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Self-dealing: The case against removing PUHCA restrictions on utility-affiliated power producers
Energy Law Notes
To FERC or Not to FERC, That Is the Question - - Donald R. Allen
Whether "tis nobler in the minds of utilities to take arms against a sea of troubles at FERC or to seek safe harbor at the SEC and, by so doing, end them. he FERC is grappling with an unprecedented wave of contested mergers among electric companies. 1 One can conjecture that we have seen only the tip of the iceberg and that the consolidation m o v e m e n t likely to develop during the 1990s is one Samuel Insull w o u l d warmly admire. One can also suppose that the Federal Energy Regulatory Commission is on the verge of shaping that consolidation m o v e m e n t as much by what it does not do as by what it chooses to do. A seminal event in this restructuring process m a y have occurred with little notice recently, w h e n
T
D o n Allen is senior partner in the Washington, D.C. law firm of Duncan & Allen. The firm represents public power and rural electric utilities in power development and regulatory matters and has the unusual distinction of having been involved in each of the recent merger cases at the Federal Energy Regulatory Commission.
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the FERC declined to take jurisdiction over the merger of two Iowa holding companies - - Midwest Energy and Iowa Resources. In that decision, 2 the FERC might have done as m u c h to reshape the industry's structure - - perhaps unwittingly - - as w h e n it tore asunder the veil of mystery surrounding the "W" w o r d and began to implement its m u c h discussed wheeling (transmission access) policy in its order conditionally approving PacifiCorp's acquisition of Utah Power and Light. The Setting Congress decided in 1935 that two federal agencies instead of one should oversee electric company consolidations. The FERC (originally FPC) was to concern itself largely with owners and operators of electric utility facilities (technically "public utilities" under section 201(e) of the Federal Power Act) which sought to merge or consolidate their facilities "by any means whatsoever, directly or indirectly" (§ 203(a)). The SEC was to concern itself largely with holding companies which owned or controlled the
owners or operators of electric utility facilities (technically "electric utility companies" under Section 2(a) of the Public Utility Holding C o m p a n y Act) and with acquisitions of 5% or more of the voting stock of more than one of such owners or operators "directly or indirectly." (PUHCA § 9(a)(2)). Put simply, the FERC would regulate mergers of hands-on electric c o m p a n y owners and operators while the SEC would regulate indirect or once removed mergers of electric company owners and operators. ongress understandably tried to head off unnecessarily duplicative oversight in its two-agency scheme of electric company regulation. It envisioned that a merger or consolidation of operating electric companies (technically a "disposition of a n y . . , facilities" under FPA section 318) might also be subject to a requirement of the PUHCA. In such an event, Congress declared that the FERC's requirement would not apply unless the SEC had exempted the merging or consolidating party from the PUHCA requirement (FPA § 318). 3 The FERC is on the brink of either making sense out of Congress' two-agency regulatory scheme or throwing it into chaos. Time will tell whether order or chaos prevails. Meanwhile, electric companies and those interested in the machinations of their corporate structures should have
C
The Electricity Journal
I an interesting time of it. Lawyers shouldn't do too badly either. The Well-Trod Path to Merger
Prior to the current wave of contested mergers, holding companies traditionally sought SEC approval for their electric company mergers and consolidations, while ordinary, hands-on operating utilities seeking to merge sought FPC (later FERC) approval. 'n the case which kicked off .the merger movement of the 1980s, PacifiCorp, which is not a holding company in the PUHCA sense, proposed to acquire Utah Power & Light and to operate it, along with its existing utility, Pacific Power & Light, as separate divisions of a single corporate entity. Accordingly, it sought only FERC approval for the takeover. FERC's proceedings on the PacifiCorp/Utah Power merger gave it the opportunity to define a transmission access policy model it had had under theoretical discussion for some time. After FERC Administrative Law Judge George Lewnes decided that the merger would be unacceptably anti-competitive, FERC conditioned its later approval of the merger on the merging parties' acceptance of novel rules of transmission access. ucson Electric and San Diego Gas & Electric also took their ultimately aborted merger to the FERC, since neither was a holding company. Recently, Kansas City Power & Light, Kansas Gas and Electric and Kansas Power & Light chose the FERC to oversee their convo-
T
January~February 1991
luted mdnage ~ trois. SCEcorp, an exempt holding company, and Northeast Utilities, a registered holding company, had to think harder about securing approval for their initially hostile bids to acquire, respectively, San Diego Gas & Electric and Public Service Company of New Hampshire. Both SCE and NU chose to steer their mergers to the FERC, notwithstanding the clear possibility
(
of FERC's imposing transmission access rules for winning merger approval. As holding companies, it would appear both could have tried to avoid the need for FERC's substantive approval by applying to the Securities and Exchange Commission for approval and arguing that the SEC's preeminent status in cases of duplicative PUHCA and FPA requirements ousted FERC of merger jurisdiction. But neither company looked to the SEC for substantive approval of its merger. Rather, both de-
cided to put on their principal cases at FERC, though NU went so far as to file its full FERC merger case, induding the direct testimony and exhibits of its witnesses, with the SEC. Fast Track to a Merger
Midwest Energy and Iowa Resources were holding companies which owned electric companies, Iowa Public Service and Iowa Power and Light, respectively. When Midwest Energy and Iowa Resources proposed to merge their holding companies, they chose to submit their merger to the SEC for approval, in effect bypassing FERC. To date, they have fared much better than their brethren. At least they have avoided the onerous transmission access conditions others have paid (or offered to pay) for FERC approval of their mergers. On September 26, 1990, without ever holding a hearing on the matter, the SEC issued a "plain vanilla" approval of the Iowa merger. EC's approval followed relatively routine state approval of the transaction, giving the goahead to Midwest Resources, a new holding company, to acquire the two existing holding companies and to own the two electric companies as separate corporate entities. The important news for electric companies is in what did not happen to the Iowa holding companies at FERC. Intervenors urged FERC to assume jurisdiction over the merger, alleging that the two holding companies were actually
S
63
merging their electric companies (technically their "FERC jurisdictional facilities") as well as the holding companies. The merging holding companies denied this, saying that there was to be no immediate merger or consolidation of the facilities of the respective utility subsidiaries. The Commission agreed with the merger applicants and declined to assert jurisdiction over the transaction, notwithstanding intervenors' allegations. (Slip Order at 2). The FERC decided that the coordinated operations which the two Iowa holding companies had told the SEC their subsidiary utilities would engage in, to meet the integrated public utility test of PUHCA, did not constitute a merger under the FPA. he FERC stressed that since only the holding companies were merging and not their operating companies (i.e., not the "public utilities" technically subject to the FERC's jurisdiction), no FERC approval was required. (Slip Order at 9). FERC noted, however, that the merging companies did appear to contemplate a possible future merger or consolidation of their facilities. If that ever happened, the Commission said, "Such a merger or consolidation of the public utility subsidiaries' jurisdictional facilities will require Commission approval under [FPA] Section 203." (Slip Order at 10). While the case is still subject to rehearing and appeal, the Iowa holding companies seem, at least so far, to have achieved the most flexible of all worlds. While not
yet physically interconnected, their subsidiaries will reap substantial benefits through establishment of a single control area and conversion from a dual to a single membership in ENEREX, the state energy dispatch scheme. They expect their integrated system to improve their off-system purchase and sale capabilities, their transmission planning and spot coal purchases. They predict
T
64
significant savings by combining their administrative and general functions, including coordination and standardization of "practices," computer software savings, increased reliability, improved demand-side management practices and more efficient environmental compliance.4 These are the same kinds of benefits claimed by PacifiCorp and UP&L, SCEcorp and SDG&E and Northeast Utilities (which also claimed benefits from resolving the PSNH bankruptcy). Yet the Iowa companies never had to even broach the subject of transmission access for neighboring
utilities because the FERC decided that they did not arise through a "merger" of the Iowa companies' operating electric companies. etter than desktop fusion? It would appear so, at least for electric company owners who wish to escape the hotly contested transmission access battle which is becoming pro forma for FERCregulated mergers. Consider the interesting restructuring possibilities for the future. If the Iowa pattern of merger approval holds, electric companies might, by merging holding companies, achieve most, if not all, of the benefits of a merger without ever merging their operating electric companies - - i.e., without ever having to seek FERC review. Assuming the SEC continues its low profile (some would say "no profile") approach to scrutinizing competitive and other public interest aspects of mergers, holding companies might meet the integrated utility system test for a merger under PUHCA with a relatively modest showing of how their separate, yet-to-be-interconnected electric companies will coordinate operation. This would leave for later the question of who, if anyone, needs to approve the de jure merger of the electric companies. Again, the answer might be "no one" - - if the SEC's initial approval is deemed ultimately to encompass the entire transaction or if, once the electric facilities of the operating companies are under a single new holding company's control, transfers among the oper-
B
The Electricity Journal
ating electric companies d o not trigger effective merger-type scrutiny from the FERC.
The Non-Merger Merger Merger watchers should probably keep an eye on a second case, which could also fundamentally affect h o w electric c o m p a n y o w n ers will go a b o u t consolidating their businesses. PacifiCorp, having failed in its bid to acquire Pinnacle West or its utility subsidiary, Arizona Public Service C o m p a n y , nevertheless pers u a d e d Arizona Public Service to sell and exchange p o w e r and energy in great amounts, p r o v i d e and exchange transmission service, construct p o w e r plants, and otherwise engage in sophisticated inter-utility coordination over a
merger can be achieved. It w o u l d be an a n o m a l y indeed if someh o w the Iowa holding c o m p a n y "non-merger merger" escaped FERC scrutiny, while the PacifiCorp merger-like non-merger did not.
Conclusion To FERC or not to FERC, that is the question. For a while, it is still an o p e n question for electric companies contemplating a merger. By virtue of FERC's hands-off posture in the Iowa merger, the door m a y n o w be open to a w h o l e n e w breed of mergers and consolidations. Utility holding companies such as the n e w Iowa-based M i d w e s t Resources, w h o s e subsidiaries are not even physically interconnected, m a y reap substan-
w i d e geographic area. he complex coordination
tial merger-type benefits u n d e r a unified m a n a g e m e n t structure
agreement that resulted from PacifiCorp's aggressive ef-
with relatively limited SEC review and no FERC review.
forts to acquire A P S / P i n n a c l e has n o w been presented to the FERC
As M i d w e s t Resources C E O Mark P u t n e y p u t it, "We've written a road m a p and w e k n o w h o w to do it again. ''6 The door
T
for approval. While s o m e intervenors are insisting that the deal should receive close scrutiny - perhaps u n d e r the FERC's merger authority (§ 203) - - PacifiCorp and APS have insisted it is merely a p o w e r and transmission sale transaction and therefore requires only rate schedule-type approval u n d e r § 205. 5 FERC's decision as to w h e t h e r this non-merger which is allegedly equivalent to a merger requires merger-type scrutiny - - or just that normally accorded a wholesale rate filing - - will influence h o w n e w types of utility coordination short of a full-blown
Jan ua ry/February 1991
left o p e n b y FERC will be an espe-
d a l l y attractive one to enter if PacifiCorp's p r o p o s e d deal with APS falls prey to the FERC merger review process. •
Notes 1. The term "electric companies" is used to avoid such technical terms as "public utilities" and "holding companies" which carry with them attributes of corporate and regulatory law which would not facilitate this discussion. 2. Missouri Basin Municipal Power Agency v. Midwest Energy Co. and Iowa Resources Inc., FERC Docket No. EL90-31000, Order Noting and Granting Interventions and Dismissing Complaint, Dec. 13, 1990. 3. The U.S. Supreme Court has yet to resolve the details of this overlapping jurisdiction since it never reached the question in the recent Arcadia case. Arcadia, Ohio v. Ohio Power Co., No. 89-1283 (U.S. Sup. Ct. Nov. 27, 1990). Its 8-0 decision there only decided that section 318 of the Federal Power Act didn't prevent both FERC and the SEC from dealing with fuel pricing. 4. See the companies' joint filing of SEC Form U-l, May 24, 1990for a more complete description of how they intend to combine their electric utility systems. 5. See motions to intervene in PacifiCorp Electric Operations and Arizona Public Service Co., FERC Docket No. ER91-26000. 6. ElectricUtilityWeek, Dec. 17,1990at 9.
Midwest Energy and Iowa Resourcesfound smooth sledding with the SEC.
65
To FERC or Not to FERC, That Is the Question - - Donald R. Allen
Whether "tis nobler in the minds of utilities to take arms against a sea of troubles at FERC or to seek safe harbor at the SEC and, by so doing, end them. he FERC is grappling with an unprecedented wave of contested mergers among electric companies. 1 One can conjecture that we have seen only the tip of the iceberg and that the consolidation m o v e m e n t likely to develop during the 1990s is one Samuel Insull w o u l d warmly admire. One can also suppose that the Federal Energy Regulatory Commission is on the verge of shaping that consolidation m o v e m e n t as much by what it does not do as by what it chooses to do. A seminal event in this restructuring process m a y have occurred with little notice recently, w h e n
T
D o n Allen is senior partner in the Washington, D.C. law firm of Duncan & Allen. The firm represents public power and rural electric utilities in power development and regulatory matters and has the unusual distinction of having been involved in each of the recent merger cases at the Federal Energy Regulatory Commission.
62
the FERC declined to take jurisdiction over the merger of two Iowa holding companies - - Midwest Energy and Iowa Resources. In that decision, 2 the FERC might have done as m u c h to reshape the industry's structure - - perhaps unwittingly - - as w h e n it tore asunder the veil of mystery surrounding the "W" w o r d and began to implement its m u c h discussed wheeling (transmission access) policy in its order conditionally approving PacifiCorp's acquisition of Utah Power and Light. The Setting Congress decided in 1935 that two federal agencies instead of one should oversee electric company consolidations. The FERC (originally FPC) was to concern itself largely with owners and operators of electric utility facilities (technically "public utilities" under section 201(e) of the Federal Power Act) which sought to merge or consolidate their facilities "by any means whatsoever, directly or indirectly" (§ 203(a)). The SEC was to concern itself largely with holding companies which owned or controlled the
owners or operators of electric utility facilities (technically "electric utility companies" under Section 2(a) of the Public Utility Holding C o m p a n y Act) and with acquisitions of 5% or more of the voting stock of more than one of such owners or operators "directly or indirectly." (PUHCA § 9(a)(2)). Put simply, the FERC would regulate mergers of hands-on electric c o m p a n y owners and operators while the SEC would regulate indirect or once removed mergers of electric company owners and operators. ongress understandably tried to head off unnecessarily duplicative oversight in its two-agency scheme of electric company regulation. It envisioned that a merger or consolidation of operating electric companies (technically a "disposition of a n y . . , facilities" under FPA section 318) might also be subject to a requirement of the PUHCA. In such an event, Congress declared that the FERC's requirement would not apply unless the SEC had exempted the merging or consolidating party from the PUHCA requirement (FPA § 318). 3 The FERC is on the brink of either making sense out of Congress' two-agency regulatory scheme or throwing it into chaos. Time will tell whether order or chaos prevails. Meanwhile, electric companies and those interested in the machinations of their corporate structures should have
C
The Electricity Journal
I an interesting time of it. Lawyers shouldn't do too badly either. The Well-Trod Path to Merger
Prior to the current wave of contested mergers, holding companies traditionally sought SEC approval for their electric company mergers and consolidations, while ordinary, hands-on operating utilities seeking to merge sought FPC (later FERC) approval. 'n the case which kicked off .the merger movement of the 1980s, PacifiCorp, which is not a holding company in the PUHCA sense, proposed to acquire Utah Power & Light and to operate it, along with its existing utility, Pacific Power & Light, as separate divisions of a single corporate entity. Accordingly, it sought only FERC approval for the takeover. FERC's proceedings on the PacifiCorp/Utah Power merger gave it the opportunity to define a transmission access policy model it had had under theoretical discussion for some time. After FERC Administrative Law Judge George Lewnes decided that the merger would be unacceptably anti-competitive, FERC conditioned its later approval of the merger on the merging parties' acceptance of novel rules of transmission access. ucson Electric and San Diego Gas & Electric also took their ultimately aborted merger to the FERC, since neither was a holding company. Recently, Kansas City Power & Light, Kansas Gas and Electric and Kansas Power & Light chose the FERC to oversee their convo-
T
January~February 1991
luted mdnage ~ trois. SCEcorp, an exempt holding company, and Northeast Utilities, a registered holding company, had to think harder about securing approval for their initially hostile bids to acquire, respectively, San Diego Gas & Electric and Public Service Company of New Hampshire. Both SCE and NU chose to steer their mergers to the FERC, notwithstanding the clear possibility
(
of FERC's imposing transmission access rules for winning merger approval. As holding companies, it would appear both could have tried to avoid the need for FERC's substantive approval by applying to the Securities and Exchange Commission for approval and arguing that the SEC's preeminent status in cases of duplicative PUHCA and FPA requirements ousted FERC of merger jurisdiction. But neither company looked to the SEC for substantive approval of its merger. Rather, both de-
cided to put on their principal cases at FERC, though NU went so far as to file its full FERC merger case, induding the direct testimony and exhibits of its witnesses, with the SEC. Fast Track to a Merger
Midwest Energy and Iowa Resources were holding companies which owned electric companies, Iowa Public Service and Iowa Power and Light, respectively. When Midwest Energy and Iowa Resources proposed to merge their holding companies, they chose to submit their merger to the SEC for approval, in effect bypassing FERC. To date, they have fared much better than their brethren. At least they have avoided the onerous transmission access conditions others have paid (or offered to pay) for FERC approval of their mergers. On September 26, 1990, without ever holding a hearing on the matter, the SEC issued a "plain vanilla" approval of the Iowa merger. EC's approval followed relatively routine state approval of the transaction, giving the goahead to Midwest Resources, a new holding company, to acquire the two existing holding companies and to own the two electric companies as separate corporate entities. The important news for electric companies is in what did not happen to the Iowa holding companies at FERC. Intervenors urged FERC to assume jurisdiction over the merger, alleging that the two holding companies were actually
S
63
merging their electric companies (technically their "FERC jurisdictional facilities") as well as the holding companies. The merging holding companies denied this, saying that there was to be no immediate merger or consolidation of the facilities of the respective utility subsidiaries. The Commission agreed with the merger applicants and declined to assert jurisdiction over the transaction, notwithstanding intervenors' allegations. (Slip Order at 2). The FERC decided that the coordinated operations which the two Iowa holding companies had told the SEC their subsidiary utilities would engage in, to meet the integrated public utility test of PUHCA, did not constitute a merger under the FPA. he FERC stressed that since only the holding companies were merging and not their operating companies (i.e., not the "public utilities" technically subject to the FERC's jurisdiction), no FERC approval was required. (Slip Order at 9). FERC noted, however, that the merging companies did appear to contemplate a possible future merger or consolidation of their facilities. If that ever happened, the Commission said, "Such a merger or consolidation of the public utility subsidiaries' jurisdictional facilities will require Commission approval under [FPA] Section 203." (Slip Order at 10). While the case is still subject to rehearing and appeal, the Iowa holding companies seem, at least so far, to have achieved the most flexible of all worlds. While not
yet physically interconnected, their subsidiaries will reap substantial benefits through establishment of a single control area and conversion from a dual to a single membership in ENEREX, the state energy dispatch scheme. They expect their integrated system to improve their off-system purchase and sale capabilities, their transmission planning and spot coal purchases. They predict
T
64
significant savings by combining their administrative and general functions, including coordination and standardization of "practices," computer software savings, increased reliability, improved demand-side management practices and more efficient environmental compliance.4 These are the same kinds of benefits claimed by PacifiCorp and UP&L, SCEcorp and SDG&E and Northeast Utilities (which also claimed benefits from resolving the PSNH bankruptcy). Yet the Iowa companies never had to even broach the subject of transmission access for neighboring
utilities because the FERC decided that they did not arise through a "merger" of the Iowa companies' operating electric companies. etter than desktop fusion? It would appear so, at least for electric company owners who wish to escape the hotly contested transmission access battle which is becoming pro forma for FERCregulated mergers. Consider the interesting restructuring possibilities for the future. If the Iowa pattern of merger approval holds, electric companies might, by merging holding companies, achieve most, if not all, of the benefits of a merger without ever merging their operating electric companies - - i.e., without ever having to seek FERC review. Assuming the SEC continues its low profile (some would say "no profile") approach to scrutinizing competitive and other public interest aspects of mergers, holding companies might meet the integrated utility system test for a merger under PUHCA with a relatively modest showing of how their separate, yet-to-be-interconnected electric companies will coordinate operation. This would leave for later the question of who, if anyone, needs to approve the de jure merger of the electric companies. Again, the answer might be "no one" - - if the SEC's initial approval is deemed ultimately to encompass the entire transaction or if, once the electric facilities of the operating companies are under a single new holding company's control, transfers among the oper-
B
The Electricity Journal
ating electric companies d o not trigger effective merger-type scrutiny from the FERC.
The Non-Merger Merger Merger watchers should probably keep an eye on a second case, which could also fundamentally affect h o w electric c o m p a n y o w n ers will go a b o u t consolidating their businesses. PacifiCorp, having failed in its bid to acquire Pinnacle West or its utility subsidiary, Arizona Public Service C o m p a n y , nevertheless pers u a d e d Arizona Public Service to sell and exchange p o w e r and energy in great amounts, p r o v i d e and exchange transmission service, construct p o w e r plants, and otherwise engage in sophisticated inter-utility coordination over a
merger can be achieved. It w o u l d be an a n o m a l y indeed if someh o w the Iowa holding c o m p a n y "non-merger merger" escaped FERC scrutiny, while the PacifiCorp merger-like non-merger did not.
Conclusion To FERC or not to FERC, that is the question. For a while, it is still an o p e n question for electric companies contemplating a merger. By virtue of FERC's hands-off posture in the Iowa merger, the door m a y n o w be open to a w h o l e n e w breed of mergers and consolidations. Utility holding companies such as the n e w Iowa-based M i d w e s t Resources, w h o s e subsidiaries are not even physically interconnected, m a y reap substan-
w i d e geographic area. he complex coordination
tial merger-type benefits u n d e r a unified m a n a g e m e n t structure
agreement that resulted from PacifiCorp's aggressive ef-
with relatively limited SEC review and no FERC review.
forts to acquire A P S / P i n n a c l e has n o w been presented to the FERC
As M i d w e s t Resources C E O Mark P u t n e y p u t it, "We've written a road m a p and w e k n o w h o w to do it again. ''6 The door
T
for approval. While s o m e intervenors are insisting that the deal should receive close scrutiny - perhaps u n d e r the FERC's merger authority (§ 203) - - PacifiCorp and APS have insisted it is merely a p o w e r and transmission sale transaction and therefore requires only rate schedule-type approval u n d e r § 205. 5 FERC's decision as to w h e t h e r this non-merger which is allegedly equivalent to a merger requires merger-type scrutiny - - or just that normally accorded a wholesale rate filing - - will influence h o w n e w types of utility coordination short of a full-blown
Jan ua ry/February 1991
left o p e n b y FERC will be an espe-
d a l l y attractive one to enter if PacifiCorp's p r o p o s e d deal with APS falls prey to the FERC merger review process. •
Notes 1. The term "electric companies" is used to avoid such technical terms as "public utilities" and "holding companies" which carry with them attributes of corporate and regulatory law which would not facilitate this discussion. 2. Missouri Basin Municipal Power Agency v. Midwest Energy Co. and Iowa Resources Inc., FERC Docket No. EL90-31000, Order Noting and Granting Interventions and Dismissing Complaint, Dec. 13, 1990. 3. The U.S. Supreme Court has yet to resolve the details of this overlapping jurisdiction since it never reached the question in the recent Arcadia case. Arcadia, Ohio v. Ohio Power Co., No. 89-1283 (U.S. Sup. Ct. Nov. 27, 1990). Its 8-0 decision there only decided that section 318 of the Federal Power Act didn't prevent both FERC and the SEC from dealing with fuel pricing. 4. See the companies' joint filing of SEC Form U-l, May 24, 1990for a more complete description of how they intend to combine their electric utility systems. 5. See motions to intervene in PacifiCorp Electric Operations and Arizona Public Service Co., FERC Docket No. ER91-26000. 6. ElectricUtilityWeek, Dec. 17,1990at 9.
Midwest Energy and Iowa Resourcesfound smooth sledding with the SEC.
65