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On April 25, 2024, the U.S. Department of Justice Antitrust
Division (DOJ) and the Federal Trade Commission (FTC) filed a joint
comment with the Federal Energy Regulatory
Commission (FERC or Commission) raising concerns about FERC’s
blanket authorization policy, which, among other things, allows
holding companies, including investment companies, to acquire
noncontrolling ownership interests in public utility companies,
subject to certain conditions.
FERC Review of Federal Power Act Section 203(a)(2) Blanket
Authorizations and the Notice of Inquiry
FERC issued a Notice of Inquiry (NOI) regarding the Federal
Power Act Section 203 Blanket Authorizations for Investment
Companies on December 19, 2023. The NOI requested comments from
interested parties, including members of the public, on the
question of 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.”
Under Section 203(a)(2) of the Federal Power Act, holding
companies that purchase, acquire, or take securities of a public
utility valued in excess of US$10m must first secure authorization
for the transaction from FERC unless a blanket authorization under
FERC’s regulations applies to the transaction. FERC’s
current regulations include blanket authorizations for a wide range
of transactions that otherwise would require FERC prior approval,
including for derivative hedging purposes, as collateral, for the
acquisition of utility securities by certain banks as a fiduciary,
or for internal corporate reorganizations.
FERC also has granted blanket authorizations for certain
acquisitions involving non-voting securities or less than 10% of an
issuer’s outstanding voting securities. Large investors in
public utilities routinely apply for and are granted blanket
authorization from FERC to acquire utility securities as passive
interest owners on a case-specific basis. Even for those companies
that are approved for blanket authorizations on a case-by-case
basis, FERC maintains oversight authority and retains the ability
to issue supplemental orders regarding its blanket authorization
approvals. Further, such authorizations are granted on a short-term
basis and require periodic reevaluation to ensure they remain
consistent with the Federal Power Act and FERC’s regulations.
FERC is required to approve a proposed transaction if it finds it
will be consistent with the public interest and will not result in
cross-subsidization or the pledge or encumbrance of utility assets
for the benefit of an associate company. In defining public
interest in the NOI, FERC referred to considerations in Section 203
of the Federal Power Act, which includes that the transaction
cannot have an adverse effect on competition, rates, or
regulation.
Citing changes in the public utility, finance, and banking
industries — including the growth of large index funds
— FERC stated there has been increased consolidation in
utility holding companies. FERC also expressed concerns about large
investors’ ability to exercise control over utility decisions
concerning environmental, social, and corporate governance (ESG)
commitments and decarbonization initiatives. As a result, FERC
sought public comments on whether the current blanket authorization
policy is sufficient to ensure transactions are consistent with
FERC’s public interest standard.
Competition Issues Raised by the Antitrust Division and the
FTC
In response to the request for comments, DOJ and the FTC urge
FERC to consider carefully the competitive implications of
acquisitions and investments in public utilities even when those
investments involve less than a controlling interest. The agencies
point to their updated Merger Guidelines in which
they express their view that partial acquisitions that involve
cross or common ownership of competitive firms can harm
competition, including in situations when the acquiring entity does
not obtain a controlling stake.
The agencies urge FERC to consider three specific areas of
concern they identified when evaluating non-controlling
acquisitions of public utility companies that involve cross or
common ownership issues:
- Partial acquisitions could lessen competition by giving the
partial owner an ability to influence competitive conduct at the
target firm, which might be manifested through involvement in
actions such as appointing board members, selecting managers, or
setting budget and investment plans. - Common ownership acquisitions could reduce incentives to
compete — even in the absence of conduct that could be deemed
anticompetitive. - Such acquisitions would give competing firms access to
non-public, competitively sensitive information that would increase
the risk of coordinated conduct between the separate
utilities.
Implications for Public Utility Transactions
Final reply comments for the NOI were due April 25, 2024. FERC
will consider the various comments filed and likely issue a notice
of proposed rulemaking (NOPR) to propose changes to its regulations
on blanket authorizations in the coming months. Only after FERC
considers public comments on the NOPR would it issue a final rule
that would effectively modify its blanket authorization regulations
and potentially heighten its scrutiny over investors in public
utility assets.
If FERC were to restrict or remove its blanket authorization for
holding companies (including large investors) to acquire interests
in public utilities, FERC will likely see a dramatic increase in
the number of Section 203(a)(2) applications filed requesting
authorization for the purchase of public utility stocks.
Concurrently, there may be changes in the types and timing of
public utility investments from the private sector because of the
regulatory and administrative burden associated with filing for and
receiving FERC authorization every time a public utility asset is
sold, traded, or acquired. Either way, such consequences could have
a substantial effect on the markets and investments in the public
utility sector. Finally, DOJ and FTC also point to recent
enforcement actions taken by both agencies regarding mergers that
were under review due to concerns with non-controlling common
ownership issues. These actions and the agencies’ comment to
FERC signal that DOJ and FTC will continue to be active in both
their own enforcement and in encouraging vigorous competition
enforcement by other agencies, including FERC, as part of the Biden
administration’s “Whole-of Government Competition
Policy.”
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