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Coop Acquisitions and PUHCA Repeal
(Hie To, or Hide From?) A perennial "hot topic" in the electric utility business seems to be repeal of the Public Utility Holding Company Act (PUHCA). Many experts have weighed in on one side or the other, and I do not feel that I can add to that debate. I do, however, feel uniquely qualified to discuss the effect that a repeal of PUHCA might have on electric cooperative acquisitions. In so doing, I will not discuss the position of the National Rural Electric Cooperative Association; those views are set forth on their web site at http://www.nreca.org/nreca/news/merger_position.html. PUHCA, as intended, has functioned to restrain consolidation of investor-owned electric utilities, largely limiting them to regional combines. The inevitable result of PUHCA repeal will be increased consolidation of investor-owned utilities (IOUs)--perhaps even beyond analyst Ed Tirello's famous prognostication of 50 ultimate survivors. Those utilities will eventually enjoy great efficiencies as a result of consolidation and streamlining of the 240 or so IOUs that exist today. This process will take at least five to ten years in my opinion, and might take longer still. In the interim, based on my experience with previous clients, I believe that IOUs will concentrate on merging amongst themselves in ways that had previously been prohibited. This focus will distract them from seriously considering cooperative acquisitions, and even IOUs that are not distracted will be reluctant to propose cooperative acquisitions, as they will fear that the coops' opposition to such actions might affect their own merger prospects. After the sector has consolidated, IOUs might again be receptive to electric cooperative acquisitions. At that point, however, the consolidated IOUs would have an average customer density of roughly 1.8 million each (assuming 50 consolidated IOUs), and even acquisition of the largest coops would have a relatively modest effect on an individual IOU's bottom line. (The largest coops serve around 150,000 customer/owners, and there are only a few of that size; the average is approximately 40,000 customer/owners per coop.) I suspect that most will look to more spectacular acquisitions, and, if enough time has passed to dim memories of the current meltdown, international combinations are much more likely than cooperative acquisitions. So, at least as far as acquisitions by IOUs are concerned, the effect of PUHCA repeal on coops would probably be positive, in effect reducing acquisition pressure from IOUs. But there's no free lunch: PUHCA repeal would have other effects on the coops. First, the consolidated utilities will become more efficient, and those savings will be shared with customers. This will increase so-called "competitive pressure" on the cooperatives, as typical rate differentials will become more pronounced. Such pressure will, in turn, encourage the cooperatives to merge amongst themselves into larger, more efficient entities. Of course, consolidation will produce a tremendous amount of consternation amongst the cooperatives, but the end result will benefit coop customer/owners. Second, PUHCA repeal may encourage financial buyers to give greater consideration to coop acquisitions. PUHCA constraints have discouraged financial buyers from acquiring properties that would otherwise interest them, and its repeal will remove those constraints. Attracted to the relatively safe and predictable returns that the regulated wires business, however dull, offers, I suspect that they will show increased interest in coop acquisitions, and I would not be surprised to see the advent of new private equity funds devoted to electric cooperative acquisitions (as far as I am aware, there is currently only one fund devoted primarily to acquisitions in the wires business, and that fund has made only one major acquisition--perhaps due, in part, to PUHCA limitations). Thus, coops could face new challenges from nontraditional acquirors, replacing and perhaps exceeding those of IOUs. While I can't predict when this might happen, I do feel comfortable predicting that it will. Finally, these newly energized financial buyers, having fewer inhibitions than IOUs, will surely be more aggressive acquirors. Most IOU acquirors, facing isolated (but noisy) opposition, frequently withdraw their offers prior to them even being considered by coop customer/owners; financial buyers will probably prove to be significantly more tenacious. And tenacity is just about the only essential element of a successful "win-win" electric cooperative acquisition. The coops have often described acquisition offers as competition for ownership. PUHCA repeal will have a great effect on the identity of those acquirors and the timing of acquisitions. Oddly enough, PUHCA repeal may serve to insulate coops from acquisitions, at least in the short run. Thereafter, though, I believe that pressure will both increase and become more diverse as newer, more aggressive players enter the acquisition market.
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