Part II. What the New Rules Mean for the Industry
by Laurel W. Glassman
Editor’s Note: Part I of this article was published in the July/August issue and is available online at www.elp.com.
In the Energy Policy Act of 2005, Congress sought to more sharply define the Federal Energy Regulatory Commission’s jurisdiction over certain entities under Section 203 of the Federal Power Act, which governs mergers, acquisitions and dispositions involving electric public utilities.
Among the key changes to Section 203 wrought by EPAct 2005 was the codification of FERC’s jurisdiction over “holding companies” (see sidebar for definition) engaged in certain types of transactions that could affect ratepayers and competition in utility markets. Subsequently, FERC commenced its task of conforming its regulations to the new direction mandated by Congress in EPAct 2005 and created a variety of regulatory “blanket authorizations” (see sidebar) for certain kinds of transactions involving holding companies.
In late February 2008, FERC issued Order No. 708, the final rule adopting a variety of new blanket authorizations and clarifying the definitions of the terms “affiliate” and “captive customers.” (Part I of this article provides a more detailed account of the evolution of Order No. 708 and a summary of the new blanket authorizations.)
With Order No. 708, which took effect at the end of March 2008, FERC has decided to loosen the reins of its jurisdiction, thereby opening new doors to investment in the electric energy sector.
Blanket authorizations harmonized
Under prior FERC orders implementing EPAct 2005 (Order Nos. 669, et seq.), certain kinds of holding companies do not have to obtain FERC authorization for a variety of transactions. These are holding companies that are part of a holding company system that includes either (1) a “transmitting utility” (an entity that owns, operates, or controls facilities for the transmission of electric energy in interstate commerce for the sale of electric energy at wholesale) or (2) an “electric utility” (an entity that sells electric energy).
For example, holding companies can, without prior FERC authorization: (i) acquire less than 10 percent of the voting securities of a transmitting utility, an “electric utility company” (see sidebar) or another holding company in a holding company system that includes a transmitting utility or an electric utility company if, after the acquisition, the acquirer would own less than 10 percent of the voting securities of the acquired entity; (ii) acquire (if they are regulated by the Federal Reserve Bank or the Office of the Comptroller of the Currency) under certain conditions an unlimited amount of the securities of a holding company that includes a transmitting utility or an electric utility company, as a fiduciary, as principal for derivatives hedging purposes, as collateral for a loan, or solely for purposes of liquidation in connection with certain previous contracted for loans; and (iii) acquire with certain conditions a public utility, or a holding company that includes a public utility, for underwriting purposes or hedging purposes. In addition, companies that are holding companies based solely on their ownership of exempt wholesale generators (EWGs), qualifying facilities (QFs) and/or foreign utility companies (FUCOs) can acquire an unlimited amount of the securities of additional EWGs, QFs and/or FUCOs without seeking prior FERC authorization.
These blanket authorizations available to holding companies have often been of little practical use, however, because the public utility involved in the transaction would still need FERC approval before it could consummate the transaction. For example, an investment bank that owned 10 percent or more of the voting securities of a small generating project (and that was therefore a holding company due to such ownership), could, under the old rules, acquire without prior FERC approval less than 10 percent of the voting securities of a franchised public utility owning interstate transmission facilities. However, that public utility could not “dispose of” its voting securities to the investment bank without prior FERC approval. As a result, the absence of a blanket authorization for the public utility negated the value of the blanket authorization available to the investment bank. Similarly, the investment bank in this example could acquire without prior FERC approval all of the voting securities of a public utility for underwriting purposes (with certain conditions), but the public utility would still need to obtain FERC approval before it could proceed with the transaction. Again, the absence of a blanket authorization for the public utility negated the value of the blanket authorization for underwriting activities available to the investment bank.
Under the new rules established by Order No. 708, the blanket authorizations for holding companies and public utilities have finally been harmonized to a significant extent. Now, many transactions that used to require prior FERC authorization may proceed under blanket authorizations, thereby avoiding unnecessary regulatory delays and costs.
One important example of a transaction that will no longer require prior FERC authorization is as follows:
Company A currently owns 10 percent or more of the voting securities of Company B. Company B currently owns or operates generation or transmission facilities used to make sales of electricity. Company A is a “holding company” because it owns 10 percent or more of the voting securities of Company B, which is considered to be an “electric utility company.” Company A now seeks to acquire less than 10 percent of the voting securities of Company C, which is not affiliated with Company A or Company B. Company C owns or operates facilities for the generation, transmission, or distribution of electric energy for sale, and is therefore considered to be a “electric utility company.” If Company C is also a “public utility” (see sidebar), then the new “10 percent” blanket authorization applicable to public utilities now enables the transaction to proceed without the need to make a filing with FERC, which would otherwise have had to demonstrate that the transaction would not adversely impact competition, rates or regulatory oversight, and would not raise cross-subsidization concerns. The one restriction is that, upon consummation of the transaction, Company A and its affiliates may not own, in the aggregate, 10 percent or more of the voting securities of Company C.
In addition to the new “10 percent” blanket authorization, Order No. 708 also provides other blanket authorizations to public utilities that in key respects mirror the blanket authorizations applicable to holding companies with respect to fiduciary activities, derivatives hedging, loans, underwriting activities, and the acquisition of QFs, EWGs, and FUCOs.
Furthermore, in Order No. 708-A, issued July 17, 2008, FERC has further expanded the “10 percent” blanket authorization to permit Company C (the public utility in the above example) to sell, transfer, or otherwise dispose of up to 10 percent of its voting securities to “any person” (not just to a holding company like Company A) provided that such person and any of its affiliates in aggregate will own less than 10 percent of the outstanding voting interests in Company C upon consummation of the transaction. This expansion will not take effect, however, until FERC has settled upon some additional reporting requirements for these types of transactions.
Over the years, more and more investment banks and other financial institutions have become holding companies. The new blanket authorizations will make it easier for them to provide additional capital to the utility sector and participate to a greater extent in energy markets. As a result, an increase in much-needed investment in the electric industry is now to be expected.
Moreover, as FERC grows more comfortable with the notion that transfers of less than 10 percent of the voting securities of a public utility will not adversely impact customers or the electricity market, FERC may well broaden the blanket authorizations to encompass transactions involving public utility transfers of voting securities to entities other than holding companies, thereby further encouraging electric industry investment.
Definition of Terms
BLANKET AUTHORIZATIONS: the right to proceed with certain transactions without prior application to, and approval from, FERC.
ELECTRIC UTILITY COMPANY: a company that owns or operates facilities for the generation, transmission or distribution of electric energy for sale.
HOLDING COMPANY: a company that owns 10 percent or more of the voting securities of an entity that owns or operates facilities for the generation, transmission or distribution of electric energy for sale.
PUBLIC UTILITY: an entity that owns or operates facilities for the transmission of electric energy in interstate commerce or contracts, books, records, and rate schedules for the sale of electric energy in interstate commerce.
TRANSMITTING UTILITY: an entity that owns, operates or controls facilities for the transmission of electric energy in interstate commerce for the sale of electric energy at wholesale.
Laurel Glassman practices in the energy, infrastructure and project finance group at White & Case, LLP, resident in the firm’s Washington, D.C., office. She has more than 30 years of experience representing clients before the Federal Energy Regulatory Commission and various state utility commissions. In addition to her work in the regulatory area, she also advises clients on transactional and litigation matters.