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After PUHCA Repeal: The State Response
Will the industry be able to meet capital investment and growth expectations?
the potential proliferation of “mini-PUHCAs”: “They generally regard a Wisconsin-type statute as an artificial impediment that would keep utilities small and prevent them from realizing economies of scale.”
Cannell believes Wall Street understands that regulators don’t want the investment community to dictate to them. However, investors also want regulators to appreciate their view that multiple inefficiencies exist within the utility sector within the context of a more dynamic, globally competitive world. She adds: “They would prefer that companies be permitted to become more efficient and optimize their earning power through consolidation if necessary.”
Cannell disputes the notion that permitting utilities this discretion means that investors just want to get rich: “It is the job of investors to seek out value opportunities.”
But NARUC’s Gray doesn’t think that investors’ negative perception of states’ attitudes toward investment is necessarily accurate. He cites the Iowa preapproval process as demonstrating that some states welcome infrastructure investment. As for mergers, he notes: “The record shows that state commissions appear generally to have been receptive to most mergers and acquisitions and the benefits offered by these transactions.”
3. Prior Experiences Involving Troubled Utilities.
Although this last factor may play a more immediate role in fewer states, the prior problems of troubled utilities still could be viewed by a broader number of states as a barometer of “what to avoid” and prompt serious consideration of additional protections. In two states, New Jersey and Kansas, difficulties of jurisdictional utilities with failed diversification investments clearly are playing a role in influencing whether to adopt a new set of rules.
In New Jersey, proposed rules to limit actions of utility holding companies have been driven by the board’s most recent experience with Elizabethtown Gas Co., a division of a company (NUI Utilities) whose failed investments with its parent and mismanagement caused a downgrade in credit quality to below investment grade of the parent, the company, and the utility division. The board was moved to address what became an emergency. 20
The impact of this experience can be seen in the current New Jersey board proposal to limit non-utility holding company investments to 25 percent or less of combined asset value, and mandate a set number of independent seats on utility boards to ensure desired independence from the parent company. The latter limitation addresses the subject of corporate governance, a matter state utility commissions customarily do not regulate. Public Service Electric & Gas has challenged the board’s legal authority to propose this type of restriction.
The Kansas experience with two troubled utilities similarly has influenced events. There, two regulated utilities, Aquila Inc. and Westar Energy Inc., were situated as divisions within a parent company, and thus not separate subsidiaries. Although neither was placed into bankruptcy, both experienced financial distress owing to non-utility investments and activities.
Because neither company had been subject to the registered holding company requirements of PUHCA 1935, its repeal had no impact on pre-existing federal regulatory oversight. 21 Nonetheless, the impairment of credit experienced by these companies has prompted the Kansas Corporation Commission to consider adopting comprehensive ring-fencing rules for