While an inspection into its approval process plays out, FERC has allowed another investment firm to purchase a sizable chunk of a public utility.

With Jan. 8’s decision, New York-based Elliott Investment Management is free to bump up its current 2.36% ownership of NRG Energy common stock to a maximum 20% through direct or indirect purchases (EC23-112).

FERC allowed the transaction over extensive protest from Public Citizen, which warned that the investment firm was seeking to control the utility. Elliott said it eventually may exercise voting rights depending on NRG’s financial and operation performance.

The approval follows FERC initiating a Notice of Inquiry last month on its practice of issuing blanket authorizations for investment companies seeking a stake in public utilities. (See FERC Reconsidering Blanket Authorizations for Investment Companies.)

In this case, FERC said the transaction won’t harm competition because Elliott doesn’t currently own or control generation in the markets where NRG operates. The commission also noted that the transaction doesn’t involve any handover of generation facilities and doesn’t disturb market concentration or operational control.

Elliott does, however, own a 15% ownership interest in Peabody Energy Corp., which supplies coal to some NRG plants in PJM and ERCOT. Elliott pledged that it doesn’t involve itself in Peabody’s day-to-day operations.

Public Citizen protested that assertion. The group pointed out that two Elliott executives, Samantha Algaze and Dave Miller, serve on Peabody’s board of directors. Public Citizen argued that Peabody’s management is “directly accountable” to the board and that board members have “unfettered access to influence management.”

Nevertheless, FERC rejected Public Citizen’s request for a hearing to probe how Peabody’s coal supply contracts with NRG would affect competition.

The Elliott executives included sworn affidavits that they do not oversee Peabody’s day-to-day operations, nor do they set pricing, negotiate contracts with customers or “seek to influence Peabody management decisions concerning to whom or what Peabody sells coal or the markets in which they sell coal.”

Public Citizen further argued that FERC couldn’t authorize the deal because it couldn’t allow Elliott executives to simultaneously serve on the NRG and Peabody boards. That would violate the Clayton Act, the organization reasoned.

Elliott argued that FERC is not tasked with enforcing the Clayton Act and that Peabody isn’t a competitor of NRG because it doesn’t mine coal.

FERC said Elliott’s board control and representation at either Peabody or NRG was “irrelevant” to its evaluation of the transaction. It also agreed that its jurisdiction doesn’t extend to Clayton Act enforcement.

Additionally, Public Citizen said it was troubled that prior to seeking FERC approval, Elliott attained indirect control of more than 10% of NRG through acquiring derivatives that “likely convey indirect voting control.” It said the Securities and Exchange Commission is similarly uneasy over the use of derivatives to covertly control public companies and has proposed a rulemaking to treat holders of cash-settled derivatives as owners for reporting purposes.

Public Citizen claimed that Elliott has a history of acquiring derivatives to “amplify their indirect control over a target company.” The consumer group said Elliott follows a playbook of using their economic interests to exert corporate control and then switch out board members and executives. Public Citizen said Elliott’s use of derivatives to control voting rights means Elliott meets FERC’s definition of an affiliate company.

FERC, however, decided it wouldn’t address the allegations of investor activism. It also said any existing affiliation between Elliott and NRG wouldn’t affect its competition analysis. FERC said though it wasn’t making a finding of affiliation now, it wasn’t foreclosing on the possibility of determining it later.

Elliott said Public Citizen’s concerns were “speculative” and its use of derivatives “merely [confers] economic interest and [does] not permit the holder to ‘force’ any change at such companies.”

Public Citizen warned FERC that “this is a proceeding of first impression for the commission, and therefore requires careful consideration, as it will likely establish precedent for both hostile takeovers of public utilities and affiliation treatment of cash-settled swaps.”

It said FERC should curb Elliott’s ability to enter into cooperation agreements and ban it from appointing board members at other public utilities. Public Citizen alleged that “at least once a year,” Elliott appears to scoop up direct and indirect interests in jurisdictional utilities and then pressure personnel and investment changes. The group said cooperation agreements allow Elliott access to nonpublic material of other utilities while simultaneously serving as a de facto affiliate of NRG, posing a risk to competition.

Public Citizen asked FERC to force Elliott to disclose how many arrangements it has with utilities and limit its ability to enter into future cooperation agreements.

Finally, Public Citizen further alleged that Elliott is collaborating with Bluescape Energy Partners to force operational changes at NRG. It said Bluescape and Elliott have enjoyed “a yearslong relationship of successfully conspiring to bend target companies to their demands.” According to Public Citizen, this is the sixth time Elliott and Bluescape have “joined an effort to usurp management of a public utility without first securing” a FERC order through a combination of cash-settled derivatives, acquisition of NRG stock and coordination with Bluescape.

FERC said any possible collusion with Bluescape was beyond the scope of the proceeding.

Commissioner Mark Christie said though he concurred with FERC’s decision to allow the stock purchase, Public Citizen’s allegations regarding Elliott and its investments in public utilities are of interest to the commission.

“To that end, in future proceedings, interested entities should continue to file information they believe may be of interest to the commission in its review, including, as Public Citizen has done here, information regarding investment practices in jurisdictional utilities commenters believe may suggest indicia of influence as they relate to affiliation and control,” Christie wrote.

He said such information on investment firm behavior led FERC to publish the notice of inquiry on its policy in the first place.