Dumbing Us Down On PUHCA Repeal
by Roger Feldman -- Bingham, Dana L.L.P.
As a nation, we seem to have been dumbed down to the "pseudo causal" sound bite. Instead of judging from the facts, we let ourselves be led by superficial formulations of how the facts might relate – whether they do or not. We are all too willing to suspend disbelief. Our collective brain no longer relates observations of what has happened in the past to the reasonableness of what projected results of policy actions will be in the future. Then we get angry at the end results. My Websters’ defines this as "dumbing down." This trend has spread to the energy policy dialogue (now known as the great Energy Crisis solution forum).
In the wider policy arena, the best example of the dumbing down of public discourse is the Administration’s tax cut rationalization. First, the cuts were an entitlement due us for the boom times we created: Government didn’t need and was not entitled to the money. Then the cuts became anti-recession medicine that the nation desperately needed. The fact that states that had set the tax cut pattern early – curiously Texas and Florida – now find themselves strapped for minimal program funding requirements is not a fact to conjure with. Not to worry, it won’t work out that way in Washington: because here we agree to tax cuts before we agree to budgets, so we never know what we gave up in the first place.
In energy, the most ironic example of policy discourse dumb down is the pell mell rush to repeal the Public Utility Holding Company Act (PUHCA). Originally, the rationale was that PUHCA wasn’t necessary. The operation of deregulation would replace antique anti-consolidation rules with the invisible band. Deregulation, after all, meant competition (which also meant lower prices). Repealing PUHCA enhanced competition, case closed.
But then California happened. It turns out that deregulation can lead to consolidation of market power in the hands of a small number of asset owning sellers (and higher prices). Not to worry. It turns out PUHCA repeal really was necessary so that investors will make the investments required to provide the infrastructure (like transmission) to offset the effects of non-competitive deregulation. How do we know? Warren Buffett has promised he will buy more assets if there is no PUHCA limitation. Sounds good. After all, Ted Turner’s gift balanced our foreign policy’s inability to stay in the United Nations. Senator Gramm has linked PUHCA repeal now to California contagion avoidance.
But is lack of incentive for investment what actually caused the California crisis? Until only yesterday, that was the received wisdom. That’s why FERC couldn’t even cap wholesale "market based" rates when they were arguably not "just and reasonable." Doing so would deter investment by reducing returns. But now caps (or "cucumbers" as the Chairman prefers to call them) seem to be OK, according to FERC, because of newfound recognition that competition won’t work well until there is more investment. Which, it turns out, can in fact occur if there is even some anticipation of deregulation gauged to how markets are operating. Maybe Warren Buffett will choose not to; other investors will.
Also, repeal proponents have emphasized, there is no need to worry about how PUHCA repeal will affect how deregulated markets operate because PUHCA is old: even if human nature has not changed since 1935, the quality of regulation has improved. Any consolidation resulting from repeal will be offset by better competition due to deregulation. Only one problem with this theory: the facts. The power industry is consolidating through mergers – rapidly. In fact, more holding companies exist now – 50% more – than before deregulation. Much larger swathes of territory are holding company held. And the quality of regulation of market competition is in question.
Not to focus on this issue say the proponents of repeal. The nation needs these consolidated juggernauts to fix the decrepit transmission system by making more investment. One problem: transmission still remains regulated at a low return after PUHCA repeal . That can be fixed of course: deregulate transmissions and let a few large holding company owners run for-profit transcos that reward them for their transmission investment risk-"taking" – unleash the hobbled greatness of AEP, Merant and the other pitiful giants (including the profitable owners of the near-bankrupt California operating utilities). Will that be anticompetitive: well, that’s not the problem.
Before agreeing with this bland dismissal, read the fine print of S. 206, the statutory blueprint for standalone PUHCA repeal without deregulation reform. The Commission (that’s SuperFERC, the savior of California) will remain empowered to review utility books and records to assure there are no market abuses. And states’ rights to protect consumers are preserved – subject, that is, to the unblockable FERC-approved, market-based wholesale rates that are rapidly supplanting the waning power sales contracts imposed by state
commissions for a period of years as a part of state deregulation settlements.
And the statute adds a few proposed, modest caveats. No unwarranted disclosure to the public "of any trade secrets or sensitive commercial information" (could this mean pricing and trading strategy of the type FERC found, initially at least, was wholly legitimate in California). FERC’s exemption authority from all this open books and records nonsense is to be selectively applied to persons who solely own exempt wholesale generators. (Could that be every utility unregulated, subsidiary owning only, market rate based merchant plants throughout the country?) But then again, the repeal proponents tell us, that’s one of the benefits of PUHCA repeal: the opportunity for national branding. That’s why gasoline prices fluctuate so wildly as a result of intense competition across the country. (Not...) No wonder David Sokol chides the power industry for having lost its vision – by which he means specifically that it has been content to earn the rates of return that were established in the 1960s. He should know; his partner in mid-America, Warren Buffett, wants to make more investments.
Is there a rational balance between free market rhetoric and real market imperfections in the PUHCA repeal debate? PUHCA, as a securities fraud protection and a shield against self-dealing, affiliate transactions, may have been outmoded by the increased sophistication of regulation. That was the argument of the last two decades. But now we have deregulation. Deregulation will evoke investment with or without PUHCA. It won’t solve the need for transmission investment – better regulatory policy will. It can’t transform FERC, the open market-hearted mastiff, into Deputy Dawg, the market abuse hunter (it’s just not in the statutory genes). And, it won’t improve the looming market power problems which consolidation poses for the healthy operation of competitive markets. All this is not to say PUHCA should not be repealed; but it is to say there was a good reason PUHCA repeal was proposed in a larger deregulation context, one which the post-repeal studies now proposed in the Senate will not rectify. Events have only served to prove the wisdom of this view. Does anyone seriously believe PUHCA repeal is what is needed to save California from itself or the nation from the newly discovered "energy Crisis"? Just as surely as that eight months of newly drilled Arctic oil at high marginal cost will be the solution to increased foreign dependence.
Energy is politics. And politics is sound bites. Sound bites are generalizations. All this must be accepted; it is what it is. But it helps us all if the arguments for energy policy relate to common sense and the facts.
No more dumbing down to effect PUHCA repeal.
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.