FERC Proposes Blanket Authorization for Acquisitions of Less Than 20 Percent of the Voting Securities of a Public Utility (Docket No. RM09-16-000)

1.        Summary

On January 21, 2010, FERC issued a Notice of Proposed Rulemaking (“NOPR”) that would grant blanket authorization for an investor to acquire 10 percent or more, but less than 20 percent, of a public utility under Section 203 of the Federal Power Act (“FPA”). The NOPR also would amend the definition of “affiliate” in Part 35, Subparts H and I of the regulations. FERC asserts that these revisions will provide greater certainty for investment in public utilities.

2.        Major Issues for Comment

The proposed rule should help to promote acquisitions and dispositions of public utilities, and limit restrictions that otherwise might apply. These revisions should facilitate corporate restructurings by streamlining the process where control is less than 20 percent. Public utilities should evaluate the proposed rule to determine if they believe the limitations and restrictions placed on the proposed blanket authorizations are appropriate, and whether they effectively balance the need for certainty in investment against the need for protection from unregulated market power and affiliate abuse.

BGM is available to discuss potential comments with interested parties.

3.        FERC's Proposed Revisions

The NOPR proposes a new blanket authorization under Section 203(a)(2) of the FPA to allow a holding company to acquire 10 percent or more, but less than 20 percent, of a public utility’s or holding company’s outstanding voting securities. FERC also proposes a parallel blanket authorization under FPA Section 203(a)(1) to allow a public utility to dispose of 10 percent or more, but less than 20 percent, of its voting securities to an investor that qualifies for the blanket authorization discussed above. In the case of an acquisition, the acquiring investor must file an Affirmation as explained below. In the case of a disposal, the disposing public utility would not be required to make a filing seeking approval for the disposition.

In order to qualify for the blanket authorization, an investor would be required to file an Affirmation with the FERC on a new Form 519-C within 10 days following the acquisition. The Affirmation is partially patterned on the Securities and Exchange Commission’s (“SEC”) Schedule 13G statement of beneficial ownership filed by passive investors. The Affirmation would set forth the investor’s certification of non-control intent, and provide the information that otherwise would be required under Part 33 of FERC’s regulations in an application under Section 203 of the FPA. The Affirmation would create a rebuttable presumption for purposes of Section 203 that the investor does not control the public utility.

By filing the Affirmation, an investor would commit to certain restrictions on its actions and to ongoing reporting obligations. Specifically, an investor would commit:

• Not to seek or accept representation on the public utility’s board of directors or otherwise serve in any management capacity;

• Not to request or receive non-public information concerning the business of the public utility;

• Not to solicit, or participate in the solicitation of, proxies involving the public utility; and

• Not to seek to influence the management or conduct of the day-to-day operations of the public utility in areas such as purchasing or selling electricity or inputs to generation, scheduling power production, and hiring or fixing compensation of the public utility’s compensation of its officers, directors and employees.

FERC also proposes to amend the definition of “affiliate” in Section 35.36(a)(9) of its market-based rate program regulations and Section 35.43 of its cross-subsidization rules. Currently, 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. FERC proposes to modify this definition of “affiliate” to be “any person that controls, is controlled by, or is under common control with, such specified company.” Under the revised regulations, when 10 percent or more but less than 20 percent of the outstanding voting securities of a public utility are owned, the public utility would be exempt from certain restrictions applicable to affiliates if the acquiring person has filed an Affirmation and continues to comply with all other conditions and reporting obligations in the Affirmation. While the affected companies are still technically considered affiliates, the affected companies would qualify for a waiver of the regulatory requirements pertaining to affiliated companies. Such an acquisition would not trigger the market-based rate filing requirements, including the filing of a notice in change in status.

Where an investor is not a holding company and therefore not subject to Section 203(a)(2), the investor will not have filed an Affirmation and the public utility will be affiliated with the investor and its other holdings. To address this situation, FERC proposes to allow investors that are not subject to the blanket authorizations to also file the Affirmation. An investor may have an incentive to file the Affirmation to protect the market-based rate authorization of the public utility in which it has invested. Such a filing would relieve the public utility of the regulatory requirements pertaining to affiliated companies.

4.        Additional Comments Requested by FERC

In addition to comment on the above revisions, FERC seeks comment on the following:

• The procedures that should be in place to protect consumers and the marketplace if an investor who filed an Affirmation can no longer comply, or wishes not to comply, with the commitments made in the Affirmation. FERC proposes that the investor may file an application under Section 203 to request authorization to retain the securities previously acquired, but may not acquire any additional voting securities and must continue to comply with all the commitments made in the Affirmation during the pendency of such a proceeding.

• Whether the proposed blanket authorizations should be limited to acquisitions of voting securities of publicly-traded utilities, or whether they should apply to acquisitions of voting securities of privately-traded companies as well.

• Whether the proposed blanket authorizations should be limited to secondary market transactions or should apply regardless of the form of the transaction.

Comments are due on March 29, 2010.

To view the FERC NOPR, please click here.

To view the FERC press release, please click here.