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The Federal Energy Regulatory Commission unveiled proposed new utility merger rules this week, the first step in exercising expanded merger-review obligations imposed by the Energy Policy Act of 2005. The proposals include plans for determining which deals fall under the commission’s jurisdiction and the possible restrictions to prevent parent companies from using regulated utility profits to subsidize their unregulated affiliates. The new energy measure passed last summer scuttled the 70-year-old Public Utilities Holding Company Act, which imposed geographic limitations on utility mergers, restricted investment by non-energy companies and was overseen by the Securities and Exchange Commission. In its place, it gives FERC new powers to review public utility mergers and power companies’ planned acquisitions of electric generation facilities. “The Energy Policy Act of 2005 improved the ability of the commission to prevent the exercise of generation market power, by granting authority to review acquisition of electric generation facilities,” said FERC Chairman Joseph Kelliher in a statement. He added that the commission is acting to “implement this significant new responsibility.” Consumer advocates have warned that removing PUHCA’s restrictions would lead to massive consolidation and higher prices for customers but because FERC made few conclusions about specific protections that should be implemented, they said it’s too early to gauge whether FERC’s plans are sufficient to protect consumers. The new law raises the threshold for the value of deals to be reviewed by FERC, from $50,000 to $10 million. The commission has proposed to value those facilities at market value of the asset rather than the cost basis of supplying that energy asset, unless for some reason the market values are not apparent. Industry observers say while FERC will ultimately review more merger and transmission deals, the thresholds are insignificant since energy contracts — the bulk of energy trading — can easily be reorganized to fall under the $10 million threshold. Additionally, public utilities have to gain FERC approval before selling, leasing or purchasing FERC-regulated facilities if they are valued in excess of $10 million. In addition, utilities can’t merge or consolidate facilities without the commission’s approval; nor can they purchase or lease an existing generating facility that has a value over $10 million, is used for interstate wholesale sales and falls under FERC’s ratemaking authority. The commission’s expanded merger role extends the commission’s scope of merger review to include transactions involving some transfers of generation facilities and utility holding company transactions. It also directs FERC to adopt processes so that a merger or acquisition will be approved within 180 days or be deemed approved. The new law requires FERC to make sure a transaction will not result in a regulated utility subsidizing a non-utility affiliate. FERC said because any merger transaction that creates a new affiliate opens the door to cross-subsidization of unregulated subsidiaries and other abuses, such as pledges or encumbrances of assets. FERC noted that some states address those concerns by imposing conditions designed to prevent unfair competitive practices, cross-subsidization and affiliate abuse. FERC is seeking comment on whether it should be willing to impose similar conditions on transactions it reviews. State conditions often include reporting and information access requirements; restrictions on intra-corporate transactions that result in direct charges or cost allocations; a prohibition on the local utility bearing any of the merger acquisition costs; and measures to protect the utility’s financial position. FERC also proposes to provide a process for “expeditious consideration” of non-merger transactions as well as those that are not contested or are consistent with precedent. This type of transaction, FERC said, might include a disposition of transmission-only facilities, especially facilities “that both before and after the transaction remain under the functional control of a commission-approved” regional transmission organization or independent system operator. One of the other types of transactions that could get expedited review would be the acquisition of a foreign utility company by a holding company that has no captive customers in the United States, FERC said. Comments on the rules are due 30 days after publication in the Federal Register, and the commission intends to issue a final rule by Feb. 8, 2006 as mandated by the new energy law. Copyright �2005 TDD, LLC. All rights reserved.

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