Initial comments on NOI regarding ownership of public utilities are due March 26
On December 19, 2023, the Federal Energy Regulatory Commission ("FERC") issued a Notice of Inquiry ("NOI")[1] seeking comment in early 2024 on whether and how to revise its policy on blanket authorizations for investment company[2] ownership of public utilities under Section 203 of the Federal Power Act ("FPA").[3] FERC also seeks comment on what constitutes "control" of a public utility in evaluating holding companies' requests for blanket authorization. The NOI represents another example of FERC's heightened scrutiny of whether and to what extent investment companies may have the ability to control public utilities.[4]
Initial comments on the NOI are due March 26, 2024, and reply comments are due April 25, 2024.[5]
Background
FPA Section 203(a)(2) restricts the ability of certain holding companies to purchase, acquire, or take any voting security with a value over $10 million, or merge or consolidate with an electric or transmitting utility or with a holding company with a value over $10 million without first receiving FERC authorization.[6] FERC adopted regulations, however, granting certain holding companies (including investment companies) a blanket authorization to acquire the voting securities of a transmitting utility, an electric utility company or a holding company if the entity will own less than 10% of the outstanding voting securities after the acquisition.[7]
In addition to blanket authorizations in its regulations, FERC 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 over the $10 million threshold and up to 20% of the outstanding securities of a given public utility.[8]
The NOI
As the impetus for revisiting its blanket authorization policy, FERC cites to significant changes in the public utility, finance, and banking industries since FERC last revised its regulations to expand blanket authorizations to investment companies.[9] These changes include consolidation in the public utility industry and the growth of large index funds and asset managers.[10] FERC also points to increased interest in United States utility assets by foreign companies, investors and private equity investors and the repeal of the Public Utility Holding Company Act of 1935 as catalysts for the greater consolidation of utility holding companies.[11] In light of these changes, FERC notes that the manner in which assets are owned and controlled warrants review of its regulations to ensure that its blanket authorization policy is consistent with the public interest.[12]
The NOI seeks comment and responses from interested parties under three main topics:
- the blanket authorization policy
- the leverage of large investment companies
- the evaluation of "control" under FPA Section 203
Blanket Authorization Policy
In the NOI, FERC seeks comment on items including but not limited to the following:
- Whether FERC's current blanket authorization policy is sufficient to ensure that holding companies, including investment companies, lack the ability to control the public utilities and holding companies whose securities they acquire and that the transactions underlying the blanket authorization are consistent with the public interest.[13]
- Whether the existing conditions and restrictions associated with case-specific blanket authorizations, such as the submission of Securities and Exchange Commission Schedule 13D and 13G filings, are effective and consistent with the public interest.[14]
- Whether the current scope or availability of blanket authorizations for the acquisition of voting securities by holding companies, including investment companies, creates an adverse effect on competition or jurisdictional rates.[15]
- Whether the informational filings required by the case-specific blanket authorizations granted by FERC to investment companies are sufficient for FERC to maintain an appropriate level of oversight for compliance with the terms of blanket authorizations.[16]
The Leverage of Large Investment Companies
FERC notes that the three largest index fund investment companies currently vote over 20% of the stock in the largest U.S. public companies, a number that may soon rise to 40%.[17] FERC also mentions concerns expressed by groups that the size of the investment companies creates issues related to competition and gives the investment companies "unique leverage" (in FERC's view)[18] over the utilities whose voting securities they control. In the NOI, FERC seeks comment on items including but not limited to the following:
- How can FERC effectively evaluate the influence and control exerted by holding companies, including investment companies, regardless of their size, over public utilities when considering blanket authorizations under section 203(a)(2)?[19]
- How should FERC distinguish between various types of investment vehicles for purposes of section 203(a)(2) blanket authorizations?[20]
- What are the impacts on the public interest, both positive and negative, of holding companies, including investment companies, holding voting securities in multiple public utilities and FERC-regulated entities?[21]
Evaluation of Control Under Section 203 of the FPA
FERC notes that when seeking a blanket authorization under section 203(a)(2), an investment company will generally take the position that its investments in public utilities do not allow for it to control the public utility, including control over the day-to-day management and operations of the utility, or holding company thereof.[22] FERC also notes that detractors argue that by holding voting securities in a large number of public utilities, investment companies are able to influence utility behavior in ways that are not captured by FERC's current analysis of control.[23] In the NOI, FERC seeks comment on what factors FERC should consider when evaluating control over public utilities as part of a request for blanket authorization including but not limited to the following:
- In what way may a holding company, including an investment company, exert control over public utilities that is not currently captured by FERC's current policies and regulations?[24]
- Should FERC consider the impact of investment companies holding public utility voting securities on long-term planning by public utilities or other issues beyond day-to-day control over utility operations?[25]
- What corporate governance factors should FERC consider when evaluating whether investment companies can exercise control over public utilities?[26]
What's Next
While the issuance of the NOI does not represent affirmative FERC action to modify its policy on blanket authorizations for investment companies under FPA Section 203, it does signal that FERC intends to consider policy modifications seriously and comprehensively. Coupled with the issuance by FERC of various orders expressing concern with upstream affiliations, [27] the NOI reminds public utilities to monitor upstream owners, e.g., in the context of Section 203 applications, not eligible for a blanket authorization, and market-based rate (MBR) applications and associated relational database filings.
[1] Federal Power Act Section 203 Blanket Authorizations for Investment Companies, Docket No. AD24-6-000, 185 FERC ¶61,192 (the "NOI").
[2] For the purposes of the NOI, FERC held that the term "investment company" means 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.".” NOI at P 1, n.1. 15 U.S.C. § 80a-3(a)(1)(A).
[3] 16 U.S.C. § 824b.
[4] Commissioner Christie expressed support for the review of FERC’s blanket authorization policy arguing that FERC must further evaluate whether investment companies are exercising control over utilities and are not just passive investors. Commissioner Christie opined that “it is simply no longer a credible assertion that investment companies are always or should be assumed to be merely passive investors as these investment companies wield significant financial power.” See Commissioner Christie NOI Concurrence at P 2.
[5] 88 Fed. Reg. 89,346, 89,350 (Dec. 27, 2023).
[6] 16 U.S.C. § 824b(a)( 2).
[7] See, e.g., 18 C.F.R § 33.1(c)(2)(ii) (granting a holding company a blanket authorization to acquire certain voting securities).
[8] See Cap. Rsch & Mgmt. Co., 116 FERC ¶ 61,267 (2006); see also The Goldman Sachs Grp., 134 FERC ¶ 61,227 (2011); BlackRock, Inc., 179 FERC ¶ 61,049 (2022).
[9] NOI at p. 8.
[10] NOI at p 8 noting that at the beginning of 2010, there was approximately $2.3 trillion invested in index funds, which grew to $11.4 trillion by the end of 2019.
[11] Id.
[12] Id.
[13] NOI at Q1.
[14] Id at Q3.
[15] Id at Q4.
[16] Id at Q7.
[17] NOI at P 11.
[18] NOI at P 11.
[19] NOI at Q8.
[20] Id. at Q10.
[21] Id. at Q11.
[22] NOI at P 12.
[23] Id.
[24] Id. at Q13.
[25] Id. at Q16.
[26] Id. at Q17
[27] See, e.g., Mankato Energy Ctr., LLC, 184 FERC ¶ 61,170 (2023) (finding that J.P. Morgan Investments is an affiliate of several public utilities).
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