The Federal Energy Regulatory Commission (FERC) issued an order on December 17, 20091 (the Order) with significant implications for owners of and tax equity investors in US generating facilities. The Order concludes that tax equity investments that are “passive,” under the FERC’s standards, do not create affiliate relationships for the purpose of market-based rate authorizations.
In the transactions described in the Order, a number of affiliates of The AES Corporation (AES Companies) made “change in status” filings to their market-based rate authorizations in connection with a new acquisition of a generating facility by AES. Under the FERC’s rules, a public utility with market-based rate authority must file a notice of change in status for any change that would reflect a departure from the characteristics that the FERC relied upon in granting that authority. Those changes include situations where the utility becomes affiliated with an entity that owns generation.
In connection with the change in status filings, the AES Companies requested that the FERC waive any requirement that the tax equity investors in certain AES Company projects be treated as affiliates for purposes of change in status filings. The AES Companies noted that if a tax equity investor is considered an affiliate of the project in which it made its tax equity investment for this purpose, a notice of change in status would need to be filed by the project company every time the tax equity investor or one of its affiliates acquires generation assets. The same requirement would apply to every affiliate of the tax equity investor with market-based rate authority every time the project acquired additional generation.
The FERC considered whether the tax equity investors in the relevant projects of the AES Companies are affiliates of such projects for purposes of market-based rate regulations by virtue of their tax equity investment and found that the tax equity investors do not hold “voting securities” for purposes of the definition of an affiliate in the FERC’s market-based rate regulations. The FERC reviewed the list of consent or veto rights granted to these tax equity investors in the project partnership agreements and specifically noted that such rights do not confer control or allow the tax equity investor to participate in the day-to-day operations. The specific consent or veto rights expressly described by the FERC include many of the standard tax equity investor consent rights that are agreed upon in most tax equity transactions. The FERC further noted that the consent or veto rights of the various tax equity investors in the several relevant AES Company projects varied somewhat from project to project, but that variation in such rights was not material to the conclusion that these consent rights are only limited rights necessary to protect the tax equity investment.
The impact of the Order is to significantly reduce the burden and risk on both developers and tax equity investors with respect to the impact of acquisitions on market-based rate authority status and subsequent compliance obligations. It is possible that the Order may lead the industry to revisit the common practice of filing under Section 203 of the Federal Power Act for authorization of the initial acquisition of passive tax equity interests. In both cases, however, it will remain important for companies and their advisors to review carefully the rights of tax equity investors in light of the Order before concluding that FERC would treat such investments as passive. The full text of the Order can be found here.