Law's Demise Powers Utilities

Repeal of a Depression-era law that sharply limited who could own public utilities has sparked a conflagration of merger activity in the sector -- and the flames look far from quenched.

The Public Utility Holding Company Act, a law established in 1935 that restricted consolidation in the utility sector, was lifted Feb. 8, making way for growth-hungry heavyweights such as Berkshire Hathaway(BRKA Quote) and General Electric(GE Quote) to get a bigger piece of the U.S. utility businesses.

On Monday, two U.S. utility companies were part of the action. KeySpan(KSE Quote), the New York utility firm, confirmed a deal in which Britain's National Grid(NGG Quote) will buy it for $7.3 billion in cash, plus assumed debt. The transactions will double the size of National Grid's U.S. business, giving the company 8 million customers in New York, New Hampshire, Massachusetts and Rhode Island.

Also reported Monday, General Electric(GE Quote) and Macquarie Bank of Australia might buy a stake in Dallas-based TXU Corp.(TXU Quote), the largest energy-delivery company in Texas. The Wall Street Journal said the Texas utility firm would spin off its poles, wires and substations unit to create a new company, and would sell a 49% stake in that firm to an outside investor.

The change in U.S. regulation paved the way for this type of activity, according to Adam Wenner, a partner in project finance at Chadbourne & Parke.

"It certainly makes life easier for companies that want to expand their footprint in U.S. utilities," he said.

The old regulation, which restricted a utility company from providing energy outside of a small region and forbade non-utilities to own more than 10% of a utility, changed on Feb. 8. As early as Feb. 9, companies began to capitalize on the rule change.

Berkshire Hathaway, the investment titan run by industry icon Warren Buffet, expanded its footprint in the sector through its investment in MidAmerican Energy. Prior to the PUHCA change, Berkshire Hathaway owned 9.9% of the Des Moines-based utility company. On Feb. 9, Berkshire Hathaway converted stock options in MidAmerican that gave it an 80.5% ownership share, on a diluted basis. The former owner, Walter Scott Jr., decreased his stake to from about 88% to 15%. Berkshire Hathaway's utility interest expanded on Feb.13, when the Idaho Public Utilities Commission approved MidAmerican's acquisition of PacifiCorp.