ORAL STATEMENT OF ISAAC C. HUNT, JR. COMMISSIONER UNITED STATES SECURITIES AND EXCHANGE COMMISSION REGARDING THE FUTURE OF THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935 BEFORE THE SUBCOMMITTEE ON FINANCE AND HAZARDOUS MATERIALS THE COMMITTEE ON COMMERCE UNITED STATES HOUSE OF REPRESENTATIVES OCTOBER 7, 1999 Chairman Oxley, Ranking Member Towns and Members of the Subcommittee: I am Commissioner Isaac C. Hunt, Jr. of the U.S. Securities and Exchange Commission. I am pleased to have this opportunity to testify before you this morning on behalf of the SEC regarding the Public Utility Holding Company Act of 1935. The Commission continues to support efforts to repeal the 1935 Act and replace it with legislation that preserves certain important consumer protections. During the first quarter of this century, the electric and gas utility industry had developed serious problems through the misuse of the holding company structure. The 1935 Act was passed by Congress to address these problems. Reorganization and simplification of existing public utility holding companies in order to eliminate those abuses was a major part of the SEC's work in the years following passage of the 1935 Act. By the early 1980's, the SEC had concluded that the 1935 Act had accomplished its basic purpose and its remaining provisions, to a large extent, either duplicated other state or federal regulation or otherwise were no longer necessary to prevent the recurrence of the abuses that led to its enactment. The SEC concluded that many aspects of 1935 Act regulation had become redundant: state regulation had expanded and strengthened since 1935, and the SEC had enhanced its regulation of all issuers of securities, including public utility holding companies. In addition, institutional investors such as pension funds and insurance companies had become more sophisticated and demanded more detailed information from all issuers of securities than was previously available. Changes in the accounting profession and the investment banking industry also had provided investors and consumers with a range of protections unforeseen in 1935. Therefore, the SEC unanimously recommended that Congress repeal the statute. Because the potential for abuse through the use of multistate holding company structures, and related concerns about consumer protection, continued to exist, and because of a lack of consensus for change, repeal legislation was not enacted in the early 1980s. Since that time, however, the SEC has continued its effort to administer the 1935 Act flexibly to accommodate developments in the industry while adhering to the basic purpose of the statute. In addition, Congress has created a number of statutory exceptions to the regulatory framework of the 1935 Act. In the summer of 1994, in light of regulatory and other changes taking place in the utility industry, the SEC staff, at the direction of Chairman Arthur Levitt, undertook a study of regulation of public utility companies that culminated in a June 1995 report. Based on the report, the SEC has recommended that Congress consider three legislative options for eliminating unnecessary regulatory burdens. The preferred option is repeal of the 1935 Act, accompanied by the creation of additional authority at the state and federal level to permit the continued protection of consumers. The Federal Energy Regulatory Commission should have the authority to exercise jurisdiction over transactions among holding company affiliates. The FERC and state utility commissions should be able to review these transactions by having access to books and records. This course of action would achieve the economic benefits of unconditional repeal and also protect consumers. The SEC is aware that proposals of comprehensive reform of energy legislation are under consideration by Congress. Repeal of the 1935 Act could also be considered as part of this overall reform. The SEC continues to support a comprehensive approach to reform of the 1935 Act. The SEC has implemented many of the numerous administrative initiatives that were recommended in the Report to streamline regulation. Despite the effects of these initiatives, developments in the utility industry are resulting in increased activity under the 1935 Act, especially in the area of mergers and acquisitions, diversification and affiliate transactions. These developments include the accelerating pace of competition initiatives at the state level, the FERC's leadership in addressing open transmission and related structural issues, and the increasing internationalization of the utility industry. These developments raise additional challenges in applying the Act to an industry that bears little resemblance to that which existed in 1935. Moreover, during 1998, mergers resulted in the formation of three new registered holding companies. The SEC expects that several holding companies will be required to register under the Act in the near future. Hence, continuation of the 1935 Act in its present form will require additional resources. The options of conditional repeal or an expansion of the SEC's exemptive authority also raise the issue of resources. Repeal of the 1935 Act would not achieve significant cost savings for the federal government, particularly if some of the responsibilities now handled by the Commission were carried out by the FERC. Expanded exemptive authority, on the other hand, could require greater resources, in view of the need to evaluate and implement broad requests for exemptive relief. The SEC respectfully defers to the judgment of Congress as to whether the public interest is better served by separate repeal of the 1935 Act or repeal as part of a larger legislative initiative. * * * The SEC takes seriously its duties to administer faithfully the letter and spirit of the 1935 Act, and is committed to promoting the fairness, liquidity, and efficiency of the United States securities markets. By supporting conditional repeal of the 1935 Act, the SEC hopes to reduce unnecessary regulatory burdens on America's energy industry while providing adequate protections for energy consumers. I will be pleased to answer your questions.