The Federal Energy Regulatory Commission (FERC) is proposing to revise its standards for determining whether proposed utility mergers and other asset transfer transactions subject to its jurisdiction under Section 203 of the Federal Power Act have the potential to have an adverse effect on cost-based rates for transmission service or wholesale electric service.

FERC’s policy statement, if adopted, may affect the willingness of utilities to enter into utility mergers and other asset transfer transactions in the future.  The proposed policy statement was published January 27 in the Federal Register, and comments are due by March 30.

A regulated entity is able to satisfy FERC’s concern that a proposed utility mergers and other asset transfer transaction will not have an adverse effect on FERC-jurisdictional rates by providing a “hold-harmless commitment.”   Currently, such a commitment has entailed agreeing that for five years after the transaction closes, the entity will not seek to recover transaction-related costs or transition costs in such rates except to the extent that there are demonstrable merger-related savings.

However, in the proposed policy statement, the FERC is proposing to make the following changes to its policy for review of hold-harmless commitments:

1. Applicants will be required to identify the costs to which the hold-harmless commitment applies.  Although the FERC will determine on a case-by-case basis the costs that must be encompassed within the hold-harmless commitment of each applicant, it has prescribed a non-exhaustive list of costs incurred to explore, agree to, consummate and implement a transaction which it believes should be covered.  Also under the proposed policy statement, the FERC would bar recovery from ratepayers of similar costs that are associated with transactions that are pursued but never completed.

2. Applicants that propose hold-harmless commitments will be required to describe in detail the controls and procedures that will be used to identify and track those costs from which their customers are to be protected.  This discussion would be required to include a describe how the applicants define, designate, accrue, and allocate transaction-related costs, explain the criteria used to determine which costs are transaction-related, and discuss the accounting and rate-making procedures that would be used track and allocate those costs.

3. The hold harmless commitment will be required to be of unlimited duration.

4. The FERC will no longer require adoption of hold harmless commitments for transactions that will not have an adverse effect on rates.  Among the transactions that fall into this category are the purchase of an existing generating plant or transmission facility that is needed to serve the acquiring company’s customers or forecasted load within a public utility’s existing footprint in compliance with a resource planning process or to meet specified NERC reliability standards.  Applicants may also demonstrate that other types of transactions meet this standard as well.