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Merger Menace: Holding Companies and Overcapitalization

Fortnightly Magazine - January 15 1996

public interest. By contrast, the PUHCA standard would have required the proponents of the merger to establish affirmatively that the merger would "serve the public interest by tending towards the economic and efficient development of an integrated public utility system."9 While DEI, Arkla, and Minnegasco conceded that the proposed merger could not meet that standard, they had entered into a stipulation with various parties, such as the Minnesota Attorney General's Office, which guaranteed, among other things, access to Arkla's books and records.

On November 9, 1990, the commissioners voted 2 to 1 to disapprove the merger. But within hours, after word of the vote reached Wall Street, the commissioners came under heavy political pressure to reconsider their vote. Confronted by some of the leading investment banking and law firms on Wall Street, as well as leading businessmen, attorneys, and politicians from Minnesota and Arkansas, the commissioners reconsidered and voted 4 to 1 to approve the merger. While they were advised that they could formally request an investigation by the SEC, the commissioners declined that course of action. Although the MPUC was unable to find the merger contrary to the public interest, it did note that its finding did not imply that the merger would produce any benefits to ratepayers or shareholders.10

Thus sanctioned, the merger produced big winners and big losers. The big winners: the investment bankers and DEI. Morgan Stanley received $1.3 million; First Boston received $3.7 million; Lehman Brothers received $600,000. The legal fees incurred were not disclosed. DEI, which was dissolved in the merger, received a fee of $4.75 million,11 which was distributed among the seven DEI executives whose positions were dissolved along with the holding company.12

The shareholders and ratepayers emerged as the big losers in the merger. DEI share values dropped from $29.60 per share to $6 to $8 per share. Likewise, the price of Arkla's stocks sank from a premerger high of $23.75 per share to below $8 per share, where it remains today as NorAm Energy. Ratepayers fared no better. After over 10 years without a rate increase, Arkla's Minnegasco division has sought and obtained several rate increases since the merger.

To be sure, the MPUC imposed a condition: The "writeup" denominated as an "acquisition adjustment" could not be recovered in rates from Minnesota ratepayers. But we know from experience with escalator and "take-or-pay" provisions in gas

producer-pipeline contracts that such orders are meaningless when enforcement threatens to impair service. One premise of PUHCA holds that state rate regulation will prove ineffective against the power of a utility company to seek and obtain revenue increases to improve earnings for an overcapitalized balance sheet. Consistent with that premise, the MPUC's condition has failed to prevent Arkla from increasing retail rates in either Minnesota, where the MPUC has jurisdiction, or in Arkansas, Texas, Kansas, Louisiana, Oklahoma, or at the FERC, where it does not.

A Second Re-Deal?

Congress characterized the holding company in 1935 as "an agency which, unless regulated, is injurious to investors, consumers and the general public."13 The Arkla-Minnegasco merger proves that the old-fashioned problem