Federal Energy Regulatory Commission Regulation Of Securities

The Federal Energy Regulatory Commission ("FERC") has jurisdiction under the Federal Power Act ("FPA")1 over the issuance or assumption of securities by public utility companies subject to its jurisdiction.2 FERC also has jurisdiction over the acquisition by a public utility company or a holding company of securities issued by a public utility company.3 FERC also mandates that public utilities file with FERC documentation regarding certain "cash management" or "money pool" arrangements. This Commentary outlines FERC's authority in these areas and the steps public utilities should take to ensure compliance.

Issuance of Securities Only "public utilities" are subject to the restrictions on securities issuance or assumption. A public utility is any entity that "owns or operates facilities subject to the jurisdiction of the Commission."4 Jurisdictional facilities are those involving the "transmission of electric energy in interstate commerce and to the sale of electric energy at wholesale in interstate commerce."5 Traditional vertically integrated electric utilities are thus subject to FERC jurisdiction. In addition, entities such as power marketers,6 stand-alone transmission companies, and certain electric generating companies7 are also included.

Under Section 204 of the FPA, without FERC approval, no public utility may:

issue any security, or assume any obligation or liability as guarantor, indorser, surety, or otherwise in respect of any security of another person....8

FERC is directed to give such approval only if the issuance or assumption:

(a) is for some lawful object, within the corporate purposes of the applicant and compatible with the public interest, which is necessary or appropriate for or consistent with the proper performance by the applicant of service as a public utility and which will not impair its ability to perform that service, and (b) is reasonably necessary or appropriate for such purposes.9

This is a broad authority and, unlike for some state utility commissions, extends to the "assumption" or "guaranty" of the obligation of another person. The definition of "security" is likewise quite broad:

"security" means any note, stock, treasury stock, bond, debenture, or other evidence of interest in or indebtedness of a corporation subject to the provisions of [the Federal Power Act].10

There are two important exceptions to the general rule that all securities issuances or assumptions must be approved by FERC. Small amounts of short-term debt can be issued without approval. Also, if a state utility commission approves a security issuance or assumption, no FERC approval is needed.11

The small issue exemption is limited. It is applicable only to debt maturing in not more than one year. The aggregate amount of such short-term debt cannot be more than 5 percent of the par value of the other securities of the public utility then outstanding.12 A public utility relying on this exemption must file a notice of issuance of the debt with FERC within 10 days.13

The second exemption eliminates the need to get FERC approval if a state utility commission has jurisdiction to approve the issuance or assumption and has done so.14 The state utility commissions of most states regulate the issuance of equity securities and long-term debt. Fewer states regulate the issuance of short-term debt. Thus, many traditional vertically integrated electric utilities will not need any FERC authorization to issue or assume securities. In the case of those in states that do not regulate short-term debt, electric utilities routinely seek FERC approval of short-term debt programs. The ability to issue short-term debt under the 5 percent of par value exemption usually does not offer sufficient short-term debt capacity.

If an issuance or assumption of a security requires FERC approval, application is made under Part 34 of FERC's regulations.15 The application includes a description of the filing utility, the date by which FERC action is requested (approval usually takes 45 to 60 days), a description of the securities offered, and the purpose of the offering (which must include a description of any construction program being funded by the offering or a description of securities being refunded). In addition, the applicant must show in detail how the offering is within the corporate purposes of the applicant and is compatible with the public interest. The application requires a description of any applicable restrictive covenants in the applicant's articles of incorporation or bond indentures (such as dividend restrictions, interest coverage tests for issuance of indebtedness, or similar restrictions). Finally, the applicant must describe recent changes in its approved state and federal electric rates.16 No filing fee is currently required in connection with an application.17

Applicants, especially those seeking approval for short-term debt, typically seek FERC approval to issue identified types of securities, up to a specified maximum amount and for a period of two years. Thus, while an applicant can seek approval of one specifically identified transaction, FERC will also approve a "shelf" type application that gives the public utility the authority to issue the identified securities from time to time over the two-year period, subject to the conditions and limits contained in the application and FERC's order.18 A public utility that participates in a cash management or money pool agreement that includes issuance by it of securities (i.e., borrowing under the agreement) will usually seek approval for these short-term borrowings in a shelf application (unless it is required to get state commission approval for these...