This week, the Federal Energy Regulatory Commission (FERC) issued an order that will lighten the regulatory burden on renewable energy project sponsors and their equity investors.1
FERC’s order stems from a petition filed last December by O’Melveny on behalf of a group of renewable energy sponsors and financial institutions, that invest in such companies.2 After a long delay—FERC lacked a quorum during much of 2017—FERC issued an order granting the relief sought in the petition. Consistent with its 2009 ruling in AES Creative Resources,3 which FERC issued in another context under the Federal Power Act (FPA), FERC found that the tax equity interests transferred to investors in these transactions do not constitute “voting securities” for purposes of Section 203 of the FPA and FERC’s implementing regulations. Consequently, the issuance (or subsequent transfer) of these interests does not constitute a change of control with respect to a public utility and does not require advance FERC authorization under FPA Section 203.
For many years, due to uncertainty about how FERC interpreted its regulations for implementing Section 203 of the FPA, renewable energy companies have filed applications with FERC seeking authorization under Section 203 for transfers of non-managing equity interests to so-called “tax equity” investors. These are investors who meet Internal Revenue Standards that allow the investors to receive a substantial portion of the tax benefits available to renewable energy projects. While most parties considered these applications to be unnecessary, renewable energy companies routinely filed the applications out of an abundance of caution due to uncertainty about FERC’s regulations. By clarifying this issue, FERC’s order will lift a considerable regulatory burden from renewable energy companies and their tax equity investors.
The order will:
- eliminate the costs incurred by renewable energy sponsors and tax equity investors for filing unnecessary FPA Section 203 applications;
- reduce the need for renewable energy companies with market-based rate authorization to file “change in status” notices to inform FERC that, even though authorization was obtained under Section 203 of the FPA for the issuance of tax equity interests, these interests do not constitute voting securities for purposes of Section 205 of the FPA;
- reduce delays in closing renewable energy investment transactions while waiting for FERC to act; and
- relieve FERC staff of the burden of processing these unnecessary filings.
Renewable energy project sponsors and their tax equity investors should exercise care in relying on this order, however. The order extends only to investments that meet the characteristics described in the petition for declaratory order—FERC specifically cautioned that “[t]o the extent a future tax equity investor is considering whether securities with characteristics that vary from those presented in AES Creative Resources constitute non-voting securities, it remains the investor’s responsibility to make a determination as to whether prior Commission approval for transactions involving such securities is necessary.” Accordingly, parties will need to examine the voting or consent rights granted to tax equity investors under their financing documents (typically included in the limited liability company operating agreements of the renewable energy project companies) to ensure they do not differ from the rights granted to investors under the AES Creative Resources precedent in any way that would be material to FERC’s analysis of what constitutes a voting security. FERC would be particularly concerned about any rights that the tax equity investors may have to influence the day-to-day management of the project company—especially the sales of energy—or to remove or replace the manager for reasons other than cause.