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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
  • "BBB" credit rating today, despite financial recoveries in the past two decades;
  • Non-investment grade ratings for some utilities;
  • An industry that any fiduciary would not deem appropriate for "widows and orphans"; and
  • Five Chapter 11 filings between 2001 and 2003, one in 1988, and one in 1992 (excluding an out-of-court reorganization in 1992).

What is the outlook for electric utilities? It is difficult to envision fundamentals improving unless and until energy policy and law are fully synchronized. Deregulation has been encouraged since the early to mid-1990s, but for the most part, these initiatives occurred at the administrative level rather than at legislative level. For instance, by 2001, 25 states had adopted deregulation policies, while the remaining half of the United States had not-a 50/50 split. Is it any wonder Congress can't reach a consensus on PUHCA reform? In some instances state regulators requested clarifying legislation before embarking upon restructuring.

At the federal level, the absence of current energy legislation is best illustrated by the SEC's need to revisit the AEP/CSW merger application. Does strictly holding AEP to the criteria of PUHCA accurately reflect current energy policy? Over the long run, the capital markets cannot be expected to respond favorably to the discord between policy and law because it creates uncertainty and increases risk.

Energy Legislation 2005: Here We Go Again

In April 2005 the House passed H.R. 6, the Energy Policy Act of 2005, a comprehensive bill that would (among other things): (1) repeal PUHCA; (2) ensure open access to the interstate transmission grid for all generators; (3) reform The Public Utility Regulatory Policies Act (PURPA); (4) establish mandatory, enforceable reliability rules to reduce the risk of power outages; (5) promote the use of technology to meet the nation's energy future, such as authorizing funding for the Hydrogen Fuel Initiative; (6) increase the use of domestic clean coal and renewable fuels; and (7) renew the nuclear energy initiative with Price-Anderson Act liability insurance revisions, as well as clarify tax treatment of nuclear decommissioning costs.

But repeal was short lived. The Senate was quick to exclude PUHCA repeal from its version of the energy bill, holding the act or any modifications to it political hostage. The leverage engendered by the act has rendered it much too powerful to merely repeal without exacting concessions from special-interest groups. PUHCA's fate likely will rest in the hands of a conference committee, not based on the need for change but rather as a political chip in a high-stakes game where energy policy is seemingly of secondary importance.

Congress needs to face a painful economic reality: Consolidation is a natural economic consequence of deregulation. Companies merge to reduce operating expenses and become more competitive and efficient. As a result, they are able to offer customers lower rates.

When the market requires higher prices to induce supply, regulation cannot be reintroduced without destabilizing the entire industry. The recent failure of several new power companies reflects the difficulty of operating between the regulated and deregulated worlds.

A thoughtful modification of PUHCA may be the common-sense compromise that finally breaks the