Utility Legal Issues Update

Utility Legal Utility Legal Issues UpdateIssues Update

Alaska Power AssociationAlaska Power Association2009 Annual Meeting2009 Annual Meeting

Andy LemanKemppel, Huffman & Ellis, P.C.

TopicsTopics

DOT&PF Right of Way PermitsDOT&PF Right of Way Permits

Red FlagsRed Flags

Failure to Respond to Service CallsFailure to Respond to Service Calls

Cooperative BylawsCooperative Bylaws

Coop Class Action LawsuitsCoop Class Action Lawsuits

Kemppel, Huffman & Ellis, P.C.




Regulations still in draft, now at the Attorney General’s officeRegulations still in draft, now at the Attorney General’s office Overall, APA would prefer the current regulationsOverall, APA would prefer the current regulations

Changes from last public comment draftChanges from last public comment draft Removed requirement for new permits if utility ownership changesRemoved requirement for new permits if utility ownership changes

Took out section allowing to use hoped for future highway plans to Took out section allowing to use hoped for future highway plans to deny permitsdeny permits

Added section allowing exceptions for mountainous terrain or Added section allowing exceptions for mountainous terrain or other special conditionsother special conditions

Other miscellaneous changesOther miscellaneous changes


Red FlagsRed Flags


Red FlagsRed Flags

November 9, 2007 – FTC announces Red Flag regulations effective Jan. November 9, 2007 – FTC announces Red Flag regulations effective Jan. 1, 2008, with enforcement date of Nov. 1, 20081, 2008, with enforcement date of Nov. 1, 2008

Oct. 22, 2008 – FTC announces enforcement delay to May 1, 2009Oct. 22, 2008 – FTC announces enforcement delay to May 1, 2009

April 30, 2009 – FTC announces enforcement delay to August 1, 2009April 30, 2009 – FTC announces enforcement delay to August 1, 2009

May 13, 2009 – FTC releases template for entities with low risk of May 13, 2009 – FTC releases template for entities with low risk of identity theftidentity theft

July 29 - the FTC announced another 3-month enforcement delay -- to July 29 - the FTC announced another 3-month enforcement delay -- to November 1, 2009.November 1, 2009. The FTC also promised more guidance and outreach to small entities.The FTC also promised more guidance and outreach to small entities.


Failure to Respond to Service Failure to Respond to Service CallsCalls



Allstate Insurance sued Cleveland Electric Illuminating Allstate Insurance sued Cleveland Electric Illuminating Company, claiming utility was negligent in failing to Company, claiming utility was negligent in failing to respond to a customer’s service callsrespond to a customer’s service calls Utility customer noticed that tree limb was leaning on service Utility customer noticed that tree limb was leaning on service

drop wiresdrop wires Called at noon to reportCalled at noon to report Called again a few hours laterCalled again a few hours later Called again at 5:00 pmCalled again at 5:00 pm Shortly after, the wires broke and set the duplex on fireShortly after, the wires broke and set the duplex on fire Allstate had to pay fire and property damageAllstate had to pay fire and property damage



Jury found Cleveland Electric 100% at fault and awarded Jury found Cleveland Electric 100% at fault and awarded $161k in damages$161k in damages

Cleveland Electric tried to argue that Ohio PUC had Cleveland Electric tried to argue that Ohio PUC had exclusive jurisdictionexclusive jurisdiction Cleveland argued that if it was negligent, that negligence arose out Cleveland argued that if it was negligent, that negligence arose out

of its own policies and procedures for responding to service calls, of its own policies and procedures for responding to service calls, and that was within the exclusive jurisdiction of the PUCand that was within the exclusive jurisdiction of the PUC

Allstate argued that Cleveland Electric had a duty to exercise Allstate argued that Cleveland Electric had a duty to exercise reasonable care and that deciding negligence claims is within the reasonable care and that deciding negligence claims is within the jurisdiction of the trial courtsjurisdiction of the trial courts



Ohio Supreme Court overruled appellate court and Ohio Supreme Court overruled appellate court and held that trial court had jurisdictionheld that trial court had jurisdiction Failure to respond to a service call is no different than any Failure to respond to a service call is no different than any

other claim that a business fails to correct a known other claim that a business fails to correct a known dangerous conditiondangerous condition Expertise of PUC not necessary to determine thisExpertise of PUC not necessary to determine this Cleveland Electric claimed it had guideline allowing an Cleveland Electric claimed it had guideline allowing an

emergency call to go without response for up to six hoursemergency call to go without response for up to six hours Court said that wasn’t sufficient to avoid trial court jurisdictionCourt said that wasn’t sufficient to avoid trial court jurisdiction

Even if Allstate had gone to PUC, PUC could not have Even if Allstate had gone to PUC, PUC could not have awarded damagesawarded damages





Illinois appellate court found that bylaw requiring Illinois appellate court found that bylaw requiring arbitration of disputes with the cooperative was arbitration of disputes with the cooperative was enforceableenforceable Member challenging bylaw signed membership application in Member challenging bylaw signed membership application in

19741974 Membership application was subject to bylawsMembership application was subject to bylaws Coop bylaws stated that application was agreement to Coop bylaws stated that application was agreement to

comply with bylaws and amendmentscomply with bylaws and amendments In 2003 after member notice and vote, bylaws were amended In 2003 after member notice and vote, bylaws were amended

to require arbitration if requested by either partyto require arbitration if requested by either party



When member sued in 2006 for stray voltage injury to When member sued in 2006 for stray voltage injury to cattle, court enforced arbitrationcattle, court enforced arbitration Court focused on fact that member signed the application Court focused on fact that member signed the application

and bylaws were properly amendedand bylaws were properly amended

Important case becauseImportant case because Court focused on signed membership applicationCourt focused on signed membership application Court enforced bylaw provision amended after applicationCourt enforced bylaw provision amended after application Court enforced arbitration bylawCourt enforced arbitration bylaw


Class Action LawsuitsClass Action Lawsuits



Last year, members of Pedernales Electric Cooperative Last year, members of Pedernales Electric Cooperative brought a class action lawsuit against the cooperative and brought a class action lawsuit against the cooperative and individual board membersindividual board members Alleged mismanagement, self-dealing and excessive Alleged mismanagement, self-dealing and excessive

compensationcompensation Objected to handling of capital creditsObjected to handling of capital credits

Failing to retire capital creditsFailing to retire capital credits

Failure to notify individual members of their capital credit Failure to notify individual members of their capital credit balancebalance



The case was eventually settled on the following terms:The case was eventually settled on the following terms: Release for all directors and PECRelease for all directors and PEC PEC agreed to retire $23 million in capital credits over 5 yearsPEC agreed to retire $23 million in capital credits over 5 years Comprehensive and independent review of financial and Comprehensive and independent review of financial and

management operations by Navigantmanagement operations by Navigant Pay $4 million in class attorney’s feesPay $4 million in class attorney’s fees

PEC’s insurer agreed to pay $2.4 million of the fees and costs PEC’s insurer agreed to pay $2.4 million of the fees and costs awardaward

Members had to pick up the remaining $1.6 millionMembers had to pick up the remaining $1.6 million



A PEC member challenged the settlement as being too A PEC member challenged the settlement as being too weakweak Court found settlement fair, adequate and reasonableCourt found settlement fair, adequate and reasonable

Emphasized that any monetary recovery would be paid by PEC Emphasized that any monetary recovery would be paid by PEC and its membersand its members

But the PEC litigation was only the beginning . . .But the PEC litigation was only the beginning . . .



In the wake of the PEC litigation, class action lawsuits In the wake of the PEC litigation, class action lawsuits have been filed against electric cooperatives in Texas, have been filed against electric cooperatives in Texas, South Carolina, and ArkansasSouth Carolina, and Arkansas

Substantive AllegationsSubstantive Allegations General failure to retire any capital creditsGeneral failure to retire any capital credits Failure to retire capital credits upon a member's cessation of Failure to retire capital credits upon a member's cessation of

membershipmembership Involuntary discounting of general capital credit retirementsInvoluntary discounting of general capital credit retirements Maintenance of unreasonably high equity levelsMaintenance of unreasonably high equity levels



Procedural AllegationsProcedural Allegations Unreasonable director nomination by petition requirementsUnreasonable director nomination by petition requirements Low member meeting attendanceLow member meeting attendance Excessive director and executive compensationExcessive director and executive compensation Failure to provide membership or voting lists Failure to provide membership or voting lists

The law firms involved previously participated in the PEC The law firms involved previously participated in the PEC litigation or requested governance and financial litigation or requested governance and financial information from multiple electric cooperatives across the information from multiple electric cooperatives across the countrycountry See http://coop-litigation.comSee http://coop-litigation.com



Are class actions coming to Alaska?Are class actions coming to Alaska? Probably notProbably not

Alaska directors cannot receive salariesAlaska directors cannot receive salaries

But shows the importance ofBut shows the importance of Retiring capital creditsRetiring capital credits

Open elections with open election proceduresOpen elections with open election procedures If you have a nominating committee, it should be independentIf you have a nominating committee, it should be independent

Relatively easy petition processRelatively easy petition process

Conducting open meetingsConducting open meetings


The EndThe End


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Utility Legal Issues Update