On October 20, 2022, FERC issued orders in two separate proceedings that clarified how investor company appointments to public utility boards of directors can trigger additional FERC regulatory scrutiny. Specifically, in the first proceeding, FERC determined that such appointments established an “affiliate” relationship under FERC’s rules, while in the second proceeding, FERC determined that the appointments effectuated a “change in control” over the public utility that required prior FERC approval under Section 203 of the Federal Power Act (“FPA”).
In the first proceeding, Evergy Kansas Central, Inc., Evergy Missouri West, Inc., and Evergy Metro, Inc. (collectively, “Evergy Sellers”) filed a notice of change in status on upstream ownership (“Notice”) under section 35.42(a) of FERC’s regulations. Public Citizen, Inc. (“Public Citizen”) and the Communication Workers of America (“CWA”) protested the Notice, arguing that two investment companies, Elliott Management Corp. (“Elliott”) and Bluescape Energy Partners, LLC (“Bluescape”) had obtained control over Evergy Sellers’ affiliate, Evergy, Inc. (“Evergy”) without appropriate regulatory notice and approval.
In particular, Public Citizen argued that Evergy Sellers failed to notify FERC under section 35.42 that investment company Elliott and its affiliates obtained control over Evergy Sellers’ affiliate, Evergy, through a non-public agreement. The agreement placed two of Elliott’s preferred board members on Evergy’s newly formed Strategic Review and Operations Committee (“Committee”) within the Evergy Board of Directors. Public Citizen contended that, as a result, Elliott must be classified as an affiliate of Evergy Sellers. Evergy Sellers disagreed, arguing that since the 10% threshold has not been crossed, Evergy is entitled to the presumption of lack of control provided in section 35.36(a)(9)(v) of FERC’s regulations.
FERC concluded Elliott was not an affiliate of Evergy or Evergy Sellers under section 35.36(a)(9)(v). FERC reasoned that because Elliott owns less than 10% of the outstanding voting securities in Evergy, Elliot is entitled to a rebuttable presumption that it does not control Evergy. Furthermore, FERC determined that neither the agreement nor the placement of members on the Evergy Board of Directors rebutted the presumption of lack of control.
FERC came to a different conclusion regarding Bluescape, a hedge fund that, in combination with Elliott, owns about 6% of Evergy’s shares. Public Citizen argued that Bluescape’s Executive Chairman – having voting rights on Evergy’s Board of Directors – conveyed clear control to Bluescape over Evergy. FERC agreed, reasoning that even though Bluescape’s investments are similar to Elliott’s to the extent that they each are hedge funds and have similar investment agreements which placed members on the Evergy Board of Directors, it differs from Elliott because Evergy has appointed one of Bluescape’s own directors to the Evergy Board. FERC explained that if an investor’s non-independent director, such as its own officer or director, is appointed to the board of a public utility or public utility holding company, such appointment could demonstrate sufficient “control” over the public utility so as to establish an affiliate relationship between the investor and the public utility under FERC’s rules.
The second proceeding involved an application filed by a group of TransAlta affiliates (“Applicants”) under Section 203 of the FPA. The application requested approval for a change in control that may occur upon the termination of specific standstill provisions in a 2019 debt securities agreement (“Standstill Agreement”) between TransAlta Corporation (“TransAlta”) and Brookfield BRP Holdings (Canada) Inc. (“Investor”) (“Proposed Transaction”). The Proposed Transaction required prior Commission approval for a change in control under FPA Section 203 because it resulted in Applicants acquiring 10.1% of TransAlta’s Common Shares.
FERC concluded that the Standstill Agreement was not enough to conclude that the new board members lacked control over TransAlta because the agreement contained no explicit prohibitions on shareholders’ ability to influence the day-to-day activities of TransAlta. FERC authorized the Proposed Transaction, reasoning that “consistent with our finding in Evergy, […] the appointment of two board members that are not independent of Investor and its affiliates to TransAlta’s Board of Directors does constitute a change of control.” FERC clarified that moving forward, an appointment of an investor’s officers or directors, or other appointees accountable to the investor, to the board of directors of a public utility or holding company that owns public utilities requires prior FERC approval under FPA Section 203(a)(1)(A).