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PUHCA Debate - Again

The SEC denies approval of the AEP/CSW merger. What will that mean for industry consolidation?

Fortnightly Magazine - July 2005

What's wrong the Public Utility Holding Company Act of 1935 (PUHCA)? Perhaps the date! On May 3, 2005, a Securities and Exchange (SEC) administrative law judge (ALJ) handed down a ruling that denied the application of American Electric Power Co. (AEP) seeking approval of its acquisition of Central and South West Corp. The ALJ concluded that AEP did not satisfy the requirements pursuant to Section 10 of PUHCA. Simply put: the merged AEP/CSW "does not constitute a 'single integrated public-utility system'" under the Act, according to the ruling.

Beyond the implications for any single company, the ALJ's decision illustrates the polarization between energy policy and legislation (namely, PUHCA). As such, in order to underwrite the nation's energy future, investors need some reassurance that the industry is operating under contemporary economic, social, and technological advances, rather than under depression-era rules.

The 1935 act clearly did not contemplate a competitive marketplace for electricity. Quite the contrary. Now the SEC judge's opinion has resurrected PUHCA as an investor concern by creating uncertainty over a merger that closed five years ago.

Legislation should be updated to reflect the prevailing energy economic climate. Both the Senate and the House claim to be on the same page when it comes to energy reform. However insofar as PUHCA is concerned, they are not reading the same book. Debate over PUHCA has been underway for decades. It seems as though there hasn't been a year in the energy industry's history in which the controversial Depression-era law restricting mergers and acquisitions has not either been up for revision or slated to be removed from the books altogether.

In fact, confidence was so high that PUHCA would be repealed in 1992 (attendant to the 1992 National Energy Policy Act) that an entire section of DOE's Annual Outlook Report for 1993  for 1993 was devoted to consolidation resulting from the inevitable repeal. This was not the first time the industry had been down this path. In the 1970s, a veteran utility analyst said PUHCA was obsolete and likely to be abolished. Hard to believe that nearly 30 years later, the law has not been changed-although energy prices, policies, technology, and the overall utility risk profile have changed drastically.

A conflict between provisions of the act and current energy policy now has become embedded in the system, and investors cannot be expected to respond favorably. Either the law has to change or the movement to competitive markets has to be abandoned. An ongoing schizophrenic situation will cause the capital markets (both debt and equity) to exact an increasing risk premium, thereby undermining the desired price savings arising from competition.

When Policy and Law Collide: Who Wins?

The AEP/CSW merger is noteworthy not only for the intense regulatory scrutiny, but in how it represents