United States: FERC Adopts Final Rules Under New Public Utility Holding Company Act

On December 8, the Federal Energy Regulatory Commission (FERC) met its deadline in the Energy Policy Act of 2005 by adopting final rules implementing the repeal of the Public Utility Holding Company Act of 1935 (PUHCA 1935) and enactment of the Public Utility Holding Company Act of 2005 (PUHCA 2005).¹ The final rules become effective on February 8, 2006, the date that PUHCA 1935 is repealed and PUHCA 2005 takes effect.

PUHCA 2005 is primarily a books and records access statute that supplements FERC’s existing authority under the Federal Power Act and Natural Gas Act. Companies should find FERC’s PUHCA 2005 regime more streamlined and less onerous than the PUHCA 1935 regime of the Securities and Exchange Commission (SEC), especially since FERC scaled back its original proposed rules (and rejected attempts by commenters) that would have re-imposed various requirements of PUHCA 1935 that Congress did not include in PUHCA 2005.

The new filing regime includes the following:

Annual Service Company Report.² All traditional centralized service companies will be required to submit to FERC by each May 1st FERC Form No. 60, which replaces and streamlines SEC Form U-13-60. Service companies in existing registered holding company systems must submit their first report by May 1, 2006, and service companies in existing exempt holding company systems must submit their first report by May 1, 2008.

Informational Holding Company Filings.³ All entities that are or become holding companies (regardless of whether previously registered or exempt) will be required to make a one-time informational filing on Form FERC-65 (which replaces SEC Form U5A) or claim an exemption or waiver from regulation by making a one-time filing on Form FERC-65A or Form FERC-65B, respectively. All holding companies as of February 8, 2006 must file the relevant form by March 10, 2006; thereafter, an entity must file the relevant form within 30 days after becoming a holding company. Entities that file Form FERC-65A or Form FERC-65B in good faith will be considered to have a temporary exemption or waiver upon filing, and the exemption or waiver will be deemed granted 60 days later absent FERC action to the contrary.

Qualifying facilities (QFs), exempt wholesale generators (EWGs) and foreign utility companies (FUCOs) are exempt under FERC’s new rules and are not required to file any of these forms. Because Section 32 (exempting owners of EWGs from PUHCA 1935) and Section 33 (a similar provision for FUCOs) of PUHCA 1935 were repealed, FERC eliminated its rules for determining EWG and FUCO status. However, PUHCA 2005 provided an exemption for entities that would be holding companies subject to PUHCA 2005 solely by virtue of ownership of EWGs and FUCOs. Companies owning EWGs and FUCOs were concerned that, absent a process for determining EWG or FUCO status contained in prior FERC rules, the acquisition of an EWG or FUCO after the effective date of PUHCA 2005 could subject its owner to PUHCA 2005. Accordingly, FERC established procedures for EWG and FUCO self-certification, similar to the option currently available for entities seeking QF status. ⁴ An entity filing a good faith notice of self-certification will be deemed to have temporary EWG or FUCO status upon filing and, if no FERC action is taken within 60 days thereafter, will be deemed to have been granted such EWG or FUCO status, and its owner will not be subject to PUHCA 2005 solely by virtue of such ownership. In addition, EWGs will not be considered "electric utility companies" under PUHCA 2005.⁵

Certain Filings No Longer Required. Various filings required under PUHCA 1935 will no longer be required, including SEC Forms U5B (registration statement), U-5S (annual report) and U-3A-2 (exemption claim) and, as discussed above, U5A (now covered by Form FERC-65) and U-13-60 (now covered by FERC Form No. 60).

FERC Access to Books and Records⁶

All holding companies and their affiliates, including those previously exempted from regulation by the SEC under PUHCA 1935, will have until January 1, 2007 to comply with FERC’s record retention requirements, which will require these companies to maintain and make available to FERC their books and records that are relevant to utility costs and jurisdictional rates.

Accounting and Recordkeeping⁷

All holding companies and service companies will be required to maintain and make available to FERC books and records of all of their transactions with respect to jurisdictional rates and otherwise comply prior to January 1, 2007 with FERC’s existing record retention requirements. Traditional centralized service companies also will be required to comply by January 1, 2007 with accounting requirements pursuant to FERC’s Uniform System of Accounts. Existing registered holding companies and service companies that currently follow the SEC’s record retention and accounting rules have the option until December 31, 2006 to follow either the SEC’s or FERC’s requirements in these respects. FERC anticipates issuing final rules to address modifications to its Uniform System of Accounts and record retention rules well in advance of January 1, 2007 to enable companies to transition to FERC’s accounting and record retention rules by that deadline.

Interaffiliate Cost Allocation⁸

FERC imposes code of conduct restrictions on power sales at market-based rates between regulated and non-regulated affiliates. The SEC and state commissions, however, previously have been primarily responsible for determining allocations of costs for non-power goods and services among the various associate companies in registered holding company systems, and these allocations have been made on an "at cost" basis. By contrast, FERC’s long-standing policy, imposed by FERC as a condition for approving mergers creating new registered holding companies, has been that registered holding company special-purpose subsidiaries must provide non-power goods and services to a public utility regulated by FERC at a price no higher than "market".

Going forward, FERC will review and authorize these non-power goods and services cost allocations at the election of the holding company system or a state commission having jurisdiction over the public utility. FERC will retain its existing "market" standard for non-power goods or services transactions between specialpurpose subsidiaries and public utilities. FERC, however, will not require any traditional centralized service companies that are currently using the SEC’s "at cost" standard to switch to FERC’s "market" standard. FERC will apply a presumption that this "at cost" pricing of non-power goods and services is reasonable, but third parties may file complaints if they believe that this use of "at cost" pricing results in costs that are above market price, in which case the third parties will bear the burden of proof. Single-state holding companies (i.e. no more than 13% of public-utility revenues are derived from outside a single state) are exempt from these cost allocation rules. Given the annual requirement to file FERC Form No. 60, FERC will not require the formal filing of cost allocation agreements.

Exemptions from New FERC Requirements⁹

Although the statutory exemptions contained in PUHCA 1935 (such as the exemption for predominately intrastate holding companies) will no longer apply and there will no longer be a distinction between registered and exempt holding companies, FERC has adopted a streamlined process to exempt from its new rules the following:

• QFs, EWGs and FUCOs

• rural electric cooperatives

• local distribution companies

• passive investors (including mutual funds and underwriters)

• FERC-jurisdictional utilities that have no captive customers and are not affiliated with any jurisdictional utility that has captive customers

• transactions where a holding company certifies that it will not (1) charge, bill or allocate to its public utility or natural gas company any costs or expenses in connection with goods and services transactions or (2) engage in financing transactions with any such public utility or natural gas company except as authorized by FERC or a state commission

• transactions between or among affiliates that are independent of and do not include a public utility or natural gas company

• single-state holding companies (except for record retention requirements)

• holding companies that own 100 megawatts or less of generation used fundamentally for their own load or affiliated end-users (except for record retention requirements)

• investors in independent transmission-only companies (except for record retention requirements)

FERC will allow an entity to continue to rely on its existing SEC financing authorization order until the later of the expiration of that SEC order or December 31, 2007, provided that the entity must file with FERC a copy of that SEC order by March 10, 2006. During this period, FERC will not require additional authorization under Federal Power Act Section 203 or Section 204. With respect to an existing SEC order that requires periodic reporting to the SEC of financing transactions consummated pursuant to that SEC order, those periodic reports must be filed with FERC beginning February 8, 2006 and so long as the entity continues to rely on that SEC order. FERC will consider whether to place the so-called "Westar" conditions¹¹ upon future financing applications on a case-by-case basis. FERC will entertain requests for new financing approvals prior to February 8, 2006, but such approvals will only be effective on or after February 8, 2006. Holding companies (as distinguished from operating utilities) will no longer be required to obtain financing authorizations (unless required by state regulators).

Most companies will find the new FERC regulatory regime much less burdensome than the current SEC regulatory regime. Companies should nonetheless consider whether these new rules and the existing rules under the Federal Power Act and Natural Gas Act (and state public utility commission rules) are applicable to them, especially insofar as the newfound absence of SEC regulation under PUHCA 1935 submits them to regulation by FERC (or state public utility commissions).