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ENERGY BILL SCORE -- Utilities: 1 Trillion; Consumers: 0 ~or~ Utilities Get to Keep Monopolies AND Kill Regulation

by Lynn Hargis, Former FERC Assistant General Counsel, Electric Rates

Contrary to most editorials condemning it, the GOP energy bill is not JUST a bag of giveaways to the energy industry, engendered in the secret Cheney energy task force meeting as the quid pro quo for campaign contributions or thrown in during conference to buy off various legislators.  It certainly is all of that, but also is far worse:  a sweeping plan to eliminate all remaining major consumer protections for electricity and natural gas consumers by repealing the Public Utility Holding Company Act and gutting the Federal Power Act’s consumer protections.

I.   Electric Rates—The Federal Power Act

Transmission:   Transmission is an essential, but not a major part of the expense of electric utility service and rates, as compared to generation.  However, it will become more expensive, if the energy bill is passed, since it provides for “incentive” rates for this monopoly service.  (The bill acknowledges how hard it is to build ONE national grid, much less competing grids, when it gives FERC rights of eminent domain and the Secretary of Energy the right to invoke “homeland security” to take state or private land for utilities to build transmission and distribution lines.) 

Incentive Rates for Essential Monopoly Service?

Despite the unarguable monopoly status of transmission lines, the energy bill offers special “incentive” rates to those who would own them.   In economic terms, anything over cost for essential, monopoly service should be considered “monopoly rents.”  The energy bill, however, is offering “incentive rates” to monopolists!  When these sweetheart rates are coupled, as they must be, with the bill’s repeal of PUHCA, it means that all sorts of companies or individuals can now own monopoly electric lines and reap monopoly rents from them.  Moreover, since FERC will bless this procedure, the Supremacy Clause of the U.S. Constitution will require the states to pass through such rates to retail electric consumers.  Nice work if you can get it, and anyone – like Warren Buffett – with a few billion to invest will be able to get it.

And, to add a little more sugar to the icing on the cake, the owners of monopoly franchise utilities including such transmission lines will be able to charge competing power plants twice for their use, under a “participant funding” provision found in the bill.

Generation: Utilities Set Rates, FERC Can’t Challenge Them

A seemingly innocuous provision in the energy bill regarding the “sanctity of contracts” codifies the ability of utilities to negotiate “market” rate contracts without any regulatory review, and requires FERC to bear the burden of challenging such contracts prospectively under an extremely high standard. In other words, in addition to annihilating PUHCA consumer protections, the energy bill would gut the electric consumer rate protections of the FPA, which now require utilities to bear the burden of proving that they need higher rates BEFORE they are allowed to collect them or provide refunds.   This provision stands FPA consumer protections on their heads.

II.    Where the Big Money Is in the Energy Bill – PUHCA REPEAL

The biggest dollar item in the entire energy bill is the repeal of PUHCA:   it will result in the nation’s approximately ONE TRILLION DOLLARS worth of still-PUHCA-regulated electric generation, transmission and distribution facilities and natural gas distribution facilities being available for sale to the highest bidder without ownership or geographic restrictions.  The last time that happened, there were 53 utility holding company bankruptcies and 16 interest defaults in a six year period, from 1929 to 1936. 

What stopped the utility capital hemorrhaging?   PUHCA was enacted.  Unfortunately, both the history and the Act have since been forgotten, since PUHCA has done its job so well for 68 years.  The unofficial historian of the SEC, Joel Seligman, Dean of the Washington University School of Law and a writer of treatises on  securities law, has called the enforcement of PUHCA both “the single most significant” and the “single most useful” thing that the SEC has ever done.  He also called enforcement of PUHCA the “most successful antitrust enforcement program in U. S. history.”  See, The Transformation of Wall Street, A History of the Securities and Exchange Commission and Modern Corporate Finance, Northeastern University Press, 3rd edition, 2003.

Too much success breeds forgetfulness, apparently, and PUHCA has been forgotten, even by the SEC it seems.   Because it was a regulatory law, unlike other SEC “disclosure” laws, the SEC commissioners were uncomfortable with it, and left it largely to their senior staff, as Seligman notes.  After a while, they seem to have forgotten what PUHCA did, and have suggested to Congress in recent years that PUHCA is more or less just an auditing statute that can safely be repealed.

Is PUHCA Outdated and Unneeded?

Here are the words of the SEC Chairman in 1995 recommending to the Congress that PUHCA was no longer needed because:

   “As a result of prudent administration of the Public Utility Holding Company Act, and the development of comprehensive federal securities regulation, the conduct that gave rise to the Act has all but disappeared.”  (emphasis supplied)

There are several problems with this statement in viewing it from the hindsight of 2003:

First, if the administration of PUHCA has resulted, even in part, in removing the conduct that gave rise to the Act--101 volumes of Enron-like utility holding company abuses were documented by the Federal Trade Commission at the time-- then that would seem to be a strong argument for KEEPING the statute, not eliminating it.

But, logic aside, the SEC Chairman in 1995 believed that “the conduct that gave rise to the Act has all but disappeared.”   Congress should ask the SEC to comment on whether the agency still believes this to be the case, but Congress has already asked the SEC Chairman to testify twice in November, 2003, on the mutual funds scandals.  These are only the latest in a long line of Wall Street scandals that involve, in fact, a lot of the “conduct that gave rise to” PUHCA, from accounting scams to affiliate dealings to all the Enron-like utility tricks that Enron itself could only do because of the partial PUHCA repeals in 1992 and 1996.

If anyone really thinks in this post-Enron, post-World Com, post-Tyco, post-Arthur Andersen, investment bank/mutual fund scandals, etc. environment that this is a good time to remove as “unneeded” PUHCA restraints from public utility holding companies, such persons have not read the business pages of their local papers, which look a good deal like the police blotter these days.

How States Lost Control Over Generation Plants

Perhaps the most impressive display of PUHCA’s powers is the effect of one simple amendment made to the statute in 1992, the exemption from PUHCA of certain power plants that sold energy exclusively for resale.    This was supposed to just create a little competition among power suppliers; instead, it effectively took generation out of the control of state commissions, who had always regulated it, and put it into the hands of FERC, which, to this day, has no statutory authority over generation plants.

This PUHCA partial repeal created power marketers, and ultimately the electricity deregulation debacle in California, the Enron bankruptcy, and the bankruptcies and huge debt of numerous utilities all over the United States.  Congress’ decisions to amend PUHCA to allow utilities to invest in telecoms and foreign utilities have been equally or even more disastrous to utility finances

So, what does the energy bill do?   Reverse these repeals and save the finances of our electric utilities and our electric rates?   Not exactly.  The conference energy bill would completely repeal PUHCA, removing all the remaining consumer and investor and financial protections of the statute. 

And here’s the best part for utilities: they don’t have to give up their monopoly utility franchises!   Plus rates accepted by FERC – whether FERC has ever actually looked at them or not—are to be passed through by the states to retail ratepayers under the Supremacy Clause of the U. S. Constitution.

Will utilities get away with this astounding coup?   Stay tuned…there’s an election coming!

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