Sep 01 - Albuquerque Journal

The repeal of a 70-yearold law originally designed to protect utility customers and shareholders from Depression-era corporate shenanigans might sound like tame news to the most casual observer.

But mention the recent cancellation of the Public Utility Holding Company Act to utility executives and consumer advocates, and the fur begins to fly.

Good riddance, say utility executives and trade organizations that lobbied hard to get rid of the law as part of the recently signed federal energy bill.

"PUHCA was a law that had outlived its usefulness," Jeff Sterba, chairman, president and CEO of PNM Resources, the holding company that owns the utility PNM, told the Journal in an interview.

The act imposed geographic restrictions that limited utilities to regional markets and limited ownership of utilities by nonutility companies.

The demise of the law will open new opportunities for investment that are sorely needed to build new power plants and transmission lines to meet demand, according to industry executives.

Consumer groups and some states' attorneys general including Patricia Madrid in New Mexico, however, said the repeal was the road to declining service standards and higher customer rates.

They predict a wave of mergers and acquisitions that could stifle competition in the industry. They point to recent bids by Warren Buffett's MidAmerican Energy Holdings to buy Portland, Ore.-based PacifiCorp, and Charlotte, N.C.-based Duke Energy to buy Cinergy, the utility that supplies parts of Ohio, Indiana and Kentucky..

If a Warren Buffett wanted to buy Public Service Company of New Mexico, a small fish among regional investor-owned utilities, ratepayers could say goodbye to the personal part of its commitment to New Mexico, they said.

Repeal of the act "is a terrible blow for consumers," said New Mexico assistant attorney general Jeff Taylor.

Congress passed the law in 1935 because companies that held ownership in several utilities were using utility rates to finance risky business ventures by their non-utility affiliates. Many of those holding companies went bankrupt after the stock market collapse of 1929 when banks called in the loans.

The law restricted the geographic size of utilities and limited ownership by nonutility companies. It also controlled the way holding companies can use utility revenues to guarantee debt.

But now, with those restrictions gone, shareholders and ratepayers are exposed to the same kind of risks, said Attorney General Patricia Madrid, one of 14 attorneys general who wrote to energy bill drafter Sen. Pete Domenici, R-N.M., asking him oppose repeal of the law.

"Its repeal would lead to unconstrained mergers and the concentration of generation ownership that was disastrous in the early part of the 20th century," the letter said.

That didn't happen. Domenici was a staunch supporter of repeal.

"Repealing the (act was) an important step in encouraging much needed investment in our energy infrastructure," Domenici's office said in a written statement.

There is a state holding company law in New Mexico that offers protections similar to PUHCA's, but it may be time to see if that law needs strengthening, said Public Regulation Commissioner Jason Marks.

For their part, utility executives said the world has dramatically changed since the law was passed and critics of the repeal need to move on.

"From our standpoint, PUHCA was a relic that was inhibiting investment in our sector, imposing burdens on regulated companies and acting as a barrier to competition," said Jim Owen, spokesman for Edison Electric Institute, a national trade association for shareholderowned electric companies.

Since the 1930s new state and federal laws have been passed, creating additional layers of regulatory protection for consumers that have made the PUHCA restrictions redundant, he said.

One industry analyst suggested that repeal of the act is unlikely to kill competition.

The utility industry has seen about two mergers per year over the past 20 years. In most cases, they are strategic alliances between utilities in neighboring territories where combining operations leads to lower rates, said Maurice E. May, an analyst who follows PNM for Power Insights-Soleil in New York.

One example was PNM's acquisition this summer of TNP Enterprises, a holding company that owns utilities that supply customers in parts of New Mexico and Texas.

"I look at PNM as more of an acquirer of others," May said.

Utilities such as El Paso Electric or Tucson Electric Power would make sense as potential acquisition targets for PNM, he said.

PNM's Sterba has hinted that he would like to establish a utility toehold in the Midwest or Kansas in a few years.

Whether suitors approach PNM or PNM goes courting others, any merger still requires approval by state and federal regulators including the Securities and Exchange Commission and the Federal Energy Regulatory Commission, Sterba said.

The new energy bill gives additional authority to federal and state regulators, which will cover any regulatory gaps created by repeal of PUHCA, said Sterba and other utility executives.

FERC now has more access to the books and records of holding companies and their subsidiaries. That will prevent holding companies from using utility revenues to subsidize non-utility business ventures, said FERC member Suedeen Kelly of New Mexico.

Sterba added that the new regulatory landscape will allow PNM to reduce administrative costs and attract new capital.

To comply with PUHCA, PNM had to register and file a report with the Securities and Exchange Commission. Sterba estimated the cost of those reporting requirements at between $500,000 and $1 million this year.

Utilities need large amounts of capital to build power plants and transmission lines. Repeal of PUHCA simplifies procedures for outside investors such as Microsoft's Bill Gates, currently PNM's largest institutional shareholder through his personal portfolio company Cascade Investment LLC, to increase their stake in the utility, Sterba said.