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FERC inquiry to explore investor influence on public utilities
2024 PRINDBRF 0113
• Practitioner Insights Commentaries
• March 1, 2024
(March 1, 2024) - Akin attorneys Stephen Hug, Emily Mallen, Scott Johnson and Ben Reiter look at the Federal Energy Regulatory Commission's approaching deadline for comments on regulations governing large investment companies' control over utilities, including ESG and decarbonization policies.
March 26, 2024 is the deadline for comments on a Notice of Inquiry issued by the Federal Energy Regulatory Commission ("FERC" or "Commission") at the end of 2023 on whether the Commission should modify its policies respecting the availability of blanket authorizations under Section 203(a)(2) of the Federal Power Act ("FPA"), including its evaluation of whether an investor has the ability to control a utility.1
The NOI dovetails with concerns certain Commissioners have expressed that large investors in public utilities that have been granted blanket authorization to acquire utility securities as passive interest owners are exercising control to influence utility decisions, including utilities' environmental, social, and corporate governance ("ESG") commitments and decarbonization initiatives.
While the NOI does not propose any specific changes to the Commission's existing blanket authorizations or control analysis, the NOI is notable in that it suggests that the Commission is considering revisiting its policies respecting passive investments by large institutional investors and expanding its evaluation of whether the acquisition of utility securities is in the public interest.
It is not clear whether FERC will pursue any concrete changes in these areas. But a decision by FERC to revisit its approach to passive investments or to modify its Section 203 framework would represent a significant change in Commission policy that could have implications for both investors and utilities.
I. Section 203 and FERC's blanket authorization policies
Section 203(a)(2) of the FPA requires holding companies to obtain prior approval from FERC before purchasing, acquiring or taking any security with a value in excess of $10 million, with a holding company defined to include a company that directly or indirectly holds an interest in companies that own or operate facilities used for the generation, transmission or distribution of electric energy for sale.2
The Commission is obligated to approve a proposed transaction if it finds that the proposed transaction will be consistent with the public interest, and will not result in cross-subsidization of a non-utility associate company, or the pledge or encumbrance of utility assets for the benefit of an associate company, unless the Commission determines that the cross-subsidization, pledge or encumbrance will be consistent with the public interest.3
In evaluating whether a transaction is consistent with the public interest, the Commission historically has evaluated whether the transaction:
•will have an adverse effect on competition (i.e., will increase prices or reduce output as a result of a reduction in competition),
•will adversely affect transmission rates or cost-based rates for captive wholesale customers,
•will impair the ability of the Commission or a state regulatory authority to regulate the utilities at issue, or
•will result in cross-subsidization or the pledge or encumbrance of utility assets for the benefit of an associate company.
Although Section 203(a)(2) could be read as requiring prior approval for a range of transactions involving the acquisition of interests in utilities, the Commission has granted blanket authorizations that allow holding companies to acquire utility securities without seeking prior approval from FERC.
For instance, Part 33 of the Commission's regulations includes blanket authorizations for a range of transactions that otherwise would require prior approval from FERC, including internal reorganizations and the acquisition of utility securities by certain banks as a fiduciary, for derivative hedging purposes, or as collateral.4
The Commission also has granted case-specific blanket authorizations that allow investors to acquire a certain level of utility securities without seeking prior approval subject to the investor agreeing to certain commitments and reporting requirements designed to limit the investor's day-to-day control of the utility.5
II. The NOI
In recent years, certain FERC commissioners have expressed concerns about the influence of investors operating under these blanket authorizations, particularly large institutional investors, over utility operations.
For example, in a May 2023 concurrence to an order extending a case-specific authorization, Commissioner Mark Christie and former Commissioner James Danly expressed concern that institutional investors may be able to "exercise 'profound control' over the Utilities whose securities it holds," including the "potential to influence decisions of the Utility management that could have serious effects on the reliability of power service and rates for customers."6
In a separate case, Commissioner Allison Clements noted that she shared the concern of some commenters that the Commission was not adequately considering the potential competitive implications of the aggregation of interests in utilities by large investors.7
The NOI appears to build on the concerns expressed by these commissioners by seeking comment on three areas: (1) FERC's blanket authorization policy; (2) large investment companies; and (3) evaluation of control under Section 203 of the FPA.
A. FERC's blanket authorization policy
The NOI requests comments on FERC's existing blanket authorization policy, including both those authorizations that have been granted by regulation and those that have been granted on a case-specific basis.
Among other things, the Commission requests comment on the following issues:
•Are FERC's existing blanket authorizations designed in a manner that ensures that holding companies do not have the ability to directly or indirectly control public utilities and that authorized transactions are consistent with the public interest? If not, how should these blanket authorizations be modified?
•Does the current scope or availability of blanket authorizations for the acquisition of voting securities create concerns regarding an adverse effect on competition or jurisdictional rates?
•Are there specific conditions or commitments that the Commission could require in order to provide assurance that blanket authorizations are consistent with the public interest?
•Should the Commission require investors that qualify for the blanket authorization for companies holding securities for purposes of liquidation or as collateral identify the basis on which it qualifies for the authorization?
•Are the informational filings submitted by investors granted case-specific authorizations sufficient for the Commission to maintain an appropriate level of oversight over the terms of blanket authorizations?
B. Large investors
The NOI notes that certain commenters have expressed concern that the accumulation of shares by large investment companies may provide investors with unique leverage over the utilities whose voting securities they hold. The NOI further notes that some have argued that such large investors can pressure utilities to "meet particular public policy goals, despite committing to not exercise control over the utilities."8
The Commission therefore requests comments on the following issues:
•Should the Commission consider the size of an investment company in evaluating a request for blanket authorization?
•How can the Commission effectively evaluate the influence and control exerted by investors over public utilities regardless of their size?
•Should the Commission consider holding companies' pre-existing ownership and control of public utilities and holding companies thereof in determining whether to grant blanket authorizations?
•How should the Commission distinguish between different investment vehicles?
•What is the impact of investors holding voting securities in multiple public utilities and Commission-regulated entities?
C. Evaluation of control under section 203 of the FPA
The Commission notes that some have argued that holding voting securities in a large number of utilities may allow investors to influence utility behavior in ways that are not captured by FERC's current analysis of control.9
The Commission therefore requests comments on
•Whether investors can exert control over public utilities in a way that is not currently captured by FERC's existing policies;
•What strategies or actions by an investor should be considered indicia of control; and
•Whether the Commission should consider the impact of investment companies holding public utility securities on long-term planning by utilities or other issues beyond day-to-day control over utility operations;
•What corporate governance factors should the Commission consider when evaluating whether investment companies can exercise control over utilities?
III. Analysis and implications
Although relatively light on concrete proposals and substantive discussion, the NOI is significant. It highlights a willingness by the Commission to modify and expand its Section 203 evaluation framework to consider a range of new issues, including the influence of large institutional investors with respect to decarbonization initiatives. In multiple places, the NOI emphasizes the impact that investors are having on the ESG priorities of utilities.
Commissioner Christie's concurrence was particularly critical of ESG influences:
These investment managers may occasionally use that financial power to push various types of policy agendas, agendas that may ultimately conflict with the utility's public service obligations to its customers ... One focus recently, and rightfully so, has been on "ESG" (environmental, social, and governance-related) corporate initiatives, with huge asset managers pushing policy decisions that should be left to elected legislators. For example, I have pointed out the reliability problems that will result from premature dispatchable generation retirements that may come from these initiatives. Decisions on the appropriate generation mix for a public utility with a state-granted franchise are policy decisions for state policymakers, not huge Wall Street asset managers.
The Commission has a long history of scrutinizing the ties between investors and public utilities. But the Commission's focus on the degree to which investors might be shaping the public policy preference of individual utilities is new. The Commission's analysis of control historically has focused on day-to-day control over utility operations and the potential competitive and cross-subsidization concerns presented by common ownership of multiple utilities.
The commissioners' statements regarding the promotion of ESG policies seem relatively far afield from the concerns that have animated the Commission's analysis of control and seem in tension with the Commission's professed commitment to fuel neutrality.
The commissioners' statements regarding the influence of large institutional investors also raise a question as to whether a decision by utilities to accommodate the interests of potential investors is sufficient to support a finding of control. While the statements of Christie and certain other commissioners appear premised on the assumption that utilities are being forced to adopt ESG policies promoting the development of renewable and zero-carbon resources unwillingly, the reality is that companies increasingly are competing for capital based in part on their ESG commitments and records.10
As investors become increasingly focused on ESG concerns, a decision by FERC to modify its Section 203 analysis to scrutinize and block or condition transactions based on concerns that utilities may shape their investment decisions to align with their investors could adversely affect the ability of utilities to attract capital.
There are a number of other aspects of Commissioner Christie's articulation of the dangers posed by activist investors that are noteworthy as well. While Commissioner Christie notes that the agendas pushed by investors "may ultimately conflict with the utility's public service obligations to its customers," many of the utilities that FERC regulates do not operate under a cost-of-service model where they have an obligation to serve.
For instance, independent power producers, power marketers and other suppliers selling their energy or services on a competitive basis do not have captive customers or an obligation to serve; instead, these entities sell their energy and associated products into the market or bilaterally at market-based rates.
Even assuming the premise that ESG policies could conflict with the public service obligation of utilities in some cases, it is not clear that those considerations have any application to transactions involving competitive suppliers of energy.
Commissioner Christie expresses concern that decisions regarding the "appropriate generation mix for a public utility with a state-granted franchise are policy decisions for state policymakers, not huge Wall Street asset managers."
Putting aside the merits of Commissioner Christie's views, the suggestion that the Commission's Section 203 analysis should consider the potential impact of a transaction on a utility's resource planning decisions represents an abrupt shift in the Commission's Section 203 analysis. None of the factors that FERC historically has considered when evaluating whether a transaction is consistent with the public interest neatly encompasses the impact of a transaction on the resource mix.
Of course, the public interest standard set out in Section 203 of the FPA does not mandate that the Commission narrowly focus its analysis on the effect of competition, rates and regulations. But it is unclear whether the Commission would have authority to reject a Section 203 application based on concerns about the potential impact of an investor's ownership of a utility's resource planning decisions and decarbonization initiatives.
While the FPA grants FERC exclusive authority over wholesale rates for transmission and electric energy in interstate commerce, the FPA has been interpreted as reserving the states the ability to regulate resource planning by utilities within their jurisdiction.11 Even if one accepts that investors are influencing resource planning decisions, it is unclear why FERC — rather than individual states — should be exercising oversight over these matters.
The manner in which FERC addresses the issues raised in the NOI is likely to have implications beyond the evaluation of the case-specific blanket authorizations for large institutional investors that appears to be the main focus of the proceeding. For example, FERC historically has not scrutinized transactions involving tax equity and limited partnership interests so long as the interests do not grant the holder the ability to "participate in the public utility's day-to-day operations."12
A decision by the Commission to expand its evaluation of control to encompass more amorphous concerns such as the size of the investor, the other interests held by the investor, or the degree to which a utility might shape its business activities to align with an investor's preferences also could change the way in which FERC views investments in this context.
Additionally, any decision by FERC to redefine or expand its definition of control is likely to be applied in the Commission's evaluation of Section 205 applications, such as market-based rate applications and similar filings.
FERC generally has defined issues of control and related concepts, such as affiliation, similar in the Section 203 and Section 205 contexts. Thus, the manner in which FERC's analysis of control evolves as part of this proceeding is likely to influence how it tackles issues of control and affiliation more generally.
Notes
1 Federal Power Act Section 203 Blanket Authorizations for Investment Companies, 185 FERC ¶ 61,192 (2023).
2 16 U.S.C. § 824b(a)(2).
3 16 U.S.C. §824(a)(4).
4 18 C.F.R. § 33.1(c)(9).
5 See, e.g., The Vanguard Group, Inc., 168 FERC ¶ 61,081 (2019); BlackRock, Inc., 131 FERC ¶ 61,063 (2010); The Goldman Sachs Group, 121 FERC ¶ 61,061 (2007).
6 The Vanguard Group, Inc., et al., Joint Statement of James P. Danly and Mark C. Christie, Docket No. EC19-57-002 at P 4 (issued May 9, 2023).
7 BlackRock, Inc., 179 FERC ¶ 61,049 (2022).
8 NOI at P 11.
9 NOI at P 12.
10 See, e.g., Price Waterhouse Cooper, Companies Failing to Act on ESG issues risk losing investors, finds new PwC survey, available at: http://tinyurl.com/4cwjpsc9.
11 Coalition for Competitive Elec. v. Zibelman, 906 F.3d 41, 50 (2nd Cir. 2018) (quoting Pac. Gas. & Elec. Co. v. State Energy Res. Conservation and Dev. Comm'n, 461 U.S. 190, 205 (1983)) (stating that the "[n]eed for new power facilities, their economic feasibility, and rates and services, are areas that have been characteristically governed by the States").
12 See, e.g., AES Creative Resources, L.P., 129 FERC ¶ 61,239 at PP 24-26 (2009).
Stephen Hug is a partner at Akin whose practice involves a range of regulatory, commercial and transactional matters related to the U.S. power sector. He regularly counsels clients in matters related to federal and state regulatory policies, regulations, and rules applicable to the electric and renewable power industries. He also represents generation developers, marketers and transmission owners in matters before the Federal Energy Regulatory Commission and state regulatory commissions and agencies. He can be reached at [email protected]. Emily Mallen is a partner focused on clients in the natural gas, oil and products pipeline industries dealing with federal regulatory, litigation and transactional matters. She advises clients on energy and environmental laws, with a particular focus on the Natural Gas Act, Natural Gas Policy Act, Interstate Commerce Act and National Environmental Policy Act. She also provides clients with strategic advice on appearing before the FERC. She can be reached [email protected]. Scott Johnson is a senior counsel whose practice focuses on energy regulation and renewable energy. He helps clients navigate and comply with federal and state energy laws and regulations to achieve their business objectives. He represents utilities, energy project developers, investors and other entities in the electric power industry in general regulatory, administrative litigation, and transaction-related matters, principally before the FERC. He can be reached at [email protected]. Ben Reiter is a counsel who advises developers, investors and utilities on regulatory and transactional issues for the development, operation and financing of electric generation and transmission assets. He represents clients before the FERC and state commissions on matters related to electric power and transmission. He can be reached at [email protected]. The authors are based in Washington, D.C.
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