FERC on Feb. 18 authorized, as consistent with the public interest, the proposed transaction in which FirstEnergy (NYSE:FE) would transfer transmission assets owned by its utility subsidiaries, Pennsylvania Electric Company (Penelec), Metropolitan Edison (Met-Ed) and Jersey Central Power and Light (JCP&L) to a new transmission affiliate, Mid-Atlantic Interstate Transmission (MAIT).
As noted in FERC’s order, Penelec, Met-Ed and JCP&L – collectively the FirstEnergy East Operating Companies – and FirstEnergy Transmission and MAIT – with the FirstEnergy East Operating Companies, the applicants – filed the application in June 2015.
Discussing the proposed transaction, FERC said that according to the applicants, FirstEnergy is implementing its Energizing the Future transmission program, which is designed to increase the reliability of the FirstEnergy transmission system, improve the condition of equipment, enhance system performance, and improve operational flexibility.
The applicants asserted that the proposed transaction will facilitate significant planned transmission investment under the Energizing the Future program in the service territories of the FirstEnergy East Operating Companies, FERC said.
The proposed transaction will consist of two primary components, FERC said. First, FirstEnergy Transmission will make a cash investment in MAIT, FERC said, adding that according to the applicants, in exchange for that equity investment, FirstEnergy Transmission will receive 100% of the Class A membership interest in MAIT, along with the sole authority to appoint the Board of Managers that will operate and manage MAIT. The applicants stated that the Class A membership interest will represent initially about 5% of MAIT’s total equity as reflected in FirstEnergy Transmission’s capital account maintained by MAIT, FERC said.
Second, the applicants stated that, simultaneously with FirstEnergy Transmission’s cash investment in MAIT, the FirstEnergy East Operating Companies will contribute their transmission assets to MAIT in a tax-free transfer, FERC said.
The applicants stated that the transmission assets to be contributed to MAIT are all assets classified by an independent consultant as serving a “transmission function,” together with associated regulatory assets and liabilities, interconnection agreements, and certain pre-Order No. 888 agreements related to transmission service, FERC said.
The applicants stated that in exchange, the FirstEnergy East Operating Companies will receive passive, Class B membership interests in MAIT, and they explained that the Class B membership interests will be allocated to each FirstEnergy East Operating Company in proportion to the percentage of the total value of the transmission assets contributed by that company to MAIT.
FERC added that the applicants stated that the FirstEnergy East Operating Companies’ Class B membership interests collectively will initially amount to the remaining approximately 95% of MAIT’s total equity as reflected on the FirstEnergy East Operating Companies’ respective capital accounts maintained by MAIT.
Penelec’s investment will total about 23%, Met-Ed’s investment will total about 17%, and JCP&L’s investment will total about 55%, FERC said, adding that MAIT will make distributions to FirstEnergy Transmission and each FirstEnergy East Operating Company pro rata in accordance with each entity’s capital account balance.
FERC said that the applicants have shown that the proposed transaction does not have an adverse effect on competition in either respect, horizontal or vertical, because the proposed transaction does not involve a change in ownership or control of generating assets or inputs to electricity products. As the applicants explained, the proposed transaction involves only the transfer of transmission assets, and for those reasons, FERC said that it finds that the proposed transaction does not raise any concerns regarding horizontal or vertical competition.
FERC also said that it finds that the proposed transaction will not have an adverse effect on rates, noting that the applicants represent that MAIT will not have any wholesale power sales customers and that the FirstEnergy East Operating Companies will make wholesale power sales under their respective market-based rate authority.
FERC said that the applicants make two commitments in order to address the effects of the proposed transaction on rates. The applicants propose a hold harmless commitment under which MAIT’s transmission customers will be protected from transaction-related costs, and they propose to apply a 50% equity/50% debt capital structure for ratemaking purposes for a two-year transition period to address the effects of the proposed transaction on rates that are not due to transaction- related costs.
“We accept applicants’ commitment to hold Mid-Atlantic Interstate’s transmission customers harmless from transaction-related costs by excluding from Mid-Atlantic Interstate’s transmission rates any transaction-related costs, including, but not limited to, all of Mid-Atlantic Interstate’s transaction-related costs, which include ‘internal labor and other than labor costs, beginning with such costs incurred to discuss, gather information and investigate the feasibility of creating [Mid-Atlantic Interstate]’ except to the extent it can demonstrate (through a separate future filing under [Federal Power Act (FPA)] section 205) that the transaction-related savings equal or exceed all the transaction-related costs,” FERC said.
FERC said it also accepts MAIT’s commitment to apply the 50% equity/50% debt capital structure in its future FPA section 205 filing for ratemaking purposes for a two-year transition period.
Among other things, FERC said that it finds no evidence that either state or federal regulation will be impaired by the proposed transaction.
“We find that the proposed transaction will not create a regulatory gap at the federal level because the commission will retain its regulatory authority over the transmission assets being transferred after the proposed transaction is consummated,” FERC said.