FERC Affirms Expansion of its Affiliate Rules, Reflecting Greater Scrutiny Over Investments in Public Utilities

The Federal Energy Regulatory Commission ("Commission" or "FERC"), sustaining a previous order, holds that the appointment of a non-independent director by an investor to a utility's board creates a per se affiliate relationship between the investor and the utility.

On July 3, 2023, the Commission issued an order on rehearing affirming its expanded definition of utility "affiliates" for purposes of its market-based rate regulations, with potentially far-reaching implications for jurisdictional utilities. At issue was Evergy Inc.'s agreement with Bluescape Energy Partners, LLC, an investment firm that held 1.1% of Evergy's outstanding voting shares, pursuant to which Evergy agreed to appoint two members to its board (including Bluescape's executive chairman) nominated by Bluescape.  

In an October 2022 order, FERC held that, while its regulations contain a rebuttable presumption that there is no "control" and therefore no affiliate relationship where an investor owns less than 10% of a utility's voting shares, appointing a non-independent director to Evergy's board "function[ed] to rebut the presumption of lack of control." The October 2022 order left some doubt as to whether a utility could then offer contrary evidence showing a lack of control. In the order on rehearing, the Commission stated unmistakably that "the appointment [by an investor] of a non-independent director is a per se finding of control," thus creating a new irrebuttable presumption. The Commission explained that "there is liable to be an absence of arm's length bargaining in transactions" where the investor's non-independent director sits on the utility's board.  

While Evergy involved the appointment of the investor's executive chairman to the utility's board, by defining "non-independent director" in broad terms as an investor's own officer or director or "other appointee accountable to the investor," the order raises questions as to how expansively the new affiliate rule will be applied. It is unclear what level of accountability between an appointed board member and the appointing investor company will trigger the new per se rule.  

Read together with the Commission's October 2022 TransAlta decision—which held that the appointment of a non-independent director to a public utility's board constitutes a change of control requiring Commission approval under Federal Power Act section 203—this decision solidifies the Commission's intent to scrutinize affiliate relationships more rigorously. It will also require further diligence on the part of public utilities in the selection of their board members and in ensuring adherence with FERC's section 205 and 203 regulations, as well increased focus on these potential issues by investors contemplating potential investments in utilities. New section 205 applications for market-based rate authority, as well as any recurring change-in-status reporting and triennial market power updates, may require identification and analysis of additional affiliates and may be subject to heightened scrutiny by FERC.  

Utilities and investors also must expect that section 203 approval may now be required prior to appointment of an investor's representative to the board, requiring careful analysis of whether an appointee may be deemed "accountable to the investor" and, therefore, potentially creating an affiliate relationship for purposes of FERC's market-based rate regulation.

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