The Energy Policy Act of 2005: The Repeal of PUHCA Paves the Way for New Investments

Client Alert

On August 8, 2005, President Bush signed into law the Energy Policy Act of 2005 (the "Act").  The Act is the result of compromises among the White House, the Senate and the House of Representatives, and aims to ensure the availability of secure, affordable and reliable energy for all Americans.  The Act has been touted as the most significant and comprehensive energy legislation in 70 years.  It makes sweeping changes that affect most sectors of the country’s energy industry.  Among its most significant provisions is the repeal of the Public Utility Holding Company Act of 1935 ("PUHCA").

"We are optimistic that PUHCA repeal will bring sorely needed new avenues of capital investment into the U.S. electricity sector, particularly for the transmission grid where investment has been lagging growth for years."

Chairman Joseph T. Kelliher
of the Federal Energy Regulatory Commission

PUHCA was one of the most difficult barriers to investment in utilities

PUHCA was adopted in 1935 as part of President Roosevelt’s New Deal.  It outlawed existing pyramidal structures and required holding companies that owned at least 10% of a public utility to register with the Securities and Exchange Commission ("SEC") and provide detailed accounts of their financial transactions and holdings.  PUHCA led to the split of several gas and electric utilities, and many companies exited the energy sector.  Within 20 years, the number of holding companies declined from more than 200 to fewer than 20.  This forced divestiture saw the creation of vertically-integrated systems, often limited to a state’s territory.

More recently, PUHCA has acted as a severe obstacle to much-needed investments in the electric and gas utility sector by sophisticated parties.  Essentially, any party (whether domestic or foreign) not primarily involved in utility activities could not acquire more than a 10% interest in a utility without exposing itself to PUHCA’s onerous requirements.  PUHCA also limited the utilities’ ability to pursue opportunities that fell outside the scope of their principal activities and otherwise restricted the territory within which they could operate.

The repeal of PUHCA will facilitate investors’ entry into the U.S. utility market and create opportunities for consolidation

The Act repeals PUHCA effective February 8, 2006.  The Federal Energy Regulatory Commission ("FERC") essentially replaces the SEC in the supervisory role it had under PUHCA, and is mandated to adopt certain rules to implement the new regime created by the Act.

It is expected that the repeal of PUHCA will allow financial institutions, private funds, energy companies, foreign entities and other parties not currently in the utility sector to invest in or merge with utility holding companies and public utilities.  Existing utilities can also now contemplate merging with or acquiring other utilities that operate in areas distant from their current customer network and other companies such as telecommunication companies or engineering firms.  Strategic alliances will become possible and the new, more open market dynamic will likely highlight the relative strength or weakness of certain players, which should make them more amenable to supportive investments, mergers and acquisitions.  The Act gives FERC broader authority to review and approve such investments, mergers and acquisitions.  However, it is hoped that FERC’s transaction review process will be less cumbersome than the SEC’s requirements under PUHCA.

The Act defines a public utility as any person who owns or operates facilities used for transmission of electric energy in interstate commerce or sales of electric energy at wholesale in interstate commerce.

Public utilities will need FERC consent before they can

  • sell, lease or otherwise dispose of all their jurisdictional facilities, or any part thereof, valued in excess of $10,000,000;
  • merge or consolidate, directly or indirectly, its jurisdictional facilities with any person;
  • purchase, acquire or take any security, valued in excess of $10,000,000, of any other public utility; or
  • purchase, lease or otherwise acquire any generation facility valued in excess of $10,000,000, used for interstate wholesale sales and over which FERC has jurisdiction for ratemaking purposes.

The new $10,000,000 threshold is seen as a relief from the $50,000 threshold that previously applied.  The inclusion of generation facilities is an expansion of previous authority.

The Act defines a holding company as one holding 10% or more of the voting rights in an electric or gas utility company, or such "controlling influence" as to make FERC supervision necessary.  Banks, savings associations or trust companies that own an interest in a holding company or a public utility as collateral for a loan, as fiduciaries or for purposes of liquidation are not deemed holding companies.

Holding companies in a holding company system that includes a transmitting utility or electric utility company will need FERC consent before they can purchase, acquire, or take any security (valued in excess of $10,000,000) of, or merge or consolidate (directly or indirectly) with,

  • a transmitting utility;
  • an electric utility company; or
  • another holding company in a holding company system that includes a transmitting utility or electric utility company valued in excess of $10,000,000.

FERC’s review of such transactions will consider the public interest, with specific attention to any cross-subsidization of a non-utility associate company or the pledge or encumbrance of utility assets for the benefit of an associate company.  The Act generally calls for an expedited review process, providing that a decision shall be made within 180 days after an application is filed (subject to extension for not more than 180 days for good cause).

Within four months, FERC will issue rules implementing the above provisions and submit to Congress detailed recommendations and conforming amendments necessary to carry out PUHCA-related reforms.

The Act also requires that each holding company and its associated companies maintain and make available to FERC such books and other records as FERC determines are relevant to costs incurred by an associate public utility or natural gas company and necessary or appropriate for the protection of customers with respect to jurisdictional rates.  Rules will be drafted to exempt from such monitoring those holding companies that limit their ownership to "qualifying facilities," "exempt wholesale generators" and "foreign utility companies."

Requirements imposed by state commissions will continue to apply and parties should carefully review such requirements, as well as the new FERC rules and regulations, as they revise their compliance procedures in the wake of the PUHCA repeal.  In addition, parties should keep in mind other aspects of the regulatory landscape that will continue to apply in certain circumstances, such as antitrust review under the Hart-Scott-Rodino Act and review by the Nuclear Regulatory Commission where nuclear assets are involved.

The new transaction review procedures described above do not apply to applications pending on August 8, 2005.  Until FERC adopts rules clarifying its overall approach with respect to such procedures, the Act’s practical effects will remain uncertain.  We will continue to watch developments in this area.  Please contact us for additional details or to discuss any particular concern.

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