1. Affiliate Transactions: New Business Models and Regulatory Structures
John Ratnaswamy
Rooney Rippie & Ratnaswamy LLP
July 11, 2017
San Diego, California
40th Annual
Legal Forum

2. What do we want? Image sources: licensed from istockphoto.com
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3. What don’t we want? Image sources: licensed from istockphoto.com
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4. Overview Forms of affiliate agreements and transactions
Who is an affiliate (an affiliated interest)?
Why regulation?
Forms of regulation
Federal regulation
State regulation
Examples
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5. 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?
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6. 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)
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7. 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Along with expected benefits, the main reasons for enactment of the PUHCA of (repealed) also included the prevention of abuse of the holding company structure.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.
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8. 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
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9. 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)
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10. 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
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11. Initiation of regulatory action
Background statutes and regulations, especially requirements for filing and possible advance review and approval
Regulator
Utility
Intervenors
Complaint
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12. 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
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13. State regulation Statutes and regulations on affiliate transactions
Examples of provisions
Alabama
California
Florida
Georgia
Illinois
Missouri
New York
Wisconsin
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14. 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)
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15. 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
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16. 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)
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17. 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