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Life After PUHCA

N.J. BPU enacts new rules to insulate utilities from holding companies.

Fortnightly Magazine - July 2009

parent and utility. The NJBPU quickly had to shepherd the utility through a merger process with a stronger company to avoid a messy bankruptcy proceeding. The NJBPU’s experience with, and the expertise gained from, that crisis shaped our thinking as we drafted our recently enacted PUHCA rules.

New Jersey PUHCA Rules

While referring to PUHCA in the colloquially named rules is somewhat misleading since the rules apply equally to both traditionally “registered” and “exempt” utility holding companies under PUHCA 1935 , and because various proscriptions in the new rules never were addressed by PUHCA 1935 , the use of the word PUHCA connotes their fundamental purpose: Ensuring no harm from a regulated utility’s membership in a utility holding company. PUHCA 1935 was enacted primarily to prevent utility holding companies from using a regulated utility as a cash cow in order to fund other, riskier subsidiaries in the holding company family. Our rules further the NJBPU’s primary purpose to prevent such activities and ensure that New Jersey utilities provide the most reliable service possible.

New Jersey’s PUHCA rules have been carefully crafted with structural and operational requirements, self-executing mechanisms, and other regulatory techniques that could benefit any state utility commission with limited staff resources. Independence requirements for utility board members, for example, empower the utility to look after its own interests vis á vis its utility holding company without regulatory staff intervention. The use of attestations by senior management likewise motivates them to be very diligent in ensuring compliance, a technique that was widely used in the Sarbanes-Oxley Act to great effect. The diversification limitation uses annual attestations by the chief executive officer of both the utility holding company and utility that the utility holding company’s investments in nonutility businesses don’t contravene the 25-percent numerical cap. These self-compliance provisions are backed by strict enforcement tools, such as regular audits and the potential for criminal prosecution, in order to ensure the NJBPU of their accuracy.

Structural Regulations

New Jersey’s PUHCA rules include a number of structural requirements, the most significant being qualification requirements for membership on a utility board of directors and line-of-business restrictions. The board qualification requirements, effective in April 2009, codify longstanding NJBPU policy, which historically was used on a company-by-company basis. The new rules require at least 40 percent of a utility’s board of directors be independent and have significant ties to New Jersey. This requirement helps to ensure the utility has an appropriate degree of autonomy and a New Jersey perspective vis á vis the utility holding company. To ensure a smooth transition, a grandfather provision allows existing directors to finish out their terms before the qualifications requirements are triggered. Once a director is reappointed or a term is extended, the director is no longer grandfathered and, therefore, the board must be recalibrated to ensure compliance with numerical requirements.

Line-of-business restrictions also have been used in the past by the NJBPU for certain companies, but the new rules apply universally to all New Jersey electric and gas utilities. The rules, which went into effect in 2006, prevent a holding company