FERC has provided specific, detailed guidance for the first time on the use of voting trusts to eliminate ownership affiliation.
Direct and indirect owners of 10% or greater voting interests in FERC-regulated “public utilities” are typically treated by FERC as “affiliates” and as “holding companies” of their public utilities. These owners become subject to FERC regulation with respect to some mergers, acquisitions, divestitures, and changes in control, and with respect to their and their affiliates’ FERC-conferred right to sell electricity at wholesale.
This regulatory status can be undesirable and comes with a number of requirements and restrictions. As the public utility affiliations of an investor increase, the investor—and all of its affiliates—can face difficulty in satisfying FERC market power screens that apply to many investment transactions and to market-based rate power sales authorizations. Affiliation with public utilities also comes with intricate filing and disclosure requirements, and can result in the owner being held responsible for their public utility affiliates’ regulatory compliance.
Voting trusts have long been used by owners of voting securities in public utilities and their holding companies to divest the owners of their voting rights and hence their exposure to direct and indirect regulation under the Federal Power Act (FPA). Since the 1930s, FERC accounting reports have called out voting trust arrangements for special treatment. In the 1990s and 2000s, FERC encouraged—and in at least some cases required—the use of voting trusts in order to cause regional transmission organizations to operate independently of their transmission-owning utility members. And numerous merger and acquisition documents publicly filed with FERC in FPA corporate regulatory proceedings reference voting trusts, although the resulting FERC orders do not typically address these arrangements in any detail.
FERC’s September 30, 2019 order provides precedential guidance on the use of voting trusts, confirming what had long been FERC practice. Under that order, for a voting trust to effectively remove voting rights from a shareholder and thereby permit the shareholder to be deemed not to hold voting rights (and therefore not exercise “control” over the subsidiary utility), the voting trust must only permit the shareholder to participate in any voting decisions in extremely limited, discrete, investor protection votes, and not in general day-to-day matters – a standard that is nearly identical to FERC’s standards for establishing whether investments in other contexts are “passive.” The trustee of the voting trust should not be an affiliate of any party that is intended to be isolated from holding voting rights. A shareholder with directorship-selection rights would not be permitted to name multiple directors; doing so could accomplish the equivalent of a voting-level of control by other means. And FERC’s order makes clear that a voting trust arrangement that does not in fact deprive the shareholder of other than bet-the-company voting rights will not “break the affiliation.”
Investors and public utilities should note that, in some cases, transferring direct or indirect voting rights of 10% or more in a public utility may separately require FERC approval. In addition, to the extent that a voting trust is relied on to establish non-affiliation in a FERC merger or market-based rate power sales filing, the filing must describe the trust arrangements.