Payment of Dividends from Funds Included in Capital Accounts (Final Policy Statement)

148 FERC ¶ 61,020

UNITED STATES OF AMERICA

FEDERAL ENERGY REGULATORY COMMISSION

18 C.F.R. Parts 2 and 35

[Docket No. PL14-1-000]

Payment of Dividends From Funds Included in Capital Account

(Issued July 17, 2014)

AGENCY: Federal Energy Regulatory Commission.

ACTION: Policy Statement.

SUMMARY: The Commission issues this policy statement to provide guidance that the

Federal Power Act (FPA) should be interpreted as not prohibiting the payment of

dividends from funds included in capital account by any public utility that has a market-

based rate tariff on file with the Commission, does not have captive customers, and does

not provide transmission or local distribution services. The Commission has concluded

that the payment of dividends from funds included in capital account by such public

utilities does not implicate the concerns underlying the enactment of the provision of the

FPA that prohibits the payment of dividends from funds included in capital account.

Thus, it is unnecessary for any public utility that meets the criteria identified in this

policy statement to file a petition for declaratory order in order to seek assurances that

dividends paid from capital account are not unlawful under this provision of the FPA.

Docket No. PL14-1-000

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EFFECTIVE DATE:

This policy will become effective July 17, 2014.

FOR FURTHER INFORMATION CONTACT:

Eric Olesh (Technical Information)

Office of Energy Market Regulation

888 First Street, NE

Washington, DC 20426

(202) 502-6524

eric.olesh@ferc.gov

Antonia Frost (Legal Information)

Office of General Counsel

888 First Street, NE

Washington, DC 20426

Docket No. PL14-1-000

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EFFECTIVE DATE:

This policy will become effective July 17, 2014.

FOR FURTHER INFORMATION CONTACT:

Eric Olesh (Technical Information)

Office of Energy Market Regulation

888 First Street, NE

Washington, DC 20426

(202) 502-6524

eric.olesh@ferc.gov

Antonia Frost (Legal Information)

Office of General Counsel

888 First Street, NE

Washington, DC 20426

(202) 502-8085

antonia.frost@ferc.gov

148 FERC ¶ 61,020

UNITED STATES OF AMERICA

FEDERAL ENERGY REGULATORY COMMISSION

Before Commissioners: Cheryl A. LaFleur, Acting Chairman;

Philip D. Moeller, John R. Norris,

and Tony Clark.

Payment of Dividends from Funds

Included in Capital Account

Docket No. PL14-1-000

POLICY STATEMENT

(Issued July 17, 2014)

1.

The Commission issues this policy statement to provide guidance that section

305(a) of the Federal Power Act (FPA)1 should be interpreted as not prohibiting the

payment of dividends from funds included in capital account by any public utility that has

a market-based rate tariff on file with the Commission, does not have captive customers,

and does not provide transmission or local distribution services because the Commission

has concluded that the payment of dividends from capital account by such public utilities

does not appear to implicate the concerns underlying the enactment of FPA section

305(a). In issuing this policy statement, the Commission eliminates a regulatory burden

otherwise applicable under FPA section 305(a) to certain public utilities that pay

dividends from funds included in capital account. Thus, it is unnecessary for any public

utility that meets the criteria identified in this policy statement to file a petition for

1 16 U.S.C. 825d(a).

policy statement, the Commission eliminates a regulatory burden

otherwise applicable under FPA section 305(a) to certain public utilities that pay

dividends from funds included in capital account. Thus, it is unnecessary for any public

utility that meets the criteria identified in this policy statement to file a petition for

1 16 U.S.C. 825d(a).

Docket No. PL14-1-000

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declaratory order in order to seek assurances that dividends paid from capital account are

not unlawful under FPA section 305(a).

I.

Background

A.

FPA Section 305(a) and Its Underlying Concerns

2.

FPA section 305(a) provides that:

It shall be unlawful for any officer or director of any public

utility … to participate in the making or paying of any

dividends of such public utility from any funds properly

included in capital account.2

3.

In Citizens Utils. Co., the Commission noted that this provision of FPA section

305(a) had not previously been interpreted by the Commission or the courts, and that

there was no explicit statement in the legislative history discussing the intent behind this

provision.3 The Commission went on to explain, however, that Congress’ intent could be

gleaned from the practices that led to the passage of the legislation,4 providing as an

example:

that sources from which cash dividends were paid were not

clearly identified and that holding companies had been paying

out excessive dividends on the securities of their operating

companies. A key concern, thus, was corporate officials

raiding corporate coffers for their personal financial benefit.5

2 Id.

3 Citizens Utils. Co., 84 FERC ¶ 61,158, at 61,864 (1998) (Citizens).

4 Id. at 61,864-65.

5 Id. at 61,865 (footnotes omitted); see also Entergy Louisiana Inc., 114 FERC

¶ 61,060, at P 12 (2006); Exelon Corp., 109 FERC ¶ 61,172, at P 8 (2004); ALLETE, Inc.,

(continued…)

raiding corporate coffers for their personal financial benefit.5

2 Id.

3 Citizens Utils. Co., 84 FERC ¶ 61,158, at 61,864 (1998) (Citizens).

4 Id. at 61,864-65.

5 Id. at 61,865 (footnotes omitted); see also Entergy Louisiana Inc., 114 FERC

¶ 61,060, at P 12 (2006); Exelon Corp., 109 FERC ¶ 61,172, at P 8 (2004); ALLETE, Inc.,

(continued…)

Docket No. PL14-1-000

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In later cases, in order to ensure that the dividend pay-outs in question would not impair

the liquidity and financial integrity of a public utility, the Commission has also often

conditioned its grant of declaratory relief on the utility’s commitment to observe

specified limitations on the amount of such dividends or on other financial

commitments.6

B.

Petitions for Declaratory Order Requesting Relief

4.

In cases in which a dividend (cash or otherwise) will be accounted for as a charge

to stated, additional, or miscellaneous paid-in capital of a public utility,7 public utilities

often filed petitions for declaratory orders in which the petitioner requests the

Commission’s concurrence that, based upon the facts and circumstances presented, the

making or paying of a proposed dividend will not implicate the concerns underlying the

enactment of FPA section 305(a) and, therefore, will not violate FPA section 305(a). The

majority of these petitions arose from three situations: (1) cases involving utility mergers

or acquisitions in which, due to the application of purchase accounting to the transaction,

107 FERC ¶ 61,041, at P 10 (2004); Niagara Mohawk Holdings, Inc., 95 FERC ¶ 61,381,

at 62,416, order denying reh’g, 96 FERC ¶ 61,144 (2001)

ng utility mergers

or acquisitions in which, due to the application of purchase accounting to the transaction,

107 FERC ¶ 61,041, at P 10 (2004); Niagara Mohawk Holdings, Inc., 95 FERC ¶ 61,381,

at 62,416, order denying reh’g, 96 FERC ¶ 61,144 (2001).

6 Niagara Mohawk Holdings, Inc., 99 FERC ¶ 61,323, at P 10 (2002) (order on

compliance filing accepting petitioner’s commitment not to pay dividends out of paid-in

capital unless it had an investment grade credit rating for its long-term debt); Exelon

Corp., 109 FERC ¶ 61,172 at P 9 (requiring petitioner to maintain a minimum common

equity balance of 30 percent of total capital).

7 See, e.g., 18 C.F.R. pt. 101, Account 201, Common stock issued, and Account

211, Miscellaneous paid-in capital.

Docket No. PL14-1-000

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the retained earnings, which is the traditional source of dividends, of the acquired public

utility is reclassified for balance sheet purposes as additional paid-in capital, without

having any effect on cash otherwise available for paying future dividends;8 (2) cases

involving the distribution (or “spin-off”) of the stock of a subsidiary or subsidiaries of a

public utility, as the result of which, again for balance sheet purposes, the retained

earnings of the public utility may be substantially reduced or eliminated, without having

any effect on cash otherwise available for paying future dividends;9 and (3) cases

involving recapitalizations of public utilities to reduce excessive equity balances with

debt, including situations in which single-asset generating companies with declining

capital needs have experienced a build-up in their equity balances as their assets have

been depreciated.10

5

eliminated, without having

any effect on cash otherwise available for paying future dividends;9 and (3) cases

involving recapitalizations of public utilities to reduce excessive equity balances with

debt, including situations in which single-asset generating companies with declining

capital needs have experienced a build-up in their equity balances as their assets have

been depreciated.10

5.

In response to petitions for declaratory orders concerning these three situations,

and sometimes in other situations, the Commission has found that FPA section 305(a)

8 See, e.g., National Grid plc, 117 FERC ¶ 61,080, at P 83 (2006), order denying

reh’g, 122 FERC ¶ 61,096 (2008); Ameren Corp., 131 FERC ¶ 61,240 (2010); Duke

Energy Ohio, Inc., 137 FERC ¶ 61,137 (2011).

9 See, e.g., Citizens, 84 FERC ¶ 61,158 (1998); Delmarva Power & Light Co.,

91 FERC ¶ 61,043 (2000); ALLETE, Inc., 107 FERC ¶ 61,041 (2004). In ALLETE, Inc.,

the Commission observed that the spin-off transaction was less like a payment of cash

dividends than it was a corporate restructuring involving a one-time distribution of

property, although the accounting issues presented were similar.

10 See, e.g., PPL Electric Utilities Corp., 99 FERC ¶ 61,317 (2002); Allegheny

Generating Co., 130 FERC ¶ 61,269 (2010); System Energy Resources, Inc., 140 FERC

¶ 61,184 (2012).

Docket No. PL14-1-000

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would not be violated by the payment of dividends, and it has allowed the public utility to

make or pay dividends from funds included in capital account.

6

presented were similar.

10 See, e.g., PPL Electric Utilities Corp., 99 FERC ¶ 61,317 (2002); Allegheny

Generating Co., 130 FERC ¶ 61,269 (2010); System Energy Resources, Inc., 140 FERC

¶ 61,184 (2012).

Docket No. PL14-1-000

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would not be violated by the payment of dividends, and it has allowed the public utility to

make or pay dividends from funds included in capital account.

6.

The Commission has used a three-factor analysis, derived from Citizens, to

determine when a proposed transaction does not implicate the concerns underlying FPA

section 305(a), specifically that: (1) the utility clearly identifies the sources from which

the dividends will be paid; (2) the dividends will not be excessive; and (3) the proposed

transaction will not have an adverse effect on the value of shareholders’ interests.11 In

certain orders granting relief from FPA section 305(a), issued subsequent to Citizens, the

Commission’s determination also was based on commitments by petitioners either to a

specific dollar cap on dividends or a limitation on the payment of dividends equal to the

pre-merger retained earnings balance of the acquired utility, and/or a commitment by the

public utility to limit the amount of dividends from paid-in capital so that common

equity, as a percentage of total capitalization, is maintained at a minimum level

(frequently, a minimum of 30 percent common equity as a percentage of total

capitalization).12

11 Citizens, 84 FERC at 61,865.

12 See, e.g., Duke Energy Ohio, Inc., 137 FERC ¶ 61,137, at P 7 (2011); National

Grid plc, 117 FERC ¶ 61,080, at P 83 (2006). The Commission also has accepted

alternative protections. See, e.g., Niagara Mohawk Holdings, Inc., 99 FERC ¶ 61,323, at

PP 12-13 (2002).

as a percentage of total

capitalization).12

11 Citizens, 84 FERC at 61,865.

12 See, e.g., Duke Energy Ohio, Inc., 137 FERC ¶ 61,137, at P 7 (2011); National

Grid plc, 117 FERC ¶ 61,080, at P 83 (2006). The Commission also has accepted

alternative protections. See, e.g., Niagara Mohawk Holdings, Inc., 99 FERC ¶ 61,323, at

PP 12-13 (2002).

Docket No. PL14-1-000

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7.

Historically, these petitions for declaratory orders concerning FPA section 305(a)

have largely involved requests by public utilities that have captive customers.13 The

Commission has found that a proposed transaction would not violate FPA section 305(a)

where the Commission has been assured that no exploitation or threat to the financial

integrity of the utilities would result from the payment of dividends from capital account,

and therefore would not impair the utility’s ability to continue its obligation to serve

captive customers.14

C.

May 16, 2013 Petition for Declaratory Order

8.

On May 16, 2013 (May 16 Petition),15 Exelon Generation Company, LLC (Exelon

Generation) and five of its direct and indirect subsidiaries (the Acquired Subsidiaries)16

(collectively Applicants) requesting that the Commission confirm that FPA

13 The Commission’s regulations define “captive customers” to mean “any

wholesale or retail electric energy customers served by a franchised public utility under

cost-based regulation.” 18 C.F.R. § 35.36(a)(6) (2013). Our use of the term “captive

customers” in this policy statement is based on this definition.

14 See, e.g., National Grid plc, 117 FERC ¶ 61,080 (2006), order denying reh’g,

122 FERC ¶ 61,096 (2008).

15 While the May 16 Petition arose from a merger transaction and related

accounting issues (see infra note 17), our policy statement in this proceeding is not

limited in its applicability to transactions involving mergers and their related accounting

issues

t is based on this definition.

14 See, e.g., National Grid plc, 117 FERC ¶ 61,080 (2006), order denying reh’g,

122 FERC ¶ 61,096 (2008).

15 While the May 16 Petition arose from a merger transaction and related

accounting issues (see infra note 17), our policy statement in this proceeding is not

limited in its applicability to transactions involving mergers and their related accounting

issues.

16 The five direct and indirect subsidiaries of Exelon Generation included CER

Generation II, LLC, Constellation Mystic Power, LLC, Constellation NewEnergy, Inc.,

Constellation Power Source Generation, Inc. and Criterion Power Partners, LLC.

Docket No. PL14-1-000

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section 305(a) was not a bar to the payment of dividends from capital account under the

limitations and circumstances described in the petition.17 The relative novelty in this

May 16 Petition, as compared with other FPA section 305(a) petitions, was that it did not

involve utilities that have captive customers.18 Rather, Applicants stated that Exelon

17 The May 16 Petition arose from a merger transaction, and involved factual

circumstances familiar to the Commission in the context of FPA section 305(a).

Specifically, Applicants explained that the merger between Exelon Corporation (Exelon)

and Constellation Energy Group, Inc. (Constellation) was recorded by Exelon under the

purchase method of accounting and that Exelon applied “push-down” accounting to the

Legacy Constellation Subsidiaries (i.e., all of the subsidiaries of Constellation that

became direct and indirect subsidiaries of Exelon Generation), including the Acquired

Subsidiaries, a subset of the Legacy Constellation Subsidiaries, which are public utilities

under the FPA. “Push-down” accounting is a method of accounting in which the

financial statements of a subsidiary are presented to reflect the costs incurred by the

parent company to buy the subsidiary, instead of the subsidiary’s historical costs

sidiaries of Exelon Generation), including the Acquired

Subsidiaries, a subset of the Legacy Constellation Subsidiaries, which are public utilities

under the FPA. “Push-down” accounting is a method of accounting in which the

financial statements of a subsidiary are presented to reflect the costs incurred by the

parent company to buy the subsidiary, instead of the subsidiary’s historical costs.

Accordingly, the purchase costs of the parent company are shown in the subsidiary’s

statements.

As a result of the “push-down” accounting adjustments to the Legacy

Constellation Subsidiaries at the time of the merger closing, the pre-merger retained

earnings balances of the Legacy Constellation Subsidiaries were “reset to zero” and

reestablished on their books as miscellaneous paid-in capital. In effect, the traditional

source of dividends - retained earnings - was eliminated, without, however, having any

impact on cash actually available for paying dividends.

The purpose of the May 16 Petition was to obtain a Commission determination

that FPA section 305(a) did not prohibit: (1) the Acquired Subsidiaries from paying

dividends to their parent company, Exelon Generation, from their respective capital

account in equal measure to the funds that were recorded as retained earnings at the close

of the merger; and (2) Exelon Generation from, in turn, paying dividends to its parent

company, Exelon Ventures LLC, from its capital account to the extent that Exelon

Generation has received dividends from any of the Legacy Constellation Subsidiaries

paid out of funds recorded as miscellaneous paid-in capital.

18 However, the Commission notes that, in Docket No. EL06-15-000, Exelon

Generation and an affiliate previously had filed a petition for declaratory order requesting

(continued…)

lon Ventures LLC, from its capital account to the extent that Exelon

Generation has received dividends from any of the Legacy Constellation Subsidiaries

paid out of funds recorded as miscellaneous paid-in capital.

18 However, the Commission notes that, in Docket No. EL06-15-000, Exelon

Generation and an affiliate previously had filed a petition for declaratory order requesting

(continued…)

Docket No. PL14-1-000

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Generation and the Acquired Subsidiaries did not have captive customers; did not provide

transmission or local distribution service or serve as a designated providers of last resort

(POLR) for any class of customers; and had electric market-based rate authorizations

from the Commission, with the standard waivers and exemptions, including waivers of

FPA section 204(a) (with respect to securities issuances)19 and waiver of the requirement

to maintain their books and records in accordance with the Uniform System of Accounts

(USofA).20

9.

In the May 16 Petition, Applicants presented the Commission with two alternative

requests:

(1)

the Commission could declare that FPA section 305(a) is not a bar to the

proposed payment of dividends by the Applicants, and this determination

could be based on the traditional Citizens three-part analysis, namely, that:

(i) the source of the dividends will be clearly identified; (ii) the dividends

will not be excessive; and (iii) the issuance of such dividends will not have

an adverse effect on the value of shareholders’ interests;21 or, alternatively,

a determination that FPA section 305(a) was not a bar to the payment of dividends from

capital account under the limitations and circumstances described in that petition. Exelon

Generation Company, LLC, 114 FERC ¶ 61,317 (2006).

19 16 U.S.C. § 824c(a).

20 18 C.F.R. pt. 101.

21 See supra P 6.

Docket No. PL14-1-000

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a determination that FPA section 305(a) was not a bar to the payment of dividends from

capital account under the limitations and circumstances described in that petition. Exelon

Generation Company, LLC, 114 FERC ¶ 61,317 (2006).

19 16 U.S.C. § 824c(a).

20 18 C.F.R. pt. 101.

21 See supra P 6.

Docket No. PL14-1-000

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(2)

the Commission could declare that FPA section 305(a) is not a bar to the

payment of dividends by the Applicants and all current and future public

utility subsidiaries of Exelon that have market-based rate authority, do not

have captive customers, do not provide transmission or local distribution

service, and will not be the POLR for any class of customers, rather than

apply the traditional Citizens three-factor analysis.

In support of its latter alternative, Applicants argued that the concerns relating to

traditional public utilities, which FPA section 305(a) was meant to address, were not

present for these kinds of non-traditional public utilities. In particular, Applicants argued

that, in Order No. 697, the Commission concluded that it was appropriate to apply a

different standard of oversight to public utilities that do not have captive customers and

do not sell electricity at cost-based rates.22 Applicants explained that, in Order No. 697,

the Commission found that it was reasonable to continue to grant (1) blanket

authorizations under FPA section 204(a) to issue securities, and (2) waivers from the

requirement to maintain books in accordance with the USofA,23 to those entities that do

22 Applicants’ May 16, 2013 Petition at 14.

23 Market-Based Rates for Wholesale Sales of Electric Energy, Capacity and

Ancillary Services by Public Utilities, Order No. 697, FERC Stats. & Regs. ¶ 31,252, at

PP 984, 999, clarified, 121 FERC ¶ 61,260 (2007), order on reh’g, Order No. 697-A,

FERC Stats. & Regs

the USofA,23 to those entities that do

22 Applicants’ May 16, 2013 Petition at 14.

23 Market-Based Rates for Wholesale Sales of Electric Energy, Capacity and

Ancillary Services by Public Utilities, Order No. 697, FERC Stats. & Regs. ¶ 31,252, at

PP 984, 999, clarified, 121 FERC ¶ 61,260 (2007), order on reh’g, Order No. 697-A,

FERC Stats. & Regs. ¶ 31,268, clarified, 124 FERC ¶ 61,055, order on reh’g, Order

No. 697-B, FERC Stats. & Regs. ¶ 31,285 (2008), order on reh’g, Order No. 697-C,

FERC Stats. & Regs. ¶ 31,291 (2009), order on reh’g, Order No. 697-D, FERC Stats.

& Regs. ¶ 31,305 (2010), aff’d sub nom. Montana Consumer Counsel v. FERC, 659 F.3d

910 (9th Cir. 2011), cert. denied, 133 S. Ct 26 (2012).

Docket No. PL14-1-000

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not have captive customers and do not sell electricity at cost-based rates. In essence,

Applicants argued that it would be logically inconsistent for the Commission to grant a

non-traditional public utility (i.e., merchant generators and power marketers) with

market-based rate authorization a blanket authorization under FPA section 204(a) to issue

securities, as well as a waiver from the requirement to maintain its books in accordance

with the USofA, while, at the same time, under FPA section 305(a), limiting the accounts

from which that public utility may pay dividends.24

10.

In response to the May 16 Petition, the Electric Power Supply Association

(EPSA)25 filed comments generally supporting both alternative requests for relief

by Applicants, but it also advocated that the Commission grant an even broader FPA

section 305(a) determination.26 EPSA posited that the factors that made the Applicants’

petition compelling are broadly applicable to certain classes of public utilities, such as

merchant generators and power marketers, which have market-based rate tariffs on file

with the Commission, do not have captive customers, and do not provide transmission or

ection 305(a) determination.26 EPSA posited that the factors that made the Applicants’

petition compelling are broadly applicable to certain classes of public utilities, such as

merchant generators and power marketers, which have market-based rate tariffs on file

with the Commission, do not have captive customers, and do not provide transmission or

24 Applicants’ May 16, 2013 Petition at 15. Specifically, Applicants stated that it

“would be anomalous for the Commission to conclude, on the one hand, that it need not

be concerned with (a) the quantity or character of securities issued by a public utility

[under FPA section 204(a)] or (b) the manner in which it keeps its accounts [under the

USofA], and then to conclude that the Commission is concerned about how the entity

accounts for dividends paid on its securities [under FPA section 305(a)].” Id.

25 EPSA is the national trade association for competitive power suppliers,

including merchant generators and power marketers.

26 EPSA June 17, 2013 Comments at 1-2.

Docket No. PL14-1-000

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local distribution services.27 EPSA added that, although Applicants proposed that the

entities eligible for Applicants’ alternative broadly construed determination include a

limitation that they would not serve as a designated POLR, such condition is not

necessary where a designated POLR would meet the other three criteria, i.e, would have

market-based rate tariffs on file with the Commission, would not have captive customers,

and would not provide transmission or local distribution services.28 Therefore, EPSA

urged the Commission to omit the POLR limitation proposed by Applicants in granting

the broader relief requested under section 305(a).29

11

ary where a designated POLR would meet the other three criteria, i.e, would have

market-based rate tariffs on file with the Commission, would not have captive customers,

and would not provide transmission or local distribution services.28 Therefore, EPSA

urged the Commission to omit the POLR limitation proposed by Applicants in granting

the broader relief requested under section 305(a).29

11.

In support of its request for a broader FPA section 305(a) determination, EPSA

argued that, in the case of entities that have market-based rate authority, do not have

captive customers, and do not provide transmission or local distribution services, the

concerns underlying section 305(a) are not present.30 In such cases, according to EPSA,

the distribution of dividends would not have any adverse effect on the financial integrity

of any traditional public utility, its customers, or the ability of state commissions to

protect public utility customers.31

27 Id. at 2-4.

28 Id. at 2 n.3.

29 Id.

30 Id. at 5-6.

31 Id. at 5.

Docket No. PL14-1-000

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12.

In sum, because of the broad applicability of these principles to the competitive

power industry as a whole, and in the interest of administrative economy, EPSA

requested that the Commission issue a blanket order finding that FPA section 305(a) does

not act as a bar to the payment of dividends from capital account by any public utility that

has market-based rate authority, does not have captive customers, and does not provide

transmission or local distribution services.32

13

wer industry as a whole, and in the interest of administrative economy, EPSA

requested that the Commission issue a blanket order finding that FPA section 305(a) does

not act as a bar to the payment of dividends from capital account by any public utility that

has market-based rate authority, does not have captive customers, and does not provide

transmission or local distribution services.32

13.

In their answer, Applicants supported EPSA’s request for a broader FPA

section 305(a) determination and, therefore, noted their agreement with EPSA’s

recommendation that the Commission omit the POLR limitation.33 As an additional basis

for dropping the POLR limitation, Applicants observed that POLR service is a retail

electric service and, thus, within the regulatory framework of state utility commissions.34

Applicants pointed out that those public utilities that provide transmission and local

distribution services and also serve as a POLR would not be eligible for the alternative

broader determination sought in Applicants’ petition by virtue of the limiting condition

that such utilities are providing transmission and local distribution services.35 Further,

32 Id. at 2-4.

33 Applicants’ June 20, 2013 Answer at 3. Applicants noted that POLR, or default,

service is also known by other terms, such as Standard Offer Service or Basic Generation

Service. Id. at 2 n.3.

34 Id. at 3.

35 Id.

the limiting condition

that such utilities are providing transmission and local distribution services.35 Further,

32 Id. at 2-4.

33 Applicants’ June 20, 2013 Answer at 3. Applicants noted that POLR, or default,

service is also known by other terms, such as Standard Offer Service or Basic Generation

Service. Id. at 2 n.3.

34 Id. at 3.

35 Id.

Docket No. PL14-1-000

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Applicants asserted that eliminating the POLR limitation would have positive public

policy implications because, in such cases, non-traditional public utilities would not be

discouraged from participating in POLR markets due to the FPA section 305(a) limits on

the payment of dividends.36 Accordingly, Applicants stated that they would not object to

the Commission’s issuance of a blanket declaratory order based on EPSA’s proposal.

14.

In its September 3, 2013 order37 on the May 16 Petition, the Commission granted

Applicants’ primary request for relief, based on the Commission’s traditional Citizens

three-factor analysis, since the Commission agreed that the concerns underlying FPA

section 305(a) were not present under the limitations and circumstances described in the

petition.38 While it declined to grant the broader relief requested in that proceeding, the

Commission also stated that it believed that Applicants and EPSA had made a strong case

for a close examination of whether FPA section 305(a) should be interpreted as not

prohibiting the payment of dividends from capital account by any public utility that has a

market-based rate tariff on file with the Commission, does not have captive customers,

and does not provide transmission or local distribution services.39 Accordingly, the

Commission stated its intent to open a generic proceeding to consider the broader request

36 Id.

37 Exelon Generation Company, LLC, 144 FERC ¶ 61,181 (2013).

38 Id. PP 20-21.

39 Id. P 22.

ate tariff on file with the Commission, does not have captive customers,

and does not provide transmission or local distribution services.39 Accordingly, the

Commission stated its intent to open a generic proceeding to consider the broader request

36 Id.

37 Exelon Generation Company, LLC, 144 FERC ¶ 61,181 (2013).

38 Id. PP 20-21.

39 Id. P 22.

Docket No. PL14-1-000

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for relief, which would provide public notice and an opportunity for a broader range of

interested parties to comment.40

D.

Proposed Policy Statement

15.

In the proposed policy statement,41 the Commission undertook a generic

proceeding to consider whether FPA section 305(a) should be interpreted as not

prohibiting the payment of dividends from capital account by any public utility that has a

market-based rate tariff on file with the Commission, does not have captive customers,42

and does not provide transmission or local distribution services.43 Because the

Commission believed that the payment of dividends from capital account by such public

utilities does not appear to create the concerns underlying the enactment of FPA section

305(a), the Commission proposed this policy in order to eliminate the regulatory burden

of filing unnecessary petitions for declaratory relief under FPA section 305(a) by such

public utilities.

16.

As previously noted, the Commission in response to the May 16 Petition had

expressed its opinion that Applicants and EPSA made a strong case for a close

40 Id.

41 Proposed Policy Statement, Payment of Dividends from Funds Included in

Capital Accounts, 146 FERC ¶ 61,108 (2014).

42 See supra note 13.

43 The Commission proposed that a public utility that does not provide

transmission or local distribution service is a public utility that does not own transmission

or local distribution facilities providing these services.

40 Id.

41 Proposed Policy Statement, Payment of Dividends from Funds Included in

Capital Accounts, 146 FERC ¶ 61,108 (2014).

42 See supra note 13.

43 The Commission proposed that a public utility that does not provide

transmission or local distribution service is a public utility that does not own transmission

or local distribution facilities providing these services.

Docket No. PL14-1-000

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examination of whether FPA section 305(a) should be interpreted as not prohibiting the

payment of dividends from capital account by any public utility that has a market-based

rate tariff on file with the Commission, does not have captive customers, and does not

provide transmission or local distribution services.

17.

In the proposed policy statement, the Commission observed that an eligible public

utility: (1) will have satisfied the Commission’s market power analysis to obtain market-

based rate authority for its wholesale power sales; (2) will have no captive customers that

require protection by the Commission or the state commissions; and (3) will not provide

transmission or local distribution services, which are traditional monopoly services

subject to Commission and state commission oversight, to customers. Similar to the

Commission’s finding in Order No. 697, the Commission stated that it may be

appropriate to now apply a different approach to its FPA section 305(a) oversight for

those public utilities that meet the three conditions. The Commission noted, in this

regard, that FPA section 305(a) was promulgated in an era of traditional, vertically-

integrated utilities providing monopoly services to captive customers, and Congress

wanted to ensure that the distribution of dividends would not have any adverse effect on

the financial integrity (and thus the ability to serve) of any such public utility or its

customers

tions. The Commission noted, in this

regard, that FPA section 305(a) was promulgated in an era of traditional, vertically-

integrated utilities providing monopoly services to captive customers, and Congress

wanted to ensure that the distribution of dividends would not have any adverse effect on

the financial integrity (and thus the ability to serve) of any such public utility or its

customers. Since that time, the Commission observed that the electric industry has

evolved, and, in the proposed policy statement, it proposed to oversee differently the

payment of dividends by non-traditional utilities, such as merchant generators and power

Docket No. PL14-1-000

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marketers, who have market-based rate authority, do not have captive customers, and do

not provide transmission and local distribution services, which, as noted, are monopoly

services.

18.

The Commission requested comment as to whether the Commission should adopt

a statement of policy that FPA section 305(a) should be interpreted as not prohibiting the

payment of dividends from funds in capital account by any public utility that has a

market-based rate tariff on file with the Commission, does not have captive customers,

and does not provide transmission or local distribution services, because such payment of

dividends does not appear to implicate the concerns underlying the enactment of FPA

section 305(a) and it is thus appropriate to eliminate this regulatory burden otherwise

applicable under FPA section 305(a) to such public utilities.

E.

Commenters

19.

The Commission received comments from Exelon, EPSA, and two individuals,

Messrs. Blake Harrison and Daisuke Ikewaza. All commenters supported adoption of the

Commission’s proposed policy statement. The comments of Exelon and EPSA include

arguments similar to those made in support of Exelon Generation’s May 16 Petition

le under FPA section 305(a) to such public utilities.

E.

Commenters

19.

The Commission received comments from Exelon, EPSA, and two individuals,

Messrs. Blake Harrison and Daisuke Ikewaza. All commenters supported adoption of the

Commission’s proposed policy statement. The comments of Exelon and EPSA include

arguments similar to those made in support of Exelon Generation’s May 16 Petition.

Exelon and EPSA assert that the Commission should adopt the proposed policy

statement’s interpretation of FPA section 305(a) because the payment of dividends by a

public utility that meets the three proposed criteria does not appear to implicate the

concerns underlying FPA section 305(a), as such dividends would not have any adverse

effect on the financial integrity of any traditional public utility, its customers, or the

Docket No. PL14-1-000

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ability of state utility commissions to protect such public utility customers.44 In addition,

Exelon and EPSA argue that, in routinely granting waivers and exemptions to public

utilities that have been granted market-based rate authority, including blanket

authorization to issue securities under FPA section 204, the Commission has determined

that it is appropriate to apply a different standard of review and oversight to such public

utilities.45 Furthermore, Exelon asserts that by adopting this policy, the Commission

would ensure that funds appropriately available for the overall liquidity and financial

integrity of a holding company are not stranded at a subsidiary that is a non-traditional

utility (i.e., a utility that has market-based rates, does not have captive customers, and

does not provide transmission or distribution services).46 Exelon also states that the

policy will eliminate unneeded filings and lessen the burden on the Commission of

reviewing those filings.47

20.

Mr

inancial

integrity of a holding company are not stranded at a subsidiary that is a non-traditional

utility (i.e., a utility that has market-based rates, does not have captive customers, and

does not provide transmission or distribution services).46 Exelon also states that the

policy will eliminate unneeded filings and lessen the burden on the Commission of

reviewing those filings.47

20.

Mr. Harrison asserts that Congress’s key concern in passing FPA section 305(a)

was grounded in ensuring the financial and, consequently, operational viability of a

public utility by preventing a utility’s directors or officers from exploiting and

44 Exelon’s May 1, 2014 Comments at 5; EPSA May 20, 2014 Comments at 4.

45 Exelon’s May 1, 2014 Comments at 4-5; EPSA May 20, 2014 Comments at 5-6.

46 Exelon’s May 1, 2014 Comments at 5-6.

47 Id. at 6.

Docket No. PL14-1-000

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withdrawing from a utility’s capital account.48 Harrison states that Congress originally

passed the FPA at a time when the primary model of a public utility was a monopolistic,

all-encompassing energy provider. In this model, Harrison states that ratepayers were

forced to deal with the public utility in order to receive energy and that a public utility

director’s financial improprieties could have a dramatic impact on the ratepayers’ energy

service given there was no alternative energy option available to the ratepayer. In that

model, Harrison argues that it was necessary to install safeguards to protect the public

from practices that could harm their access to energy.49

21.

However, Mr

in order to receive energy and that a public utility

director’s financial improprieties could have a dramatic impact on the ratepayers’ energy

service given there was no alternative energy option available to the ratepayer. In that

model, Harrison argues that it was necessary to install safeguards to protect the public

from practices that could harm their access to energy.49

21.

However, Mr. Harrison argues that the landscape of public utilities has changed

since the passage of the FPA toward more retail competition and, in some limited

circumstances, does not give rise to the concern that motivated the initial prohibition in

FPA section 305(a).50 Harrison further argues that, if the fundamental concern of FPA

section 305(a) involved protecting ratepayers from being negatively impacted by

improper dividend conduct where they were beholden only to the public utility for their

energy, and if it can be shown that ratepayers are not beholden to a public utility with

48 Harrison’s April 14, 2014 Comments at 1.

49 Id.

50 Id.

Docket No. PL14-1-000

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certain characteristics, then FPA section 305(a) should not be applied to public utilities

with those characteristics.51

22.

Mr. Harrison agrees with the Commission’s proposal in the proposed policy

statement that a public utility that has a market-based rate tariff on file with the

Commission, does not have captive customers, and does not provide transmission or local

distribution services does not lend itself to the concern that motivated Congress to pass

FPA section 305(a). Harrison states that, if the public utility has a market-based rate

tariff on file with the Commission, it is clear evidence that the public utility is not

operating in a regulated, centralized utility environment and it signals that the public

utility is not a traditionally-regulated monopoly

ion services does not lend itself to the concern that motivated Congress to pass

FPA section 305(a). Harrison states that, if the public utility has a market-based rate

tariff on file with the Commission, it is clear evidence that the public utility is not

operating in a regulated, centralized utility environment and it signals that the public

utility is not a traditionally-regulated monopoly. Harrison asserts that, although it is

possible that such a public utility has market power, which would give rise to the set of

concerns that motivated FPA section 305(a), the Commission’s next two proposed

criteria further distinguish this particular type of public utility and alleviate the concerns

motivated by FPA section 305(a).52 Harrison argues that, if the public utility does not

have captive customers, its failure as a result of its financial practices would only harm

those ratepayers who could instead elect to purchase their energy from other suppliers.53

Finally, Harrison argues that, if the public utility does not provide transmission or

51 Id.

52 Id. at 2.

53 Id.

Docket No. PL14-1-000

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distribution, this characteristic is further evidence that financial failure as a result of

improper financial conduct would not unduly disrupt ratepayer service.54

23.

Mr. Ikewaza also agrees that the Commission’s three criteria in the proposed

policy statement demonstrate when a public utility does not have market power

51 Id.

52 Id. at 2.

53 Id.

Docket No. PL14-1-000

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distribution, this characteristic is further evidence that financial failure as a result of

improper financial conduct would not unduly disrupt ratepayer service.54

23.

Mr. Ikewaza also agrees that the Commission’s three criteria in the proposed

policy statement demonstrate when a public utility does not have market power. Ikewaza

explains that public utilities with market power could exploit their capital account and

pass on the financial losses to their customers, because their customers have no

alternatives in the market and they would be forced to buy electricity even when the price

of electricity is higher.55 Ikewaza adds that the Commission’s three-factor analysis in

Citizens, which the Commission relies on to analyze FPA section 305(a) petitions,56 is a

framework established on the premise that traditional utilities indeed have market power.

Ikewaza states that this framework helps ensure the financial integrity of, and investment

in, traditional utilities by preventing them from arbitrarily using funds from their capital

account.57 However, Ikewaza argues that the Citizens framework is not necessarily

54 Id.

55 Ikewaza’s April 17, 2014 Comments at 1.

56 As described above, under the three-factor analysis in Citizens, the Commission

determines that a proposed transaction does not implicate the concerns underlying FPA

section 305(a) if: (1) the utility clearly identifies the sources from which the dividends

will be paid; (2) the dividends will not be excessive; and (3) the proposed transaction will

not have an adverse effect on the value of shareholders’ interests. See supra P 6

(discussing Citizens, 84 FERC ¶ 61,158 at 61,865).

57 D. Ikewaza’s April 17, 2014 Comments at 1.

e the concerns underlying FPA

section 305(a) if: (1) the utility clearly identifies the sources from which the dividends

will be paid; (2) the dividends will not be excessive; and (3) the proposed transaction will

not have an adverse effect on the value of shareholders’ interests. See supra P 6

(discussing Citizens, 84 FERC ¶ 61,158 at 61,865).

57 D. Ikewaza’s April 17, 2014 Comments at 1.

Docket No. PL14-1-000

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suitable for non-traditional utilities because non-traditional utilities usually do not have

market power.58

24.

Mr. Ikewaza states that, under the Commission’s first criterion – that the public

utility that has a market-based rate tariff on file with the Commission – it should be

presumed that such a public utility does not have market power because the Commission

would not grant market-based rate authority to a public utility that has market power.59

Ikewaza explains that if the public utility lacks market power, customers can find and

substitute electricity from other competitors.60 Ikewaza asserts that the Commission’s

second criterion – that the public utility does not have captive customers – is reasonable

because it protects against a situation where, even if customers have alternative sources

of electricity from competing suppliers, the alternatives may not be meaningful if the

customers cannot switch to alternative suppliers without difficulty and at substantial

cost.61 Ikewaza also states that the Commission’s third criterion – that the public utility

does not provide transmission or local distribution services – is reasonable. Ikewaza

argues that, even where a public utility that meets the first two criteria and thus does not

have enough discretion to exploit its capital funds, this third criterion protects against the

58 Id.

59 Id. at 2.

60 Id.

61 Id.

criterion – that the public utility

does not provide transmission or local distribution services – is reasonable. Ikewaza

argues that, even where a public utility that meets the first two criteria and thus does not

have enough discretion to exploit its capital funds, this third criterion protects against the

58 Id.

59 Id. at 2.

60 Id.

61 Id.

Docket No. PL14-1-000

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situation where a public utility still provides transmission or local distribution services

and thus could choose to exploit its capital funds in a way that would have a very

significant, negative impact on customers.62 Therefore, Ikewaza supports the third

criteria as part of the Commission’s policy statement.

II.

Policy Statement

25.

Recognizing that the electric industry has evolved, on the record before us, we

find, as a matter of policy, that FPA section 305(a) should not be construed as a bar to the

payment of dividends from funds included in capital account by any public utility that:

has a market-based rate tariff on file with the Commission; does not have captive

customers; and does not provide transmission or local distribution services. The payment

of dividends from capital account by such public utilities does not appear to implicate the

concerns underlying the enactment of FPA section 305(a), and we issue this policy

statement in order to eliminate a regulatory burden otherwise applicable under FPA

section 305(a) to such public utilities. In light of our interpretation of FPA section

305(a), it is our view that a public utility that meets the three criteria identified above

does not need to file a petition for declaratory order under FPA section 305(a) requesting

an interpretation from the Commission that FPA section 305(a) does not bar its payment

of dividends from capital account.

62 Id.

f our interpretation of FPA section

305(a), it is our view that a public utility that meets the three criteria identified above

does not need to file a petition for declaratory order under FPA section 305(a) requesting

an interpretation from the Commission that FPA section 305(a) does not bar its payment

of dividends from capital account.

62 Id.

Docket No. PL14-1-000

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III.

Document Availability

26.

In addition to publishing the full text of this document in the Federal Register, the

Commission provides all interested persons an opportunity to view and/or print the

contents of this document via the Internet through the Commission’s Home Page

(http://www.ferc.gov) and in the Commission’s Public Reference Room during normal

business hours (8:30 a.m. to 5:00 p.m. Eastern time) at 888 First Street, NE, Room 2A,

Washington, DC 20426.

27.

From the Commission’s Home Page on the Internet, this information is available

on eLibrary. The full text of this document is available on eLibrary in PDF and

Microsoft Word format for viewing, printing, and/or downloading. To access this

document in eLibrary, type the docket number excluding the last three digits of this

document in the docket number field.

28.

User assistance is available for eLibrary and the Commission’s website during

normal business hours from FERC Online Support at 202-502-6652 (toll free at 1-866-

208-3676) or email at ferconlinesupport@ferc.gov, or the Public Reference Room at

(202) 502-8371, TTY (202) 502-8659. Email the Public Reference Room at

public.referenceroom@ferc.gov.

By the Commission.

( S E A L )

Nathaniel J. Davis, Sr.,

Deputy Secretary.