FERC to Update Dividend Payment Policies
On February 20, FERC issued a Proposed Policy Statement that, if adopted, will permit officers and directors of merchant generators and power marketers to participate in the making or paying of any dividends from funds included in capital accounts. The proposed policy represents a significant change because FERC does not currently allow such dividends unless the company can 1) clearly identify the sources from which the dividends will be paid; 2) demonstrate that the dividends will not be excessive; and 3) demonstrate that the dividend payment will not have an adverse effect on the value of shareholders’ interests.
The current test stems from FERC’s historic view that the purpose of the Federal Power Act’s prohibition on such dividend payments is to stop “corporate officials raiding corporate coffers for their personal financial benefit” to the detriment of a public utility’s financial integrity and its ability to serve its customers.
In proposing the Policy Statement, FERC recognized that the power industry has evolved significantly since the dividend restriction was originally adopted. While the current dividend payment restrictions may be appropriate for traditional, vertically-integrated utilities providing monopoly services to captive customers, the industry of today is comprised of new types of public utilities, such as merchant generators and power marketers. For these entities, the restrictions may not make sense and may, in fact, impose an undue burden. FERC’s level of oversight on dividend payments by modern non-traditional utilities may be excessive, particularly where FERC has determined that it does not need to be concerned about:
- The character and quality of the non-traditional utilities’ securities – because it granted them blanket authorization to issue securities
- The way in which non-traditional utilities keep their accounts, by granting waiver of compliance with the Uniform System of Accounts
The Proposed Policy Statement recognizes that, under such circumstances, FERC should not be concerned about how such non-traditional public utilities account for dividends paid on their securities. Accordingly, FERC is proposing that FPA Section 305(a) should not prohibit public utilities from paying dividends from funds in capital accounts where they:
- Have market-based rate authorization;
- Do not have captive customers; and
- Do not provide transmission or local distribution services.
We expect comments on this proposed policy will be due in April.