Utility Legal Issues Update

1. Utility Legal Issues Update Alaska Power Association 2009 Annual Meeting Andy Leman Kemppel, Huffman & Ellis, P.C.

2. Topics • DOT&PF Right of Way Permits • Red Flags • Failure to Respond to Service Calls • Cooperative Bylaws • Coop Class Action Lawsuits Kemppel, Huffman & Ellis, P.C.

3. DOT&PF Right of Way Permits Kemppel, Huffman & Ellis, P.C.

4. DOT&PF Right of Way Permits • Regulations still in draft, now at the Attorney General’s office • Overall, APA would prefer the current regulations • Changes from last public comment draft • Removed requirement for new permits if utility ownership changes • Took out section allowing to use hoped for future highway plans to deny permits • Added section allowing exceptions for mountainous terrain or other special conditions • Other miscellaneous changes Kemppel, Huffman & Ellis, P.C.

5. Red Flags Kemppel, Huffman & Ellis, P.C.

6. Red Flags • November 9, 2007 – FTC announces Red Flag regulations effective Jan. 1, 2008, with enforcement date of Nov. 1, 2008 • Oct. 22, 2008 – FTC announces enforcement delay to May 1, 2009 • April 30, 2009 – FTC announces enforcement delay to August 1, 2009 • May 13, 2009 – FTC releases template for entities with low risk of identity theft • July 29 - the FTC announced another 3-month enforcement delay -- to November 1, 2009. • The FTC also promised more guidance and outreach to small entities. Kemppel, Huffman & Ellis, P.C.

7. Failure to Respond to Service Calls Kemppel, Huffman & Ellis, P.C.

8. Failure to Respond to Service Calls • Allstate Insurance sued Cleveland Electric Illuminating Company, claiming utility was negligent in failing to respond to a customer’s service calls • Utility customer noticed that tree limb was leaning on service drop wires • Called at noon to report • Called again a few hours later • Called again at 5:00 pm • Shortly after, the wires broke and set the duplex on fire • Allstate had to pay fire and property damage Kemppel, Huffman & Ellis, P.C.

9. Failure to Respond to Service Calls • Jury found Cleveland Electric 100% at fault and awarded $161k in damages • Cleveland Electric tried to argue that Ohio PUC had exclusive jurisdiction • Cleveland argued that if it was negligent, that negligence arose out of its own policies and procedures for responding to service calls, and that was within the exclusive jurisdiction of the PUC • Allstate argued that Cleveland Electric had a duty to exercise reasonable care and that deciding negligence claims is within the jurisdiction of the trial courts Kemppel, Huffman & Ellis, P.C.

10. Failure to Respond to Service Calls • Ohio Supreme Court overruled appellate court and held that trial court had jurisdiction • Failure to respond to a service call is no different than any other claim that a business fails to correct a known dangerous condition • Expertise of PUC not necessary to determine this • Cleveland Electric claimed it had guideline allowing an emergency call to go without response for up to six hours • Court said that wasn’t sufficient to avoid trial court jurisdiction • Even if Allstate had gone to PUC, PUC could not have awarded damages Kemppel, Huffman & Ellis, P.C.

11. Cooperative Bylaws Kemppel, Huffman & Ellis, P.C.

12. Cooperative Bylaws • Illinois appellate court found that bylaw requiring arbitration of disputes with the cooperative was enforceable • Member challenging bylaw signed membership application in 1974 • Membership application was subject to bylaws • Coop bylaws stated that application was agreement to comply with bylaws and amendments • In 2003 after member notice and vote, bylaws were amended to require arbitration if requested by either party Kemppel, Huffman & Ellis, P.C.

13. Cooperative Bylaws • When member sued in 2006 for stray voltage injury to cattle, court enforced arbitration • Court focused on fact that member signed the application and bylaws were properly amended • Important case because • Court focused on signed membership application • Court enforced bylaw provision amended after application • Court enforced arbitration bylaw Kemppel, Huffman & Ellis, P.C.

14. Class Action Lawsuits Kemppel, Huffman & Ellis, P.C.

15. Class Action Lawsuits • Last year, members of Pedernales Electric Cooperative brought a class action lawsuit against the cooperative and individual board members • Alleged mismanagement, self-dealing and excessive compensation • Objected to handling of capital credits • Failing to retire capital credits • Failure to notify individual members of their capital credit balance Kemppel, Huffman & Ellis, P.C.

16. Class Action Lawsuits • The case was eventually settled on the following terms: • Release for all directors and PEC • PEC agreed to retire $23 million in capital credits over 5 years • Comprehensive and independent review of financial and management operations by Navigant • Pay $4 million in class attorney’s fees • PEC’s insurer agreed to pay $2.4 million of the fees and costs award • Members had to pick up the remaining $1.6 million Kemppel, Huffman & Ellis, P.C.

17. Class Action Lawsuits • A PEC member challenged the settlement as being too weak • Court found settlement fair, adequate and reasonable • Emphasized that any monetary recovery would be paid by PEC and its members • But the PEC litigation was only the beginning . . . Kemppel, Huffman & Ellis, P.C.

18. Class Action Lawsuits • In the wake of the PEC litigation, class action lawsuits have been filed against electric cooperatives in Texas, South Carolina, and Arkansas • Substantive Allegations • General failure to retire any capital credits • Failure to retire capital credits upon a member's cessation of membership • Involuntary discounting of general capital credit retirements • Maintenance of unreasonably high equity levels Kemppel, Huffman & Ellis, P.C.

19. Class Action Lawsuits • Procedural Allegations • Unreasonable director nomination by petition requirements • Low member meeting attendance • Excessive director and executive compensation • Failure to provide membership or voting lists • The law firms involved previously participated in the PEC litigation or requested governance and financial information from multiple electric cooperatives across the country • See http://coop-litigation.com Kemppel, Huffman & Ellis, P.C.

20. Class Action Lawsuits • Are class actions coming to Alaska? • Probably not • Alaska directors cannot receive salaries • But shows the importance of • Retiring capital credits • Open elections with open election procedures • If you have a nominating committee, it should be independent • Relatively easy petition process • Conducting open meetings Kemppel, Huffman & Ellis, P.C.

21. The End Kemppel, Huffman & Ellis, P.C.