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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

benefit of an associate company (or to allow an applicant to show how such activities are consistent with the public interest). 5

In its final rule effectuating PUHCA 2005, FERC chose a cautious, incremental path. NARUC and other commentaters urged it to promulgate specific requirements mandating the blanket filing of agreements allocating costs of non-power goods and services purchased by jurisdictional utilities from affiliated companies, or to impose additional rules regarding cross subsidization, encumbrances of utility assets, or diversification into non-utility businesses. Instead, FERC opted to rely on the case-by-case exercise of its ratemaking authority under the Federal Power Act and Natural Gas Act and of its enhanced merger review authority. It deferred adoption of a more prescriptive approach until it had an opportunity to convene a subsequent technical conference in a year, based on lessons learned.

A glance at comments filed separately by various state commissions during the pendency of the final rule indicates that some would have preferred that FERC do more. For example, two state commissions (Missouri and Arkansas) asked FERC not to rely on ratemaking authority but rather to mandate structural safeguards to limit ratepayer exposure to holding company diversification. Specifically, they sought continuation of the SEC’s ”functionally related” approach of limiting the quantity and types of non-utility businesses with which a utility may be affiliated, as well as prohibitions on a utility entity engaged in non-utility businesses, and structural separation of utility and non-utility assets.

Yet neither NARUC nor any of these state commissions felt so strongly about these matters to raise them on rehearing of FERC’s final rule. Recognizing that FERC preferred to exercise its new authority on case-by-case basis, Ervin did not challenge that approach, observing that “NARUC concluded that FERC did not do anything that justified further litigation.”

Charles Gray, NARUC’s executive director and a 20-year veteran of the PUHCA repeal debate, says the unusual degree of cooperation between FERC and the state commissions on this, as well as other new requirements called for by EPACT is another reason for not pursuing rehearing. In Gray’s opinion, “The states believe that FERC has been very engaged with them in addressing implementation of all of its new rules. There is a strong sense that if there are problems down the road, we are comfortable we can raise them at that time.”

A Range of Options for States

A “savings clause” of PUHCA 2005 expressly disclaims any intent to preclude a state commission “from exercising its jurisdiction under otherwise applicable law to protect utility customers.” 6 Given the preservation of this authority, states have a number of options on how to proceed. 7 For some, arriving at a decision may be premised on addressing prior abuses. However, for others, giving necessary weight to a set of variables will make resolution a more difficult process. Although a strong regulatory impulse may influence a command-and-control outcome, at this time there is no clear indication that most states will not attempt to balance protecting ratepayers from unacceptable risks and attracting needed capital into the electric sector.

The investor-owned electric utility