[Federal Register: February 29, 2008 (Volume 73, Number 41)]
[Rules and Regulations]
[Page 11013-11026]
[DOCID:fr29fe08-13]

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 35

[Docket No. RM07-15-000; Order No. 707]

Cross-Subsidization Restrictions on Affiliate Transactions

Issued February 21, 2008.
AGENCY: Federal Energy Regulatory Commission, Department of Energy.

ACTION: Final rule.

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SUMMARY: In this Final Rule, pursuant to sections 205 and 206 of the
Federal Power Act, the Federal Energy Regulatory Commission
(Commission) is amending its regulations to codify restrictions on
affiliate transactions between franchised public utilities that have
captive customers or that own or provide transmission service over
jurisdictional transmission facilities, and their market-regulated
power sales affiliates or non-utility affiliates. These restrictions
will supplement other restrictions the Commission has in place to
protect captive customers of franchised public utilities or
transmission customers of franchised public utilities that own or
provide transmission service over jurisdictional transmission
facilities from inappropriate cross-subsidization of affiliates.

DATES: Effective Date: This Final Rule will become effective March 31,
2008.

FOR FURTHER INFORMATION CONTACT:

Carla Urquhart (Legal Information), Office of the General Counsel,
Federal Energy Regulatory Commission, 888 First Street, NE.,
Washington, DC 20426,<PHONE_NUMBER>.
Roshini Thayaparan (Legal Information), Office of the General Counsel,
Federal Energy Regulatory Commission, 888 First Street, NE.,
Washington, DC 20426,<PHONE_NUMBER>.
David Hunger (Technical Information), Office of Energy Market
Regulation, Federal Energy Regulatory Commission, 888 First Street,
NE., Washington, DC 20426,<PHONE_NUMBER>.
Stuart Fischer (Technical Information), Office of Enforcement, Federal
Energy Regulatory Commission, 888 First Street, NE., Washington, DC
20426,<PHONE_NUMBER>.

SUPPLEMENTARY INFORMATION: Before Commissioners: Joseph T. Kelliher,
Chairman; Suedeen G. Kelly, Marc Spitzer, Philip D. Moeller, and Jon
Wellinghoff.

Final Rule

    1. On July 20, 2007, the Commission issued a Notice of Proposed
Rulemaking to codify affiliate restrictions that would be 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.\1\ After receiving
comments in response to the Affiliate Transactions NOPR, the Commission
amends Part 35 of its regulations, pursuant to sections

205 and 206 of the Federal Power Act (FPA), to adopt such
restrictions.\2\
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    \1\ Cross-Subsidization Restrictions on Affiliate Transactions,
Notice of Proposed Rulemaking, 72 FR 41644 (July 31, 2007), FERC
Stats. & Regs. ] 32,618 (2007) (Affiliate Transactions NOPR).
    \2\ 16 U.S.C. 824d, 824e.
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    2. Finalization of this rulemaking is one of a number of steps the
Commission has taken following the repeal of the Public Utility Holding
Company Act of 1935 \3\ to ensure that customers of franchised public
utilities do not inappropriately cross-subsidize the activities of
``non-regulated'' affiliates, and are not otherwise financially harmed
as a result of affiliate transactions and activities. The restrictions
in this Final Rule will provide certainty to public utilities and
customers with respect to the pricing standard that must be applied to
certain affiliate transactions. While the Commission already has in
place affiliate rules that apply to public utilities with market-based
rates and to public utilities seeking merger approvals, the
restrictions in this rule will supplement existing restrictions and
will apply to all franchised public utilities that have captive
customers or that own or provide transmission service over
jurisdictional transmission facilities. Thus, they will strengthen the
Commission's ability to ensure that customers are protected against
affiliate abuse and that rates remain just and reasonable.
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    \3\ 16 U.S.C. 79a et seq. (PUHCA 1935).
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I. Background

    3. Under sections 205 and 206 of the FPA, the Commission must
ensure that the rates, terms and conditions of jurisdictional service
are just, reasonable and not unduly discriminatory or preferential. As
part of the Commission's obligation in administering this FPA standard,
it ensures that wholesale customers' rates do not reflect costs that
are the result of undue preferences granted to affiliates or that are
imprudent or unreasonable as a result of affiliate transactions. The
Commission has a long history of scrutinizing affiliate transactions
for potential cross-subsidization and in recent rulemakings and orders
it has codified and expanded affiliate restrictions, both under its FPA
section 205-206 rate authority (in the context of market-based rates)
and under its FPA section 203 merger authority. As discussed infra,
pursuant to its FPA section 205-206 authority, in this Final Rule the
Commission will extend similar restrictions to all franchised public
utilities that have captive customers or that own or provide
transmission service over jurisdictional transmission facilities. As
historical backdrop, however, we first discuss our past and existing
practices with respect to affiliate transactions in the context of
market-based rates and mergers.

A. Affiliate Transactions in the Context of Market-Based Rate
Authorizations

1. Historical Approach
    4. The Commission began considering proposals for market-based
pricing of wholesale power sales and attendant cross-subsidy issues in
1988. The Commission acted on market-based rate proposals filed by
various wholesale suppliers on a case-by-case basis. In doing so, the
Commission considered, among other things, whether there was evidence
of affiliate abuse or reciprocal dealing involving the seller or its
affiliates.\4\ As the Commission explained, ``[t]he Commission's
concern with the potential for affiliate abuse is that a utility with a
monopoly franchise may have an economic incentive to exercise market
power through its affiliate dealings.'' \5\ The Commission also stated
its concern that a franchised public utility and an affiliate may be
able to transact in ways that transfer benefits from the captive
customers of the franchised public utility to the affiliate and its
shareholders.\6\ Where a franchised public utility makes a power sale
to an affiliate, the Commission is concerned that such a sale could be
made at a rate that is too low, in effect, transferring the difference
between the market price and the lower rate from captive customers to
the market-regulated affiliated entity. Where a power seller with
market-based rates makes power sales to an affiliated franchised public
utility, the concern is that such sales could be made at a rate that is
too high, which would give an undue profit to the affiliated entity at
the expense of the franchised public utility's captive customers.\7\ In
determining whether to allow power sales affiliate transactions, the
Commission, over time, has adopted several methods, all of which have
focused on ensuring that captive customers are adequately protected
against affiliate abuse.
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    \4\ See Heartland Energy Services Inc., 68 FERC ] 61,223, at
62,062 (1994) (Heartland) (discussing the potential for abuse in the
case of affiliated power marketers); Commonwealth Atlantic Limited
Partnership, 51 FERC ] 61,368, at 62,245 (1990) (discussing
potential for reciprocal dealing if a buyer agrees to pay more for
power from a seller in return for that seller (or its affiliates)
paying more for power from that buyer (or its affiliates)).
    \5\ Boston Edison Company Re: Edgar Electric Energy Co., 55 FERC
] 61,382, at 62,137 n.56 (1991) (Edgar). See also TECO Power
Services Corp., 52 FERC ] 61,191, at 61,697 n.41, order on reh'g, 53
FERC ] 61,202 (1990) (``The Commission has determined that self
dealing may arise in transactions between affiliates because
affiliates have incentives to offer terms to one another which are
more favorable than those available to other market
participants.'').
    \6\ See, e.g., Heartland, 68 FERC at 62,062.
    \7\ The Commission has found that a transaction between two non-
traditional utility affiliates (such as power marketers, exempt
wholesale generators (EWGs), or qualifying facilities (QFs)) does
not raise the same concern about cross-subsidization because neither
has a franchised service territory and therefore has no captive
customers. As the Commission has explained, no matter how sales are
conducted between non-traditional affiliates, profits or losses
ultimately affect only the shareholders. FirstEnergy Generation
Corporation, 94 FERC ] 61,177, at 61,613 (2001); USGen Power
Services, L.P., 73 FERC ] 61,302, at 61,846 (1995). With respect to
affiliate power sales, the Commission has also developed guidelines
on how to determine whether a transaction is above suspicion and
captive customers are protected, as well as guidelines for
competitive solicitation processes. See Edgar, 55 FERC at 62,167-69;
Allegheny Energy Supply Company, LLC, 108 FERC ] 61,082, at 61,417
(2004).
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    5. Just as the Commission has expressed concern about the potential
for affiliate abuse in connection with power sales between affiliates,
it also has recognized that there may be a potential for affiliate
abuse through other means, such as the pricing of non-power goods and
services or the sharing of market information between affiliates.\8\
The same concerns about giving undue profits to affiliated market-
regulated entities and their shareholders, discussed above with respect
to power sales, also apply with respect to these interactions.
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    \8\ See, e.g., Potomac Electric Power Company, 93 FERC ] 61,240,
at 61,782 (2000) (Potomac); Heartland, 68 FERC at 62,062-63.
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    6. Accordingly, the Commission's policy for many years had been to
require that, as a condition of market-based rate authorization,
applicants adopt a code of conduct applicable to non-power goods and
services transactions and information sharing between regulated and
non-regulated (market-regulated) affiliated power sellers. The
Commission has also required that applicants include a provision in
their market-based rate tariffs prohibiting power sales between
regulated and non-regulated affiliated power sellers without first
receiving authorization of the transaction under section 205 of the
FPA.\9\
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    \9\ Aquila, Inc., 101 FERC ] 61,331, at P 12 (2002).
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    7. The purpose of the market-based rate code of conduct was to
safeguard against affiliate abuse by protecting against the possible
diversion of benefits or profits from franchised public utilities
(i.e., traditional public utilities with captive ratepayers) to an
affiliated entity for the benefit of shareholders. The Commission has
waived the market-based rate code of conduct requirement in cases where
there are no captive customers, and thus no potential

for affiliate abuse, or where the Commission finds that such customers
are adequately protected against affiliate abuse.\10\ In such cases,
however, the Commission directed the utilities to notify the Commission
should they acquire captive customers in the future and expressly
reserved the right to reimpose the market-based rate code of conduct
requirement.
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    \10\ See, e.g., CMS Marketing, Services and Trading Co., 95 FERC
] 61,308, at 62,051 (2001) (granting request for cancellation of
code of conduct where wholesale contracts, as amended, ``cannot be
used as a vehicle for cross-subsidization of affiliate power sales
or sales of non-power goods and services''); Alcoa Inc., 88 FERC ]
61,045, at 61,119 (waiving code of conduct requirement where there
were no captive customers); Green Power Partners I LLC, 88 FERC ]
61,005, at 61,010-11 (1999) (waiving code of conduct requirement
where there are no captive wholesale customers and retail customers
may choose alternative power suppliers under retail access program).
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2. The Market-Based Rate Final Rule
    8. In the Commission's recent Market-Based Rate Final Rule,\11\
among other things, the Commission codified in the regulations at 18
CFR part 35, subpart H, an explicit requirement that any seller with
market-based rate authority must comply with the affiliate power sales
restrictions and other affiliate restrictions. Compliance on an ongoing
basis is a condition of retaining market-based rate authority. The
Market-Based Rate Final Rule retains the policy that wholesale sales of
power between a franchised public utility and any of its market-
regulated power sales affiliates must be pre-approved by the
Commission. It also adopts uniform affiliate restrictions governing
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.\12\ The power and non-power goods and services
restrictions, however, apply only to transactions involving two power
sellers. They do not apply to transactions between a franchised public
utility and a non-utility affiliate.
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    \11\ Market-Based Rates For Wholesale Sales Of Electric Energy,
Capacity and Ancillary Services by Public Utilities, Order No. 697,
72 FR 39904 (July 20, 2007), FERC Stats. & Regs. ] 31,252 (2007)
(Market-Based Rate Final Rule).
    \12\ Id. P 23.
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B. Affiliate Transactions Under Section 203

1. Before the Energy Policy Act of 2005
    9. The Commission has also addressed cross-subsidization issues in
the context of section 203 merger applications. Prior to the Energy
Policy Act of 2005,\13\ the Commission's policy was to condition its
approval of certain section 203 mergers on the applicants' agreement to
abide by certain restrictions on non-power goods and services
transactions between a merged company's utility and non-utility or
market-regulated subsidiaries. The condition was imposed on those
mergers involving registered holding companies under PUHCA 1935 \14\ in
order to find that the merger would not adversely affect federal
regulation.\15\ That requirement grew out of judicial determinations
that, when a merger would create or involve a registered holding
company, the actions of the Securities and Exchange Commission (SEC)
may preclude the Commission from asserting jurisdiction over the non-
power transactions between subsidiaries of that holding company.\16\
Under Ohio Power, if the SEC approved an affiliate contract involving
special purpose subsidiary goods or services at cost, the Commission
had to allow pass-through of the costs in jurisdictional rates even if
the public utility purchasing the goods or services could have obtained
them at a lower market price from a non-affiliate.\17\ For over a
decade following the Ohio Power decision, the Commission required that,
to gain section 203 approval of a proposed merger without a hearing, if
the transaction would create a registered holding company under the
PUHCA 1935, applicants must agree to waive the Ohio Power immunity and
abide by the Commission's policy on intra-system transactions for non-
power goods and services.\18\
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    \13\ Energy Policy Act of 2005, Pub. L. 109-58, 1289, 119 Stat.
594, 982-83 (2005) (EPAct 2005).
    \14\ EPAct 2005 repealed PUHCA 1935. EPAct 2005, Pub. L. 109-58,
1263.
    \15\ See, e.g., Niagara Mohawk Holdings, Inc., 95 FERC ] 61,381,
at 62,414, order on reh'g, 96 FERC ] 61,144 (2001).
    \16\ See Ohio Power Co. v. FERC, 954 F.2d 779, 782-86 (D.C.
Cir.), cert. denied sub nom., Arcadia v. Ohio Power Co., 506 U.S.
981 (1992) (Ohio Power).
    \17\ The Commission's policy since the mid-1990s has been that
where the regulated public utility has provided non-power goods or
services to the non-regulated affiliate, the public utility provides
the goods or services at the higher of cost or market. A non-
regulated affiliate that sells non-power goods or services to an
affiliate with captive customers may not sell at higher than market
price. This is often referred to as the ``market'' standard. These
standards were articulated in the Commission's 1996 Merger Policy
Statement. 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, at 30,124-25 (1996)
(1996 Merger Policy Statement), reconsideration denied, Order No.
592-A, 62 FR 33341 (June 19, 1997), 79 FERC ] 61,321 (1997).
    \18\ Public Service Company of Colorado, 75 FERC ] 61,325, at
62,046 (1996) (PSC Colorado); 1996 Merger Policy Statement, FERC
Stats. & Regs. ] 31,044 at 30,124-25.
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2. After EPAct 2005
    10. Because EPAct 2005 repealed PUHCA 1935, certain activities of
previously-registered holding companies that were previously subject to
SEC regulation, including intra-system affiliate transactions, are no
longer exempt from this Commission's full regulatory review. In
particular, the Commission's conditions and policies under FPA sections
205 and 206 with respect to non-power goods and services transactions
between holding company affiliates may now be applied to all public
utilities that are members of holding companies, whether in the context
of a section 203 merger proceeding or the context of a section 205-206
rate proceeding.\19\ In addition, the Commission has authority to
review allocation of service company costs among members of holding
companies that have public utilities with captive customers.
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    \19\ The provisions of PUHCA 1935 that formed the basis for Ohio
Power are no longer in effect, thus removing the Ohio Power
limitation on our oversight of non-power transactions. Further, FPA
section 318, which provided for SEC preemption in certain
circumstances where there was a conflict between SEC PUHCA 1935
regulation and Commission regulation, was repealed.
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    11. In the Order No. 669 rulemaking proceedings,\20\ which revised
the Commission's regulations pursuant to amended section 203, the
Commission continued its past approach with respect to affiliate abuse
restrictions involving power and non-power goods and services
transactions, in the context of section 203 applications.\21\ However,
the Commission made two additional clarifications.
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    \20\ Transactions Subject to FPA 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, order on reh'g, Order No. 669-B, 71 FR 42579 (July
27, 2006), FERC Stats. & Regs. ] 31,225 (2006).
    \21\ Amended section 203(a)(4) adds to the Commission's merger
analysis the explicit requirement that the Commission find that any
proposed transaction will not 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, unless that
cross-subsidization, pledge, or encumbrance will be consistent with
the public interest.
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    12. First, in its implementation of regulations pursuant to PUHCA
2005,\22\ the Commission discussed one exception to the traditional
standards articulated in the 1996 Merger Policy Statement. In the Order
No. 667

rulemaking proceeding,\23\ the Commission explained that there are two
circumstances in which the at-cost or market standards may arise in the
context of the Commission's jurisdictional responsibilities: (1) The
Commission's review of the costs of non-power goods and services
provided by a traditional, centralized service company to public
utilities within the holding company system; and (2) when a service
company that is a special-purpose company within a holding company
provides non-power goods or services to one or more public utilities in
the same holding company system. Under both scenarios, similar concerns
regarding affiliate abuse arise: ``[W]hether the public utility's costs
incurred in purchasing from the affiliate are prudently incurred and
just and reasonable, and whether non-regulated affiliates purchasing
non-power goods and services from the same special-purpose company are
receiving preferential treatment vis-[agrave]-vis the public utility.''
\24\ In Order No. 667, the Commission exempted traditional, centralized
service companies, which at that time were using the SEC's ``at-cost''
standard, from complying with the Commission's market standard for
their sales of non-power goods and services to regulated
affiliates.\25\ In determining that the at-cost standard was
appropriate for traditional, centralized service companies, the
Commission noted that centralized provision of the services provided by
such companies (such as accounting, human resources, legal, tax, and
other such services) benefits ratepayers through increased efficiency
and economies of scale. Moreover, the Commission recognized that it is
frequently difficult to define the market value of the specialized
services provided by centralized service companies. On this basis, the
Commission stated it would apply a rebuttable presumption that costs
incurred under at-cost pricing of such services are reasonable.\26\
However, with respect to non-power goods and services transactions
between holding company affiliates other than traditional, centralized
service companies, i.e., service companies that are non-regulated,
special-purpose affiliates, such as a fuel supply company or a
construction company, the Commission continued with its prior
practice.\27\
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    \22\ PUHCA 2005 is primarily a books and records access statute
and does not give the Commission any new substantive authorities,
other than the requirement that the Commission review and authorize
certain non-power goods and services cost allocations among holding
company members upon request. EPAct 2005, Public Law 109-58, 1275.
    \23\ Repeal of the Public Utility Holding Company Act of 1935
and Enactment of the Public Utility Holding Company Act of 2005,
Order No. 667, 70 FR 75592 (Dec. 20, 2005), FERC Stats. & Regs. ]
31,197 (2005), order on reh'g, Order No. 667-A, 71 FR 28446 (May 16,
2006), FERC Stats. & Regs. ] 31,213, order on reh'g, Order No. 667-
B, 71 FR 42750 (July 28, 2006), FERC Stats. & Regs. ] 31,224 (2006),
order on reh'g, 72 FR 8277 (Feb. 26, 2007), 118 FERC ] 61,133
(2007).
    \24\ Order No. 667, FERC Stats. & Regs. ] 31,197 at P 168.
    \25\ Id. P 169.
    \26\ Id. The Commission stated, however, that it would entertain
complaints that at-cost pricing for such services exceeds the market
price, but complainants would have the burden of demonstrating that
that is the case.
    \27\ In Order No. 667, the Commission stated that, with respect
to sales from a public utility to a non-regulated, affiliated
special-purpose company, the price should be no less than cost,
i.e., the higher of cost or market; otherwise, a public utility
could attempt to game the system and forego profits it could
otherwise obtain by selling to a non-affiliate, to the benefit of
its non-regulated affiliate who receives a good or service at a
below-market price. The Commission also stated that, when the
situation is reversed, i.e., the non-regulated, affiliated special-
purpose company is providing non-power goods and services to the
public utility affiliate, the Commission will continue to apply its
market standard. Accordingly, the non-regulated, affiliated special-
purpose company may not sell to its public utility affiliate at a
price above the market price. The Commission found that such
transactions involving such non-regulated, affiliated special-
purpose companies pose a greater risk of inappropriate cross-
subsidization and adverse effects on jurisdictional rates. Id. P
171.
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    13. Second, in recent section 203 merger proceedings, the
Commission has extended the applicability of the code of conduct
restrictions previously applied only to registered holding companies.
In National Grid plc,\28\ the Commission announced that it would
require all merging parties to abide by a code of conduct containing
specific provisions regarding power and non-power goods and services
transactions between the utility subsidiaries and their affiliates:

    \28\ 117 FERC ] 61,080 (2006) (National Grid).
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    Implementation of the Code of Conduct for all utility
subsidiaries of the merged company, as required by our decision
here, will address both power and non-power goods and services
transactions between the utility subsidiaries and their affiliates.
The Code of Conduct to be implemented by the merged company shall
(1) require our approval of all power sales by a utility to an
affiliate, (2) require a utility with captive customers to provide
non-power goods or services to a non-utility or ``non-regulated
utility'' affiliate at a price that is the higher of cost or market
price, (3) prohibit a non-utility or non-regulated utility affiliate
from providing non-power goods or services to a utility affiliate
with captive customers at a price above market price, and (4)
prohibit a centralized service company from providing non-power
services to a utility affiliate with captive customers at a price
above cost. These requirements protect a utility's captive customers
against inappropriate cross-subsidization of non-utility or non-
regulated utility affiliates by ensuring that the utility with
captive customers neither recovers too little for goods and services
that the utility provides to an affiliate nor pays too much for
goods and services that the utility receives from an affiliate.
Implementation of these requirements provides a prophylactic
mechanism to ensure that the merger will not result in cross-
subsidization of non-utility or non-regulated utility companies in
the same holding company system and therefore meets the requirement
of section 203(a)(4) that a merger not result in inappropriate
cross-subsidization of a non-utility associate company.\29\

    \29\ Id. P 66 (internal citations removed).
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    14. While these affiliate restrictions are broad in terms of
transactions covered (covering transactions between power sales
affiliates as well as transactions between power sales affiliates and
non-utility affiliates) and have been extended within the context of
section 203 approvals, they do not apply to public utilities that do
not need to seek section 203 merger approval.

II. Affiliate Transactions NOPR

    15. In the Affiliate Transactions NOPR, the Commission proposed to
implement uniform affiliate restrictions that would be applicable to
all franchised public utilities with captive customers and their
market-regulated and non-utility affiliates and would address both
power and non-power goods and services transactions between the utility
and its affiliates.\30\ The Commission's goal in proposing these
prophylactic restrictions is to protect against inappropriate cross-
subsidization of market-regulated and unregulated activities by the
captive customers of franchised public utilities. The proposed
restrictions are based upon those already imposed by the Commission in
the context of certain section 203 and 205 approvals, but expand the
transactions and entities to which they apply.
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    \30\ On July 20, 2007, the Commission took three actions based
on the Commission's experience implementing amended FPA section 203
and PUHCA 2005, as well as the record from the Commission's December
7, 2006 and March 8, 2007 technical conferences regarding section
203 and PUCHA 2005. In this docket, the Commission issued the
Affiliate Transactions NOPR. In addition, in separate orders, the
Commission issued a section 203 Supplemental Policy Statement, and a
Notice of Proposed Rulemaking proposing additional blanket
authorizations under section 203 of the FPA. FPA Section 203
Supplemental Policy Statement, 72 FR 42277 (Aug. 2, 2007), FERC
Stats. & Regs. ] 31,253 (2007) (Supplemental Policy Statement),
order on clarification and reconsideration, 122 FERC ] 61,157
(2008); Blanket Authorization Under FPA Section 203, Notice of
Proposed Rulemaking, 72 FR 41640 (July 31, 2007), FERC Stats. &
Regs. ] 32,619 (2007) (Blanket Authorization NOPR); see Blanket
Authorization Under FPA Section 203, Order No. 708, 122 FERC ]
61,156 (2008) (Blanket Authorization Final Rule).
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    16. Specifically, the proposed regulations would: (1) Require the
Commission's approval of all wholesale sales between a franchised
public utility with captive customers and a market-regulated power
sales affiliate; (2)

require a franchised public utility with captive customers to provide
non-power goods and services to a market-regulated power sales
affiliate or a non-utility affiliate at a price that is the higher of
cost or market price; (3) prohibit a franchised public utility with
captive customers from purchasing non-power goods or services from a
market-regulated power sales affiliate or a non-utility affiliate at a
price above market price (with the exception of (4)); and (4) prohibit
a franchised public utility with captive customers from receiving non-
power goods and services from a centralized service company at a price
above cost. The Commission stated that these restrictions would help
the Commission meet the requirement of amended section 203(a)(4) that a
transaction not result in the inappropriate cross-subsidization of a
non-utility associate company and, moreover, help the Commission assure
just and reasonable rates and the protection of captive customers for
all public utilities pursuant to sections 205 and 206 of the FPA,
irrespective of whether they need approval of a section 203
transaction.

III. Procedural Matters

    17. The Affiliate Transactions NOPR invited comments on the
proposed regulations. Comments on the Affiliate Transactions NOPR were
filed by: American Public Power Association and National Rural Electric
Cooperative Association (APPA/NRECA); Edison Electric Institute (EEI);
Entergy Services, Inc. (Entergy); Interstate Gas Supply, Inc. (IGS);
National Grid USA (National Grid); New York State Public Service
Commission (New York Commission); NiSource Inc. (NiSource); Occidental
Power Marketing, L.P. (Occidental); Oklahoma Corporation Commission
(Oklahoma Commission); Pacific Gas and Electric Company (PG&E); the
Pinnacle West Companies (Pinnacle West);\31\ and San Diego Gas &
Electric Company and Southern California Gas Company (Sempra).\32\
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    \31\ For purposes of their filing, the Pinnacle West Companies
include: Pinnacle West Marketing & Trading Co., LLC; Arizona Public
Service Company; and APS Energy Services Company, Inc.
    \32\ Although unnecessary to preserve their rights to
participate in a rulemaking proceeding, Allegheny Power and
Allegheny Energy Supply Company, LLC filed a motion to intervene
without comments.
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IV. Discussion

    18. This Final Rule explains the Commission's authority and
jurisdiction under sections 205 and 206 of the FPA to regulate
affiliate transactions to ensure that public utility rates are just,
reasonable, and not unduly discriminatory or preferential. This Final
Rule implements affiliate restrictions applicable to power sales and
transactions for non-power goods and services between franchised public
utilities that have captive customers or that own or provide
transmission service over jurisdictional transmission facilities, and
their market-regulated and non-utility affiliates.

A. General Matters

1. The Need for the Proposed Regulations
    a. Comments
    19. EEI argues that the Commission has not demonstrated a need for
the proposed regulations. While EEI agrees that the Commission has been
applying affiliate transactions restrictions in the context of section
203 and market-based rates,\33\ EEI argues that the Affiliate
Transactions NOPR goes too far. EEI argues that the Commission does not
provide any examples of the problems that the Commission has discovered
in the pricing of utility-affiliate transactions that would warrant the
expanded new regulations. EEI also argues that there is sufficient
regulatory oversight by the Commission and state commissions, so this
extension of policy is not warranted.
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    \33\ EEI asserts that the Affiliate Transactions NOPR states
that the Commission currently waives market-based rate code of
conduct requirements and allows transactions in cases where there
are no captive customers or customers are protected against
affiliate transactions, but that exception is not reflected in the
Market-Based Rate Final Rule.
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    20. Moreover, EEI argues that the Commission's authority to
regulate utility-affiliate transactions under sections 205 and 206 is
limited to determining whether jurisdictional rates are just and
reasonable. EEI argues that the Commission has not demonstrated why the
proposed regulations are necessary to achieve a just and reasonable
result. EEI also argues that the Affiliate Transactions NOPR indirectly
proposes to regulate entities over which the Commission has no
jurisdiction--EWGs, QFs, and non-utilities--by imposing constraints on
the prices that utilities may pay these companies for non-power goods
and services and the companies in turn must pay the utilities for such
goods and services.\34\
---------------------------------------------------------------------------

    \34\ EEI Comments at 6-7 (citing Sunray Mid-Continental Co. v.
FPC, 364 U.S. 137, 142 (1960); Altamont Gas Transmission Co. v.
FERC, 92 F.3d 1239 (D.C. Cir. 1996); National Fuel Gas Supply Corp.
v. FERC, 909 F.2d 1519 (D.C. Cir. 1990)).
---------------------------------------------------------------------------

    21. EEI also argues that the Commission's adoption of the rules as
a ``prophylactic'' measure ignores the wording of the Commission's
cross-subsidy authority under section 203 by failing to recognize that
certain transactions may be in the public interest.
    b. Commission Determination
    22. We disagree with EEI regarding the need for the proposed
regulations or the Commission's authority to enact them. Sections 205
and 206 of the FPA require the Commission to ensure that public utility
rates are just, reasonable and not unduly discriminatory or
preferential. A rate is not just and reasonable if it includes costs
which the Commission finds are imprudently incurred or which require a
customer to bear costs that are unreasonable. Further, the Commission
must ensure that no public utility makes or grants an undue preference
with respect to any transmission or sale subject to the Commission's
jurisdiction.\35\ The Commission has the authority to address these
types of rate issues not only in individual cases, but also to set
standards by rulemaking with respect to what costs will or will not be
considered just and reasonable. The Commission's experience makes clear
the need for these types of restrictions and we believe they are
particularly warranted in light of the repeal of PUHCA 1935 and our
need to be vigilant with respect to holding companies and affiliate
transactions.
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    \35\ Although section 203 of the FPA requires the Commission to
recognize that certain cross-subsidization or pledges or
encumbrances of utility assets can be in the public interest, the
proposed regulations are set forth pursuant to the Commission's
authority under sections 205 and 206 of the FPA.
---------------------------------------------------------------------------

    23. As discussed above, the Commission has a long history of
requiring public utilities to comply with affiliate restrictions where
an entity seeks market-based rate authorization and in the context of
seeking merger authorization under section 203 of the FPA. However,
limiting affiliate restrictions to these two contexts leaves a
regulatory gap. As the Affiliate Transactions NOPR explained, (1)
restrictions on market-based rate applicants do not cover non-power
goods and services transactions between a franchised public utility and
non-utilities; they cover only transactions between power sales
affiliates and are imposed on only the market-based rate applicants;
(2) restrictions imposed on section 203 applicants only apply to merger
applicants; (3) the pricing policy set forth in Order No. 667 regarding
non-power goods and services provided by centralized service companies
was not codified in the regulations; and (4) not all states regulate
these types of

transactions.\36\ The purpose of the proposed regulations therefore is
to supplement existing affiliate restrictions to cover transactions
between all franchised public utilities with captive customers and
their non-utility affiliates. Just as the Commission has adopted
regulations designed to prevent captive customers of franchised public
utilities from inappropriately cross-subsidizing the activities of
market-regulated affiliates (such as affiliated power marketers), so
too the Commission wants to ensure that captive customers of franchised
public utilities do not inappropriately cross-subsidize the activities
of non-utility affiliates (such as an affiliated construction services
firm, real estate company, legal services companies, fuel supply
companies, or other non-utility affiliates). For example, where a
franchised public utility with captive customers transacts with an
affiliated non-utility construction services firm, the Commission is
concerned that the franchised public utility with captive customers not
pay an above-market price for construction services provided by the
affiliated construction firm. Otherwise, the public utility's customers
would be inappropriately cross-subsidizing the activities of the
affiliate. Indeed, non-utility affiliates such as real estate
companies, legal services companies, fuel supply companies or other
companies selling non-power goods and services could provide similar
opportunities for affiliate abuse and improper cross-subsidization.
---------------------------------------------------------------------------

    \36\ Affiliate Transactions NOPR, FERC Stats. & Regs. ] 32,618
at P 15.
---------------------------------------------------------------------------

    24. Finally, we disagree with EEI that the Affiliate Transactions
NOPR indirectly proposes to regulate entities over which the Commission
``has no jurisdiction''--EWGs, QFs, and non-utilities. As an initial
matter, the Commission does, in fact, have certain jurisdiction over
QFs, and most EWGs are jurisdictional public utilities. More
importantly, however, the pricing rules we adopt here are rooted in our
authority to impose pricing rules with respect to certain sales and
purchases by public utilities (including EWGs) over whom we have rate
jurisdiction under the FPA. These restrictions are tied directly to the
reasonableness of public utility rates and the Commission has the
statutory responsibility to protect captive customers from unjust and
unreasonable rates.
2. The Scope of the Proposed Regulations
    a. Comments
    25. Several commenters filed comments concerning the scope of the
proposed regulations. APPA/NRECA ask that the Commission clarify that
the regulations adopted in this proceeding do not preclude the
Commission from imposing additional cross-subsidization restrictions on
affiliate transactions as appropriate on a case-by-case basis.
    26. The Oklahoma Commission notes that the Commission stated that
it would require all merging parties to abide by a code of conduct that
has specific provisions regarding power and non-power goods and
services transactions between the utility subsidiaries and their
affiliates. The Oklahoma Commission urges to the Commission to continue
to do so. The Oklahoma Commission also asks that the Commission add
language that states that section 203 does not preempt applicable state
law concerning reporting requirements, which would further protect the
interest and authority of state commissions.
    27. IGS agrees with the Commission's proposal to codify affiliate
restrictions but suggests that the intent of the code of conduct
requirement also includes preventing a utility or its affiliate from
gaining unfair advantages in a market, thus impeding the development of
a competitive market. IGS agrees that a code of conduct should be
codified and expanded to apply to non-power goods and services, and
that a code of conduct and related rules should also apply outside the
context of merger situations. IGS also agrees that, even outside of the
context of a merger, it is important that utility/affiliate code of
conduct and related rules apply. IGS further agrees that it is
appropriate for the code of conduct and related rules to apply to
transactions involving non-power goods and services because, among
other things, consumers may not be able to differentiate easily between
affiliates and traditional regulated utility and where affiliates are
provided preferential access and opportunities, competition is stifled.
In addition, IGS argues that the same opportunity for abuse exists in
the natural gas industry. It maintains that the same affiliate
restriction concepts should be extended to natural gas utilities, and
should be considered whenever the utility has an economic interest in
the sale of the commodity or non-commodity goods or services.
    28. Occidental argues that the proposed regulations permit a
utility to circumvent the affiliate transactions restrictions by simply
conducting all of its market-based rate activities within its
franchised public utility. Occidental asks that the Commission
explicitly require that the functional attributes, rather than the
arbitrary structure, of a utility be considered in determining
compliance with the rule's affiliate abuse restrictions.
    b. Commission Determination
    29. We agree with APPA/NRECA that the pricing rules that we adopt
in this proceeding do not preclude the Commission from imposing
additional cross-subsidization restrictions on affiliate transactions,
as appropriate, on a case-by-case basis.
    30. Regarding the Oklahoma Commission's request that we continue to
require all merging parties to abide by a code of conduct that has
specific provisions regarding power and non-power goods and services
transactions between the utility subsidiaries and their affiliates,
although this rulemaking is not under section 203, as discussed supra,
as a condition of section 203 authorization for mergers, we have
already stated in the context of section 203 proceedings that we will
continue to impose affiliate restrictions on entities seeking merger
authorization under section 203 of the FPA. Further, we clarify that
neither the rules we adopt here, nor the cross-subsidization
restrictions imposed under section 203 of the FPA, preempt applicable
state law concerning reporting requirements.
    31. We deny IGS' request to expand the proposed regulations to
include preventing a utility or its affiliate from gaining unfair
advantage in a market. The scope of the proposed regulations is to
protect against inappropriate cross-subsidization of affiliates by
franchised public utilities with captive customers. We note, however,
the cross-subsidy protections go a long way to preventing such unfair
advantages since market-regulated or non-regulated companies may have
an unfair competitive advantage in the marketplace if others bear some
of their costs of doing business.
    32. We also deny IGS' request to expand the scope of the proposed
regulations to include the natural gas industry. As discussed above,
the focus of this rulemaking is public utilities--specifically,
franchised public utilities that have captive customers or that own or
provide transmission service over jurisdictional transmission
facilities. We find that there is an insufficient record to warrant
including LDCs and interstate pipelines within the scope of the
regulations at this time.
    33. Finally, we decline to revise the scope of the proposed
regulations to address Occidental's concern that the proposed
regulations permit a utility to circumvent the affiliate transactions
restrictions by simply conducting all of

its market-based rate activities within its franchised public utility.
We note that Occidental has raised this concern in its request for
rehearing of the Market-Based Rate Final Rule. We find that this
concern is more appropriately addressed on rehearing of that order.

B. Specific Issues

1. Definitions
    a. Captive Customers
    i. Comments
    34. Commenters seek a number of clarifications concerning the
definition of ``captive customers.''
    35. EEI and Pinnacle West ask the Commission to clarify that
wholesale customers with fixed price contracts are not ``captive
customers'' even if the contracts are cost-based, because there is no
risk of harm to such customers from utility-affiliate transactions.
    36. Occidental argues that the Commission should revise the
definition of ``captive customer'' to not include wholesale customers.
Occidental argues that the Commission clarified in the Market-Based
Rate Final Rule that retail customers that have retail choice are not
captive customers. Occidental maintains that wholesale customers,
whether cost-based or market-based, have alternatives and therefore,
are not captive. Accordingly, Occidental argues that the definition of
``captive customer'' should be limited to retail customers served under
cost-based regulation who do not have retail choice available, and
should not include wholesale customers which have choices.
    37. EEI, National Grid, and Pinnacle West ask the Commission to
clarify its definition of ``captive customers'' consistent with its use
of the term in the preamble of the Market-Based Rate Final Rule. In
this regard, they ask that the Commission clarify that retail customers
in states with retail competition are not ``captive customers'' for
purposes of the affiliate restrictions. Pinnacle West also states that
the Commission clarified in Order No. 697 that, for companies the
Commission has acknowledged in prior orders as not having captive
customers, the affiliate transaction restrictions can be waived. It
asks the Commission to provide the same clarification and exemptions in
this proceeding.
    38. IGS, on the other hand, argues that the restrictions proposed
in the Affiliate Transactions NOPR should not be waived for utilities
simply because those utilities implement a retail choice program. IGS
argues that the ability of a customer to purchase commodities from an
alternative power supplier under a retail access program does not mean
that these customers are not captive for purposes of receiving their
distribution service under cost-based legislation. IGS also states that
the restrictions should apply even if the retail customer has a
competitive alternative available. It further argues that, as long as a
utility is in the business of providing commodity service, there is an
opportunity for abuse.
    39. EEI and National Grid also ask that the Commission clarify that
``captive customers'' do not include transmission customers, consistent
with the Market-Based Rate Final Rule. By contrast, APPA/NRECA ask that
the definition of ``captive customers'' be expanded to expressly
include transmission customers. APPA/NRECA state that the Commission
recognized in both the Order No. 669 series and the Order No. 667
series that transmission customers must be protected against cross-
subsidization along with captive wholesale and retail customers. They
note that the Commission adopted regulatory language in Order No. 669-A
``to cover public utilities that own or provide transmission service
over Commission-jurisdictional transmission facilities,'' and ask that
the Commission clarify the regulatory text in the Final Rule to ensure
that the new generic cross-subsidization regulation explicitly protects
transmission customers.
    40. APPA/NRECA also ask that the Commission confirm, consistent
with the Market-Based Rate Final Rule, that the affiliate transactions
rules do not apply to electric cooperatives.
    ii. Commission Determination
    41. The term ``captive customers'' is used in a number of recently
adopted Commission rules, including Order No. 667, Order No. 669, and
the Market-Based Rate Final Rule. The Commission for many years had
used this term in its orders without definition, but in both the Order
No. 669 series and the Market-Based Rate Final Rule, the Commission
included in the regulatory text a definition or description of
``captive customers'' as: ``any wholesale or retail electric energy
customers served under cost-based regulation.'' \37\ Based on the
comments received, we recognize that there may be some ambiguity as to
what types of customers are considered to be under ``cost-based
regulation'' and we provide additional clarifications below. We also
modify the definition to make clear that it is intended to refer to
customers of franchised public utilities. First, however, we believe it
is important to discuss the purpose of our definition and its focus on
``cost-based regulation.''
---------------------------------------------------------------------------

    \37\ Order No. 669-A, FERC Stats. & Regs. ] 31,214 at P 147;
Market-Based Rate Final Rule, FERC Stats. & Regs. ] 31,252 at P 23;
see also Order No. 667-A, FERC Stats. & Regs. ] 31,213 at n.35.
---------------------------------------------------------------------------

    42. The Commission's fundamental goal in categorizing certain
customers as ``captive'' is to protect customers served by franchised
public utilities from inappropriately subsidizing the market-regulated
or non-utility affiliates of the franchised public utility or otherwise
being financially harmed as a result of affiliate transactions and
activities. In other words, we are concerned about the potential for
the inappropriate transfer of benefits from such customers to the
shareholders of the franchised public utility or its holding
company.\38\ Where customers are served under market-based regulation
as opposed to cost-based regulation, it is presumed that the seller has
no market power over a customer and that the customer has a choice of
suppliers; thus, there is less opportunity for a customer to
involuntarily be in a situation in which its rates subsidize or support
another entity.
---------------------------------------------------------------------------

    \38\ For example, if a market-regulated seller sells power to
its affiliated franchised public utility at an above market price,
the customers of the franchised public utility pay more than they
need to for power and the affiliate makes a higher profit for the
holding company's shareholders. Similarly, if a franchised public
utility sells temporarily excess fuel to its market-regulated power
seller affiliate at a price below its cost, the customers of the
franchised utility end up subsidizing the affiliate's operating
costs, to the benefit of shareholders and the detriment of the
customers of the franchised utility. In other contexts, an extreme
example would be a holding company that siphons funds from a
franchised public utility to support its failing non-regulated
affiliate company; again, this results in financial benefit to
shareholders at the expense of customers.
---------------------------------------------------------------------------

    43. Under a regime of cost-based regulation, however, we cannot
make these same assumptions. If a franchised public utility is selling
at a wholesale cost-based rate under the FPA, the franchised utility
seller may be in the position of potentially trying to flow through its
cost-based rates costs that should instead be borne by its affiliates,
i.e., potentially subsidizing the ``non-regulated'' activities of its
market-regulated and non-utility affiliates to the detriment of the
franchised public utility's customer(s). While there is some merit to
Occidental's assertion that wholesale customers, by definition, have
alternatives and that there is no obligation for a wholesale seller to
sell to any buyer, nor for a buyer to buy from any particular seller,
for the customer protection reasons stated above, we believe it is
important to err on the side of a broad definition of captive
customers.

    44. Although we are erring on the side of a broad definition of
captive customers, we recognize that there may well be circumstances in
which customers fall within our definition but nevertheless there are
sufficient protections in place to protect such customers against any
risk of harm from transactions between the franchised public utility
and its affiliates. For example, it is possible, as advocated by EEI
and Pinnacle West, that wholesale customers with fixed rate contracts
would be adequately protected and that the affiliate restrictions of
this rule should not apply to utilities whose customers all have fixed
rate contracts with no fuel adjustment clause.\39\ We are not prepared
at this time to generically exclude such customers from the definition
of captive customers but instead will allow franchised public
utilities, on a case-by-case basis, to seek a waiver of the affiliate
restrictions. This will allow the Commission to closely examine the
facts related to each franchised public utility. There may be
circumstances other than fixed rate contracts in which we may be
willing to waive the affiliate restrictions of this rule, but a public
utility will need to demonstrate that there is no opportunity for
wholesale customers of the franchised public utility to be harmed as a
result of affiliate transactions.
---------------------------------------------------------------------------

    \39\ The Commission would need to be assured that all wholesale
customers of a franchised public utility have adequate fixed rate
contracts, not just a sub-set of the customers. Further, because
such contracts may have different expiration dates, the Commission
might need to place temporal conditions on such a waiver.
---------------------------------------------------------------------------

    45. With respect to requested clarifications regarding retail
customers in states with retail competition, consistent with our
Market-Based Rate Final Rule, we clarify that customers with retail
choice are not considered to be customers served under ``cost-based
regulation'' and therefore are not considered captive customers. These
customers have retail choice, i.e., by virtue of state law they can
purchase at market-based rates from retail suppliers other than a
franchised public utility.\40\ As the Commission explained in the
Market-Based Rate Final Rule, in a regulatory regime in which retail
customers have no ability to choose a supplier, they are considered
captive because they must purchase from the local utility pursuant to
rates set by a state or local regulatory authority. However, retail
customers in retail choice states who choose to buy power from their
local utility at cost-based rates as part of that utility's provider-
of-last resort obligation are not considered captive customers because,
although they may choose not to do so, they have the ability to take
service from a different supplier whose rates are set by the
marketplace.\41\ We clarify, however, that if a state regulatory
authority in a retail choice state does not believe retail customers
are sufficiently protected and that our affiliate restrictions should
apply to the local franchised public utility, it may file a petition
for declaratory order to deem its retail customers to be captive
customers for purposes of applying the affiliate restrictions.\42\
---------------------------------------------------------------------------

    \40\ As further discussed in the Market-Based Rate Final Rule,
the role of this Commission is not to evaluate the success or
failure of a state's retail choice program including whether
sufficient choices are available for customers inclined to choose a
different supplier. In this regard the states are best equipped to
make such a determination and, if necessary, modify or otherwise
revise their retail access programs as they deem appropriate.
Further, to the extent a retail customer in a retail choice state
elects to be served by its local utility under provider-of-last
resort obligations, the state or local rate setting authority, in
determining just and reasonable cost-based retail rates, would in
most circumstances be able to review the prudence of affiliate
purchased power costs and disallow pass-through of costs incurred as
a result of an affiliate's undue preference. Market-Based Rate Final
Rule, FERC Stats. & Regs. ] 31,252 at P 481. Also, we note that some
states have chosen to impose their own affiliate restrictions in
such circumstances.
    \41\ Id. If the retail choice program is not available to all
customers in the state, those customers that do not have retail
choice would be considered captive customers of the franchised
public utility that serves them, and our affiliate restrictions
would apply to the franchised public utility.
    \42\ Under the Commission's regulations, states are exempt from
filing fees for petitions for declaratory order. 18 CFR 381.108.
---------------------------------------------------------------------------

    46. As a general matter, we also clarify that the definition of
captive customers, and our interpretations of the term, are intended to
be applied uniformly in implementing all of our rules. In connection
with the affiliate restrictions adopted in the Market-Based Rate Final
Rule, we clarified that those affiliate restrictions will not apply
where a seller demonstrates, and the Commission agrees, that the seller
has no captive customers.\43\ We also clarified that any sellers that
have previously demonstrated and been found not to have captive
customers, and therefore have received a waiver of the market-based
rate code of conduct requirement in whole or in part, will not be
required to request another waiver of the associated affiliate
restrictions.\44\ We will adopt a similar approach with regard to the
cross-subsidization affiliate restrictions that we adopt in this Final
Rule. If a utility makes a showing that it has no captive customers,
and the Commission agrees, the affiliate cross-subsidization
restrictions will not apply. If a public utility has received a finding
that it has no captive customers for purposes of meeting the market-
based rate affiliate restrictions, such filing will be deemed
sufficient here. However, the utility must make an informational filing
with the Commission stating that the affiliate restrictions we adopt in
this Final Rule do not apply.
---------------------------------------------------------------------------

    \43\ Market-Based Rate Final Rule, FERC Stats. & Regs. ] 31,252
at P 552.
    \44\ Id. P 551.
---------------------------------------------------------------------------

    47. Further, in considering the comments in this docket and in the
Market-Based Rate Final Rule (pending rehearing), and in reviewing the
use of the definition of captive customers in our other rules, we
believe it appropriate to modify the definition of captive customers to
make explicit what was only implicit in our earlier rules--that the
definition is intended to apply to customers served by a franchised
public utility under cost-based regulation. Accordingly, we will modify
the term to mean: ``any wholesale or retail electric energy customers
served by a franchised public utility under cost-based regulation.''
\45\
---------------------------------------------------------------------------

    \45\ We recognize that this amended definition will result in
redundancy in certain of our regulations since some regulations
refer to ``franchised public utilities with captive customers'' and
other regulations simply refer to ``captive customers'' without
elaboration. However, we believe the amendment will eliminate
possible confusion in future interpretations.
---------------------------------------------------------------------------

    48. In response to clarification requests by APPA/NRECA that we
modify our proposed regulatory text so that the affiliate restrictions
apply not only to franchised public utilities that have captive
customers but also to public utilities that own Commission-
jurisdictional transmission facilities or provide Commission-
jurisdictional transmission service, we will grant the request. Thus,
the affiliate restrictions will apply where a franchised public utility
has captive customers or owns or provides transmission service over
Commission-jurisdictional transmission facilities. While some
franchised public utilities have captive customers, others do not,
although they own or provide transmission service over Commission-
jurisdictional transmission facilities.\46\ The customers of these
franchised public utilities also should not inappropriately be required
to subsidize ``non-regulated'' activities of the affiliates of such
utilities.\47\
---------------------------------------------------------------------------

    \46\ A public utility that has no captive power customers but
that owns or provides transmission service over Commission-
jurisdictional facilities may seek a waiver of the affiliate
restrictions if it can demonstrate that transmission customers are
adequately protected against inappropriate cross-subsidization.
    \47\ For example, if a franchised public utility owns
transmission facilities and also owns a non-utility construction
services firm, the public utility's customers should not pay an
above market price for construction services to upgrade transmission
facilities.

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

    49. Finally, we clarify that, consistent with the Market-Based Rate
Final Rule, we will continue to treat electric cooperatives as not
subject to the Commission's affiliate abuse restrictions.\48\
---------------------------------------------------------------------------

    \48\ Market-Based Rate Final Rule, FERC Stats. & Regs. ] 31,252
at P 526.
---------------------------------------------------------------------------

    b. Non-Utility Affiliate
    i. Definition of ``Affiliate''
    (a) Comments
    50. PG&E asks the Commission to clarify the definition of
``affiliate,'' as used in the definition of non-utility affiliate.\49\
PG&E states that the Commission should clarify whether the proposed
regulations use the definition of affiliate set forth in the PUHCA 2005
regulations or some other definition.
---------------------------------------------------------------------------

    \49\ As defined in the proposed regulations, ``non-utility
affiliate'' means ``any affiliate that is not in the power sales or
transmission business.''
---------------------------------------------------------------------------

    (b) Commission Determination
    51. In response to PG&E's request for clarification concerning the
definition of affiliate in the proposed regulations, we have considered
the use of the term affiliate in the context of the Affiliate
Transactions NOPR, the Commission's Standards of Conduct for
Transmission Providers, and other precedent.\50\ We have also reviewed
the affiliate definitions contained in both the PUHCA 1935 and PUHCA
2005 and have considered the fact that, with respect to certain
affiliate preferences or advantages involving EWG rates and charges, we
are specifically required by FPA section 214 \51\ to use the definition
contained in PUHCA 1935. After taking into account these differing
definitions of affiliate (or, in some cases, no definition at all, as
in the context raised by PG&E), and recognizing the need to provide
greater clarity and consistency in our rules, we believe it is
important to try to adopt a more consistent definition in our various
rules and also one that is sufficiently broad to allow us to adequately
protect customers.\52\
---------------------------------------------------------------------------

    \50\ See, e.g., Morgan Stanley Capital Group, Inc., 72 FERC ]
61,082, at 61,436-37 (1995) (Morgan Stanley).
    \51\ 16 U.S.C. 824m.
    \52\ For example, we adopt this definition of affiliate for
purposes of section 203 of the FPA in the concurrent Blanket
Authorization Final Rule.
---------------------------------------------------------------------------

    52. Our goal is to have a more consistent definition of affiliate
for purposes of both EWGs and non-EWGs to the extent possible, as well
as to strengthen the Commission's ability to ensure that customers are
protected against affiliate abuse. Accordingly, having studied the
clarity and scope of various definitions, we believe it appropriate to
modify the definition proposed in the Affiliate Transactions NOPR to
explicitly incorporate the PUHCA 1935 definition of affiliate for EWGs
(rather than incorporate it by reference as previously has been done).
We will also adopt the PUHCA 1935 definition of affiliate for non-EWGs,
but with adjustments to reflect our previously-used 10 percent voting
interest threshold for non-EWGs and to eliminate certain language not
applicable or necessary in the context of the FPA. This is discussed
more fully below.
    53. In the case of non-EWG public utilities, our past approach has
been that a voting interest of 10 percent creates a rebuttable
presumption of control for purposes of determining the existence of an
affiliate relationship.\53\ For EWGs, on the other hand, section 214 of
the FPA specifies that the term affiliate shall have the same meaning
as provided in section 2(a) of PUHCA 1935 (which, inter alia, contains
a five percent voting interest test) for purposes of determining
whether an electric utility is an affiliate of an EWG for purposes of
evaluating EWG rates. Although PUHCA 2005 also contains a definition of
affiliate, which has been incorporated in Sec.  366.1 of our
regulations, that definition is not the same as the definition
contained in PUHCA 1935. Indeed, it is narrower than the definition
contained in PUHCA 1935.\54\
---------------------------------------------------------------------------

    \53\ See Morgan Stanley, 72 FERC at 61,436-37; 18 CFR 358.3(b)
and (c).
    \54\ It is not clear whether some of the language from PUHCA
1935 was inadvertently omitted from the PUHCA 2005 definition or
whether Congress thought a more narrow definition was appropriate
with respect to a ``books and records'' access statute. In either
case, the PUHCA 1935 definition provides a more ``bright line''
approach while still reserving the agency's ability to deem an
entity an affiliate based on specific circumstances, thus better
ensuring the ability to protect customers.
---------------------------------------------------------------------------

    54. In particular, the PUHCA 2005 definition defines affiliate of a
company to mean ``any company, 5 percent or more of the outstanding
voting securities of which are owned, controlled, or held with power to
vote, directly or indirectly, by such company.'' The PUHCA 1935
definition, on the other hand, also defines as an affiliate of a
specified company ``any person that directly or indirectly owns,
controls, or holds with power to vote, 5 per centum or more of the
outstanding voting securities of such specified company'' and ``any
individual who is an officer or director of such specified company, or
of any company which is an affiliate thereof * * *.'' In addition, the
PUHCA 1935 definition also includes in the definition of affiliate
``any person or class of persons that the Commission determines, after
appropriate notice and opportunity for hearing, to stand in such
relation to such specified company that there is liable to be such an
absence of arm's-length bargaining in transactions between them as to
make it necessary or appropriate in the public interest or for the
protection of investors or consumers that such person * * *'' be
treated as an affiliate.
    55. Because FPA section 214 directs the Commission to use the
definition of affiliate that appears in PUHCA 1935 with respect to
certain affiliate preferences affecting rates or charges of EWGs, we
will revise the definition proposed in the Affiliate Transactions NOPR
to be consistent with the PUHCA 1935 definition.\55\
---------------------------------------------------------------------------

    \55\ Section 214 provides that no rate or charge of an EWG shall
be lawful if, after notice and opportunity for hearing, the
Commission finds that it resulted from any undue preference or
advantage received from an electric utility that is an associate or
affiliate of the EWG.
---------------------------------------------------------------------------

    56. We also will revise the definition of ``affiliate'' for
purposes of non-EWGs utilities to be consistent with the definition of
``affiliate'' for EWGs, except to the extent we believe it may leave a
gap in coverage or contains language not applicable to the FPA. The
definition we adopt for non-EWGs essentially parallels the EWG
definition (with certain exceptions that we discuss below), while
retaining the 10 percent voting interest threshold contained in the
current regulations. Use of the PUHCA 1935 definition for non-EWGs may
capture under the definition of ``affiliate'' entities that otherwise
would not have been treated as affiliates under the definition
currently in place in the Commission's regulations. We believe it is
appropriate to adopt a broader definition, one that is largely
consistent with the definition for EWGs, because it will strengthen the
Commission's ability to ensure that customers are protected against
affiliate abuse. For example, the revised affiliate definition for non-
EWGs will give the Commission the ability to treat an entity as an
affiliate of a company if, after notice and opportunity for hearing,
the Commission finds that ``there is liable to be such an absence of
arm's-length bargaining in transactions between them as to make it
necessary or appropriate in the public interest or for the protection
of investors or consumers'' that such entity be treated as an
affiliate. It also is consistent with other recent orders and rules
(e.g., the Supplemental Policy Statement) in which we have provided
greater clarity as to what is considered ``control'' of an entity.
    57. While the affiliate definition we adopt for non-EWGs
essentially

parallels the EWG definition, there are a number of exceptions. One
exception is that the non-EWG definition also defines an affiliate of a
specified company to include ``any person that is under common control
with such specified company.'' This language is included in the
definition of non-EWG affiliate that currently is in the Commission's
regulations and identifies an additional instance in which an entity
will be deemed to be an affiliate of a specified company. On this
basis, we believe it appropriate to include this language as part of
the non-EWG definition. Because the ``under common control with''
language is not part of the PUCHA 1935 definition, however, we cannot
also include it as part of the definition of affiliate for purposes of
EWGs. We also include as part of the non-EWG affiliate definition a
provision making clear that where a person owns, controls, or holds
with power to vote less than 10 percent of the outstanding voting
securities of a specified company, this creates a rebuttable
presumption of lack of control. Although the PUHCA 1935 definition does
not contain a parallel provision with regard to the five percent
threshold in the case of EWGs, we nevertheless believe that it is
appropriate to include this rebuttable presumption as part of the non-
EWG definition because it provides greater clarity concerning the
circumstances in which an entity will be presumed not to be an
affiliate.
    58. Another exception concerns the provision in the PUHCA 1935
definition that includes as an affiliate of a specified company ``any
individual who is an officer or director of such specified company, or
of any company which is an affiliate thereof * * *.'' We do not believe
it necessary to include that language as part of the affiliate
definition for non-EWGs because we already are including in the
definition, a provision giving the Commission the ability to treat an
entity as an affiliate if, after notice and opportunity for hearing,
the Commission finds that there is liable to be an absence of arm's-
length bargaining in transactions between two entities.\56\
---------------------------------------------------------------------------

    \56\ With respect to this provision, we note that we are
omitting language referencing the duties, obligations and
liabilities imposed by PUHCA 1935 since those are no longer
applicable in light of repeal of PUHCA 1935.
---------------------------------------------------------------------------

    59. In sum, we believe that the definition of affiliate that we
adopt in this Final Rule will provide greater clarity to public
utilities and customers with respect to identifying which entities are
considered to be affiliates for purposes of the regulations that we
adopt in this Final Rule.
    ii. Definition of ``Non-Utility Affiliate''
    (a) Comments
    60. NiSource argues that the Commission should revise the
definition of non-utility affiliate because it could inadvertently
include state-regulated local distribution companies (LDCs) and
Commission-regulated interstate pipelines because they are not in the
power sales or transmission business. NiSource notes that the
regulatory text strongly suggests that the Commission intended the
definition of non-utility affiliate to apply only to ``unregulated''
entities. NiSource argues that this is important because any franchised
public utility with captive customers would have to price sales of non-
power goods and services to any non-utility affiliate at the higher of
cost or market. NiSource argues that imposing this pricing requirement
on LDCs and Commission-regulated interstate pipelines (as non-utility
affiliates): (1) Is inconsistent with the intent of the regulations,
which is to prevent cross-subsidization of a ``non-utility associate
company'' as derived from PUHCA 1935 and PUHCA 2005, (2) could conflict
with state requirements, and (3) is unnecessary because the Commission
and the states have ample authority to review such transactions.
    (b) Commission Determination
    61. We agree with NiSource and clarify that the definition of non-
utility affiliate does not apply to utility affiliates that sell or
transport natural gas, such as LDCs, or Commission-regulated interstate
pipelines. However, we will not foreclose the expansion of the
definition of non-utility affiliate to include LDCs and/or interstate
pipelines if circumstances warrant it in the future.
2. Pricing Non-Power Affiliate Transactions
    62. In the Affiliate Transactions NOPR, the Commission proposed to
implement affiliate restrictions that would be applicable to
transactions for non-power goods and services between franchised public
utilities with captive customers and their market-regulated and non-
utility affiliates. Specifically, the Commission proposed that: (1) A
franchised public utility with captive customers that provides non-
power goods and services to a market-regulated power sales affiliate or
a non-utility affiliate should charge a price that is the higher of
cost or market price; (2) a franchised public utility with captive
customers should be prohibited from purchasing non-power goods and
services at a price above market price from market-regulated power
sales affiliates and non-utility affiliates, with the exception of
centralized service companies; \57\ and (3) a franchised public utility
with captive customers should be prohibited from buying non-power goods
and services from a centralized service company at a price above
cost.\58\ The Affiliate Transactions NOPR indicated that each of the
proposed restrictions was consistent with restrictions previously
imposed in the 203-merger context.\59\
---------------------------------------------------------------------------

    \57\ Order No. 667 defines centralized service companies as
performing generally corporate administration functions, such as
accounting, human resources, legal and tax services, while special-
purpose non-utility affiliates provide generally a single input to
utility operations, such as fuel supply, construction or real
estate. Order No. 667, FERC Stats. & Regs. ] 31,197 at P 171 n.178.
    \58\ Affiliate Transactions NOPR, FERC Stats. & Regs. ] 32,618
at P 16.
    \59\ See, e.g., National Grid, 117 FERC ] 61,080 at P 66.
---------------------------------------------------------------------------

    a. Comments
    63. Several commenters suggest that the Commission's proposal will
raise prices within holding company systems by creating inefficiencies.
Specifically, EEI, Entergy, NiSource and PG&E argue that the Commission
should require at-cost pricing for all transactions within a holding
company system regardless of whether the services are provided for or
by the franchised public utility. They contend that an at-cost standard
creates savings through economies of scale that apply whether the
employee providing the non-power good or service is located in a
centralized service company, a utility or another affiliate. In
addition, they note that it is difficult to find a market price for
affiliate transactions for such goods and services.
    64. EEI and PG&E further argue that requiring a utility to charge
an affiliate the ``higher of cost or market'' would likely increase
costs to both the utility and the affiliate by discouraging the
efficient sharing of services. As a substitute for the ``higher of cost
or market'' requirement for sales by a franchised public utility to an
affiliate, they state that the Commission should allow the fully loaded
cost to be a proxy for the market price for sales of non-power services
by a utility to its affiliates.
    65. National Grid argues that at-cost pricing for sales of non-
power goods and services provided by a franchised public utility to a
centralized service company would be consistent with the Commission's
rationale for allowing at-cost pricing for sales in the opposite
direction. It states that the Commission established at-cost pricing in
Order No. 667 to encourage centralization of certain services that
provide economies of scale that benefit customers, and that these
benefits occur whether a

franchised public utility is buying or selling non-power goods or
services to or from its centralized service company. It argues that
requiring at-cost pricing for transactions from a centralized service
company to a franchised public utility on the one hand, while requiring
at-the-higher-of-cost-or-market pricing for transactions from a
franchised public utility to a centralized service company on the other
hand, creates a bifurcated-pricing structure that undermines efficient
pricing within a holding company. It further argues that tracking which
transactions are ``at market'' and which transactions are ``at cost''
adds a level of complexity to the accounting within holding companies,
and identifying the market prices for certain non-power goods and
services that may be sold by franchised public utilities to centralized
service companies is difficult.
    66. In contrast, the New York Commission focuses on whether the
Commission's proposed pricing standards adequately protect captive
customers from cross-subsidization. Specifically, it challenges the
Commission's proposal to prohibit a franchised public utility with
captive customers from purchasing non-power goods and services at a
price above market price from market-regulated power sales affiliates
and non-utility affiliates, with the exception of centralized service
companies. It asserts that this standard would allow utilities to
purchase non-power goods or services from an affiliated entity at
market prices and may allow holding companies to structure affiliate
transactions so that utilities with captive customers would pay above-
cost charges. It states that where an affiliate makes central purchases
on behalf of several utilities, the affiliate will likely obtain
discounts in the prices it pays due to the combined volume of
purchases. The New York Commission contends, however, that the
Commission's proposal would allow the central purchasing affiliate to
charge each utility up to the prevailing market price which otherwise
would be incurred if the utilities made their own separate purchases,
and the result would provide a source of affiliate cross-subsidization
in an amount equivalent to the incremental purchase quantity discount.
    67. As an alternative, the New York Commission proposes that the
Commission require utilities to record purchases of covered items from
their affiliates at the lower of actual cost or market prices. It
contends that this standard would protect captive utility customers
against paying affiliates more than the affiliate's actual costs.
    68. Commenters also made recommendations on the appropriate
relationship between state and Commission affiliate-pricing standards.
In particular, EEI, National Grid and Pinnacle West argue that, at the
very least, the Commission should avoid unnecessary duplication or
conflict with state provisions. In particular, EEI encourages the
Commission to adopt deference to states in the cross-subsidy context,
unless a state or holding company asks the Commission to apply uniform
rules to avoid inconsistent standards that would trap legitimate costs.
EEI suggests that the Commission adopt a procedure similar to the one
it adopted in Order No. 667, in which a holding company system can
apply to the Commission to impose consistent requirements that would
eliminate the possibility of trapped costs. National Grid contends that
inconsistencies between federal and state rules make implementation of
both sets of rules impossible, particularly with respect to the day-to-
day press of business within a utility holding company. It argues that
deference to the states would minimize disruption of existing holding
company accounting and reporting systems, cost-allocation manuals, and
interaffiliate-transaction procedures built around state regulation.
Pinnacle West states that, because state regulations typically address
affiliate transactions, the Commission's regulations could upset
states' efforts to ring fence utilities.
    b. Commission Determination
    69. The Commission will adopt the pricing restrictions on
transactions for non-power goods and services proposed in the Affiliate
Transactions NOPR, with the exception of a modification to the
restriction applicable to transactions with centralized service
companies, to conform those restrictions to the language in our Order
No. 667 regulations. These are explained below.
    70. First, as proposed, a franchised public utility with captive
customers that provides non-power goods and services to a market-
regulated power sales affiliate or a non-utility affiliate will be
required to sell at a price that is the higher of cost or market price.
We will not adopt an at-cost pricing structure for these types of non-
power transactions (as suggested by National Grid, EEI, NiSource,
Entergy and PG&E) because it would require a franchised public utility
to sell to an affiliate at cost even when market prices are higher,
thereby foregoing profits that the utility otherwise could have
obtained by selling to a non-affiliate at a market price. In such a
scenario, the benefit would go to the market-regulated affiliate or
non-utility affiliate who receives a good or service at a below-market
price. We believe the benefits that captive customers will receive
under this ``higher of cost or market price'' standard outweigh any
savings that may (or may not) occur through the use of a uniform at-
cost standard.
    71. Next, we will adopt the proposal in the Affiliate Transactions
NOPR to prohibit a franchised public utility with captive customers
from purchasing non-power goods or services from a market-regulated
power sales affiliate or a non-utility affiliate at a price above
market price (with the exception of transactions from centralized
service companies, which are discussed below). In doing so, we deny the
New York Commission's request for a ``lower of cost or market''
standard for these types of transactions. As discussed above, the New
York Commission argued that the ``at a price above market price''
standard would allow holding companies to structure affiliate
transactions so that captive customers would pay above-cost charges.
But captive customers are not harmed by the franchised public utility
paying above-cost charges if those charges are no higher than what they
would pay non-affiliates for the same non-power goods and services.
Moreover, nothing in the standard requiring that these purchases not be
above market prevents the franchised public utility from paying less
than the market price. The New York Commission, or any other state
commission, can require a stricter standard for these transactions so
long as the standards do not result in trapped costs in situations
involving multi-state holding companies. If the state commission's
pricing standards for a franchised public utility's purchases from an
affiliate are stricter than the Commission's (e.g., the state standard
is lower of cost or market as opposed to market), then the stricter
pricing standard would apply, as long as there is no conflict in
complying with both the state's pricing standard and this Commission's
pricing standard.\60\
---------------------------------------------------------------------------

    \60\ See 18 CFR 366.5.
---------------------------------------------------------------------------

    72. Finally, with regard to centralized service companies, the
Affiliate Transactions NOPR proposed that a franchised public utility
with captive customers should be prohibited from purchasing or
receiving non-power goods and services from a centralized service
company at a price above cost. We will conform this standard to the
language in Order No. 667, which is to require that such transactions
occur ``at cost.'' While this is a change from the

Affiliate Transactions NOPR, which proposed to prohibit such sales from
centralized service companies at a price above cost, our intent in the
Affiliate Transactions NOPR was to be consistent with Order No.
667,\61\ as well as the SEC's at-cost standard used prior to the repeal
of PUHCA 1935. As we have previously stated, the at-cost pricing
standard for transactions for non-power goods and services from
centralized service companies to franchised public utilities with
captive customers benefits ratepayers through economies of scale, and
eliminates the speculative task of defining a market price in these
instances.\62\
---------------------------------------------------------------------------

    \61\ Order No. 667, FERC Stats. & Regs. ] 31,197 at P 169.
    \62\ Id.
---------------------------------------------------------------------------

    73. We recognize that one of the risks of at-cost pricing is the
potential for prices to be imposed that are substantially higher than
the market price. As we stated in Order No. 667, the Commission will
entertain complaints that at-cost pricing exceeds the market price.
Complainants would continue to have the burden of demonstrating the at-
cost price exceeded market price and, furthermore, any change in the
price as a result of the complaint would be prospective.
    74. With regard to comments that the Commission's affiliate-pricing
standards may conflict with similar pricing rules at the state level,
we are not convinced that the Commission should establish a general
policy of deference to existing state rules. For many years, we have
required restrictions on certain affiliate transactions for non-power
goods and services in the context of both market-base rate
authorizations and merger approval under section 203.\63\ As stated
above, to the extent a state has affiliate-pricing standards that are
``stricter'' than the Commission's then the stricter standard applies,
as long as there is no conflict in complying with both the state's
pricing standard and this Commission's pricing standard.
---------------------------------------------------------------------------

    \63\ See, e.g., Potomac, 93 FERC at 61,782; Heartland, 68 FERC
at 62,062-63; PSC Colorado, 75 FERC at 62,046.
---------------------------------------------------------------------------

3. Reporting Requirements
    75. In the Affiliate Transactions NOPR, the Commission asked
whether it should adopt any after-the-fact reporting requirements for
transactions covered by the proposed regulations.
    a. Comments
    76. Most commenters, including EEI, Entergy, PG&E, Pinnacle West
and Sempra, argue that the Commission should not require after-the-fact
reporting requirements.
    77. EEI argues that such reporting would be onerous given the
number of transactions at issue, the fact that further reporting could
include sensitive information and the Commission already collects large
volumes of information from utilities and service companies. EEI also
argues that if the Commission does adopt these regulations, it should
clarify that utilities no longer need to include language that
duplicates the regulations in their code of conduct as part of their
individual tariffs.
    78. Pinnacle West and Sempra argue that additional reporting is not
required because many states already require reporting of affiliate
transactions (including the states in which they conduct business) and
the Commission already collects affiliate power sales information
through EQRs and market-based rate requirements. Sempra states that it
does not object to additional reporting requirements provided that the
entities subject to the requirements are authorized to submit the same
information in the same format and in the same time period as is
required under existing state requirements.
    79. PG&E encourages the Commission not to require additional
reporting requirements for single-state holding companies. PG&E argues
that such a requirement would be extraordinarily onerous. PG&E also
argues that such a requirement would be duplicative because of
Commission reporting requirements (EQRs and Form No. 3-Qs) and state
requirements (where there is adequate state regulation of cross-subsidy
issues).
    80. APPA/NRECA and the state commissions support after-the-fact
reporting requirements. APPA/NRECA ask that the Commission adopt
additional after-the-fact reporting requirements. APPA/NRECA state that
the Commission should require the filing of affiliate agreements
governing non-power goods and services and the filing of periodic
reports of all affiliate transactions within holding company systems
regardless of whether they involve a centralized service company, a
single-purpose service company, a market-regulated power sales
affiliate or a non-utility affiliate. APPA/NRECA assert that there is
no question of the Commission's statutory authority to require such
reporting (citing the Commission's analysis in Order No. 667). APPA/
NRECA also note that, in Order No. 667, the Commission only requires
traditional, centralized service companies in holding company systems
to file annual reports containing certain information relating to
affiliate transactions, but the Commission does not require any
reporting for single-purpose service companies or other associate
companies in holding company systems. While APPA/NRECA acknowledge that
a one-size-fits-all reporting scheme may not be appropriate, they
believe additional reporting is required. As a suggestion, they offer
that the Commission require each covered public utility to file a one-
time compliance filing which would inform the Commission of its then-
existing affiliate relationships and any exemptions from annual
reporting requirements. APPA/NRECA admit that that sort of reporting
regime is general, and ask that the Commission consider a further
technical conference on this question.
    81. The Oklahoma Commission also recommends after-the-fact
reporting, noting that its rules regarding affiliate information have
been effective. The Oklahoma Commission suggests that the Commission
allow state commissions the opportunity to review and comment on any
post occurrence reporting (suggesting a 90-day review and comment
period).
    82. The New York Commission also recommends reporting on affiliate
transactions. The New York Commission recommends revisions to Form No.
1 and Form No. 2 to require utilities to describe, quantify, and
provide the basis used to record each type of transaction with its
affiliates. It argues that these reporting requirements are similar to
those the Commission included in Form No. 60 for centralized service
companies.
    b. Commission Determination
    83. We believe that the current reporting regulations are adequate
to ensure compliance with the proposed restrictions on affiliate
transactions between franchised public utilities that have captive
customers or that own or provide transmission service over
jurisdictional transmission facilities and their market-regulated power
sales affiliates or non-utility affiliates. In addition to the
information gathered through Form No. 1, the Commission already
collects affiliate power sales information from franchised public
utilities through EQRs and market-based requirements. With regard to
non-power goods and services, franchised public utilities that have
captive customers or that own or provide transmission service over
jurisdictional transmission facilities are covered by the existing
record retention requirements in Parts 125 and 225 of the Commission's
regulations. Accordingly, there is no need to impose additional
reporting requirements to ensure compliance with the proposed
regulations. However, if

the Commission finds that the existing requirements are inadequate, we
will consider holding a technical conference to discuss what additional
reporting requirements may be warranted.
4. Effective Date
    a. Comments
    84. EEI and Entergy recommend that the application of any adopted
regulations be prospective in nature and not affect any existing
contracts. In its comments, EEI asserts that it would be ``unjust and
detrimental to the financial integrity'' of holding companies for the
Commission to retroactively void pricing arrangements to provide energy
or non-power goods and services.\64\
---------------------------------------------------------------------------

    \64\ EEI Comments at 13.
---------------------------------------------------------------------------

    b. Commission Determination
    85. In response to EEI's request for clarification, we clarify that
the pricing rules adopted herein are prospective and will apply to any
contracts, agreements or arrangements entered into on or after the
effective date of this Final Rule. To the extent different pricing was
in effect for any contract, agreement or arrangement entered into prior
to the effective date of this Final Rule, such pricing may remain in
effect; however, the Commission on its own motion, or upon complaint,
may on a case-by-case basis institute a section 206 proceeding to
determine whether the costs incurred by a public utility under such
pre-existing contracts, agreements or arrangements are just, reasonable
and not unduly discriminatory or preferential. We also note that many
public utilities already have the same pricing restrictions in effect
as a result of Commission orders approving mergers or market-based
rates; these restrictions remain in place.

V. Information Collection Statement

    86. The Office of Management and Budget's (OMB's) regulations
require that OMB approve certain information collection requirements
imposed by agency rule.\65\ This Final Rule does not impose any
additional information collection requirements. Therefore, the
information collection regulations do not apply to this Final Rule. The
Commission received 12 comments on the Affiliate Transactions NOPR and
no entity specifically addressed the Commission's information
collection statement. The Commission will submit for informational
purposes only a copy of this rulemaking to OMB.
---------------------------------------------------------------------------

    \65\ 5 CFR 1320.12.
---------------------------------------------------------------------------

VI. Environmental Analysis

    87. 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.\66\ The
Commission has categorically excluded certain actions from this
requirement as not having a significant effect on the human
environment.\67\ The final rule is categorically excluded as it
addresses rate filings submitted under sections 205 and 206 of the
FPA.\68\ Accordingly, no environmental assessment is necessary and none
has been prepared in this final rule.
---------------------------------------------------------------------------

    \66\ Regulations Implementing the National Environmental Policy
Act, Order No. 486, 52 FR 47897 (Dec. 17, 1987), FERC Stats. &
Regs., Regulations Preambles 1986-1990 ] 30,783 (1987).
    \67\ 18 CFR 380.4.
    \68\ See 18 CFR 380.4(a)(15).
---------------------------------------------------------------------------

VII. Regulatory Flexibility Act

    88. The Regulatory Flexibility Act of 1980 (RFA) \69\ generally
requires a description and analysis of final rules that will have
significant economic impact on a substantial number of small
entities.\70\ Agencies are not required to make such an analysis if a
rule would not have such an effect.
---------------------------------------------------------------------------

    \69\ 5 U.S.C. 601-12.
    \70\ The RFA definition of ``small entity'' refers to the
definition provided in the Small Business Act, which defines a
``small business concern'' as a business that is independently owned
and operated and that is not dominant in its field of operation. 15
U.S.C. 632. The Small Business Size Standards component of the North
American Industry Classification System defines a small electric
utility as one that, including its affiliates, is primarily engaged
in the generation, transmission, and/or distribution of electric
energy for sale and whose total electric output for the preceding
fiscal year did not exceed 4 million MWh. 13 CFR 121.201.
---------------------------------------------------------------------------

    89. The Final Rule is applicable to franchised public utilities
that have captive customers or that own or provide transmission service
over jurisdictional transmission facilities. Most such companies
regulated by the Commission do not fall within the RFA's definition of
small entity.\71\ Therefore, the Commission certifies the Final Rule
will not have a significant economic impact on a substantial number of
small entities. As a result, no regulatory flexibility analysis is
required.
---------------------------------------------------------------------------

    \71\ 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.
---------------------------------------------------------------------------

VIII. Document Availability

    90. 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 FERC's Home Page (http://www.ferc.gov) and in FERC'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.
    91. From FERC'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.
    92. User assistance is available for eLibrary and the FERC'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>
IX. Effective Date and Congressional Notification

    93. These regulations are effective March 31, 2008. The Commission
has determined, with the concurrence of the Administrator of the Office
of Information and Regulatory Affairs of OMB, that this rule is not a
``major rule'' as defined in section 351 of the Small Business
Regulatory Enforcement Fairness Act of 1996.

List of Subjects in 18 CFR Part 35

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

    By the Commission.
 Kimberly D. Bose,
Secretary.

0
In consideration of the foregoing, the Commission amends part 35,
Chapter I, Title 18, Code of Federal Regulations, to read as follows:

PART 35--FILING OF RATE SCHEDULES AND TARIFFS

0
1. 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.

0
2. Subpart I is added to read as follows:

Subpart I--Cross-Subsidization Restrictions on Affiliate
Transactions

Sec.
35.43 Generally.
35.44 Protections against affiliate cross-subsidization.

Sec.  35.43  Generally.

    (a) For purposes of this subpart:
    (1) Affiliate of a specified company means:
    (i) For any person other than an exempt wholesale generator:
    (A) Any person that directly or indirectly owns, controls, or holds
with power to vote, 10 percent or more of the outstanding voting
securities of the specified company;
    (B) Any company 10 percent or more of whose outstanding voting
securities are owned, controlled, or held with power to vote, directly
or indirectly, by the specified company;
    (C) Any person or class of persons that the Commission determines,
after appropriate notice and opportunity for hearing, to stand in such
relation to the specified company that there is liable to be an absence
of arm's-length bargaining in transactions between them as to make it
necessary or appropriate in the public interest or for the protection
of investors or consumers that the person be treated as an affiliate;
and
    (D) Any person that is under common control with the specified
company.
    (E) For purposes of paragraph (a)(1)(i) of this section, 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) For any exempt wholesale generator (as defined under Sec.
366.1 of this chapter), consistent with section 214 of the Federal
Power Act (16 U.S.C. 824m), which provides that ``affiliate'' will have
the same meaning as provided in section 2(a) of the Public Utility
Holding Company Act of 1935 (15 U.S.C. 79b(a)(11)):
    (A) Any person that directly or indirectly owns, controls, or holds
with power to vote, 5 percent or more of the outstanding voting
securities of the specified company;
    (B) Any company 5 percent or more of whose outstanding voting
securities are owned, controlled, or held with power to vote, directly
or indirectly, by the specified company;
    (C) Any individual who is an officer or director of the specified
company, or of any company which is an affiliate thereof under
paragraph (a)(1)(ii)(A) of this section; and
    (D) Any person or class of persons that the Commission determines,
after appropriate notice and opportunity for hearing, to stand in such
relation to the specified company that there is liable to be an absence
of arm's-length bargaining in transactions between them as to make it
necessary or appropriate in the public interest or for the protection
of investors or consumers that the person be treated as an affiliate.
    (2) Captive customers means any wholesale or retail electric energy
customers served by a franchised public utility under cost-based
regulation.
    (3) Franchised public utility means a public utility with a
franchised service obligation under state law.
    (4) Market-regulated power sales affiliate means any power seller
affiliate other than a franchised public utility, including a power
marketer, exempt wholesale generator, qualifying facility or other
power seller affiliate, whose power sales are regulated in whole or in
part on a market-rate basis.
    (5) Non-utility affiliate means any affiliate that is not in the
power sales or transmission business, other than a local gas
distribution company or an interstate natural gas pipeline.
    (b) The provisions of this subpart apply to all franchised public
utilities that have captive customers or that own or provide
transmission service over jurisdictional transmission facilities.

Sec.  35.44  Protections against affiliate cross-subsidization.

    (a) Restriction on affiliate sales of electric energy. No wholesale
sale of electric energy may be made between a franchised public utility
with captive customers and a market-regulated power sales affiliate
without first receiving Commission authorization for the transaction
under section 205 of the Federal Power Act.
    (b) Non-power goods or services.
    (1) Unless otherwise permitted by Commission rule or order, sales
of any non-power goods or services by a franchised public utility that
has captive customers or that owns or provides transmission service
over jurisdictional transmission facilities, including sales made to or
through its affiliated exempt wholesale generators or qualifying
facilities, to a market-regulated power sales affiliate or non-utility
affiliate must be at the higher of cost or market price.
    (2) Unless otherwise permitted by Commission rule or order, and
except as permitted by paragraph (b)(3) of this section, a franchised
public utility that has captive customers or that owns or provides
transmission service over jurisdictional transmission facilities, may
not purchase or receive non-power goods and services from a market-
regulated power sales affiliate or a non-utility affiliate at a price
above market.
    (3) A franchised public utility that has captive customers or that
owns or provides transmission service over jurisdictional transmission
facilities, may only purchase or receive non-power goods and services
from a centralized service company at cost.

[FR Doc. E8-3820 Filed 2-28-08; 8:45 am]

BILLING CODE 6717-01-P