The Federal Energy Regulatory Commission recently announced that it intends to review whether to grant blanket relief to certain public utilities from the prohibition in the Federal Power Act against payment of dividends by public utilities “from any funds properly included in capital account.” Exelon Generation Company, LLC, 144 FERC ¶ 61,181 (2013) (“Exelon Generation”).
Section 305(a) of the Federal Power Act provides in part that it is unlawful for any director of a public utility “to participate in the making or paying of any dividends of such public utility from any funds properly included in capital account.” Although this prohibition may impair the ability of public utilities to pay dividends to their stockholders, the scope of the prohibition is uncertain. The term “capital account” is not defined either in the Federal Power Act or in the FERC’s regulations, and the legislative history of the act does not illuminate how the term is to be interpreted.
Indeed, the FERC has acknowledged that the lack of clarity in the statute makes it difficult to administer this restriction. However, based on the legislative history, the FERC has determined that payment of dividends by a public utility is not barred by this provision where the source of funds for payment of dividends is clearly identified, the amount of the dividend is reasonable under the circumstances, and the dividend will not have an adverse effect on shareholder interests (e.g., by raiding corporate coffers to provide personal financial benefits to certain shareholders).
In recent years, public utilities concerned about the potential for issuance of dividends to run afoul of this restriction have asked the FERC to issue a declaratory order finding on a case-by-case basis that the proposed issuance of dividends under specified circumstances will not violate Section 305(a) of the FPA. The filing fee for each such declaratory order currently is $24, 370.
In May, 2013, Exelon Generation Company, LLC filed a petition for a declaratory order finding that it could continue to pay dividends following the acquisition of Constellation Energy Group by Exelon Corp. Exelon Generation explained that as a result of “push down” accounting adjustments to reflect the price of the acquisition, the pre-merger retained earnings balances of certain public utilities within the Exelon corporate family were “’reset to zero’ and re-established on their books as miscellaneous paid-in capital.” Exelon Generation said that the effect of this accounting adjustment was to eliminate the traditional source of dividends—retained earnings—without having any impact on cash actually available for paying dividends. Exelon Generation therefore sought a determination that the ability of these public utilities to issue dividends would not be affected by the restrictions in Section 305(a) of the Federal Power Act if certain safeguards were adopted.
In the alternative, Exelon Generation asked the FERC to declare that, as a matter of public policy, Section 305(a) of the FPA does not bar the distribution of funds included in capital accounts of current and future public utility subsidiaries of Exelon Corp. that (a) have been granted market-based rate authority, (b) do not have captive customers, (c) do not provide transmission or distribution services, and (d) do not serve as a designated provider-of-last-resort for any class of customers. The Electric Power Supply Association intervened in the proceeding and asked the FERC to determine more broadly that the prohibition on payment of dividends out of capital account would not apply to any public utility, such as a merchant generator or a wholesale power marketer, that has market-based rate authority, does not have captive customers, and does not provide transmission or distribution services. (EPSA thought the fourth criteria proposed by Exelon, involving service as a POLR load provider, should not be adopted.) In Exelon Generation, the FERC granted the petition for a declaratory order filed by Exelon Generation and found that Section 305(a) of the FPA would not bar the payment of dividends by Exelon Generation and its specified public utility affiliates under the conditions and limitations that had been proposed. Significantly, the FERC also found that Exelon Generation and EPSA had made “a strong case for a close examination of whether section 305(a) should be interpreted as not prohibiting the payment of dividends from capital account by any public utility that has a market-based rate tariff on file with the Commission, does not have captive customers, and does not provide transmission or distribution services.” The FERC therefore announced that it “intends to open a generic proceeding, which will provide public notice and an opportunity for a broader range of interested parties to comment.”
Significantly, Section 305(a) of the FPA establishes an unconditional prohibition against payment of dividends by any public utility “from any funds properly included in capital account.” The FERC has no authority to grant a waiver of this prohibition, or otherwise to authorize payment of dividends from capital account by any public utility. However, by finding that the prohibition does not apply when the concerns discussed in the legislative history are not present, the FERC has been able to provide public utilities with flexibility to issue dividends when they might otherwise have refrained from doing so.