Image provided by: University of Oregon Libraries; Eugene, OR
About Northwest labor press. (Portland , Ore.) 1987-current | View Entire Issue (March 3, 2006)
...Storm Warning: Merger madness in utilities (From Page 1) companies do their job. But imagine a different approach to electric service: Your utility is no longer located in your home state, it’s headquartered in Texas — or Tokyo. Your utility’s fi- nances are no longer made secure by a guaranteed rate of return on investment, but are controlled instead by global oil companies or venture capitalists. When your rates go up or your service takes a dive, your state legislator calls up the head of the utility — but no one’s an- swering the phone in Texas or Tokyo. Welcome to a world without PUHCA. It’s a world we’ve seen before, ac- cording to Lynn Hargis, a lawyer who spent 10 years at the Federal Energy Regulatory Commission and another 17 years helping companies comply with PUHCA. “The last time there was no PUHCA we had a Great Depression,” Hargis wrote in her 2003 monograph PUHCA for Dummies. “PUHCA was enacted because huge holding companies were using secure utility revenues to finance and guarantee other, riskier business ventures around the world.” In the seven years following the great stock market crash of 1929, 53 utility holding compa- nies went bankrupt and 23 others de- faulted on interest payments. Holding companies didn’t collapse because electricity was no longer prof- itable. They collapsed, Hargis says, be- cause they had looted their utility sub- sidiaries to finance non-utility invest- ments And their collapse deepened and prolonged the Great Depression. The Public Utility Holding Company Act of 1935 was championed by Presi- dent Franklin D. Roosevelt to prevent a resurrection of these enormous utility conglomerates and the havoc they wrought on the U.S. economy. Hargis explains how this historic law worked: • PUHCA made it possible for states to regulate utility holding companies by limiting the types of business they could engage in, and also by limiting their ge- ographic size. •PUHCA, by controlling holding company dividends, loans and guaran- tees based on the utility subsidiary, made it harder for holding companies to loot their utility subsidiaries . • PUHCA regulated self-dealing among the holding companies’ various affiliates. • PUHCA imposed controls over utility acquisitions of other utilities or other businesses. And PUHCA worked. For seven decades, electric service was assured by utilities whose profits were closely reg- ulated, whose shareholders were pro- tected, and whose obligation to serve was written into law. No speculators need apply. Not everyone liked PUHCA. Gas and electric service generate a lot of money, and PUHCA severely limited the ability of private investors to get their hands on it. Federal energy bills in 1978 and 1992 modified PUHCA, creating opportunities for nonutility investments in the electric industry. The stage was set for Enron to champion “competitive markets” in the 1990s and for investors like billionaire Warren Buffet to push for outright repeal of PUHCA in recent years. Utility holding companies haven’t waited for PUHCA’s repeal to start test- ing their ability to siphon money out of their regulated subsidiaries. State regulators in Kansas found that Westar Energy of Topeka had quietly shifted more than $1.95 billion of debt onto the utility side of the business through intercompany loans and other means, according to a Wall Street Jour- nal report in December 2002. John Wine, then chairman of the Kansas Cor- poration Commission, told the Journal that utility holding companies “can go pretty far down the road of commingling utility assets before it gets detected,” and expressed concern about the impact on service and rates. In 2001, Duke Energy transferred as much as $124 million in expenses from its unregulated divisions to the books of Duke’s utilities. E-mail messages showed a protracted campaign by Duke accountants to shift expenses onto the utilities, according to the audit. Regula- tors might never have noticed if they hadn’t received an inside tip. Michael Valocchi, a utility consultant at IBM Consulting Services, told the Journal in 2002 that his utility clients were under orders to cut capital spend- ing by as much as 30 percent in 2003, in some cases to free up funds for use by the holding company parents. But this disturbing trend received lit- tle media attention and the campaign to repeal PUHCA continued, achieving success on Aug. 8, 2005 when President Bush signed the Energy Policy Act. A Faster Crowd After PUHCA officially exits the stage in February 2006, what will be- come of America’s utility companies? One thing we know for sure: there will be a lot fewer of them. Utility merg- ers and acquisitions were already gain- ing traction before President Bush signed the energy bill last August. In late 2004, Chicago-based Exelon merged with Public Service Enterprise Group — the parent of New Jersey’s largest utility — in a $13 billion deal. In May of 2005, Duke Energy bought Cin- ergy, combining the parent companies of utilities ranging from the Carolinas to Kentucky, Indiana and Ohio. Also in May, Buffett announced he would buy PacifiCorp, with utility operations in Oregon, Washington, Wyoming, Cali- fornia, Utah and Idaho. FPL Group’s planned purchase of Constellation Energy sheds light on the character of such mergers. FPL Group, a holding company, gets most of its revenue from its regulated subsidiary, Florida Power and Light. But in recent years FPL Group had begun to dabble in unregulated power generation and wholesale telecommunications services, and was clearly yearning to run with a faster crowd. Constellation Energy is that faster crowd. A major player in the wholesale power market, Constellation gets less than a quarter of its revenue from its reg- ulated subsidiary, Baltimore Gas and Electric. FPL Group’s acquisition of Constellation will make the combined company the nation’s largest marketer of wholesale electric power. Gold Rush Utility corporations won’t be the only ones to notice the new profit op- portunities in the utility industry follow- ing the repeal of PUHCA. Oil compa- nies, for example, are flush in the wake of last fall’s hurricanes. Exxon Mobil currently has $34 billion in spare cash. “Is an Exxon or Shell a potential buyer? I say yes,” says Jim Hunter, util- ity director for the International Broth- erhood of Electrical Workers in Wash- ington, D.C. It’s understandable, he says, that a company in possession of oil and gas resources would be interested in acquiring companies that use those re- (Turn to Page 8) Thank You! 2005 Washington CLUB Tournament Sponsors Thank you from the entire Washington CLUB Tournament Committee – without your generous support and contributions, this tournament would not exist and our recipient charities would not have received the $322,000 we have been able to donate together. Mark your Calendars for this year’s event: June 15-16 at Gold Mountain Golf Complex, Bremerton, Wash. For more info, see out Web site at www.wa-club.org TITLE SPONSORS Ferguson Wellman Capital Management, Inc. Washington Building & Construction Trades Council PLATINUM SPONSORS Fifth Third Asset Management IBEW Local 76 / SWWashington-NECA Pacific NW Regional Council of Carpenters Parsons Corp. Rainier Investment Management, Inc. Union Bank of California Washington Capital Management Washington State Association of Plumbers MARCH 3, 2006 GOLD SPONSORS ABN AMRO Asset Management Bechtel National Bricklayers Local 1 Washington Eckman, Bohrer & Thulin, P.S. First Choice Health Goldman Sachs Asset Management ICM Asset Management Intech Janus Capital Management Invesco McMorgan & Company New York Life Investment Management Oppenheimer Investment Management Sentinel Realty Advisors Washington State Council of Fire Fighters Wurts & Associates NORTHWEST LABOR PRESS SILVER SPONSORS Becker Capital Management Columbia Management Operating Engineers Local 302 Operating Engineers Local 612 Lindquist LLP Lockitch Clements & Rice Marco Consulting Group Mellon Financial Corp Mercer Human Resources Pacific Dental Alliance Principal Financial Group Quest Investment Management Rigel Capital, LLC The Segal Company Systematic Financial US Bank Institutional Trust & Custody Vision Service Plan WA & Northern ID Dist. Council of Laborers Welfare & Pension Administration Services Zenith Administrators PAGE 5
