On October 4, 2017, the Federal Energy Regulatory Commission (the “Commission”) issued an order allowing entities with certain passive investments to transfer those interests without receiving prior authorization from the Commission under Section 203 of the Federal Power Act (“FPA”). Specifically, the Commission found that passive tax equity interests in public utilities or public utility holding companies do not constitute voting securities for the purposes of Section 203. Thus, the transfer of these interests does not require Section 203 approval because such transfer does not constitute a transfer of control with respect to the public utility. In addition, the Commission found that the transfer of these passive investments by a holding company qualifies for blanket authorization under FPA Section 203 (a)(2).
On December 9, 2016, a group of investors in renewable energy projects (the “Petitioners”) filed a petition for declaratory order (the “Petition”) asking the Commission to extend its prior finding that their tax equity interests in renewable energy projects are not voting securities under FPA Section 205, to the prior authorization requirements of Section 203. The Petition also requested that the Commission confirm that holding companies’ acquisition of these interests qualifies for blanket authorization under Section 203 (a)(2).
The Petitioners provide “tax equity financing” for public utilities, or their holding companies, that generate renewable energy. Even though the Petitioners’ investments are passive in nature, like a number of financers in this space, the Petitioners have been subject to the burden of filing applications for authorization under Section 203 out of an abundance of caution. To relieve this burden, Petitioners asked the Commission to extend its holding in AES Creative Resources, L.P. to Section 203 of the FPA. In AES Creative Resources, the Commission held that tax equity interests in public utilities were not considered voting securities under FPA Section 205 because the interests did not grant their holders the “authority to manage, direct, or control the activities” of the public utilities. The Petitioners argued that the same analysis should apply to the transfer of tax equity interests in public utilities under Section 203.
II. The Commission’s Decision and Investor Impact
The Commission granted the Petition, expanding the holding in AES Creative Resources L.P. to apply to passive tax equity interests in public utilities for the purposes of Section 203, relieving holders of such passive interests from the prior authorization requirement under Section 203. Ultimately, the Commission found that the central question in AES Creative Resources—whether the tax equity interests gave the holder control over the activities and day-to-day operation of the public utility or were passive in nature—applies equally to the determination of whether prior approval for the transfer of tax equity interests is required under Section 203. The Commission concluded that, to the extent tax equity interests are classified as passive under the standard set by AES Creative Resources L.P., the same analysis will apply under Section 203 and passive tax equity interests will not be considered voting securities that trigger the application of Section 203. The Commission also clarified that a holding company’s acquisition of these interests qualifies for blanket authorization under Section 203 (a)(2).
This order eliminates the “just in case” Section 203 applications routinely filed with FERC for authorization of passive investments, which have been particularly burdensome for entities making tax equity investments in renewable projects. Allowing investors to freely transfer such passive investments will improve the efficiency of transactions in the renewable energy project finance industry.
However, the Commission made clear that the scope of investments covered by the order is limited to the type of passive tax equity interests addressed in AES Creative Resources. In AES Creative Resources, the Commission addressed the limitations of what may qualify as a passive interest and certain types of limited consent or veto rights that a holder of a passive tax equity interest may have to protect the value of their investment. Entities and investors will continue to bear the responsibility of determining whether the investments involved in their transactions can be appropriately classified as passive under the AES Creative Resources standard and or if they are voting securities that trigger Section 203’s prior approval requirement.