...Storm Warning: Merger madness in utilities
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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-
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