On December 9, 2016, a group of investors in renewable energy projects ("Petitioners")1 asked the Federal Energy Regulatory Commission (FERC) to find that certain non-managing (i.e., passive) "tax equity" interests in public utilities are "non-voting securities" for purposes of Section 203 of the Federal Power Act (FPA) and therefore that dispositions or acquisitions of such interests do not require prior authorization from FERC. Petitioners' request, if granted, has potentially significant implications for the energy project finance community. Favorable FERC action it would relieve parties to passive investment transactions and FERC staff of significant burdens in preparing and processing precautionary Section 203 applications for such transactions, and would streamline the process for closing such investments. It also would reduce the number of related "change-in-status" filings under Section 205, further reducing administrative burdens on regulated entities, their upstream owners and FERC staff.
Background and Request for Relief
Section 203(a)(1) requires prior (i.e., preclosing) FERC authorization for a public utility—such as an entity with market-based rate authority—to transfer control over all or any portion of its FERC-jurisdictional facilities with a value of more than $10 million. Similarly, Section 203(a)(2) requires prior FERC authorization for certain "holding companies" to acquire securities worth more than $10 million of certain types of companies. While FERC's regulations include blanket authorizations under Section 203 for some transactions, there is no blanket authorization under Section 203(a)(1) for a transfer of passive, non-managing equity interests in a public utility, despite (i) FERC precedent disclaiming jurisdiction over transfers of interests with very limited veto or consent rights (because such transactions would not result in a change of control) and (ii) blanket authorizations under Section 203(a)(2) for certain such transactions.
In AES Creative Resources, L.P., FERC held that certain equity interests in public utilities are not "voting securities" for purposes of determining affiliation between parties under Section 205.2 However, FERC never expressly extended AES Creative Resources to Section 203—including its blanket authorizations under Section 203—leaving some "tax equity" and other passive investment transaction parties uncertain of the need for FERC authorization for their transactions. In addition, while FERC has provided some guidance on passive investments that do not trigger Section 203(a)(1), it also has warned that "the circumstances that convey control . . . vary depending on a variety of factors" and that "the burden remains upon the entities involved . . . to decide whether they need to obtain Commission authorization under section 203 to undertake a proposed transaction."3 Accordingly, parties to passive investment transactions for which no blanket authorization squarely applies often request FERC authorization under Section 203 on a precautionary basis to obtain any authorization that might be deemed necessary.
Petitioners ask FERC to extend AES Creative Resources to Section 203 i.e., to find that securities like those addressed in AES Creative Resources do not constitute "voting securities" for purposes of Section 203 because there is no reason that FERC should define voting securities differently for purposes of Section 203 versus Section 205. This "would confirm that dispositions of tax equity interests in renewable energy generation companies do not result in a change of control" and do not require authorization under Section 203(a)(1). Petitioners also request that FERC grant their petition soon and not delay action pending completion of FERC's consideration (in a separate proceeding addressed here) of whether to revise its blanket authorizations under Section 203. Quick action, Petitioners argue, is necessary to maximize the benefits of their request because the tax credits driving the "tax equity" transactions they address are scheduled to decline in value and phase out in coming years.
Potential Implications
Favorable FERC action would "provide . . . clear and explicit precedent upon which public utilities, public utility holding companies, and investors may rely in order to discontinue the practice of submitting Section 203 applications 'out of an abundance of caution' for the issuance and transfer of the[] types of non-managing, equity interests in public utilities" that FERC addressed in AES Creative Resources. This would reduce burdens on public utilities and their owners of filing and waiting for action on such applications—which represent as much as 20 percent of recent Section 203 applications—as well as complying with change-in-status reporting requirements under Section 205. This could reduce costs and transaction risk and maximize beneficial investments. Petitioners also note that FERC staff would benefit from not having to process arguably unnecessary Section 203 applications and related notices of changes in status.
Comments on the petition are due January 9, 2017.
Footnotes
1 JPM Capital Corporation; Bankers Commercial Corporation; Enel Green Power North America, Inc.; Firstar Development, LLC; State Street Bank and Trust Company; BAL Investment & Advisory, Inc.; Wells Fargo Bank, N.A.; and FTP Power LLC (d/b/a sPower).
2 129 FERC ¶ 61,239, at P 28 (2009) ("AES Creative Resources") (reasoning that such interests are not "voting securities" for Section 205 purposes because they do not entitle their holders "to vote in the direction or management of the affairs" of the public utilities).
3 FPA Section 203 Supplemental Policy Statement, FERC Stats. & Regs. ¶ 31,253, at PP 55-56 (2007), clarified, 122 FERC ¶ 61,157 (2008).
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