Repeal of U.S. Utility Law Opens Door for Mergers

When Enron Corp. was collapsing in 2001, it sucked in every dollar it could find from its subsidiaries to fend off its creditors. One of its pipeline companies borrowed $1 billion, using its pipes as collateral.

But one subsidiary escaped: Portland General Electric, Oregon’s biggest public utility, which Enron had bought in 1997.

State regulators insisted that the utility’s revenue remain in Oregon. In U.S. Bankruptcy Court, they made sure that creditors did not lay claim to the company and sell it. Earlier this year, they repelled an attempt by Texas buyout specialists to purchase the utility with borrowed money, saying the sale could cause rate increases.

What enabled the regulators to shield Portland General Electric from the Enron debacle was the Public Utility Holding Company Act, a New Deal-era federal law requiring companies that owned electric utilities either to incorporate in the state where they sell power or to accept tight regulation by the federal Securities and Exchange Commission. The law also forced almost every company that owned an electric utility to sell off its unrelated subsidiaries -- keeping oil companies, for example, out of the utility business.

But after more than 20 years of agitation from industry financiers and free-market advocates, the 1935 law will be repealed when President Bush signs the energy bill, which he is expected to do Monday at a ceremony in Albuquerque.

Wall Street analysts and energy industry observers expect the repeal to accelerate the industry’s consolidation, with more utilities being bought by national -- and even foreign -- electricity companies and by oil, construction and service companies.

Indeed, three industry deals that are already underway, involving the exchange of more than $30 billion in cash and stock, were triggered by the anticipated elimination of the holding company act, according to stock analysts.

Duke Energy Corp. is buying Cinergy Corp. and Exelon Corp. is acquiring Public Service Enterprise Group Inc., in both cases creating power companies that serve customers far from the corporate headquarters.

In addition, Warren E. Buffett’s MidAmerican Energy Holdings Co. has offered $5.1 billion in cash for PacifiCorp, an Oregon company that provides electricity to the very northern reaches of California along with parts of five other Western states. Jonathan Weisgall, vice president of legislative and regulatory affairs at MidAmerican, said the change would allow his company to bring billions of dollars of investment capital to PacifiCorp.

Deals like these, and the possibility of many more, are one reason that utility company stocks have rocketed this year, adding to their sharp gains in 2003 and 2004.

The Dow Jones utility stock index, which tracks 15 major issues, is up 18.2% year to date, and last week hit its highest level since 2000.

The full value of utilities now available to be bought and sold is estimated at about $1 trillion -- and as takeovers and mergers create larger companies, the change in the law will diminish federal oversight. The SEC will no longer regulate utilities, and its most powerful rules will be lifted.

Supporters of repeal say the change will bring new money into the industry, enabling it to build cleaner generating plants and additional power lines to stabilize the power grid.

Bob Finkelstein, executive director of the Utility Reform Project, a San Francisco advocacy group, is unimpressed by such claims.

“The promises of life being better under the new regime are exactly the promises we got under deregulation” of California’s energy industry, Finkelstein said.

He and other consumer advocates warn that the end of the holding company act could turn utilities into speculative investments, as they were before 1935. They fear that an oil company or a manufacturer of nuclear turbines, for example, that buys a utility would have an incentive to sell its type of energy to captive consumers, regardless of cost.

Lynn Hargis, a lawyer with the consumer advocacy group Public Citizen, led the fight against the law’s repeal. She played on congressional concern over a Chinese oil company’s attempt to take over El Segundo-based Unocal Corp., warning that if the utility act were repealed, overseas firms would be free to buy utilities.

Sue Kelly, chief counsel for the American Public Power Assn., a trade association for more than 2,000 community-owned nonprofit electric utilities, has another worry.

“I am concerned about a Carl Icahn-type person coming in and stripping a company and flipping it,” Kelly said, referring to the corporate raider who came to prominence in the 1980s.

“The potential is there for all types of financial transactions, if not shenanigans, that we have not seen for 70 years,” she said.

The Edison Electric Institute, which represents utility companies whose shares are publicly traded, says the old law has “outlived its usefulness.”

“It was created in 1935 at a time when the industry was very different from today,” said Jim Owen, the group’s spokesman. Now, it “acts as a barrier to investment and an impediment to effective competition.”

Owen said concern about international consolidation was overblown, as demonstrated by the failure of the Chinese attempt to buy Unocal.

In addition, he said, by limiting utility companies to single states, the law kept bigger companies from buying and investing in utilities, reducing the amount of capital available for transmission lines and generating stations.

Owen said consolidation also would increase efficiency, as it has in other deregulated industries. “Look at the other large network industries,” he said. “How many railroads, airlines and phone companies are there?”

Finkelstein, of the Utility Reform Project, also compared electric utilities to the phone companies. But he concluded, “We have a hideous track record in telecom.”

He cited the example of Pacific Bell, which he said was viewed by many consumers as a bad phone company even before it was taken over by San Antonio-based SBC.

But “SBC has done what everyone thought impossible -- make California customers miss Pacific Bell,” Finkelstein said. “California customers are now the cash cow, and they ship the milk to Texas.”

Another concern for consumer advocates is who will regulate what is likely to become a more consolidated industry with large, powerful corporations.

Under the utility company act, the SEC had broad powers over publicly traded utilities and could turn down mergers. Under the new law, several different entities -- state public utilities commissions, the Federal Energy Regulatory Commission and, for utilities that own nuclear generators, the Nuclear Regulatory Commission -- will take over regulatory duties, and they will have much less authority than the SEC.

Consumer advocates say state regulators in particular aren’t necessarily prepared for the legal changes ahead. For the first time, state public utilities commissions will have to regulate utility mergers and track internal cash flows in what promise to be interstate corporations.

Hargis, of Public Citizen, predicted that ill-prepared, legally limited states would be outmatched by the corporate giants now free to move into the electricity field.

“I haven’t seen a lot of states saying no to anybody,” she said. “At a certain point, states facing these deep-pocketed companies, what are they going to say?”

Weisgall of MidAmerican Energy Holdings downplayed concerns about reduced regulation, saying it would be better handled by FERC and the state public utilities commissions, known in the business as PUCs.

“People do an incredible job of underestimating the expertise of state PUCs,” he said. “There are 24 people at the SEC to oversee” the utility industry. “California alone has over 600 people at its PUC.”

At the federal level, FERC, which gets new regulatory authority, has never stopped a merger. But spokeswoman Barbara Connors disputed the notion that it was too easy on utilities.

“I hope people don’t think companies just get what they want,” she said. She pointed out that the agency had sometimes forced companies to sell off power plants before they could merge.

FERC’s role is primarily to keep utilities from gaining monopoly power by owning too many generating stations. By comparison, the SEC regulated the financial structure of the companies and ensured that their stock and bond issues were well scrutinized.

That oversight made utilities a safer investment, according to two reports by bond-rating agencies released last year that showed companies regulated by the holding company act had higher credit ratings than unregulated energy firms.

Hargis and other critics contended that the reduced credit-worthiness of deregulated energy firms could cost ratepayers if the companies need to pay higher interest on their loans. That could be a problem not only for the deregulated utilities’ consumers but also for other utilities, such as the Los Angeles Department of Water and Power.

DWP spokesman Randy Howard said that the city had opposed repeal of the holding company act, contending that it could raise the cost of “numerous joint projects, such as transmission lines and/or generating plants.”

Howard warned that the agency’s corporate partners have generally been able to maintain their credit ratings, but with repeal of the law, he said, “this could change.”