On February 2, 2010, President Barack Obama outlined a proposal for a Small Business Lending Fund ("SBLF"), which is expected to support lending by banks with assets under $10 billion. Under the proposal, the SBLF will utilize $30 billion from the Troubled Asset Relief Program ("TARP") that was repaid by banks that participated in TARP to support lending to small businesses. In the wake of the President's proposal, on February 4, 2010, the federal financial institutions regulatory agencies and the state supervisors issued an Interagency Statement on Meeting the Needs of Creditworthy Small Business Borrowers (the "Interagency Statement"). The Interagency Statement represents efforts by regulatory agencies to encourage "prudent" small business lending by financial institutions and clarify standards regarding the same.

Small Business Lending Fund.  Under the President's proposal, the SBLF is expected to be separate and distinct from TARP, which will not subject participants to TARP restrictions. Nonetheless, the proposal includes similar features to the U.S. Department of Treasury's ("Treasury") Capital Purchase Program ("CPP") launched under the Emergency Economic Stabilization Act, including that the $30 billion would be provided to qualifying banks in the form of additional capital injections. Dividend payments required on the investment would be smaller when compared with the Treasury's investments in financial institutions made under TARP. Certain details of the President's proposal include the following:

• Banks with less than $1 billion in assets would be eligible to receive capital investments up to 5% of their risk-weighted assets, while banks with between $1 billion and $10 billion in assets would be eligible to receive 3% of risk-weighted assets. 
• Existing CPP participants would be able to convert the capital received from Treasury in the CPP to the SBLF. 
• Initial dividend payments made by participants in the SBLF would be 5%, but could be reduced by one percentage point for each 2.5% increase in lending over a baseline determined using 2009 data.
• After five years, the dividend rate would be increased to encourage timely repayment.
• Banks will need to receive approval from their primary federal regulator in order to participate in the SBLF.

Although the White House released details on its proposal, it expects to discuss the specifics with Congress in the weeks ahead. The proposal did not include information on the type of instrument Treasury would receive in exchange for its investment, where the investment would be made (parent holding company or bank level), or whether financial institutions that have elected subchapter S corporation status would be eligible for participation. Creation of the SBLF and the transfer of funds from TARP will require approval of legislation by Congress. 

Interagency Statement.  In addition to confronting the economic downturn, financial institutions have faced tension between public statements from government officials and regulatory agencies regarding the need for banks to make more loans and the operational impact of increased regulatory criticism of loan portfolios and operations occurring during examinations. The Interagency Statement acknowledges the economic effects of excessive tightening of credit availability in small businesses and notes that the regulators are working to ensure that supervisory policies and actions do not inadvertently curtail availability of credit to sound small business borrowers. 

According to the Interagency Statement, between June 20, 2008 and June 30, 2009, loans outstanding to small businesses and farms (as defined in the Consolidated Report of Condition) declined almost $14 billion, or 1.8 percent. The Interagency Statement outlines underwriting and risk management considerations to be taken into account by financial institutions in lending to small businesses. It also acknowledges that examiners are expected to take a "balanced approach" in assessing the adequacy of an institution's risk management procedures for small business lending. Specifically, the Interagency Statement notes that examiners will not adversely classify loans due solely to the decline in the collateral value below the loan balance, provided that the borrower has the willingness and ability to repay the loan according to "reasonable terms." The Interagency Statement also states that examiners won't classify loans due solely to a borrower's association with a particular industry or geographic area experiencing financial difficulties.

The Interagency Statement represents another step taken by regulatory agencies to minimize the impact of the economic downturn and its impact on banks. On October 30, 2009, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of Thrift Supervision and the FFIEC State Liason Committee jointly released a Policy Statement on Prudent Commercial Real Estate Loan Workouts. This policy statement, which was intended to promote supervisory consistency, enhance the transparency of commercial real estate workout transactions, and ensure that supervisory policies and actions do not inadvertently curtail the availability of credit to sound borrowers, was released as many financial institutions faced increased criticisms from regulatory agencies based on Guidance on Concentrations in Commercial Real Estate Lending, Sound Risk and Management Practices, which jointly issued by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation on December 12, 2006 (the "Joint CRE Guidance"). The Joint CRE Guidance, among other things, provides that banks with loans for construction, land development, and other land and loans secured by multifamily and nonfarm nonresidential property (excluding loans secured by owner-occupied properties) in an aggregate amount in excess of 300 percent or more of total capital, would be considered to have a commercial real estate concentration and should employ heightened risk management practices.

Although the SBLF and the Interagency Statement represent efforts to free up credit for small businesses, in order for the SBLF to be successful, we believe that it will be necessary to do the following:

• Treasury will need to make the capital investments available not just to so-called "healthy" banks as was the case with the CPP program, but also to banks that can demonstrate that they will become healthy by receiving the capital.
• Treasury will need to publish clear standards that must be met to qualify for the capital so that the process is much more transparent than that for the CPP.
• Regulatory agencies will need to moderate the currently harsh examination practices by bank examiners. Most of the banks that need capital have been downgraded by examiners, put under restrictive enforcement actions by the agencies and ordered to raise capital to levels substantially above those prescribed in current regulations. Capital for small banks with poor ratings and subject to enforcement actions is hard to come by and the SBLF could provide a material benefit to those banks. 

While the specific terms of the SBLF have not been approved, we can hope that the Interagency Statement may signal that bank examiners will take a more meaningful account of the impact of enforcement actions in order to prevent curtailing the availability of credit to sound borrowers. Or it could represent the continuation of mixed regulatory and political signals creating uncertainty for financial institutions.

As financial institutions with less than $10 billion of assets take into account the impact of the Interagency Statement on their own short-term and long-term planning, they should be mindful of the status of the SBLF. To the extent that a final proposal regarding the SBLF eliminates uncertainties that have been associated with the CPP, the SBLF may provide a source of inexpensive capital. The SBLF may also present an opportunity for financial institutions that participated in the CPP to lower the cost of the capital previously received as well as eliminate the need to comply with the corresponding restrictions.

OIL AND GAS NEWS

France's GDF Suez Says Interested in Turkmen Gas
Reuters, 4 February 2010
"French power and gas group GDF Suez is interested in developing Turkmen gas and shipping it from the Central Asian state to Europe, Turkmen state television quoted a GDF executive as saying on Thursday."

Total to Begin Absheron Drilling in September
Oil and Gas Journal, 3 February 2010
"The Total SA-led consortium plans to begin drilling its first exploration well on the Absheron block off Azerbaijan in September, according to a senior official of State Oil Co. of Azerbaijan Republic."

Bulgaria Ratifies Nabucco Gas Pipeline Agreement
People's Daily, 3 February 2010
"Bulgaria Wednesday ratified an agreement to build the European Union-backed Nabucco gas pipeline, which will help reduce its dependence on Russian gas."

Kazakhstan Wants Stake in Karachaganak Field to Get More Profit
Bloomberg, 1 February 2010
"Kazakhstan wants a stake in the BG Group Plc-led Karachaganak field to increase the country’s profit from the venture, the state oil company said."

Caspian Energy: Washington Trying New Tack in Nabucco Project
Eurasianet.org, 1 February 2010
"The United States wants to "depoliticize" the proposed Nabucco pipeline project, and might welcome Russia’s participation in the pipeline, Washington’s Eurasian energy envoy, Richard Morningstar, recently announced. The Kremlin, however, is likely to interpret this outwardly magnanimous gesture as a sign of Nabucco’s weakness, some experts say."

Nabucco at Center of Gas Politics
Wall Street Journal, 1 February 2010
"Running one of Europe's most controversial infrastructure projects can at times get a little intense. In the Floridotower, overlooking central Vienna, Reinhard Mitschek, managing director of Nabucco Gas Pipeline project, pauses for breath."

Kazakhstan Eager to Win Back Energy Assets
UPI, 29 January 2010
"Kazakhstan is trying to extract more cash from domestic oil and gas fields developed by Western companies in a move some observers fear is part of a greater strategy to win back influence over key industries."

Kazakhstan to Double Metals Output Within Five Years
Bloomberg, 29 January 2010
"Kazakhstan, the largest oil producer in Central Asia, must double metals production and exports within five years, President Nursultan Nazarbayev said."

Kazakh President Calls For OSCE Summit In Astana
Radio Free Europe, 29 January 2010
"Kazakh President Nursultan Nazarbaev today called for the first Organization for Security and Cooperation in Europe (OSCE) summit of heads of state in 11 years to be held in Astana, RFE/RL's Kazakh Service reports."

KAZAKHSTAN NEWS

Kazakh PM Orders New Oil Tax Rules to be Drafted
Reuters (Via Yahoo), 4 February 2010
"Kazakh Prime Minster Karim Masimov ordered the government on Thursday to draft new tax rules to abolish tax exemptions for foreign firms working on large oil and gas projects in the Central Asia state."

Kazakh Currency Reserves Rise $3.2 Billion in January to Record
Bloomberg, 4 February 2010
"Kazakhstan’s international currency and gold reserves jumped $3.2 billion in January to a record high $26.4 billion, the central bank said on its Web site today."

Kazakhstan Sets 20-Nation Entry Target by 2020
Gazeta, 4 February 2010
"Kazakhstan must enter the top 20 countries with the most favorable business climate by 2020, Nazarbayev said, adding this was necessary to ensure stable development of the country's economy."

Kazakh Papers Say Libel Suit Bid to Control Media
Reuters, 3 February 2010
"Two Kazakh newspapers on Wednesday criticised a libel suit brought by President Nursultan Nazarbayev's son-in-law against them, saying it was an attempt to muzzle the country's independent media."

Kazakh Banks' Bad Loans to Peak in 2010 - S&P
Reuters (via Yahoo), 2 February 2010
"Bad loans held by Kazakh banks are set to peak this year and investors are already showing interest in fresh Kazakh debt, despite a number of unfinished restructuring deals, a Standard & Poor's analyst told Reuters."

Kazakhstan: Nazarbayev Sets Ambitious Development Agenda for Astana
Eurasianet.org, 1 February 2010
"With Kazakhstan’s economy on the up-tick, President Nursultan Nazarbayev is setting some ambitious development goals for the Central Asian state."

Kazakhstan: Foreign Minister's Arrival in Washington Highlights Democratization vs. Security Debate
Eurasianet.org, 1 February 2010
"Kazakhstan’s foreign minister, Kanat Saudabayev, is in Washington from February 1-4. He is expected to seek US backing for two prestige events: a summit of the Organization for Security and Cooperation in Europe to be held in Kazakhstan; and a one-on-one meeting between US President Barack Obama and Kazakhstani President Nursultan Nazarbayev."

Kazakhstan: Bridging the East and West
New Europe, 31 January 2010
"The attention of the Euro-Atlantic community is increasingly focusing on Kazakhstan as it chairs since January 1st the Organization for Security and Cooperation in Europe. Few in Europe know, however, that Kazakhstan is no stranger to leading major international forums and, more importantly, in contributing to strengthening international security."

Kazakhs Protest Against China's Growing Influence
Reuters, 30 January 2010
"Kazakh protesters scuffled with police on Saturday at a rally against their government's burgeoning ties with neighbouring China."
 

CASPIAN REGION NEWS

Turkmenistan: Berdymukhamedov Seeks Prestige in Paris
Eurasianet.org, 3 February 2010
"It seems fitting that opaque is the best word to describe Gurbanguly Berdymukhamedov’s just-concluded visit to the City of Light."

Tajiks Despair as Soviet - Style Election Looms
New York Times, 2 February 2010
"Umida Abdurakhmonova, a Tajik woman selling herbs in a small tumbledown market, looks puzzled when asked about a parliamentary election due in less than a month in her impoverished Central Asian homeland."

As anticipated, effective February 1, 2010, the director of the United States Patent and Trademark Office (USPTO), David Kappos, officially extended the duration of the “Patent Application Backlog Reduction Stimulus Plan”¹ (the "Plan"). Click here to read the USPTO's Notice. The Plan, which was initially set to expire on February 28, 2010, was extended until June 30, 2010. Under the Plan, a small entity applicant² may petition to make an application special and have it advanced to the front of the examination queue if the applicant agrees to expressly abandon a co-pending application owned by the same applicant or having a common inventor. Thus, a patent application may be examined sooner by the USPTO, and consequently a patent may issue sooner under the Plan than under normal procedures. This extension of time may further increase the chances that  Director Kappos' goals of acceleration and backlog reduction will be achieved by providing applicants with additional time to opt into the program. Click here for more Background on the Plan. It remains to be seen whether Director Kappos, in the future, will expand the Plan to include large entities, generally those companies with greater than 500 employees. To make significant headway in backlog reduction, however, such an expansion to large entities should be implemented.

If you are a small entity and would like to participate in this accelerated examination plan, please contact your Bracewell & Giuliani attorney or one of the attorneys listed on the top-right of this update. If you are a large entity and want this program expanded to include your company, please write to Director Kappos to express your interest at the following address: Box Comments Patents, Commissioner for Patents, P.O. Box 1450, Alexandria, VA 22313–1450. Please stand-by as we keep you updated on future developments in this backlog reduction area.

________________________

¹ See Extension of the Patent Application Backlog Reduction Stimulus Plan, 75 Fed. Reg.
5,041, 5,041 (Feb. 1, 2010) available at
http://www.regulations.gov/search/Regs/home.html#documentDetail?R=0900006480a88708.

² Generally defined as an individual, a non-profit institution, or companies having less than 500 employees, in each case having no obligation to grant, convey, or license the invention to another entity that doesn’t qualify for small entity status. See 37 C.F.R. 1.27.

Patent owners may now enjoy longer patent terms after a recent Federal Circuit ruling¹ which determined that patent owners had been shortchanged by how the U.S. Patent and Trademark Office ("Patent Office") had calculated adjustments to patent terms to compensate for Patent Office caused delays in issuance of a patent. The U.S. Patent Statutes² guarantee patent term extensions if the Patent Office causes a delay by failing to meet certain response deadlines.³ The statutes⁴ also guarantee patent term extensions if the Patent Office fails to issue the patent within three years after filing a patent application. Specifically excluded in the statutes, however, are compensating extensions for "overlap" between the two types of delays, as well as delays caused by the applicant.⁵ According to the Patent Office calculation ("Patent Office new math"), the calculation period for both types of delays began when the patent application was filed, not after three years. Thus, applying the Patent Office new math "overlap" could occur at any time after filing. In Wyeth, the Federal Circuit disagreed with the Patent Office's new math; and while giving patent owners potentially more time to claim patent term extensions, also gave the Patent Office a lesson in math and statutory construction. 

At issue in Wyeth was the meaning of "overlap" as found in 35 U.S.C. § 154(b). Wyeth argued the Patent Office misconstrued the "overlap" to wrongly truncate patent term extensions for U.S. Patent No. 7,179, 892 ("'892 patent") and U.S. Patent No. 7,189,819 ("'819 patent"). The '892 patent was delayed for 610 days by Patent Office prosecution delays, 345 days by the Patent Office not issuing the patent within three years, and 148 days by the applicant. Of the 610 days of Patent Office prosecution delays, 51 days took place more than three years after the application was filed. The '819 patent was delayed by the Patent Office for 336 days by Patent Office prosecution delays, of which 106 days were after the three year mark, and 827 days for not issuing the patent within three years. The applicant caused 335 days of delay for the '819 patent. 

The statute⁶ directs the Patent Office to draft regulations establishing procedures for determining patent term adjustments. The Patent Office promulgated 37 C.F.R .§ 1.703(f) which sets forth that delays caused by not issuing a patent within three years may occur as soon as the application was filed, not upon expiration of three years. As guided by Section 1.703(f), the Patent Office calculated patent term adjustments by selecting the greater of either the Patent Office caused prosecution delays or period of time beyond three years and then subtracting applicant delays.

Using the Patent Office new math method, the Patent Office calculated patent term adjustments of 462 days for the '892 patent as follows:

[(610 days for patent prosecution delays caused by the Patent Office) – (148 days for delays caused by applicant) = (462 days of patent term extension)].

The Patent Office calculated the patent term adjustment of 492 days for the '819 patent as follows:

[(827 days for patent prosecution delays caused by the Patent Office) – (335 days for delays caused by applicant) = (492 days of patent term extension)].

Under the Patent Office new math method, consideration of overlap was construed to exclude the shorter of: (1) days of Patent Office prosecution delays, or (2) days of Patent Office delay causing the patent to issue more than three years after filing. As such, not included in the Patent Office calculation was a value representing days of overlap.

Unhappy with the patent term adjustments calculated by the Patent Office using their Patent Office new math method, Wyeth petitioned the Patent Office director for reconsideration.⁷ When the petition was denied Wyeth filed a lawsuit in the United States District Court for the District of Columbia,⁸ Wyeth sought an order from the District Court directing the Patent Office to calculate an alternative adjustment term. Wyeth countered the Patent Office new math by arguing that "overlap" only arose when delays occurred attributable to both prosecution delays caused by the Patent Office and the Patent Office failing to issue a patent within three years of the filing date of the patent application, and thus the patent term adjustment calculus should consider each type of delay.

Under Wyeth's proposed method, and the prevailing method, patent term adjustments should be calculated as follows:

Patent Extension Term = [(Patent Office prosecution delay) + (Patent Office delay causing the patent to issue more than three years after filing) – (overlap) – (applicant delay)].

Note Wyeth's proposed method totals both (1) days of prosecution delay caused by the Patent Office, and (2) days of Patent Office delay causing patent issuance more than three years after the patent filing date.  Because both types of delay are considered, Wyeth's method deducts overlap days, i.e., days of delay classified as both Patent Office prosecution delay and Patent Office delay causing the patent to issue more than three years after the filing date of the patent application.

Using the Wyeth method the patent term adjustment would then be 756 days for the '892 patent calculated as follows:

[(610 days for patent prosecution delays caused by the Patent Office) + (345 days for the Patent Office not issuing the patent within three years) – (51 days for the length of time the Patent Office did not issue the patent after three years from its filing date) – (148 days for delays caused by applicant) = 756 days of patent term extension].

A patent term extension of 722 days for the '819 patent using the Wyeth method is calculated as follows: [(336 days for patent prosecution delays caused by the Patent Office) + (827 days for the length of time the Patent Office did not issue the patent after three years from its filing date) – (106 days for "overlap") – (335 days for delays caused by applicant) = 722 days of patent term extension]. 

In the District Court proceeding,⁹ the Patent Office argued that its interpretation was based on language in the statute that the adjustment "shall not exceed the actual number of days the issuance of the patent was delayed."¹⁰ The Patent Office argued that under Wyeth's proposed method, Patent Office prosecution delays inevitably lead to delays which made the patent issue more than three years from the filing date, thereby duplicating compensation for the delays.  According to the Patent Office, the patent owner would receive a "benefit" rather than a "compensation."¹¹ The Patent Office further cited Chevron v. Natural Resources, 467 U.S. 837 (1984) to support an assertion that statutory interpretation by the Patent Office should be given deference. 

Both sides filed motions for summary judgment. The District Court agreed with Wyeth noting the Patent Office only had authority to issue procedural rules and not substantive ones, thereby rejecting the notion of affording the Patent Office the Chevron deference. The Court further stated that even if the Chevron deference was available, the statute was not ambiguous and its plain meaning contradicted the Patent Office's interpretation.¹² The District Court addressed the unjust compensation argument by stating Congress could have capped patent terms in the statute had Congress intended this meaning. The District Court further iterated that if unintended results occurred from the statute, it was Congress' problem to correct. 

On appeal, the Federal Circuit applied similar reasoning used by the District Court to dispatch the Patent Office's arguments. Like the lower court, the Federal Court found the 35 U.S.C. § 154(b) language unambiguous, specifically with regard to "periods of delay" and "overlap." The Federal Circuit reasoned because each period of delay has a discrete time span with defined boundaries, no "overlap" happens unless the Patent Office violations occur at the same time. The Federal Circuit further determined the delays caused for not issuing a patent within three years could not occur until after three years from filing and concluded no overlap can occur between the two types of delay until three years after filing of the patent application.

The Federal Circuit also addressed the unfair compensation issue by citing legislative history from a 1994 amendment to 35 U.S.C. § 154(b).¹³ From the legislative history, the Federal Circuit concluded that the statutory language provides a minimum 17 year term for patents but provides no maximum time cap for patent terms. Concurring with the District Court's determination that the Patent Office should receive no Chevron deference, the Federal Circuit concluded the statutory language sets an unambiguous rule for determining "overlap" for patent term adjustments.

On February 1, 2010, the Patent Office responded to the Wyeth ruling by announcing an upgrade (http://www.uspto.gov/patents/law/notices/2010.jsp) to Patent Office computer systems that calculate patent term adjustments and implementation of interim procedures for revising patent term extensions.¹⁴ Under the interim procedures, patentees now have 180 days after patent issuance to request reconsideration of a patent term extension, instead of the previous two month time period. The interim procedures, however, only apply to patents that issue prior to March 2, 2010.  Although the interim procedures temporarily waive government request fees, patentees must specify recalculation is requested in view of Wyeth. A request form (PTO/SB/131 (01-10)) prepared by the Patent Office is available online at http://www.uspto.gov/forms/index.jsp#business.

Patent owners may want to consider auditing all patents that have been issued within the past 180 days to identify where patent term extensions may have been warranted but not granted.  Patent owners now have Federal Circuit guidance for conducting an accurate independent assessment and Patent Office authority to obtain entitled patent term extensions. 

________________________

¹ Wyeth v. Kappos, ___F.3d ___, (Fed. Cir. 2010) WL 27184.

² See, e.g., 35 U.S.C. § 154(b).

³ A delay under 35 U.S.C. § 154(b)(1)(A) occurs if the Patent Office does not notify the applicant of any Patent Office action taken on the application within 14 months from filing. Patent Office actions include application rejections, objections, or notices of allowance.  A delay under 35 U.S.C. § 154(b)(1)(A) also occurs if within four months the Patent Office does not: respond to an applicant's response or appeal, act on an application at the direction of the Board of Patent Appeals and Interferences, or issue a patent after issue fee payment.

⁴ 35 U.S.C. § 154(b)(1)(B).

⁵ Delays under 35 U.S.C. § 154(b)(1)(B) may be reduced by time taken by an applicant requested continued examination, an interference, a secrecy order, an appeal for the Board or a Federal Court, or applicant caused delay. Adjustments for delay caused by an interference, secrecy order, and appellate review by the patent board or a Federal Court are available under "paragraph C" of the Statutes. Extension term limitations also exist if the applicant disclaims a term of the patent or delayed prosecution for failing to use reasonable efforts during prosecution.

⁶ 35 U.S.C. § 154(b)(3).

⁷ Per 35 U.S.C. § 154(b)(3), applicant is provided one opportunity to request reconsideration of the patent term adjustment, the time period for making the request is two months and not extendable. 37 C.F.R. § 1.705(d) and (e).

⁸ The remedy for applicants dissatisfied by the director's determination of patent term adjustments is to file suit in the United States District Court for the District of Columbia within 180 days after the grant of the patent.

⁹ Wyeth v. Dudas, 580 F.Supp.2d 138 (D.D.C. 2008).

¹⁰ 35 U.S.C. § 154(b)(2)(A).

¹¹ Wyeth 580 F.Supp.2d at 142.

¹² Id. at 141-42.

¹³ H.R. Rep. No. 106-464, at 125 (1994).

¹⁴ 75 Fed. Reg. 5043.

On January 27, 2010, by a vote of three to two, the SEC adopted new interpretive guidance on how public companies should evaluate the impacts of climate change in their communications with shareholders. Such guidance had long been sought by certain pension funds, shareholder advocacy groups and states, who were unsatisfied with the varied nature of corporate disclosure concerning climate change. On February 2, the SEC issued the written interpretive release, which reviews existing environmental disclosure guidance and specifically addresses climate change.  The guidance will be effective upon publication in the Federal Register (likely to be in February).

The SEC identified four topics to be evaluated and, as appropriate, discussed in disclosures:

• The impact of existing as well as pending climate-change legislation and regulation.
• The impact of international accords and treaties on climate change or greenhouse gas emissions.
• The actual and potential indirect consequences of climate change regulation or business trends (e.g., reduced demand for carbon-intensive products).
• The actual and potential impacts of the physical effects of climate change.

The guidance does not make climate change risk per-se material, and it does not mandate universal disclosure of specific items, such as carbon footprint, carbon intensity or actions being taken to reduce greenhouse gas emissions.  Such requirements would have required the SEC to undergo formal rulemaking. The guidance also does not alter the principal tenets of existing disclosure law. Climate disclosure still requires a case-by-case evaluation of materiality by the company in light of reasonable shareholder expectations.

The structure and perspective of the guidance suggest that the SEC expects to see greater attention being given to the evaluation and disclosure of risks and opportunities arising from climate change.  The guidance expressly notes that generic disclosure in Risk Factors may not be sufficient.  With respect to disclosure under Management's Discussion and Analysis (Item 7 - MD&A), the interpretive release states that, unless a company can determine that climate change legislation or regulation is not reasonably likely, the company must assume that the legislation or regulation will be enacted and must then evaluate the potential materiality of the resulting effects – based on a specific understanding of the company's greenhouse gas emissions and "other operational matters."

The pre-publication copy of the interpretive release is available at http://www.sec.gov/rules/interp/2010/33-9106.pdf.

Impetus for Action

The SEC’s decision to issue interpretive guidance follows years of outspoken criticisms, formal petitions, and advocacy concerning the sufficiency of corporate climate disclosure. Before and during this period, as the science of climate change evolved and was more widely understood, ever more companies across many business sectors had begun to acknowledge the potential relevance and impact of climate change and associated regulation. Many have for years reported their carbon footprint and other parameters to shareholders in sustainability reports and to non-governmental aggregators of climate disclosures, like the Carbon Disclosure Project. Nevertheless, the perception persisted that climate disclosure practices varied widely in quality and transparency, although in practice the SEC and its staff rarely voiced concern. In fact, in her dissent, Commissioner Casey specifically noted that the SEC has never made a particular finding that climate change disclosures to date have been materially inadequate.  Moreover, the SEC's interpretive guidance acknowledges that only some of the information that is already provided to the marketplace voluntarily is required under the SEC's disclosure rules.

Effect on Companies

In the absence of clear legal direction from Congress or the Executive Branch as to a carbon price or a mandatory system for reducing greenhouse gas emissions, many companies could offer shareholders little certainty as to the anticipated financial impact of any future federal requirements intended to address global warming. Commissioners Walter and Aguilar emphasized that companies should err on the side of more disclosure when uncertain about the materiality of an issue to the company.

The full effects of the new guidance remain to be seen. For the moment it is apparent that the SEC has become sensitized to the potential importance of climate change to reporting companies and has signaled its expectation that companies focus with renewed vigor on the traditional disclosure analysis, predicated on materiality and likelihood. While purporting not to modify the existing tenets of disclosure practice, the SEC's action will clearly affect the practical application of these principles.

Companies preparing their Form 10-K annual reports will wish to review the SEC’s new interpretive guidance with care and in light of prior disclosures to shareholders concerning climate change, keeping in mind the basic tenets of SEC disclosure and recognizing that the guidance does not represent a checklist of required disclosures.

Other Recent SEC Actions

Last October, the SEC modified its position with respect to the ability of companies to reject shareholder proposals (concerning climate change or other matters) on the basis of the ordinary-business exclusion codified at Rule 14a-8(i)(7). In doing so, the SEC also noted “that there is widespread recognition that the board's role in the oversight of a company's management of risk is a significant policy matter regarding the governance of the corporation.” Therefore, “a proposal that focuses on the board's role in the oversight of a company's management of risk may transcend the day-to-day business matters of a company and raise policy issues so significant that it would be appropriate for a shareholder vote.”

The environmental practice of Bracewell & Giuliani LLP offers seamless, front-rank representation in local, state, national, and cross-border regulatory, enforcement, and litigation matters, as well as experienced counsel on the environmental aspects of transactions and operations across the country and around the world. We are dedicated to helping clients successfully navigate complex and costly environmental issues and to building longstanding client relationships founded on superior advice, integrity, and value. We are pleased to provide you with this issue of Bracewell & Giuliani's Texas Environmental Update, offering the latest news about permitting, enforcement, regulatory developments, and other matters of interest to the regulated community in Texas.

BRACEWELL & GIULIANI ALERTS AND PUBLICATIONS

TCEQ Releases Emissions Study for Barnett Shale – Added Regulatory Attention Expected
Bracewell & Giuliani Environmental Law Update, January 29, 2010
On January 27, 2010, the Texas Commission on Environmental Quality (TCEQ) released its highly anticipated Barnett Shale Formation Area Monitoring Projects survey. The survey was conducted over three months in the latter part of 2009 [...]

Divided SEC Adopts Guidance on Climate Disclosure, But Uncertainty Remains
Bracewell & Giuliani Environmental Law Update, January 27, 2010
Today, by a vote of three to two, the SEC adopted new interpretive guidance on how public companies should evaluate the impacts of climate change [...]

Efforts to Federally Regulate Hydraulic Fracturing May Pick Up Momentum in 2010
Bracewell & Giuliani Energy Legal Blog, January 22, 2010
The so-called FRAC Act, legislation introduced in June of last year by Rep. Diana DeGette (D-CO) and Rep. Maurice Hinchey (D-NY) in the House of Representatives and Senators Casey (D-PA) and Schumer (D-NY) in the Senate, received a fresh jolt of publicity this week when the House Energy and Commerce Subcommittee on Energy and Environment [...]

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TEXAS COMMISSION ON ENVIRONMENTAL QUALITY - AGENDAS AND WORK SESSIONS

Commissioners' February 10, 2010 Meeting Agenda
(Adobe Acrobat Required)
TCEQ Web Site

Commissioners' January 27, 2010 Agenda Meeting Webcast
(Real Player Required)
TexasAdmin.com

Commissioners' January 22, 2010 Work Session Webcast
(Real Player Required)
TexasAdmin.com
 

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TEXAS COMMISSION ON ENVIRONMENTAL QUALITY - NEWS REPORTS

Air
 

Latest Fight Over Houston's Air Hovers Over New Smog Limit
Houston Chronicle, February 2, 2010
"The latest front in the fight over Houston's air is a newly proposed federal limit for smog, with government officials, environmentalists and industry representatives at odds over more than a few molecules' difference in the standard."

Fort Worth May Pay for Its Own Air Testing Around Gas Drilling Sites
Fort Worth Star-Telegram, February 2, 2010
"FORT WORTH - City Council members plan to use city funds to pay for air testing around natural gas sites in an attempt to settle disagreements over how much - or even whether - drilling and production contribute to air pollution in the city."

TCEQ Chief Toxicologist Dr. Michael Honeycutt Provides Comment on EPA Proposed Ozone Standard
TCEQ Web Site, February 2, 2010
"As EPA re-examines the ozone NAAQs, I, Dr. Michael Honeycutt, Director of the Toxicology Division would like to offer the following comments on behalf of the Texas Commission on Environmental Quality."

Ireland: Clearing the Air on the Barnett Shale
Fort Worth Star-Telegram, February 1, 2010
"In the 29 years since the first well was drilled in the Barnett Shale, the natural gas industry has taken steps to ensure that it is a good neighbor."

Editorial: Barnett Shale Drilling Worries Are Reasonable
Fort Worth Star-Telegram, January 31, 2010
"Only a little more than a year ago, Fort Worth City Council members adopted an ordinance to give themselves, energy companies and local residents clear guidelines about how Barnett Shale natural gas drilling should be done."

High Benzene Levels Found on Barnett Shale
Dallas Morning News, January 28, 2010
"Nearly one-fourth of the sites monitored in North Texas' Barnett Shale natural-gas region had levels of cancer-causing benzene in the air that could raise health concerns, state regulators said Wednesday."

TCEQ Completes Study on Air Emissions in Barnett Shale
TCEQ Web Site, January 27, 2010
"The Texas Commission on Environmental Quality (TCEQ) has announced the results of its study of air quality in the Barnett Shale area of North Texas."

Air Monitoring Near Frisco Battery-Recycling Plant Could Be Expanded
Dallas Morning News, January 25, 2010
"Environmental regulators are considering stepping up efforts to measure lead emissions from a battery-recycling plant in Frisco."

Officials Release Maps of Toxins
Denton Record-Chronicle, January 25, 2010
"DISH - Town officials have released a set of maps showing that some carcinogens and neurotoxins could be drifting a mile or more from compression facilities here - and at levels that exceed the state’s long-term screening limits."

EPA Extends Study of State Air Permit Rules
Houston Chronicle, January 24, 2010
"Federal environmental regulators will get more time to determine whether Texas' program for issuing air permits allows for adequate public participation."

Questions Raised Over Fort Worth Air Testing
WFAA.com, January 23, 2010
"There's new information on testing near natural gas facilities in Fort Worth."

State Removes Corpus Christi From Pollutant Watch List for Benzene
Corpus Christi Caller-Times, January 22, 2010
"CORPUS CHRISTI - The state removed Corpus Christi from a pollution watch list for benzene, in the midst of several studies into the effects the chemical has on the community."

Air Pollutant Levels Continue to Decrease in Texas
TCEQ Web Site, January 22, 2010
"The Texas Commission on Environmental Quality (TCEQ) announced today that because of successful reductions in air emissions, it is removing pollutants from the Air Pollutant Watch Lists (APWL) in the Lynchburg Ferry area of Houston, Texas City, and Beaumont."

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Enforcement

TCEQ Approves Fines Totaling $854,922
TCEQ Web Site, January 27, 2010
"The Texas Commission on Environmental Quality today approved penalties totaling $854,922 against 82 regulated entities for violations of state environmental regulations."

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Regulatory Developments

What's New in TCEQ Rules
TCEQ Web Site, January 29, 2010

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Waste

State Agency: City in Violation at Texas Ranger Museum Expansion Site
KWTX.com, January 27, 2010
"More problems at the Texas Ranger Hall of Fame and Museum expansion site, as a state agency says the City of Waco is now allegedly violating environmental laws."

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Other TCEQ News

TCEQ Fighting Lawmaker's Demand
Houston Chronicle, January 28, 2010
"AUSTIN - A state senator's pursuit of documents he believes will lead to a criminal investigation of senior staff members of the Texas Commission on Environmental Quality is in the hands of an appeals court that heard arguments this week about whether the records should be public."

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EPA REGION 6

New EPA Regional Chief From El Paso Will Be Sworn In Today
El Paso Times, February 2, 2010
"AUSTIN - Cleaning up the old Asarco smelter and making sure that state-issued air-quality permits meet federal standards are some of the challenges facing the El Paso native who is the EPA's new regional chief."

New EPA Chief Brings Environmentalist Philosophy
KERA, February 2, 2010
"Expectations are high as SMU engineering professor Al Armendariz prepares for Tuesday's swearing-in as this region's new EPA administrator."

EPA Region 6 Releases Air Monitoring Data From Seven Texas Schools
EPA Region 6 Web Site, January 25, 2010
"Dallas, Texas – Environmental Protection Agency (EPA) Region 6 today announced the air toxics monitoring data from seven Texas schools has been posted on the agency’s Web site."

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EPA

Proposed Significant New Use Rule for Multi-walled Carbon Nanotubes
(Adobe Acrobat Required)
75 Federal Register 5546, February 3, 2010

Release of Draft Documents Related to the Review of the National Ambient Air Quality Standards for Particulate Matter
(Adobe Acrobat Required)
75 Federal Register 4067, January 26, 2010

API: Proposed EPA Ozone Limits Harm Oil, Gas Production
Fort Worth Business Press, January 25, 2010
"It’s too early to know what effects, if any, the proposed, Environmental Protection Agency-mandated reduction in a city’s allowable smog will have on oil and gas producers, but that hasn’t stopped some from hitting out at the federal agency."

EPA Tightens Standards on Nitrogen Dioxide in the Air
Fort Worth Star-Telegram, January 25, 2010
"The Environmental Protection Agency announced new rules Monday on how much nitrogen dioxide is allowed in the air, continuing its trend of tightening air pollution standards."

EPA Strengthens Air Quality Standard for Nitrogen Dioxide
EPA Web Site, January 25, 2010
"WASHINGTON – The U.S. Environmental Protection Agency today announced a new national air quality standard for nitrogen dioxide (NO2)."

Westar Energy to Spend Approximately $500 Million to Settle Clean Air Act Violations
EPA Web Site, January 25, 2010
"WASHINGTON – Westar Energy has agreed to spend approximately $500 million to significantly reduce harmful air pollution from a Kansas power plant and pay a $3 million civil penalty, under a settlement to resolve violations of the Clean Air Act, the U.S. Environmental Protection Agency (EPA) and the U.S. Justice Department announced today."

EPA Increases Transparency on Chemical Risk Information
EPA Web Site, January 21, 2010
"WASHINGTON - As part of Administrator Lisa P. Jackson’s commitment to strengthen and reform chemical management, the U.S. Environmental Protection Agency (EPA) today announced a new policy to increase the public’s access to information on chemicals."

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PIPELINE AND HAZARDOUS MATERIALS SAFETY ADMINISTRATION
 

Issuance of Advisory Bulletin: Pipeline Safety: Implementation of Revised Incident/Accident Report Forms for Distribution Systems, Gas Transmission and Gathering Systems, and Hazardous Liquid Systems
(Adobe Acrobat Required ]]> Wed, 3 Feb 2010 12:00:00 -0500 http://www.bracewellgiuliani.com/index.cfm/fa/news.advisory/item/bae475de-c145-4f08-9f84-5e851e5605f4/from_rss.cfm TCEQ Releases Emissions Study for Barnett Shale - Added Regulatory Attention Expected

On January 27, 2010, the Texas Commission on Environmental Quality (TCEQ) released its highly anticipated Barnett Shale Formation Area Monitoring Projects survey. The survey was conducted over three months in the latter part of 2009 and focuses on characterizing air emissions associated with natural gas and oil production in the Barnett Shale. Out of a total of 94 monitoring sites spread over 5,000 square miles and six counties, benzene levels at two sites were determined to exceed TCEQ's short-term health-based comparison value, and at another 19 sites, TCEQ expressed concern about long-term cumulative exposure. 

While TCEQ recommends continued and expanded monitoring, the agency also notes that at the majority of monitoring sites, chemicals were either not detected or detected below levels of immediate concern. TCEQ's survey memorandum lists the following agency actions and recommendations:

• Conduct additional stationary long-term monitoring to assess the influence of oil and gas activity on VOC concentrations;
• Begin regular helicopter flights to identify large hydrocarbon plumes from oil and gas sources;
• Investigate sources for proper permit authorization;
• Perform investigations with passive infrared cameras to focus additional testing and investigations;
• Review permitting rules that apply to oil and gas operations;
• Conduct a "special emissions inventory" to more clearly define locations, sources, and emissions in the Barnett Shale area, including actual analysis of gas from each site, an inventory of equipment at each site, and emissions calculations for demonstration; and
• Conduct outreach and compliance assistance to small operators via cooperation with the Texas Railroad Commission, including the development of a fact sheet summarizing environmental compliance requirements and common violations.

Beyond the increased attention that is expected to arise from TCEQ's recommendations, there are additional statewide and national implications that warrant consideration:

• Investigations. Similar use of the infrared camera and mobile monitoring tools will likely be used in other natural gas production fields in Texas, including the Haynesville Shale, as well as other areas across the nation.
• Emission Factors and Controls. Investigations will naturally lead to questions regarding whether the emission factors should be improved to better represent the identified benzene emissions and the appropriate emission controls for sources of concern. Such emission factors and controls may be promoted or considered for industry-wide application by local, state or federal agencies or other interested parties nationwide.
• Texas Legislative Session. Absent TCEQ regulation, the Texas Legislature may attempt to impose statutory environmental controls or air toxic legislation. Significantly, in 2011, TCEQ will be subject to "Sunset" review in which the legislature reviews the state agency for reauthorization, often with extensive changes to the agency. The Sunset process provides a forum for discussion and possible passage of air toxic legislation that has been under consideration for the past several sessions and that may receive additional attention due to the Barnett Shale investigations.
• Ozone Implications. TCEQ has also authorized a study to develop an "ambient emission signature" for oil and gas compression engines, gas wells and pipelines. This study could have a significant impact on how such facilities are considered in future ozone models and state implementation plan control strategies.
• Threat of Toxic Tort Litigation. Toxic tort litigation may not be far behind. As the technology to measure ever smaller levels of chemicals such as benzene continues to evolve, activists and the plaintiff's bar have pushed increasingly to associate any measured exposure to benzene with a host of adverse health conditions.

Although the TCEQ survey was not focused entirely on hydraulic fracturing activities, the announcement is likely to draw the attention of environmental groups opposed to the expansion of unconventional natural gas production via hydraulic fracturing. Environmental groups have largely focused their opposition to hydraulic fracturing on perceived concerns about impacts to water quality; however, uncertainty surrounding air emissions from natural gas production facilities, especially benzene, adds another environmental facet to the discussion.

NOTE: On February 2, the SEC issued its written interpretive guidance regarding climate change disclosures by public companies. For a more up-to-date examination of this issue, please visit: http://bgllp.com/sec_climate_guidance_feb10.

On January 27, 2010, by a vote of three to two, the SEC adopted new interpretive guidance on how public companies should evaluate the impacts of climate change in their communications with shareholders. Such guidance had long been sought by certain pension funds, shareholder advocacy groups and states, who were unsatisfied with the varied nature of corporate disclosure concerning climate change. While a copy of the guidance has not yet been made available, the Commissioners discussed the guidance at length.

The SEC identified four topics to be evaluated and, as appropriate, discussed in disclosures:

• The impact of existing as well as pending climate-change legislation and regulation.
• The impact of international accords and treaties on climate change or greenhouse gas emissions.
• The actual and potential indirect consequences of climate change regulation or business trends (e.g., reduced demand for carbon-intensive products).
• The actual and potential impacts of the physical effects of climate change.

As Commissioner Walter acknowledged, the guidance does not require disclosure of carbon footprint or what companies are doing to reduce greenhouse gas emissions, since such requirements would require the SEC to undergo formal rulemaking. The guidance does not intend to modify the principal tenets of disclosure law. Climate disclosure still requires a case-by-case evaluation of materiality by the company in light of reasonable shareholder expectations. 

Impetus for Action

The SEC’s actions today follow years of outspoken criticisms, formal petitions, and advocacy concerning the sufficiency of corporate climate disclosure. Before and during this period, as the science of climate change evolved and was more widely understood, ever more companies across many business sectors had begun to acknowledge the potential relevance and impact of climate change and associated regulation. Many have for years reported their carbon footprint and other parameters to shareholders in sustainability reports and to non-governmental aggregators of climate disclosures, like the Carbon Disclosure Project. Nevertheless, the perception persisted that climate disclosure practices varied widely in quality and transparency, although in practice the SEC and its staff rarely voiced concern. In fact, in her dissent, Commissioner Casey specifically noted that the SEC has never made a particular finding that climate change disclosures to date have been materially inadequate.

Effect on Companies

In the absence of clear legal direction from Congress or the Executive Branch as to a carbon price or a mandatory system for reducing greenhouse gas emissions, many companies could offer shareholders little certainty as to the anticipated financial impact of any future federal requirements intended to address global warming. Commissioners Walter and Aguilar emphasized that companies should err on the side of more disclosure when uncertain about the materiality of an issue to the company.

The full effects of the new guidance remain to be seen. For the moment it is apparent that the SEC has become sensitized to the potential importance of climate change to reporting companies and has signaled its expectation that companies focus with renewed vigor on the traditional disclosure analysis, predicated on materiality and likelihood. While purporting not to modify the existing tenets of disclosure practice, the SEC's action will clearly affect the practical application of these principles.

Companies preparing their Form 10-K annual reports will wish to review the SEC’s new interpretive guidance with care and in light of prior disclosures to shareholders concerning climate change. 

Other Recent SEC Actions

Last October, the SEC modified its position with respect to the ability of companies to reject shareholder proposals (concerning climate change or other matters) on the basis of the ordinary-business exclusion codified at Rule 14a-8(i)(7). In doing so, the SEC also noted “that there is widespread recognition that the board's role in the oversight of a company's management of risk is a significant policy matter regarding the governance of the corporation.” Therefore, “a proposal that focuses on the board's role in the oversight of a company's management of risk may transcend the day-to-day business matters of a company and raise policy issues so significant that it would be appropriate for a shareholder vote.”

Merging parties take note: the antitrust agencies will take action where "conduct of business" provisions are drafted too broadly, or where the buyer goes further than the provisions allow to manage or influence the seller’s actions before the parties obtain clearance under the Hart-Scott-Rodino Antitrust Improvements Act ("HSR Act"). 

In a recent complaint, the Department of Justice ("DOJ") alleged that Premium Standard Farms ("Premium"), a pork packer and processor and hog producer, sought approval from Smithfield Foods ("Smithfield"), the largest pork packer and processor and hog producer in the United States, for its business decisions made in the "ordinary course" during the HSR Act waiting period. Although the merger documents apparently included appropriate provisions requiring Premium only to obtain approval for decisions outside of the "ordinary course," DOJ alleged that the Smithfield executives in practice reviewed and approved supply agreements that were "ordinary course." Concurrent with the filing of the lawsuit, the parties filed a settlement agreement in which Smithfield agreed to pay a $900,000 penalty. The Smithfield example serves as a reminder that parties should not only draft merger agreement language carefully; they must also ensure that executives are educated and trained as to what that language means and the antitrust ramifications of failing to abide by it.

Smithfield and Premium filed for HSR approval of Smithfield's acquisition of Premium with the agencies in October 2006. Following the initial HSR waiting period, the DOJ issued requests for additional information and documents ("second requests"). According to the DOJ's complaint, the parties' merger agreement contained customary "conduct of business" provisions limiting Premium's operations during the waiting period, including a requirement that Premium operate its business in the "ordinary course" consistent with past practice. In practice, however, instead of "exercising independent business judgment" during the waiting period, Premium sought Smithfield's approval on three supply contracts the DOJ characterized as "ordinary course." For each of the three contracts, Premium shared with Smithfield the proposed contract terms, including pricing, quantity and length of contract information. As a result, the DOJ alleged that Smithfield controlled a significant segment of Premium's business operations and therefore acquired beneficial ownership of Premium's business in violation of the HSR Act. During the waiting period, the HSR Act forbids the parties from transferring beneficial ownership (i.e. operational control) of any aspect of the target's business to the acquiring party. Formal guidance provided by the agencies explains that "the existence of beneficial ownership is determined in the context of the particular case with reference to the person or persons that enjoy the indicia of beneficial ownership."

In order to protect the buyer's investment during the period prior to closing, merger agreements almost always contain "conduct of business" provisions. These provisions often include restrictions on actions the seller may take, such as forbidding the assumption of new debt or financing, or the issuance of voting securities or the sale of assets, as well as language requiring the seller to continue to operate its business in the ordinary course consistent with past practice during the period prior to closing. Parties to merger agreements must be very careful as to how "ordinary course" is both defined and interpreted. Although the antitrust agencies recognize the importance of protecting the buyer's investment, they also recognize the need to preserve competition between the parties and the seller as an independent company in case the proposed merger is not consummated. Thus, "conduct of business" provisions, and in particular, "ordinary course" language or limitations should be considered in light of the facts and circumstances of a particular business and industry. The parties should make certain that the relevant definitions are properly drafted to ensure the seller retains the ability to use its independent business judgment for all decisions necessary to the seller's day-to-day ongoing operations. 

Perhaps even more importantly, all personnel must understand the importance of fulfilling the merger agreement obligations, and stopping short of exceeding those obligations. Executives of merging parties often have a natural tendency to want to establish a rapport with their counterparts, and that tendency, combined with a fear of running afoul of the merger agreement provisions, can lead to well-intentioned "gun-jumping" violations like the Premium disclosure and Smithfield review of the supply agreements described by the DOJ. 

Allegations of "gun jumping" violations can be extraordinarily costly, and not simply because of a fine or penalty paid by a company facing enforcement action. Even the suggestion that the parties are not carefully following antitrust safeguards can complicate an otherwise straightforward HSR process. The Smithfield example shows that parties can find themselves in a multi-year investigation that will distract the companies and detract resources away from both the merger process and business operations. These effects are preventable, however. Antitrust counsel can help to properly draft merger agreement language and establish integration planning processes to assure compliance with "gun-jumping" prohibitions. 

Yesterday, The Federal Energy Regulatory Commission issued a Notice of Proposed Rulemaking ("NOPR") in Docket No. RM09-16 that would permit a new class of transactions to proceed without the need for a Federal Power Act Section 203 order.  Comments on the proposal are solicited and will be due 60 days after its publication in the Federal Register.

Except in limited circumstances, the Commission currently requires advance Section 203 approval for holding company acquisitions of 10% or more of the outstanding voting securities of public utilities or holding companies. Similarly, utilities generally must be authorized to transfer 10% or more of their voting securities. The NOPR proposes to permit certain investors to proceed on a blanket pre-authorized basis to acquire between 10 and 19.99% of the voting securities of a public utility or holding company. Public utilities whose securities were being acquired by qualified investors also would have blanket pre-authorization for the transfer of securities between these thresholds to such investors. The NOPR also would waive certain obligations that otherwise might apply to the public utility or holding company based upon affiliations that may be triggered by the security acquirer's other utility investments. 

The NOPR ostensibly stemmed from a Petition for Guidance Regarding "Control" and "Affiliation" filed by the Electric Power Supply Association ("EPSA") in 2008. EPSA cited to the increased investment activity in the utility sector by hedge funds and investment funds, which it indicated could have unintended consequences on the public utilities in which these funds were investing given the Commission's then-current precedent on control and affiliation. The Commission subsequently held a workshop at which it invited selected interested industry participants to present their views on the issues. The Commission invited post-workshop comments. 

In the NOPR, the Commission proposes to solve the concerns raised in the EPSA Petition with a different solution than proposed by EPSA. The Commission proposes the use of a new Affirmation Form, Form 519-C, by investors seeking to acquire shares between 10% and 19.99% who wish to avoid the process of obtaining a Section 203 order. To proceed to acquire securities of publicly-traded or privately-held utilities on a blanket pre-authorized basis, an investor would need to file an Affirmation in which it committed to restrict its actions as to the investment at issue. The Affirmation would create a rebuttable presumption that the investor does not control the public utility.  While the implicated entities would be considered "affiliates," the Commission proposes to grant a waiver of the regulatory requirements applicable to affiliated companies based upon the Affirmation. The Affirmation would be due within 10 days after an acquisition and would be subject to quarterly updating.

The Affirmation is intended to serve a purpose similar to the SEC Schedule 13G filing. The signatory would commit that the securities referred to in the filing were not acquired and would not be held "for the purpose of or with the effect of changing or influencing the control of the issuer of the securities and were not acquired and are not held in connection with or as a participant in any transaction having that purpose or effect." Interestingly, the Commission proposes that to be eligible for the blanket authorizations, an investor would need to file an Affirmation for each public utility in which the investor acquired securities. 

The Affirmation would:

(1) disclose the number of shares of voting securities (and percent of the total shares outstanding) of the public utility in respect of which the statement is filed;

(2) disclose the identity and location of any other public utility that is an affiliate of the investor;

(3) provide a description and the location of “inputs to electric power production” owned or controlled by the investor or by any affiliate of the investor;

(4) require the investor to commit that it will not

(a) seek or accept representation on the public utility’s board of directors or otherwise serve in any management capacity;

(b) request or receive non-public information, either directly or indirectly, concerning the business or affairs of the public utility;

(c) not to solicit, or participate in any solicitation of, proxies involving the public utility; and

(d) seek to influence the management or conduct of the day-to-day operations of the public utility in such areas as

purchasing or selling electricity or inputs to generation,

scheduling power production, including, but not limited to, the dispatching of generation units or scheduling outages,

hiring or fixing compensation of the public utility’s officers, directors and employees.

The Commission confirmed that it is not its intent that these restrictions interfere with shareholder voting rights. The Commission is soliciting comments on the procedures that would be applicable if an investor that had filed an Affirmation sought to change its investment intent and no longer abide by the commitments made in the Affirmation. 

As to the definition of "affiliate," the Commission proposes to change the definition so that it would apply when an investor has the ability to control a public utility or has been demonstrated to have such a degree of influence over management policies to dictate being treated as an affiliate. Entities owning 10% but less than 20% would be deemed affiliates, but if an Affirmation is filed would qualify for a waiver of the associated regulatory requirements. The NOPR also proposes to define "voting security" as "any security presently entitling the owner or holder thereof to vote in the direction of management of the affairs of a company."