It's a law that only a mother could love.
It's tough to write another word about repealing the Public Utility Holding Company Act (PUHCA), or the "35 Act," as it is also known, referring to its Depression-era origins. But like the Energizer bunny, this debate keeps on going and going.
It's almost 70 years later, and the issue has outlived several generations of utility executives, regulators, lawyers, bankers, academics, and a few magazine editors. Heck, it may outlive us all.
As far back as 1931-in our issue of Feb. 19-you can see the playing host to James C. Bonbright, the famed professor from Columbia University, as he sparred with the now-infamous president of Middle West Utilities Cos., Sam Insull, on the subject of holding companies in the utility industry.
But it's time that this long, storied debate comes to an end, as Congress in the coming weeks prepares to introduce PUHCA repeal as part of a national energy bill. Many of the old problems that PUHCA was designed to fix are no longer relevant today. And when supporters counter that PUHCA ought to survive into the 21st century, they fail to account for 20th century improvements in regulation that are already on the books.
Last fall, sources told me that a majority in Congress wanted PUHCA repeal, and disagreed only on how much added authority to give to FERC to regulate mergers as a . Those senators who opposed PUHCA repeal argued that PUHCA would have prevented the Enron collapse.
Yet the Securities and Exchange Commission (SEC) flatly has refuted this last-ditch assertion aimed at saving PUHCA. Sources at the SEC have advised me that the agency supported PUHCA repeal wholeheartedly:
"Repeal of the act would eliminate regulatory restrictions that prohibit utility holding companies from owning utilities in different parts of the country and that prevent non-utility businesses from acquiring regulated utilities," the SEC said.
"In particular, repeal of restriction of geographic scope and other businesses would remove the impediments … to capital flowing into the industry from sources outside."
Many financial experts say that had PUHCA been repealed earlier, utilities might have been able to develop more sizeable balance sheets to better withstand the economic downturn and credit risks, and might have diversified their risks, in general. Perhaps the SEC recognizes, like so many students of history, that greater consolidation would have benefited utilities as it did the U.S. banking industry.
Last year, Columbia University's Charles W. Calomiris, in an essay in the Cato Institute's magazine, described the consequences to banks from Depression-era deregulation:
Calomiris argues that geographic fragmentation and restrictions on banking activities tended to limit the diversification of loan risks: "Small, un-diversified banks tended to be riskier, leading to greater instability during economic downturns."
Many executives would argue that Calomiris has described the electric utility industry of today, not the banking industry of yesteryear.
Inside the Beltway: Some Raw Nerves
With its recent report on PUHCA, sporting the wishful subtitle, , the American Public Power Association seems to have touched a raw nerve in the boardrooms of investor-owned utilities. I heard more than one IOU executive describe public power as "those subsidy-sucking vampires" after the report was released. Other retorts are not fit to print. Suffice to say that tensions run high.
Thomas R. Kuhn, president of the Edison Electric Institute, takes shots at the APPA report. "We take strong exception to the suggestion that changes to PUHCA embodied in the Energy Policy Act of 1992 have led to consumer abuses," he says. "Nothing could be further from the truth."
Kuhn notes that electric companies remain captive to comprehensive federal and state economic regulation, as well as the same level of oversight by the SEC as every other publicly traded company. Plus, the passage last fall of the Sarbanes-Oxley law comprehensively reformed securities regulation of such companies.
Contrary to the APPA's claims, the financial and credit problems that have beset parts of the investor-owned electric sector have arisen because of the excess generating capacity and weakened demand-common features of cyclical, commodity businesses-and not because of the 1992 statute criticized by APPA, he says.
Kuhn also points out that APPA seemingly ignores the fact that the Bush administration favors replacing PUHCA with federal legislation granting greater access to utility books and records. You hear the same call for legislation from just about every other federal and state regulatory organization charged with protecting consumers, ratepayers, and investors (the SEC, FERC, and NARUC). Previous administrations took the same stance.
Kuhn accuses APPA of hypocrisy. "APPA is seeking heightened regulatory scrutiny of [IOUs] while studiously avoiding regulatory scrutiny of its own members," he says.
Insull vs. Bonbright: Time Erases Arguments of the Past
Bonbright's and Insull's arguments were shaped by their time. Those two titans never could have imagined the activist utility regulators of today.
Although Insull's company and business practices made a good case for PUHCA in the 1930s, most regulators believe the financial abuses committed by him would have easily been detected under today's scrutiny from state and federal regulators, without the need for PUHCA. Furthermore, many who point to Enron as a reason for PUHCA forget that several companies in other industries committed many of the abuses committed by Enron. Many feel that the passage of Sarbanes-Oxley is enough to fix the problem.
At the time, Insull argued that PUHCA would limit a utility's ability to reach greater economies of scale and thus find lower rates for consumers. Certainly, this case has been proven in the banking industry through its consolidation. Today's utility CEO understands that mergers can't solve everything, but many industry execs might well favor more consolidation.
Insull had argued that government should not regulate mergers or holding companies, since it is only the operating subsidiary that affects consumer welfare. But Bonbright saw three fallacies in that-fallacies that justified PUHCA-type oversight, in his view. First, consumers deserve "good" mergers that boost efficiency. Second, holding companies can overpay in takeovers, becoming overcapitalized. Third, holding companies tend to sign sweetheart deals with subsidiaries instead of bargaining for service contracts at arm's length.
So let's get real.
First, does PUHCA prevent "bad" mergers? Of course not. Did it make sense for Entergy to merge with FPL?
Second, I'll grant you that capitalization is important, but many execs today will tell you that credit rating agencies have done more to keep the industry's capital structure in line than PUHCA ever has. And third, Bonbright failed to anticipate that state utility commissions would adopt special rules governing contracts with affiliates. Everyone knows how the Virginia commission only recently stopped Dominion from moving its regulated generation over to its unregulated subsidiary and then establishing a supply contract with the regulated utility. We didn't need PUHCA for that.
If time heals all wounds, then it's high time to repeal PUHCA, a key weakness in a gravely wounded industry.
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