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Business & Money

Is the industry on the verge of a new consolidation wave? Should it be?
Fortnightly Magazine - September 15 2003

Business & Money

Is the industry on the verge of a new consolidation wave? Should it be?


The question of whether this is the year for repeal of the Public Utility Holding Company Act (PUHCA), or the "35 Act," as it is also known, is now an age-old one for industry participants. Although those supporting repeal may again experience disappointment, as a result of the 2003 Northeast blackout or otherwise, circumstances suggest that repeal is more likely than it has ever been. PUHCA was originally enacted in 1935 and served a public policy purpose for some time thereafter. However, the enactment of various laws directed at the utility and power industry, together with the general applicability of other bodies of law to industry participants, have eviscerated the original public policy purpose of PUHCA. Congress has recently acknowledged as much with both the House of Representatives and the Senate adopting legislation to repeal PUHCA. The Securities and Exchange Commission, the regulatory body that administrates PUHCA, has also taken the same position, from time to time, recommending repeal.

Although PUHCA has been flexibly interpreted in recent years, its existence, even in its flexible state, has some effect on transaction activity, especially for "out-of-industry" entities, and following the court challenge to the SEC's decision under PUHCA relating to the AEP/CSW merger. Accordingly, PUHCA repeal should enhance the probability of certain transactions occurring and of certain entities participating in transactions; yet, industry consolidation activity should not materially change as a result of repeal. As discussed below, PUHCA repeal should have certain specific consequences on consolidation activity.

First, state regulators and perhaps federal regulators might in the short-term scrutinize more carefully the activities of regulated utilities, including the area of consolidation. This additional scrutiny would come from those regulators concerned that a regulatory gap has been created by PUHCA repeal when, in fact, after considering the rules and regulations still applicable and the actual substance of PUHCA in today's world, it would be extremely difficult to credibly identify any such regulatory gap.

If PUHCA repeal occurs, financial buyers and entities such as Berkshire Hathaway and GE Capital would find that the primary regulatory impediments to conventional acquisition structures in respect of regulated utilities had been eliminated. In addition, non-U.S. companies with U.S. regulated businesses would find it easier to consummate follow-on transactions in the United States. (It is important to note that PUHCA is not really a fundamental impediment to these companies right now.) In particular, the requirement under PUHCA that a follow-on utility acquisition be interconnected with the existing owned utility would no longer be applicable. Other non-U.S. companies, while perhaps not currently interested in the United States, would also be able to pursue acquisitions here, without concern about participation in non-utility businesses, ownership structure, or other PUHCA restrictions. U.S.-regulated utilities, such as Duke Energy, which have preferred not to be regulated under PUHCA, or which have a particular problem under PUHCA in respect of potential transactions as a result of their location (e.g., TXU) or otherwise would be free from such concerns.

Strategically appealing,