Berlack, Israels & Liberman llp
Kenneth R. Asher
120 WEST 45TH STREET
Gerald W. Conway*
Andrew S. Dash
February 3, 2000
Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549-0609
Re: File No S7-30-99
Dear Secretary Katz:
On behalf of our client, GPU, Inc. ("GPU"), we appreciate the opportunity to provide GPU's views in response to the Commission's request for comments on various issues arising under the Public Utility Holding Company Act, as amended, (the "Holding Company Act") surrounding foreign company acquisitions of United States utilities as set out in Registered Public Utility Holding Companies and Internationalization, Release No. 35-27110, 64 Fed. Reg. 71341 (December 21, 1999) (the "Concept Release").
As the Commission has recognized in the Concept Release, the Holding Company Act neither prohibits nor expressly restricts foreign acquisitions of interests in U.S. utilities or utility holding companies, and indeed, this did not appear to be a Congressional concern in 1935.1 GPU agrees that there is no apparent statutory basis under the Holding Company Act for the Commission to bar such acquisitions, and does not suggest that it would be appropriate or in the best interests of consumers, investors or the industry at large, for the Commission to establish material barriers to foreign ownership. At the same time, however, GPU submits that, where as a result of an acquisition a foreign acquirer registers as a holding company under the Holding Company Act, the foreign holding company should, in general, be subject to all provisions of the Holding Company Act, including, in particular, with respect to its investments in financing and acquisitions of foreign utility companies ("FUCOs") and exempt wholesale generators ("EWGs"), to the same degree as domestic registered holding companies. In short, the Commission should not adopt any policy in this regard which would place foreign-based holding companies on other than a completely equal footing with its domestic counterparts under the Holding Company Act. To do so would provide foreign entities with a competitive advantage contrary to the Commission's statutory authority and sound regulatory policy.
GPU is an electric utility holding company registered under Section 5 of the Holding Company Act. Through its domestic electric utility subsidiaries -- Jersey Central Power & Light Company, Metropolitan Edison Company and Pennsylvania Electric Company (which collectively do business as GPU Energy)-- GPU services about 2 million customers in New Jersey and Pennsylvania. In addition, through its Midlands Electricity subsidiary in the United Kingdom and GPU Emdersa in Argentina, GPU serves another 2.65 million electric customers. GPU also owns and operates GPU PowerNet and GPU GasNet -- the electric and gas transmission utilities serving the State of Victoria, Australia. Other GPU subsidiaries include GPU Advanced Resources, Inc., GPU International, Inc., GPU Nuclear, Inc., GPU Service, Inc. and GPU Telcom Services, Inc. GPU's consolidated revenues were $4.8 billion and its total assets were $21.7 billion in 1999.
Since the passage of the Energy Policy Act of 1992, which, among other things, added the exemptive provisions of Sections 32 and 33 to the Holding Company Act, GPU has invested a total of $2 billion in FUCOs and an additional $141 million in foreign and domestic EWGs. As of December 31, 1999, GPU's total FUCO and EWG assets ($2.14 billion) represented approximately 10% of GPU's total consolidated assets. Despite these significant acquisitions, GPU's ability to make investments in FUCOs and EWGs has been constrained -- at times severely -- by restrictive provisions of Rule 53 under the Holding Company Act. Indeed, in November 1997, GPU found it necessary to seek Commission authorization (which GPU ultimately obtained) to increase its FUCO and EWG financing limit to 100% of consolidated retained earnings.2 Absent that Commission order, GPU would have incurred substantial additional financing expense in connection with its then pending acquisition of PowerNet from the State of Victoria, Australia. Moreover, and despite the continued growth in GPU's consolidated retained earnings, the limitation on FUCO and EWG investments imposed by the November 1997 Order and Rule 53 have from time to time hampered GPU's ability to make significant additional investments and have at times forced GPU to resort to unconventional, complicated and costly financing techniques. Thus, as a general proposition, the limited nature of the exemptions provided by Sections 32 and 33, as well as by Rule 58,3 continues to restrict the ability of GPU and other registered holding companies to acquire interests in utility and utility-related businesses.
In response to the specific items on which the Commission has requested comments in the Concept Release, GPU offers the following for the Commission's consideration.
1. General Policies of the Holding Company Act
In general, GPU does not believe that foreign registered holding companies, merely by virtue of their being foreign, are inconsistent with the Holding Company Act's policies. Thus, for example, effective regulation by the Commission and state regulatory agencies as well as investor and consumer protection can be assured to the same degree as with domestic registered holding companies. The Commission has direct regulatory authority over foreign registered holding companies4 and state commissions will likewise continue to exercise regulatory authority over their public utility subsidiaries providing retail service. There would seem to be no meaningful distinction between foreign and domestic registered holding companies in this regard.
In order to ensure that the interests of investors and consumers are properly protected as the Holding Company Act mandates, it may, however, be appropriate for the Commission to require that foreign registered holding companies own their U.S. public utility subsidiaries through an intermediate U.S. subholding company and agree that they will not seek to recover losses from non-U.S. utility operations through rates. We do not believe that this subholding company arrangement would unduly complicate the holding company's corporate structure; and any disadvantage of such complexity would be outweighed by the benefits of further insulating domestic utility operations, customers and investors from exposure to the risks of unregulated foreign activities.
Finally, we do not believe the Commission should automatically "grandfather" or otherwise routinely exempt any foreign or other non-utility interests currently owned by the foreign company from the aggregate investment test of Rule 53(a)(1).5 We see no basis under the Holding Company Act or regulations thereunder for the Commission to do so. The Commission's statutory obligations in this regard are clear; the Commission should make no distinctions in assessing acquisitions by domestic or foreign entities. Section 11 makes no such distinction and neither should the Commission.
In a series of recent merger related decisions involving to-be-registered holding companies, the Commission has made specific determinations as to whether the proposed retention of non-utility interests meets the requirements of Section 11(b)(1) of the Holding Company Act.6 At the same time, the Commission concluded in these cases that the applicant's existing investments in "energy-related companies", as defined in Rule 58, should be disregarded for purposes of calculating the dollar limitation under the rule on future such investments. The Commission based its conclusion on the fact that at the time these investments were made, the to-be-registered holding company was not subject to the restrictions of Section 11(b)(1).7
GPU submits that the Commission's conclusion in this regard, while perhaps appropriate with respect to Rule 58, should not be applied when considering the level of EWG and FUCO investments which may be made by foreign registered holding companies. The Commission has noted the important differences in the concerns addressed by Sections 32 and 33 and Rule 53, on the one hand, and Rule 58, on the other hand.
With respect to investments in "energy-related companies" pursuant to Rule 58, the Commission pointed out in its release adopting the rule8 that the rule was designed under Section 9(c)(3) to permit the acquisition of interests in energy-related businesses which are "not so material as to depart from the statutory concept of transactions in the ordinary course of business...."9 Contrasting the Rule 58 investment limitations to those under Rule 53, the Commission further noted that the potential risks of EWG and FUCO investments could not be accurately predicted and could conceivably be significant. The Commission therefore concluded that:
the level of retained earnings, which is directly sensitive to losses, was a more appropriate standard against which to measure [EWG and FUCO] investments. In contrast, investments under rule 58 are deemed to be appropriate within the ordinary course of business of registered systems and consistent with the protected interest under the Act. The risks are more predictable and presumably more limited.10
Finally, and perhaps most significantly, in adopting Rule 58, the Commission specifically excluded from the calculation of "aggregate investment" any investment made by a registered holding company system prior to the adoption of the rule.11
These orders "grandfathering" investments in "energy-related companies" by to-be-registered holding companies from the Rule 58 aggregate investment calculation are therefore entirely consistent with the rule itself and the treatment accorded domestic registered holding company systems at the time Rule 58 was adopted.
Regarding FUCO and EWG investments, however, the Commission's statutory mandates under Sections 32 and 33 are quite different than under Section 9(c)(3). Accordingly, GPU believes that while "grandfathering" investments made prior to Rule 58's adoption is appropriate, the Commission should not accord similar treatment under Rule 53 to existing foreign investments of to-be-registered foreign holding companies. Section 32(h)(6) requires the Commission to make 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; such regulations shall ensure that the action shall not have an adverse impact on any subsidiary or its customers, or on the ability of state commissions to protect such subsidiary or customers.
Similarly, Section 33(c)(1) provides, with respect to financing investments in FUCO's, that the Commission shall adopt rules:
which shall provide for the protection of the customers of a public utility company which is an associate company of a foreign utility company and the maintenance of the financial integrity of the registered holding company system.
As the Commission has acknowledged, "investments in FUCO's and foreign EWGs can pose risks that do not arise in the domestic electric utility industry," including political and economic risks not present with respect to domestic investments.12 For example, the Commission, in the November 1997 Order, required that GPU adopt policies and procedures to mitigate the risks inherent in foreign investments, such as "country specific risks relating to political and economic conditions". The Commission has the statutory obligation under Sections 32 and 33 to consider whether investments in EWGs and FUCOs would have a substantial adverse impact on the financial integrity of the registered holding company system. Moreover, the economic, political and other risks associated with foreign investments require that the Commission take all EWG and FUCO investments by registered holding companies -- whether foreign or domestic -- into account in calculating the investment limitation under Rule 53.
2. Section 11
We would expect that foreign companies can, depending upon the facts and circumstances, demonstrate the types of direct and indirect benefits of acquiring a domestic utility which would enable the Commission to make the affirmative findings required by Section 10(c)(2) in a particular case. That determination, however, should be left to the facts of a particular transaction; we see no reason why the Commission should predetermine whether a foreign company's proposed utility acquisition - merely by virtue of the foreign nature of the acquirer - satisfies the Section 10(c)(2) standards.
With the use of a domestic subholding company structure, the advantages of localized management might more readily be assured. The mere fact that the ultimate parent holding company is foreign-based does not, perforce, mean that domestic utility management must be foreign as well. Large multistate domestic registered holding companies may have corporate headquarters distant from at least some of their utility subsidiaries, yet they are able to maintain sufficiently localized management.13 We suspect that foreign based holding companies would likewise be able to meet this test.
Section 33 expressly exempts transactions by FUCOs from all provisions of the Holding Company Act.14 Thus, Section 33 places no restriction or limitation on a FUCO's sale of securities15 or its acquisition of securities or interests in any other business.16 Indeed, as the Commission itself notes in the Concept Release, to eliminate any doubt whatsoever, Congress provided in Section 33(c)(2) that ownership of a FUCO is "consistent with the operation of a single integrated public utility system within the meaning of section 11; and reasonably incidental, or economically necessary or appropriate, to the operations of an integrated public utility system, within the meaning of section 11."17
In light of the clear exemption which Section 33 provides, we see no statutory basis for the Commission to read this provision out of the Holding Company Act by prohibiting FUCOs from acquiring or retaining non-utility businesses. Indeed, FUCOs acquired by domestic registered holding companies have been able not only to retain existing non-utility foreign business activities but also to acquire additional such foreign businesses.
3. Other Standards for Review
In general, GPU does not believe that the Commission should regard the foreign nature of an acquirer as raising any particular issues under Section 10 of the Holding Company Act. To the extent a given proposed acquisition may raise specific issues, the Commission can certainly address those issues on a case by case basis.
4. Substantive Regulation of Foreign Holding Companies
Similarly, GPU does not believe the foreign nature of an acquirer should impact the Commission's substantive regulation under the Holding Company Act. While FUCOs may, indeed, issue and acquire securities without Commission authorization, the same issues exist with respect to FUCOs owned by either foreign or domestic registered holding companies.18 In this regard, as noted above, GPU believes that the Commission should not "grandfather" or otherwise exempt foreign holding companies from Rule 53 or Rule 54. The Commission may, of course, authorize FUCO and EWG financing in excess of the 50% "partial safe harbor" limitation of Rule 53, as it has for a number of domestic registered holding companies, including GPU.19 Yet, the Commission should do so only by specific order and upon an appropriate demonstration that the applicant's request satisfies the statutory requirements of the Holding Company Act. Moreover, for the reasons expressed above, GPU does not believe it appropriate for the Commission to exclude from the Rule 53 calculation FUCO and EWG investments made by foreign holding companies prior to their registration under the Holding Company Act.
5. Accounts and Records
GPU believes that the Holding Company Act provides the Commission with ample jurisdiction over the books and records of registered holding company systems that should apply with equal force to foreign holding company systems.20 To the extent, if any, that the Commission were to encounter difficulty in obtaining information from foreign companies, the Commission could, we submit, impose information access and reporting requirements on foreign companies in connection with their registration under the Holding Company Act.
6. Other Issues
In GPU's view, the Commission could properly consider the interests of national security in exercising its jurisdiction under Section 10 of the Holding Company Act to assess the effect of a proposed acquisition on investors and consumers.21 Nevertheless, as noted above, GPU believes that the Commission must act in a non-discriminatory manner when reviewing proposed utility acquisitions by foreign companies. In GPU's experience, foreign governments have acted in an even- handed manner when reviewing proposed U.S. utility acquisitions of foreign utilities. Were the Commission to do otherwise, it would discourage the free flow of foreign investment capital, resources and expertise into the U.S. and might lead to retaliatory action by foreign governments or regulatory authorities.
While proposed acquisitions of U.S. utilities by foreign companies do raise unique issues for Commission consideration, GPU does not believe that the Commission should erect significant barriers to foreign investment in the U.S. energy sector. At the same time, however, it is GPU's position that in approving such acquisitions, the Commission should not automatically "grandfather" or otherwise permit foreign companies to retain existing investments in FUCOs or EWGs beyond the limitations of Rule 53. In order to retain such investments and make additional investments, the foreign acquirer, like any U.S. acquirer, should be required to demonstrate that retaining such investments and making future such investments beyond the Rule's safe harbor limitations is consistent with the applicable standards of the Holding Company Act. Foreign owners should not be entitled to any special status or competitive advantage relative to their domestic counterparts once they register and become subject to Commission jurisdiction. The Commission's expressed concerns regarding the potential effect of FUCO and EWG investments on the holding company's capitalization and utility customers, and the exposure to political and economic risks, apply with no less (and perhaps greater) force to foreign holding companies.
Very truly yours,
/s/ Douglas E. Davidson
Douglas E. Davidson
1 Concept Release at p. 71343.
2 GPU, Inc., et al., Release No. 35-26779 (November 17, 1997) ("November 1997 Order"). Rule 53 under the Holding Company Act provides a "partial safe harbor" for registered holding companies to finance investments in FUCOs and EWGs up to 50% of their "consolidated retained earnings", provided that all of the other conditions of the rule are satisfied.
3 Rule 58 under the Holding Company Act exempts from Section 9 of the Holding Company Act the acquisition of securities of specified domestic "energy- related companies".
4 As noted in the Concept Release, the Holding Company Act does not explicitly require that a registered holding company be organized under U.S. law. Concept Release at p. 71343.
5 See Concept Release at p. 71344.
6 See, e.g., Dominion Resources, Inc., where the Commission concluded that "DRI's existing investments in these activities, as of the date of consummation of the [m]ergers, should be disregarded for purposes of calculating the dollar limitation on investment in energy-related companies under rule 58." Release No. 35-27113 (December 15, 1999). See also WPL Holdings, Inc., et al., Release No. 35-26856 (April 14, 1998); Conectiv, Inc., Release No. 35-26832 (February 25, 1998); Ameren Corporation, Release No. 35-26809 (December 30, 1997); New Century Energies, Inc., Release No. 35-26748 (August 1, 1997).
8 Release No. 35-26667 (February 14, 1997).
12 November 1997 Order.
13 See, e.g., Conectiv; Inc., et al., Release No. 35-26832 (February 25, 1998); New Century Energies, Inc., et al., Release No. 35-26750 (August 1, 1997).
14 See Section 33(a)(1).
15 See Section 6(a).
16 See Section 9(a).
17 Concept Release at p. 71344.
18 And, as the Commission notes in the Concept Release, U.S. registeredholding companies have acquired a substantial amount of foreign utility assets. Concept Release at p. 71342.
19 See, e.g., November 1997 Order; American Electric Power Company Inc. et al., Release No. 35-26864 (April 27, 1998); Central and South West Corporation, et al., Release No. 35-26653 (January 24, 1997); and The Southern Company, et al., Release No. 26501 (April 1, 1996).
20 See Section 15 of the Holding Company Act and Rule 26 thereunder.
21 Section 10, for example, requires the Commission to determine if an acquisition is "in the public interest".