July 1, 2001
L.A. Loves a Loophole
There's no getting around it...
How do American electric utilities differ from water companies, telephone companies, airlines, insurance firms, food processors, newspapers, steel mills, and other industries in the United States? "They produce electricity and the others don't," you answer. Maybe, but the others can produce electricity, too, if they want to. The correct answer is: Thanks to a law passed 60 years ago to protect a different industry from the depredations of now long-dead financial manipulators, no business may buy 10 percent or more of an electric utility's shares without submitting its entire operation to the jurisdiction of the Securities and Exchange Commission (SEC), and risking a demand to divest itself of all nonutility operations. Let's think about that for a minute.
The framers of the Public Utility Holding Company Act (PUHCA), the law in question, had their reasons for that restriction of ownership. Financial geniuses, in the days before the founding of the SEC and the development of sophisticated regulatory tools, developed many ways to milk the utilities, defraud shareholders and creditors, and evade regulation. And these people succeeded in their efforts even though they owned a small percentage of the capital of the utility group they controlled. Today, those restrictions seem superfluous, given the hawklike stance of the utility regulatory agencies as well as the protective rules enforced by the SEC and the stock exchanges, and the audits of accountants that get sued when they don't pay attention.
If I were a utility executive, I might want to keep the ownership restrictions. Don't those PUHCA rules constitute bulletproof armor against unfriendly takeover attempts? Not exactly. They protect against takeover attempts by nonutility firms that wish to keep their nonutility business lines. (Private individuals, I gather, could take control, but few of them seem enamored of the utility business.) Utilities, on the other hand, can and do make unfriendly bids to take control of other utilities. In those instances, all PUHCA does is to limit the number of potential competing bidders by keeping out nonutilities. In other words, shareholders may not do as well because of restrictions on the bidders, but the deal happens anyway.
But, you may ask, why bother changing this obscure part of a law that all but energy people have forgotten? The answer is that times have changed, and customers, shareholders, and managements might benefit. Let's argue that three themes will dominate the industry: competition, restructuring, and internationalization. How does a lifting of the PUHCA ownership restriction (some states may have their own restrictions) fit in with those driving forces?
s Competition. Meeting competition from other utilities, nonutility firms, and the actions of customers might require expertise and resources the utility doesn't have. To maximize its chances for success, a utility may have to align the interests of those providing the competitive edge with those of ownership. (That's a complicated way of saying that I won't give you what you need to succeed unless I get a piece of the action.) Some help may come in the form of alliances, and part of the alliance deal often involves one firm's minority