The adequacy of state and federal regulatory structures for governing electric utility holding companies

Posted by Brad Johnson Thu, 01 May 2008 13:30:00 GMT

Panel I
  • Joseph Kelliher, chairman, FERC
  • Suedeen Kelly, commissioner, FERC
  • Philip Moeller, commissioner, FERC
  • Jon Wellinghoff, commissioner, FERC
  • Marc Spitzer, commissioner, FERC
Panel II
  • David Owens, executive vice president, Business Operations, Edison Electric Institute
  • Mark Gaffigan, director, Energy Projects, Division of Natural Resources and Environment, GAO
  • Scott Hempling, executive director, National Regulatory Research Institute
  • James Kerr, commissioner, North Carolina Utilities Commission
E&E News:
The Senate Energy and Natural Resources Committee will question energy regulators about their efforts to protect consumers when utilities are acquired by large holding companies at a hearing Thursday.

The 2005 Energy Policy Act repealed a 1935 provision that had prevented holding companies from owning more than one utility and restricting non-utility companies from owning or controlling regulated utilities. The intention was to generate investment and access to capital in the power industry to stimulate the large projects needed in generation and transmission.

When holding companies own subsidiaries in both competitive and regulated markets, it is important to protect consumers from cross-subsidization. This involves large holding companies using guaranteed rates from captive customers – those who still receive power from one regulated utility – to pay for financial risks taken by other subsidiaries.

Holding companies could also abuse that privilege by having regulated utilities buy services for above-market prices from its other companies and get paid through rate returns.

The 2005 EPAct granted the Federal Energy Regulatory Commission authority to review merger acquisitions but required the commission to determine if the transaction would result in “cross subsidizations” and to adopt rules in that regard. The bill did not outline specific consumer protection regulations be put in place.

Chairman Jeff Bingaman (D-N.M.) and Sens. Russ Feingold (D-Wis.) and Sam Brownback (R-Kan.) had questioned the wisdom of repealing the 1935 provision without providing some required consumer protection regulation at the time.

Feingold and Brownback introduced an amendment that would have required FERC to establish “ring fencing” rules that restricted financial transfers between a regulated utility and its unregulated affiliates owned by the same holding company. The amendment did not pass but Bingaman promised during floor debate to hold a hearing on federal and state regulations on merger reviews and also asked the Government Accountability Office to investigate the matter. GAO confirms doubts

The GAO report was finally released last month and it appeared to confirm the senators’ fears of weak consumer protection.

The report said FERC has not substantially expanded its review policies since the 2005 bill and relies too much on self-reporting.

The report recommended FERC use “a risk-based approach to detect cross-subsidization, enhance audit reporting, and reassess resources to demonstrate oversight vigilance.”

FERC has strongly disagreed with the GAO report. FERC Chairman Joseph Kelliher said the report failed to understand FERC’s current policies and the history of its authority and definition of cross-subsidization.

FERC has the flexibility to defer to states’ protective measures, in contrast to the “pre-emptive” approach supported by the GAO report, Kelliher said at this month’s meeting.

“Recognizing the common interest in policing improper cross-subsidization, that [pre-emptive] approach seemed wholly inappropriate, since it would produce unnecessary conflict between federal and state regulators,” Kelliher said.

FERC is currently reviewing a proposed rule that would require a “code of conduct” when regulated and market-based companies had transactions.

But the GAO report said merely requiring merger companies to disclose existing or planned cross-subsidization and to promise not to engage in cross-subsidization is not strong enough regulation.

Several states have established “strong ring fencing” rules, including Oregon and Arizona, and have asked FERC not to adopt “pre-emptive” merger regulations.

All five FERC commissioners will testify, as well as representatives from state regulators, consumer advocates, GAO and the electric industry.