• Commission Testifies on the Adequacy of State and Federal Regulatory Structures for Governing Electric Utility Holding Companies
  • May 15, 2008
  • Law Firm: Troutman Sanders LLP - Atlanta Office
  • Yesterday, Federal Energy Regulatory Commission (“FERC” or “Commission”) Chairman Joseph Kelliher and his colleagues, Commissioners Suedeen Kelly, Jon Wellinghoff, Marc Spitzer, and Philip Moeller testified before the Senate Energy and Natural Resources Committee in a hearing to examine the adequacy of state and federal regulatory structures for governing electric utility holding companies in light of changes made through Energy Policy Act of 2005 (“EPAct 2005).  These changes included the repeal of the Public Utility Holding Company Act of 1935 (“PUHCA 1935”) and its replacement with the Public Utility Holding Company Act of 2005 (“PUHCA 2005”).

    The hearing was focused on a report issued by the Government Accountability Office (“GAO”).  The report criticizes FERC for making too few changes to its merger review process and postmerger oversight since EPAct 2005.  As a result of the lack of substantive changes, GAO believes that the Commission does not have a strong basis for ensuring that cross-subsidization does not occur.  The report also examined state merger oversight post PUHCA 1935.  Most state utility commissions’ views varied on their oversight capacity, but the majority agree that more resources are needed via additional staff and funding to respond to changes in their oversight.  The report recommended “that FERC use a risk-based approach to detect cross-subsidization, enhance audit reporting, and reassess resources to demonstrate oversight vigilance.”

    In his testimony, Chairman Kelliher defended FERC’s more flexible approach to preventing cross-subsidization stating that a more strict preemptive federal approach “would limit the ability of state commissions to accept the federal rule.”  The Chairman first presented the Commission’s actions to protect consumers and remove unnecessary transaction burdens and limitations on investment since the enactment of the EPAct 2005 merger provisions and PUHCA 2005.  He then explained the Commission’s approach to prevent improper cross-subsidization. 

    Under the Commission’s flexible approach to police cross-subsidies, FERC reviews merger conditions imposed by state commissions to protect consumers against improper cross-subsidization such as ring fencing.  If the Commission feels that these measures come up short or if states have no authority to act, the Commission will act and impose measures.  Chairman Kelliher argued that any other more restrictive rule would require state commissions to follow the federal rule and prevent them from designing safeguards against cross-subsidization.  The Chairman did acknowledge that a preemptive federal approach may be warranted if there is regulatory failure on the part of the state commissions. 
    Chairman Kelliher noted that the Commission reviews the entire record in every case under FPA section 203 which includes information from the applicant, customers and state consumer advocates, competitors, state commissions and attorneys general.  If the record is inadequate it can direct the submission of additional information.  In addition, the Commission can prevent cross-subsidization through its traditional ratemaking authority, through the imposition of civil penalties for non-adherence to commitments by merger applicants, or through the issuance of supplemental orders with respect to a particular transaction. 

    In its report, the GAO also makes four recommendations to enhance the Commission’s ability to detect and prevent harmful cross-subsidization involving public utilities in the post-merger oversight including audits.  Chairman Kelliher responded to each of these recommendations in turn and noted in summary that:

    the Commission’s auditors already follow a risk-based approach for selecting holding company audit candidates for examination of their affiliated transactions, and the Commission constantly assesses and reassesses its audit resources to carry out the audit priorities in the annual audit plan.  Similarly, the Commission continues to collaborate with state regulators to capitalize on their unique knowledge.  Interacting with state regulators during the course of an audit is a practice the Commission auditors have followed for a long time.  Finally, the Commission continually strives to maintain and improve existing staff practices to ensure that the audit reports include clear audit objectives, scope, and methodologies.

    In closing, the Chairman said, “I believe the Commission has laid a solid foundation to adequately protect customers and we will continue to adapt our policies and our auditing approach as necessary to meet our core customer protection mission.”

    The GAO report is available at: http://energy.senate.gov/public/_files/
    d08289restricted.pdf.  The Commission’s testimony is available on FERC’s web site.