Whatever is going to happen to PUHCA?
In August, PUHCA's
repeal in the energy act was exciting -- certainly to David Sokol, CEO
of MidAmerican, maybe the nation's leading PUHCA opponent.
He envisioned the repeal as an invitation to his boss Warren
Buffett to invest in power.
But FERC's NOPR (9/16) on a new PUHCA has left people scratching
their heads.
The commission had a laundry list of questions that went far beyond
what was needed for books and records, Douglas Dunn told us.
He's a partner at Milbank, Tweed, Hadley & McCloy and chairs the
firm's power and energy practice. He may be the leading attorney in the
world of PUHCA.
Is FERC rethinking that PUHCA repeal?
Probably not, Dunn said.
FERC probably wrote the NOPR, he thinks, to allay congressional
worries of a vacuum in regulation.
The commission has always been realistic, he added.
Yet he's confident of their focus on the physical system.
He's comfortable that the new PUHCA will allow convenient
mergers. FERC's final rule from the NOPR will have books and records as
safeguards but won't put back the barriers of the old PUHCA, he
predicted.
The new PUHCA is meant to be just a books and records statute, Dunn
added, not continuing regulation.
The whole idea of repeal, he reminded, was to get rid of the
arbitrary barriers that discouraged investment.
PUHCA stymied private equity or large commercial concerns like oil
companies from getting into power.
But private equity brings investment.
Imagine large commercial concerns such as oil companies -- with
their histories of capital-intensive jobs -- bringing good management
skills into this industry.
The power industry desperately needs investment, Dunn argued,
pointing to the August 2003 blackout.
What's life with new PUHCA going to look like?
Nothing happens fast in the industry, Dunn cautioned, and it's just
too soon to tell.
He has seen a greater interest from big financial players.
In the end, Dunn expects consolidation because the US is the only
country with so many small players in power.
The US's largest players are dwarfed by even modest overseas firms.
PUHCA repeal intends to remove rules blocking mergers of
non-contiguous utilities.
Why would such cross-country mergers happen?
Those mergers won't have the synergies merging contiguous utilities
would, Dunn explained, but cross-country mergers diversify your two
biggest risks -- state regulation and weather.
He expects cross-country mergers to be a big part of life with the
new PUHCA.
Mergers may take a variety of forms.
One lingering challenge will be FERC's market-power rules.
Under old PUHCA the SEC only allowed noncontiguous mergers in the
special case of American Electric Power and Central & South West.
The contiguous ones are considered the most likely to raise market
power concerns.
But merging near systems can foster efficiencies such as expanding
generation and fuel diversity, Dunn added.
Integration of touching systems has to win out in the end, Dunn
argued, because of its economic benefits.
The solution could, Dunn thinks, be the advent of a truly
independent grid where market power of generation isn't a problem.
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