On July 3, 2023, the Federal Energy Regulatory Commission (“FERC”) issued an order addressing issues raised on rehearing in response to one of two October 2022 orders that set the stage for small minority investors to be considered affiliates of a public utility for market-based rate and Federal Power Act (“FPA”) section 203 approval purposes whenever someone accountable to them is appointed to a public utility or utility holding company board of directors. The July 3 order affirms FERC’s prior conclusion that Bluescape Energy Partners, LLC (“Bluescape”), an owner of barely 1% of the stock of Evergy Inc. (“Evergy”), became an affiliate of Evergy and its public utility subsidiaries by virtue Evergy’s appointment Bluescape’s Executive Chairman to the Evergy board of directors.
The broader significance of this ruling is FERC’s affirmation that “[w]here an investor’s own officer or director, or other appointee accountable to the investor, is appointed to the board of a public utility or holding company that owns public utilities,” that investor becomes an affiliate of the public utility or public utility holding company to which the accountable officer, director, or appointee has been appointed, no matter the size of the interest the investor owns in the public utility or holding company. See Evergy Kansas Central, Inc., 184 FERC ¶ 61,003, at P 23 (2023) (“July Order”). Prior to the October orders, in most circumstances an investor became an affiliate of a public utility only upon owning or controlling 10% or more of a public utility’s voting interests.
In the July order, FERC clarified that when it comes to FPA section 203, “an entity would need to make a FPA section 203 filing with the Commission when the Commission has jurisdiction under section 203 and there is a change in control based on the circumstances discussed above.” Id. At P 30. This clarification implies that public utilities need only file a section 203 request for authorization for a board appointment when an appointment of an accountable board member results in a change of control and FERC has jurisdiction. One logical conclusion, then, is that where an investor already has a controlling interest in a public utility, section 203 approval will not be needed simply to replace a one accountable board member with another, reappoint the same board member to a new term, or add additional accountable board members. This is because those actions do not result in a change of control. Despite this clarification, it remains unclear whether and how exactly FERC intends to apply the $10 million threshold for the section 203 approval requirement in the context of changes in control due to accountable board appointments.
Also relevant as to the rationale for the new rule, FERC has revised its reasoning to specifically find affiliation under 18 C.F.R. § 35.36(9)(iii), which allows FERC to conclude that any person or class of person qualifies as an affiliate if it determines, after notice and opportunity for a hearing, that the person or class of persons, “stand(s) in such relation to the specified company that there is liable to be an absence of arm’s-length bargaining in transactions between them as to make it necessary or appropriate in the public interest or for the protection of investors or consumers that the person be treated as an affiliate.” This appears to be a step to cure earlier arguments that FERC improperly relied on a different part of the same regulation, § 35.36(9)(v), to support its finding of affiliation. Critics of the majority ruling, including FERC acting chair Willie Phillips who wrote a separate concurrence, have argued (and likely will continue to argue) that that FERC should have opened a further proceeding or invited briefing prior to relying on § 35.36(9)(iii).
Although FERC decided to base its affiliation finding on 18 C.F.R. § 35.36(9)(iii), that does not appear to change the previously understood conclusion that affiliation based on having an accountable board member does not render a less-than-10% investor an “ultimate upstream affiliate” as that term is defined in 18 C.F.R. § 35.36(10). However, FERC included a footnote stating that while FERC’s regulations define “upstream affiliate” as any entity “that directly or indirectly owns, controls, or holds with power to vote, 10 percent or more of the outstanding voting securities of the specified company,” see 18 C.F.R. § 36.36(a)(9)(i) & (a)(10), this “does not mean that entities that do not ‘own, control, or hold with power to vote, 10 percent or more of the outstanding voting securities of the specified company’ cannot be considered to be an upstream ‘affiliate’ for purposes of market-based rate authority.“ July Order at P. 22 n.56. The footnote may raise more questions than it answers. The term “ultimate upstream affiliate” is relevant primarily to (1) what upstream owners need to be reported in FERC’s relational database, (2) when change in status filings must be made by entities with market-based rate authority (e.g., whenever there is a new ultimate upstream affiliate), and (3) what upstream owners must be included in market-based rate applications and triennial market power analyses. Entities with market-based rate authority thus may want to evaluate whether this footnote, as applied to their own circumstances, should lead to changes to their market-based rate reporting practices.