Ken Silverstein EnergyBiz Insider Editor-in-Chief

The so-called Public Utilities Holding Company Act (PUHCA) of 1935 had been considered by the administration, many lawmakers and utilities to be "outdated, Depression-era" law. Now that the old law has been repealed, some say that the industry appears ripe for more consolidation and a new influx of capital that can help pay for investments in new transmission and generation.

Clearly, the most important implication of this new law is that it opens opportunities for mergers that were either cumbersome from a regulatory standpoint or they were prohibited altogether by the old law. Before, it was as difficult for foreign utilities to buy American utilities as it was for non-traditional energy companies to purchase such enterprises. At the same time, the old law had forbid companies that were not in the same geographic district to link up.

Now, foreign energy providers such as Germany's E.ON or Britain's National Grid will have an easier time buying U.S. utilities. And folks such as Warren Buffet who had earlier purchased MidAmerican Corp. will have fewer hoops to jump through if they want to make the same kind of buys. Meantime, mergers can now take place between utilities in different parts of the country such as California and Florida.

"This will be a good time to get some new money into the industry," says David Raskin, partner with Steptoe & Johnson in Washington, D.C. "The ultimate barrier to consolidation will be state regulation. In the past, the toughest issues have been the ones raised with regard to market concentration -- or companies merging in the same geographic areas and possibly hurting consumers. States must still review the question of whether they think these mergers are in the best interest of consumers."

In fact, the argument for repeal of PUHCA is that there remains a myriad of regulatory hoops companies face if they want to merge. The Securities and Exchange Commission may play less of a role but the Federal Energy Regulatory Commission will continue to play an integral part in these decisions. And, the states will not lose their say in the matter. Major mergers and asset acquisitions are still subject to scrutiny by all relevant regulatory bodies.

Warren Buffett has said that if PUHCA is repealed then his Berkshire Hathaway would be willing to invest $10 billion to $15 billion into the energy sector -- critical capital at a time of emphasis on reliability. And with many energy providers now trying to shore up their balance sheets to boost credit ratings, an increasing number of utility-type assets are on the auction block and presumably ones that need to modernized.

Credit Ratings

PUHCA had been enacted in the 1930s in response to abuses by electric companies at the time, and because the 16 biggest corporations back then controlled 75 percent of the generation market. It has sought to ensure the financial integrity of regulated operations that are responsible for delivering power to consumers. But critics of PUHCA argued that it has inhibited utility holding companies from making investments that are ancillary to their core services.

"There will be a fair amount of more merger activity," says Michael Shenberg, head of the energy practice at Strook & Strook law offices in New York City. When asked if more mergers might lead to increased market domination, the attorney answered, "Why should Home Depot swallow up my local hardware store?" The implication is that the bigger business has more resources and better access to capital, all of which the utility sector desperately needs at the moment.

Consolidation, of course, has occurred industry-by-industry with most having a select group of national players and several niche players. Hundreds of utility companies now exist with some experts saying that many of those could combine and noting the industry should not be treated any differently than others.

Critics say repealing PUHCA will prove to be a bad idea, particularly now when consumers and shareholders have seen the effects of market manipulation in the electricity sector. The law provides valuable consumer protections, they say. Take Southern Co., which spun off its unregulated subsidiary now known as Mirant Corp. Mirant is now bankrupt and is suing Southern, which produces power and then delivers it to millions of consumers in the Southeast.

Moreover, critics of repeal say that the key to winning new investment is having better credit ratings and that mergers oftentimes hurt such ratings. Standard & Poor's, for example, says that holding companies regulated under PUHCA have better scores than those entities exempted from PUHCA regulation. "S&P also rejected the claim that PUHCA was preventing investment in utility infrastructure," says watchdog Public Citizen. "It found that the opposite was true, since investors like strong credit ratings."

In any event, there's still a lot of follow up work to be completed on this energy bill and in particular the repeal of PUHCA. The FERC must issue new rules. Jim Steffas, vice president of government affairs for Direct Energy in Houston, says that repeal of PUHCA should be viewed as part of an overall initiative by the administration and Congress to improve the viability of wholesale and retail electric markets. His company, which sells retail power in several U.S. states and Canada, says that regulators will work harder to ensure any benefits of merger activity are shared throughout the value chain.

Repeal of PUHCA has far-reaching effects. But, Congress and the president are persuaded that federal and state regulators will not have their hands tied. Their hope is that the changes will bring in investment to better enable reliability and improve services.

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