by Diana L. Moss
There is a provision in the Senate energy bill that proposes to entirely repeal the Public Utility Holding Company Act of 1935. Even the casual reader might take note, since the wholesale repeal of laws on the books for almost three-quarters of a century does not happen every day. Proponents of repeal seem motivated by an opportunity to eliminate a relic of the New Deal. One gets the sense that the ideology of electricity “deregulation” may be running amuck--if some deregulation does not work well, deregulate more!
The proposed energy bill would repeal a law that was originally designed to protect investors, consumers and competition from exploitation by large utility holding companies with monopoly electric and gas subsidiaries. PUHCA empowered state and federal regulators to enforce financial and structural regulations regarding what multi-state holding companies could do and where they could do it. That included things like buying up ever-more companies and engaging in deceptive financial and accounting practices, which could degrade the value of utility securities or lead to higher electricity prices for consumers.
Some of this should sound familiar. Remarkably, the electricity industry environment today is similar to what it was in 1935. It revolves around a commodity that is critical for economic growth and security, involves an industry in difficult transition, is threatened by the risk that entrenched monopolists will get even bigger, and is still reeling from the damages inflicted on investors and consumers by Enron’s accounting fraud and affiliate shell games. If California taught us one thing, it was that electricity isn’t just another “commodity”--it is essential for daily life, safety, and well-being.
Consider also that the electricity industry has been in transition from regulation to competition for almost a decade. Things have not gone smoothly. Optimistic predictions of “laissez faire” competition have given way to an emerging consensus in favor of “managed competition.” The reality is that the industry will never be totally deregulated. Instead, there is likely to be some combination of regulation and enforcement of the competition laws by the antitrust authorities--perhaps into perpetuity.
The U.S. electricity industry is therefore a special needs candidate--one that is not helped by a “sink or swim” approach to restructuring. Eradicating PUHCA’s protections would most likely unleash the least desirable kind of response in an industry already struggling to keep it together. No one seems equipped to deal with the magnitude or complexity of corporate reorganization and restructuring that might ensue. All of this makes it difficult to see how advocates of PUHCA repeal have a compelling case. The million dollar question, of course, is figuring out which original PUHCA provisions still apply, or should be tailored to the modern electricity industry. This is part of the bigger public policy struggle that strives to balance the benefits of market expansion, innovation, and choice against the costs to consumers of anticompetitive behavior. But outright repeal of PUHCA is probably not the solution, since it is likely to make a difficult situation even worse.
With all this said, it is reported that the political horse is nearly out of the barn--the House version of the energy bill has already passed. But if repeal is imminent, what can be done? A set of amendments to the Senate bill could set forth important provisions that mimic the PUHCA protections that remain important for today’s industry. One protection is careful monitoring of transactions between regulated and unregulated subsidiaries of a holding company to make sure that transactions occur at “arms length.” This would prohibit firms from using profits from, or the credit of, regulated electric utility businesses to subsidize the activities of riskier, unregulated ventures, therefore preventing captive utility customers from paying higher prices.
Another protection is expanding the Federal Energy Regulatory Commission’s role, including the review of proposed utility holding company mergers and sales of generation assets between holding companies. The Commission should also pay more explicit attention to the costs and benefits of proposed mergers by requiring companies to make the case that merger-related savings outweigh the harm to consumers of higher prices from potentially anticompetitive mergers.
Without some “PUHCA-like” measures to address modern electricity industry problems, the Senate energy bill could have serious fallout--possibly reversing some of the restructuring gains that have already been made and inflicting huge costs on investors, competition, and consumers. In considering the bill, the Senate should focus on acknowledging those problems and finding effective solutions.
Vice-president and Senior Research Fellow, American Antitrust Institute (www.antitrustinstitute.org). Dr. Moss is an economist, formerly with the Federal Energy Regulatory Commission and adjunct professor at the Georgetown University Public Policy Institute.