One simple line in the recent Energy Policy Act sets the stage for broader geographical ownership by current utilities and easier ownership from outside industries.
Readers know very well that one line calls for the repeal of the depression-era Public Utility Holding Company Act, more commonly referred to as PUHCA. With PUHCA repeal, a major feature of the recent act, many pundits have stated that a wave of mergers and acquisition activity is now imminent.
The last 12 months have seen four major utility deals announced (see Table 1). All four have had similar pricing ratios, with multiples of 8x-11x recurring earnings before interest, taxes, depreciation, and amortization and 1.5x-2.1x book values. If we truly see a group of energy acquirers step off the sidelines and a wave of new markets entrants, logic would seem to indicate that pricing ratios will rise in the face of more competitive bidding situations.
Critics of PUHCA repeal have warned that energy companies will squander capital and put reliability at risk in the quest for higher growth. Other critics warn that financial players will leverage up holding companies and put their financial health at risk. Critics also point to Enron and capital squandered in the gas-fired merchant power buildout of recent years.