-------------------- BEGINNING OF PAGE #1 ------------------- SECURITIES AND EXCHANGE COMMISSION 17 CFR Part 250 Release Nos. 35-26153; IC-20675; International Series Release No. 740 File No. S7-32-94 Request for Comments on Modernization of the Regulation of Public-Utility Holding Companies AGENCY: Securities and Exchange Commission ("Commission"). ACTION: Concept release; request for comments. SUMMARY: The Commission is soliciting comments on modernization of the regulation of public-utility holding companies under the Public Utility Holding Company Act of 1935. Developments in recent years require reexamination of the need for, and role of, a federal holding company statute. Accordingly, the Commission is requesting comment on a number of specific issues summarized in this release, and generally on any other issues that commenters believe relevant to the regulation of public-utility holding companies. DATES: Comments are to be received on or before [90 days after publication in the Federal Register]. ADDRESSES: Comments should be submitted in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. All comment letters should refer to File No. S7-32-94. All comments received will be available for public inspection and copying in the Commission's Public Reference Room, 450 Fifth St., N.W., Washington, D.C. 20549. FOR FURTHER INFORMATION CONTACT: William C. Weeden, Associate Director, Joanne C. Rutkowski, Assistant Director, Office of Legal & Policy Analysis, Martha Cathey Baker, Assistant Director, Office of Applications, Robert P. Wason, Chief Financial Analyst, Office of Public Utility Regulation, or C. Hunter Jones, Special Counsel, Office of the General Counsel, all at (202) 942-0545. SUPPLEMENTARY INFORMATION: I. Introduction The Commission is soliciting comments in connection with a comprehensive study ("Study") of regulation under the Public Utility Holding Company Act of 1935 ("Holding Company Act" or "Act"). The Holding Company Act was complex and far-reaching New Deal legislation, enacted by Congress to eliminate abuses that had plagued the U.S. electric and gas utility industry and threatened the interests of investors and consumers. The public- utility holding companies subject to this statute operate across the United States, serving a vast number of utility consumers.-[1]- Although in the past sixty years there have been fundamental changes in the industry, as well as significant legal and regulatory developments, the Holding Company Act has remained largely unchanged. The Commission is undertaking a thorough evaluation of the Act, to review the regulatory framework in light of developments in recent years and to consider how federal regulation of utility holding companies can best serve the interests of investors, -[1]- At present, there are fourteen active registered holding companies and several hundred exempt holding companies. -------------------- BEGINNING OF PAGE #2 ------------------- consumers, and the general public in the years to come. The Commission inaugurated the Study with a roundtable discussion, in Washington, D.C. on July 18 and 19, 1994 ("Roundtable"), in which representatives of the utility industry, consumer groups, trade associations, investment banks, rating agencies, economists, state, local and federal regulators, and others participated.-[2]- The participants discussed a number of issues facing the industry today. They noted that deregulation and increased competition have created risks, as well as potential benefits, for public utilities. Many participants stated that utilities are experiencing little or no earnings growth in their core utility business. A number of possible responses, including reorganization of the industry along functional lines, diversification, and investment in foreign projects, were mentioned. Although the participants had widely divergent views on the future of the Act, all agreed that the statute poses some impediments to change. Recommendations ranged from selective reform of the Act to outright repeal. Those favoring repeal have argued that the Act is redundant or outmoded as a result of changes in the industry, the capital markets, accounting standards, state and other federal regulation, and the disclosure required under other federal securities laws. Although the Commission has previously supported proposals to repeal or transfer administration of the Act,-[3]- these proposals have not succeeded. Commenters who favor continued efforts for repeal should describe in particular the protections that would be afforded consumers by state and other federal law, in the absence of a Holding Company Act. At the Roundtable, Commissioner Richard Y. Roberts expressed the view, and the Commission concurs, that the most valuable contributions to the Study may consist of concrete proposals for reforms on which it is likely that the industry, the regulators and other interested parties can agree.-[4]- The objective of such proposals would be to modernize and simplify regulation, reduce the delay inherent in the current administration of the Act, and minimize regulatory overlap, while protecting the interests of consumers and investors. As a point of departure, the existing regulatory framework is summarized below. Also identified are a number of specific topics on which the Commission is seeking comment. Commenters are encouraged to address the overall regulatory structure for -[2]- A transcript of the Roundtable discussion, which was open to the public, will soon be available for inspection and copying at the Commission's Public Reference Room in File No. S7-19-94. -[3]- See, e.g., Statement of the U.S. Securities and Exchange Commission Concerning Proposals to Amend or Repeal the Public Utility Holding Company Act of 1935 (June 2, 1982). -[4]- Several commenters provided specific proposals for Commission consideration. See, e.g., Comments by Joan T. Bok, Chairman, New England Electric System; Summary of Comments of Clinton Vince, Special Counsel to the Council of the City of New Orleans; Columbia Gas System, Initial Comments on the Need for Legislative Reform (Aug. 10, 1994) (available in Public Comment File No. S7-19-94). -------------------- BEGINNING OF PAGE #3 ------------------- public-utility holding companies, and to consider the appropriate role of a federal holding company statute, particularly in view of the work of the Federal Energy Regulatory Commission ("FERC") and state and local regulators. In addition, commenters are urged to address any general topics or issues that they believe merit examination in the Commission's study of holding company regulation. The Commission requests that commenters provide specific statutory or rulemaking language, where possible, to implement their recommendations. It may also be helpful to compare the costs and benefits of various proposals, to companies as well as to consumers and investors. In addition, if commenters argue that regulatory or market protections outside the Holding Company Act suffice to protect investors and consumers on a particular issue, they should describe the operation of these other safeguards. II. The Existing Regulatory Structure A. Background: Passage of the Holding Company Act The Holding Company Act-[5]- was intended to address the practices by which small groups of investors, by means of the holding company structure, were able to exploit vast networks of utility companies, to the detriment of utility consumers and other security holders. The specific problems identified by Congress included inadequate disclosure, excessive leverage, abusive affiliate transactions, use of the holding company to evade state regulation, and the growth and extension of holding companies without regard to the economy of management and operation of system utility companies.-[6]- These aggressive practices harmed investors who owned the securities of the utility companies and captive utility consumers who were forced to pay inflated rates for gas and electric energy. The multistate character of the holding companies prevented effective control by state regulators. Holding company ownership shifted management and control from the operating utilities, which were subject to state regulation, to a parent company organized under the laws of another state and beyond the jurisdiction of utility regulators in any state. During the early years of this century, the federal government played a very limited role in the regulation of the utility industry.-[7]- At the time the Holding Company Act was passed, jurisdiction over holding companies consisted largely of nascent, indirect -[5]- Pub. L. No. 74-333, 49 Stat. 803 (1935) (codified as amended at 15 U.S.C. 79a - 79z-6). The Holding Company Act was enacted as Title I of the Public Utility Act of 1935. Title II amended the Federal Water Power Act of 1920 to create the Federal Power Act. See Pub. L. No. 74-333, 49 Stat. 838 (1935) (codified as amended at 16 U.S.C. 791a - 828c). -[6]- Holding Company Act section 1(b) (15 U.S.C. 79a(b)). -[7]- The jurisdiction of the Federal Power Commission was then narrowly defined. Prior to 1935, most transactions involving interstate transmission of electricity were not regulated by the federal government. See Richard Lowitt, Federal Power Commission, in Government Agencies 233, 235 (Donald R. Whitnah ed., 1983). See infra section II.C.1. (discussing developments in federal energy regulation). -------------------- BEGINNING OF PAGE #4 ------------------- regulation under the Securities Act of 1933-[8]- and the Securities Exchange Act of 1934.-[9]- Extensive studies that preceded the Act found "a number of almost inherent incidental abuses in the holding-company system which cannot be reached by direct regulation of the operating company,"-[10]- and concluded that "[t]he only practical control over public-utility holding companies will be one which can directly reach the holding company itself and supervise its security structure and its use of capital * * *. Only in that way can Government protect the investors who supply that capital and the consumers who must bear its cost."-[11]- The Holding Company Act was intended to curb the abusive practices of public-utility holding companies by bringing these companies under effective control.-[12]- Thus, the Commission, as the agency with expertise in financial transactions and corporate finance, was charged with regulation of the corporate structure and financings of public-utility holding companies and their affiliates.-[13]- -[8]- Pub. L. No. 73-22, 48 Stat. 74 (1933) (codified as amended at 15 U.S.C. 77a et seq.). -[9]- Pub. L. No. 73-290, 48 Stat. 881 (1934) (codified as amended at 15 U.S.C. 78a et seq.). -[10]- Summary Report of the Federal Trade Commission to the Senate, Utility Corporations, S. Doc. No. 92, 70th Cong., 1st Sess., pt. 73-A, at 3 (1935) (in 101 volumes) ("For example, no matter how strict the regulation of an operating company, improper payments of dividends and of other items still can be made by the holding company out of surplus other than earned surplus. Excessive capital issues can be floated by the holding company, with an important indirect effect upon rates charged by the operating company to the public."). -[11]- Report of National Power Policy Committee on Public- Utility Holding Companies, S. Doc. No. 137, 74th Cong., 1st Sess. 8 (1935). See also SCEcorp, Holding Co. Act Release No. 25564 (June 29, 1992), citing Arkansas Louisiana Gas Co., 36 S.E.C. 121, 137 (1954) (the Act was intended to address "evils * * * which because of holding company action or control, cannot be effectively dealt with by other regulatory agencies"). -[12]- Gulf States Utilities Co. v. FPC, 411 U.S. 747, 758 (1973). -[13]- At the same time, Congress amended the Federal Power Act to provide effective federal regulation of the expanding business of transmitting and selling electric power in interstate commerce. Congress entrusted the administration of this statute to the Federal Power Commission (now the Federal Energy Regulatory Commission), as the agency with the technical expertise necessary to regulate the transmission of energy. See Arcadia v. Ohio Power Co., 498 U.S. 73, 87 (1990) (Stevens, J., concurring). The role of the FERC is discussed infra at section II.C.1. -------------------- BEGINNING OF PAGE #5 ------------------- Any company that owns 10 percent or more of the outstanding voting securities of a public-utility company is presumptively a holding company for purposes of the Act.-[14]- The burden of regulation under the Act falls most heavily on holding companies that have significant interstate utility operations, and are thereby not readily susceptible to effective state regulation. These companies must register and comply with the myriad requirements of the Act.-[15]- Section 11, which the Supreme Court has described as the "very heart" of the Act,-[16]- generally limits registered holding companies to a single integrated public-utility system and such other businesses as are "reasonably incidental, or economically necessary or appropriate" to the operations of that system.-[17]- Companies in a registered holding company system must obtain Commission approval for a wide range of transactions, including financings,-[18]- acquisitions,-[19]- and intrasystem transactions.-[20]- These companies are also subject to various accounting and reporting requirements.-[21]- Although most public-utility holding companies are largely exempt from pervasive regulation under the Holding Company Act, they nonetheless remain subject to the requirement of prior Commission approval for utility acquisitions. In addition, the Commission may challenge the continued availability of an -[14]- Holding Company Act section 2(a)(7)(A) (15 U.S.C. 79b(a)(7)(A)). For purposes of the Act, a public- utility company means either an electric or a gas utility company. Holding Company Act section 2(a)(5) (15 U.S.C. 79b(a)(5)). An electric utility company is broadly defined as any company that owns or controls assets used for the generation, transmission or distribution of electricity. Holding Company Act section 2(a)(3) (15 U.S.C. 79b(a)(3)). A gas utility company is more narrowly defined as any company that owns or controls assets used for the retail distribution of gas for heat, light or power. Holding Company Act section 2(a)(4) (15 U.S.C. 79b(a)(4)). -[15]- Holding Company Act section 5 (15 U.S.C. 79e). -[16]- SEC v. New England Elec. System, 384 U.S. 176, 180 (1966), citing North American Co. v. SEC, 327 U.S. 686, 704 n.14 (1946). -[17]- Holding Company Act section 11(b)(1) (15 U.S.C. 79k(b)(1)). -[18]- Holding Company Act sections 6, 7 and 12 (15 U.S.C. 79f, g and l). -[19]- Holding Company Act sections 9 and 10 (15 U.S.C. 79i and j). -[20]- Holding Company Act section 13 (15 U.S.C. 79m). -[21]- See Holding Company Act sections 14 and 15 (15 U.S.C. 79n and o) and rules thereunder. -------------------- BEGINNING OF PAGE #6 ------------------- exemption under the "unless and except" clause of section 3.-[22]- B. Legislative and Regulatory Developments Related to the Holding Company Act The Commission's early administration of the Act was largely directed toward the reorganization of existing holding companies. By the 1950s, this work was largely completed.-[23]- Since then, the Commission has acted to ensure that the abuses that gave rise to the Act do not recur.-[24]- Although the basic framework of the Act remains unchanged, Congress has created a number of statutory exceptions to the regulatory scheme. Beginning in the 1970s, Congress enacted the Public Utility Regulatory Policies Act of 1978 (PURPA)-[25]- to stimulate alternative energy production. To that end, PURPA granted "qualifying facilities" (QFs) significant regulatory advantages over traditional generating facilities. Among other things, most QFs are exempted from the Holding Company Act,-[26]- and a registered holding company can acquire interests in QFs that are unrelated to its core utility operations.-[27]- In addition, Congress enacted the Gas Related Activities Act of 1990 (GRAA), which permits gas registered holding companies to acquire significant production and transportation assets that do not -[22]- Section 3(a) of the Act (15 U.S.C. 79c(a)) authorizes the Commission in certain circumstances to exempt any holding company and subsidiary company thereof from any provision of the Act, "unless and except insofar as it finds the exemption detrimental to the public interest or the interest of investors or consumers." -[23]- See Statement of the U.S. Securities and Exchange Commission Concerning Proposals to Amend or Repeal the Public Utility Holding Company Act of 1935 (June 2, 1982). -[24]- Section 1(c) of the Holding Company Act (15 U.S.C. 79a(c)) directs the Commission to administer all the provisions of the Act to prevent practices the Congress found detrimental to the interests of investors, consumers and the general public (the "protected interests" under the Act). -[25]- Pub. L. No. 95-617, 92 Stat. 3117 (1978). -[26]- Most qualifying facilities are deemed to be nonutilities for purposes of the Holding Company Act. See 18 CFR 292.602. -[27]- See Pub. L. No. 99-186, 99 Stat. 1180 (1985) (investments in cogeneration by registered gas systems); Pub. L. No. 99-553, 100 Stat. 3087 (1986) (investments by registered electric systems); Pub. L. No. 102-486, 713, 106 Stat. 2776, 2911 (1992) (section 713 of Energy Policy Act of 1992, investments by registered holding companies in small power production). -------------------- BEGINNING OF PAGE #7 ------------------- directly serve the needs of their retail distribution systems.-[28]- Congress accelerated the pace of change in the industry with the Energy Policy Act of 1992,-[29]- which enables companies to invest in "exempt wholesale generator"-[30]- and "foreign utility company"-[31]- operations throughout the United States and abroad. The Energy Policy Act represented the first major change in the pattern of regulation under the Holding Company Act. Congress did not dispense with the need for Commission approval of activities under PURPA and GRAA: Holding Company Act section 10(b)(3) continues to require that an acquisition not be detrimental to the public interest or the interests of investors or consumers. In contrast, the Energy Policy Act broadly exempts certain wholesale generators from all provisions of the Holding Company Act and expressly authorizes a registered holding company to acquire an exempt wholesale generator without the need for Commission approval. Congress sought to promote this type of diversification and made the Commission primarily responsible for protecting consumers of registered holding companies from any adverse effects of these new ventures. The Commission's authority in this area, however, is limited; the Commission can regulate investments in exempt wholesale generators only indirectly, through its jurisdiction over holding company financings and other related transactions. This hybrid regulation has proved troublesome, and the Commission has strongly recommended that Congress not duplicate the model developed under the Energy Policy Act.-[32]- -[28]- Pub. L. 101-572, 104 Stat. 2810 (1990). Gas production and transportation activities are nonutility businesses for purposes of the Holding Company Act. See Holding Company Act section 2(a)(4) (15 U.S.C. 79b(a)(4)) ("gas utility company" includes only companies owning or controlling assets used for retail gas distribution). -[29]- Pub. L. No. 102-486, 106 Stat. 2776 (1992). -[30]- An exempt wholesale generator is any person determined by the FERC to be engaged exclusively in owning or operating facilities used for the generation of electricity for sale at wholesale. See Holding Company Act section 32(a)(1) (15 U.S.C. 79z-5a(a)(1)); see also Holding Company Act section 32(b) (15 U.S.C. 79z-5a(b)) (permitting certain foreign retail sales). -[31]- Briefly stated, any company can claim status as a foreign utility company by notifying the Commission that it owns or operates gas or electric utility facilities outside the United States. See Holding Company Act section 33(a)(3) (15 U.S.C. 79z- 5b(a)(3)) (such company cannot derive any utility income from within the United States, and cannot be, or have a subsidiary that is, a public-utility operating in the United States). -[32]- Hearings on Proposals to Lift the Current Diversification Restrictions on Telecommunications Activities of Registered Holding Companies Before the Subcomm. on Telecommunications and Finance and the (continued...) -------------------- BEGINNING OF PAGE #8 ------------------- C. Other Regulatory Factors 1. FERC Regulation The work of the Commission under the Holding Company Act was intended to complement the work of the Federal Power Commission (now the FERC) in the regulation of the electric and gas utility industry. a. Electricity The Holding Company Act was enacted as Title I of the Public Utility Act of 1935.-[33]- Title II of the legislation-[34]- gave the Federal Power Commission (FPC) broad authority over the transmission and sale of electricity in interstate commerce. Congress's decision to entrust administration of the Holding Company Act to the SEC and administration of the Federal Power Act to the FPC reflected two differing goals. The Holding Company Act was intended to curb abusive practices of public- utility subsidiaries of holding companies by bringing them under effective control. The Federal Power Act was intended to provide effective federal regulation of the transmission and sale of electricity in interstate commerce.-[35]- -[32]-(...continued) Subcomm. on Energy and Power of the House Comm. on Energy and Commerce, 103d Cong., 2d Sess. (1994) (statement of Richard Y. Roberts, Commissioner, SEC). Although the Commission has adopted rules 53 and 54 (17 CFR 250.53 and 54) that are intended to protect consumers and investors from any substantial adverse effect that may be associated with investments in exempt wholesale generators, these rules are currently the subject of litigation in the U.S. Court of Appeals for the District of Columbia Circuit. NARUC v. SEC, No. 93-1778 (D.C. Cir. filed Nov. 22, 1993). The Court of Appeals has been asked to consider the extent to which the Commission must ensure the protection of consumers of registered holding companies from any detriment associated with investments in exempt wholesale generators. The Commission is currently engaged in a related rulemaking with respect to investments in foreign utility companies. See Holding Co. Act Release No. 25757 (Mar. 8, 1993), 58 FR 13719 (Mar. 15, 1993) (notice of proposed rulemaking). -[33]- Pub. L. No. 74-333, 49 Stat. 803 (1935). -[34]- Pub. L. No. 74-333, 49 Stat. 838 (1935) (codified as amended at 16 U.S.C. 791a - 828c). -[35]- See Gulf States Utilities Co. v. FPC, 411 U.S. 747, 758 (1973). The Federal Power Act represented a response to the gap in state regulation of utility rates and services that arose in the wake of the decision of the United States Supreme Court in Public Utilities Comm'n of Rhode Island v. Attleboro Steam & Elec. Co., 273 U.S. 83, 86-90 (1927), overruled in part, Arkansas Elec. Coop. v. Ark. Public Service Comm'n, 461 U.S. 375, 390-96 (1983). The Court in Attleboro held that interstate wholesale sales of electricity were beyond the reach of state regulation. See New England Power Co. v. New Hampshire, 455 U.S. 331, 340 (1982). See generally Note, Federal Regulation of Holding (continued...) -------------------- BEGINNING OF PAGE #9 ------------------- The primary focus in the administration of the Federal Power Act has been the protection of ratepayers against excessive electric rates.-[36]- Utilities must file wholesale rate schedules with the FERC, which may then suspend any rate increase for up to five months, order refunds for rates that it finds exceed a "just and reasonable" level, and prescribe rates to be charged prospectively. Under the Public Utility Regulatory Policies Act, the FERC adopted rules concerning qualifying facilities. These rules require electric utilities to interconnect with QFs and to offer to purchase power from, and sell power to, QFs, and set the general standard for determining the rates for power sale transactions with QFs.-[37]- Following the enactment of PURPA, other independent generators began to seek entry into bulk power markets. The FERC, which had traditionally required cost-based rates for electric power, began to permit market-based rates for nontraditional sellers that could not exercise market power, where there was no evidence of affiliate abuse or reciprocal dealing.-[38]- As traditional, investor-owned utilities began to seek market-based rates for their existing excess capacity, the FERC extended its market power analysis to these companies. In these matters, the FERC required that the utility mitigate its transmission market power by opening its transmission system to other wholesale sellers and buyers.-[39]- The FERC has also -[35]-(...continued) Companies: The Public Utility Act of 1935, 45 Yale L.J. 468 (1936). -[36]- The Federal Power Act also gives the FERC jurisdiction over accounting practices and over facilities used for the transmission of electricity in interstate commerce. Section 204 authorizes the FERC to regulate the issuance of securities or assumption of obligations or liabilities by public utilities, but only if such issuance or assumption is not regulated by a state utilities commission. 16 U.S.C. 824c. The FERC has interpreted this authority narrowly. See Michael Small, A Guide to FERC Regulation and Ratemaking of Electric Utilities and Other Power Suppliers 18 (3d ed. 1994). -[37]- Congress in PURPA also gave the FERC direct authority to order wholesale transmission services by public utilities and by certain other entities. There were significant procedural and substantive limitations on this authority, however, and FERC issued only one order pursuant to this authority. See Central Power and Light Co., 17 FERC 61,078 (1981), order on reh'g, 18 FERC 61,100 (1982), further order, Texas Utilities Elec. Co., 40 FERC 61,077 (1987). -[38]- See, e.g., Commonwealth Atlantic Ltd. Partnership, 51 FERC 61,368 (1990). -[39]- See, e.g., Public Service Co. of Indiana, 51 FERC 61,367 (1990). -------------------- BEGINNING OF PAGE #10 ------------------- relied on open access transmission tariffs to mitigate the anticompetitive effects of proposed mergers.-[40]- In the Energy Policy Act of 1992, Congress gave the FERC additional authority to promote competition in wholesale bulk power markets by ordering transmission,-[41]- if it finds that to do so is in the public interest and will not unreasonably impair the continued reliability of affected electric systems.-[42]- The FERC is also responsible for determining exempt wholesale generator status under the Energy Policy Act.-[43]- b. Natural Gas FERC regulation of the natural gas industry has changed significantly since 1938, when the Natural Gas Act gave the FPC authority to set "just and reasonable" rates for pipelines selling natural gas for resale in interstate commerce.-[44]- -[40]- Open access transmission tariffs have been a central feature of recent combinations involving FERC-regulated utilities. Major combinations involving FERC-regulated utilities have included the mergers of Utah Power & Light Company and PacifiCorp; Northeast Utilities and Public Service of New Hampshire; Kansas Power & Light Company and Kansas Gas & Electric Company; Entergy Corporation and Gulf States Utilities Company; Cincinnati Gas & Electric Company and PSI Energy, Inc.; and the proposed merger of Central and South West Corporation and El Paso Electric Company. With the exception of the Utah Power & Light merger, each of these mergers also is subject to the requirement of approval by the SEC. -[41]- "Any electric utility, Federal power marketing agency, or any other person generating electric energy for sale for resale" may apply to the FERC for an order requiring a utility to provide "transmission services (including any enlargement of transmission capacity necessary to provide such services)." Federal Power Act section 211(a) (16 U.S.C. 824j(a)). -[42]- As of September 22, 1994, the FERC had granted six applications for mandatory services (three proposed orders and three final orders). See, e.g., City of Bedford, Virginia, 68 FERC 61,003 (1994). Since enactment of the Energy Policy Act, the FERC has undertaken a number of initiatives with respect to the development of competitive bulk power markets. These measures include a policy statement on regional transmission groups, a rulemaking on transmission information availability, and an inquiry on transmission pricing policy. In a series of cases, the FERC has also interpreted the Federal Power Act's prohibition on undue discrimination to require that transmission owners offer services to others comparable to those they provide to themselves. -[43]- An exempt wholesale generator is exempt from all provisions of the Holding Company Act. See Holding Company Act section 32(e) (15 U.S.C. 79z-5a(e)). -[44]- Pub. L. No. 75-688, 52 Stat. 821 (1938) (codified as amended at 15 U.S.C. 717 - 717w). In 1954, the U.S. (continued...) -------------------- BEGINNING OF PAGE #11 ------------------- Under the Natural Gas Act, the FPC had jurisdiction over both the price and the allocation of natural gas sold at the wellhead for resale in interstate commerce. During the late 1960s and the early 1970s, the FPC kept the wellhead price for interstate natural gas artificially low, thereby encouraging consumption. At the same time, the federal price restraints discouraged producers from dedicating reserves to the pipelines that served the interstate market. The result was a series of gas shortages in the mid-1970s. In reaction to these shortages, Congress enacted the Natural Gas Policy Act of 1978, which provided for partial decontrol of natural gas at the wellhead.-[45]- Over the next decade, Congress and the FERC worked to encourage competition in the natural gas industry. Pursuant to the Natural Gas Wellhead Decontrol Act of 1989, the FERC implemented full producer deregulation, effective January 1, 1993.-[46]- The latest of the FERC's major natural gas rulemakings, Order No. 636, significantly changed the structure of the services provided by interstate pipelines.-[47]- Among other things, the order requires that pipelines provide open access transportation service that is equal in quality for all gas supplies, regardless of whether the customer purchases gas from the pipeline or from another supplier. 2. State and Local Regulation Regulation of electric and gas utilities varies among state and local governments. Most state commissions have authority to issue licenses, franchises or permits for the initiation of service, for construction or abandonment of facilities and related matters. With respect to retail rates, state commissions generally have the power to require prior authorization of rate changes, to suspend proposed rate changes, to prescribe interim rates and to initiate rate investigations. Most state commissions also have authority to control the quantity and quality of service, to require uniform systems of accounting, and to regulate the issuance of securities.-[48]- Congress intended that the Commission's work be coordinated with, and complement, the work of state and local -[44]-(...continued) Supreme Court ruled that sales by independent producers were also subject to regulation under the Natural Gas Act. Phillips Petroleum Co. v. Wisconsin, 347 U.S. 672 (1954). -[45]- Pub. L. No. 95-621, 92 Stat. 3351 (1978) (repealed in 1987). -[46]- Pub. L. No. 101-60, 103 Stat. 157 (1989) (codified as amended at 15 U.S.C. 3331). -[47]- Regulation of Natural Gas Pipelines After Partial Wellhead Decontrol, Order No. 636, 57 FR 13267 (Apr. 16, 1992). -[48]- See Charles F. Phillips, Jr., The Regulation of Public Utilities: Theory and Practice 136 (1993). -------------------- BEGINNING OF PAGE #12 ------------------- regulators.-[49]- In recent years, the Commission has worked in consultation with these regulators on a number of matters. 3. Other Considerations Registered holding companies are subject to extensive reporting requirements under the Act. In addition, the securities of these companies are publicly held and are registered under the Securities Act of 1933 ("Securities Act"), and the companies must comply with the continuous disclosure requirements of the Securities Exchange Act of 1934 ("Exchange Act"). When Congress passed the Holding Company Act, these laws were still in their infancy. Congress has amended the Securities Act and the Exchange Act several times since 1935, in order to expand and strengthen the disclosure and reporting requirements, as well as the Commission's ability to enforce these provisions.-[50]- Thus, it appears that investors today have far greater access to information concerning their investment decisions. The Commission requests comment on these and other factors, including the development of generally accepted accounting principles and the role of nationally recognized statistical rating organizations (NRSROs)-[51]- in protecting consumers and investors against holding company abuses. III. Conceptual Issues The electric and gas utility industry is in transition. The rapid growth that characterized the industry in the early part of this century has diminished. In addition, companies must adapt to an increasingly competitive environment. The present model of regulation under the Act, which strictly limits the size of a system's utility operations and the scope of its nonutility businesses, was intended to focus the attention of the registered holding company on the needs of its operating utilities, and thereby protect consumers and investors from the risks that might be associated with unrelated businesses. Some have suggested that this model is no longer appropriate and that market -[49]- Numerous sections of the Act refer to regulation at the state and local level. See, e.g., Holding Company Act sections 2(a)(26), 6(b), 8, 9(b), 10(f), 18, 19 and 20(b) (15 U.S.C. 79b(a)(26), f(b), h, i(b), j(f), r, s and t(b)). -[50]- See, e.g., Securities Acts Amendments of 1964, Pub. L. No. 88-467, 78 Stat. 565 (1964) (extending Securities Exchange Act registration requirements to over-the- counter securities); Williams Act, Pub. L. No. 90-439, 82 Stat. 454 (1968) (additional disclosure requirements in situations of control acquisitions); Securities Enforcement Remedies and Penny Stock Reform Act of 1990, Pub. L. No. 101-429, 104 Stat. 931 (1990) (increasing Commission's authority to seek and impose remedies against securities law violations). The courts have also permitted private litigants to bring actions for violations of certain provisions of the securities laws. See, e.g., Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, reh'g denied, 423 U.S. 884 (1975) (implied private right of action for securities fraud). -[51]- See Securities Act Release No. 7085 (Aug. 31, 1994), 59 FR 46314 (Sept. 7, 1994) (concept release concerning the definition and status of NRSROs). -------------------- BEGINNING OF PAGE #13 ------------------- conditions require a broader focus on energy services and other nonutility activities. The Act, as currently administered, does not afford the degree of flexibility that many believe will be necessary to meet these changes. One purpose of the study is to explore a new approach to regulation in this area. The Act was intended to protect the public interest and the interests of investors and consumers. The phrase "public interest" has been used in connection with the policy of curing evils that result "when the growth and extension of holding companies bears no relation to economy of management and operation or the integration and coordination of related operating properties."-[52]- The need for adequate disclosure for investors has largely been addressed by developments in the federal securities laws and in the securities markets themselves.-[53]- With respect to consumer interests, it appears that retail distribution will continue to be a monopoly for at least the next decade, thus justifying the continued protection of captive consumers. The Commission has noted that there is an inherent tension between the drive toward competitive markets, and the need to protect captive utility customers.-[54]- The magnitude of the anticipated change in the utility industry raises concerns whether any regulator can effectively protect ratepayers.-[55]- While some believe that market forces will ultimately result in lower prices for consumers, others suggest that there will be losers as well as winners along the way.-[56]- At a minimum, any new approach must carefully balance the competing interests, and provide safeguards against detriment to consumers. -[52]- Holding Company Act section 1(b)(4) (15 U.S.C. 79a(b)(4)), cited in North American Co., 11 S.E.C. 194, 218-219 (1942), aff'd, 133 F.2d 148 (2d Cir. 1943), aff'd, 327 U.S. 686 (1946). -[53]- See section 1(b)(1) of the Holding Company Act (15 U.S.C. 79a(b)(1)) (investor interests may be adversely affected "when such investors cannot obtain the information necessary to appraise the financial position or earning power of the issuers"). -[54]- Holding Co. Act Release No. 25886 (Sept. 23, 1993), 58 FR 51488 (Oct. 1, 1993). -[55]- At present, registered holding companies can readily invest up to 50 percent of their consolidated retained earnings, or approximately $7 billion, in exempt wholesale generators and foreign utility companies. See rule 53(a) under the Holding Company Act (17 CFR 250.53(a)). -[56]- The introduction of competition in the natural gas industry, for example, was not without its costs. Many producers went out of business when wellhead prices collapsed. See Donald F. Santa, Jr. and Patricia J. Beneke, Federal Natural Gas Policy and the Energy Policy Act of 1992, 14 Energy L.J. 1, 8 (1993). The Columbia Gas System, a registered gas utility holding company, has filed for relief under Chapter 11 of the Bankruptcy Code (11 U.S.C. 1101 et seq.) in large part as a result of uneconomic take-or-pay contracts. -------------------- BEGINNING OF PAGE #14 ------------------- Reform of existing regulation also calls into question the roles of the respective regulators. The Commission requests comments on these topics, especially on the need to adjust responsibilities among the regulators. It would be helpful, in this regard, for commenters to provide specific information concerning the various regulatory approvals that may be required for a transaction under present law. The studies that preceded the Act found "wide differences in the extent and effectiveness of the regulatory policies of the various States."-[57]- Although there has been a significant increase in the reach of state utility regulation, the Commission has noted that the pattern of state control over operating utilities and their relationships with affiliates remains uneven.-[58]- There are concerns that the states remain unable to regulate interstate holding companies directly in a comprehensive fashion.-[59]- The Commission seeks comment on the current status of the regulation of electric and gas utilities by the states. In particular, descriptions of the regulatory systems of each state would be helpful in determining the extent to which state regulators would be able to provide regulatory protection in the absence of a federal holding company statute. Comment is requested on the problems inherent in the regulation of a multistate system, including the possibility of conflict among the various state and local regulators. Comment is also sought on the role of the FERC in regulating utility holding companies. Would the FERC's existing authority, combined with that of the states, suffice to protect consumers? In the absence of the Holding Company Act, it appears that there would be little direct regulation of the nonutilities that may ultimately comprise a significant part of a registered system's business activities. If there is a continuing need for a federal holding company statute, should the FERC rather than the SEC administer it? IV. Specific Topics to Be Addressed To facilitate the identification of issues, paragraphs in which comments are specifically requested in this section are numbered consecutively. Commenters are encouraged to refer to these numbers in their comments, but are also welcome to comment on any issues not contained in numbered paragraphs. A. Financings and Intrasystem Transactions Under the Holding Company Act, the Commission has broad authority over financings and intrasystem transactions involving companies in a registered holding company system. As discussed above, FERC and state regulatory approval is also required for certain transactions. In addition, the FERC and state regulators, in the exercise of ratemaking authority, may -[57]- Summary Report of the Federal Trade Commission to the Senate, Utility Corporations, S. Doc. No. 92, 70th Cong., 1st Sess., pt. 73-A, at 2 (1935). -[58]- See, e.g., Statement of the U.S. Securities and Exchange Commission Concerning Proposals to Amend or Repeal the Public Utility Holding Company Act of 1935 (June 2, 1982). -[59]- See The National Energy Security Act of 1991: Hearings on S. 341 Before the Senate Comm. on Energy and Natural Resources, 102d Cong., 1st Sess. (1991) (statement of Edward H. Fleischman, Commissioner, SEC). -------------------- BEGINNING OF PAGE #15 ------------------- determine whether the costs associated with such transactions will be passed on to utility consumers. 1. Financings Prior Commission approval is generally required for the issuance and sale of securities by a company in a registered system.-[60]- The Commission can refuse to authorize the issuance of a security that is not reasonably adapted to the capital structure of the issuer and other companies in the holding company system, or to the earning power of the issuer, or that "is not necessary or appropriate to the economical and efficient operation of a business in which the applicant lawfully is engaged or has an interest."-[61]- The Act also requires Commission approval for various intrasystem financing transactions, including, among other things, loans from the parent to a subsidiary company, and guarantees by the parent of the obligations of a subsidiary company.-[62]- 1. Comment is sought on the Commission's review of financing transactions. As a general matter, are the protections provided by such review still necessary in view of developments in state and federal regulation? If this review is still needed, how could it be made more effective and efficient? 2. At the Roundtable, many participants emphasized the need to streamline Commission review and liberalize the standards for financings. Regulatory delay was described as an impediment to the companies' ability to access the capital markets. How critical a role does timing play in financial decisions? To what extent is regulatory delay an obstacle to desirable financing opportunities? -[60]- See Holding Company Act section 6(a) (15 U.S.C. 79f(a)). The Act permits the Commission to grant exemptions in certain situations, such as the issuance and sale of securities by a subsidiary if the transaction is expressly authorized by a state regulatory commission. See section 6(b) (15 U.S.C. 79f(b)). -[61]- Holding Company Act section 7 (15 U.S.C. 79g). This standard has been modified for financings by registered holding companies for the purpose of acquiring interests in exempt wholesale generators. Holding Company Act section 32(h)(3) (15 U.S.C. 79z-5a(h)(3)) provides that the Commission shall not make a finding that such security is not reasonably adapted to the earning power of such company or to the security structure of such company and other companies in the same holding company system, or that the circumstances are such as to constitute the making of such guarantee an improper risk for such company, unless the Commission first finds that the issue or sale of such security, or the making of the guarantee, would have a substantial adverse impact on the financial integrity of the registered holding company system[.] See also rule 53 (17 CFR 250.53). -[62]- See Holding Company Act section 12 (15 U.S.C. 79l) and rules thereunder. -------------------- BEGINNING OF PAGE #16 ------------------- 3. The Commission has adopted an approach, similar to the shelf-registration provisions of rule 415 under the 1933 Act,-[63]- under which a registered company may obtain authorization for all short-term debt financings contemplated for a two-year period.-[64]- Could this approach be expanded or altered to meet the companies' need for greater flexibility and speed of approval? Could a safe harbor for routine financings be properly tailored to balance a company's need for flexibility and speed with the need to protect ratepayers? What should be the parameters of a safe harbor (e.g., minimum capitalization, dividend payout ratios, third-party credit ratings)? How should such routine financings be defined for the purpose of a safe harbor rule? 4. At the Roundtable, some suggested that utilities would like to issue a greater variety of securities in order to reduce capital costs. Under current administration of the Act, registered companies are generally limited to conventional securities, such as common stock, preferred stock, and first mortgage bonds. Should the financing standards be eased to permit companies in registered systems to issue different types of securities? What are the perceived risks and benefits of allowing such companies to issue innovative types of securities? What limitations, if any, would be appropriate in this regard? For example, should the Commission modify requirements such as minimum capitalization and coverage ratios to reflect current financing practices? 5. Some of the concerns described above could be addressed through Commission rulemaking. For example, the Commission has eased regulatory burdens in this area by adopting rule 52, which provides a safe harbor for certain routine utility financings that have been approved by the relevant state commission.-[65]- Has this rule been effective? Should other routine utility financings be similarly exempted? To what extent do state regulators currently regulate utility financings, or rely on the Commission's review of these transactions? Do the states have sufficient resources and authority to undertake more extensive reviews in this area? 6. The Commission has proposed further amendments to rule 52 that would unconditionally exempt many nonutility -[63]- 17 CFR 230.415. -[64]- See, e.g., Northeast Utilities, Holding Co. Act Release No. 25710 (Dec. 16, 1992), 53 SEC Dkt. 0190 (Jan. 5, 1993). -[65]- 17 CFR 250.52 (Commission approval is not required for a utility subsidiary of a registered holding company to issue or sell common stock, preferred stock, and mortgage bonds, or to issue a note to its parent company, for the purpose of financing its business as a public-utility company, where the financing transaction has been expressly approved by the relevant state commission). The Commission has requested comment on an amendment that would exempt additional types of utility financings. See Holding Co. Act Release No. 25574 (July 7, 1992), 57 FR 31156 (July 14, 1992). -------------------- BEGINNING OF PAGE #17 ------------------- financings.-[66]- Should different standards apply to financings by system nonutility companies? For example, nonrecourse obligations are not counted toward the overall limit on a system's aggregate investment in exempt wholesale generators and foreign utility companies for purposes of rule 53 under the Act. 7. Under present law, intrasystem financings must mirror the terms of a system's external financings.-[67]- This requirement is intended to protect the system's operating companies, by ensuring that the holding company does not profit from intrasystem transactions. Is this restriction still needed, particularly with respect to nonutility financings? 8. The Commission regulates the ability of registered holding companies to declare and pay dividends.-[68]- Should the Commission ease the limitations imposed upon this activity? 9. Some have suggested that rating agencies perform a valuable service in highlighting potential financial instabilities. The Commission's administration of other securities statutes relies in some circumstances on the existence of investment grade ratings by nationally recognized statistical rating organizations.-[69]- Should the Commission pursue a regulatory approach that would utilize NRSRO credit ratings of utility companies in a registered holding company system? 2. Intrasystem Transactions Under the Holding Company Act, the Commission also has broad authority over transactions among companies in a registered system. Section 13, in particular, was intended to eliminate abusive practices whereby utility subsidiaries were forced to pay grossly inflated costs for services and goods provided by an affiliate company. The profits from these transactions flowed to the holding company's controlling investors; the inflated costs were passed on as higher rates to consumers.-[70]- -[66]- See Holding Co. Act Release No. 25574 (July 7, 1992), 57 FR 31156 (July 14, 1992) (requesting comment on, among other things, an exemption for nonutility transactions that "are solely for the purpose of financing the [company's] existing business"). -[67]- See, e.g., Consolidated Natural Gas Co., Holding Co. Act Release No. 26072 (June 27, 1994), 57 SEC Dkt. 0067 (July 26, 1994). -[68]- See, e.g., Holding Company Act rule 46 (17 CFR 250.46). -[69]- See, e.g., 17 CFR 240.15c3-1 (net capital rule for broker-dealers); 17 CFR 239.13(b)(2) (instructions for Securities Act Registration Form S-3). The Commission recently issued a release in which it posed questions regarding the Commission's reliance on NRSRO ratings. See Securities Act Release No. 7085 (Aug. 31, 1994), 59 FR 46314 (Sept. 7, 1994). Comments on the release are available for public inspection in File No. S7-23-94. -[70]- Section 13 of the Act is designed to free public-utility companies of the tribute heretofore extracted from them in the performance of service, sales, and construction contracts by their holding companies and by servicing, construction, and (continued...) -------------------- BEGINNING OF PAGE #18 ------------------- The central provision, section 13(b), prohibits holding company subsidiaries from entering into or performing any service, sales, or construction contracts for associate companies unless the terms and conditions of the contract comply with Commission rules, regulations and orders.-[71]- Under the Commission's rules, interaffiliate transactions must generally be conducted at cost.-[72]- 10. Some commenters have suggested that the concerns about intrasystem transactions reflected in the Holding Company Act are no longer relevant. To what extent should the federal government regulate such transactions to prevent affiliate abuses? 11. Under current law, affiliate transactions may be subject to multiple regulatory reviews. Companies in a registered system generally must obtain Commission approval to enter into affiliate contracts. The costs associated with these transactions may be subject to further review by the FERC and state regulators. The possibility of inconsistent determinations by the various regulators was highlighted by the recent Ohio Power decision, in which the U.S. Court of Appeals for the District of Columbia Circuit held that the FERC was precluded from reexamining costs established pursuant to a Commission order under section 13(b) of the Act.-[73]- There are concerns that the Ohio Power decision can be interpreted to challenge the ability of the FERC, as well as state and local regulators, to protect consumers through traditional ratemaking proceedings. How can these concerns best be addressed?-[74]- Should responsibility in this area continue to be apportioned between the SEC and the FERC? 12. Several commenters at the Roundtable emphasized the need for a single federal arbiter, either the SEC or the FERC, in order to avoid inconsistent state determinations and any potential tendency among states to shift costs to other -[70]-(...continued) other companies controlled by their holding companies. Such contracts when made freely and openly by parties dealing at arms' length are subject to the checks incident to our competitive system, but when dictated by holding companies sitting on both sides of the transaction are one of the most abused devices of the public-utility holding company system. S. Rep. No. 621, 74th Cong., 1st Sess. 36 (1935). -[71]- 15 U.S.C. 79m(b). -[72]- See rules 90 - 92 under the Holding Company Act, 17 CFR 250.90 - 92. -[73]- Ohio Power Co. v. FERC, 954 F.2d 779 (D.C. Cir.), cert. denied, 113 S. Ct. 483 (1992). -[74]- The Commission staff is working on a rulemaking to address these concerns. In addition, Congress has considered legislation to clarify the regulatory roles of the Commission and the FERC with respect to the approval of contracts and rates related to intra- system transactions. See S. 544, 103d Cong., 1st Sess. (1993); H.R. 4645, 103d Cong., 2d Sess. (1994). -------------------- BEGINNING OF PAGE #19 ------------------- jurisdictions. Should federal oversight of these transactions be consolidated under a single regulator? 13. What role, if any, should states play in regulating such transactions? What additional powers do state regulators need to be able to protect consumers against affiliate abuses? Some states, for example, may not have access to all relevant books and records.-[75]- Should state access be enhanced if Holding Company Act restrictions are to be relaxed? 14. Should transactions between utilities in a holding company system be regulated differently than transactions between a utility and a nonutility company in a holding company system? B. Utility Acquisitions The Commission is charged with overseeing the growth and extension of holding companies to avoid recreating, by acquisition, the problems that the Act was intended to undo or eliminate.-[76]- The Holding Company Act addresses these concerns by requiring Commission approval for most utility acquisitions. The standards for acquisition approval relate to the overall structure of the resulting system, and the effect of the acquisition upon the public interest and the interests of investors and consumers, the "protected interests" under the Act. 15. There have been suggestions that the Commission's work in this area has been largely superseded by the FERC's review of utility mergers.-[77]- In recent matters, the Commission has relied upon the FERC's analysis of certain issues that are closely linked to operations. The Commission requests comment on the extent to which its review under the standards of section 10 may duplicate the efforts of other regulators. 16. Comment is also requested on the issue of takeover attempts of utility operating companies or their parent holding companies. What has been the effect of the Holding Company Act on such takeover attempts in the past? Should the Commission devise special rules for such takeovers?-[78]- -[75]- Access to books and records is discussed further below. See Section IV.E infra. -[76]- Public Service Co. of Oklahoma, 45 S.E.C. 878, 882 (1975). -[77]- See section 203 of the Federal Power Act. 16 U.S.C. 824b. The legislative history indicates that section 203 was intended to complement the Holding Company Act. See S. Rep. No. 621, 74th Cong., 1st Sess. 50 (1935) ("In this way the [FERC] would have authority to keep the same kind of check upon the creation of spheres of influence among operating companies that the Securities and Exchange Commission has over holding companies under [the Holding Company Act]."). Until recently, the FERC did not exercise jurisdiction over the merger of holding companies. See Missouri Basin Municipal Power Agency v. Midwest Energy Co., 53 FERC 61,368 (1990). The agency, however, has revised its position and announced that such mergers are presumptively subject to FERC approval. See Illinois Power Co., 67 FERC 61,136 (1994). -[78]- Rule 51 provides that a tender offer is subject to the section 9(a) restrictions on acquisitions of utility (continued...) -------------------- BEGINNING OF PAGE #20 ------------------- 1. Integration Under section 11 of the Act, a registered holding company is generally limited to a single integrated public-utility system. The integration requirement was intended to ensure economical and efficient utility operations in the context of a monopoly environment. Some critics have challenged the continuing usefulness of this requirement, given the movement towards greater competition in the industry. 17. Does the integration requirement still serve the interests of investors and consumers? What effect does geographic proximity have on a utility's efficiency of operation, particularly in view of open access transmission policies?-[79]- Has the requirement of geographic integration hindered the development of creative solutions to the production and delivery of energy? 18. One of the assumptions underlying the Act was that utilities were essentially local institutions that should be locally controlled and owned.-[80]- Is this premise still valid, in view of the technological and regulatory developments of the past 60 years? 19. The definition of an "integrated public-utility system" gives the Commission flexibility to respond to technological advances and other changes in the industry.-[81]- Should the -[78]-(...continued) securities by utility affiliates, unless the tender offer meets certain conditions. 17 CFR 250.51. -[79]- Although the Energy Policy Act of 1992 permits registered holding companies to acquire exempt wholesale generators and foreign utility companies without regard for physical interconnection and geographic proximity, the rationale for this type of exemption appears to be that there are no "captive" U.S. consumers associated with these new entities. -[80]- See, e.g., 79 Cong. Rec. 8389 (1935) (statement of Sen. Wheeler). -[81]- Section 2(a)(29) (15 U.S.C. 79b(a)(29)) defines an "integrated public-utility system" as follows: (A) As applied to electric utility companies, a system consisting of one or more units of generating plants and/or transmission lines and/or distributing facilities, whose utility assets, whether owned by one or more electric utility companies, are physically interconnected or capable of physical interconnection and which under normal conditions may be economically operated as a single interconnected and coordinated system confined in its operations to a single area or region, in one or more States, not so large as to impair (considering the state of the art and the area or region affected) the advantages of localized management, efficient operation, and the effectiveness of regulation; and (B) As applied to gas utility companies, a system consisting of one or more gas utility companies which are so located and related that substantial economies (continued...) -------------------- BEGINNING OF PAGE #21 ------------------- definition be read to accommodate nontraditional systems? For example, one commenter has suggested that, as a result of open access policies, all gas companies in the United States could be deemed to comprise a single integrated system.-[82]- 2. Combination Systems The Commission and the courts have previously interpreted section 11 of the Holding Company Act to prohibit a registered holding company from owning both gas and electric facilities.-[83]- There is a tension between this precedent and section 8 of the Act, which appears to contemplate the combination of gas and electric properties.-[84]- -[81]-(...continued) may be effectuated by being operated as a single coordinated system confined in its operations to a single area or region, in one or more States, not so large as to impair (considering the state of the art and the area or region affected) the advantages of localized management, efficient operation, and the effectiveness of regulation; Provided, That gas utility companies deriving natural gas from a common source of supply may be deemed to be included in a single area or region. -[82]- See Columbia Gas System, Initial Comments on the Need for Legislative Reform (Aug. 10, 1994) (available in Public Comment File No. S7-19-94). -[83]- See SEC v. New England Elec. System, 384 U.S. 176, 183 (1966); Northeast Utilities, Holding Co. Act Release No. 24908 (June 22, 1989), 43 SEC Dkt. 2115, 2135-37 (July 5, 1989). These decisions focused largely on the anticompetitive effects of dual electric and gas ownership. -[84]- Section 8 (15 U.S.C. 79h) provides: Whenever a State law prohibits, or requires approval or authorization of, the ownership or operation by a single company of the utility assets of an electric utility company and a gas utility company serving substantially the same territory, it shall be unlawful for a registered holding company, or any subsidiary company thereof, by use of the mails or any means or instrumentality of interstate commerce, or otherwise-- (1) to take any step, without the express approval of the State commission of such State, which results in its having a direct or indirect interest in an electric utility company and a gas utility company serving substantially the same territory; or (2) if it already has any such interest, to acquire, without the express approval of the State commission, any direct or indirect interest in an electric utility company or gas utility company serving substantially the same territory as that served by such companies in which it already has an interest. (continued...) -------------------- BEGINNING OF PAGE #22 ------------------- 20. What are the perceived risks and benefits of allowing registered holding companies to own and operate a combination of gas and electric properties?-[85]- Specifically, are gas and electric utilities sufficiently similar in operation and management that ownership by a single holding company could lead to gains in efficiency? Are there adequate protections against the potential anticompetitive effects of such combination systems? 3. Foreign Ownership Congress in 1935 did not consider the question of foreign ownership of U.S. public-utility companies. The Energy Policy Act of 1992 authorized foreign ownership of U.S. exempt wholesale generators which, by definition, have no retail customers. The legislation did not address the further issue of foreign ownership of a U.S. utility with captive retail customers. The Commission has been asked to consider this issue in a pending administrative proceeding, Noverco, Inc., Admin. Pro. File No. 3- 7097.-[86]- Federal law imposes various restrictions on foreign ownership of other regulated industries. Some laws specifically restrict foreign ownership,-[87]- while others provide for such ownership subject to certain conditions. The Federal Aviation -[84]-(...continued) In addition, the Commission has permitted combination systems under the so-called "A-B-C clauses" of section 11(b)(1), which permit a registered holding company to control additional integrated public-utility systems if (A) each additional system cannot be operated as an independent system without the loss of substantial economies, (B) all additional systems are located in one state, or in adjoining states, or in a contiguous foreign country, and (C) the continued combination of such systems under the control of such holding company is not so large (considering the state of the art and the area or region affected) as to impair the advantages of localized management, efficient operation, or the effectiveness of regulation. See 15 U.S.C. 79k(b)(1). See also UNITIL Corp., Holding Co. Act Release No. 25524 (Apr. 24, 1992), 51 SEC Dkt. 0764 (May 12, 1992). -[85]- In a recent matter, the Commission reserved jurisdiction, pending the completion of the Study, over the ownership of electric and gas properties by a registered holding company. See CINergy Corp., Holding Co. Act Release No. 26146 (Oct. 21, 1994). -[86]- At issue in that matter is the acquisition of a Vermont gas utility by a Canadian holding company. The Division of Investment Management opposed the acquisition, arguing that the Holding Company Act does not permit foreign ownership of a domestic public- utility company. -[87]- See, e.g., 16 U.S.C. 797 (power production on land and water controlled by the U.S. government); 42 U.S.C. 2131 - 2134 (prohibition of foreign ownership or control of facilities that produce or use nuclear materials); 42 U.S.C. 6508 and 43 U.S.C. 1701 et seq. (oil and gas leases within the National Petroleum Reserve). -------------------- BEGINNING OF PAGE #23 ------------------- Act, for example, establishes percentage limitations on board membership and voting interests in determining whether an air carrier is considered a United States citizen.-[88]- 21. At the Roundtable, many commenters expressed the view that foreign investors should be permitted, subject to appropriate conditions, to acquire U.S. utilities. Should the law permit such foreign ownership? What conditions should be placed on foreign ownership? 22. Is there a national security interest in restricting foreign ownership of U.S. utilities?-[89]- Are there difficulties in obtaining information from foreign companies that would support limitations on foreign ownership? What types of safeguards or limitations on ownership might prevent or minimize such risks? 23. United States companies have acquired significant interests in foreign utilities over the past several years. Would restrictions on foreign ownership of U.S. utilities be likely to lead to restrictions on investment in foreign utilities by U.S. investors? C. Diversification Among other things, the Holding Company Act was intended to simplify the structure of the utility industry by confining holding companies to the management of a single system of operating companies, without entanglement in extraneous lines of business. Section 11(b)(1) provides that nonutility businesses must be "reasonably incidental, or economically necessary or appropriate" to a system's core utility operations. The Commission and the courts have interpreted the "other business" provisions to require a "functional relationship" between a nonutility business and the utility operations of a registered holding company system.-[90]- The functional relationship requirement was intended to focus the attention of the registered holding company on its operating utilities in order to protect consumers and investors from risks associated with unrelated businesses. 24. At the Roundtable, many commenters expressed the opinion that additional latitude is necessary. To what extent do utilities hope to improve their economic position through diversification? How can the applicable standards be made more flexible while retaining appropriate consumer protections? -[88]- See 49 U.S.C. 1301(16) (air carrier considered U.S. citizen if president and two-thirds of board of directors and other managing officers are U.S. citizens and at least 75% of voting interest is owned or controlled by U.S. citizens). -[89]- Congress has authorized the President to investigate the national security effects of "foreign control of persons engaged in interstate commerce in the United States," and to suspend or prohibit any acquisition, merger, or takeover of such persons in order to protect the national security. 50 U.S.C. App. 2170. The President has established the Committee on Foreign Investment in the United States to administer this authority. See 31 CFR 800.101 et seq. -[90]- See Michigan Consol. Gas Co. v. SEC, 444 F.2d 913 (D.C. Cir. 1971); CSW Credit, Inc., Holding Co. Act Release No. 25995 (Mar. 2, 1994), 56 SEC Dkt. 0521 (Mar. 22, 1994). -------------------- BEGINNING OF PAGE #24 ------------------- 25. What are the risks and benefits of diversification for consumers? What are the risks and benefits for investors? Under what circumstances would the risks associated with diversification outweigh the potential benefits? Is low earnings growth in the core utility business the primary justification for further diversification? Do other factors, such as the cyclical business patterns of other industries, also support diversification? 26. Should there be limits on diversification by registered holding companies? If so, what types of limits are most appropriate (e.g., investment caps, ratios based on retained earnings or income, regulatory veto authority)? If not, how would increased diversification affect the ability of the FERC and state regulators to protect the interests of consumers? 27. Has the requirement that nonutility interests be "functionally related" to a system's core utility operations demonstrably benefited investors and consumers of registered holding companies? What has been the experience of companies that were not similarly constrained?-[91]- Are there limits on diversification by these companies? Are these experiences likely to be repeated in the future, or did they result from unique circumstances? Do these companies face other types of limitations? 28. If constraints on diversification were eased, would there be a need for additional safeguards against cross- subsidization? What are the major issues in this area? For example, does a nonutility's use of proprietary information such as an associate utility's customer information raise cross- subsidization concerns? 29. Should there be different limitations on foreign and domestic diversification by registered holding companies? 30. To what extent should a utility's past experience in a particular type of business affect its ability to engage in similar activities in the future? D. Exemptions There are a number of exemptions from, or exceptions to, regulation under the Act for certain companies. Each reflects a legislative determination that the purposes and policies of the Act are not implicated. Certain entities do not come within the ambit of the Act.-[92]- Other entities are subject to limited regulation under the Act because they are presumptively subject to effective state regulation,-[93]- or because there is limited -[91]- Some analysts have observed that utilities that diversified in the past decade did not fare as well economically as the registered holding companies, which were unable to diversify. See, e.g., Charles M. Studness, Earnings from Utility Diversification Ventures, Pub. Util. Fort., Sept. 1, 1992, at 28 - 29. -[92]- For example, the Commission has authority to declare that an entity is not an electric utility company, gas utility company, holding company, or subsidiary company within the meaning of the Act. See Holding Company Act sections 2(a)(3), 2(a)(4), 2(a)(7) and 2(a)(8) (15 U.S.C. 79b(a)(3), b(a)(4), b(a)(7) and b(a)(8)) and rules thereunder. -[93]- See Holding Company Act section 3(a)(1) (15 U.S.C. 79c(a)(1)) ("predominantly intrastate" holding (continued...) -------------------- BEGINNING OF PAGE #25 ------------------- regulatory concern.-[94]- In each instance, the exemption may be revoked by the Commission on a finding of detriment to the interests of investors or consumers. 31. The Commission generally exempts holding companies from all provisions of the Act except section 9(a)(2), which requires Commission approval for subsequent utility acquisitions. What has been the experience of exempt holding companies? Is there a continuing need to review utility acquisitions by exempt holding companies? Conversely, is there a need for increased Commission oversight in some areas? 32. Do the theories underlying these exemptions remain valid? What other types of companies should be exempted from the Act? Should the Commission adopt safe harbors in this area? Should state certification be a condition for exemption?-[95]- E. The Audit Function The Act gives the Commission broad authority to impose reporting and accounting requirements for registered holding companies. Among other things, the Commission may require the filing of annual, quarterly, and other periodic reports by registered holding companies, and may require such reports to be certified by an independent public accountant.-[96]- The Commission can establish the form of accounts and prescribe uniform methods of keeping accounts for registered system companies.-[97]- 1. Books and records 33. As companies increasingly engage in activities not directly related to their core utility operations, it becomes more important for ratemakers to have access to the information necessary to protect utility consumers from the potential adverse effects of these new ventures. Under the Act, the Commission has broad access to the books and records of companies in a -[93]-(...continued) company); section 3(a)(2) (15 U.S.C. 79c(a)(2)) (holding company that is "predominantly a public- utility company"). -[94]- See Holding Company Act section 3(a)(3) (15 U.S.C. 79c(a)(3)) (utility operations functionally related to holding company's primary nonutility business); section 3(a)(4) (15 U.S.C. 79c(a)(4)) (company is only temporarily a holding company); and section 3(a)(5) (15 U.S.C. 79c(a)(5)) (U.S. company holds essentially foreign utility operations). -[95]- Columbia Gas System, Inc., for example, has suggested that Congress should amend section 3(a)(1) to exempt a holding company of which each utility subsidiary is predominantly intrastate in character and carries on its business substantially in a single state subject to regulation by a state authority as to rate and financial matters. Columbia Gas System, Initial Comments on the Need for Legislative Reform (Aug. 10, 1994). See also Post-Round Table Comments of Central and South West Corporation (Oct. 5, 1994). -[96]- Holding Company Act section 14 (15 U.S.C. 79n). -[97]- Holding Company Act section 15 (15 U.S.C. 79o). -------------------- BEGINNING OF PAGE #26 ------------------- registered system.-[98]- What books and records do state regulators and the FERC currently have authority to examine? What additional access is needed? How can the Commission facilitate access by other regulators? How can the Commission address confidentiality concerns raised by the companies? 2. Auditing 34. In recent years, the Commission's audits have focused on service companies and nonutility subsidiaries of registered holding companies, including exempt wholesale generators and foreign utility companies. Among other things, these audits are intended to detect cross-subsidization and other affiliate abuses. Is there a need for an enhanced audit function? Is there duplication between FERC and SEC review? Between state and federal review? How can the Commission's audit program better facilitate state and FERC regulation? 3. Reporting Registered, and many exempt, holding companies are required to file annual reports under the Holding Company Act.-[99]- In addition, service company subsidiaries of the registered holding companies are required to file annual reports. Further, registered holding companies must also file reports under the other federal securities laws. 35. Under the Act, registered holding companies must disclose financial information concerning each system company.-[100]- What additional information should be required if, for example, registered holding companies were permitted to diversify more freely? Should this requirement be extended to exempt holding companies? -[98]- See Holding Company Act section 15(f) (79 U.S.C. 79o(f)); see also rule 53 under the Holding Company Act (17 CFR 250.53). -[99]- Holding companies seeking exemption under sections 3(a)(1) or 3(a)(2) of the Holding Company Act may apply for a Commission order or, in the alternative, file a claim of exemption pursuant to rule 2 under the Act (17 CFR 250.2). This claim of exemption, Form U-3A-2, must be renewed annually. -[100]- See Form U5S, which requires disclosure on a consolidating basis. In contrast, consolidated financial statements are required for registration statements and reports under other federal securities laws. See Article 3 of Regulation S-X (17 CFR 210.3- 01 et seq.). -------------------- BEGINNING OF PAGE #27 ------------------- F. Miscellaneous 1. Investment Company Issues 36. Questions have arisen in recent years concerning investment companies and investment advisers that acquire the securities of public-utility companies. Should these entities be subject to regulation as utility affiliates-[101]- or public- utility holding companies-[102]- under the Act? 2. Other Issues The Holding Company Act authorizes the Commission to regulate many registered holding company activities that are also regulated today by other federal laws. For example, with respect to registered holding companies and subsidiaries, the Commission has broad regulatory authority over proxy solicitations, powers of attorney, and other types of authorizations;-[103]- sales of utility securities and assets;-[104]- officers and directors;-[105]- political contributions;-[106]- and -[101]- See Holding Company Act section 2(a)(11)(A) (15 U.S.C. 79b(a)(11)(A)) (any person owning 5 percent or more of the outstanding voting securities of a company is an affiliate of that company). Under section 9(a)(2), an affiliate of a public-utility company may need to obtain prior Commission approval for any subsequent acquisition of utility securities. 15 U.S.C. 79i(a)(2). -[102]- See Holding Company Act section 2(a)(7) (15 U.S.C. 79b(a)(7)). Among other things, a holding company may be required to divest any unrelated nonutility interests. See Holding Company Act section 11(b)(1) (15 U.S.C. 79k(b)(1)). -[103]- See section 12(e) (15 U.S.C. 79l(e)). Under rules 60 through 65 (17 CFR 250.60 - 65), the Commission can review solicitation materials prior to their effectiveness and require the disclosure of funds spent to compensate persons who conduct solicitations. Rule 61 also provides that the solicitation of proxies is subject to the rules promulgated under section 14(a) of the Securities Exchange Act (15 U.S.C. 78n(a)). 17 CFR 250.61. -[104]- See Holding Company Act section 12(d) (15 U.S.C. 79l(d)). This provision was enacted to prevent the piecemeal evasion of the reorganization accomplished under section 11 of the Act, and to prevent the sacrifice of investors' equity. S. Rep. No. 621, 74th Cong., 1st Sess. 35 (1935). Under rule 44 (17 CFR 250.44), registered holding companies are required to submit proposed sales of securities or assets to the Commission by a declaration and to obtain an order from the Commission permitting such sales. The rule exempts holding companies from submitting such declarations regarding the sale of securities or of utility assets up to $5,000,000 during any calendar year if the acquisition does not also require Commission approval. -[105]- Officers and directors of registered holding companies are subject to certain reporting requirements and (continued...) -------------------- BEGINNING OF PAGE #28 ------------------- lobbying.-[107]- Comments are sought on the continued need for regulation under the Holding Company Act specifically directed at these various activities. V. Administrative Policy During the Period of Reexamination During the pendency of the review of comments elicited by this release, and while awaiting adoption of such legislative or administrative amendments as may result therefrom, the Commission intends to continue its past practice of administering the Holding Company Act to accommodate changes in the industry and the regulatory environment, within the guidelines of the statute and past interpretations by the courts and the Commission. VI. Conclusion In reexamining the regulation of public-utility holding companies, the Commission is seeking comment on a number of specific regulatory issues. Commenters are encouraged, however, to address any other matters that they believe merit reexamination. By the Commission. Jonathan G. Katz Secretary Dated: November 2, 1994 -[105]-(...continued) trading limitations that are similar to those imposed by section 16 of the Securities Exchange Act of 1934 (15 U.S.C. 78p). See Holding Company Act section 17 (15 U.S.C. 79q). The Commission has adopted rules intended to minimize duplicative regulation. See rule 72 under the Holding Company Act (17 CFR 250.72) (section 17(a) deemed satisfied by statements of beneficial ownership filed under section 16(a) of the Securities Exchange Act). The Act also restricts participation by officers and directors of commercial and investment banks as officers and directors of companies in registered systems. See Holding Company Act section 17(c) (15 U.S.C. 79q(c)). -[106]- Registered holding companies and their subsidiaries are prohibited from making campaign or political party contributions. Holding Company Act section 12(h) (15 U.S.C. 79l(h)). The Federal Election Campaign Act of 1971, however, permits registered holding companies to make contributions through political committees. See Pub. L. No. 92-225, 86 Stat. 3 (1972) (codified as amended at 2 U.S.C. 431 - 55). -[107]- Holding Company Act section 12(i) (15 U.S.C. 79l(i)) requires a registered holding company or subsidiary that engages in lobbying efforts before the Congress, the SEC or the FERC or any of its members, officers, or employees to file certain forms with the Commission providing information such as the subject matter of and compensation for the lobbying efforts.