[Federal Register Volume 70, Number 128 (Wednesday, July 6, 2005)]
[Rules and Regulations]
[Pages 38757-38759]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-13200]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 35

[Docket No. PL05-11-000]


Policy Statement Regarding Evaluation of Independent Ownership 
and Operation of Transmission

Issued June 27, 2005.
AGENCY: Federal Energy Regulatory Commission, DOE.

ACTION: Policy statement.

-----------------------------------------------------------------------

SUMMARY: The Federal Energy Regulatory Commission (Commission) is 
adopting this Policy Statement to clarify the ownership structures that 
could qualify for passive ownership in regards to independent ownership 
and operation.

DATES: Effective Date: The Policy Statement will become effective 
immediately.

FOR FURTHER INFORMATION CONTACT:

Sebastian Tiger (Technical Information), Office of Market Oversight and 
Investigations, Federal Energy Regulatory Commission, 888 First Street, 
NE., Washington, DC 20426, (202) 502-6079.
Andre Goodson (Legal Information), Office of the General Counsel, 
Federal Energy Regulatory Commission, 888 First Street, NE., 
Washington, DC 20426, (202) 502-8560.

SUPPLEMENTARY INFORMATION: 
Before Commissioners: Pat Wood, III, Chairman; Nora Mead Brownell, 
Joseph T. Kelliher, and Suedeen G. Kelly.

I. Introduction

    1. The Commission is issuing this Policy Statement to provide 
clarity and remove barriers to the formation of independent 
transmission companies. Specifically, the Policy Statement clarifies 
that the Commission would be willing to accept proposals from 
independent transmission companies (ITCs) which have market 
participants as passive minority equity owners. On various occasions, 
the Commission has allowed innovative rate treatments both to 
facilitate the creation of ITCs and to stimulate investment in 
transmission infrastructure by ITCs.\1\
---------------------------------------------------------------------------

    \1\ These incentive proposals include: enhanced returns on 
equity, within the zone of reasonableness; hypothetical or imputed 
capital structures; recovery of deferred income tax liabilities; 
cost deferrals; Construction Work in Progress (CWIP) in rate base; 
accelerated book depreciation; and expensing of pre-certification 
costs associated with new transmission. In addition, the Commission 
is willing to consider further incentives for independent 
transmission companies, among which are 100 percent recovery of 
CWIP, 100 percent recovery of abandoned plant costs, and accelerated 
depreciation. See Michigan Electric Transmission Co., LLC, 105 FERC 
] 61,214 (2003) (METC) ; ITC Holdings Corp., 102 FERC ] 61,182, 
reh'g denied, 104 FERC ] 61,033 (2003); American Transmission Co. 
and Midwest Independent Transmission Operator, Inc., 105 FERC ] 
61,388 (2003), order dismissing reh'g as moot, providing 
clarification and approving uncontested settlement, 107 FERC ] 
61,117 (2004) (ATC).

---------------------------------------------------------------------------

[[Page 38758]]

    2. The Policy Statement describes a non-exclusive list of the 
factors which the Commission will consider when evaluating rate 
proposals by ITCs to ensure that passive ownership does not affect the 
independent operation, planning and construction of their transmission 
systems. The Commission will evaluate the merits of such proposals on 
an individual basis.
    3. The Commission recently demonstrated additional flexibility in a 
case involving the initial public offering of shares in an ITC that 
allows for the potential that market participants could purchase a 
small percentage of its shares in the public equity markets. In ITC 
Holdings II,\2\ the order authorizing the disposition of jurisdictional 
facilities and confirming the independence of ITC Holdings, the 
Commission confirmed that International Transmission would continue to 
be independent of market participants and remain eligible for 
innovative rate treatment after a change in ownership is effected 
through an initial public offering of its shares. International 
Transmission adopted certain safeguards to ensure its continued 
independence, including limits on potential ownership by market 
participants as well as a corporate governance structure that assures 
that market participants that do purchase limited stakes in the company 
would not be able to influence its independent operation. Several 
commenters at an April 22, 2005 technical conference at the Commission 
noted that allowing market participant sellers to retain a passive 
ownership stake in stand-alone transmission companies (with appropriate 
safeguards to ensure their independence) could facilitate transactions 
creating such stand-alone transmission companies as ITCs.\3\
---------------------------------------------------------------------------

    \2\ ITC Holdings Corp. and International Transmission Co., 111 
FERC ] 61,149 (2005) (ITC Holdings II).
    \3\ E.g., Transmission Independence and Investment, Docket No. 
AD05-5-000, Tr. 190-91 (Paul McCoy, Trans-Elect, Inc. (Trans-
Elect)); Tr. 195-97 (Dale Landgren, American Transmission Company); 
Docket No. AD05-5-000, Supplemental Comments of Trans-Elect at 3-4; 
Supplemental Comments of National Grid USA at 18-19.
---------------------------------------------------------------------------

II. Factors the Commission Will Evaluate in Determining if Market 
Participants Are Passive Equity Owners in Proposed Independent 
Transmission Companies

    4. In this Policy Statement, the Commission is identifying a non-
exclusive list of the relevant considerations that it intends to take 
into account in evaluating if market participants are truly passive 
owners in any application for incentive rate treatment filed by ITCs or 
stand-alone transmission companies under section 205 of the Federal 
Power Act (FPA).\4\ These factors include:
---------------------------------------------------------------------------

    \4\ 16 U.S.C. 824d (2000).
---------------------------------------------------------------------------

     The percentage ownership held by market participants;
     Composition of the board of directors and the 
responsibilities and rights of the board;
     The corporate governance structure of the applicant;
     The nature of the applicant's capital investment planning 
and policies;
     The relationship, if any, of capital investment policies 
with those governing capital contributions or dividend reinvestment by 
passive equity holders;
     The role of executive compensation agreements and other 
management incentives in shaping independent operation and investment 
decisions; and
     The nature and strictness of limits on contractual service 
and legacy relationships with ex-affiliates that are market 
participants.
    5. In evaluating any proposed passive ownership structure in an ITC 
application, the Commission will focus on the ability of the applicant 
to operate free of market participant control or influence. When 
determining if an applicant could qualify as an ITC, the Commission 
will consider proposals involving passive minority participation of up 
to 49 percent ownership by a single market participant. In addition, as 
in ATC, the Commission would be willing to consider applications in 
which multiple market participants owned greater than 49 percent of the 
applicant's equity. The Commission is concerned about the level of 
voting control (if any) held by market participants. In ITC Holdings 
II, for example, the applicants committed to prohibit a market 
participant that does acquire five percent or more of any class of ITC 
Holdings' stock from voting, giving consent in respect of, or directing 
or controlling five percent or more of ITC Holdings stock, in order to 
limit direct or indirect voting control over the applicant. The 
Commission will continue to use this standard in evaluating ITC 
applicants with passive ownership. In determining the applicant's level 
of independence from market participant control or influence to 
determine if it should qualify as an ITC, the Commission will also 
consider the applicant's governance structure and any rights that could 
allow market participant owners to directly or indirectly affect the 
applicant's operation, planning or investment decisions.
    6. Evaluation of the ITC applicant's board of directors will weigh 
the representation (if any) by market participants, and consider 
factors such as the composition and responsibilities of the board 
committees (e.g., compensation, audit and investment committees) and 
the extent and nature of corporate actions for which company management 
must obtain prior board approval. We appreciate the need for market 
participant representation to consider significant business decisions 
such as a sale of or merger of the company. However, the Commission 
will review the need (if present) for management to seek board approval 
in the normal course of operations for capital investments above a 
certain size. The degree to which market participant board members have 
granular knowledge of or ability to influence individual investment 
decisions would influence the appropriateness of allowing incentive 
rate treatments.
    7. The Commission will consider the potential role that equity 
holders that are market participants play in financing ongoing 
investments by the independent transmission company, to gauge if there 
is a risk that those equity holders could frustrate investment in 
transmission infrastructure either by disapproving a plan or by denying 
capital to projects in the plan.
    8. In evaluating the independence of applicants, the Commission 
will review executive compensation and deferred compensation plans to 
understand if those plans involve financial interests in market 
participants that would be inconsistent with independent operation, 
planning and expansion of the applicant's transmission system.\5\
---------------------------------------------------------------------------

    \5\ In discussing independence, the Commission has previously 
highlighted the importance of separation from financial interests in 
market participants. See Regional Transmission Organizations, Order 
No. 2000, 65 FR 809 (Jan. 6, 2000), FERC Statutes & Regulations, 
Regulations Preambles July 1996-December 2000 ] 31,089 (1999), order 
on reh'g, Order No. 2000-A, 65 FR 12-088 (Mar. 8, 2000), FERC 
Statutes & Regulations, Regulations Preambles July 1996-December 
2000 ] 31,092 (2000), aff'd sub nom. Public Utility District. No. 1 
of Snohomish County, Washington v. FERC, 272 F.3d 607 (D.C. Cir. 
2001), where the Commission stated:
    We reaffirm the NOPR proposal that the RTO, its employees and 
any non-stakeholder directors must not have any financial interests 
in market participants. As noted in the NOPR, our focus will be on 
current financial interests. Since this principle raises a number of 
specific issues, especially with respect to pension rights and 
benefits, we will continue our current policy of implementing this 
principle on a case-by-case basis.
    Order No. 2000 at 31,063.

---------------------------------------------------------------------------

[[Page 38759]]

    9. In evaluating the applicability of incentive rate treatment for 
structures allowing equity interests by market participants, the 
Commission will not limit its consideration to passive participation by 
integrated sellers who wish to retain a financial stake. The Commission 
will also consider ownership structures that facilitate participation 
by municipalities, cooperatives, and other transmission dependent users 
of the grid to the degree that corporate governance structures provide 
for independent operation, planning and investment. The Commission has 
approved the creation of a stand-alone transmission company, and 
allowed innovative rate treatments, for American Transmission Company 
(ATC), which is jointly-owned by investor-owned utilities which 
contributed their systems, and by public power customers which 
contributed cash in return for equity stakes in ATC with limited voting 
and governance rights.\6\ The Commission remains comfortable that the 
governance structure of ATC allows some degree of participation by 
market participants, but ensures the operational and managerial 
independence of the stand-alone transmission company.
---------------------------------------------------------------------------

    \6\ See American Transmission Co. and Midwest Independent 
Transmission Operator, Inc., 105 FERC ] 61,388 at P 24-31 (2003) 
(allowing ATC to apply innovative rate treatment, but only to 
projects that are accepted by Midwest ISO's Transmission Expansion 
Plan, and providing that ATC's incentive rates could remain 
effective only so long as ATC remains a member of Midwest ISO), 
order dismissing reh'g as moot, providing clarification and 
approving uncontested settlement, 107 FERC ] 61,117 (2004) (ATC), 
which is also discussed further in the Appendix to this Policy 
Statement; see also Docket No. AD05-5-000, Tr. 195-96 (Dale 
Landgren, ATC) (``Our form of governance is a variation on passive 
ownership in that the larger owners each have a seat on our board 
along with independent members. ATC demonstrates that this form of 
governance does not inhibit us from operating independently from 
market participants, which is after all the real objective.''). 
Further, each ATC board member has one vote per owner, regardless of 
their size. Docket No. AD05-5-000, Tr. 196 (Dale Landgren, ATC).
---------------------------------------------------------------------------

Document Availability

    10. In addition to publishing the full text of this document in the 
Federal Register, the Commission provides all interested persons an 
opportunity to view and/or print the contents of this document via the 
Internet through FERC's Home page (http://www.ferc.gov) and in FERC's 
Public Reference Room during normal business hours (8:30 a.m. to 5 p.m. 
E.t.) at 888 First Street, NE., Room 2A, Washington DC 20426.
    11. From FERC's Home page on the Internet, this information is 
available in the eLibrary. The full text of this document is available 
on elibrary in PDF and Microsoft Word format for viewing, printing, 
and/or downloading. To access this document in eLibrary, type the 
docket number excluding the last three digits of this document in the 
docket number field.
    12. User assistance is available for eLibrary and the FERC's 
website during normal business hours from our Help line, toll-free at 
(866) 208-3676 or for TTY, contact (202) 502-8659. The Public Reference 
Room may be reached at (202) 502-8371, or by e-mail at, 
[email protected].

Effective Date

    13. This Policy Statement is effective immediately.

    By the Commission.
Magalie R. Salas,
Secretary.
[FR Doc. 05-13200 Filed 7-5-05; 8:45 am]
BILLING CODE 6717-01-P