The sweeping regulatory reform implemented in Michigan over the past year is often couched as a response to the economic crisis. Decoupling rates from utility profits, the reasoning goes, will...
How to Build a Fence (and When)
A formal methodology for developing ring-fencing arrangements and setting conditions.
are fundamental, regardless of parent company risk. These include maintaining a separate utility board of directors and maintaining separate utility books and records. This level of ring-fencing would be appropriate in low-risk utility holding companies, as was the case for CEG in 1999. There are other ring-fencing measures that aren’t necessary in low and mid-risk situations, but might be necessary when a utility’s holding company is engaged in particularly risky activities, as was the case for CEG in 2008.
The ring-fencing measures listed in the Figure 3 matrix aren’t meant to be exhaustive. Nor is it recommended that public utility commissions blindly use this matrix without consideration of case specific circumstances. This matrix could be used in a fashion similar to how credit ratings agencies use their credit ratings matrices, which is to say it provides an objective starting point that public utility commissions can then modify based on the specific situation. By using objective criteria upon which to base ring-fencing decisions, regulators can drastically reduce the amount of time and effort that is spent in devising ring-fencing provisions. Employing more objective criteria will also benefit the utilities by decreasing the level of regulatory uncertainty regarding the imposition of ring-fencing measures.
The repeal of 1935 PUHCA has made it possible for utility holding companies to engage in highly diverse operations. It has also made the jobs of regulators more difficult by forcing them to evaluate complex affiliate issues. One of the primary concerns of public utility commissions is whether, and to what extent, public utilities should be shielded from the operations of their affiliates through the use of ring-fencing measures.
A framework providing clear and objective guidance when imposing ring-fencing conditions can greatly reduce the time and resources required for this analysis. The framework provided is subject to further refinement as an analytical tool for regulators. It has been developed as a broad version of the model so that regulators can begin to consider the use of ring-fencing conditions in a more systematic fashion, not only in merger proceedings, but in the context of the ongoing regulatory oversight function.
2. The term “regulators” in this article is primarily meant to include U.S. state public service commissions. However, the basic precepts that were used developing the framework are based on regulatory policy generally applicable to regulated utilities.
3. Lynn Hargis, “PUHCA for Dummies: An Electricity Blackout and Energy Bill Primer,” Public Citizen’s Critical Mass Energy and Environment Program, September 2003. http://www.citizen.org/documents/puhcafordummies.pdf