Underscoring FERC's successful track record in quickly acting on merger proposals, FERC Commissioner Joseph Kelliher last Thursday said that he doesn't think it makes sense for the federal agency to alter its existing approach to merger applications.
In an appearance before Deloitte's 2005 energy conference in Washington, DC, the commissioner noted that the Federal Energy Regulatory Commission (FERC) has "approved most merger proposals that have been submitted to us."
Kelliher said that FERC has the capacity to act quickly on mergers, "even large mergers." In recent years, FERC has issued final orders on proposed mergers in an average of 114 days, "which I think is pretty swift action." In the most recent large merger submitted to FERC -- the Commonwealth Edison/Peco combination -- the Commission approved that deal in 140 days. "So the Commission clearly can act quickly, even in the case of large mergers."
Kelliher said that FERC's merger policy is "well defined and well understood. It was established more than a decade ago and it's been honed in more than 100 transactions over that period and in my view, we should apply that same merger test to current and proposed mergers. I have no reason to think that the current merger test is somehow inadequate."
He noted that while the current set of FERC Commissioners has acted on some significant mergers, "none of the four commissioners have acted on a very large merger. That's one reason, I think, that it's important for us to clarify what test" FERC applies to mergers. "I think we should apply the same test we've applied in more than 100 transactions."
Two major energy mergers have been unveiled in the last six months, both of which will require various regulatory approvals, including FERC. The first is the combination of Exelon Corp. and Public Service Enterprise Group and the second is the more recently announced merger between Duke Energy Corp. and Cinergy Corp.
Meanwhile, Kelliher also commented on electric reliability issues. He noted that all three of the last major regional blackouts that occurred in the U.S. were caused in part by violation of voluntary, unenforceable reliability standards.
"I think it's clear that enforcement of reliability standards is absolutely essential and I frankly don't know how many times we have to learn the same lesson before we act to make compliance mandatory." Comprehensive energy legislation pending on Capitol Hill would do just that (see related story).
Kelliher said that FERC is "best positioned" to enforce reliability standards. "In my view, it's necessary for Congress to pass legislation providing for enforcement of reliability standards."
If Congress fails to act, "the question will in turn be what authority does the Commission have under current law to move towards enforcement," Kelliher told the conference. "It's clear that we may be able to do more than have in the past" under current authority, he added. "For example, I think there's no question the Commission under current law could require that jurisdictional utilities report their violations of reliability standards. I don't think there's really any question about that."
He also said that there's "no question" that FERC would not be able to enforce reliability standards against non-jurisdictional utilities, such as the Tennessee Valley Authority, the Bonneville Power Administration and the Los Angeles Department of Water and Power. He noted that a summer 1996 blackout "was caused by Bonneville's violation of reliability standards."
At a later point, Kelliher noted that the Federal Power Act (FPA) was written 70 years ago -- in 1935. While the power industry and markets "have changed dramatically," the FPA has remained unchanged in many respects, he said. Kelliher believes that the "time has come to change this law, to reform this law."
Meanwhile, the Commissioner said that he thinks the Commission probably will act on a final transmission pricing policy statement before the end of next month. Some "significant changes" may be made to a previously issued draft policy statement, he added.
Kelliher noted that FERC in January 2003 issued a draft transmission pricing policy statement. "We have been working very hard to reach consensus among the commissioners to finalize that."
Kelliher said that he had some concerns about the initial transmission pricing policy statement. From his point of view, the draft policy statement was designed more to encourage membership in regional transmission organizations (RTOs) than to encourage investment in transmission.
"That's a concern I had in that the incentives that were provided in the draft policy statement were only available within RTO regions." He didn't think there was any basis in the record to conclude that "a problem of under investment in transmission is peculiar to" RTOs.
FERC has been working on the policy statement "and I think perhaps some significant changes will be made," he added. "I think we probably will act before the end of June to finalize the policy statement, but I think it will be different from the draft" that FERC issued in January 2003.
Greg Aliff, national managing partner, energy and resources group, Deloitte & Touche USA LLP, responded to Kelliher's remarks by saying the private sector "can fund much-needed upgrades to the power grid, but only when investors have more certainty about the ability to site new transmission lines, recover their costs and earn the return they deserve in a reasonable period of time. Congress with the energy bill and the Federal Energy Regulatory Commission with its rulemakings need to reduce the existing level of uncertainty so that the private sector will respond to these needs."
Action on the transmission pricing policy statement could come as soon as this week. FERC late Wednesday issued its agenda for the Commission's next open meeting, slated for May 25. On the agenda is docket PL03-1, "Pricing Policy for Efficient Operation and Expansion of Transmission Grid," the same docket for the initial policy statement rolled out in January 2003.
As with all items included on open meeting agendas issued by the Commission, the docket could wind up being struck from consideration at next week's meeting by FERC and taken up at a later point in time.
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