FERC: Investors with Utility Board Members are Affiliates

Building on analysis in its February 2021 Public Citizen, Inc. v. Centerpoint Energy, Inc. opinion, the Federal Energy Regulatory Commission (FERC) recently issued decisions in Evergy Kansas, Inc. (Evergy) and Transalta Energy Marketing (U.S.), Inc. (Transalta) analyzing whether investments that were under 10% of outstanding voting shares, but were paired with appointment of directors that were accountable to the investors, constitute a change in control within the meaning of the Federal Power Act.


The commission held in Transalta: “Going forward, appointment of an investor’s own officers or directors, or other appointee accountable to the investor, to the board of a public utility or holding company that owns public utilities will require prior Commission approval under Federal Power Act (FPA) section 203(a)(1)(A).”

In addition to requiring prior approval, FERC announced that such officer and director appointments may also create affiliation.  This, in turn, would seem to raise implications regarding affiliate restrictions, Market Based Rate (MBR) Authority change in status reporting, and maintenance of up-to-date information in FERC’s Order No. 860 Relational Database.

Maxwell Multer

Public utilities and public utility holding companies should consider reviewing their board rosters to determine whether there have been changes in control or affiliations that may require corrective filings or self-reporting to the Office of Enforcement.  Notably, although the commission’s language in Transalta speaks in terms of prospective application, affiliation carries ongoing obligations.

Investors in public utilities and public utility holding companies should take note that, under Evergy and Transalta, placement of non-independent directors likely constitutes a change of control requiring prior approval under FPA section 203(a)(1)(A), regardless of whether the investor’s holdings remain under 10% of the outstanding voting securities.

Compliance with the affiliate rules is already a frequent examination focus of the Office of Enforcement’s Division of Audits and Accounting (DAA).  Because this is an important policy change with a relatively clear framework regarding compliance, DAA may further emphasize this audit scope area in the future.

Implications of Control and Affiliation

FERC’s regulatory regime includes various restrictions and procedural requirements relating to changes in control of jurisdictional assets and entities.  These include the obligation to obtain prior approval for certain transactions that result in a change in control, potential reporting requirements relating to new affiliations, and resulting restrictions on activity and information sharing between affiliates.

The commission’s regulations at 18 C.F.R. identify various circumstances that constitute affiliation.  According to Transalta and Evergy, placement of an officer or director of an investor (or an affiliate of the investor) on a public utility or public utility holding company’s board of directors constitutes affiliation as well.  FERC’s analysis suggests that appointment of any director that is accountable to the investor or the investor’s affiliates, whether or not an officer or director of the investor, would likely raise the same concerns.

FPA Section 203 Prior Approval Requirements

Section 203 of the Federal Power Act requires prior FERC authorization for certain transactions, including the sale, lease, or other disposition of jurisdictional assets, including any portion thereof valued at more than $10 million.

Generally, acquisition by an investor of less than 10% of total outstanding voting securities is entitled to a rebuttable presumption of no control and, consequently, does not come within the “other disposition” language of Section 203.  Per Transalta and Evergy however, control may exist where such ownership is accompanied by appointment of board members.  Specifically, FERC held in these cases that the control and flow of information encompassed in investor placement of non-independent board members on the board of a public utility or public utility holding company constitutes an “other disposition” under section 203(a)(1)(A), thus necessitating prior Commission authorization.

Market-Based Rate (MBR) Authorization

In order to obtain MBR authorization from the commission, sellers must submit an application that includes various information designed to allow FERC to conduct an appropriate market power analysis, and, if market power concerns exist, to determine what mitigation measures are sufficient to address those concerns.  This includes identification of ownership or control of inputs to electric power production by the applicant or affiliates, as well as submission of an asset appendix that identifies all generation assets, long-term firm purchase contracts, transmission assets, and natural gas intrastate pipelines and gas storage facilities owned or controlled by the applicant or any of its affiliates.

After obtaining MBR authorization, MBR entities must report within 30 days any change in status that would reflect a departure from the characteristics the Commission relied upon in granting MBR authority, including certain new affiliations and changes to affiliated asset ownership.

MBR entities should consider whether newly identified affiliations based on the Commission’s analysis in Transalta and Evergy necessitate MBR Change in Status filings, MBR Relational Database updates, and/or self-report to the commission’s Office of Enforcement.  Appropriate action will depend on the nature of, and assets owned by, the affiliated entities.

Affiliate Restrictions

In addition to the filing obligations discussed above, MBR entities are subject to various restrictions on activity and information sharing among affiliates.  Among other things, these include restrictions relating to energy and capacity sales, as well as the provision of non-power goods and services.

To the extent FERC’s opinions in Evergy and Transalta implicate previously unreported or unformalized affiliations, MBR entities should evaluate the relationship and related communication channels with the affiliate(s) and, if appropriate, implement controls to ensure they do not run afoul of the Commission’s affiliate restrictions.

Key Takeaways

In light of FERC’s analysis in Transalta and Evergy, public utilities, public utility holding companies, and investors should consider whether there are affiliations that exist by virtue of board membership of individuals accountable to investors.  If so, they should work with counsel to determine whether corrective filings, self-reporting, or other actions may be appropriate.  Potential filings could include MBR Change in Status Filings or MBR Relational Database updates.

Likewise, all should be aware that, going forward, such director appointments will be subject to FERC review and approval pursuant to FPA § 203, and will likely constitute affiliation between the investor and the public utility or public utility holding company.

Maxwell Multer, a counsel with Bryan Cave Leighton Paisner, represents energy clients in regulatory and enforcement matters before the Federal Energy Regulatory Commission, as well as state utility commissions. He was previously in-house counsel at a large combination utility and formerly an attorney-adviser in FERC’s Office of Enforcement. He can be reached at [email protected]

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