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Merger Menace: Holding Companies and Overcapitalization

Fortnightly Magazine - January 15 1996

of overcapitalization remains a prime area of abuse. The use of the holding company in the Arkla-Minnegasco merger also undermines the claims in the preamble to S. 1317 that "changes in regulation and in the industry itself, have called into question the continued relevance of the model of regulation established" by PUHCA. If the issue is the manipulation of utility securities by holding companies to effect overcapitalization of

underlying utility companies, rather than the "model of regulation," the Arkla-DEI-Minnegasco merger suggests that the unregulated holding company is still an agency capable of injury to public, consumer, and investor interests that requires special regulation. Neither the states nor federal agencies acting under other legislation find themselves in a position to act as even a first set of suspenders to prevent utility overcapitalization by unregulated holding companies.14

How then should Congress or the SEC respond to calls for a "re-deal" of PUHCA? In most respects, as the Arkla-Minnegasco merger shows, the event has already occurred. Any further reform would mark a "second re-deal" for public utility holding companies. Neither Congress nor the SEC is in any position to consider a "second re-deal" when they

remain totally ignorant of the consequences of the first. The most important thing Congress could do, therefore, would be to inform itself about the consequences of its policies over the past 25 to 30 years. PUHCA instructed the SEC to study the problems of public utility companies and to make recommendations to Congress from time to time about the type and size of companies that would be best integrated and best promote and harmonize the interests of the public, the investor, and the consumer. The SEC has never conducted such studies.

Before Congress takes any further steps, it must confirm any resurgence of those abuses so carefully delineated in PUHCA and prior studies. As long as either Congress or the SEC chooses to ignore facts that do not coincide with a predetermined view of policy, any further "re-deal" would come from the bottom of the deck. t

Jon Erik Kingstad is a former assistant chief counsel to the Wisconsin Public Service Commission and a former legal counsel to the Minnesota Public Utilities Commission. He is presently in private practice in the Minneapolis/St. Paul, MN, area, providing legal and consulting services to the independent and public power industries.

1 S. 1317.

2 See Douglas Hawes, "Whither PUHCA: Repeal or Re-Deal," Public Utilities Fortnightly, July 15, 1995, p. 34.

3 Ibid.

4 15 U.S.C. 79a(b)(1).

5 Report of National Power Policy Committee on Public Utility Holding Companies, S. Rep. No. 621, 74th Cong., 1st Sess. at 57-58.

6 DEI Proxy Statement dated Oct. 25, 1990.

7 In the Matter of Proposed Merger of Minnegasco, Inc. with and into Arkla, Inc., MPUC Docket No. G-008/PA-90-604, Nov. 27, 1990.

8 Id. citing Minn.Stat. 261B.50 (1990).

9 15 U.S.C. 79j(c)(2). Wisconsin's Environmental Decade, Inc. v. SEC, 882 F.2d 523, 528 (D.C.Cir.1989).

10 In the Matter of the Proposed Merger of Minnegasco, Inc. with and into Arkla, Inc., MPUC Docket No. G-008/PA-90-605, Nov. 27, 1990.