On March 18, FERC issued a highly anticipated order denying the petition for declaratory order filed by several electric public utilities addressing the extent to which equity ownership of multiple utility holding companies by certain institutional investors creates affiliation between those holding companies. The institutional investors in question hold specific blanket authorizations to acquire up to 20% of the voting equity in public utilities without seeking transaction-specific authorizations from FERC, in contrast to the existing blanket authorization available to all entities that allows acquisitions below 10% without prior authorization.
FERC clarified that although institutional investors owning 10% or more of the outstanding voting securities of utilities pursuant to a blanket authorization order under Section 203 of the Federal Power Act (FPA) are affiliates of those utilities through ownership of voting securities under 18 CFR § 35.36(a)(9)(i), the limitations on their ownership contained in those blanket authorization orders prevent the creation of cross-affiliations under 18 CFR § 35.36(a)(9)(iv) among the entities in which a single institutional investor holds multiple 10–20% voting equity interests.
This works as follows: An institutional investor holds one of these specific blanket authorizations. That institutional investor then purchases 15% voting equity interests in two different holding companies (HoldCo A and HoldCo B) in which all subsidiaries are wholly owned by the top-level holding company. Under FERC’s order, the institutional investor is itself affiliated with HoldCo A and the public utilities owned by HoldCo A; the same investor is also affiliated with HoldCo B and the public utilities owned by HoldCo B. However, HoldCo A is not affiliated with HoldCo B, and the public utilities owned by HoldCo A are not affiliated with the public utilities owned by HoldCo B.
This distinction is crucial to minimize the regulatory burden of utilities under FPA Section 205, as the widespread and frequently fluctuating investments into utilities by institutional investors would otherwise trigger significant reporting requirements.
Therefore, even though the petition was denied, FERC’s guidance should alleviate many of the concerns raised regarding the consequences of institutional investors owning utilities. Moreover, the timing of this guidance is especially important as the compliance date for FERC’s Order No. 860 is July 1, 2021, and the deadline for baseline submissions into the market-based rate (MBR) database is November 2, 2021. Under Order No. 860, every “ultimate upstream affiliate” must be identified in the relational database.
Prior to the above-mentioned guidance issued by FERC, it was uncertain whether institutional investors would link together utilities as affiliates, requiring all those utilities’ assets to be listed in others’ asset appendices. Now it is clear that while the institutional investor must be identified as an ultimate upstream affiliate if it owns 10% or more of the voting securities of a utility with MBR authorization, utilities with MBR authorization will not be required to link assets with other utilities with MBR authorization by virtue of the fact that they are both owned by an institutional investor pursuant to a Section 203(a)(2) blanket authorization order.