FERC on Wednesday approved Pacific Gas and Electric’s transaction to spin off its non-nuclear generation to a new subsidiary called Pacific Generation (EC23-38).

The firm plans to sell off up to 49.9% of the generation subsidiary so it can raise capital more efficiently than through the sale of additional stock in parent company PG&E.

Pacific Generation will become a certificated, cost-of-service public utility regulated by the California Public Utilities Commission in the same franchise territory as PG&E after the deal closes, providing cost-based generation to customers and selling some power into the CAISO market under a market-based rate tariff the firm will file with FERC.

The generators being spun off include 3,848 MW of hydro, 1,400 MW of natural gas units, 152 MW of solar and 182 MW of storage.

The proposal led to protests from the California Community Choice Association, the Transmission Agency of Northern California (TANC), Northern California Power Agency (NCPA) and Public Citizen. (See Parties Protest PG&E Plan to Spin Off Generation.)

The community choice aggregation association argued that without detailed information on which firm will buy the generation, its impact on vertical market power cannot be determined. FERC sided with PG&E, saying that spinning off the generation to a new subsidiary that does not provide any inputs to electricity products will not lead to vertical market power concerns.

While the utility promised to hold its customers harmless in the transactions, the city of Santa Clara, TANC, Public Citizen and NCPA said that was not enough to ensure that outcome. PG&E should look into less disruptive ways to raise capital, Public Citizen said.

TANC noted that PG&E wants to issue up to $2.1 billion in debt for the new firm, whose assets will value about $3.5 billion. It argued that FERC should require the company to show its accounting treatment and whether the deal would alter PG&E’s equity ratio. The utility provided no information on which costs transmission customers will be held harmless, which makes it impossible to determine whether that will actually happen, TANC said.

FERC determined that the deal would not affect rates. When it comes to wholesale rates, the assets will be bid at market prices, which will not be impacted by the seller’s cost-of-service retail rates.

Pacific Generation has yet to file a request for market-based rate authority; FERC said its approval is based on the new firm getting that authority before the deal closes.

“Failure by Pacific Generation to obtain market-based rate authority as PG&E represents in its application would constitute a material change in circumstances that we rely on in making our findings herein,” FERC said.

The commission also said the protesters failed to show the deal would impact PG&E’s cost of capital or transmission rates. The deal would not impact the firm’s return on equity, its credit rating or its capital structure, so claims to the contrary lack a factual basis, the commission said. It noted, however, that if those change, then that would also represent a material change to the facts relied upon in its approval.

FERC also found the deal would not affect rates, as the new subsidiary and the utility will still be regulated by it on the wholesale side, and the CPUC on the retail side.

Public Citizen argued that the transfer of generation to private equity could impair state oversight, but FERC said that is beyond the scope of the proceeding because it focused on the spinoff, not any later sales.

The deal would not lead to any cross-subsidization issues, where benefits are transferred from captive customers to shareholders, because both the utility and Pacific Generation will be regulated by the CPUC, FERC said.

“A debt issuance by Pacific Generation for the benefit of its utility affiliate, PG&E, is not analogous to a situation where the assets of a franchised public utility with captive customers are used to finance its market-regulated utility affiliates or nonutility affiliates or their activities, which the commission has stated may raise concerns,” FERC said.

Many of the protests argued that FERC should consider the spinoff and the subsequent sale of a minority interest in the generation at the same time, but the commission disagreed, saying expanding the proceeding to cover the second deal would be inappropriate.