FERC Clarifies Policy and Proposes New Blanket Authorizations Under Section 203 of the FPA
August 9, 2007
Earle H. O'Donnell
On July 20, 2007, the Federal Energy Regulatory Commission ("FERC" or "Commission") issued two Notices of Proposed Rulemaking ("NOPR") and a supplemental policy statement concerning refinements and clarifications to its regulations under Section 203, 205 and 206 of the Federal Power Act ("FPA"). This "package of orders" is intended to "reflect[] both a commitment to discharge [FERC's] statutory duty and a desire to facilitate transactions in a capital intensive industry."1 While FERC did not introduce any radical new developments in its policy or regulations, it did propose a number of measures meant to reduce the regulatory burden under Section 203 of the FPA on some common types of transactions (described below).
Blanket Authorizations
The Commission proposes to amend Part 33 of its regulations to provide for an additional blanket authorization under FPA Section 203(a)(1), permitting a public utility to "dispose of less than 10 percent of its voting securities to a public utility holding company but only if, after the disposition, the holding company and any associate company in aggregate will own less than 10 percent of that public utility."2 Though not precisely parallel in scope3, the new pre-authorization is intended to be a close companion to the existing blanket authorization for holding companies to acquire any voting securities in a public utility if, after the acquisition, the holding company owns less than ten percent of the public utility's outstanding voting securities.4
FERC does not propose any additional reporting requirements on the part of individual public utilities that utilize this blanket authorization, as acquiring holding companies utilizing the existing blanket authorization are already required to file copies of Securities and Exchange Commission ("SEC") Schedules 13D, 13G and 13F with FERC at the same time as they are filed with the SEC.5
FERC specifically seeks comment on whether the proposed blanket authorization should be extended to the transfer of securities by a public utility to a holding company already granted a blanket authorization under section 203(a)(2) of the FPA in Sections 33.1(c)(8)6, 33.1(c)(9)7, and 33.1(c)(10)8 of FERC's regulations. It also requests comment concerning whether the Commission should grant a generic blanket authorization under section 203(a)(1) for the acquisition or disposition of a jurisdictional contract where neither the acquirer nor transferor has captive customers and the contract does not convey control over the operation of a generation or transmission facility.9 With these two proposed blanket authorizations, the Commission is addressing obstacles to timely consummation of two common transaction types for which the cost and delay of regulatory approval has been a concern to industry participants.
Noting the simultaneously issued Blanket Authorization NOPR, FERC stated in its Policy Statement that it will consider adopting further blanket authorizations on a case-by-case basis, and does "not rule out the possibility that groups of similarly situated holding companies, such as financial institutions, can make joint filings seeking common blanket authorizations under section 203(a)(1) or section 203(a)(2)" where they "clearly demonstrate on the record that there would be no adverse impact on captive customers or the public interest if the authorizations were granted."10 This invites particular subsections of investors in the industry with similar interests to work together to develop more narrowly tailored pre-authorizations than FERC appears comfortable providing on a generic level.
Further, FERC clarified that secondary market transactions involving the purchase or sale of public utility securities by third-party investors do not require approval under section 203(a)(1).11 It also noted that transactions that do not transfer control of a public utility (such as acquisitions involving securities held for lending, hedging, underwriting and/or fiduciary purposes) do not fall within the "or otherwise dispose" language of section 203(a)(1)(A). In keeping with the blanket authorizations proposed in the Blanket Authorization NOPR, FERC also notes that its "general policy in future cases will be to presume that a transfer of less than 10 percent of a public utility's holdings is not a transfer of control if:
- after the transaction, the acquirer and its affiliates and associate companies, directly or indirectly, in aggregate will own less than 10 percent of such public utility; and
- the facts and circumstances do not indicate that such companies would be able to directly or indirectly exercise a controlling influence over the management or policies of the public utility."12
Policy Clarifications
The Policy Statement also contains a laundry list of clarifications concerning FERC's policy toward its regulations under Section 203 of the FPA, supplementing FERC's 1996 Merger Policy Statement. For example, the Commission provided some "guidance" on what constitutes "control" but did not move away from its position that the determination "must be based on all circumstances" at issue in each case.13 Generally, FERC recounted its precedent on the issue of "control" under Section 203, the central value of which was to clarify that pre-EPAct 2005 seminal orders such as Enova Corporation,14 R.W. Beck,15 Bechtel,16 and D.E. Shaw17 are still alive and viable precedent after the changes wrought by EPAct 2005 to FERC's authority under Section 203 of the FPA.
FERC adopted no modifications to the Appendix A analysis of a transaction's effect on competition in the Policy Statement, but did clarify the Commission's approach to analyzing competition issues under that analysis. The Commission explained that its focus is on the merger's effect on the "merged firm's ability and incentive to withhold output in order to drive up market price. The ability to withhold output depends on the amount of marginal capacity controlled by the merged firm, and the incentive to do so depends on the amount of infra-marginal capacity that could benefit from higher prices."18 While not a departure from past precedent, this clarification of approach should subtly shape applicants' arguments with respect to a transaction's effect on both horizontal and vertical competition, and interpretation of the results of a competitive analysis performed under Appendix A.
Comments Due This Month
Comments on the Blanket Authorization NOPR are due on August 30, 2007. The Policy Statement became effective on July 20, 2007. For more information, please contact Earle O'Donnell at , Stuart Caplan at , David Hunt at , Donna Attanasio at , or Jane Rueger at .
For information about proposed refinements to FERC's policies and regulations under Section 203, 205 and 206 of the FPA concerning cross-subsidization, click here.
1 Statement of Chairman Joseph T. Kelliher, Federal Energy Regulatory Commission Open Meeting at 1 (July 19, 2007) ("Kelliher Statement" ).
2 Blanket Authorization Under FPA Section 203, 120 FERC 61,062 at P 9 (2007) ("Blanket Authorization NOPR").
3 The Commission does recognize that the proposed blanket authorization does not "entirely 'parallel'" the section 203(a)(2) authorization since that authorization does not contain the "in aggregate" limitation. Id. at P 9.
4 18 C.F.R. § 33.1(c)(2)(ii) (2006).
5 Blanket Authorization NOPR at P 11; 18 C.F.R. § 33.1(c)(4).
6 Pre-authorizing persons that are holding companies solely with respect to one or more exempt wholesale generators ("EWG" ), qualifying facilities ("QF" ) or foreign utility companies ("FUCO" ) to acquire the securities of additional EWGs, QFs or FUCOs.
7 Pre-authorizing a holding company or subsidiary of that holding company that is regulated by the Board of Governors of the Federal Reserve Bank or by the Office of the Comptroller of the Currency, under the Bank Holding Company Act of 1956 to acquire and hold an unlimited amount of the securities of holding companies that include a transmitting utility or an electric utility company if such acquisitions and holdings are in the normal course of its business and the securities are held as a fiduciary, as principal for derivatives hedging purposes, as collateral for a loan, or solely for purposes of liquidation and in connection with a loan previously contracted for and owned beneficially for a period of not more than two years, subject to certain conditions.
8 Pre-authorizing any holding company or subsidiary of a holding company to acquire any security of a public utility or holding company that includes a public utility for purposes of conducting underwriting activities or engaging in hedging transactions, subject to certain conditions.
9 Blanket Authorization NOPR at P 13.
10 FPA Section 203 Supplemental Policy Statement, 120 FERC 61,060 at P 35 (2007) ("Policy Statement" ).
11 Id. at P 36.
12 Id. at P 57.
13 Id. at P 43.
14 Enova Corporation, 79 FERC 61,107 (1997).
15 R.W. Beck Plant Mgmt., 109 FERC P 61,315 (2004).
16 Bechtel Power Corp., 60 FERC P 61,156 (1992).
17 D.E. Shaw Plasma Power, L.L.C., 102 FERC P 61,265 (2003).
18 Policy Statement at P 60.
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