The Federal Energy Regulatory Commission ("FERC") announced on March 25, 2005 proposed new rules to tighten and clarify the requirements for advance approval for officers and directors of FERC public utilities to also hold officer and director positions with certain other entities. Public comments on the proposed rule changes (Docket RM05-6-000) are due no later than June 6, 2005. Comments may be filed electronically via the eFiling link on the commission’s web site (www.ferc.gov).

This is the latest in a string of increasingly blunt actions by the FERC to strictly enforce the interlock provisions of the Federal Power Act. In particular, the FERC has made clear it will not tolerate those who wait until after they assume the interlocking positions to seek the necessary approval. Approval in advance is required.

Section 305(b) of the Federal Power Act requires prior FERC approval for any person to hold a position as an officer or director of a public utility and officer or director of certain other entities including:

  • any other "public utility" as defined in the act;
  • a "bank, trust company, banking association or firm that is authorized by law to underwrite or participate in the marketing of securities of a public utility;" and
  • any supplier of "electrical equipment" to the public utility of which the person is also officer or director.

For these rules, "public utility" means any person that owns facilities used to transmit electricity in interstate commerce or who engages in wholesale sales of electricity in interstate commerce. Traditional investor- owned utilities as well as exempt wholesale generators and energy marketing firms are generally included within this definition.

The FERC’s rules defining who must seek approval and what must be included in an application for authorization are set out at 18 CFR Part 45. The March proposal would change these rules in several respects.

First, the proposed rule change would make clear that only a request in advance of the time the person "holds" the interlock will be considered timely. Currently, the rules suggest that a filing made within 30 days following the time the inter- lock first arises is timely. The revised rule would clarify that "holding" an interlocking position means "acting as, serving as, voting as or otherwise performing or assuming the duties and responsibilities of" the position for which authorization is sought. If adopted, the revised rule will specifically provide that late-filed applications will be denied.

If adopted, this revision will increase pressure on public utilities and their general counsel to ensure that all jurisdictional interlocks are identified in advance so that the necessary FERC approval can be obtained before the person involved assumes the new position. Public utilities should consider the following:

  • Current officers and directors of public utilities will have to be reminded that there are certain other officer and director positions that they cannot accept until they have received advance approval from the FERC.
  • When a utility is considering adding a new director to its board, or filing officer positions, it will be imperative to find out the person’s other affiliations well in advance. If the new person is affiliated with another public utility, with a firm authorized to underwrite utility securities, or an entity that supplies electrical equipment to the utility, the FERC approval will have to be sought and obtained before the person can assume the new position.
  • With the FERC’s clear intent to deny late-filed applications, there would be considerable embarrassment if the person involved begins to "hold" the interlocking position without approval and then has to resign.

The second proposed change emphasizes the advance filing requirement necessary to obtain the "automatic" approval allowed in the rules for interlocks between utilities that are part of the same corporate family. Section 45.9 of the rules (18 CFR § 45.9) allows a person serving as officer or director of one public utility to also serve as officer or director of another affiliated public utility (for example, serving as officer of each of the several utility subsidiaries in a holding company system). The required approval for these interlocks is deemed granted automatically upon filing of a simple informational report with the FERC. The revised rules will reiterate that the informational report must be filed before the per- son begins to hold the specified interlocking positions. The applicant will have to include the dates on which he or she assumed the positions referenced in the informational report. Under the changed rule, late-filed reports will result in denial of the approval.

The third possible change relates to waivers that the FERC has typically granted to public utilities authorized to make wholesale sales of electricity at market-based rates. The FERC has often included in its orders authorizing use of market-based rates a partial waiver of the requirement to seek approval for interlocking positions involving that utility. Similar to the automatic approvals for affiliated utilities, these orders authorize a simple notice filing, after the interlock arises, merely stating the facts of the interlock. The March 2005 notice requests comments on whether the FERC should change this practice and require that such interlocks would require a full advance filing seeking authorization under Part 45 of the commission’s rules.

Recently, the FERC has been tightening its interpretation of the interlock rules of Section 305. Earlier this year, the FERC denied approval for a utility executive to also serve on the board of the Southwest Power Pool, a regional transmission organization. Robert G. Schoenberger, 110 FERC ¶ 61,197 Schoenberger (Feb. 28, 2005). The applicant had been CEO of a northeast U.S. utility holding company and its utility subsidiaries for a number of years and also assumed the SPP director position in 2003. He filed for approval of this interlock in 2004.

The FERC held that it could not find that "neither public nor private interests will be adversely affected" through the interlock. Except for interlocks among affiliated utilities, the FERC has rarely, if ever, approved interlocks between utilities. The applicant’s suggestion that his expertise in the field of electric transmission, generation planning, and operation would aid SPP was not sufficient to overcome the FERC’s view that there is potential for abuse when unaffiliated utilities are interlocked.

Chairman Wood dissented, arguing that the interlock should have been approved. He believes that the expertise of utility executives would be beneficial to regional transmission organizations. Commissioner Kelliher wrote a concurring opinion, agreeing with the denial of approval but asserting that it should have been based on the untimely filing. The interlock had been in place since 2003 but the application was not filed until December 2004. Commissioner Kelliher’s concerns have found voice in the latest proposed rules, which would officially clarify that only advance applications should be approved.

A 2004 order involving an electric equipment supplier indicated a tightening of enforcement. In Douglas R. Oberhelman, 109 F.E.R.C. ¶ 61,332 (Dec. 22, 2004), the FERC Oberhelman denied the applicant’s request to continue to hold a preexisting interlock between a public utility and a company that supplied electrical equipment to that utility.

The FERC only approves interlocks between a public utility and an electric equipment supplier upon a showing of a de minimis amount of business between them, both in ref- erence to the electrical equipment supplier’s overall sales and the public utility’s overall purchases. In this case, the FERC held that the applicant had not provided sufficient evidence that the amount of business done was in fact de minimis under this standard. Accordingly, the applicant did not mis meet his burden of proving that the public or private interests would not be harmed by the interlock. Again, Commissioner Kelliher concurred in the denial, noting that he would reject the request because the applicant had filed for approval only after assuming the interlocking positions.

For information on another case where the applicant was unable to prove that an interlock with an electrical equipment supplier would not be harmful, see Jones Day Energy Bulletin, "FERC Cracks Down on Violations of Interlocking Director Rules," April 2004 (available on Jones Day’s web site). This order brought increased complaints from the FERC commissioners regarding tardy filings.

With the FERC evidencing an increasing zeal for enforcement of the Section 305 interlocking rules, one interpretation of those requirements may become increasingly important. An interlock requires approval under Section 305 only if one side of the interlock is a FERC public utility company. The FERC does not seek to apply the interlock rules to utility holding companies. Thus, if a person is an officer or director of a public utility holding company, but does not serve as officer or director of any of its public utility company subsidiaries, he or she may have interlocking positions with any of the three classes of other entities: other utilities, entities authorized to underwrite utility securities, or electrical equipment suppliers. In such cases, FERC approval is not required because no "jurisdictional" interlock exists.

This aspect of the rules may increase the trend for public utility holding companies to use outside directors only at the holding company level and not at the utility subsidiary level. Even though these outside directors supervise the operations of the public utilities, if they are not directors of the public utility, the FERC does not take jurisdiction over any interlocks they may have.

For a number of years, the FERC did not enforce the requirement for timely filing of interlock approval requests. Further, changes in the Federal Power Act in 1999 increased the circumstances under which no advance approval was required for interlocks between a public utility and an entity authorized to underwrite utility securities. (For details on this change, see Energy Bulletin, "FERC Approval for Interlocking Directors Bulletin —New Actions for Utilities to Take By April 30, 2001" (available on Jones Day’s web site)). The era of loose enforcement and eased restrictions is over. Whether or not the proposed rule changes are adopted, public utilities must increase their vigilance to ensure that their officers and directors remain in compliance with Section 305 of the Federal Power Act.

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