FERC Broadens Definition of Affiliate; Increases Investor and Utility Scrutiny
On October 20, 2022, the Federal Energy Regulatory Commission (FERC) issued two orders broadening the definition of “affiliate” under federal electric regulations. Pursuant to 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 board member to a FERC jurisdictional utility or its holding company. Importantly, FERC has not indicated the changes will be applied retroactively; however, the Orders will prospectively impact FERC jurisdictional utilities and their third-party investors on two major fronts: market-based rate authorizations and utility transactions.
Prior to the Orders, FERC used a threshold of 10% control in determining if an entity was an affiliate of a FERC jurisdictional utility. Investors falling under the threshold held a rebuttable presumption of lack of control of the subject utility or holding company, and thus they were not deemed affiliates. The prior bright line rule allowed third-party investors to acquire and hold FERC jurisdictional utility interests 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 expanded FERC oversight.
Under Section 205 of the FPA, FERC has the authority to require authorization for market-based rate electricity sales. To receive such authorization, utilities must show they lack both horizontal and vertical market power. In determining market power, FERC looks to the market control of the subject utility and all affiliates operating in their region. Pursuant to Evergy, a third-party entity is now considered an affiliate if just one board member is “accountable” to said third-party entity. Importantly, FERC did not define “accountable”; therefore, it will be important to work with legal counsel to monitor future developments for clarity on this issue.
The order issued in TransAlta will similarly impact utility transactions. Under Section 203 of the FPA, FERC must approve transactions that result in “change of control” of a FERC jurisdictional utility. Prior to TransAlta, third-party investors held a rebuttable presumption that a change in control does not occur if the investor acquires less than 10% of the subject utility. As a result of TransAlta, if a transaction results in a third-party investor appointing a board member “accountable to the investor,” the transaction will require prior approval from FERC.