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Frontlines

It's a law that only a mother could love.
Fortnightly Magazine - March 15 2003

I heard more than one IOU executive describe public power as "those subsidy-sucking vampires" after the report was released. Other retorts are not fit to print. Suffice to say that tensions run high.

Thomas R. Kuhn, president of the Edison Electric Institute, takes shots at the APPA report. "We take strong exception to the suggestion that changes to PUHCA embodied in the Energy Policy Act of 1992 have led to consumer abuses," he says. "Nothing could be further from the truth."

Kuhn notes that electric companies remain captive to comprehensive federal and state economic regulation, as well as the same level of oversight by the SEC as every other publicly traded company. Plus, the passage last fall of the Sarbanes-Oxley law comprehensively reformed securities regulation of such companies.

Contrary to the APPA's claims, the financial and credit problems that have beset parts of the investor-owned electric sector have arisen because of the excess generating capacity and weakened demand-common features of cyclical, commodity businesses-and not because of the 1992 statute criticized by APPA, he says.

Kuhn also points out that APPA seemingly ignores the fact that the Bush administration favors replacing PUHCA with federal legislation granting greater access to utility books and records. You hear the same call for legislation from just about every other federal and state regulatory organization charged with protecting consumers, ratepayers, and investors (the SEC, FERC, and NARUC). Previous administrations took the same stance.

Kuhn accuses APPA of hypocrisy. "APPA is seeking heightened regulatory scrutiny of [IOUs] while studiously avoiding regulatory scrutiny of its own members," he says.

Insull vs. Bonbright: Time Erases Arguments of the Past

Bonbright's and Insull's arguments were shaped by their time. Those two titans never could have imagined the activist utility regulators of today.

Although Insull's company and business practices made a good case for PUHCA in the 1930s, most regulators believe the financial abuses committed by him would have easily been detected under today's scrutiny from state and federal regulators, without the need for PUHCA. Furthermore, many who point to Enron as a reason for PUHCA forget that several companies in other industries committed many of the abuses committed by Enron. Many feel that the passage of Sarbanes-Oxley is enough to fix the problem.

At the time, Insull argued that PUHCA would limit a utility's ability to reach greater economies of scale and thus find lower rates for consumers. Certainly, this case has been proven in the banking industry through its consolidation. Today's utility CEO understands that mergers can't solve everything, but many industry execs might well favor more consolidation.

Insull had argued that government should not regulate mergers or holding companies, since it is only the operating subsidiary that affects consumer welfare. But Bonbright saw three fallacies in that-fallacies that justified PUHCA-type oversight, in his view. First, consumers deserve "good" mergers that boost efficiency. Second, holding companies can overpay in takeovers, becoming overcapitalized. Third, holding companies tend to sign sweetheart deals with subsidiaries instead of bargaining for service contracts at arm's length.

So let's get real.

First, does PUHCA prevent "bad" mergers?