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New Energy Act Makes Dramatic Changes In Public Utility Laws
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August 15, 2005
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By William T. Baker and Linda Key Breathitt
Thelen Reid Brown Raysman & Steiner LLP
The Public Utility Holding Company Act of 1935 (PUHCA) will be off the books shortly. For the last 70 years, PUHCA has limited the growth and expansion of electric and gas utility companies in the United States and has prevented utility holding companies from owning other businesses that are not reasonably incidental or functionally related to the utility business. PUHCA also has significantly discouraged ownership of U.S. electric and gas utilities by domestic industrial and financial institutions and by foreign institutions.
The House and the Senate voted to repeal PUHCA as part of their approval of a joint Conference Report on the Energy Policy Act of 2005. President Bush signed the energy bill on August 8. There is a six-month delay in the effective date of PUHCA repeal after enactment. This transition period will provide an opportunity for strategic planning and consideration of transactions involving the purchase, sale, merger and restructuring of U.S. electric and gas utilities and their assets that would not be permissible today.
What's in Store in the Transition?
The next six months will provide some interesting challenges. It is hard to take 70 years of regulation and make it disappear. Some questions: What are the post-repeal effects of current PUHCA orders and no-action letters? What relief will there be from PUHCA's approval and filing requirements? How will the Federal Energy Regulatory Commission (FERC) comply with the requirements in the 2005 Act for rule-making and legislative recommendations to implement PUHCA repeal? What plans do we make for the future?
What Will Repeal Mean?
Above all else, PUHCA repeal will broaden the market for ownership of electric and gas distribution companies. For example, a construction company could acquire one or more of these companies anywhere in the United States. The same would be true for telecommunications and Internet companies, financial services companies, private equity investors and funds as well as other industrial players such as oil companies and infrastructure developers. Foreign companies (both utilities and non-utilities) could acquire electric and gas companies without the fear of extensive additional regulation, which has largely kept them on the sidelines until now.
Without PUHCA's requirement that utility operations be limited to a single integrated system, a U.S. electric and gas distribution company on the East Coast could, for example, acquire a combination gas distribution and electric company on the West Coast, utilities in geographically dispersed states or a string of local distribution companies.
Repeal also would aid the development of national, multistate or regional transmission companies, allowing for greater investment opportunities and the ability to operate independently.
Both registered and exempt holding company systems will be freed from PUHCA's restrictions on ownership of non-utility businesses and restraints on expansion in these areas.
Exempt companies operating utility systems in a single state may expand their operations without PUHCA's limitations. They also may restructure their energy trading and independent power operations. Until now, non-utility owners of utility properties have had to create complex structures to avoid or minimize PUHCA's effect; these arrangements may well be restructured. New transactions involving electric transmission and distribution and gas distribution properties can be entered into with non-utility players and can employ far less complicated structures more closely aligning economic and voting power.
Registered companies no longer will be subject to PUHCA's structural and regulatory approval requirements, including, primarily, those relating to sales and acquisitions of utility properties and securities, issuance of securities by the top level holding company, and affiliate arrangements involving extensions of credit and the provision of goods, services or construction. With PUHCA repeal, registered systems will consider restructuring their operations, particularly in the affiliate services area, because the manner in which these operations are conducted is, to a major degree, a creature of PUHCA.
PUHCA repeal, consequently, carries with it the possibility of widespread restructuring and ownership change in the electric and gas distribution business in the United States. In this sense, the 2005 Act eclipses the Energy Policy Act of 1992 and is as important as the adoption of PUHCA and the amendments to the Federal Power Act in 1935. Seventy years of structure are being changed.
Will There Be Other Regulation?
A cautionary note: Other regulation of gas and electric businesses will continue. FERC regulatory rule-makings and orders (including during the transition period) will shape the new federal regulatory regime, together with activities of the Justice Department and the Federal Trade Commission. The chief focus is likely to be on affiliate transactions and cross-subsidization issues. Congress has started the new regime by giving the FERC expanded jurisdiction over mergers and acquisitions. This includes, for the first time, jurisdiction over acquisitions of electric generating facilities only. FERC also is required to consider whether a merger or acquisition will result in cross-subsidization of associate non-utility companies.
At the state level, legislatures and regulators can be expected to adopt laws and regulations or new orders that seek to insulate regulated public utilities from the financial and other effects of activities of affiliated holding companies and non-utility companies. Mini-PUHCAs are a possibility.
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For more information about the issues covered in this report, please contact William T. Baker, Jr. in our New York office at 212-603-2106 or at wbaker@thelen.com, or Linda Breathitt in our Washington, D.C. office at 202-508-4063 or at lbreathitt@thelen.com or contact your Thelen attorney. For more information about Thelen's Construction and Government Contracts Department, click here.
©2005 Thelen Reid Brown Raysman & Steiner LLP
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