Introduction
This explainer provides an overview of the Federal Energy Regulatory Commission’s (FERC) Notice of Inquiry (NOI), issued in Docket No. AD24-6-000, on December 19, 2023, regarding the Federal Power Act Section 203 Blanket Authorizations for Investment Companies. This explainer will help you understand the purpose of the inquiry, the current rules for energy-related holdings by investment companies, and how to provide your thoughts to FERC.
This explainer is organized into three sections:
This explainer offers a summary of publicly available information about blanket authorizations for holding companies, including investment companies, under the Federal Power Act and should not be relied upon as a legal document.
Q. What is a Notice of Inquiry (NOI)?
A. An NOI is a request for comments on specific questions about an issue. NOIs sometimes involve possible changes in FERC policy or procedure.
Q. Can the public comment on the NOI? What are the dates?
A. Yes, FERC encourages interested parties, including members of the public, to provide comments on the NOI. This explainer highlights areas in which the NOI seeks public comment. In this case, comments are due by March 26, 2024, with reply comments due by April 25, 2024. Reply comments give commenters a chance to respond to each other, including the opportunity to emphasize, refute, or address the comments of others. Commenters only need to address the issues they wish to comment on. If you have questions regarding the NOI process or if you need assistance with filing comments or accessing FERC’s administrative record, please contact FERC’s Office of Public Participation (OPP) by e-mail at OPP@ferc.gov or by phone at (202) 502-6595.
Q. Why should I consider this NOI to be important to me?
A. Whether you are already involved in the energy sector or a private citizen interested in issues relating to the ownership of public utilities, your voice is important so that FERC considers multiple perspectives. FERC is asking whether the "current scope or availability of blanket authorizations for the acquisition of voting securities by holding companies, including investment companies, creates concerns regarding an adverse effect on competition or jurisdictional rates." The NOI provides you an opportunity to express your view on this key topic.[i] Among others, those who own mutual or index funds in a brokerage account (or as part of a retirement plan) that include shares in public utilities may also be interested in expressing their view.
Key Terms
Blanket Authorization – permission from FERC, either established in FERC regulations or granted by a FERC order, for a company to undertake investment transactions that meet certain criteria without the need for subsequent approval(s).
Federal Power Act – a provision of the U.S. code enacted in 1920 to administer the regulation of certain energy-related matters in interstate commerce.
Fiduciary – a kind of responsibility that requires a person or company exercising judgment on behalf of a stakeholder to act in the interest of that stakeholder.
Holding Company – a parent company that owns and controls shares of other companies.
Index Fund – an investment vehicle that is passively managed, generally to offer lower fees, and that tends to track a particular market index, such as the S&P 500, the Dow Jones Industrial Average, or the Nasdaq Composite.
Investment Company – a company whose primary activity is the buying, selling, and management of financial securities, usually with the aim of providing returns to investors.
Mutual Fund – an investment vehicle in which shareholders’ assets are pooled and used to purchase a diverse array of securities.
Public Interest – for the purpose of this explainer, public interest refers to considerations in Section 203 of the Federal Power Act, which includes no adverse effect on competition, rates, or regulation.
Public Utility – a business entity with an obligation to serve the public, including business entities that provide gas, electric, water, and sewage services.
Voting Securities – interests in a business entity that entitle the owner to vote on matters relating to the business, including matters such as electing board directors, advising on executive compensation, ratifying auditors, and agreeing to corporate transactions related to the business entity.
Current Rules Regarding Energy-related Security Holdings
Section 203(a)(2) of the Federal Power Act requires holding companies, including investment companies, that acquire securities of a public utility in an amount of $10 million or greater to first secure authorization from FERC. Through both its regulations and orders, FERC has allowed for some blanket authorizations where acquisitions are authorized without a case-specific order. Blanket authorizations are still subject to limitations and on-going reporting requirements, including but not limited to the following:
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the shares acquired cannot exceed 20% of the outstanding voting securities of any one utility company;
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the holding company will not exercise control over the day-to-day management or operations of any public utility acquired under the blanket authorization;
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certain filings with the U.S. Securities Exchange Commission will be maintained;
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certain quarterly reports detailing the acquisitions of securities made under the blanket authorizations will be filed with FERC; and
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the blanket authorizations require that the securities be held as a fiduciary, as principal for derivative investments, as collateral for a loan, or for maintaining liquidity for certain specific transactions.
The original rationale for these blanket authorizations was that they were appropriate to encourage greater investment in utilities by mutual funds, so long as FERC could perform ongoing oversight of the business relationship between holding companies, including investment companies, and public utilities. Due to significant industry changes since FERC began granting these blanket authorizations, FERC is seeking comments from interested stakeholders regarding the modification of current regulations, policies, and the administration of its oversight in these matters.
Commission Questions for Comment
Due to changes in the public utility, finance, and banking industries, as well as the growth of large index funds, there has been greater consolidation of utility holding companies. This consolidation has changed the investment landscape as it relates to public utilities. In 2021, index funds represented over 40% of the fund market.[ii] This significant share of the market may impact the level of influence index funds (and their managers) may have, despite existing limitations of ownership provided by the blanket authorizations. With this consideration, FERC is seeking comments on whether the current processes and limitations governing blanket authorizations continue to work as originally intended.
The Public Interest
Consistent with its goal to protect the public interest, FERC is seeking comments on the following:
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whether the current policy regarding the approval of blanket authorizations, and the associated conditions and restrictions, are sufficient to ensure that transactions relating to the ownership of public utilities are consistent with the public interest;
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if current policy is insufficient, how FERC should revise its case-specific blanket authorizations granted through orders and regulations under Section 203(a)(2); and
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how the public interest is impacted (positively or negatively) by holding companies, including investment companies, that obtain or control up to 20% of multiple public utilities.
Control of Public Utilities
Regarding control of public utilities, FERC is seeking comments on the following:
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which factors FERC should prioritize in effectively evaluating the influence and control of holding companies, including investment companies, on public utilities;
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whether and how FERC should consider a company’s pre-existing ownership and control of public utilities when granting blanket authorizations;
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how a company may exert control over public utilities in a manner not captured by FERC’s current policies and regulations, as well as what might constitute control or influence in a manner not currently addressed by those policies and regulations;
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whether FERC should consider the impact of a holding company’s, including an investment company’s, ownership of public utilities on the long-term planning by those utilities; and
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which corporate governance factors FERC should consider when evaluating if holding companies, including investment companies, might be able to exercise control over public utilities.
Oversight
In addition to considering blanket authorizations, FERC maintains oversight of companies approved for blanket authorizations to ensure they are in compliance with the associated conditions and restrictions. In the interest of considering the effectiveness of current policies in that regard, FERC is seeking comments on the following issue:
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whether the informational filings of holding companies, including investment companies, are sufficient for FERC to maintain an appropriate level of oversight for compliance purposes and, if not, what other measures FERC should take.
[i] Fed. Power Act Sec. 203 Blanket Authorizations for Inv. Cos., Notice of Inquiry, 185 FERC ¶ 61,192 (2023).
[ii] Investment Company Institute, 2022 Investment Company Factbook: A Review of Trends and Activities in the Investment Company Industry, at 29 (2022), https://www.icifactbook.org/pdf/2022_factbook.pdf