Electric Utility Industry
After PUHCA Repeal
ROBERT W. GEE
PRESIDENT
GEE STRATEGIES GROUP LLC
NARUC STAFF SUBCOMMITTEE ON
ACCOUNTING AND FINANCE
APRIL 24, 2006
CORPUS CHRISTI, TEXAS
Overview
• Background leading up to PUHCA repeal in the Energy Policy Act
of 2005
• What the new law (PUHCA 2004) intended and what new authority
it provides to FERC and the states
• How some states are reacting to repeal to protect ratepayers
• How investors regard the role of the states
• Suggestions for how states should proceed under the new law
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Background of Public Utility
Holding Company Act of 1935
• No significant utility state regulation existed
• PUHCA enacted to address financial abuses facilitated by
complex holding company structures and interlocking
directorates resulting in numerous utility insolvencies and little
accountability
• Required simplified, limited holding company system
• Utility activities limited to a single, geographically integrated
public utility system and to such other businesses as are
“reasonably incidental, or economically necessary or appropriate”
to the operations of the integrated system
• Imposed significant recordkeeping and filing requirements before
the Securities and Exchange Commission
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The Case for PUHCA Repeal
• Over time, PUHCA’s restrictions were deemed as not reflecting
either the market structure or regulatory policy priorities affecting
the modern electric power industry
– Geographic integration requirement counterintuitive to blunt growth of
market power
– “PUHCA Pretzels” rendered certain legal requirements meaningless
• Over 2 decades, SEC favored its repeal
• Perception grew that repeal was necessary to eliminate arcane,
duplicative, and unduly burdensome regulations that disserved
the interest of the consuming public by hindering needed
investment
• Role of FERC and states in ratepayer protection had matured
– Would be better equipped to protect ratepayers
– SEC focused on investor protection
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•
Basic Premises Reflected in Energy
Policy Act Electricity Title
• Congress concluded that the electric utility sector has been in dire
need of significant capital investment to maintain affordable,
reliable electric service for the future
• This investment requirement could be met by making the sector
more competitive from a capital-attraction standpoint, extending
to a more diversified class of investors
• Regulatory reform was required to spawn greater capital
attractiveness
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“PUHCA of 2005”
• Under Energy Policy Act, FERC given expanded Section 203 authority to
oversee mergers & acquisitions of electric and gas companies to include
holding companies, and to prevent cross-subsidization by utility of nonutility affiliates
• FERC given access to books and records of utility holding companies
“relevant to costs incurred” by the public utility affiliated with a holding
company and “necessary or appropriate” to protect utility customers
• FERC authorized to determine certain non-power goods and services
cost allocations among holding company members upon request
• State commissions given a federally enforceable right to request access
to utility holding company books and records, wherever located, with
certain provisos
•
Act does not preempt states from exercising jurisdiction under
otherwise applicable law to protect utility customers
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FERC’s Response to Repeal
• Final rule takes incremental approach to exercising new authority
• Streamlined filing requirements in contrast to prior SEC
requirements
• Chose not to mandate blanket filing of cost allocation agreements
addressing costs of non-power goods and services purchased by
jurisdictional utilities from affiliated companies
• Deferred adopting additional rules regarding cross subsidization,
encumbrances of utility assets, or diversification into non-utility
businesses
• Preferred to rely on existing ratemaking authority under Federal
Power Act and Natural Gas Act and enhanced merger & acquisition
authority
• Revisit need for expanded action in technical conference next year
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Post-PUHCA State Inquiries
• Some concerned about:
– Prospect of increased merger & acquisition activity
– Greater complexity in detecting utility’s cross-subsidization of its affiliates
– Ability to address potential absorption of holding company diversification
risks by regulated utility
• Some have opened dockets to consider adoption of ex ante
safeguards in anticipation of utility holding company diversification
and potential cross-subsidization
– Examining limits on degree and character of holding company
diversification (New Jersey Board of Public Utilities Staff proposal to limit
holding company diversification at 25 percent of aggregate asset value)
– Requiring structural separation of utility and holding company, accompanied
by ringfencing” safeguards (Kansas Corporation Commission staff proposal)
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Considerations to Factor
• In PUHCA 2005 Congress gave states a vote of confidence to
assume responsibility to protect ratepayer interests
consistent with federal law
• But will Congress’ intent to encourage investment be negated
by state actions tilting too heavily in the name of ratepayer
protection?
– “Investors versus ratepayers” presents states with a false dichotomy
– Both interests should be balanced in reaching a decision, consistent
with state and federal laws
• Outlook for new Merger & Acquisition activity
– Pre-PUHCA repeal – accelerated activity (“land rush”) anticipated from
more M & As and acquisitions by new investors
– Post-PUHCA repeal – somewhat more sober, realistic assessments
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Investors’ Perspectives on
PUHCA Repeal
• While M & As will continue, as before, they still will be strategic in
seeking value
• Some new investors likely to be interested, but will be highly
cautious given current regulatory risks, lack of familiarity with
state or U.S.-style utility regulation (in the case of foreign
investors), and books & records requirement of PUHCA 2005
• Recent J.M. Cannell, Inc., survey indicated that many institutional
investors deemed PUHCA repeal as benign, but a “non-event”
– Respondents understood the need for effective state and federal regulation
– Generally, they favorably regarded ringfencing to protect utility from affiliate
or parent holding company risks
– But many unfavorably regarded proliferation of Wisconsin-type holding
company statutes (“Mini-PUHCAs”) in other states
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Recommended Steps for States Considering
New Rules
• If you can, take the time – don’t rush to judgment
• Review existing authority to:
–
–
–
–
–
condition and approve mergers
oversee issuance of debt
impose restrictions on dividend payouts
monitor affiliate transactions
conduct audits
• Examine precedent construing merger approval and ratemaking
authority to determine if sufficient to protect ratepayers
• Questions
– Does the Commission require a broader scope of oversight?
– Does the Commission have sufficient resources to escalate oversight?
– Can objectives be met through voluntary or “safe harbor” alternatives?
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Strategic Implications for States
Contemplating Post-PUHCA Rules
• State authority customarily at zenith during merger approvals
even if express statutory authority unclear or ambiguous
• Ambiguity allows commissions to condition outcome of
requested approval to its favor where case resolved through
settlement
• But certainty of new rules could undercut authority if court
finds that adopted rules exceed statutory authority
• From a strategic standpoint, is ambiguity or uncertainty
preferred?
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Considerations for Seeking New
Legislation
• PUC's existing relationship with legislature – good, bad, or
mixed?
• Weigh likelihood of outcomes
– Legislation adopted as requested
– Legislation defeated
– Requested legislation not adopted but alternative legislation adopted
that PUC dislikes
• Two out of three outcomes are negative
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Post-PUHCA Closing Thoughts
• PUHCA repeal represents a rare instance of Congress modifying
federal regulation of energy sector and inviting states to “share
the field”
• How states respond to Congress’ invitation could strongly
influence pace and degree of future mergers and acquisitions
and volume of capital invested into the sector
• How FERC exercises its new M & A authority in future cases, in
tandem with new PUHCA authority, should provide states with
guidance, and could conceivably lessen need for separate state
safeguards
• FERC and state commissions are “joined at the hip” in
implementing this legislation
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Robert W. Gee
President
Gee Strategies Group LLC
7609 Brittany Parc Court
Falls Church, VA 22304
U.S.A.
703.593.0116
703.698.2033 (fax)
[email protected]
www.geestrategies.com
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