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U.S. FERC Orders Increase Definition of Affiliate for Public Utilities Underneath Federal Energy Act | Insights


Background

FERC’s laws determine sure bases on which entities could also be deemed associates beneath the Federal Energy Act (FPA). Normally, FERC defines an “affiliate” to incorporate (i) “any individual that immediately or not directly owns, controls, or holds with energy to vote, 10[%] or extra of the excellent voting securities of the desired firm” and (ii) “any firm 10[%] or extra of whose excellent voting securities are owned, managed, or held with energy to vote, immediately or not directly, by the desired firm.”1 As well as, FERC’s laws specify that “any particular person that’s beneath widespread management with the desired firm” is an affiliate of the desired firm.2 FERC’s laws additionally present that an affiliate of a specified firm may be any particular person or class of individuals that FERC determines, after applicable discover and alternative for listening to, to face in such relation to the desired firm that there’s liable to be an absence of arm’s-length bargaining in transactions between them as to make it vital or applicable within the public curiosity or for the safety of traders or shoppers that the particular person be handled as an affiliate.3 Underneath FERC’s laws, possession of lower than 10% of the excellent voting securities of a specified firm creates a rebuttable presumption of lack of management.4

FPA Part 203 requires a “public utility” to acquire prior FERC authorization to promote, lease, or in any other case eliminate the entire of its services topic to the jurisdiction of FERC, or any half thereof, of a price in extra of $10 million.5 In figuring out whether or not a disposition of management will happen for functions of Part 203, FERC considers a switch of 10% or extra of a public utility’s voting securities as constituting “management” for FPA Part 203 functions. FERC has established that an possession share beneath 10% creates a rebuttable presumption of no management.6 Different elements might assist a conclusion {that a} disposition of management will happen, even when the quantity being transferred is under 10% (e.g., non-independent board appointment or sure consent or veto rights).

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

In Evergy, FERC discovered that the place an investor’s non-independent director, resembling its personal officer or director, or different appointee accountable to the investor, is appointed to the board of a public utility or public utility holding firm, that appointment capabilities to rebut the presumption of lack of management for affiliation functions beneath FERC’s laws.7 Due to this fact, FERC will deal with that investor as an affiliate of the general public utility or public utility holding firm to which the investor has appointed a non-independent director.

FERC reasoned that board membership confers rights, privileges, and entry to nonpublic info, together with info on business technique and operations. The place an investor’s personal officer or director, or different appointee accountable to the investor, is appointed to the board of a public utility or holding firm that owns public utilities, the investor itself could have these rights, privileges, and entry and thus the authority to affect vital choices involving the general public utility or public utility holding firm. FERC said that its discovering is in keeping with its discovering in Public Citizen, Inc., v. CenterPoint Power, Inc., wherein FERC expressed concern with constructions the place the investor itself could be represented on the board via appointment of the investor’s personal officers, administrators, or different appointee accountable to the investor.8

In the identical order, FERC dominated {that a} separate passive funding administration firm that owns lower than 10% of the excellent voting securities in Evergy was not an affiliate of Evergy the place a director appointed to the Evergy board on the funding administration firm’s request is impartial of, and never compensated by, the funding administration firm. FERC centered on the truth that this director was impartial and thus declined to seek out that the funding administration firm was an affiliate of Evergy.

TransAlta Power Advertising and marketing (U.S.) Inc., et al. (FERC Docket No. EC22-45-000)

In TransAlta Power Advertising and marketing (U.S.) Inc., et al., FERC prolonged its discovering in Evergy to transactions beneath Part 203 of the FPA, which requires prior FERC approval for sure transactions, together with tendencies of management over a public utility.9 FERC clarified that in keeping with its discovering in Evergy, the appointment of two non-independent board members by an investor and its associates to TransAlta’s board of administrators represents a change of management requiring prior approval by FERC. FERC said, “Going ahead, appointment of an investor’s personal officers or administrators, or different appointee accountable to the investor, to the board of a public utility or holding firm that owns public utilities would require prior Fee approval beneath part 203(a)(1)(A).”

On this case, the related investor and its associates had an settlement to appoint for appointment two of the 12 members of TransAlta’s board of administrators and have positioned two executives from their associates on the board of administrators. FERC rejected the candidates’ arguments that the holding of two board seats is inadequate to realize management, as the massive dimension and impartial composition of the board operates to limit the investor’s administrators from exercising management over administration choices. FERC additionally rejected the candidates’ argument that two administrators can’t affect any board determination except at the very least 5 different administrators, none of which is affiliated with each other, additionally individually assist the identical end result. FERC once more reasoned that the place an investor’s personal officer or director, or different appointee accountable to the investor, is appointed to the board of a public utility or holding firm that owns public utilities, the investor itself could have these rights, privileges, and entry and thus the authority to affect vital choices involving the general public utility or public utility holding firm.

Takeaways

Going ahead, traders and public utilities topic to FERC’s jurisdiction beneath the FPA should extra carefully analyze whether or not the appointment of a number of administrators/officers will set off a previous FERC approval beneath FPA Part 203, a discover of change in standing beneath FPA Part 205, in addition to different potential FERC filings and updates. Specifically, if a third-party investor appoints a non-independent board member to the board of the general public utility or its holding firm (whatever the quantity of excellent voting securities held by the third get together), FERC’s orders point out that FERC will deal with these entities as associates (triggering the necessity for each prior- and post-appointment filings and approvals).

As a result of the circumstances that convey management and affiliation beneath the FPA can differ based mostly on a number of elements, together with the transaction construction and the contractual or voting rights concerned, explicit consideration should be paid to the info and circumstances surrounding a given transaction or appointment in time to obtain any vital approvals and make every other vital filings with FERC. Importantly, FERC has the power to “undo” a transaction that’s consummated with out vital FPA Part 203 authorization. FERC additionally has authority to evaluate civil penalties in such circumstances. Due to this fact, it’s important to find out what approvals are vital earlier than consummating a specific transaction involving the appointment of administrators or officers, significantly non-independent administrators or officers.


18 C.F.R. § 35.36(a)(9)(i), (ii).

Id. § 35.36(a)(9)(iv).

Id. § 35.36(a)(9)(iii).

Id. § 35.36(a)(9)(v).

16 U.S.C. § 824b(a)(1)(A).

See Transactions Topic to FPA Part 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).

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

See TransAlta Power Advertising and marketing (U.S.) Inc., 181 FERC ¶ 61,055, at PP 28-29 (2022).



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