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FERC Issues Proposed Changes to Merger Reviews

FERC last Monday proposed rules and amendments to the Commission's regulations to implement merger review provisions of the Energy Policy Act of 2005 (EPAct 2005), which amended section 203 of the Federal Power Act (FPA).

Section 203 of the FPA requires Commission authorization for mergers and acquisitions and dispositions of jurisdictional assets. Among other things, the Energy Policy Act amended section 203 of the FPA to:

Under the existing section 203, the Commission reviews utility mergers to ensure they are "consistent with the public interest." In 1996, the Commission updated and clarified its merger review policy in order to provide greater certainty and means to expedite merger reviews. The merger policy statement (RM96-6) established three factors that the Commission considers when analyzing section 203 transactions: (1) the effect on competition; (2) the effect on rates; and (3) the effect on regulation.

As a result of the changes to section 203, the Commission is seeking comment on the proposed definitions of "value." The Commission proposes that "value," as applied to transmission facilities and existing generation facilities, be defined as the market value of such facilities for transactions between non-affiliates.

Regarding wholesale contracts, the Commission proposes that "value" would be based on total expected contract revenues over the remaining life of the contract. "Value" for securities would be defined as the market price at the time the security is acquired.

The Commission seeks comment on its proposed definition of "existing generation facility" as a facility that is operational at the time the transaction is consummated. The proposal also seeks comment on cross-subsidization issues.

"In light of the Congress' clear directive in EPAct 2005 that the Commission make findings regarding cross-subsidization and the pledge or encumbrance of utility assets in the context of a section 203 application, we seek comment...on what additional safeguards or conditions may need to be placed on section 203 transactions," the rulemaking proposal says. "[T]he Commission solicits comments on the adequacy of its present policies preventing affiliate abuse and cross-subsidization, and whether conditions such as those imposed by state commissions may need to be placed on section 203 transactions."

Further, the Commission proposes to provide for the expeditious consideration of completed section 203 applications that are not contested, are not mergers and are consistent with Commission precedent.

The Commission intends to issue a final rule by Feb. 8, 2006, the date on which the amended section 203 provisions take effect.

"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. Today, the Commission acts to implement this significant new responsibility," said Commission Chairman Joseph T. Kelliher.

Comments on the proposed rule are due 30 days after the notice of proposed rulemaking, Transactions Subject to FPA Section 203, is published in the Federal Register (available at www.gpoaccess.gov).

The NOPR is just the latest in a series of steps FERC has taken in following up on the sweeping new energy law. In late August, FERC proposed a rule to require potential developers of new liquefied natural gas (LNG) import terminals and associated facilities to initiate pre-filing procedures at least six months before filing a formal application with the agency. The proposed rule also would apply to companies seeking to expand their existing LNG facilities, if FERC's director of Office of Energy Projects deems it necessary.

FERC also recently proposed criteria for the establishment of an electric reliability organization that will enforce reliability standards under the regulatory review and oversight of the Commission and, separately, proposed rules to implement the repeal of the Public Utility Holding Company Act of 1935 (PUHCA) and to enact the new Public Utility Holding Company Act of 2005 (PUHCA 2005).

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