Energy Law Alert: Energy Bill Repeals the Public Utility Holding Company Act, Limits Utility Purchase Obligation from Qualifying Facilities
The Energy Policy Act of 2005 (the "Act") has been signed into law by President Bush. The Act repeals the longstanding Public Utility Holding Company Act of 1935 ("PUHCA"). The Act also amends the Public Utility Regulatory Policies Act of 1978 ("PURPA") so as to change the rights of "Qualifying Facilities." This client alert summarizes these two major changes to federal energy legislation.
REPEAL OF PUHCA; MERGER AUTHORITY OF FERC
PUHCA has been repealed. Some of the most notable changes associated with PUHCA repeal include:
- PUHCA repeal becomes effective 6 months after the date of enactment of the Act.
- The Federal Energy Regulatory Commission ("FERC") is given approval authority over mergers of public utility companies, over the acquisition, sale or other disposition of more than $10,000,000 in assets or stock of a public utility company or holding company, and over the leasing of more than $10,000,000 in public utility assets. Notably, for the first time, FERC is given jurisdiction over mergers, purchases and leases of generation assets that are used for interstate wholesale power sales.
- FERC is required to consider whether disposition, consolidation, acquisition or change in control will result in cross-subsidization of a non-utility associate company or will involve a pledge or encumbrance of utility assets for the benefit of an associate company. FERC also must find that such transaction is consistent with the public interest.
- Public utility holding companies, and their associate and affiliate companies, still must maintain and make available to FERC and to state utility commissions on a confidential basis books, accounts and other records relevant to costs incurred by public utilities.
- FERC must conduct a rulemaking within 90 days after the effective PUHCA repeal date regarding exemptions to Federal access to books and records of holding companies owning only qualifying facilities, exempt wholesale generators, or foreign utility companies.
- FERC’s authority to require that jurisdictional rates are just and reasonable is amended to explicitly call out the need for FERC to prevent cross-subsidization involving regulated utilities.
- Within 4 months after the date of enactment, FERC must issue regulations necessary to implement the new legislation.
- Within 4 months after the date of enactment, FERC must submit to Congress detailed recommendations on technical and conforming amendments necessary to implement PUHCA repeal.
- A holding company system or a state commission with jurisdiction over a public utility within a holding company system may elect to authorize FERC to review and authorize the allocation of the costs for non-power goods or administrative or management services provided by an associate company organized specifically to provide such goods or services to the public utility.
THE CONSEQUENCES OF PUHCA REPEAL
PUHCA originally broke up the nation’s gas and electric utility holding companies and limited the ability of gas and electric utilities to recombine. PUHCA required that holding companies systems be simplified so as to be limited, with relatively few minor exceptions, to the operations of a single integrated public utility system and to such other businesses as are reasonably incidental, or economically necessary or appropriate to the operations of the integrated system.
PUHCA repeal will open opportunities for utility acquisitions and mergers that have not been permitted since 1935. For example, when the repeal becomes effective:
- Parties may acquire multiple operating electric or gas utility companies that are not part of a single integrated public utility system.
- Parties may create combined multi-state gas and electric companies. The long-touted "convergence" of widespread electric and gas utility companies may now begin to occur.
- Non-utility companies in the United States may be able to invest surplus funds, or newly-raised funds, to acquire major interests in or to control of public utility companies.
- Individual investment funds may be able to acquire major interests in, or control of, multiple public utility companies.
- Holding companies, which under PUHCA would have been registered holding companies, will no longer be restricted from engaging in unrelated business activities.
AMENDMENTS TO PURPA
Prior to passage of the Act contains, utilities have been required to buy capacity when needed and all energy made available to it by Qualifying Facilities. The Act alters the PURPA requirements in major respects.
- The mandatory purchase obligation is terminated if the Qualifying Facility has non-discriminatory access to competitive wholesale markets for capacity and energy. Utilities must make a filing at FERC to be relieved of their purchase obligation on this basis.
- In addition, the mandatory purchase obligation will not apply to any new Qualifying Cogeneration Facility, unless (a) the thermal output the new Qualifying Cogeneration Facility is used in a productive and beneficial matter, (b) the electric, thermal, and chemical output of the new Qualifying Cogeneration Facility is used fundamentally for industrial, commercial or institutional purposes, and is not intended fundamentally for sale to a utility, and (c) the new Qualifying Cogeneration Facility complies with rules ensuring the continuing progress in the development of efficient Qualifying Facility generating technology. FERC must issue new rules within 180 days to implement these requirements with respect to new Qualifying Cogeneration Facilities.
- The Act eliminates restrictions on public utility ownership of Qualifying Facilities. The Act provides that utilities and their affiliates can invest in and control Qualifying Facilities.
The Act also amends PURPA to:
- Add several new federal ratemaking standards that state utility commissions must consider whether to implement. These new standards include provisions dealing with net metering, diversity and fossil fuel efficiency considerations in utility resource planning, time-of-use based rate schedules, and interconnection for customers with on-site generating facilities.
- Authorizes the Secretary of Energy to provide notice to state regulatory authorities and public utilities regarding technologies and ratemaking methods for advanced metering and communications and their use in demand response programs.
- Makes the Secretary of Energy responsible for educating consumers on advanced metering, for working with states and utilities to identify and address barriers to demand response programs, and for providing a report to Congress by January 1, 2007 that identifies and quantifies the benefits of demand response and makes a recommendation on achieving those benefits.
These changes in the regulatory paradigm pose many corporate restructuring and market opportunities and will likely create significant regulatory activity at the federal and state levels. This summary describes only some of the most notable provisions of the Act in these two areas. If you have any questions about this update or about other provisions of the Act, please contact your Stoel Rives lawyers or one of the following lawyers:
Marcus Wood at firstname.lastname@example.org or (503) 294-9434
Steve C. Hall at email@example.com or (503) 294-9625
Jennifer H. Martin at firstname.lastname@example.org or (801)-578-6996
This is a publication of Stoel Rives Energy Group for the benefit and information of clients and friends. This bulletin is not legal advice or a legal opinion on specific facts or circumstances. The contents are intended for information purposes only. Copyright 2005, Stoel Rives LLP.