FERC Schedules Technical Conference on Proposed Rule for Collection of “Connected Entity” Data from Participants in Organized Electric Markets; Rule May Affect Investors and Lenders
The Federal Energy Regulatory Commission (FERC) issued an order on November 10, 2015, establishing a technical conference to discuss a proposed rule to require Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs) to collect information from market participants on their “Connected Entities” and to deliver such information to FERC. The technical conference is scheduled for December 8, 2015. The order also extended the time period for submitting comments on the proposed rule to January 22, 2016 (45 days after the technical conference). This order responded to requests by numerous commentators, including major energy industry participants, trade associations, and working groups, that FERC hold a technical conference to collect more information regarding the proposed rule and provide interested parties more time to prepare and submit comments.1
The rule proposed by FERC, if adopted, would impose new data reporting requirements on many public utilities and other entities that participate in organized electric markets and would require collection of information from or regarding their owners and investors, affiliates, key officers and employees, and contractual counterparties (referred to as Connected Entities). The proposed rule applies to RTOs and ISOs (which are entities that operate electric transmission networks and organized electric markets in much of the United States2) and, indirectly, to the “market participants” that buy or sell electric energy and related services in the organized electric markets. The proposed rule also would affect direct or indirect equity investors in market participants (including tax equity investors in renewable energy projects and private equity funds) as well as direct or indirect lenders to market participants in certain circumstances, because such entities would need to provide information to the market participants for reporting to the RTOs and ISOs (and eventually to FERC). This could impose substantial record-keeping burdens on market participants and investors and potentially could lead to penalties for any failure to provide complete and accurate information.
Under the proposed rule as issued on September 17, 2015,3 FERC would require RTOs and ISOs to collect and deliver to FERC on an ongoing basis the following information4:
- the identity of each market participant, using a common alphanumeric identifier. FERC proposes to use Legal Entity Identifiers (LEIs), as established in connection with implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act, for this purpose. Market participants also would report the LEIs, if known, of their Connected Entities.
a list of the Connected Entities of each market participant. The term Connected Entity is broadly defined to include the following:
any entity that directly or indirectly owns, controls, or holds with power to vote, 10% or more of the ownership instruments of the market participant, including:
- owners of voting and non-voting stock and general and limited partnership shares.
- any entity that holds or issues a debt interest or 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 an ownership interest that, in connection with other ownership interests, gives the entity, directly or indirectly, 10% of the ownership interests of the market participant.
any entity 10% or more of whose ownership interests are owned, controlled, or held with power to vote, directly or indirectly, by a market participant, including:
- any entity 10% or more of whose ownership interests could, with the conversion of debt or structured products and in combination with other ownership interests, be owned or controlled, directly or indirectly, by a market participant.
- any entity engaged in FERC-jurisdictional markets that is under common control with the market participant.
- the chief executive officer, chief financial officer, chief compliance officer, and traders of a market participant.
- any entity that has 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 the operational or financial control of such resources.5
- any entity that directly or indirectly owns, controls, or holds with power to vote, 10% or more of the ownership instruments of the market participant, including:
- a brief description of the nature of the relationship of each Connected Entity. This would include, for example, major provisions of contracts, such as the effective date, term, renewal provisions, the identity of any generating plant involved as well as information such as heat rate or power curves.
The broad definition of Connected Entities would represent a departure from a recent FERC action to limit required disclosures of affiliates of public utilities with market-based authorization to entities that are affiliated based on a standard of 10% or more of the voting interests.6 It also represents a departure from FERC precedent under which debt instruments, non-voting interests, and interests that are convertible to equity interests are not relevant for purposes of establishing affiliate relationships for FERC purposes.
It would be challenging for many market participants to collect the broad information proposed to be reported under this rule, particularly where the market participant’s direct or indirect owners include individuals and investment funds or where its debt or equity interests are actively traded. The market participant not only would need to keep track of changes in all of its upstream owners that hold, directly or indirectly, 10% or more of its ownership interests, but it also would have to keep track of entities that are engaged in FERC jurisdictional markets and could be considered under “common control” with the market participant.7 In many cases, market participants and their investors would need to put in place new or expanded mechanisms to require reporting of relevant information to the market participant, as well as a waiver of applicable confidentiality requirements.
Market participants would be required to update the data provided to RTOs and ISOs within 15 days of a change in status. Unless FERC establishes a significant threshold for what constitutes a change in status, these updates could be very frequent for market participants that have many Connected Entities, particularly if they or their upstream owners have issued equity or convertible debt instruments that are frequently traded, or if their owners include investment funds that have many other investments that might meet any standard for “common control” established under the rule.
In the proposed rule, FERC provided estimates of the time and expense involved in collecting and reporting the information, including annual ongoing burdens of 5 hours ($356, including the $150 fee to maintain the LEI) for each market participant and 1.25 hours ($53) for each Connected Entity. These estimates appear to be very low given the extensive scope of the information that would need to be collected and the need for updates for any change in status, plus the requirement to provide the information in the required format.
Data that are not already public would be treated by FERC as non-public information; FERC expects that such data would satisfy an exemption from public disclosure under the Freedom of Information Act. However, it could be challenging for some market participants to determine what information is already public and what information benefits from an exemption from disclosure, particularly for data provided to the market participant from Connected Entities that may be only marginally affiliated with the market participant reporting to the RTO or ISO.
The need expressed by FERC for collecting this information generally is to assist in identifying market manipulation schemes that might be implemented by a market participant to benefit a Connected Entity. However, FERC did not provide any specific examples of situations or trends that indicate that such schemes as between market participants and Connected Entities are prevalent or that any such schemes cannot be adequately addressed by FERC using other means.8
Interested market participants, investors, and others potentially affected by the proposed rule should consider participating in the December 8, 2015, technical conference and submitting comments by the January 22, 2016, due date.
 Trade associations and working groups supporting the scheduling of a technical conference and extension of the comment period include the American Forest & Paper Association, the American Gas Association, the American Wind Energy Association, the Canadian Electricity Association, the Commercial Energy Working Group, the Edison Electric Institute, the International Energy Credit Association, and the Private Equity Growth Capital Counsel.
 The FERC-jurisdictional RTOs and ISOs are: ISO New England Inc., New York Independent System Operator, Inc., PJM Interconnection, L.L.C., Midcontinent Independent System Operator, Inc., Southwest Power Pool, Inc., and the California Independent System Operator Corporation. These RTOs and ISOs operate electric transmission networks and organized electric markets in New England, New York, the Mid-Atlantic States, much of the Midcontinent region extending from the Canadian border to the Gulf of Mexico, and California.
 Collection of Connected Entity Data from Regional Transmission Organizations and Independent System Operators, Docket No. RM15-23-000, 152 FERC ¶ 61,219 (2015).
 The proposed rule envisions that data would be presented in a tabular format that would be submitted electronically to the RTOs/ISOs and ultimately to FERC.
 FERC included a non-exclusive list of types of relevant agreements, including tolling agreements, energy management agreements, asset management agreements, fuel management agreements, operating management agreements, and energy marketing agreements.
 See Refinements to Policies and Procedures for Market-Based Rates for Wholesale Sales of Electric Energy, Capacity and Ancillary Services by Public Utilities, Order No. 816, 153 FERC ¶ 61,065 at PP 21, 333 and 375 (2015).
 There are many details that would need to be further defined in any final rule, including, among others, how to determine 10% of an entity’s direct or indirect “ownership interests,” particularly in situations involving multiple classes of ownership interests and layers of ownership interests, and how to define terms such as “common control,” “structured transaction,” and “structured products.” The scope of entities covered by the definition of Connected Entities could vary significantly depending on the details. For example, if a private equity fund holds minority, non-voting interests indirectly in a market participant, to what extent would that fund, and other funds under the same or affiliated management, and the entities in which they invest that engage in FERC-jurisdictional markets be considered Covered Entities?
 FERC currently collects information with respect to many of the Connected Entity relationships addressed in the proposed rule through its market-based rate applications and associated notices of change in status and triennial market power updates, its electric quarterly reports of contracts and transactions for wholesale electric sales, and reports of officers and directors holding interlocking positions with respect to more than one public utility. Moreover, FERC can collect additional information using investigatory measures in the event that it uncovers any anomalous trading activities that raise suspicion of market manipulation.