- PUHCA Repeal and the Public Utility Holding Company Act of 2005
- August 19, 2005 | Authors: Stephen H. Watts; Mark J. McGuire
- Law Firms: McGuireWoods LLP - Richmond Office ; McGuireWoods LLP - Chicago Office
Among the most significant features of the Energy Policy Act of 2005 (EPAct 2005) -- the comprehensive energy bill the Congress sent to President Bush on July 29, 2005, -- is repeal of the Public Utility Holding Company Act of 1935 (PUHCA). In its place, the Congress enacted the new Public Utility Holding Company Act of 2005 (PUHCA 2005), which creates a far less problematic regulatory regime for public utility holding companies but one which energy companies and regulators will need to take into account in the future.
For seventy years, entities that own, operate and finance (or that wish to do so) interests in electric generation, transmission and distribution companies and assets or in retail natural gas utilities have contended with the maze of PUHCA's structural, financial and operating limitations administered by the Securities and Exchange Commission (SEC). This entire regime will be swept away by PUHCA repeal. So, what will take PUHCA's place, and how will PUHCA 2005 affect those same entities and federal and state regulators?
Effective Date and Purpose
PUHCA repeal, which is contained in Title XII, Subtitle F of the new legislation, will not become effective until six months after the date it is signed by the President. On that date, PUHCA 2005, which will be administered by the Federal Energy Regulatory Commission (FERC), will become effective. PUHCA 2005 is designed to assure that holding company structures do not prevent FERC and state utility regulators from having sufficient access to the books and records of public utility holding companies and their unregulated subsidiaries and affiliates necessary for those regulators to carry out their jurisdictional duties.
Many of the definitions of PUHCA terms are retained for PUHCA 2005. These include the definition of a "company" (essentially any entity other than a natural person), "holding company" (any entity that owns or controls ten percent or more of the voting securities of an electric public utility or a retail gas utility), "holding company system" (a holding company and its subsidiary companies), "affiliate" (five percent or more of the voting securities under common control), "associate company" (any company in the holding company system) and "subsidiary company" (ten percent or more of the voting securities under common control). As with PUHCA, familiarity with these and the other definitions in PUHCA 2005 is essential to an understanding of its effect.
FERC Access Under Section 1264
Under Section 1264 of PUHCA 2005, FERC is granted access to the books and records of (a) holding companies and their associate companies, (b) affiliates and subsidiary companies of a holding company with respect to any transaction with another affiliate and (c) any company in the holding company system or any affiliate thereof, that are determined by FERC to be relevant to costs incurred by FERC-regulated natural gas pipelines or electric public utilities in the holding company and necessary or appropriate for the protection of utility customers with respect to FERC-jurisdictional rates.
Exemption from FERC access to books and records under Section 1264 is provided for entities that are holding companies solely with respect to qualifying facilities (QFs), exempt wholesale generators (EWGs) and foreign utility companies (FUCOs), which were exempt from treatment as public utility companies under PUHCA. In other words, an entity that otherwise would be a holding company will be exempt if its holding company system only includes QFs, EWGs or FUCOs. An exemption is also to be made available for persons, transactions or classes of transactions found by FERC not to be relevant to FERC-jurisdictional rates.
State Regulator Access Under Section 1265
Under Section 1265 of PUHCA 2005, a state regulator having jurisdiction over a retail gas utility or an electric public utility in a holding company system is granted access, upon written request, to books and records of the holding company and any of its associate companies or affiliates, wherever located, that are (a) identified in reasonable detail in a proceeding before the state regulatory body, (b) relevant to costs incurred by the state-regulated company and (c) necessary for the effective discharge of the state regulator's jurisdiction. A state regulator can enforce its rights under Section 1265 in any United States district court in that state.
Allocation of Centralized Services Costs Under Section 1275
Registered holding companies under PUHCA (as well as many other holding companies) whose systems include a FERC-regulated electric public utility have an associate company organized specifically to provide centralized non-power goods or administrative or management services within the holding company system. Section 1275 of PUHCA 2005 provides that, at the request of a holding company system with such a centralized services associate company or of a state regulator with jurisdiction over an electric public utility in the system, the FERC will review and authorize the allocation of the associate company's costs for such goods and services. FERC is to develop regulations exempting from the requirements of Section 1275 any company in a holding company system whose electric public utility operations are confined substantially to a single state, as well as any other class of transactions FERC determines not to be relevant to the FERC-jurisdictional rates of an electric public utility.
Within four months after EPAct 2005 is signed by the President, the FERC is required to issue regulations for its implementation, with the exception of regulations authorizing exemptions under Section 1264, which must be issued within 90 days of the effective date of PUHCA 2005 (six months after enactment, as noted above). The FERC is also required to provide, within four months of enactment, recommendations to Congress on technical and conforming amendments to Federal law that may be necessary to carry out PUHCA 2005. Industry players will want to participate in, or at least follow closely, these rulemakings going forward.
For many holding companies, regulator access to books and records of non-regulated subsidiaries is not new. By granting regulator access to books and records of affiliates and associate companies, however, PUHCA 2005 will extend the reach of regulators beyond the limits of many state laws governing relationships between regulated public utilities and entities with which they are affiliated.
Under PUHCA, exemptions for QFs, EWGs and FUCOs were crucial to avoiding the creation of new holding companies, and additional layers of compliance with comprehensive regulation. Under PUHCA 2005, these exemptions will still be important to holding companies whose operating electric companies all qualify for these exemptions and are not subject to state utility regulation because such holding companies will be exempt from the requirements of the new law.
On the other hand, a holding company that includes an electric public utility or a retail gas utility will be subject to PUHCA 2005 with respect to the books and records of all subsidiary companies, affiliates and associate companies, whether or not they are QFs, EWGs or FUCOs. Accordingly, these exemptions, while they may have application with respect to other federal laws and to state laws, may not have currency for such holding companies with respect to EPAct 2005.