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Transmission Asset Sales: Running the Regulatory Gauntlet

There are many considerations and obstacles to overcome before transmission assets can be bought or sold.
Fortnightly Magazine - May 15 2003

typically wish to avoid PUHCA entanglement, and they usually can do so by limiting control over the operating company to the minimum necessary to protect their interests as investors. 10

In General Electric Capital Corp., SEC No-Action Letter (April 26, 2002), the SEC concluded that GE's significant financial involvement in Michigan Electric Transmission Co. LLP (METC) would not result in GE being a holding company or an affiliate under the PUHCA. METC was formed to own all of the transmission assets then owned by Consumers Energy, the nation's fifth largest electric company. METC's general partner is Trans-Elect, an entity owned and controlled by a number of executives with extensive and distinguished electric utility backgrounds. GE is a preferred limited partner and provided virtually all of the equity capital of partnership. Another GE subsidiary was expected to own 25 percent of Series C preferred equity issued by Trans-Elect, which equated to 12.5 percent of that entity's total equity.

The SEC provides a detailed summary of GE's rights as a limited partner. Key findings include: (1) independence and experience of the owner-executive group of Trans-Elect; (2) management of the partnership is clearly vested in the general partner; (3) rights reserved to GE as limited partner are limited to those necessary to protect the limited partnership investment and do not go to day-to-day management of the partnership; and (4) the high standard that must be met before the general partner can be terminated and replaced.

The SEC also discussed GE's rights as a 25 percent holder of Series C preferred stock in the general partner. The Series C holders' voting rights are limited to a modest number of extraordinary items, namely: amendment of the general partner's articles of incorporation; mergers or substantial asset sales or purchases; stock redemptions; dilutive stock issuances; benefit or option plan amendments; and agreements with officers.

Moreover, GE has no veto power over these items since they are subject to simple majority vote of the preferred stock and GE holds only 25 percent of that stock. Finally, the SEC letter emphasized that the general partner's experience, economic stake, independence, and financial incentives militate against any finding of control by GE. Overall, the SEC has provided a clear road map for those who want to take a significant economic stake in an ITC without subjecting themselves to PUHCA.

While the SEC's no-action letter may facilitate planning by ITCs and their investors, public utilities must evaluate PUHCA-related issues in deciding whether to divest their transmission assets. Specifically, a utility that is considering a mergers and acquisitions strategy should determine whether a sale of its transmission assets would impair its ability to form a single integrated public-utility system with potential merger or acquisition candidates. 11

On a more long-term basis, if PUHCA is repealed, investors, transmission companies, and utilities would have even greater flexibility in structuring these transactions. Ultimately, repeal of PUHCA could enhance the ability of independent transmission firms to attract and retain capital.

Utility Planning for a Potential Divestiture: The Devil in the Details

The substantial planning or evaluation for a potential