• FERC Issues Final Rules Implementing the Public Utility Holding Company Act of 2005 and Revisions to Section 203 of the Federal Power Act
  • February 23, 2006
  • Law Firm: Fenwick & West LLP - Office
  • The Federal Energy Regulatory Commission ("FERC") recently approved a final rule implementing the Public Utility Holding Company Act of 2005 (PUHCA 2005), which became effective on February 8, 2006. On that same date, repeal of the Public Utility Holding Company Act of 1935 (PUHCA 1935) also took effect. The repeal of PUHCA 1935 eliminates long-standing restrictions on the activities and geographic scope of utility holding companies, while PUHCA 2005 is limited to the requirement that utility holding companies and their affiliates provide FERC and state regulators access to their books and records as may be necessary to protect utility customers, and includes accounting, record retention and reporting requirements.

    Under PUHCA 2005, a 'holding company' includes any direct or indirect owner of 10 percent or more of an electric utility company or a gas utility company. An electric utility company is broadly defined to include any company that owns or operates facilities used for the generation, transmission, or distribution of electric energy for sale. As a result, unlike under PUHCA 1935, the upstream owners of exempt wholesale generators (EWGs) or foreign utility companies (FUCOs) are considered holding companies under PUHCA 2005. In a final rule issued by FERC last week implementing amendments to the Public Utility Regulatory Policies Act of 1978, qualifying facilities (QFs) and their owners are exempt from PUHCA 2005. This exemption mirrors the exemption from PUHCA 1935 that was available to QFs under FERC's original QF rules.

    Under FERC's PUHCA 2005 rule, every holding company must make a one-time filing of a FERC-65 form notifying FERC of its holding company status 30 days after the statute's effective date (March 10, 2006) or within 30 days of becoming a holding company (if subsequent to March 10, 2006). The final rule, however, offers several exemptions from the books and records requirements of PUHCA 2005. Holding companies that own only EWGs or FUCOs are exempt (but must still file a notification of holding company status). FERC's rule implementing PUHCA 2005 also grants exemptions for passive investors, power or gas marketers, and other utilities that have no captive customers, and electric power cooperatives, among others. In addition, waivers from PUHCA's 2005 accounting, record retention and reporting requirements are available to the following entities: (i) single-state holding company systems; (ii) holding companies that own no more than 100 MW of generation and use it fundamentally for their own load or for affiliated end-users; and (iii) investors in independent transmission-only companies.

    Entities claiming an exemption must file a FERC-65A form, while entities claiming a waiver must file a FERC-65B form. Both forms must be filed by March 10, 2006 (or within 30 days of qualifying for an exemption or waiver if subsequent to March 10, 2006). Entities that do not qualify for any of the enumerated exemptions or waivers may nevertheless file a petition for a declaratory order with FERC, which will exclude from the scope of its review any class of transactions that it determines are not relevant to the jurisdictional rates of a public utility.

    Contrary to its original proposal in a notice of proposed rulemaking, the FERC did not eliminate EWG or FUCO status for new entities. Instead, the Commission established self-certification procedures for the continuing certification of EWGs or FUCOs. Alternatively, entities may file a petition for a declaratory order for a formal determination of EWG or FUCO status.

    Amendments to FPA Section 203

    FERC authority governing mergers and transfers of FERC-jurisdictional facilities also changed on February 8, 2006, the date on which amendments to Section 203 of the Federal Power Act (FPA), as well as the FERC's regulations implementing those provisions, took effect.

    Amended Section 203 increases the value threshold (from $50,000 to greater than $10 million) of the jurisdictional facilities that would trigger Section 203 review of the disposition of FERC-jurisdictional facilities, and extends the scope of FERC's review authority to include transactions involving transfers of generation facilities that have a value in excess of $10 million, are used in interstate wholesale sales, and are subject to FERC's ratemaking authority. In addition, revised Section 203 extends FERC's review under Section 203 to include acquisitions or mergers valued in excess of $10 million undertaken by a holding company whose subsidiaries include a transmission-owning utility or an electric utility, if the company or assets to be acquired involve any company that owns or operates facilities used to generate, transmit or distribute electric energy for sale, even if such facility was previously exempt from Section 203 by virtue of operating solely in intrastate or foreign commerce. Notably, this provision also gives FERC authority to review transactions by holding companies whose subsidiaries include QFs. Finally, amended Section 203 limits the FERC's review of a public utility's acquisition of securities of another public utility to transactions valued at greater than $10 million, and requires the FERC, when reviewing proposed Section 203 transactions, to examine cross-subsidization and pledges or encumbrances of utility assets.

    In view of the broad reach of amended Section 203, FERC's final rule implementing those amendments contains several new blanket authorizations for certain types of transactions. The blanket authorizations apply to:

    • holding companies acquiring ownership, control or securities of facilities used solely for transmission or sale of energy in intrastate commerce, for local distribution or sale of energy at retail regulated by a state commission;

    • holding companies engaging in a corporate reorganization that does not present cross-subsidization issues or involve a traditional public utility with captive rate customers;

    • holding companies acquiring passive (non-voting) security interests or less than 10 percent of the voting security interests in a transmitting utility or electric utility company or of the securities of any subsidiary in its holding company system; and

    • holding companies acquiring foreign utility companies if the holding company and its affiliates have no captive customers in the United States.

    Under the final rule, parties submitting applications for authorizations under Section 203 must provide evidence that the proposed transaction will not result in cross-subsidization or the pledge or encumbrance of utility assets for the benefit of an affiliate company, or alternatively, that such pledge or cross-subsidization is in the public interest. Applicants also must state whether a state commission has the authority to act on the transaction.

    Finally, the FERC's new regulations provide that it will act on a complete application within 180 days of its filing (though the FERC can extend this deadline by one additional 180-day period) and will provide "expeditious" consideration of certain applications, including those that are not contested, do not involve mergers and are consistent with FERC precedent, such as dispositions that involve only transmission facilities, and those that do not require the FERC's vertical or horizontal market power analyses.