First Name | Gregory |
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Last Name | Meisinger |
Email Address | gameisinger@aeraenergy.com |
Affiliation | |
Subject | California Cap on Greenhouse Gas Emissions and Market-Based Compliance Mechanisms Comments |
Comment | Dear Clerk of the Board: Aera Energy LLC (“Aera”) is a large oil and gas producer headquartered in Bakersfield, California. Aera appreciates the opportunity to comment on the March 21, 2014, California Cap on Greenhouse Gas Emissions and Market-Based Compliance Mechanisms 15-day Package. Aera would like to focus its comments on Section 95833(a)(2)(F) Aera believes Section 95833(a)(2)(F) should be revised to read: “In the case of a limited liability corporation company, owns more than 50% of the other entity regardless of how the interest is held., unless that entity provides documentation demonstrating to the reasonable satisfaction of the Executive Officer that it neither controls nor is controlled by the other entity.” Rationale Some LLCs have member companies that are totally unassociated market participants but with one of the members (or a group of members, collectively, a “member group”) having an ownership interest in the LLC of greater than 50%. Normally, control follows from ownership. However, in some situations, the LLC’s governance documents dictate that no member or member group has control over the LLC’s activities, despite holding a majority ownership interest in the LLC. In these cases, the LLC acts as an independent entity, and the majority member or member group should be found to have a corporate association with the LLC under section 95833(a)(1), but not a “direct corporate association” under section 95833(a)(2). As proposed, section 95833(a)(2)(F) creates legal dilemmas for the LLC, its majority ownership member, and any minority members or member groups. The LLC can be put in the untenable situation of having to choose to take actions that could violate the provisions of its LLC governance documents, violate the non-disclosure provisions of section 95914(c), and/or potentially run contrary to state and federal antitrust laws. Depending on the LLC’s governance documents, the minority ownership members would likely have the right to understand the LLC’s joint, coordinated strategy that it develops with the majority member because it directly impacts the operational and financial viability of the LLC. Further, the LLC could be required to obtain the unanimous approval of all members in order to implement the joint strategy after disclosure. In this case, although the minority members would not have a direct corporate association with the LLC, the LLC would be obligated to share with the minority member the details of the purchase strategies it has developed with the majority member, including plans for auction and secondary market participation, as well as bidding and pricing strategy. Holding limits/strategies would also be implicated, including any strategies related to the timing of transfers of compliance instruments to/from third parties or into compliance accounts. Any sharing of such information by the LLC with its minority members would be a direct violation of section 95914(c). Even if minority members are not directly participating in the cap-and-trade program, they could have corporate associations with other registered and non-registered entities, further multiplying the potential for violations of the non-disclosure provisions of section 95914. If the minority members are covered entities or opt-in covered entities registered and participating in the cap-and-trade program, the end result is that there will be three or more market participants having knowledge of the majority owner’s and the LLC’s market position, participation, and transfer strategies. The only way the LLC can avoid putting its members in this untenable situation created by section 95833(a)(2)(F) is to violate the provisions of its corporate governance documents. This result is not only patently unfair to the entities involved, it also gives rise to potential antitrust issues. Section 95833(a)(2)(F) creates serious antitrust implications because it creates the appearance that the LLC and its majority and minority members could be colluding to manipulate one or more carbon markets. There are potential international law implications as well, now that California’s cap-and-trade program is linked with Quebec’s. The best solution to avoid the undesirable and unjust outcomes described above is to vest the Executive Officer with the power to review the corporate governance documents of LLCs where ownership does not equate to control over the LLC’s actions. Such review could be augmented with objective indicia of non-control, such as the inability of the majority member or member group to obtain any of the following: 1. Appointment or removal of more than 50% of the directors of the LLC; 2. Unilateral appointment or removal of officers of the LLC; or 3. Ability to act unilaterally on behalf of the LLC or commit it to any obligation. It would not be unreasonable for the Executive Officer to require some form of attestation from the LLC that it will not share market-sensitive information relating to its participation in the cap-and-trade program with the majority member. Because not all information related to the LLC’s program participation is market-sensitive, some limited exceptions to the blanket “gag order” could be made to facilitate proper governance of the LLC by its members. Exceptions could include the following: 1. Forecasted aggregate annual cost of purchasing compliance instruments; 2. Actual aggregate annual cost incurred to purchase compliance instruments; 3. Volume and total cost of compliance instruments associated with any untimely surrender obligation or excess emissions (section 95857); 4. Volume, source and cost of offset credits invalidated by CARB and remedies pursued; 5. Penalties imposed by CARB (section 96013) 6. Violations noticed by CARB (sections 95856, 95857 and 96104) 7. Any other actions taken by CARB that directly affect the LLC’s ability to participate in the cap-and-trade program and the reasons therefore (e.g. auction registration rejected by the Auction Administrator). There are undoubtedly other solutions that can be considered to the situation where LLC ownership does not equate to LLC control. However, the revisions proposed above strike a rational balance between the need for certain LLCs to conduct business and the need to protect the integrity of the cap-and-trade program and related markets. The added language gives the Executive Officer the authority to require that the LLC make its case for being exempted from the finding of a direct corporate association with its majority member. It also vests the Executive Officer with the power to demand enforceable assurances from the LLC that ownership does not equate to control, and that its information sharing with the majority owner will be limited to a closely circumscribed subset of information that is not market-sensitive. Aera appreciates your consideration of its comments. Sincerely, Gregory A. Meisinger Government Affairs Manager |
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Date and Time Comment Was Submitted | 2014-04-03 15:05:12 |
If you have any questions or comments please contact Clerk of the Board at (916) 322-5594.