FERC Signals Increased Scrutiny Over Affiliate Relationships

The Federal Energy Regulatory Commission ("Commission" or "FERC") holds that appointing an investor representative to a Public Utility Board results in an affiliate relationship independently of the amount of voting stock held by the investor.

On October 20, 2022, the Commission issued two orders that broadened the meaning of public utility "affiliates" for purposes of: (i) the Commission's change in status filing requirement and other affiliate rules and restrictions that apply to sellers with market-based rate authority under section 205 of the Federal Power Act ("FPA"); and (ii) what constitutes "control" for purposes of FPA section 203 governing dispositions of jurisdictional facilities.

In the first case, Evergy, Inc. ("Evergy") conveyed an interest of less than 10 percent to investor Bluescape Energy Partners, LLC ("Bluescape"), and agreed to appoint two Bluescape representatives to its board, including Bluescape's executive chairman. While the Commission's regulations contain a rebuttable presumption that there is no "control"—and therefore no affiliate relationship—where an investor owns less than 10 percent of the utility's voting shares, in Evergy, the Commission held that appointing a non-independent director accountable to an investor to a public utility's board "functions to rebut the presumption of lack of control." In such instances, the investor shall be deemed an affiliate of the public utility, and the public utility will now be required to notify the Commission of its change in status.

In the second case, the Commission extended its holding in Evergy to apply to section 203 filings. TransAlta Corporation conveyed an interest to investor Brookfield BRP Holdings (Canada) Inc., which was permitted to place executives from affiliate companies on TransAlta's board. Under section 203, a public utility must obtain Commission approval to "dispose of" jurisdictional facilities, but the Commission has held that a transaction that does not transfer "control" does not require such approval. In TransAlta, the Commission held that appointing the investor's executives to the TransAlta board constitutes a change in control that requires prior section 203 approval, regardless of the percentage ownership transferred. The Commission warned that applicants must submit required section 203 applications or "face possible sanctions."

At the Commission's October meeting, Chairman Richard Glick signaled increased scrutiny over affiliate relationships, stating, "It's very important from a Commission perspective in terms of protecting consumers." This new approach means that sellers with market-based rate authority and market participants seeking FERC's approval for transactions must be vigilant in analyzing potential affiliate relationships that may arise when investors join public utility boards.

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