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Energy Regulatory Update: FERC Supplements Existing Cross-subsidization Restrictions and Sets Pricing Standards for Certain Affiliate Transactions

February 27, 2008

On February 21, 2008, FERC issued a Final Rule through Order No. 707 in which it supplements existing affiliate transaction rules and codifies restrictions on and pricing of affiliate transactions between franchised public utilities that have captive customers or own or provide transmission service over jurisdictional transmission facilities, and their market-regulated power sales affiliates or non-utility affiliates. This Final Rule expands the transactions and entities to which the existing cross-subsidization restrictions apply and provides certainty to public utilities and customers with respect to pricing standards for certain affiliate transactions. The new rule takes effect 30 days after its publication in the Federal Register.
 
FERC's goal through this rule is to ensure that captive customers of franchised public utilities do not inappropriately cross-subsidize the activities of market regulated affiliates (e.g., power marketers) and unregulated affiliates (e.g., construction service firms, real estate companies, legal services companies or fuel supply companies) and are not otherwise financially harmed as a result of affiliate transactions and activities.
 
The Final Rule codifies the following affiliate transaction restrictions: 

  • FERC authorization under FPA Section 205 is required for any wholesale sale of electric energy between a franchised utility with captive customers and a market-regulated power sales affiliate;
     
  • Unless otherwise permitted by FERC rule or order, sales of any non-power goods or services by a franchised public utility with captive customers or that owns or provides transmission service over jurisdictional transmission facilities (including sales made to or through its affiliated EWGs or QFs) to a market-regulated power sales affiliate or non-utility affiliate must be at the higher of cost or market price;
     
  • Unless otherwise permitted by FERC rule or order, a franchised public utility with captive customers or that owns or provides transmission service over jurisdictional transmission facilities may not purchase or receive non-power goods and services from a market-regulated power sales affiliate or a non-utility affiliate at a price above market price except for transactions from centralized service companies (as provided for below); 
     
  • A franchised public utility with captive customers or that owns or provides transmission service over jurisdictional transmission facilities may only purchase or receive non-power goods and services from a centralized service company at cost. 

FERC also revises certain definitions to align the cross-subsidization and affiliate transaction definitions with those in FERC's other rules. For instance, the definitions of "captive customer" and "affiliate" are revised in this order and now comport with those definitions in the Blanket Authorization Final Rule, as discussed in this Energy Update. In addition, FERC provides in this Final Rule that there may be circumstances in which franchised pubic utilities may request and obtain waivers from the affiliate restrictions on a case-buy-case basis if there are sufficient protections in place to protect the customers against risk of harm from transactions between the franchised public utility and its affiliates. FERC also clarifies that if a utility received a finding from FERC that it has no captive customers for purposes of meeting the market based-rate affiliate restrictions, such finding will be sufficient to demonstrate that these affiliate restrictions do not apply. However, the utility will need to make an informational filing with FERC stating that the affiliate restrictions in this Final Rule do not apply.
 
Finally, to coordinate FERC's efforts under this rule with the different state affiliate transaction rules, FERC provides that if the particular state has affiliate pricing standards that are "stricter" than those in this Final Rule, then the stricter standard will apply so long as the there is no conflict in complying with both the state's and FERC's pricing standards. 

For More Information

Follow these links for additional reports on actions taken by the Federal Energy Regulatory Commission at its February 21, 2008 meeting:

Please contact Earle O'Donnell at , Stuart Caplan at , David Hunt at or Donna Attanasio at for more information.


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