[Federal Register Volume 60, Number 124 (Wednesday, June 28, 1995)]
[Rules and Regulations]
[Pages 33634-33639]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-15836]
[[Page 33633]]
_______________________________________________________________________
Part VIII
Securities and Exchange Commission
_______________________________________________________________________
17 CFR Part 250, et al.
Exemption of Issuance and Sale of Certain Securities by Public
Utilities and Nonutility Subsidiary Companies, etc.; Final Rule and
Proposed Rules
Federal Register / Vol. 60, No. 124 / Wednesday, June 28, 1995 /
Rules and Regulations
[[Page 33634]]
SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 250
[Release No. 35-26311, File No. S7-17-92]
RIN 3235-AF49
Exemption of Issuance and Sale of Certain Securities by Public
Utility and Nonutility Subsidiary Companies of Registered Public
Utility Holding Companies; Exemption of Acquisition by Companies in a
Registered Public Utility Holding Company System of Certain Securities
of Associate Companies; Exemption of Capital Contributions and Open
Account Advances, Without Interest, by Parent Companies to Subsidiary
Companies
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
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SUMMARY: The Commission is amending rule 52, which exempts certain
financing transactions involving the securities of the public utility
subsidiary companies of a registered public utility holding company
from the requirement of prior Commission approval under the Public
Utility Holding Company Act of 1935 (``Act''). As amended, the rule
will exempt certain additional types of securities, and will exempt the
issuance and sale of certain types of securities of nonutility
subsidiary companies of a registered holding company in connection with
routine financing transactions. The Commission is also amending rule
45(b)(4) to exempt from the requirement of prior Commission
authorization under section 12(b) of the Act and rule 45(a) all capital
contributions and open account advances by a parent company to its
subsidiary company. These amendments are intended to eliminate
unnecessary regulatory and paperwork burdens associated with seeking
Commission approval for routine financings by registered holding
companies and their subsidiary companies.
EFFECTIVE DATE: June 28, 1995. These amended rules are substantive
rules that grant an exemption or relieve restrictions.\1\
\1\ 5 U.S.C. 553(d)(1).
FOR FURTHER INFORMATION CONTACT: William C. Weeden, Associate Director,
Joanne C. Rutkowski, Assistant Director, or Bonnie Wilkinson, Staff
Attorney, all at (202) 942-0545, Office of Public Utility Regulation,
Division of Investment Management, Securities and Exchange Commission,
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450 Fifth Street, NW, Washington, DC 20549.
SUPPLEMENTARY INFORMATION: Rule 52 (17 CFR 250.52) exempts from the
requirement of prior Commission approval under section 6(a) the
issuance and sale of certain specified types of securities by a public
utility subsidiary of a registered holding company, subject to the
terms and conditions of the rule. Rule 52 also exempts from the
requirement of prior Commission authorization under section 9(a) the
acquisition by a parent holding company of the securities issued by an
existing public utility subsidiary pursuant to the rule. The Commission
is amending rule 52 to broaden the types of debt securities that may be
issued in reliance upon the exemption and to make the exemption
available to nonutility subsidiaries of a registered holding company in
connection with routine financing transactions. The Commission is also
amending rule 45 (17 CFR 250.45) to exempt from the requirement of
prior Commission authorization under section 12(b) of the Act and rule
45(a) capital contributions and open account advances by a parent
company to its subsidiary companies. The Commission proposed these
amendments by release issued on July 7, 1992.\2\
\2\ Holding Co. Act Release No. 25574 (July 7, 1992), 57 FR
31156 (July 14, 1992) (``Proposing Release'').
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In a companion release published today in the Federal Register, the
Commission is inviting public comment on a further amendment to rule 52
that would extend the exemption to all types of securities issued in
connection with routine financing transactions, provided that the
conditions of the rule are met. The Commission is also proposing a
conforming change to rule 45.
Discussion
Rule 52 exempts from the requirement of prior Commission
authorization under section 6(a) the issue and sale of certain
specified types of securities by public utility subsidiary companies of
registered holding companies.\3\ The rule also exempts from the
requirement of prior Commission authorization under section 9(a)(1) the
acquisition by a company in a registered system of any securities
issued by an existing public utility subsidiary pursuant to the
rule.\4\
\3\ Section 6(a) requires Commission approval under the
standards of section 7 for the issue and sale of any security of a
registered holding company or its subsidiary company.
Section 6(b) authorizes the Commission to exempt from the
requirements of section 6(a):
the issue or sale of any security by any subsidiary company of a
registered holding company, if the issue and sale of such security
are solely for the purpose of financing the business of such
subsidiary company and have been expressly authorized by the State
commission of the State in which such subsidiary company is
organized and doing business.
Congress intended ``to exempt the issue of securities by
subsidiary companies in cases where holding company abuses are
unlikely to exist.'' H.R. Conf. Rep. No. 1903, 74th Cong., 1st Sess.
66-67 (1935). See generally Holding Co. Act Release No. 25058 (Mar.
19, 1990), 55 FR 11362 (Mar. 28, 1990) (adopting rule 52), and
Holding Co. Act Release No. 25573 (July 7, 1992), 57 FR 31120 (July
14, 1992) (amending rule 52).
\4\ Section 9(a)(1) in pertinent part requires prior approval
under the standards of section 10 for an acquisition of securities
by a registered holding company or its subsidiary company. Section
9(c)(3) provides a limited exception from this requirement for the
acquisition of:
such commercial paper and other securities, within such
limitations, as the Commission may by rules and regulations or order
prescribe as appropriate in the ordinary course of business of a
registered holding company or subsidiary company thereof and as not
detrimental to the public interest or the interest of investors or
consumers.
The exemption under rule 52 does not apply to the issuance of
securities to form a new public utility subsidiary of a registered
holding company. See rule 52(c).
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At present, the rule applies only with respect to the issuance of
common stock, preferred stock, mortgage bonds and notes issued to a
parent holding company, where the interest rate and maturity date of
the note is designed to parallel a debenture or preferred stock issued
by the parent. The issue and sale of such securities must be solely for
the purpose of financing the business of the public utility company,
and the relevant state commission must have expressly authorized the
financing transactions.
Rule 45 prohibits registered holding companies and their
subsidiaries from lending or extending credit to, indemnifying, or
making any donation or capital contribution to a company in the same
holding company system, except in specified circumstances.\5\ The rule
provides exceptions from the general provision, including an exception
under rule 45(b)(4) for capital contributions or open account advances
without interest to any subsidiary in an [[Page 33635]] aggregate
amount of up to $50,000 in any calendar year, after deducting payments
during the year.
\5\ Rule 45 was adopted under section 12(b), which provides
that:
It shall be unlawful for any registered holding company or
subsidiary company thereof, by use of the mails or any means or
instrumentality of interstate commerce, or otherwise, directly or
indirectly, to lend or in any manner extend its credit to or
indemnify any company in the same holding-company system in
contravention of such rules and regulations or orders as the
Commission deems necessary or appropriate in the public interest or
for the protection of investors or consumers or to prevent the
circumvention of the provisions of this title or the rules,
regulations, or orders thereunder.
Rule 45(a) requires the filing of a declaration and an order of
the Commission permitting the declaration to become effective in
order for a registered holding company or its subsidiary to engage
in these transactions.
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On July 7, 1992, the Commission proposed amendments to rules 52 and
45(b)(4) under the Public Utility Holding Company Act of 1935 (15
U.S.C. 79 et seq.).\6\ The amendments would (a) broaden the types of
debt securities that may be issued by public utility subsidiaries in
reliance upon rule 52, (b) extend the exemption under rule 52 to
nonutility subsidiaries of registered holding companies, (c) revise the
conditions of rule 52 applicable to intrasystem loan transactions, and
(d) remove the annual dollar limitation from rule 45(b)(4).
\6\ See the Proposing Release.
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The Commission received comments submitted by or on behalf of seven
registered holding companies \7\ and by the Council of the City of New
Orleans and the National Association of Regulatory Utility
Commissioners (``NARUC''). While the registered holding companies
generally support adoption of the proposed amendments, New Orleans and
NARUC generally oppose the amendments. New Orleans urged that, in the
event the amendments are adopted, several additional conditions,
including incorporation of a consolidated debt/equity ratio applicable
to sales of securities by nonutility subsidiaries, should be included.
The Commission had invited comment on the need for such a limitation in
its notice of proposed rulemaking. The objections of New Orleans and
NARUC are discussed in greater detail in section 5, below.
\7\ The registered holding companies submitting comments were
American Electric Power Company, Inc., Allegheny Power System, Inc.
(``APS''), Consolidated Natural Gas Company (``CNG''), Central and
South West Corporation (``CSW''), Eastern Utilities Associates,
General Public Utilities Corporation (``GPU''), and New England
Electric System.
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1. Issue and Sale of Securities by Public Utility Subsidiaries
Rule 52 currently exempts the issue and sale by a public utility
subsidiary of any common stock, preferred stock, mortgage bond or note
issued to a parent holding company. The rule currently has limited
usefulness. With respect to intrasystem loan transactions, the
exemption is available only for notes issued to a parent holding
company with interest rates and maturity dates that parallel those of
the holding company's debentures or preferred stock. This condition
prevents the use of the exemption in connection with other common forms
of intrasystem financing, such as unsecured short-term and long-term
loans, money pool arrangements, and the like, the terms of which are
not matched to an actual debenture or preferred stock issued by the
acquiring company.8 In addition, because none of the registered
electric utility holding companies currently issues debentures and
preferred stocks, their subsidiaries do not benefit from the exemption
at all in connection with down-stream loans. The Commission proposed to
amend the rule to extend the exemption to all types of debt
instruments, including bonds, notes and other forms of indebtedness
issued by the subsidiary, having interest rates and maturities designed
to parallel the effective cost of capital of the purchaser.9 All
of the holding companies submitting comments support a change that
would extend the benefits of rule 52 to all types of indebtedness.
\8\ As noted in the Proposing Release, the omission of common
intrasystem financing transactions is of particular concern to the
registered gas systems. Unlike registered electric systems, these
systems typically issue and sell debt to the public at the parent
company level and fund their subsidiaries' operations by means of
capital contributions, open account advances, money pool
arrangements, purchases of common stock, and short- and long-term
loans.
\9\ The Commission noted that it has permitted numerous
declarations to become effective for the issuance and sale of such
securities on this basis. See, e.g., Consolidated Natural Gas Co.,
Holding Co. Act Release No. 25339 (June 28, 1991), 49 SEC Docket 449
(July 16, 1991), and Holding Co. Act Release No. 25110 (June 29,
1990), 46 SEC Docket 1124 (July 17, 1990) (cost to subsidiaries of
borrowing from parent registered holding company tied to Federal
Funds' rate for short-term debt and published bond index for long-
term debt).
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The Commission believes it is appropriate to expand the exemption
of rule 52 to include all types of debt securities 10 that may be
issued by utility subsidiaries, as proposed. The Commission believes
that this expanded exemption is appropriate in view of the continuing
requirement of express approval by the state commission of the state in
which the public utility is organized and doing business. In 1935, few
states exercised jurisdiction over public utility financing. Today,
most do, although the extent of such jurisdiction varies
greatly.11 Rule 52 will not apply to utility financings if a state
does not regulate financing, nor to a utility in a state which
regulates securities sales generally if such state chooses not to
regulate a particular type of security, such as short-term debt. CSW
and CNG ask the Commission to interpret section 6(b) to permit an
extension of the exemption under rule 52 to utility debt issuances
where the relevant state government has determined that such issuances
need not be reviewed by the state utility commission. Similarly, GPU
suggests an expansion of rule 52 to guaranties issued by a holding
company where no state commission approval is required. The Commission
declines to adopt these suggestions, as section 6(b) does not appear to
offer a basis for such action.
\10\ In the Proposing Release, the Commission sought comment on
whether rule 52 should be extended to cover guaranties. However, the
rule as amended today will specifically exclude guaranties. As
discussed below, the Commission is requesting comment in a companion
release to be published today on the question of whether rule 52
should be further amended to cover issuance of all types of
securities, including guaranties.
\11\ See National Association of Regulatory Utility
Commissioners Compilation of Utility Regulatory Policy in the United
States and Canada, 1993-94 Compilation (NARUC 1994), Tables 59A and
B (state jurisdiction with respect to the issue and sale of
securities by public-utilities).
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In proposing the amendment to rule 52, the Commission contemplated
that the effective cost of capital for debt securities which have
recently been issued by the purchasing associate company will be the
coupon rate of interest plus all expenses, including, but not limited
to, underwriters' compensation, discounts, and fees and commissions
associated with the issue and sale of such debt; and that, in the event
the purchasing associate company has not recently issued debt
securities, the effective cost of capital may be tied to an appropriate
index such as, but not limited to, the Federal Funds' rate or a
published bond index. The Commission invited comment on whether other
factors should be considered in determining the effective cost of
capital of the purchasing associate company.
APS suggests that filing fees, listing fees, counsel and
accountants' fees, Blue Sky survey fees, and transfer agent fees should
also be considered.12 The Commission agrees that all ordinary and
necessary costs of a debt offering should be considered.
\12\ APS at 1.
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CNG recommends that the Commission permit use of an appropriate
index to determine the effective cost of capital if the associate
company has issued debt securities in circumstances where the financing
terms are not comparable to the terms of the intrasystem loan.13
We believe that the language of the final rule is flexible enough to
permit use of a published rate or index in these circumstances.
\13\ CNG at 2.
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2. Issue and Sale of Securities by Nonutility Subsidiaries
In the Proposing Release, the Commission noted the large volume of
debt securities sold by nonutility subsidiaries of registered holding
companies. The Commission proposed [[Page 33636]] to amend rule 52 to
encompass nonutility as well as utility subsidiaries. So doing, the
Commission noted that absent further amendment of the rule, routine gas
intrasystem financings would remain subject to the requirement of prior
approval.14
\14\ The Commission noted that the nonutility operations of
registered gas holding companies rival in size the utility
operations, largely because the Act does not include transmission
assets in the definition of a gas utility company.
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Section 6(b) provides that the Commission shall exempt the issue
and sale of a security of a nonutility subsidiary of a registered
holding company for the purpose of financing the subsidiary's business,
subject to such terms and conditions as the Commission deems
appropriate in the public interest or for the protection of investors
or consumers. In enacting section 6(b), Congress intended the
Commission ``to exempt the issue of securities by subsidiary companies
in cases where holding company abuses are unlikely to exist.15
\15\ H. R. Conf. Rep. No. 1903, 74th Cong., 1st Sess. 66-67
(1935).
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In the past, the Commission has granted exemptions for nonutility
financings by order on a case-by-case basis. The Commission, in 1989,
also considered an exemption by rule for such financings. In the
release proposing the original rule 52, the Commission deferred action,
citing its concern ``with the adverse consequences that potential
growth of debt in the nonutility subsidiary companies could have for
the holding-company system and the public utility subsidiaries.''
16
\16\ Holding Co. Act Release No. 24891 (May 17, 1989), 54 FR
22314 (May 23, 1989) (proposing rule 52).
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Our experience since that time suggests to the Commission that a
case-by-case approach to nonutility financings is no longer necessary.
In addition, the extensive reporting requirements imposed on registered
holding company systems by the Act and other federal securities laws,
and the level of scrutiny of reporting companies by investors and by
the financial community suggest that the rule may appropriately
encompass nonutility as well as utility subsidiaries. All of the
registered holding companies submitting comments support expansion of
the rule to exempt routine nonutility subsidiary financings.
GPU, noting the widespread use of partnership interests and other
types of securities in nonutility financing, particularly in the
context of project finance, recommends the inclusion of such securities
in rule 52(b).17 Because the Commission is proposing a further
amendment to rule 52 to extend the exemption of the rule to all types
of securities issued by subsidiary companies of a registered holding
company, so long as the other conditions of the rule are met, we do not
think it necessary to address the status of partnership interests
separately at this time.18
\17\ GPU at 3.
\18\ Filings with the Commission to date suggest that the kinds
and types of securities issued by nonutility subsidiaries, such as
independent power subsidiaries, will vary more than those issued by
public utility subsidiaries.
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In the Proposing Release, the Commission invited comment on
whether, to avoid excess leveraging, the availability of the exemption
for security issuances of nonutility subsidiaries should be conditioned
upon a requirement that an issuance not cause the consolidated debt/
equity ratio of the holding company system to exceed 65/30.19 None
of the commenting holding companies support such a measure. Most
observe that market forces affecting the parent holding company's
common stock, as well as the desire to maintain credit quality ratings
on public utility debt, will effectively deter management from over-
leveraging the holding company capital structure.20
\19\ The Commission noted that this condition is drawn from
section 7(d)(1), which requires the Commission, in reviewing an
issuance of securities, to consider whether the security is
reasonably adapted to the security structure of the company issuing
the security and the other companies in the registered holding
company system. Under that section, the Commission generally has
required a registered holding company system and its public utility
subsidiaries to maintain a 65/30 debt/common equity ratio, the
balance generally being preferred equity. Such a debt/equity
capitalization requirement was included in rule 52, as originally
adopted, as applied to securities issued by public utility
subsidiaries, but was eliminated in 1992.
\20\ The Commission also notes the emphasis placed upon these
considerations in many comments received in response to our request
for comment concerning the modernization of regulation under the
Act. See Holding Co. Act Release No. 26153 (Nov. 2, 1994), 59 FR
55573 (Nov. 8, 1994).
GPU notes that financing of independent power project subsidiaries
is typically non-recourse to other companies in the holding company
system, so that including such debt in a consolidated capitalization
ratio would overstate the exposure of the registered system. GPU also
states that the use of a consolidated debt/equity ratio would not be
consistent with the Commission's approval of higher debt ratios in
numerous project financing applications.21 New Orleans, however,
supported by NARUC, believes that such a consolidated capitalization
ratio is necessary if proposed rule 52(b) is adopted, which, as
previously indicated, these commenters oppose.
\21\ GPU at 3-4.
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Total investment by registered holding companies in nonutility
subsidiaries, to date, has not been significant in amount. As of
December 31, 1994, the registered holding companies had invested only
$1.1 billion (1.4% of over $80 billion of total capitalization) in all
energy-related businesses, exclusive of exempt wholesale generators,
foreign utility companies and gas holding company transportation and
supply operations.
The Commission has concluded that it is unnecessary to condition an
exemption under rule 52(b) upon the maintenance of a consolidated debt/
equity ratio of 65/30.22 We agree with the arguments of the
holding companies in this respect. We also note that the Commission
will continue to have jurisdiction over securities sales by registered
holding companies. The Commission will thus be able to monitor, on a
continuing basis, the effects of holding company financing on the
consolidated capital structure of the registered system.
\22\ As in the case of a debt instrument issued by a public
utility subsidiary pursuant to the rule, the interest rates and
maturity dates of any debt security issued by a nonutility
subsidiary to an associate company would be required to parallel the
effective cost of capital of the associate company. See the
discussion supra, at 6-7, 8-9.
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Because rule 52(c) currently exempts only acquisitions of
securities issued and sold by a public utility subsidiary, the
Commission proposed to amend rule 52 to extend the exemption to
acquisitions of securities of nonutility subsidiaries as well. The
Commission is adopting the proposed amendment. Paragraph (c) of the
rule, with this change, becomes paragraph (d).
In a separate release, the Commission is today seeking comment on a
rule that would allow registered holding companies to diversify through
new or existing subsidiaries into certain categories of ``energy-
related'' businesses, subject to financial and other limitations. In
this connection, the Commission intends to revisit rule 52(d) to
conform or limit its scope.
3. Capital Contributions and Open Account Advances, Without Interest,
to Subsidiary Companies
Rule 52, as amended, does not provide an exemption for certain
other common intrasystem financing transactions. For example, a capital
contribution from a registered holding company to any of its subsidiary
companies is regulated as an intercompany loan under section 12(b)
[[Page 33637]] and rule 45.23 Open account advances that do not
bear interest are also subject to these provisions.
\23\ Section 12(b) and rule 45(a) generally require prior
Commission approval for a registered holding company or its
subsidiary company to ``lend or in any manner extend its credit to
or indemnify any company in the same holding-company system.''
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To facilitate these transactions, the Commission proposed to amend
rule 45(b)(4), which exempts up to $50,000 in capital contributions and
open account advances, without interest, made to any subsidiary during
a calendar year, to remove the dollar limitation of the rule.24
All of the registered holding companies submitting comments support
this change. New Orleans proposes that, if rule 45(b)(4) is amended, it
should exempt capital contributions or open account advances subject to
an aggregate limitation of $1,000,000 per year.
\24\ Rule 45(b)(4) exempts ``[c]apital contributions or open
account advances, without interest, to any subsidiary: Provided,
That after giving effect to the transaction the total net amount
which such subsidiary will have received during the calendar year as
a result of such transactions will not exceed $50,000 (after
deducting payments during the year regardless of the date of the
advances).'' The rule contained the $50,000 limitation when adopted
in 1941. Holding Co. Act Release No. 2694 (Apr. 21, 1941).
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As the Commission noted in the Proposing Release, the legislative
history of the Act makes clear that the Congress, while concerned with
holding company abuses, recognized that ``[d]own-stream loans * * * may
be legitimate sources of credit * * *,'' and concluded that ``the
subject is one in which the rule-making power of the Commission is
required to meet a host of varying circumstances.'' 25 Capital
contributions and open account advances, without interest, are routine
transactions which serve to transfer funds from the parent to its
subsidiary. The amounts and types of securities issued by any
registered holding company, which remain subject to prior approval by
the Commission, must be justified by reference to the need for capital
infusions by its subsidiaries, both utility and nonutility. Financing
requests must be supported by capital budget projections covering the
authorization period. The Commission believes that its ability to
supervise intrasystem financing through these means will not be
compromised by removal of the dollar limitation in rule 45(b)(4).
Accordingly, the Commission declines to incorporate an aggregate dollar
limitation in the rule as adopted.26
\25\ S. Rep. No. 621, 74th Cong., 1st Sess. 34-5 (1935).
\26\ We also intend to revisit rule 45(b)(4) in the context of
any rulemaking on nonutility diversification.
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4. Issuance of Other Securities
Finally, the Commission sought comment on whether the amendments to
rules 45 and 52 should be extended to exempt financing transactions
involving other securities, in particular, guaranties of debt
securities issued by other subsidiary companies.27 Because
guaranties are securities under the Act,28 their issuance and sale
are subject to the declaration requirement of section 6, unless
exempted under section 6(b). At present, rule 52 does not extend to the
issuance and sale of guaranties.
\27\ Section 12(a) prohibits the guaranty by subsidiary
companies of debt issued by a registered holding company.
\28\ See section 2(a)(16) (definition of security).
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In addition, the guaranty by a subsidiary company of debt
securities issued by another subsidiary company is subject to section
12(b) and rule 45 thereunder. Rule 45, with exceptions not relevant
here, prohibits the issuance of guaranties by a subsidiary company
without the filing of a declaration.29
\29\ At present, rule 45(b)(6) exempts certain guaranties ``in
the ordinary course of business.'' The rule by its terms does not
apply to a guaranty of a subsidiary's indebtedness for borrowed
money.
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As previously indicated, we are publishing a companion release
inviting comment on a further amendment to rule 52 to exempt the
issuance of all types of securities. Accordingly, there is no need to
address guaranties separately at this time.
5. Comments by the City of New Orleans and NARUC
New Orleans opposes any expansion of the exemptions from the
Commission's pre-approval requirement for financings provided by rules
45(b)(4) and 52 which, the city contends, would ``widen the existing
regulatory gap between federal and state and local regulators.''
30 New Orleans urges that, if the amendments are adopted, several
additional conditions need to be incorporated. Certain of these
additional conditions, or limitations on the availability of the
exemptions, have been discussed above. New Orleans states that these
conditions are generally necessary to protect public utility
subsidiaries of registered holding companies and their customers from
the financial effects of financing transactions, particularly in the
context of nonutility ventures that are not otherwise subject to
effective state oversight.
\30\ New Orleans, Executive Summary, at 4-5.
During the notice period inviting comment on the proposed
amendments to rules 45(b)(4) and 52, Congress passed the Energy Policy
Act of 1992.31 Title VII of the Energy Policy Act amended the Act
to permit investments by registered holding companies in ``exempt
wholesale generators'' (``EWGs'') and ``foreign utility companies''
(``FUCOs''), defined in new sections 32 and 33, respectively.32
Those sections exempt EWGs and FUCOs from all provisions of the Act,
including sections 6(a), 7 and 12(b), which would otherwise apply to
securities and guaranties issued and sold by such entities. However,
these sections do not exempt issuance and sale of securities by a
registered holding company in cases where the proceeds will be used for
EWG or FUCO investments, and these financing transactions continue to
require Commission approval under sections 6(a) and 7. Under section
32, Congress directed the Commission to promulgate rules with respect
to actions which would be considered to ``have a substantial adverse
impact on the financial integrity of the registered holding company
system'' to ensure that actions (e.g., financings, guaranties, etc.) by
any registered holding company in respect of EWGs would not have any
adverse impact on any utility subsidiary or its customers or on
effective state regulation.33 Similarly, under section 33,
Congress directed the Commission to promulgate rules regarding
registered holding companies' acquisitions of interests in FUCOs which
shall provide for the protection of the customers of associate public
utility companies and the financial integrity of the holding company
system.34
\31\ P.L. 102-486, 106 Stat. 2776 (1992).
\32\ An EWG is defined in section 32(a) of the Holding Company
Act as any person determined by the Federal Energy Regulatory
Commission to be engaged exclusively in the business of owning and/
or operating all or part of one or more facilities that are used for
the generation of electric energy, exclusively for sale at wholesale
or leased to a utility, and selling electric energy at wholesale. A
FUCO is defined in section 33(a) as any person that owns or operates
facilities outside the United States used for the generation,
transmission or distribution of electric energy for sale or for the
distribution at retail of natural or manufactured gas, that derives
no part of its income from such utility activities in the United
States and is not a public utility company operating in the United
States, and that provides notice to the Commission.
\33\ See section 32(h)(6).
\34\ See section 33(c)(1).
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The Commission had not yet initiated the rulemaking effort under
new sections 32 and 33 when it proposed the additional amendments to
rules 45(b)(4) and 52. In part for that reason, NARUC and New Orleans
both urged the Commission to delay any action on the proposed rules
pending development of consumer protection measures in the broader
context of investments in EWGs and FUCOs, which, for purposes of the
[[Page 33638]] Act, are nonutilities. However, since that time, several
related rules have been promulgated under the new provisions, and
others are pending.35 Those rules were intended to carry out the
Congressional mandates under sections 32 and 33.36 We note that
those rules are subject to a pending challenge by NARUC and
others.37
\35\ See Holding Co. Act Release No. 25886 (Sept. 23, 1993), 58
FR 51488 (Oct. 1, 1993).
\36\ Rule 53 provides standards for the Commission to determine
whether to approve the issue or sale of a security by a registered
holding company, in cases where the proceeds of the financing will
be used to acquire an EWG. Rule 54 provides that the effect of EWG
and FUCO operations on the registered system will not be considered
in determining whether to approve any other transactions under the
Holding Company Act, if the standards of rule 53 are satisfied. 17
CFR 250.53 and 250.54.
\37\ National Association of Regulatory Utility Commissioners,
et al. v. Securities and Exchange Commission, U.S. Court of Appeals
for the District of Columbia Circuit, No. 93-1778.
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The City of New Orleans recommends that the Commission consider the
proposed amendments in light of the Congressional mandates under
sections 32 and 33. We do not believe this measure is necessary. As
indicated, those provisions exempt EWGs and FUCOs from all provisions
of the Act, and the rules adopted under those sections are intended to
provide a means to ensure that investments by the holding company and
activities of the exempt subsidiaries have not adversely affected the
holding company or its utility customers. The proposed amendments to
rules 45(b)(4) and 52, in contrast, exempt only public utility
financing that has been reviewed and approved by state commissions, and
financing by nonutility subsidiaries (other than EWGs and FUCOs) that
is non-recourse to the holding company or any utility subsidiary. As a
result, the activities exempted by the proposed rule amendments are not
nearly so far-reaching as the EWG and FUCO provisions, and do not have
the same need for additional consumer protection. Further, and this
distinction appears critical, the acquisition by a registered holding
company of an interest in a new nonutility business, and any other
actions related thereto, such as the organization of a separate
subsidiary to conduct that business, the initial capitalization
thereof, intrasystem guaranties and any arrangements for the sale of
goods and services to the new subsidiary, are, in the absence of any
other applicable exemption, subject to the pre-approval process
required under applicable provisions of the Act, as well as to ongoing
reporting requirements and other requirements of the Act regarding
maintenance of books and records, audits, inspections and the like.
State commissions, consumer groups and other interested parties have
the opportunity to express their views regarding the likely effects of
nonutility ventures on consumers and other protected interests and to
propose safeguards appropriate in order to protect these interests in
connection with this pre-approval process.38
\38\ Further, the amended rules do not create any new exemption
from the pre-approval process for guaranties by a registered holding
company of the securities or other obligations of any subsidiary.
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In addition to the modifications to the proposed rules mentioned
elsewhere in this release, New Orleans recommends that the rules, if
adopted, should require prior approval of a holding company's cost of
capital by each state and local commission which regulates the parent.
The Commission understands this request to involve approval by a
commission in each of the states in which the holding company's public
utility subsidiaries operate.39 Because the rules do not exempt
holding company financings from our approval, we see no useful purpose
to be achieved by requiring a multistate determination of a holding
company's cost of capital. The Commission is specifically obligated by
section 7(d) to consider the reasonableness of the fees, commissions
and other expenses of a securities issuance which would be relevant to
the determination of a holding company's effective cost of capital in
connection with our consideration of any holding company financing
applications.
\39\ New Orleans at 15.
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New Orleans' suggestion that rule 52, as proposed to be amended,
also be conditioned upon a requirement for state commission approval in
every state in a holding company's service territory for any guaranty
is likewise misplaced.40 As previously stated, the rules do not
exempt registered holding companies from the requirement to obtain
Commission approval in connection with issuing any guaranty.
\40\ New Orleans at 16.
In summary, we do not believe that the proposed amendments to rules
45(b)(4) and 52 will compromise our ability to protect consumers and
investors, and we do not find that the additional conditions and
restrictions proposed by New Orleans are necessary for this purpose. We
are therefore adopting the proposed amendments to rules 45(b)(4) and 52
substantially in the form proposed.
Conclusion
The Commission believes that the registered holding-company systems
should have a greater ability to engage in routine financings without
the regulatory burden of prior Commission authorization, and that this
may be done without jeopardizing the interests the Act is designed to
protect. The rule amendments adopted today are consistent with those
two objectives.
Regulatory Flexibility Act Certification
Pursuant to Section 605(b) of the Regulatory Flexibility Act, 5
U.S.C. 605(b), the Chairman of the Commission has certified that the
proposed amended rules will not, if adopted, have a significant
economic impact on a substantial number of small entities. The
Commission did not receive any comments with respect to the Chairman's
certification.
Costs and Benefits
Amended rule 52 will substantially decrease regulatory compliance
costs for the registered holding companies. In calendar years 1993 and
1994, 122 applications would not have been filed, had the proposed
amended rule 52 been in place. Estimated savings per application would
have been approximately $30,000 including the $2,000 filing fee per
application, and related legal, accounting, and management costs. Thus,
for 122 applications filed in calendar years 1993 and 1994, the
aggregate savings would have been approximately $3,660,000 or
$1,830,000, respectively, per year. Moreover, the reduction in
Commission staff hours associated with reviewing and analyzing these
applications would have been approximately 5,700 hours per year (2.5
staff years). The only cost to the registered holding companies in
complying with the amended rule will be the cost of completing a Form
U-6B-2 after the issue or sale of any security. It is estimated that
approximately one hour will be required to complete each form at an
estimated cost of $100 per hour. Assuming 61 financing applications per
year, the cost of compliance reporting would approximate $6,100 per
year.
Paperwork Reduction Act
The proposed amended rules are subject to the Paperwork Reduction
Act of 1980 (44 U.S.C. 79 et seq.) and have been submitted to the
Office of Management and Budget for approval to use them through July
31, 1997. Final action is expected by June 23, 1995.
Statutory Authority
The Commission is amending rules 45 and 52 pursuant to sections 6,
9, 12 and 20 of the Public Utility Holding Company Act of 1935.
[[Page 33639]]
List of Subjects in 17 CFR Part 250
Electric utilities, Holding companies, Natural gas, Reporting and
recordkeeping requirements, Securities.
Text of Final Rules
For the reasons set forth in the preamble, Part 250 of chapter II,
title 17, of the Code of Federal Regulations is amended as follows:
PART 250--GENERAL RULES AND REGULATIONS, PUBLIC UTILITY HOLDING
COMPANY ACT OF 1935
1. The authority citation for part 250 continues to read as
follows:
Authority: 15 U.S.C. 79c, 79f(b), 79i(c)(3), 79t, unless
otherwise noted.
2. Section 250.45 is amended by revising paragraph (b)(4) to read
as follows:
Sec. 250.45 Loans, extensions of credit, donations and capital
contributions to associate companies.
* * * * *
(b) Exceptions. * * *
(4) Capital contributions or open account advances, without
interest, by a company to its subsidiary company.
* * * * *
3. Section 250.52 is revised to read as follows:
Sec. 250.52 Exemption of issue and sale of certain securities.
(a) Any registered holding-company subsidiary which is itself a
public utility company shall be exempt from section 6(a) of the Act (15
U.S.C. 79f(a)) and rules thereunder with respect to the issue and sale
of any common stock, preferred stock, bond, note or other form of
indebtedness, of which it is the issuer (excluding any guaranty and
other form of assumption of liability on the obligations of another)
if:
(1) The issue and sale of such security are solely for the purpose
of financing the business of such public utility subsidiary company;
(2) The issue and sale of such security have been expressly
authorized by the state commission of the state in which such
subsidiary company is organized and doing business; and
(3) The interest rates and maturity dates of any debt security
issued to an associate company are designed to parallel the effective
cost of capital of that associate company.
(b) Any subsidiary of a registered holding company which is not a
holding company, a public utility company, an investment company, or a
fiscal or financing agency of a holding company, a public utility
company or an investment company shall be exempt from section 6(a) of
the Act (15 U.S.C. 79f(a)) and rules thereunder with respect to the
issue and sale of any common stock, preferred stock, bond, note or
other form of indebtedness, of which it is the issuer (excluding any
guaranty and other form of assumption of liability on the obligations
of another) if:
(1) The issue and sale of such security are solely for the purpose
of financing the existing business of such subsidiary company; and
(2) The interest rates and maturity dates of any debt security
issued to an associate company are designed to parallel the effective
cost of capital of that associate company.
(c) Within ten days after the issue or sale of any security exempt
under this section, the issuer or seller shall file with the Commission
a Certificate of Notification on Form U-6B-2 (17 CFR 259.206)
containing the information prescribed by that form. However, with
respect to exempt financing transactions between associate companies
which involve the repetitive issue or sale of securities or are part of
an intrasystem financing program involving the issuance and sale of
securities not exempted by this section, the filing of information on
Form U-6B-2 may be done on a calendar quarterly basis.
(d) The acquisition by a company in a registered holding company
system of any security issued and sold by any associate company,
pursuant to this section, is exempt from the requirements of section
9(a) of the Act (15 U.S.C. 79i(a)); provided that the exemption granted
by this paragraph (d) shall not apply to any transaction involving the
issue and sale of securities to form a new subsidiary company of a
registered holding company.
Dated: June 20, 1995.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-15836 Filed 6-27-95; 8:45 am]
BILLING CODE 8010-01-P
