FERC Opens Inquiry into Investments by Financial Firms

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On December 19, 2023, the Federal Energy Regulatory Commission (FERC) issued a Notice of Inquiry (NOI) relating to Blanket Authorizations for Investment Companies under Section 203 of the Federal Power Act (FPA). Currently, FERC grants blanket authorizations for a three-year period pursuant to Section 203(a)(2) of the FPA.

The NOI alludes to the "increased interest in U.S. utility assets by foreign companies/investors and private equity investors" that has led to a market trend of consolidation of holding companies, "as shown by utility merger activity of approximately $200 billion from 2012 to 2018."1 As a broader macroeconomic signal, investment in index funds has risen precipitously in recent years: by the end of 2019, $11.4 trillion had been invested, a significant increase from $2.3 trillion in 2010.2

In the NOI, FERC purports to evaluate if the existing blanket authorization policy should be revised in light of, but not limited to, the items below:

  • Whether the existing conditions and restrictions (e.g., submission of SEC Schedules 13D and 13G) in blanket authorization proceedings are effective measures to provide information to the Commission in making public interest determinations
  • If the scope or availability of blanket authorizations to investment companies has an adverse effect on competition or FERC-jurisdictional rates
  • What commitments or specific conditions might be required by investors that could give assurance to FERC that the blanket authorization would be in the public interest
  • If a holding company, or subsidiary, should be compelled to report on what basis it qualifies as an entity eligible for a blanket authorization if it holds securities solely for liquidation and in connection with a loan previously contracted for a period of less than two years
  • Whether the size of an investment company should be evaluated in granting a blanket authorization as well as whether to distinguish between the types of investment vehicles
  • How to evaluate the influence and control exerted by holding companies, irrespective of size
  • What mechanisms an investment company may use to influence utility behavior or otherwise control utility decision-making that are not currently captured by FERC policies and regulations
  • If holding the voting securities, even with commitments to not exercise control, over multiple public utilities concurrently produces control or influence not currently resolved by FERC review
  • Which emerging corporate governance factors, including any influence on the composition of board membership, might fall under FERC purview in appraising a blanket authorization request

While discussing the NOI at the monthly open meeting, the FERC Commissioners offered some initial remarks regarding the purpose and scope of the new proceeding. Chairman Phillips opened by saying that stakeholders would like FERC to look at "rules of the road." However, he clarified that an NOI is not about making "immediate changes" but rather evaluating and assessing the overall framework of the investment sector in the operation of energy markets. Commissioner Danly stated that the historical practice of FERC allowing blanket authorizations to investors may have not "adhered to" the long-standing requirement that public utilities operate in benefit of ratepayers "especially with regard to soft control."

Commissioner Christie emphasized that public utilities under FERC jurisdiction have a "public service obligation," unlike many other private sector companies. Commissioner Christie also listed three specific concerns to be addressed in the NOI proceeding: 1) If an asset manager or private equity investor may have "short-term profit goals" which would be fundamentally inconsistent with the long-term (public service) obligations of the utility; 2) interlocking ownership interests across affiliates that may run afoul of competitive principles; and 3) if asset managers or private equity investors might be "pushing" Environmental, Social, and Governance (commonly known as ESG) priorities that may contradict the operational requirements of a public utility.

In October of last year, FERC also found that investors—with representatives placed on the boards of utilities subject to its jurisdiction—would be considered as affiliates. Accordingly, financial firms have been operating under higher scrutiny following the issuance of that order, since all of the electricity assets under investor ownership are now included in the FERC regional market power analyses of utilities and affiliates, pursuant to its authority under the FPA.

The NOI, as filed in Docket No. AD24-6, can be viewed on the FERC website here. The comment deadline will be 90 days following publication in the Federal Register, with reply comments due 30 days thereafter.

1 State Regulatory Reviews Are Creating Headwinds For Utility Merger Activity, S&P GLOBAL (April 5, 2019).
2 Index funds break through $10tn-in-assets mark amid active exodus, FINANCIAL TIMES (January 7, 2020).

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