The utility’s role is changing, and regulation must change along with it – to spur innovation and respond to evolving customer needs. Modernizing the industry will require a dynamic approach.
After PUHCA Repeal: The State Response
Will the industry be able to meet capital investment and growth expectations?
industry certainly hopes this is the case. “The electric utility industry needs new infrastructure, but PUHCA of 1935 restricted the sector’s access to additional capital, and prohibited certain kinds of investors,” says David Owens, executive vice president for the Edison Electric Institute (EEI). These restrictions are removed by the replacement with PUHCA 2005, but Owens says ratepayer interests still are held in high priority through the transparency offered by FERC and state access to holding company books and records. Nonetheless, Owens sees this as a work in progress: “Because some states may conclude that additional measures might be needed to protect ratepayers, we need to work with them so their concerns are addressed.”
If or when a state chooses to adopt additional ratepayer protection measures, three factors strongly could influence this decision.
1. Scope and Breadth of Existing Oversight Authority.
Even prior to repeal of PUHCA 1935, many states held varying degrees of oversight authority by statute or conditions imposed in rate or merger and acquisition proceedings. A mid-1990s survey of state commissions by NARUC found that all but three state commissions at that time (Florida, Michigan, and Montana) held authority to approve mergers and acquisitions, and thereby the authority to condition these transactions. 8 In addition, nearly all states hold authority over affiliate transactions and cost allocations. 9
Prior cases have shown that when a state commission exercises its ratemaking authority, its power is at its zenith. In a February 2004 survey of the rate and merger approval authority of state public utility commissions, Fitch Ratings concluded that the broad statutory mandates to uphold the public interest and ensure reliable service at just and reasonable rates have empowered commissions to exercise authority not directly spelled out under their statutes. Even when such authority is challenged by the utility, most likely such cases have been resolved in a consensual outcome rather than litigated to a conclusion. 10 Fitch Ratings similarly found that the exercise of merger approval authority by state commissions had given them indirect authority to order holding-company formation as a condition to securing approval for the transaction. 11
The leveraging of this existing authority highlights the fact that commissions will need to examine whether to rely solely on this practice, or whether to go one step further by adopting the type of ex ante structural requirements such as those recommended by some state commissions to FERC in its final PUHCA rule.
At least one leading state commissioner regards reliance on ratemaking authority as inadequate. “Rate cases are reactive,” says Jeanne Fox, president of the New Jersey Board of Public Utilities. According to Fox, commissions now are called upon to address issues in a dynamic, competitive capital market where ownership, control, and management of a utility system could be situated at points far distant from one’s state where services are provided. “This new kind of competitive market calls for a new kind of regulation.”
Whether to impose structural conditions now or when a case arrives at one’s doorstep involves a delicate balancing act with profound strategic significance. If a state commission