On September 6, 2024, the Federal Energy Regulatory Commission (FERC or Commission) issued an order finding that the presence of a non-independent director, i.e., one who is affiliated with an investor, on the board of directors of a public utility or its upstream holding company creates an affiliation between the sponsor and the investor, regardless of who appointed the non-independent director. Castleton Commodities Merchant Trading L.P., 188 FERC ¶ 61,157 (2024) (Castleton). This order expands upon the Commission’s previous orders issued in Evergy Kansas Central, Inc., 181 FERC ¶ 61,044 (2022) (Evergy), order on reh’g, 184 FERC ¶ 61,003 (2023) (Evergy Rehearing Order), and is important for purposes of educating sponsors and investors alike about how to structure transactions in ways to avoid creating affiliations where investors and sponsors would prefer they not exist.
As background, section 35.36(a)(9)(v) of the Commission’s regulations provides a rebuttable presumption that an investor that owns less than 10 percent of the outstanding voting securities of a specified company lacks control of that company and therefore is not an affiliate of the specified company for reporting and other purposes. But that 10 percent guideline does not always win out because under section 35.36(a)(9)(iii) of the Commission’s regulations, if after notice and opportunity for hearing the Commission finds that any person(s) “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” then that person will be treated as an affiliate. In other words, certain circumstances may cause an investor with a less-than-10-percent stake in a public utility, either directly or indirectly, to be considered an affiliate of that public utility and trigger reporting and other regulatory requirements—something investors and sponsors seek to avoid.
In Evergy and the Evergy Rehearing Order, the Commission explained that a non-independent director is “an investor’s own officer or director, or other appointee accountable to the investor.” The Commission found that the appointment of a non-independent director automatically rebuts the presumption of a lack of control and “is a per se determination of control.” The Commission further found that because an investor with a non-independent director on a board of directors has the rights, privileges, and access of the affiliated, non-independent directors, there is liable to be an absence of arm’s-length bargaining, and the investor will be treated as an affiliate. On rehearing, the Commission also reiterated and clarified its holding in TransAlta Energy Marketing (U.S.) Inc., 181 FERC ¶ 61,055 (2022), noting that appointment of an investor non-independent director to the board of a public utility or holding company that owns public utilities will require prior approval under FPA section 203(a)(1)(A).
While Evergy and subsequent Commission orders make clear that an investor’s appointment of a non-independent director is per se control, Castleton extends the underlying rationale. In Castleton, the Commission explained that the mere presence of a non-independent director will result in per se control (and therefore affiliation). How that director was appointed, or by whom, is irrelevant. As a result, an investor will be deemed an affiliate of a public utility simply because a non-independent director affiliated with the investor sits on the board of directors of the public utility or its upstream holding company. Consequently, sponsors and investors should be aware when selecting their boards of directors that who makes a particular appointment is less relevant to the issue of affiliation than a director’s relationship with an investor.
These orders have far-reaching implications for public utilities and their investors as they will impact the structure of transactions and future filings with the Commission.
