The Securities and Exchange Commission's Division of Investment Management has proposed repeal of the Public Utility Holding Company Act of 1935 (PUHCA), with consumer safeguards preserved and...
Corporations will need FERC approval for a merger simply because they own paper assets that qualify as utility property.
In three companion orders issued April 30, 1997, the Federal Energy Regulatory Commission tried to stake out new jurisdictional turf. It attempted to expand its jurisdiction under section 203 of the Federal Power Act to cover "convergent" mergers and reorganizations involving electric utility holding companies and power marketers. Examination of the orders reveals a mighty effort by FERC to come to grips with the protean nature of what we mean by the term "public utility."
We used to know what a "public utility" was: a vertically integrated business, serving as the producer, transmitter and distributor of electricity within a defined geographic territory. This definition is not universally true any more. Now we have "quasi-utilities" that provide only one or two of these services. The open-access world also has produced "virtual utilities," marketers who trade in electricity without owning or controlling any of the physical facilities needed for production, transmission or distribution.
The three new rulings FERC issued were: Enova Corp. and Pacific Enterprises %n1%n; Morgan Stanley Capital Group Inc. %n2%n; and NorAm Energy Services Inc. %n3%n The cases are especially significant for some corporations that do not resemble traditional utilities. Such firms will find that the new rulings require them to obtain approval from the FERC for a merger, restructuring or any other reorganization if they own any "public utility" assets. This category of assets may include the contracts, books and records owned by a power marketer. It won't matter that a utility itself is not being merged or reorganized. Nor that the deal involves only a power marketer's "paper assets."
What is the FERC's purpose? As we shall see, the FERC fears that mergers will impede competition. However, the same transactions already have satisfied antitrust scrutiny under the Hart-Scott-Rodino Act. The Department of Justice and the Federal Trade Commission, the government's presumed experts in antitrust law, have given these companies the green light. Why should section 203 require yet another round of bureaucratic oversight?
This section of the Federal Power Act was enacted to curb the so-called "Power Trusts" (em pyramidal holding company structures. Perfected by Samuel Insull (once the private secretary of Thomas Edison), the holding companies were thought to be devices for diverting utility earnings to Wall Street bankers. To rein in these "Malefactors of Great Wealth," Congress gave wide authority to the Federal Power Commission (now the FERC) to approve or disapprove a public utility's sale, lease or other disposition of jurisdictional assets (i.e., anything except generating facilities) worth more than $50,000, as well as any merger or consolidation of jurisdictional assets with those of another public utility.
Given the nexus between section 203 and the perceived abuses of holding companies during the 1920s and 1930s, it is ironic that, during the past decade or so, FERC has labored mightily to decide whether to apply section 203 to deals involving holding companies. The climax of these efforts came in the April 30 orders.
Before 1987, the formation of