T H E NEWS IN FO

regulation. The Court sided with

the Alliance, ruling that the entire

$476 million disallowance must

stand.

Special Report: Behind the PUHCA Debate

For the Alliance, it was a joyous

victory, albeit a brief one. Alliance

Executive Director Gary Groesch

said NOPSI’s claimed lack of re-

sponsibility couldn’t stand. “Just

because an operating company

joins a holding company doesn’t

mean they can go play golf”

when decisions are being made

that affect the entire system, he

said.

New Orleans and Alliance law-

yers were hoping the Supreme

Court would deny NOPSI’s peti-

tion for certiorari and allow the

state court case to advance to its

conclusion. The fact that the high

court has stepped in and agreed

to review the Fifth Circuit’s deci-

sion at this point looks ominous

for consumer interests, say knowl-

edgeable onlookers.

“We‘re hoping that the Supreme

Court will summarily reverse the

Fifth Circuit decision and throw

out the disallowance,” says Tom

Lind, an attorney for NOPSI.

“Unless the Supreme Court re-

verses Mississippi, I think we’ll

prevail. A FERC allocation is vir-

tually inviolate in this situation.”

Said John J. Cordaro, NOR’S1

group vice president for external

affairs, about the Supreme Court’s

decision to review the Fifth Cir-

cuit decision, “This . . . increases

our confidence that NOl’SI’s posi-

tion will ultimately be upheld .”

- R. Evan Wdlace

Who Should Enforce the Public Utilitu Holding Compa&y Act?

R epeal the Public Utility Holding

Company Act, the Securities and

Exchange Commission urged in

mid-March before the Senate En-

ergy and Natural Resources Com-

mittee. Although the SEC seemed

to break the first rule of bureau-

cratic politics - never relinquish

control over anything to anyone

- few eyebrows were actually

raised by the testimony That’s be-

cause the agency was merely re-

peating its longstanding view that

PUHCA should be repealed be-

cause the objectives of the 1935

Act were satisfied long ago.

Since the mid-1940s people

have tried without success to

transfer administration of the Act

to other federal agencies. In 1977

the Carter Administration tried to

transfer PUHCA to the newly cre-

ated Department of Energy, but

c u s

that attempt fell flat. Five years

later, during the height of the

Reagan Administration’s

deregulatory zeal, the SEC urged

repeal of PUHCA, but to no avail.

What’s different today is that

the non-utility generating (NUG)

industry is booming, jump-

started largely by the Public Util-

ity Regulatory Policies Act. Last

year NUGs built more generating

capacity than utilities, and NUGs

are expected to build 25% or more

of the nation’s future capacity ad-

ditions. To the NUGs spawned

by PURPA, Sen Bennettt Johnston

(D-La.) would now add EWGs -

wholesale generators that would

be exempt from the strictures of

PUHCA.

Johnston’s proposal, contained

in Title XV of S. 341, the “Na-

tional Energy Security Act of

1991,” has re-ignited a bitter in-

dustry-wide debate over

I’UHCA, deregulation and com-

petition in bulk power markets.

f%JHCA restrains competition

among independent power pro-

ducers, according to a chorus of

interests representing utilities as

well as independent power pro-

ducers. Even consumer advo-

cates who are deeply skeptical of

the intentions of utilities have con-

ceded that the 56-year-old law

should be changed to boost com-

petition.

Somewhat less prominent,

though no less important, has

been the question of the SEC’s

role in a rapidly changing electric-

ity industry. More to the point: is

it time to reassign PUHCA to an-

other agency, namely FERC?

14 The Electricity Jownal

T H E

Yes, says the SEC. Since the

Carter Administration the

agency’s commissioners have said

that because FERC and the De-

partment of Energy are the

nation’s energy policy makers, it

makes sense to move the 1935 Act

to one of those agencies, the SEC’s

William Weeden tells Tke Electric-

ity Jow~u7l. Moving the Act there

would make for a more coordi-

nated energy policy, he adds.

Yes, says Ohio regulator Ashley

Brown, who also chairs NARUC’s

electricity committee. “It’s proba-

bly the only time that NARUC

would actually approve an expan-

sion of FERC jurisdiction,” he

says.

Yes, says a key Capitol Hill

PUHCA-watcher. “It makes

sense, it’s a natural. PUHCA and

the Federal Power Act deal with

different aspects of the same in-

dustry. PUHCA deals with corpo-

rate structure and the FPA deals

with power transactions, and they

interrelate.”

Yes, say several Washington reg-

ulatory lawyers who insist on ano-

nymity The SEC has done a terri-

ble job of analyzing the potential

anticompetitive effects of utility

mergers, they claim, pointing to

the agency’s late-December deci-

sion in the Northeast Utilities-

Public Service Co. of New Hamp-

shire merger case.

No, replies a veteran PUHCA

lawyer who also insists on ano-

nymity One agency should not

have the power to approve whole-

sale electric rates and the utilities’

corporate structure, he says. With

so much power, the agency could

May 1991

NEWS IN F 0 c u s

be tempted to use exemptions

from PUHCA as a reward to

those utilities willing to make con-

cessions on electric rates, he

warns.

No, say the registered utility

holding companies, who have op-

posed repealing the Act. While

they may not like the SEC’s ad-

ministration of PUHCA, transfer-

ring the Act to FERC would her-

ald a different - and potentially

tougher - administration. Better

the Devil you know than the

Devil you don’t, they say in es-

sence.

But there is a growing consen-

sus that the nation’s electricity pol-

icy is evolving in too piecemeal a

fashion, and that something

needs to be done to coordinate the

efforts of a disparate group of

agencies and individuals. DOE,

FERC, the SEC and the state com-

missions are marching to different

drummers, and last year’s pas-

sage of the Clean Air Act placed

additional strains on an already

overworked and cacophonous or-

chestra.

As Scott Hempling, a Washing-

ton lawyer and PUHCA special-

ist, sees it, EERC’s staff and some

of the commissioners bring a lot

of dedication and drive to their

consideration of electricity issues.

But “there is no sign of indepen-

dent thinking or will at the SEC,”

Hempling tells The Electricity Jour-

ml. “At the commission level,

people just don’t seem to care.”

It’s hard for the SEC to enforce

I’UHCA aggressively when the

White House - and the presiden-

tially-appointed commissioners -

favor repealing the Act, counters

one former SEC staffer. It’s even

harder to attract quality lawyers

or accountants to the agency’s

small PUHCA staff as long as

there remains a strong, longstand-

ing institutional belief that the

Act’s time has long since passed,

he says: “Things must start at the

top.”

“The 1935 Act is one of the most

pervasive of the New Deal regula-

tory schemes,” SEC commissioner

Edward Fleischman told the Sen-

ate Energy and Natural Resources

Committee in mid-March.

PUHCA was “adopted by Con-

gress in order to reform the U.S.

gas and electric utility industry,

after extensive studies by the Fed-

eral Trade Commission and a con-

gressional committee had docu-

mented numerous abuses

resulting from the unrestrained

use of the holding company struc-

ture.”

Quoting from PUHCA, Fleisch-

man outlined the statute’s pur-

pose: “to meet the problems and

eliminate the evils [of holding

companies] . . . and to provide as

soon as practicable for the elimina-

15

T H E

tion of public utility holding com-

panies except as otherwise pro-

vided” within the statute. In

1932, he reminded the senators,

three holding companies con-

trolled 49% of the nation’s in-

vestor-owned utilities.

A total of 223 holding compa-

nies, consisting of 1,040 utility

subsidiaries and 1,156 non-utility

subsidiaries, were registered at

one time or another under

PUHCA, according to the SEC’s

June 1982 argument in favor of re-

pealing the Act. But today there

are only 12 registered holding

companies: nine electrics and

three gas.

PUHCA: Mission Accomplished? This shows that the “main pur-

pose” of PUHCA, reorganization

of the nation’s electric and retail

gas utility holding companies, has

been accomplished, the SEC ar-

gues. “The abuses by which hold-

ing companies had exploited in-

vestors and frustrated effective

state regulation of utilities are not

likely to recur,” the agency pre-

dicted in 1982.

Hempling disagrees. PUHCA

has enough loopholes already,

and the law should be strength-

ened to ensure fair competition as

well as true independent power

producers - those not affiliated

with any utility - to compete in

power generation, he says.

Hempling frequently testifies on

PUHCA before Congress, and he

has appended to his testimony a

long list of incidents where utili-

ties allegedly transgressed the let-

ter and spirit of PUHCA.

16

NEWS IN F

What is not disputed is that

state regulatory authority has

been strengthened substantially

since the Depression. Moreover,

the accounting industry has devel-

oped uniform accounting stan-

dards over the last 60 years. Reg-

ulation of holding companies had

been impaired by weak state regu-

latory and inconsistent account-

ing standards, the SEC points out.

Tougher state regulation and uni-

form accounting standards, when

combined with the passage of fed-

eral securities laws, “have made

the disclosure and financial re-

porting requirements of the 1935

Act redundant,” the SEC claims.

Even if these securities laws fail

to protect investors and consum-

ers, observers claim that today’s

much more efficient financial mar-

kets will prevent the return of py-

ramided holding companies, one

of the most objectionable holding

company practices. Pyramided

holding companies, where hold-

ing companies with no assets

were inserted on an organiza-

tional chart between a corporate

c u s

parent and a utility subsidiary, al-

lowed Depression-era utility

chiefs to pledge the same utility

asset to any number of different

lenders and investors.

Pyramided holding companies

allowed a small group of invest-

ors - often including investment

bankers who raised funds to

launch new holding companies-

to exert tremendous control over

a wide range of utility assets. But

power flowed in both directions:

any operating problem with the

utility subsidiary - the base of

the pyramid - could be felt

throughout the corporate struc-

ture. The whole over-leveraged

house of cards occasionally came

tumbling down because a prob-

lem at the utility level shut off

cash to the holding company and

didn’t allow it to pay its debts.

Forum Shopping: A New Abuse Pyramided holding companies

may be out, but forum-shopping

has arrived with a vengeance.

Those who favor moving PUHCA

to FERC claim this will help close

a regulatory gap now exploited

by clever forum-shoppers.

Last December FERC rejected a

request by Missouri Basin Munici-

pal Power Agency to assert juris-

diction in a proposed merger of

two utility holding companies,

Midwest Energy and Iowa Re-

sources. The holding companies,

parents to Iowa Public Service

and Iowa Power, respectively,

wanted to merge but did not

want to consolidate their utility

operations, at least not yet. Under

the Federal Power Act, the pro-

posed merger is not jurisdictional

at FERC, the commission said.

FERC says it has jurisdiction

when the holding companies

want to consolidate their opera-

tions, or when a utility wants to

form a holding company, but not

when two holding companies

merge.

“That means if American Elec-

tric Power and the Southern Com-

pany decide they want to merge,

FERC would have no jurisdic-

tion,” one legal source said at the

time of the decision.

FERC Avoidance? FERC’s logic would apply

whether the two merger candi-

dates were exempt or registered

holding companies, remarks Mike

Naeve, a former FERC commis-

sioner and now a partner at

Skadden, Arps, Slate, Meagher &

Flom.

“I don’t think people will make

the decision to merge or not to

merge simply because they can

avoid FERC jurisdiction,” Naeve

says. “I don’t think this decision,

in and of itself, will induce people

who otherwise would not have

considered merging to merge,”

adds Mike Cusick, a partner in

the New York offices of Winthrop,

Stimson, Putnam & Roberts.

Maybe not, but two months

after FERC’s decision in Missouri

Basin, two other Iowa utility hold-

ing companies - IE Industries

and Iowa Southern - announced

their plan to merge. Coincidence

or copy-cat merger? Washington

regulatory lawyers are keeping

their eyes on the merger proposal.

c u s

The Missouri Basin decision

continues a stance on jurisdiction

FERC first laid down a few years

before in a case involving Central

Vermont Public Service, where

the utility wanted to form a hold-

ing company.

‘Missouri Bnsiu shows that

whether a transaction is jurisdic-

tional at FERC or the SEC de-

pends largely on corporate form,”

says Reinier Lock, who is of coun-

sel to the Washington office of Le-

Boeuf, Lamb, Leiby & MacRae.

“Some policy makers in FERC

say, ‘If we can assert jurisdiction

in Central Vermont, then surely we

can assert jurisdiction in Missouri

Basin,’ ” Lock tells The Electricity

Journal. These people feel the un-

derlying policy issues are so im-

portant that the commission

should ‘bust through the corpo-

rate form to see what’s really

going on. But the lawyers are a

lot more cautious. They say, ‘In

passing the Public Utility Act of

1935 [which contained PUHCA

and the FI’A], Congress to some

extent did distinguish jurisdiction

on the basis of corporate form.’ ”

It was relatively easy for FERC

to assert jurisdiction over the for-

mation of a holding company

when the utility is jurisdictional at

FERC to start with, he says. But it

was legally more difficult for the

commission to assert jurisdiction

in Missouri Basin, because that

would have required collapsing

the distinction between the hold-

ing companies and their utility

subsidiaries, Lock adds. “I think

the lawyers felt that was going

too far and that it didn’t mesh

with the statutory scheme of the

1935 Act.”

PUHCA in FEW: It’s A Match FERC says it will review the

Midwest Energy-Iowa Resources

merger when the operating utili-

ties consolidate their operations.

But by that time any anti-competi-

tive damage will have already

been done, and it could be ex-

tremely hard to remedy past dam-

ages, sources say Having FERC

administer PUHCA would close

this jurisdictional gap and ensure

that the public is not ill-served by

utility mergers.

Having FERC administer

PUHCA would also eliminate any

potential confusion caused by

transactions between subsidiaries

of the same holding company.

Last year’s Arcadia, Ohio v. Ohio

Power Co., involving American

Electric Power, which went all the

way to the U.S. Supreme Court,

was a case in point.

PUHCA requires that interaffili-

ate transfers take place at cost,

which includes a profit margin.

T H E

In the early 1970s the SEC author-

ized AEP to create and capitalize

the Southern Ohio Coal Company

(SOCCO), which later sold coal to

another AEP affiliate, Ohio

Power. But SOCCO’s costs were

well above the prevailing market

price, and when the utility sought

FERC approval for a bulk power

sale to municipal utilities, the

commission ordered a rate reduc-

tion to make up for the expensive

coal purchases from SOCCO.

FERC argued that the utility

was not compelled to buy coal

from SOCCO, and that if Ohio

Power it had shopped the market

it could have easily found

cheaper coal. But AEP said the

coal contract had already been ap-

proved by the SEC. Writing for

an 8-O court in Amdh, Associate

Justice Antonin Scalia sided with

FERC.

SEC Misses a Call The SEC is poorly qualified to

pass judgment on competition,

say lawyers who have practiced

before the commission. Case in

point: the SEC approved the NU-

PSNH merger in late-December

without a meeting. The commis-

sion’s decision to approve the

merger used “a mode of ‘analysis’

so primitive as to be inscrutable,”

David Bardin, a partner at Arent,

Fox, Kintner, Plotkin & Kahn,

complained in his petition for re-

hearing. The decision “ignoreldl

extensive techniques developed

since 1935 {and applicable to

today’s proper administration of

the 1935 Act) to guide the Com-

mission and other federal agen-

cies in determining the nature

NEWS IN FO

and measure of anti-competitive

impacts. The order never men-

tions, much less discusses, the pre-

pared testimony . . . of Dr. Robert

J. Reynolds, former senior econo-

mist with the Department of Jus-

tice, who analyzed the anti-com-

petitive impacts of this merger.”

The same day the SEC decision

approving the merger came

down, a FERC administrative law

judge determined that the merger

would be anti-competitive unless

further conditions were imposed.

The judge spent a good bit of his

59-page decision weighing the

competitive effects of the pro-

posed merger.

Three months later, in mid-

March, the SEC agreed that it was

not well qualified to decide com-

petitive issues, and that it would

condition its approval of the

merger on a FERC approval.

I n a supplemental memoran-

dum opinion, the SEC said, “Both

the Commission and the FERC

have statutory responsibilities

with respect to the anti-competi-

tive consequences of mergers in

the public utility industry. How-

ever, the Commission in adminis-

c u s

tering PUHCA and the EERC in

administering the Federal Power

Act pursue different goals in their

regulation of the utility subsidiar-

ies of holding companies. Thus,

the Commission, as the agency

with expertise in financial transac-

tions and corporate finance, is

charged with the regulation of the

corporate structure and financing

of public utility holding compa-

nies and their affiliates.

“Because the FPA is directed at

operational issues, including

transmission access and bulk

power supply, the expertise and

technical ability for resolving the

types of anticompetitive issues

[raised in the NU-PSNH case] lie

principally with the FERC,” the

SEC opinion continues. “We can

look to FERC’s expertise for an ap-

propriate resolution of these is-

sues.”

Unqualified and Uninterested

Hempling, normally mild-man-

nered, claims the SEC has “a

grammar school understanding”

of utility antitrust law. The

agency once employed a number

of economists and electrical engi-

neers, but the steady downgrad-

ing of PUHCA’s importance has

left the agency bereft of expertise

in these crucial fields, he tells 7%~

Elcctricit!/ ]ozlvr~al.

An ex-SEC source shrugged his

shoulders. The agency and the

administration can hardly be

blamed for not having the staff to

administer a law that it thinks

should be repealed or transferred,

he says.

The Commission has been far

too eager to believe what the utili-

T H E

ties say in their filings, Hempling

claims, citing the SEC’s pervasive

use of ‘No action’ letters. These

are form letters in which the Com-

mission staff says, in essence, that

if the utility’s filing has accurately

represented the facts in a case,

then the staff will recommend tak-

ing no action in the transaction be-

cause no substantial issues are in

dispute.

“Dear Occupant...” “The SEC is restructuring the

electricity industry with form let-

ters,” Hempling says. There is no

investigation to determine if the

facts of a case are as the utility

claims, and the letters are not gen-

erally available to the public for

weeks or more, he adds.

Hempling points to Pinnacle

West Capital Corp. as a perfect

case of the SEC accepting at face

value the claims of utilities. Pin-

nacle West, parent to Arizona Pub-

lic Service, diversified into real

estate and a savings and loan in

the 198Os, with disastrous results.

The losses were so large that they

posed a threat to the utility’s rate-

payers, claimed the Arizona Cor-

poration Commission. APs’s

ratepayers were insulated from

the diversification program, re-

plied Pinnacle West. The roof fell

in 1989, when Pinnacle West took

a $676 million writedown on its

nonutility ventures, causing the

holding company to lose $551 mil-

lion on revenue of $1.5 billion.

Following the financial disaster,

Hempling helped the ACC draft a

filing asking the SEC to revoke

Pinnacle West’s exemption from

PUHCA and compel the holding

NEWS IN FO

company to sell its nonutility busi-

nesses within a fixed period of

time. But the ACC brief, written a

year ago, still sits at the SEC, gath-

ering dust.

Though Pinnacle West wants to

leave its nonutility businesses, it

wants to do so at its own pace.

Moreover, Richard Snell, Pinnacle

West’s chairman and CEO, has

never renounced diversification

as a strategy to increase earnings.

Some Arizona utility regulators

are worried that Pinnacle West

could repeat its forays into non-

utility businesses, which is why

they asked the SEC to rein in the

Phoenix-based holding company.

Pinnacle West has sold most of

its nonutility businesses and

earned $97 million last year (in-

cluding $27 million from discon-

tinued operations) on $1.6 billion

in revenue. But Hempling is wor-

ried that the sorry episode will be

repeated elsewhere. “How bad

does it have to get before the SEC

will intervene?” he asks.

“Most of the SEC’s work is in in-

vestor protection, not consumer

protection,” says another Wash-

ington lawyer. “But PUHCA is

c u s

quite explicit about the need to

protect consumers.”

P- mnacle West’s diversification

program, coupled with operating

trouble at the huge Palo Verde nu-

clear plant, could have bank-

rupted the utility A utility

bankruptcy doesn’t necessarily

mean an interruption of service,

but as New Hampshire regulators

can attest, consumers pay the ulti-

mate price for a reorganization.

Moreover, local business develop-

ment can hardly take place when ;

the area’s utility is in Chapter 11.

It’s the Right Thing to Do “The issues today are not issues

of protecting investors,” the law-

yer continues. “The issues today

are how markets work and how a

utility holding company structure

should work. In an ideal world,

where Congress could legislate in-

stead of finding itself frozen in

gridlock, you would bring

PUHCA and the FPA under one

agency’s roof.

“There has been a longstanding

argument that the SEC is the

wrong agency to administer

PUHCA,” he tells The Electricity

Journal. “I think it’s very difficult

to have two federal agencies deal-

ing with these two statutes, which

were part of one law, the Public

Utility Act.”

A Capitol Hill PUHCA-watcher

agrees that it makes sense to reas-

sign PUHCA to FERC, but says

that Congress won’t take the lead.

‘Who’s the constituency that

would push it? It’s logical, it’s

right, it has a lot to recommend it,

but who’s going to push it?”

- {ohn Egan