FERC Filings

MOTION TO INTERVENE AND PROTEST OF THE ELECTRIC POWER SUPPLY ASSOCIATION-Carolina Power & Light Company , Duke Energy Corporation, South Carolina Electric & Gas Company, GridSouth Transco, LLC - Docket No. RT01-74-000

b. The selection process for the board of directors is biased to protect the interests of the Applicants despite the implications on other market stakeholders

The filing indicates that the board selection process is “designed to preserve the legitimate financial and business interests of the Applicants as transmission owners and utilities.”10 While the Applicant’s interest in maximizing the value of their transmission assets is understandable, their dominant role in the selection process is troubling—and unnecessary. The Applicants propose to use a national search firm to identify candidates for the initial GridSouth Board. However, after receiving stakeholder comments, the Applicants themselves will select the proposed board for Commission approval. While stakeholders can “review” the list of candidates, the filing gives them no decision-making role in the Board selection process. The basis for the concern about true Board independence is apparent.

Interestingly, the Applicants note that they expect intervenors to challenge the selection process, but appear to argue that their unilateral control is necessary to obtain a “high quality” board. They also suggest that sharing the responsibility of Board selection will somehow prevent the Commission from properly balancing the “legitimate interests of transmission owners and customers.”11 EPSA disagrees. The interests of transmission owners and customers should be balanced before, not after, the Board is selected. After all, transmission customers also have substantial investment monies at stake which are potentially impacted by Board decisions.

The Applicants’ believe that to protect their transmission investment, and the public’s interest in reliability, they must have exclusive control. They are incorrect. Whether the Board is selected solely by the Applicants or in a more democratic fashion, Board members will assume fiduciary obligations pursuant to the LLC Agreement, enforceable under Delaware law. These obligations include the duty to maximize the value of the assets that GridSouth owns or controls, and to protect the integrity of the Applicants’ capital investment. Additionally, §6.13 (“Limitations on Board Activities”) of the LLC Agreement provides extensive protections for the Applicants’ assets, including restrictions on actions that could undermine the value of Applicants’ assets, and requiring their consent (as well as FERC approval) for certain extraordinary corporate actions.

Beyond the Board selection process, the LLC Agreement unnecessarily perpetuates the Applicants’ control and influence in ways that compromise true Board independence. Under §6.9 of the LLC Agreement, authorizes the Board to set Director compensation. However, any amendment or modification of equity option plans or other equity incentive plans available to a Director or senior Officer on GridSouth’s start date require approval of 85 percent of the Applicants. Moreover, while the Board must “inform” the Stakeholder Advisory Committee (“SAC”) of “pending significant actions of the Board affecting [their] interests,” the SAC’s role is limited to providing “input.” The role of the SAC’s subcommittees is similarly limited.

Another example of Applicant overreaching is contained in §6.10 (“Removal and Resignation of Directors; Vacancies”), which allows a Super Majority (85 percent) of the passive owners to request an arbitrator to remove one or more directors for cause, and for violations of any duties contained in the LLC Agreement. As mentioned above, market participants and other stakeholders also have substantial interests that could be adversely affected by the failure of directors to responsibly and lawfully exercise their duties. Accordingly, there should be some provision for all parties to take action against directors who violate the LLC Agreement.

More generally, as mentioned above, EPSA is also troubled by the prospects of a for-profit Transco exercising authority over market policy and design issues. Establishing a fundamental obligation to maximize the value of the transmission owners’ assets within the governance structure raises serious concerns about the neutrality of the decision-making process in developing a congestion management scheme. This concern is heightened by the Applicants’ deferral of the details associated with a congestion management plan and the adoption of a single control area until GridSouth determines that there is a “cost-effective” solution. The Applicants purposefully postponed developing new market structures and rules due to their “high cost.” EPSA urges the Commission to carefully consider this inherent tension when assessing GridSouth’s proposal for sole responsibility for the market development process. 8 The existing GridSouth Board proposal will likely result in an experience and skill set more consistent with oversight of a regulated investor-owned utility than a competitive market, and the potential for undue influence over the selection process by the Applicants will likely produce a set of directors well-suited to run a transmission business, but not oversight of a competitive market.

9 While EPSA members feels strongly that market stakeholders need to have a meaningful voice in the development of market designs and ongoing market policy, it is possible that stakeholder involvement could occur through a well balanced advisory committee process where ultimate decisions occur through a truly neutral cross RTO market policy board provided that market stakeholders have access to the board, perhaps through multiple ombudsmen on behalf of groups of members, and provided that the board is composed of directors with experience in commercial markets, investment banking and recent FERC policy.

10 RTO Compliance Filing, Vol.1 (“Filing”), p. 9

11 Filing p.10.