[Federal Register: January 28, 2010 (Volume 75, Number 18)]
[Proposed Rules]
[Page 4498-4509]
[DOCID:fr28ja10-16]

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Parts 33 and 35

[Docket No. RM09-16-000]

Control and Affiliation for Purposes of Market-Based Rate
Requirements Under Section 205 of the Federal Power Act and the
Requirements of Section 203 of the Federal Power Act

January 21, 2010.
AGENCY: Federal Energy Regulatory Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Federal Energy Regulatory Commission (Commission) is
proposing to amend its regulations pursuant to sections 203 and 205 of
the Federal Power Act (FPA) to grant blanket authorization to acquire
securities under section 203 and amend the definitions of ``affiliate''
in Subpart H and Subpart I of Part 35 of the Commission's regulations.
The Commission seeks public comment on the rules and amended
regulations proposed herein.

DATES: Comments are due March 29, 2010.

ADDRESSES: You may submit comments, identified by docket number by any
of the following methods:
     Agency Web site: http://www.ferc.gov. Documents created
electronically using word processing software should be filed in native
applications or print-to-PDF format and not in a scanned format.
     Mail/Hand Delivery: Commenters unable to file comments
electronically must mail or hand deliver an original and 14 copies of
their comments to: Federal Energy Regulatory Commission, Secretary of
the Commission, 888 First Street, NE., Washington, DC 20426.

FOR FURTHER INFORMATION CONTACT:

Andrew P. Mosier, Jr. (Technical Information), Office of Energy Market
Regulation, Federal Energy Regulatory Commission, 888 First Street,
NE., Washington, DC 20426, Telephone:<PHONE_NUMBER>.
Christina Hayes (Legal Information), Office of the General Counsel,
Federal Energy Regulatory Commission, 888 First Street, NE.,
Washington, DC 20426, Telephone:<PHONE_NUMBER>.

SUPPLEMENTARY INFORMATION:

I. Introduction

    1. The Federal Energy Regulatory Commission (Commission) proposes
to amend its regulations to provide greater certainty with respect to
certain transactions in which a holding company acquires voting
securities of a public utility. Specifically, the Commission proposes
to amend Part 33 of its regulations to grant a blanket authorization
under section 203(a)(2) of the Federal Power Act (FPA), as well as a
parallel blanket authorization under section 203(a)(1), for
acquisitions of 10 percent or more, but less than 20 percent, of the
outstanding voting securities of a public utility or holding company,
where the acquiring company files a statement certifying that such
securities were not acquired and are not held for the purpose or with
the effect of changing or influencing the control of the public utility
and such acquiring company complies with certain conditions designed to
limit its ability to exercise control (all as set forth in an
Affirmation in Support of Exemption from Affiliation Requirements on
FERC Form 519-C (Affirmation), the form of which is annexed hereto as
Appendix A). The Commission also proposes to amend Subpart H and
Subpart I of Part 35 of the Commission regulations to define an
``affiliate'' of a specified company as any person that controls, is
controlled by, or is under common control with such specified company.
A public utility in respect of which an Affirmation has been filed
would be exempt from certain requirements of an affiliate for purposes
of the Commission's market-based rate program, but only with respect to
current or subsequent affiliation(s) that result from the transaction
that is the subject of such Affirmation and only for so long as the
information contained in the Affirmation (as modified through
subsequent quarterly updates) is true, complete and correct and the
reporting person remains in compliance with the commitments that are
made in the Affirmation.

II. Background

A. Overview

    2. Section 203 of the FPA, as amended by the Energy Policy Act of
2005,\1\ requires Commission authorization for mergers, and
dispositions and acquisitions involving electric generation and
transmission companies and their holding companies. The Energy Policy
Act of 2005 expanded the Commission's authority over corporate
transactions and granted the Commission new regulatory tools to
strengthen its ability to prevent the exercise of market power. The

Commission has implemented rules under section 203 to help prevent the
accumulation of either horizontal or vertical market power, while at
the same time eliminating unnecessary regulatory barriers to the making
of needed investment in generation and transmission infrastructure.
These rules are complemented by the rules the Commission has
implemented under its market-based rate program under section 205 to
prevent the exercise of market power in wholesale energy and capacity
markets.\2\
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    \1\ Energy Policy Act of 2005, Public Law 109-58, Sec. Sec.
1289 et seq., 119 Stat. 594 (2005).
    \2\ Market-Based Rates for Wholesale Sales of Electric Energy,
Capacity and Ancillary Services by Public Utilities, Order No. 697,
72 FR 39904 (Jul. 20, 2007), FERC Stats. & Regs. ] 31,252,
clarified, 121 FERC ] 61,260 (2007), order on reh'g, Order No. 697-
A, 73 FR 25832 (May 7, 2008), FERC Stats. & Regs. ] 31,268, order on
reh'g and clarification, 124 FERC ] 61,055 (2008), order on reh'g
and clarification, Order No. 697-B, 73 FR 79610 (Dec. 30, 2008),
FERC Stats. & Regs. ] 31,285 (2008), order on reh'g, Order No. 697-
C, 74 FR 30924 (Jun. 29, 2009), FERC Stats. & Regs. ] 31,291 (2009).
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    3. The Commission has granted, both on a generic basis and on a
case-by-case basis, blanket authorizations under section 203 where the
Commission has determined that transactions that fall within certain
parameters would be consistent with the public interest and would not
result in inappropriate cross-subsidization.\3\ While these blanket
authorizations have facilitated transactions under section 203, the
Commission must also consider the effect of transactions under the
market-based rate program under section 205. The Commission has
codified its rules under the market-based rate program.\4\ Under these
rules, among other things, a market-based rate seller must demonstrate
that neither it nor its affiliates have market power in the relevant
geographic market. In this regard, the acquisition or disposition of
public utility securities under blanket section 203 authorization may
raise questions as to whether the energy assets that are directly or
indirectly owned by an investor should be attributed to the public
utility whose securities are acquired by the investor for purposes of
the public utility's market power analysis under the market-based rate
program.
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    \3\ See Transactions Subject to Federal Power Act 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 (2006), order on reh'g, Order
No. 669-B, 71 FR 42579 (Jul. 27, 2006), FERC Stats. & Regs. ] 31,225
(2006). See also Goldman Sachs Group, 121 FERC ] 61,059 (2007),
clarified, 122 FERC ] 61,005 (2008) (Goldman Sachs); Capital
Research & Mgmt. Co., 116 FERC ] 61,267 (2006) (Capital Research).
    \4\ See Order No. 697, 72 FR 39,904 (Jul. 20, 2007), FERC Stats.
& Regs. ] 31,252 at P 1078-1105; Order No. 697-A, 73 FR 25,832 (May
7, 2008), FERC Stats. & Regs. ] 31,268 at P 527-533.
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B. EPSA's Petition for Guidance

    4. On September 2, 2008, the Electric Power Supply Association
(EPSA) filed a petition requesting guidance regarding concepts of
control and affiliation as they relate to transactions subject to the
Commission's jurisdiction under sections 203 and 205 of the FPA.\5\
Specifically, EPSA requested that, where an investor directly or
indirectly acquires 10 percent or more but less than 20 percent of a
public utility's outstanding voting securities and is eligible to file
a statement of beneficial ownership with the Securities and Exchange
Commission (SEC) on SEC Schedule 13G,\6\ such investment would not be
deemed to result in a disposition of the public utility's
jurisdictional facilities under section 203(a)(1) of the FPA or to
result in affiliation with the public utility for purposes of the
Commission's market-based rate requirements under section 205 of the
FPA.
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    \5\ The petition was originally docketed as EL08-87-000 and was
subsequently redocketed as PL09-3-000.
    \6\ As relevant here, a Schedule 13G is filed with the SEC
pursuant to section 13(d) of the Securities Exchange Act of 1934, 15
U.S.C. 78a et seq. (2000) (1934 Act), and the SEC's rules
thereunder, by any person (referred to here as a ``passive
investor'') when such person has acquired beneficial ownership of
more than five percent but less than 20 percent of the outstanding
voting equity securities of a company that are registered under
section 12 of and the 1934 Act and such person certifies that it has
not acquired, and does not hold, such securities for the purpose of
or with the effect of changing or influencing the control of the
issuer. The 20 percent limit on the acquisition of voting securities
reflects the SEC's view that ``it would be unusual for an investor
to be able to make the necessary certification of a passive
investment purpose when beneficial ownership approaches 20
percent,'' where the investor is not subject to other limitations.
Amendments to Beneficial Ownership Reporting Requirements, File No.
S7-16-96, 1998 SEC LEXIS 63, at * 17 n. 20 (Jan. 12, 1998). EPSA
appears to have adopted the 20 percent limitation based on its
desire to use the filing of Schedule 13G as dispositive of an
investor's non-control status.
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    5. EPSA states that a number of recent transactions involving
investments in publicly-held competitive power supply companies bring
to light concerns about when an investment will result in affiliation.
EPSA asserts that these concerns threaten to discourage investment in
energy infrastructure and also create compliance issues for competitive
power supply companies with market-based rates.
    6. EPSA states that secondary market transactions in publicly-
traded securities can result in situations that could be deemed to
result in a transaction subject to Commission authorization under
section 203 or affiliation for market-based rate purposes. EPSA
explains that such transactions can subject a public utility to
potential compliance issues under sections 203 and 205 of the FPA since
they take place without the knowledge of the affected public utility.
    7. EPSA's discussion of affiliation for market-based rate purposes
is based on the definition of an ``affiliate'' set forth in Order No.
697-A. That definition has been superseded by the definition adopted in
Order No. 697-B, although the changes do not fundamentally alter the
issues that EPSA describes. The current definition provides that an
affiliate of a specified company is (i) any person that has a 10
percent or greater voting security interest in the specified company;
(ii) any company that the specified company has a 10 percent or greater
voting interest in; (iii) any person that is under common control with
the specified company; or (iv) any person or class of persons that the
Commission determines, after notice and opportunity for a hearing, it
is necessary or appropriate to treat as an affiliate of the specified
company either to promote the public interest or to protect investors
and consumers.
    8. EPSA states that a number of concerns arise if one strictly
applies a 10 percent or greater voting security interest test to
determine affiliation. An upstream owner with a 10 percent or greater
voting interest in one public utility can acquire a 10 percent or
greater voting interest in a second unaffiliated public utility and
thereby create a new affiliate relationship between the two public
utilities. EPSA states that this could trigger a need for section 203
filings by the acquirer and the second public utility, or only the
acquiring company if the securities are acquired on the secondary
market.
    9. In addition, the transaction could trigger a market-based rate
change in status reporting requirement for both the first and second
public utilities and their existing affiliates. This requirement could
exist even though the affected public utilities are not aware that the
new affiliate relations had been created. EPSA claims that the public
utilities would thus not be in a position to make a change in status
filing, even though failure to make a necessary filing could result in
revocation of market-based rate authority and/or the imposition of
penalties. EPSA states that the consequences could be even more serious
if any of the entities involved is a traditional public utility with
captive customers. Where a public utility with market-based rate
authority is selling to a traditional public utility with captive
customers and subsequently becomes

affiliated with the traditional public utility as the result of
investment by a common owner, the market-based rate seller would become
subject to the Commission's affiliate sales restrictions, even though
it was unaware of the new affiliate relationship.
    10. To address its concerns, EPSA requests that the Commission make
three basic findings. First, EPSA requests that the Commission state
that no control or affiliation exists for market-based rate or section
203 purposes where an investor holds less than 20 percent of a public
utility's outstanding voting securities and files a Schedule 13G with
the SEC. EPSA also requests a finding that where an investor meets
these requirements and thus is deemed not to control the public utility
or be an affiliate of it: (1) The public utility need not make a change
in status filing in instances where it has market-based rate
authorization; (2) subsequent market power analyses submitted in
connection with either market-based rate authorizations or section 203
applications need not include generation and inputs owned or controlled
by other entities in which the investor holds an interest; and (3)
affiliate sales restrictions will not apply to transactions between a
publicly-held company and its subsidiaries with market-based rate
authorization, on the one hand, and other entities in which the
investor has interests, on the other.
    11. EPSA recommends that the Commission rely on the SEC's sanctions
associated with Schedule 13G filings, and it also recommends the
following additional safeguards: (1) As a condition to an investor's
reliance on a Schedule 13G filing as the basis for foregoing case-
specific approval under section 203(a)(2) for particular investments,
the investor would have to file a copy of its Schedule 13G with the
Commission within 30 days of filing it with the SEC \7\; and (2) when
an investor ceases to meet Schedule 13G eligibility requirements, it
must observe the requirements of the SEC's ``cooling off period'' while
awaiting the Commission's section 203 approval, which means that the
investor could not acquire additional securities until prior
authorization under section 203 is granted and must refrain from voting
its securities during this period.
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    \7\ EPSA notes that there may be circumstances in which an
investor is either not subject to section 203(a)(2) (for example,
because the investor is not a holding company) or is able to rely on
some other blanket authorization under the regulations. In such
circumstances, the investor would not need to rely on the filing of
Schedule 13G for section 203(a)(2) purposes. Nevertheless, EPSA
asserts that the publicly-held company (that is, the utility or its
holding company whose securities are acquired) should still be
allowed to rely upon the investor's filing of Schedule 13G with the
SEC for purposes of control and affiliation determinations.
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    12. Second, EPSA requests that if the Commission finds no control
for section 203 purposes, that finding should also apply for market-
based rate authorization purposes, such that the transaction will not
be deemed to result in affiliation for market-based rate purposes. This
would mean that a public utility with market-based rate authority would
not have to file a change in status if an entity that holds an interest
in it has also acquired an interest in another utility that did not
convey control. As a result, the market power analysis of the public
utility with market-base rate authority would not include the second
utility's generation and inputs in any required change in status
filing.
    13. Third, EPSA proposes that when an entity that is upstream of a
publicly-held company invests in an entity that is not otherwise
related to the publicly-held company, that investment should not be
deemed to be within the knowledge and control of the publicly-held
company's subsidiaries that have market-based rate authorization.
    14. On December 3, 2008, Commission staff held a workshop to
address the issues raised by EPSA. Additional comments were submitted
on January 16, 2009, and EPSA filed a subsequent response on February
2, 2009.
    15. Calpine Corporation and Tenaska Energy, Inc. (Calpine), Mirant
Corporation (Mirant), the Edison Electric Institute (EEI), and several
other commenters generally support EPSA's proposal. The Financial
Institutions Energy Group (FIEG) and Harbinger Management Corporation
(on behalf of certain affiliated investment funds) (Harbinger) contend
that the absence of a Schedule 13G filing with the SEC does not
necessarily indicate the existence of a control relationship. They also
assert that the SEC's definition of control is broader than the
Commission's view of control, which they contend is limited to matters
involving the ability of capacity to reach the market and the decision-
making over sales of electric energy.
    16. American Public Power Association (APPA) and National Rural
Electric Cooperative Association (NRECA) do not oppose EPSA's request
that a determination of ``no control'' under section 203 also apply
under the market-based rate program under section 205. But they, as
well as Transmission Access Policy Study Group (TAPS) and American
Antitrust Institute (AAI), oppose reliance on a Schedule 13G filing as
the sole basis for finding that the investor does not control a utility
in which it has invested. Instead, at the workshop APPA and NRECA
recommended that the Commission create its own form to evaluate whether
an investor has acquired control over a public utility.
    17. AAI raises concerns about an investor with a partial interest
in rival generating assets, which could diminish competition and lead
to a common owner serving as a conduit for commercially sensitive
information between rivals. AAI contends that the Department of Justice
and the FTC consider these issues of ``cross-ownership'' and that this
Commission should consider these issues, as well. The FTC also
encourages the Commission to consider issues associated with an
investor's partial ownership of multiple utilities and the investor's
related incentives to compete less vigorously, collude to avoid price
wars, and share commercially sensitive information.

III. Discussion

A. Overview of Proposal

    18. As indicated above, EPSA only sought ``guidance'' on the issues
it raised and did not propose a Commission rulemaking. However, in the
course of considering the comments submitted and the discussions at the
December 3, 2008 workshop, the Commission has determined that the
issues involved may call for more formal treatment. In particular, an
additional blanket authorization under section 203(a)(2) may be
necessary to achieve the desired result. In addition, the approach EPSA
proposed is at odds with aspects of the definition of an ``affiliate''
applicable under the Commission's market-based rate regulations.
Finally, the Commission finds that the Schedule 13G does not provide
sufficient information to the Commission to monitor markets and protect
the public interest, and therefore is proposing adoption of a form
better tailored to the Commission's needs.
    19. The proposed Affirmation would create a rebuttable presumption
for purposes of section 203 that the investor does not control the
public utility whose voting securities it has acquired. The Affirmation
is a representation by the filer and does not operate as a conclusive
finding that the investor does not control the public utility, which
the Commission finds would be necessary for an ownership interest of 10
percent or more, and less than 20 percent, of the outstanding voting
securities of a public utility to fall

outside of the definition of affiliate, as used in its regulations
under Part 35. Nevertheless, while the affected companies are still
considered affiliates, under the Commission's proposal, the affected
companies would qualify for a waiver of certain regulatory requirements
pertaining to an affiliate, specifically, the obligation to include the
energy assets of the affiliate for purposes of a market power analysis,
the change in status reporting requirement and the affiliate
transaction restrictions under Part 35 of the Commission's regulations.
    20. The Commission is therefore issuing this notice of proposed
rulemaking. In it, we propose a new blanket authorization under section
203(a)(2), in Part 33, which would allow a holding company to acquire
10 percent or more, but less than 20 percent, of a public utility's or
holding company's outstanding voting securities, provided that the
investor files an Affirmation with the Commission on Form 519-C. The
Affirmation, while similar to the Schedule 13G in that it would set
forth the investor's certification of non-control intent, has been
tailored to provide additional information and to impose restrictions
on certain activities to better meet the requirements of the FPA and
Commission policy. In particular, as described in greater detail below,
the Affirmation will serve as the source of information that would
otherwise be required under Part 33 of the Commission's regulations in
an application under section 203. Further, by filing an Affirmation,
the investor would commit to specific restrictions on its actions and
to ongoing reporting obligations. The investor would file the
Affirmation within 10 days following the acquisition. We believe the
use of this newly developed form and the restrictions contained therein
will help address the concerns raised by APPA, NRECA, AAI, TAPS, and
the FTC.
    21. The Commission also proposes to amend the definition of
``affiliate'' in section 35.36(a)(9) of its market-based rate program
regulations.\8\ As proposed to be amended, an ``affiliate'' of a
specified company would mean ``any person that controls, is controlled
by, or is under common control with, such specified company.''
Currently, the Commission's regulations create a rebuttable presumption
that a person that owns less than 10 percent of the outstanding voting
securities of a public utility lacks control of that public utility.\9\
The Commission proposes to amend its regulations under Part 33 to
provide that in any case in which 10 percent or more but less than 20
percent of the outstanding voting securities of a public utility are
owned, the public utility would be exempt from certain restrictions
applicable to affiliates if the acquiring person has filed an
Affirmation and continues to comply with all of the other conditions
and reporting obligations set forth therein. Thus, the market-based
rate filing requirements, including the filing of a notice of change in
status, would not be triggered. The Affirmation would allow the
Commission to monitor and sanction entities that violate it.
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    \8\ As discussed below, the Commission also proposes to amend
the definition of ``affiliate'' for purposes of Subpart H, Cross-
Subsidization Restrictions on Affiliation Transactions.
    \9\ 18 CFR 35.36(a)(9)(v) (2009).
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    22. If an investor that is a public utility holding company desires
to acquire 20 percent or more of the outstanding voting securities of a
public utility, or an interest of 10 percent or more, but less than 20
percent that is not the subject of an Affirmation, then the investor
would be required to file a stand-alone application under section
203(a)(2), unless the investor qualifies for one of the other blanket
authorizations provided for in the regulations.
    23. As discussed above, EPSA notes that an investor's acquisition
of the voting securities of a public utility with market-based
authorization could trigger the need for change in status filings by
both the public utility whose securities are acquired and by any other
public utility affiliate of the investor. This requirement could exist
even though the affected public utilities are not aware that the new
affiliate relations had been created. EPSA further states that the
public utilities would thus not be in a position to make a change in
status filing, even though failure to make a necessary filing could
result in revocation of market-based rate authority and/or the
imposition of penalties. The consequences could be even more serious if
any of the entities involved is a traditional public utility with
captive customers. Where a public utility is selling to a traditional
public utility with captive customers and subsequently becomes
affiliated with the traditional public utility as the result of
investment by a common owner, the public utility would become subject
to the Commission's affiliate sales restrictions, even though it was
unaware of the new affiliate relationship.
    24. In light of these concerns and the fact that the Commission's
rules require certain information regarding affiliates from market-
based rate sellers and impose certain restrictions on transactions
between affiliates in order to ensure that rates are just and
reasonable, we believe that the holding company whose acquisition of
voting securities of a public utility results in affiliations between
or among public utilities is in the best position to facilitate an
affected public utility's compliance with the Commission's regulations
pertaining to affiliate relationships. For instance, the holding
company may be in the best position to provide to an affected public
utility certain information regarding the holding company's investments
in other utilities with which the affected public utility would be
deemed affiliated, in order to enable the affected public utility to
comply with our regulatory requirements regarding affiliate
relationships.
    25. As EPSA notes, since a public utility with market-based rate
authority that fails to comply with market-based rate reporting
requirements may risk losing its market-based authorization, and a
public utility that fails to comply with our requirements relating to
affiliate transactions may be subject to penalties, we expect that a
holding company whose investment has created the affiliate relationship
between and among affected public utilities would also have an economic
incentive to preserve the market-based rate authority of a public
utility in which it has invested, and to ensure that a public utility
in which it has invested is in compliance with our regulations. A
holding company may elect to file the Affirmation in order to relieve
the public utility of its obligation to report certain information
regarding its affiliations through the holding company investor, and to
assist the public utility in complying with our regulations pertaining
to affiliate relationships resulting from the investment by the holding
company.

B. Section 203

1. Requirements of Section 203
    26. Section 203(a)(1) of the FPA requires prior Commission
authorization for a public utility to (A) sell, lease, or otherwise
dispose of its facilities; (B) merge or consolidate its facilities with
any other person; (C) purchase, acquire, or take any security in excess
of $10 million of any other public utility; or (D) purchase, lease, or
otherwise acquire an existing generation facility valued in excess of
$10 million and that is used in interstate wholesale

sales and over which the Commission has ratemaking jurisdiction.\10\
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    \10\ 16 U.S.C. 824b (2006).
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    27. Section 203(a)(2) requires prior Commission authorization for a
holding company in a holding company system that includes a
transmitting utility or an electric utility to purchase, acquire, or
take any security with a value in excess of $10 million of a
transmitting utility, an electric utility company, or a holding company
in a holding company system that includes a transmitting utility or an
electric utility company with a value in excess of $10 million.
    28. The Commission must approve an application under section 203 if
it finds the proposed transaction is consistent with the public
interest, and will not result in cross-subsidization of a non-utility
associate company or any pledge or encumbrance against utility assets
for the benefit of an associate company, unless the cross-subsidization
or pledge or encumbrance are found to be consistent with the public
interest. The Commission's analysis of whether a transaction is
consistent with the public interest generally involves consideration of
three factors: (1) The effect on competition; (2) the effect on rates;
and (3) the effect on regulation.\11\ The Commission's regulations
establish verification and informational requirements for applicants
that seek a determination that a transaction will not result in
inappropriate cross-subsidization or pledge or encumbrance of utility
assets.\12\
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    \11\ See 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 (1996),
reconsideration denied, Order No. 592-A, 79 FERC ] 61,321 (1997)
(Merger Policy Statement); see also Revised Filing Requirements
Under Part 33 of the Commission's Regulations, Order No. 642, 65 FR
70984 (Nov. 28, 2000), FERC Stats. & Regs., Regulations Preambles
July 1996-Dec. 2000 ] 31,111 (2000), order on reh'g, Order No. 642-
A, 94 FERC ] 61,289 (2001).
    \12\ 18 CFR 33.2(j).
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2. Existing Blanket Authorizations and Case-Specific Approvals
    29. Under section 203(a)(5), the Commission is authorized to
identify classes of transactions that meet these standards and provide
expedited review for such transactions. Pursuant to this authority, the
Commission has granted blanket authorizations in its regulations,
thereby pre-authorizing certain transactions.\13\ However, as it is an
ex ante determination as to the appropriateness of a category of
transactions under section 203, a blanket authorization can be granted
only after the Commission is assured that the statutory standards will
be met, including ensuring that the interests of captive customers are
safeguarded and that public utility assets are protected under all
circumstances.\14\
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    \13\ See Order No. 669, FERC Stats. & Regs. ] 31,200, at P 141
(2005), order on reh'g, Order No. 669-A, FERC Stats. & Regs. ]
31,214, at P 55-133, order on reh'g, Order No. 669-B, FERC Stats. &
Regs. ] 31,225, at P 24-44 (2006). See also Order No. 708, 73 FR
11003 (Feb. 29, 2008), FERC Stats. & Regs. ] 31,265, order on reh'g,
Order No. 708-A, 73 FR 43066 (Jul. 24, 2008), FERC Stats. & Regs. ]
31,273 (2008).
    \14\ FPA Section 203 Supplemental Policy Statement, FERC Stats.
& Regs. ] 31,253, at P 33 (2007).
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    30. For instance, a blanket authorization has been granted under
section 203(a)(2) for an acquisition of less than 10 percent of the
outstanding voting securities of a public utility.\15\ In granting a
blanket authorization for acquisitions of less than 10 percent of the
voting securities of a utility, the Commission determined that such a
blanket authorization would be consistent with the public interest and
Congressional intent in repealing the Public Utility Holding Company
Act of 1935 (PUHCA 1935) and encouraging incentives for additional
investment.\16\ In considering a parallel blanket authorization under
section 203(a)(1), the Commission declared a general policy, to be
applied on a case-by-case basis, of presuming that a transfer of less
than 10 percent of a public utility's outstanding voting securities is
not a transfer of control if: (1) After the transaction, the acquirer
and its affiliates and associate companies, directly or indirectly, in
aggregate will own less than 10 percent of the outstanding voting
securities of such public utility; and (2) the facts and circumstances
do not indicate that such companies would be able to directly or
indirectly exercise a controlling influence over the management or
policies of the public utility.\17\
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    \15\ 18 CFR 33.1(c)(2)(ii).
    \16\ Order No. 669, FERC Stats. & Regs. ] 31,200, at P 145.
    \17\ FPA Section 203 Supplemental Policy Statement, FERC Stats.
& Regs. ] 31,253, at P 57.
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    31. In several recent section 203 cases, the Commission has relied
upon an applicant's eligibility to file statements of beneficial
ownership with the SEC on Schedule 13G as one factor in the
Commission's section 203 analysis of control.\18\ Under section
13(d)(1) of the 1934 Act and the SEC's rules thereunder,\19\ any person
who acquires beneficial ownership of more than five percent of any
voting equity security of a class that is registered under section 12
of the 1934 Act (which would include securities that are listed for
trading on a national securities exchange) must, within 10 days of such
acquisition, file a statement on SEC Schedule 13D with the SEC
containing information about the acquiring person and the amount of
securities acquired, the source of the funds used to complete the
acquisition, whether the purpose for the acquisition is to acquire
control, and whether there are any contracts or understandings with
respect to the securities acquired relating to various types of
transactions, and such other information as the SEC may by rules and
regulations prescribe as necessary and appropriate in the public
interest or for the protection of investors. However, as noted above,
the SEC's rules allow so-called ``passive investors'' to instead file a
much abbreviated disclosure statement on Schedule 13G.\20\
---------------------------------------------------------------------------

    \18\ See, e.g., Horizon Asset Mgmt., Inc., 125 FERC ] 61,209, at
P 45-50 (2008) (Horizon); Goldman Sachs, 121 FERC ] 61,059, at P 30-
41; Morgan Stanley, 121 FERC ] 61,060, at P 37-49 (2007), clarified,
122 FERC ] 61,094 (2008) (Morgan Stanley); Legg Mason, Inc., 121
FERC ] 61,061, at P 26-30 (2007) (Legg Mason); Capital Research, 116
FERC ] 61,267, at P 16-20.
    \19\ 17 CFR 240.13d-1 et seq.
    \20\ See 17 CFR 240.13d-1(c). See also discussion at n.6.
---------------------------------------------------------------------------

    32. A ``passive investor'' filing Schedule 13G certifies only that
the securities that are the subject of the filing ``were not acquired
and are not held for the purpose of or with the effect of changing or
influencing the control of the issuer of the securities and were not
acquired and are not held in connection with or as a participant in any
transaction having that purpose or effect.'' The SEC defines
``control'' as ``the possession, direct or indirect, of the power to
direct or cause the direction of the management and policies of a
person, whether through the ownership of voting securities, by
contract, or otherwise.'' \21\ The Schedule 13G also does not provide
information regarding the investor's other holdings. While the
Commission has considered an applicant's eligibility to file a Schedule
13G with the SEC an indication that the applicant will not be able to
assert control over a public utility, the Commission has not accepted
Schedule 13G eligibility as a definitive statement regarding
control.\22\
---------------------------------------------------------------------------

    \21\ 17 CFR 240.12b-2.
    \22\ FPA Section 203 Supplemental Policy Statement, FERC Stats.
& Regs. ] 31,253, at P 41.
---------------------------------------------------------------------------

3. Proposal
    33. The Commission proposes to amend 18 CFR Part 33 (Applications
Under Federal Power Act section 203) to provide a new blanket
authorization under section 203(a)(2) for a holding company to acquire
10 percent or more, but less than 20 percent, of the

outstanding voting securities of a public utility, provided that the
holding company files an Affirmation, on Form 519-C, within 10 days of
the acquisition of such voting securities. The Affirmation would create
a rebuttable presumption for purposes of section 203 that the investor
does not control the public utility where the holding company acquires
10 percent or more, but less than 20 percent of the voting securities
of the public utility. Therefore, the Commission believes that the
acquisition by the holding company, and the disposition by the public
utility, of 10 percent or more, but less than 20 percent of voting
securities, with the filing of the Affirmation, will not harm
competition, rates, regulation or captive customers. However, as
explained above, the Affirmation is a representation by the filer and
does not operate as a conclusive finding that the investor does not
control the public utility, which the Commission finds would be
necessary for an ownership interest of 10 percent or more, and less
than 20 percent, of the outstanding voting securities of a public
utility to fall outside of the definition of affiliate. Thus, while the
affected companies are still considered technically affiliates, the
affected companies would qualify for a waiver of the regulatory
requirements pertaining to affiliated companies. The Commission seeks
comments on this proposal.
    34. The Commission also proposes to amend 18 CFR Part 33 to provide
a parallel blanket authorization under FPA section 203(a)(1). Under the
proposed section 203(a)(1) blanket authorization, a public utility
whose outstanding voting securities are acquired in a transaction that
falls within the proposed 203(a)(2) blanket authorization would be pre-
authorized under 203(a)(1) to dispose of those securities. We believe
that these new blanket authorizations, along with the proposed revised
definitions of ``affiliate'' in Part 35 discussed in further detail
below, will address EPSA's concerns, while at the same time provide the
Commission with a mechanism to ensure that acquisitions are consistent
with the public interest under section 203, are subject to effective
monitoring, and do not present concerns under the Commission's market-
based rate program. We believe that this proposal also addresses
concerns raised by the FTC, APPA/NRECA, AAI, and TAPS, because the
Affirmation will require the investor to abide by commitments to not
take specific actions that would unduly influence the management of the
utility, interfere with the operation of the utility's facilities, or
request or receive non-public information. We seek comments on this
proposal.
a. Affirmation in Support of Exemption From Affiliation Requirements
    35. EPSA's proposal relies on the filing of SEC Schedule 13G to
demonstrate conclusively that an investor will not control the public
utility in which it has invested. While the Commission has relied on
these filings, in conjunction with other conditions and reporting
requirements in the past for various purposes, we believe the
Commission could better fulfill its statutory responsibilities if it
did not rely exclusively on the Schedule 13G. The primary regulatory
purpose of the beneficial ownership disclosure requirements under
section 13(d) of the 1934 Act is to provide companies and their
shareholders with information about large accumulations of a company's
stock, which could be indicative of a possible takeover attempt which,
in turn, could affect the market value of the issuer's securities. The
requirements of section 13(d) do not bar an investor from acquiring
control of a company, which is of utmost importance to this Commission.
    36. Therefore, the Commission proposes that, to be eligible for the
new blanket authorizations, the investor must file an Affirmation,
which, as more fully described below, will serve a similar purpose to
SEC Schedule 13G. As is the case with Schedule 13G, the investor, by
signing the Affirmation, certifies that the securities referred to in
the filing were not acquired and are not held for the purpose of or
with the effect of changing or influencing the control of the issuer of
the securities and were not acquired and are not held in connection
with or as a participant in any transaction having that purpose or
effect. The Affirmation will provide information on the number of
shares of voting securities (and percent of the total shares
outstanding) of the public utility in respect of which the statement is
filed. In addition, the Affirmation must include the name and location
of any other public utility that is an affiliate of the investor and a
description and the location of ``inputs to electric power production''
(as defined in section 35.36(a)(4) of the Commission's regulations)
that are owned or controlled by the investor or by any affiliate of the
investor. This latter information (which would not be disclosed in a
Schedule 13G filing) will assist the Commission in its task of ensuring
that investment in a public utility does not, in fact, create
opportunities or incentives for the investor or the public utility to
engage in anti-competitive conduct. To be eligible for the blanket
authorizations, an investor would need to file an Affirmation for each
public utility in which the investor acquired securities.
    37. In addition, by filing an Affirmation, the investor makes
certain additional commitments. Specifically, the investor certifies
that the acquisition was not for the purpose, or with the effect, of
changing or influencing control over the public utility, and also
commits:
     Not to seek or accept representation on the public
utility's board of directors or otherwise serve in any management
capacity;
     Not to request or receive non-public information, either
directly or indirectly, concerning the business or affairs of the
public utility;
     Not to solicit, or participate in any solicitation of,
proxies involving the public utility; and
     Not to seek to influence the management or conduct of the
day-to-day operations of the public utility in such areas as
    [cir] Purchasing or selling electricity or inputs to generation,
    [cir] Scheduling power production, including, but not limited to,
the dispatching of generation units or scheduling outages,
    [cir] Hiring or fixing compensation of the public utility's
officers, directors and employees.\23\
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    \23\ These restrictions are similar to, and in fact, based on,
restrictions that the Commission has imposed in orders approving 10
percent or greater investments in utilities. See Cascade Investment,
LLC, 129 FERC ] 61,011, at P 20-21 (2009); Mach Gen, LLC, 127 FERC ]
61,127, at P 24-31 (2009); Franklin Resources, Inc., 126 FERC ]
61,250, at P 21 (2009), order on reh'g, 127 FERC ] 61,224 (2009);
Entegra Power Group LLC, 125 FERC ] 61,143, at P 40 (2008), order on
clarification and reh'g denied, 129 FERC ] 61,156 (2009).

It is not intended that these restrictions would preclude the exercise
of voting rights on any matter properly submitted for a vote of
shareholders.
    38. We propose to require that the Affirmation be filed within 10
days after the acquisition, that a copy thereof be provided to the
company whose securities have been acquired, and that the information
provided on share ownership in the initial filing be updated
quarterly.\24\
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    \24\ This ongoing reporting obligation is also consistent with
other Part 33 reporting requirements, as well as quarterly reporting
obligations that the Commission routinely imposes under its section
203 orders granting blanket authorizations. See, e.g., 18 CFR
33.1(c)(4); Horizon, 125 FERC ] 61,209 at P 49; Goldman Sachs, 122
FERC ] 61,005 (2008).

---------------------------------------------------------------------------

    39. Consistent with the case-specific blanket authorizations under
section 203(a)(2),\25\ the Commission believes that a blanket
authorization for the acquisition of 10 percent or more, but less than
20 percent, of the outstanding voting securities of a utility, limited
by the commitments of non-control set forth in the proposed
Affirmation, would not result in any adverse effect on competition,
rates, or regulation, or 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. Under the companion blanket
authorization under section 203(a)(1) that we are proposing, a public
utility whose securities are acquired in a transaction that falls
within the proposed 203(a)(2) blanket authorization would have no
obligation to seek approval under section 203(a)(1). This parallel
treatment of control issues under section 203(a)(1) with blanket
authorizations under section 203(a)(2) follows the same approach that
we have previously taken in Part 33 \26\ and is also consistent with
blanket authorizations that we have granted by order.\27\
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    \25\ See Horizon, 125 FERC ] 61,209; Capital Research, 116 FERC
] 61,267 (2006).
    \26\ See, e.g., 18 CFR 33.1(c)(11)-(15).
    \27\ See, e.g., Morgan Stanley, 121 FERC ] 61,060 at P 34; Legg
Mason, 121 FERC ] 61,061 at P 18.
---------------------------------------------------------------------------

b. Administration of Proposed Affirmation in Support of Exemption From
Affiliation Requirements
    40. Given the nature of the transaction, the limited ownership
interest of the reporting person, and the continuing nature of the
conditions and reporting obligations imposed (as described above), the
Affirmation will enable the Commission to monitor the new affiliations
that are created and provide the Commission with a sufficient basis to
conclude that a transaction that is the subject of an Affirmation is
consistent with the public interest because it will not have an adverse
effect on competition, rates or effective regulation, or result in
inappropriate cross-subsidization or an inappropriate pledge or
encumbrance of utility assets. The Commission believes that the
information, representations and commitments required of, and the
conditions imposed on, the filer of the Affirmation (including the
obligation to file quarterly updates to ownership of the issuer's
voting securities) are consistent with those requirements imposed on an
applicant seeking case-by-case section 203 authorization for a similar
transaction. Specifically, the information provided in the Affirmation
is the same or similar to the information that would be required by
section 33.2(a) of the Commission's regulations (name and business
address of the reporting person), section 33.2(c)(2) (identity of and
ownership interests in other energy affiliates), section 33.2(e)
(description of the transaction, which, in the particular circumstances
covered by the proposed new blanket authorization, would always be an
acquisition of 10 percent or more but less than 20 percent of the
issuing public utility's outstanding voting securities), and section
33.2(i) (other regulatory approvals). Other specific information
requirements of an application under section 203 are unnecessary in the
case of any transaction that is the subject of an Affirmation. For
example, specific disclosure otherwise required by section 33.2(c)(5)
of the Commission's regulations (identity of common officers or
directors of parties to the transaction) is unnecessary since such
management interlocks are precluded by the conditions imposed on the
reporting person under the Affirmation. Similarly, statements
concerning the impact of the transaction on the public interest and on
competition, rates and regulation and whether the transaction will
result in inappropriate cross-subsidization or an inappropriate pledge
or encumbrance of utility assets, which would be required by sections
33.2(g) and 33.2(j) of the Commission's regulations in an application
under section 203, are unnecessary given the specific conditions and
restrictions imposed on the reporting person. Finally, the information
contained in the initial Affirmation and quarterly updates will provide
the Commission with the means to monitor the new affiliations created
by any transaction that is the subject of an Affirmation and, to take
further action as necessary.
    41. The Commission seeks further comments on the procedures that
should be in place to protect consumers and the marketplace if an
investor, having filed an Affirmation, no longer can comply, or wishes
not to comply, with the commitments made in the Affirmation. In the
context of section 203, the Commission is proposing that, in any such
case, the investor may file an application under section 203 to request
authorization to retain the securities previously acquired under the
blanket authorization if the investor determines that it no longer
wishes to be bound by the terms of the commitments it has made in the
Affirmation. During the pendency of any such proceeding, the investor
may not acquire any additional voting securities of the public utility
and must continue to comply with all of the commitments made in the
Affirmation. In addition, depending on the final disposition of the
section 203 application, the public utility may be required to file a
notice of change in status and the restrictions on affiliate
transactions may become applicable.
c. Applicability of Proposed Blanket Authorization
    42. EPSA's request for guidance related only to acquisitions of
voting securities of publicly-held companies, that is, securities that
are registered under section 12 of the 1934 Act and, therefore, subject
to the beneficial ownership reporting requirements of section 13(d) of
the 1934 Act. The Commission's proposed blanket authorization, however,
makes no distinction between the securities of publicly-traded
utilities or securities of privately-held utilities. On the one hand,
this approach might be reasonable because the distinction between
public utilities whose securities are publicly-held and public
utilities whose securities are privately-held is not critical to the
issues of control presented under the FPA, and the affirmations and
ongoing commitments made in the form of Affirmation annexed hereto are
not in any way dependent upon the status of the issuer as a publicly-
held company. We note that Harbinger argues that the distinction that
EPSA would make between publicly-traded securities and securities of
privately-held companies would lead to a nonsensical situation, namely,
that in the case where an investor owns interests in both non-publicly-
held and publicly-held utilities, the non-publicly-held utility would
have to presume an affiliation that the publicly-held utility would
not.\28\
---------------------------------------------------------------------------

    \28\ Harbinger comments at 16-17 (EL08-87-000) (September 30,
2008).
---------------------------------------------------------------------------

    43. On the other hand, expanding EPSA's request to apply to voting
securities of privately-held utilities may impact existing blanket
authorizations and their related conditions. For example, if the
blanket authorizations under section 203 that we are proposing today
could be relied upon for transactions that have previously been
authorized by order,\29\ then the

conditions imposed in those orders, to limit the adverse impact on
competition and create transparency through reporting requirements,
would arguably no longer apply.\30\
---------------------------------------------------------------------------

    \29\ Specifically, in a series of orders, the Commission granted
blanket authorizations for a period of two years for acquisitions
and holdings of up to 20 percent of the voting securities of certain
public utilities. Although the Commission made no findings on
whether the acquisition of securities would result in a transfer of
control of the public utility, it imposed conditions to address
concerns over transfers in control and potential adverse effects on
competition. Among these conditions is a requirement that the
acquiring party must be a financial-type entity and not primarily
engaged in an energy-related business. The Commission also
restricted the acquiring party from holding more than five percent
of another jurisdictional asset within the same market area. In
addition, the Commission imposed certain reporting requirements on
the public utility disposing of its securities under such a blanket
authorization. See, e.g., Entegra Power Group, LLC, 115 FERC ]
62,038 (2006) (delegated letter order); MACH Gen, LLC, 113 FERC ]
61,138 (2005).
    \30\ Because the securities of these companies are traded
privately and therefore there is less transparency of ownership
interests, the Commission conditioned approval of requests for
authorizations by imposing reporting requirements. MACH Gen, 113
FERC ] 61,138 at P 40.
---------------------------------------------------------------------------

    44. As proposed herein, the proposed blanket authorizations make no
distinctions between the securities of publicly-traded utilities or
securities of privately-held utilities. The Commission invites comment
on whether its proposed blanket authorizations under section 203 should
be limited to acquisitions of voting securities of publicly-traded
utilities, or whether the proposed blanket authorizations should apply
to acquisitions of voting securities of privately-traded companies as
well.
    45. Further, although the affiliate compliance issues that EPSA
focused on in its petition result largely from secondary market
purchases of a public utility's voting securities, the rules that we
are proposing under Part 33 make no distinctions between secondary
market purchases and direct acquisitions of securities from the issuing
public utility. The Commission invites comment on whether the proposed
blanket authorizations under section 203 should be limited to secondary
market transactions or should apply regardless of the form of the
transaction.
d. Filing of Affirmation in Support of Exemption From Affiliation
Requirements
    46. Most filings made under the blanket authorizations in Part 33
are submitted in dockets established for each blanket authorization,
which are updated by year. For instance, a Schedule 13D, Schedule 13G,
or Form 13F filed under 18 CFR Sec.  33.1(c)(4) would be submitted in
Docket No. HC09-5, if submitted in 2009, and Docket No. HC10-5, if
submitted in 2010. For consistency, the Commission is proposing that
one docket should be established for filing of all Affirmations and
quarterly updates. In addition, because the acquisition of 10 percent
or more of the outstanding voting securities of a public utility is
likely to have broad implications for that company, the Commission is
also proposing that the filer of an Affirmation be required to provide
a paper copy of the Affirmation to the public utility whose securities
are acquired at the same time as it is filed with the Commission. The
Commission invites comment on these proposals.

C. Definition of Affiliate

1. Market-Based Rate Program
a. Market Power Analysis
    47. Under the market-based rate regulations, an ``affiliate'' of a
specified company includes, among other things, ``[a]ny person that is
under common control with the specified company.'' \31\ The Commission
allows power sales at market-based rates if the seller and its
affiliates lack or have adequately mitigated both horizontal and
vertical market power. The Commission adopted two indicative screens
for assessing horizontal market power, the pivotal supplier screen and
the wholesale market share screen, both of which consider the
generation assets owned or controlled by the seller and its affiliates.
If a seller passes both of the screens, there is a rebuttable
presumption that the seller lacks horizontal market power.
---------------------------------------------------------------------------

    \31\ Order No. 697-A, 73 FR 25832 (May 7, 2008), FERC Stats. &
Regs. ] 31,268, at P 182-83. ``[O]wning, 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.'' 18 CFR 35.36(a)(9)(E).
---------------------------------------------------------------------------

    48. To demonstrate a lack of vertical market power, a seller that
owns, operates or controls transmission facilities, or whose affiliates
own, operate or control transmission facilities, must have an Open
Access Transmission Tariff (OATT) on file with the Commission. The
Commission also considers a seller's ability to erect other barriers to
entry as part of the vertical market power analysis. The Commission
requires a seller to provide information describing its ownership or
control of, or affiliation with an entity that owns or controls, inputs
to electric power production.\32\ A seller must also make an
affirmative statement that it has not erected barriers to entry into
the relevant market and will not erect barriers to entry into the
relevant market.
---------------------------------------------------------------------------

    \32\ Inputs to electric power production means intrastate
natural gas transportation, intrastate natural gas storage or
distribution facilities; sites for generation capacity development;
physical coal supply sources and ownership or control over who may
access transportation of coal supplies.
---------------------------------------------------------------------------

b. Change in Status Reporting
    49. As a condition of obtaining and retaining market-based rate
authority, sellers must timely report to the Commission ``any change in
status that would reflect a departure from the characteristics the
Commission relied upon in granting market-based rate authority.'' \33\
The Commission clarified in Order No. 697 that the change in status
requirements are intended to track the requirements embedded in the
horizontal and vertical analyses and the affiliate abuse
representations.\34\ Market-based rate sellers are required to file
notices of change in status for ownership or control of generation
capacity that results in net increases of 100 MW or more, or of inputs
to electric power production, or ownership, operation or control of
transmission facilities. In addition, ``[a]ffiliation with any entity
not disclosed in the application for market-based rate authority that
owns or controls generation facilities or inputs to electric power
production, affiliation with any entity not disclosed in the
application for market-based rate authority that owns, operates or
controls transmission facilities, or affiliation with any entity that
has a franchised service area'' are reportable changes in status.\35\
In Order No. 652, the Commission concluded that the reporting
obligation should extend only to changes in circumstances within the
knowledge and control of the seller.\36\
---------------------------------------------------------------------------

    \33\ 18 CFR 35.42(a).
    \34\ See Order No. 697, 72 FR 39904 (Jul. 20, 2007), FERC Stats.
& Regs. ] 31,252 at P 1018.
    \35\ 18 CFR 35.42(a)(2).
    \36\ Reporting Requirement for Changes in Status for Public
Utilities with Market-Based Rate Authority, Order No. 652, 70 FR
8253 (Feb. 18, 2005), FERC Stats. & Regs. ] 31,175, at P 27 (2005),
order on reh'g, 111 FERC ] 61,413 (2005).
---------------------------------------------------------------------------

    50. When submitting a notice of change in status regarding a change
that impacts the pertinent assets held by a seller or its affiliates
with market-based rate authorization, a seller must also include an
asset appendix, which lists the filing entity and all of its energy
affiliates and their associated generation assets as well as electric
transmission assets, natural gas intrastate pipelines, and gas storage
facilities owned or controlled by the entity or its energy
affiliates.\37\
---------------------------------------------------------------------------

    \37\ Part 35, Subpart H, Appendix B. An asset appendix is
required for new market-based rate applications and updated market
analyses.
---------------------------------------------------------------------------

c. Affiliate Restrictions
    51. The concept of affiliation is also important in determining the
scope of the Commission's restrictions on affiliate transactions. The
Commission

has adopted restrictions on affiliates in the market-based rate
regulations.\38\ These regulations govern 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.
---------------------------------------------------------------------------

    \38\ These rules are codified at 18 CFR 35.39.
---------------------------------------------------------------------------

    52. The Commission has also adopted cross-subsidization
restrictions on affiliate transactions in Subpart I of its regulations,
as discussed further below.\39\ These regulations govern 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.
---------------------------------------------------------------------------

    \39\ These rules are codified at 18 CFR 35.43 and 35.44.
---------------------------------------------------------------------------

    53. Both sets of rules regulate affiliate transactions to address
the Commission's concern that a franchised public utility and an
affiliate may be able to engage in transactions in ways that transfer
benefits from the captive customers of the franchised public utility to
the affiliate and its shareholders.\40\ Any changes to the definition
of affiliate would necessarily affect the scope of both of these sets
of restrictions.
---------------------------------------------------------------------------

    \40\ For a discussion see Cross-Subsidization Restrictions on
Affiliate Transactions, Order No. 707, 73 FR 11013 (Feb. 29, 2008),
FERC Stats. & Regs. ] 31,264, at P 4-5, order on rehearing, Order
No. 707-A, 73 FR 43072 (Jul. 24, 2008), FERC Stats. & Regs. ] 31,272
(2008).
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d. Other Implications of Affiliation in the Market-Based Rate Program
    54. Affiliation also plays a key role in determining whether a
seller qualifies as a Category 1 Seller, a limited category that is
exempt from the requirement of filing a regularly scheduled updated
market power analysis every three years.\41\ A Category 1 Seller cannot
be affiliated with an entity that owns, operates or controls
transmission facilities in the same region as the seller's generation
assets and cannot be affiliated with a franchised public utility in the
same region as the seller's generation assets. Moreover, a Category 1
Seller can only own or control 500 MW or less of generation in a
region. Affiliate generation is included in the 500 MW or less
determination. Finally, in order to qualify as a Category 1 Seller, a
seller cannot raise ``other vertical market power issues.'' In that
regard, the Commission will consider whether the seller's affiliate has
holdings that raise vertical market power issues and can erect barriers
to entry.
---------------------------------------------------------------------------

    \41\ 18 CFR 35.36(a)(2).
---------------------------------------------------------------------------

2. Cross-Subsidization Restrictions on Affiliate Transactions
    55. In Order No. 707, the Commission added Subpart I to Part 35 of
its regulations to codify affiliate restrictions 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. The Commission also promulgated
pricing restrictions on the sale of non-power goods and services.\42\
For purposes of Subpart I, the Commission also adopted a definition of
``affiliate.'' \43\ As is the case with the definition of ``affiliate''
in Subpart H, an ``affiliate'' of a specified company for purposes of
Subpart I includes ``[a]ny person that is under common control with the
specified person.'' \44\
---------------------------------------------------------------------------

    \42\ These rules are codified at 18 CFR 35.44.
    \43\ 18 CFR 35.43(a)(1).
    \44\ 18 CFR 35.43(a)(1)(D). The definitions of the term
``affiliate'' in Subpart H and Subpart I differ in other respects,
such as the definition in Subpart I has a five percent threshold for
affiliation for exempt wholesale generators, due principally to the
fact that definitions were adopted in parallel rulemakings that were
not synchronized. As discussed below, the Commission is proposing
herein to conform the definition of ``affiliate'' used in Subpart I
to the definition (as proposed to be amended) used in Subpart H. The
five percent threshold for affiliation for exempt wholesale
generators under Subpart H was eliminated in Order No. 697-B, FERC
Stats. & Regs. ] 31,285, at P 48, and we propose to eliminate that
separate threshold under Subpart I here, for the same reasons.
---------------------------------------------------------------------------

3. Proposal
    56. Under the Commission's current rules, an investor is an
``affiliate'' of a public utility if it ``owns, controls, or holds with
power to vote'' 10 percent or more of the public utility's outstanding
voting securities. Also under this analysis, the public utility is
considered to be an affiliate of the investor, and two companies under
common control are also considered affiliates. Owning, controlling or
holding with power to vote less than 10 percent of the outstanding
voting securities of a specified public utility company creates a
rebuttable presumption of lack of control.
    57. The Commission proposes to modify this definition so that an
affiliate relationship exists when an investor is able to control a
public utility. The proposed definition also provides that the
Commission may, after appropriate notice and opportunity for hearing,
determine that any person is an affiliate of a specified company if it
finds that such person exercises directly or indirectly (either alone
or pursuant to an arrangement or understanding with one or more
persons) such a degree of influence (through ownership of voting
securities or otherwise) over the management or policies or operations
of the specified company as to make it necessary or appropriate in the
public interest that the person be treated as an affiliate. Owning,
controlling, or holding with power to vote less than 10 percent of the
outstanding voting securities would continue to create a rebuttable
presumption of lack of control.
    58. Under the proposed amendments to Part 33, owning, controlling,
or holding with power to vote 10 percent or more, but less than 20
percent, of the outstanding voting securities, as long as the
Affirmation had been filed within 10 days after the acquisition, would
create an affiliate relationship, but would qualify for a waiver of the
regulatory requirements pertaining to affiliated companies.
    59. As a consequence of this modified definition, a public utility
subject to the Affirmation in Part 33 would not be required to file a
notice of change in status or include the investor or the investor's
other affiliates in its market power analysis, and would not be subject
to the affiliate transaction rules for transactions with the investor
or the investor's other affiliates. The Commission proposes these
changes because it believes that the commitments required by the
Affirmation, and the Commission's related enforcement of those
commitments, will be rigorous enough to ensure adequate oversight of
public utilities and protection of utility customers.
    60. The Commission proposes to adopt the same definition of
``affiliate'' for purposes of the cross-subsidization rules in Subpart
I so that the definitions of ``affiliate'' in Subparts H and I are
consistent. We believe that the proposed changes to the definition of
``affiliate'' in the cross-subsidization regulations will not adversely
impact our ability to protect against cross-subsidization. In
connection with these changes, the Commission is also proposing to add
a definition of ``voting security'' to both section 35.36 and section
35.43. As proposed, the term ``voting security'' would mean ``any
security presently entitling the owner or holder thereof to vote in the
direction or management of the affairs of a company.'' This is the same
meaning as given under the Public Utility Holding Company Act of
2005.\45\

Comment is also requested on this proposal.
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    \45\ 42 U.S.C. 16451(17) (2006); see also AES Creative
Resources, L.P., 129 FERC ] 61,239, at P 24 (2009) (confirming that
the term ``voting security,'' as used in the market-based rate
regulations, was intended to have the same meaning as the definition
of ``voting security'' adapted from the PUHCA 1935 and set forth in
PUHCA 2005).
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    61. We note that this framework will apply to public utilities
whose outstanding voting securities have been acquired by a holding
company that has filed an Affirmation as part of the blanket
authorization under section 203. However, where the investor is not a
holding company and therefore not subject to section 203(a)(2), the
investor will not have filed an Affirmation with the Commission, and
the public utility will be affiliated with the investor and its other
holdings,\46\ raising concerns related to the requirements of the
market-based rate program discussed above. To address this situation,
the Commission proposes to allow investors that are not subject to the
blanket authorizations proposed above to also file the Affirmation with
the Commission. Such an investor may have an incentive to file the
Affirmation to protect the market-based rate authorization of the
public utility in which it has invested. The public utility would then
be relieved of the requirements discussed above. The Commission invites
comment on its proposal.
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    \46\ To the extent that the investor has holdings in, and the
public utility becomes affiliated with, a company that controls, for
instance, sources of coal supplies and the transportation of coal
supplies such as barges and rail cars, then the public utility must
account for these inputs in its market power analysis. 18 CFR 35.37.
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IV. Information Collection Statement

    62. The Office of Management and Budget's (OMB) regulations require
that OMB approve certain information collection and data retention
requirements imposed by agency rules.\47\ Therefore, the Commission is
submitting the proposed modifications to its information collections to
OMB for review and approval in accordance with section 3507(d) of the
Paperwork Reduction Act of 1995.\48\
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    \47\ 5 CFR 1320.
    \48\ 44 U.S.C. 3507(d).
---------------------------------------------------------------------------

    63. The ``public protection'' provisions of the Paperwork Reduction
Act of 1995 require each agency to display a currently valid control
number and inform respondents that a response is not required unless
the information collection displays a valid OMB control number on each
information collection or provides a justification as to why the
information collection control number cannot be displayed. In the case
of information collections published in regulations, the control number
is to be published in the Federal Register.
    64. The Commission is proposing amendments to the Commission's
regulations to provide for limited blanket authorizations under FPA
section 203(a)(1) and FPA section 203(a)(2). Although the Affirmation
constitutes a new reporting requirement, it is offset by the reduction
in applications under section 203 and related reporting requirements
under section 205 under the market-based rate program. In lieu of a
section 203 application, the Affirmation would need to be filed with
the Commission, reducing the filing burden. Moreover, the related
filings under the market-based rate program under section 205, such as
the notices of change in status, would also decrease. This would reduce
the burden on the electric industry because it will reduce the number
of filings that need to be made with the Commission.
    65. The Commission estimates there will be 10 initial filers each
filing an average of 1.2 Affirmations annually with an estimated time
of response of 3.5 hours, for a total of 42 hours. The Commission
further estimates that there will be 40 annual updates to the initial
filings with an estimated time of response of 1 hour each, for a total
of 40 hours. Therefore the Affirmation would create a total reporting
burden of 82 hours annually. Since the Affirmation is voluntary for
holding companies that wish to avoid filing a complete application of
approval under section 203(a)(2) of the FPA, the Commission believes
the preparation of the Affirmation will consume less time than
preparation of an application for approval under section 203(a)(2).
    Title: FERC-519C, Applications Under Federal Power Act Section 203;
FERC-516, Electric Rate Schedule Filings.
    Action: Proposed Collection.
    OMB Control No.: To be determined by OMB following issuance of the
final rule.
    Respondents: Businesses or other for-profit institutions.
    Frequency of Responses: Occasionally.
    Necessity of the Information: The Commission is proposing limited
blanket authorizations under section 203(a)(1) and section 203(a)(2),
providing for a category of jurisdictional transactions under section
203 for which the Commission would not require applications seeking
prior approval. Under the proposed blanket authorization, the public
utility whose securities are acquired would be exempt from the
requirements of the market-based rate program and restrictions on
affiliate transactions under Part 35. The information collected
pursuant to this Affirmation will allow the Commission to monitor
public utility holding companies that are granted an exemption of
affiliate reporting requirements and to ensure that a holding company's
acquisitions and subsequent conduct are consistent with the public
interest. Commission enforcement staff may periodically review and seek
to verify the statements made in filed Affirmations.
    Internal Review: The Commission has conducted an internal review of
the public reporting burden associated with the collection of
information and assured itself, by means of internal review, that there
is specific, objective support for its information burden estimate.
    66. Interested persons may obtain information on the reporting
requirements by contacting the following: Federal Energy Regulatory
Commission, 888 First Street, NE., Washington, DC 20426 [Attention:
Michael Miller, Office of the Executive Director, Phone: (202) 502-
8415, fax:<PHONE_NUMBER>, e-mail<EMAIL_ADDRESS>    67. For submitting comments concerning the collection(s) of
information and the associated burden estimate(s), please send your
comments to the contact listed above and to the Office of Information
and Regulatory Affairs, Office of Information and Regulatory Affairs,
Washington, DC 20503 [Attention: Desk Officer for the Federal Energy
Regulatory Commission, phone<PHONE_NUMBER>, fax:<PHONE_NUMBER>, e-
mail<EMAIL_ADDRESS>
V. Environmental Analysis

    68. 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.\49\ The
Commission has categorically excluded certain actions from this
requirement as not having a significant effect on the human
environment. The proposed regulations are categorically excluded as
they address actions under section 203 \50\ and section 205.\51\
Accordingly, no environmental assessment is necessary

and none has been prepared in this NOPR.
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    \49\ Regulations Implementing the National Environmental Policy
Act of 1969, Order No. 486, FERC Stats. & Regs., Regulations
Preambles 1986-1990 ] 30,783 (1987).
    \50\ 18 CFR 380.4(a)(16).
    \51\ 18 CFR 380.4(a)(15).
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VI. Regulatory Flexibility Act Analysis

    69. The Regulatory Flexibility Act of 1980 (RFA) \52\ generally
requires a description and analysis of final rules that will have
significant economic impact on a substantial number of small entities.
The RFA mandates consideration of regulatory alternatives that
accomplish the stated objectives of a proposed rule and that minimize
any significant economic impact on a substantial number of small
entities. Most filing companies regulated by the Commission do not fall
within the RFA's definition of small entity.\53\ Moreover, as noted
above, this proposed rule provides for a blanket authorization under
section 203 that would extend to an exemption from certain filing
requirements under Part 35 of the Commission's regulations. Thus,
filing requirements are reduced by the rule. Therefore, the Commission
certifies that the proposed rule will not have a significant economic
impact on a substantial number of small entities. As a result, no
regulatory flexibility analysis is required.
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    \52\ 5 U.S.C. 601-12.
    \53\ 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.
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VII. Comment Procedures

    70. The Commission invites interested persons to submit comments on
the matters and issues proposed in this notice to be adopted, including
any related matters or alternative proposals that commenters may wish
to discuss. Comments are due March 29, 2010. Comments must refer to
Docket No. RM09-16-000, and must include the commenters' name, the
organization they represent, if applicable, and their address in their
comments.
    71. The Commission encourages comments to be filed electronically
via the eFiling link on the Commission's Web site at http://
www.ferc.gov. The Commission accepts most standard word processing
formats. Documents created electronically using word processing
software should be filed in native applications or print-to-PDF format
and not in a scanned format. Commenters filing electronically do not
need to make a paper filing.
    72. Commenters that are not able to file comments electronically
must send an original and 14 copies of their comments to: Federal
Energy Regulatory Commission, Secretary of the Commission, 888 First
Street, NE., Washington, DC 20426.
    73. All comments will be placed in the Commission's public files
and may be viewed, printed, or downloaded remotely as described in the
Document Availability section below. Commenters on this proposal are
not required to serve copies of their comments on other commenters.

VIII. Document Availability

    74. 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 the Commission's Home Page (http://www.ferc.gov) and
in the Commission'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.
    75. From the Commission'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.
    76. User assistance is available for eLibrary and the Commission'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
<EMAIL_ADDRESS>or the Public Reference Room at (202) 502-
8371, TTY<PHONE_NUMBER>. E-mail the Public Reference Room at
<EMAIL_ADDRESS>
List of Subjects

18 CFR Part 33

    Electric utilities, Reporting and recordkeeping requirements,
Securities.

18 CFR Part 35

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

    By direction of the Commission. Commissioner Norris voting
present.
Nathaniel J. Davis, Sr.,
Deputy Secretary.
    In consideration of the foregoing, the Commission proposes to amend
parts 33 and 35, Chapter I, Title 18, Code of Federal Regulations, as
follows:

PART 33--APPLICATIONS UNDER FEDERAL POWER ACT SECTION 203

    1. The authority citation for part 33 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; Pub. L. No. 109-58, 119 Stat. 594.

    2. Section 33.1 is amended by revising paragraphs (c)(2), (c)(12),
and (c)(17) to read as follows:

Sec.  33.1  Applicability, definitions, and blanket authorizations.

* * * * *
    (c) * * *
    (2) Any holding company in a holding company system that includes a
transmitting utility or an electric utility is granted a blanket
authorization under section 203(a)(2) of the Federal Power Act to
purchase, acquire, or take:
    (i) Any non-voting security (that does not convey sufficient veto
rights over management actions so as to convey control) in a
transmitting utility, an electric utility company, or a holding company
in a holding company system that includes a transmitting utility or an
electric utility company; or
    (ii) Any voting security in a transmitting utility, an electric
utility company, or a holding company in a holding company system that
includes a transmitting utility or an electric utility company if,
after the acquisition:
    (A) The holding company will own less than 10 percent of the
outstanding voting securities of such company; or
    (B) The holding company will own 10 percent or more but less than
20 percent of the outstanding voting securities of such company,
provided that such holding company has not acquired, and does not hold,
such securities for the purpose of or with the effect of changing or
influencing the control of the specified company, and has not acquired,
and does not hold, such securities in connection with or as a
participant in any transaction having that purpose or effect, and must
within 10 days following such acquisition file with the Commission an
Affirmation in Support of Exemption from Affiliation Requirements, Form
519-C, and provide a copy to such company.
    (1) The statement must be signed by a senior executive officer of
the company filing the statement, and must be verified under oath.
    (2) A public utility whose voting securities are acquired, directly
or indirectly, in a transaction described in paragraph (c)(2)(ii)(B) of
this section shall be exempt from the requirements of an ``affiliate''
in Part 35.
    (3) If a holding company that has filed with the Commission an
Affirmation in Support of Exemption from Affiliation Requirements
subsequently determines that it no longer wishes to be bound by the
commitments set forth in the Affirmation in Support of Exemption

from Affiliation Requirements, the holding company must either reduce
its ownership interest to below 10 percent of the outstanding voting
securities of the company that has issued such securities or file with
the Commission an application under section 203 of the Federal Power
Act to request authorization to retain such securities, provided that,
during the pendency of any application, it shall continue to comply
with all of the commitments made in the Affirmation in Support of
Exemption from Affiliation Requirements; or
    (iii) Any security of a subsidiary company within the holding
company system.
* * * * *
    (12) A public utility is granted a blanket authorization under
section 203(a)(1) of the Federal Power Act to transfer its outstanding
voting securities to:
    (i) Any holding company granted blanket authorizations in paragraph
(c)(2)(ii) of this section if, after the transfer, the holding company
and any of its associate or affiliate companies in aggregate will own:
    (A) Less than 10 percent of the outstanding voting securities of
such public utility, or
    (B) 10 percent or more and less than 20 percent of the outstanding
voting securities of such public utility, provided that the holding
company has complied with all requirements of paragraph (c)(2)(ii)(B)
of this section; or
    (ii) Any person other than a holding company if, after the
transfer, the person and any of its associate or affiliate companies in
aggregate will own:
    (A) Less than 10 percent of the outstanding voting securities of
the public utility and within 30 days after the end of the calendar
quarter in which such transfer has occurred the public utility notifies
the Commission in accordance with paragraph (c)(17) of this section, or
    (B) 10 percent or more but less than 20 percent of the outstanding
voting securities of the public utility, provided that the person has
filed Form 519-C and continues to abide by the commitments stated in
the form.
* * * * *
    (17) A public utility granted blanket authorization under paragraph
(c)(12)(ii)(A) of this section to transfer its outstanding voting
securities shall, within 30 days after the end of the calendar quarter
in which such transfer has occurred, file with the Commission a report
containing the following information:
    (i) The names of all parties to the transaction;
    (ii) Identification of the pre- and post-transaction voting
security holdings (and percentage ownership) in the public utility held
by the acquirer and its associate or affiliate companies;
    (iii) The date the transaction was consummated;
    (iv) Identification of any public utility or holding company
affiliates of the parties to the transaction; and
    (v) A statement indicating that the proposed transaction will not
result in, at the time of the transaction or in the future, cross-
subsidization of a non-utility associate company or pledge or
encumbrance of utility assets for the benefit of an associate company
as required in Sec.  33.2(j)(1).

PART 35--FILING OF RATE SCHEDULES AND TARIFFS

    3. 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.

    4. In Sec.  35.36, paragraph (a)(9) is revised, and paragraph
(a)(10) is added, to read as follows:

Sec.  35.36  Generally.

    (a) * * *
    (9) Affiliate of a specified company means any person that
controls, is controlled by, or is under common control with the
specified company.
    (i) 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) The Commission may, after appropriate notice and opportunity
for hearing, determine that any person is an affiliate of a specified
company if it finds that the person exercises directly or indirectly
(either alone or pursuant to an arrangement or understanding with one
or more persons) such a degree of influence (through ownership of
voting securities or otherwise) over the management or policies or
operations of the specified company as to make it necessary or
appropriate in the public interest that the person be treated as an
affiliate.
    (10) Voting security means any security presently entitling the
owner or holder thereof to vote in the direction or management of the
affairs of a company.
* * * * *
    6. In Sec.  35.43, paragraph (a)(1) is revised and paragraph (a)(6)
is added, to read as follows:

Sec.  35.43  Generally.

    (a) * * *
    (1) Affiliate of a specified company means any person that
controls, is controlled by, or is under common control with the
specified company.
    (i) 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) The Commission may, after appropriate notice and opportunity
for hearing, determine that any person is an affiliate of a specified
company if it finds that the person exercises directly or indirectly
(either alone or pursuant to an arrangement or understanding with one
or more persons) such a degree of influence (through ownership of
voting securities or otherwise) over the management or policies or
operations of the specified company as to make it necessary or
appropriate in the public interest that the person be treated as an
affiliate.
* * * * *
    (6) Voting security means any security presently entitling the
owner or holder thereof to vote in the direction or management of the
affairs of a company.
* * * * *
[FR Doc. 2010-1544 Filed 1-27-10; 8:45 am]
BILLING CODE 6717-01-P