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Where Have All the Mergers Gone?

EPACT and the repeal of PUHCA have not affected the pace of utility acquisitions.

Fortnightly Magazine - June 2007

had outlived its usefulness. In a world without PUHCA, many of the chains restricting utilities from lowering their costs and undertaking dynamic change would be removed, and investment by non-traditional participants in the power sector would blossom.

In particular, the electric utility industry was starved for innovation, dynamism, and capital, as it was staid and conservative. Plus, PUHCA was the barrier putting the industry on a diet. Absent PUHCA, it was thought that pent-up capital would participate actively in acquisitions in the utility sector from such industries as: oil and gas companies; overseas (especially European) utilities; financial entities such as equity and hedge funds; and other infrastructure-intensive entities such as telecomm companies. As a result, the new owners would realize the efficiencies and economies mentioned above in a drive to seek higher returns.

On Aug. 8, 2005, the advocates of these positions achieved their goal when the president signed EPACT. The repeal of PUHCA was not complete, in recognition of the potential abuses of utility holding companies that the framers of PUHCA had memorialized. To balance the removal of most of PUHCA’s protection for consumers, EPACT inserted additional provisions allowing greater federal and state access to the books and records of utilities when M&A deals were proposed.

PUHCA focused on oversight by the Securities and Exchange Commission (SEC), while EPACT effectively eliminated the role of the SEC. In its place, it vested the Federal Energy Regulatory Commission (FERC) and the states with the primary responsibility to review proposed M&A deals and protect the public interest. It was expected to open the door to a wealth of utility M&A activity.

Fast forward to nearly two years since the passage of EPACT 05. In light of all the optimism and expectations surrounding utility M&A, it is appropriate to ask: Has the M&A activity that was expected actually occurred? Have the corresponding customer benefits and cash infusions that were anticipated from consolidation taken place? What does this mean for the future?

The answer as to whether M&A has risen in the past few years is a resounding no; in fact, it’s almost a deafening silence, as utility deals have not taken place in any meaningful amounts.

• Over the past two decades, utility M&A peaked between 1997 and 2002, when there were a total of 58 successful transactions—an average of almost 10 per year—and more were proposed that were not successful.

• Beginning in 2003, however, the pace of utility transactions dropped off dramatically, averaging only two per year from 2003 through 2005. This is the pre-EPACT lull that observers thought would be remedied by passage of the legislation.

• Since 2005 and the passage of EPACT, the pace of successful electric utility acquisitions has been at a similar pace, or two per year. In other words, no change.

Thus, EPACT and the removal of the PUHCA impediment does not seem to have affected the pace of utility acquisitions. While each individual deal is critical to its participants, and most have involved large entities, utility M&A since then across the nation has generated a collective