Comment Log Display

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