On May 1, the Senate Energy and Natural Resources (ENR) Committee held a hearing to examine the adequacy of state and federal regulatory structures governing electric utility holding companies, following the repeal of the Public Utility Holding Company Act (PUHCA) in the Energy Policy Act of 2005 (EPAct). The hearing focused on a February 2008 report by the Government Accountability Office (GAO) which looked primarily, at how the Federal Energy Regulatory Commission (FERC) and state public utility commissions are addressing the potential for cross subsidization of electricity company affiliates, post-EPAct.
The report was requested by Sens. Russ Feingold (D-WI) and Sam Brownback (R-KS), who opposed the PUHCA repeal provisions in EPAct and tried unsuccessfully to substitute strict "ring-fencing" requirements on holding company affiliates to offset the risk of cross-subsidization to consumers of PUHCA repeal. Cross-subsidization occurs when utility companies and their affiliates unfairly pass on the cost of their transactions, by either unfairly charging electric ratepayers too much for affiliate services or by paying too little and creating unfair subsidies for the affiliates.
"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," the GAO said. The report recommended that FERC use a risk-based approach to detect cross-subsidization, enhance its audit report and reassess resource allocation to demonstrate adequate oversight is occurring.
Sen. Feingold testified that he was concerned that, following the repeal of PUHCA, there were not enough consumer protections in the utility sector. He may introduce a "ring-fencing" bill, which he said would protect consumers by providing a way for utilities to insulate themselves from the activities of their unregulated affiliates, which is a condition of approving mergers.
All five FERC Commissioners testified at the hearing and defended their overall implementation of the provisions of EPAct. Four of the five echoed FERC Chairman Joe Kelliher's disagreement with the GAO report's assertion that FERC "does not have a strong basis for ensuring that harmful cross-subsidization does not occur." However, Commissioner Suedeen Kelly agreed with the findings of the GAO report and said that the GAO report had raised issues regarding the ability of FERC to perform oversight on risky mergers.
All of the commissioners said that the best way to ensure against cross-subsidization was in the review of utility rates. The commissioners also argued that they did not want to pre-empt states' ability to review mergers.