FERC Expands Definition of Affiliate; Increases Surveillance of Investors and Utilities | Steptoe & Johnson LLC
On October 20, 2022, the Federal Energy Regulatory Commission (FERC) issued two orders expanding the definition of “affiliate” under federal electricity regulations. In accordance with Evergy Kansas Cent., Inc. and TransAlta Energy Mktg. (the “Orders”), FERC now considers an affiliate any person or company that has the power to appoint a member of the board of directors of a jurisdictional utility of FERC or its holding company. It is important to note that FERC has not indicated that the changes will be applied retroactively; however, the orders will have a prospective impact on FERC’s jurisdictional utilities and their third-party investors on two main fronts: market-based rate authorizations and utility transactions.
Prior to the orders, FERC used a threshold of 10% control to determine whether an entity was a subsidiary of a jurisdictional utility of FERC. Investors falling below the threshold had a rebuttable presumption of lack of control of the utility or holding company in question, and were therefore not considered affiliates. The previous clear line rule allowed third-party investors to acquire and hold FERC jurisdictional utility interests of up to 10% while avoiding the stringent regulatory hurdles imposed by Sections 203 and 205 of the Federal Power Act (FPA). With the changes imposed by the orders, investors can expect increased scrutiny from FERC.
Below Section 205 of the FPA, FERC has the authority to require authorization for electricity sales at market rates. To receive such authorization, utilities must demonstrate that they lack horizontal and vertical market power. In determining market power, FERC considers the market control of the utility in question and all subsidiaries operating in their area. In accordance with Evergy, a third-party entity is now considered an affiliate if only one member of the board of directors is “accountable” to said third-party entity. Importantly, FERC has not defined “responsible”; therefore, it will be important to work with legal counsel to monitor future developments to clarify this issue.
The order issued in Trans Alta will have a similar impact on utility transactions. Below Section 203 of the FPA, FERC must approve transactions that result in a “change of control” of a jurisdictional utility of FERC. Prior to Trans Alta, third-party investors held a rebuttable presumption that a change of control does not occur if the investor acquires less than 10% of the utility in question. Consequently Trans Altaif a transaction results in a third-party investor appointing a board member “accountable to the investor,” the transaction will require FERC’s prior approval.