The Murky Rules of the Game After PUHCA

The Energy Policy Act of 2005 repealed the Public Utility Holding Company Act (PUHCA), in part to help spur infrastructure investment through mergers and acquisitions in the electricity sector.  Yet four years later, the mergers and acquisitions picking up steam in the energy sector are (according to the New York Times) primarily in the oil and gas area, not the electricity area. 
 
This is yet another indicator that the threat of regulation often has as great an effect on investment decisions than actual regulation.  Case in point: there is currently a renewable fuel standard (RFS), which requires a certain amount of U.S. fuel consumption to come from renewable sources (e.g., ethanol, biodiesel), but there is no such federal renewable electricity standard (RES) (there are, however, 29+ widely varied state requirements).  
 
Although the cynic in me might argue that oil and gas companies simply aren’t threatened by the relatively low mandated levels in the RFS (they aren’t), there is more to it than that.  The oil and gas companies have a better idea of the rules of the game in which they are playing, and they know there are less readily available options for their product than there are in the electricity arena.  Even if there were a significant carbon tax, gas companies (at least in the next decade) would not be competing in any significant way with other resources; they would just sell less of their resource. 
 
Not so on the electricity side, where electricity can come from a whole host of sources (coal, natural gas, nuclear, wind, solar, geothermal, hydro, etc.).  In addition, there is continuing uncertainty related to possible cap-and-trade and RES programs (both are included in H.R. 2454 – Waxman-Markey – which passed the House in 2009).  In fact, more than twenty-five renewable electricity mandates have been proposed in recent years, but all failed to get support from both the House and Senate in the same session.  In light of this, companies (and investors) have remained reluctant to make significant financial commitments in electricity infrastructure. 

If we’re really serious about electricity infrastructure investment, let’s tell the potential investors the rules. Now that PUHCA is gone, there should be a bunch more of them out there.

--Josh Fershee