Utility Oversight
Recent Changes in Law Call for Improved Vigilance by FERC Gao ID: GAO-08-289 February 25, 2008Under the Public Utility Holding Company Act of 1935 (PUHCA 1935) and other laws, federal agencies and state commissions have traditionally regulated utilities to protect consumers from supply disruptions and unfair pricing. The Energy Policy Act of 2005 (EPAct) repealed PUHCA 1935, removing some limitations on the companies that could merge with or invest in utilities, leaving the Federal Energy Regulatory Commission (FERC), which already regulated utilities, with primary federal responsibility for regulating them. Because of the potential for new mergers or acquisitions between utilities and companies previously restricted from investing in utilities, there has been considerable interest in whether cross-subsidization--unfairly passing on to consumers the cost of transactions between utility companies and their "affiliates"--could occur. GAO was asked to (1) examine the extent to which FERC changed its merger and acquisition and post merger review and oversight processes since EPAct to protect against cross-subsidization and (2) survey state utility commissions about their oversight.
FERC has made few substantive changes to its merger review processes and does not have a strong basis for ensuring that utilities do not engage in harmful cross-subsidization. FERC officials told us that they plan to require merging companies to disclose existing or planned cross-subsidization and to certify in writing that they will not engage in cross-subsidization, but do not plan to independently verify such information. Once mergers have taken place, FERC intends to rely on its existing enforcement mechanisms--primarily companies' self-reporting noncompliance and a limited number of compliance audits--to detect potential cross-subsidization. FERC officials told us that they believe the threat of large fines, as allowed by EPAct, will encourage companies to investigate and self-report any non-compliance. In addition, FERC officials told us that, for 2008, FERC developed its plans to conduct compliance audits of 3 of the 36 holding companies it regulates based on informal discussions between senior agency officials and staffs in key offices. However, FERC does not formally use a risk based approach that considers factors, such as companies' financial condition or history of compliance. A risk-based audit approach is an important consideration in efficiently allocating its limited resources to detect non-compliance. In addition, we found that FERC's public audit reports often lacked a clear description of the audit objectives, scope, methodology, and findings--inhibiting their use in improving transparency with stakeholders or helping FERC staff improve their audit practices. State utility commissions' views of their oversight capacity varied, but many reported a need for additional resources, such as staff and funding, to respond to changes in their oversight after the repeal of PUHCA 1935. State regulators in all but a few states reported that utilities must seek state approval for proposed mergers. State regulators reported being mostly concerned about the impact of mergers on customer rates, but 25 of 45 reporting states also noted concerns that the resulting, potentially more complex company could be more difficult to regulate. Most states reported having some type of audit authority over the transactions between utilities and their affiliated companies, but many states currently review or audit only a small percentage of these transactions, with 28 of the 49 reporting states auditing 1 percent or less over the last five years. On the other hand, some states reported that they require periodic, specialized audits of affiliate transactions. In addition, although almost all states require financial reports from utilities and report they have access to utility companies' financial books and records, many states reported they do not have such direct access to the books and records of affiliated companies. While EPAct provides state regulators the ability to obtain such information, some states expressed concern that this access is narrow and could require them to be extremely specific in identifying needed information, thus potentially limiting their audit access. From a resources perspective, 22 of the 50 states reporting said that they needed additional staffing and funding to a carry out their oversight responsibilities.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-08-289, Utility Oversight: Recent Changes in Law Call for Improved Vigilance by FERC
This is the accessible text file for GAO report number GAO-08-289
entitled 'Utility Oversight: Recent Changes in Law Call for Improved
Vigilance by FERC' which was released on March 7, 2008.
This text file was formatted by the U.S. Government Accountability
Office (GAO) to be accessible to users with visual impairments, as part
of a longer term project to improve GAO products' accessibility. Every
attempt has been made to maintain the structural and data integrity of
the original printed product. Accessibility features, such as text
descriptions of tables, consecutively numbered footnotes placed at the
end of the file, and the text of agency comment letters, are provided
but may not exactly duplicate the presentation or format of the printed
version. The portable document format (PDF) file is an exact electronic
replica of the printed version. We welcome your feedback. Please E-mail
your comments regarding the contents or accessibility features of this
document to Webmaster@gao.gov.
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed
in its entirety without further permission from GAO. Because this work
may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this
material separately.
Report to Congressional Requesters:
United States Government Accountability Office:
GAO:
February 2008:
Utility Oversight:
Recent Changes in Law Call for Improved Vigilance by FERC:
GAO-08-289:
GAO Highlights:
Highlights of GAO-08-289, a report to congressional requesters.
Why GAO Did This Study:
Under the Public Utility Holding Company Act of 1935 (PUHCA 1935) and
other laws, federal agencies and state commissions have traditionally
regulated utilities to protect consumers from supply disruptions and
unfair pricing. The Energy Policy Act of 2005 (EPAct) repealed PUHCA
1935, removing some limitations on the companies that could merge with
or invest in utilities, leaving the Federal Energy Regulatory
Commission (FERC), which already regulated utilities, with primary
federal responsibility for regulating them. Because of the potential
for new mergers or acquisitions between utilities and companies
previously restricted from investing in utilities, there has been
considerable interest in whether cross-subsidization”unfairly passing
on to consumers the cost of transactions between utility companies and
their ’affiliates“––could occur. GAO was asked to (1) examine the
extent to which FERC changed its merger and acquisition and post merger
review and oversight processes since EPAct to protect against cross-
subsidization and (2) survey state utility commissions about their
oversight.
What GAO Found:
FERC has made few substantive changes to either its merger review
process or its postmerger oversight since EPAct and, as a result, does
not have a strong basis for ensuring that harmful cross-subsidization
does not occur. FERC officials told us that they plan to require
merging companies to disclose existing or planned cross-subsidization
and to certify in writing that they will not engage in cross-
subsidization, but do not plan to independently verify such
information. Once mergers have taken place, FERC intends to rely on its
existing enforcement mechanisms”primarily companies‘ self-reporting
noncompliance and a limited number of compliance audits”to detect
potential cross-subsidization. FERC officials told us that they believe
the threat of large fines, as allowed by EPAct, will encourage
companies to investigate and self-report any non-compliance. In
addition, FERC officials told us that, for 2008, FERC developed its
plans to conduct compliance audits of 3 of the 36 holding companies it
regulates based on informal discussions between senior agency officials
and staffs in key offices. However, FERC does not formally use a risk
based approach that considers factors, such as companies‘ financial
condition or history of compliance. A risk-based audit approach is an
important consideration in efficiently allocating its limited resources
to detect non-compliance. In addition, we found that FERC‘s public
audit reports often lacked a clear description of the audit objectives,
scope, methodology, and findings”inhibiting their use in improving
transparency with stakeholders or helping FERC staff improve their
audit practices.
State utility commissions‘ views of their oversight capacity varied,
but many reported a need for additional resources, such as staff and
funding, to respond to changes in their oversight after the repeal of
PUHCA 1935. State regulators in all but a few states reported that
utilities must seek state approval for proposed mergers. State
regulators reported being mostly concerned about the impact of mergers
on customer rates, but 25 of 45 reporting states also noted concerns
that the resulting, potentially more complex company could be more
difficult to regulate. Most states reported having some type of audit
authority over the transactions between utilities and their affiliated
companies, but many states currently review or audit only a small
percentage of these transactions, with 28 of the 49 reporting states
auditing 1 percent or less over the last five years. On the other hand,
some states reported that they require periodic, specialized audits of
affiliate transactions. In addition, although almost all states require
financial reports from utilities and report they have access to utility
companies‘ financial books and records, many states reported they do
not have such direct access to the books and records of affiliated
companies. While EPAct provides state regulators the ability to obtain
such information, some states expressed concern that this access is
narrow and could require them to be extremely specific in identifying
needed information, thus potentially limiting their audit access. From
a resources perspective, 22 of the 50 states reporting said that they
needed additional staffing and funding to a carry out their oversight
responsibilities.
What GAO Recommends:
GAO recommends that FERC use a risk-based approach to detect cross-
subsidization, enhance audit reporting, and reassess resources to
demonstrate oversight vigilance. While FERC‘s Chairman disagreed with
GAO‘s findings and recommendations, GAO maintains they are sound.
For the full product, including scope and methodology, click on GAO-08-
289. For the survey results, click on [hyperlink, http://www.GAO-08-
290SP]. For more information, contact Mark Gaffigan at (202) 512-3841
or gaffiganm@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
FERC'S Merger Review and Postmerger Oversight to Prevent Cross-
Subsidization in Utility Holding Company Systems Are Limited:
States Vary in Their Capacities to Oversee Utilities:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II:Agency Comments and Our Response:
GAO Comments:
Appendix III: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Merger Proposals Reviewed by FERC since EPAct:
Table 2: FERC's Audit Universe by Category of Company:
Table 3: Key Factors in Commission Evaluations of Mergers and
Acquisitions:
Table 4: State Reviews and Audits of Affiliate Transactions:
Table 5: State Commissions' Access to Books and Records:
Table 6: Some States Foresee Needing Additional Resources Due to EPAct:
Abbreviations:
EPAct: Energy Policy Act of 2005:
FERC: Federal Energy Regulatory Commission:
GAGAS: Generally Accepted Government Auditing Standards:
NARUC: National Association of Regulatory Utility Commissioners:
PUHCA 1935: Public Utility Holding Company Act of 1935:
PUHCA 2005: Public Utility Holding Company Act of 2005:
SEC: Securities and Exchange Commission:
United States Government Accountability Office:
Washington, DC 20548:
February 25, 2008:
The Honorable Jeff Bingaman:
Chairman:
Committee on Energy and Natural Resources:
United States Senate:
The Honorable Sam Brownback:
United States Senate:
The Honorable Russell Feingold:
United States Senate:
Public electric and natural gas utilities sell about $325 billion worth
of electricity and natural gas to more than 140 million customers in
U.S. homes and businesses each year. These customers depend on reliable
and reasonably priced electricity and natural gas for everything from
lighting homes to large-scale manufacturing. Federal and state
regulators seek to balance efforts to ensure that these utilities are
profitable enough to attract private investment to pay for things such
as construction of new power plants with efforts to protect consumers
from potential supply disruptions and unfair pricing practices. With
the utility industry facing the need to invest potentially hundreds of
billions of dollars to expand and upgrade the utility infrastructure
over the next 10 years, recent changes in federal laws and regulations
have eliminated some limitations on the types of companies that can own
and invest in utilities--thereby opening the sector to new investment.
These changes, however, have raised considerable interest about whether
the remaining laws and regulations strike an appropriate balance
between encouraging investment in the utility sector and protecting
consumers.
Public electric and natural gas utilities historically operated as
state-regulated monopolies, providing electricity and natural gas
services to all consumers within a geographic region. For many years,
utilities were primarily regulated by the states through state utility
commissions, which approved plans for new plants and other
infrastructure, examined operating costs such as labor and purchases of
fuel, and approved prices--also referred to as "rates"--to allow
utility companies the opportunity to recover these costs and make
reasonable profits. As regulators, state commissions reviewed proposed
mergers or acquisitions involving state-regulated utilities, audited
some individual purchases of goods and services for compliance with
relevant pricing and other regulatory requirements, and often examined
financial records of utilities. In exchange for this regulation,
utilities were typically allowed an opportunity to recover costs
prudently incurred to provide electricity or natural gas to customers
and an opportunity to earn a specified rate of return on their
investments. This opportunity to recover costs and a rate of return
often meant that utilities were perceived as low-risk investments and
were able to obtain money from stock and bond markets at low costs
relative to companies in more risky businesses such as energy
exploration and development.
Over time, changes occurred in the utility industry that made it more
difficult for individual states to regulate utilities. First, the
utility industry grew very rapidly during the early part of the 20th
century, and utilities that spanned multiple states began to emerge.
These multistate utilities shared use of plants and equipment located
in different states that often had different rules and jurisdictional
authority, making it more difficult for individual state utility
commissions to effectively regulate them. Second, by the 1920s, as a
result of mergers and acquisitions, utilities were largely controlled
by a handful of complex corporations--called holding companies--many of
which owned several utilities as well as other companies. In many
cases, the companies within these holding companies--called affiliates-
-sold a wide range of goods and services to utilities, such as fuel for
power plants. These transactions between affiliates are generally
referred to as affiliate transactions. Some affiliate transactions
could benefit utility customers, such as when utilities effectively
shared the cost of legal and other administrative services with
affiliates instead of each company maintaining staff and other
resources to provide these services separately. However, since the
rates utility customers pay generally include all of the costs of goods
and services bought to serve them, affiliate transactions that were
priced unfairly could result in utility customers subsidizing
operations outside the utility--called cross-subsidies. When this
harmful cross-subsidization occurs, utility rates to electricity and
natural gas consumers are inflated, causing them to pay too much and
allowing the utility to unfairly compete in other industries. Third,
poor disclosure of financial information and limited access to
financial records often made it difficult to accurately assess the
utilities' financial health. Compounding this, many of these holding
companies were involved in risky business ventures outside the utility
industry and had pledged utility assets to support those investments.
Partly as a result of the poor financial disclosure and the complex web
of corporate ownership and affiliate transactions, many utilities went
into bankruptcy during the financial collapse followed by the Great
Depression of the 1930s, placing at risk the electricity and natural
gas services that consumers and businesses relied upon.
To restore public confidence after the Depression, the federal
government undertook three efforts to improve the regulation of
utilities. First, to protect investors, the federal government created
the Securities and Exchange Commission (SEC) to establish rules for the
financial markets and publicly traded companies participating in those
markets as well as a means to regulate them. Among these were rules
focused on improving reporting of financial information to the public.
This improved oversight and access to financial information fostered
development of publicly held companies and financial markets for timely
financial information. For example, credit rating agencies and other
financial firms began to track company financial conditions on a
regular basis to determine if any changes could pose risks to the
company's investors. Second, to protect utility customers, the federal
government enacted the Federal Power Act of 1935 which served, and
continues to serve today, as the foundation of federal regulatory
authority related to regulation of public utilities. Among other
things, this law empowered the Federal Energy Regulatory
Commission[Footnote 1] (FERC) to serve as the primary federal regulator
of utilities and made it responsible for overseeing interstate
transmission of electricity, wholesale sales of electricity to
resellers (e.g., sales by utilities to other utilities), and reviewing
proposed mergers or acquisitions involving companies it
regulates.[Footnote 2] In its role of regulating interstate
transmission and wholesale sales, FERC has been responsible for
approving prices (i.e., rates) for the use of transmission lines and
the sales of electricity in wholesale markets--also commonly called
"rate setting." In recent years, FERC has granted "market-based rates"
for wholesale sales to many companies. For the rates that FERC still
approves, generally interstate transmission rates, utilities generally
initiate these rate-setting procedures--often in order to increase
rates to recover rising costs. During such procedures FERC may examine
individual costs incurred by utilities to determine whether to allow
utilities to recover them in regulated rates. In this way, FERC may
determine which costs may lawfully be included in rates charged to
customers. However, such reviews may not be done for several years,
under some circumstances. To perform its role as federal regulator,
FERC has annually collected certain financial and operational data on
utilities and more frequently collected other data, such as prices and
quantities of sales of electricity to others. While this law created a
new layer of federal regulation over certain aspects of the utility
industry, state commissions maintain their traditional role as the
primary regulator of retail sales--approving many aspects of utility
operations, such as the siting and construction of new power plants and
approving the rates consumers pay. Third, the federal government
enacted the Public Utility Holding Company Act of 1935 (PUHCA 1935) to
regulate investment in the utility industry to protect investors and
consumers from potential abuses by holding companies and empowered SEC
to administer this law. PUHCA 1935 sought to simplify and reorganize
existing holding companies' structures, limit the formation of new
holding companies that were not physically connected by electric power
lines, and prohibited existing holding companies from acquiring more
than one utility, unless the utilities were physically connected by
power lines. In addition, PUHCA 1935 restricted the ability of
companies outside the utility industry to own or control public
utilities. In order to maintain control over holding companies, SEC was
given responsibility for reviewing mergers or acquisitions involving
holding companies, or which could result in the formation of a holding
company.
PUHCA 1935 also empowered the SEC to examine utility operations. As
such, PUHCA 1935 gave the SEC authority to require more extensive
financial reporting than what was previously required and to examine
and limit affiliate transactions to ensure that utilities do not
purchase goods and services at inflated prices from companies within
the same corporation then pass those inflated costs on to utility
consumers. In overseeing affiliate transactions in recent years, SEC
audited each holding company about every 6 years.
Over time, other statutory and regulatory changes reduced some of the
strict limitations PUHCA 1935 initially imposed. For example, PUHCA
1935 was amended in 1978 and 1992 to exempt certain companies that
generated electricity but did not sell it directly to consumers. This
change allowed companies outside the utility sector to build and
operate power plants and sell electricity to utilities and others, but
remain outside of the jurisdiction of the SEC. Further, in 1995, to
facilitate investment and respond to changes in the utility industry,
SEC determined it should interpret PUHCA 1935 more broadly to allow
certain mergers and acquisitions by nonutilities. The SEC also allowed
some mergers and acquisitions to proceed without becoming subject to
SEC oversight if they met certain financial requirements designed to
limit control over the utilities.[Footnote 3] These interpretations
allowed some mergers by utilities and nonutilities, holding companies,
and other diversified corporations. While allowing these specific
transactions to proceed, SEC still placed restrictions on transactions
that would result in these new owners owning multiple U.S. utilities.
Over the past two decades, interested parties have advocated repeal or
further amendment of PUHCA 1935. The utility industry sought PUHCA
1935's repeal to improve investment in the utility sector, and some
believed that this investment could help utilities make needed
improvements at a lower cost than on their own. Some advocates also
believed that this oversight was no longer needed because several other
federal laws had been passed, including antitrust laws requiring the
Department of Justice and the Federal Trade Commission to examine large
mergers and laws requiring extensive financial disclosure to provide
for improved financial oversight of utilities. Furthermore, advocates
of repeal argued that federal regulation of utilities by FERC includes
extensive oversight of power sales and mergers. Finally, industry has
held that state commissions have extensive authority to oversee
utilities and limit abusive practices that could affect the rates paid
by consumers. On the other hand, opponents of PUHCA 1935's repeal,
including some business and consumer representatives, expressed concern
that utilities would become too complex to effectively regulate,
potentially resulting in higher prices for consumers. Business groups
outside the utility industry were also concerned that utilities could
use their monopolies in providing electricity and natural gas services
to unfairly compete in other businesses--in other words, they could use
utility revenues to cross-subsidize investments into other businesses
and harm competition and competitors in those other industries.
Consumer representatives also expressed concern that, unbound by PUHCA
1935's limitations on the types of companies that could own utilities,
utilities could become part of more risky financial structures, as had
been the case in the 1930s, compared to the traditional low-risk
utility structure.
Through the Energy Policy Act of 2005 (EPAct), the federal government,
among other things, repealed PUHCA 1935, thus eliminating the
restrictions on the types of companies that can own utilities, and
replaced it with the Public Utility Holding Company Act of 2005 (PUHCA
2005). EPAct also granted FERC enhanced civil penalty authorities. The
act did not change the states' overall responsibilities for regulating
retail markets, but with the repeal of PUHCA 1935, SEC no longer had an
oversight role in regulating utility holding companies or for
preventing cross-subsidies.[Footnote 4] FERC's new authorities under
EPAct, to regulate corporate structures and transactions, fell into two
broad areas and required FERC to issue regulations that implement these
authorities, which it has done.
Merger review. EPAct expanded FERC's merger review to require FERC to
ensure that a proposed merger will not result in harmful cross-
subsidization. Traditionally, under the authority of the Federal Power
Act, FERC determined whether a proposed merger was consistent with the
public interest. FERC's 1996 merger review policy statement outlines
three primary factors for analysis before approving a merger--the
merger's effect on: competition, rates, and regulation. According to
FERC officials, although preventing cross-subsidization has been a long-
standing responsibility of FERC under its rate-setting authority,
preventing it at the point of the merger review is new for
FERC.[Footnote 5]
Postmerger oversight. With the repeal of PUHCA 1935, FERC became the
principal federal agency responsible for determining how costs for
affiliate transactions should be allocated for all utility holding
companies irrespective of when they were formed (i.e., new companies
formed through mergers or acquisitions or already existing companies).
Traditionally, as part of its review and approval of prices public
utilities charge for use of transmission lines and wholesale sales of
electricity, for companies not overseen by SEC, FERC had the authority
to determine whether costs from affiliate transactions between
companies in the same holding company were allowed.[Footnote 6] To help
FERC better oversee these transactions, EPAct provided FERC specific
postmerger access to the books, accounts, memos, and financial records
of utility owners and their affiliates and subsidiaries. The act also
granted state utility commissions access to such information subject to
some conditions. Furthermore, EPAct gave FERC enhanced civil penalty
authority to help it enforce it new requirements, providing the
commission the ability to levy penalties of up to $1 million per day
per violation.
Business and consumer groups, as well as some state regulators,
disagree as to whether the current federal and state legal and
regulatory structure imposed by EPAct is sufficient to protect
consumers. In the context of this disagreement, we agreed to examine:
(1) the extent to which FERC, since EPAct's enactment, has changed its
merger or acquisition review process and postmerger or acquisition
oversight to ensure that potential harmful cross-subsidization by
utilities does not occur; and (2) the views of state utility
commissions regarding their current capacity, in terms of regulations
and resources, to oversee utilities.
To answer these questions, we reviewed relevant reports, examined
existing data, interviewed key officials, and conducted site visits in
four states that had strong protections in place for overseeing holding
and related affiliate companies or where additional consumer
protections were being considered as a direct result of the repeal of
PUHCA 1935. In addition, we conducted a detailed survey of state
regulators in all 50 states and the District of Columbia. We have
provided a copy of our survey and detailed tables showing the staff of
the public utility commissions' responses to the questions in a
separate report, Utility Oversight: Survey of State Public Utility
Commissions Regarding Utility Commission Authorities and Reporting
Responsibilities for Overseeing Utilities Since the Passage of EPAct
2005 (GAO-08-290SP), available on the Internet [hyperlink,
http://www.gao.gov/special.pubs/gao-08-290sp]. We did not attempt to
develop a cost-benefit analysis of the repeal of PUHCA 1935. A detailed
description of our methodology is included in appendix I. We performed
our review from May 2006 through February 2008 in accordance with
generally accepted government auditing standards. Those standards
require that we plan and perform the audit to obtain sufficient,
appropriate evidence to provide a reasonable basis for our findings and
conclusions based on our audit objectives. We believe that the evidence
obtained provides a reasonable basis for our findings and conclusions
based on our audit objectives.
Results in Brief:
FERC has made few substantive changes to either its merger review
process or its postmerger oversight since EPAct and, as a result, does
not have a strong basis for ensuring that harmful cross-subsidization
does not occur. With regard to its review of mergers and acquisitions,
FERC officials told us that they do not intend to make changes to their
process other than to require companies to disclose any existing or
planned cross-subsidization and explain why it is in the public
interest, and to certify in writing that they will not engage in
harmful cross-subsidization. With this disclosure and company
attestation, FERC officials review organizational and financial
information provided by the companies at the time of the proposed
merger and do not take further steps to independently verify such
information. With regard to postmerger oversight, including its
oversight of already existing companies previously regulated by SEC or
FERC, FERC intends to continue to rely on its existing enforcement
mechanisms to detect potential cross-subsidies--primarily companies
self-reporting noncompliance and a limited number of compliance audits.
FERC officials told us that they believe the threat of large fines, as
allowed by EPAct, will encourage companies to investigate and self-
report noncompliance that they discover. To augment self-reporting,
FERC officials told us that they are using an informal plan to
reallocate their limited audit staff to conduct affiliate transaction
audits of 3 companies in 2008 (of the 36 holding companies it
regulates). FERC officials told us that it relies on informal
discussions between senior FERC managers and staffs to plan its audits
each year, but does not formally consider the risks posed by various
companies. A risk assessment, for example, could include developing a
risk profile for companies by using data on a company's financial
condition and by collaborating with states to consider a company's
history of compliance. In contrast to FERC's approach for selecting
companies for compliance audits, financial auditors and other experts
told us that such a risk-based audit approach is an important
consideration in allocating resources to detect noncompliance. Finally,
we found that where affiliate transactions were audited, the resulting
audit reports often lacked a clear description of the audit objectives,
scope, methodology, and findings--thus preventing them from being
useful to FERC staff to build better audit practices or to improve
transparency to states and companies policing these transactions or the
public more generally.
Although states' views varied on their current regulatory capacities to
review utility mergers and acquisitions and oversee affiliate
transactions, many states reported the need for additional resources,
such as staff and funding, to respond to changes in oversight after the
repeal of PUHCA 1935. With regard to the review of mergers, state
regulators in all but a few states reported utilities must seek state
approval for these proposals. State regulators reported being mostly
concerned about the impact of mergers on customer rates, but 25 of 45
reporting states also noted concerns that the resulting potentially
more complex company could be more difficult to regulate. In recent
years, two state commissions denied mergers, in part, because of these
concerns. With regard to affiliate transactions and the potential for
cross-subsidies, most states have some type of authority to approve,
review, and audit affiliate transactions, but many states currently
review or audit only a small percentage of the transactions. For
example, over the last 5 years, the majority of states (28 of 49 states
reporting) audited 1 percent or less of affiliate transactions. On the
other hand, some states reported that they require periodic,
specialized audits of affiliate transactions to ensure transactions are
consistent with applicable rules. Although almost all states require
financial reports from utilities and report they have access to
financial books and records from utilities in order to review affiliate
transactions, many states reported they do not have such direct access
to the books and records of holding or affiliated companies. Some
utility experts believe that this lack of authority could prevent some
states from linking the financial risks associated with affiliate
companies to their regulated utility customers. While EPAct provides
state regulators the ability to obtain such information, some states
expressed concern that this access is narrow and could require them to
be extremely specific in identifying needed information, thus
potentially limiting their audit access. From a resources perspective,
almost one-half (22 of 50 states reporting) said that with the changes
in EPAct they needed additional staffing and funding to a carry out
their oversight responsibilities. A commission official told us that
examining affiliate transactions can be resource intensive since
determining whether a transaction is unfair may require detailed
analysis of the transaction and the market for the good or service that
was the subject of the transaction.
GAO recommends that the Chairman of FERC develop a risk-based audit
approach to detect cross-subsidization, enhance its public audit
reporting, and reassess its resources in light of a risk-based audit
approach in order to demonstrate that its oversight is sufficiently
vigilant. The FERC Chairman disagreed with our report findings and
recommendations. We maintain that fully implementing our
recommendations would enhance the effectiveness of FERC's oversight.
FERC'S Merger Review and Postmerger Oversight to Prevent Cross-
Subsidization in Utility Holding Company Systems Are Limited:
FERC has made few substantive changes to either its merger review
process or its postmerger oversight as a consequence of its new
responsibilities and, as a result, does not have a strong basis for
ensuring that harmful cross-subsidization does not occur. To review
mergers and acquisitions, FERC officials told us that they do not
intend to make changes to their process other than to require companies
to disclose any existing or planned cross-subsidization and explain why
it is in the public interest, and to certify in writing that they will
not engage in harmful cross-subsidization. For postmerger oversight,
FERC intends to continue to rely on its existing enforcement
mechanisms, as expanded by EPAct, to detect potential cross-subsidies-
-primarily companies' self-reporting of noncompliance and a limited
number of compliance audits. However, FERC does not formally consider
the risks posed by various companies in determining which companies to
audit--a consideration that financial auditors and other experts told
us is important when auditing with limited resources. We also found
that where affiliate transactions were audited, the resulting audit
reports sometimes lacked clear and useful information.
FERC's Merger and Acquisition Review Relies Primarily on Company
Disclosures and Commitments Not to Cross-Subsidize:
FERC's merger review process requires companies to submit evidence that
a merger or acquisition will not result in unapproved cross-
subsidization, and its ability to prevent cross-subsidization depends
largely on commitments by the merging parties rather than independent
analysis. FERC-regulated companies that are proposing to merge with or
acquire a regulated company must submit a public application for FERC
to review and approve. As part of its review of these applications,
FERC is now responsible for ensuring that mergers do not result in
harmful cross-subsidies. To do this, FERC attempts to ensure that
mergers will not result in:
* any transfer of facilities between or issuance of securities by a
traditionally regulated public utility to an affiliate;[Footnote 7]
* any new financial obligation by a traditionally regulated public
utility for the benefit of an affiliate;[Footnote 8] or:
* any new affiliate contract between a nonutility affiliate company and
a traditionally regulated public utility company, other than agreements
subject to review by FERC under the Federal Power Act.
To fulfill this new responsibility, FERC established an additional
requirement that the merging companies submit new information as part
of their application for merger or acquisition approval, referred to as
"Exhibit M." Exhibit M requires companies to describe organizational
and financial information, such as affiliate relationships and any
existing or planned cross-subsidies. If cross-subsidies already exist
or are planned, companies are required to describe how these are in the
public interest by, for example identifying how the planned cross-
subsidy benefits utility ratepayers and does not harm others. Further,
in FERC's recent supplemental merger policy statement, issued July 20,
2007, FERC provided additional guidance on certain types of
transactions that are not likely to raise concerns about cross-
subsidization--termed "safe harbors."[Footnote 9] FERC also requires
company officials to attest that they will not engage in unapproved
cross-subsidies in the future and specifically requires the merger
application, including Exhibit M, to be signed by a person or persons
having appropriate knowledge and authority.
FERC's merger or acquisition decision is based on a public record that
starts with an initial application. This record includes the filing of
the initial application. FERC's review process also allows stakeholders
or other interested parties, such as state regulators, consumer
advocates, or others to submit information and arguments to this public
record for FERC to consider. FERC officials told us that they evaluate
the information in the public record for the application and do not
separately develop or collect evidence or conduct separate analyses of
a proposed merger beyond what is submitted as part of the record. FERC
officials told us that they can, and sometimes do, request that
applicants provide additional information or conduct additional
analysis. In addition, FERC may require a public hearing before making
a decision. Whether or not a hearing is held, officials noted that they
are required to make their decision based on the evidence that is in
the public record. On the basis of this information, FERC officials
told us that they will determine which, if any, existing or planned
cross-subsidies may be allowed, which is then detailed in the final
merger or acquisition order.
According to experts, FERC is generally supportive of mergers. FERC
officials largely acknowledged this perspective, telling us that under
law and regulation, FERC must approve mergers that are consistent with
the public interest. These officials also said that FERC believes it
has broad flexibility in determining what is consistent with the public
interest, particularly in light of changing conditions in the industry
and, as such, it does not read the statute as creating a presumption
against mergers.[Footnote 10] On the other hand, FERC officials said
that FERC was not prepared to presume that all mergers were beneficial
but that it was the merger applicant's responsibility to demonstrate
that the merger was consistent with the public interest by, for
example, demonstrating how it improves efficiency or lowers costs while
not harming competition.
Between the time EPAct was enacted in 2005 and July 10, 2007, FERC has
reviewed or was in the process of reviewing 15 mergers or potential
mergers (see table 1).[Footnote 11] FERC has not rejected any merger
applications. In nine cases, FERC approved the merger without
condition. In three cases, FERC approved the merger with conditions,
for example, requiring the merging parties to provide further evidence
of ratepayer protection consistent with FERC-approved "hold harmless"
provisions. One merger was withdrawn by the merging parties prior to
FERC's decision. The two other applications are still pending.
Table 1: Merger Proposals Reviewed by FERC since EPAct:
Merging parties: Duke Energy Corp. and Cinergy Corp;
Decision date: 12/20/2005;
FERC order: Approved without conditions.
Merging parties: MidAmerican Energy Holding Co., Scottish Power plc,
and PacifiCorp Holdings, Inc;
Decision date: 12/20/2005;
FERC order: Approved without conditions.
Merging parties: Florida Power & Light and Constellation Energy;
Decision date: Not applicable;
FERC order: Merger was withdrawn prior to FERC decision.
Merging parties: Georgia Power Company and Savannah Electric Power
Company;
Decision date: 3/30/2006;
FERC order: Approved without conditions.
Merging parties: ITC Holdings Corp., International Transmission Co.,
Michigan Transco Holding Limited Partnership, Michigan Electric
Transmission Co. LLC and Trans-Elect NTD Path 15, LLC;
Decision date: 9/21/2006;
FERC order: Approved subject to conditions.
Merging parties: National Grid plc and KeySpan Corp;
Decision date: 10/20/2006;
FERC order: Approved subject to conditions.
Merging parties: Boston Edison Co., Cambridge Electric Light Company,
Commonwealth Electric Co., and Canal Electric Co;
Decision date: 10/ 20/2006;
FERC order: Approved subject to conditions.
Merging parties: Northwestern Corp. and Babcock & Brown Infrastructure
Limited;
Decision date: 10/25/2006;
FERC order: Approved without conditions.
Merging parties: Green Mountain Power Corp, Northern New England
Electric Corp. and Northstars Merger Subsidiary Corp;
Decision date: 12/4/2006;
FERC order: Approved without conditions.
Merging parties: WPS Resources Corp. and Peoples Energy Corp;
Decision date: 12/26/2006;
FERC order: Approved without conditions.
Merging parties: Duquesne Light Holdings, Inc., DQE Merger Sub, Inc.,
and DQE Holdings;
Decision date: 12/22/2006;
FERC order: Approved without conditions.
Merging parties: Dynegy Inc., and LS Power Development, LLC;
Decision date: 12/21/2006;
FERC order: Approved without conditions.
Merging parties: EBG Holdings LLC, Boston Generating LLC, and Astoria
Generating Company Holdings LLC;
Decision date: 5/30/2007;
FERC order: Approved without conditions.
Merging parties: Oncor Electric Delivery Co., TXU Portfolio Management
Co. LP, and Texas Energy Future Holdings Limited Partnership;
Decision date: Not applicable;
FERC order: Not yet decided.
Merging parties: ITC Holdings Corp. and Interstate Power and Light Co;
Decision date: Not applicable;
FERC order: Not yet decided.
Source: FERC.
[End of table]
FERC'S Postmerger Oversight Relies on Its Existing Enforcement
Mechanisms and Lacks a Risk-Based Approach:
FERC officials in the Office of Enforcement intend to use the same
tools to enforce prohibitions on cross-subsidization that they
currently use for other enforcement actions. In general, the Office of
Enforcement relies on two primary tools--self-reporting and a limited
number of compliance audits.[Footnote 12] However, we found that FERC
does not use a formal risk-based approach to guide its audit planning-
-the active portion of its oversight efforts to detect cross-
subsidization--or deploy its limited audit resources. As such, FERC's
actions do not provide a strong basis for ensuring the detection of
potentially harmful cross-subsidization.
The first detection tool that FERC emphasizes is that companies self-
police their own affiliate transactions and intercompany relationships
and voluntarily self-report instances of harmful cross-subsidization to
FERC. FERC's policy statement on enforcement emphasizes such voluntary
internal compliance and reporting as well as cooperation with FERC in
order to detect and correct violations. A company's actions in
following this policy, along with the seriousness of a potential
violation, help inform FERC's decision on the appropriate level of
potential penalty to impose on violating companies.[Footnote 13] FERC
indicates that it places great importance on company's proactive self-
reporting because it believes that companies are in the best position
to detect and correct both inadvertent and intentional violations of
FERC orders, rules, and regulation. According to FERC officials,
companies can actively police their own behavior through a formal
program for internal compliance, internal audits, and through annual
external financial audits.
Since the enactment of EPAct,[Footnote 14] when Congress formally
highlighted its concern about cross-subsidization, no companies have
self-reported any of these types of violations. FERC officials said
that FERC had approved 12 settlements with natural gas and electric
entities, none of which involved violations of the PUHCA 2005
provisions in EPAct. In these cases, FERC has assessed civil penalties
totaling $39.8 million on the companies.[Footnote 15] FERC officials
told us that because it can now levy much larger fines--up to $1
million per violation per day--they expect companies to become more
vigilant in monitoring their behavior.
Regarding FERC's reliance on self-reporting, key stakeholders have
raised several concerns about this approach. First, because FERC's
rules related to affiliate transactions are broad, company managers may
not always be fully aware of how these rules apply to specific
affiliate transactions. According to market experts, including a
November 2007 report issued by a former FERC Commissioner on behalf of
a broad consortium of energy companies, FERC's rules are often written
broadly and it is unclear what standards of conduct FERC uses to
oversee transactions between companies. This can result in utility
managers being unaware that specific transactions may violate current
FERC policies. One controller we met with told us that these broad
rules can be counterproductive in encouraging company compliance and
self-reporting because it is difficult to determine if the rules are
actually being violated. Second, internal company audits tend to focus
on areas of highest perceived risk and, as a result, may not focus
specifically on affiliate transactions. Internal auditors with whom we
spoke told us that they have relatively small staffs and are
responsible for auditing a wide range of matters within a corporation
and, as such, they focus their efforts on areas they believe pose the
highest risk to the company. They said this approach means that they
rarely focus on affiliate transactions, unless those transactions
represent a large financial exposure to the company's potential
profitability. Finally, financial audit firms we spoke with told us
their work primarily focuses on auditing financial statement balances
and related disclosures. These audits focus on providing an opinion
about whether the financial statements present fairly, in all material
respects, the financial position and operations of the company. As
such, they said that their work with regard to affiliate transactions
is limited to the related disclosures rather than determining if
harmful cross-subsidization was occurring. Only in cases where
transactions could have a material effect on the overall financial
statements of a company would they conduct detailed testing and review
pricing arrangements. Compounding these concerns, and FERC's belief
that the threat of large fines will encourage companies to self-report,
companies expressed uneasiness over FERC's use of its new penalty
authority on self-reporting companies. One company official noted that
some of the recent penalties for companies that self-reported
violations were large and would "chill" companies' willingness to self-
report violations. In addition, state commissions expressed concerns
about a reliance on self-reporting of cross-subsidies and reported that
effective oversight would require regular and rigorous audits of
affiliate transactions.
As a second way to detect potential harmful cross-subsidization, FERC
plans to conduct a limited number of compliance audits of holding
companies each year. Since enactment of PUHCA 2005 provisions in EPAct,
FERC has not completed any audits to detect whether cross-subsidization
is occurring. In our review of FERC processes for planning these
audits, however, officials with the Division of Audits in the Office of
Enforcement told us that FERC conducts audit planning for 1 fiscal year
at a time. On the basis of this approach, FERC's current audit plan for
these matters in 2008 will audit three companies--Exelon Corporation,
Allegheny, Inc., and the Southern Company. The overall objective of
these audits will be to determine whether these companies are
inappropriately cross-subsidizing or granting special preference to
affiliates or burdening utility assets for the benefit of nonutility
affiliated companies. Such compliance audits, officials told us, will
determine whether companies are complying with FERC rules for the
pricing of affiliate transactions, among other things. FERC's audit
plan is not designed to address the number of audits FERC will conduct
beyond 2008, or at what companies it will conduct them since the
planning for 2009, for example, will not be done until sometime later
in 2008. In addition, based on discussions with FERC officials, the
development of its audit plan is informal and developed in an ad hoc
manner to address the specific audits for a given year. Specifically,
these officials said that the plan is developed through informal
discussions between FERC's Office of Enforcement, including its
Division of Audits, and relevant FERC offices with related expertise,
including the Office of General Counsel, the Office of Energy Markets
Regulation, and the new Office of Electric Reliability. FERC officials
also told us that the plan is reviewed by top agency officials and
approved by the Chairman.
While FERC's audit plan for 2008 reflects insights of key FERC staff,
it does not formally consider the risks posed by individual companies,
or the overall universe of companies, in determining which companies to
audit or how many audit resources to deploy. FERC officials told us
that while they do not specifically consider the individual or
collective risks posed by companies in a formal manner, they believe
that their discussions with knowledgeable staff provide a reasonable
picture of risk. However, on the basis of our discussions with FERC
staff, this picture of risk may be somewhat limited in that it is
informed only by the views of a few key staff and does not seek input
from stakeholders, such as the financial community or state
commissions, or reflect analysis of key data on risk.
To obtain a more complete picture of risk, FERC could more actively
monitor company-specific data to develop a picture of the risks posed
by the companies it regulates--something it currently does not do. To
partly address this, FERC recently required certain affiliates to begin
gathering comprehensive financial information in 2008 and filing the
first of what will be annual financial reports by May 2009.[Footnote
16] According to a FERC audit official, after a year or 2 of data
collection, analysis, and conducting audits, it will be in a much
better position to plan, conduct, and report the results of its audits
of affiliate relationships and potential cross-subsidization.[Footnote
17] In addition, this official said that FERC does not typically review
certain publicly available financial information, such as bond ratings
and stock prices for companies that FERC regulates or their affiliates.
According to bond rating companies, they actively monitor companies'
operating and financial condition to identify the key risks faced by
companies and reflect these risks in the ratings they assign to the
company's debt. Further, state officials agreed that such information
may help provide a view of the financial condition of specific
companies, or the overall industry, and how they may be changing. In
support of the use of this information, some state regulators told us
that such information has been helpful to them in identifying when
companies may engage in unlawful cross-subsidies. Finally, some state
officials said that because they regulate companies on a day-to-day
basis, they have considerable expertise and knowledge that may prove
useful to FERC. Thus, unless FERC changes its view about the usefulness
of such data, it will continue to lack available information that may
be potentially useful in assessing risk.
The importance of formally considering risk when carrying out
compliance oversight is highlighted by prior GAO reports.[Footnote 18]
In these reports GAO identified instances where other agencies, such as
SEC, the Department of Homeland Security, and the Environmental
Protection Agency could use and have used risk-based approaches to
inspect for compliance with regulations. In some cases, agencies have
developed and used statistical models to estimate an entity's (e.g., a
company's) risk of a violation and as a means to target limited audit
resources. In other cases, we have recommended that agencies continue
to devote some resources to auditing entities on a random basis but use
the data collected from these random audits to update statistical
models so that the agency can continue to identify high-risk entities.
Furthermore, according to financial auditors and other experts we spoke
with, risk assessments are an important consideration in targeting
audits and allocating resources to detect noncompliance. Without a
sufficient assessment of risk, it may be difficult for FERC to convince
companies, states, and other market stakeholders that it can adequately
and consistently detect cross-subsidization.
At present, without a risk-based approach to guide its audit planning
and deploy its limited audit resources, FERC may not be effectively
allocating its staff to audit the companies it regulates. FERC's
Division of Audits currently has a total of 34 full-time staff,
including 21 accountants/ auditors, 6 energy industry analysts, 3
economists, 2 engineers, 1 attorney, and 1 support staff. FERC has
determined that of the 149 companies that have been identified as
holding companies, 36 of them are currently subject to its PUHCA 2005
authority and it plans to allocate 9 of its available staff to these
audits in 2008.[Footnote 19] Officials in the Division of Audits told
us that they believe a typical audit would involve three to four audit
staff--an auditor-in-charge and one or two auditors. Other companies
and state auditors involved in auditing affiliate transactions told us
that these audits can be difficult and require significant use of
auditors with specialized skills and experience. These auditors also
told us that examining affiliate transactions can be resource intensive
since determining whether a transaction is unfair may require detailed
analysis of the transaction and the market for the good or service that
was the subject of the transaction. At its planned 2008 audit rate of 3
companies, it would take FERC 12 years to audit each of these companies
once. In commenting on the report, FERC noted that the number of audits
in future years may change. Nevertheless, FERC may face additional
companies, some of which may require more complex audits. According to
financial and industry experts we spoke with, the elimination of PUHCA
1935 is likely to attract companies previously restricted from owning
utilities to consider mergers or acquisitions. For example, some
experts told us that foreign companies, corporate conglomerates, and
private equity companies are considering mergers or acquisitions of
U.S. utilities. In addition to companies subject to FERC's oversight
under the PUHCA 2005 provisions of EPAct, FERC also has audit
responsibilities for the electric reliability organization, the North
American Electricity Reliability Corporation, which oversees issuing
and enforcing rules, such as compliance with reliability standards,
focused on ensuring reliable electricity supplies. At present, there
are about 4,700 companies that could potentially be audited for
compliance with FERC's rules, regulations, and orders regarding
reliability, transmission, and electricity pricing rules. FERC
officials said some overlap exist between categories, such as investor-
owned utilities and electric suppliers with market-based rate
authority. In addition, according to FERC, Federal Power Act section
215 companies would initially be audited and overseen by the new
Regional Reliability Organization and the related regional entities.
FERC officials also said that they intend to audit about 100 of these
companies during 2008. The universe of companies that FERC is
responsible for auditing is identified in 10 categories in table 2.
Because of the magnitude of companies it oversees and the range of
rules it enforces, FERC enforcement and audit officials described their
offices as resource constrained and acknowledged that the Office of
Enforcement has not yet adopted a formal, risk-based approach to target
these resources.
Table 2: FERC's Audit Universe by Category of Company:
Category of jurisdictional company: Investor-owned utilities;
Number of companies: 211.
Category of jurisdictional company: Electric suppliers with market-
based rate authority;
Number of companies: 1,304.
Category of jurisdictional company: FPA section 215 (reliability);
Number of companies: 1,510.
Category of jurisdictional company: Power marketing agencies;
Number of companies: 5.
Category of jurisdictional company: Hydroelectric projects;
Number of companies: 1,022.
Category of jurisdictional company: Liquid natural gas terminals;
Number of companies: 17.
Category of jurisdictional company: Oil pipelines;
Number of companies: 199.
Category of jurisdictional company: Interstate natural gas pipelines;
Number of companies: 159.
Category of jurisdictional company: Natural gas storage facilities;
Number of companies: 201.
Category of jurisdictional company: Intrastate pipelines (Natural Gas
Policy Act, section 311);
Number of companies: 68.
Category of jurisdictional company: Total;
Number of companies: 4,696.
Source: FERC.
Note: Some overlap exists between categories, such as investor-owned
utilities and electric suppliers with market-based rate authority. In
addition, according to FERC, Federal Power Act section 215 companies
would initially be audited and overseen by its new Regional Reliability
Organization and the related regional entities.
[End of table]
FERC's Postmerger Audit Reports on Affiliate Transactions Often Lack
Clear Information:
FERC's publicly available audit reports pertaining to affiliate
transactions are not clear and, thus, their usefulness in terms of
public transparency and disclosure is limited. Although FERC has not
yet completed any affiliate transaction audits or yet issued any
reports under EPAct, officials with the Division of Audits told us that
they intend to rely on their existing "exception-based" audit reporting
policy. A FERC official told us their "exception-based" audit reporting
policy means audit reports would only reflect the audit findings and
recommendations associated with the audit issues on which FERC found
the company to be out of compliance. In contrast, if an audit does not
result in FERC taking an enforcement action due to noncompliance, the
audit report does not provide information on the methodology the
auditors used nor their findings. Thus, FERC's public audit reports may
not always fully reflect key elements such as objectives, scope,
methodology, and the specific audit findings. Federal government
auditing standards, developed by GAO and referred to as Generally
Accepted Government Auditing Standards (GAGAS), stipulate that audit
reports contain this basic information, and other information as well,
in order to comply with GAGAS. According to FERC officials, they are
not required to comply with GAGAS, but "follow the spirit" of these
standards because they provide a good framework for performing high-
quality audits.[Footnote 20] In our review of 18 recent FERC audit
reports pertaining to affiliate transactions, we found that they did
not always identify any findings on affiliate transactions or have any
recommendations. Further, the audit reports sometimes lacked key
information, such as the type, number, and value of affiliate
transactions at the company involved and the percentage of all
affiliate transactions tested, or the test results. A FERC official
conceded that FERC past audit reports on affiliate transactions do not
always meet GAGAS standards because they are not required to do so.
However, without this information, it may be difficult for regulated
companies to understand the nature of FERC's oversight concerns and to
conduct internal audits to identify potential violations that are
consistent with those conducted by FERC--key elements in improving
companies' self-reporting. Further, financial audit firms, internal
auditors, and auditors at state commissions told us that they typically
review prior related audits, including those done by FERC, as part of
their preparation for a new audit. To the extent that FERC audit
reports lack information on the work they performed, they limit the
usefulness of these audits for future auditors as well as miss an
opportunity to improve FERC's audit practices and transparency to state
regulators and other companies and stakeholders. Furthermore, without
such information in the audit report, we and other stakeholders, such
as state commissions, cannot confidently and credibly determine that
the auditor's efforts to detect abusive affiliate transactions and
cross-subsidization were sufficient. A recent report prepared by a
former FERC Commissioner on behalf of a wide range of industry
stakeholders expressed concern that FERC increase the transparency of
its audits and investigations in order to, among other things, help
individual market participants to improve their internal compliance
programs and correct deficiencies before they cause harm to consumers.
States Vary in Their Capacities to Oversee Utilities:
States utility commissions' views of their oversight capacities vary,
but many states foresee a need for additional resources to respond to
changes from EPAct. Almost all states have specific authority to review
and either approve or disapprove mergers and acquisitions. Despite this
authority, many states' commission staff expressed concern over their
ability to regulate the resulting companies. Almost all states report
they have some type of authority over affiliate transactions, although
many states report reviewing or auditing few of these transactions.
Further, although almost all states can access the books and records of
the utility to substantiate costs and other relevant data, many states
report they cannot obtain such access to these books and records at the
holding company or other affiliated nonutility companies. Almost half
of the states report they need additional staff and funding to respond
to changes stemming from EPAct.
Almost All States Have Merger Approval Authority but Many States
Express Concern about Future Regulation of the Resulting Companies
after Merger Approval:
On the basis of our survey of state commission staff,[Footnote 21] all
but 3 states (out of 50 responses) have authority to review and either
approve or disapprove mergers. The types of authority states have vary,
however. For example, one state noted that, technically, it could only
disapprove a merger and, as such, the state allows a merger by taking
no action to disapprove it. Three states noted their state legislatures
had not provided them direct merger review authority,[Footnote 22] but
they were able to use other commission authority to conduct such
reviews.
State commissions responding to our survey noted that the most
important factors they consider in evaluating mergers or acquisitions
are the effects on regulated rates and the quality of retail service
(e.g., no significant problems with service interruptions for
consumers). The next most important factors were the commission's
ability to regulate the resulting company and the effect on the
financial complexity of the company that would result from the merger.
Staff from one state told us in additional narrative comments that they
were concerned that with the passage of EPAct utilities will become
larger, more complex, and located in geographically diverse areas. They
specifically expressed concerns over the challenges of allocating costs
between various entities due to the potential for centralization of
services in these types of resulting companies.
Table 3 below lists the 4 top factors rated as either of very great
importance or great importance out of 15 factors we asked states to
rate in their evaluation of proposed mergers and acquisitions.[Footnote
23]
Table 3: Key Factors in Commission Evaluations of Mergers and
Acquisitions:
Key factors in commission evaluations: Impact of combination on
regulated retail rates;
Number of states noting these factors as having great or very great
importance: 44;
Total states responding: 47.
Key factors in commission evaluations: Impact on retail service
quality;
Number of states noting these factors as having great or very great
importance: 43;
Total states responding: 46.
Key factors in commission evaluations: Impact on ease or difficulty of
regulation of resulting company by commission;
Number of states noting these factors as having great or very great
importance: 25;
Total states responding: 44.
Key factors in commission evaluations: Impact on financial complexity
of resulting company;
Number of states noting these factors as having great or very great
importance: 23;
Total states responding: 44.
Source: GAO analysis of state survey of utility commission authorities
and reporting responsibilities.
Note: GAO asked commission staff to evaluate the importance of 15
different factors they might consider in evaluating mergers and
acquisitions. They were asked to rank these factors on a 5-point scale
with the 2 highest points on the scale being very great importance and
great importance. The factors listed in the table are the four factors
most commonly listed as being of either very great or great importance.
Some states did not comment on all factors.
[End of table]
In recent years, the difficulty and increased complexity of regulating
merged companies has been cited by two state commissions denying
proposed mergers in their states. For example, a state commission
official in Montana told us the commission denied a merger in July
2007, between Northwestern Company and Babcock and Brown
Infrastructure, an Australian company, even though it had been approved
by FERC. This merger involved a Montana regulated utility, whose
headquarters was located in South Dakota and was being bought by a
foreign-owned holding company. According to this official, the
commission denied the merger partly due to concerns about regulating
the utility under such a corporate combination. He noted concerns that
no top corporate officials would be located in Montana and that the
time zone differences with the Australian company made contact with
those officials more difficult in dealing with regulatory issues. As a
result of the denial by the state commission, the merger was not
allowed to proceed. In a different proposed merger in Oregon, state
utility commission officials told us they denied the proposed merger in
March 2005 between Portland General Electric, one of their regulated
utilities and the Texas Pacific Group, a private equity fund company.
They noted under their implementation of Oregon's statutes, mergers
must meet two standards: (1) they must provide net benefits to
consumers and (2) they cannot harm consumers. Officials in Oregon noted
that the state commission was concerned that consumers could be harmed
because regulating the resulting company would be more difficult due to
the financial complexity of the new ownership arrangement. In addition,
the commission was concerned that consumers faced potential harm due to
risks posed by high levels of debt and the private equity firm's short-
term business plan. Although an application had been made for a review
at FERC it was withdrawn in April 2005 prior to FERC review.
State commission views regarding potential mergers and acquisitions are
of increasing importance in the financial community, as well. Officials
from the financial community noted they believe state commissions may
be highly suspicious of some of the new corporate structures being
proposed, especially the role of private equity firms. They also noted
that some commissions have expressed significant concerns over the
formation of vast utility companies operating in multiple states. As a
result of these and other concerns, these officials reported that some
companies potentially interested in merging with or acquiring utilities
have been reluctant to propose transactions so far.
Most States Have Authorities over Affiliate Transactions, but Many
States Report Auditing Few Transactions:
Almost all states report having authorities over affiliate transactions
or regular reporting of such transactions, or both. Nationally, 49
states noted they have some type of affiliate transaction authority.
These authorities, however, vary from prohibitions against certain
types of transactions, or prior approval by the commission for
transactions over a certain dollar amount, to less restrictive
requirements such as allowance of the transaction without prior review.
In some cases state commission authorities permit them to disallow
these transactions at a later time if they were inappropriate. In fact
more than half the states (27) reported that under their authority,
affiliate transactions did not require prior commission approval, but
could be reviewed and disallowed later. Such a disallowance would
result in the cost of the transaction not being passed on to consumers
or being recovered from the company. Only 3 states reported that
affiliate transactions always needed prior commission approval.
Nearly all states (41) require utilities to report affiliate
transactions at least annually, or more frequently. These reports
varied, however, in frequency of reporting, types of transactions
requiring reporting, and the detail of reporting. For example, some
states required reporting all transactions at least annually, while
others required reporting of only certain types of transactions or just
reporting the total dollars spent by each affiliate. Several of the
state commissions we interviewed noted the importance of strong state
authority over affiliate transactions. Staff in one state noted their
commission must preapprove any affiliate transactions over $25,000 and
conditions for approval were stringent. In some instances the state's
attorney general stepped in to stop companies from going ahead with
affiliate transactions that had not been preapproved.
Some states are concerned that they may not have sufficient authorities
to oversee affiliate transactions, after the repeal of PUHCA 1935. In
our survey, some state commissions expressed a need to increase their
authority over affiliate transactions. During the course of our work
one state took action to increase its authority. In 2006, the
California commission strengthened existing affiliate transactions
authorities, partly due to concerns related to the repeal of PUHCA
1935. The new rules clarified the scope of allowable utility affiliate
transactions and tightened the rules on when and how specific services,
such as, legal services could be shared between affiliates and the
regulated utility.
Despite various authority governing the prior authorization and
disclosure of affiliate transactions, many states responding to our
survey reported they audit few if any affiliate transactions or
dedicate much staff time to reviewing these transactions. The majority
of states reported they have audited 1 percent or less of these
transactions over the last 5 years and dedicated no staff time to
reviews or audits over the last year. Table 4 shows that many states
are not performing reviews or audits of affiliate transactions.
Table 4: State Reviews and Audits of Affiliate Transactions:
Limited state reviews or audits conducted: Number of states with no
staff time dedicated to auditing holding companies and affiliates over
last 12 months;
Number of states: 24;
Total states responding: 41.
Limited state reviews or audits conducted: Number of states performing
no reviews of affiliate transactions within the last 5 years;
Number of states: 18;
Total states responding: 45.
Limited state reviews or audits conducted: Number of states auditing 1
percent or less of affiliate transactions over the last 5 years;
Number of states: 28;
Total states responding: 49.
Limited state reviews or audits conducted: Number of states that
dedicated 1 staff year or less to affiliate transactions over the last
5 years;
Number of states: 27;
Total states responding: 44.
Source: GAO analysis of state survey of utility commission authorities
and reporting responsibilities.
[End of table]
Since the passage of EPAct several aspects of monitoring of affiliate
transactions were raised as key challenges by several state commissions
responding to our survey and during our interviews. For example, an
attorney from one state utility commission expressed concerns about
having enough resources and expertise to enforce existing authorities.
He noted that holding company and affiliate transactions can be very
complex and time-consuming to review. He noted these reviews are
resource intensive, since determining whether a transaction is unfair
may require detailed analysis of the transaction and the market for the
good or service that was subject of the transaction. Another expert,
with extensive experience with FERC and several state public utility
commissions noted that on the basis of his experience, states do not
generally have the resources to effectively review affiliate
transactions, particularly when they are multistate in nature.
Similarly, a consultant whose firm does numerous affiliate transaction
audits in many states, noted in a March 2007 FERC technical conference
on related issues that many states, even when they have significant
authority, lack staff to review transactions. Further, he noted that
state commissions often lack the staff expertise to adequately address
the accounting and financial operations aspects of these affiliate
relationships as well as the risks inherent to audits of affiliate
transactions:
Some states, however, do put special emphasis on auditing affiliate
transactions. All four states we visited routinely audit affiliate
transactions. Commission officials in one of these states told us they
commit the equivalent of 2.5 full time employees to auditing affiliate
transactions for reasonableness (e.g., prices appear to be correct). If
they find unreasonable transactions the commission can adjust future
electricity rates to correct for the problem (e.g., they disallow some
or all of the value of the transaction and remove that amount from
prices that consumers pay). Their goal is to audit each utility every 2
years and they estimate that over the last 5 years they have audited
100 percent of all utility affiliate transactions. As part of their
audits the staff requests SEC filings, monitors credit reports, and
reviews other related financial data. However despite this effort,
representatives from two consumer groups in this state expressed
concerns that affiliate transactions are so complex that the state
commission just does not have enough resources to fully audit these
transactions. Two additional states commissions we interviewed contract
with outside auditors to do specific audits of the affiliate
transactions of the state's regulated utilities biennially. State
commission staff in one of these states noted their audits review
company affiliate transactions for appropriateness and proper pricing.
The purpose of the audits is to show the transactions were made fairly
to the utility and that ratepayers are not paying more than they
should. One auditor who had done affiliate transaction audit work for
another state we visited described that state's approach to auditing
affiliate transactions as being very aggressive in that their audits
involved significant data analysis and the reports contained
considerable detail about the findings.
Some States Report Not Having Access to Holding Company Books and
Records:
All states regularly require financial reports from utilities and are
able to obtain access to the financial books and records of these
utilities that document costs, but access beyond the utility varies.
All 49 states that responded to this survey question, noted that they
require utilities to at least provide financial reports. Most states
(41) only require such reporting by the utility but 8 states require
reports that also include the holding company or both the holding
company and the affiliated companies. Of the 48 states that responded
to our questions about the frequency of required reporting, 35 require
annual reports; 6, quarterly reports; and 7, monthly reports.
Although all states but 1 report having access to the books and records
of the utilities in their states, some report they do not have such
access to other companies within the holding company.[Footnote 24]
Nearly one-third of the states reporting said they do not have access
to the books and records of the utility holding company. Similarly,
over 40 percent of the states reporting said they do not have such
access to affiliated nonutility companies. Table 5 shows state
commission access to different parts of holding companies.
Table 5: State Commissions' Access to Books and Records:
Organization: Regulated utility;
Yes, commission has access: 49;
No commission access: 1;
Total states responding: 50.
Organization: Utility holding company;
Yes, commission has access: 32;
No commission access: 14;
Total states responding: 46.
Organization: Affiliated nonutility company;
Yes, commission has access: 28;
No commission access: 20;
Total states responding: 48.
Source: GAO analysis of state survey of utility commission authorities
and reporting responsibilities.
Note: Question asked "Excluding the information, if any is provided to
the commission through financial reporting by the utilities, does your
commission have access to any books and records that document costs and
other relevant information for each of the following?"
[End of table]
Utility experts also expressed concerns over state commissions' access
to the books and records of holding companies or other affiliate
companies either through state authority or through assistance by FERC.
Lack of such access, these experts noted, may limit the effectiveness
of state commission oversight and result in harmful cross-subsidization
because the states cannot link financial risks associated with
affiliated companies to their regulated utility customers. Experts
expressed concern over state commission authority. For example, the
president of an audit company, who currently works with two-thirds of
the utility commissions across the country and completed many affiliate
audits, noted that there is a lack of clear authority in some states to
gain access to the key records in other states, even though the utility
shares common services across the states that bear upon the utilities
transactions. Similarly, one commission official told us that it is
difficult to get access using state authority alone. He noted that
holding companies can set up numerous roadblocks for staff to access
the records. Consistent with this view, in comments to our survey
concerning key challenges since the passage of EPAct one state noted a
concern about the responsiveness of a parent holding company based out
of state to specific in-state inquiries.
While the PUHCA 2005 provisions of EPAct provide states with additional
access to books and records, some states expressed reservations
relating to the level of protection this offered their states. In
response to our survey, 8 states noted that access to books and
records, if they had to gain assistance through FERC, offered little or
no protection to their states, while another 14 states noted this
offered only some protection. In contrast, only 3 states noted that
FERC assistance in gaining access offered great protection. Commission
staff in one state told us that obtaining such information requires
state commissions to be very specific in identifying the necessary
information. However, this commission staff noted that it may be
difficult to develop such detailed knowledge. According to this state
commission staff, such a detailed requirement to access information may
limit their ability to conduct adequate and timely affiliate
transaction audits. A utility expert who has experience with both FERC
and state commissions also noted that states often follow leads and do
not always know the specific information to support a detailed request.
As a result of the potential need to develop a series of detailed
requests, it may take longer to complete an audit. He stated this
creates significant risks for states and their ratepayers as the full
scope of utility transactions cannot be understood without seeing the
entire trail of these transactions through the holding company and
affiliate books and records.
States Foresee Needing Additional Resources:
States and other officials expressed concerns that the state
commissions do not currently have sufficient resources and may need
additional resources to respond to the changes from EPAct. Since states
have gained over 2 years of experience since EPAct was passed, many
believe they now need additional resources to carry out their
responsibilities. Specifically, as seen in table 6, 44 percent of the
states responded to our survey that they need additional staffing or
funding, or both, to deal with the changes from EPAct. Further, 6 out
of 30 states raised staffing as a key challenge in overseeing utilities
since the passage of EPAct. One state, for example, noted monitoring of
affiliate relationships as a key challenge, particularly in light of
its current staff and resources. Since the passage of EPAct, 8 states
have proposed or actually increased staffing.
Table 6: Some States Foresee Needing Additional Resources Due to EPAct:
Type of resource: Additional staffing; Yes: 22; No: 28; Total states
responding: 50.
Type of resource: Additional funding; Yes: 22; No: 28; Total states
responding: 50.
[End of table]
Source : GAO analysis of state survey of utility commission authorities
and reporting responsibilities.
Note: Survey question asked "Does your commission foresee needing any
of the following to deal with the changes from EPAct 2005 concerning
holding companies, mergers and various activities previously covered by
the Public Utility Holding Company Act of 1935?"
Staffing concerns were also mentioned as problems by officials at the
commissions or by representatives of consumer groups in 3 of the 4
states we visited as well others. For example, an official from the one
of these state's commissions noted that the state, in response to
tighter budgets, had reduced staffing levels across-the-board including
the utility commission and that the median age of the commission staff
was now 56 and could soon face a wave of retirements. In addition,
representatives of two consumer groups in another state expressed
concerns that the commission does not have enough resources to oversee
or audit affiliate transactions. In addition an official from a
national credit-rating agency expressed concern that some state
commissions may not fully appreciate the degree of difficulty they
could face with existing staffs in the years ahead.
Conclusions:
The repeal of PUHCA 1935 further opened the door for new and different
corporate combinations, including the ownership of utilities by complex
international companies or equity firms, potentially providing needed
investment to the utility industry. However, this potential to increase
investment comes at the potential cost of making regulation more
difficult. Further, the introduction of new types of investors, with
incentives that may be at odds with traditional utility company
services, could change the utility industry into something quite
different than the industry that FERC and the states have overseen for
decades. Despite these evolving changes, FERC continues to rely to a
considerable degree on companies to self-certify that they will not
cross-subsidize and self-report when they do. On the basis of our
discussions with industry, state regulators, and audit experts, this
reliance on self-enforcement--backed up by a few audits--does little to
convince consumers and other market stakeholders that FERC's oversight
is sufficiently vigilant.
As FERC and states approve mergers, the responsibility for ensuring
that cross-subsidization will not occur shifts to FERC's Office of
Enforcement and state commission staffs. However, in the case of FERC
this presents a challenge because FERC lacks a formal way of allocating
resources to the areas of highest potential risk--leaving audit
resources deployed in an ad hoc manner. Without a risk-based audit
approach, FERC may not allocate its scarce audit resources to the right
areas, potentially allowing cross-subsidization to go undetected. In
addition, since states generally review only a very small percent of
affiliate transaction to identify potential cross-subsidization and
many reported resource constraints, some states' detection of cross-
subsidization may be limited.
By reassessing its audit approach, how it shares the results of its
audits, and its resources, FERC could take important steps to
demonstrate its commitment to ensure that companies are not engaged in
cross-subsidization at the expense of consumers. Absent such a
reassessment, the potential exists for FERC to approve the formation of
companies that are difficult and costly for it and states to oversee
and potentially risky for consumers and the broader market.
Recommendations for Executive Action:
We recommend that the Chairman of the Federal Energy Regulatory
Commission (FERC) take the following actions:
1. Develop a comprehensive, risk-based approach to planning audits of
affiliate transactions in holding companies and other corporations that
it oversees to more efficiently target its resources to highest
priority needs and to address the risk that affiliate transactions pose
for utility customers, shareholders, bondholders, and other
stakeholders.
2. As an aid to developing this risk-based approach, FERC should
develop a better understanding of the risks posed by each company by
doing the following:
a. Monitoring the financial condition of utilities to detect
significant changes in the financial health of the utility sector, as
some state regulators have found it useful to do. To do this, FERC
could leverage analyses done by the financial market and develop a
standard set of performance indicators.
b. Developing a better means of collaborating with state regulators to
leverage resources already applied to enforcement efforts and to
capitalize on state regulators' unique knowledge. As part of this
effort, FERC may want to consider identifying a liaison, or liaisons,
for state regulators to contact and to serve as a focal point(s).
3. Develop an audit reporting approach to clearly identify the
objectives, scope and methodology, and the specific findings of the
audit, irrespective of whether FERC takes an enforcement action, in
order to improve public confidence in FERC's enforcement functions and
the usefulness of audit reports on affiliate transactions for FERC,
state regulators, affected utilities, and others.
4. After developing a more formal risk-based approach, reassess whether
it has sufficient audit resources to perform these audits. If FERC
believes that it does not have sufficient resources to conduct adequate
auditing of the companies that it oversees within its existing staff
and budget, FERC should provide this information to Congress and
request additional resources.
Agency Comments and Our Evaluation:
We provided a draft of our report to FERC for review and comment. We
received written comments from FERC's Chairman and that letter and our
detailed response is presented in appendix II. In his comments, the
Chairman strongly disagreed with the report finding that FERC does not
have a strong basis for ensuring that utilities do not engage in
harmful cross-subsidization and noted that he believed the report
contained inaccuracies and misunderstandings. We disagree with the
Chairman's characterization of our report and note that the letter's
assertions about some aspects of FERC's operations are, in fact, quite
different than the views of numerous commission staff and experts with
whom we met over the course of the past year as well as FERC's own
Policy Statement on Enforcement. In addition, we believe that the
repeal of PUHCA 1935 represents an important change in the context of
FERC's regulation of the industry and, in light of this change, FERC
should err on the side of a "vigilance first" approach to preventing
potential cross-subsidization by enhancing its current approach to
audit planning and reevaluating audit resources. Overall, we believe
our report presents a fair and balanced presentation of the facts and
issues associated with FERC's oversight and, as a result, encourage the
Chairman to fully consider our recommendations. FERC also provided
technical comments, which we incorporated, as appropriate.
As agreed with your offices, unless you publicly announce the contents
of this report earlier, we plan no further distribution until 14 days
from the report date. At that time, we will send copies to the Chairman
of the Federal Energy Regulatory Commission (FERC) and other interested
parties. We will also make copies available to others upon request. In
addition, the report will be available at no charge on the GAO Web site
at [hyperlink, http://www.gao.gov].
If you or your staff have any questions about this report, please
contact me at (202) 512-3841, or gaffiganm@gao.gov. Contact points for
our Offices of Congressional Relations and Public Affairs may be found
on the last page of this report. GAO staff who made major contributions
to this report are listed in appendix III.
Signed by:
Mark Gaffigan:
Acting Director, Natural Resources and Environment:
[End of section]
Appendix I: Scope and Methodology:
In this report, we agreed to determine: (1) the extent to which FERC
changed its merger or acquisition review process and postmerger or
acquisition oversight to ensure that potential harmful cross-
subsidization by utilities does not occur, and (2) the views of state
utility commissions regarding their current capacity, in terms of
regulations and resources, to oversee utilities.
Overall, to address the objectives we reviewed relevant reports,
examined existing data, interviewed key officials and collected new
data and information from 49 states and the District of Columbia. We
interviewed and obtained documentation, when applicable, from a wide
range of stakeholders including federal and state officials, industry
officials, and various other special groups and organizations. We
interviewed federal agency officials at FERC, the Department of
Justice, the Federal Trade Commission, and the Securities and Exchange
Commission (SEC). We obtained views from organizations including the
National Association of Regulatory Utility Commissioners (NARUC),
American Antitrust Institute, National Regulatory Research Institute,
American Public Power Association, Electricity Consumers Resource
Council, Edison Electric Institute, and Public Citizen. In addition, we
obtained information and views on the effects of the Energy Policy Act
of 2005 (EPAct) on investment in the utility industry from two national
credit reporting agencies, Standard and Poor's and Fitch Ratings, and
the investment advisor Goldman Sachs Company.
To specifically determine how FERC has changed its merger review
processes and postmerger oversight to prevent cross-subsidization
affecting utilities, we reviewed the Energy Policy Act of 2005 and the
Public Utility Holding Company Act of 2005 (PUHCA 2005) provisions in
EPAct related to FERC's review of mergers and acquisitions, access to
the books and records of companies in holding company systems, and
assessment of civil penalties on companies that violate its rules. We
reviewed information on the number, identity, and outcome of mergers
that FERC has reviewed, audits of affiliate transactions that FERC has
conducted, and civil penalties that FERC has assessed since passage of
the 2005 legislation. We interviewed officials in FERC's Office of
Enforcement, Office of Energy Markets and Reliability, and Office of
General Counsel concerning their plans to implement the statutory
provisions of EPAct, including the PUHCA 2005 provisions and their
development or update of new and existing rules, policies, and
procedures regarding merger review, law enforcement, and audits. We
performed a limited review of selected FERC merger orders and audit
reports, including 18 completed audit reports the commission identified
as pertaining to affiliate transactions, to assess FERC's practices for
reviewing mergers and conducting audits to prevent cross-subsidization.
To address the second objective and gain insight into states' views on
their current capacities to oversee utilities, we visited four states,
California, New Jersey, Oregon, and Wisconsin and conducted an Internet-
based survey with staff from the public utility commissions in the 50
states and District of Columbia. In our site visits we met with
officials from the public utility commissions, representatives of two
utilities in each state, in some cases the utilities' internal and
external audit firms, and we also obtained views from representatives
of consumer protection groups. We obtained information on the state's
authorities, actions, and resources relating to mergers, affiliate
transactions, financial reporting, and access to company records. We
gathered opinions relating to the federal regulatory changes and
current or planned enforcement by FERC. We selected these states
through a literature search, discussions with representatives of NARUC,
a national organization representing state utility commissions, and
from some initial discussions with selected states. We chose several
states to visit that had strong protections related to holding
companies/affiliates and utilities prior to the repeal of PUHCA 1935.
We also selected two states of the four that were considering
additional consumer protections directly due to the repeal of PUHCA
1935. We also discussed key issues with commission officials from
Kansas and Montana.
Since little detailed information existed that summarized the
authorities, actions, and resources of all the states' regulatory
oversight related to utilities and holding companies, we supplemented
our audit work with a survey of the staff of the 50 states' and
District of Columbia's public utility commissions. The survey was
developed between September and December 2006. Because we administered
the survey to all of the state public utility commissions, our results
are not subject to sampling error. However, the practical difficulties
of conducting any survey may introduce other types of errors, commonly
referred to as nonsampling errors. For example, differences in how a
particular question is interpreted, the sources of information
available to respondents in answering a question, or the types of
people who do not respond can introduce unwanted variability into the
survey results We included steps in the development of the survey to
minimize such nonsampling error.
To reduce nonsampling error, we had cognizant officials at NARUC review
the survey to make sure they could clearly comprehend the questions. We
also pretested the survey with two states to ensure that (1) the
questions were clear and unambiguous, (2) terminology was used
correctly, (3) the survey did not place an undue burden on commission
officials, and (4) the survey was comprehensive and unbiased. In
selecting the pretest sites, we sought the advice of NARUC and selected
states that had different types of regulatory requirements. We made
changes to the content and format of the final survey based on the
pretests.
We conducted the survey using a self-administered electronic
questionnaire posted to GAO's Web site on the Internet. To ensure that
we would obtain information from commission staff most knowledgeable,
we first obtained a list of key contacts from NARUC. We sent e-mail
notifications to the Chairmen of the public utility commissions
informing them of the purpose of our survey and requesting that they
make any changes on the contact list provided to us by NARUC that would
be most appropriate. After we made changes to our contact list, we sent
e-mail notifications to alert the appropriate officials of the
forthcoming survey. These were followed by another e-mail containing
unique passwords and usernames that enabled officials to access and
complete the survey and notifying officials that the survey was
activated. Although the survey was available on the Web until June 30,
2007, we followed up with officials first through e-mail reminders and
then by telephone to encourage them to respond. We received survey
responses from 49 states plus the District of Columbia (each state
could only provide one response). One state did not respond due to
other high priorities at the time of our survey. We edited all
completed surveys for consistency, but it was agreed we would not
follow up with states relating to specific responses, but only to
encourage them to send us their survey.
Detailed survey results are available at: [hyperlink,
http://www.gao.gov/special.pubs/gao-08-290sp].
[End of section]
Appendix II: Agency Comments and Our Response:
Note: GAO comments supplementing those in the report text appear at the
end of this appendix.
Federal Energy Regulatory Commission:
Washington, DC 20426:
January 22, 2008:
Office Of The Chairman:
Mr. Mark Gaffigan:
Acting Director, Natural Resources and Environment:
United States Government Accountability Office:
Room 2T47
441 G Street, NW
Washington, DC 20548
Dear Mr. Gaffigan:
Thank you for the opportunity to comment on the U.S. Government
Accountability Office's Draft Report to Congressional Requestors
entitled "Utility Oversight: Recent Changes in Law Call for Improved
Vigilance by FERC", GAO- 08- 289 (Draft GAO Report). My staff received
the draft report on December 20, 2007, with a requested response from
me as Chairman of the Federal Energy Regulatory Commission (FERC or
Commission) by January 22, 2008. This letter contains both general
overview comments on the report as well as detailed comments on errors
or omissions in the report.
I strongly disagree with the Draft GAO Report's statements and
implications that the Commission "does not have a strong basis for
ensuring that utilities do not engage in harmful cross-subsidization"
and that the Commission has not taken sufficient steps in this- area
following the passage of the Energy Policy Act of 2005 (EPAct 2005).
Further, the Draft GAO Report contains numerous inaccuracies and
apparent misunderstandings regarding cross-subsidization, the
Commission's historical regulation of jurisdictional utilities with
respect to cross-subsidization and the Commission's current regulatory
structure, and the Commission's current audit and enforcement process
with respect to this discrete area of its enforcement responsibilities.
All of these matters are set forth in detail below.
Initially, the introduction of the Draft GAO Report errs in stating
that EPAct 2005's repeal of the Public Utility Holding Company Act of
1935 (PUHCA 1935). which removed limitations on the types of companies
that could merge with or invest in utilities. "shifted sole
responsibility for regulating public utilities from the Securities and
Exchange Commission [SEC] to the Federal Energy Regulatory
Commission...." The SEC has never had sole responsibility for
regulating public utilities. In fact, prior to EPAct 2005, the SEC had
very little responsibility for regulating public utilities. While it
regulated certain activities of holding companies, with minor
exceptions the SEC did not regulate public utilities. Regulation of
public utilities (both public utility subsidiaries of holding companies
and public utilities that were not part of holding companies) has long
been the province of this Commission and the states.
(See comment 1.):
Since 1935, this Commission, and not. the SEC, has had exclusive
responsibility for regulating transmission and wholesale sales of
electric energy by public utilities and has had shared responsibility
with the SEC with respect to certain other activities (e.g., mergers
involving both a public utility and a holding company). With respect to
cross- subsidization, in particular, the Draft GAO Report ignores the
Commission's extensive ratemaking authority that has been in place
since 1935 (Federal Power Act (FPA)) and 1938 (Natural Gas Act) to
prevent cross-subsidization, and the Commission's expertise and
practices developed over the last 70 years in its exercise of that
authority. The importance of the powerful ratemaking tool of
disallowing flow-through in rates of costs deemed to represent cross-
subsidies, a tool which the SEC never had, cannot be overstated. The
draft report also does not reflect an accurate understanding of the
Commission's historical and existing review and analysis of proposed
mergers. Although our merger review historically overlapped, in part,
with merger review by the SEC, the SEC did not undertake the extensive
analysis and customer protection oversight performed by the
Commission.[Footnote 25] Similarly, the Draft GAO Report is incorrect
in its stated and implied conclusions that the Commission has failed to
significantly change its processes since the passage of EPAct 2005 to
address the issue of inappropriate cross- subsidization.
(See response 4.):
(See response 1.):
(See response 3.):
(See response 2.):
Broadly, the Draft GAO Report seems to urge the Commission to resurrect
the regulation of holding companies that occurred under PUHCA 1935 on
the thin bones of the Public Utility Holding Company Act of 2005 (PUHCA
2005). This would clearly not be appropriate. Notwithstanding its
similar title, PUHCA 2005 is primarily an access to book and records
statute. It gives the Commission no substantive authority to regulate
public utilities, it merely supplements the Commission's pre-existing
authority to access the books and records of holding companies, public
utilities, and other holding company affiliates, and it gives states
separate, independent authority to access that information. We have not
sought to resurrect PUHCA 1935 for the simple reason that the statute
was repealed by Congress after great deliberation and PUHCA 2005 has
none of the substantive authority of PUHCA 1935. The heart of the
Commission's authority to regulate public utilities remains FPA
provisions enacted more than 70 years ago. This authority was expanded
by EPAct 2005, primarily through the amendment to FPA section 203 to
give the Commission jurisdiction over certain holding company mergers
and acquisitions, and we have appropriately exercised this expanded
authority over the past two years.
The Draft GAO Report asserts that "FERC has made few substantive
changes to ... its merger review process ... since EPAct [2005]." As
discussed below, that is simply incorrect. The Commission has taken a
number of significant steps to implement the provisions of revised FPA
section 203. We have focused much of our attention on the cross-
subsidization provisions because in other respects EPAct 2005 largely
codified the merger test used by the Commission for years.
(See response 3.):
In response to EPAct 2005, which repealed PUHCA 1935, enacted PUHCA
2005 and amended section 203 of the FPA to require explicit
consideration of cross- subsidization at the time mergers are reviewed
and to give the Commission authority over certain holding company
mergers and acquisitions of securities, the Commission responded
promptly with a series of actions all within the short time frames
required by the new laws:
- adopted regulations to implement PUHCA 2005, codified at 18 C.F.R.
Part 366;[Footnote 27]
- adopted detailed accounting, reporting, and record retention
requirements for utility holding companies and their service
companies;[Footnote 28]
- adopted regulations to implement PUHCA 2005, codified at 18 C.F.R.
Part 366;[Footnote 27]
- adopted detailed accounting, reporting, and record retention
requirements for utility holding companies and their service companies;
[Footnote 28]
- required FPA section 203 applicants to demonstrate that proposed
mergers would not result in cross-subsidization or the pledge or
encumbrance of utility assets, or explain how the cross- subsidization
or pledge or encumbrance would be in the public interests;[Footnote
29]
Similarly, in the context of a specific merger proposal filed after
EPAct 2005 was enacted[Footnote 30] and later in the Notice of Proposed
Rulemaking in Cross-Subsidization Restrictions on Affiliate
Transactions,[Footnote 31] the Commission stated that all merger
approvals would be conditioned on a "code of conduct" that would govern
dealings between franchised public utilities and both market-based rate
power sales affiliates and non- utility affiliates, in order to address
cross-subsidization concerns involving power and non-power goods and
services transactions. The Commission found that, despite the passage
of EPAct 2005, imposing such conditions was in the public
interests[Footnote 32]
As a foundation for a second round of initiatives following EPAct 2005,
on December 7, 2006 and March 8, 2007, the Commission held public
conferences regarding section 203 and the newly enacted PUHCA 2005 in
which industry participants and state commissioners provided input on
key issues including the protection of utility customers from
inappropriate cross-subsidization. In particular, the Commission sought
input regarding overlaps in state-federal jurisdiction with respect to
mergers and various cross-subsidization protections such as "ring-
fencing" and other techniques to protect the assets of regulated
utilities. One important purpose of these technical conferences was to
solicit the views of state regulators on the best way to prevent cross-
subsidization, and how to coordinate federal and state merger review to
that end. The Commission also sought comment on whether additional
measures under the Commission's FPA and NGA authorities were needed to
supplement existing protections against cross-subsidization. In
response to the input received in those conferences and written
comments following the conferences, in July 2007, the Commission took
the following actions:
- The Commission approved a Supplemental Merger Policy Statement, in
which it provided additional clarification and guidance on, among other
things, information that must be provided as part of an application
when proposed transactions do not raise cross-subsidization concerns,
and as relevant here, the types of commitments applicants could make
and the ring-fencing measures applicants could offer to address cross-
subsidization concerns when proposed transactions raise cross-
subsidization concerns. In response to recommendations by the states,
the Policy Statement also stated that the Commission would defer to
state ring-fencing measures absent evidence that additional measures
were needed to protect wholesale customers. Further, where states have
no authority to impose cross-subsidization protections, transactions
would not qualify for "safe harbor" protection. FPA Section 203
Supplemental Policy Statement, 72 Fed. Reg. 42,277 (Aug. 2, 2007), FERC
Stats. & Regs. ¶ 31,253 (2007).
- The Commission issued a Notice of Proposed Rulemaking, proposing to
codify restrictions on the pricing of power and non- power goods and
services in affiliate transactions between franchised public utilities
with captive customers, on the one hand. and their market-regulated
power sales affiliates and their non- utility affiliates, on the other
hand. These restrictions would apply to all public utilities, not just
those proposing a merger. Cross-Subsidization Restrictions on Affiliate
Transactions, 72 Fed. Reg. 41,644 (July 31, 2007), FERC Stats. & Regs.
¶ 32,618 (2007).
- The Commission issued a second Notice of Proposed Rulemaking,
proposing to grant limited blanket authorizations for certain
jurisdictional corporate transactions that would not be expected to
harm either competition or captive customers. Blanket Authorization
under FPA Section 203, 72 Fed. Reg. 41,640 (July 31, 2007), FERC Stats.
& Regs. 9[ 32,619 (2007).
The Commission is currently working on finalizing these important
initiatives, which will provide additional cross-subsidization
protections and guidance. As this brief discussion demonstrates, the
Draft GAO Report's suggestion that the Commission has done little in
response to EPAct 2005 and PUHCA 2005 is simply incorrect.
It is important to understand that inappropriate cross-subsidization is
a constant concern, which does not arise only in the context of, and
following, a merger or other jurisdictional corporate transaction.
Cross-subsidies can occur at any time and the Commission has
appropriately focused on up-front conditions and mandatory prophylactic
rules ” like those highlighted above ” that, for example, identify
pricing standards that must be applied to affiliate transactions should
they occur.
Cross-subsidization is primarily a ratemaking concept, one that is very
familiar to the Commission. The Commission has developed policies under
its rate-setting authority to prevent harmful cross-subsidization over
the past 70 years. Not only does the Commission analyze cross-
subsidization in the context of a specific rate-setting proceeding and
disallow flow-through of inappropriate costs, but it also has generic
cross-subsidy restrictions in its regulations.
For instance, the Commission's regulations include a provision
expressly prohibiting power sales between a franchised public utility
with captive customers and any market-regulated power sales affiliates
without first receiving Commission authorization for the transaction
under FPA section 205. The Commission reviews such filings to protect
against inappropriate cross-subsidization. Similarly, the Commission's
regulations require that sales of any non-power goods or services by a
market-regulated power sales affiliate to an affiliated franchised
public utility with captive customers will not be at a price above
market, and any such sales from a franchised utility with captive
customers to the market-regulated power sales affiliate must be at the
higher of cost or market, unless otherwise authorized by the
Commission.
With respect to the Commission's ratemaking responsibilities, the
Commission promulgated rules to take advantage of the new access to
books and records provisions of PUHCA 2005. The information obtained
from holding companies under its new regulations enhances the
Commission's ability to determine audit candidates and also arms the
public with financial information to assist with the filing of formal
and informal complaints. In this regard, as noted above, the Commission
adopted new standardized accounting regulations in October 2006, and to
allow for greater transparency to protect ratepayers from paying
improper service company costs, the Commission added a new Uniform
System of Accounts for centralized service companies. In addition, the
Commission implemented record retention requirements to require holding
companies and service companies to retain records consistent with the
retention periods for public utilities and natural gas companies, and
required centralized service companies to file financial information
and information related to providing non-power goods and services to
affiliates.[Footnote 33] Information collected in that form is
available electronically to market participants and the public for use
in detecting cross-subsidization, affiliate abuse, or other violations
of the Commission regulations.
As a further protection, the Commission staff conducts targeted audits
as proactive measures to detect and protect against cross-
subsidization. Even before PUHCA 1935 was repealed, the Commission had
a long-standing practice dating back at least to the 1970s of auditing
affiliated transactions as part of its financial audit program. More
recently, in November 2003, the Commission began auditing affiliated
transactions as part of its multi-scope audits covering its market-
based rate program.[Footnote 34] Specifically, in anticipation of the
repeal of PUHCA 1935, the Commission developed and implemented a
comprehensive audit program to conduct audits of affiliated
transactions to ensure that cross-subsidization does not occur. The
audit program reflects the detailed auditing procedures and techniques
used to guide the audit team in accomplishing the audit work.
The Draft GAO Report incorrectly concludes in several places that the
Commission intends to rely on self-reports as the primary enforcement
mechanism to prevent cross-subsidization. The Commission has never
relied on self-reports as its primary enforcement mechanism to prevent
inappropriate cross-subsidization or assure compliance with other
regulatory requirements. Because cross-subsidization is an aspect of
ratemaking, by its very nature, it does not lend itself to being self-
reported as a violation of the Commission's rules. Ratemaking is a
complicated process which relics on the development of an extensive
record on costs and revenues, and determination of the proper
allocation of costs between jurisdictional and non-jurisdictional
operations, the appropriate distribution of costs between and among the
various jurisdictional services, and the selection of an appropriate
rate of return. Under these circumstances, self-reports would not be an
effective method to monitor cross-subsidization. It is possible that
the Draft GAO Report may be confusing self-reports regarding standards
of conduct violations (pertaining to communications between the
transmission and generation functions of a utility) with self-reports
regarding cross-subsidization. Moreover, the Draft GAO Report seems
unaware that, prior to passing through costs in rates, a public utility
must request authority to do so and therefore the Commission, at the
time of such a request, can determine whether the proposed rate or rate
formula permits inappropriate cross-subsidization to occur and, if so,
to disallow rate recovery.
(See response 4.):
Similarly, the Draft GAO Report makes incorrect assertions concerning
the universe of companies subject to the Commission's jurisdiction, the
number of PUHCA audits the Commission will conduct in the future, and
the process used to select the PUHCA audit candidates. With respect to
the universe of companies subject to the Commission's jurisdiction, the
Draft GAO Report implies that the Commission will audit only 100
companies out of a universe of 4,700 potential audit candidates. The
Draft GAO Report fails to take into account the Commission's
comprehensive compliance program in its Office of Energy Projects (OEP)
for overseeing the jurisdictional operation of 17 LNG terminals and
1,022 hydroelectric projects. In addition, the Draft GAO Report also
fails to indicate that the primary audit responsibility for the 1,510
FPA section 215 reliability standards compliance audits falls on the
Electric Reliability Organization and the Regional Entities. Aside from
these 2,539 audit candidates, there is also significant overlap between
the other categories of jurisdictional companies. Thus, the universe of
potential audit candidates is significantly below the 4,700 figure
cited in the Draft GAO Report.
(See response 5.):
The Draft GAO Report also is incorrect when it suggests that the
Commission will audit holding companies only once every 12 years. The
Commission considers a number of factors including the size and
complexity of holding companies in determining how many holding company
audits the Commission will conduct in a given year. Until the
Commission obtains sufficient experience conducting holding company
audits pursuant to PUHCA 2005, the Commission cannot correctly estimate
how many of these audits will be necessary in the future. The three
PUHCA 2005 audits scheduled for FY08 are the initial audits focused on
compliance with these requirements, and concentrate on some of the
largest utility holding companies. It is inappropriate to assume these
PUHCA audits are indicative of the number of audits that the Commission
will perform in subsequent years.
The Draft GAO Report incorrectly portrays the Commission's method of
selecting audit candidates as informal. The Commission consistently
uses a variety of methods to assess risk in order to facilitate the
selection of audit candidates. These methods include internally
developed screens and models, past compliance history, information
gleaned from on-going and completed audits, investigations, and
complaints, Commission financial forms, SEC filings, websites, rate
information gathered from Commission and state rate filings and
discussions with the Commission's legal and technical experts.
(See response 6.):
The Draft GAO Report gives short shrift to a public utility's
commitments that are made with respect to cross-subsidization in the
context of a merger proceeding and appears to ignore the fact that such
commitments are incorporated in the Commission's order as conditions of
allowing a merger or other corporate transaction. If those commitments
are not adhered to, the public utility will be in violation of a
Commission order and subject to sanctions including possible civil
penalties. Further, the Commission retains authority under FPA section
203(b) to issue supplemental merger orders as it finds may be necessary
or appropriate. The Draft GAO Report also ignores generic rules
delineating and proscribing cross-subsidization in power sales and non-
power goods and services transactions between affiliates, which are
both auditable and enforceable. Continuing rate review by the
Commission, and rate complaints by customers, as well as audits provide
regulatory tools to identify and disallow inappropriate cost-
subsidization and inappropriate cost recovery. Inappropriate costs may
be disallowed in rates and/or penalties may be assessed for not
complying with such commitments and restrictions. The Commission's
audit process and further clarification of apparent misunderstandings
regarding the Commission's audit process with respect to cross-
subsidies are discussed below.
(See response 7.):
In the draft report, the GAO makes four recommendations that
purportedly would enhance the Commission's ability to detect and
prevent harmful cross-subsidization involving public utilities. These
recommendations focus primarily on post-merger oversight, in particular
with respect to the audit process. In brief, the GAO recommends that
the Commission use a risk-based approach to detect cross-subsidization,
enhance the agency's audit reporting, and reassess resources to
demonstrate that its oversight is sufficiently vigilant.
The Draft GAO Report's first recommendation is that the Commission
"[d]evelop a comprehensive, risk-based approach to auditing affiliate
transactions in holding companies and other corporations that it
oversees to more efficiently target its resources to highest priority
needs and to address the risk that affiliate transactions pose for
utility customers, shareholders, bondholders, and other stakeholders."
Contrary to the premise of this recommendation, the Commission followed
a risk-based approach in selecting the FY08 PUHCA audit candidates and
will continue to follow a similar approach in the future. The risk-
based approach entailed a comprehensive review of audit materials
obtained from the SEC; discussions with the SEC; examination of
financial information contained in FERC Form No. 60, FERC Form No. 1,
and SEC filings; rate information gathered from Commission filings; and
discussions with the Commission's legal and technical experts. In
addition to the above methods, the Commission audit staff searched
through 155 boxes of audit materials received from the SEC covering 28
holding companies, participated in several conference calls with the
SEC staff responsible for the implementation of PUHCA 1935 and
discussed audit practices, processes and procedures, as well as
outstanding issues for certain holding companies. Finally, shortly
after the audits started, the Commission held discussions with state
commission officials in the states of Georgia, Alabama, Mississippi,
Florida, Maryland, Virginia, West Virginia, and Pennsylvania.
(See response 6.):
The second recommendation suggests that the Commission should develop a
better understanding of the risks posed by each company.[Footnote 35]
Briefly, the Draft GAO Report suggests monitoring the financial
condition of utilities and collaborating with state regulators.
Contrary to the Draft GAO Report's assumptions, the Commission audit
staff frequently interacts with state regulators during an audit. For
example, the Commission's audit staff recently either met or had
telephone conversations with eight state regulators regarding the three
current FY08 PUHCA 2005 audits. These actions demonstrate that I
recognize maintaining contact with state regulators is mutually
beneficial to the states and the Commission.
(See response 8.):
However, the suggestion that the Commission should monitor the
financial condition of public utilities fails to appreciate that a
company's stock price and bond ratings are typically driven by the
company's overall business risks and prospects. Thus, the fact that a
company's stocks or bonds are doing well or poorly says little or
nothing, standing alone, about whether cross-subsidization is
occurring. That is why the Commission's existing method of assessing
risk is comprehensive and takes into account both financial and non-
financial information rather than solely relying on a public utility's
stock prices and bond ratings as indicators of potential cross-
subsidization.
The third recommendation is that the Commission "[d]evelop an audit
reporting approach to clearly identify the objectives, scope and
methodology, and the specific findings of the audit, irrespective of
whether FERC takes an enforcement action in order to improve public
confidence in FERC's enforcement functions and the usefulness of audit
reports on affiliate transactions for FERC, state regulators, affected
utilities, and others." The Commission has always strived to clearly
identify its objectives and methodologies for all areas of its
jurisdictional responsibilities. The Commission is currently
implementing this recommendation in the audit context. For example, in
November 2007, the Commission's audit staff began the process of
including an enhanced audit methodology section in all of its public
audit reports.[36] Also, the Commission's public audit reports have
always included audit objectives and scope, as well as audit findings,
where applicable. In contrast, the SEC previously issued non- public
audit reports at the completion of its holding company audits. Thus,
the Commission's enhanced audit methodology and practice of publicly
publishing audit reports provide the public and the regulated community
with greater transparency than previously provided by the SEC.
Finally, the Draft GAO Report recommends that the Commission, "[a]fter
developing a more factual risk-based approach, reassess whether it has
sufficient audit resources to perform these audits" and request
additional funds, if necessary. Currently, the Commission continuously
reassesses its audit and other resources to achieve its strategic
goals. To that end, for each audit cycle, the Commission prepares an
annual audit plan that is vetted with senior Commission officials,
reviewed and approved by me as Chairman, and shared with all of my
fellow Commissioners for their information and input. Needless to say,
the Commission will continue to seek additional funds from Congress if
it believes it needs more resources to carry out its auditing
responsibilities, including PUHCA 2005 audits, just as the Commission
recently did when requesting
(See response 10.):
To summarize, the Commission's auditors already follow a risk-based
approach for selecting holding company audit candidates for examination
of their affiliated transactions, and the Commission constantly
assesses and reassesses its audit resources to carry out the audit
priorities in the annual audit plan. Similarly, the Commission
continues to collaborate with state regulators to capitalize on their
unique knowledge. Interacting with state regulators during the course
of an audit is a practice the Commission auditors have followed for a
long time. Finally, the Commission continually strives to maintain and
improve existing staff practices to ensure that the audit reports
include clear audit objectives, scope, and methodologies.
(See response 11.):
Finally, before turning from these more general comments to more
specific comments, I should note that the Draft GAO Report contains
considerable discussion regarding states' abilities to protect against
cross-subsidization at the retail level. 1 and my fellow Commissioners
have recognized this very important issue in our post-EPAct 2005
actions and it was a topic of lengthy discussion at one of our
technical conferences and in our consideration of the Supplemental
Policy Statement issued in July 2007 and referenced above. In fact, we
heard feedback from our state colleagues that the Commission should
defer to state commissions and state regulatory tools with respect to
protecting retail customers. The Draft GAO Report also refers to
concerns that state commissions may not be able to obtain books and
records of utility holding companies and utility associates and
affiliates necessary to assist them in detecting potential cross-
subsidization by retail customers and that, under PUHCA 2005's access
to books and records provisions, state commissions have to go through
this Commission to obtain information. These statements, particularly
the statement at page 30 of the Draft GAO Report that refers to
developing "a series of detailed requests to FERC," are incorrect.
PUHCA section 1265, 42 U.S.C. § 16453, gives state commissions explicit
authority to obtain information – including "books, accounts, memoranda
and other records" – from utility holding companies and utility
associate and affiliate companies "wherever located;" there is no
requirement in PUHCA 2005 that state commissions need this Commission's
authorization to obtain such information or that they otherwise must go
through this Commission.
The Draft GAO Report is also inaccurate in its criticism of mergers
approved by the Commission since enactment of EPAct 2005. The report
argues these mergers were made possible by repeal of PUHCA 1935. The
fact, however, is that the two largest mergers during GAO's study
period – Cinergy/Duke and Mid-American/PacifiCorp – were all announced
prior to the repeal of PUHCA 1935. The Draft GAO Report asserts that
repeal of PUHCA 1935 "opened the door" for ownership of utilities by
international companies and "new types of investors." That statement
fails to recognize that there were a number of acquisitions of U.S.
utilities by international companies before repeal of PUHCA
1935.[Footnote 37 In addition, there were proposed acquisitions of
utilities by equity firms before repeal of PUHCA 1935, some of which
were successful.[Footnote 38]
(See response 12.):
The Draft GAO Report asserts "FERC is generally supportive of mergers,"
but cites unnamed "experts" without attribution. The Draft GAO Report
implies criticism that the Commission has not conditioned more of the
mergers approved since enactment of EPAct 2005. Yet, it makes no effort
to analyze any of the approved mergers that were not conditioned. For
example, GAO fails to mention that two of these mergers were
cross-country mergers involving utilities in different regions of the
country, and that other mergers involved acquisition of a utility by a
new entrant. The Commission conditions mergers as necessary to mitigate
merger-related increases in market power, and as a general matter
neither of these types of mergers raise market power issues. In my
view, it is unfair to criticize the Commission for not conditioning
mergers that presented no market power or other issues.
I also take great exception to the Draft GAO Report's characterization
of the capacity of state commissions to oversee utilities. The report
specifically criticizes state commissions for not auditing more
affiliate transactions. I believe this criticism is unfair ” my state
colleagues are dedicated to protecting retail consumers, and are as
committed to preventing cross-subsidization as this Commission.
Recognizing the expertise of states in this area, we consulted closely
with our state colleagues as we implemented our expanded merger
authority.
(See response 13.):
Turning from my more general concerns with the Draft GAO Report to more
specific concerns, let me proceed page-by-page and identify errors or
misstatements that I believe need to be corrected:[Footnote 39]
(1) Introductory Page: As an initial matter, as I noted at the outset,
the discussion of "Why GAO Did This Study" errs in stating that EPAct
2005's repeal of PUHCA 1935, which removed limitations on the types of
companies that could merge with or invest in utilities, "shifted sole
responsibility for regulating public utilities from the Securities and
Exchange Commission to the Federal Energy Regulatory Commission... .
The SEC never had sole responsibility for regulating public utilities.
I discuss this error earlier in this letter, so I will not repeat that
discussion here.
(See response 1.):
(2) Introductory Page: The Draft GAO Report leads with a claim that for
2008 the Commission plans to conduct audits of only 3 of the 149
companies that it regulates. That claim misrepresents the percentage of
companies presently planned to be audited. As recognized later in the
Draft GAO Report, on page 29, while there are 149 holding companies,
only 36 of these holding companies are subject to Commission authority
under PUHCA 2005; the other holding companies have received either an
exemption or a waiver of all or most of the requirements of PUHCA 2005
and the Commission's implementing regulations. I also note that certain
exemptions given under PUHCA 2005 are required by statute.
(3) Page 3, Footnote 2: The Draft GAO Report incorrectly characterizes
the Commission's limited authority with respect to Texas. Much of Texas
is the responsibility of the Electric Reliability Council of Texas
(ERCOT) and is electrically isolated from the rest of the United States
(with the exception of certain direct current ties that are subject to
only limited Commission authority); power flowing within ERCOT is not
considered to be power flowing in interstate commerce and hence the
utilities that transmit and/or sell such power are not considered to be
"public utilities" that are subject to Commission rate regulation under
Part II of the FPA.
(See response 15.):
(4) Page 6: The Draft GAO Report suggests that, before the passage of
EPAct 2005, the Commission was not concerned with cross- subsidization;
the Draft GAO Report states that preventing inappropriate cross-
subsidization is a "new" responsibility. As described above, that is
incorrect. The Commission has long been concerned with identifying and
addressing inappropriate cross-subsidization; all that is new is the
explicit statutory directive to consider cross-subsidization at the
time a merger's approved.
(See response 16.):
(5) Page 8: The Draft GAO Report indicates that the Commission has done
little in response to the passage of EPAct 2005. As described above,
that is incorrect. In the comparatively short time since the passage of
EPAct 2005, the Commission has instituted a number of rulemaking
proceedings, and issued a number of Final Rules and other documents.
(See response 3.):
(6) Page 3, 8, 10: The Draft GAO Report implies that the Commission
relies largely on self-reporting and a limited number of audits (again
citing the incorrect 3 of 149 comparison discussed above). The detailed
discussion provided above demonstrates that with respect to cross-
subsidization this implication is incorrect. While self-reports are
important, they are neither the beginning nor the end of the
Commission's efforts. The Draft GAO Report does not, for example,
recognize the Commission's ongoing ratemaking authority to ensure
inappropriate cost-subsidies are not charged to ratepayers, and does
not recognize such customer protections as the restrictions on
affiliate transactions that are discussed above.
See response 4.):
(7) Pages 10-11: The Draft GAO Report chastises the Commission for not
doing an "independent" analysis of proposed mergers. This discussion
largely ignores that the Commission makes its decision in each case
based on the record developed in that case – a record created not only
by the applicants but by the filings of customers, competitors, state
commissions and attorneys general, and others that may oppose the
merger. if the record as developed by the parties through their various
filings is not adequate. the Commission can find, for example, that an
applicant's filing is "deficient" and direct the applicant to submit
additional record evidence; such evidence would, like the original
application, be reviewed by and subject to challenge by customers,
competitors, state commissions and attorneys general, and others that
may oppose the merger. If the record is still inadequate, the
Commission can institute so-called paper hearing procedures or even
trial-type evidentiary hearing procedures. Once there is sufficient
record evidence, the Commission is required to act based on this record
evidence. The Commission, like most regulatory agencies, is not
permitted to act based on non-record evidence; indeed, its decision
will be overturned by a reviewing court if it decides based on non-
record evidence. That being said, the Commission is free to
independently analyze that record evidence, and does so. The Commission
is not bound to follow the analysis of the applicants, and it often
does not. Rather, the Commission analyzes the entire record and
determines what result is appropriate based on the entire record, and
the Commission provides its analysis of the record in the public order
that it issues. The Draft GAO Report confuses the record evidence that
must form the basis of the Commission's actions with the analysis of
that evidence by the Commission, and incorrectly assumes that because
the Commission cannot rely on non-record evidence the Commission cannot
develop or rely on its own analysis. Finally, I note that EPAct 2005
amended FPA section 203 to require that the Commission expedite review
for corporate transactions and to provide that if the Commission does
not act within 180 days the application "shall be deemed granted"
(unless the Commission for good cause extends the time for not more
than an additional 180 days). Thus, the Commission's process as a
matter of statute must be streamlined.
(See response 17.):
(8) Page 11: The Draft GAO Report again suggests that, before the
passage of EPAct 2005, the Commission was not concerned with cross-
subsidization; the Draft GAO Report states that preventing
inappropriate cross-subsidization is a responsibility that the
Commission "now" has. As described above, that is incorrect. The
Commission has long been concerned with identifying and addressing
inappropriate cross- subsidization; what is new is the explicit
statutory directive, to address cross-subsidization at the time the
merger application is approved.
(See response 16.):
(9) Page 12: While acknowledging the need for a public record, the
Draft GAO Report chastises the Commission for failing to develop its
own evidence. Again, as described above, the Draft GAO Report fails to
recognize that the Commission is barred from using non-public, extra-
record evidence; rather, the Commission must decide based on record
evidence.
(See response 17.):
(10) Page 14: The Draft GAO Report chastises the Commission for not
"formally" considering risk, but fails to recognize that the Commission
does take risk into account. The Draft GAO Report also ignores the
Commission's ongoing ratemaking authority and the ability of customers
and competitors, among others, to challenge through formally docketed
complaints rates that they believe reflect inappropriate cross-
subsidization.
(See responses 6&4.):
(11) Page 15: The Draft GAO Report takes a November 2007 report
submitted "on behalf of a broad consortium of energy companies" and
does not consider that the report may not be objective, but rather may
reflect the commercial interests of the energy companies that sponsored
it. Further, this report did not even directly address the issue of
cross- subsidization.
(See response 18.):
(12) Page 16: The Draft GAO Report references an unidentified "company
official" without addressing whether that particular official is
objective but whose views instead may reflect the commercial interests
of that company. In addition, that official's comments appear to be
based on a very limited public data set which, given the newness of the
Commission's expanded penalty authority, is necessarily more likely to
reflect self-reports. Further, it is not clear that that company
official was even addressing the issue of cross-subsidization.
(13) Page 16: The Draft GAO Report refers to the Commission's plan to
conduct a "limited number of compliance audits." The Draft GAO Report,
however, does not acknowledge that the Commission's PUHCA 2005 books
and records authority with respect to holding companies is new, and
that the implementing regulations are likewise new. In fact, these are
the initial PUHCA 2005 audits. In this same vein, the Draft GAO Report
also refers to "compliance with the PUHCA 2005 provisions contained in
EPAct [2005J." This implies that PUHCA 2005 has significant substantive
requirements; however, it does not. The statute merely supplements our
pre-existing authority to access the books and records of public
utilities and holding companies.
(See response 19.):
(14) Page 17: The Draft GAO Report suggests the Commission's audit plan
should be developed after "seek[ing] l input from stakeholders." This
is a course I do not plan to pursue, since I believe it would be
inappropriate to consult with non-federal persons, such as regulated
companies, on the allocation and deployment of the Commission's
enforcement resources.
(See response 20.):
(15) Page 18: The Draft GAO Report suggests that the Commission should
consider looking to bond ratings and other public financial data in
determining what companies to audit, and that the Commission should
look to statistical models in identifying what companies to audit. As
to the latter point, in particular, these statistical models are
unidentified, and it is unclear whether and to what degree those models
may be of value in identifying the companies that should be audited.
Similarly, it is unclear whether bond ratings and other similar data
are a sound method of identifying, for example, what companies may be
engaged in inappropriate cross-subsidization and therefore should be
audited.
(See response 8.):
(16) Page 19: The Draft GAO Report shows no appreciation for the limits
on Commission enforcement resources, and that a greater commitment to
conducting PUHCA 2005 audits would require a reallocation of
enforcement staff from auditing compliance with other regulatory
requirements, such as reliability standards, or investigating possible
manipulation of power and gas markets.
(See response 21.):
(17) Page 19: While the Draft GAO Report notes the number of staff
members that are at present expected to be assigned to audit holding
companies, the Draft GAO Report does not acknowledge that that number
represents a quarter of the audit staff and thus, as a percentage,
represents a substantial commitment of resources.
(18) Page 19: The Draft GAO Report refers to "companies subject to
FERC's oversight under the PUHCA [2005] provisions of EPAct [2005],"
which carries with it an implication that PUHCA 2005 contains
significant substantive requirements that companies must comply with.
That implication is not accurate, as PUHCA 2005 is limited to accessing
books and records.
(See response 19.):
(19) Page 19, Footnote 18: The Draft GAO Report notes that it did not
assess whether the exemptions or waivers from PUHCA 2005 and the
Commission's implementing regulations "were reasonable." The Draft GAO
Report fails to recognize that certain of the exemptions are
statutorily mandated by section 1266(a) of PUHCA 2005, 42 U.S.C. §
16454(a), and that the Commission "shall", i.e., must, grant other
exemptions if the Commission makes certain findings pursuant to section
I266(b) of PUHCA 2005, 42 U.S.C. § 16454(b).
(See response 14.):
(20) Pages 20-21: The Draft GAO Report states, on the one hand,
that the Commission has not yet conducted any affiliate transaction
audits, but then objects to how the Commission has conducted affiliate
transaction audits to date.
(See response 22.):
(21) Page 22: The Draft GAO Report references a report (presumably the
same report referenced on page 15), sponsored by companies benignly
described as "a wide range of industry stakeholders." These
stakeholders actually represent Commission-regulated companies. More to
the point, the Draft GAO Report again takes that report at face value
and does not take into account that that report may not be objective,
but rather is equally likely to be an advocacy document reflecting the
commercial interests of the energy companies that sponsored it. Also,
the report does not even directly address the issue of cross-
subsidization.
(See response 18.):
(22) Page 32: In its conclusions, the Draft GAO Report suggests that
all that the Commission does is to "rely" on commitments by merger
applicants. That is decidedly not the case. While applicant commitments
are certainly important tools in the Commission's toolbox, they are far
from the only tools and indeed are not necessarily the best, most
useful tools. The Commission has many means by which it can enforce
prohibitions on cross-subsidization. As the Draft GAO Report notes on
page 6, PUHCA 2005 provided the Commission specific post-merger access
to the books, accounts, memos, and financial records of utility owners
and their affiliates and subsidiaries to enhance the Commission's
traditional review of affiliate transactions in the context of the
Commission's review and approval of prices public utilities charge for
the use of transmission lines and for wholesale sales of electricity.
The Commission will continue to evaluate whether utilities may pass
through costs of affiliated transactions in the context of rate reviews
prior to accepting the rates utilities charge their customers. That
aside, it is unclear why these commitments should be disregarded. These
commitments may reflect a careful review of Commission policy, and
anticipate merger conditions that would otherwise be imposed by the
Commission to prevent cross-subsidization. Further, adherence to those
commitments is a condition of the Commission's approval and if public
utilities do not adhere to the commitments they are subject to
sanctions, including possible civil penalties.
(See responses 7&4.):
(23) Page 32: In its conclusions, the Draft GAO Report suggests that
the Commission should focus on "areas of highest potential risk." This
recommendation is reasonable but the Draft GAO Report is vague on how
the Commission should do that, beyond general references to
unidentified statistical models and to bond ratings and other public
financial information. It is uncertain what specific actions the report
recommends.
(See response 6.):
In conclusion, let me emphasize that, just as the Commission has done
since 1935, it will continue to be vigilant to protect customers from
inappropriate cross-subsidization through its ratemaking and other
regulatory authorities.
I believe the rules and policies the Commission has adopted since EPAct
2005 was enacted, and the strengthening of its enforcement function
following EPAct 2005, have given the Commission an even stronger
foundation to do this. Our existing cross-office approach to regulating
utilities allows us to bring to bear all agency expertise necessary to
detect potential problems and protect customers. In this regard, I have
asked Commission staff to explore what further adjustments might
improve our processes based on the Draft GAO Report recommendations. I
encourage you to ask your staff to once again meet with my staff to
obtain a better understanding of the Commission's implementation of
EPAct 2005, PUHCA 2005 and the Commission's post-merger oversight.
I believe the Draft GAO Report suffers from a fundamental
misunderstanding of important issues, is based on incomplete
information, contains many errors, and demonstrates flawed analysis.
Unfortunately, that greatly diminishes the value of the report.
Nonetheless, 1 have directed Commission staff to carefully consider the
recommendations in the report.
I regret that it was necessary to submit such a lengthy response. Much
of this information has been submitted to your staff previously, in
some cases more than once. It is not apparent why this information was
not considered. Unfortunately, the Draft GAO Report does not reflect an
awareness and an appreciation of essential facts. 1 thought it
necessary to provide a complete response in the hopes your analysis of
these important issues would be properly grounded.
Thank you again for the opportunity to comment on the Draft GAO
Report.
Sincerely,
Signed by:
Joseph T. Kelliher:
Chairman:
[End of section]
Appendix A: Historical Merger Authority:
Section 203 of the Federal Power Act (FPA) long provided (and, even
after EPAct 2005, still provides) that proposed mergers and other
jurisdictional corporate transactions require Commission authorization,
and that such authorization must be granted if the Commission finds
that the merger or transaction is "consistent with the public
interest." Since 1996, in evaluating proposed mergers and other
jurisdictional corporate transactions, the Commission has employed a
three-part analysis[Footnote 40]– looking at the effect of the merger
or transaction on rates, competition, and regulation.
Though not expressly stated as a part of the Commission's merger
analysis, consideration of cross-subsidization by the Commission is not
new. In practice, it has long been an integral part of the Commission's
analysis of mergers and other jurisdictional corporate transactions.
For example, in January 1996, in considering a proposed merger of
Wisconsin Electric Power Company, Northern States Power Company
(Minnesota), Northern States Power Company (Wisconsin), and Cenergy,
Inc., the Commission noted that "[c]ross-subsidization through inter-
affiliate transactions is a major concern of the Commission,"[Footnote
41] and the Commission further noted that, while the applicants had
pledged not to claim that SEC oversight of inter-affiliate transactions
was a bar to state utility commission review of the utilities' costs
and rates, the applicants had made no similar pledge not to claim that
SEC oversight of inter-affiliate transactions was a bar to this
Commission's review of the utilities' costs and rates; the Commission
set the proposed merger for hearing. Wisconsin Electric Power Co., 74
FERC 161,069 at 61,191, 61,193 & n.23 (1996), reh'g denied, 79 FERC ¶
61,158 (1997).
In 1997, in addressing a Boston Edison Company corporate
reorganization, the Commission again noted its concern with possible
inappropriate cross- subsidization, explaining that the reorganization
at issue would, in fact, separate non-utility operations and costs from
utility operations and costs which, in turn, "should facilitate
regulatory monitoring of possible cross-subsidization between the two
lines of business." Boston Edison Co., 80 FERC ¶ 61,274 at 61,992
(1997). The Commission also expressly noted the cross-protections that
would be in place ” state-established standards of conduct and
contractual agreements between the relevant affiliated companies ” ,
and found that these protections would "both act to help protect
against cross-subsidization between the utility and non-utility
affiliates and ensure comparable treatment between affiliates and non-
affiliates as well as arm's-length relationships among affiliates." The
Commission thus concluded that the reorganization would "not increase
the potential for affiliate abuse or preferential dealings." Id. at
61,993-94.
Similarly, in 2000, in the context of a proposed merger between CP&L
Holdings, Inc. and Florida Progress Corporation, the Commission found
that, while the applicants had included "certain protections against
cross-subsidization," the applicants proposed price cap was
inadequate[Footnote 42] explaining that "[w]ithout an adequate
protection method, the danger exists that a negotiated rate that is too
high might shift transaction benefits from the ratepayers of one
company to the ratepayers of the other" and that "a negotiated rate
that is too low might shift transaction benefits as well." Accordingly,
the Commission directed the applicants to "incorporate an appropriate
pricing safeguard." CP&L Holdings, Inc., 92 FERC 161,023 at 61,060
(2000), reh'g denied, 94 FERC ¶ 61,096 (2001).
As a further illustration of the Commission's longstanding concern with
inappropriate cross-subsidization, in 2004, the Commission adopted new
guidelines for transactions between affiliates. The Commission
explained that acquisitions involving affiliates presented "an inherent
potential for discriminatory treatment in favor of the affiliate" and
that the Commission, to ensure that proposed transactions are
consistent with the public interest, as required by section 203 of the
FPA, "must assure that a public utility's acquisition of a plant from
an affiliate is free from preferential treatment" and does not harm to
competition and the development of vibrant, fully-competitive
generation markets. Accordingly, the Commission found that a proposed
transaction "is not consistent with the public interest unless shown
not to be the result of affiliate abuse," and required an analysis that
would demonstrate a lack of affiliate abuse (based on the so-called
Edgar standard, referring to Boston Edison Co. Re: Edgar Electric
Energy Co., 55 FERC 9( 61,382 at 62,167-70 (1991)). The Commission also
adopted solicitation guidelines intended to demonstrate that affiliates
had no undue advantage over non-affiliates, with a showing that (1) the
solicitation process was open and fair, (2) the products sought through
the solicitation were precisely defined, (3) the evaluation criteria
used to evaluate the competing bids were standardized and applied
equally to all bids and to all bidders, and (4) the solicitation was
overseen by an independent third-party (who designed the solicitation,
administered the bidding, and evaluated the bids). Ameren Energy
Generating Co., 108 FERC 9[ 61,081 at P 59-84 (2004).
[End of section]
GAO Comments:
The following are GAO's responses to the Federal Energy Regulatory
Commission's comments on our draft report as outlined in its January
22, 2008, letter.
1. Our statement in the summary Highlights of the draft report
referring to Energy Policy Act (EPAct) shifting sole responsibility
from the Securities and Exchange Commission (SEC) to Federal Energy
Regulatory Commission (FERC) was not intended to imply that, prior to
the passage of EPAct, FERC had no role in regulating public utilities.
We simply wanted to point out that, after EPAct, sole responsibility
for oversight of potential cross-subsidies rested with FERC. We revised
the Highlights text to clarify the historical roles of FERC and SEC.
Other information in the draft report accurately reflected each
agency's role.
2. As a point of clarification, we make no explicit or implicit
recommendation regarding "resurrecting" the Public Utility Holding
Company Act of 1935 (PUHCA 1935). We share FERC's apparent view that
this was not the intent of Congress and the President in repealing
PUHCA 1935. Our report focused on FERC's new role as the sole federal
agency responsible for enforcing prohibitions against cross-
subsidization.
3. We acknowledge that FERC has executed the administrative steps to
begin implementing EPAct, made changes such as adding a "code of
conduct" for utilities and their affiliates as well as other changes
discussed in the letter within the short time frames provided under
law--and recognized this in our draft report. However, as we noted in
our draft report, our view and the view expressed by FERC staff we met
with during our investigation is that FERC's overall merger review
process remains largely unchanged except that FERC now requires
companies to attest in writing that they will not engage in
unauthorized cross- subsidization. We commend FERC for its ongoing
outreach efforts, such as conferences to solicit stakeholders' views,
but we maintain that those efforts have, so far, resulted in few
changes to FERC's merger review process. Accordingly, we made no change
to our draft report in response to this comment.
4. The Chairman of FERC said that we incorrectly conclude that the
commission intends to rely on self-reporting as the primary enforcement
mechanism to prevent cross-subsidization but did not explain what
mechanism(s) FERC will use to detect potential cross-subsidization. To
be clear, our draft report stated that once a merger has taken place,
FERC intends to rely on its existing enforcement mechanisms--primarily
(1) companies' self-reporting and (2) compliance audits--to detect
potential cross-subsidization. In addition, the draft report stated
that FERC officials also said they used their "hotline" reporting
system to identify potential violation of FERC rules. Throughout the
course of our audit work, key FERC staff, including those involved in
enforcement, noted that self-reporting was a central element in
enforcing FERC's overall enforcement approach, including all of the
statutes, orders, rules, and regulations the commission enforces. FERC
officials also provided a copy of FERC's October 25, 2005, Policy
Statement on Enforcement--which prominently features self-reporting--
in the context of our discussion of how FERC planned to enforce the
prohibitions on cross-subsidization. We share the views of the Chairman
that self-reporting is not an effective method to reliably detect cross-
subsidization. The Chairman also said that we may be confusing self-
reports regarding standards of conduct violations with self- reports
regarding cross-subsidization. We have not confused these two distinct
reporting mechanisms as our report focuses on concerns related to
potential cross-subsidization. As the draft report also discusses, the
second key mechanism that FERC intends to use to detect potential cross-
subsidization, and its only proactive enforcement component, is a
limited number of compliance audits. We believe that audits provide
tremendous potential value in enforcing the prohibitions against
unauthorized cross-subsidization (delineated in detail by FERC on pages
3 through 7 of the Chairman's letter and addressed in our comment 3),
especially in light of FERC's new role as the federal agency primarily
responsible for the oversight of public utilities. We believe that
audits of companies and transactions should play a key role in the
FERC's overall enforcement strategy, particularly in the area of cross-
subsidization. With regard to preventing potential cross-subsidization
through rate reviews, we are aware of this process and recognized in
our draft report that FERC retains a limited ratemaking role and, as
such, may have opportunities to establish cost recovery rules
prospectively in these proceedings. We added additional language to our
draft report to indicate that FERC may examine costs incurred by
utilities for rates it still sets and, in so doing, decide which costs
may be lawfully included in rates charged to customers. We also
recognize that FERC allows third parties to report potential violations
using its hotline or by filing a complaint that the terms of the
approved rates are being violated. We revised our draft report to
better reflect that such reports and complaints may lead to a FERC
investigation. However, because we have no way of knowing (1) whether
third parties will be a reliable enforcement tool, (2) how likely FERC
is to conduct rate setting procedures, and (3) FERC's plans currently
reflect only 3 audits, we remain concerned that FERC is overly reliant
on self-reporting.
5. We relied on FERC officials to identify the universe of companies it
could audit and how many it planned to audit for the information
contained in our draft report. In addition, we included suggestions
from FERC staff regarding caveats to its audit responsibilities and
overlaps raised in the Chairman's letter. For example, the draft report
noted that there was overlap between the various categories and that
the Regional Reliability Organization, according to FERC, would be
responsible for the initial audits of these 1,510 companies.
Nonetheless, we moved our table note to the body of the report to
emphasize these overlaps and the fact that the number of potential
audit candidates could be lower than the universe of 4,700 companies
identified by FERC. It is important to note, however, that some of the
audits may be quite different and require different resources than
audits of affiliate transactions. For example, audits of compliance
with reliability rules may focus on whether companies have conducted
sufficient training of staff, not addressing the unique accounting
issues associated with affiliate transactions. While this change in the
text of the report may help the reader better understand overlaps in
the universe of companies, it is still not clear from the Chairman's
comments how many audits will ultimately be required of these
companies, the nature of the audits or the resources needed, and how
they would affect the resources available for audits of affiliate
transactions. Regarding the frequency of audits, our draft report
states, "At its planned 2008 audit rate of 3 companies, it would take
FERC 12 years to audit each of these companies once." We recognize that
the current audit rate may change since such determinations are made
annually, but we use these data--as provided by FERC--as the best
available at the time of our review. We added an explicit notation that
the number of audits may change to further clarify the statement
already in the report.
6. The Chairman stated that the draft report incorrectly portrays
FERC's method of selecting audit candidates as informal and that FERC
actually uses a variety of methods to assess the individual and
collective risks posed by companies it oversees. However, during the
course of our year- long engagement, including discussions with key
FERC officials, the process was described as informal and did not
mention the other mechanisms described in the Chairman's letter. In
addition, FERC staff, when we asked for a record of a risk-based
analysis or the criteria FERC would have used to conduct such an
analysis, were unable to provide them and told us audit selections were
based on informal discussions with knowledgeable senior FERC staff.
Although FERC officials may individually consider risk as they
discussed audit planning in these informal discussions--and we noted in
the draft report these officials believe their judgments provide a
reasonable picture of risk--such considerations are not sufficiently
formal or systematic and could change as staff in key positions change.
In our view, a risk-based audit planning approach should be
sufficiently rigorous and systematic to ensure that it reliably and
consistently guides FERC in assessing individual company risks and the
overall risks posed by the companies collectively and making audit
selections accordingly. Furthermore such an approach should be flexible
enough to meet FERC's current and expected future auditing demands now
that it is solely responsible for detecting potential cross-
subsidization. We noted in our draft report that some federal agencies
develop their own statistical measures of risk, derived in some cases
from models although there are other methods. It may or may not be
appropriate for FERC to use this type of tool but we want FERC to be
aware that there are other ways of more formally considering risk in
agency decision making. In any case, designing a formal risk-based
approach will take time and effort and FERC may want to consider
consulting with outside experts. It was our intent, by excluding these
statistical methods from our recommendation, to provide the Chairman
with flexibility on how best to implement a more formal, risk-based
approach. With regard to FERC's comment about its outreach to states
during audits, we commend FERC for these efforts when conducting
compliance audits, but also believe FERC could benefit from the states'
expertise and knowledge earlier in the process when determining which
companies to audit. We continue to believe that our recommendation, if
implemented, would improve the likelihood that the audits will be most
effective. As such, we made no change to our draft report in response
to these comments.
7. We are aware that FERC has established many expectations and rules--
through both the company attestation process and its generic
prohibitions on cross-subsidization--but we have concerns as to whether
FERC has devoted enough attention to the formidable task of enforcing
those rules by detecting violations. We recognize the importance of
company attestations that they will not engage in cross-subsidization
for use in developing a formal record from which FERC can potentially
take enforcement actions. We share FERC's view that companies should
honor their commitments to the federal government, but know that staff
turnover at these companies can be high, and that financial and other
circumstances of companies can, and do, change. Because of this, and
other factors, we believe that it is important to recognize the value
of these company attestations in creating a record, but also believe
that it is important to be vigilant and proactive in looking for
potential violations. As a result, we made no change to the draft
report in response to this comment. With regard to the Chairman's
related comment about FERC's generic rules, we agree that these rules
delineate FERC's expectations for compliance; however, while these
rules define potential violations, they do not detect them. Therefore,
they must be coupled with vigilant enforcement mechanisms, such as
audits to detect potential cross-subsidization. It is these mechanisms
that the draft report concludes are inadequate in FERC's approach. We
made no change to our draft report for this comment. With regard to the
Chairman's comment about rate review, we discuss this point in our
response to comment 4.
8. As noted above in comment 6, we are pleased that FERC includes
discussions with state regulators when it conducts audits, however we
believe FERC could further benefit from their expertise when selecting
which companies to audit. With regard to financial indicators, as noted
in the draft report, we believe that the deterioration of a company's
financial condition may raise the potential for financial abuses. In
that regard, how the financial community values a company's stocks or
bonds is used as a high-level example of financial indicators that
could be helpful to FERC. We do not suggest in our report that FERC
should examine only stock and bond values; rather, we suggest that FERC
should be gauging risk by, among other things "monitoring the financial
condition of utilities." Companies' financial data is a window into
their risks and an opportunity to leverage the financial community's
research. Such research is not strictly limited to stock and bond
prices; it could include other appropriate metrics, such as financial
ratios. In implementing our recommendation, FERC may wish to consult
with financial experts to develop a set of useful metrics to monitor.
We believe, as do others we spoke with in states and the financial
community, that such indicators could provide additional insights into
the risk posed by individual companies and the financial health of the
overall industry. We made no change to our draft report in response to
these comments.
9. As the Chairman indicates, FERC is in the process of implementing
our recommendation to improve the usefulness of its audit reports. We
discussed the need to improve the transparency of its audit
requirements and actions during our discussions with FERC audit
officials and encourage FERC to fully implement this recommendation.
10. As noted in the draft report, we believe that FERC should develop a
formal risk-based audit planning approach to help inform its decisions
about which companies to audit but also to assist it in better
leveraging its resources. The development of such an approach could
also help FERC determine whether it needs additional audit staff
resources to fulfill its oversight responsibilities, particularly given
that SEC no longer conducts such audits. We continue to encourage FERC
to assess its resources for auditing and enforcement efforts and did
not change our recommendation.
11. We agree that the Public Utility Holding Company Act of 2005 (PUHCA
2005) provisions in EPAct grant states the authority to obtain this
information directly. Our statements related to state commissions'
access to books and records of utilities, holding companies, and
affiliate companies was not intended to imply that states must go
through FERC for access to this information. However, the draft report
points out that this is the perception or experience in some states.
For example, in response to our state survey, 14 states reported their
state commission did not have access to these records at the holding
company and 20 states reported this problem for affiliated nonutility
companies. Further, as we reported, officials from companies that
conduct audits for the states noted difficulties in obtaining access to
out-of-state companies' books and records. We did not evaluate states'
reasons for these views. Since there seem to be misunderstandings or
misinformation about the access granted under the PUHCA 2005 provisions
in EPAct, FERC could play an important role in clarifying these
authorities or providing assistance in response to states' concerns, or
both. In response to this comment, we clarified the language related to
states' access to companies' books and records.
12. The intent of our discussion of mergers in the draft report is not
to criticize FERC's merger review decisions or the conditions FERC
placed on mergers. Rather, our intent is to provide some perspective on
the number and status of FERC's merger reviews and their disposition.
Nonetheless, we note that FERC has been supportive of mergers--a point
repeated by numerous FERC staff--and that FERC believes that it has
certain obligations to approve mergers. Regarding FERC's concern that
the draft report does not recognize that "new types of investors" have
acquired U.S. utilities before the repeal of PUHCA 1935, the draft
report described such transactions in its discussion of changes to the
strict limitations in this act. As such, we recognize that while PUHCA
1935 placed limitations on what types of companies could control
utilities, some investors were allowed to invest into the utility
industry if they met certain financial requirements (see GAO-05-617).
Because these financial requirements placed limits on the companies
outside the utility sector, the number of these types of investments
was limited. In our discussions with financial experts, we found that,
with the repeal of PUHCA 1935, more companies from outside the utility
sector are considering utility mergers or acquisitions, or both, which
could broaden the pool of potential investors. We revised the text of
the report to better reflect these considerations.
13. As a point of clarification, our report conveys the views of state
commission staff; we did not analyze state commissions' auditing
efforts or other state regulations or responsibilities. As such, we
make no criticism of state commissions with regard to auditing, or any
other areas of state regulation or responsibility. With this in mind,
FERC should be aware that it is the view of state regulators--not based
on evaluation by GAO--that state commissions are generally not
conducting extensive compliance audits because of limited staff and
other factors. On numerous occasions, FERC officials noted that state
regulators, outside audit firms, and others are conducting audits of
affiliate transactions; however, based on our discussions with each of
these groups, we did not find this to be the case. We believe FERC
should consider this information as it develops a formal risk-based
audit planning approach, therefore we did not change the draft report
in response to this comment.
14. With regard to accurately representing the percentage of companies
that FERC plans to audit in 2008, FERC determined that 36 of 149
holding companies are subject to its authority under the PUHCA 2005
provisions in EPAct and told us it planned to audit 3. Although we
agree that certain exemptions are required by statute, we did not
conduct a legal analysis of these exceptions and waivers required by
law nor did we review FERC's evaluation of these applications to
determine if the 36 holding companies (of the 149) accurately reflect
the potential universe of companies to be audited. Because we did not
make these evaluations, we revised the Highlights page of the draft
report to reflect that FERC said it would audit 3 of the 36 companies
it regulates, as we more fully described in the body of the report.
15. We revised footnote number 2 in the draft report to further clarify
what authority FERC has with respect to Texas.
16. We disagree that the draft report suggests that, before the passage
of EPAct 2005, the commission was not concerned with cross-
subsidization. The draft explicitly stated that preventing cross-
subsidization has been a long-standing responsibility of FERC and that
preventing it at the point of merger review is new. As such, we made no
change to the report in response to this comment.
17. We note that our draft report did not have an objective to
determine the adequacy of FERC's merger review and, as such, makes no
finding regarding the quality of the FERC's review. The draft report
describes the record-based analysis noted in the Chairman's comment,
and participants' possible roles, and states that FERC does not
independently develop such information--a point that was repeatedly
noted by FERC officials; rather, its review is limited to reviewing the
record. We agree that FERC must make its decisions based on this
record, and that it can take additional steps to make sure the evidence
provided is sufficient. We clarified the language in the report to note
that FERC can request that applicants provide additional information
and perform its own independent analysis of record evidence.
18. During our review, we sought input from many stakeholders and
involved parties. The report referenced by the Chairman's comments
provides one insight as to how industry perceives FERC's actions but
does not provide the sole insight, and we disclosed the report's author
and interest group affiliation so that the readers are aware of their
interests. Similarly, the company official cited in the Chairman's next
comment reflects one example of concerns expressed by companies. In
either case, we recognize--as should any reader of this report--that
stakeholders have specific interests in FERC's decisions and
operations. However, it is important to note that some of the
industries FERC regulates are expressing opinions similar to views we
have developed independently during the course of our work in this
area--namely that FERC needs to provide greater transparency of its
enforcement functions. Furthermore, it is also worth noting that the
need for greater transparency has been a theme over the last several
years for GAO's work regarding FERC, which has previously recognized
this and made strides toward improving transparency. It is encouraging
to point out that the Chairman recently acknowledged a similar view and
committed FERC to improving the transparency of its enforcement
functions. We made no change to our draft report in response to these
comments.
19. The draft report contained language stating that EPAct provided
FERC specific postmerger access to books, accounts, memos, and
financial records of utility owners and their affiliates and
subsidiaries, therefore we made no change to our draft report in
response to this comment. Regarding the comment about "compliance with
PUHCA 2005", we deleted the language in the draft report related to
company compliance.
20. We are not advocating that FERC allow nonfederal parties, such as
FERC- regulated companies, to determine auditing priorities and agree
that this would pose significant risks. We believe our recommendation
that FERC seek input from stakeholders, such as the financial community
and state commissions--many of whom have more frequent or more recent
dealings with the utilities, or may have more recent audit experience
with these companies, or both--may be an opportunity for FERC to better
leverage these resources. Such input, along with the other information
sources already at FERC's disposal, could help inform FERC's decisions
but should not substitute for the risk-based decision-making criteria
that we recommend FERC develop as part of a risk-based audit planning
approach. We made no change to our draft report in response to these
comments.
21. We recognize that the current FERC staffing choices, as they relate
to auditing, leave few resources available to cover a broad range of
potentially auditable entities. It is clear that the context within
which the FERC audit staff are operating has changed in important ways
and may require a reassessment of FERC resources, therefore we
recommended that FERC seek additional resources, if needed. It is in
this vein that we have outlined a path for FERC to make such a
reassessment and to report its results to Congress so that it could
potentially consider such a request. In addition, as noted in earlier
comments, the development of a risk-based audit planning approach could
also help FERC allocate its existing resources most efficiently and
effectively. We made no change to our draft report in response to these
comments.
22. Our draft report states that FERC has not yet completed any
affiliate transaction audits under the PUHCA 2005 provisions of EPAct,
but notes that FERC intends to rely on its existing, "exception-based,"
reporting that it used for other types of audits. As noted in the draft
report, our examination of FERC reports issued under this exception-
based reporting policy raised concerns. As a point of clarification,
our concern about this policy is meant to provide constructive
criticism so that future reports on affiliate transactions could be
more transparent and useful to FERC staff, states, and market
participants. We made no change to our draft report in response to
these comments.
[End of section]
Appendix III: GAO Contact and Staff Acknowledgments:
GAO Contact:
Mark Gaffigan, (202) 512-3841, gaffiganm@gao.gov:
Staff Acknowledgments:
In addition to the contact named above, key contributors to this report
included Dan Haas, Jon Ludwigson, Randy Jones, and Tony Padilla.
Important assistance was also provided by Lee Carroll, Brad Dobbins,
Kevin Dooley, Dan Egan, Gloria Hernandez-Saunders, Allison O'Neill,
Glenn Slocum, Jay Smale, and Barbara Timmerman.
[End of section]
Footnotes:
[1] The Federal Power Act of 1935 empowered the Federal Power
Commission, the predecessor to FERC.
[2] Subsequent to the enactment of the Federal Power Act, FERC was
empowered by the Natural Gas Act as the primary federal regulator of
natural gas transportation and sales, and was granted similar but not
identical authorities. Most of the geographic area of Texas is
electrically isolated from the rest of the United States. Electricity
flowing within this electrically isolated area is not considered to be
interstate in nature and, hence, the utilities that transmit or sell,
or both, such electricity are not considered to be subject to FERC rate
regulation. FERC does have limited jurisdiction over the facilities
that connect the electrically isolated portion of Texas to the rest of
the United States.
[3] For a more complete discussion of these financial restrictions, see
GAO, Public Utility Holding Company Act: Opportunities Exist to
Strengthen SEC's Administration of the Act, GAO-05-617 (Washington,
D.C.: July 8, 2005).
[4] The SEC will continue enforcing laws and regulations governing the
issuance of securities and regular financial reporting by public
companies.
[5] Related to mergers, the Department of Justice and the Federal Trade
Commission will continue their long-standing enforcement of antitrust
laws. These include the premerger provisions of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 and Section 7 of the Clayton Act.
[6] According to FERC, its rules governing market-based rates contain
specific restrictions on affiliate transactions.
[7] This specifically applies to any "public utility associate company
that has captive customers or that owns or provides transmission
service over jurisdictional transmission facilities, and an associate
company."
[8] FERC specifically prohibits any new pledge or encumbrance of assets
of a traditional public utility associate company that has captive
customers or that owns or provides transmission service over
jurisdictional transmission facilities, for the benefit of an associate
company.
[9] FERC recognizes three types of transactions that are unlikely to
raise cross-subsidization concerns, including (1) transactions where
the applicant shows that a traditionally regulated utility is not
involved so there is no potential harm to utility customers, (2)
transactions that are subject to review by a state commission because
it has the authority to impose cross-subsidization protections, and (3)
transactions that involve only nonaffiliates so that the potential for
inappropriate cross-subsidization generally is not present.
[10] To the contrary, FERC officials noted that if FERC does not act on
an application within 180 days, EPAct states that the application
"shall be deemed granted" unless FERC grants itself one 180-day
extension.
[11] These data include mergers, acquisitions, or the sales of assets.
[12] FERC officials also told us that in addition to self-reporting and
audits of some companies, they also may initiate investigations based
on internal and external reports of potential violations. Officials
told us that they are able to initiate internal investigations based on
referrals from FERC staff such as those monitoring natural gas and
electricity trading and markets in the market monitoring center. In
addition, FERC officials noted that companies and individuals may
report potential violators. Such reports may be made, they said,
through their "hotline" reporting system, which allows individuals to
anonymously report suspected violations of FERC rules. In addition,
individuals knowledgeable of FERC's processes and rules may also report
violations as formal or informal complaints that companies are
violating the terms and conditions of the detailed FERC-approved
tariffs or rates. FERC officials did not tell us how many such reports
have been made related to cross-subsidies or how many of such reports
resulted in cross-subsidy violations. However, officials noted that all
complaints are investigated to determine whether they have merit.
[13] FERC generally plans to retain its flexibility and discretion to
decide remedies on a case-by-case basis rather than to prescribe
penalties or develop formulas for different violations.
[14] Subtitle F of EPAct replaced PUHCA 1935 with the "Public Utility
Holding Company Act of 2005."
[15] In January 2007, FERC first used the expanded civil penalty
authority provided by Congress in the EPAct by assessing total
penalties of $22.5 million on SCANA Corp., PacifiCorp, Energy Corp.,
Northwestern Energy Corp., and NRG Energy Inc.
[16] This requirement affects traditional, centralized service
companies (i.e., a company providing services such as administrative,
financial, or accounting services, which are provided to other
companies in the same holding company system).
[17] FERC officials told us that in addition to these new data, FERC
adopted new accounting rules to implement the PUHCA provisions in EPAct
and that these rules make certain financial information available to
the public, thus improving public transparency of financial accounting
for holding and service companies.
[18] GAO, Mutual Fund Industry: SEC's Revised Examination Approach
Offers Potential Benefits, but Significant Oversight Challenges Remain,
GAO-05-415 (Washington, D.C.: Aug. 17, 2005); GAO, Pension Plans:
Stronger Labor ERISA Enforcement Should Better Protect Plan
Participants , GAO/HEHS-94-157 (Washington, D.C.: Aug. 8, 1994).
[19] Initially, FERC officials identified 149 companies that had filed
a FERC form 65 (notification of holding company status) with it. Of
that total, 113 companies requested and received from FERC an exemption
(FERC form 65A exemption notification) or waiver (FERC form 65B waiver
notification) from the PUHCA 2005 provisions in EPAct. FERC grants an
exemption, for example, if the holding company and its subsidiaries are
nontraditional utilities without captive customers. FERC could also
grant a waiver, for example, if the company is a holding company in a
single state. We did not assess whether these exemptions or waivers
were reasonable.
[20] FERC is not specifically required to comply with GAGAS. In
general, cabinet-level agencies--such as the Department of Energy--and
selected other federal agencies and commissions--such as the Nuclear
Regulatory Commission--are required to follow GAGAS. The following are
among the laws, regulations, and guidelines that require use of GAGAS:
(1) The Inspector General Act of 1978, as amended, 5 U.S.C. App.
(2000), requires that the statutorily appointed federal inspectors
general comply with GAGAS for audits of federal establishments,
organizations, programs, activities, and functions. The act further
states that the inspectors general shall take appropriate steps to
assure that any work performed by nonfederal auditors complies with
GAGAS; (2) The Chief Financial Officers Act of 1990 (Pub. L. No. 101-
576), as expanded by the Government Management Reform Act of 1994 (Pub.
L. No. 103-356), requires that GAGAS be followed in audits of executive
branch departments' and agencies' financial statements; (3) The Single
Audit Act Amendments of 1996 (Pub. L. No. 104-156) require that GAGAS
be followed in audits of state and local governments and nonprofit
entities that receive federal awards; and (4) The Office of Management
and Budget (OMB) Circular A-133, Audits of States, Local Governments,
and Non-Profit Organizations, which provides the governmentwide
guidelines and policies on performing audits to comply with the Single
Audit Act, also requires the use of GAGAS. Even if not required to do
so, auditors may find it useful to follow GAGAS. Many audit
organizations not formally required to do so, both in the United States
and in other countries, voluntarily follow GAGAS.
[21] Responses to our survey came from 49 states and the District of
Columbia. For all references to this survey, we do not distinguish
responses for the District of Columbia separately from those of the
states.
[22] After completion of our survey, one state subsequently obtained
approval from its legislature to review and approve future electric
utility mergers.
[23] The entire table of all factors can be reviewed in question 6 of
our survey at [hyperlink, http://www.gao.gov/special.pubs/gao-08-
290sp].
[24] PUHCA 2005 provisions in EPAct (section 1265) give state
commissions explicit authority to obtain information--including "books,
accounts, memoranda and other records"--from utility holding companies
and utility associates and affiliated companies "wherever located."
[25] A detailed discussion of the Commission's pre-EPAct 2005 merger
reviews is provided in Appendix A. As discussed below, following the
passage of EPAct 2005, the Commission strengthened its merger oversight
review.
[26] PUHCA 2005 did not transfer the SEC's PUHCA 1935 functions to the
Commission. Instead, as an "access to books and records" statute, it
provides the Commission and states with access to the books and records
of holding companies and their members if relevant to jurisdictional
rates.
The only provision of PUHCA 2005 that touches on the Commission's
substantive authority is a procedural provision that allows multi-state
holding companies and state commissions to obtain a determination
regarding centralized service company cost allocations for such multi-
state holding companies, although the Commission already has
substantive authority to do this under the FPA.
[27] See Repeal of the Public Utility Holding Company Act of 1935 and
Enactment of the Public Utility Holding Company Act of 2005, Order No.
667, 70 Fed. Reg. 75,592 (Dec. 20, 2005), FERC Stats. & Regs. ¶ 31,197
(2005), order on reh'g, Order No. 667-A, 71 Fed. Reg. 28,446 (May 16,
2006), FERC Stats & Regs. 9[ 31,213 (2006), order on reh'g, Order No.
667-B, 71 Fed. Reg. 42,750 (July 28, 2006), FERC Stats. & Regs. 31,224
(2006), order on reh'g, Order No. 667-C, 72 Fed. Reg. 8277 (Feb. 26,
2007), 118 FERC $ 61,133 (2007).
[28] Financial Accounting, Reporting and Record Retention Requirements
Under the Public Utility Holding Company Act of 2005, Order No. 684, 71
Fed. Reg. 65,200 (Nov. 7, 2006), FERC Stats. & Regs. 9[ 31.229 (2006).
[29] 18 C.F.R. § 33.2(j), adopted in Transactions Subject to FPA
Section 203, Order No. 669, 71 Fed. Reg. 1348 (Jan. 6, 2006), FERC
Stats & Regs. 91 31,200 (2005), order on reh'g, Order No. 669-A, 71
Fed. Reg. 28422 (May 16, 2006), FERC Stats & Regs. 9[ 31,214 (2006),
order on reh'g, Order No. 669-B, 71 fed. Reg. 42579 (July 27, 2006),
FERC Stats. & Regs. ¶31,225 (2006). Accord, Cross-Subsidization
Restrictions on Affiliate Transactions, 72 Fed. Reg. 41,644 (July 31,
2007), FERC Stats. & Regs. 9[ 32,618 at P 11-13 (2007).
[30] National Grid plc, 117 FERC ¶ 61,080 (2006)
[31] 72 Fed. Reg. 41,644 (July 31, 2007), FERC Stats. & Regs. ¶ 32,618
(2007).
[32] See National Grid, 117 FERC 9[ 61.080 at P 66 & n.78; Cross-
Subsidization Restrictions on Affiliate Transactions', FERC Stats. &
Regs. ¶ 32,618 at P 11-13.
[33] Financial Accounting, Reporting and Records Retention
Requirements Under the Public Utility Holding Company Act of 2005,
Order No. 684, 71 Fed. Reg. 65,200 (Nov. 7, 2006).
[34] See, e.g., Progress Energy, 111 FERC 161,243 (2005); Public
Service Company of Colorado, Docket No. PA05-1-000 (November 28, 2005)
(unpublished letter order); Florida Power & Light, Docket No. PA05-7-
000 (May 12, 2006) (unpublished letter order).
[35] The Draft GAO Report suggests: (a) monitoring the financial
condition of utilities to detect significant changes in the financial
health of the utility sector, as some state regulators have found it
useful to do. To do this the Commission could leverage analyses done by
the financial market and develop a standard set of performance
indicators; and (b) developing a better means of collaborating with
state regulators to leverage resources already applied to enforcement
efforts and to capitalize on state regulators unique knowledge. As part
of this effort, the Commission could consider identifying a liaison, or
liaisons, for state regulators to contact and to serve as a focal point
or points.
[36] See, e.g., Kansas City Power & Light Co., Docket No. PA06-6-000
(Nov. 27, 2007) (unpublished letter order).
[37] See, e.g., Niagara Mohawk Holdings., Inc., 95 FERC 1 61,381
(2001); Bangor Hydro-Electric Company, 94 FERC ¶ 61,049 (2001);
Louisville Gas & Electric Company, 91 FERC ¶ 61,321 (2000); PacifiCorp,
87 FERC ¶ 61,288 (1999); New England Power Company, 87 FERC ¶ 61,287
(1999).
[38] See, e.g., Tucson Electric Power Co., 80 FERC ¶ 62,275 (1997);
Portland General Electric Company, Docket No. EC04-90 (withdrawn April
8, 2005); Mid- American Energy Company, 89 FERC ¶ 62,225 (2000).
[39] Appendix B contains staff's detailed rebuttal to the incorrect
and misleading audit-related statements contained in the Draft GAO
Report.
[40] See 18 C.F.R. § 2.26.
[41] In a similar vein, in 2000, in considering a proposed transaction
involving Consolidated Water Power Company, the Commission noted that
`[w]hen a public utility is acquired by another company,...the
Commission's ability to adequately protect public utility ratepayers
against inappropriate cross-subsidization may be impaired absent access
to the parent companies' books and records," but the Commission also
noted that section 301 of the FPA "gives the Commission authority to
examine the books and records of any person who controls, directly or
indirectly, a jurisdictional public utility insofar as the books and
records relate to transactions with or the business of such public
utility." Consolidated Water Power Co., 91 FERC 9[ 61,275 at 61,931-32
(2000); accord E.ON AG, 97 FERC 9[ 61,049 at 61,284 (2001).
[42] The Commission had previously noted that the effect of
inappropriate cross-subsidization is felt through a utility's rates.
Boston Edison Co., 80 FERC ¶ 61,273 at 61,986 (1997). Thus, it can be
addressed at the wholesale level through the Commission's review of the
proposed transaction at the outset and through the Commission's
continuing review of the utility's wholesale rates, and at the retail
level through state regulatory commission review of the utility's
retail rates. Id.
GAO's Mission:
The Government Accountability Office, the audit, evaluation and
investigative arm of Congress, exists to support Congress in meeting
its constitutional responsibilities and to help improve the performance
and accountability of the federal government for the American people.
GAO examines the use of public funds; evaluates federal programs and
policies; and provides analyses, recommendations, and other assistance
to help Congress make informed oversight, policy, and funding
decisions. GAO's commitment to good government is reflected in its core
values of accountability, integrity, and reliability.
Obtaining Copies of GAO Reports and Testimony:
The fastest and easiest way to obtain copies of GAO documents at no
cost is through GAO's Web site [hyperlink, http://www.gao.gov]. Each
weekday, GAO posts newly released reports, testimony, and
correspondence on its Web site. To have GAO e-mail you a list of newly
posted products every afternoon, go to [hyperlink, http://www.gao.gov]
and select "Subscribe to Updates."
Order by Mail or Phone:
The first copy of each printed report is free. Additional copies are $2
each. A check or money order should be made out to the Superintendent
of Documents. GAO also accepts VISA and Mastercard. Orders for 100 or
more copies mailed to a single address are discounted 25 percent.
Orders should be sent to:
U.S. Government Accountability Office:
441 G Street NW, Room LM:
Washington, D.C. 20548:
To order by Phone:
Voice: (202) 512-6000:
TDD: (202) 512-2537:
Fax: (202) 512-6061:
To Report Fraud, Waste, and Abuse in Federal Programs:
Contact:
Web site: [hyperlink, http://www.gao.gov/fraudnet/fraudnet.htm]:
E-mail: fraudnet@gao.gov:
Automated answering system: (800) 424-5454 or (202) 512-7470:
Congressional Relations:
Ralph Dawn, Managing Director, dawnr@gao.gov:
(202) 512-4400:
U.S. Government Accountability Office:
441 G Street NW, Room 7125:
Washington, D.C. 20548:
Public Affairs:
Chuck Young, Managing Director, youngc1@gao.gov:
(202) 512-4800:
U.S. Government Accountability Office:
441 G Street NW, Room 7149:
Washington, D.C. 20548:
