On December 2, 2020, FERC clarified that when an entity with passive equity holdings in a company later wants to assume operational responsibilities over the company, the entity must obtain authorization under Federal Power Act (“FPA”) section 203 prior to the assumption of operational management responsibilities. FERC’s December 2 order on rehearing modified the discussion in a May 29, 2020 order in the proceedings approving Tenaska Lotus Holdings, LLC’s (“Tenaska Lotus”) assumption of rights as operations manager of 41MB 8me, LLC (“Project Company”) (together, “Applicants”), a 51 MW solar facility in California.
Tenaska Lotus’ acquisition of Project Company occurred in two stages. First, on April 17, 2020, Tenaska Lotus acquired passive tax equity interests in the Project Company’s parent, Lotus Solar Partnership, LLC (“Lotus Solar”). Second, Tenaska Lotus sought to become operations manager of Lotus Solar and the Project Company; pursuant to FPA section 203, the Applicants submitted an application for authorization for this change in control on April 20, 2020. In a May 29, 2020 order, FERC authorized the transaction as consistent with the public interest but, in Footnote 2 of the order, noted that the Applicants failed to file an application for FPA section 203 authorization prior to the first phase of the transaction. FERC reminded Applicants that they must submit required filings on a timely basis or face possible sanctions.
Applicants sought rehearing of FERC’s May 29 order, arguing that no FPA section 203 approval was required for Tenaska Lotus to acquire the passive, non-controlling tax equity interests in Project Company’s parent Lotus Solar, because such tax equity interests do not constitute voting securities. Applicants clarified that they sought FERC approval when Tenaska Lotus sought to become operations manager of Lotus Solar and the Project Company, because this constituted an upstream change in control over the Project Company. Applicants further pointed to previous examples in which, according to Applicants, FERC authorized identical bifurcated transactions without finding any violations of FPA section 203.
FERC’s December 2 order on rehearing stated that its precedent on the jurisdictional treatment of multi-step transactions has not been clear, and acknowledged that it has previously found that advance section 203 approval is not required for the transfer of tax equity interests on its own. FERC therefore clarified that “[w]hen an entity with passive equity holdings in a company later wants to assume operational responsibilities over the company, the entity must obtain authorization under section 203 prior to the assumption of operational management responsibilities.” Moreover, FERC warned that that entities may not evade Commission jurisdiction by separating an otherwise jurisdictional transfer into separate transactions.
Applying these holdings, FERC found that Tenaska Lotus’s assumption of management responsibilities, when coupled with its existing passive equity holdings, constituted a change in control that is a jurisdictional event subject to prior FERC approval. But because Applicants filed a section 203 application prior to Tenaska Lotus’ assumption of operational management responsibilities, FERC held that Applicants satisfied their obligations under section 203, and set aside the May 29 order in part to remove Footnote 2.
FERC’s December 2 order is available here.