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FERC Issues Proposed Rules to Implement PUHCA Repeal

FERC last week 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) [RM05-32-000]. The PUHCA repeal notice of proposed rulemaking (NOPR) marks the third major action FERC has taken to implement the Energy Policy Act of 2005 enacted this summer.

"I know that on one hand, there are many people who believe this offers huge opportunities, and I am one of those," FERC Commissioner Nora Brownell said in reference to the new energy law's repeal of PUHCA. "But I also know there [are] a number of people who are concerned about this change and whether, in fact, customer protections will be adequately addressed, there will be sufficient transparency. So I think it's important that we get this right."

Comments in response to the proposed rules "need to reflect the most affirmative and substantive way we can move forward to allow the opportunities to be seen and experienced, while addressing the concerns that others have expressed during the course of this debate," she added.

In the new energy law, Congress repealed PUHCA and gave broader state and federal access to the books and records of holding company members.

In addition, Congress broadened the scope of FERC's Section 203 merger authority, "including widening the area of acquisitions and mergers that we will review and approve and also adding a new criteria to our merger approval and that is that a proposed 203 transaction will not result in cross-subsidization of a non-utility holding company or the encumbrance of utility assets for the benefit of an associate company unless those would otherwise be consistent with the public interest," said FERC Commissioner Suedeen Kelly.

This week's NOPR "deals with the first and second category -- the repeal of PUHCA, the broader state and federal access to books and records of holding companies." The NOPR does not deal with the scope of FERC's Section 203 merger authority. "Nevertheless, I do want to focus on one provision in this NOPR that relates to our Section 203 merger authority."

In the NOPR, FERC asks for comments "on whether, in light of the repeal of PUHCA, the Commission needs to promulgate additional rules or adopt additional policies to protect against inappropriate cross-subsidization or encumbrances of utility assets," Kelly said. "That is a question we ask pursuant to our Section 204 and 205 authority, not pursuant to our 203 merger authority. We will deal with that issue when we deal with our new 203 authority."

Nevertheless, "even though we are not dealing with Section 203, we take that statement of Congress very seriously. We do have policies in place to protect against cross-subsidization, but we seek comment as to whether in light of the repeal of PUHCA, we should change or add to those existing policies."

FERC Chairman Joseph Kelliher moved to "offer some reassurance" related to the impact of PUHCA repeal on consumers.

He noted that 25 years ago, the DC Circuit said that the Commission's primary task is to guard the consumer from exploitation by non-competitive electric power companies. "That's our central charge in the area of electric regulation and that was true before PUHCA repeal. It's true after PUHCA repeal. And we will honor that responsibility and we have new and better tools to actually discharge that duty."

At the same time Congress repealed PUHCA, "it granted the Commission new authority to protect consumers. It established an express prohibition of market manipulation. It gave us new authority to prevent the accumulation and exercise of generation market power. It gave us significant penalty authority. It authorized us to assure greater price transparency and it required that we look at cross-subsidization at the point of merger. So we have those new tools and we will exercise them."

Kelliher said that FERC's been moving to assure a smooth transition from the Securities and Exchange Commission (SEC) to FERC. Kelliher personally met with SEC Chairman Christopher Cox last month "and the Commission staff has had a number of meeting with the SEC staff."

In the proposed rule, the Commission noted that Congress in this year's Energy Policy Act not only gave the Commission new Holding Company Act responsibilities, but also significantly enhanced the Commission's authority over mergers, acquisitions and dispositions of jurisdictional assets by public utilities.

FERC said its existing authority under the Federal Power Act and Natural Gas Act, "in combination with our enhanced authority over public utility mergers, acquisitions and dispositions of jurisdictional facilities, and our new PUHCA 2005 authority, provide a sound framework to protect customers. To the extent that additional rulemakings or orders may be needed to protect customers adequately, the Commission will take appropriate actions in the future."

The Energy Policy Act repeals the 70-year-old PUHCA, which established a regulatory regime overseen by the U.S. Securities and Exchange Commission, and replaces it with a new regulatory regime involving access to holding company books and records by the Federal Energy Regulatory Commission and state utility regulators.

Congress mandated that the new Holding Company Act take effect within six months of Aug. 8, 2005, when President Bush signed the energy bill into law. The Commission is required to finalize new Holding Company Act rules and to report to Congress recommendations on any necessary technical and conforming statutory amendments within four months.

The Commission then has 90 days beyond the February 2006 effective date to finalize a rule exempting certain holding company systems with qualifying facilities, exempt wholesale generators and foreign utility companies from the federal access to books and records provisions of PUHCA 2005.

All rulemaking requirements of the new PUHCA are addressed in this week's NOPR, in which the Commission proposes to add a new Part 366, and to remove Part 365, in Title 18 of the Code of federal regulations to implement PUHCA 2005. The proposal also asks comment on what Securities and Exchange Commission requirements under the old Holding Company Act regulatory regime should be maintained under the new PUHCA 2005.

FERC also is seeking comment on a proposal to remove its exempt wholesale generator rules, as they are unnecessary under the new Holding Company Act statutory regime established by the Energy Policy Act of 2005. Comments are due 21 days after publication in the Federal Register.

The PUHCA repeal NOPR is the third major action FERC has taken to implement the 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.

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