United States: FERC Grants Petition For Declaratory Order Disclaiming Jurisdiction Over Passive Interests Under Section 203 And Market-Based Rate Requirements

The Federal Energy Regulatory Commission (FERC) has issued an order granting a petition for declaratory order in Starwood Energy Group Global, Docket No. EL15-87-000, 153 FERC ¶ 61,332 (2015). The order found that transfer of certain passive interests would not require FERC authorization under section 203 of the Federal Power Act (FPA), such passive interests do not create affiliation requiring inclusion in certain market-based rate filings under FPA section 205, and holders of those passive interests alone would not result in the entities being considered public utilities under FPA section 201 or holding companies under the Public Utility Holding Company Act of 2005 (PUHCA).

As described in its petition, Starwood Energy Group manages several Starwood Funds that in turn invest in various energy projects, some of which are FERC-jurisdictional, including several transmission lines and exempt wholesale generators. Starwood Energy Group created Limited Partnership (LP) Interests in the Starwood Funds with specifically enumerated limited rights and sought a declaratory order regarding FERC's jurisdiction over the LP Interests on the issues noted above.

According to Starwood Energy Group, the LP Interest rights are limited to veto and consent rights necessary to protect the LP Investors' economic interests, generally regarding incurrence or forgiveness of debt, changes to the business, the disposal of substantially all of the assets of the business, the filing of a petition for bankruptcy, and other actions of a similar business, financial or organizational nature. The LP Investors' rights provide no authority to manage, direct or control the activities of a jurisdictional asset. FERC also noted that no LP Investor has a principal business of producing, selling, or transmitting electric power, and no LP Investor directly or indirectly controls or is affiliated with any public utility other than through the Starwood Funds. LP Investors may receive annual and quarterly reports, access to books and records, periodically appraise the assets owned by the relevant investor, and amend the valuation plan presented by the general partner.

In its order, FERC stated that, based on the facts in the petition, and as conditioned in the order, current and future LP Interests with specific limited rights that do not allow the LP Investors to manage, direct, or control the activities of FERC-jurisdictional public utilities are passive investments. Accordingly, FERC disclaimed jurisdiction under FPA section 203 as to transfers regarding current and future LP Interests, specifically disclaiming jurisdiction as to case-specific transactions for LP Interests to co-invest in jurisdictional facilities, or for Starwood Energy Group to sell future LP Interests. FERC also provided that, to the extent relevant, acquisition of LP Interests under FPA section 203(a)(2), which relates to the ability to "purchase, acquire, or take any security," will qualify for the blanket authorization relating to non-voting securities provided by 18 C.F.R. section 33.1(c)(2)(i).

FERC stated that the declaratory order would also apply to future LP Investors, so long as there are no material changes in the rights and obligations of the LP Investors. FERC stated that the declaratory order will not apply to any circumstance in which an LP Investor has taken an active role in an investment in a jurisdictional facility or where LP Investors have removed the general partner with or without cause. Moreover, Petitioners must inform FERC of any material change in circumstances that would reflect a departure from the facts FERC relied upon in the declaratory order.

Further, FERC found that because LP Investors are passive, the Starwood Funds and their affiliates (including Starwood Energy Group) do not need to identify the LP Investors in any future section 205 market-based rate application, updated market power analysis, or notice of change in status. Similarly, LP Investors need not be identified as energy affiliates in any future application under section 203 filed by the Starwood Funds or their affiliates (including Starwood Energy Group).

Finally, FERC stated that LP Investors, as they have been found to be passive investors as noted above, are neither "public utilities" under FPA Section 201(e), nor holding companies under PUHCA.

A copy of the order can be found here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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