in the Commission's regulations. We believe it is 
appropriate to adopt a broader definition, one that is largely 
consistent with the definition for EWGs, because it will strengthen the 
Commission's ability to ensure that customers are protected against 
affiliate abuse. For example, the revised affiliate definition for non-
EWGs will give the Commission the ability to treat an entity as an 
affiliate of a company if, after notice and opportunity for hearing, 
the Commission finds that ``there is liable to be such an absence of 
arm's-length bargaining in transactions between them as to make it 
necessary or appropriate in the public interest or for the protection 
of investors or consumers'' that such entity be treated as an 
affiliate. It also is consistent with other recent orders and rules 
(e.g., the Supplemental Policy Statement) in which we have provided 
greater clarity as to what is considered ``control'' of an entity.
    57. While the affiliate definition we adopt for non-EWGs 
essentially

[[Page 11022]]

parallels the EWG definition, there are a number of exceptions. One 
exception is that the non-EWG definition also defines an affiliate of a 
specified company to include ``any person that is under common control 
with such specified company.'' This language is included in the 
definition of non-EWG affiliate that currently is in the Commission's 
regulations and identifies an additional instance in which an entity 
will be deemed to be an affiliate of a specified company. On this 
basis, we believe it appropriate to include this language as part of 
the non-EWG definition. Because the ``under common control with'' 
language is not part of the PUCHA 1935 definition, however, we cannot 
also include it as part of the definition of affiliate for purposes of 
EWGs. We also include as part of the non-EWG affiliate definition a 
provision making clear that where a person owns, controls, or holds 
with power to vote less than 10 percent of the outstanding voting 
securities of a specified company, this creates a rebuttable 
presumption of lack of control. Although the PUHCA 1935 definition does 
not contain a parallel provision with regard to the five percent 
threshold in the case of EWGs, we nevertheless believe that it is 
appropriate to include this rebuttable presumption as part of the non-
EWG definition because it provides greater clarity concerning the 
circumstances in which an entity will be presumed not to be an 
affiliate.
    58. Another exception concerns the provision in the PUHCA 1935 
definition that includes as an affiliate of a specified company ``any 
individual who is an officer or director of such specified company, or 
of any company which is an affiliate thereof * * *.'' We do not believe 
it necessary to include that language as part of the affiliate 
definition for non-EWGs because we already are including in the 
definition, a provision giving the Commission the ability to treat an 
entity as an affiliate if, after notice and opportunity for hearing, 
the Commission finds that there is liable to be an absence of arm's-
length bargaining in transactions between two entities.\56\
---------------------------------------------------------------------------

    \56\ With respect to this provision, we note that we are 
omitting language referencing the duties, obligations and 
liabilities imposed by PUHCA 1935 since those are no longer 
applicable in light of repeal of PUHCA 1935.
---------------------------------------------------------------------------

    59. In sum, we believe that the definition of affiliate that we 
adopt in this Final Rule will provide greater clarity to public 
utilities and customers with respect to identifying which entities are 
considered to be affiliates for purposes of the regulations that we 
adopt in this Final Rule.
    ii. Definition of ``Non-Utility Affiliate''
    (a) Comments
    60. NiSource argues that the Commission should revise the 
definition of non-utility affiliate because it could inadvertently 
include state-regulated local distribution companies (LDCs) and 
Commission-regulated interstate pipelines because they are not in the 
power sales or transmission business. NiSource notes that the 
regulatory text strongly suggests that the Commission intended the 
definition of non-utility affiliate to apply only to ``unregulated'' 
entities. NiSource argues that this is important because any franchised 
public utility with captive customers would have to price sales of non-
power goods and services to any non-utility affiliate at the higher of 
cost or market. NiSource argues that imposing this pricing requirement 
on LDCs and Commission-regulated interstate pipelines (as non-utility 
affiliates): (1) Is inconsistent with the intent of the regulations, 
which is to prevent cross-subsidization of a ``non-utility associate 
company'' as derived from PUHCA 1935 and PUHCA 2005, (2) could conflict 
with state requirements, and (3) is unnecessary because the Commission 
and the states have ample authority to review such transactions.
    (b) Commission Determination
    61. We agree with NiSource and clarify that the definition of non-
utility affiliate does not apply to utility affiliates that sell or 
transport natural gas, such as LDCs, or Commission-regulated interstate 
pipelines. However, we will not foreclose the expansion of the 
definition of non-utility affiliate to include LDCs and/or interstate 
pipelines if circumstances warrant it in the future.
2. Pricing Non-Power Affiliate Transactions
    62. In the Affiliate Transactions NOPR, the Commission proposed to 
implement affiliate restrictions that would be applicable to 
transactions for non-power goods and services between franchised public 
utilities with captive customers and their market-regulated and non-
utility affiliates. Specifically, the Commission proposed that: (1) A 
franchised public utility with captive customers that provides non-
power goods and services to a market-regulated power sales affiliate or 
a non-utility affiliate should charge a price that is the higher of 
cost or market price; (2) a franchised public utility with captive 
customers should be prohibited from purchasing non-power goods and 
services at a price above market price from market-regulated power 
sales affiliates and non-utility affiliates, with the exception of 
centralized service companies; \57\ and (3) a franchised public utility 
with captive customers should be prohibited from buying non-power goods 
and services from a centralized service company at a price above 
cost.\58\ The Affiliate Transactions NOPR indicated that each of the 
proposed restrictions was consistent with restrictions previously 
imposed in the 203-merger context.\59\
---------------------------------------------------------------------------

    \57\ Order No. 667 defines centralized service companies as 
performing generally corporate administration functions, such as 
accounting, human resources, legal and tax services, while special-
purpose non-utility affiliates provide generally a single input to 
utility operations, such as fuel supply, construction or real 
estate. Order No. 667, FERC Stats. & Regs. ] 31,197 at P 171 n.178.
    \58\ Affiliate Transactions NOPR, FERC Stats. & Regs. ] 32,618 
at P 16.
    \59\ See, e.g., National Grid, 117 FERC ] 61,080 at P 66.
---------------------------------------------------------------------------

    a. Comments
    63. Several commenters suggest that the Commission's proposal will 
raise prices within holding company systems by creating inefficiencies. 
Specifically, EEI, Entergy, NiSource and PG&E argue that the Commission 
should require at-cost pricing for all transactions within a holding 
company system regardless of whether the services are provided for or 
by the franchised public utility. They contend that an at-cost standard 
creates savings through economies of scale that apply whether the 
employee providing the non-power good or service is located in a 
centralized service company, a utility or another affiliate. In 
addition, they note that it is difficult to find a market price for 
affiliate transactions for such goods and services.
    64. EEI and PG&E further argue that requiring a utility to charge 
an affiliate the ``higher of cost or market'' would likely increase 
costs to both the utility and the affiliate by discouraging the 
efficient sharing of services. As a substitute for the ``higher of cost 
or market'' requirement for sales by a franchised public utility to an 
affiliate, they state that the Commission should allow the fully loaded 
cost to be a proxy for the market price for sales of non-power services 
by a utility to its affiliates.
    65. National Grid argues that at-cost pricing for sales of non-
power goods and services provided by a franchised public utility to a 
centralized service company would be consistent with the Commission's 
rationale for allowing at-cost pricing for sales in the opposite 
direction. It states that the Commission established at-cost pricing in 
Order No. 667 to encourage centralization of certain services that 
provide economies of scale that benefit customers, and that these 
benefits occur whether a

[[Page 11023]]

franchised public utility is buying or selling non-power goods or 
services to or from its centralized service company. It argues that 
requiring at-cost pricing for transactions from a centralized service 
company to a franchised public utility on the one hand, while requiring 
at-the-higher-of-cost-or-market pricing for transactions from a 
franchised public utility to a centralized service company on the other 
hand, creates a bifurcated-pricing structure that undermines efficient 
pricing within a holding company. It further argues that tracking which 
transactions are ``at market'' and which transactions are ``at cost'' 
adds a level of complexity to the accounting within holding companies, 
and identifying the market prices for certain non-power goods and 
services that may be sold by franchised public utilities to centralized 
service companies is difficult.
    66. In contrast, the New York Commission focuses on whether the 
Commission's proposed pricing standards adequately protect captive 
customers from cross-subsidization. Specifically, it challenges the 
Commission's proposal to prohibit a franchised public utility with 
captive customers from purchasing non-power goods and services at a 
price above market price from market-regulated power sales affiliates 
and non-utility affiliates, with the exception of centralized service 
companies. It asserts that this standard would allow utilities to 
purchase non-power goods or services from an affiliated entity at 
market prices and may allow holding companies to structure affiliate 
transactions so that utilities with captive customers would pay above-
cost charges. It states that where an affiliate makes central purchases 
on behalf of several utilities, the affiliate will likely obtain 
discounts in the prices it pays due to the combined volume of 
purchases. The New York Commission contends, however, that the 
Commission's proposal would allow the central purchasing affiliate to 
charge each utility up to the prevailing market price which otherwise 
would be incurred if the utilities made their own separate purchases, 
and the result would provide a source of affiliate cross-subsidization 
in an amount equivalent to the incremental purchase quantity discount.
    67. As an alternative, the New York Commission proposes that the 
Commission require utilities to record purchases of covered items from 
their affiliates at the lower of actual cost or market prices. It 
contends that this standard would protect captive utility customers 
against paying affiliates more than the affiliate's actual costs.
    68. Commenters also made recommendations on the appropriate 
relationship between state and Commission affiliate-pricing standards. 
In particular, EEI, National Grid and Pinnacle West argue that, at the 
very least, the Commission should avoid unnecessary duplication or 
conflict with state provisions. In particular, EEI encourages the 
Commission to adopt deference to states in the cross-subsidy context, 
unless a state or holding company asks the Commission to apply uniform 
rules to avoid inconsistent standards that would trap legitimate costs. 
EEI suggests that the Commission adopt a procedure similar to the one 
it adopted in Order No. 667, in which a holding company system can 
apply to the Commission to impose consistent requirements that would 
eliminate the possibility of trapped costs. National Grid contends that 
inconsistencies between federal and state rules make implementation of 
both sets of rules impossible, particularly with respect to the day-to-
day press of business within a utility holding company. It argues that 
deference to the states would minimize disruption of existing holding 
company accounting and reporting systems, cost-allocation manuals, and 
interaffiliate-transaction procedures built around state regulation. 
Pinnacle West states that, because state regulations typically address 
affiliate transactions, the Commission's regulations could upset 
states' efforts to ring fence utilities.
    b. Commission Determination
    69. The Commission will adopt the pricing restrictions on 
transactions for non-power goods and services proposed in the Affiliate 
Transactions NOPR, with the exception of a modification to the 
restriction applicable to transactions with centralized service 
companies, to conform those restrictions to the language in our Order 
No. 667 regulations. These are explained below.
    70. First, as proposed, a franchised public utility with captive 
customers that provides non-power goods and services to a market-
regulated power sales affiliate or a non-utility affiliate will be 
required to sell at a price that is the higher of cost or market price. 
We will not adopt an at-cost pricing structure for these types of non-
power transactions (as suggested by National Grid, EEI, NiSource, 
Entergy and PG&E) because it would require a franchised public utility 
to sell to an affiliate at cost even when market prices are higher, 
thereby foregoing profits that the utility otherwise could have 
obtained by selling to a non-affiliate at a market price. In such a 
scenario, the benefit would go to the market-regulated affiliate or 
non-utility affiliate who receives a good or service at a below-market 
price. We believe the benefits that captive customers will receive 
under this ``higher of cost or market price'' standard outweigh any 
savings that may (or may not) occur through the use of a uniform at-
cost standard.
    71. Next, we will adopt the proposal in the Affiliate Transactions 
NOPR to 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 transactions from centralized 
service companies, which are discussed below). In doing so, we deny the 
New York Commission's request for a ``lower of cost or market'' 
standard for these types of transactions. As discussed above, the New 
York Commission argued that the ``at a price above market price'' 
standard would allow holding companies to structure affiliate 
transactions so that captive customers would pay above-cost charges. 
But captive customers are not harmed by the franchised public utility 
paying above-cost charges if those charges are no higher than what they 
would pay non-affiliates for the same non-power goods and services. 
Moreover, nothing in the standard requiring that these purchases not be 
above market prevents the franchised public utility from paying less 
than the market price. The New York Commission, or any other state 
commission, can require a stricter standard for these transactions so 
long as the standards do not result in trapped costs in situations 
involving multi-state holding companies. If the state commission's 
pricing standards for a franchised public utility's purchases from an 
affiliate are stricter than the Commission's (e.g., the state standard 
is lower of cost or market as opposed to market), then the stricter 
pricing standard would apply, as long as there is no conflict in 
complying with both the state's pricing standard and this Commission's 
pricing standard.\60\
---------------------------------------------------------------------------

    \60\ See 18 CFR 366.5.
---------------------------------------------------------------------------

    72. Finally, with regard to centralized service companies, the 
Affiliate Transactions NOPR proposed that a franchised public utility 
with captive customers should be prohibited from purchasing or 
receiving non-power goods and services from a centralized service 
company at a price above cost. We will conform this standard to the 
language in Order No. 667, which is to require that such transactions 
occur ``at cost.'' While this is a change from the

[[Page 11024]]

Affiliate Transactions NOPR, which proposed to prohibit such sales from 
centralized service companies at a price above cost, our intent in the 
Affiliate Transactions NOPR was to be consistent with Order No. 
667,\61\ as well as the SEC's at-cost standard used prior to the repeal 
of PUHCA 1935. As we have previously stated, the at-cost pricing 
standard for transactions for non-power goods and services from 
centralized service companies to franchised public utilities with 
captive customers benefits ratepayers through economies of scale, and 
eliminates the speculative task of defining a market price in these 
instances.\62\
---------------------------------------------------------------------------

    \61\ Order No. 667, FERC Stats. & Regs. ] 31,197 at P 169.
    \62\ Id.
---------------------------------------------------------------------------

    73. We recognize that one of the risks of at-cost pricing is the 
potential for prices to be imposed that are substantially higher than 
the market price. As we stated in Order No. 667, the Commission will 
entertain complaints that at-cost pricing exceeds the market price. 
Complainants would continue to have the burden of demonstrating the at-
cost price exceeded market price and, furthermore, any change in the 
price as a result of the complaint would be prospective.
    74. With regard to comments that the Commission's affiliate-pricing 
standards may conflict with similar pricing rules at the state level, 
we are not convinced that the Commission should establish a general 
policy of deference to existing state rules. For many years, we have 
required restrictions on certain affiliate transactions for non-power 
goods and services in the context of both market-base rate 
authorizations and merger approval under section 203.\63\ As stated 
above, to the extent a state has affiliate-pricing standards that are 
``stricter'' than the Commission's then the stricter standard applies, 
as long as there is no conflict in complying with both the state's 
pricing standard and this Commission's pricing standard.
---------------------------------------------------------------------------

    \63\ See, e.g., Potomac, 93 FERC at 61,782; Heartland, 68 FERC 
at 62,062-63; PSC Colorado, 75 FERC at 62,046.
---------------------------------------------------------------------------

3. Reporting Requirements
    75. In the Affiliate Transactions NOPR, the Commission asked 
whether it should adopt any after-the-fact reporting requirements for 
transactions covered by the proposed regulations.
    a. Comments
    76. Most commenters, including EEI, Entergy, PG&E, Pinnacle West 
and Sempra, argue that the Commission should not require after-the-fact 
reporting requirements.
    77. EEI argues that such reporting would be onerous given the 
number of transactions at issue, the fact that further reporting could 
include sensitive information and the Commission already collects large 
volumes of information from utilities and service companies. EEI also 
argues that if the Commission does adopt these regulations, it should 
clarify that utilities no longer need to include language that 
duplicates the regulations in their code of conduct as part of their 
individual tariffs.
    78. Pinnacle West and Sempra argue that additional reporting is not 
required because many states already require reporting of affiliate 
transactions (including the states in which they conduct business) and 
the Commission already collects affiliate power sales information 
through EQRs and market-based rate requirements. Sempra states that it 
does not object to additional reporting requirements provided that the 
entities subject to the requirements are authorized to submit the same 
information in the same format and in the same time period as is 
required under existing state requirements.
    79. PG&E encourages the Commission not to require additional 
reporting requirements for single-state holding companies. PG&E argues 
that such a requirement would be extraordinarily onerous. PG&E also 
argues that such a requirement would be duplicative because of 
Commission reporting requirements (EQRs and Form No. 3-Qs) and state 
requirements (where there is adequate state regulation of cross-subsidy 
issues).
    80. APPA/NRECA and the state commissions support after-the-fact 
reporting requirements. APPA/NRECA ask that the Commission adopt 
additional after-the-fact reporting requirements. APPA/NRECA state that 
the Commission should require the filing of affiliate agreements 
governing non-power goods and services and the filing of periodic 
reports of all affiliate transactions within holding company systems 
regardless of whether they involve a centralized service company, a 
single-purpose service company, a market-regulated power sales 
affiliate or a non-utility affiliate. APPA/NRECA assert that there is 
no question of the Commission's statutory authority to require such 
reporting (citing the Commission's analysis in Order No. 667). APPA/
NRECA also note that, in Order No. 667, the Commission only requires 
traditional, centralized service companies in holding company systems 
to file annual reports containing certain information relating to 
affiliate transactions, but the Commission does not require any 
reporting for single-purpose service companies or other associate 
companies in holding company systems. While APPA/NRECA acknowledge that 
a one-size-fits-all reporting scheme may not be appropriate, they 
believe additional reporting is required. As a suggestion, they offer 
that the Commission require each covered public utility to file a one-
time compliance filing which would inform the Commission of its then-
existing affiliate relationships and any exemptions from annual 
reporting requirements. APPA/NRECA admit that that sort of reporting 
regime is general, and ask that the Commission consider a further 
technical conference on this question.
    81. The Oklahoma Commission also recommends after-the-fact 
reporting, noting that its rules regarding affiliate information have 
been effective. The Oklahoma Commission suggests that the Commission 
allow state commissions the opportunity to review and comment on any 
post occurrence reporting (suggesting a 90-day review and comment 
period).
    82. The New York Commission also recommends reporting on affiliate 
transactions. The New York Commission recommends revisions to Form No. 
1 and Form No. 2 to require utilities to describe, quantify, and 
provide the basis used to record each type of transaction with its 
affiliates. It argues that these reporting requirements are similar to 
those the Commission included in Form No. 60 for centralized service 
companies.
    b. Commission Determination
    83. We believe that the current reporting regulations are adequate 
to ensure compliance with the proposed restrictions on affiliate 
transactions between franchised public utilities that have captive 
customers or that own or provide transmission service over 
jurisdictional transmission facilities and their market-regulated power 
sales affiliates or non-utility affiliates. In addition to the 
information gathered through Form No. 1, the Commission already 
collects affiliate power sales information from franchised public 
utilities through EQRs and market-based requirements. With regard to 
non-power goods and services, franchised public utilities that have 
captive customers or that own or provide transmission service over 
jurisdictional transmission facilities are covered by the existing 
record retention requirements in Parts 125 and 225 of the Commission's 
regulations. Accordingly, there is no need to impose additional 
reporting requirements to ensure compliance with the proposed 
regulations. However, if

[[Page 11025]]

the Commission finds that the existing requirements are inadequate, we 
will consider holding a technical conference to discuss what additional 
reporting requirements may be warranted.
4. Effective Date
    a. Comments
    84. EEI and Entergy recommend that the application of any adopted 
regulations be prospective in nature and not affect any existing 
contracts. In its comments, EEI asserts that it would be ``unjust and 
detrimental to the financial integrity'' of holding companies for the 
Commission to retroactively void pricing arrangements to provide energy 
or non-power goods and services.\64\
---------------------------------------------------------------------------

    \64\ EEI Comments at 13.
---------------------------------------------------------------------------

    b. Commission Determination
    85. In response to EEI's request for clarification, we clarify that 
the pricing rules adopted herein are prospective and will apply to any 
contracts, agreements or arrangements entered into on or after the 
effective date of this Final Rule. To the extent different pricing was 
in effect for any contract, agreement or arrangement entered into prior 
to the effective date of this Final Rule, such pricing may remain in 
effect; however, the Commission on its own motion, or upon complaint, 
may on a case-by-case basis institute a section 206 proceeding to 
determine whether the costs incurred by a public utility under such 
pre-existing contracts, agreements or arrangements are just, reasonable 
and not unduly discriminatory or preferential. We also note that many 
public utilities already have the same pricing restrictions in effect 
as a result of Commission orders approving mergers or market-based 
rates; these restrictions remain in place.

V. Information Collection Statement

    86. The Office of Management and Budget's (OMB's) regulations 
require that OMB approve certain information collection requirements 
imposed by agency rule.\65\ This Final Rule does not impose any 
additional information collection requirements. Therefore, the 
information collection regulations do not apply to this Final Rule. The 
Commission received 12 comments on the Affiliate Transactions NOPR and 
no entity specifically addressed the Commission's information 
collection statement. The Commission will submit for informational 
purposes only a copy of this rulemaking to OMB.
---------------------------------------------------------------------------

    \65\ 5 CFR 1320.12.
---------------------------------------------------------------------------

VI. Environmental Analysis

    87. 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.\66\ The 
Commission has categorically excluded certain actions from this 
requirement as not having a significant effect on the human 
environment.\67\ The final rule is categorically excluded as it 
addresses rate filings submitted under sections 205 and 206 of the 
FPA.\68\ Accordingly, no environmental assessment is necessary and none 
has been prepared in this final rule.
---------------------------------------------------------------------------

    \66\ 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).
    \67\ 18 CFR 380.4.
    \68\ See 18 CFR 380.4(a)(15).
---------------------------------------------------------------------------

VII. Regulatory Flexibility Act

    88. The Regulatory Flexibility Act of 1980 (RFA) \69\ generally 
requires a description and analysis of final rules that will have 
significant economic impact on a substantial number of small 
entities.\70\ Agencies are not required to make such an analysis if a 
rule would not have such an effect.
---------------------------------------------------------------------------

    \69\ 5 U.S.C. 601-12.
    \70\ 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.
---------------------------------------------------------------------------

    89. The Final Rule is applicable to franchised public utilities 
that have captive customers or that own or provide transmission service 
over jurisdictional transmission facilities. Most such companies 
regulated by the Commission do not fall within the RFA's definition of 
small entity.\71\ Therefore, the Commission certifies the Final Rule 
will not have a significant economic impact on a substantial number of 
small entities. As a result, no regulatory flexibility analysis is 
required.
---------------------------------------------------------------------------

    \71\ 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.
---------------------------------------------------------------------------

VIII. Document Availability

    90. In addition to publishing the full text of this document in the 
Federal Register, the Commission provides all interested persons an 
opportunity to view and/or print the contents of this document via the 
Internet through FERC's Home Page (http://www.ferc.gov) and in FERC's 
Public Reference Room during normal business hours (8:30 a.m. to 5 p.m. 
Eastern time) at 888 First Street, NE., Room 2A, Washington DC 20426.
    91. From FERC's Home Page on the Internet, this information is 
available on eLibrary. The full text of this document is available on 
eLibrary in PDF and Microsoft Word format for viewing, printing, and/or 
downloading. To access this document in eLibrary, type the docket 
number excluding the last three digits of this document in the docket 
number field.
    92. User assistance is available for eLibrary and the FERC's Web 
site during normal business hours from FERC Online Support at 202-502-
6652 (toll free at 1-866-208-3676) or e-mail at 
ferconlinesupport@ferc.gov, or the Public Reference Room at (202) 502-
8371, TTY (202) 502-8659. E-mail the Public Reference Room at 
public.referenceroom@ferc.gov.

IX. Effective Date and Congressional Notification

    93. These regulations are effective March 31, 2008. The Commission 
has determined, with the concurrence of the Administrator of the Office 
of Information and Regulatory Affairs of OMB, that this rule is not a 
``major rule'' as defined in section 351 of the Small Business 
Regulatory Enforcement Fairness Act of 1996.

List of Subjects in 18 CFR Part 35

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

    By the Commission.
 Kimberly D. Bose,
Secretary.

0
In consideration of the foregoing, the Commission amends part 35, 
Chapter I, Title 18, Code of Federal Regulations, to read as follows:

PART 35--FILING OF RATE SCHEDULES AND TARIFFS

0
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.

0
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.

[[Page 11026]]

Sec.  35.43  Generally.

    (a) For purposes of this subpart:
    (1) Affiliate of a specified company means:
    (i) For any person other than an exempt wholesale generator:
    (A) Any person that directly or indirectly owns, controls, or holds 
with power to vote, 10 percent or more of the outstanding voting 
securities of the specified company;
    (B) Any company 10 percent or more of whose outstanding voting 
securities are owned, controlled, or held with power to vote, directly 
or indirectly, by the specified company;
    (C) Any person or class of persons that the Commission determines, 
after appropriate notice and opportunity for hearing, to stand in such 
relation to the specified company that there is liable to be an absence 
of arm's-length bargaining in transactions between them as to make it 
necessary or appropriate in the public interest or for the protection 
of investors or consumers that the person be treated as an affiliate; 
and
    (D) Any person that is under common control with the specified 
company.
    (E) For purposes of paragraph (a)(1)(i) of this section, owning, 
controlling or holding with power to vote, less than 10 percent of the 
outstanding voting securities of a specified company creates a 
rebuttable presumption of lack of control.
    (ii) For any exempt wholesale generator (as defined under Sec.  
366.1 of this chapter), consistent with section 214 of the Federal 
Power Act (16 U.S.C. 824m), which provides that ``affiliate'' will have 
the same meaning as provided in section 2(a) of the Public Utility 
Holding Company Act of 1935 (15 U.S.C. 79b(a)(11)):
    (A) Any person that directly or indirectly owns, controls, or holds 
with power to vote, 5 percent or more of the outstanding voting 
securities of the specified company;
    (B) Any company 5 percent or more of whose outstanding voting 
securities are owned, controlled, or held with power to vote, directly 
or indirectly, by the specified company;
    (C) Any individual who is an officer or director of the specified 
company, or of any company which is an affiliate thereof under 
paragraph (a)(1)(ii)(A) of this section; and
    (D) Any person or class of persons that the Commission determines, 
after appropriate notice and opportunity for hearing, to stand in such 
relation to the specified company that there is liable to be an absence 
of arm's-length bargaining in transactions between them as to make it 
necessary or appropriate in the public interest or for the protection 
of investors or consumers that the person be treated as an affiliate.
    (2) Captive customers means any wholesale or retail electric energy 
customers served by a franchised public utility under cost-based 
regulation.
    (3) Franchised public utility means a public utility with a 
franchised service obligation under state law.
    (4) 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.
    (5) Non-utility affiliate means any affiliate that is not in the 
power sales or transmission business, other than a local gas 
distribution company or an interstate natural gas pipeline.
    (b) The provisions of this subpart apply to all franchised public 
utilities that have captive customers or that own or provide 
transmission service over jurisdictional transmission facilities.

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 that 
has captive customers or that owns or provides transmission service 
over jurisdictional transmission facilities, 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 that has captive customers or that owns or provides 
transmission service over jurisdictional transmission facilities, 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 that has captive customers or that 
owns or provides transmission service over jurisdictional transmission 
facilities, may only purchase or receive non-power goods and services 
from a centralized service company at cost.

[FR Doc. E8-3820 Filed 2-28-08; 8:45 am]

BILLING CODE 6717-01-P