MANAGING REGULATORY RISK IN A POST-PUHCA WORLD MACQUARIE SECURITIES 2007 UTILITIES & INFRASTRUTURE CONFERENCE VAIL, CO FEBRUARY 13, 2007 ROBERT W. GEE PRESIDENT GEE STRATEGIES GROUP LLC

2 PUHCA 101(The 1935 Act) No significant utility state regulation existed PUHCA enacted to address financial abuses facilitated by complex holding company structures and interlocking directorates resulting in numerous utility insolvencies and little accountability Required simplified, limited holding company system Utility activities limited to a single, geographically integrated public utility system and to such other businesses as are “reasonably incidental, or economically necessary or appropriate” to the operations of the integrated system Imposed significant recordkeeping and filing requirements before the Securities and Exchange Commission

3 The Case for PUHCA Repeal Over time, PUHCA’s restrictions were deemed as not reflecting either the market structure or regulatory policy priorities affecting the modern electric power industry – Geographic integration requirement counterintuitive to blunt growth of market power – States had assumed greater ratepayer protection role Over 2 decades, SEC favored its repeal Perception grew that repeal was necessary to eliminate arcane, duplicative, and unduly burdensome regulations that disserved the interest of the consuming public by hindering needed investment FERC and states would be better equipped to protect ratepayers, and not the SEC which is focused on investor protection

4 Just when you thought the war was over, the battleground shifted... PUHCA repealed in Energy Policy Act of 2005 – Victory Declared! Because PUHCA repeal premised on adequacy of state authority to protect ratepayers from holding company abuses, states were invited to address any perceived “regulatory gap” Result: most states have yet to act, but several are becoming increasingly assertive – Arkansas, California, New Jersey, and Kansas (pending) Whether this signals a trend is premature Are we witnessing a proliferation of “Mini-PUHCAs” a la Wisconsin? To the states

5 New State Post-PUHCA Measures Structural corporate separation of utility, affiliates, and holding companies – California – mandated by rule – Kansas – Staff recommendation – New Jersey – Staff recommendation Maintenance and retention of separate books and records for utility and holding company affiliates (Arkansas & California) Ringfencing to protect utility credit quality – Arkansas – under certain conditions, can order termination of relationship between utility and its affiliate if shown to impair utility’s credit quality to below BB+ (S & P) or Ba1 (Moody’s) – Kansas – Staff proposal to prohibit utility from issuing long-term debt to fund non-utility activities, investments, or businesses – New Jersey – Staff proposal would empower Board, among other things, to limit or cease payment of dividends or holding company if capital of utility is found impaired

6 New State Post-PUHCA Measures (con’t.) Caps on non-utility diversification by utility or utility holding company akin to Wisconsin “Mini-PUHCA” – Arkansas percent of the book value of the total assets of the public utility and all its affiliates – New Jersey – 25 percent of utility and utility-related assets, with latitude to seek increase to 35 percent under certain conditions Restrictions on transactions or sharing of services/personnel between utility and holding company & affiliates – California – limitations on use of common key corporate officers, and personnel for regulatory affairs, legal, & lobbying – Arkansas – prohibition of affiliate transactions where utility provides to or shares with affiliate any financial resource or financial benefit Disclosure of total compensation for executive officers (and those making >$250K/yr. in base salary), including proportion paid, directly or indirectly, by ratepayers (California )

7 Corporate Governance Oversight: An Emerging Issue New Jersey Staff proposes to require utility annually to certify that: – 40 percent of its directors are “independent” (i.e., not directors of both the electric or gas public utility and its public utility holding company system) – It has process in place for selecting new directors and such process identifies New Jersey residency, employment and/or other significant ties with the State of New Jersey (“New Jersey Qualification”) – If less than 40 percent, made a good faith effort in meeting New Jersey Qualification California’s rule -- Indirect effort at governance oversight via required disclosure of share of executive compensation attributable to utility ratepayers – infers utility executive decisions driven by superseding business priorities of holding company and/or affiliates

8 Common Drivers for State Post- PUHCA Measures A strong preference for ex ante versus ex post sanctions – generic rules versus case-by-case determinations Skepticism of effectiveness of existing ratemaking authority to prevent harm to ratepayers from cross-subsidization or risk of non- utility diversification Desire for more rigorous oversight over matters previously left to management discretion Not persuaded that new rules would chill investment

9 Lessons for Investors (thus far) State commission’s inclination to impose controls influenced by variety of factors: – Prior history of utility conduct (e.g., abuses affecting utility creditworthiness) – General mistrust of utility ownership by large multi-state holding companies or by out-of-state interests – “Activist” regulatory culture – Commission’s relationship to legislature and/or Governors No two commissions are identical, but they talk to one another Investors should continue to monitor state actions to see how this evolves

10 Robert W. Gee President Gee Strategies Group LLC 7609 Brittany Parc Court Falls Church, VA U.S.A (fax)