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The Public Utility Holding Company Act of 1935 will be laid to rest today when President Bush signs legislation eliminating 70-year-old restrictions on utility mergers and acquisitions. Congress first began debate over the law’s repeal more than a decade ago, and the imminent demise of federal restrictions on utility deals has been predicted since. PUHCA, as the law is better known, was finally done in by the Energy Policy Act of 2005, a far-reaching piece of energy legislation of which PUHCA’s repeal was a major component. Passage of the bill ended a nearly five-year congressional stalemate that hindered the legislation. “I am proud to have helped write this bill. I’m proud of the open and bipartisan process we used to write it, debate it and conference it,” said Sen. Pete V. Domenici, R-N.M., chairman of the Energy and Natural Resources Committee and chief senate negotiator. Domenici added that the measure “will make a real difference to every American.” PUHCA leaves behind a utility industry ripe for acquisitions and sweeping consolidation. According to the Edison Electric Institute, a Washington-based trade association, there are about 2,000 municipal utilities, 900 electric cooperatives, roughly 200 shareholder-owned utilities and about 840 power marketers. Erasing PUHCA from the law books will “lead to a wave of utility mergers and acquisitions unseen since the 1920s and 1930s,” said Ken Hurwitz, a former executive director of the Maryland Public Service Commission and now the leader of the energy and power practice group for law firm Haynes and Boone in Washington. The first candidates for deals are expected to be smaller regional utilities in the $3 billion to $8 billion range, analysts believe. In the Northeast, possible targets include Albany, N.Y., and Portland, Maine’s Energy East Corp. and Connecticut-based Northeast Utilities Systems. In the Midwest, Madison, Wis.-based Alliant Energy Corp. and Dayton, Ohio’s DPL Inc., as well as Westar Energy Inc. of Topeka, Kan., and Great Plains Energy Inc. of Kansas City, Mo. Further south, there is speculation that Miami-based FPL Group Inc. may look beyond Florida’s borders. For years the power utility industry has been lobbying to kill the measure, saying the law is a Depression-era anachronism that hinders much-needed investment in the ailing electricity grid. PUHCA was a foundation of Franklin D. Roosevelt’s New Deal. In the wake of the stock market crash of 1929, Washington imposed geographic limitations on utility mergers and imposed rules that thwarted investment by nonenergy companies. 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. Now, the law’s demise removes a major impediment to investment in the sector allowing nonutility businesses, from private equity funds to large manufacturing companies to investment banks to acquire a utility. “Within the next five to 10 years, the current number of electric utilities — which numbers more than 100 — could shrink dramatically to between 10 to 20 utilities nationwide,” Hurwitz says. That’s just what consumer advocates fear. Eliminating the restrictions will usher in a return to those hazardous practices and lead to monopoly and higher consumer costs, says Lynn Hargis, a former staff attorney with the Federal Energy Regulatory Commission who now works for the watchdog group Public Citizen. “An overconcentration of economic power will be in the hands of a handful of holding companies by the end of the decade.” Hargis mourns the loss of PUHCA and estimates that $1 trillion in energy assets will soon be in play, creating a “feeding frenzy of buying and selling utilities and utility assets — it will be a revival of the 1920s, when three huge companies owned half of all utilities.” She also predicts more episodes such as the Enron Corp. scandal because holding companies could move capital around and risk the health of electricity providers. But it’s not just consumer watchdogs who predict deregulation will have a downside. Even Wall Street credit-rating agency Standard & Poor’s said the legislative abolition of the PUHCA could encourage some speculators to purchase utilities to “lever them up and use the cash to invest in higher risk, unrelated ventures.” 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.” But investors are already acting on the urge to merge. Three large utility deals have been announced in recent months as the law’s demise became more certain: the $13.2 billion deal between Exelon Corp. of Chicago and Public Service Enterprise Group Inc. of Newark, N.J.; the $9.1 billion merger of Charlotte, N.C.’s Duke Energy Corp. and Cincinnati’s Cinergy Corp.; and the $9.4 billion acquisition by Des Moines, Iowa-based MidAmerican Energy Holdings Co. of PacifiCorp, a unit of U.K.-based ScottishPower plc. All three transactions were subject to PUHCA review, and while they are still subject to review in the states they will do business in, there is now one less regulatory hurdle. Of course, federal restraint on utility deals isn’t disappearing. The law also assigns the Federal Energy Regulatory Commission greater responsibility for approving mergers in the sector. FERC’s new authority means it has to promulgate rules before December and will need to become more diligent in reviewing industry mergers (it hasn’t rejected one in 10 years). PUHCA’s detractors say the combinations of FERC and state reviews are enough to keep utility owners in check without help from the old restrictions. Indeed, state regulators are beginning to flex a little more muscle, vetoing two recent deals on grounds that they would be bad for consumers. One was Texas Pacific Group’s proposed $1.25 billion purchase of Enron’s Portland General Electric Co., which the Oregon Public Utility Commission rejected in March. And late last year, the Arizona Corporation Commission rejected a $3 billion leveraged buyout of UniSource Energy Corp. by Kohlberg Kravis Roberts & Co. Nevertheless, the end of PUHCA is just the beginning for a whole new “universe of entities that can invest in electric utilities,” says Adam Wenner, a partner in the project finance group at law firm Chadbourne & Parke in Washington. “One phenomenon [as a result of PUHCA's repeal] will be the pouring in of capital from private equity funds and industrial companies,” he said. Companies that shied away from pursuing a merger or acquisition in the utility industry because of PUHCA’s barriers will now compete more readily. For instance, he said it would be conceivable for an auto company to buy an electric utility or transmission company. Private equity funds, which once could take only a passive role, are expected to kick into high gear. Says Wenner: “I wouldn’t be surprised if KKR was already assembling a buyout fund.” Copyright �2005 TDD, LLC. All rights reserved.

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