Lawmakers Call SEC on Carpet Over Utilities

The congressmen also challenged the SEC's decision to issue "no-action" letters to nonutility companies, most notably Berkshire Hathaway, seeking exclusion from PUHCA rules. The questions, at times, were pointed:

• On how many occasions over the last 10 years has a request for a no-action letter under PUHCA been filed and granted on the same day?

• Do companies ever negotiate the terms of a no-action letter in private with SEC staff prior to the issuance (of) a no-action letter?

• Did this occur with respect to the Berkshire Hathaway no-action letter or the other no-action letters?

Berkshire Hathaway sparked broad interest in the sector with its 1999 acquisition of MidAmerican Energy. Since then, two prominent private equity players -- Texas Pacific Group and Kohlberg Kravis & Roberts -- have plunged into the utility sector as well.

New Deal

But a state commission has raised concerns about KKR at least. Late last month, the Arizona Corporation Commission staff warned that KKR's planned buyout of UniSource -- parent of the state's second-largest utility -- "is not in the public interest."

KKR plans to finance the $3 billion acquisition with some new debt that will make UniSource even more leveraged than it already is. Critics fear that KKR -- perhaps best known for its takeover of RJR Nabisco during the LBO frenzy of the 1980s -- will then begin cutting corners to maximize profits before selling UniSource in pieces.

"Leveraged buyouts ... typically result in major pressure to cut costs," the commission staff wrote on April 30. "The transaction contains no enforceable protections against reductions that would be inappropriate to maintaining safe, reliable and adequate electric service. Absent specific commitments to protect utility customers in the future, staff does not believe the deal should be consummated."

For its part, KKR has portrayed UniSource as another long-term investment for a firm that, on average, now keeps its ownership stake in companies for seven or eight years. And UniSource investors -- welcoming a 30% premium over their predeal share price -- have clearly embraced the transaction. During an election on the merger in late March, roughly 97% of the votes fell in favor of the deal.

UniSource CEO James Pignatelli, who will continue to lead the company, celebrated the arrangement as a good one for everybody involved. But the utility commission staff disagreed.