[Federal Register Volume 59, Number 215 (Tuesday, November 8, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-27565]
[[Page Unknown]]
[Federal Register: November 8, 1994]
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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.
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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 February 6, 1995.
ADDRESSES: Comments should be submitted in triplicate to Jonathan G.
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street
NW., Washington, DC 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 Street
NW., Washington, DC 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.
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\1\At present, there are fourteen active registered holding
companies and several hundred exempt holding companies.
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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, 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
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\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.
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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.
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\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).
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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.
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\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).
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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 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 Act5 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.
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\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)).
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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 regulation under the Securities Act of 19338 and the
Securities Exchange Act of 1934.9
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\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).
\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.).
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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
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\1\0Summary 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.'').
\1\1Report 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'').
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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
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\1\2Gulf States Utilities Co. v. FPC, 411 U.S. 747, 758 (1973).
\1\3At 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.
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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
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\1\4Holding 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)).
\1\5Holding Company Act section 5 (15 U.S.C. 79e).
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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
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\1\6SEC 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).
\1\7Holding Company Act section 11(b)(1) (15 U.S.C.
Sec. 79k(b)(1)).
\1\8Holding Company Act sections 6, 7 and 12 (15 U.S.C.
Secs. 79f, g and l).
\1\9Holding Company Act sections 9 and 10 (15 U.S.C. Secs. 79i
and j).
\2\0Holding Company Act section 13 (15 U.S.C. Sec. 79m).
\2\1See Holding Company Act sections 14 and 15 (15 U.S.C.
Sec. 79n and o) and rules thereunder.
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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 exemption under the ``unless
and except'' clause of section 3.22
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\2\2Section 3(a) of the Act (15 U.S.C. Sec. 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.''
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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
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\2\3See 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).
\2\4Section 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).
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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 directly serve the needs of their retail distribution
systems.28
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\2\5Pub. L. No. 95-617, 92 Stat. 3117 (1978).
\2\6Most qualifying facilities are deemed to be nonutilities for
purposes of the Holding Company Act. See 18 CFR Sec. 292.602.
\2\7See 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, Sec. 713, 106 Stat. 2776, 2911 (1992) (section 713
of Energy Policy Act of 1992, investments by registered holding
companies in small power production).
\2\8Pub. 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. Sec. 79b(a)(4)) (``gas utility company'' includes only
companies owning or controlling assets used for retail gas
distribution).
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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
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\2\9Pub. L. No. 102-486, 106 Stat. 2776 (1992).
\3\0An 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. Sec. 79z-5a(a)(1));
see also Holding Company Act section 32(b) (15 U.S.C. Sec. 79z-
5a(b)) (permitting certain foreign retail sales).
\3\1Briefly 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. Secs. 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).
\3\2Hearings on Proposals to Lift the Current Diversification
Restrictions on Telecommunications Activities of Registered Holding
Companies Before the Subcomm. on Telecommunications and Finance and
the 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).
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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
legislation34 gave the Federal Power Commission (FPC) broad
authority over the transmission and sale of electricity in interstate
commerce.
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\3\3Pub. L. No. 74-333, 49 Stat. 803 (1935).
\3\4Pub. L. No. 74-333, 49 Stat. 838 (1935) (codified as amended
at 16 U.S.C. Secs. 791a-828c).
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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
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\3\5See 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 Companies: The Public Utility Act of
1935, 45 Yale L.J. 468 (1936).
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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.
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\3\6The 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. Sec. 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).
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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
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\3\7Congress 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).
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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 relied on open
access transmission tariffs to mitigate the anticompetitive effects of
proposed mergers.40
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\3\8See, e.g., Commonwealth Atlantic Ltd. Partnership, 51 FERC
61,368 (1990).
\3\9See, e.g., Public Service Co. of Indiana, 51 FERC 61,367
(1990).
\4\0Open 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.
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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
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\4\1``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. Sec. 824j(a)).
\4\2As 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.
\4\3An exempt wholesale generator is exempt from all provisions
of the Holding Company Act. See Holding Company Act section 32(e)
(15 U.S.C. Sec. 79z-5a(e)).
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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 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.
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\4\4Pub. L. No. 75-688, 52 Stat. 821 (1938) (codified as amended
at 15 U.S.C. Secs. 717-717w). In 1954, the U.S. 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).
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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
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\4\5Pub. L. No. 95-621, 92 Stat. 3351 (1978) (repealed in 1987).
\4\6Pub. L. No. 101-60, 103 Stat. 157 (1989) (codified as
amended at 15 U.S.C. Sec. 3331).
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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.
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\4\7Regulation of Natural Gas Pipelines After Partial Wellhead
Decontrol, Order No. 636, 57 FR 13267 (Apr. 16, 1992).
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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
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\4\8See Charles F. Phillips, Jr., The Regulation of Public
Utilities: Theory and Practice 136 (1993).
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Congress intended that the Commission's work be coordinated with,
and complement, the work of state and local regulators.49 In
recent years, the Commission has worked in consultation with these
regulators on a number of matters.
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\4\9Numerous 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.
Secs. 79b(a)(26), f(b), h, i(b), j(f), r, s and t(b)).
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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.
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\5\0See, 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).
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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.
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\5\1See Securities Act Release No. 7085 (Aug. 31, 1994), 59 FR
46314 (Sept. 7, 1994) (concept release concerning the definition and
status of NRSROs).
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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
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
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\5\2Holding 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).
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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.
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\5\3See section 1(b)(1) of the Holding Company Act (15 U.S.C.
Sec. 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'').
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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.
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\5\4Holding Co. Act Release No. 25886 (Sept. 23, 1993), 58 FR
51488 (Oct. 1, 1993).
\5\5At 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)).
\5\6The 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.
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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
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\5\7Summary 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).
\5\8See, 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).
\5\9See 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).
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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 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
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\6\0See Holding Company Act section 6(a) (15 U.S.C.
Sec. 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. Sec. 79f(b)).
\6\1Holding Company Act section 7 (15 U.S.C. Sec. 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.
Sec. 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).
\6\2See Holding Company Act section 12 (15 U.S.C. Sec. 79l) and
rules thereunder.
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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?
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?
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\6\317 CFR 230.415.
\6\4See, e.g., Northeast Utilities, Holding Co. Act Release No.
25710 (Dec. 16, 1992), 53 SEC Dkt. 0190 (Jan. 5, 1993).
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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?
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\6\517 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).
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6. The Commission has proposed further amendments to rule 52 that
would unconditionally exempt many nonutility 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.
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\6\6See 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'').
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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?
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\6\7See, e.g., Consolidated Natural Gas Co., Holding Co. Act
Release No. 26072 (June 27, 1994), 57 SEC Dkt. 0067 (July 26, 1994).
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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?
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\6\8See, e.g., Holding Company Act rule 46 (17 CFR 250.46).
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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?
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\6\9See, 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.
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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
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\7\0Section 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 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).
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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
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\7\115 U.S.C. Sec. 79m(b).
\7\2See rules 90-92 under the Holding Company Act, 17 CFR
250.90-92.
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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?
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\7\3Ohio Power Co. v. FERC, 954 F.2d 779 (D.C. Cir.), cert.
denied, 113 S. Ct. 483 (1992).
\7\4The 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).
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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 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?
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\7\5Access to books and records is discussed further below. See
Section IV.E infra.
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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.
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\7\6Public Service Co. of Oklahoma, 45 S.E.C. 878, 882 (1975).
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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.
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\7\7See section 203 of the Federal Power Act. 16 U.S.C.
Sec. 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).
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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
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\7\8Rule 51 provides that a tender offer is subject to the
section 9(a) restrictions on acquisitions of utility securities by
utility affiliates, unless the tender offer meets certain
conditions. 17 CFR 250.51.
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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?
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\7\9Although 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.
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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?
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\8\0See, e.g., 79 Cong. Rec. 8389 (1935) (statement of Sen.
Wheeler).
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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 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
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\8\1Section 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 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.
\8\2See Columbia Gas System, Initial Comments on the Need for
Legislative Reform (Aug. 10, 1994) (available in Public Comment File
No. S7-19-94).
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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
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\8\3See 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.
\8\4Section 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.
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. Sec. 79k(b)(1). See also UNITIL Corp.,
Holding Co. Act Release No. 25524 (Apr. 24, 1992), 51 SEC Dkt. 0764
(May 12, 1992).
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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?
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\8\5In 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).
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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
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\8\6At 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.
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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 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
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\8\7See, 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. Sec. 6508 and 43 U.S.C.
Sec. 1701 et seq. (oil and gas leases within the National Petroleum
Reserve).
\8\8See 49 U.S.C. Sec. 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).
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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?
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\8\9Congress 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. section 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.
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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.
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\9\0See 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).
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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?
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?
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\9\1Some 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.
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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 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.
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\9\2For 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. Secs. 79b(a)(3), b(a)(4), b(a)(7) and b(a)(8))
and rules thereunder.
\9\3See Holding Company Act section 3(a)(1) (15 U.S.C.
Sec. 79c(a)(1)) (``predominantly intrastate'' holding company);
section 3(a)(2) (15 U.S.C. 79c(a)(2)) (holding company that is
``predominantly a public-utility company'').
\9\4See Holding Company Act section 3(a)(3) (15 U.S.C.
Sec. 79c(a)(3)) (utility operations functionally related to holding
company's primary nonutility business); section 3(a)(4) (15 U.S.C.
Sec. 79c(a)(4)) (company is only temporarily a holding company); and
section 3(a)(5) (15 U.S.C. Sec. 79c(a)(5)) (U.S. company holds
essentially foreign utility operations).
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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
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\9\5Columbia 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).
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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
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\9\6Holding Company Act section 14 (15 U.S.C. Sec. 79n).
\9\7Holding Company Act section 15 (15 U.S.C. Sec. 79o).
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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 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?
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\9\8See Holding Company Act section 15(f) (79 U.S.C.
Sec. 79o(f)); see also rule 53 under the Holding Company Act (17 CFR
250.53).
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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.
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\9\9Holding 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.
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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?
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\1\00See 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.).
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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 affiliates101 or public-utility holding
companies102 under the Act?
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\1\01See Holding Company Act section 2(a)(11)(A) (15 U.S.C.
Sec. 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.
Sec. 79i(a)(2).
\1\02See Holding Company Act section 2(a)(7) (15 U.S.C.
Sec. 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. Sec. 79k(b)(1)).
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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 lobbying.107 Comments are sought on the
continued need for regulation under the Holding Company Act
specifically directed at these various activities.
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\1\03See section 12(e) (15 U.S.C. Sec. 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. Sec. 78n(a)). 17 CFR 250.61.
\1\04See Holding Company Act section 12(d) (15 U.S.C.
Sec. 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.
\1\05Officers and directors of registered holding companies are
subject to certain reporting requirements and trading limitations
that are similar to those imposed by section 16 of the Securities
Exchange Act of 1934 (15 U.S.C. Sec. 78p). See Holding Company Act
section 17 (15 U.S.C. Sec. 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. Sec. 79q(c)).
\1\06Registered holding companies and their subsidiaries are
prohibited from making campaign or political party contributions.
Holding Company Act section 12(h) (15 U.S.C. Sec. 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. Secs. 431-55).
\1\07Holding Company Act section 12(i) (15 U.S.C. Sec. 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.
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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.
Dated: November 2, 1994.
Jonathan G. Katz,
Secretary.
[FR Doc. 94-27565 Filed 11-7-94; 8:45 am]
BILLING CODE 8010-01-P
