FERC Clarifies Scope of Proposed RTO and ISO Disclosure Requirements
On December 8, 2015, the Federal Energy Regulatory Commission ("FERC") Office of Enforcement held a technical conference respecting FERC's recent Notice of Proposed Rulemaking ("NOPR") on Connected Entity Data. As discussed in an earlier post, if adopted, the NOPR would dramatically increase the amount of information that entities participating in Regional Transmission Organization ("RTO") and Independent System Operator ("ISO") markets would be required to disclose regarding their affiliates, contractual arrangements, and employees. In particular, the NOPR would require each market participant to report to each RTO and ISO any "Connected Entities," a term that is defined to include:
- Any entity that directly or indirectly owns, controls, or holds 10% or more of the ownership instruments of a market participant, that is under common control with the market participant and participates in FERC-jurisdictional markets, or in which the market participant holds an ownership interest;
- The CEO, CFO, chief compliance officer, and the traders of each market participant;
- Any entity that is the holder or issuer of a debt interest or a structured transaction that gives it the right to share in the market participant's profitability above a de minimis amount or that is convertible to a direct or indirect ownership interest of 10% or more in the market participant;
- Any entity 10% or more of whose ownership interests could, with the conversion of debt or structured products, be owned, directly or indirectly by a market participant; and
- Entities that have entered into an agreement with the market participant that relates to the management of resources that participate in FERC-jurisdictional markets or otherwise relates to operational or financial control of such resources, such as a tolling agreement, energy management agreement, asset management agreement, fuel management agreement, or the like.
- Connected Entity encompasses a broad range of ownership interests, regardless of whether the interest confers control. With respect to ownership interests requiring disclosure, FERC staff affirmed that the definition of Connected Entity would include any entity that directly or indirectly holds an ownership interest in a market participant, even if the interest is passive and does not confer control over the market participant. FERC staff emphasized that market participants may have a motive to favor the interests of such Connected Entities, even where the Connected Entity does not have control. FERC staff also clarified that the definition could encompass entities that hold ownership interests in a market participant that do not do any business in FERC-jurisdictional markets or are located outside of the United States.
- Connected Entity includes employees, contractors, or agents of a market participant that exercise decision-making authority over trading activities. FERC staff also provided further clarity regarding the requirement that market participants identify individual traders. In particular, FERC staff clarified that "trader" is defined to include any person who makes decisions or devises the strategies for buying and selling physical or financial products in organized electricity markets. FERC staff added that the definition would not include an employee that plays a purely administrative function and executes trades without having any control or influence over the decision whether to make the trade. FERC staff also explained that the disclosure requirement would extend not only to the market participant's employees performing such functions, but also to any contractors or agents of the market participant as well.
- "Management of resources" for purposes of the Connected Entity requirement includes agreements that confer operational control. FERC also narrowed the potential scope of the requirement that market participants identify parties to agreements relating to the "management of resources that participate in FERC-jurisdictional markets." FERC staff acknowledged that the examples provided in the NOPR, which suggested that agreements relating to solely administrative services such as billing and procurement would need to be disclosed, may have caused unneeded confusion. In this regard, FERC staff stated that the focus of this element of the definition of Connected Entity is on agreements that confer control over trading activities or the unit commitment decisions of the market participant. Thus, fuel arrangements, tool sharing arrangements, physical maintenance arrangements, and power purchase agreements would not typically merit disclosure.
- Connected Entity includes debts and other contractual arrangements that give the entity the right to share in a market participant's profitability or establish an ownership interest in the market participant. Finally, on the issue of debt interests and structured transactions, FERC staff clarified that the focus of this requirement is on transactions that give the entity the right to share in the market participant's profitability or that are convertible to 10% or more of the ownership interests of the market participant. FERC staff added that this could include, for example, mortgagees who are eligible to acquire an ownership interest in the market participant upon default, tax equity interests, and employee incentive plans that grant stock options to employees.