Federal regulators have approved activist investor Carl Icahn’s bid to seat a corporate officer on one of the nation’s biggest public utility boards amid concerns about balancing profit motives with public interest.
The Federal Energy Regulatory Commission (FERC), required under federal law to scrutinize and endorse appointments to investor-owned public utility boards, granted American Electric Power Co.’s (AEP) request to add an Icahn Enterprises executive to its board, even though the firm owns less than 2 percent of the company.
The order adheres to a March FERC determination that eliminated the historic threshold that an investment interest must have at least 10 percent ownership in a public utility to warrant an “affiliation” or voting seat on its board.
Columbus, Ohio-based AEP supplies electricity to utilities across 11 states, with more than 200,000 miles of transmission lines that serve 5.6 million ratepayers. Along with Duke Energy Corp., NextEra Energy Inc., and Southern Co., it’s among the largest investor-owned public utilities in the United States.
Icahn Enterprises is a master limited partnership with $16 billion in assets and seats on dozens of boards on companies that it effectively owns, such as CVR Energy, in which it owns a 66 percent share, and on those for which it is a minority or even a marginal shareholder, such as Southwest Gas (with a 15 percent share), JetBlue Airways (with 10 percent), and AEP (with about 1.5 percent).
Mr. Icahn, an icon of the 1980s “corporate raiders,” is now regarded as a “shareholder activist,” in his penchant for investing in undervalued markets where operating efficiencies can drive profits for investors.
Chair Willie Phillips and commissioners David Rosner and Doug Christie agreed that AEP’s board appointment of Icahn Senior Managing Director Hunter Gary doesn’t violate “public interest” under the Federal Powers Act (FPA).
Commissioners said AEP’s “change in control” wouldn’t affect the three factors that it gauges in defining public interest—effect on rates, effect on regulation, and “[to] not result in cross-subsidization of a non-utility associate company or ... encumbrance of utility assets for the benefit of an associate company.”
AEP announced in February an agreement with Icahn Capital LP that put Mr. Gary and Hank Linginfelter, retired executive vice president of Southern Co. Gas, on its board.
Icahn Capital portfolio manager Andrew J. Teno is a “non-voting observer” on the board.
In March, the AEP board ousted President, Chair, and CEO Julie Sloat and replaced her with Benjamin G.S. Fowke III, former chairman and CEO of Xcel Energy.
‘Hostile Takeover’ Protest Dismissed
Public Citizen, the nonprofit consumer rights advocacy group founded by Ralph Nader, protested the order, claiming that by the time FERC acted, Icahn Enterprises’ “hostile takeover” of a public utility was a done deal with Ms. Sloat’s “involuntary termination.”“But Mr. Icahn is not a typical investor. He is an activist investor” who specializes in “protracted, hostile shareholder fights to gain control of target corporations for the sole purpose of moving the company’s stock price to a pre-determined target that bestows considerable profit for Mr. Icahn,” Mr. Slocum said.
Icahn Enterprises is “uninterested in providing long-term capital investment to assist a public utility in ensuring the reliability of the bulk power market or delivering just and reasonable rates,” he said. “Rather, Mr. Icahn exploits regulatory loopholes to transform companies into mere speculative commodities to serve his short-term investment whims.”
The commission said Public Citizen failed to address the factors that it gauges in assessing “public interest” or provide any evidence supporting its allegations, but it did chide AEP for failing “to file a timely request for approval of the appointment of the Icahn Group designee to the AEP board.”
“An investor seeks to place a director on the board of directors of a company for only one reason—to exert its influence on the company’s decision-making and actions,” he wrote.
Although utilities are private, for-profit companies, they are public service infrastructure and heavily regulated by state public utility commissions and FERC. Thus, as Mr. Christie stated, they are “not typical for-profit, shareholder-owned companies.”
“[Electrical utilities] are usually holders of a state-granted monopoly franchise that comes with various public service obligations, such as providing reliable power service at rates that are just and reasonable,” he wrote. “So whether a public utility is owned by investors directly or through a holding company structure, it is absolutely essential for regulators to make sure that the interests of investors do not conflict with the public service obligations that a utility has.”
Defining that “potential for a conflict—and there always is“ is FERC’s responsibility under FPA Section 203, Mr. Christie stated, which “in my view ... must involve balancing consumer protection and potential impacts to reliability with the interests of investors in addition to evaluating traditional market power concerns.”
“These issues are ripe for action,” he wrote, “and I look forward to continued consideration of them with my colleagues.”
