Regulatory Issues in US Utility Acquisitions

Regulatory Issues in US Utility Acquisitions

April 01, 2005

By Adam Wenner and Donna J. Bobbish

Observers expect to see consolidation in the electric utility sector over the next five years and, as a result of a weakened US dollar, US utility assets are of renewed interest to foreign investors. The focus of this article is regulatory hurdles facing foreign investors who want to purchase US electric utilities. The article not only explains what the regulatory hurdles are, but also describes the experience of four non-US companies that cleared them. 

At the federal level, acquisition of a US electric utility will require approval by the Federal Energy  Regulatory Commission under the Federal Power Act and may also require approval by the Securities and Exchange Commission under a 1935 law called the Public Utility Holding Company Act (or “PUHCA”).

Filings under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 with the US Department of Justice and the Federal Trade Commission will probably also be required. In addition, if the electric utility has a license to own or operate a nuclear power plant, then authorization for the transfer of that license will be required from the Nuclear Regulatory Commission under the Atomic Energy Act. Review of the transaction’s effect on national security under section 27 of the Defense Production Act of 1950 — known  as “ExonFlorio” — also may be required. Federal regulators reviewing transactions under these statutes will examine the effect of a proposed transaction on competition, wholesale electricity rates and national security. At the state level, the acquisition also may require approval of one or more state public utility commissions under state utility laws.

Four Case Studies

Four foreign companies acquired US electric utilities during a four-year period starting in 1999. The buyers decided that the prospect of US regulation was an acceptable price of owning a US utility.

Scottish Power plc acquired PacifiCorp in 1999. Through its operating company subsidiaries, Scottish Power is engaged in the transmission, distribution and power generation business in the United Kingdom. Although PacifiCorp operates in several states, it is organized as a single utility company with divisions, rather than separate companies.

National Grid Group plc purchased New England Electric System, or “NEES,” in 1999. NEES is a "registered holding company” with utility company subsidiaries operating in Massachusetts, Rhode Island and New Hampshire, and other utility operations in Vermont and Connecticut. A subsidiary of National  Grid, the National Grid Company plc, is a public utility company operating in England and Wales. National Grid also holds investments in transmission companies in Argentina and Zambia. National Grid subsequently acquired Niagara Mohawk Power Company, another US electric utility in upstate New York. Niagara Mohawk’s system is directly interconnected with the NEES system in Massachusetts. PowerGen plc acquired LG&E Energy in 2000. PowerGen is engaged in the generation and distribution of electricity in England and Wales through a subsidiary. It also is involved in the transportation, marketing and delivery of natural gas and the development of cogeneration and renewable energy facilities. LG&E Energy is the parent of Kentucky Utilities Company and Louisville Gas and Electric Company.

Subsequently in 2002, the German utility E.ON AG acquired PowerGen and, as a consequence, E.ON became a “registered holding company” subject to PUHCA regulation in the United States. At that time, E.ON, through its subsidiaries, had six business divisions: energy, chemicals, real estate, oil, telecommunications and distribution/logistics. E.ON was engaged in the ownership and operation of power plants and the transmission and distribution of electricity, gas, heat, water and water-related services.  E.ON also held interests in regional electricity and gas distributors and in municipal utilities in Germany.

Each of these transactions was subject to federal and state regulatory scrutiny in the United States. Each transaction was approved. A foreign investor acquiring a US utility may have to deal not only with numerous federal and state regulatory bodies but also with other utilities and consumer advocates that might intervene in regulatory proceedings and have to reach an accommodation with such intervenors to remove opposition to a proposed transaction. 

Federal approval of the Scottish Power, National Grid and PowerGen transactions was fairly  straightforward. However, state approval was much more contentious, and the applicants had to enter in settlements with consumer advocacy groups and to agree to numerous conditions to get through them.


PUHCA is a 1935 law aimed at curbing abuses by large multistate utilities that, because of their size and geographic reach, can evade state utility regulation. PUHCA is a significant inconvenience for a foreign buyer that is already in the electric utility business outside the US, but it is not an insurmountable barrier to entry. However, for other buyers, it is likely to be too much of an obstacle because PUHCA will require them to divest all of their non-utility businesses. 

Who is subject to PUHCA? 

The answer is anyone buying a US utility, but the pain hits under the statute only if the buyer cannot find a way to avoid status as a “registered holding company.” 

Any company that acquires 10% or more of the voting securities of an electric utility or a gas distribution utility (or of another holding company of such utilities) is automatically a “holding company.” So is anyone buying a smaller voting interest but whom the US Securities and Exchange Commission concludes exercises management control over the utility. Once the label “holding company” attaches to a buyer, then the buyer must look for an exemption that will spare it from status as a “registered holding company.” Registered holding companies are subject to extensive regulation by the SEC.

Since it is ownership of voting securities that triggers registered holding company status, a buyer might acquire non-voting stock or other types of non-voting ownership interests, such as passive limited partnership or non-managing member interests in a limited liability company.

Acquiring significant financial interests while limiting voting interests to less than 10% has become the standard way for US buyers to acquire utilities while avoiding PUHCA. 

The norm is to find a company that is willing to be subject to PUHCA to hold the voting securities, which can be common stock, a general partner interest or a managing member interest in a limited liability  company. Alternatively, an individual might be found to play this role. An individual is presumed not to be a holding company. Several recent acquisitions of US utilities have been structured with an individual as the general partner of a limited partnership that indirectly owns the utility, while institutional investors avoid PUHCA regulation by participating as limited partners. 

If the buyer cannot avoid status as a registered holding company, then it will be limited to owning one primary “integrated public utility system” in the United States, and the buyer will have to divest itself of other non-utility and non-utility-related businesses.

Unfortunately, none of the exemptions from registered holding company status is available to a  foreign buyer. Foreign buyers of US utilities cannot avoid becoming registered holding companies.

Therefore, as long as PUHCA remains on the statute books, the only potential foreign buyers of US utilities are foreign companies that are already exclusively in the utility business or are willing to divest their non-utility businesses. (Congress is debating whether to repeal PUHCA.) And any foreign buyer who buys more than one utility can only do so if the two are part of an “integrated public utility system.”

An integrated system means the generation, transmission or distribution facilities must be physically connected and operated as a single integrated and coordinated system. In practice, this means a buyer cannot own more than one electric utility in the United States unless the utilities are confined to a single area or region and they coordinate their activities so as to function as a single interconnected system. If a buyer owns more than one US utility, then the utilities must be physically interconnected; however, interconnection may be achieved by reserving a firm transmission path between two utilities. Two utilities are considered physically interconnected if they are members of the same “tightly integrated” power pool, independent system operator (ISO) or regional transmission organization (RTO), such as PJM or ISO New England.

The SEC has applied the limitation of a “single area or region” liberally, permitting, in the most extreme case, American Electric Power, which operates in the Midwest, to acquire Central and South West Corporation, which operated in Texas, Oklahoma and Louisiana. Nevertheless, the SEC will not permit an east coast utility to acquire a west coast utility, and it is clear that PUHCA continues to prevent the  development of “super-utilities” that, absent PUHCA, could take advantage of management and other scale economies by owning utilities throughout the US. EWGs and FUCOs Historically, the SEC  interpreted the “single integrated system” standard as applying to a US utility seeking to acquire a foreign utility, thus making it impossible for US utilities to acquire utilities in other countries unless the acquired utility was located in Canada or Mexico and could integrate its operations with those of the US utility. The result was that US utilities could not bid into the wave of utility privatizations abroad. 

However, Congress amended PUHCA in 1992 to open the door to US ownership of foreign utilities — and vice versa. First, the 1992 amendments created something called an “exempt wholesale generator,” or “EWG.” An EWG is a company that owns or operates a power plant used only for wholesale sales and that does not engage in any other activities. EWGs are not considered utilities for purposes of PUHCA. Thus, a buyer, irrespective of whether it is a US or a foreign buyer, is free to own EWGs without becoming a holding company. During the 1990’s, many US utilities divested their generating facilities; the EWG exemption opened the door to foreign buyers that wanted to amass portfolios of generating assets in the United States. 

A second exemption in the 1992 amendments proved helpful in an unforeseen way. Congress created  another category of company under PUHCA called a “foreign utility company,” or “FUCO.” A FUCO is a company that owns or operates electric generation, transmission or distribution, or retail gas distribution facilities, and operates exclusively outside of the United States. FUCOs and their owners are exempted from PUHCA regulation. A FUCO, like an EWG, is not considered a utility under PUHCA, so that a company may own as many FUCOs as it wants without becoming a holding company. This opened the door for US utilities to make acquisitions overseas without subjecting themselves to regulation under PUHCA.

Although the 1992 amendments creating FUCOs were intended to assist US companies acquire utilities outside the United States, the legislation also works in reverse, enabling foreign utilities to claim FUCO status for their non-US utility operations and then acquiring a US utility company. Because the foreign buyer would own a US utility, the buyer would still become a holding company under PUHCA. However, it could own utilities outside the United States without having to show that they are part of a single integrated system with the US utility.

The “Two Bite” Rule

For foreign buyers who acquire interests in two or more US utilities, the single integrated system standard is enforced by a requirement in section 9(a)(2) of PUHCA known as the “two-bite rule.”This provision requires a buyer to get SEC approval for any acquisition that would give it more than a 5% voting interest in more than one utility. No approval is required for the first utility acquisition (the “first bite”).

The SEC may only approve the acquisition of a second or additional utility if the combined utilities will form an integrated system. A buyer is permitted to acquire or retain a “secondary” gas or electric utility system that is not integrated with the others it is acquiring if the secondary system would incur substantial losses if it were operated as a standalone company. Historically, a holding company could have either electric or gas utility subsidiaries, but not both. However, in recent years, the SEC has permitted holding companies that own electric utilities to acquire gas utilities as a secondary system, although this has generally been limited, in the case of electric utility holding companies, to acquisitions of combined electric and gas utilities or neighboring small gas companies.

In addition to barring a buyer from owning more than one utility unless the utilities are in a single area or region, PUHCA requires a foreign buyer to be involved only in the utility business or in related businesses. While the SEC has been expansive in its rulings on the types of businesses that qualify as appropriately related to the utility business, it has not and could not, under PUHCA permit, for example, an automobile manufacturer or a software company to acquire a US utility. As E.ON found when it acquired Powergen, if a company engaged in non-utility businesses becomes a registered holding company by acquiring a US utility, then the SEC will require the holding company to divest its non-utility businesses.

Financing Hassles

Foreign buyers of US utilities should take note: any registered holding company — which a foreign buyer would automatically become — must get SEC approval before issuing any equity or debt securities (including guarantees). This approval requirement extends all the way up the ownership chain. Thus, if a foreign buyer forms a US holding company to acquire a US utility, not only would that US holding company need SEC approval for its equity and debt offerings, but so would the parent company outside the United States.

PUHCA requires that a security issued by a registered holding company or its subsidiaries be reasonably adapted to the earning power of the issuing company and to the capital structure of the holding company. Also, a registered holding company may not borrow or receive any extension of credit or indemnity from any of its utility subsidiaries. The SEC generally requires that a common stock equity ratio of 30% or higher be maintained for the utility company subsidiaries. The SEC also regulates the sale of goods and services by affiliates to regulated utilities, generally requiring that goods and services be priced at “cost” so as to prevent artificial increases in the “cost-of-service” that the utility can pass through to its customers. The cost of services, sales and construction contracts between companies in the same holding company system must be equitably allocated among the holding company subsidiary companies.

PUHCA also specifically requires that a holding company must obtain SEC approval for the issuance of securities to finance the acquisition of FUCOs. There are also special rules on financing for acquiring EWGs.

The SEC has adopted Rule 53, a “safe harbor” rule for investments in FUCOs and EWGs, that provides the issuance of securities by a registered holding company — in other words, by any foreign buyer — to acquire EWGs is automatically approved if the aggregate investment does not exceed 50% of the holding company’s consolidated retained earnings. The holding company must keep separate books and records for its FUCOs and EWGs in accordance with GAAP. To fall under the Rule 53 safe harbor, the holding company may not be the subject of bankruptcy proceedings, and its consolidated retained earnings may not have experienced significant reductions in recent years.

The company also cannot have experienced operating losses related to its investments in FUCOs and EWGs.

Practical Experience

When Scottish Power purchased PacifiCorp, it acquired only one US utility and, thus, the acquisition did not require prior SEC approval under the two-bite rule.

Scottish Power became a registered holding company with the acquisition. That means it must limit its business activities to the utility and utility-related business, and it must comply with the provisions of PUHCA governing affiliate activities and the issuance of securities.

In its SEC filing, Scottish Power committed to maintaining its and PacifiCorp’s credit ratings at an investment grade level and to maintain the capitalization of PacifiCorp at a 30% equity or higher level. Scottish Power already had investments in FUCOs and EWGs of approximately $3.2 billion, and it sought authority to finance up to $4.8 billion in such investments, which represented 148% of its consolidated retained earnings. PacifiCorp claimed FUCO status for its UK utility operations, thus rendering them “non-utilities” under PUHCA. Scottish Power committed to complying with the PUHCA requirement that services that its affiliates provide to PacifiCorp will be priced “at cost” and would be subject to review by all affected state regulatory commissions. The SEC approved the PacifiCorp acquisition on that basis. 

In contrast to the PacifiCorp case, the New England Electric System acquisition by the National Grid involved the indirect acquisition of more than two US utilities and, therefore, required prior SEC approval under section 9(a)(2) of PUHCA. In its order approving the transaction, the SEC found that National Grid’s utility operations in England and Wales, as well as its transmission businesses in Argentina and Zambia, qualified for FUCO status and therefore were not utilities for purposes of PUHCA. Since the only utilities for PUHCA purposes were the existing US NEES utility subsidiaries, which the SEC had previously found to satisfy the integration standard, the SEC approved the acquisition. Like Scottish Power, National Grid  became a registered holding company when it completed the acquisition.

In considering National Grid’s application, the SEC focused on whether National Grid’s acquisition of NEES would impede state regulation of the NEES utilities. Helpfully, each of the state commissions involved advised the SEC that it had adequate authority and resources to protect customers of the NEES system. The SEC found that the National Grid had an investment in utility operations outside the United States of $3.5 billion, which represented approximately 202% of the pro forma consolidated retained earnings of NEES and National Grid. National Grid sought approval to invest an additional $874 million in EWGs and FUCOs, for an aggregate investment of 252% of consolidated retained earnings. National Grid committed to insulating the NEES utility subsidiaries from its investments in EWGs and FUCOs and agreed that none of the NEES utility subsidiaries would extend its credit or pledge its assets to any EWG or FUCO in which National Grid held an interest.

Because the acquisition of NEES required prior SEC approval, the SEC had to make certain PUHCA findings. It had to confirm that the consideration paid for the acquisition was not unreasonable, the capital structure of the merged company would not be unduly complicated or detrimental to the interest of investors or consumers, the corporate structure would not be unduly complicated or inequitably distribute voting power among security holders, and the transaction would result in economies and efficiencies. Like Scottish Power, National Grid committed to maintaining its long-term debt rating at an investment grade level. It also committed to maintaining a 35% equity ratio for NEES and its utility subsidiaries on a consolidated basis and to achieving a 30% equity ratio for National Grid.

Three years later, the SEC approved National Grid’s acquisition of Niagara Mohawk. Niagara Mohawk is a  member of a different regional transmission system (the New York ISO) than NEES (ISO New England). However, the transmission systems connect through a 230 kV intertie. The SEC found that the two ISOs engage in coordinated activities so that they function as a single market. Thus, Niagara Mohawk and NEES satisfied the integration standard.

PowerGen’s acquisition of LG&E Energy also required prior approval by the SEC under section 9(a)(2) of PUHCA because the acquisition would make PowerGen the indirect owner of two utilities, Kentucky Utilities and LG&E.

PowerGen’s non-US utility operations qualified for FUCO status. The application stated that the consolidated equity for PowerGen, following the acquisition, would be 29.2% of total capitalization. PowerGen committed that the common stock equity of LG&E and Kentucky Utilities would not fall below 35% of total capitalization. The combined LG&E Energy Group and PowerGen investment in EWGs and FUCOs was approximately $1.2 billion, representing 61% of PowerGen’s consolidated retained earnings.

PowerGen sought authority to finance investments in EWGs and FUCOs up to $1.9 billion, which represented 100% of the consolidated retained earnings of PowerGen. The SEC authorized the acquisition and the requested financing authority.

E.ON acquired PowerGen one year later. E.ON had to satisfy the PUHCA requirement limiting the activities of a registered holding company — which E.ON would become with the acquisition — to the utility and utility-related businesses. E.ON proposed to divest its chemical, real estate, oil, real estate and distribution/logistics operations. Consistent with its longstanding policies to avoid “fire sales” of divested companies, the SEC provided that these companies could be retained for periods of three to five years.

E.ON’s existing investment in FUCOs, comprised of its utility operations in Germany, was $3.8 billion, and the combined LG&E Energy and PowerGen investment in EWGs and FUCOs was another $1.1 billion, representing 47% of the pro forma consolidated retained earnings of E.ON, PowerGen and LG&E Energy, which is above the Rule 53 safe harbor. The SEC observed that although E.ON’s proposed investment in EWGs and FUCOs significantly exceeded the normal percentages for US registered holding companies, the US companies have significantly more assets invested in the US utility business, while E.ON’s foreign operations are significant and its proposed FUCO investment is commensurately larger. Further, E.ON’s debt-to-capitalization and interest-coverage ratios were shown to be within the ranges for US utility companies, and E.ON committed to maintaining its equity ratio at 30% or above and to maintaining its senior unsecured long-term debt rating at an investment grade level.

The lesson from these SEC reviews of the Scottish Power, National Grid, PowerGen and E.ON transactions is that PUHCA is not an insurmountable obstacle to foreign acquisitions US utilities, provided that the buyer limits its business to utilities and related businesses. Furthermore, the SEC is willing to allow significant time — up to five years — for a company to divest its non-utility businesses. Since PUHCA repeal is likely to be included in any US energy legislation in the next three years, a non-US company with unrelated businesses might take the risk that prior to the deadline for divestiture, PUHCA, and the requirement to divest, will have been repealed.

Federal Power Act

Another critical regulatory approval for a foreign buyer of a US utility is authorization by the Federal Energy Regulatory Commission under section 203 of the Federal Power Act. This requirement is not unique to foreign acquisitions of US utilities; any acquisition of an integrated electric utility, a generating company or a transmission company, whether accomplished through a stock purchase or an asset purchase, requires prior authorization by the FERC.

How long does FERC approval take? 

Historically, one of the most vexing aspects of FERC’s approval process was the length of time it took for the FERC to rule on an application. FERC has said that it can issue an initial order for most acquisitions within 150 days (five months) of receiving a completed application. FERC’s ability to rule promptly on an application depends on the extent to which other parties oppose the proposed transaction. Once an application is filed, persons with an interest in the proposed transaction have the right to file comments either supporting or opposing the transaction. State public utility commissions have a right to intervene and frequently participate in merger proceedings before the agency. FERC must approve a proposed acquisition if it finds the acquisition “will be consistent with the public interest.” In making its public interest determination, FERC generally considers three factors: the effect of the transaction on competition, the effect of the transaction on rates, and the effect of the transaction on regulation. FERC also has the authority to attach conditions to its approval of a transaction to ensure that the transaction is consistent with the public interest.

FERC’s objective in analyzing the effect of a proposed acquisition on competition is to determine whether the acquisition will lead to higher prices or reduced output in electricity markets. FERC also looks at the effect of the transaction on electricity rates. It expects applicants to try to resolve ratepayer protection issues with customers prior to filing an application. It looks at ratepayer protection mechanisms proposed by applicants for wholesale sales and transmission customers, such as “hold harmless” and “open season” provisions, rate reductions and moratoria, or a combination of such mechanisms. 

The lesson that foreign buyers may take from the experiences of Scottish Power, National Grid, PowerGen and E.ON before FERC is that the first acquisition of a US electric utility will not face difficulties. However, any subsequent acquisitions may well raise competitive issues requiring considerably more scrutiny.

For example, in 2001, FERC authorized National Grid to acquire Niagara Mohawk Holdings, Inc., an  exempted utility holding company under PUHCA that owns Niagara Mohawk Power Corporation, a combination gas and electric utility in upstate New York. Because National Grid already owned the NEES utilities by then, it had to persuade FERC that buying another US utility would not hamper competition in the relevant markets. FERC found that the proposed merger raised no competitive concerns. The key was that Niagara Mohawk lacked operational control over generation and, consequently, could not withhold resources to drive up market prices.

Other Federal Approvals

A Hart-Scott-Rodino notice must be filed with the US Department of Justice and the Federal Trade  Commission, and the parties must wait 30 days after filing, before most acquisitions can close. Both parties to the transaction must file. The waiting period might be longer if the government asks for more information, called a “second request.” On the other hand, the government also consents in some cases to cut the waiting period short. 

Most acquisitions of US utilities will require Hart-ScottRodino filings. The government reviews the information in the filing to make sure the transaction will not lead to too much concentration of economic power. 

If the utility being acquired owns or operates a nuclear power plant, then prior approval will be required under the Atomic Energy Act from the Nuclear Regulatory Commission. Such approval is unlikely unless the buyer can show that the board of directors of the US company owning or operating the nuclear plant has only US citizens as members.

Owners of nuclear power plants must obtain an operating license from the NRC and, by law, the NRC must approve any transfer (direct or indirect) of a nuclear power plant license. Foreign ownership of US nuclear facilities is prohibited. Section 103 of the Atomic Energy Act prohibits the transfer of a license to own or operate a nuclear plant to an entity that is owned, controlled or dominated by an “alien, foreign corporation or foreign government,” and the NRC must reject any license transfer that would “be inimical to the common defense and security or the health and safety of the public.”

The New England Electric System owns interests in two nuclear power plants: Seabrook and Millstone 3. The NRC approved the acquisition of NEES by National Grid and the concomitant transfer of minority ownership interests in the NRC licenses to foreign hands. Another New England utility, Northeast Utilities, intervened during the NRC review proceeding and raised the question whether the acquisition would result in impermissible foreign ownership of Seabrook and Millstone 3. The NRC established a hearing schedule that would have delayed the closing. In order to avoid the hearing, NEES agreed that all of the officers and board members of New England Power — the NEES subsidiary with the interest in the two power plants — would be US citizens. 

In return, Northeast Utilities agreed to withdraw its request for a hearing.


Section 27 of the Defense Production Act of 1950 — called “Exon-Florio” — gives the president authority to suspend or prohibit foreign acquisitions, mergers or takeovers of US companies upon a finding that the foreign interest might take action that threatens national security and there is no other way to protect national security than to block the merger. Authority to review foreign investment transactions has been delegated to an interagency group, the Committee on Foreign Investment in the United States. The committee is chaired by the US Treasury secretary and has representatives from 11 federal agencies.

Review under Exon-Florio is triggered by either a voluntary filing by a party to the transaction, or by notice of a transaction from an agency member on the committee. The committee can review a transaction even after it has been completed. The president is authorized to “direct the Attorney General to seek appropriate relief, including divestment relief, in the district courts of the United States.” In other words, the parties might be ordered to unwind a transaction. Subjecting the transaction to an Exon-Florio review before closing insulates it from this risk. 

The National Grid told the New Hampshire regulatory commission in 1999 that its acquisition of the New England Electric System had received clearance from the Exon-Florio committee and that the committee concluded that the proposed merger raised “no issues of national security sufficient to warrant an  investigation.”

State Regulatory Approvals

A foreign buyer purchasing a US utility must usually also get approval from the state regulatory  commission in each state where the target utility conducts operations. Not all states approve mergers, but most do. 

The criteria to be applied in reviewing a transaction differ from state to state. In addition to looking at the effect of the acquisition on retail rates and competition, state public utility commissions also consider the effect of an acquisition on a variety of local issues such as employment, the environment and low-income consumers. State public utility commission review of proposed acquisitions frequently involves evidentiary hearings. As is the case in proceedings at the federal level, interested parties, including state consumer advocates and other interest groups, may intervene in state regulatory proceedings. As a consequence, obtaining state approval frequently requires that applicants enter into settlements with these groups head off opposition to the transaction and avoid prolonged proceedings.

Scottish Power had to get approval or waivers from six state public utility commissions before buying PacifiCorp in 1999. The public utility commissions in Idaho, Oregon, Utah, Washington and Wyoming approved the merger, subject to numerous conditions and commitments. The California Public Utilities Commission said the transaction did not need regulatory approval, but made its exemption subject to several conditions.

California exempted the transaction because PacifiCorp had only 41,273 retail customers in California. It required Scottish Power to get California approval for any future sale of the distribution lines in California, to keep separate books of account for PacifiCorp from the Scottish parent, and to make the PacifiCorp books, records and employees available in the future to California regulators.

The Idaho Public Utilities Commission made its approval of the merger subject to conditions “considerable in quantity and scope.” It imposed some 46 separate conditions on the merged company. These conditions included commitments that rates would not increase as a result of the merger, PacifiCorp would not seek a general rate increase for its Idaho service territory prior to January 1, 2002, and PacifiCorp would provide merger related cost-of-service reductions totaling $6.4 million through an annual “merger credit” over
four years. 

In order to get approval for the transaction in Oregon, PacifiCorp agreed to fund conservation programs at a level of $6 million a year for a period of three years, use shareholder funds for low-income initiatives in Oregon at a level of $400,000 a year over what was spent on similar programs in 1998, remove a $1,000 funding cap from its low-income weatherization program tariff, provide a “merger credit” of up to $51 million over a four-year period beginning in 2001, develop or acquire an additional 50 megawatts of systemwide renewable resources, and implement a “green resource tariff” that allows customers to purchase energy from renewable sources.

The Washington Utilities and Transmission Commission also imposed conditions. Among other things, PacifiCorp agreed to provide cost-of-service reductions of $12 million over four years through an annual “merger credit” and exclude from all future ratemaking treatment in Washington all transaction costs associated with the merger and the premium paid by Scottish Power for PacifiCorp. Washington also required Scottish Power and PacifiCorp to reflect in Washington retail rates savings from lower costs of capital and to bear the cost of any increased cost of capital of PacifiCorp electric operations directly resulting from the merger. The company also agreed to develop an additional 50 megawatts of wind, solar or geothermal resources at an estimated cost of approximately $60 million within five years, to make available $300,000 a year out of shareholder funds for a bill payment assistance and energy efficiency program, and to maintain the PacifiCorp Washington low income weatherization annual budget at least at the 1999 level of $560,000 for a three-year period following the merger. 

Wyoming imposed 36 negotiated conditions. They require prior notice to the utility commission of each debt or equity issuance by either Scottish Power or PacifiCorp of more than $75 million with a term greater than one year. Wyoming also required the companies to hold any diversified holdings and investments of Scottish Power or PacifiCorp in separate companies from PacifiCorp, with “ring fence” provisions for each diversified activity to prevent any financial problems from infecting the utility and to notify Wyoming promptly of any acquisition of a business representing 5% or more of the market capitalization of Scottish Power.

Utah imposed conditions, but many of them overlapped with the conditions imposed by the other states.

Other State Reviews

National Grid received relatively straightforward approvals at the state level for its acquisition of the New England Electric System. It got approvals in 1999 from utility commissions in Connecticut, New Hampshire and Vermont.

The Connecticut Department of Public Utility Control determined that it had jurisdiction over the merger by
virtue of New England Power’s minority ownership interest in the Millstone Unit No. 3, located in Connecticut. However, since the company had no ratepayers in Connecticut — just an interest in a power plant in the state — approval was easy. Connecticut decided the merger would not adversely affect electric service in Connecticut or affect Connecticut ratepayers.

The Vermont regulators concluded that the merger would promote the public good in Vermont, but  reiterated a long-standing policy that above-book acquisition costs cannot be included in the rates charged Vermont consumers. The New Hampshire Public Utilities Commission held a hearing about the merger. It approved the merger, applying its “no net harm” test that requires a proposed transaction be approved if the public interest is not adversely affected. It imposed minor conditions.

PowerGen had to get approval for its acquisition of LG&E Energy from state regulators in Kentucky and Virginia. Kentucky imposed numerous conditions. They included a requirement to keep the current officers in their current positions unless directed otherwise by the board of directors, keep the transaction costs and acquisition premium out of rates, continue to operate through regional offices with local service personnel and field crews, keep the headquarters of LG&E Energy and its utilities in Kentucky for a period of at least 10 years following the merger, and maintain a seat on the PowerGen board for a US citizen who lives in the LG&E service territory.

PowerGen promised not to claim in the future that Kentucky lacks the ability to deny rate recoveries for the cost of goods or services purchased from affiliates or to review transfer pricing on grounds that the state is “preempted” by US or UK government authority in this area. PowerGen also promised to maintain cordial relationships with the unions representing employees, remain neutral with respect to an individual’s right to choose whether to join a trade union, continue to recognize the unions that currently have collective bargaining agreements with LG&E, and honor those agreements.

Virginia required PowerGen to commit to $2 million a year on average in investments over five years to enhance transmission, distribution and the general condition of the electric system in the service territory of Old Dominion Power, a subsidiary of LG&E Energy.

PowerGen received the state approvals for its acquisition in 2000. The next year, it had to go back to the commissions for approval of the E.ON acquisition of PowerGen. Virginia approved the E.ON takeover with 12 conditions. Kentucky approved it with 52 conditions. They included a promise that all corporate officers of LG&E and Kentucky Utilities would reside in Kentucky.


Obtaining the approval of US regulators has not proved a significant obstacle to acquisitions of US electric utilities by foreign buyers. At the federal level, the most complicated transactions are those where the buyer has other businesses besides utilities or where the target utility has a license to own or operate a nuclear power plant. In the first situation, the SEC will require divestiture of the non-utility and non-utility related businesses. In the second situation, the merged company may be required to commit that the board of directors of the US utility will consist entirely of US citizens.

However, state-level review presents a foreign buyer with the prospect of having to enter into agreements to address numerous local issues as the price of securing state commission approval.