FERC Filings
MOTION TO INTERVENE AND PROTEST OF ELECTRIC POWER SUPPLY ASSOCIATION-Southern Company Services, Inc.-Docket No. RT00-77-000
The proposed structures of the Southern RTO and the proposed governance fail to provide for the independence of an RTO.
If independence is the bedrock on which an RTO should be built, then the foundation for Southern’s RTO is lacking. Southern advances three alternate structures for its for-profit Gridco:
1. a limited liability company in which the transmission owners are members (the “LLC”) governed and managed by a board of directors;
2. the LLC managed by a Managing Member (also referred to as “NewCo”) that would be an unaffiliated company; and
3. an unaffiliated company that would own the transmission assets (a transco) and operate the assets as “NewCo.”
Most of EPSA’s concerns arise from Southern’s proposed Structure No. 1. Although Southern’s proposed Structure No. 2 is improved, insufficient details are set forth to allow a determination to be made as to whether the independence concerns are adequately mitigated. With respect to proposed Structure No. 3, EPSA acknowledges that independence could be accomplished through a properly structured, publicly traded, for-profit transco. Southern’s NewCo proposal, however, lacks details to ensure independence.
Structure No. 1 (LLC)
a. The Southern RTO LLC membership will be exclusively transmission owners and will be controlled by Southern’s five memberships.
In Southern’s Petition it explains that the membership of the LLC will be comprised exclusively of transmission owners. Although Southern indicates that the members will be passive and that the board of directors will be independent, a closer examination indicates the fallacy of both assertions. As set forth on page 18 of Southern’s petition, the LLC members preserve absolute control over certain issues.
First, note that to ensure its dominance and control, Southern indicates that it will have not one membership in the LLC, but five membership interests, one for each of its five regulated operating companies, which equal the total number of memberships allocated for the other participants – the five non-jurisdictional transmission owners (whose participation in the RTO appears speculative at best). This means that Southern is preserving for itself absolute control over the reserved issues set forth on page 18 of its Petition, one of which addresses the preservation of Southern’s membership dominance. The Petition indicates that the LLC will not be able to dilute or change member’s ownership interest in the LLC without the approval of the passive owners. Specifically, no new members, even other transmission owners, are able to join the LLC without Southern’s approval. Approval of the owners cannot be obtained without Southern’s five members’ votes. Not only has Southern maintained absolute control over the reserved issues, but it has established that it will be impossible for Southern’s control to be diluted without its consent. This contradicts the Order No. 2000 requirement of “open architecture” that allows RTOs to evolve over time to reflect changes in facility ownership and geographical scope.
b. The membership of the Southern RTO LLC and its ability to select the initial Chief Executive Officer, who will also be a member of the board of directors and who will install the management team, all combine to ensure that the Southern RTO will not be independent.
If the initial board of directors is not installed in a timely manner, Southern’s Petition indicates that an initial Chief Executive Office (“CEO”) would be hired by the LLC owners – of which the Southern operating companies comprise at least half, assuming full participation of the non-jurisdictional utilities. This provision essentially provides Southern the unchallenged right to install the first CEO. The CEO will have one of seven seats on the board of directors, and therefore the so-called independent board of directors clearly will have one non-independent member hand-picked by Southern. To the extent the independence of the RTO has not already been fatally compromised, Southern proposes that in the interim, while the rest of the board of directors are being selected, its hand-picked CEO will be authorized to select the rest of the management team and employees. This process ensures that Southern will have influence over the formative process of Gridco, and worse, will lay a foundation in the management and employee ranks that will likely be aligned with Southern.
Southern’s proposal of the selection of the initial CEO, a member of the board, and the management team, suggests complete disregard for the Commission’s objective of independence – both in perception and reality – and should be rejected.
c. The selection process for the board of directors and Southern’s reservation for itself of control over the incentive compensation of the initial board combine to ensure allegiance to Southern.
Southern’s proposal for the selection of the remainder of the board of directors is only slightly less egregious in its attempt to ensure the influence and control of Southern over the Southern RTO. Southern states that “[s]imilar to the process used for jury selection, each equity owning participant in the LLC will have the opportunity to ‘strike’ one of the candidates without cause.” Although not clear in the petition, given the staggered terms of the directors and the seven different areas of expertise, the only logical way of reading Southern’s petition is that each owner gets one “strike” per board seat, as opposed to board slate. True, Southern limits itself to one “strike” for its five operating companies; however, one strike per seat is still sufficient to ensure that the board of directors will be dedicated to accommodating Southern.
Southern’s attempt to assert control over the board selection process and incentive compensation plans should be rejected. In summary, for the reasons set forth above, Southern’s proposed Structure No. 1 should be rejected as it fails to comply with the Commission’s standard for independence. EPSA does not support the establishment of a fatally flawed RTO over the status quo.
Structure No. 2 (LLC with Managing Member)
d. The lack of an operating agreement between the LLC and Managing Member make it impossible to evaluate whether the Managing Member will serve to ensure the independence of the RTO.
Under Southern’s proposed Structure No. 2, an “independent entity” is selected by the passive owners to direct and manage the activities of the LLC. The ability of the so-called passive members to select the Managing Member (which could be a new company – “NewCo”) clearly compromises the independence of the RTO. It is further unclear the extent to which the “passive owners” have rights to remove the Managing Member, as there is no detail in the Petition with respect to the engagement of the Managing Member. Irrespective of the removal rights, the independent entity will presumably be seeking compensation for its services, and likely will want to keep its “business” of serving as the Managing Member (the extent to which the Managing Member can change from time to time is unclear). Since the selection of the Managing Member is done by the passive members, and given that the Southern operating companies will hold five out of a potential of ten votes at most, any Managing Member that wants to renew its engagement will be obligated to please Southern.
In addition, there is little guidance on the qualifications of the Managing Member, or conversely any restrictions. Although the entity is described as not being a market participant, or an affiliate of a market participant, or a subsidiary of a market participant, nothing in Southern’s petition prohibits the Managing Member from being a subsidiary of The Southern Company, the ultimate parent and public utility holding company, which is not a member-participant. The definition of affiliate contained in Section 2a(11) of the Public Utility Holding Company Act (“PUHCA”) is not broad enough to address the situation of common control, unless a determination is made under part (10) of the definition. The existence of common control, however, and the fact that both entities would ultimately report to the same CEO and board of directors would significantly compromise the independence of the RTO (and certainly the RTO would not be perceived to be independent). Absent such determination, NewCo technically would not be an “affiliate” of the Southern operating companies within the meaning of Order No. 2000, only an “affiliate” of The Southern Company (The Southern Company, however, would have many affiliates that would be market participants, including the transmission owning operating companies).
Southern would be expected to argue that, notwithstanding the corporate relationship, that NewCo is not a market participant and is not affiliated with any market participant within the meaning of the term “affiliate” under PUHCA. Further, Southern would argue that the NewCo is not controlled by the transmission owners, and that the NewCo affiliate has no “economic or commercial interests” in the RTO decisions. The common control, however, compromises the independence and even if the NewCo does not have any direct economic commercial interest in RTO decisions, it is unreasonable to expect the managers to ignore the objective of profits for The Southern Company. The Commission should clarify that, to the extent Southern desires to pursue its proposed Structure No. 2, that the Managing Member cannot be an affiliate of The Southern Company. Furthermore, as discussed below, the total ownership interest by any and all affiliates of The Southern Company in the managing Member should not exceed five percent.
Southern’s petition indicates that the Managing Member will “enter operating agreements with participating transmission owners and operate their assets in accordance with that agreement.” However, no form of operating agreement is attached to the Petition. Consequently, it is not possible to determine whether the transmission assets will be operated in a non-discriminatory manner. Furthermore, there is no support or details regarding Southern’s assertion that “the Managing member will be completely responsible for the management of the LLC.” Accordingly, the Commission should reject or condition, in accordance with the above points, Southern’s proposed Structure No. 2.
Structure No. 3 (NewCo Transco)
e. The Commission should clarify that the five percent limitation on ownership of stock in NewCo for a “single market participant” is defined to include all affiliates of The Southern Company, and that Southern will not be able to creatively utilize its public utility/holding company structure and operating companies to circumvent the five percent ownership limitation.
Of Southern’s three proposals, EPSA believes that the most efficient method of ensuring independence and, in EPSA’s opinion, the only viable alternative of the three proposed, is Southern’s proposed Structure No. 3. However, additional clarification is needed with respect to Southern’s ownership of stock in the NewCo.
Southern indicates that NewCo will be “owned by its equity investors.” Apparently, the NewCo will be both the owner and operator of the transmission assets. Southern states that the NewCo will have non-market participant shareholders, but then notes that “[a]ny ownership interest that is retained by a market participant will have to meet the requirements of Order No. 2000.” This statement is a reference to the portion of Order No. 2000 which permits “any market participant” to retain five percent ownership during a five year transmission-period and a class of owners to a total of 15%. Given Southern’s five transmission-owning affiliates, those operating companies, which are clearly market participants, alone could own 15% of the NewCo. As noted above, given the definition of “affiliate” employed in the RTO proposal, other subsidiaries of The Southern Company would not be “affiliates” of NewCo as they would not control or be controlled by NewCo. Through creative use of subsidiaries of The Southern Company, other affiliates of The Southern Company could, however, own shares in NewCo, if they were to not exceed the limitation based upon a class of owners. The Commission should clarify that any and all affiliates of The Southern Company be permitted to own and control no more than five percent of the total shares of NewCo.