Loosening the Reins—FERC takes new steps to encourage investment in the electric utility sector

Part I, A Summary of the New Rules

by Laurel W. Glassman

In the Energy Policy Act of 2005, Congress sought to more sharply define the Federal Energy Regulatory Commission’s jurisdiction over certain entities. In this regard, its focus was, among other things, on 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 its codification of FERC’s jurisdiction over “holding companies” (see sidebar) 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. In this regard, FERC created a variety of regulatory “blanket authorizations” (see sidebar) for certain kinds of transactions involving holding companies. One of the most important of these was a blanket authorization for a holding company to acquire less than 10 percent of the voting securities of certain types of utility entities and holding companies. FERC determined that these kinds of transactions could not negatively impact customers or electricity markets. With these new blanket authorizations, FERC has decided to loosen the reins of its jurisdiction, thereby opening new doors to investment in the electric energy sector.

Evolution of the new blanket authorizations

In late 2006, when FERC first began to consider whether to expand the blanket authorizations under Section 203 that were already on the books, it had no specific ideas in mind, other than possibly to grant a blanket authorization to public utilities that would parallel the blanket authorization available to holding companies to acquire less than 10 percent of the voting securities of a “transmitting utility,” an “electric utility company,” or a “holding company” without FERC’s prior approval. It decided to hold a “Technical Conference” on FPA Section 203 issues (among others) and invited comments. Various commenters, including financial institutions such as commercial and investment banks, urged FERC to provide the same blanket authorizations to public utilities (see sidebar) as FERC had previously provided to holding companies. In this regard, they explained the need for the Commission to harmonize its blanket authorizations between these two types of entities in order to remove unnecessary regulatory obstacles and thereby encourage investment in the electric utility sector. FERC was strongly encouraged to provide a blanket authorization for acquisitions in which the acquirer would acquire less than 10 percent of the voting securities of the public utility, and for acquisitions involving voting securities held for lending, hedging, underwriting, and/or fiduciary purposes. Commenters also strongly suggested that FERC adopt a blanket authorization for the acquisition of contracts for the sale of electric energy where the contracts do not provide the acquirer with control over electric generation or transmission facilities.

FERC reacted cautiously but somewhat favorably to these comments in a Notice of Proposed Rulemaking issued in July of 2007. After reviewing an additional round of comments on that NOPR for more than six months, in late February 2008 FERC finally issued Order No. 708, the final rule adopting all of these blanket authorizations.

In addition to affording certain utilities some blanket authorizations similar to those already available to holding companies, FERC provided some helpful clarifications of the previously adopted blanket authorizations. The new rule took effect at the end of March 2008.

Summary of the new rules

In Order No. 708, FERC added five new blanket authorizations. Under the new rules, prior FERC authorization will no longer be required for:

(1) a public utility to transfer less than 10 percent of its voting securities to a holding company that has a blanket authorization to acquire the voting securities, provided that, after the transfer, the holding company and any of its associate or affiliate companies in aggregate will own less than 10 percent of the outstanding voting interests of such public utility;

(2) a public utility to transfer its voting securities to an entity that is a holding company solely with respect to exempt wholesale generators (EWGs), foreign utility companies (FUCOs), or qualifying facilities (QFs), where the holding company has blanket authorization under 18 C.F.R. § 33.1(c)(8) to acquire the securities of additional EWGs, FUCOs or QFs, provided that, after the transfer, the holding company and any of its associate or affiliate companies in aggregate will own less than 10 percent of the outstanding voting interests of such public utility;

(3) a public utility to transfer an unlimited amount of its voting securities to a holding company regulated by the Federal Reserve Bank or by the Office of the Comptroller of the Currency under the Bank Holding Company Act where the holding company has blanket authorization under 18 C.F.R. § 33.1(c)(9) to acquire the securities of holding companies if such acquisitions are held (a) as a fiduciary; (b) for hedging purposes (with certain conditions); (c) as collateral for a loan; or (d) solely for purposes of liquidation and in connection with a loan previously contracted for (with certain conditions);

(4) a public utility to transfer an unlimited amount of its voting securities to a holding company that has blanket authorization under § 33.1(c)(10) to acquire the securities of a public utility or holding company that includes a public utility, for underwriting or hedging purposes (with certain conditions);

(5) a public utility to acquire or dispose of a jurisdictional contract(s) where neither the acquirer nor the transferor has captive customers or owns or provides transmission service over jurisdictional transmission facilities, the contract does not convey control over the operation of a generation or transmission facility, the parties to the transaction are neither associate nor affiliate companies, and the acquirer is a public utility.

In addition, the new rules clarify the definition of the term “affiliate.” The term affiliate is used in various parts of the blanket authorization regulations, including in the aggregation provisions of (1) and (2) above. For entities other than EWGs, an “affiliate” basically means an entity that directly or indirectly owns 10 percent or more of a company or that is directly or indirectly 10 percent or more owned by a company. For EWGs, an “affiliate” basically means an entity that directly or indirectly owns 5 percent or more of a company or an entity that is 5 percent or more owned by a company.

Finally, the new rules narrow the definition of the term “captive customers,” which is a key part of FERC’s cross-subsidization rules and was previously raised as a concern by FERC in refusing to expand certain blanket authorizations. Specifically, “captive customers” are wholesale and retail electric customers serviced by a franchised public utility under cost-based rate regulation.

In Part II, which will be published in the Sept/Oct. issue, the author will discuss what the new rules mean for the electric industry.


Definition of Terms

BLANKET AUTHORIZATIONS: the right to proceed with certain transactions without prior application to, and approval from, FERC.

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.

Author

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.

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