Ferc, May I? When Is Ferc Authorization Needed for Transfers of Public Utility Assets and Equity Interests in Public Utilities?

Article excerpt

Synopsis: Section 203 of the Federal Power Act requires parties engaging in certain transactions involving public utilities to obtain prior authorization from the Federal Energy Regulatory Commission (FERC).1 This requirement generally applies to transfers of public utility assets, such as electric transmission lines, as well as "paper facilities," such as tariffs and contracts for sale of electric energy at wholesale or for interstate electric transmission service. It also applies to many change-in-control transactions and acquisitions of securities in public utilities. This article examines the scope of FERC jurisdiction under section 203, discusses certain questions about whether the FERC has, or should have, jurisdiction over these transactions, and suggests how the FERC could clarify the scope of its jurisdiction and, in some instances, even reduce it.

I. INTRODUCTION

Parties to transactions involving transfers of public utility assets and equity interests in public utilities face an important question: do they need advance authorization from the FERC under section 203 of the Federal Power Act (FPA)?2 The answer can affect the timing of a transaction, since obtaining FERC authorization requires preparing and filing a comprehensive application, including a copy of the agreement documenting the transaction (or at least a draftagreement or term sheet that accurately reflects the material provisions), and then waiting for the FERC to process the application and issue an order. It also affects the risks to the parties, since, if FERC approval is required, there is always a possibility that the FERC may not grant it (or may grant it with unacceptable conditions) or that the time needed to obtain it may interfere with the closing of the transaction.

The FERC has provided guidance in its orders, regulations, and policy statements, but in many instances the guidance does not resolve the issue of whether authorization is required in particular circumstances. When faced with uncertainty about their section 2033 obligations, parties either proceed without obtaining authorization, assuming they are sufficiently convinced that authorization is not required, or they seek FERC approval to ensure their transaction is compliant, despite knowing it might not be required. Because parties typically will not proceed without a clean opinion of counsel that all necessary regulatory authorizations have been obtained, they generally choose the latter course: to file an application with the FERC "out of an abundance of caution," without necessarily agreeing that the FERC has jurisdiction.4 The result is that parties to planned transactions often end up filing unnecessary applications-an impediment that could be avoided if the FERC were to provide different, or clearer, answers.

Unnecessary section 203 applications increase transactional costs and risks for public utilities, their owners, and investors. They also increase the workload for the FERC and make it more likely that other parties facing similar circumstances in the future also will file an application. Deciding not to file a section 203 application in the face of uncertainty also creates risks for the parties to a transaction, since the FERC might later claim jurisdiction over the transaction, which could lead to civil penalties and even arguments that the transaction should be voided.

This article discusses the bases for the FERC's jurisdiction to approve public utility transactions under section 203 of the Federal Power Act and examines some of the sources of uncertainty about section 203's application. It also discusses those areas in which the FERC could resolve questions about its jurisdiction, or disclaim jurisdiction, thereby reducing the burden of unnecessary filings.5

II. OVERVIEW OF SECTION 203 OF THE FPA

FERC jurisdiction under section 203 has two separate bases-one for transactions by public utilities6 and one for transactions by holding companies. …