Academic journal article Energy Law Journal

Puhca's Gone: What Is Next for Holding Companies?

Academic journal article Energy Law Journal

Puhca's Gone: What Is Next for Holding Companies?

Article excerpt

On February 8, 2006, the repeal of the Public Utility Holding Company Act of 1935 (PUHCA) became effective.1 PUHCA repeal comes seventy years after the statute was enacted and over a quarter century after the securities and Exchange Commission (sec), the agency charged with administering PUHCA, concluded that PUHCA had outlived its purpose and first recommended that it be repealed. The story of PUHCA is a reflection of the U.S. industrial revolution in the twentieth century, the growth of financial markets and the increased sophistication of regulatory agencies and institutions necessary to keep abreast of an increasingly complex industry. PUHCA's repeal is an acknowledgement that the modern electric and gas industry requires a newer, less heavy-handed regulatory approach. It also marks the beginning of a new era of holding company regulation. The Federal Energy Regulatory Commission (FERC), has been granted limited new authority over holding companies in the Public Utility Holding Company Act of 2005 and in amendments to section 203 of the Federal Power Act as part of the Energy Policy Act of 2005 (EPAct 2005). State regulators also generally have had jurisdiction over many kinds of transactions involving utilities and holding companies for some time but will no longer have the backstop of sec regulation to lean on. It remains to be seen whether PUHCA's demise will usher in a new era of consolidation for electric and gas utilities.

PUHCA was widely believed to have discouraged investment in electric and gas utility infrastructure by companies that could not restructure to satisfy PUHCA's prohibition on the ownership of diversified businesses. PUHCA also prohibited combinations of electric and gas utility companies that were not located in the same region, coordinated, and additionally for electric utilities, interconnected.2 These PUHCA restrictions, in combination with the FERC's competition policy that discourages electric utility combinations in the same market, have made it difficult to complete utility acquisitions. Principally because of PUHCA, the U.S. electric and gas utility industry has remained relatively fragmented for many decades.

PUHCA repeal means that electric and gas utility acquisitions face one fewer regulatory hurdle. Many more investors, including those that traditionally did not invest in the energy industry, can participate in utility ownership. This is a positive change that should lead to a more vibrant and resilient industry and better service at a lower cost. PUHCA repeal, however, also means that the FERC, state utility commissions, credit rating agencies and others must adjust to a new regulatory environment. The sec will no longer be regulating holding company systems and attempting to protect public utility company subsidiaries from the dangers of unsound capital structures, affiliate transactions abuses and misadventures in diversification.

Over the coming months utility regulators will evaluate whether the repeal of PUHCA has caused a regulatory gap and, if so, how to best address the gap. Should the FERC re-create PUHCA through rules based largely on its Federal Power Act and Natural Gas Act authority to protect the ratepayers of public utilities and natural gas companies? Should the FERC try "cooperative federalism" and work more closely with state public utility commissions through audits and policy development?3 Will the FERC's primary jurisdiction over public utilities and natural gas companies cause it to focus on building appropriate structural and financial protections around utility subsidiaries (i.e., ring-fencing), while leaving holding companies relatively unregulated? Finally, if the FERC's response is not seen to be effective, will state commissions move to adopt regulatory policies and promote the adoption of new laws to address perceived gaps created by PUHCA repeal?

The regulatory balance has shifted. Utility holding companies and investors are unencumbered and have new investment options. …

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