The marriage between Exelon and PSEG would create the largest electric utility in the United States. The policy implications could loom even larger, however. Standing at risk is nothing less than...
Ring Fencing In Utah
Regulatory structures protect ratepayers in geography-spanning utility mergers.
electric utility and its corporate restructuring activities. For example, the entity’s selected corporate structure, such as a parent holding company or a wholly-owned utility subsidiary, affects the needs and interests of utility management, shareholders, bondholders, utility customers, and regulators. Additionally, relatively complex corporate restructuring activities and policies have implications for regulatory authority.
Ring-Fencing PacifiCorp and MidAmerican
In May 2005, PacifiCorp announced it was being sold to MidAmerican Energy Holdings Co. (MEHC). ScottishPower had purchased PacifiCorp in 1999 when interest in deregulating electric utilities was near its peak. Subsequent events, such as the California energy crisis in 2000 and 2001, convinced Scottish Power that its expectations for PacifiCorp probably never would be fully met, and so it decided to sell the company. In 1999 regulators had required a number of ring-fencing- related structures be put in place as a condition for approval of PacifiCorp’s acquisition (See sidebar, “PacifiCorp Ring-Fence Structures”) .3
In its acquisition, MEHC adopted or otherwise agreed to continue and extend these conditions. For example, MEHC committed to give regulators access to all documents related to affiliate transactions with PacifiCorp; this commitment even was extended to Berkshire Hathaway, MEHC’s ultimate parent, with Berkshire’s approval. Additionally, customer service guarantees and performance standards were extended to at least 2011. Several specific customer service guarantees and performance standards negotiated in Utah for the Scottish Power purchase expired five years after the closing of that transaction.
Additional relevant commitments were offered by MEHC or were negotiated by the Utah parties. 4 So far, there have been few actual tests of the ring-fencing structures put in place. However, PacifiCorp has continued to maintain its own separate debt and preferred stock. The company has conducted several debt financings or restructurings in its own name and independently of MEHC debt. MEHC has made equity capital contributions to PacifiCorp totaling several hundred million dollars that have helped keep PacifiCorp’s debt-to-equity ratios stable as PacifiCorp has borrowed heavily to fund its capital expenditure programs.
So far, credit rating agencies have seemed satisfied with PacifiCorp’s activities since PacifiCorp has maintained its A- rating on its secured debt. However, the rating agencies continue to note that on a stand-alone basis, PacifiCorp would merit a lower debt rating of, perhaps, BBB. The financial support from MEHC and standby support from Berkshire Hathaway are seen as significant support for PacifiCorp’s financial situation.
PacifiCorp or MEHC have delivered on the commitments promised as part of the acquisition to the extent the commitments required certain actions within specified time frames. However, PacifiCorp’s performance has not always been satisfactory in the opinion of some parties. For example, advocates for low-income rate payers were dissatisfied with PacifiCorp based on the arrearage economic study produced under an acquisition commitment.
Utah regulators have not yet tested the availability and cooperation of MEHC or Berkshire Hathaway regarding the audit or other examination of their books and records with respect to any issues related to PacifiCorp. Further, there have not been events that would trigger other ring-fencing structures such as major acquisitions or divestitures. Fortunately, of course, regulators have not been faced