Zori G. Ferkin and Robert S. Fleishman
Energy Regulatory, Project Finance, Energy Litigation, Energy, and Renewable Energy
On October 4, 2017, the Federal Energy Regulatory Commission (FERC) continued to clear its case backlog and issued a declaratory order that draws a road map clarifying that certain tax equity investments in FERC-regulated public utilities will not require prior FERC authorization under Section 203 of the Federal Power Act (FPA). FERC created the road map in 2009 in its AES Creative Resources order by reviewing the characteristics of certain tax equity interests—specifically, their rights and authority to manage and control the day-to-day operations of the public utility—and ruling that such interests did not constitute “voting securities” for purposes of FERC’s market-based rate regulations under Section 205 of the FPA. In granting the petition for declaratory order filed by the Ad Hoc Renewable Energy Financing Group, FERC determined that such interests are also not “voting securities” for purposes of FERC’s regulation of mergers and acquisitions under FPA Section 203. FERC also determined that a holding company qualifies for a blanket authorization to acquire such interests because they are not “voting securities.”
To the extent a prospective tax equity ownership interest adheres to the road map, FERC’s latest order should provide assurance that the transaction does not require FERC Section 203 approval. Prospective tax equity investors and public utility owners will need to pay close attention to the terms and conditions of their formation and operating agreements in order to determine if FERC approval is necessary as a condition to closing on the investment. Any variance from the road map, however, may call into question whether the tax equity interest would be deemed a non-voting security that does not require approval from FERC. FERC stated: “We note that our granting of the Petition is limited to the securities addressed in AES Creative Resources, as requested. . . . To the extent a future tax equity investor is considering whether securities with characteristics that vary from those presented in AES Creative Resources constitute non-voting securities, it remains the investor’s responsibility to make a determination as to whether prior Commission approval for transactions involving such securities is necessary.”
View the full text of the Declaratory Order.
 Ad Hoc Renewable Energy Financing Group, Order Granting Petition for Declaratory Order, 161 FERC ¶ 61,010 (Oct. 4, 2017) (“Declaratory Order”).
 AES Creative Resources, L.P. et al., 129 FERC ¶ 61,239 (2009).
 As noted in the petition for declaratory order, in AES Creative Resources, authority to manage and direct the company was “fully vested” in the managing member. The tax equity investors had certain voting and consent rights that FERC found to be limited to such rights as are necessary to protect their economic investments, including incurring certain types of indebtedness; selling or transferring assets; making capital expenditures above a certain threshold; and changing the purpose of the company. The tax equity investors also had a right to remove the managing member in certain limited circumstances, including fraud, willful misconduct or gross negligence, in the event of a bankruptcy, or if the managing member no longer holds membership interests. Declaratory Order at ¶ 5.
 18 C.F.R. § 33.1(c)(2)(i) grants a blanket authorization under Section 203(a)(2) of the FPA for acquisition of any “non-voting security (that does not convey sufficient veto rights over management actions so as to convey control). . . .”
 Declaratory Order at ¶ 17 n.30.
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