FERC conditionally approves nextera acquisition of gridliance

On October 20, 2020, in Docket EC21-10, NextEra Energy Transmission, LLC (NEET), GridLiance West LLC, GridLiance High Plains LLC, and GridLiance Heartland LLC (collectively, GridLiance) filed an application requesting authorization for a transaction whereby NEET will acquire the upstream ownership interests in GridLiance.   FERC reviewed the proposed transaction and, on March 18, 2021, conditionally authorized it as consistent with the public interest.  The condition FERC placed on its approval is because the Applicants representations were insufficient to show that the Proposed Transaction will not result in the cross-subsidization of a non-utility associate company by a utility company, or in a pledge or encumbrance of utility assets for the benefits of an associate company.  Therefore FERC required that the Applicants must show that they meet the criteria for application of the safe harbor (which they claimed in their filing) by filing a new Exhibit M (verification regarding cross-subsidization of non-utility associate company or pledge of encumbrance) no later than 60 days from the issuance of this order.
The GridLiance Transco’s partner with municipal electric utilities, electric cooperatives, and joint action agencies to solve transmission issues, optimize its partners’ systems, and help manage costs of these systems to the benefit of its partners and the broader transmission grid.  Blackstone Power & Natural Resources Holdco, L.P. (Blackstone) has partnership interests in the Gridliance Transcos.  Following the Proposed Transaction, Blackstone will no longer own any direct or indirect interests in GridLiance Transcos, and NEET will become the indirect owner of GridLiance Transcos. 
In its Order, FERC found that:

1. The Proposed Transaction does not involve the change in ownership or control of any generating assets or capacity and, accordingly, it will not have any impact on concentration in any relevant market and therefore will not have an adverse impact on horizontal competition.
2. The Proposed Transaction will not have an adverse effect on vertical competition as the Proposed Transaction involves the upstream change in control over transmission and related assets; however, there is no change in control over electric products or inputs to electric products.  NEET and its subsidiaries do not currently have any jurisdictional transmission facilities in MISO and SPP.  NEET’s subsidiaries do have jurisdictional transmission facilities in CAISO, and they are under CAISO’s operational control and subject to CAISO’s OATT.  Applicants do not own or control within MISO, SPP, and CAISO any intrastate natural gas transportation, storage, or distribution facilities; physical coal supply sources or access to transportation of coal supplies; or any generation capacity development sites that would constitute barriers to entry to the generation market.  NEET is affiliated with two interstate natural gas pipelines, which are not located in MISO, SPP, or CAISO.
3. The Proposed Transaction will not have an adverse effect on rates for wholesale customers because it does not involve the transfer of generation facilities.  With respect to the effect on rates for transmission customers, the Proposed Transaction will be treated as a taxable event requiring the immediate reversal of ADIT balances related to the Proposed Transaction.  This will result in a step-up in rate base and a corresponding increase in rates for GridLiance West and GridLiance HP.  Applicants propose to mitigate the rate increase associated with the reversal of the ADIT balances.  In addition, NextEra commits to apply the same mitigation proposal to fully offset any rate increase from a higher cost of capital because of the Proposed Transaction, to the extent the equity capitalization of GridLiance West and GridLiance HP are not already capped at 60% equity from other sources of capital.  FERC found that these proposed rate mitigations address the rate impacts of the Proposed Transaction such that it will not have an adverse effect on rates.  NextEra stated that the rate mitigation proposal in the Application complies with IRS tax normalization rules and would not constitute an Indirect Normalization Violation.  Lastly, FERC accepted NextEra’s commitment to hold customers harmless from costs related to the Proposed Transaction, interpreting the hold harmless commitment to apply to all transaction-related costs, including costs related to consummating the Proposed Transaction, incurred prior to the consummation of the Proposed Transaction, or in the five years after the Proposed Transaction’s consummation, in accordance with the Commission’s policy on hold harmless commitments.
4. The Commission’s review of a transaction’s effect on regulation focuses on ensuring that it does not result in a regulatory gap.  As to whether a proposed transaction will have an effect on state regulation, the Commission explained in the Merger Policy Statement that it ordinarily will not set the issue of the effect of a proposed transaction on state regulatory authority for a trial-type hearing where a state has authority to act on the proposed transaction.  FERC’s approval of the Proposed Transaction under FPA section 203 does not affect any state proceedings, that the timing of its determination does not have any impact on state jurisdiction, and that nothing in this Order should be read as addressing the question of whether the approval of the Illinois Commission is required.  Moreover, the Commission has stated that it is not Commission policy to delay ruling on an FPA section 203 application when there are parallel state proceedings. 
5. According to the Applicants, the Proposed Transaction falls within one of the “safe harbors” established by the Commission for which detailed explanation and evidentiary support to demonstrate a lack of cross-subsidization is not required.  Specifically, Applicants state that the Proposed Transaction falls within the “safe harbor” for transactions that do not involve a franchised public utility with captive customers. Nonetheless, Applicants verify that, based on facts and circumstances known to them or that are reasonably foreseeable, the Proposed Transaction will not result in, at the time of the Proposed Transaction or in the future, any cross-subsidization of a non-utility associate company or pledge or encumbrance of utility assets for the benefit of an associate company.  FERC found the Applicants’ representations insufficient to show that the Proposed Transaction will not result in the cross-subsidization of a non-utility associate company by a utility company, or in a pledge or encumbrance of utility assets for the benefits of an associate company.  Although Applicants rely upon the safe harbor established by the Commission for transactions that do not involve a franchised public utility with captive customers, they acknowledge that NextEra is affiliated with a franchised public utility with captive customers.  Applicants do not provide sufficient explanation of either how the safe harbor applies to the Proposed Transaction, or how the Proposed Transaction otherwise meets the requirements of Exhibit M.  FERC found that the Applicants have failed to make a sufficient showing that they meet the criteria for application of the safe harbor.  Therefore, as a condition of its approval of the Proposed Transaction, Applicants must, no later than 60 days of the issuance of this order, file a new Exhibit M.