 AEP-CSW Ruling: A Slippery Slope – By Ken Silverstein Daily IssueAlert 5/12/2005 Free A Securities & Exchange Commission administrative law judge has thrown cold water on the merger consummated in June 2000 between American Electric Power and Central & South West. The ruling says that the deal has violated the Public Utilities Holding Company Act of 1935 in that it does not constitute a single integrated region, pointing out that the entities stretch from Mexico to Canada. The ruling is a setback for AEP but it is far from a deal-killer. The Columbus-based utility has 21 days from May 3, 2005, to file a petition for review, which it says that it will do; it will first go through the SEC before it would consider appealing any adverse ruling to the appellate level. Any time lag, meanwhile, may actually work to AEP's advantage. That’s because Congress is now grappling with a comprehensive energy bill and while repeal of the Holding Company Act is not in the current House version that just passed, it is expected to be included in any final bill—as it has for a decade now. “This decision disappoints us, but it does not alter AEP´s current structure or operations,” said Michael Morris, CEO of AEP. “We have been operating as a single integrated company for almost five years now, so this appears to be an instance where legal theory doesn’t conform to reality. This merger went through 30 months of intense review by a number of federal agencies before receiving ultimate approval by the SEC. We will review the initial decision and file a petition for review.” Many in the utility industry view the Public Utility Holding Company Act (PUHCA) of 1935 as a barrier to asset sales and believe that its repeal would increase capital flow to the utility sector. They add that times have changed since 1935 and now federal and state authorities have expansive authority to ensure that unregulated and regulated delivery businesses don't make bad investment decisions that would harm electricity and natural gas consumers. If the law is repealed, major mergers and asset acquisitions would still be subject to scrutiny by all relevant regulatory bodies, although critics of reform are protesting and pointing to the spate of recent corporate abuses. That said, the SEC, which administers PUHCA, has formally supported repeal in the past. The SEC previously OK'd the AEP-CSW merger but that decision was vacated and remanded back to the SEC after public power trade groups appealed it to the court of appeals. In his reversal, Administrative Judge Mahoney said that the electric systems of AEP and CSW are “clearly noncontiguous,” rejecting arguments by AEP that the entire eastern interconnection along with regional transmission organizations meant that the area was unified. The ruling makes no mention of how the merger has already affected consumers. “AEP’s evidence, in fact, exhibits more convincingly that the combined system operates over several regions,” Mahoney writes. “Accordingly, the Initial Decision denies the approval of the merger of AEP and CSW.” Regulatory Process It’s too early to know the ramifications of this one legal decision. But it didn’t seem to quell the early enthusiasm that Duke Energy and Cinergy Corp. displayed for their proposed $9 billion merger. Under the terms of the deal announced Monday, Cinergy’s shareholders would get 1.56 shares of Duke for each share they now hold. In the end, Duke’s stockholders would own 76 percent of the company while Cinergy’s shareholders would own 24 percent. Duke will begin filling out nine state and regulatory forms and it expects the merger to be approved in a year. The Charlotte-based utility says that its marriage to Cincinnati-based Cinergy is well conceived not just because they are geographically juxtaposed to one another but also because they complement each other’s fuel mixes. It comes atop the Exelon Corp. - Public Service Enterprise Group proposed deal, which would create the nation's largest power generation company. That acquisition, proposed by Exelon last December, would be worth $12 billion in stock. It all circles back to the discussion over whether PUHCA should be repealed. The main contention that regulators will hear in all these cases is that the proposition would harm consumers by allowing the utilities to aggregate market power. A core group of consumer advocates and public power representatives that include the American Public Power Association continues to lobby that the law should remain intact because it offers valuable consumer-protection measures. The fundamental objection raised by these groups is that repeal would allow utility holding companies to gamble ratepayer money on potentially risky, non-utility business ventures. Consumers must be protected “from excessive consolidation of utility ownership and resulting electricity price-gouging,” adds Public Citizen. The main foundation for the "repeal PUHCA" argument is that the industry climate has changed so significantly that it has rendered the 1935 Act obsolete. Since the 1980s, the Federal Energy Regulatory Commission and state regulatory commissions have provided regulatory control, and improvements have been made in holding company accounting policies. Consequently, the argument goes, PUHCA has become a redundant and costly form of unnecessary regulation. Aggressive Utilities An uninhibited marketplace would give aggressive utilities a better chance at capturing new markets and increasing shareholder wealth, proponents of PUHCA reform say. All in all, estimates are that the industry must attract $150 billion in new capital over 20 years—something that can only happen with regulatory reform, they add. Berkshire Hathaway’s Warren Buffet says that his company would invest as much as $15 billion in energy-related assets if PUHCA is repealed. “PUHCA imposes artificial constraints—constraints that were designed to promote policies that are not particularly relevant anymore,” says Bill Harmon, with the Jones Day law firm in Chicago. “Having investors with resources that are interested in long-term, sound business practices—other things being equal—is a good thing.” The SEC’s latest ruling that would nullify the AEP-CSW merger approval is just one battle resulting from the PUHCA debate. Clearly, public power groups and citizen activists have a right to be concerned about the concentration of market power, although in this particularly instance the focal point is on whether the two make up a single integrated utility structure. That one argument won’t likely hold with regard to the proposed Duke-Cinergy merger and it has not been made with respect to the Exelon-PSEG deal. In any event, PUHCA will become an even hotter topic and particularly as Congress wrestles with its repeal during upcoming discussions on the contents of the 2005 energy bill. UtiliPoint's IssueAlerts are compiled based on the independent analysis of UtiliPoint consultants. The opinions expressed in UtiliPoint's IssueAlerts are not intended to predict financial performance of companies discussed, or to be the basis for investment decisions of any kind. UtiliPoint's sole purpose in publishing its IssueAlerts is to offer an independent perspective regarding the key events occurring in the energy industry, based on its long-standing reputation as an expert on energy issues. Copyright 2005. UtiliPoint International, Inc. All rights reserved. |
