In a pair of orders issued on October 20, 2022,1 the Federal Energy Regulatory Commission (“FERC” or “Commission”) ruled for the first time that an entity, such as an investor, that appoints a director to the board of a FERC-regulated “public utility” or a direct or indirect holding company of the public utility is a regulatory affiliate of the public utility solely by virtue of the directorship appointment and can be subject to FERC merger and acquisition, affiliate, power sales, and other corporate requirements.
When an investor acquires a voting or equivalent interest of 10 percent or greater in any public utility2 that is regulated under the Federal Power Act (“FPA”), the transaction will often require the pre-closing approval of the FERC under FPA Section 203 unless some specific exemption applies. Essentially all 10 percent and larger direct and indirect investors in any one public utility are all deemed to be affiliated with the public utility and with all of that public utility’s available capacity and associated energy. All of the public utility’s available capacity and energy are attributed to all of the investors (in its entirety and not just ratably) such that after the acquisition closes, the public utility must be treated as an FPA “affiliate” of each direct and indirect 10 percent voting co-owner. The breadth of FERC’s application of the term “affiliate” is highly material to FERC disclosure requirements and to FERC’s competition standards and directly affects the public utility’s eligibility for market-based rate (“MBR”) authority to sell wholesale electricity—which is typically a significant, and often the only, ultimate source of revenue for a FERC-regulated public utility with MBR authority.
For these reasons, applying Section 203 and MBR requirements to a directorship appointment can have significant implications. Both Section 203 M&A application proceedings and MBR applications and ongoing reporting proceedings are public, and parties hostile to a transaction can and do intervene. Even the simplest Section 203 proceedings take many months for FERC to process. FERC market power restrictions are stringent, and an investor’s FERC-regulated affiliations can limit the investor’s future investments in FERC-regulated interests. Even relatively small percentages of the generating capacity available in a market can trigger regulatory barriers to market entry and to selling wholesale electricity.
FERC regulations likewise provide that acquiring voting rights (even without economic interests) can be a “disposition of control” for Section 203 purposes. And regulations have long reserved to FERC the right to determine that a business arrangement presents the absence of arms-length dealing such that the public interest compels a finding of affiliation between two entities. But FERC has never before generically ruled that a directorship can be an automatic trigger for acquisition approval or for ongoing affiliation.
FERC’s conclusions regarding directorships are buried in the text of these two orders and are expressed in shorthand. Following an abbreviated recitation of the record, FERC in TransAlta declares that:
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 [FPA] section 203(a)(1)(A).3
In Evergy, FERC declares that:
[W]here 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 under section 35.36(a)(9)(v). We will therefore treat that investor as an affiliate of the public utility or public utility holding company to which a non-independent director has been appointed.4
Since TransAlta and Evergy do not address a number of circumstances applicable to appointments of directors, they raise a number of unanswered questions, including on these areas
Investments That Are Exempt From FERC FPA Regulation: First, tens of thousands of public utilities are smaller renewable or cogeneration “qualifying facility” (“QF”) generators that in most cases are not subject to regulation under FPA Section 203 nor are required to hold MBR authority5 but are nonetheless subject to public utility regulation under the FPA.6 Arguably, the FERC holdings in Evergy and TransAlta should not apply to QFs, and direct and indirect holding companies of QFs, that are otherwise exempt from FPA Section 203 and from MBR regulation. But the highly abrupt language FERC used in Evergy and TransAlta could cause investors to question whether the orders roll back long-standing and well-established QF regulatory exemptions.
Non-Jurisdictional Voting Interests Below 10 Percent: Evergy and TransAlta both address factual circumstances in which directors holding greater than 10 percent of the board voting rights were appointed. If a director appointed by an investor holding less than the presumptively FPA-jurisdictional 10 percent voting level is appointed, then one might argue that no affiliation should exist for FPA Section 203 or MBR purposes. But on their face, the Evergy and TransAlta orders appear to treat all voting directorship appointments as presumptively creating FPA affiliation.
Passive Investment: The appointment by an investor of a director with only limited voting rights—such as rights only to receive information and exercise the consent, veto, and related rights that FERC permits a passive investor to enjoy without triggering FPA jurisdiction7—appears to not trigger jurisdiction under FPA Section 203 and therefore requires no pre-appointment FERC Section 203 approval.8 But the issue of post-appointment affiliation under FERC’s MBR regulations is not expressly resolved in either of the orders.
Other FERC Regulation of Directors and Officers: The appointment of a person to “interlocking” directorship positions, for example to directorships of two different public utilities, is subject to regulation under other provisions of the FPA.9 The Commission treats appointment at the holding company level—above the level of the public utility itself—as not regulated under FPA provisions addressing “interlocking” positions among public utilities,10 but both Evergy and TransAlta impose regulation on upstairs as well as public utility-level appointments. Neither Evergy nor TransAlta addresses the inconsistency of regulating directorships with FERC’s findings under other FPA provisions that holding company directorships are not subject to regulation.
Notice and Comment Requirements for New Regulations: FERC intends both TransAlta and Evergy to control investor appointments with apparently immediate effect. FERC has never conducted any rulemaking or similar proceeding to take comments on what FERC acknowledges to be entirely new requirements. Indeed, the subject matter of Evergy and TransAlta have not previously been placed by FERC within the scope of FPA Section 203 or the MBR regulations, and, in these respects, the orders announce an entirely new regulatory regime with absolutely no rulemaking basis whatsoever. If either Evergy or TransAlta were to seek rehearing or take appeal of either order, it should be anticipated that this issue will be raised.
FERC’s MBR regulations applicable to the Evergy proceeding in particular establish that, in the absence of a 10 percent or greater voting ownership interest, “affiliation” only arises from actual control or from circumstances that have been the subject of notice and an opportunity for hearing.11 No trial-type proceeding was conducted in either Evergy or TransAlta, and the Evergy parties were not even afforded a paper hearing; FERC instead found that other, generic provisions of its MBR “affiliate” definition justified FERC’s fiat that directorship creates affiliation. Because no formal hearing procedures (paper or trial-type) were adopted, it is impossible to speculate about what further arguments might have been presented in opposition to FERC’s conclusion.
Independence of Directors: The Evergy order finds (and the TransAlta order in passing notes12) that the appointment or designation of a director other than one of the investor’s “own officers or directors, or other appointee accountable to the investor”13 will not trigger affiliation and that only the investor’s appointment of one of the investor’s own such executives or directors triggers affiliation. That safe-harbor distinction may offer little comfort as to investor-designated directors serving on the boards of public-listed entities in that those designations still can be subject to significant and time-consuming director nomination, selection, and related pre-appointment procedures.
Because FERC issued the Evergy and TransAlta orders without general public notice proceedings, the implications of the orders for an investor that has appointed one of its own key officials as a director or officer of an otherwise-unaffiliated public utility are unclear. Some directorships might be susceptible to prohibitive or other limiting commitments as to voting action such that an incumbent director would exercise only passive investor rights and thereby not trigger affiliation. In some cases, it might be necessary or desirable to cause an incumbent director to resign and to replace that incumbent with an independent director.
For the foregoing reasons and others, it is unlikely that the Evergy and TransAlta orders will be FERC’s last words on the issue of directorships creating regulated affiliate relationships. Some of the intervening parties in the Evergy proceeding have already publicly announced that they will ask FERC to even further enlarge the presumption of directorship-triggered affiliation by eliminating the safe-harbor for the appointment of independent directors. As noted, Evergy, TransAlta, and their investors may seek rehearing of either or both orders. Other investors and public utilities might file requests for reversal or clarification.
In the meantime, every investor that appoints one of its own non-independent officials to be a director to any public utility or holding company that is not already an affiliate of the investor should carefully review those appointments to determine whether the appointment merits modification, whether compliance reporting is required, and whether the imposition of limiting prohibitions on the appointee’s actions as a director may be viable.
1 TransAlta Energy Marketing (U.S.) Inc., et al., Docket No. EC22-45-000, 181 FERC ¶ 61,055 (2022) (TransAlta); Evergy Kansas Central, Inc., et al., Docket Nos. ER20-67-001 et al., 181 FERC ¶ 61,044 (2022)(Evergy).
11 18 C.F.R. § 35.36(a)(9)(iii). One subsection of Section 35.35(a)(9) provides that an investor that holds below a 10 percent voting interest is rebuttably concluded to not be an affiliate of the applicable public utility or holding company; the direct effect of Evergy and the indirect effect of TransAlta are to completely eliminate the rebuttable conclusion and to instead adopt affiliation as the irrebuttable conclusion when there is a non-independent, non-passive directorship appointment.