[Federal Register Volume 64, Number 244 (Tuesday, December 21, 1999)]
[Proposed Rules]
[Pages 71341-71346]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-32952]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 250
[Release No. 35-27110; International Series Release No. 1210; File No.
S7-30-99]
Registered Public-Utility Holding Companies and
Internationalization
AGENCY: Securities and Exchange Commission.
ACTION: Concept release; request for comments.
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SUMMARY: We are seeking comment on various issues surrounding the
acquisition of United States utilities by foreign companies that will
register as holding companies following the transaction.
DATES: Comments must be submitted on or before February 4, 2000.
ADDRESSES: Please send three copies of the comment letter to Jonathan
G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth
Street, NW, Washington, DC 20549-0609. Comments also may be submitted
electronically at the following E-mail address: rule-comments@sec.gov.
All
[[Page 71342]]
comment letters should refer to File No. S7-30-99; include this file
number on the subject line if E-mail is used. Anyone can read and copy
the comment letters at our Public Reference Room, 450 Fifth Street, NW
Washington, DC 20549. Electronically submitted comment letters also
will be posted on our Internet web site (http://www.sec.gov).
FOR FURTHER INFORMATION CONTACT: Catherine A. Fisher, Assistant
Director, or Mark F. Vilardo, Senior Counsel, both at 202/942-0545.
SUPPLEMENTARY INFORMATION: Today we are requesting comment on issues
arising under the Act with respect to foreign acquisitions of U.S.
utilities.
Table of Contents
I. Executive Summary and Introduction
II. Background
III. Acquisition of U.S. Utilities by Foreign Companies
A. The Legal Framework
B. Areas for Comment
1. General Policies of the Act
2. Section 11
3. Other Standards for Reviewing Acquisitions
4. Substantive Regulation of Foreign Holding Companies
5. Accounts and Records; Jurisdiction
6. Other Issues
I. Executive Summary and Introduction
In 1992, Congress adopted the Energy Policy Act of 1992 [Pub. L.
102-486, 106 Stat. 2776 (1992)] (``Energy Policy Act''). The
legislation amended the Public Utility Holding Company Act of 1935 [15
U.S.C. 79(a) et seq.] (``Holding Company Act'' or ``Act'') to create
two new types of exempt entities, exempt wholesale generators
(``EWGs'') and foreign utility companies (``FUCOs''). The legislation
was intended to facilitate investments in foreign utilities by U.S.
companies.
Just as registered holding companies have pursued investment
opportunities abroad, foreign companies are increasingly seeking to
enter the utility business in the United States.1 Recently,
two British companies engaged in the utility or energy business,
Scottish Power plc (``ScottishPower'') and The National Grid Group plc
(``National Grid''), have announced (and, in the case of ScottishPower,
completed) plans to acquire U.S. utilities or public-utility holding
companies.2 ScottishPower has registered under the Act and
National Grid has announced its intention to do so. The acquisition of
a U.S. utility or holding company by a foreign company and the
acquiror's subsequent registration raise a number of interpretative and
policy issues under the Act. We will need to address these issues when
such transactions are presented to us for any necessary approvals or
when the foreign companies register under the Act. We are, therefore,
seeking comment from the public relating to these issues.
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\1\ See infra note 5.
\2\ On December 7, 1998, ScottishPower, an electric, gas and
water utility based in the United Kingdom, announced its proposed
acquisition of PacifiCorp, a electric utility operating in the
western United States, in a share exchange valued at $12.8 billion,
including assumed debt. See ScottishPower Offers $7.8 Billion for
PacifiCorp, Megawatt Daily, Dec. 8, 1998, at 1. On December 14,
1998, National Grid, an electric transmission utility, also based in
the U.K., announced its proposed acquisition of New England Electric
System (``NEES''), an electric utility operating in the northeast
United States, for $3.2 billion in cash. See Laura Johannes,
Electric Utility Set to Be Acquired by National Grid, Wall St. J.,
Dec. 14, 1998, at A2. In June 1999, the Federal Energy Regulatory
Commission (``FERC'') approved each of these transactions. See
Howard Buskirk, FERC Approves Foreign Buys of U.S. Utilities, The
Energy Daily, Jun. 17, 1999, at 3. On November 30, 1999,
ScottishPower announced that it had completed its acquisition of
PacifiCorp. On December 1, 1999, ScottishPower filed with this
Commission its Form U5A, notification of registration as a holding
company under the Act. National Grid's application concerning its
acquisition of NEES is pending at the Commission. See Holding Co.
Act Release Nos. 27085 and 27086 (Oct. 8, 1999), 64 FR 56236 (Oct.
18, 1999) and 64 FR 56372 (Oct. 19, 1999) (notices of the
applications relating to the proposed acquisition of NEES by
National Grid and National Grid's financing authorizations).
ScottishPower concluded that, under section 9(a) of the Act, it did
not require our approval to acquire PacifiCorp. See infra note 29
for a discussion of the circumstances under which a utility
acquisition requires our approval.
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II. Background
Congress amended the Holding Company Act in 1992 in response to
changes in the United States utility industry. As discussed in greater
detail below, the Energy Policy Act created new categories of exempt
entities and thereby provided greater flexibility for U.S. and foreign
companies to acquire EWGs and for U.S. utilities to acquire both EWGs
and FUCOs.3
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\3\ The Energy Policy Act amended the Holding Company Act by,
among other things, adding section 33, which addresses acquisition
and ownership of FUCOs. In section 33(c)(1), Congress directed the
Commission to adopt rules concerning FUCO acquisitions by registered
holding companies. See 15 U.S.C. 79z-5b(c)(1). Under this directive,
the Commission proposed rules 55 and 56 in 1993, but deferred action
on those rules in order to consider the comments received on the
rules. See Holding Company Act Release No. 25757 (Mar. 8, 1993), 58
FR 13719 (Mar. 15, 1993) (proposing release); Holding Company Act
Release No. 25886 (Sept. 23, 1993), 58 FR 51488 (Oct. 1, 1993)
(adopting certain rules, deferring action on rules 55 and 56). The
Commission will consider reproposing rules 55 and 56 in the near
future.
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The utility business is rapidly evolving into a global industry,
with participants seeking multinational investment opportunities.
Sweeping political and economic changes worldwide have created a large
demand for American utility expertise and significant investment
opportunities for United States companies. Registered public utility
holding companies have taken advantage of these opportunities. As of
December 31, 1998, registered holding companies had invested $8.2
billion in FUCOs and $892 million in domestic and foreign EWGs. Based
on publicly reported information, we believe that investments made by
exempt holding companies and public utilities not part of a registered
or exempt holding company system, are significantly higher.4
At the same time, foreign energy companies have made significant
investments in the United States, primarily through acquisition of
electric wholesale generation units which, by virtue of the Energy
Policy Act, are exempt from the Act.5 In this Release, we
are requesting comment on issues relating to the acquisition of U.S.
utility companies by foreign holding companies.
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\4\ As of December 31, 1998, holding companies exempt under rule
2 of the Act had invested $12.3 billion in FUCOs and domestic and
foreign EWGs. In addition, domestic energy companies that are not
part of either a registered or exempt holding company system have
made major investments in FUCOs and EWGs in recent years. For
example, in 1995 and 1996, PacifiCorp, a public utility company
operating in the western United States, acquired an Australian
electric distribution company and an interest in an Australian power
plant and mine for a total of $1.7 billion. According to a U.S.
Department of Energy report, U.S. energy companies have played ``a
major role * * * as investors in the reformed and privatized
electricity sectors'' in the United Kingdom, Australia and
Argentina. See Electricity Reform Abroad and U.S. Investment, Energy
Information Administration, September 1997, at v.
\5\ In 1998, foreign utilities invested $31.3 billion in the
United States. See Power Legislation; Foreign Companies Acquiring
U.S. Utility Systems: Overcoming PUHCA, Power Economics, March 31,
1999, at p. 23. For example, National Power plc, the U.K.'s largest
power generator, has invested over $1.0 billion in U.S. generating
facilities and had announced plans to spend an additional $1.6
billion on U.S. generation projects and acquisitions. See Overseas
Investments; National Power Steps Over the Pond, Power Economics,
Nov. 30, 1998, at 5. In addition, British Energy Inc., a British
utility, in partnership with PECO Energy Co., an inactive registered
holding company, have agreed to buy three of four U.S. nuclear
plants that have been put up for sale in the past year. See
Christopher Palmieri and John Gorham, Give Me Your Nukes, Forbes,
Sept. 6, 1999, at 124-25. See also infra note 37.
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III. Acquisition of U.S. Utilities by Foreign Companies
In 1994, in recognition of the increasingly international nature of
the energy business, we requested public comment on the concept of
foreign ownership of U.S. utilities.6 We asked,
[[Page 71343]]
among other things, whether the Holding Company Act permits foreign
ownership; what conditions should be placed on foreign ownership;
whether there was a national security interest in restricting foreign
ownership of U.S. utilities; whether there are difficulties in
obtaining information from foreign companies that would support
limitations on foreign ownership; and what types of safeguards or
limitations on ownership might prevent or minimize such risks.
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\6\ See Request for Comments on Modernization of the Regulation
of Public-Utility Holding Companies, Holding Co. Act Rel. No. 26153
(Nov. 2, 1994), 59 FR 55573 (Nov. 8, 1994).
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Most commenters appeared to agree that the Holding Company Act did
not, or should not, prohibit foreign ownership of U.S.
utilities.7 Commenters suggested that foreign ownership
could bring some advantages to domestic utilities--increased sources of
capital (which could reduce the cost of capital) and management
experienced in dealing with competitive markets.8 Commenters
agreed that foreign holding companies would and should be subject to
the same regulatory requirements as U.S. companies.9 Local
regulators were divided on whether foreign ownership would impede their
ability to obtain information relevant to ratemaking.10
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\7\ Consolidated Natural Gas Company; NEES; Southern Company
(``Southern''); Wisconsin Electric Power Company; City of New
Orleans; American Gas Association (``AGA''); National Power PLC/
American National Power, Inc.; New York State Bar; Yorkshire
Electricity Group/National Grid Company (``Yorkshire''). Only two
commenters, the staff of the Michigan Public Service Commission
(``MPSC'') and Allegheny Power System (``APS''), suggested that
foreign ownership should be prohibited. Comments we received in
response to our initial request for comments may be found in File
No. S7-32-94.
\8\ City of New Orleans; Southern; Yorkshire.
\9\ See, e.g., AGA; City of New Orleans.
\10\ The MPSC expressed concern that absentee owners may not
place sufficient emphasis on service and the public interest, and
that access to books and records may be compromised. On the other
hand, City of New Orleans stated that foreign ownership would not
impair access to relevant books and records.
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Since our initial request for comment, there have been significant
foreign investments in domestic power projects.11 The
prospect of foreign ownership of significant U.S. utilities is raised
by ScottishPower's acquisition of PacifiCorp and National Grid's
proposed acquisition of NEES.12 ScottishPower has registered
under the Act, and National Grid has announced its intention to do so.
The acquisition of a U.S. utility or holding company by a foreign
company and the acquiror's subsequent registration raise a number of
interpretative and policy issues under the Act. We think it
appropriate, therefore, to renew our request for comment on the issues
related to foreign ownership of U.S. utilities.
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\11\ See supra notes 4 and 5.
\12\ See supra note 2.
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A. The Legal Framework
Federal law imposes various restrictions on foreign ownership of
some significant industries. Some laws specifically restrict foreign
ownership.13 Others provide for 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.14
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\13\ 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).
\14\ 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).
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In contrast, the Holding Company Act is silent concerning foreign
ownership of domestic utilities. Nowhere does the Act explicitly
require that a holding company be organized under U.S.
law.15 Indeed, we have noted that the Holding Company Act
``contains no prohibition against foreign holding companies as such.''
16 We have not had occasion, however, at least in recent
times, to address the registration under the Act of a foreign holding
company.
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\15\ The key definitions in the Holding Company Act (e.g.,
``electric utility company,'' ``gas utility company,'' ``public-
utility holding company,'' ``holding company,'' ``holding-company
system'') make no reference to a company's domicile. See, e.g.,
sections 2(a)(3) [15 U.S.C. 79b(a)(3)], 2(a)(4) [15 U.S.C.
79b(a)(4)], 2(a)(5) [15 U.S.C. 79b(a)(5)], 2(a)(7) [15 U.S.C.
79b(a)(7)] and 2(a)(9) [15 U.S.C. 79b(a)(9)] of the Act. Section 5
[15 U.S.C. 79e] of the Act, which sets forth certain procedural
requirements for registration under the Act, does not refer to the
domicile of the holding company.
Section 4(b) [15 U.S.C. 79d(b)] of the Act does make reference
to holding companies' being organized under state law. This section
generally requires that a holding company must register with the
Commission if any of its securities that were publicly offered after
January 1, 1925 are held ``by persons not resident in the State in
which such holding company is organized.'' (Section 2(a)(24) of the
Act defines the term ``State'' to mean ``any State of the United
States or the District of Columbia.'') The legislative history
suggests that section 4(b) was included to assure that the Act
subjected to federal regulation those companies that might in some
way affect interstate commerce, rather than to require that holding
companies be organized under state law. See S. Rep. No. 621, 74th
Cong., 1st Sess. 25:
[Section 4(b)] subjects to Federal jurisdiction those holding
companies which, though they may not contemplate new acts in
interstate commerce in the immediate future, are nevertheless
affected with a national public interest by reason of the fact that
they have in the past set in motion through the channels of
interstate commerce forces which affect investors throughout the
country, which forces are still in operation in more than one State
and cannot be effectively dealt with by any State.
\16\ Gaz Metropolitain, Inc., Holding Co. Act Rel. No. 26170
(Nov. 23, 1994) (``Gaz Met''). In Gaz Met we approved the
acquisition of a Vermont gas utility by a Canadian gas holding
company and granted the holding company an exemption from
registration under section 3(a)(5) of the Act. Section 3(a)(5) makes
an exemption available to a holding company that ``is not, and
derives no material part of its income, directly or indirectly, from
any one or more subsidiary companies which are, a company or
companies the principal business of which within the United States
is that of a public-utility company.''
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It appears that Congress, in 1935, did not intend or foresee
ownership of a domestic utility by a holding company domiciled outside
the United States. The Act places structural and geographic limitations
upon public-utility holding company systems. Section 11 of the Act
generally limits a registered holding company to ownership of a single
``integrated public-utility system,'' defined in terms of a group of
naturally related operating properties. Under section 2(a)(29) of the
Act, an integrated public-utility system is ``confined in its
operations to a single area or region, in one or more States * * *.''
17
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\17\ The provisions of section 11(b)(1)(A)-(C) create an
exception to the requirement of a single integrated system. Clause B
would permit a registered holding company to own, in addition to its
primary U.S. integrated system, an additional system located in a
contiguous foreign country.
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For many years, it was generally assumed that the integration
provisions of the Act would generally preclude a U.S. registered
holding company from owning both domestic and foreign utility
properties, especially if the foreign utility operations were located
in a country not contiguous to the United States.18 For
virtually identical reasons, the integration provisions were understood
to bar a holding company with foreign utility operations from acquiring
a U.S. utility.19
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\18\ See, e.g., Electric Bond and Share Co., 33 S.E.C. 21 (1952)
(``the provisions of Section 11(b)(1) stand in almost every detail
as an unyielding barrier'' to the simultaneous holding of large
domestic utility operations and utility operations in Cuba, Mexico,
Central and South America, China and India). See also Report
Relating to Intercorporate Relations Between the General Public
Utilities Corp. and the Manila Electric Company, S. Rep. 2787, 84th
Cong., 2d Sess. (July 25, 1956) (report of Senator Magnuson from the
Committee on Interstate and Foreign Commerce to accompany H.R.
10621, a bill to exempt General Public Utilities Corp., a registered
holding company, from the provisions of section 11(b)(1) of the Act,
under which we had ordered the holding company to divest its
Philippine utility subsidiary).
\19\ See Gaz Met, supra note 16. In Gaz Met, we determined that
the integration provisions did not bar the Canadian gas holding
company from owning a Vermont gas utility.
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In 1992, we determined that a U.S. registered holding company could
acquire foreign utility properties notwithstanding the integration
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provision.20 In that year also, as discussed previously,
Congress amended the Holding Company Act to permit the ownership of
EWGs and FUCOs--utility properties that would not, when combined with
existing utility properties, constitute an integrated system.
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\20\ See Southern Co., Holding Co. Act Release No. 25639 (Sept.
23, 1992) (authorizing registered holding company to acquire
Australian utility operations). We relied upon the second clause of
section 10(c)(2), which provides that section 10(c)(2), requiring us
to find that an acquisition ``will serve the public interest by
tending towards the economical and efficient development of an
integrated public-utility system,'' does not apply to an acquisition
of a public-utility company operating exclusively outside the United
States. In 1992, also, we granted orders of exemption under section
3(b) from all provisions of the Act for two newly formed indirect
Australia subsidiaries of SCEcorp, an exempt holding company. See
SCEcorp., Holding Co. Act Release No. 25564 (June 29, 1992).
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Sections 32 and 33 provide that EWGs and FUCOs are not public-
utility companies. Thus, the Act's statutory integration provisions, by
their terms, are not applicable to these entities. To eliminate any
doubt that ownership does not implicate the Act's integration
requirements, section 33(c)(3) provides that ownership of a FUCO is
considered to be ``consistent with the operation of a single integrated
public utility system, within the meaning of section 11 * * *.''
21 Section 32(h)(1) contains a similar provision for EWGs.
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\21\ Section 11 also provides that any nonutility business owned
by a registered holding company be ``reasonably incidental, or
economically necessary or appropriate, to the operations of such
integrated public utility system * * *.'' Section 33(c)(3) provides
that ownership of a FUCO satisfies this standard.
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Section 33 is neutral on its face with respect to the ownership of
a FUCO by a foreign holding company.22 It is thus possible
to construe section 33(c)(1) to allow a foreign holding company to
qualify its foreign utility operations as a FUCO, and the foreign
holding company to acquire a U.S. utility without regard to the
integration of the foreign and domestic operations. As explained above,
the Act would otherwise generally raise significant barriers to an
acquisition of U.S. utility properties by a foreign company with
existing foreign utility properties.
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\22\ Section 33(a)(1) provides an exemption for a FUCO
``notwithstanding that the [FUCO] may be a subsidiary * * * of a
holding company or of a public utility company.'' The nationality of
the holding company is not a component of the exemption. Similarly,
section 32 allows ownership of a domestic EWG without regard to the
owner's nationality.
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In adopting the Energy Policy Act, Congress did not address this
possibility and therefore may not have intended this interpretation of
section 33(c)(1). The legislative history of the Energy Policy Act
emphasizes that the legislation was designed to enable U.S. companies
to respond to domestic and overseas investment opportunities. Nothing
in the legislative history suggests that section 33 was intended to be
a vehicle for foreign investment in the United States.
Moreover, although section 33(c)(1) does not expressly preclude
foreign holding companies, we do not believe it should be interpreted
to permit a foreign holding company to acquire a U.S. utility if doing
so would undercut the fundamental purpose of the Act--to protect
consumers and investors.23 We recognize that foreign
registered holding companies present novel and important issues. We
therefore are soliciting comments generally on the registration and
regulation of foreign holding companies. These comments will inform our
consideration of rule 55, our consideration of applications and
requests for interpretative guidance concerning foreign holding
companies and our review, under section 11, of registration statements
filed by foreign holding companies. The comments may also suggest an
additional rulemaking to address these issues.
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\23\ See Crandon v. United States, 494 U.S. 152, 158 (1990)
(``In determining the meaning of [a federal] statute, [the court]
look[s] not only to the particular statutory language, but to the
design of the statute as a whole and to its object and policy.'')
(citations omitted).
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B. Areas for Comment
1. General Policies of the Act
The Holding Company Act 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, evasion
of state regulation, and the growth and extension of holding companies
without regard to the economy of management and operation of system
utility companies.24
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\24\ Section 1(b) of the Holding Company Act [15 U.S.C. 79a(b)].
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We request comment whether foreign registered holding companies, by
virtue of being foreign, are inconsistent with the Holding Company
Act's policies. In general, we request comment concerning:
the effects of foreign ownership on effective Commission
regulation;
the effects of foreign ownership on effective state
regulation;
the effects of foreign ownership on investor protection;
and
the effects of foreign ownership on consumer protection.
In particular, a registered foreign holding company would likely
own significant foreign utility operations. The magnitude of these
foreign utility operations could be significantly greater than those
currently owned by U.S. holding companies; they could be significantly
larger than the holding company's U.S. utility system. Will this expose
U.S. ratepayers to greater risks? Should newly registered, foreign
holding companies' interests in FUCOs and EWGs be ``grandfathered,''
with only post-registration FUCO and EWG investments counted toward the
aggregate investment test of rule 53(a)(1)? 25 U.S. holding
companies, in seeking authorization to issue securities to finance the
acquisition of FUCOs, have represented that they will not seek recovery
in rates for any losses, or inadequate returns, on their investments in
FUCOs and EWGs. Will foreign holding companies be in a position to make
similar undertakings with respect to their FUCO operations?
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\25\ Rule 53 provides a partial ``safe harbor'' for EWG
financings by registered holding companies. Among other things, in
order to qualify for the safe harbor the amount of a registered
holding company's aggregate investments in EWGs and FUCOs cannot
exceed 50% of the system's consolidated retained earnings. See rule
53(a)(1) [17 CFR 250.53(a)(1)].
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We also request comments on whether structural safeguards can be
developed to limit the risk that financial problems in the holding
company's FUCOs will have an adverse effect on U.S. ratepayers and
security holders of the holding company's U.S. subsidiaries. For
example, would requiring the U.S. utility subsidiary stock to be owned
by an intermediate holding company based in the U.S. and organized
under state law provide any additional protection to U.S. interests?
Would such intermediate holding companies be consistent with the Act's
goal of simplifying the corporate structure of holding companies? We
are particularly interested in the views of state regulators and
consumers concerning the effects of foreign ownership on state
regulation and consumer protection.
2. Section 11
Section 11 has been described by the Supreme Court as the ``very
heart'' of the Act.26 In addition to the general requirement
that a registered holding company own a single integrated public-
utility system, section 11 limits nonutility businesses to those that
are
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``reasonably incidental, or economically necessary or appropriate'' to
system utility operations, on our finding that the nonutility
businesses are ``necessary or appropriate in the public interest or for
the protection of investors or consumers and not detrimental to the
proper functioning of such system or systems.'' Section 11 further
directs us to require the simplification of the corporate structure of
registered systems and to ensure that voting power is fairly and
equitably distributed among security holders.
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\26\ 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).
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The policies underlying section 11 must also enter into our
consideration of the acquisition of a U.S. utility by a foreign
company. Section 10(c)(1) provides that we cannot approve an
acquisition if it would be detrimental to the carrying out of the
provisions of section 11. Section 10(c)(2) provides that we must find
that the acquisition will serve the public interest by tending towards
the economical and efficient development of an integrated public-
utility system.
Section 10(c)(2) ``make[s] clear that the Commission was not to
approve acquisitions of utility securities merely because of the
absence of indications of any positive detriment to the carrying out of
Section 11.'' 27 What types of direct or indirect benefits
should be considered under section 10(c)(2) when a foreign company
seeks to acquire a domestic utility? For example, would a domestic
public-utility system benefit from an affiliation with a financially
stronger foreign holding company, or a foreign company that has
experience in operating in competitive markets? Are these benefits a
sufficient basis for making the findings required by section 10(c)(2)?
Are there other economies and efficiencies that foreign ownership would
confer upon a domestic system?
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\27\ Electric Bond and Share Co., supra note 18, at 31.
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Commenters should specifically address the key goals of an
integrated system as reflected in section 2(a)(29)--the ``advantages of
localized management, efficient operation, and the effectiveness of
regulation * * *.'' 28 Localized management is a particular
issue in this context. The advantage of localized management is that
policies affecting consumers and local regulators are handled by
persons who are intimately familiar with local conditions and are
sensitive and responsive to the interests of the community and of
consumers. This does not necessarily mean that the directors and
officers of the holding company must be permanent residents of the
locality. For example, the advantages of localized management can be
realized where the authority and responsibility for local policy-making
are properly delegated throughout the service territory of the holding
company. Would a foreign holding company be able to preserve the
advantages of local management?
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\28\ Section 2(a)(29) of the Act.
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Section 11 not only addresses the integration of utility properties
but also requires us to limit the nonutility businesses of a registered
holding company to those that are ``reasonably incidental, or
economically necessary or appropriate to the operations of'' the
holding company system. We have interpreted this provision to reflect a
Congressional policy against nonutility acquisitions that bear no
functional relationship to the core utility business of the registered
holding company. We request comments on how this provision should apply
with respect to non-utility businesses of a FUCO.
3. Other Standards for Reviewing Acquisitions
Section 9 of the Act provides that, under certain circumstances,
the acquisition of a public-utility company or public-utility holding
company requires our prior approval.29 The main purpose of
section 9 is to prevent ``the growth and extension of holding companies
[that bear] no relation to economy of management and operation or the
integration and coordination of related operating properties'' (an
abuse that led to enactment of the Holding Company Act).30
Section 10 of the Act sets forth the standards for reviewing
acquisitions. Section 10(b) provides that we shall approve an
acquisition unless we affirmatively find that the acquisition will have
certain adverse consequences.31 Section 10(c)(2) provides
that we shall not approve an acquisition unless we affirmatively find
that the acquisition will ``[tend] towards the economical and the
efficient development of an integrated public-utility system.''
Finally, section 10(f) requires us to be satisfied that there is
compliance with state law.
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\29\ Section 9(a)(1) of the Act requires our prior approval
under section 10 of a direct or indirect acquisition by a registered
holding company of any securities or utility assets.
Section 9(a)(2) of the Act bars any person who is an affiliate
of a public-utility or holding company from becoming an affiliate of
any other public-utility company or holding company without our
prior approval. Section 2(a)(11)(A) defines an ``affiliate'' of a
specified company as ``any person that directly or indirectly owns,
controls, or holds with power to vote 5 per centum or more of the
outstanding voting securities of such specified company.'' As noted
above, a FUCO is not a public-utility company for purposes of the
Act.
An entity that has no public utility affiliate may acquire the
securities of a single utility without the need to seek or obtain
our prior authorization. This acquisition, which is known as a
``first bite,'' would not be subject to section 9(a)(2). For
example, ScottishPower concluded that its acquisition of PacifiCorp
constituted its ``first bite'' for purposes of section 9(a). See
PacifiCorp proxy statement, dated May 6, 1999, at 69.
An acquisition of a company having two or more utility
subsidiaries, however, would simultaneously involve both a ``first
bite'' and a ``second bite'' and so be subject to section 9(a)(2).
See Coral Petroleum, Inc., Holding Co. Act Release No. 21632 (June
19, 1980).
\30\ See section 1(b)(4) of the Act.
\31\ In addition to the findings discussed below, we must find
that the consideration paid in connection with the acquisition is
not reasonable or does not bear a fair relation to the sums invested
in or the earning capacity of the utility assets to be acquired or
the utility assets underlying the securities to be acquired.
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We request comments concerning whether the foreign nature of an
acquiror raises any particular issues concerning the application of
section 10. In addition to the issues relating to section 10(c), we
must consider the following issues:
Section 10(b)(1) Will the acquisition tend towards interlocking
relations or the concentration of control of public-utility companies,
of a kind or to an extent detrimental to the public interest or the
interest of investors, or consumers?
Traditionally, our evaluation of this factor has been informed by
federal antitrust policies.32 Should we weigh concentration
of control issues in view of the increasing internationalization of the
energy business? Should we continue to rely, where appropriate, upon
the findings and requirements of other agencies that address the
potential anticompetitive effects of an acquisition?
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\32\ See, e.g., Sempra Energy, Holding Co. Act Release No. 26890
(June 26, 1998) (relying upon findings and remedial measures of the
Department of Justice, the FERC and the interested state commission
to address potential anticompetitive effects of acquisition);
Entergy Corp., Holding Co. Act Release No. 25952 (Dec. 17, 1993)
(relying upon hearing records and orders of FERC and state
commissions). See also Madison Gas and Electric Co. v. SEC, slip
op., Dkt. No. 98-1216 (DC Cir. Mar. 16, 1999) (``We have previously
observed that the SEC is entitled to `watchfully' defer to the
determinations of other regulatory bodies * * *.'') (citations
omitted).
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Section 10(b)(3): Will the acquisition unduly complicate the
capital structure of the holding-company system of the applicant or be
detrimental to the public interest or the interest of investors or
consumers or the proper functioning of such holding-company system?
We request comments concerning how foreign ownership could ``unduly
complicate the capital structure of the holding company system * * *.''
We would, of course, have to consider whether the holding company has
[[Page 71346]]
issued stock with special voting rights to any particular group or
class.33 In this regard, we understand that, in connection
with certain foreign utility privatization transactions, foreign
governments hold special or ``golden'' shares that give them veto
rights with respect to certain corporate transactions. We recognize
that these shares are intended to protect the foreign government's
regulatory interests rather than to create the type of abusive capital
structure that led to passage of the Act. Are these types of
arrangements inconsistent with the Act?
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\33\ See section 11(b)(2).
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We would also consider whether foreign law imposed any impediments
on our ability to inspect the foreign holding company and its
subsidiaries. Such impediments could be detrimental to the public
interest, the interests of investors and consumers, and ``the proper
functioning of [a] holding-company system.''
4. Substantive Regulation of Foreign Holding Companies
The Holding Company Act imposes a comprehensive federal framework
of regulation on registered holding companies. A registered foreign
holding company would be subject to this framework to the same degree
as a registered domestic company. For example, we must approve:
issuances and sales of securities; 34
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\34\ Sections 6 and 7 require our prior approval under specified
qualitative standards for most types of securities issuances.
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certain acquisitions; 35 and
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\35\ Section 11(b)(1) confines the nonutility businesses of a
registered holding company to those that have a functional
relationship to its core utility business. Rule 58 under the Act
permits a registered holding company to acquire certain types of
non-utility businesses without our approval.
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sales of utility assets.
We also have jurisdiction over intrasystem transactions. For example,
section 12 requires our prior approval for a registered holding company
or its subsidiary ``to lend or in any manner extend its credit to or
indemnify any company in the same holding-company system.'' Section 13
authorizes us to regulate service, sales and construction contracts
between operating utilities within a registered system and other
companies within the same system and require that such services be
performed at cost. Finally, registered holding companies are subject to
extensive reporting, recordkeeping and accounting requirements.
Despite our jurisdiction over registered holding companies, the
EWGs and FUCOs owned by a foreign registered holding company, like
those of a domestic registered holding company, would generally be
exempt from the Act. Moreover, a FUCO may issue and acquire securities
without our authorization. A registered holding company with large FUCO
operations may be able to issue securities through a FUCO to finance
other businesses. Does this raise significant policy issues under the
Act, even if the holding company's U.S. utilities do not have any
liability with respect to those financings?
5. Accounts and Records; Jurisdiction
The Holding Company Act contains a number of provisions designed to
prevent companies in registered holding company systems from engaging
in abusive affiliate transactions. In order for these provisions to be
effective, we were given the authority to monitor intra-system
transactions by requiring the making and keeping of holding company
system records and mandating that we have access to those
records.36
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\36\ See section 15 of the Act.
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We anticipate that we would be able to exercise this authority with
respect to foreign registered holding companies. We request any
information concerning possible impediments to our exercise of our
inspection authority and jurisdiction. Are there difficulties in
obtaining information from foreign companies that are inconsistent with
regulation under the Holding Company Act? What types of safeguards or
limitations on ownership might prevent or minimize such risks?
6. Other Issues
Are there any other policy issues related to foreign acquisitions
of U.S. utilities that we should consider? For example, do we need to
consider national security interests that would be implicated by a
foreign acquisition of a U.S. utility? 37 We note that the
President may investigate the national security effects of ``foreign
control of persons engaged in interstate commerce in the United
States,'' and suspend or prohibit any acquisition, merger, or takeover
of such persons in order to protect the national security.38
United States companies have acquired significant interests in FUCOs
over the past several years. Would restrictions on foreign ownership of
U.S. utilities be likely to lead to restrictions on investment in FUCOs
by U.S. investors?
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\37\ In response to our prior request for comments, APS raised
national security concerns. Most of the other commenters did not
believe that there were any national security concerns or that any
such concerns should be addressed by Congress. Some federal laws
specifically restrict foreign ownership of certain regulated
entities, while others provide for ownership subject to certain
conditions. See, e.g., 42 U.S.C. 2131-2134 (prohibition of foreign
ownership or control of facilities that produce or use nuclear
materials). The Nuclear Regulatory Commission (``NRC'') has
developed a ``Standard Review Plan'' for use in reviewing nuclear
power plant licenses involving foreign interests. See Final Standard
Review Plan on Foreign Ownership, Control, or Domination, 64 FR 5355
(Sept. 28, 1999). The NRC has approved, with certain restrictions on
foreign ownership and control, transfers of the operating license
for three nuclear power plants. See NRC Approves AmerGen's Takeover
of Clinton Plant, The Energy Daily, Nov. 30, 1999 (describing
transfers of two operating licenses to AmerGen Energy Co., a company
jointly owned by PECO Energy Co., an inactive registered holding
company, and British Energy Inc., a British utility company), and
PacifiCorp (Trojan Nuclear Plant), 64 FR 63060 (Nov. 18, 1999) (NRC
order approving transfer of licenses to ScottishPower). See also
supra note 5.
\38\ 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.
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Dated: December 14, 1999.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-32952 Filed 12-20-99; 8:45 am]
BILLING CODE 8010-01-P
