The US Federal Energy Regulatory Commission (FERC) issued a notice of inquiry (NOI) in December 2023 seeking comments on whether and, if so, how FERC should revise its policy on providing blanket authorizations for investment companies under Section 203(a)(2) of the Federal Power Act (FPA). This policy has permitted certain nonactive investors (such as mutual funds) to purchase and sell equity interests in utilities and holding companies without the typical FERC review of such investments.
FERC also seeks comments on what constitutes control of a public utility in evaluating holding companies’ (including investment companies’) requests for blanket authorization and what factors it should consider when evaluating control over public utilities as part of a request for blanket authorization.
The NOI follows two recent orders in which FERC analyzed whether investment companies are asserting control over public utilities through, e.g., investment advisory and partnership agreements and board of director appointments. These recent issuances signal a higher level of scrutiny by FERC on investments into public utilities and public utility holding companies by investment companies.
FERC’s Blanket Authorization Policy
Section 203(a)(2) of the FPA provides that a holding company in a holding company system that includes a transmitting utility or an electric utility must obtain FERC authorization prior to purchasing, acquiring, or taking any security with a value exceeding $10 million or by any means, directly or indirectly, merging or consolidating with a transmitting utility, an electric utility company, or a holding company in a holding company system that includes a transmitting utility or an electric utility company with a value in excess of $10 million.
FERC has promulgated regulations that grant blanket authorizations for certain types of transactions, including certain investments in transmitting utilities and electric utility companies, allowing those transactions to occur without prior FERC review.
FERC has also issued blanket authorizations on a case-specific basis to investment companies that allow them to acquire securities in public utilities over the $10 million threshold and up to 20% of the outstanding voting securities of a given public utility.
FERC found that these investor-specific authorizations were appropriate to encourage greater investment in utilities by investors, such as mutual funds, that do not take an active role in day-to-day management. These blanket authorizations are effective for three-year periods, which allows FERC to periodically reevaluate whether each blanket authorization remains consistent with the public interest.
Notice of Inquiry
Recognizing that the public utilities, finance, and banking industries continue to evolve, FERC issued the NOI to solicit industry input to assess whether the blanket authorization policy continues to work as intended and whether it is still consistent with the public interest.
The NOI includes a variety of specific questions about the existing blanket authorization policy and whether FERC should revise the policy; whether, and if so how, FERC should consider the size of an investment company in evaluating a request for Section 203(a)(2) blanket authorization; and the factors that FERC should consider in its evaluation of control over public utilities as part of a request for blanket authorization.
The questions largely fall into the following categories:
- Whether additional controls are necessary to ensure that these blanket-authorized investments are truly noncontrolling
- Whether the regulations or policies need to be modified
- Whether the existing policies are creating competition concerns
- What FERC should consider when considering granting additional investor-specific blanket authorizations
- Whether investors that do not have day-to-day control are nevertheless in a position to exert control over long-term planning and decision-making
More specifically, FERC seeks comments on whether the current policy is sufficient to ensure that investment companies lack the ability to control the public utilities and holding companies whose securities they acquire. FERC also seeks comments on whether the current informational filings that are required of a blanket authorization holder are sufficient to enable FERC to maintain an appropriate level of oversight for compliance with the terms of the blanket authorization.
In addition, given the growth of index funds and the increased interest by investment companies in utility assets, FERC seeks comments on how it can effectively evaluate the influence and control exerted by holding companies, regardless of their size, over public utilities when considering blanket authorizations.
Finally, with respect to its evaluation of control, FERC noted that it has fielded arguments that an investment in a public utility does not allow for control of the public utility as well as arguments that investment companies are able to influence utility behavior in ways that are not captured by FERC’s analysis of control.
FERC seeks comments on questions including the way in which a holding company could exert control over public utilities that is not currently evaluated under current policies and procedures and what corporate governance factors FERC should consider when evaluating whether investment companies can exercise control over public utilities.
FERC invites interested persons to submit comments to all or part of the questions posed in the NOI. Initial comments are due by March 25, 2024 and reply comments are due by April 24, 2024. FERC’s issuance of the NOI will not necessarily result in a change in policy but it does indicate that FERC continues to pay particular attention to investments by investment companies and the question of whether investment companies can exercise some form of control over the public utilities in which they hold interests.
As reflected in the concurrence issued by Commissioner Mark C. Christie, at least one member of the Commission is doubtful that these blanket authorizations should be granted to financial investors that claim to not be involved in day-to-day decisions by utility holding companies but have simultaneously issued ESG-style investment policies that emphasize the importance of pushing toward those ESG objectives through their investments.