On February 21, 2008, the Federal Energy Regulatory Commission ("FERC") issued Order No. 708, a Final Rule that adopts a series of blanket authorizations for dispositions or acquisitions that are subject to Section 203(a)(1) of the Federal Power Act ("FPA"). The Final Rule expands the range of transactions that can proceed without prior approval from FERC. FERC hopes that this rule will facilitate further investment in the electric utility industry while protecting public utility customers.

The Final Rule harmonizes many of the blanket authorizations under FPA Section 203(a)(1) with those previously adopted for public utility holding companies under Section 203(a)(2), adopts one new blanket authorization for which there is no parallel under Section 203(a)(2) and provides some helpful clarifications of the previously adopted blanket authorizations. The new rule takes effect 30 days after its publication in the Federal Register. Below is a brief discussion of each of the principal provisions of the Final Rule.

Summary of New Rules

In the Final Rule, FERC added five new blanket authorizations. Most involve dispositions of voting securities by public utilities to public utility holding companies that are in holding company systems that include a transmitting utility or an electric utility ("holding companies"). Four of these blanket authorizations in large part provide a "flip side" to blanket authorizations FERC had previously granted to public utility holding companies to acquire those public utility voting securities. The fifth blanket authorization pertains to the disposition of certain kinds of jurisdictional contracts. Under the new rules, prior FERC authorization will no longer be required for:

(1) a public utility to transfer less than 10% of its voting securities to a holding company that has a blanket authorization under FERC regulations to acquire public utility voting securities, provided that, after the transfer, the holding company and any of its associate or affiliate companies in aggregate will own less than 10% of the outstanding voting interests of such public utility;

(2) a public utility to transfer its voting securities to an entity that is a holding company solely with respect to exempt wholesale generators ("EWGs"), foreign utility companies ("FUCOs"), or qualifying facilities ("QFs"), where the holding company has blanket authorization under 18 C.F.R. § 33.1(c)(8) to acquire the securities of additional EWGs, FUCOs or QFs, provided that, after the transfer, the holding company and any of its associate or affiliate companies in aggregate will own less than 10% of the outstanding voting interests of such public utility;

(3) a public utility to transfer an unlimited amount of its voting securities to a holding company regulated by the Board of Governors of the Federal Reserve Bank or by the Office of the Comptroller of the Currency under the Bank Holding Company Act where the holding company has blanket authorization under 18 C.F.R. § 33.1(c)(9) to acquire the securities of holding companies if such acquisitions are in the normal course of its business and the securities are held (a) as a fiduciary; (b) for hedging purposes (with certain conditions); (c) as collateral for a loan; or (d) solely for purposes of liquidation and in connection with a previously contracted loan (with certain conditions);

(4) a public utility to transfer an unlimited amount of its voting securities to a holding company that has blanket authorization under 18 C.F.R. § 33.1(c)(10) to acquire the securities of a public utility or holding company that includes a public utility, for underwriting or hedging purposes (with certain conditions);

(5) a public utility to acquire or dispose of a jurisdictional contract where neither the acquirer nor the transferor has captive customers or owns or provides transmission service over jurisdictional transmission facilities, the contract does not convey control over the operation of a generation or transmission facility, the parties to the transaction are neither associate nor affiliate companies, and the acquirer is a public utility.

In addition, the new rules clarify the definition of the term "affiliate," which is used in various parts of the blanket authorization regulations including in the aggregation provisions of (1) and (2) above. For entities other than EWGs, an "affiliate" generally means an entity that directly or indirectly owns 10% or more of a company or that is directly or indirectly 10% or more owned by a company. For EWGs, an "affiliate" generally means an entity that directly or indirectly owns 5% or more of a company or an entity that is 5% or more owned by a company.

Finally, the new rules narrow the definition of the term "captive customers," which is a key part of the cross-subsidization rules and was raised as a concern by FERC in refusing to expand certain blanket authorizations. Specifically, "captive customers" are wholesale and retail electric customers serviced by a franchised public utility under cost-based rate regulation.

Analysis of New Rules

FERC first began, in late 2006, to consider whether to expand the blanket authorizations under its FPA Section 203 regulations. Many industry players requested FERC to adopt blanket authorizations for public utilities that parallel those blanket authorizations already granted to public utility holding companies.

In July of 2007, FERC issued a Notice of Proposed Rulemaking (Docket No. RM07-21) proposing to adopt and requesting comments on the numerous blanket authorizations recommended by the energy industry. In the Final Rule, FERC agreed to expand the blanket authorizations as proposed by these commenters and agreed not to impose additional reporting requirements. As a result, FERC has "synchronized" its blanket authorizations under FPA Section 203(a)(1) (which applies to public utilities) with those under Section 203(a)(2) (which applies to holding companies) and has removed unnecessary regulatory obstacles to certain merger and acquisition transactions.

Although FERC did not accept other suggested blanket authorizations (e.g., to expand the blanket authorization for less than 10% dispositions to cover dispositions to "any persons" as opposed to just holding companies), FERC recognized that these proposals may be appropriate in certain circumstances and left the door open to making certain additional blanket authorizations available on a case-by-case basis. For example, FERC stated that it may support a blanket authorization for less than 10% dispositions to "any person" if "applicants can propose sufficient reporting requirements to allow adequate monitoring of possible changes in control and assure us that captive customers are adequately protected."

For More Information

Follow these links for additional reports on actions taken by the Federal Energy Regulatory Commission at its February 21, 2008 meeting: