FERC Order Reaffirms Affiliate Relationship Involving Investor Officers/Directors and Public Utilities

The Federal Energy Regulatory Commission (“FERC”) recently affirmed its prior determination that where an investor’s non-independent director is appointed to the board of a public utility or public utility holding company, that appointment rebuts the presumption of a lack of control between the entities, such that the investor and public utility should be deemed “affiliates” under section 35.36(a)(9)(v) of FERC’s regulations. Under this decision, FERC found that the amount of membership interests held by the investor in the public utility or public utility holding company did not matter so long as the investor’s officer or director was appointed to a position of control over the public utility or public utility holding company. FERC’s July 3, 2023 order took its original October 20, 2022 decision in Evergy Kansas Central, Inc., et al. (“Evergy”) a step further by clarifying the appointment of an investor’s non-independent officer or director, or other appointee accountable to the investor, to the board of a public utility or public utility holding company, is a per se finding of control.

FERC’s original decision in Evergy found that the appointment of Bluescape Energy Partners, LLC’s (“Bluescape”) non-independent director to Evergy’s 13-member board of directors created an affiliate relationship between Bluescape and certain public utility affiliates of Evergy despite the fact that Bluescape owned less than 1.1% of Evergy’s outstanding voting shares of common stock. Prior to Evergy, the general rule was that affiliation between a public utility and an investor did not exist unless the investor held greater than 10% direct or indirect voting interests in a public utility, i.e., owning less than 10% of the outstanding voting securities created a rebuttable presumption that the entity/investor lacks control over the public utility.

Evergy sought rehearing of the Evergy order arguing that the Commission’s decision: (i) incorrectly applied the analysis it was required to conduct under its regulations; (ii) was a marked departure from its precedent that did not give interested parties a meaningful opportunity to comment; (iii) exceeds FERC’s authority under the Federal Power Act (“FPA”) because it unlawfully regulates director appointments; and (iv) fails to consider the practical implications of its decision.

FERC considered and responded to some, but not all of these arguments, in a rehearing order issued on July 3, 2023 (“Rehearing Order”). The Rehearing Order created a new bright-line rule by holding that “not only does the appointment of a non-independent director rebut the presumption of a lack of control, but that appointment is a per se finding of control,” which creates an affiliate relationship under FERC’s regulations. “Affiliate” is defined to include a person that FERC determines, after appropriate notice and opportunity to comment, to stand in such relation to the specified company that there is liable to be an absence of arm’s-length bargaining between the parties. FERC reasoned that the Bluescape director’s appointment to Evergy’s board precluded arm’s-length bargaining between the entities because the director has fiduciary duties to both Evergy and Bluescape.

FERC uses an affiliate analysis under its review of section FPA 205 market-based rate authorization (“MBR”) petitions to determine whether the entity seeking MBR authorization and its “affiliates” can exercise market power. Going forward, entities seeking MBR authorization must treat investors as “affiliates” if the investor has a non-independent board member appointed to the board of the public utility or public utility holding company, regardless of whether the investor owns less than 10% of the outstanding voting interests in a public utility. FERC also uses an affiliate analysis when reviewing FPA section 203 applications to determine whether a proposed transaction will have an undesirable effect on competition. The appointment of an investor’s non-independent officer or director or other appointee accountable to the investor, to the board of a public utility or public utility holding company, requires prior FERC authorization under section 203 of the FPA because such an appointment constitutes a “change in control” under the Evergy decisions.

The Evergy order has been appealed to the U.S. Court of Appeals for the Eighth Circuit in Case No. 23-1175.

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