Laura V. Szabo, Dickstein Shapiro Morin & Oshinsky
The Public Utility Holding Company Act of 1935 (PUHCA), a depression era law, discourages investments in electric and natural gas companies by firms with the cash and credit needed to revive the industry. PUHCA is redundant and obsolete; its core goal of breaking up multi-state utility holding companies was achieved in the 1950s. Fortunately, PUHCA is currently in Congress’ crosshair. The House of Representatives approved an energy bill that, if enacted, will repeal PUHCA. The Senate is considering a bill with the same goal. Both the White House and the Securities Exchange Commission (SEC), the agency that enforces PUHCA, support PUHCA’s demise. Given the energy industry’s financial straits, PUHCA repeal is a wise national energy policy objective.
Every participant in the electric or gas business grapples with PUHCA. PUHCA requires any company directly or indirectly owning or controlling 10 percent or more of the voting securities of an electric or gas utility, or utility holding company, to register with the SEC, unless an exception applies. PUHCA regulation of registered holding companies is pervasive, extending to virtually all companies (not just the utilities) in a holding company system. Such regulation entails corporate and financial (not energy rate) oversight including debt and equity security issuances or acquisitions; intrasystem loans; dividends; utility acquisitions and asset sales; affiliate sales of goods or services; and, investments in non-utility businesses. A holding company, however, need not register if it qualifies for one of five PUHCA statutory exemptions. The most significant exemptions are for intrastate holding companies (significant utility operations are confined to a single state) and predominantly utility holding companies (operations are predominantly utility and carried on in the state of organization and contiguous states). But PUHCA largely limits the utility operations of both exempt and registered holding companies to a single state or region.
For most companies, especially unregulated firms, PUHCA is a terrifying obstacle. For decades, most participants in the energy industry structured their investments to legitimately avoid registering as holding companies under PUHCA. In recent years, however, a number of utilities elected to become registered holding companies in order to carry out expansion plans. Since the mid-1990s, the number of registered holding companies has increased from 12 to approximately 35. The new holding companies were advised that utilities already subject to extensive regulation would not be overly burdened by PUHCA regulation. Most of these companies now realize that PUHCA regulation restricts their options, delays potential transactions, prescribes forms of corporate organization that often conflict with other regulatory requirements or preferred methods of operation, and adds a level of complexity to their business activities.
Despite the increased number of registered holding companies, most utility holding companies have retained exempt status and, as a result, their utility operations are confined to a single state or region. Non-utility companies generally are not willing to become registered holding companies and, thus, are often limited to investments in energy companies like exempt wholesale generators or natural gas pipelines (which are not considered PUHCA utilities), individual rather than corporate ownership structures or passive investment interests.
PUHCA’s continued existence is not the answer to the energy industry woes. It is illogical to believe that PUCHA will rectify the California or Enron problems, or avert similar future situations, when it was powerless to prevent these crises. Many PUHCA-endorsed exempt utility holding company systems, as well as registered holding companies like Xcel, are suffering financial difficulties. These events attest to PUHCA’s irrelevance; they happened even though PUHCA existed and was enforced by the SEC.
Likewise, PUHCA is not needed to protect consumers, as this function is already performed by FERC and state commissions. PUHCA repeal legislation pending before Congress will enhance their consumer protection powers by providing regulators access to books and records of utility affiliates. FERC, other federal agencies and the states will continue to address market power in the energy industry; thus, the SEC’s review of utility mergers under PUHCA adds nothing.
In sum, repealing PUHCA will encourage investments in ailing utilities and the electric transmission system and other innovations and efficiencies, which will lead to better products and lower costs for utility customers at a time when these are needed most.
Szabo is a partner at Dickstein Shapiro Morin & Oshinsky LLP and in the energy and natural resources practice of the corporate & finance group. She may be reached at firstname.lastname@example.org or 202-775-4710.