Public Utilities Reports

PUR Guide 2012 Fully Updated Version

Available NOW!
PUR Guide

This comprehensive self-study certification course is designed to teach the novice or pro everything they need to understand and succeed in every phase of the public utilities business.

Order Now

Transmission Asset Sales: Running the Regulatory Gauntlet

There are many considerations and obstacles to overcome before transmission assets can be bought or sold.
Fortnightly Magazine - May 15 2003
  1. 787, 796-97 (2d Cir.), cert. denied, 320 U.S. 792 (1943) (Judge Augustus Hand, concurring); Duquesne Light, 488 U.S. at 308-310.
  2. See, e.g., Trans-Elect Inc. (Consumers Energy), Order on Rehearing, 98 FERC 61, 368, pp. 4-5 (2002).
  3. FERC is generally reluctant to utilize "double leverage" or otherwise look behind the capital structure of the regulated entity. See, e.g., William Natural Gas, 84 FERC 61,080 (1998) rehearing denied, 86 FERC 61,232 (1999). This reluctance, combined with relatively favorable debt-equity ratios, provides an investor with another vehicle for recouping an acquisition premium that is not explicitly recognized in rate base.
  4. A further 100 basis point adder is available for certain transmission upgrades funded by the independent transmission company pursuant to an RTO planning process.
  5. As a practical matter, the investors are not giving up much, since the independent transmission company has already ceded so much operating control to the regional transmission operator.
  6. PUHCA provides that the SEC "shall approve" a merger unless it makes certain adverse findings. PUHCA prohibits approval of an acquisition if the SEC finds that the resulting holding company will no longer constitute a single "integrated public-utility system." PUHCA §§10(c)(1), 11(b)(1); 15 USC §§ 79j(c)(1), 79k(b)(1). This is defined as "[A] system . . . whose utility assets, whether owned by one or more electric utility companies, are physically interconnected or capable of physical interconnection and which under normal conditions may be economically operated as a single interconnected and coordinated system confined in its operations to a single area or region, in one or more states, not so large as to impair (considering the state of the art and the area or region affected) the advantages of localized management, efficient operation and the effectiveness of regulation." PUHCA §2(a)(29), 15 USC § 79b(a)(29). See, generally, National Rural Electric Cooperative Ass'n v. SEC, 276 F.3d 609 (D.C. Cir. 2002).
  7. While the seven-indicators test in Order 888, 75 FERC 61, 080, pp. 401-02 (1996), and its application by state public utility commission define the line between transmission and distribution assets, drawing the line separating transmission and generation-related assets can sometimes be trickier.
  8. Trans-Elect Inc. (Consumers Energy), 98 FERC 61,132, pp. 12-16 (2002), is especially instructive on the right of way issue because the parties structured the transaction with the rights of way retained by the seller. The buyer was obligated to make annual lease payments. This reduced buyer's capital requirements and provided the seller with a long-term stream of income and cash flows. FERC approved this arrangement but modified it by limiting the seller's retained interest to uses that do not impair or interfere with transmission-related uses.

*Plus annual easement payments for retained right-of-way.

The Deferred Tax Issue

Understanding the tax issues that must be addressed before selling transmission assets.

Deferred taxes are often a significant component of a utility's capital structure. Generally, they arise from the fact that federal income tax expense paid is less than the amount recorded for book purposes or reflected in the cost of service in setting rates. The difference is chiefly attributable to depreciation that is more rapid for