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After PUHCA Repeal: The State Response

Will the industry be able to meet capital investment and growth expectations?

Fortnightly Magazine - May 2006

that of debt; and (2) result in the utility subsidizing its parent or affiliates by bolstering the latter two’s credit ratings.

Ultimately, the Maryland staff concluded that it was “practically impossible to determine in advance which measures are necessary or appropriate,” citing the PGE case to demonstrate that even when an appropriate measure is adopted, there are costs to customers. Accordingly, it recommended that the commission avoid adopting generic ring-fencing requirements and instead require the filing of an annual ring-fencing report from jurisdictional utilities, enabling the commission to focus separately on each utility and specific remedy if needed. 15 The commission recently adopted this recommendation and voted to require the filing of this annual report. 16

While the Maryland commission’s decision may represent a modest application of ring-fencing controls, the Wisconsin Utilities Holding Company Act (WUHCA) represents a much more activist approach. 17 Popularly termed a “mini-PUHCA,” this statute (enacted in mid-1980) also has been cited as a potential reference tool for states contemplating next steps.

Among other things, WUHCA capped non-utility investments at 25 percent of the total assets of the utility; required Wisconsin utility holding companies to incorporate in Wisconsin; and required the Public Service Commission of Wisconsin to approve the acquisition of 10 percent or more of the utility holding companies’ voting shares. Following a constitutional challenge by investor-owned utilities, a federal appellate court struck down as unconstitutional the incorporation requirement, but upheld the asset cap. 18

The prospect of other states emulating the Wisconsin model sends shudders through the ranks of investor-owned utilities. While EEI’s Owens acknowledges the potential merits of ring-fencing between the utility and its parent to protect ratepayer interests, he strongly disfavors efforts to prescribe the type of parent company asset limitations exemplified by WUHCA as they would undo the very limitations Congress intended to remove when it repealed PUHCA 1935.

Owens adds, “By repealing PUHCA, Congress intended to confer on parent companies the flexibility to invest in core-related and non-core activities that enhance the overall value of utility service. Congress also wanted to remove barriers to new investment in the utility industry. The Wisconsin statute is not one that lends itself to the diversity of capital that would be beneficial to the sector.”

His sentiment is shared by a cross section of the investment community. A recent survey of 30 investment professionals taken by J.M. Cannell Inc., an electric utility advisory firm, showed that their opinions toward state commission ring fencing ran positive to neutral, while the prospect of multiple “mini-PUHCAs” drew a decidedly negative reaction from almost half of the respondents. 19

Julie M. Cannell, president of the firm, says that the survey shows that investors accept or acknowledge that utility commissions should have oversight over mergers and acquisitions, with the burden on utilities to show that their actions are in the public interest. “But they don’t want regulation to stand in the way of transactions that add value.”

According to Cannell, the respondents found financial and public policy merit to ring-fencing as it was adopted in Oregon, but had significant questions with