NorthWestern’s Exemption from Vital Consumer Protection Act Means Customers Not Protected in Utility’s Bankruptcy Proceedings

Oct. 1, 2003

NorthWestern’s Exemption from Vital Consumer Protection Act Means Customers Not Protected in Utility’s Bankruptcy Proceedings

 

Public Utility Holding Company Act Could Have Protected South Dakota and Montana Utility Consumers

 

WASHINGTON, D.C. – An exemption to a critical consumer protection law, obtained in 2002 by a now bankrupt utility company, NorthWestern Corp., could lead state regulators to lose control over the bankruptcy proceeding and result in higher electric rates for consumers in South Dakota and Montana.

NorthWestern, an electric and natural gas utility in South Dakota and Montana, declared bankruptcy last month. Had NorthWestern not been granted the exemption from the Public Utility Holding Company Act (PUHCA) – a law that Congress is poised to repeal – South Dakota and Montana would have a stronger ability to protect consumers in their state. Now, though, Wall Street banks and other creditors will have priority over states and consumers under NorthWestern’s bankruptcy proceeding.

A bankruptcy judge likely will foist NorthWestern’s $2.2 billion debt upon the company’s electric utility subsidiaries – meaning consumers will end up paying the bill. While consumers will be paying more for their electricity, the public utility commissions of both states will have to try to persuade the bankruptcy judge to give them a significant role as mere “parties in interest” rather than as creditors.

But had the Securities and Exchange Commission (SEC) not allowed NorthWestern to be exempt from PUHCA, consumers and the states would be protected because under the Act, the SEC must approve any reorganization plan before such plan even goes to the bankruptcy court. The agency also has the power to force the company to separate the utility businesses from its debt-inducing projects in telecommunications.

“The fact that ratepayers are on the hook is the latest testament to the importance of PUHCA,” said Joan Claybrook, Public Citizen’s president. “Congress must not repeal this vital act.”

PUHCA was enacted in 1935 after the collapse of dozens of highly leveraged utility holding companies caused severe damage to the economy and helped deepen and prolong the Great Depression. Among its many consumer and shareholder safeguards, the law limits the investment of utility profits in unrelated business ventures. It regulates the size, geographic spread, types of businesses and the finances of utility holding companies. This prohibits expansion-minded executives from endangering the essential service delivered by utility subsidiaries by siphoning off profits to engage in risky investment schemes that do nothing to improve service reliability or keep rates low.

In 1992 and 1996, Congress repealed key portions of the act, allowing utilities to build power plants outside their core territories, foreign companies to purchase U.S. utilities, and utilities to invest in the telecommunications industry. The result is a grim story in the domestic electricity and retail natural gas sector: Once-stable and secure utility companies have used deregulation and partial PUHCA repeal to leverage ratepayer assets to finance risky investments and executive perks. Consumers are paying higher rates for less reliable service and loss of local control and accountability.

Prior to 2002, NorthWestern was exempt from PUHCA because it operated only in one state, South Dakota. The SEC does not apply PUHCA’s regulations to a company that operates a single-state utility, since state regulators are assumed to be able to effectively oversee such a utility.

In February 2002, NorthWestern purchased Montana Power, a 90-year-old utility that experienced problems of its own stemming from deregulation and poor investments in telecommunications. It then became subject to regulation under PUHCA. However, in early 2002, the SEC granted NorthWestern’s request for a minimum 18-month exemption from PUHCA by declining to act on the matter. As a result, NorthWestern was freed from having to comply with the act’s investor- and consumer-friendly rules.

NorthWestern’s financial woes stem from the mid-to late-1990s, when the company began to make significant investments outside its regulated electric and natural gas business. In 1995, NorthWestern derived two-thirds of its revenues from its regulated electric and natural gas operations. But by 2000, its regulated natural gas and electric operations accounted for only 2.5 percent of total revenues. Losses in the growing non-utility portion of the company (mostly telecommunications) and the acquisition of Montana Power led to mounting debt and the company’s eventual bankruptcy.

“Had NorthWestern stuck to its regulated business ventures and been subject to PUHCA regulation, it likely would not have been forced into bankruptcy. Even bankrupt, consumers at least would have had SEC bankruptcy protections,” said Wenonah Hauter, director of Public Citizen’s Critical Mass Energy and Environment Program. “Despite being weakened, PUHCA still provides the federal government’s strongest utility consumer protections, including protections during bankruptcy. That’s why Congress must remove the provisions in the pending energy bill that would repeal PUHCA entirely.”

During the 68 years that PUHCA has been in effect, not a single PUHCA-regulated electric utility holding company has gone bankrupt. However, a number of companies that have taken advantage of the partial repeal of PUHCA or have been granted exemptions have gone bankrupt, including Enron, Mirant and NRG. Further, even PUHCA may not be able to save Allegheny Energy, which has been allowed by PUHCA repeals to engage in substantial, risky and unprofitable energy trading. “PUHCA must not be repealed, but strengthened,” Hauter said.

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