About a year and a half ago, my Foolish colleague Bill Mann took a look at the possible repeal of the Public Utilities Holding Company Act (PUHCA -- pronounced "pooh-ka") being discussed in Congress. He commented that most investors would rather read the phone book or cut their lawn with a spoon than discuss energy policy. I couldn't agree more.
Bill also noted that this was the millionth time a possible PUHCA repeal had been discussed. Prepare yourselves, folks, for the million-and-first. Last week, the Senate Energy Committee passed a bill that would repeal PUHCA and transfer some of the act's authority to the Federal Energy Regulatory Commission (FERC).
I'm not here to argue whether this is good or bad for consumers or investors; one short article can't do something as large and expansive as PUHCA justice. That said, I think PUHCA and its potential changes are more important than investors might assume. As hard as it might be, forget for a moment that energy policy is less exciting than watching grass grow, and consider that a change to PUHCA is a material event for both Income Investors and the investment community at large.
Let's take the proposed Duke Energy (NYSE:DUK) merger with Cinergy (NYSE:CIN), for example. Today, under PUHCA, Duke will need to make numerous compromises to complete its merger with Cinergy. It'll have to register as a holding company subject to PUHCA's regulation, which means that Duke will have to prove it operates in the same geographic region as Cinergy and will need to divest its non-energy-related subsidiary Crescent Resources. (Crescent is focused on developing real estate held by Duke.)
In the proposed PUHCA-free world, Duke would only need to petition FERC for approval of its merger; FERC would determine the merger's competitive merits and review pricing. In addition, it's quite likely that Duke would be able to retain its real estate subsidiary, Crescent Resources.
While PUHCA is a burden for utility holding companies such as American Electric Power (NYSE:AEP) and AES (NYSE:AES), it also forces companies with operations in other industries to settle for passive utility ownership. Warren Buffett of Berkshire Hathaway (NYSE:BRKa) (NYSE:BRKb) has been outspoken for the past few years that Berkshire, with its large amounts of capital, is a natural fit for the utility industry, but to date PUHCA limits Berkshire -- on paper, anyway -- to its passive investment in MidAmerican Energy.
Time will tell whether a PUHCA reform will actually pass into law. It's clear, however, that substantial reform would change the investing outlook in the utility industry in both the near and long term. Investors should pay close attention.
Finished the phone book? Try reading these Foolish Takes on the energy business:
Nathan Parmelee owns shares in Berkshire Hathaway but has no financial interest in any of the other companies mentioned. The Fool has a disclosure policy.
