[BETA] Fortnightly

No clear signal as yet from new chair James Hoecker.

The Federal Energy Regulatory Commission had a busy day on July 30, but observers will have to wait until the fall to learn of any new wide-ranging policy initiatives planned by incoming chair James Hoecker, who has now succeeded Elizabeth Moler in the top post.

The end-of-summer meeting (em and Commissioner Donald F. Santa Jr.'s last (em was marked largely by a lack of controversy. Among other items, the FERC revisited the old ratemaking issue of double leverage in the capital structure for corporate subsidiaries and cleaned up its docket on electric utility mergers and open-access transmission tariffs. It also turned away requests for additional hearings or technical conferences on the California Power Exchange and Independent System Operator.

Pipeline Capital Structure. In two orders involving interstate natural gas pipelines, the FERC modified its policy on capital structure (em regarding the amount of equity it will recognize in setting an overall return for pipelines that operate as corporate subsidiaries. The two pipelines, Transcontinental Gas Pipeline Corp. (Docket Nos. RP95-197-023 et al.) and Williams Natural Gas Co. (Docket No. RP93-109-011), both operate as subsidiaries of The Williams Cos.

Commissioner Vicky Bailey said the orders will affect rate of return throughout the pipeline industry. Chair James Hoecker said return-on-equity methods will be subject to debate, and so perhaps FERC should explore use of incentive rates.

The issue concerns subsidiaries, which can issue debt capital in part on the strength of the parent company. And, because the parent company issues its own debt, a portion of the subsidiary's apparent equity capital is actually funded by parent company debt.

To ensure a fair rate of return for gas pipelines that operate as subsidiaries, the FERC said it would accept the pipeline's nominal capital structure on two conditions: 1) the subsidiary issues its own debt, without guarantee by the parent, and 2) the subsidiary has its own bond rating. Even then, however, the pipeline's nominal equity ratio must fall within the range observed for comparable, market-driven proxy companies.

Thus, it accepted Transco's nominal capital structure, but rejected the 64.29-percent equity ratio claimed by WNG, noting that it exceeded the equity ratio of all other companies in the proxy group. For WNG, the FERC assigned the equity ratio of the corporate parent.

A Clean Merger Slate. The FERC also approved two mergers, bringing to 13 the number of merger applications it has acted on since issuance of its Merger Policy Statement last December. It approved the convergence merger of NorAm Energy and Houston Industries (Docket No. EC97-24-000) and the more traditional merger of Delmarva Power & Light Co. and Atlantic Electric Co. (Docket No. EC97-7-000).

Commissioner William Massey disagreed with industry speculation that the FERC does not like traditional mergers and favors convergence mergers. Massey, referring to the Delmarva deal, said the commission had approved a merger that many had thought it would reject, adding, "each merger is unique and must be considered on the merits."

In the convergence merger of natural gas company NorAm Energy and holding company