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After PUHCA Repeal: The State Response

Will the industry be able to meet capital investment and growth expectations?

Fortnightly Magazine - May 2006

The Energy Policy Act of 2005 gave states a new federally enforceable right to access holding company books and records, but concern remains that some of these initiatives may run counter to the goal of capital attraction.

On Aug. 1, 2005, one week before President Bush signed into law the Energy Policy Act of 2005 (EPACT), the New Jersey Board of Public Utilities initiated an investigation. Its purpose: to determine whether to adopt additional measures to protect ratepayers as a consequence of the imminent repeal of the Public Utility Holding Company Act of 1935 (PUHCA) that would be effectuated by the president’s signature. Later this year, the board may decide to adopt new measures limiting under what conditions a utility holding company would be permitted to acquire a New Jersey electric or gas utility.

Some of the options being weighed include limiting non-utility parent company investments to no more than 25 percent of aggregate asset value, and mandating a number of independent board seats at the utility company level. This is one example of how states are looking into expanding their reach into areas previously committed primarily to federal jurisdiction under the now repealed PUHCA.

At stake is the future of the electric utility industry, and whether it will be able to meet capital investment and growth expectations. Advocates calling for the repeal of PUHCA sought to remove various restraints limiting certain forms of utility ownership and structures that they believed had inhibiting effects on capital formation. Claims that PUHCA was unnecessary for ratepayer protection were premised in part on the argument that states were fully empowered to address the type of holding company abuses that originally had prompted enactment of the 70-year-old statute.

That some states now would review their own jurisdiction to serve in that capacity comes as no surprise. When it repealed PUHCA, Congress virtually invited them to take a fresh look at their own jurisdiction to regulate mergers and acquisitions, and to consider conditions they deem necessary for ratepayer protection. Among other things, EPACT gave states a new federally enforceable right to access holding company books and records, wherever located. 1 But utilities and certain sectors of the financial community are concerned that some of these initiatives may run counter to the goal of capital attraction intended by PUHCA repeal.

State Commission Concerns

The primary concerns of state commissions fall into the following categories:

  • Utility company cross-subsidization of affiliate company activities within a holding company structure sharing joint or common costs;
  • Diversification by the utility or ownership of diversified assets within the holding company that might place at risk the credit quality of the utility company;
  • Improper use of utility company assets or its revenue