Public Utility Transaction Authorization and FERC
This is the latest in a series of columns by O’Melveny & Myers attorneys, focusing on key legal issues specific to a variety of U.S. industries.
Transactions that involve transferring the assets of, or equity interests in, a public utility subject to the Federal Power Act (FPA) often require authorization from the Federal Energy Regulatory Commission (FERC). Companies that are not primarily engaged in public utility activities, such as financial institutions, may be taken aback to learn that this requirement can apply to their transactions because of indirect interests held in public utility subsidiaries. And even companies that are engaged in public utility activities may have trouble at times determining whether FERC authorization is required for a particular transaction. Failing to obtain the required FERC authorization has the potential to lead to civil penalties or arguments that the transaction may be void.
Section 203 of the FPA has two subsections establishing FERC’s jurisdiction over public utility transactions: one applies to transactions by public utilities, and the other applies to transactions by holding companies. Section 203(a)(1) of the FPA requires a “public utility” to obtain FERC authorization before it may: “sell, lease or otherwise dispose” of public utility facilities; merge or consolidate public utility facilities; purchase securities in another public utility; or acquire an existing electric generating facility. (A “public utility” under the FPA is an entity that owns or operates facilities used for the transmission of electric energy in interstate commerce or for the sale of electric energy at wholesale in interstate commerce.)
Practitioners encountering Section 203 for the first time often are surprised to learn that FERC’s jurisdiction extends to transfers of “paper facilities,” including tariffs, contracts, and other books and records associated with sales of electric energy at wholesale. They also often are surprised to learn that FERC considers a change-in-control transaction, including a direct or indirect transfer of as little as 10 percent of the voting securities in a public utility, to constitute a disposition of facilities.
Section 203(a)(2) requires “holding companies” to obtain FERC authorization before engaging in certain transactions involving electric utilities. A holding company is a company that directly or indirectly owns, controls, or holds with power to vote 10 percent or more of the outstanding voting securities of a “public-utility company” or of another holding company. “Public-utility company” has a different definition from “public utility”—it is more expansive in some respects and more limited in others. Section 203(a)(2) is mostly commonly applied to acquisitions by holding companies of 10 percent or more of the voting securities of companies engaged in electric transmission, distribution, or generation.
The standards for FERC authorization are the same under both of these sections—FERC is required to approve the transaction if the transaction is consistent with the public interest and will not lead to certain types of cross-subsidization between utilities with captive customers and utilities more exposed to competition. The most important factor in FERC’s public interest determination is whether the transaction will adversely affect competition. FERC generally is required to approve or disapprove transactions within 180 days of receiving a complete application, but it often approves uncontested applications more quickly—and it can extend the 180-day deadline in certain circumstances.
Many exemptions are available under Section 203. For example, the statute and FERC’s regulations establish a $10 million jurisdictional threshold for certain types of transactions otherwise subject to Section 203. In addition, Section 203 does not apply to most types of transactions involving government-owned or -sponsored utilities or their facilities. FERC has significantly narrowed the scope of transactions requiring authorization under Section 203 by including in its regulations exemptions and blanket authorizations for many types of transactions. Blanket authorizations permit parties to immediately proceed with transactions that fall within certain regulatory parameters without having to file an application with FERC seeking an order specifically approving the transaction. For example, FERC has granted blanket authorizations for certain transactions by financial institutions acting in a banking capacity, for internal corporate reorganizations, and for transfers of securities in the secondary market. Transactions involving direct or indirect transfers of non-voting securities or less than 10 percent of the voting securities in a public utility typically are exempt from Section 203.
Unfortunately, the scope of Section 203 and of the various exemptions and blanket authorizations often is not clear, leaving parties with the dilemma of whether to proceed with a transaction that they do not believe needs additional authorization from FERC or to obtain specific authorization from FERC before closing the transaction. For example, FERC has not provided clear guidance on whether certain equity interests with limited consent rights constitute voting securities for purposes of Section 203. The choice to obtain specific authorization where the law is not completely clear often hinges on whether counsel is willing to provide a clean opinion that authorization is unnecessary. In the absence of clear guidance from FERC, parties often decide to seek FERC authorization “out of an abundance of caution” to avoid the risk of incurring civil penalties or the potential that FERC or some other party may later argue that the transaction should be void due to failure to obtain authorization.
Parties to large merger transactions occasionally have failed to recognize the need to obtain FERC authorization for a change in control with respect to public utilities in which one of the parties holds indirect, minority interests. For example, this occurred in several bank mergers implemented in response to the 2008 financial crisis. Several parties to these transactions later requested FERC authorization, which FERC granted on a prospective basis only.
Given this arcane area of the law and its many uncertainties, parties to mergers and acquisitions involving public utilities and holding companies, including indirect transfers of ownership or control, should consider conducting a detailed review of whether FERC authorization is required. A more in-depth analysis of the nuances of FERC’s jurisdiction under Section 203 is available in the author’s article entitled “FERC, May I? When is FERC Authorization Needed for Transfers of Public Utility Assets and Equity Interests in Public Utilities?” 34 Energy L.J. 151 (2013).
Hugh E. Hilliard is a counsel in O’Melveny & Myers’s Washington, D.C., office and a member of the Project Development and Real Estate Practice. He represents clients on matters related to regulation of energy companies by the Federal Energy Regulatory Commission (FERC) and on energy-industry transactions.