The buyers behind the proposed sale of El Paso Electric Co. will need to provide the Federal Energy Regulatory Commission with more details concerning an investment fund's relationship with a JPMorgan Chase & Co. subsidiary before the agency signs off on the deal.
In a Dec. 5 deficiency letter, FERC directed the buyers — IIF US Holdings 2 LP, or IIF 2, which is advised by J.P. Morgan Investment Management Inc. — to disclose much of the same information sought by Public Citizen, a consumer advocacy group that has raised questions about the close ties between the two entities.
The parties in August asked FERC to approve the proposed sale of El Paso Electric, which provides generation, transmission and distribution service to about 428,000 retail and wholesale customers in West Texas and southern New Mexico. But Tyson Slocum, Public Citizen's energy program director, intervened in the proceeding (FERC docket EC19-120) and filed an Oct. 7 protest after digging into IIF 2's complex corporate structure.
While IIF 2 said in its initial application with FERC that it is merely advised by J.P. Morgan Investment, Slocum learned that two of the fund's three owners were formally recommended by JPMorgan Chase. And since its founding in 2006, IIF 2 has only used J.P. Morgan Investment as its sole advisor, suggesting the two entities are actually affiliates, Slocum argued.
Aside from the fund's three owners, Slocum also discovered that IIF 2 appears to be entirely staffed by JPMorgan Chase employees. Slocum also noted that the three current owners may not have invested any meaningful capital in the fund, and he cited filings made in a separate regulatory proceeding in Texas that indicate they are term-limited.
Slocum argued in a subsequent Nov. 6 filing with FERC that such an arrangement diminishes the fund's ability to produce analyses independent of J.P. Morgan Investment's preferences. In addition, whether IIF 2 and J.P. Morgan Investment are affiliated is potentially significant because federal rules place limits around the types of activities in which bank holding companies and their subsidiaries can engage.
In an Oct. 15 response, lawyers representing IIF 2 asserted that none of the three owners "are employed by, or otherwise affiliated with" JPMorgan Chase, maintaining that "each independently owns its respective general partner interest, and each votes this interest in accordance with his/her individual views of how best to promote the interests of [IIF 2] and its limited partners."
However, FERC's Dec. 5 deficiency letter seeks additional information on the nature of the relationship between J.P. Morgan Investment, IIF 2, and Sun Jupiter, a subsidiary of IIF 2 that would merge with and into El Paso Electric if the sale is approved.
FERC's letter noted that Sun Jupiter's initial application for approval of the sale listed the same principal business address as another JPMorgan Chase subsidiary: JP Morgan Asset Management. Sun Jupiter also listed an email address under the "@jpmorgan.com" domain to receive notices and communications related to the proposed transaction, FERC noted.
"Please explain why and how Sun Jupiter and J.P. Morgan Asset Management share the same principal business office; please also explain why and how Sun Jupiter uses the '@jpmorgan.com' domain," FERC said in its letter.
In addition to asking for details on how the owners of IIF 2 are selected and how the fund is staffed, FERC asked whether its current three owners made capital contributions to secure their ownership shares, and if so, in what amount.
The letter concluded by asking whether the designation of J.P. Morgan Investment as an affiliate of Sun Jupiter would impact the representations made to FERC in analyses submitted along with the application for approval of the sale.
JPMorgan Chase did not respond to a request for comment Dec. 6. FERC directed counsel for IIF 2 to respond with the requested information within 30 days.
The proposed merger is also facing headwinds at the Nuclear Regulatory Commission, where Public Citizen has requested a public hearing to flesh out more details about IIF 2's relationship with JPMorgan Chase before the regulator processes the transfer of an operating license for the 4,000-MW Palo Verde nuclear plant. El Paso Electric owns a 15.8% interest in the generating facility.
On Nov. 21, IIF 2 and El Paso Electric announced an agreement in principle with the Public Utility Commission of Texas' staff and most other intervenors regarding the proposed acquisition. The PUCT has delayed a hearing on the proposed transaction that had been scheduled to run from Nov. 20 to Nov 22 as the parties attempt to reach a unanimous settlement, according to a statement. An update will be provided at the PUCT's regularly scheduled meeting on Dec. 13.