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Potential M&A Players Watching How States, FERC Get Along Post-PUHCA

Until it is known how states and FERC are "going to play in the sandbox together" in a post-Public Utility Holding Company Act of 1935 (PUHCA) world, there are likely to be at least some potential merger candidates that will remain on the sidelines, a top official with Lehman Brothers said last Wednesday. Under the Energy Policy Act of 2005 (EPAct), PUHCA will be officially repealed in February 2006.

"There is a desire to have somebody else go through that process and codify the rules of the road, if you will, and so I think that partially will stop people from coming out Feb. 9 and announcing transactions," Brett Mitsch, a senior vice-president at Lehman Brothers, said at an Infocast energy conference in Washington, DC.

"On a very macro level, I think we probably were headed toward an era of some consolidation," said Nancy Bagot, vice-president of regulatory policy at the Electric Power Supply Association (EPSA). She made her comments in a Tuesday appearance at the conference. "I think there would have been consolidation going forward, regardless of what happened with PUHCA."

"Absolutely when you look out 10 to 15 years from now, there will be fewer utilities delivering power and gas to the consumer," added Raymond Wood, managing director of global energy at Credit Suisse First Boston. "There clearly will be more and more M&A geared toward driving down costs and consumers will demand it and regulators will end up getting comfortable with it, to the extent that there's no market power," Wood said on Tuesday.

EPAct repeals PUHCA and removes the Securities and Exchange Commission (SEC) as the main overseer of holding companies. In its place, the law allows FERC and state regulators greater access to the companies' books and records. The law also gives FERC some additional authority in overseeing mergers, including oversight of utility acquisitions of generating assets.

FERC in September proposed rules to implement the repeal of PUHCA and has received a number of comments in response to the notice of proposed rulemaking. FERC has also proposed rules and amendments to the Commission's regulations to implement merger review provisions of EPAct.

"Our effort is not to create a mini-PUHCA or even a gigantic PUHCA and just move the whole thing from the SEC" to FERC, Commissioner Nora Brownell told the conference. FERC's goal "is, in fact, to give expeditious treatment to mergers because we understand the cost of delay and that's a cost ultimately borne by customers," she said.

At the same time, FERC also has "an obligation to balance, I think, the concerns that many people expressed during the debate on PUHCA repeal and our merger review authority, which was somebody has to be there and looking out for the best interests of the customers. I think we can get there."

She believes that PUHCA repeal and the Commission's authority is going to bring change. "Do I think it's going to be a flood of mergers as we might have thought three or four years ago? No, I don't, for a bunch of reasons. One of which is the companies are really concerned about state clawbacks and about the cost and effort that it will take to make it through the system."

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