This article provides an overview of certain federal energy regulatory approvals for electric public utility merger and acquisition transactions (Public Utility Transaction(s)). Specifically, this article discusses Federal Energy Regulatory Commission (FERC) authorization pursuant to the Federal Power Act of 1935, as amended (FPA),1 and Federal Communications Commission (FCC) consent pursuant to the Communications Act of 1934, as amended.2 The article also discusses FERC, FCC, and Commodity Futures Trading Commission (CFTC) due diligence issues that could be considered in a Public Utility Transaction.
State public utility commission regulatory approval will likely be required for a Public Utility Transaction and will typically take longer than FERC and FCC approvals. In fact, if the electric public utility (or utilities) involved in the Public Utility Transaction operates in several states, approval from more than one state public utility commission may be required, adding to pre-closing requirements and underscoring the fact that utility merger and acquisition deals are atypical.3
Although a state public utility commission transaction approval proceeding may take longer and require more attention with respect to commitments, the FERC proceeding could become a critical path item to closing a Public Utility Transaction. Accordingly, it is very important to focus on issues related to FERC approval for the Public Utility Transaction early in the process. As described in further detail below, although the number of considerations in the FERC proceeding may be fewer than at the state public utility commission level, the considerations are different and FERC considerations can be material. Significantly, although certain statutory provisions found in the Natural Gas Act of 1938, as amended (NGA),4 mirror those of the FPA, the NGA does not include a merger and acquisition prior approval authorization provision. Thus, merger and acquisition transactions involving interstate natural gas pipelines without including power assets do not typically trigger FERC approval requirements.5 Notably, however, most interstate natural gas pipelines do have a handful of FCC licenses relied upon for operational purposes that could trigger the need for FCC consent.
Due Diligence—Federal Energy Regulatory Review— Approval Process
A typical initial step in the federal energy regulatory diligence phase for a Public Utility Transaction is to examine whether a FERC or FCC authorization is required. This is a case-by-case analysis and requires facts regarding the Public Utility Transaction and the jurisdictional status of the companies and assets involved. In most instances, a Public Utility Transaction will require prior approval from FERC pursuant to FPA Section 203.6 Some exceptions exist so it is important to examine the facts carefully. For example, if the public utility over which there will be a transfer of control or a transfer is entirely located within the Electric Reliability Council of Texas footprint (in Texas) and thus, not considered to be part of the United States interstate grid, or if the utility is otherwise located outside of the interstate transmission grid, such as in Alaska or Hawaii, there may be no FERC approval required. For example, the parties to the recent proposed sale of Hawaiian Electric did not file for FERC approval pursuant to FPA Section 203.7
If the facts indicate that a FERC authorization is required, the logical next step is to consider whether there are any substantive market power issues that may require mitigation (i.e., the possible divestiture of generation assets and/or commitment to invest in transmission to relieve transmission constraints that are creating market power concerns) or whether other facts exist that would make it difficult to obtain FERC authorization for the Public Utility Transaction. Once the diligence review indicates that the Public Utility Transaction is likely to obtain FERC authorization, it is helpful to estimate how long it may take to obtain FERC authorization. Separately, if it is anticipated that commitments would likely be made in the FERC proceeding that could be material from an economic standpoint, those should be factored into negotiations.
Checking for FCC licenses as an initial step in federal energy regulatory diligence is also typical. The FCC’s Universal Licensing System, an online system, provides information on FCC licenses.8 Prior FCC approval pursuant to Section 310 of the Communications Act of 1934, 47 U.S.C. § 310(d), is required for the transfer of or transfer of control over wireless radio licenses. The types of licenses typically held by owners of electric generation and transmission are private land mobile licenses (for hand-held communications devices) and microwave licenses (used for operational purposes). Some utility holding companies also have an affiliate holding an FCC license for a corporate jet.
Other Federal Energy Regulatory Due Diligence
Reviewing FERC’s public records during a diligence process is relatively straightforward. Among other things, such a review could include determining whether there are complaints pending against to any of the companies that will be acquired or merged as a result of the proposed transaction. Complaints could include, for example, an FPA Section 206, 18 U.S.C. § 824e, rate complaint where the complainant is seeking lower transmission rates. We also take a look at electric transmission rates to determine if they are particularly vulnerable to complaints. We may also consider rate risk associated with the new tax law, the Tax Cuts and Jobs Act of 2017. Separately, it might be helpful to review other types of complaint proceedings—a customer complaint can sometimes flag a larger issue. Complaints filed by one of the companies involved in a Public Utility Transaction could also indicate an issue that could possibly be material.
A due diligence review of FERC’s public records may also include a high level review of the company’s submittals in FERC regional market proceedings or the proceedings of other entities. These types of submittals reflect what the company under review considers to be more significant items. A review of FERC submittals in generic proceedings, such as centralized energy markets proceedings, could also reflect whether a company is concerned about the economic effects of particular market developments. With respect to centralized markets proceedings, it may also be important to review possible changes to rules and requirements related to the relevant centralized market that are not yet before FERC. Changes in price formation that could result from market rules changes may affect the value of the asset owner.
Since the Energy Policy Act of 2005 (EPAct) became law, FERC has had enhanced enforcement authority so some FERC compliance diligence is typically recommended.9 EPAct also resulted in electric reliability rules, which up until that point had been voluntary, becoming mandatory with potential for accompanying penalties assessed in a FERC/North American Reliability Corporation (NERC) process. When following up with the company itself, diligence questions could focus on FERC and NERC compliance programs as well as any past or present FERC and/or NERC investigations or inquiries that might be non-public. For utilities trading commodities, we also ask about any non-public CFTC investigations.
FERC Section 203 Approval—Standard of Review
FPA Section 203(a) has two subsections that may trigger a prior FERC approval requirement—one applies to transferors and one to transferees. A determination of the proper applicant and whether a transaction requires Section 203 approval is fact-specific. FERC has established certain blanket authorizations that limit the number of transactions that need to be approved.10
Unlike the standard of review for Public Utility Transactions before many state commissions, FERC’s analysis is focused on whether the transaction will result in adverse effects. At the state level, there is frequently a standard of review that requires parties to a Public Utility Transaction to demonstrate customer benefits. Section 203(a)(4) of the FPA provides that “the Commission shall approve the proposed disposition . . . if it finds that the proposed transaction will be consistent with the public interest.”11 Applicants need not show that a transaction positively benefits the public interest, but simply that it is “consistent with the public interest,” i.e., that the transaction does not harm the public interest.12
In determining whether a proposed disposition of jurisdictional facilities is consistent with the public interest, FERC evaluates the effect of the proposed disposition on competition, rates, and regulation.13 When considering the effect on competition, FERC reviews both horizontal effects resulting from any increases in concentration in energy and capacity markets and vertical effects resulting from increases in the ability or incentive to leverage control over electric transmission or natural gas transportation facilities or other inputs to the generation of electricity in order to enhance revenues in generation markets.14
In addition, pursuant to FPA Section 203(a)(4), FERC must determine that a proposed transaction will not result in cross-subsidization of a non-utility associate company by a traditional utility company, or the pledge or encumbrance of utility assets for the benefit of an associate company, unless that cross-subsidization, pledge, or encumbrance will be consistent with the public interest. The standards for evaluating whether an improper cross-subsidization will result are set forth in Order Nos. 669, 669-A, and 669-B15 and were clarified in FERC’s Supplemental Merger Policy Statement.16 FERC will look to see whether there will be cross-subsidization concerns that do not presently exist after the Public Utility Transaction.
Over the years, the effect on competition has typically been the most substantive issue in FERC merger proceedings. FERC’s market power analysis is based on and is generally consistent with the 1992 Department of Justice (DOJ) and Federal Trade Commission (FTC) merger guidelines. FERC decided not to update its market power analysis when the DOJ and FTC updated their analyses several years ago.17
Even though it is “based” on the DOJ and FTC guidelines, FERC’s analysis is different than the competitive review of Public Utility Transactions performed by the antitrust agencies. In a Public Utility Transaction, the DOJ18 focuses on competition and whether the transaction will substantially lessen competition while FERC is primarily focused on just and reasonable rates. FERC is also looking at competition but its focus is on the rate effect of a Public Utility Transaction. It is a slightly different analysis and certain transactions have obtained FERC approval but have had issues with the DOJ and conversely, FERC has taken a very close look at many Public Utility Transactions that the DOJ did not seem to review as closely.
Over the past twenty years, the independent system operator (ISO) markets in the United States have developed and expanded, eliminating many market power issues. Also, fewer submarkets exist within those markets now than in the past. In general, Public Utility Transactions tend to present fewer significant market power issues at FERC in transactions now than they did ten or twenty years ago. As to ISO submarkets, the ISOs have worked to eliminate transmission constraints so some recent transactions that may have required additional market power analysis in the past did not require it because the submarkets no longer existed electrically.19
Vertical power concerns have been a FERC issue in a handful of transactions over the years. This review typically concerns the combination of generation with gas transportation or fuel inputs. When presented with convergence mergers, FERC has concluded that a necessary condition for a convergence merger to cause a vertical concern is that both the upstream (natural gas) and downstream (electric) markets are highly concentrated. That is not something that would typically be present in most convergence mergers.
If significant market power issues are present, the parties to a Public Utility Transaction may propose to mitigate market power or FERC may condition the authorization of the transaction on market power mitigation. Most typically, the need for a mitigation proposal occurs as a result of horizontal market power concerns (i.e., concerns about the combination of generation). Structural mitigation—for example, commitment to sell generation assets or to invest in transmission upgrades that would relieve transmission congestion—is more common mitigation in the transaction context.20 That being said, mitigation proposals could include, among other things, the following: (1) relinquishing operational control over generation assets permanently through divestiture; (2) commitment to invest in transmission upgrades to relieve transmission constraints; (3) sales of capacity and energy through a competitive bidding process or long-term sales; (4) the interim sale of power and energy for ultimate delivery to retail customers (among other tailored interim measures); (5) treatment of municipal systems as native load; (6) establishment of a market monitor; (7) limitations on the ability to contract and/or make sales in control areas; (8) cost-based and market-based rate caps; and (9) joining an ISO and transferring operational control of facilities to such entity. Some of these market power mitigation “tools” are more frequently seen at FERC in contexts other than the transaction context.
As to the effect on rates review in the FERC process, most applicants are able to satisfy rate issues through commitments. Entities involved in a Public Utility Transaction typically make a hold harmless commitment to FERC that cost-based transmission customers and wholesale power customers will be held harmless from adverse effects of the transaction. FERC issued a Hold Harmless Policy Statement in 2016, Policy Statement on Hold Harmless Commitments, 155 FERC ¶ 61,189 (2016), and provided additional guidance on hold harmless policy commitments. In that proceeding, FERC noted that it “has found hold harmless commitments under which applicants commit not to seek to recover transaction-related costs except to the extent that such costs are exceeded by demonstrated transaction-related savings for a period of five years to be ‘standard.’”21
Timing for a FERC response for a request for transaction approval varies greatly according to the type of transaction and the types of companies involved as well.
As noted above, electric and gas utilities frequently have wireless FCC licenses and Section 310(d) of the Communications Act, 47 U.S.C. § 310(d), requires prior authorization from the FCC before a license may be transferred or before a transfer of control over an FCC license occurs. In the past, the FCC has expressed concern about the utility industry’s failure to obtain required approvals and the FCC has fined certain utility companies for failing to obtain required approvals. The FCC published a practical advice report regarding private wireless licenses that might be helpful.22
The FERC application for FPA Section 203 approval is a written document with attachments. In contrast, the FCC’s Section 310 submittal is a form that is filed electronically. The FCC’s consent may be obtained as quickly as one-to-two days in certain cases provided the FCC licenses have been maintained (i.e., the FCC ULS system accurately reflects the current upstream owner and other types of required notices have been submitted to the FCC on a routine basis).
Some natural gas pipeline companies, where the licenses are used for operational purposes, have hundreds of licenses. On the electric utility side, companies may rely on FCC licenses for handheld communications devices used onsite at generation facilities or possibly for automated meter reading.
1 16 U.S.C. § 791a et seq.
2 47 U.S.C. § 151 et seq.
3 In one pending Public Utility Transaction, there are ongoing proceedings in six states.
4 15 U.S.C. § 717 et seq.
5 From time to time, certain transactions involving natural gas transportation contracts require FERC waiver of capacity release requirements in order for one party to a contract to make a permanent capacity release (i.e., if that entity has contractual rights as a shipper on an interstate gas pipeline that are being transferred as a result of a transaction). The determination of whether a filing is required is fact-specific and should be examined on a case-by-case basis.
6 FPA Section 203 is codified at 16 U.S.C. § 824b.
7 In another recent transaction whereby Hydro One Limited proposed to acquire Avista Corporation, Avista actually does business in six different states, including Alaska. In that instance, if Avista owned and controlled only energy assets and only did energy business in Alaska, FERC authorization likely would not have been required. Because Avista’s businesses included providing FERC jurisdictional services within the continental United States, however, the parties to the transaction did seek and receive prior authorization for the transaction from FERC. Hydro One Limited, 162 FERC ¶ 62,030 (2018).
9 EPAct provides for enhanced penalties: criminal penalties up to $1 million a day and/or imprisonment of up to five years for willful and knowing violations of any section of the FPA; a criminal penalty of up to $25,000 a day for willful and knowing violations of rules, regulations, restrictions, conditions, and orders under the FPA. In addition, Congress gave the Commission authority to impose upon “any person” civil penalties of up to $1 million a day “after notice and opportunity for public hearing,” with the commission taking into consideration “the seriousness of the violation and the efforts of [the violator] to remedy the violation in a timely manner.”
10 See 18 C.F.R. Part 33.
11 16 U.S.C. § 824b(a)(4).
12 See, e.g., Texas-New Mexico Power Co., 105 FERC ¶ 61,028 at P 23 & n.14 (2003) (citing Pac. Power & Light Co. v. FPC, 111 F.2d 1014, 1016–17 (9th Cir. 1940)).
13 See Inquiry Concerning the Commission’s Merger Policy Under the Federal Power Act: Policy Statement, Order No. 592, FERC Stats. & Regs. ¶ 31,044 at 30,111 (1996), order on reconsideration, Order No. 592-A, 79 FERC ¶ 61,321 (1997).
14 See Revised Filing Requirements Under Part 33 of the Commission’s Regulations, Order No. 642, FERC Stats. & Regs. ¶ 31,111 at 31,872 (2000), order on reh’g, Order No. 642-A, 94 FERC ¶ 61,289 (2001).
15 Transactions Subject to FPA Section 203, Order No. 669, FERC Stats. & Regs. ¶ 31,200 (2005), order on reh’g, Order No. 669-A, FERC Stats. & Regs. ¶ 31,214, order on reh’g, Order No. 669-B, FERC Stats. & Regs. ¶ 31,225 (2006).
16 FPA Section 203 Supplemental Policy Statement, FERC Stats. & Regs. ¶ 31,253 (2007), reh’g and clarification denied, 122 FERC ¶ 61,157 (2008).
17 Analysis of Horizontal Market Power Under the Federal Power Act, 138 FERC ¶ 61,109 (2012).
18 The DOJ will typically take a closer look at power transactions and the FTC will look at transactions involving gas utilities.
19 See Atlas Power Finance, LLC, 157 FERC ¶ 61,237 (2016); Wisconsin Energy Corp., 151 FERC ¶ 61,015 (2015).
20 Discussion of market power mitigation may be found in the following FERC orders: American Electric Power Co. and Central and South West Corp., Order No. 442, 90 FERC ¶ 61,242, order on reh’g, 91 FERC ¶ 61,129 (2000) (orders conditionally authorizing proposed merger); 91 FERC ¶ 61,208 (2000) (orders on compliance filings); Exelon Corp. and Public Serv. Enterprise Corp., Inc., 112 FERC ¶ 61,011, denying reh’g, 113 FERC ¶ 61,299 (2005); Westar Energy, Inc., ONEOK Energy Servs. Co., LP, 115 FERC ¶ 61,228, order on reh’g, 117 FERC ¶ 61,011 (2006).
21 Id. at P 85. Notably, the hold harmless commitments typically provide for the option of making a separate submittal to FERC to recovery transaction-related costs to the extent they exceed transaction-related savings. Not many companies have sought such recovery but there is some existing precedent.
22 Private Wireless Licensees’ Obligations Under Section 310(d) of the Communications Act of 1934, available at https://www.fcc.gov/reports-research/guides/private-wireless-licensees-obligations-under-section-310d-communications-act-1934.