Yesterday, The Federal Energy Regulatory Commission issued a Notice of Proposed Rulemaking ("NOPR") in Docket No. RM09-16 that would permit a new class of transactions to proceed without the need for a Federal Power Act Section 203 order. Comments on the proposal are solicited and will be due 60 days after its publication in the Federal Register.

Except in limited circumstances, the Commission currently requires advance Section 203 approval for holding company acquisitions of 10% or more of the outstanding voting securities of public utilities or holding companies. Similarly, utilities generally must be authorized to transfer 10% or more of their voting securities. The NOPR proposes to permit certain investors to proceed on a blanket pre-authorized basis to acquire between 10 and 19.99% of the voting securities of a public utility or holding company. Public utilities whose securities were being acquired by qualified investors also would have blanket pre-authorization for the transfer of securities between these thresholds to such investors. The NOPR also would waive certain obligations that otherwise might apply to the public utility or holding company based upon affiliations that may be triggered by the security acquirer's other utility investments.

The NOPR ostensibly stemmed from a Petition for Guidance Regarding "Control" and "Affiliation" filed by the Electric Power Supply Association ("EPSA") in 2008. EPSA cited to the increased investment activity in the utility sector by hedge funds and investment funds, which it indicated could have unintended consequences on the public utilities in which these funds were investing given the Commission's then-current precedent on control and affiliation. The Commission subsequently held a workshop at which it invited selected interested industry participants to present their views on the issues. The Commission invited post-workshop comments.

In the NOPR, the Commission proposes to solve the concerns raised in the EPSA Petition with a different solution than proposed by EPSA. The Commission proposes the use of a new Affirmation Form, Form 519-C, by investors seeking to acquire shares between 10% and 19.99% who wish to avoid the process of obtaining a Section 203 order. To proceed to acquire securities of publicly-traded or privately-held utilities on a blanket pre-authorized basis, an investor would need to file an Affirmation in which it committed to restrict its actions as to the investment at issue. The Affirmation would create a rebuttable presumption that the investor does not control the public utility. While the implicated entities would be considered "affiliates," the Commission proposes to grant a waiver of the regulatory requirements applicable to affiliated companies based upon the Affirmation. The Affirmation would be due within 10 days after an acquisition and would be subject to quarterly updating.

The Affirmation is intended to serve a purpose similar to the SEC Schedule 13G filing. The signatory would commit that the securities referred to in the filing were not acquired and would not be held "for the purpose of or with the effect of changing or influencing the control of the issuer of the securities and were not acquired and are not held in connection with or as a participant in any transaction having that purpose or effect." Interestingly, the Commission proposes that to be eligible for the blanket authorizations, an investor would need to file an Affirmation for each public utility in which the investor acquired securities.

The Affirmation would:

  1. disclose the number of shares of voting securities (and percent of the total shares outstanding) of the public utility in respect of which the statement is filed;
  2. disclose the identity and location of any other public utility that is an affiliate of the investor;
  3. provide a description and the location of “inputs to electric power production” owned or controlled by the investor or by any affiliate of the investor;
  4. require the investor to commit that it will not
  1. seek or accept representation on the public utility’s board of directors or otherwise serve in any management capacity;
  2. request or receive non-public information, either directly or indirectly, concerning the business or affairs of the public utility;
  3. not to solicit, or participate in any solicitation of, proxies involving the public utility; and
  4. seek to influence the management or conduct of the day-to-day operations of the public utility in such areas as

purchasing or selling electricity or inputs to generation,

scheduling power production, including, but not limited to, the dispatching of generation units or scheduling outages,

hiring or fixing compensation of the public utility’s officers, directors and employees.

The Commission confirmed that it is not its intent that these restrictions interfere with shareholder voting rights. The Commission is soliciting comments on the procedures that would be applicable if an investor that had filed an Affirmation sought to change its investment intent and no longer abide by the commitments made in the Affirmation.

As to the definition of "affiliate," the Commission proposes to change the definition so that it would apply when an investor has the ability to control a public utility or has been demonstrated to have such a degree of influence over management policies to dictate being treated as an affiliate. Entities owning 10% but less than 20% would be deemed affiliates, but if an Affirmation is filed would qualify for a waiver of the associated regulatory requirements. The NOPR also proposes to define "voting security" as "any security presently entitling the owner or holder thereof to vote in the direction of management of the affairs of a company."