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Hold the Champagne?

There is much to celebrate in the Energy Policy Act of 2005, but what will federal regulators do?

Fortnightly Magazine - September 2005

publications that covered the enactment of the Public Utility Holding Company Act of 1935 (PUHCA), as well as its repeal. Over our 76-year history, we have published mountains of PUHCA repeal papers, and we're glad we won't be publishing any more of them.

Like many of you out there, I did not believe I would live to see the day PUHCA was repealed. It is, as far as I'm concerned, the most important component of the law, as the main mission of EPAct is to promote infrastructure investment. Particularly, as FERC Chairman Kelliher said recently, repeal brings "sorely needed new avenues of capital investment into the U.S. electricity sector, particularly for the transmission grid where investment has been lagging growth for years." He also noted that PUHCA had served to blunt electricity market entry by certain well-capitalized companies and industry sectors.

But regarding the all important question as to whether PUHCA repeal will lead to more mergers, many experts—even the FERC chairman—are not sure.

Kelliher says "time will tell" whether PUHCA repeal will lead to a wave of mergers. Certainly, there is a question as to how onerous FERC's review of books and records will be, and how it will differ from the Securities and Exchange Commission. For example, it has been said in the past by oil experts that PUHCA was a large barrier for consolidation between oil companies and utilities, because oil companies did not want to be regulated by FERC. According to law firm Chadbourne & Park, "PUHCA repeal does not mean an end to regulation. Utilities will be able to expand their operations without geographical restrictions, and private equity funds as well as other enterprises will have the opportunity to acquire utilities with fewer restrictions. However, this does not mean that companies are exempted from other regulatory constraints on utility ownership. Virtually every U.S. state regulatory commission has approval authority over acquisition of regulated utilities."

In fact, LeBoeuf, Lamb, Greene & MacRae wrote in early August that state commissions have imposed, and will continue to impose, obstacles to mergers and acquisitions- "particularly acquisitions by entities not already in the utility business, as can be see from the rejection of the TPG/Portland General and KKR/UniSource transactions," the report says.

Weighing in on whether PUHCA repeal will lead to more consolidation, the attorneys at LeBoeuf, Lamb, Greene & MacRae believe "there will not be an immediate significant increase in the number of mergers and acquisitions. First, of course, each transaction will still have to be judged by whether it makes business sense."

A Brand New Day

While the degree of future consolidation is still in question, the fact that the industry is now able to consolidate with industries outside the utilities space is one very refreshing aspect of the new energy law, many experts say. One of the critiques of the initial opening of competitive electricity markets was that the executives charged with designing or participating in wholesale (or retail) power markets had never been part of a competitive industry.

What might have happened had there been a law that