The Federal Energy Regulatory Commission recently issued two rulemakings and one notice of inquiry, each of which is important but which collectively have the potential to drastically alter the landscape of the wholesale power markets in the U.S. In the three orders, FERC proposes new rules designed to provide greater certainty and opportunity to companies seeking to invest in U.S. electric utilities, proposes credit reforms for organized wholesale electric markets and, lastly, seeks information from market participants as to whether it should extend its information-gathering authority to federal, municipal, cooperative and public power authorities. FERC is allowing 60 days for public comment on these initiatives.

Rulemaking 1: New Rules Proposed to Provide Greater Certainty and Opportunity to Investors in U.S. Utilities.

Prompted by a petition filed by the Electric Power Supply Association in late 2008, FERC seeks to expand blanket authorizations under section 203 of the Federal Power Act and to loosen market-based rate change of status reporting requirements and cross-subsidization restrictions under section 205. Under the proposed new rules, a holding company would have blanket authorization to acquire 10% or more, but less than 20%, of voting securities in a public utility, provided that it files an Affirmation in Support of Exemption from Affiliation Requirements (Affirmation) on the new FERC Form 519-C and provides a copy to the utility. The companion blanket authorizations for public utilities whose securities are transferred resulting in such ownership are expanded by the proposed regulations in parallel fashion.

FERC is also proposing to revise the definition of an "affiliate" under the marketbased rate and cross-subsidization regulations. Currently, those regulations treat 10% ownership ties as creating affiliate relationships. Under the proposed regulations, an affiliate of a specified company would mean "any person that controls, is controlled by, or is under common control with the specified company," and owning 10% or less of the company would create a rebuttable presumption of lack of control. While the proposal states that ownership between 10% and 20% would still create an affiliate relationship under this standard, where such ownership of a utility results from a transaction accompanied by the Form 519-C Affirmation described above, the utility would be exempt from having to report a change of status regarding its marketbased rate approval and from having to comply with affiliate cross-subsidization restrictions. Taken together, the proposed changes will provide greater opportunity for investment in U.S. utilities by removing regulatory burdens that may previously have chilled investment due to added cost and uncertainty.

Rulemaking 2: Credit Reforms in Organized Wholesale Electric Markets.

Prompted by recent turmoil in financial markets and by independent development of creditworthiness requirements by RTOs and ISOs on a case-by-case basis, FERC is proposing a new set of regulations to govern credit practices in organized wholesale electric markets, i.e., RTOs and ISOs. The new regulations will require these markets to have tariff provisions that:

  1. Limit the amount of unsecured credit extended to any market participant to no more than $50 million.  
  2. Adopt a settlement period of no more than seven days and allow no more than an additional seven days to receive payment.  
  3. Eliminate unsecured credit in the financial transmission rights market.  
  4. Allow it to offset market obligations owed to market participants against market obligations owed by market participants.  
  5. Limit to no more than two days the time period provided to post additional collateral when additional collateral is requested by the organized wholesale electric market.  
  6. Provide minimum participation criteria (such as the capability to engage in risk management or hedging or to out-source this capability with periodic compliance verification) required of market participants to be eligible to receive credit from the organized wholesale electric market.  
  7. Specify when a market administrator may invoke the "material adverse change" as a justification for requiring additional collateral.  

These new regulations may weed out some financially unsound participants from participation in ISO and RTO markets and significantly limit the financial, and perhaps operational, flexibility enjoyed by others.

Notice of Inquiry: FERC Considers Collecting Market Information from Market Participants Not Under FERC's Rate Making Jurisdiction.

In order to ensure and improve transparency in the U.S. wholesale electric markets, FERC is seeking information regarding whether it should extend its existing quarterly informational filing requirements to include market participants that are otherwise excluded from FERC jurisdiction under the Federal Power Act. This would include federal entities, municipal and publicly owned utilities, public utility districts and rural electric cooperatives. FERC's authority to extend these requirements comes from EPAct 2005, and FERC has already used that authority to extend reporting requirements to all participants in natural gas markets (not just those subject to FERC's rate jurisdiction) via its new Form 552 reporting requirements. With respect to electricity markets, FERC is requesting comments on such questions as: whether it should extend informational filing requirements to entities not subject to FERC rate making jurisdiction, whether and how large a de minimis market presence threshold it should establish for such entities, and what information it should require of such entities in the quarterly filings. As it is estimated that these public entities account for approximately 30% of U.S. electric utility sales, the extended filing requirements would enhance FERC's current ability to monitor jurisdictional sellers' market concentration and roles in price formation.

Comments on each of the FERC notices discussed above must be filed no later than 60 days after their publication in the Federal Register.