A new legislation signed into law in August, the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), will expand vastly the types of foreign investment transactions that the Committee on Foreign Investment in the United States (“CFIUS”) may review. Under the new law, a wide range of foreign investments affecting the U.S. energy sector will be subject to the federal scrutiny.

Overview of the CFIUS Review Process

CFIUS has the authority to review “covered transactions” that might raise national security concern. CFIUS is a US government interagency process, chaired by the Treasury Department. Under the previous law, a “covered transaction” is one that results in foreign control over a U.S. business engaged in interstate commerce, and CFIUS is interested in reviewing a transaction if it raises risk of impairing national security, where the foreign entity is controlled by a foreign government, or if it involves any “critical infrastructure” that could impair the national security.

Critical infrastructure has been defined to mean “systems and assets, whether physical or virtual, so vital to the United States that the incapacity or destruction of such systems and assets would have a debilitating impact on security, national economic security, national public health or safety, or any combination of those matters.” Through a series of directives, the Department of Homeland Security (DHS) has identified 16 sectors of the economy as with assets potentially critical to the U.S. infrastructure, including the energy sector.

For each transaction that it reviews, CFIUS’s analysis considers:

  • Threat – whether the foreign acquirer has the capability or intent to exploit or cause harm;
  • Vulnerability – whether the nature of the US target asset creates susceptibility to impairment of national security;
  • Consequences – to US national security of the combination of the threat and vulnerability

This process may result in transactions being suspended, blocked, or modified.

Expansion of “Covered Transactions”

Previously the CFIUS only had jurisdiction to review foreign investments or acquisitions that could result in foreign control over a U.S. Business. After FIRRMA, the new legislation now calls for CFIUS to review a wide range of non-controlling investments made by foreign persons. Among the expanded categories of “covered transactions,” what is particularly relevant to the energy sector is that FIRRMA directs CFIUS to review all investments in US businesses that own, operate, manufacture, supply, or service “critical infrastructure” such as electricity transmission line, pipelines, oil and gas facilities, nuclear, hygro and other power plants, or US businesses that produces, designs, tests, manufactures, fabricates, or develops “critical technologies.” Such foreign investments, even though non-controlling, are subject to review if they afford the foreign person access to any material non-public technical information, membership or observer rights on the board of directors, or any involvement (other than through voting of shares) in substantive decision-making of the business in connection with critical infrastructure or critical technology.

FIRMMA provides the general contours for CFIUS reform, but not the specifics. To achieve broad-based support among competing interests and various US agency members of CFIUS, many concepts of FIRRMA, and especially key definitions relevant to the expansion of the non-controlling “covered transactions” relevant to the “critical infrastructure” and “critical technologies,” are left subject to the regulations to be prescribed by CFIUS. For example, FIRRMA continues to define “critical technologies” to mean “systems and assets, whether physical or virtual, so vital to the United States that the incapacity or destruction of such systems and asses would have a debilitating impact on national security.” And what type of assets will meet this bar are subject to interpretation in the regulations to be prescribed by the Committee. Congress also deferred to CFIUS to prescribe regulations to limit the application of the expanded “covered transactions” to “certain categories of foreign persons.” How broad or narrow those “categories of foreign persons” are and what criteria CFIUS will use to define the categories, remain to be seen.

FIRRMA contains an important carve-out for indirect investments made by a foreign person into an investment fund. In particular, an indirect investment does not constitute investment subject to CFIUS jurisdiction if the investment fund is managed exclusively by a non-foreign general partner; any advisory board membership associated with the investment does not come with an ability to control the fund’s investments or the activities of any portfolio company; and the indirect investor does not as result of advisory board membership, gain access to “material nonpublic technical information.

Declarations – Fast Track Process

One of the most important procedural reforms of FIRRMA is to allow the more simplified “declaration” process for parties who wish to submit them. These declarations will be shorter than fully written notices (i.e., no more than five pages), and FIRRMA requires that CFIUS provide responses to declarations within 30 days. CFIUS may notify the parties that they should file a compete notice, initiate a full review on its own, or clear the transaction. This could be used as a fast track process for parties with less sensitive transactions to secure a confirmatory declaration with a much shorter process.

Effects on CFIUS Filing Process

While FIRRMA aims at reforms that enhance the protection of national security, it does continue to emphasize on the value of continued attraction of foreign investment into the U.S. To that end FIRRMA pointedly directs, that the CFIUS should continue to review transactions for the purpose of protecting national security, and should not consider commercial purposes, or to advance trade or other industrial policy goals.

Some FIRRMA changes to the review process came into effect immediately upon enactment, but the most significant changes will only take into effect until CFIUS certifies the implementing regulations. For example, the expanded “covered transactions” relating to “critical infrastructure” does not go into effect until the implementing regulation is adopted or a pilot program is put in place.

On the heels of last week’s Hearing on the Merits, the proposed transition of Lubbock Power & Light (“LP&L”) from the Southwest Power Pool (“SPP”) to the Electric Reliability Council of Texas (“ERCOT”) was back on the agenda at this week’s Public Utility Commission of Texas (“PUCT” or the “Commission”) open meeting.

During last week’s hearing Chairman DeAnn Walker instructed representatives of LP&L and ERCOT to finalize an agreement in which LP&L pays to help counterbalance some of the transmission infrastructure costs that may be incurred by ERCOT customers as a result of the transition. Walker also advised LP&L and SPP to try to reach a similar agreement for the benefit of the ratepayers in that region.

In response to that directive, LP&L, the Commission Staff, the Office of Public Utility Counsel (“OPUC”), and the Texas Industrial Energy Consumers (“TIEC”) have reached an agreement in principle that would, if approved by the Commission, resolve the outstanding ERCOT issues. A letter summarizing the terms of the agreement in principle filed in PUCT Docket No. 47576 last week states that LP&L will pay $22 million each year for five years to ERCOT wholesale transmission customers through the tariff proposed by Commission Staff to shield ERCOT ratepayers against the expected financial impacts of LP&L’s requested transition, and that LP&L will pay SPP’s study costs of approximately $172,000.

Discussions with ERCOT continued this week regarding what terms the final transition agreement will need to contain to satisfy ERCOT’s concerns. LP&L has completed a draft settlement agreement with ERCOT’s guidance in mind and circulated it to all parties the day before the open meeting. LP&L’s attorney conducted preliminary conversations with the parties regarding the draft and the settlement discussion is ongoing; LP&L expects to gain more guidance from the parties over the course of the next several days. Continue Reading Updates in the LP&L Case on the Heels of the Hearing on the Merits

 

In a four-part series recently published in Law360, Husch Blackwell’s energy regulatory group analyzed the significant aspects of the U.S. Department of Energy’s (DOE) most recent installment of the Quadrennial Energy Review (QER). The first article focused on the QER’s discussion of the critical role that the nation’s electricity industry plays in supporting the country’s economy and national security.  The second installment examined the QER’s emphasis on grid security. The third focused on Continue Reading Dissecting DOE’s Recent Quadrennial Energy Review

Part I

The Quadrennial Energy Review (“QER”) is a four-part roadmap for U.S. Energy policy to the year 2040.  It is a non-partisan report that provides “policymakers, industry, investors, and other stakeholders with unbiased data and analysis on energy challenges, needs, requirements, and barriers that will inform a range of policy options, including legislation.”

The first Installment of the QER (“QER 1.1”), published in April 2015, focused on “infrastructure challenges,” namely transmission and distribution and storage (TS&D), as well as natural gas resources.  Parts II-IV will focus on renewable generation, demand response and efficiency, and grid security respectively. Continue Reading “Transforming the Nation’s Electricity System.” A Four-Part Examination of DOE’s Quadrennial Energy Review

drillingAs discussed in our client alert, the Supreme Court of Texas issued an opinion on May 27, 2016, extending the accommodation doctrine to groundwater owners. The City of Lubbock (the City) filed a Motion for Rehearing on August 2, 2016 requesting clarification of certain language in the opinion. Specifically, the City argues that as written, the opinion would allow the limitations of the accommodation doctrine to govern a groundwater lessee’s rights to the surface to extract groundwater, in spite of the express rights granted by the deed between the parties, on the grounds that: Continue Reading Motion for Rehearing Filed in Accommodation Doctrine Case

Electric powerlinesMissouri Public Service Commission (Commission) Rule 4 CSR 240-4.020(2) provides that any “regulated entity” that intends to file a case likely to be a contested case must file a notice with the Commission a minimum of sixty days prior to filing such case. Until the Commission’s rejection of Grain Belt Express’ application for a certificate of convenience and public necessity (CCN) for its proposed Clean Line project, it was arguably unclear which applicants were “regulated entities” subject to the notice requirement. Continue Reading Missouri PSC Clarifies Applicability of 60-Day Notice Filing Requirement