For the millionth time since it was passed in 1935, a proposed energy bill in Congress would repeal the Public Utility Company Holding Act, or PUHCA ("pooh-ka", or more derisively, "puke-ah").
When you start talking about things like energy policy, most investors would rather read the phone book or cut their lawns with a spoon. It's boring. It's also important. If Congress were to repeal PUHCA, the environment for investor-owned electric utilities would dramatically change. Warren Buffett, Chairman of Berkshire Hathaway (NYSE:BRK.A) has said on multiple occasions that he would like to invest another $10 billion to $15 billion into electric companies, but cannot since the one that Berkshire owns the majority of -- Iowa utility Mid-American Energy -- is subject to PUHCA. Millions of investors interested in income-generating stocks (the kinds Mathew Emmert highlights each month in Income Investor) could see their portfolios affected by the outcome.
So, what the heck is PUHCA?
Here's the simple explanation of PUHCA -- and I emphasize the word simple. PUHCA controls the types of businesses that electric utilities can compete in, it places strict capital controls on debt structure as well as investor ownership, and limits the geographic reach of any utility. The reason that PUHCA came into being is simple -- electric utilities once upon a time were government-mandated monopolies throughout the country. In exchange for monopoly status, electric utilities ceded their pricing power, as well as new facility financing, to state public utility commissions. So a company would say "we expect that it will cost X" to produce enough power for our region, and the state PUC would then determine the price at which the utility can charge per kilowatt.
Companies under such an environment would have some incentive to pile all kinds of business activities into the "cost" assumption, including businesses and ventures completely unrelated to power generation and distribution. Just as importantly, companies could take the revenues they generated from power and use them for other, perhaps riskier ventures. Were a company to get in trouble with these riskier ventures, it could put its customers' power supply at risk. And because it's a monopoly, those customers don't get to choose. Of course, PUHCA completely failed to protect Portland General Electric, owned by Enron. It also was insufficient to keep electric utilities such as Duke Energy (NYSE:DUK), Mirant (NYSE:MIR), and Aquila (NYSE:ILA) from falling into financial turmoil in the merchant energy sector.
Some of the limitations placed on utilities by PUHCA are somewhat bizarre. Utilities reporting that they couldn't lease out an unneeded floor of a company-owned office building due to PUHCA limitations. What we have overall is a situation where companies would like to invest further into electric companies, and cannot. Both opponents and proponents of repeal of the legislation state that the industry will change under such an environment -- proponents pointing to the blackouts of this summer and the need for billions in investment to update America's power grid, opponents stating that local ownership of power companies keeps them out of the hands of a few powerful companies that would be too large for any one state PUC to regulate.
My own opinion is that regulation that limits the flow of capital to its most efficient use is ultimately expensive for us all. That Warren Buffett has billions of dollars that he can't invest into an industry that clearly needs intelligent investment tells me that time has come to peel PUHCA back.
Bill Mann owns shares of Berkshire Hathaway.
