FERC Pares Back Accounting & Record Keeping, but Retains Strict Transfer Pricing for Public Utility Holding Companies under PUHCA 2005

In a December 8 final rule FERC substantially pared back its initial proposal for regulating holding companies under the recently enacted Public Utility Holding Company Act of 2005 (PUHCA 2005), which replaces the PUHCA of 1935 effective February 8, 2006.  The 2005 Act replaces the 1935 Act's strict structural and transactional limitations on public utility holding companies with a system of transparent access to the books and records of holding companies as needed for states (and also FERC) to prevent abusive transactions.   To be considered, public comments on the final rule must be filed with FERC by January 9, 2006.

The most conspicuous retreat in the final rule abandons FERC's earlier proposal to perpetuate the strict accounting and record-keeping requirements of the Securities and Exchange Commission (SEC) under the 1935 Act.  That suggestion had drawn Congressional fire for being inconsistent with the legislative intent to repeal the 1935 Act.  Public utility holding companies under the final rule will instead be required to comply only with FERC's less onerous record retention requirements.  Exempt from those record retention rules are qualifying facilities under the scaled back provisions of the Public Utility Regulatory Policies Act of 1978, and exempt wholesale generators (EWG) and foreign utility companies (FUCO), classifications that were exempt from the 1935 Act and which the final rule now retains.  Also exempt are certain passive investors in public utilities, natural gas and power marketers lacking captive franchise customers, co-ops and local natural gas distribution companies. 

Not exempt but eligible for a waiver of the record retention requirements are holding company systems confined to a single state, holding companies owning no more than 100 megawatts of power generation that is used to serve their own or affiliated utility customers, and, significantly, investors in independent power transmission companies.

Central to regulation of holding companies under the 1935 Act were limits on the transfer prices that non-utility companies within the holding company structure could charge in sales of services or products to the operating public utilities within the same holding company.  To protect ratepayers of the operating utilities from excess charges in these non-arm's-length transactions, the SEC capped service company prices at the cost of providing the service.  This was known as "at cost" pricing.  FERC had earlier asked whether "at cost" should be replaced by FERC's stricter rule capping inter-affiliate prices at the lower of cost or market price.  The final rule adopts a hybrid.  For administrative services, such as back office functions, the final rule prescribes "at cost" pricing.  But for the products of special-purpose service companies, such as fuel, fuel transport, or construction, market-based price caps are prescribed.   [Repeal of the Public Utility Holding Company Act of 1935 and Enactment of the Public Utility Holding Company Act of 2005, 113 FERC ¶ 61,248 (2005)]