March 28, 2024

Generation Investors Step Up to the Plate: What’s FERC Pitching?
The Bigger Picture

by Gregory K. Lawrence, Contributing Editor
Existing and planned electric generation faces important headwinds to profitability and financing given lower electricity and capacity prices, a slow economy dip in demand, looming “big-ticket” capital expenditures such as environmental regulation compliance, and competition among generators based on fuel sources. Renewable generation is in a lull absent renewed federal tax credit and grant programs. Forward curve price signals for generation repowering and new construction are not yet perfectly clear. Facing such uncertainties, the need for capital investment in the power generation sector may be at its highest. And investors come in all shapes and sizes – banks, hedge funds, private equity – each with different risk profiles, passive or active management plans, and expectations on returns. Each targets different opportunities ranging from the profitable to distressed, from single plants to the restructuring of entire fleets. Many generators are regulated as “public utilities” by the Federal Energy Regulatory Commission (“FERC”), while and many interested investors are not familiar with FERC’s asset disposition and affiliation rules – rules that directly impact the investment structure and expectations. Is FERC clearing the way for generation investors or throwing curve balls?

Assuming investors are willing to step up to the plate, navigating FERC’s requirements is a gating issue. As a regulated industry, advanced approval often is required before making investments in “public utility” assets, including independent power producers. As discussed here, FERC has made progress in facilitating such investment through the institution of “blanket authorizations” that obviate the need for investors and generators alike to obtain FERC pre-approval for the purchase and sale of smaller minority interests in the generator. FERC, however, has been cautious. For example, one blanket authorization rule that would arguably provide the investment community with needed additional flexibility has been pending since January 2010, with case-by-case review continuing in the interim.

I. Background Regarding FPA Asset Disposition and Acquisition Requirements
The Federal Power Act (“FPA”) requires prior FERC authorization for certain mergers, dispositions and acquisitions involving electric generation and transmission companies and their upstream holding companies. Generation and transmission companies are often deemed “public utilities.” Section 203 of the FPA requires prior FERC authorization for a public utility to:

  • sell, lease, or otherwise dispose of the whole of its facilities;
     
  • sell, lease, or otherwise dispose of any part of its facilities of a value in excess of $10 million;
     
  • merge or consolidate its facilities with any other person;
     
  • purchase, acquire, or take any security in excess of $10 million of any other public utility; and
     
  • purchase, lease, or otherwise acquire an existing generation facility in excess of $10 million.1

Certain holding companies also must obtain FERC approval under section 203 before acquiring more than $10 million in the securities of any transmitting utility, electric utility, or any holding company that includes a transmitting utility or electric utility. 2

Under FERC’s definition, an investor is an “affiliate” of a public utility if it owns, controls, or holds with power to vote 10 percent or more of the public utility’s outstanding voting securities. The public utility is also considered to be an affiliate of the investor, as are any companies under common control.3 Under FERC’s regulations, owning, controlling, or holding with power to vote less than 10 percent of the outstanding voting securities of a specified public utility company creates a rebuttable presumption of lack of control.4

FERC analyzes the disposition of the ownership of public utilities including jurisdictional generation assets under FPA § 203. FERC must ensure that the transaction will be consistent with the public interest by reviewing the transaction’s effect on competition, rates, and regulation. The transactions also cannot “result in cross-subsidization of a non-utility associate company or the pledge or encumbrance of utility assets for the benefit of an associate company” unless found to be consistent with the public interest.”

II. Existing Blanket Authorizations Applicable under FPA Section 203
FERC has issued generic “blanket approvals” applicable under FPA § 203 for certain classes of transactions. For example, FERC has granted blanket authorization for acquisitions and dispositions of less than 10 percent of the outstanding voting securities of a public utility (including generators), and has declared as a matter of general policy that a transfer of less than 10 percent of a public utility’s outstanding voting securities is, without additional indicia of control, not considered a “transfer of control” for the purposes of § 203.

FERC also has granted project- or transaction-specific blanket authorizations on a case-by-case basis.

One example of a transaction-specific blanket authorization came in 2009, when Franklin Resources, Inc. (“Franklin”) and its investment management subsidiaries and applicant funds (“Franklin”) requested blanket authorizations for each of its “Reporting Groups” to acquire up to but less than 10 percent of a publicly traded utility where the Reporting Group files a Schedule 13D (the “beneficial ownership report” under Security Exchange Commission rules) for such holdings.5 The use of a 13D rather than a 13G (beneficial ownership report for passive investors and those not exerting control) filing would allow Franklin to assume a broader advocacy role with respect to major economic decisions and corporate governance issues, such as asset purchases and changes in management.6 FERC allowed Franklin to treat each of its Reporting Groups as a separate entity, and granted Franklin’s request to rely on Schedule 13D filings and certain conditions to establish Franklin’s inability to exercise control over the utility whose securities were to be acquired.7 FERC in that case granted blanket authorization for each individual Reporting Group to acquire up to 20 percent of the voting securities of a public utility or its parent, and imposed a limitation of less than 10 percent on the ownership of voting securities of a publicly traded utility by any applicant fund or investment account within the Reporting Group.8

FERC also has granted project-specific blanket authorizations. In general, these blankets authorization have been requested by specific generation projects seeking authorization to dispose of up to 20 percent of its upstream securities to certain investors not otherwise engaged in the energy business. A condition of these blankets has been that such investors not own 5 percent or more of another generation assets in the same control area. These project-specific blanket authorizations have been extremely helpful, yet given the 5 percent limitation on other investments in the same market, investors often become ineligible.

III. Proposed Blanket Authorization Rulemaking
In January 2010, FERC issued a notice of proposed rulemaking in response to the Electric Power Supply Association’s (“EPSA”) request for guidance regarding the concepts of “control” and “affiliation” as they relate to transactions subject to FPA section 203.9 EPSA specifically requested that where an investor directly or indirectly acquires 10 percent or more but less than 20 percent of a public utility’s outstanding voting securities and is eligible to file a statement of beneficial ownership with the SEC on Schedule 13G, such investment would not be deemed to result in a transfer of control so as to trigger the need for authorization under FPA section 203(a)(1) or to result in affiliation with the public utility under FPA section 205.

FERC proposed:

  1. to adopt blanket authorizations under FPA Section 203 for the acquisition of between 10 and 20% of the voting securities of a public utility or of a holding company with a public utility subsidiary by an investor, conditioned on the submission of an “Affirmation” regarding control; and
     
  2. to exempt such an investor and the affected company and its public utility subsidiaries from the definition of “affiliate” for the purposes of FERC’s market power analysis, reporting requirements, and affiliate sales restrictions under FPA section 205.


Though FERC issued this rulemaking in early 2010, and many parties filed comments in support, FERC has not yet moved to enact a final rule and resulting regulations. FERC might be hesitant given the broad applicability that the blanket authorization contained in the rulemaking would have. Interestingly, FERC has issued authorizations to specific projects based on representations of non-control guided by the example affirmation found in the pending rulemaking.

For example, FERC recently authorized the acquisition of up to 20 percent of the equity interests in Entegra Power Group, LLC (“Entegra”) by Merrill Lynch GENCO II, LLC (“ML Genco”).10 Because ML Genco also owned interests in another generation asset located in the same control area, it committed to transaction-specific covenants ensuring its lack of control over Entegra’s generating assets. Among other things, ML Genco committed:

  • not to take any action that directly or indirectly exerts decision-making over the sale of electric energy by the Entegra Project Companies, including any discretion as to how or when power generated by such companies will be sold;
     
  • not to increase its aggregate holdings beyond 20 percent in Entegra, absent express prior authorization from FERC; and
     
  • not to seek or hold representation on Entegra’s board or the boards of the Entegra Project Companies;
     
  • to make quarterly reports to FERC regarding the level of ML Genco holdings in Entegra and its continued compliance with the conditions. 11


In addition to the rulemaking affirmation, ML Genco’s commitments also are similar to a set of conditions FERC accepted in a prior authorization of the acquisition of up to 40 percent of the equity interests in MACH Gen, LLC (“MACH Gen”) by Strategic Value Partners, LLC and funds under its management (“SVP”).12

These specific grants and inaction on the rulemaking indicate that although FERC might be comfortable with transaction-specific blanket authorizations, it might have some degree of unease with respect to industry-wide grants given FERC’s charge to ensure such transactions, including the ownership of generators, are consistent with the public interest. An investor’s acquisition of the voting securities of a public utility could trigger the FPA section 203 authorization requirement for both the generator and the investor and create new affiliations between, and regulatory requirements for, the generator and the investor and its affiliates. This is a significant consideration for structuring the investment. Clarity and certainty regarding the rules can only help to reduce investor’s risks and thus encouraged needed generation investment.

About the Author

Gregory K. Lawrence is a partner in the Energy and Commodities advisory group of the law firm Cadwalader, Wickersham & Taft LLP. Mr. Lawrence focuses his practice on regulatory proceedings, projects, negotiations, enforcement and agency litigation relating to the wholesale and retail electricity and natural gas industries. Mr. Lawrence would like to thank Terence Healey, special counsel, and Sarah Tucker, associate, for their contributions to this article.

 

 


1 16 U.S.C. § 824b (2006).

2 Id.

3 18 C.F.R. § 35.36(a)(9) (2009).

4 18 C.F.R. § 35.36(a)(9)(v) (2009).

5 Franklin Resources, Inc., 126 FERC ¶ 61,250 (March 19, 2001).

6 Id. at ¶ 18. Investors who take over 5% of the total outstanding shares in a company must file either a Schedule 13G or a Schedule 13D. Schedule 13G is for passive investors or those who do not intend to control the company. Schedule 13D is for investors that might want to exert control. Schedule 13D also is for an investor owning more than 20% of the company, or if it intends to be active in company management.

7 Id.at ¶ 31.

8 Id. at ¶ 39.

9 Notice of Proposed Rulemaking, Control and Affiliation for Purposes of Market-Based Rate Requirements under Section 205 of the Federal Power Act and the Requirements of Section 203 of the Federal Power Act, 130 FERC ¶ 61,046 (2010).

10 Entegra Power Group, LLC, 136 FERC ¶ 61,049 (2011).

11 Id. at ¶ 18.

12 MACH Gen, LLC, 127 FERC ¶ 61,127 (2009).