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Affiliate Transactions: New Business Models and Regulatory Structures
John Ratnaswamy Rooney Rippie & Ratnaswamy LLP July 11, 2017 San Diego, California 40th Annual Legal Forum
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What do we want? Image sources: licensed from istockphoto.com
© 2017 Rooney Rippie & Ratnaswamy LLP - No copyright claimed in sourced material
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What don’t we want? Image sources: licensed from istockphoto.com
© 2017 Rooney Rippie & Ratnaswamy LLP - No copyright claimed in sourced material
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Overview Forms of affiliate agreements and transactions
Who is an affiliate (an affiliated interest)? Why regulation? Forms of regulation Federal regulation State regulation Examples © 2017 Rooney Rippie & Ratnaswamy LLP - No copyright claimed in sourced material
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Forms of affiliate agreements and transactions
Master agreements Framework for shared services Framework for ongoing transactions Framework for individual transactions Individual agreements Tax and finance arrangements Incidental or emergent situations Data sharing? © 2017 Rooney Rippie & Ratnaswamy LLP - No copyright claimed in sourced material
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Who is an affiliate (an affiliated interest)?
Not all affiliate relationships are obvious Affiliate relationships might be deemed from relatively limited ownership interests, overlapping Board members or officers, or other circumstances indicating control or influence E.g., Public Utilities Holding Company Act (PUHCA) of 2005, 42 U.S.C. § 16451; FERC reg., 18 CFR § (under PUHCA 2005, Federal Power Act, and Natural Gas Act); Illinois Public Utilities Act, Section (2) © 2017 Rooney Rippie & Ratnaswamy LLP - No copyright claimed in sourced material
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Why regulation? IOU financial / rate regulation in general seeks to obtain the benefits of private investment and economic efficiency while emulating a market and avoiding monopoly pricing Along with expected benefits, the main reasons for enactment of the PUHCA of (repealed) also included the prevention of abuse of the holding company structure. One of the three main abuses identified was intercompany transactions that exploited public utilities. © 2017 Rooney Rippie & Ratnaswamy LLP - No copyright claimed in sourced material
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Why regulation? Cont’d Holding company structures, and affiliate transactions, can be highly beneficial, so the objective is enlightened regulation, not prohibition Concerns may include, for example: Taking advantage of the utility’s credit or name Subsidizing affiliates The utility taking on excessive or unwarranted risks Effects on the utility’s cost of capital Inhibition of innovation Data sharing © 2017 Rooney Rippie & Ratnaswamy LLP - No copyright claimed in sourced material
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Forms of regulation apart from rate regulation
Direct regulation of agreements and transactions, i.e., filing and possible advance review and approval Master agreements Specific agreements Regulation as part of the review and approval of M&A activity and other reorganizations Accounting regulation Investigations and audits NARUC Rate Case and Audit Manual (2003) © 2017 Rooney Rippie & Ratnaswamy LLP - No copyright claimed in sourced material
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Rate regulation Can be before and/or after the fact depending on the form of ratemaking Regulation of methods and outputs Allocations or assignments of costs and revenues among companies Possible federal preemption issues Possible stranded cost issues Inclusion or exclusion of allocated / assigned costs and revenues in revenue requirements © 2017 Rooney Rippie & Ratnaswamy LLP - No copyright claimed in sourced material
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Initiation of regulatory action
Background statutes and regulations, especially requirements for filing and possible advance review and approval Regulator Utility Intervenors Complaint © 2017 Rooney Rippie & Ratnaswamy LLP - No copyright claimed in sourced material
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Federal regulation PUHCA 1935 Era
Energy Policy Act of 2005 and PUHCA 2005 Role of the Securities and Exchange Commission Role of the Federal Energy Regulatory Commission © 2017 Rooney Rippie & Ratnaswamy LLP - No copyright claimed in sourced material
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State regulation Statutes and regulations on affiliate transactions
Examples of provisions Alabama California Florida Georgia Illinois Missouri New York Wisconsin © 2017 Rooney Rippie & Ratnaswamy LLP - No copyright claimed in sourced material
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Examples – master agreements
What goods / services are covered, including shared and non-shared Pricing, including allocations and specific pricing Testing / validation Provisions for individual agreements E.g., Wisconsin Energy acquisition of common stock of Integrys Energy (multiple states 2015) © 2017 Rooney Rippie & Ratnaswamy LLP - No copyright claimed in sourced material
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Examples – specific Electric Power Supply Assoc., et al., v. FirstEnergy Solutions Corp., et al., 155 FERC ¶ 61,101 (FERC April 27, 2016) Marketing Home services Other © 2017 Rooney Rippie & Ratnaswamy LLP - No copyright claimed in sourced material
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Questions? Source: Illustration by W.W. Denslow in The Wonderful Wizard of Oz by L. Frank Baum (1890) (public domain per The_Wonderful_Wizard_of_Oz%2C_009.png) © 2017 Rooney Rippie & Ratnaswamy LLP - No copyright claimed in sourced material
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Contact information John P. Ratnaswamy Rooney Rippie & Ratnaswamy LLP 350 W. Hubbard Street, Suite 600 Chicago, Illinois Direct | Main © 2017 Rooney Rippie & Ratnaswamy LLP - No copyright claimed in sourced material
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