Enron Fallout Clouds Utility Mergers

A U.S. appeals court decision snagging the merger of two unconnected utility holding companies has thrown a cloud over m&a across the entire industry, including three deals previously completed. The dilemma is being further complicated by the political firestorm erupting in the Enron Corp. scandal, which has all but hamstrung regulators and legislators from taking immediate action to clear up the confusion. Widespread doubts about m&a in the restructuring industry arose from a mid-January ruling by the District of Columbia Appeals Court that held up the combination of American Electric Power Co. (AEP), based in Columbus, Ohio, and Central & South West Corp. (CSW), anchored in Dallas. The case was sent back to the Securities and Exchange Commission (SEC), which rules on mergers of registered interstate holding companies, for further action. While not upsetting the deal, the three-judge appeals panel directed the SEC to provide more detailed justification for its okay of the merger, which broke new ground in utility combinations last year. Specifically, the panel found that the SEC might have overstepped its authority in authorizing the merger in apparent contravention of the 1935 Public Utility Holding Company Act (PUHCA), which requires combining holding companies to have operations in adjoining states. The SEC bought the utilities’ contention that the two firms were linked by a 250-mile transmission line operated by another utility in Missouri, but the court said that the commission “failed to explain its conclusions regarding the interconnection requirement.” Kevin Fitzgerald, a utility lawyer at Troutman Sanders in Washington, D.C., says that the agency has three options, including an appeal to the Supreme Court, which, it has indicated, is not likely. He says that the SEC also can “supplement the record” by appending the appeals court-directed rationale for the initial approval or, with its newly constituted membership, hold a hearing and determine that “it does not have the legal authority” to allow mergers of holding companies in remote areas. Besides the impact of the proceedings on future mergers, Fitzgerald notes, there is concern about how the ultimate SEC decision will affect three completed mergers between utilities located in non-adjacent states. These deals created: * Progress Energy Inc., via a merger of Florida Progress Corp. and Carolina Power & Light Co.; * Exelon Corp., via a merger of PECO Energy Co. (Pennsylvania) and Unicom Corp. (Illinois); and * Xcel Energy Inc., via a merger of Northern States Power Co. (Minnesota) and Public Service Co. of Colorado. Although these deals did not involve holding companies and did not go through the SEC, the resulting companies subsequently had to register as interstate holding companies and subject themselves to the authority of that agency. As a result, Fitzgerald says, if the commission does decide that it lacks authority to okay mergers between utilities in non-abutting states, these prior transactions could be scaled back. “It is conceivable that a rule could come out that these other mergers would not have to be unwound but that certain properties would have to be divested,” he says. But the Enron controversy, although not directly connected to the mergers, is causing near paralysis on both the legislative and regulatory fronts. Clifford S. Sikora, also of Troutman Sanders, says that an obvious way out of the confusion is congressional legislation that either repeals the New Deal-era PUHCA, which many utility experts regard as anachronistic, or clarifies the SEC’s right to approve mergers like AEP and CSW. But he says that because of Enron, the tide is moving in the other direction. “There is huge political pressure,” mostly from Democrats, to “tighten down on PUHCA,” he says. “If that’s the case,” Sikora adds, “the SEC will be under a lot of political pressure not to whitewash this thing and to maybe look into it more. My sense is that they will wait to do the remand (the court-ordered reconsideration) until this political storm blows over.”