An Eloquent Argument For Puhca’s Repeal

Lynne Kiesling

I’m going to answer jdr’s comment about PUHCA from yesterday’s post about the Senate energy bill here instead of in comments. I am neither so foolish or so presumptuous that I think I can prognosticate the effects of PUHCA repeal, but based on some simple economics of organization and financial markets, I think it’s pretty clear that PUHCA impedes investment and duplicates other transparency and reporting functions that are performed better and more cheaply through organizations such as the SEC.

One person who I think consistently hits the nail on the head regarding the pernicious effects of PUHCA in a dynamic, complex, evolving industry is Pat Wood, FERC Chairman (for two more days). From testimony he delivered to the House Government Reform Subcommittee on Energy and Resources on 8 June 2005:

Finally, the repeal of PUHCA is necessary to spur investment in the transmission infrastructure and facilitate competition. PUHCA was enacted primarily to undo the harms caused by certain holding company structures that no longer exist. In the almost 70 years since PUHCA was enacted, utility regulation has increased substantially under the FPA, federal securities law and state laws, all of which ensure that customers are protected. The existing integration requirement of PUHCA actually encourages market structures that impede competition. In particular, under PUHCA, acquisitions by registered holding companies generally must tend toward the development of an “integrated public utility system.” To meet this requirement, the holding company’s system must be “physically interconnected or capable of physical interconnection” and “confined in its operations to a single area or region.” This requirement tends to create greater geographic concentrations of generation ownership, which may increase market power at a time when we want a diverse and competitive generation marketplace. Further, PUHCA may impede investment in transmission companies in more than one region by subjecting any owner of ten percent or more of a public utility to becoming a holding company and possibly being required to register under PUHCA. PUHCA is a statute that has served its usefulness and now needs to be repealed.


10 thoughts on “An Eloquent Argument For Puhca’s Repeal

  1. Thanks.

    All good intentions he gives, but without a nod to possible unintended and darker consequences. And it’s not that those things WILL happen, but that that the consequences are really unknown, and the other extant constraints may or may not be sufficient. If it is repealed, then we’re a ball on a new slope on a new landscape. Let’s hope the reaction won’t require legislation. Like you, I worry when energy legislation gets too detailed, but I also worry when it makes potentially large changes in industry structure with just a few words.

    As for transmission investment, I agree that PUHCA constraints make transmission businesses more awkward to form, but certainly these constraints are not what are holding back transmission investment. A new paradigm is needed to get that done.

    See http://www.ksg.harvard.edu/hepg/Papers/Hogan_hepg_052005.pdf
    and
    http://www.ksg.harvard.edu/hepg/Papers/Roark%20HEPG%20Screen.pps

  2. Thanks.

    All good intentions he gives, but without a nod to possible unintended and darker consequences. And it’s not that those things WILL happen, but that that the consequences are really unknown, and the other extant constraints may or may not be sufficient. If it is repealed, then we’re a ball on a new slope on a new landscape. Let’s hope the reaction won’t require legislation. Like you, I worry when energy legislation gets too detailed, but I also worry when it makes potentially large changes in industry structure with just a few words.

    As for transmission investment, I agree that PUHCA constraints make transmission businesses more awkward to form, but certainly these constraints are not what are holding back transmission investment. A new paradigm is needed to get that done.

    See http://www.ksg.harvard.edu/hepg/Papers/Hogan_hepg_052005.pdf
    and
    http://www.ksg.harvard.edu/hepg/Papers/Roark%20HEPG%20Screen.pps

  3. I classify PUHCA repeal as a clearing-of-the-underbrush that makes it easier for new paradigms to arise and succeed or fail according to their own merits.

  4. You’re right. Ideology is too strong a word for that. Agreed, and better stay tuned!

  5. You’re right. Ideology is too strong a word for that. Agreed, and better stay tuned!

  6. PUCHA repeal got a brief mention at the June 30 FERC meeting in the context of remarks about the Exelon-PSEG merger, which again highlighted a benefit of PUHCA repeal. The Exelon-PSEG merger creates significant market power problems because they are two large, adjacent utilities and they are joining together.

    At the meeting Chairman Pat Wood noted (as he did in the testimoney cited by Lynne) that PUHCA tended to result in mergers with more serious market power problems, and he suggested the PUHCA repeal could bring about mergers that lack such problems.

    The issue is PUHCA’s requirement that companies with multiple retail gas or electric utilities operate as coordinated, integrated systems, confined to a single area or region. Mergers therefore tend to be between adjacent or at least nearby utilities, and since utilities in the same area tend to participate in the same markets, the combined companies are more likely to present market power concerns.

    In my view a more efficient electric power system would have fewer and larger transmission owners (to promote efficient operations), more generation owners (to promote competition), and structural separation between the two (but that is another story).

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