M & A Roundup: Utility Merger Bypasses Holding Company Act

The merger of American Electric Power (AEP) and Central & South West Corp. (CSW) cleared a major hurdle in March when FERC approved the pact. In a market where some deals hurtle along to conclusion at Internet speed, both inside and outside of the utility sector, this one has the distinction of being among the slowest – perhaps not surprising given the rule-bending stakes involved in joining the two big utility holding companies. They announced an agreement in December 1997 and expect to complete the deal in the second or third quarter of this year. “It will probably come out at about two and a half years to do the thing,” said David Burks, an energy analyst at the J.J.B. Hilliard, W.L. Lyons brokerage in Louisville. “While some in the financial community wondered if it would ever happen, the parties remained committed to the deal and worked together to make it a reality.” The deal will create what Burks calls a “super-regional” utility with about 38,000 megawatts of generating capacity in the U.S., more than 4.7 million customers in 11 states, and about 4 million customers outside of the U.S. Efficiencies gained through the deal will result in at least $2 billion in savings over 10 years, according to AEP. “A merger like ours requires approvals from many state and federal agencies, but FERC’s approval is our biggest step forward to date,” said E. Linn Draper Jr., AEP’s chairman, president, and CEO. An old law is being bent The final regulatory step for the merger will be getting the green light from the Securities and Exchange Commission (SEC), which has final authority over interstate holding companies. The pact already has received antitrust clearance from the Department of Justice and from state regulatory commissions. One outgrowth of the FERC approval that may impact future utility mergers is a further weakening of the Public Utilities Holding Company Act (PUHCA) of 1935, which stipulates that only utilities whose service areas are contiguous can merge. “The FERC approval of the deal means that PUHCA considerations will be less of a factor in any other industry mergers between noncontiguous companies,” Burks said. One industry source said that in the era of open transmission rules, which FERC mandated in a 1996 ruling, the Depression-era law has become irrelevant and is becoming a non-issue in utility mergers. He pointed to a previous FERC-approved merger in which the companies’ service territories don’t border each other – the combination of Carolina Light & Power Co. and Florida Progress Corp. – as an example of the shrinking role of PUHCA concerns in today’s spate of utility mergers. In addition to regulatory concerns, the AEP/CSW deal has had to overcome objections from competitors and customers. “More than 100 parties intervened in this merger, raising numerous issues. We worked diligently to address the issues and we reached settlements with the vast majority of intervenors,” Draper said. Among the intervenors’ concerns was the massive amount of transmission and generation capacity that the combined company will have. In an effort to ensure that AEP/CSW will not have overwhelming market power, FERC said that the merged company, which will be called AEP, must transfer control of its transmission system to a regional transportation organization by Dec. 15, 2001. This is the same deadline FERC set for all transmission-owning companies. The commission also instructed AEP to install a third-party manager for the pre-RTO (regional transmission organization) period to ensure that the enlarged transmission grid is managed evenhandedly.