Originally published November 24, 2008

Keywords: Federal Energy Regulatory Commission, FERC, electric utilities, electric utility holding companies, Federal Power Act, Public Utility Holding Company Act, Horizon Asset Management

On November 20, 2008, the Federal Energy Regulatory Commission (FERC) issued two important orders relevant to investment companies, advisers, and other entities that engage in the acquisition of securities in electric utilities and electric utility holding companies.

In Horizon Asset Management, Inc., 125 FERC ¶ 61,209 (2008) (the "Horizon Order"), FERC clarified its interpretation of the "purchase, acquire or take any security" clause of Section 203(a)(2) of the Federal Power Act (the "FPA") and required prior FERC approval before investment companies and advisers that already hold the power to vote 10 percent or more of the securities of a public utility or public utility holding company acquire additional securities of electric utilities or electric utility holding companies on behalf of their investment account holders. FERC denied a request from Horizon Asset Management (Horizon) for a disclaimer of jurisdiction that would exempt it from the prior approval requirement of Section 203(a)(2) and for retroactive authorization for previously acquired holdings in excess of 10 percent in Reliant Energy, Inc. (Reliant), Sierra Pacific Power (Sierra), and Aquila, Inc. (Aquila).

Horizon's argument that it was not a "holding company" within the scope of Section 203(a)(2) was rejected by FERC, which found that Horizon had received delegated power from its account holders to vote the securities at issue. Further, because Horizon held the power the vote the securities at issue, FERC determined that Horizon must have "acquire[d]" or "take[en]" the securities, prior approval of which was required under Section 203(a)(2) of the FPA.

Because Horizon's acquisition of the voting rights "could (but may not necessarily) result in the exercise of control over a public utility company," FERC held that its interpretation of the "purchase, acquire or take any security" clause of Section 203(a)(2) was consistent with "both the investment and consumer protection purposes envisioned in the [Energy Policy Act of 2005] amendments." However, because FERC had not clearly addressed the meaning of "purchase, acquire or take any security" prior to the Horizon Order, it declined to sanction Horizon for its previous failure to file for approval with respect to the holdings in Reliant, Sierra, and Aquila.

Horizon alternatively sought permanent blanket authorization under Section 203(a)(2) for the acquisition of securities in electric utilities and electric utility holding companies. FERC granted blanket authorization for a three-year period, provided that Horizon restricts its "holdings of the voting securities of any public utility or public utility holding company to less than 10 percent in an individual Horizon account and to no more than 19.99 percent [cumulatively] for Horizon or any affiliated entity having voting power." In order to ensure that Horizon will not exercise control over the electric utilities or electric utility holding companies, Horizon's blanket authorization is subject to other conditions, including its commitment to report its transactions through Schedule 13G filings with the Securities and Exchange Commission (the "SEC") pursuant to the SEC's rules and the Securities and Exchange Act of 1934, which require the filer to certify that the securities have been acquired without the effect of changing or influencing the control of the issuer. Horizon must provide FERC with copies of the Schedule 13G filings, and must file any comment or deficiency letters received from the SEC. In addition, Horizon committed to provide FERC with quarterly reports of its security holdings of public utilities and public utility holding companies. Horizon also committed to include in its Form ADV (which registers Horizon as an investment adviser under the Investment Advisers Act), its Policies and Procedures Manual, its annual letter to account holders and all future account holder agreements, language providing that it "shall not exercise the shareholder voting rights delegated to [it] by Account Holders, or act in any other way, to exercise control over any public utility or any public utility holding company." Investment advisers or entities that engage in activities similar to those engaged in by Horizon should be prepared to make similar commitments in seeking blanket authority under Section 203(a)(2).

The Horizon Order is the latest in a series of FERC orders that clarify both when prior FERC approval is required for the acquisitionof securities in electric utilities or electric utility holding companies and what conditions will enable FERC to conclude that the holdings will not confer control over such a company by the equity holder. See, e.g., Harbinger Capital Partners Master Fund I, Ltd., 125 FERC ¶ 61,145 (November 5, 2008); Entegra Power Group LLC, 125 FERC ¶ 61,143 (November 5, 2008). These orders further clarified the operation of certain blanket authorizations that FERC had previously granted by rulemaking and reminded parties that FERC has jurisdiction over both certain acquisitions by holding companies and dispositions that result in the change of control of a public utility. Collectively, these orders provide a road map for obtaining FERC's approval of specific transactions and blanket authorizations to obtain non-controlling interests in such companies. But they also reiterate FERC's strong emphasis on compliance.

FERC provided 90 days from the date of the Horizon Order's publication in the Federal Register for any entity affected by the Horizon Order to file an application requesting the appropriate authorizations. In addition, mergers and transactions that do confer control, including a change in the nature of holdings already authorized by FERC, will continue to require prior approval by FERC and, in some cases, state regulators. Failure to make a timely filing with FERC could subject the affected entity to civil penalties or other sanctions.

The second order issued by FERC on November 20, 2008, Material Changes in Facts that Require Notifications Under Commission Regulations Under the Public Utility Holding Company Act of 2005, Docket No. PL09-2-000, 125 FERC ¶ 61,208 (2008) (the "PUHCA 2005 Order"), concerns holding companies that have obtained certain exemptions or waivers from the regulatory requirements of PUHCA 2005.

The PUHCA 2005 Order clarifies that when a holding company that has obtained an exemption or waiver "becomes a holding company with respect to an additional public-utility company or holding company of any public-utility company (i.e., obtains the power to vote 10 percent or greater of the voting securities of an additional company), that holding company should file with [FERC] a notification of material change in facts that describes the additional public utility company or holding company of any public-utility company." (emphasis original). Such filing must be made regardless of whether "a change has occurred with respect to the basis on which the exemption or waiver was granted." All affected holding companies have 45 days from the date of publication of the PUHCA 2005 Order in the Federal Register to file a notification of change in material facts that updates FERC on any investments of 10 percent or more in the voting securities of a public utility or public utility holding company made since the PUHCA 2005 exemption or waiver was granted. Again, the failure to comply could result in FERC imposing sanctions.

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