Utility Mergers Hit A Wall
The two utility holding companies are American Electric Power, a holding company headquartered in Ohio, and Central South West, a holding company with its headquarters in Texas.
PUHCA is a 1935 statute aimed at preventing utility holding companies from extending their reach beyond state borders in a manner that makes it difficult for states to regulate their public utility subsidiaries.
The court said the planned merger violated a restriction in PUHCA against owning more than a single integrated utility in a single region. The case is National Rural Electric Cooperative Association et al. v. SEC. The decision was announced January 18.
Congress has seemed on the verge for the past several years of repealing PUHCA, but the Enron bankruptcy has made the fate of the statute less certain. There have been suggestions that stricter enforcement of PUHCA by the US Securities and Exchange Commission might have prevented the Enron bankruptcy. (Enron’s power marketing operation was exempted from PUHCA regulation under an SEC staff “no action letter.”)
The court found that the SEC had failed adequately to explain its decision under two separate provisions of PUHCA: the “interconnection requirement” and the “region requirement.”
The interconnection requirement reflects a policy that a registered public utility holding company must constitute a single “integrated public-utility system.” There are currently 35 registered holding companies in the United States, including AEP. The US Securities and Exchange Commission has interpreted the statute to mean that such a utility system’s assets must be “physically interconnected or capable of physical interconnection.”
In its order approving the AEP-CSW merger, the SEC said that a unidirectional transmission contract between the widely-separated AEP and CSW systems — over several hundred miles — was sufficient to “interconnect” the systems.
The court disagreed. It said this conclusion was inconsistent with prior SEC orders that a transmission contract is not enough by itself to integrate distant utility assets.
The SEC tried to rationalize this inconsistency by arguing that the length of an interconnection line is not relevant to whether two utilities are interconnected. It simply goes to whether the two utilities are within a “single area or region.” The court remanded the merger — or sent it back — to the SEC to focus on the inconsistency of this new position with how the agency has applied PUHCA in the past.
Probably more important is the court’s finding that the SEC failed to support its conclusion that the AEP and CSW merged company meets the “single area or region” requirement of PUHCA. The court said the SEC appeared not to have given serious consideration to the question at all.
The court said that the SEC had listed a number of factors in past merger cases that might support a finding that even though two utility systems were distant geographically, they could still be located in “a common economic and geographic region.” These factors include “industrial, marketing and general business activity, transportation facilities, and gas utility requirements.”
The court chastised the SEC for apparently concluding that a proposed merger satisfies the “region requirement” if it satisfies all the other parts of PUHCA. The SEC “may not interpret the phrase ‘single area or region’ so flexibly as to read it out of the Act . . . ,” the court said. If there is a legitimate basis for concluding that AEP’s service territories (in Indiana, Kentucky, Michigan, Ohio, Tennessee, Virginia and West Virginia) fall in the same “region” as CSW’s service territories (in Arkansas, Louisiana, Oklahoma and Texas), the court said, “we cannot find it in the record before us.”
The court indicated that the SEC may have gone about as far as it can go with its “flexible” interpretation of PUHCA’s single system requirements and that any further flexibility would have to come from Congress.
The [SEC] may well be right that PUHCA’s region requirement is outdated in light of recent technological advances. In view of the statute’s plain language, however, only Congress can make that decision. In fact, a pending bill would repeal PUHCA, but it has not yet become law.
The decision may become another factor in the PUHCA repeal debate in Congress. In the meantime, mergers that meet the pre-AEP and CSW criteria should still be approved, but those that push the PUHCA envelope may have finally hit a wall. Until Congress acts on PUHCA, this decision will limit the scope for utility mergers.