The Federal Energy Regulatory Commission has taken a number of steps to implement its expanded authority over the new broader market for utility mergers and acquisitions, Chairman Joseph T. Kelliher told a congressional committee Thursday, rebutting a critical Government Accountability Office (GAO) report that called for greater efforts to protect consumers.

Following on the replacement of the old Public Utility Holding Company Act (PUHCA) with PUHCA 2005, the Commission has taken a series of actions to expand recordkeeping and reporting requirements for utility holding companies, revised accounting requirements for centralized service companies to provide greater transparency, and incorporated in its rules the explicit consideration of whether a proposed merger would result in cross-subsidization, whereby ratepayer assets could wind up in the pockets of other subsidiaries.

Kelliher and the four other FERC commissioners were among the witnesses testifying before the Senate Energy and Natural Resources Committee regarding the GAO report issued earlier this year (see Power Market Today, March 10).

Responding to questions from Sen. Maria Cantwell (D-WA), the chairman explained that the federal agency acted as a backstop to state regulatory agencies, examining measures such as ring-fencing the states imposed to ensure that they were adequate to prevent cross subsidization. Saying the Commission doesn’t “blindly trust the states,” Kelliher said the Commission “is the last resort if the states don’t do the job.”

Cantwell said FERC should make clear in advance what its merger requirements are and implement a ring-fencing “tool” in its merger reviews.

Other restrictions FERC has installed include rules on the pricing of nonpower goods and services between a regulated utility and an unregulated affiliate, as well on sales of power between the two related entities, Kelliher said. The new rules and the Commission’s Supplemental Merger Policy Statement “have focused first and foremost on ensuring customer protection (including protection against inappropriate cross-subsidization) and precluding harm to competition, but also on removing unnecessary transaction burdens and limitation on much-needed investment in the utility industry.”

North Carolina Utilities Commissioner James Kerr also focused on the capital needs of the industry, arguing against prescriptive formulas and in favor of fact-specific inquiries. States also are facing an increased burden of reviewing utility mergers or acquisitions involving a new variety of nonutility partners. Some states are expanding their review process and the National Association of Regulatory Utility Commissioners (NARUC) is working to leverage resources across the states. The states also are working with FERC in this regard.

“The sense of just what the public interest is is evolving,” Kerr said. “It’s not just cost-based. There are environmental challenges and we may be looking at the role of utilities somewhat differently.” For instance, he said, “we may want the lower cost of capital applied to renewable power generation, which is not the most economical currently. What we are going to want tomorrow may not be purely economic efficiency in investments or structures. More flexibility at the current time is what we need because the concept of how this segment of society is going to be dealt with is evolving rapidly, and it’s not purely a matter off economic efficiency.”

Kelliher also defended the Commission’s audit process against GAO claims that it does not adequately evaluate risk in choosing companies to audit, detailing an extensive process, including review of materials received from the Securities and Exchange Commission and consultation with state regulators. FERC is conducting post-merger audits on three companies in fiscal 2008, the chairman said, noting the Commission’s funding is tight and much of it goes to its top jobs of maintaining market reliability, fostering competitive markets and preventing market manipulation

Commissioner Suedeen Kelly agreed with the GAO that the Commission should “adopt and communicate a clear vision for its enforcement strategy…There is a distinct difference between including objectives and scope in an individual audit and setting forth the Commission’s objectives, scope, vision and strategy for enforcement more broadly.”

Regarding cross-subsidization, Kelly agreed that there should not be a “uniform and preemptive federal rule on cross-subsidization in the absence of widespread evidence of state regulatory failure,” but she suggested FERC could insist that “at least one of a suite of mechanisms to prevent cross-subsidization be adopted.”

She also agreed with criticism that the Commission currently relies primarily on self-reported information from market participants, urging increased funding to enable the Commission to obtain its own information.

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