Kate Thomas
OGJ Online
HOUSTON, Jan. 31 -- A law the investor-owned utility industry has targeted for repeal appears to have deterred Enron Corp. from buying up US electric companies and possibly compromising the nation's electric grid, two Democratic legislators said.
In a letter to Securities and Exchange Commission Chairman Harvey Pitt, Representatives John Dingell (D-Mich.), ranking member of the House Energy and Commerce Committee, and member Edward Markey (D-Mass.) asked the agency to review its repeal position of the Public Utility Holding Company Act, "given what has come to light so far with respect to Enron's activities" and pending results of investigations under way by the SEC.
"Given what we have learned about Enron's operations, it is fortunate that recent efforts to repeal PUHCA without countervailing protection did not succeed," they said. Although Enron succeeded in buying Portland General Electric Co., the act apparently discouraged the company from making additional direct investments in investor-owned utilities, the congressmen said.
Dingell and Markey speculated grid reliability could have been compromised if the Houston company had been able to "gain control of critical transmission facilities." They suggested PUHCA limits on the ability of nonutility companies to diversify into the utility business discouraged Enron because it would have been required to register under PUHCA and divest its nonutility holdings.
Repeal of PUHCA is included in an electricity restructuring bill that is expected to come to a vote by the House Subcommittee on Energy and Air Quality in February. Dingell and Markey asked Pitt if the agency believes Congress should repeal PUHCA before pending investigations into Enron are completed.
They also want to know if the agency's proposed reliance on existing financial disclosure requirements to offset risks posed by PUHCA repeal make sense, especially with respect to the growing "evidence of fundamental problems" in the accounting profession.
Dingell and Markey expressed doubt state regulators would be able to protect ratepayers against potential risks posed by the complex financial transactions Enron used, if PUHCA is repealed without instituting consumer safeguards.
Some utility holding companies' efforts to diversify in the past resulted in spectacular disasters. Pinnacle West Corp., parent of Arizona Public Service Corp., lost millions after buying a savings and loan that failed. Ratepayers picked up the tab. FPL Group Inc., parent of Florida Power & Light Co., wrote off $689 million after an unsuccessful plan to diversify into cable television, insurance, and citrus fruit production.
"If PUHCA is to be repealed or otherwise modified, it is incumbent on Congress to carefully distinguish between provisions which may no longer be warranted and aspects of the act which still serve a useful and necessary purpose," they said.
The oil industry is watching the PUHCA discussion closely. If the act remains in force, oil companies will find it even harder to buy up utilities.
The SEC already is under the microscope with respect to its interpretation of PUHCA. Two weeks ago a federal appeals court ordered the agency to review its approval of the merger between American Electric Power Co. Inc. and Central & South West Corp.
The SEC approved the merger June 14, 2000, and it was completed June 15. The US Court of Appeals for the District of Columbia said it violated PUHCA, which requires a US utility's operations to be interconnected and located in a single area. The court said the SEC "failed to explain its conclusions" regarding the interconnection requirement.
The SEC decision was appealed by the National Rural Electric Cooperative Association and the American Public Power Association, who argued the approval order departed from SEC precedent without adequate explanation. Many investor-owned utilities want the law repealed, claiming it is antiquated and restricts needed investment in electric transmission and other energy-related facilities.
Enron exemption
Separately, Dingell and Markey also asked the SEC to produce documents exempting Enron from laws governing investment companies. Had Enron, now under bankruptcy court protection, not been exempted the lawmakers wondered if some of the "potentially fraudulent" actions could have been prevented.
In 1997, the agency granted Enron an exemption from the Investment Company Act, after Congress rejected the company's efforts to obtain an exemption. Dingell and Markey said they are now "extremely wary" of a provision of the electricity restructuring bill because it appears to create potentially "dangerous loopholes" in the system of investor protection.
Under a grandfathering proposal, the legislators said it appears existing affiliates of utility holding companies that hold investment securities of electric or gas utilities would not be treated as investment companies. Through a series of transactions, the companies could escape oversight, including hedge fund regulation, that presently rely on specific exemption from registration, Dingell and Markey said.
Moreover, they said the provision would allow affiliates to invest in securities and other investments, without protection from laws governing investment companies, including oversight of directors, bans on affiliated transactions, daily marking-to-market of assets, limits on leveraging, and full disclosure requirements.
They asked the agency to determine how many unregulated investment companies potentially would be permitted to exist and what securities the companies would be allowed to invest in, if the provision of HR 3406 becomes law.
Contact Kate Thomas at [email protected]