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<title>March 2002: Geezer at the Wake</title>
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<p align="left"><font face="Arial"><strong><small>About The Author:<br>
<br>
</small></strong><span lang="X-NONE" style="color: black"><font size="2">
ROGER FELDMAN, Co-Chair of Andrews Kurth LLP Climate Change and Carbon
Markets Group has practiced law related to the finance of environmental and
energy projects and companies for 40 years. In particular, he has analyzed
and executed a wide variety and substantial value of project financings. He
chairs the American Bar Association’s Committee on Carbon Trading and
Finance, serves on the Board of the American Council for Renewable Energy,
and has been a senior official in the Federal Energy Administration. He is
a graduate of Brown University, Yale Law School and Harvard Business School.</font></span></font></p>
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<img src="../images/feldman.gif" alt="Washington Viewpoint by Roger Feldman" border="0" width="375" height="75"><p><b><u><br>
March 2002</u><br>
</b></p>
<p><font size="6">Geezer at the Wake</font></p>
<p><strong>by Roger Feldman -- Bingham, Dana L.L.P.<br>
</strong><font face="Arial" size="2">(<em>originally published by PMA OnLine Magazine:
2002</em>/05/16)<br>
</font><span style="font-size: 10.0pt; font-family: Palatino; color: black">
</span></p>
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<p>Washington’s having an Enron bash of a wake at the club, and all of the
power policy players are there: snappy traders in natty deregulation suits;
dowdy utilities in tattered, integrated, three-piece outfits; state
regulators nervously patting their thinning wallets of authority; and a few
florid, beefy giants wearing "master of the universe" ties. At the door
trying to get some attention, while some of the hosts are trying to hustle
him permanently away, is old man PUHCA (the Public Utility Holding Company
Act of 1935). He outlived Al D’Amato’s repeal efforts; he survived the
efforts of his own nursing home caretakers – the SEC – to do him in; he’s
dodged the ricocheting bullets of comprehensive energy deregulation bill
proposals; and outlived sassy Enron, which had gotten itself exemptions from
his authority. And now the adoring son of one of his original sponsors, Rep.
John Dingell himself, is demanding not only to let him stay at the party,
but that everyone listen to him tell his stories about Sam Insull and the
unregulated energy pyramid schemes of old. He has taken the SEC by the
lapels and asked: "Does the Commission believe that Congress should address
PUHCA repeal before pending investigations of Enron (including his own
inquiry) have been completed"?</p>
<p>In parallel, focusing on its literal statutory non-compliance with
PUHCA’s requirement that a registered holding company have a single
geographically-integrated territory, the D.C. Court of Appeals has
blocked the AEP-CSW merger, signaling that the days of patronizing but
finessing the old PUHCA fossil may be again past. </p>
<p>Which leaves the power industry with the very non-academic question: what
happens to PUHCA now? The competing sound bites boil down to three questions
concerning the law: (1) Ghost or no ghost? (2) Obsolete or functional? (3)
Dead hand or stout heart? </p>
<p>(1) Is Enron a reincarnation of the abuses of the ‘30s that the New
Deal sought to squelch? Certainly, as Congressman Dingell has pointed out,
several of the manifestations of greed and folly at which PUHCA was aimed
seem to be present, viz., unsecured asset values, inflated capital
structure, market manipulation, exploitation of operating subsidiaries
through cross-subsidization and mismanagement, and concentration of economic
power not susceptible to state regulation. But, counter proponents of PUHCA
repeal, Enron’s demise was the product not of PUHCA’s reach or lack of it
(notwithstanding that both its acquisition of a regulated utility and its
trading business were exempted from it), but the rogue character of
management’s actions. In an almost theological conclusion, an SEC
Commissioner told Congress: "The tragic collapse of Enron is not a result of
its classification or lack of classification as a public utility holding
company . . . Enron is a tragedy for our entire system of disclosure
regulation."</p>
<p>(2) More narrowly, is PUHCA then a usefully workable law? Or, put
differently, sure Enron did some very bad things, but they were not the
particular things PUHCA was designed to deal with? In particular, PUHCA
doesn’t address the character of market operations for regulation over the
past decade. In addition, as FERC has pointed out, PUHCA’s terms may
interfere with RTO participation and with the organization of for-profit
transcos.</p>
<p>PUHCA proponents suggest that had Enron not been exempted from regulation
as a registered holding company, the law’s reporting requirements and
corporate diversification restrictions might have blocked some of the acts
that helped to bring down the company. Therefore, repeal of PUHCA might
allow other utilities to emulate the Enron model with eventual similar
adverse consequences.</p>
<p>(3) Which leaves the key technical question: should PUHCA be
substantially swept away, subject to some modest safeguards (as bills like
S. 1766 would do), or should it be viewed as a placeholder for an updated
industry structural oversight reform bill that accurately reflects the
operation of modern utility markets. FERC, the residuary legatee of a
statutorily bobtailed PUHCA, adheres to the former view. It views the
statute as anachronistically increasing concentrations of generation
ownership, thereby increasing market power and diminishing electric
competition. Protection of its access to books and records – and such
other information as may be necessary to prevent Enron-like trading abuses –
is what FERC feels is necessary.</p>
<p>By contrast, Congressman Dingell emphasizes that prior FERC exemptive
legislation for other industries has been much more detailed in its "books
and records" requirements than that now proposed for energy. He is not
buying the argument that general securities law disclosure
requirements are sufficient, by themselves, to deal with and control the
diverse and complex operations of energy utility holding companies.
Moreover, the original basis of the 1995 SEC finding that there were
adequate consumer protections without PUHCA was the presumed efficacy of
rate regulation which, of course, now has been dismantled significantly by
deregulation.</p>
<p>There seems to be only one point of consensus: if PUHCA is to play a
valuable ongoing role, it must be reformed to meet both industry needs to
continue to attract additional investment, and consumer needs to provide
identifiable, workable protection against the potential adverse effects of
utility consolidation consistent with FERC’s market-based rates
investigation/ rulemaking. It seems as though old man PUHCA should be
allowed to stay at the Enron policy wake bash, at least until the bartender
has definitely figured out a better way to keep track of the libations being
served. </p>
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text-align:left"><font face="Arial" size="2">
<span lang="X-NONE" style="color: black">ROGER FELDMAN, Co-Chair of Andrews
Kurth LLP Climate Change and Carbon Markets Group has practiced law related
to the finance of environmental and energy projects and companies for 40
years. In particular, he has analyzed and executed a wide variety and
substantial value of project financings. He chairs the American Bar
Association’s Committee on Carbon Trading and Finance, serves on the Board
of the American Council for Renewable Energy, and has been a senior official
in the Federal Energy Administration. He is a graduate of Brown University,
Yale Law School and Harvard Business School.</span></font></p>
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