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Unanticipated Consequences

Progress never comes without pain. But over the past decade, it seems like we've majored in pain and minored in gain. We have a history of launching into

Progress never comes without pain. But over the past decade, it seems like we've majored in pain and minored in gain. We have a history of launching into new initiatives without taking a long look into our crystal ball. The rearview mirror too often tells us our assumptions were flawed or overly simplistic.

Take deregulation. We assumed that competition would be good for all involved. We also assumed that a new breed of generating and retail companies would sweep aside their slow-moving regulated brethren. Instead, we saw too many shady trading deals, too few energy contracts and the emergence of flimsy retail startups. Execution was only part of the problem. We also conveniently ignored the reality that residential customers paid less for electricity than the cost to serve them. Instead of telling the voting public that competition could well mean higher bills, our courageous regulators instituted rate caps, hoping that deregulation magic would result in falling rates after the caps expired.

Now Congress is pushing for an energy bill. Versions have passed both the House and the Senate. These bills focus primarily on the generation side. Both bills push clean coal technology, renewable energy, hydro relicensing and natural gas storage. Looking at T&D, both versions address mandatory reliability standards, congested transmission corridors and federal backstop siting authority.

Both versions also call for the repeal of the Public Utility Holding Company Act (PUHCA) of 1935. PUHCA is definitely long in the tooth. This law was passed to curb abuses by huge utility holding companies that resulted in higher electric bills. PUHCA requires holding companies to own utilities that are physically connected to one another via the transmission grid. PUHCA also requires each holding company to operate in a single area or region.

The Warren Buffets of the world feel comfortable investing in cash-cow businesses like ours. But PUHCA creates a stumbling block. Buffet's company, Berkshire Hathaway, owns MidAmerican Energy Holdings Company. This utility has announced an agreement to purchase PacifiCorp from parent company Scottish Power. MidAmerican intends to meet the PUHCA interconnection requirement by reserving a transmission path between the two systems. Whether it is successful remains to be seen.

We've already seen one merger run afoul of PUHCA. Recently, Security and Exchange Commission administrative law judge Robert Mahony, on appeal, denied approval of the AEP-C&SW merger, which took effect way back in 2000.

Earlier this year, Duke Energy Corp. announced an agreement to merge with Cinergy. As Duke is headquartered in North Carolina and Cinergy is headquartered in Ohio, PUHCA also could cause this deal to run afoul. Duke and Cinergy are working to see if they can effectively address PUHCA restrictions. If the deal progresses, the combined company intends to file as a holding company under PUHCA.

With or Without PUHCA

John Marshall, senior vice president delivery with Kansas City Power & Light, expects that sooner or later PUHCA will be repealed. When that day arrives, don't expect purchasers to rush in with their checkbooks open. Marshall predicts new entrants will be upstream strategic buyers versus pure financial suitors. “Imagine the opportunities a Peabody Coal would unearth if it built a series of mine-mouth plants and then purchased utilities that needed base-load generation,” states Marshall.

Kenneth Marks, a managing director with Morgan Stanley, sees considerable room for further consolidation with or without PUHCA. As reported in trade journal Energy Biz, Marks believes, “The repeal of PUHCA would facilitate the ability of financial investors, foreign utilities and geographically remote domestic utilities to acquire other utilities.” But with or without PUHCA, Marks expects existing utilities will be best positioned to achieve the synergies necessary for mergers to move forward.

One of my biggest post-PUHCA fears is that we forget about customer service. We've seen consolidation in telecom result in a meltdown in customer-satisfaction ratings. I expect the same could happen in our industry if new owners are more motivated by financial returns than by delivering service.

Another fear is that massive utilities will lose the ability to innovate. I seldom see large utilities riding the crest of technology. Instead, mid-tier utilities have become the proving grounds for new technologies.

Regardless, we have an obligation to look at all the forces pressing in on us. Let's make sure we understand the threats and opportunities facing us as we prepare to meet an uncertain future.

Editor's Note: As of July 29, the comprehensive energy bill was passed in both the House of Representatives and the Senate. This bill calls for the repeal of PUHCA after a six-month transition period.

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