«ON THE EVE OF THE FEDERAL POWER ACT INTERLOCKING DIRECTORATE REGULATIONS’ DIAMOND JUBILEE, ARE WE LEFT WITH CHERRIES OR THE PITS? John J. Schulze, ...»
ON THE EVE OF THE FEDERAL POWER ACT
INTERLOCKING DIRECTORATE REGULATIONS’
DIAMOND JUBILEE, ARE WE LEFT WITH CHERRIES
OR THE PITS?
John J. Schulze, Jr.*
Synopsis: The Federal Power Act‘s prohibition on certain interlocking
directorates involving public utilities was a result of the concerns and fears of the
era in which it was created. Over the last seventy plus years, the Federal Power Commission and its successor the Federal Energy Regulatory Commission have kept pace with the evolving economy and corporate organizations by transforming the Federal Power Act section 305 from simply a ban to a relatively accommodating information gathering tool.
II. FPA Section 305 Background
A. Environment That Bore Utility Interlock Regulation
B. Commission Authority and Interpretation of FPA Section 305........ 671
1. Burden on the Applicant
2. Authority to Change the Standard
3. Federal Court Deference to the Commission‘s Application of FPA 305
III. Commission Treatment of Each FPA Section 305 Interlock Type.............. 672 A. Interlocking Directorates Between Public Utility and Electrical Equipment Supplier
1. Definition of Electrical Equipment
2. Definition of De Minimis
3. Subsequent Reporting Requirement
B. Interlocking Directorates between Public Utility and Public Utility Securities Firm
1. 1935: Original Definition of Public Utility Securities Firm....... 676 2. 1978: PURPA Expands Definition of Public Utility Securities Firm
3. Late 1980‘s: FPA Section 305 Attributed to Affiliates and Subsidiaries
4. 1990‘s: FPA Section 305 Jurisdiction is Narrowed
C. Interlock of Two Utilities
1. Non-Affiliated Utilities
2. Affiliated Utilities
3. Unintended Consequence
* John Schulze Jr. is a corporate attorney with American Transmission Company LLC, the first stand-alone, multi-state transmission company. He can be reached at firstname.lastname@example.org. John is grateful for the exceptional assistance of paralegal Susan I. Ecker.
D. Compare and Contrast: FPA Section 305 with Other Interlocking Directorate Restrictions.
1. PUHCA 1935
2. Section Eight of the Clayton Act
IV. COMMISSION GETS TOUGH
A. Enforcing the Rules Already on the Books
1. Michael J. Chesser
2. Commission Order Reminding Public Utilities of FPA Section 305 Obligations
3. Douglas R. Oberhelman
4. Robert G. Schoenberger
B. The 2005 FPA Section 305 Rules
1. All Late-Filed Applications Will Be Denied - Period................. 685
2. Oath Obligation
3. Defined Holding
4. Eliminated Future Market Based Rate Waivers
5. Temporary Safe Harbor Sixty Days After Filing Application.... 685
6. Grandfathering of Existing Interlocking Directorates................ 686 V. Compliance With New Rules & New Commission Focus
A. General Advice
1. Determine Type of Business Employing the Candidate............. 686
2. Title Not Determinative of FPA Section 305 Authority.............. 687 B. Going Forward: Post-Approval Obligations and Rules
1. Form 561
2. Reporting Obligations Related to Changes in Position............... 688 VI. Future of FPA Section 305
A. Public Utility – Public Utility Interlocks
B. Financial Institution – Public Utility Interlocks
1. Public Utility Securities Firms
2. Power Marketers
C. Electrical Equipment Supplier - Public Utility Interlocks.................. 691 D. Commission Enforcement Policy
I. INTRODUCTION[I]f federal agencies are going to use power to prevent free speech on the part of those with whom they come in contact, then, it seems only a short step to the point where that same agency can say to me as a writer; ―Don‘t you criticize us; we will throw you in jail if you do.‖ I call attention to this general situation because, as I said at the beginning, I think it is a dangerous trend in government. I think it is time for [C]ongress to awaken and use some caution in the powers it delegates to executive agencies.
1. William Bruckart, National Topics Interpreted, WASHINGTON DIGEST, Aug. 4, 1938, available at http://www.newspaperarchive.com/LandingPage.aspx?type=glpnews&search=%22william%20bruckart%22% 20aug&img=\\na0038\6773636\30824154.html.
2008] INTERLOCKING DIRECTORATE REGULATIONS 669 The above is from a nationally syndicated column critiquing the Federal Power Commission‘s (FPC) regulation of interlocking directorates, less than a few years after it became law with overwhelming support. Now, on the eve of the Federal Power Act (FPA) section 305‘s diamond jubilee, this article intends to provide both an exhaustive retrospective, and a forecast of changes to come.
Section two of this article will explain the environment which formed FPA section 305 – the restriction on interlocking directorates between public utilities and certain other entities (interlocks). Section three will examine the evolution of FPA section 305‘s application and summarize the significant changes to FPA section 305, including the creation of the annual filing requirement, the automatic approval of interlocks between affiliated utilities, and the Public Utility Regulatory Policies Act (PURPA) and Gramm-Leach-Bliley Act‘s (GLB Act) inclusion and exclusion of companies within the law‘s purview. Section three will also compare FPA section 305 to the interlock prohibitions found in section eight of the Clayton Act, and the now-repealed Public Utility Holding Company Act of 1935 (PUCHA 1935). Section four will explain the Federal Energy Regulatory Commission‘s (Commission) relatively new emphasis on enforcement of FPA section 305, and the new 2005 rules in light of the repeal of PUHCA 1935. Section five will provide practical advice when applying for the Commission‘s approval of an interlocking position. Section six will be forwardlooking, examining where the Commission‘s application of the interlocking rules may lead.
II. FPA SECTION 305 BACKGROUND
A. Environment That Bore Utility Interlock Regulation The federal government‘s concern about the economic power wielded by large corporations predates the New Deal‘s regulatory initiatives,2 but President Franklin D. Roosevelt is rightly credited with the restrictions on certain public utility interlocking directorates.3 A perfect storm of public utility bad actors,4 and the belief that only the federal government could regulate big businesses, like public utilities,5 allowed President Roosevelt to deliver on his campaign promises with the FPA of
2. Edwin I. Hatch, 2 F.E.R.C. 63,023, at p. 65,125-26 (1978); Charles T. Fisher, 7 F.E.R.C. 61,290 (1979); Victor H. Kramer, Interlocking Directorships and the Clayton Act After 35 Years, 59 YALE L.J. 1266 (1950) (citing S. REP. NO. 63-698 (1914)).
3. Franklin D. Roosevelt, President of the United States, Message to Congress Recommending Regulation of Public Utility Holding Companies (March 12, 1935) (http://www.presidency.ucsb.edu/ws/index.php?pid=15019).
4. Richard D. Cudahy & William D. Henderson, From Insull to Enron: Corporate (Re)Regulation After the Rise and Fall of Two Energy Icons, 26 ENERGY L.J. 35 (2005). See also In re Portland Elec. Power Co., 97 F.Supp. 857, 857-58 (D. Or. 1951) (―The history of this company [which sought voluntary reorganization] has been marked by stock manipulation, bond and note issues, holding companies and operations carried out by interlocking directorates... so characteristic of the period.‖); In re Louisville Hydro-Elec. Co., 1 F.P.C. 130 (1933).
5. Pub. Utils. Comm‘n v. Attleboro Steam & Elec. Co., 273 U.S. 83 (1927).
670 ENERGY LAW JOURNAL [Vol. 29:667 1935—sweeping legislation that regulated national electrical power.6 The FPA‘s legislative history shows that Congress had particular concern about the concentration of wealth and potential for conflicts of interest systemic to interlocking directorates.7 Nebraska Senator George William Norris‘ 1935
Senate floor speech is an example:
I have on my desk here the names of a great many other persons, and there are a great many that I do not have; but I will say that this is the universal rule, running all through these corporations, from one end of the United States to the other. They are interlocked, intermingled, intertwined, interwoven, mixed up, scrambled, and all put together so that they are practically like one man, bleeding those at the bottom, taking their toll from those who toil and sweat, levying upon everybody who uses electric light or electric power in this country, putting the cost of their murderous operations into everything we eat, drink, and wear. Everything that is produced by electric power has contributed to it. Every common little home must make its contribution, and every big factory with a million dollars capital must make its contribution. In the end, it all comes out of the consumers, the common people of the United States; and still we hesitate to put forth the strong arm of the law and say, ―You shall not proceed further with these murdering operations, with this dishonorable business of controlling a necessity of life.‖ As a result, FPA section 305 requires individuals to receive the Commission‘s9 approval before concurrently serving as officers or directors of public utilities, or public utilities and firms that underwrite or participate in the marketing of securities of any public utility, or public utilities and companies supplying electrical equipment to such public utilities (―interlocks‖).10 The FPA and the interlocking directorate restrictions on public utilities found in section 305 were actually the second of President Franklin Roosevelt‘s legislative initiatives to police public utilities. The first was the ―PUHCA 1935‖ which, in addition to regulating public utility holding companies‘ interlocking directorates, restricted public utility companies from implementing complex corporate and capital structures, having more than a single integrated electric or gas utility within the holding company, borrowing or using the public utility for indemnification, or providing goods or services to the utility subsidiaries.11
6. Richard M. Merriman & J. Richard Tiano, Interlocking Director Positions: An Area of Concern for Electric Utilities, 1 ENERGY L.J. 55, 55-56 n.2 (1980) (citing In re John Edward Aldred, 2 F.P.C. 247, 260-61 (1940)).
7. Hatch v. FERC, 654 F.2d 825, 831 (D.C. Cir. 1981).
8. Hatch, 2 F.E.R.C. 63,023, at p. 65,127 (quoting Cong. Rec. 8,694 (1935) citing CONGRESS NUMBER CONG. REC. 8694 (1935).
9. The ―Commission‖ in the original Federal Power Act referred to the FPC. The FERC was created on October 1, 1977 as the FPC‘s successor. Richard M. Merriman & J. Richard Tiano, Interlocking Director Positions: An Area of Concern for Electric Utilities, 1 ENERGY L.J. 55, 56 n.3 (1980) (citing 42 U.S.C. § 7107 (1977) and Exec. Order No. 12,009). To avoid confusion for the reader, the term ―Commission‖ will be used in the article for both the FPC and FERC.
10. 16 U.S.C. § 825d (1934 & Supp. V).
11. 15 U.S.C. § 79 (2005); Markian M.W. Melnyk & William S. Lamb, PUHCA’s Gone: What Is Next for Holding Companies?, 27 ENERGY L.J. 1 (2006).
2008] INTERLOCKING DIRECTORATE REGULATIONS 671 B. Commission Authority and Interpretation of FPA Section 305 FPA section 305 empowered the Commission to prescribe the ―form and manner‖ for applying the regulation.12 While court decisions and congressional action have altered FPA section 305 over its seventy-plus life, the Commission has always had the last word in determining how and whether the regulated interlocking directorate rule should be applied.
1. Burden on the Applicant The Commission places the burden on the applicant to show that neither public nor private interests would be adversely affected by the interlock. The Commission‘s denial of John Edward Aldred‘s application is an early example of the applicant‘s burden, just the type of ―clown car‖ of corporate inside dealing and conflicts of interest that FPA section 305 was created to eliminate, involving nearly two dozen interlocking directorates between public utilities and investment banks.13 The Commission may also revoke an approved interlock after giving due notice and an opportunity for hearing, and at such review, the burden remains with the applicant to show that neither public nor private interests will be adversely affected by the holding of the positions.14
2. Authority to Change the Standard The Commission has the authority to change the applicant‘s burden of proof, as shown in the Edwin I. Hatch series of cases. Hatch15 applied to hold the positions of Chairman and CEO of public utility Georgia Power Company (Georgia Power), and director of an entity with a second-generation subsidiary that purchased Georgia Power securities. Usually, the Commission required the applicant to show that neither public nor private interests would be adversely affected by the interlock. But, this time the Commission required Hatch to affirmatively show ―clear, overriding benefit‖ of the interlock.16 On appeal, the D.C. Circuit wrote that the Commission was free to alter its then forty years of past practices and rulings to apply the new stricter standard so long as it ―provide[d] a reasoned explanation for any failure to adhere to its own precedents‖ at a rehearing for Hatch.17 On rehearing, the Commission reverted back to its earlier test, and authorized Hatch‘s interlock because he was able to show that neither public nor private interests would be affected by the interlock.18 The record does not explain why the Commission originally applied greater scrutiny to Hatch‘s interlock application, but a reason could have been
that Hatch was involved in double interlocks, and was a director of a vast array of entities outside of the purview of FPA section 305.19