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By Michael G. Morris
News Flash>>
www.energycentral.com
STRATEGY NEEDED
The United States,
Mexico and Canada
should band
together to develop
a North American
energy strategy.
That is the
recommendation
of the former U.S.
energy secretary,
Bill Richardson,
who is now governor
of New Mexico
and a possible
candidate for
president in 2008.
“This council will
give our hemisphere
the heft we need
to counterbalance
the powerful energy
centers in the Middle
East — creating
more regional
independence,”
Richardson told the
Associated Press.
16 ENERGYBIZ MAGAZINE July/August 2005
Legal Eagle
THE VIEW FROM AEP
Mauled by PUHCA
AN ODD AND extremely frustrating thing happened
to us in early May. We were going about our daily
activities at American Electric Power — delivering
reliable, affordable electricity to our more than 5 million
customers in 11 states, installing additional environmental
controls on our efficient fleet of coal-fired power
plants, and continuing necessary work to implement
leading-edge, clean-coal power generation technology
– when we became entangled in the belts, sprockets,
and gears of the Public Utilities Holding Company Act
(PUHCA), a regulatory mechanism built in 1935 to
protect investors from Depression-era abuses.
An administrative law judge of the Securities
and Exchange Commission (SEC) issued an initial
decision on May 3 that said our merger with Central
and South West, approved by the SEC in June 2000
as the last step in 30 months of review by multiple
federal and state agencies, meets the interconnection
requirement of PUHCA, but “does not
constitute a ‘single integrated public-utility system’
for failure to be confined in its operations to a single
area or region under (PUHCA).”
What does all that mean? In a nutshell, the merger
had been challenged by public power organizations.
In response, AEP and the SEC staff have filed
separate petitions for review to the SEC — each
supporting the commission’s June 2000 approval
of the merger and each taking issue with interpretations
made by the administrative law judge.
The initial decision has no effect on the current
structure or operations of our company, which has
functioned on a fully integrated basis since the merger
was completed five years ago. We’re confident that
the merger will again prove consistent with the policy
objectives of PUHCA. However, this initial decision
changed the focus of merger announcements made
later in the month by Duke and Cinergy as well as by
MidAmerican and PacifiCorp. Instead of discussing
the potential benefits the mergers bring for consumers
and investors, the companies spent much of their time
answering questions about compliance with PUHCA’s
archaic requirement that the parties be directly interconnected
and with the administrative law judge’s restrictive
interpretation of the single area or region requirement.
I’m confident the initial decision also triggered
concern at other utilities considering merger plans,
since it creates uncertainty on Wall Street. Again, it
illustrates how PUHCA can be used as a barrier to
consolidation necessary to reduce costs of operations
in the highly fragmented utility sector. The outdated
regulation also serves as a barrier to much-needed
investment in an industry facing a growing need for
infrastructure improvements, since fear of entanglement
in PUHCA’s aging regulatory mechanism deters
potential non-PUHCA acquirers of utility assets.
In its 70 years of existence, PUHCA’s now-antiquated
approach to investor protection has been
superseded by much newer, more efficient regulations
to protect investors in today’s instant-access,
high-speed information business environment. The
SEC’s authority to protect investors’ interests is
backed by a database full of regulations that provide
necessary transparency into corporate finances and
activities — regulations that were recently enhanced
by the additional disclosure requirements of the
Sarbanes-Oxley Act of 2002.
The SEC, the regulatory body charged with enforcing
PUHCA requirements, has admitted this regulation
no longer serves a purpose. In 1981, the commission
recommended to Congress that PUHCA be repealed,
saying its “provisions were either duplicative of other
regulatory schemes or no longer necessary to prevent
the abuses that led to enactment.” The SEC reaffirmed
this recommendation in 1995 in a report issued as
part of then-Vice President Al Gore’s “Reinventing
Government” initiative.
The Senate Banking Committee repeatedly has
agreed with the SEC recommendation, supporting
PUHCA repeal on an almost annual basis in reports
issued under both Democratic and Republican
leadership. Yet PUHCA lives on — the same aging
collection of regulatory belts, sprockets, and gears
now repainted as an important consumer protection
machine by supporters who ignore the existence of
newer consumer protection regulations.
For instance, all proposed mergers undergo a
thorough antitrust review by either the Department
of Justice or the Federal Trade Commission. This
review ensures that a proposed merger does not
harm the competitive balance of the marketplace,
thereby protecting the interests of consumers.
For electric utility mergers, the Federal Energy
Regulatory Commission (FERC) examines potential
market power issues with consumer protection in