By Rich Heidorn Jr.
The Federal Energy Regulatory Commission said last week that it intends to tighten the rules on the use of “hold harmless” commitments in support of merger applications and will prohibit commitments that are limited in duration, which could leave ratepayers vulnerable.
In a proposed policy statement (PL15-3), the commission said it was better defining the costs subject to such commitments and the accounting methods used to track them. The commission will accept comments on the proposal, which it called a reaffirmation of its 1996 Merger Policy Statement (Order 592), for 60 days.
FERC noted that hold harmless commitments — agreements not to seek recovery of transaction-related costs in rates unless they are offset by transaction-related savings — have become a common feature of merger applications under section 203 of the Federal Power Act (FPA) over the last decade.
The commission said, however, that “it has never defined those costs with much specificity, leading to inconsistency with respect to this issue.”
The policy statement’s definition includes the costs of consummating a transaction (e.g., legal, investment advisory, accounting and financing costs) and the capital and operating costs incurred to achieve merger synergies (e.g., severance payments, accounting and operating systems integration costs).
The commission said requiring applicants to explain how they track the costs will help ensure that they are not recovered in rates without commission approval.
Time Limits
The Merger Policy Statement requires that hold harmless commitments must protect customers “for a significant period of time following the merger,” a period that the commission has typically defined as five years.
FERC said it now realizes that such a limit “raises the risk that transaction-related costs could be included in future formula rate billings without applicants making the showing of offsetting savings.”
The commission said its concern arose from its experience auditing utilities with hold harmless commitments, the concerns of protestors in previous merger applications and the proposed treatment of certain categories of costs.
“For example, an applicant could try to include transaction-related costs in formula rates without making a showing of offsetting savings if the costs, though incurred during the hold harmless period, do not enter the ratemaking process until after the hold harmless period expires … Similarly, limiting the applicability of hold harmless commitments to specific time periods may incentivize applicants to delay incurring some types of transaction-related costs until after the hold harmless period expires.”
The new policy, FERC said, ensures “that the focus of a hold harmless commitment [is] on whether a cost is transaction-related, and not on when the cost is incurred.”
FERC also said removing the time limit will ensure proper treatment of costs that should be capitalized as an asset during the hold harmless period, but whose cost recovery would occur as the asset is depreciated over future periods that extend beyond the hold harmless period.
Changes are Prospective
The commission also reiterated its opposition to including acquisition premiums as transaction-related costs. It said it would continue to require a showing of “specific, measurable and substantial benefits to ratepayers” for recovery in a subsequent FPA section 205 proceeding.
FERC said the policy changes would apply prospectively and would not affect existing commitments or pending merger applications.
