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The utility industry is about to undergo massive consolidation, now that the Public Utility Holding Company Act is history. That’s the prediction of both those who loved and loathed Puhca, as it’s better known. The 70-year-old law was done in by the Energy Policy Act of 2005, which was signed by President George Bush in August. A foundation of the New Deal, Puhca imposed geographic limitations on utility mergers and imposed rules that thwarted investment by nonenergy businesses. At the time, it was viewed as a vital safeguard to prevent holding companies from amassing utilities over vast regions of the country and using captive electricity receipts to fund risky corporate ventures unrelated to electricity service. The law worked � the utility sector is one of the most fragmented in the country. Puhca’s repeal removes a major impediment to investment, allowing nonutility businesses to acquire a utility. And that will “lead to a wave of utility mergers and acquisitions unseen since the 1920s and 1930s,” says Ken Hurwitz. A former executive director of the Maryland Public Service Commission, Hurwitz now heads the energy and power practice group for Haynes and Boone in Washington. He adds, “Within the next five to ten years, the current number of electric utilities � which numbers more than 100 � could shrink dramatically to between ten to 20 utilities nationwide.” That’s just what consumer advocates fear. “An overconcentration of economic power will be in the hands of a handful of holding companies by the end of the decade,” says Lynn Hargis. A former staff attorney with the Federal Energy Regulatory Commission (FERC), Hargis now works for the watchdog group Public Citizen. She predicts that eliminating Puhca’s restrictions will bring back the hazardous practices that made the law necessary in the first place, and will lead to monopolies and higher energy costs. But it’s not just consumer watchdogs who think that deregulation will have a downside. Even Standard & Poor’s, the Wall Street credit rating agency, has said that Puhca’s abolition could encourage some speculators to purchase utilities to “lever them up and use the cash to invest in higher-risk, unrelated ventures.” And Fitch Ratings notes that while mergers may offer a way to achieve utility earnings growth, the “emergence of larger groups could also result in more rating degradation, if merger frenzy results in higher merger premiums and more debt-financed merger transactions.” Of course, federal restraint on utility deals isn’t disappearing. The new energy act gives FERC greater responsibility for approving mergers in the sector. The agency’s increased authority means it has to promulgate revised rules before the end of the year. FERC will have to become more diligent in reviewing industry mergers (it hasn’t rejected one in ten years). State utility regulators will also help keep utility merger mania in check, say those who advocated for Puhca’s repeal. Nevertheless, the changed regulatory environment creates opportunities for a whole new “universe of entities that can invest in electric utilities,” says Adam Wenner, a partner in the project finance group at Chadbourne & Parke in Washington. For example, an auto company could conceivably buy an electric utility or transmission company, Wenner says. Private equity funds are also expected to kick into high gear. Says Wenner: “I wouldn’t be surprised if [Kohlberg Kravis Roberts & Co.] was already assembling a buyout fund.”

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