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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

a transition to broader, competitive markets. The transaction was reviewed and approved years ago by the Federal Energy Regulatory Commission (FERC), the SEC, and 11 states.

Then on May 3, an SEC law judge found that "AEP has failed to establish that the combined AEP/CSW system is confined in its operations to a single area or region," and concluded that "the combined AEP/CSW system does not constitute a single integrated public-utility system under the act."

Didn't someone in the federal government look at a map? The ALJ's finding of a proposed breach of regulatory principal or law five years after the fact involving two agencies of the federal government (the direct challenge of the SEC's findings, and by implication those of the FERC) raises serious questions about the system of checks and balances in this country. Members of these two agencies are nominated by the president and approved by Congress, and as such they have the highest level of accountability. The public, especially the investing public, should be able to have some faith in the staying power of their combined decisions.

Would AEP spend the money, time, and effort to acquire CSW if management was not compelled by a growing national sentiment for increased competition? Moreover, would CSW have accepted the offer if its management did not share the same view? At the time, there was a movement calling for an end to the historic land-locked monopolies and a broadening of the breadth and depth of the electricity markets. It was, therefore, reasonable for AEP to expect a contemporary interpretation of the four most restrictive PUHCA provisions:

1. Interconnection Requirement - The capability of physical interconnection;

    2. Coordination Requirement -The capability of operating as a single interconnected and coordinated system;

      3. Single Area or Region Requirement -Confinement to a single area or region; and

        4. Localization Requirement -The system must not be so large as to impair the advantage of local operating management, efficiencies and regulation.

          The FERC's rulemaking changes further support AEP's and CSW's position. For example, in December 1999, FERC issued Order No. 2000 , calling on transmission-rich utilities either to form or join a regional transmission organization (RTO) that in effect created "virtual transmission integration" systems. Creation of RTOs, as well as other structural and operating changes in place today, arguably could satisfy the troubling PUHCA requirements-infrastructure changes that were inconceivable in 1935.

          Conditional approval of the AEP/CSW merger by FERC clearly weaves prevailing energy policy into its written decision and addresses the anti-competitive (and speculative investment) points of law under the act, satisfying the public interest standard by:

          • Providing greater customer choice, which increases competition;
          • Lowering prices for consumers through more efficient markets; and
          • Increasing reliability for non-discriminatory transmission systems.

          Through the newly expanded market created by RTOs and flexible interpretation of the "contiguous" requirements, the AEP/CSW merger could defuse the anti-competitive issue and allow the SEC and FERC to permit the AEP/CSW merger.

          Are investors to believe that federal regulators are merely a rogue group shaping energy policy unchecked? FERC clearly was aware of the spirit of