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The 2005 Energy Policy Act repealed a 1935 provision that had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.