On Dec. 19, 2023, the Federal Energy Regulatory Commission (FERC) issued a Notice of Inquiry (NOI) seeking comments on whether it should revise its policy on providing blanket authorizations under Section 203(a)(2) of the Federal Power Act (FPA) for holding companies and investment companies that seek to invest in public utilities. Blanket authorizations allow certain investment companies to buy and sell public utility securities without first obtaining FERC approvals. In the NOI proceeding, FERC is re-examining what factors it should consider when evaluating what it means to lack control over public utilities for companies who seek to invest in public utilities. While the NOI is directly aimed at “investment companies,” as defined in the Investment Company Act of 1940, FERC’s policy re-examination could have broader ramifications for other types of control analyses for FPA purposes.
In addition to the blanket authorizations provided in FERC’s regulations, FERC has granted company-specific blanket authorizations under FPA Section 203(a)(2) for holding companies, including investment companies’ managed funds, to acquire the voting securities of public utilities and holding companies of public utilities. It has been more than a decade since FERC has considered whether its regulations are adequate to protect the public interest. According to FERC, there have been changes in public utility, finance and banking industries since 2010 that may warrant new consideration of existing policies. Such new considerations include increased interest in public utility assets by foreign company investors and private equity investors, greater consolidation of utility holding companies, and growth of large index funds and asset managers. The influence of large investment companies over public utilities has raised concerns over whether there is adequate scrutiny in the grant of blanket authorizations.
Setting out seventeen specific questions, FERC seeks comments on whether its current blanket authorizations or case-specific authorizations are sufficient to ensure that holding companies and investment companies lack the ability to control the public utilities in which they invest and, if not, what changes FERC should to make to its current policy. FERC also referenced concerns over the growing influence of index fund investment companies and their ability to exert “unique leverage over the utilities whose voting securities they control.” FERC described comments in prior proceedings that argue these companies can use their investments to pressure utilities to meet particular public policy goals. In this regard, FERC seeks comments on how it can effectively evaluate the influence these companies may have over public utilities.
Finally, FERC noted that its current analysis regarding whether an investment company has control over the day-to-day utility management and operations may not capture the extent of an investment company’s influence over utility behavior. Thus, FERC seeks comments on what factors it should consider when evaluating the ways in which investment companies can exert control over public utilities. In a concurring statement to the NOI, Commissioner Christie stated his view that investment managers should not be assumed to be passive investors because they can use their financial power to push policy agendas that may be at odds with a public utility’s service obligation or that may be better left to elected legislators, such as the case with “ESG” (environmental, social and governance-related) initiatives.
The NOI is another step in FERC’s recent heightened scrutiny over public utility control. FERC recently issued a new policy pronouncement that the holding of a board position provides control. In TransAlta Energy Marketing (U.S.) Inc., 181 FERC ¶ 61,055 at P 29 (2022) and Evergy Kansas Central, Inc., 181 FERC ¶ 61,044 (2022), order on reh’g, 184 FERC ¶ 61,003 at P 25 (2023), FERC found that for purposes of FPA Sections 203 and 205, respectively, the appointment of an investor’s non-independent director, such as its own officers or directors, to the board of a public utility or a holding company that owns public utilities is a per se finding of control and will potentially require prior FERC approval of an implicated transaction or rate filing. Prior to those orders, investors received a presumption of lack of control as long as they owned less than 10 percent of the outstanding voting securities.
Initial comments on the NOI are due on March 25, 2024, and reply comments are due on April 24, 2024, in FERC Docket No. AD24-6. Once FERC has an opportunity to review the comments submitted it could issue a new policy statement or propose changes to its regulations. Any changes to FERC’s public utility control analysis could have broader implications for FPA Section 203 filings for acquisitions and dispositions of public utility assets and securities and for Section 205 market-based rate filings and affiliate determinations.