U.S. FERC Orders Expand Definition of Affiliate for Public Utilities Under Federal Power Act

Background

FERC’s regulations identify certain bases on which entities may be deemed affiliates under the Federal Power Act (FPA). In general, FERC defines an “affiliate” to include (i) “any person that directly or indirectly owns, controls, or holds with power to vote, 10[%] or more of the outstanding voting securities of the specified company” and (ii) “any company 10[%] or more of whose outstanding voting securities are owned, controlled, or held with power to vote, directly or indirectly, by the specified company.”¹ In addition, FERC’s regulations specify that “any person that is under common control with the specified company” is an affiliate of the specified company.² FERC’s regulations also provide that an affiliate of a specified company may also be any person or class of persons that FERC determines, after appropriate notice and opportunity for hearing, to stand in such relation to the specified company that there is liable to be an absence of arm’s-length bargaining in transactions between them as to make it necessary or appropriate in the public interest or for the protection of investors or consumers that the person be treated as an affiliate.³ Under FERC’s regulations, ownership of less than 10% of the outstanding voting securities of a specified company creates a rebuttable presumption of lack of control.⁴

FPA Section 203 requires a “public utility” to obtain prior FERC authorization to sell, lease, or otherwise dispose of the whole of its facilities subject to the jurisdiction of FERC, or any part thereof, of a value in excess of $10 million.⁵ In determining whether a disposition of control will occur for purposes of Section 203, FERC considers a transfer of 10% or more of a public utility’s voting securities as constituting “control” for FPA Section 203 purposes. FERC has established that an ownership share under 10% creates a rebuttable presumption of no control.⁶ Other factors may support a conclusion that a disposition of control will occur, even when the amount being transferred is below 10% (e.g., non-independent board appointment or certain consent or veto rights).

Evergy Kansas Central, Inc., et al. (FERC Docket No. ER20-67-001, et al.)

In Evergy, FERC found that where an investor’s non-independent director, such as its own officer or director, or other appointee accountable to the investor, is appointed to the board of a public utility or public utility holding company, that appointment functions to rebut the presumption of lack of control for affiliation purposes under FERC’s regulations.⁷ Therefore, FERC will treat that investor as an affiliate of the public utility or public utility holding company to which the investor has appointed a non-independent director.

FERC reasoned that board membership confers rights, privileges, and access to nonpublic information, including information on commercial strategy and operations. Where an investor’s own officer or director, or other appointee accountable to the investor, is appointed to the board of a public utility or holding company that owns public utilities, the investor itself will have those rights, privileges, and access and thus the authority to influence significant decisions involving the public utility or public utility holding company. FERC stated that its finding is consistent with its finding in Public Citizen, Inc., v. CenterPoint Energy, Inc., in which FERC expressed concern with structures where the investor itself would be represented on the board through appointment of the investor’s own officers, directors, or other appointee accountable to the investor.⁸

In the same order, FERC ruled that a separate passive investment management company that owns less than 10% of the outstanding voting securities in Evergy was not an affiliate of Evergy where a director appointed to the Evergy board at the investment management company’s request is independent of, and not compensated by, the investment management company. FERC focused on the fact that this director was independent and thus declined to find that the investment management company was an affiliate of Evergy.

TransAlta Energy Marketing (U.S.) Inc., et al. (FERC Docket No. EC22-45-000)

In TransAlta Energy Marketing (U.S.) Inc., et al., FERC extended its finding in Evergy to transactions under Section 203 of the FPA, which requires prior FERC approval for certain transactions, including dispositions of control over a public utility.⁹ FERC clarified that consistent with its finding in Evergy, the appointment of two non-independent board members by an investor and its affiliates to TransAlta’s board of directors represents a change of control requiring prior approval by FERC. FERC stated, “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 section 203(a)(1)(A).”

In this case, the relevant investor and its affiliates had an agreement to nominate for appointment two of the 12 members of TransAlta’s board of directors and have placed two executives from their affiliates on the board of directors. FERC rejected the applicants’ arguments that the holding of two board seats is insufficient to gain control, as the large size and independent composition of the board operates to restrict the investor’s directors from exercising control over management decisions. FERC also rejected the applicants’ argument that two directors cannot influence any board decision unless at least five other directors, none of which is affiliated with one another, also individually support the same outcome. FERC again reasoned that where an investor’s own officer or director, or other appointee accountable to the investor, is appointed to the board of a public utility or holding company that owns public utilities, the investor itself will have those rights, privileges, and access and thus the authority to influence significant decisions involving the public utility or public utility holding company.

Takeaways

Going forward, investors and public utilities subject to FERC’s jurisdiction under the FPA must more closely analyze whether the appointment of one or more directors/officers will trigger a prior FERC approval under FPA Section 203, a notice of change in status under FPA Section 205, as well as other potential FERC filings and updates. In particular, if a third-party investor appoints a non-independent board member to the board of the public utility or its holding company (regardless of the amount of outstanding voting securities held by the third party), FERC’s orders indicate that FERC will treat those entities as affiliates (triggering the need for both prior- and post-appointment filings and approvals).

Because the circumstances that convey control and affiliation under the FPA can vary based on several factors, including the transaction structure and the contractual or voting rights involved, particular attention must be paid to the facts and circumstances surrounding a given transaction or appointment in time to receive any necessary approvals and make any other necessary filings with FERC. Importantly, FERC has the ability to “undo” a transaction that is consummated without necessary FPA Section 203 authorization. FERC also has authority to assess civil penalties in such cases. Therefore, it is critical to determine what approvals are necessary before consummating a particular transaction involving the appointment of directors or officers, particularly non-independent directors or officers.

¹ 18 C.F.R. § 35.36(a)(9)(i), (ii).

² Id. § 35.36(a)(9)(iv).

³ Id. § 35.36(a)(9)(iii).

⁴ Id. § 35.36(a)(9)(v).

⁵ 16 U.S.C. § 824b(a)(1)(A).

⁶ See Transactions Subject to FPA Section 203, Order No. 669-A, 115 FERC ¶ 61,097 at P 101 (2006).

⁷Evergy Kansas Central, Inc., et al., 181 FERC ¶ 61,044, at P 45 (2022).

⁸ See Public Citizen, Inc., v. CenterPoint Energy, Inc., 174 FERC 61,101 at 33 (2021).

⁹ See TransAlta Energy Marketing (U.S.) Inc., 181 FERC ¶ 61,055, at PP 28-29 (2022).