FERC Clarifies Upstream Affiliate Ownership Disclosure Requirements in Market-Based Rate Applications

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On February 23, 2024, the Federal Energy Regulatory Commission (FERC) issued an order approving an application for market-based rate (MBR) authority to VESI 12 LLC.1 However, the language in this MBR approval was not boilerplate — FERC set out new guidance relating to the narrative descriptions of upstream ownership structures of MBR sellers. Specifically, FERC stipulated that MBR applications must furnish information regarding the publicly traded upstream owners that may hold voting interests in the applicant company.

In the order, FERC underscored that an affiliate or ultimate upstream affiliate includes those entities that are publicly traded and any entity that owns, controls, or holds with power to vote 10% or more of the outstanding voting securities of such publicly traded entities.2 As a result, the immediate and practical implication is that, in any MBR application or seller submittal that requires a narrative description of the MBR applicant's or seller's upstream affiliates, applicants and sellers may not simply state that they, or their upstream affiliate(s), are publicly traded.3 If an applicant, seller, or its upstream affiliate(s) is publicly traded and has owners that hold 10% of the outstanding voting securities, then a narrative description of such ownership structure must be provided, continuing up the ownership chain until "to the best of its knowledge, there is no owner that holds 10% or more of the outstanding voting securities, or other upstream affiliate(s)."4

Based on the fairly limited scope, it is likely that FERC views this guidance about the narrative description requirement as a "clarification" on existing disclosure mandates rather than as a "new" pronouncement. The order references previous MBR-related orders issued by FERC, including Order Nos. 697, 816, and 860 et seq., as the foundation for the guidance. Importantly, the order also does not contemplate only prospective MBR authority applications — as such, the order reads that any submissions from this point forward should comply with the guidance, not just "new" MBR applications or proceedings.

To assist applicants in complying with this directive, the order provides the "magic language" that FERC is looking for with respect to tracing ultimate upstream ownership of publicly traded entities. For instance, if the relevant publicly traded entity does not have any owners that hold 10% of the outstanding voting securities, then the applicant or seller should include a representation that includes the following: "[T]o the best of its knowledge, there is no owner that holds 10% or more of the outstanding voting securities, or other upstream affiliate(s)."5 Whenever an applicant or seller identifies one or more upstream affiliate(s) of a publicly traded entity, it should specify whether, to the best of applicant's or seller's knowledge, it has identified the only such upstream affiliate(s).6 However, FERC specified that applicants and sellers are only expected to report information that is within their knowledge and control.7

In the case of this particular MBR application, as supplemented, the applicant had identified two entities that owned 10% or more of the publicly traded shares of its upstream affiliate, Ormat Technologies, Inc.: (i) Orix Corporation and (ii) BlackRock, Inc.8 The applicant further represented that, to the best of its knowledge, no entities own 10% or more of BlackRock, Inc.'s shares or ORIX Corporation's shares, which FERC subsequently found to satisfy its requirements for describing the upstream affiliate ownership structure.

The implementation of this guidance may yet be subject to its own clarification, as some substantive issues pertaining to this broader focus on upstream ownership by FERC have yet to be resolved. In a filing made on February 5, 2024 — responsive to a supplemental information request by FERC — MS Solar 5, LLC (MS Solar) contended that FERC staff had not provided a sufficient definition for "involvement" by an individual in the energy industry "other than affiliation."9 Under footnote 258 of Order No. 697-A, FERC had previously stated: "Finally, an entity seeking market-based rate authority must describe the business activities of its owners, stating whether they are in any way involved in the energy industry." MS Solar asserted that this provision was related to potential matters of affiliate abuse and does not constitute official FERC guidance on the new practice of gathering information on individuals (i.e., natural persons) with upstream ownership interests. A forthcoming response by FERC to MS Solar may confer some insight on how MBR applicants will need to proceed in detailing and disclosing "involvement" in the energy industry by individuals who hold ownership.

Due to these increased disclosure requirements, FERC staff has exponentially increased the number of deficiency letters and requests for additional information to MBR applicants surrounding upstream ownership issues. Parties should be mindful of potential delays in receiving authorizations if such requests are issued and deal documents should build in flexibility for such delays.

Given the number of current MBR sellers and future applicants who have upstream owners with publicly traded shares, this guidance may have far-reaching effects on the way such sellers draft all of their MBR-related filings, including triennials and changes in status as well. The clarification follows the recent Notice of Inquiry (NOI)10 issued by FERC in December of 2023, which also focused on the "increased interest in U.S. utility assets by foreign companies/investors and private equity investors [that has] led to the greater consolidation of utility holding companies." (For additional insight, please see our client alert regarding the NOI.) Accounting for all of these recent actions as a cohesive and purposeful strategy, FERC is clearly signaling its increased scrutiny of such upstream ownership structures and the associated affiliation and control implications.

1 VESI 12 LLC, 186 FERC ¶ 61,137 (2024).
2 Id. at 12, at P 15, n. 27 (citing Order No. 860-A, 170 FERC ¶ 61,129 at P 10 (finding that there is no exemption from the definition of affiliate or ultimate upstream affiliate for entities that hold publicly traded securities)).
3 Id. at P 16.
4 Id.
5 Id.
6 Id. at P 16, n. 31.
7 Id. at P 16.
8 Id. at P 17.
Supplement to Petition for Acceptance of Initial Market-Based Rate Tariff and Request for Shortened Comment Period and Expedited Action, MS Solar 5, LLC, FERC Docket No. ER24-619-000 (February 5, 2024).
Federal Power Act Section 203 Blanket Authorizations for Investment Companies, 185 FERC ¶ 61,192 at P 8 (2023).

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