DOJ and FTC Raise Concerns about Overlapping Ownership in Public Utility Companies
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.”
