2nd UPDATE: FERC Sets New Process For Investment In Power Cos

The Federal Energy Regulatory Commission proposed new rules Thursday that could make it easier for investors such as hedge funds to take large stakes in power companies.

Generators and investment firms for more than a year have argued that federal regulation to protect electricity market competition makes it difficult for passive investors to own more than a 10% stake in power companies. The commission's proposal would allow investors through a new process to take up to a 20% stake without being subject to certain rate requirements and cross-ownership restrictions.

A spokesman for the Managed Funds Association, which represents the hedge-fund industry, said the organization is broadly supportive of the changes FERC proposed.

As investment by hedge funds picked up in 2008, power producers feared they would lose their ability to sell at market-based rates if they had a large shareholder in common. Funds such as Harbinger Capital Partners and LS Power Development LLC sought FERC authorization as they looked to increase their positions in companies such as Mirant Corp. (MIR) and TransAlta Corp. (TAC). But as the credit crunch dried up access to financing, hedge funds and power companies reframed their argument, saying the easing of rules would help increase investment in the sector.

Under the new proposal, investors can take a 10% to 20% stake in a power company by filing a new form to ensure they won't change or influence control of the company. FERC would have the ability to monitor investors and sanction them if they violate statements made in the form.

A representative of the Electric Power Supply Association, which represents some of the nation's largest power companies, said the proposed rule appears to address the concerns raised, but further details are being awaited.

- By Mark Peters, Dow Jones Newswires; 212-416-2457 [e-mail]

(Siobhan Hughes in Washington, D.C., contributed to this article.)