A Brave New World: Congress Repeals the Public Utility Holding Company
Act of 1935
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“The Public Utility Holding Company Act of 1935 (15 U.S.C. 79 et seq.)
is repealed.” Rarely does Congress do as much with so few words, and these,
set forth in the Energy Policy Act of 2005, bring down the curtain on the
70 year reign of the most radical of the New Deal securities legislation.
When the repeal of the Public Utility Holding Company Act of 1935, or PUHCA,
becomes effective six months from now, Congress will have unleashed upon
public utilities the deregulated market forces that have remade the airline,
telecommunications and banking industries. Instead of the comprehensive
system of holding company regulation administered under PUHCA, Congress
has instead adopted a new Public Utility Holding Company Act of 2005 which
has all but dismantled that system, taking the Securities and Exchange Commission
(“SEC”) out of the utility regulatory business and shifting a more limited
regulatory prerogative to the Federal Energy Regulatory Commission (“FERC”).
|“…with the repeal of PUHCA, it
appears that the world of public utilities is moving forward to
the past, returning to a regulatory environment that should foster
merger and consolidation activity that has been suppressed for nearly
Adopted in the wake of corporate scandals which in their day rivaled
those of recent years, PUHCA overhauled an industry that was rife with abuse
and fraud. Unlike other major New Deal legislation such as the Securities
Act and Securities Exchange Act, which were directed at disclosure, PUHCA
authorized the SEC to restructure the gas and electric utility industries
by forcing complex multi-state utility companies to dismantle their systems,
spin off their subsidiaries and reorganize their capital structures so that
they would be limited to a single, geographically integrated utility system
that could be more easily regulated by state public utility commissions.
Those companies that could not or would not pare themselves down, were required
to register under PUHCA and were, as a result, subjected to intrusive regulatory
scrutiny by the SEC of almost every significant corporate transaction. Moreover,
registered holding companies were limited to business activities directly
related to the conduct of their utility operations which discouraged non-utilities
from becoming holding companies or acquiring significant interests in more
than one utility. In addition, PUHCA forced utility holding companies to
become single state holding company systems because so called “intrastate
systems” were largely exempted from PUHCA. This exemption, however, required
that a holding company and each of its material utility subsidiaries limit
their activities to a single state.
In particular, PUHCA prohibited any utility company affiliate (an entity
owning 5% or more of the voting securities of a utility or a utility holding
company) from becoming an affiliate of another utility unless first obtaining
SEC approval. That approval, usually involving a lengthy open ended process,
was conditioned upon meeting a strict set of criteria, designed to advance
PUHCA’s policy objectives (as they existed in 1935). This so called “two
bite rule” acted as a legislative shark repellant, effectively discouraging
utility acquisitions by other holding companies or any investor seeking
to consolidate the industry. Only those combinations able to meet the prescribed
standards of promoting geographically integrated and interconnected utility
systems could be approved by the SEC.
Moreover, PUHCA effectively split the energy industry between electric
utilities and gas utilities. Utility holding company systems in which both
electric and gas utilities were combined were severely limited, if not prohibited,
by PUHCA. Along with the intrusive regulation applicable to registered holding
companies and the prohibition on registered companies engaging in non-utility
businesses, PUHCA has largely shielded public utilities from the consolidation
trends that have remade so many of our key industry sectors.
As with other industries that have seen the elimination of artificial
checks on market forces, we should expect that PUHCA’s repeal will trigger
vigorous utility acquisition activity. By eliminating the need for an intrastate
exemption, utility entities organized in one state will be able to acquire
utilities in another. For the same reason, it will be possible for one utility
company to also own utilities in multiple states. Industrial and financial
services companies will also be able to acquire utilities in a variety of
states without fear of PUHCA regulation and the loss of the ability to conduct
non-utility businesses. Private equity firms will be able to participate
in the market for utility properties just as they do for almost every other
From the other direction, existing registered utility holding companies
will be able to diversify into non-utility businesses, thus allowing them
to leverage their substantial cash flows and capital resources to bid for
and acquire a variety of non-utility enterprises. In addition, registered
holding companies will be able to play more freely in the exempt wholesale
generator and foreign utility company markets without the financial limitations
imposed by PUHCA.
The bottom line is that electric and gas utilities will be newly vulnerable
to acquisition, will have increased pressure to perform financially and
will increasingly look to acquisitions as a means to grow and improve financial
performance through the synergies derived from consolidation. Moreover,
public utilities and their holding companies should draw the attention of
national and multinational conglomerates seeking to tap into the steady
cash flows and valuable assets offered by utilities. This means that utilities
should be reviewing their anti-takeover protections while identifying targets
of opportunity (both utility and non-utility).
This is not to suggest that we will see a totally unfettered utility
merger market. The new legislation provides FERC with increased regulatory
authority over utility mergers, including authority over mergers and acquisitions
of generation facilities used for interstate wholesale sales of electricity.
FERC can be expected to apply its merger guidelines rigorously to protect
consumers from the anticompetitive effects of utility mergers and acquisitions
that would permit the exercise of horizontal or vertical market power. In
addition, holding companies will be subject to enhanced information reporting
to both FERC and state utility regulators to facilitate rate regulation
and protection of ratepayers from abusive affiliate company transactions.
Of course, state utility commissions will continue to regulate local public
utility activity, including mergers and acquisitions.
Despite its enhanced regulatory role, FERC’s oversight should not be
nearly as intrusive as was the SEC’s under PUHCA. The new legislation, which
will be implemented through FERC rulemaking, appears to limit the scope
of FERC’s review to antitrust-related and cross-subsidization issues rather
than the wide-ranging review required by the SEC under PUHCA. Moreover,
Congress has limited FERC’s merger review process to 180 days (absent a
showing of good cause) in striking contrast to the open-ended SEC process
in which some utility mergers simply died from SEC inaction.
In sum, with the repeal of PUHCA, it appears that the world of public
utilities is moving forward to the past, returning to a regulatory environment
that should foster merger and consolidation activity that has been suppressed
for nearly 70 years.
This Alert was written by
Ira N. Rosner in the Miami
office. Please contact Mr. Rosner at 305.579.0500 or your Greenberg Traurig
liaison, if you have any questions regarding the subject matter of this
© 2005 Greenberg Traurig
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