By action of December 4, the Federal Reserve Board (“Board”) held that a Financial Holding Company (“FHC”) can provide energy management services to owners of power plants under energy management agreements. The Board found such activity is complementary to the financial activities of engaging as principal in commodity derivatives and providing financial and investment advisory services for derivatives transactions (http://www.federalreserve.gov/newsevents/press/orders/20071204a.htm).
In September 2006, Fortis—an FHC headquartered in Brussels, Belgium—was authorized to engage in the United States in physical commodity trading activities, on a limited basis, as an activity that is complementary to the financial activity of engaging in commodity derivatives. At the time, the Board indicated it would review the activities of Fortis Energy Marketing & Trading GP (“FEMT”) for permissibility. This Board order completes that process.
Energy Management Services can be defined as services provided for a power plant owner related to the acquisition of fuel and the sale of power and the development of risk management plans related to such activities. Energy Management Services are provided by a third-party financial intermediary, in this case FEMT, pursuant to an Energy Management Agreement.
A typical Energy Management Agreement will provide an energy management plan that sets forth the required output of the power plant and related fuel needs. The “Energy Manager” is then authorized to enter into contracts to meet these requirements with certain limitations, although the owner of the plant retains the authority to override the Energy Manager’s decision. As part of the fuel purchase and power sales transactions, the Energy Manager will be acting as a financial intermediary for the power plant owner, providing the required credit support for such transactions. The Energy Manager also will arrange for fuel and power transportation services. An Energy Manager does not operate the power plant. That function is typically provided by a separate company. The Energy Manager’s fees are usually based on the spread between the price of fuel and the revenues from the sales of power.
This is another order in which the Board made a complementary activity finding. The Bank Holding Company Act as amended by the Gramm-Leach-Bliley Act permits FHCs to engage in an expanded scope of activities that are defined as (i) financial in nature (12 USC 1843 (K)(4)), (ii) incidental to a financial activity (12 USC 1843(K)(1)(A)), or (iii) any activity that the Board determines is complementary to a financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally (12 USC 1843(K)(1)(B)).
The intent of Congress in authorizing the Board to make a complementary activity finding is to allow FHCs to engage, on a limited basis, in activities that, although not necessarily financial in nature, are so meaningfully connected to financial activities that they complement those activities. Thus, the FHC would not be competitively disadvantaged by commercial activities evolving into financial activities or competitors finding ways to combine financial and nonfinancial activities. Only the Board can make a complementary finding.
The Board cited as a basis for approving this activity that Fortis would better learn about energy markets that would improve its ability to manage its own commodity risks and advise clients on their commodity-related activities. Also, a number of nonbanking participants in the energy trading markets, including diversified financial services companies, offer this service. Determining that Energy Management Services is a complementary activity will allow FHCs to better compete.
Fortis has committed that its revenue attributable to this activity will not exceed 5 percent of Fortis’ total consolidated operating revenues. In addition, the Board imposed conditions to address the requirements that engaging in this activity by Fortis would not pose a substantial risk to Fortis, depository institutions or the U.S. financial system generally. Those four conditions are that:
- The owner retains the right to market and sell power directly to third parties, which may be subject to the Energy Manager’s right of first refusal;
- The owner retains the right to determine the level at which the facility will operate;
- Neither the Energy Manager nor its affiliates guarantee the facility’s financial performance; and
- Neither the Energy Manager nor its affiliates bear any risk of loss if the facility is not profitable.
Finally, the Board also determined there were net public benefits by enhancing Fortis’ ability to provide efficiently a full range of commodity-related services consistent with existing market practice. In addition, Fortis would improve its understanding of physical commodity and commodity derivatives markets and, thereby, its ability to serve as an effective competitor.
This ruling is evidence of the Board’s apparent willingness to use its complementary authority to allow greater expanded activities for FHCs. Also, the Board appears to be more willing than in the past to use as part of the justification for approving a new activity the competitive environment within which an FHC operates and the activities of competitors. The OCC has considered on a number of occasions in the past the competitive environment encountered by national banks and used it as part of its rationale for approving expanded activities for national banks under the “incidental powers” clause (at 12 USC 24(7)).