PowerFacts
Fact Sheet: Overview of EPSA Petition for Guidance Regarding Company Control and Affiliation
On September 2, 2008, the Electric Power Supply Association (EPSA) filed a Petition for Guidance Regarding "Control" and "Affiliation" with the Federal Energy Regulatory Commission (FERC). The petition requested guidance on when investments in publicly-held companies will be deemed to convey "control" or to result in "affiliation" for purposes of the Commission's market-based rate authority (MBRA) requirements under Section 205 of the Federal Power Act (FPA) and merger and acquisitions regulations under Section 203 of the FPA.
Background
A number of transactions have developed in 2008 that involve the acquisition of shares of publicly-traded power supply companies by financial entities such as hedge funds or asset management companies. Some of these transactions have exceeded FERC's 10 percent trigger for questions of "control." Understandably, the acquisition of shares in other companies by these financial entities is not necessarily known to downstream entities such as the publicly-held power supplier or its FERC-regulated subsidiaries.
Because of this recent trend, EPSA members have requested guidance on FERC's policies and requirements regarding such upstream securities acquisitions in two contexts - FPA Sections 203 and 205.
- Section 203 establishes that Commission authorization is required for mergers or consolidations involving the jurisdictional facilities of a public utility; the sale, lease or other disposition of jurisdiction facilities with a value in excess of $50,000; and, the purchase by a public utility of the securities of another public utility.
- Section 205 establishes market-based rate (MBR) authority for wholesale power sales.
Currently, transactions surpassing the 10 percent "control" threshold may be approved by FERC under Section 203 of the FPA because the transaction is "consistent with the public interest and will not result in cross-subsidization of a non-utility associate company." However, if various competitive suppliers with MBRA are determined to be affiliated solely because of indirect upstream ownership in which there is no common control, this could pose serious threats to FERC's market-based rate program. Findings of control or affiliation are not necessarily made in the 203 context, thus issues that might arise in the 205 context are not part of the initial 203 review of the transaction. Uncertainty over the impact of these transactions threatens to discourage much needed investment in energy infrastructure and could create potentially serious compliance issues for competitive suppliers.
EPSA's Petition for Guidance
In its filed petition, EPSA proposed a solution that builds on the existing regulatory framework of the Securities and Exchange Commission (SEC) disclosure reporting regime for investments in publicly-held companies.
- EPSA recommended use of the SEC's 13G disclosure as a strong and effective process for monitoring upstream acquisitions. The 13G establishes significant enforcement rules and penalties, it provides market transparency to facilitate needed investment and it complies with FERC's requirements without impairing FERC's regulatory authority:
- This regime employs proven measures that are more than sufficient to encompass what FERC considers to be the "control" area. Additionally, FERC can rely on the certifications of "no control" made in Schedule 13G filings. Specifically:
- When a Passive Investor or Qualified Institutional Investor (both SEC-defined terms) acquires up to 20 percent of a publicly-traded company, and certifies that it has no intent or purpose to effect, change or influence the control of the acquired company, that investor files a Schedule 13G with the SEC. Of note, only entities that affirmatively attest to this lack or intent are eligible to file a Schedule 13G.
- The "no intent to control" certification in the Schedule 13G carries the possibility of severe sanctions and penalties should that sworn certification be false or misleading. Sanctions include civil and criminal penalties, disgorgement of profits and imprisonment.
- The SEC definition of control is broad and extensive, covering any purpose or intent to influence or control directly or indirectly company policies. Based on the examples and case law, the SEC concepts of control and control purposes are more than broad enough to encompass FERC's concerns over control over a company's operations.
- Acquiring companies would file Schedule 13G with FERC in lieu of case-specific 203(a)(2) approval for a given investment.
EPSA also seeks clarification that findings of "no control" by FERC in the Section 203 context apply equally in Section 205 MBRA proceedings to give competitive suppliers certainty that a given interest does not convey control, is not deemed to be under common control, nor does it carry affiliations to other holdings of the investor.
Thus, when a finding is made of no control based on the common assumption under FPA Sections 203 and 205, competitive suppliers should not be required to file a change of status filing or attribute generation of other entities in which the investor has interest for purposes of market power analysis.
CONTACT: JOHN SHELK
(202) 349-0154or 703-472-8660
EPSA is the national trade association representing competitive power suppliers, including generators and marketers. These suppliers, who account for nearly 40 percent of the installed generating capacity in the United States, provide reliable and competitively priced electricity from environmentally responsible facilities serving global power markets. EPSA seeks to bring the benefits of competition to all power customers.