Expect Fewer and Larger Utilities

This column was originally published on RealMoney on July 26 at 2:15 p.m. EDT.

With a congressional conference committee completing its work on a broad-based energy bill including the repeal of the Public Utility Holding Company Act, or PUHCA, two utility insiders think we are close to a new era in electric utility consolidation.

"The industry will see the repeal as a much more favorable condition for mergers and acquisitions and consolidation of the electric utility business," Southern Company(SO Quote) Chairman and CEO David Ratcliffe told RealMoney in an exclusive interview Tuesday morning. "While we had become almost indifferent to PUHCA's repeal, it opens the door for new consolidation opportunities."

Tom Fanning, Southern's CFO, agrees. "The repeal of PUHCA is a long-awaited step that should lead to a number of utilities looking at strategic options."

PUHCA, a Depression-era statute, was enacted to restrict even larger power monopolies across the country. In simple terms, it prohibited holding companies from owning multiple utilities that were not geographically contiguous.

However, with competition and advances in technologies, the threats of large holding companies have largely been mitigated. And in fact, the Securities and Exchange Commission and other regulatory bodies have taken much of the bite out of PUHCA in recent years, allowing questionable mergers to meet relaxed PUHCA standards.

But a recent court ruling that threatened to reverse the merger of American Electric Power(AEP Quote) and Central and SouthWest that was completed years ago caused renewed interest in the repeal of the decades-old law.

While there is little doubt that PUHCA will renew the focus on potential utility deals, the shape of those deals could be very diverse.

Regionalization Likely

Large utility transactions such as the pending deal between Exelon(EXC Quote) and Public Service Enterprise Group(PEG Quote) and the merger of Cinergy(CIN Quote) with Duke Energy(DUK Quote) are made easier by the repeal of PUHCA.

And while they're reluctant to speak publicly, attorneys for the companies suggest that PUHCA's demise will make approval of their combinations less arduous.

However, mega-transactions such as the Exelon-PSEG deal are still difficult to put together for several reasons, including difficult approval from state utility regulators, concerns over reliability and, not surprisingly, management egos.

More likely than blockbuster deals is regional consolidation, an opportunity to build scale among smaller utilities in a specific area of the country. As mentioned in previous columns, the Midwest is one place to look. Between Kansas, Missouri and Oklahoma, you have regional utilities such as Westar Energy(WR Quote), Great Plains(GXP Quote), Aquila(ILA Quote), Empire District Electric(EDE Quote), OG&E Corp.(OGE Quote) and, further south, Cleco(CNL Quote). There is no reason all of those utilities would not be in play for a regional consolidator, something Ratcliffe thinks is more likely.

"Certainly, the repeal of PUHCA makes it much easier for consolidation on a regional basis, and that is likely to happen," he says. "However, the repeal will also make some people more favorably disposed to larger deals."

While Southern Co. doesn't need to consolidate to continue its steady growth rate, there are opportunities on its regional radar, including Teco(TE Quote), Scana(SCG Quote) and Progress Energy(PGN Quote). While a Progress deal would be at the large end, there have been rumblings for years about a marriage of the two utilities.

One person to watch as PUHCA is repealed is Warren Buffett and his MidAmerican Energy subsidiary. With Buffett sitting on billions and a known willingness to look at power assets, he could become an even more powerful player.

And, of course, he is in the Midwest.

PUHCA, R.I.P.

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