[Federal Register Volume 79, Number 141 (Wednesday, July 23, 2014)]
[Rules and Regulations]
[Pages 42665-42670]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-17228]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Parts 2 and 35

[Docket No. PL14-1-000]


Payment of Dividends From Funds Included in Capital Account

AGENCY: Federal Energy Regulatory Commission.

ACTION: Policy statement.

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SUMMARY: The Commission issues this policy statement to provide 
guidance that the Federal Power Act (FPA) should be interpreted as not 
prohibiting the payment of dividends from funds included in capital 
account by any public utility that has a market-based rate tariff on 
file with the Commission, does not have captive customers, and does not 
provide transmission or local distribution services. The Commission has 
concluded that the payment of dividends from funds included in capital 
account by such public utilities does not implicate the concerns 
underlying the enactment of the provision of the FPA that prohibits the 
payment of dividends from funds included in capital account. Thus, it 
is unnecessary for any public utility that meets the criteria 
identified in this policy statement to file a petition for declaratory 
order in order to seek assurances that dividends paid from capital 
account are not unlawful under this provision of the FPA.

DATES: This policy will become effective July 23, 2014.

FOR FURTHER INFORMATION CONTACT:
Eric Olesh (Technical Information), Office of Energy Market Regulation, 
888 First Street NE., Washington, DC 20426, (202) 502-6524, 
[email protected].

Antonia Frost (Legal Information), Office of General Counsel, 888 First 
Street NE., Washington, DC 20426, (202) 502-8085, 
[email protected].

SUPPLEMENTARY INFORMATION:
148 FERC ] 61,020

Before Commissioners: Cheryl A. LaFleur, Acting Chairman; Philip D. 
Moeller, John R. Norris, and Tony Clark.

Policy Statement

Issued July 17, 2014.

    1. The Commission issues this policy statement to provide guidance 
that section 305(a) of the Federal Power Act (FPA) \1\ should be 
interpreted as not prohibiting the payment of dividends from funds 
included in capital account by any public utility that has a market-
based rate tariff on file with the Commission, does not have captive 
customers, and does not provide transmission or local distribution 
services because the Commission has concluded that the payment of 
dividends from capital account by such public utilities does not appear 
to implicate the concerns underlying the enactment of FPA section 
305(a). In issuing this policy statement, the Commission eliminates a 
regulatory burden otherwise applicable under FPA section 305(a) to 
certain public utilities that pay dividends from funds included in 
capital account. Thus, it is unnecessary for any public utility that 
meets the criteria identified in this policy statement to file a 
petition for declaratory order in order to seek assurances that 
dividends paid from capital account are not unlawful under FPA section 
305(a).
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    \1\ 16 U.S.C. 825d(a).
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I. Background

A. FPA Section 305(a) and Its Underlying Concerns

    2. FPA section 305(a) provides that it shall be unlawful for any 
officer or director of any public utility to participate in the making 
or paying of any dividends of such public utility from any funds 
properly included in capital account.\2\
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    \2\ Id.
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    3. In Citizens Utils. Co., the Commission noted that this provision 
of FPA section 305(a) had not previously been interpreted by the 
Commission or the courts, and that there was no explicit statement in 
the legislative history discussing the intent behind this provision.\3\ 
The Commission went on to explain, however, that Congress' intent could 
be gleaned from the practices that led to the passage of the 
legislation,\4\ providing as an example:
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    \3\ Citizens Utils. Co., 84 FERC ] 61,158, at 61,864 (1998) 
(Citizens).
    \4\ Id. at 61,864-65.

that sources from which cash dividends were paid were not clearly 
identified and that holding companies had been paying out excessive 
dividends on the securities of their operating companies. A key 
concern, thus, was corporate officials raiding corporate coffers for 
their personal financial benefit.\5\
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    \5\ Id. at 61,865 (footnotes omitted); see also Entergy 
Louisiana Inc., 114 FERC ] 61,060, at P 12 (2006); Exelon Corp., 109 
FERC ] 61,172, at P 8 (2004); ALLETE, Inc., 107 FERC ] 61,041, at P 
10 (2004); Niagara Mohawk Holdings, Inc., 95 FERC ] 61,381, at 
62,416, order denying reh'g, 96 FERC ] 61,144 (2001).

    In later cases, in order to ensure that the dividend pay-outs in 
question would not impair the liquidity and financial integrity of a 
public utility, the Commission has also often conditioned its grant of 
declaratory relief on the utility's commitment to observe specified 
limitations on the amount of such dividends or on other financial 
commitments.\6\
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    \6\ Niagara Mohawk Holdings, Inc., 99 FERC ] 61,323, at P 10 
(2002) (order on compliance filing accepting petitioner's commitment 
not to pay dividends out of paid-in capital unless it had an 
investment grade credit rating for its long-term debt); Exelon 
Corp., 109 FERC ] 61,172 at P 9 (requiring petitioner to maintain a 
minimum common equity balance of 30 percent of total capital).
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B. Petitions for Declaratory Order Requesting Relief

    4. In cases in which a dividend (cash or otherwise) will be 
accounted for as a charge to stated, additional, or miscellaneous paid-
in capital of a public utility,\7\ public utilities often filed 
petitions for declaratory orders in which the petitioner requests the 
Commission's concurrence that, based upon the facts and circumstances 
presented, the making or paying of a proposed dividend will not 
implicate the concerns underlying the enactment of FPA section 305(a) 
and, therefore, will not violate FPA section 305(a). The majority of 
these petitions arose from three situations: (1) Cases involving 
utility mergers or acquisitions in which, due to the application of 
purchase accounting to the transaction, the retained earnings, which is 
the traditional source of dividends, of the acquired public utility is 
reclassified for balance sheet purposes as additional paid-in capital, 
without having any effect on cash otherwise available for paying future 
dividends; \8\ (2) cases involving the distribution (or ``spin-off'') 
of the stock of a subsidiary or subsidiaries of a public utility, as 
the result of which, again for balance sheet purposes, the retained 
earnings of the public utility may be substantially reduced or 
eliminated, without having

[[Page 42666]]

any effect on cash otherwise available for paying future dividends; \9\ 
and (3) cases involving recapitalizations of public utilities to reduce 
excessive equity balances with debt, including situations in which 
single-asset generating companies with declining capital needs have 
experienced a build-up in their equity balances as their assets have 
been depreciated.\10\
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    \7\ See, e.g., 18 CFR pt. 101, Account 201, Common stock issued, 
and Account 211, Miscellaneous paid-in capital.
    \8\ See, e.g., National Grid plc, 117 FERC ] 61,080, at P 83 
(2006), order denying reh'g, 122 FERC ] 61,096 (2008); Ameren Corp., 
131 FERC ] 61,240 (2010); Duke Energy Ohio, Inc., 137 FERC ] 61,137 
(2011).
    \9\ See, e.g., Citizens, 84 FERC ] 61,158 (1998); Delmarva Power 
& Light Co., 91 FERC ] 61,043 (2000); ALLETE, Inc., 107 FERC ] 
61,041 (2004). In ALLETE, Inc., the Commission observed that the 
spin-off transaction was less like a payment of cash dividends than 
it was a corporate restructuring involving a one-time distribution 
of property, although the accounting issues presented were similar.
    \10\ See, e.g., PPL Electric Utilities Corp., 99 FERC ] 61,317 
(2002); Allegheny Generating Co., 130 FERC ] 61,269 (2010); System 
Energy Resources, Inc., 140 FERC ] 61,184 (2012).
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    5. In response to petitions for declaratory orders concerning these 
three situations, and sometimes in other situations, the Commission has 
found that FPA section 305(a) would not be violated by the payment of 
dividends, and it has allowed the public utility to make or pay 
dividends from funds included in capital account.
    6. The Commission has used a three-factor analysis, derived from 
Citizens, to determine when a proposed transaction does not implicate 
the concerns underlying FPA section 305(a), specifically that: (1) The 
utility clearly identifies the sources from which the dividends will be 
paid; (2) the dividends will not be excessive; and (3) the proposed 
transaction will not have an adverse effect on the value of 
shareholders' interests.\11\ In certain orders granting relief from FPA 
section 305(a), issued subsequent to Citizens, the Commission's 
determination also was based on commitments by petitioners either to a 
specific dollar cap on dividends or a limitation on the payment of 
dividends equal to the pre-merger retained earnings balance of the 
acquired utility, and/or a commitment by the public utility to limit 
the amount of dividends from paid-in capital so that common equity, as 
a percentage of total capitalization, is maintained at a minimum level 
(frequently, a minimum of 30 percent common equity as a percentage of 
total capitalization).\12\
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    \11\ Citizens, 84 FERC at 61,865.
    \12\ See, e.g., Duke Energy Ohio, Inc., 137 FERC ] 61,137, at P 
7 (2011); National Grid plc, 117 FERC ] 61,080, at P 83 (2006). The 
Commission also has accepted alternative protections. See, e.g., 
Niagara Mohawk Holdings, Inc., 99 FERC ] 61,323, at PP 12-13 (2002).
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    7. Historically, these petitions for declaratory orders concerning 
FPA section 305(a) have largely involved requests by public utilities 
that have captive customers.\13\ The Commission has found that a 
proposed transaction would not violate FPA section 305(a) where the 
Commission has been assured that no exploitation or threat to the 
financial integrity of the utilities would result from the payment of 
dividends from capital account, and therefore would not impair the 
utility's ability to continue its obligation to serve captive 
customers.\14\
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    \13\ The Commission's regulations define ``captive customers'' 
to mean ``any wholesale or retail electric energy customers served 
by a franchised public utility under cost-based regulation.'' 18 CFR 
35.36(a)(6) (2013). Our use of the term ``captive customers'' in 
this policy statement is based on this definition.
    \14\ See, e.g., National Grid plc, 117 FERC ] 61,080 (2006), 
order denying reh'g, 122 FERC ] 61,096 (2008).
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C. May 16, 2013 Petition for Declaratory Order

    8. On May 16, 2013 (May 16 Petition),\15\ Exelon Generation 
Company, LLC (Exelon Generation) and five of its direct and indirect 
subsidiaries (the Acquired Subsidiaries) \16\ (collectively Applicants) 
requesting that the Commission confirm that FPA section 305(a) was not 
a bar to the payment of dividends from capital account under the 
limitations and circumstances described in the petition.\17\ The 
relative novelty in this May 16 Petition, as compared with other FPA 
section 305(a) petitions, was that it did not involve utilities that 
have captive customers.\18\ Rather, Applicants stated that Exelon 
Generation and the Acquired Subsidiaries did not have captive 
customers; did not provide transmission or local distribution service 
or serve as a designated providers of last resort (POLR) for any class 
of customers; and had electric market-based rate authorizations from 
the Commission, with the standard waivers and exemptions, including 
waivers of FPA section 204(a) (with respect to securities issuances) 
\19\ and waiver of the requirement to maintain their books and records 
in accordance with the Uniform System of Accounts (USofA).\20\
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    \15\ While the May 16 Petition arose from a merger transaction 
and related accounting issues (see infra note 17), our policy 
statement in this proceeding is not limited in its applicability to 
transactions involving mergers and their related accounting issues.
    \16\ The five direct and indirect subsidiaries of Exelon 
Generation included CER Generation II, LLC, Constellation Mystic 
Power, LLC, Constellation NewEnergy, Inc., Constellation Power 
Source Generation, Inc. and Criterion Power Partners, LLC.
    \17\ The May 16 Petition arose from a merger transaction, and 
involved factual circumstances familiar to the Commission in the 
context of FPA section 305(a). Specifically, Applicants explained 
that the merger between Exelon Corporation (Exelon) and 
Constellation Energy Group, Inc. (Constellation) was recorded by 
Exelon under the purchase method of accounting and that Exelon 
applied ``push-down'' accounting to the Legacy Constellation 
Subsidiaries (i.e., all of the subsidiaries of Constellation that 
became direct and indirect subsidiaries of Exelon Generation), 
including the Acquired Subsidiaries, a subset of the Legacy 
Constellation Subsidiaries, which are public utilities under the 
FPA. ``Push-down'' accounting is a method of accounting in which the 
financial statements of a subsidiary are presented to reflect the 
costs incurred by the parent company to buy the subsidiary, instead 
of the subsidiary's historical costs. Accordingly, the purchase 
costs of the parent company are shown in the subsidiary's 
statements.
    As a result of the ``push-down'' accounting adjustments to the 
Legacy Constellation Subsidiaries at the time of the merger closing, 
the pre-merger retained earnings balances of the Legacy 
Constellation Subsidiaries were ``reset to zero'' and reestablished 
on their books as miscellaneous paid-in capital. In effect, the 
traditional source of dividends--retained earnings--was eliminated, 
without, however, having any impact on cash actually available for 
paying dividends.
    The purpose of the May 16 Petition was to obtain a Commission 
determination that FPA section 305(a) did not prohibit: (1) The 
Acquired Subsidiaries from paying dividends to their parent company, 
Exelon Generation, from their respective capital account in equal 
measure to the funds that were recorded as retained earnings at the 
close of the merger; and (2) Exelon Generation from, in turn, paying 
dividends to its parent company, Exelon Ventures LLC, from its 
capital account to the extent that Exelon Generation has received 
dividends from any of the Legacy Constellation Subsidiaries paid out 
of funds recorded as miscellaneous paid-in capital.
    \18\ However, the Commission notes that, in Docket No. EL06-15-
000, Exelon Generation and an affiliate previously had filed a 
petition for declaratory order requesting a determination that FPA 
section 305(a) was not a bar to the payment of dividends from 
capital account under the limitations and circumstances described in 
that petition. Exelon Generation Company, LLC, 114 FERC ] 61,317 
(2006).
    \19\ 16 U.S.C. 824c(a).
    \20\ 18 CFR pt. 101.
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    9. In the May 16 Petition, Applicants presented the Commission with 
two alternative requests:
    (1) The Commission could declare that FPA section 305(a) is not a 
bar to the proposed payment of dividends by the Applicants, and this 
determination could be based on the traditional Citizens three-part 
analysis, namely, that: (i) the source of the dividends will be clearly 
identified; (ii) the dividends will not be excessive; and (iii) the 
issuance of such dividends will not have an adverse effect on the value 
of shareholders' interests; \21\ or, alternatively,
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    \21\ See supra P 6.
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    (2) the Commission could declare that FPA section 305(a) is not a 
bar to the payment of dividends by the Applicants and all current and 
future public utility subsidiaries of Exelon that have market-based 
rate authority, do not have captive customers, do not provide 
transmission or local distribution service, and will not be the POLR 
for any class of

[[Page 42667]]

customers, rather than apply the traditional Citizens three-factor 
analysis.
    In support of its latter alternative, Applicants argued that the 
concerns relating to traditional public utilities, which FPA section 
305(a) was meant to address, were not present for these kinds of non-
traditional public utilities. In particular, Applicants argued that, in 
Order No. 697, the Commission concluded that it was appropriate to 
apply a different standard of oversight to public utilities that do not 
have captive customers and do not sell electricity at cost-based 
rates.\22\ Applicants explained that, in Order No. 697, the Commission 
found that it was reasonable to continue to grant (1) blanket 
authorizations under FPA section 204(a) to issue securities, and (2) 
waivers from the requirement to maintain books in accordance with the 
USofA,\23\ to those entities that do not have captive customers and do 
not sell electricity at cost-based rates. In essence, Applicants argued 
that it would be logically inconsistent for the Commission to grant a 
non-traditional public utility (i.e., merchant generators and power 
marketers) with market-based rate authorization a blanket authorization 
under FPA section 204(a) to issue securities, as well as a waiver from 
the requirement to maintain its books in accordance with the USofA, 
while, at the same time, under FPA section 305(a), limiting the 
accounts from which that public utility may pay dividends.\24\
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    \22\ Applicants' May 16, 2013 Petition at 14.
    \23\ Market-Based Rates for Wholesale Sales of Electric Energy, 
Capacity and Ancillary Services by Public Utilities, Order No. 697, 
FERC Stats. & Regs. ] 31,252, at PP 984, 999, clarified, 121 FERC ] 
61,260 (2007), order on reh'g, Order No. 697-A, FERC Stats. & Regs. 
] 31,268, clarified, 124 FERC ] 61,055, order on reh'g, Order No. 
697-B, FERC Stats. & Regs. ] 31,285 (2008), order on reh'g, Order 
No. 697-C, FERC Stats. & Regs. ] 31,291 (2009), order on reh'g, 
Order No. 697-D, FERC Stats. & Regs. ] 31,305 (2010), aff'd sub nom. 
Montana Consumer Counsel v. FERC, 659 F.3d 910 (9th Cir. 2011), 
cert. denied, 133 S. Ct 26 (2012).
    \24\ Applicants' May 16, 2013 Petition at 15. Specifically, 
Applicants stated that it ``would be anomalous for the Commission to 
conclude, on the one hand, that it need not be concerned with (a) 
the quantity or character of securities issued by a public utility 
[under FPA section 204(a)] or (b) the manner in which it keeps its 
accounts [under the USofA], and then to conclude that the Commission 
is concerned about how the entity accounts for dividends paid on its 
securities [under FPA section 305(a)].'' Id.
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    10. In response to the May 16 Petition, the Electric Power Supply 
Association (EPSA) \25\ filed comments generally supporting both 
alternative requests for relief by Applicants, but it also advocated 
that the Commission grant an even broader FPA section 305(a) 
determination.\26\ EPSA posited that the factors that made the 
Applicants' petition compelling are broadly applicable to certain 
classes of public utilities, such as merchant generators and power 
marketers, which have market-based rate tariffs on file with the 
Commission, do not have captive customers, and do not provide 
transmission or local distribution services.\27\ EPSA added that, 
although Applicants proposed that the entities eligible for Applicants' 
alternative broadly construed determination include a limitation that 
they would not serve as a designated POLR, such condition is not 
necessary where a designated POLR would meet the other three criteria, 
i.e, would have market-based rate tariffs on file with the Commission, 
would not have captive customers, and would not provide transmission or 
local distribution services.\28\ Therefore, EPSA urged the Commission 
to omit the POLR limitation proposed by Applicants in granting the 
broader relief requested under section 305(a).\29\
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    \25\ EPSA is the national trade association for competitive 
power suppliers, including merchant generators and power marketers.
    \26\ EPSA June 17, 2013 Comments at 1-2.
    \27\ Id. at 2-4.
    \28\ Id. at 2 n.3.
    \29\ Id.
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    11. In support of its request for a broader FPA section 305(a) 
determination, EPSA argued that, in the case of entities that have 
market-based rate authority, do not have captive customers, and do not 
provide transmission or local distribution services, the concerns 
underlying section 305(a) are not present.\30\ In such cases, according 
to EPSA, the distribution of dividends would not have any adverse 
effect on the financial integrity of any traditional public utility, 
its customers, or the ability of state commissions to protect public 
utility customers.\31\
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    \30\ Id. at 5-6.
    \31\ Id. at 5.
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    12. In sum, because of the broad applicability of these principles 
to the competitive power industry as a whole, and in the interest of 
administrative economy, EPSA requested that the Commission issue a 
blanket order finding that FPA section 305(a) does not act as a bar to 
the payment of dividends from capital account by any public utility 
that has market-based rate authority, does not have captive customers, 
and does not provide transmission or local distribution services.\32\
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    \32\ Id. at 2-4.
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    13. In their answer, Applicants supported EPSA's request for a 
broader FPA section 305(a) determination and, therefore, noted their 
agreement with EPSA's recommendation that the Commission omit the POLR 
limitation.\33\ As an additional basis for dropping the POLR 
limitation, Applicants observed that POLR service is a retail electric 
service and, thus, within the regulatory framework of state utility 
commissions.\34\ Applicants pointed out that those public utilities 
that provide transmission and local distribution services and also 
serve as a POLR would not be eligible for the alternative broader 
determination sought in Applicants' petition by virtue of the limiting 
condition that such utilities are providing transmission and local 
distribution services.\35\ Further, Applicants asserted that 
eliminating the POLR limitation would have positive public policy 
implications because, in such cases, non-traditional public utilities 
would not be discouraged from participating in POLR markets due to the 
FPA section 305(a) limits on the payment of dividends.\36\ Accordingly, 
Applicants stated that they would not object to the Commission's 
issuance of a blanket declaratory order based on EPSA's proposal.
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    \33\ Applicants' June 20, 2013 Answer at 3. Applicants noted 
that POLR, or default, service is also known by other terms, such as 
Standard Offer Service or Basic Generation Service. Id. at 2 n.3.
    \34\ Id. at 3.
    \35\ Id.
    \36\ Id.
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    14. In its September 3, 2013 order \37\ on the May 16 Petition, the 
Commission granted Applicants' primary request for relief, based on the 
Commission's traditional Citizens three-factor analysis, since the 
Commission agreed that the concerns underlying FPA section 305(a) were 
not present under the limitations and circumstances described in the 
petition.\38\ While it declined to grant the broader relief requested 
in that proceeding, the Commission also stated that it believed that 
Applicants and EPSA had made a strong case for a close examination of 
whether FPA section 305(a) should be interpreted as not prohibiting the 
payment of dividends from capital account by any public utility that 
has a market-based rate tariff on file with the Commission, does not 
have captive customers, and does not provide transmission or local 
distribution services.\39\ Accordingly, the Commission stated its 
intent to open a generic proceeding to consider the broader request for 
relief, which would provide public notice and an

[[Page 42668]]

opportunity for a broader range of interested parties to comment.\40\
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    \37\ Exelon Generation Company, LLC, 144 FERC ] 61,181 (2013).
    \38\ Id. PP 20-21.
    \39\ Id. P 22.
    \40\ Id.
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D. Proposed Policy Statement

    15. In the proposed policy statement,\41\ the Commission undertook 
a generic proceeding to consider whether FPA section 305(a) should be 
interpreted as not prohibiting the payment of dividends from capital 
account by any public utility that has a market-based rate tariff on 
file with the Commission, does not have captive customers,\42\ and does 
not provide transmission or local distribution services.\43\ Because 
the Commission believed that the payment of dividends from capital 
account by such public utilities does not appear to create the concerns 
underlying the enactment of FPA section 305(a), the Commission proposed 
this policy in order to eliminate the regulatory burden of filing 
unnecessary petitions for declaratory relief under FPA section 305(a) 
by such public utilities.
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    \41\ Proposed Policy Statement, Payment of Dividends from Funds 
Included in Capital Accounts, 146 FERC ] 61,108 (2014).
    \42\ See supra note 13.
    \43\ The Commission proposed that a public utility that does not 
provide transmission or local distribution service is a public 
utility that does not own transmission or local distribution 
facilities providing these services.
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    16. As previously noted, the Commission in response to the May 16 
Petition had expressed its opinion that Applicants and EPSA made a 
strong case for a close examination of whether FPA section 305(a) 
should be interpreted as not prohibiting the payment of dividends from 
capital account by any public utility that has a market-based rate 
tariff on file with the Commission, does not have captive customers, 
and does not provide transmission or local distribution services.
    17. In the proposed policy statement, the Commission observed that 
an eligible public utility: (1) Will have satisfied the Commission's 
market power analysis to obtain market-based rate authority for its 
wholesale power sales; (2) will have no captive customers that require 
protection by the Commission or the state commissions; and (3) will not 
provide transmission or local distribution services, which are 
traditional monopoly services subject to Commission and state 
commission oversight, to customers. Similar to the Commission's finding 
in Order No. 697, the Commission stated that it may be appropriate to 
now apply a different approach to its FPA section 305(a) oversight for 
those public utilities that meet the three conditions. The Commission 
noted, in this regard, that FPA section 305(a) was promulgated in an 
era of traditional, vertically-integrated utilities providing monopoly 
services to captive customers, and Congress wanted to ensure that the 
distribution of dividends would not have any adverse effect on the 
financial integrity (and thus the ability to serve) of any such public 
utility or its customers. Since that time, the Commission observed that 
the electric industry has evolved, and, in the proposed policy 
statement, it proposed to oversee differently the payment of dividends 
by non-traditional utilities, such as merchant generators and power 
marketers, who have market-based rate authority, do not have captive 
customers, and do not provide transmission and local distribution 
services, which, as noted, are monopoly services.
    18. The Commission requested comment as to whether the Commission 
should adopt a statement of policy that FPA section 305(a) should be 
interpreted as not prohibiting the payment of dividends from funds in 
capital account by any public utility that has a market-based rate 
tariff on file with the Commission, does not have captive customers, 
and does not provide transmission or local distribution services, 
because such payment of dividends does not appear to implicate the 
concerns underlying the enactment of FPA section 305(a) and it is thus 
appropriate to eliminate this regulatory burden otherwise applicable 
under FPA section 305(a) to such public utilities.

E. Commenters

    19. The Commission received comments from Exelon, EPSA, and two 
individuals, Messrs. Blake Harrison and Daisuke Ikewaza. All commenters 
supported adoption of the Commission's proposed policy statement. The 
comments of Exelon and EPSA include arguments similar to those made in 
support of Exelon Generation's May 16 Petition. Exelon and EPSA assert 
that the Commission should adopt the proposed policy statement's 
interpretation of FPA section 305(a) because the payment of dividends 
by a public utility that meets the three proposed criteria does not 
appear to implicate the concerns underlying FPA section 305(a), as such 
dividends would not have any adverse effect on the financial integrity 
of any traditional public utility, its customers, or the ability of 
state utility commissions to protect such public utility customers.\44\ 
In addition, Exelon and EPSA argue that, in routinely granting waivers 
and exemptions to public utilities that have been granted market-based 
rate authority, including blanket authorization to issue securities 
under FPA section 204, the Commission has determined that it is 
appropriate to apply a different standard of review and oversight to 
such public utilities.\45\ Furthermore, Exelon asserts that by adopting 
this policy, the Commission would ensure that funds appropriately 
available for the overall liquidity and financial integrity of a 
holding company are not stranded at a subsidiary that is a non-
traditional utility (i.e., a utility that has market-based rates, does 
not have captive customers, and does not provide transmission or 
distribution services).\46\ Exelon also states that the policy will 
eliminate unneeded filings and lessen the burden on the Commission of 
reviewing those filings.\47\
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    \44\ Exelon's May 1, 2014 Comments at 5; EPSA May 20, 2014 
Comments at 4.
    \45\ Exelon's May 1, 2014 Comments at 4-5; EPSA May 20, 2014 
Comments at 5-6.
    \46\ Exelon's May 1, 2014 Comments at 5-6.
    \47\ Id. at 6.
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    20. Mr. Harrison asserts that Congress's key concern in passing FPA 
section 305(a) was grounded in ensuring the financial and, 
consequently, operational viability of a public utility by preventing a 
utility's directors or officers from exploiting and withdrawing from a 
utility's capital account.\48\ Harrison states that Congress originally 
passed the FPA at a time when the primary model of a public utility was 
a monopolistic, all-encompassing energy provider. In this model, 
Harrison states that ratepayers were forced to deal with the public 
utility in order to receive energy and that a public utility director's 
financial improprieties could have a dramatic impact on the ratepayers' 
energy service given there was no alternative energy option available 
to the ratepayer. In that model, Harrison argues that it was necessary 
to install safeguards to protect the public from practices that could 
harm their access to energy.\49\
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    \48\ Harrison's April 14, 2014 Comments at 1.
    \49\ Id.
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    21. However, Mr. Harrison argues that the landscape of public 
utilities has changed since the passage of the FPA toward more retail 
competition and, in some limited circumstances, does not give rise to 
the concern that motivated the initial prohibition in FPA section 
305(a).\50\ Harrison further argues that, if the fundamental concern of 
FPA section

[[Page 42669]]

305(a) involved protecting ratepayers from being negatively impacted by 
improper dividend conduct where they were beholden only to the public 
utility for their energy, and if it can be shown that ratepayers are 
not beholden to a public utility with certain characteristics, then FPA 
section 305(a) should not be applied to public utilities with those 
characteristics.\51\
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    \50\ Id.
    \51\ Id.
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    22. Mr. Harrison agrees with the Commission's proposal in the 
proposed policy statement that a public utility that has a market-based 
rate tariff on file with the Commission, does not have captive 
customers, and does not provide transmission or local distribution 
services does not lend itself to the concern that motivated Congress to 
pass FPA section 305(a). Harrison states that, if the public utility 
has a market-based rate tariff on file with the Commission, it is clear 
evidence that the public utility is not operating in a regulated, 
centralized utility environment and it signals that the public utility 
is not a traditionally-regulated monopoly. Harrison asserts that, 
although it is possible that such a public utility has market power, 
which would give rise to the set of concerns that motivated FPA section 
305(a), the Commission's next two proposed criteria further distinguish 
this particular type of public utility and alleviate the concerns 
motivated by FPA section 305(a).\52\ Harrison argues that, if the 
public utility does not have captive customers, its failure as a result 
of its financial practices would only harm those ratepayers who could 
instead elect to purchase their energy from other suppliers.\53\ 
Finally, Harrison argues that, if the public utility does not provide 
transmission or distribution, this characteristic is further evidence 
that financial failure as a result of improper financial conduct would 
not unduly disrupt ratepayer service.\54\
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    \52\ Id. at 2.
    \53\ Id.
    \54\ Id.
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    23. Mr. Ikewaza also agrees that the Commission's three criteria in 
the proposed policy statement demonstrate when a public utility does 
not have market power. Ikewaza explains that public utilities with 
market power could exploit their capital account and pass on the 
financial losses to their customers, because their customers have no 
alternatives in the market and they would be forced to buy electricity 
even when the price of electricity is higher.\55\ Ikewaza adds that the 
Commission's three-factor analysis in Citizens, which the Commission 
relies on to analyze FPA section 305(a) petitions,\56\ is a framework 
established on the premise that traditional utilities indeed have 
market power. Ikewaza states that this framework helps ensure the 
financial integrity of, and investment in, traditional utilities by 
preventing them from arbitrarily using funds from their capital 
account.\57\ However, Ikewaza argues that the Citizens framework is not 
necessarily suitable for non-traditional utilities because non-
traditional utilities usually do not have market power.\58\
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    \55\ Ikewaza's April 17, 2014 Comments at 1.
    \56\ As described above, under the three-factor analysis in 
Citizens, the Commission determines that a proposed transaction does 
not implicate the concerns underlying FPA section 305(a) if: (1) The 
utility clearly identifies the sources from which the dividends will 
be paid; (2) the dividends will not be excessive; and (3) the 
proposed transaction will not have an adverse effect on the value of 
shareholders' interests. See supra P 6 (discussing Citizens, 84 FERC 
] 61,158 at 61,865).
    \57\ D. Ikewaza's April 17, 2014 Comments at 1.
    \58\ Id.
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    24. Mr. Ikewaza states that, under the Commission's first 
criterion--that the public utility that has a market-based rate tariff 
on file with the Commission--it should be presumed that such a public 
utility does not have market power because the Commission would not 
grant market-based rate authority to a public utility that has market 
power.\59\ Ikewaza explains that if the public utility lacks market 
power, customers can find and substitute electricity from other 
competitors.\60\ Ikewaza asserts that the Commission's second 
criterion--that the public utility does not have captive customers--is 
reasonable because it protects against a situation where, even if 
customers have alternative sources of electricity from competing 
suppliers, the alternatives may not be meaningful if the customers 
cannot switch to alternative suppliers without difficulty and at 
substantial cost.\61\ Ikewaza also states that the Commission's third 
criterion--that the public utility does not provide transmission or 
local distribution services--is reasonable. Ikewaza argues that, even 
where a public utility that meets the first two criteria and thus does 
not have enough discretion to exploit its capital funds, this third 
criterion protects against the situation where a public utility still 
provides transmission or local distribution services and thus could 
choose to exploit its capital funds in a way that would have a very 
significant, negative impact on customers.\62\ Therefore, Ikewaza 
supports the third criteria as part of the Commission's policy 
statement.
---------------------------------------------------------------------------

    \59\ Id. at 2.
    \60\ Id.
    \61\ Id.
    \62\ Id.
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II. Policy Statement

    25. Recognizing that the electric industry has evolved, on the 
record before us, we find, as a matter of policy, that FPA section 
305(a) should not be construed as a bar to the payment of dividends 
from funds included in capital account by any public utility that: Has 
a market-based rate tariff on file with the Commission; does not have 
captive customers; and does not provide transmission or local 
distribution services. The payment of dividends from capital account by 
such public utilities does not appear to implicate the concerns 
underlying the enactment of FPA section 305(a), and we issue this 
policy statement in order to eliminate a regulatory burden otherwise 
applicable under FPA section 305(a) to such public utilities. In light 
of our interpretation of FPA section 305(a), it is our view that a 
public utility that meets the three criteria identified above does not 
need to file a petition for declaratory order under FPA section 305(a) 
requesting an interpretation from the Commission that FPA section 
305(a) does not bar its payment of dividends from capital account.

III. Document Availability

    26. 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 the Commission's Home Page (http://www.ferc.gov) and 
in the Commission's Public Reference Room during normal business hours 
(8:30 a.m. to 5:00 p.m. Eastern time) at 888 First Street NE., Room 2A, 
Washington, DC 20426.
    27. From the Commission's Home Page on the Internet, this 
information is available on 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.
    28. User assistance is available for eLibrary and the Commission's 
Web site during normal business hours from FERC Online Support at 202-
502-6652 (toll free at 1-866-208-3676) or email at 
[email protected], or the Public Reference Room at (202) 502-
8371, TTY (202) 502-8659. Email the Public Reference Room at 
[email protected].

    Issued: July 17, 2014.


[[Page 42670]]


    By the Commission.
Nathaniel J. Davis, Sr.,
Deputy Secretary.
[FR Doc. 2014-17228 Filed 7-22-14; 8:45 am]
BILLING CODE 6717-01-P