On May 19, 2016, the Federal Energy Regulatory Commission (“FERC”) issued a policy statement regarding future implementation of hold harmless commitments offered by applicants as ratepayer protection mechanisms to mitigate adverse effects on rates that may result from transactions subject to section 203 of the Federal Power Act (“FPA”). The policy statement provides guidance in four areas related to hold harmless commitments: (1) the scope and definition of the costs that should be subject to hold harmless commitments; (2) controls and procedures to track the costs from which customers will be held harmless; (3) FERC’s continued acceptance of hold harmless commitments that are limited in duration; and (4) clarification that applicants may offer another form of ratepayer protection mechanism in the place of a hold harmless commitment, and that an applicant may not require any such mechanism in order to be able to demonstrate that a proposed transaction will not have an adverse effect on rates. The policies adopted in the policy statement will be effective 90 days after publication.

FERC issued a proposed policy statement on hold harmless commitments on January 22, 2015. FERC’s stated intent for the proposed policy statement was to address the scope of hold harmless commitments, as well as certain industry concerns that hold harmless commitments may offer insufficient protection in some instances and are unnecessary in others.

Scope and Definition of Transaction-Related Costs

First, FERC adopts a bulleted list of transaction-related costs to which hold harmless commitments should generally apply, encompassing four basic categories of costs: (1) transition costs; (2) capital costs; (3) internal labor costs; and (4) costs of transactions that are not completed. FERC emphasizes that it will “continue to consider hold harmless commitments on a case-by-case basis and, as such, applicants may propose that their hold harmless commitments cover specific transaction-related costs . . . if they can demonstrate that those certain cost categories may be properly included or excluded from their hold harmless commitment without an adverse effect on rates.”

Controls and Procedures to Track and Record Costs Related to Hold Harmless Commitments

Second, FERC adopts a policy requiring FPA section 203 applicants offering hold harmless commitments to provide a description of how they define, designate, accrue, and allocate transaction-related costs. FERC will also require applicants to employ a “well-documented methodology” to account for transaction-related costs, and to provide proper documentation for the transaction-related costs for which an applicant seeks recovery under section 205 of the FPA.

Time Limits on Hold Harmless Commitments

Third, FERC clarifies that it will continue to accept hold harmless commitments that are time-limited as a method to show no adverse effect on rates. In doing so, FERC withdrew its initial proposal to reject time-limited hold harmless commitments. Based on comments received from stakeholders, FERC found that the majority of transaction-related costs are incurred in the first five years after the closing of the FPA section 203 transaction. Further, FERC states that there is insufficient evidence to conclude that applicants are incurring substantial transaction-related costs after five years.

Clarification on Necessity of Hold Harmless Commitments for all FPA Section 203 Transactions

Finally, FERC clarifies that, under FERC’s Merger Policy Statement, a hold harmless commitment is just one of several ratepayer protection mechanisms that may be appropriate for any given transaction. FERC reaffirms that a hold harmless commitment is not a requirement for an FPA section 203 application and that applicants may offer other forms of ratepayer protection to demonstrate that the transaction has no adverse effect on rates.

The Policy Statement is available here.