March 2002

Geezer at the Wake

by Roger Feldman  --   Bingham, Dana L.L.P.
(originally published by PMA OnLine Magazine: 2002/05/16)
 

Washington’s having an Enron bash of a wake at the club, and all of the power policy players are there: snappy traders in natty deregulation suits; dowdy utilities in tattered, integrated, three-piece outfits; state regulators nervously patting their thinning wallets of authority; and a few florid, beefy giants wearing "master of the universe" ties. At the door trying to get some attention, while some of the hosts are trying to hustle him permanently away, is old man PUHCA (the Public Utility Holding Company Act of 1935). He outlived Al D’Amato’s repeal efforts; he survived the efforts of his own nursing home caretakers – the SEC – to do him in; he’s dodged the ricocheting bullets of comprehensive energy deregulation bill proposals; and outlived sassy Enron, which had gotten itself exemptions from his authority. And now the adoring son of one of his original sponsors, Rep. John Dingell himself, is demanding not only to let him stay at the party, but that everyone listen to him tell his stories about Sam Insull and the unregulated energy pyramid schemes of old. He has taken the SEC by the lapels and asked: "Does the Commission believe that Congress should address PUHCA repeal before pending investigations of Enron (including his own inquiry) have been completed"?

In parallel, focusing on its literal statutory non-compliance with PUHCA’s requirement that a registered holding company have a single geographically-integrated territory, the D.C. Court  of Appeals has blocked the AEP-CSW merger, signaling that the days of patronizing but finessing the old PUHCA fossil may be again past.

Which leaves the power industry with the very non-academic question: what happens to PUHCA now? The competing sound bites boil down to three questions concerning the law: (1) Ghost or no ghost? (2) Obsolete or functional? (3) Dead hand or stout heart?

(1) Is Enron a reincarnation of the abuses of the  ‘30s that the New Deal sought to squelch? Certainly, as Congressman Dingell has pointed out, several of the manifestations of greed and folly at which PUHCA was aimed seem to be present, viz., unsecured asset values, inflated capital structure, market manipulation, exploitation of operating subsidiaries through cross-subsidization and mismanagement, and concentration of economic power not susceptible to state regulation. But, counter proponents of PUHCA repeal, Enron’s demise was the product not of PUHCA’s reach or lack of it (notwithstanding that both its acquisition of a regulated utility and its trading business were exempted from it), but the rogue character of management’s actions. In an almost theological conclusion, an SEC Commissioner told Congress: "The tragic collapse of Enron is not a result of its classification or lack of classification as a public utility holding company . . . Enron is a tragedy for our entire system of disclosure regulation."

(2) More narrowly, is PUHCA then a usefully workable law? Or, put differently, sure Enron did some very bad things, but they were not the particular things PUHCA was designed to deal with? In particular, PUHCA doesn’t address the character of market operations for regulation over the past decade. In addition, as FERC has pointed out, PUHCA’s terms may interfere with RTO participation and with the organization of for-profit  transcos.

PUHCA proponents suggest that had Enron not been exempted from regulation as a registered holding company, the law’s reporting requirements and corporate diversification restrictions might have blocked some of the acts that helped to bring down the company. Therefore, repeal of PUHCA might allow other utilities to emulate the Enron model with eventual similar adverse consequences.

(3) Which leaves the key technical question: should PUHCA be substantially swept away, subject to some modest safeguards (as bills like S. 1766 would do), or should it be viewed as a placeholder for an updated industry structural oversight reform bill that accurately reflects the operation of modern utility markets. FERC, the residuary legatee of a statutorily bobtailed PUHCA, adheres to the former view. It views the statute as anachronistically increasing concentrations of generation ownership, thereby increasing market power and diminishing electric competition. Protection of its access to books and records –  and such other information as may be necessary to prevent Enron-like trading abuses – is what FERC feels is necessary.

By contrast, Congressman Dingell emphasizes that prior FERC exemptive legislation for other industries has been much more detailed in its "books and records" requirements than that now proposed for energy. He is not buying the argument that  general securities law disclosure requirements are sufficient, by themselves, to deal with and control the diverse and complex operations of energy utility holding companies. Moreover, the original basis of the 1995 SEC finding that there were adequate consumer protections without PUHCA was the presumed efficacy of rate regulation which, of course, now has been dismantled significantly by deregulation.

There seems to be only one point of consensus: if PUHCA is to play a valuable ongoing role, it must be reformed to meet both industry needs to continue to attract additional investment, and consumer needs to provide identifiable, workable protection against the potential adverse effects of utility consolidation consistent with FERC’s market-based rates investigation/ rulemaking. It seems as though old man PUHCA should be allowed to stay at the Enron policy wake bash, at least until the bartender has definitely figured out a better way to keep track of the libations being served.

ROGER FELDMAN, Co-Chair of Andrews Kurth LLP Climate Change and Carbon Markets Group has practiced law related to the finance of environmental and energy projects and companies for 40 years.  In particular, he has analyzed and executed a wide variety and substantial value of project financings.  He chairs the American Bar Association’s Committee on Carbon Trading and Finance, serves on the Board of the American Council for Renewable Energy, and has been a senior official in the Federal Energy Administration.  He is a graduate of Brown University, Yale Law School and Harvard Business School.