On December 19, 2023, the Federal Energy Regulatory Commission (FERC) issued a Notice of Inquiry (NOI) to request public comments on questions relating to FERC’s current policy on providing blanket authorizations for the acquisition of voting securities of public utilities by holding companies, including investment companies, under Federal Power Act (FPA) Section 203(a)(2).1 Changes in FERC policy on such blanket authorizations could make it more difficult for investment companies to engage in transactions involving public utilities—including generation resources engaged in FERC-jurisdictional transactions—going forward. Further, as highlighted in a concurring statement issued by one of the FERC commissioners, depending on the record established through the public comments, the proceeding could diminish investment companies’ ability to influence their public utility portfolio companies’ environment, social, and governance (ESG) policies.
FERC’s FPA Section 203(a)(2) Authority and Blanket Authorization Policy
FPA Section 203(a)(2) requires that a holding company (which is defined as any company that directly or indirectly owns or controls 10 percent or more of the outstanding voting securities of a public utility company, and so includes many large investment firms) receive FERC authorization before purchasing, acquiring, or taking any security worth more than $10,000,000 in a “transmission utility” or “electric utility.”2 FERC has promulgated regulations granting blanket authorization under FPA 203(a)(2) for transactions that meet certain criteria,3 and has granted blanket authorizations on a case-specific basis to “investment companies,”4 with the purpose of encouraging investment in transmission and generation infrastructure while ensuring that such investments are in the public interest.
For example, FERC has granted blanket authorization for holding companies 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 Act of 1956 as amended by the Gramm-Leach-Bliley Act of 1999, to acquire and hold an unlimited amount of the securities of holding companies that include a transmitting utility or an electric utility company, subject to several limitations regarding the nature of the holding company’s acquisition.5 Similarly, FERC has issued several case-specific blanket authorizations that allowed the acquisitions of securities in public utilities over the $10,000,000 threshold and up to 20 percent of the target’s outstanding voting securities, subject to certain conditions such as a limit on the concentration of securities within each individual fund and time-limits (e.g., periods of three years), such that the investment company would have to periodically request extensions on the blanket authorization.
In 2010, FERC considered standardizing requests for blanket authorization by creating a FERC form through which holding companies would affirm that an investor did not control a public utility when it refrained from engaging in certain actions, such as: seeking or accepting representation on the public utility’s board of directors or otherwise serving in any management capacity; requesting or receiving non-public information, either directly or indirectly, concerning the business or affairs of the public utility; and soliciting, or participating in any solicitation of, proxies involving the public utility.6 Entities signing the form would have been eligible for a blanket authorization for the acquisition of up to 20 percent of the outstanding voting securities of a public utility or holding company that controlled a public utility. However, based on the comments filed in response—some of which argued that the proposal was too restrictive and would throttle necessary investment, and some of which, on the other hand, argued that the proposal would open wholesale energy markets to anticompetitive behavior through partial acquisitions of the securities of multiple public utilities without adequate oversight—FERC ultimately decided not to adopt that proposed form.
The Notice of Inquiry and Commissioner Christie’s Concurrence
Through the December 19, 2023, NOI, FERC has decided to reconsider its FPA 203(a)(2) blanket authorization policies in light of changes within the industry, including “consolidation in the public utility industry as well as the growth of large index funds and asset managers.”7 FERC has requested comments on seventeen questions broken into three categories.
- Category 1: “Blanket Authorization Policy.” FERC has asked commenters to explain whether FERC’s blanket authorization policy is sufficient to ensure that investment companies lack the ability to control the public utilities whose securities they acquire, that the transactions underlying such blanket authorizations are consistent with the public interest, and, if the policies are insufficient to protect the public interest, how FERC should revise those policies.
- Category 2: “Large Investment Companies.” FERC has requested input on whether and how it should consider the size of an investment company, how it should evaluate the influence and control exerted by investment companies, regardless of size, over their public utility portfolio companies, and how such companies’ ownership of voting securities in multiple public utilities impacts the public interest.
- Category 3: “Evaluation of Control Under Section 203 of the FPA.” FERC has asked commenters to explain how investment companies exert control over public utilities, what are the indicia of control that FERC could look to, and what corporate governance factors FERC should consider when evaluating whether investment companies can exercise control over public utilities.
FERC Commissioner Mark Christie issued a concurring statement accompanying the NOI in which he raised concerns that large investors may have interests that conflict with the public service obligations of public utilities. More specifically, Commissioner Christie expressed concern that, rather than serving as passive investors “simply seeking the best risk-based returns for their own clients,” large investors may be “actively using their investment power to affect” how their public utility portfolio companies meet their public service obligations in order to push the public utilities to accept the investment companies’ ESG initiatives.8 Commissioner Christie indicated that such ESG initiatives can impact generation procurement and cause “reliability problems” as a result of premature retirement of dispatchable generation resources.9 He asserted that “[d]ecisions on the appropriate generation resources mix for a public utility with a state-granted franchise are policy decisions for state policymakers, not huge Wall Street asset managers.”10 Commissioner Christie identified investment companies’ ESG activity as a symptom of the “pernicious threat” posed by “improper investor influence and control over public utilities.”11
Key Takeaways
This NOI could have investor-specific and transaction-specific ramifications, as well as industry-wide implications for investment companies’ relationships to the public utilities and public utility holding companies in which they have invested or wish to invest. Eliminating or narrowing the existing blanket authorizations could require investment companies to seek FERC authorization for transactions involving public utilities or public utility holding companies, which could make it more difficult for investment companies to engage in such transactions going forward. As Commissioner Christie’s concurrence indicates, the proceeding could incite a public policy debate over whether investment companies can use their ownership rights to influence public utilities to enact their favored ESG policies.
The clock may prove to be a key determinant of the policy changes, if any, that FERC adopts through this proceeding. At present, one of the three participating FERC commissioners has been critical of the role that ESG investing is playing, or could play, in the public utility industry. However, given upcoming changes in the slate of FERC Commissioners, and the fact that 2024 is an election year, that could change. Accordingly, unless FERC takes quick action based on the comments submitted in this proceeding, the agency’s action based on the record developed here could be subject to changing political winds. As such, those interested in financial firms’ ability to own public utilities and the impact that such firms’ ESG policies could have on those holdings should monitor, and consider submitting comments in, this proceeding.
Request for Public Comments
The NOI invites interested parties to submit comments on the 17 questions raised therein. Initial comments are due March 26, 2024 (90 days after the NOI’s date of publication in the Federal Register). Reply comments are due April 25, 2024 (120 days after the NOI’s date of publication in the Federal Register, i.e., 30 days after initial comments are due).
The Wilson Sonsini energy and climate solutions team is pleased to assist you in drafting comments and considering the implications of this proceeding. For more information, please contact Wilson Sonsini attorneys Nic Gladd, Todd Glass, Peter Mostow, Scott Zimmermann, or Max Learner.
[1] FERC’s Notice of Inquiry (https://ferc.gov/media/e-1-ad24-6-000).
[2] 16 U.S.C. 796(22) and 16 U.S.C. 796(23) (https://www.law.cornell.edu/uscode/text/16/796).
[3] 18 C.F.R. 33.1(c) (https://www.ecfr.gov/current/title-18/chapter-I/subchapter-B/part-33)
[4] “Investment Companies” is defined in FERC’s Notice of Inquiry as those companies meeting the definition of “investment companies” in the Investment Company Act of 1940, which includes any issuer that “holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting, or trading in securities.” 15 U.S.C. § 80a-3.
[5] 18 C.F.R. 33.1(c)(9) (https://www.ecfr.gov/current/title-18/chapter-I/subchapter-B/part-33).
[6] FERC’s Notice of Inquiry ¶ 7 (https://ferc.gov/media/e-1-ad24-6-000).
[7] FERC’s Notice of Inquiry ¶ 8 (https://ferc.gov/media/e-1-ad24-6-000).
[8] Commissioner Christie Concurring Statement ¶ 1 (https://ferc.gov/media/e-1-ad24-6-000).
[9] Commissioner Christie Concurring Statement ¶ 3 (https://ferc.gov/media/e-1-ad24-6-000).
[11] Commissioner Christie Concurring Statement ¶ 4 (https://ferc.gov/media/e-1-ad24-6-000).
