Energy Legal Blog

No More Mr. Nice-Guy on Utilities Favoring Affiliates

In an October 5, 2006 decision, a chastened FERC ruled that it would no longer tolerate Southern Company - the sine qua non of traditional holding companies - providing its in-house "independent" generator with "inside" information on its transmission systems.   The decision is noteworthy in its apparent validation of whistle-blower allegations that certain authorities tried to prevent a thorough investigation into allegations that Southern favored its "independent" generation to the detriment of competitive generators and other power suppliers.

The case illustrates the shifting sands of how FERC has regulated relations between traditional utilities and their merchant generation divisions.  In 2000, under Chair James Hoecker, FERC approved treating Southern's power marketing affiliate as a member of the Southern power pool.  That decision ensured the affiliate would have access to utility information and services not available to other competitive generators and power marketers.  Then, responding to complaints from competitive power suppliers in 2005, FERC under Chair Pat Wood undertook an investigation into whether the 2000 arrangement remained just and reasonable.  One year later, current Chair Joe Kelliher's chief of staff negotiated a controversial settlement with Southern, under which Southern agreed to limited restrictions on its marketing affiliate's access to utility information.  Consternation greeted this negotiated outcome.  One FERC investigator publicly accused Kelliher and his chief of staff of obstructing the investigation into Southern and of packaging a sweet-heart deal with the holding company.  Taking up the disheartened investigator's cause, Representative Henry Waxman called Kelliher on the carpet.  Later, the FERC judge assigned to the case publicly described the circumstances surrounding the negotiated settlement as "most unusual" and "maybe even dangerous."  And in an opinion concurring in the October 5 decision, Commissioner Suedeen Kelly described the negotiation as "questionable."

The October 5 decision, supported by three newly seated commissioners, unanimously rejects the controversial settlement that Chair Kelliher's chief of staff negotiated.  The decision finds the settlement restrictions "severely deficient" and orders that they be replaced with a clear separation between Southern and the affiliate and restrictions on the affiliate's preferential access to information and services.  Moreover, it keeps open an investigation into how Southern interacts with its marketing affiliate and directs the agency's Office of Enforcement to audit Southern and all of its affiliates.  At a higher level the decision also indicates a sea change that will bring greater scrutiny to commerce between transmission utilities and their merchant generation and power marketing affiliates.