• What to Know When Taking Equity Investments from Electric Utilities
  • May 7, 2003
  • Law Firm: Buchanan Ingersoll, Professional Corporation - Pittsburgh Office
  • Technology Companies Considering Equity Investments from Electric Utilities Should Be Aware of FERC Policies Concerning Approval of Interlocking Officers and Directors and State Utility Regulatory Policies Concerning Affiliate Transactions

    The U.S. electric utility industry has traditionally been a very significant purchaser of technology based products and services. Notwithstanding this history, the wholesale and retail restructuring of the industry has created an explosive demand for new technology and services. At the same time, many utility companies are considering direct investments in emerging technology companies as a way to create additional shareholder value and offset earnings reductions from regulated operations. Emerging technology companies, in need of capital and seeing an electric utility investment as a way to potentially create the opportunity to generate or increase business with the utility, need to be mindful of the regulatory restrictions that such investments can create on their future business relationship with the utility.

    FERC Policies on Interlocking Officers and Directors

    Approval of the Federal Energy Regulatory Commission ("FERC") is required under the Federal Power Act ("FPA") and the FERC's accompanying regulations for individuals to serve in the dual positions of director or officer of a public utility and director or officer of a company supplying "electrical equipment" to the public utility. The FERC's regulations implementing this section of the FPA broaden the scope of individuals covered by this statute to include not only officers and directors, but general managers, chief purchasing agents and any other position in which the person performs similar executive duties or functions. The FERC's regulation also extend the statute's coverage to include advisors to the utility regarding policy and management decisions, but excludes individuals, like lawyers and accountants, that render professional services for a fee.

    In order for FERC approval to be triggered, it first must be determined whether the products in question are likely to meet the definition of "electrical equipment" in the FERC regulations. "Electrical equipment" is defined to mean "any apparatus, device, integral component, or integral part used in an activity which is electronically, mechanically, or by legal prescription necessary to the process of generation, transmission or distribution of electric energy". The FERC's regulations specifically reference meters as an example of equipment falling within this definition. The FERC's regulations also include within the scope of the definition of the supply "electrical equipment" companies that are a "...manufacturer, or dealer, or one supplying electrical equipment pursuant to a construction, service, agency or other contract..." Further guidance may be obtained in what constitutes "electrical equipment" by referring to certain accounts listed in the Uniform System of Accounts in the FERC's regulations. By way of example, these account references make it clear that the definition is broad enough to include meters, telephone, telegraph and wireless equipment and other types of equipment which might not otherwise typically be considered to fall within the common definition of "electrical equipment".

    Second, in order to approve the proposed interlock, the FERC must determine that "neither public nor private interests will be adversely affected" thereby. This determination is geared towards ensuring "arms length dealings" between the public utility and the equipment supply company. In making such determinations the FERC has typically looked at (1) the ratio of the utility's purchases of such electrical equipment to the public utility's total expenditures for materials and supplies and (2) the ratio of the equipment company's sales of equipment to the public utility to the total sales of the equipment company.

    In examining these ratios in the context of FERC precedent, the FERC has only approved such interlocking position when the ratios demonstrated that such purchases were minor in nature in light of the utility's overall purchases of electrical equipment. In most of the cases where the interlock was approved by the FERC, the category (1) ratio has typically less that 1%. In applying this test , the FERC generally looks at the total quantity of materials and supplies, exclusive of fuel, purchased by the utility, as opposed to only electrical equipment purchases or a particular category of electrical equipment purchases (e.g. meters).

    In some instances the FERC has reviewed whether the individual is intimately involved with the day-to-day affairs of the companies (i.e. both the public utility and the electrical supply company) or whether the individual is merely an outside director. In others, the FERC reviewed whether the purchase was subject to competitive bidding and permitted such interlock only where the director in question agreed to refrain from any decision making in connection with such equipment purchases. The general tendency, however, has been to routinely approve such interlocks only when the purchases of equipment are extremely minor in nature or when the director in question is an outside director of both companies and is therefore unlikely to be in a position to significantly influence decision making.

    Interlocking positions, when approved, impose ongoing reporting requirements to the FERC by such directors and directors and authorization to serve in the interlocking position is subject to the ongoing jurisdiction of the FERC, including the right to revoke its approval and take such other remedial action as it determines necessary.

    With respect to the timing of the application to the FERC for approval of the interlocking positions, the FPA and the FERC accompanying regulations at provides that the holding of such interlocked positions is unlawful unless approved by the FERC and that nothing in the FERC's regulations shall be construed as authorizing the holding of the interlocking positions prior to authorization.

    The responsibility to apply for FERC approval of an interlocking position rests with the individual director in question.

    State Utility Affiliate Regulatory Policies

    Investments by utilities and their affiliates in a company doing business with the utility can also trigger state utility commission regulations and oversight of these business arrangements. The states are far from uniform in terms of how they define what constitutes an "affiliate" of the utility for purposes of triggering utility commission jurisdiction and policies concerning affiliate transactions. Some states require the utility, or an entity under common control of the utility, have a certain threshold ownership of stock in the company, while others define an affiliate to include any company on whose board an utility officer or director also sits or is employed.

    Triggering of utility commission regulatory authority by virtue of classification as an "affiliate" of the utility for purposes of state law will trigger additional oversight of the transaction and, depending upon the laws of the particular state, potentially provide the utility commission with the ability to void the transaction. In most instances, the state commission will focus its determination on the reasonableness of the consideration paid to ensure that utility customers are not paying more than would typically be paid in a truly arms length transaction. Some states have gone further to examine issues related to market power, bar certain types of affiliate transactions, and permit others only to the extent they were the product of competitive bids.

    Technology companies considering investments by utilities in contemplation of future commercial business relationships with that utility should carefully investigate potential impact of both the FERC's policies on affiliate transactions, as well as potentially applicable state utility laws and regulations. Review and understanding these rules in advance can avoid a lot of potential headaches down the road.