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FERC: Qualified OK to Puget Utility-Macquarie Merger

Expressing confidence in state of Washington regulators, FERC gave conditional approval last Thursday to the proposed Puget Sound Energy (PSE) $7.4 billion merger with a private equity consortium of North American infrastructure investors led by a New York City unit of Australian-based Macquarie Infrastructure Partners (MIP).

A day earlier, PSE shareholders approved the deal, which will take the combination natural gas-electric utility private.

Under the action, the Federal Energy Regulatory Commission (FERC) accepts the conditions that Washington state regulators are imposing, unless on further examination it finds they are "inadequate." In that regard, FERC reserves the right to impose other conditions at a later time after the state regulators have acted.

Noting that "unnecessary conflict" between state and federal regulators works against the public interest, Chairman Joseph Kelliher said FERC's more flexible approach still gives what he called "a hard look" to the merger conditions imposed by state commissions, such as the Washington Utilities and Transportation Commission (WUTC) in the case of PSE and its parent company, Puget Energy. He specifically called out protections against cross-subsidization through ring-fencing provisions that protect the utility from the credit risks of affiliated nonutility companies.

This is the major federal regulatory approval needed, although there are still pending actions by the federal Justice Department and the Federal Trade Commission, a Bellevue, WA-based PSE spokesperson said. State WUTC hearings on the merger begin next month and are expected to run into June, with a final state determination expected in September, the spokesperson said.

A nonoperating holding company, the Macquarie Group holds multinational assets, including Duquesne Light Holdings in western Pennsylvania. Other members of the consortium bidding to own PSE are the Canadian Pension Plan Investment Board, British Columbia Investment Management Corp. and the Alberta Investment Corp.

Kelliher voiced strong support for the ring-fencing provisions submitted to the WUTC, noting they should insulate PSE's utility customers from financial activities associated with the new holding company structure. Thursday's action directed PSE to file with FERC within 10 days after the Washington state regulators approve the ring-fencing measures.

Within 90 days of the merger closing, the Washington utility and parent company are expected to file a "nonconsolidation opinion" with the WUTC affirming that the ring-fencing provisions are sufficient in that a bankruptcy court would not order consolidation of utility assets and liabilities with Puget Energy or any of its other subsidiaries. And in another commitment, the companies are required to maintain separate books and records to generally hold PSE utility customers harmless from any business and financial risk exposure associated with Puget Energy, Puget Holdings and other nonutility affiliates.

On Wednesday, Puget CEO Stephen Reynolds hailed as a "strong endorsement" the positive vote by Puget Energy shareholders to accept the $30/share offer from the Macquarie-led consortium. "The transaction benefits [shareholders], and over the next several years will benefit our customers, communities and employees."

Before voting 5-0 for the conditioned approval, FERC commissioners echoed what Reynolds has been saying about the deal since it was struck last October -- namely, that it will provide the utility with the financial backing it needs during the next five years for accelerated development in utility infrastructure.

Commissioner Philip Moeller, a Washington state native, said he was happy to support the merger with conditions, particularly because he respected the three WUTC regulators whom he called "very competent."

"The reality is that we are entering a period in the utility sector of rising costs, and the utilities need a lot of investment in very critical infrastructure -- transmission, generation, distribution -- and this merger allows [PSE] access to that kind of capital," said Moeller, adding that with the consumer protection provisions included at the state level, he is confident the "consumers are protected."

Other commissioners echoed similar thoughts about the "critical rising cost" environment facing the utilities, and the Washington regulators' "outstanding reputation."

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