United States: FERC Confirms Regulatory Immunities For Private Equity Investors And Funds

Last Updated: January 4 2016
Article by Mark C. Williams

Passive limited partner investors in private equity funds that make FERC-regulated investments are not themselves subject to FERC's corporate regulatory regime.

Those that own interests in businesses that sell electricity in commerce and those that own interests in electric power generation, transmission, and distribution facilities are subject to extensive and microscopic federal corporate and financial regulation and disclosure obligations unique to the electric power sector. On December 22, the Federal Energy Regulatory Commission (FERC) issued an order1 confirming that passive limited partner investors (LPs) in private equity funds that make FERC-regulated investments are not themselves subject to FERC's corporate regulatory regime.

Background

Almost every business (whether a corporation, a partnership, a limited liability entity, or even an unincorporated group of persons) that sells or transmits electricity in interstate commerce is a "public utility" under the Federal Power Act (FPA), and in many cases, is a "public-utility company" under the Public Utility Holding Company Act (PUHCA). This applies even to businesses that transmit electricity within a single state (using any interconnection to the interstate power grid), and those that engage in other lines of business. FERC regulates the sale, disposition, or other direct or indirect transfers (for example, by merger) of control of public utilities by voting securities or their equivalents, such as partnership or limited liability company interests.2 FERC regulation of control transactions can be triggered by sales of voting or equivalent interests as small as 10%, and related-entity owners of interests are aggregated by FERC. Transfers of indirect interests in a public utility (such as acquiring stock or membership interests in a public utility's parent company) are subject to FERC authorization in the same manner as direct purchases of a public utility's stock or partnership interests. Typically, FERC analyzes ownership and market power by aggregating the interests of related or "affiliated" entities, such that two funds that are under the ultimate control of a common entity are—to FERC—one single entity.

Investors that own or control 10% or more of a public utility's voting securities generally become subject to FERC jurisdiction (including the regulation of other energy-sector investments) and to comprehensive FERC disclosure requirements, including the public identification of their US electric and gas-related investments and on-demand FERC access to books and records.

Although some interests in what are typically smaller renewable and cogeneration facilities can be immune from FERC change-in-control requirements, the FERC requirements can attach to both those that purchase interests and to FERC-regulated public utilities themselves. FERC jurisdiction over control-related transactions—even minority-interest transactions—is difficult to avoid. In the last year, FERC reviewed and issued orders on substantially more than 200 applications for approvals of transactions.

Fund Investments in the Electric Sector

Most private equity funds and similar investment vehicles receive capitalization from LPs that do not manage or control that fund or its public utility investments. Such a fund is typically controlled by general partners, frequently through an affiliated fund management entity. LPs3 have typically been treated by FERC as not holding the equivalent of voting interests, and have not been subject to FERC's FPA or PUHCA ownership transaction approval requirements, although explicit case law that provided fund and LP comfort has not been abundant.

  • In the summer of 2015, FERC was asked to issue a declaratory order regarding funds and LPs subject to the governing documents that contain the following LP rights and limitations:
  • Investment restrictions that function to limit fund ability to dispose of assets or redeem interests without consent of a majority of LPs
  • Limitations on the general partner's powers to subject, without consent, the LPs to an act that would have an LP function as a general partner, such as incurring liabilities, making loans, or forming additional partnerships on behalf of the LPs
  • Prohibitions on in-kind distributions so that the general partner cannot distribute marketable assets of the fund (such as marketable securities) unless such distribution has been approved either by an advisory committee or LPs
  • The approval of two-thirds of the LPs is necessary to remove the general partner upon receiving a "for cause" notice with respect to the actions of the general partner
  • Amendments to the fund governing agreement require the majority consent of the LPs
  • A requirement that a majority of LPs approve the appointment of the general partner's candidate to fill a vacancy on the advisory committee
  • A requirement that a majority of LPs appoint a liquidation trustee to wind up the affairs of the fund and to liquidate its assets when there is no general partner
  • A requirement that a two-thirds vote of the LPs may dissolve the fund
  • A requirement that an advisory committee be established comprising a certain number of LP investors or their representatives that will be vested with power sufficient to protect their economic investment in the fund but prohibited from taking part in the control or management of the fund

The Order

FERC ruled that

  • current and future LPs are passive investors; LPs4 do not manage, direct, or control the activities of the funds nor of the FERC-regulated public utilities in which the funds invest;
  • the purchase and sale of LP interests do not require case-specific approval pursuant to the FPA and, to the extent relevant, LP interests are nonvoting securities under FERC's regulations implementing the FPA;
  • the funds and their public utilities need not identify the LPs in filings with FERC that ordinarily would be required to include ownership-disclosure information; and
  • a fund itself, and each passive LP, is not a public utility under the FPA, and an LP is not itself a "holding company" under PUHCA, solely by virtue of its fund investment.

Limitations on the Order

  • Although the Order confirms that purely passive investors remain largely immune from FERC's FPA and PUHCA jurisdiction, the Order is not without limitations:
  • The Order implies that an LP, to hold the immunities from regulation that the Order sets out, would not have a principal business of producing, selling, or transmitting electric power—in effect prohibiting an entity from claiming immunity from FERC regulation if it simultaneously holds a regulated, "control" position in some investments while simultaneously holding passive fund investments.
  • The Order is inapplicable to an LP that exercises any "active role" that goes beyond the passive rights generally outlined in the Order.
  • The Order does not provide any immunity to an LP that removes (or, presumably, causes the removal of) a fund general partner or manager, even for cause. Where cause for GP removal exists, LPs will need to consider whether LP removal is worth the price of becoming FERC jurisdictional.
  • The LP rights that received FERC assent in the Order are not a minimum floor that investors, and funds, may freely exceed. If an LP's rights exceed the rights that FERC discussed in the Order, the LP may not be determined to be passive, and the LP (and even the fund in which the LP invests) should not rely on the Order's declaratory relief from FERC jurisdiction.
  • In other proceedings,5 FERC is in the process of substantially expanding the data that is collected concerning the ultimate holders of economic, rather than control, interests in public utilities. The Order provides no relief from that proceeding whatsoever; it applies only to FERC corporate regulation of LPs and funds under the FPA and PUHCA.

Footnotes

1 Starwood Energy Group Global, L.L.C., et al., Docket No. EL15-87-000, 153 FERC ¶ 61,332 (2015) (the Order).

2 Note that some state utility commissions (such as New York's Public Service Commission) regulate the acquisition of assets and interests in energy businesses located in those states.

3 The Order strongly suggests that investors in co-investment vehicles that exhibit governance features, and limitations on investor rights, should be viewed as similar to LPs in funds.

4 As defined by the petitioners, LP investors "consist of a mix of sovereign wealth funds, insurance companies, pension funds, superannuation funds, fund[s] of funds, charitable endowments, family offices, high net worth individuals and banking institutions." Id. at 6–7. By this definition, none of the LP investors has a principal business of producing, selling, or transmitting electric power.

5 See, e.g., Notice of Proposed Rulemaking, Docket No. RM15-23-000, Collection of Connected Entity Data from Regional Transmission Organizations and Independent System Operators, 152 FERC ¶ 61,219 (2015).

This article is provided as a general informational service and it should not be construed as imparting legal advice on any specific matter.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions