BEFORE THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Registered Public Utility                  |               File No. S7-30-99
Holding Companies                          |
and Internationalization                   |
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Joint Response of The National Grid Group Plc and New England Electric System to the Concept Release on Registered Public Utility Holding Companies and Internationalization

I. Introduction to National Grid/NEES Comments.

The National Grid Group plc ("National Grid") and the New England Electric System ("NEES") are pleased to submit these comments in response to the Commission's release on Registered Public Utility Holding Companies and Internationalization (the "Concept Release") under the Public Utility Holding Company Act of 1935 (the "1935 Act" or "Act"). The comments respond in three ways to the issues raised in the Concept Release. First, the comments consider the legal and policy concerns raised by the Commission within the framework of the Act. Second, they suggest and discuss specific measures to address these concerns. Third, as the Concept Release notes, many of the issues raised in the Concept Release are present in the applications filed by National Grid and NEES.1 Accordingly, the comments cite various aspects of the National Grid/NEES filings with the hope and belief that they may serve as examples of how these issues may be successfully resolved.

The Concept Release responds to the enormous changes that have taken place in the utility industry in the past several years. Spurred by the passage of the Energy Policy Act of 1992 ("Energy Policy Act"), the energy business has become increasingly global. In the pastdecade, vast sums of money have been invested by U.S. utility companies in offshore utility projects. In the United Kingdom alone, U.S. companies have invested more than $30 billion.2 Seven of the fifteen U.K. regional electricity distribution companies are wholly or partially owned by U.S. utility companies.3 Not surprisingly, just as U.S. companies have looked offshore for utility investment opportunities, foreign companies have taken an interest in U.S. utility companies; a few of these, including National Grid, are now asking the Commission to permit access to U.S. energy markets.

Foreign ownership can deliver enormous benefits to U.S. consumers, investors and the public as foreign owners infuse new capital into U.S. utilities and bring important experience gained operating in competitive energy markets. The advantages of such participation can be dramatic. The restructuring of the electric industry in the United Kingdom, including the participation by U.S. utilities, has resulted in a decrease of 15 to 25% in the price of electricity in real terms, depending on customer class. Indeed, in approving the National Grid/NEES merger, Chairman Hoecker of the Federal Energy Regulatory Commission expressed hope "that the acquiring companies can bring to our electricity markets the benefits and experiences of the restructuring process in Great Britain, including how to avoid some of the pitfalls of that experience."4

The challenge posed by the Concept Release, then, is how best to secure these benefits while ensuring the continued protection of U.S. interests. Following the Commission'slead, these comments analyze cross-border transactions in view of the purposes and provisions of the Act. The comments are organized under the following major topics: General Policies of the Act; Foreign Utility Companies and Section 11 of the Act; Standards for Reviewing Foreign Acquisitions; and Ongoing Regulation of Foreign Holding Companies.

II. Properly Conditioned, Foreign Ownership Is Consistent With the General Policies of the Act.

The Act was intended to address a variety of problems presented by holding company ownership of local public utilities. Prior to the passage of the Act, inadequate disclosure made it difficult for investors to appraise the financial position or earning power of the issuer. Excessive debt and abusive affiliate transactions tended to inflate costs and overstate the rates of local utilities, and constitutional doctrines that limited the reach of economic regulation frustrated states' efforts to respond to these problems.

The 1935 Act provides a two-pronged approach to these issues. Under the Act, holding companies with utility operations that are largely confined to a single state, and therefore presumed to be susceptible to effective state regulation, are exempted from the Act. In contrast, holding companies with multistate operations are generally required to register with the Commission and comply with a comprehensive framework of federal regulation under the 1935 Act.

Holding company regulation has traditionally involved direct jurisdiction over domestic holding companies, whether absolute, as in the case of a registered holding company, or conditional, as in the ability of the Commission to terminate the exemption of an exempt holding company. Until 1994, the Commission had not addressed the application of these approaches to foreign ownership of U.S. utilities. In its landmark Gaz Metropolitain decision,however, the Commission determined that -- on the facts of that particular matter -- foreign ownership was not detrimental to the public interest or the interest of investors or consumers, the "protected interests" under the Act.5

Gaz Metropolitain involved an exempt foreign holding company with small, single-state U.S. utility operations. As noted above, in the case of single-state utility operations, there is a presumption as to the adequacy of state regulation and a corresponding need for little, if any, holding company regulation.

The Concept Release explores the further question, namely, what happens when the foreign parent acquires a system with utility operations in multiple states. As noted, in that circumstance, the Act represents a congressional determination that certain federal protections are necessary to safeguard the protected interests. The Concept Release seeks comment on the adequacy of these protections when the parent is a foreign registered holding company. Specifically, the Concept Release asks whether foreign registered holding companies, by virtue of being foreign, are inconsistent with the Act's policies. In addition, the Concept Release focuses on the possible effect of foreign ownership on Commission and state regulation and the protection of consumers and investors.

1. Safeguards to Ensure Effective Regulation and Consumer and Investor Protection

The Act does not distinguish between holding companies organized in the U.S. and those organized abroad. Thus, the policies and provisions of the Act apply equally to foreign or domestic registered holding companies. In practice, however, in considering applications involving foreign acquisitions of U.S. utilities, there are a number of safeguards that theCommission can implement to ensure effective regulation and consumer and investor protection. They include:

  • Registration of the foreign parent as a holding company under the Act:

    Registration as a holding company subjects the foreign parent to full regulation under the Act and assures that consumers, investors and the public interest are not adversely affected by unsound financial structures and abusive affiliate transactions. The structural separation of the U.S. utility and the FUCO operations of the registered foreign holding company further allows for greater clarity in managing financial arrangements among system companies and enhances the ability of regulators to monitor the financial soundness of the system.

  • Registration, as well, of a U.S. holding company in the chain of ownership:

    Registration of a U.S. holding company in the chain of ownership assures that the Commission will have complete jurisdiction over an entity located in the United States.

  • Appointment of an agent in the U.S. for service of process:

    The appointment of an agent in the U.S. for service of process is a safeguard that assures that the Commission will have access to the non-U.S. resident officers and directors of a foreign registered holding company as needed to enforce the provisions of the laws administered by the Commission.

  • Access to books and records:

    Full access to books and records allows the Commission to investigate any potential violations of the Act and to monitor the financial soundness of a foreign registrant.

  • Consultation with other regulators including the state regulatory commissions, the Federal Energy Regulatory Commission ("FERC"), the Department of Justice ("DOJ"), the Nuclear Regulatory Commission ("NRC"), and agencies with particular concern for foreign investment in critical industries:

    The Commission has made considerable effort in recent years to solicit input from other regulators in its implementation of the Act. When other regulators, for example state regulatory commissions and the FERC, also review a transaction from the perspective of their particular area of expertise and responsibility, the Commission can look to the work of those regulators for assistance in its ultimate goal of safeguarding the public interest and the interest of investors and consumers.

    Finally, the Commission has expertise that is not duplicated by the other energy regulators with respect to investor protection. The Commission has extensive experience with foreign issuers. Through its work on international issues the Commission has become expert in assuring the protection of U.S. investors while opening U.S. markets to foreign issuers.6

    The Commission has also taken the lead in actively promoting international cooperation in the global financial marketplace. Working closely with finance ministers and central bank governors from around the world, the Commission has improved financial stability, promoted capital raising and enhanced information sharing. Consequently, the participation of foreign companies in the U.S. markets has continued to grow. During 1998, for example, approximately 160 foreign companies from 34 countries entered the U.S. market for the first time, and public offerings filed by foreign companies totaled over $170 billion. In 1998, there were over 1,100 foreign companies from 56 countries filing reports with the Commission.7

    For both foreign and domestic companies, therefore, disclosure under the Securities Act of 1933 and the Securities Exchange Act of 1934 provides added protection for investors in utility and utility holding company securities.8 Investor protection is also provided by the substantive and procedural requirements of state corporate law. Under state corporate law, mergers generally require the approval of the shareholders of the acquired company.

    To summarize, although no one single measure may itself be enough, the various measures work well and substantially together to ensure that consumers and investors enjoy the same degree of protection that they would with a domestic parent.

    2. The Safeguards as Applied to National Grid

    The operations of these various protections is illustrated by the National Grid/NEES transaction. Upon completion of the merger, National Grid and each of its subsidiary holding companies in the NEES ownership chain will register under Section 5 of the Act and fully comply with the requirements of the Act. NEES is, and post-acquisition will remain, a registered holding company subject to the full jurisdiction of the Commission under the Act. The structure for the National Grid/NEES transaction maintains the separate registered holding company structure of NEES post-merger and places all existing FUCO interests under a first-tier subsidiary of National Grid.

    In connection with its ADR listing on the New York Stock Exchange, National Grid will file periodic reports under the Securities Exchange Act of 1934 and be subject to the Commission's jurisdiction in that regard. As a company listed on a major exchange, National Grid will also be followed by analysts here and elsewhere around the world and, ultimately, will be accountable to the marketplace for its performance. In addition, the adequacy of disclosure in connection with the NEES proxy solicitation and the National Grid ADR program have been reviewed by this Commission.

    National Grid of course has committed to make its books and records available to the Commission, upon request, and officers and directors of National Grid that are not U.S. residents will designate U.S. agents for service of process, thereby assuring the Commission's jurisdiction over National Grid.

    Finally, in the National Grid/NEES matter, the transaction has been reviewed by regulators who, with the Commission, share responsibility for protecting consumer interests (the state commissions and the FERC), protecting U.S. energy markets (the DOJ, FERC and theNRC), and protecting national security interests (the Committee on Foreign Investment in the United States ("CFIUS") and the NRC). These regulators have determined that their jurisdictional concerns about foreign ownership have been satisfied and, in some cases, they identified specific and important benefits to their constituents from the merger.

    The affected state commissions, for example, have either issued certification letters or expressly approved the merger.9 The Massachusetts Department of Telecommunications and Energy and the Rhode Island Public Utility Commission issued certification letters, and the Connecticut Department of Public Utility Control, the New Hampshire Public Utilities Commission ("NHPUC") and the Vermont Public Service Board ("VPSB") issued orders approving the acquisition. These latter regulators commented extensively on the benefits that may be expected from National Grid's ownership of NEES. Their comments, while specific to the National Grid/NEES matter, identify important and specific factors that regulators should consider in finding in favor of a particular merger. The NHPUC, for example, found that in the National Grid/NEES transaction, which involves transmission companies, National Grid:

    possesses considerable technical expertise in the planning and operation of transmission systems. NGG has a record of improving maintenance programming, introducing improvements to the transmission system, interconnecting new facilities and reducing transmission costs to customers inGreat Britain when the company took over for the state-owned transmission system at the time of that nation's electric industry restructuring . . . NGG brings experience in managing a transmission system in a competitive market. The Commission believes that this experience may assist ISO New England, which operates the grid in our region, as well as the New England states themselves as each implements competition in the regional power market.10

    The VPSB concluded: "The merger with National Grid will enhance NEES companies' access to financial and technical resources which should allow them to maintain and improve their service and operations."11 The VPSB also found that the merger will give NEES strong operational cash flow and enhanced ability to attract capital, allowing it "the possibility of funding its capital expenditures, including transmission grid enhancements, at reduced cost."12

    The FERC's views are also obviously of critical importance in addressing a merger involving a foreign owner. In the National Grid/NEES transaction, for example, the FERC, in applying its Merger Policy Statement found that there would be no adverse effects on rates, FERC jurisdiction or state regulation, stating that "[t]here is no indication that any state lacks authority to regulate this merger and no state has raised any concern about the effect on regulation."13 The FERC also highlighted another factor of significance to regulators inassessing mergers involving foreign companies: it noted that National Grid agreed to make available, upon request by the FERC, all of its publicly available financial information and related books and records as well as all information necessary to support the pricing for the sales of goods and services between the National Grid companies and the NEES companies.14

    Concerning investor interests, National Grid's Form 20-F ADR registration and New York Stock Exchange listing provides the kind of disclosure and transparency that the Commission has found appropriate to protect the interests of U.S. investors in the case of foreign issuers. NEES shareholders will receive cash for their stock. There will be no public NEES security-holders after the transaction is consummated. To the extent there is a carryover of debt at the NEES subsidiary level, the interests of the public bondholders will be further protected by the dividend and capitalization ratio commitments that National Grid and NEES have made for the protection of consumers.

    The Commission has noted in a number of matters that its approval does not guarantee the financial success of a given venture.15 Its work instead is directed to ensuring that, regardless of the outcome, there will be effective regulation and protection of the interests of consumers, investors and the public. Again, while no one measure may be sufficient, thecombination of the above measures is intended to provide the maximum protection for these interests, consistent with the operation of a free and competitive market.

    III. The Use of the FUCO Exemption by Foreign Registered Holding Companies Is Consistent With Section 11 of the Act.

    The Concept Release notes that Section 11 has been described as the "very heart" of the Act.16 Section 11(b)(1) generally limits a registered holding company system to "a single, integrated public-utility system, and to such other businesses as are reasonably incidental, or economically necessary or appropriate to the operations of such integrated public-utility system."17 Section 11(b)(2) further directs the Commission 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.

    Section 11 does not, however, stand on its own. Since 1935, Congress has enacted a number of statutes which affect the requirements of that section.18 Of principal importance here, the Energy Policy Act amended the 1935 Act to create a new Section 33, "Treatment of Foreign Utility Companies." Section 33 provides, among other things, that a foreign utility company ("FUCO"):

    shall be exempt from all provisions of the Act, except as otherwise provided under this section, and shall not, for any purpose under this Act, be deemed to be apublic utility company under Section 2(a)(5), notwithstanding that the foreign utility company may be a subsidiary company, an affiliate, or an associate company of a holding company or of a public utility company.19

    Section 33(a)(3) further provides that:

    Any interest in the business of one or more foreign utility companies . . . shall for all purposes of this Act, be considered to be --

    (A) Consistent with the operation of a single integrated public utility system, within the meaning of Section 11; and

    (B) Reasonably incidental, or economically necessary or appropriate, to the operations of an integrated public utility system, within the meaning of Section 11.

    The effect of these provisions has been to permit U.S. registered holding companies to acquire foreign utility operations without the need to establish that the foreign and domestic operations are, among other things, capable of physical interconnection. The Concept Release notes that a foreign holding company could similarly seek to rely on Section 33 to qualify its foreign utility operations as FUCOs, thus permitting the foreign holding company to acquire a U.S. utility without the need to establish that the foreign and domestic operations are, among other things, capable of physical interconnection.

    The Concept Release asks whether Congress intended that foreign entities would be able to rely on Section 33 in connection with the acquisition of U.S. utilities. Although Congress clearly contemplated foreign ownership of exempt wholesale generators under Section 32, the question of foreign ownership of U.S. retail utilities apparently did not arise in the discussions that resulted in enactment of Section 33. In other contexts, the Commission has found that the Act's silence should not be read to preclude foreign ownership of U.S. utilities.

    In Gaz Metropolitain, Inc., the Commission found that foreign acquisitions of U.S. utility companies are permissible under the Act, notwithstanding the Act's silence on the question of foreign ownership.20 In that matter, the Commission staff had opposed the acquisition by a Canadian entity of a Vermont gas utility company, in part because Congress had not contemplated foreign ownership of U.S. utilities when it drafted the Act in 1935. The staff argued that additional legislation was required to address the question of cross-border transactions. The Commission rejected the staff's argument, stating:

    We do not agree with the staff's analysis. The Act contains no prohibition against foreign utilities as such. Indeed, nothing in the Act prevents a foreign company that does not own or control public utility or holding company securities from acquiring the securities of a domestic public utility company.21

    The emphasis, the Commission suggested, should instead be on whether the proposed transaction is detrimental to the public interest or the interest of investors or consumers or would lead to a recurrence of the problems that the Act was intended to address.

    The Gaz Metropolitain analysis, focusing on the protected interests under the Act, is confirmed by the Commission's recent AES decision.22 In that matter, AES Corporation ("AES"), a U.S.-based independent power project developer, sought to acquire CILCORP, a traditional gas and electric retail utility. Although AES is a domestic corporation, the company derives more than 80% of its revenues, nearly $2 billion in 1998, from exempt foreign utility operations. Nonetheless, on the facts of that matter, the Commission was able to conclude that large foreign holdings were not inconsistent with the ownership of domestic utility companies,and that the grant of an exemption to AES was consistent with the public interest and the interest of investors and consumers.

    Although the Gaz Metropolitain and AES cases involved exempt foreign holding companies, the lack of registration should not affect the validity of the underlying analysis with respect to the protected interests. On the contrary, the Commission will have considerably more authority over the registered foreign holding companies that are the subject of the Concept Release to assure that transactions and activities of these systems comply with the Act on an ongoing basis.

    1. With Appropriate Safeguards, U.S. Interests Can Be Protected From Risks That May Be Associated With FUCOs.

    The Concept Release asks whether the presence of large FUCO operations in a foreign registered holding company system exposes U.S. utility customers to undue risk. As the Commission noted in its release adopting rules under the Energy Policy Act, there is an inherent tension between the drive toward a competitive energy market and the demand for effective consumer protection.23 The Commission's continued jurisdiction under the Act should limit any undue risks associated with foreign ownership. It is important to remember that the Commission has nearly 30 years of experience dealing with the issues presented by investments in foreign activities and the measures necessary to protect U.S. ratepayers from any adverse effects that might be associated with those activities.

    Beginning in 1971, the Commission authorized a series of investments in foreign utility and nonutility operations. On the nonutility side, registered holding companies have beenauthorized to engage in the marketing and trading of energy commodities in Canada;24 energy management, consulting services and related financings;25 exploration for and production of natural gas;26 and construction, ownership and operation of gas pipelines.27 In addition, even prior to the Energy Policy Act, the Commission authorized U.S. holding companies to acquire foreign utility operations.28 In those orders, the Commission sought to protect the interests of domestic utility consumers and investors while permitting the acquisition of foreign utility operations.

    The Commission has created standards, incorporated in Rule 53, which are intended to ensure that foreign utility interests will not have a substantial adverse impact upon the financial integrity of the registered holding company system and, further, will not have anadverse impact on any utility subsidiary of the registered holding company, or its customers, or on the ability of state commissions to protect such subsidiaries or customers. The Commission has further developed, in a series of cases, the conditions under which it will grant an exception from the requirements of Rule 53.29 On a going-forward basis, foreign registered holding companies will be subject to these requirements, and consumer interests will be protected accordingly.

    2. Pre-existing Foreign Utility Interests Should Generally Be Grandfathered for Purposes of Rule 53.

    The treatment of pre-existing FUCO interests is particularly important to foreign entities operating in the U.S. Because these operations represent the historical core business of the foreign holding company, the size of these investments will likely exceed 50% of consolidated retained earnings of the holding company, the limit on the aggregate investment safe harbor under Rule 53, absent a specific order of the Commission. A number of parties, including National Grid and Scottish Power, have suggested that these preexisting interests should not count toward the limit. Instead, they ask the Commission to grandfather the interests solely in determining aggregate investment for purposes of Rule 53. There is an equitable argument that existing FUCO investments are sunk costs which were not funded with the proceeds from U.S. utility operations and should not be counted toward the cap on aggregateinvestment. The Commission has applied a similar logic in grandfathering investments made in energy-related companies before an entity became part of a registered system.30

    Resolution of the equitable concerns does not, however, end the Commission's inquiry. Regardless of whether they are grandfathered for purposes of Rule 53, pre-registration FUCO investments are relevant to the extent that they may affect the financial soundness of the registered holding company system. In other words, overall financial soundness is key, not the size of a registered holding company's FUCO portfolio. The Commission must consider whether, as a result of its FUCO interests, a foreign applicant will be financially sound at the time of registration.31 Thereafter, all of a registered holding company's interests, both FUCO and domestic, should be considered for purposes of determining whether additional EWG and FUCO investment authority is appropriate. This part of the inquiry goes to the Commission's core expertise, developed in the course of its administration of the Act.

    Among other things, the Commission could look to:

  • Financial soundness:

    The Commission may require a foreign acquirer to demonstrate that it has a sound capital structure and adequate ability to support its financial obligations through the application of capitalization ratios, debt coverage ratios, minimum credit ratings and other financial measures.

  • Dividend limitations:

    The Commission may impose limitations of the level of dividends payable by U.S. utility subsidiaries of foreign registered holding companies to prevent the impairment of utility subsidiaries' capital to the detriment of consumers.

  • Corporate structural separations:

    The Commission may require the organization of foreign investments and U.S. utility properties in separate subsidiaries to minimize the potential for adverse financial performance in the foreign investments affecting the U.S. utilities.

  • Intellectual capital:

    The Commission may restrict the number of U.S. utility employees that may be assigned to foreign operations to prevent the loss of skilled workers in the domestic utility operations.

  • Foreign investment evaluation procedures:

    The Commission may require a showing that the foreign acquirer's management applies appropriate due diligence procedures in the selection of foreign investments and that its management of foreign operations has been effective.

  • Reporting:

    The Commission may require reports on the foreign registered holding company's FUCO activities to monitor their performance and their effect on the financial soundness of the holding company system.

    The National Grid/NEES filings offer an example of how the Commission staff has assured that each of these standards has been addressed in the National Grid/NEES transaction. To assure that it remains financially sound, National Grid has committed to abide byvarious financial measures addressing: (1) capitalization at the National Grid, NEES and U.S. utility subsidiary company levels; (2) debt ratings, and; (3) debt service capability.

    Although every potential acquirer will exhibit particular financial strengths and weaknesses that will require the Commission's case-by-case analysis, perhaps the best overall expression of sound capitalization and low credit risk is a high credit rating. National Grid's current AA rating by Standard & Poor's would be among the highest ratings issued to U.S. investor-owned electric utilities.32 While National Grid's credit rating is now on a "credit watch," the major rating agencies have indicated that the company will retain at least an A rating.33

    It is important to note that none of the NEES utility subsidiaries will provide financing or credit support for any FUCO in which National Grid holds an interest. National Grid has also committed to limit the dividends payed by the NEES utility subsidiaries to a specific percentage of earnings to preserve appropriate levels of cash and adequate operating capital. In addition, National Grid has undertaken that it will not seek recovery in retail rates for any failed investment in, or inadequate returns from, a FUCO investment.

    To further protect U.S. utility operations, National Grid has structurally separated its FUCO activities from the NEES Group and committed that it will limit the use of employees of the U.S. Utility Subsidiaries in FUCO operations. To ensure continued success in its new ventures, National Grid subjects all project proposals to stringent reviews that minimize the risksassociated with FUCO activities.34 Lastly, periodic reporting of National Grid's aggregate investment in EWGs and FUCOs and a description of new FUCO investments will allow the Commission to monitor National Grid's foreign activities on an ongoing basis.

    3. With Appropriate Safeguards, Nonutility Activities Are Properly Included Under the FUCO Exemption.

    Finally, a question has arisen concerning the use of the FUCO exemption to cover other nonutility interests. As a technical matter, Section 33 does not require a FUCO to be engaged exclusively in providing utility service. The FUCO definition differs in this regard from the definition of exempt wholesale generators and exempt telecommunications companies which are required by statute to be engaged "exclusively" in the subject activities. Again, there is a dearth of legislative history on Section 33 generally and none to explain the significance of this distinction. With that proviso, it does not seem unreasonable to conclude that Congress in Section 33 was attempting to accommodate the realities of foreign utility systems. Unlike EWGs, which are, by definition, special purpose generating entities, a FUCO can comprise a vertically-integrated utility system. As in the United States, these systems typically include certain "other" businesses. Indeed, a review of recent Forms U5S suggests that U.S. holding companies have indirectly acquired certain nonexempt interests in connection with their FUCO holdings.

    While the existence of these other businesses is consistent with Section 33 as a matter of law, they may raise potential issues for the Commission in view of its ongoing duty toensure the protection of the public interest and the interest of investors and consumers.35 With respect to nonutility interests generally, Section 11(b)(1) generally requires that "such other businesses . . . are reasonably incidental, or economically necessary or appropriate to the operations of [the] integrated public-utility system." As noted above, Section 33(c)(3), in turn, provides that FUCOs shall "for all purposes of this Act" be deemed to be "[r]easonably incidental, or economically necessary or appropriate, to the operations of an integrated public utility system, within the meaning of Section 11." One approach would be to require that foreign nonexempt nonutility interests establish the requisite "functional relationship" to either the U.S. integrated public-utility system or the FUCO utility interests.36

    To that end, the Commission should not find a FUCO's "other businesses" to be inconsistent with the policies and provisions of the Act, so long as: (i) the nonutility interests are functionally related to the utility business, whether foreign or domestic, in the same way domestic nonutility interests must be related to domestic utility operations, (ii) all direct or indirect investments in these businesses for which there is recourse, directly or indirectly, to the registered holding company will be counted toward "aggregate investment" for purposes of Rule 53, and (iii) there are appropriate safeguards, such as those described above, to protect theinterests of U.S. utility customers from the adverse effects, if any, that may be associated with the foreign operations.

    National Grid has implemented this approach. It has segregated all of its non-NEES interests under a newly-formed subsidiary, National Grid Holdings Limited ("National Grid Holdings") which will file a notification of FUCO status on Form U-57. Thereafter, National Grid Holdings and its subsidiary companies will claim the benefit of the FUCO exemption under Section 33(a)(1). At the same time, even though National Grid Holdings and its subsidiaries are not technically jurisdictional under the Act, National Grid is submitting information to establish that each of these entities would be retainable in its own right, consistent with Commission precedent.37 National Grid will count all post-merger "aggregate investment" in accordance with Rule 53 and, finally, as discussed elsewhere in these comments, National Grid has put into place the necessary safeguards to ensure the continued protection of U.S. investors and consumers.

    IV. The Standards for Reviewing Foreign Acquisitions Provide a Template for Ensuring the Continued Protection of the Public Interest and the Interest of Investors and Consumers.

    Section 10 sets forth the factors to be considered in the Commission's review of an acquisition. They include the potential anticompetitive effects of a utility acquisition, the adequacy of consideration, and the effect of the acquisition upon the system, the public interest and the interest of investors and consumers. In addition, the Commission cannot approve an acquisition that is "detrimental to carrying out the provisions of section 11." Further, the Commission must find that a proposed acquisition "serve[s] the public interest by tendingtowards the economical and efficient development of an integrated public-utility system." These standards assure that a proposed transaction is consistent with the public interest and the interest of investors and consumers. In the context of foreign registered holding companies, a transaction could present an additional concern focused on national security, which is discussed below.

    1. National Security Interests Generally

    Electric and gas utilities are of critical importance to the basic health, safety and economy of our communities. The Concept Release asks whether national security interests would be implicated by a foreign acquisition of a U.S. utility. In other words, do foreign acquirors pose a threat to the safety and welfare of the American public, either through control of the nation's energy infrastructure or because they may have access to sensitive information? In 1994, a local regulator addressed this point, stating:

    As local regulators, we are aware of the importance of the utility industry to the general economy and to national security. The utility industry is an important one, but foreign ownership ought not to pose a risk to national security. Most utility assets are stationary; they remain in place should a national emergency arise. As with most other industries (e.g., airlines, railroads and shipping), the federal government retains tremendous authority over operations of the utility grid in an emergency. Foreign ownership does not affect this authority.38

    Other federal regulators have express authority and means to protect national security interests. They include the NRC under the Atomic Energy Act of 1954 (where nuclear facilities are involved) and the CFIUS under the Exon-Florio Provision of the Defense Production Act of 1950 (in the case of cross-border transactions generally). Given the role of these other agencies, the Commission, after careful consideration, is entitled to take notice of the findings of these regulators in making its public-interest determination.

    2. NRC National Security Review

    Under the Atomic Energy Act, the NRC has authority to control foreign ownership, direct or indirect, of nuclear power generating facilities. Specifically, Sections 103d and 104d of the Atomic Energy Act and the implementing regulations found in 10 C.F.R. § 50.38 prohibit the issuance of commercial licenses for nuclear power plants to aliens or entities that the Commission knows or has reason to believe are owned, controlled, or dominated by foreign interests.39 The fundamental purpose of the NRC's authority is to safeguard national security and defense. In practical terms, the NRC has interpreted this mandate to allow foreign utilities to hold ownership interests in U.S. nuclear plants when it does not lead to foreign control or domination.40

    The NRC has published specific guidance on the application of its authority in its Standard Review Plan on Foreign Ownership ("Foreign Ownership SRP").41 The NRC guidance recognizes the international scope of the energy markets, with foreign utilities providing a source of capital and expertise for U.S. utilities in a restructured and competitive electric market. Under the Foreign Ownership SRP, an applicant for a license is considered to be foreign owned, controlled, or dominated whenever a foreign interest has the power, direct or indirect, whether exercised or not, to direct or decide matters affecting the management or operations of the applicant.42

    Where facts indicate that foreign ownership, control or domination may exist, the Foreign Ownership SRP still allows the NRC to issue a license if steps are taken to mitigate these factors - i.e., provide the means effectively to deny control or domination. Typically, to demonstrate that the mitigation is sufficient, the NRC will request that the applicant provide a "negation action plan." The NRC recommends the following measures to be included in the plan, as appropriate:

  • Modification or termination of loan agreements, contracts, and other understandings with foreign interests.

  • Diversification or reduction of foreign source income.

  • Demonstration of financial viability independent of foreign interests.

  • Elimination or resolution of problem debt.

  • Assignment of specific oversight duties and responsibilities to board members.

  • Adoption of special board resolutions.

    The approach used by the NRC provides protection for the nation's interests in national security and defense. At the same time, it is flexible and reasonable - thus avoiding inappropriate restrictions on the expansion of the global energy market.

    Although the NRC's fundamental mission of protecting public health and safety differs from the Commission's (i.e., protecting investors and consumers), a major purpose of the NRC's review of foreign ownership issues is to provide assurance that the nuclear plant licensee will have and maintain adequate resources to meet its financial obligations to ensure safe operation and decommissioning of the plant. The NRC's concern for financial assurance is similar to the Commission's public interest policy of promoting a soundly-capitalized utility industry.

    In connection with the National Grid/NEES transaction, New England Power Company ("NEP") , a NEES utility subsidiary company, was required to establish a Special Nuclear Committee that would have the "responsibility and exclusive authority to ensure . . . that the business and activities of NEP with respect to [the nuclear facilities] are at all times conducted in a manner consistent with the protection of the public health and safety and common defense and security of the United States."43 In addition, to address the NRC's concern that corporate restructuring can lead to a diminution of assets necessary for the safe operation and decommissioning of a licensee's nuclear power plant, the NRC required NEP to give the NRC acopy of any application to transfer from NEP to any affiliated company, electric utility facilities having a depreciated book value exceeding 10% of NEP's consolidated net utility plant.44

    3. CFIUS National Security Review

    The Exon-Florio Provision of the Defense Production Act of 1950 authorizes the President to suspend or prohibit any foreign acquisition, merger, or takeover of a U.S. corporation if the transaction is determined to threaten the national security of the United States. Before a transaction subject to Exon-Florio may be consummated, any CFIUS review and investigation must have terminated and the President of the United States must not have taken any of his authorized actions under Exon-Florio. The CFIUS, an inter-agency committee chaired by the Secretary of Treasury, on behalf of the President, determined under the Exon-Florio Provision that the National Grid/NEES transaction presented "no issues of national security sufficient to warrant an investigation under" the Exon-Florio Provision.45

    4. A Closed Door Policy Is Not An Option

    The Commission too is charged with protecting the public interest by promoting a financially sound U.S. utility industry. The Commission's role under the Act as financial and corporate regulator helps to ensure the continued health of the U.S. utility industry. Its ongoing authority with respect to registered holding companies, in particular, gives the Commission the means and the ability to address the specific circumstances of each foreign acquiror.

    An overly-restrictive interpretation of the Act could effectively close the electric and gas utility markets to foreign competition -- a result that other regulators have found would be ultimately detrimental to the public interest and the interest of investors and consumers. Global capital markets provide U.S. companies, including utilities, with an additional important and economical source of financing. Increasing the supply of investment capital for utilities will put downward pressure on its cost.46 In addition, the availability of capital may be even more important at this juncture in the history of the electric utility industry as utility asset ownership is reorganized and held by an increasing number of market participants in the transition to competition.

    Foreign acquirers of U.S. utility companies also could bring valuable skills and experience that would improve the operation of U.S. utilities and hasten the transition to competitive markets. National Grid is one of the world's first privatized grid operators and its transparent, non-discriminatory operation of the transmission grid is an essential feature of the deregulated electricity industry in England and Wales. National Grid is responsible for the real-time control of the transmission system and the daily dispatch of generating stations. It also administers the power pool settlement system and, as such, plays an important role in the development and maintenance of competitive energy markets.

    Together with the FERC and the states, the Commission's administration of the Act plays a crucial role in setting the atmosphere for competition in the U.S. The Commission should interpret and apply the Act to encourage participation and ownership by the highest number of qualified utility system operators, to promote the statutory goals of efficient and economical operation of utility systems for the benefit of consumers.

    The remarks of the FERC Commissioners at the meeting approving the National Grid/NEES transaction provide further insights into the FERC's views on foreign acquisitions. Both Chairman Hoecker and Commissioner Breathitt spoke to the appropriateness of these types of transactions:

    What's most striking in my estimation about these orders [National Grid/NEES and Scottish Power/PacifiCorp] is not that these mergers involve foreign acquisitions of domestic utilities but how these combinations can also meet our requirements for mergers that do not adversely affect competition or raise rates or impede U.S. domestic regulation."47

    * * * * *

    [T]here is a certain reciprocal nature to these acquisitions which I believe is appropriate. For several years, U.S. utilities have been acquiring foreign utility assets. In fact, since privatization of regional electric companies began in the United Kingdom, numerous U.S. companies have acquired utilities there. Combined purchases by U.S. utilities of regional electric companies in the U.K. exceed $30 billion, and this doesn't include the substantial purchases of independent power plants in the U.K. by U.S. companies. These two acquisitions show that America's door is also open to mergers of U.S. utilities with those in other countries.48

    The FERC struck a similar note in its press release:

    The transactions we approve today are evidence of the international character of modern energy markets. Our domestic utilities have been investing in foreign utilities for some time. Now, the shoe is on the other foot. Our analysis shows no anti-competitive harm from these mergers. And, as with consolidation in the business generally, these transactions offer the hope of greater efficiency, innovation, and improved customer services. Our bottom line is still to obtain net benefits for American consumers.49

    Finally, in the past, the Commission has taken notice of the relationship between the United States and the home country of the foreign acquiror. In support of its position in Gaz Metropolitain, for example, the Commission cited the North American Free Trade Agreement("NAFTA") and its role in reducing trade and investment barriers between the U.S. and Canada, as well as the Energy Policy Act which adopted Section 33 of the Act.50 With regard to the National Grid/NEES merger, the United States has a long-standing and open trading relationship with Great Britain.51

    As discussed elsewhere in these comments, the Commission may secure the benefits of foreign participation in the U.S. utility industry consistent with its administration of the Act by focusing on a few key safeguards: the financial soundness of the acquirer and the resulting holding company system; a corporate structure that isolates the U.S. utilities from foreign operations, and; a continued presence in and responsiveness to the communities served by the target utilities through localized management. These key themes, coupled with a recognition of the important role served by other federal and state regulators, should assure that foreign acquisitions will be in the public interest.

    5. Foreign Ownership Can be Implemented While Preserving the Advantages of Localized Management of U.S. Utility Operations.

    From the perspective of the U.S. consumer, the concern with foreign ownership is whether the local utility will continue to be run by people with local responsibilities and concern for the community that they serve. Foreign ownership can be fully consistent with the preservation of "the advantages of localized management, efficient operation, and the effectiveness of regulation" -- one of the key goals of the integration requirement under the Act.

    Many factors work together to preserve these advantages, including:

  • employing a significant majority of U.S. citizens in the utility subsidiaries and the U.S. holding company;

  • maintaining local headquarters for the U.S. system and regional offices;

  • maintaining continuity of management, and;

  • including U.S. citizens on the foreign registered holding company's board

    The National Grid/NEES transaction includes these elements and offers an example of how localized management, efficient operation and effective regulation can be preserved. Indeed, the NHPUC considered the effect of a foreign acquisition on local interests, noting that "the takeover of a local or regional public utility by a larger, more remotely-managed and distantly-headquartered company raises concerns about the successor company's ability to maintain contact with its customers and remain aware of, and responsive to, local issues" but concluded that "the merger will not have a negative effect on the local operation of [Granite State Electric Company's] transmission system or its customer service."52 The NHPUC also drew comfort from the conclusions of the CFIUS, stating that the CFIUS letter addressed any potential national security concerns regarding a non-domestic corporation owning part of the transmission grid.53

    V. On-going Commission Regulation of Foreign Registered Holding Companies will Ensure the Continued Protection of U.S. Interests.

    As noted previously, the Act applies equally to U.S. and foreign registered holding companies. The Commission's on-going administration of the Act, therefore, should be applied with a view towards maintaining a level playing field as among foreign and domestic registered holding companies. As explained above, this can be done most effectively through the maintenance of basic standards of financial soundness and free access to books and records.

    An undue focus on the size of the foreign investments held by foreign or domestic registered holding companies is not likely to be an especially useful means to measure the risks to U.S. interests. The magnitude of the risks that may be associated with FUCO investments is not simply a function of the size of the investments. Many factors affect risk including, management quality, political risks, market risks, and regulatory risks. High political risk, for example, can make a small investment in one country substantially riskier than a larger investment in a more politically stable country. Therefore, the Commission's view of the potential adverse effects of a foreign investments must be formed on a case-by-case basis.

    Protection of the interests of U.S. consumers is most directly accomplished by monitoring the capitalization of the utility subsidiaries of domestic and foreign registered holding companies. The Commission may impose restrictions on the level of dividends paid by a U.S. utility subsidiary to a registered holding company to prevent the inadequate capitalization of utility operations. Among the many other financial commitments made by National Grid and NEES, the companies agreed to limit the dividends paid by the utility subsidiaries to a specified percentage of their gross earnings.

    1. Meaningful Access to the Accounts and Records Helps to Ensure Effective Regulation of Foreign Registered Holding Companies.

    Access to books and records is important for the Commission to effectively monitor the financial conditions that it may place on foreign registered holding companies. The Concept Release asks whether foreign law imposes impediments to the Commission's access to books and records and its ability to inspect the foreign holding company and its subsidiaries.

    Under Sections 14 and 15 of the Act, the Commission has broad authority over reporting and the books, records and accounts of companies in a registered holding company system. Section 18 provides the Commission with discretionary authority to investigate any facts, conditions, practices, or matters as necessary or appropriate to determine whether any person has violated or is about to violate any provision of the Act. In the course of an investigation the Commission may subpoena witnesses and require the production of documents.54 Where a person refuses to obey a Commission subpoena, the Commission may seek a court order requiring the person to appear and produce records or give testimony.55

    Where significant books, records and personnel of a foreign registered holding company are located outside the U.S., the Commission is understandably concerned that its jurisdiction under the Act may not extend abroad. Voluntary submission to service of process can be used to address this problem. National Grid, for example, has agreed to file, and will cause each of its present and future directors and officers, who is not a resident of the United States, to file with the Commission irrevocable designation of the party's custodian as an agent in the United States to accept service of process in any suit, action or proceeding before the Commission or any appropriate court to enforce the provisions of the acts administered by the Commission.

    National Grid has also agreed to provide the Commission access to the books, records and financial statements, or copies thereof, of any of its subsidiary companies, as the Commission may request. In addition, National Grid, in consultation with the Commission staff, has developed and committed to provide various reports that will enable the Commission to continue to monitor, among other things, the financial soundness of the National Grid system, affiliate transactions and investments in foreign utility companies.

    One minor distinction between the regulation of U.S. and foreign registered holding companies under the Act goes to the format of financial reporting. While registered holding companies organized in the U.S. prepare their accounts in accordance with U.S. Generally Accepted Accounting Principles ("U.S. GAAP"), National Grid and the intermediate holding companies organized abroad will prepare and present their financial statements using the generally accepted accounting principles of their place of organization. This presentation is consistent with that required of National Grid in its capacity as a foreign private issuer. Briefly stated, under Form 20-F, National Grid must include a description of the material variations in the accounting principles, practices and methods used in preparing the financial statements from U.S. GAAP.56

    VI. Conclusion.

    Certain basic principles can be derived from the foregoing discussion. Any acquirer, foreign or domestic, should be financially sound. The Commission should determine that the capitalization, dividend policies and overall financial health of a new foreign registered holding company system does not pose a threat to the financial condition of U.S. operating utility subsidiary companies.

    The continued financial health of the U.S. operating utility subsidiaries can be made more secure with an appropriate corporate structure. Foreign operations should be segregated in separate subsidiaries, where possible, to avoid cross subsidization and adverse credit effects should the foreign operations experience financial trouble.

    A continued local management presence is also helpful to assure that the foreign registered holding company continues to be responsive to consumers and local regulators. Management and directors of the foreign registered holding company and the domestic operations should be accountable to local and U.S. public interests.

    Each foreign acquisition of a U.S. utility company is likely to involve unique circumstances requiring flexible interpretation and application of the standards of the Act. The Commission can accommodate the differences inherent in foreign registered holding companies while still protecting consumers, investors and the public interest. The Commission's broad authority under the Act should be used to secure the benefits that can flow from foreign acquisitions, not to place unnecessary obstacles in the way of foreign acquirers.

    Finally, the Commission has historically proceeded on a case-by-case basis until it developed sufficient familiarity with the issues to prescribe rules of general application.57 There is no reason to deviate from that practice in the context of foreign registered holding companies.

    Respectfully submitted,

    New England Electric System* The National Grid Group plc

    By, /s/ Cheryl A. LaFleur By, /s/ Fiona B. Smith

    Cheryl A. LaFleur
    Senior Vice President
    General Counsel

    Fiona B. Smith
    Company Secretary and
    General Counsel

    February 3, 2000

    *The name "New England Electric System" means the trustee or trustees for the time being (as trustee or trustees but not personally) under an agreement and declaration of trust dated January 2, 1926, as amended, which is hereby referred to, and a copy of which as amended has been filed with the Secretary of the Commonwealth of Massachusetts. Any agreement, obligation or liability made, entered into or incurred by or on behalf of New England Electric System binds only its trust estate, and no shareholder, director, trustee, officer or agent thereof assumes or shall be held to any liability therefor.

    Footnotes

    1 See SEC Forms U-1 filed by The National Grid Group plc and New England Electric System in File Nos. 70-9473 ("Merger Application") and 70-9519 ("Financing Application") for authorization for National Grid to acquire NEES and related registered holding company system financing authority.

    2 Transcript of Federal Energy Regulatory Commission Meeting, June 16, 1999 at 5 ("FERC Meeting Transcript").

    3 Edison Electric Institute, 1998 Financial Review at 13 ("Edison Electric Report").

    4 FERC Meeting Transcript at 6.

    5 Gaz Metropolitain, Inc., Holding Co. Act Release No. 26170 (Nov. 23, 1994).

    6 See, e.g., International Disclosure Standards, Securities Act Release No. 7637 (Feb. 2, 1999) ("[M]any of our initiatives for foreign issuers have had the goal of reducing barriers to cross-border offerings and listings in the United States. We have long believed that investors in the United States benefit when they have a wide range of investment choices, and we have sought to increase their investment opportunities in foreign companies while preserving the protections they have come to expect from the federal securities laws.").

    7 See U.S. Securities and Exchange Commission, 1998 Annual Report at 11-13.

    8 The Commission has previously found that investor interests are adequately protected by disclosure under the other federal securities laws. See The Southern Co., Holding Co. Act Release No. 25639 (Sept. 23, 1992). National Grid's American Depositary Receipts ("ADRs") are listed on the New York Stock Exchange.

    9 Under Section 10(f) of the Act, the Commission may not approve an acquisition unless it is satisfied that the applicant has complied with state laws. The majority of state commissions regulate utility mergers. See U.S. Securities and Exchange Commission, The Regulation of Public Utility Holding Companies at Appendix A (1995) ("1995 Report") (Summary of Responses to State Survey of Regulation of Public Utility Holding Companies). In the absence of state jurisdiction over mergers, the Commission's practice has been to encourage the applicants to request a certification from the affected state commission that it has the authority and resources necessary to protect ratepayers in matters such as rates, financings, affiliate transactions and the financial integrity of the operating utility within its state and additionally that the state commission intends to exercise that authority.

    10 New England Electric System, NHPUC Order No. 23,308 at 17 (Oct. 4, 1999) ("NHPUC Order") (emphasis added) (included as Exhibit D-5.3 to the Merger Application).

    11 Joint Petition of The National Grid Group plc and New England Power Company for approval of the indirect acquisition of a controlling interest in New England Power Company, VPSB Docket No. 6225 at 8 (June 15, 1999) (emphasis added) (included as Exhibit D-6.2 to the Merger Application).

    12 Id. at 10 (emphasis added).

    13 New England Power Co., 87 FERC ¶61,287 ("FERC Order") at 62,147 (1999) (emphasis added), applying Inquiry Concerning the Commission's Merger Policy Under the Federal Power Act; Policy Statement, Order No. 562, FERC Statutes and Regulations, ¶31,044 (1996), reconsideration denied, Order No. 592-A, 79 FERC ¶61,321 (1997) ("Merger Policy Statement"). The FERC generally takes into account three factors in analyzing proposedmergers: (a) the effect on competition; (b) the effect on rates; and (c) the effect on regulation. Merger Policy Statement at 30,111.

    14 Commissioner Massey emphasized the importance of access to the books and records of any owner of FERC-jurisdictional assets: "Without this authority, we would be unable to ensure that U.S. ratepayers are not being forced to subsidize foreign operations." FERC Meeting Transcript at 2.

    15 See, e.g., Sierra Pacific Resources, Holding Co. Act Release No. 24566 (Jan. 28, 1988), aff'd sub nom. Environmental Action, Inc. v. SEC, 895 F.2d 1255 (9th Cir. 1990).

    16 SEC v. New England Electric System, 384 U.S. 176, 180 (1966), citing North American Co. v. SEC, 327 U.S. 686, 704 n.14 (1946).

    17 Section 11(b)(1).

    18 See, e.g., Gas Related Activities Act of 1990, 104 Stat. 280 (declaring certain activities, for purposes of Section 11(b)(1), to be reasonably incidental or economically necessary or appropriate to the registered holding company's integrated public-utility system); Section 32(h)(1) and (2) (making similar findings with respect to exempt wholesale generators); Section 33(c)(3) (FUCOs); and Section 34(e)(1) and (2) (exempt telecommunications companies).

    19 Section 33(a)(1).

    20 See Gaz Metropolitain, Holding Co. Act Release No. 26170 (Nov. 23, 1994).

    21 Id. (emphasis added).

    22 AES Corporation, Holding Co. Act Release No. 27063 (Aug. 20, 1999).

    23 Adoption of Rules, Forms and Form Amendments Relating to Exempt Wholesale Generators and Foreign Utility Companies, Holding Co. Act Release No. 25886 (Sept. 23, 1993).

    24 American Electric Power Co., Inc., Holding Co. Act Release No. 27062 (Aug. 19, 1999); Southern Energy, Inc., Holding Co. Act Release No. 27020 (May 13, 1999).

    25 American Electric Power Co., Inc., Holding Co. Act Release No. 26267 (April 5, 1995). See also Columbia Insurance Corp., Ltd., Holding Co. Act Release No. 27051 (July 23, 1999) ($50 million investment limit worldwide); The Southern Co., Holding Co. Act Release No. 22132 (July 17, 1981) (granting foreign consulting authority).

    26 Columbia Energy Group, Holding Co. Act Release No. 26820 (Jan. 23, 1998), as amended by Holding Co. Act Release No. 27055 (July 30, 1999) (authorizing Columbia to invest up to $55 million in Canadian E&P activities). See also The Columbia Gas System, Inc., Holding Co. Act Release No. 17290 (Sept. 27, 1971) (authorizing the formation of a wholly-owned Canadian oil and gas exploration and production subsidiary in connection with an effort to obtain natural gas from the Prudhoe Bay and Arctic region of Canada), and Holding Co. Act Release No. 18534 (Aug. 16, 1974) (authorizing participation in projects for the development of proven gas reserves in Alaska and Canada, and for transportation of the gas to the United States).

    27 See Consolidated Natural Gas Co., Holding Co. Act Release No. 26595 (Oct. 25, 1996) and Holding Co. Act Release No. 26608 (Nov. 19, 1996) (authorizing CNG to invest, on a case-by-case basis, in foreign pipeline projects).

    28 See, e.g., The Southern Co., Holding Co. Act Release No. 25639 (Sept. 23, 1992) (authorizing the acquisition of foreign utility interests by a registered holding company); SCEcorp, Holding Co. Act Release No. 25564 (June 29, 1992) (authorizing the acquisition of foreign utility interests by an exempt holding company).

    29 See New Century Energies, Inc., Holding Co. Act. Release No. 26982 (Feb. 26, 1999); American Electric Power Co., Holding Co. Act Release No. 26864 (April 27, 1998); Cinergy Corp., Holding Co. Act Release No. 26848 (March 23, 1998); GPU, Inc., Holding Co. Act Release Nos. 26773 (Nov. 5, 1997 ) (order) and 26779 (Nov. 17, 1997) (opinion); Central and South West Corp., Holding Co. Act Release No. 26653 (Jan. 24, 1997); The Southern Company, Holding Co. Act Release No. 26501 (April 1, 1996).

    30 See, e.g., New Century Energies, Inc., Holding Co. Act Release No. 26748 (Aug. 1, 1997).

    31 As a general rule, an acquiring holding company with a large asset base will have a greater ability to finance U.S. utility operations. In this respect, grandfathering is consistent with the Act's goal of a soundly capitalized U.S. utility industry. If the Commission were to deny grandfathering, it could inadvertently create a preference for foreign companies with smaller FUCO operations as U.S. acquirors, possibly to the detriment of the financial stability of the resulting holding company system.

    32 Edison Electric Report at 47-48 (Only 7.1% of all investor-owned electric utilities had senior debt ratings of AA and 0.8% had ratings of AA+. The industry in general is characterized by a senior debt rating of A-). Our own analysis of the 15 U.S. registered holding companies with long-term debt ratings shows that the average rating is A- and the highest is A+. See also The Financial Strength of The National Grid Group and the Proposed Acquisitions of NEES and EUA at Table 5 (included as Exhibit J-3 to the Merger Application) ("Franks/Brattle Study").

    33 Franks/Brattle Study at 12.

    34 The project review process is discussed in extensive detail in the companies' Financing Application.

    35 See Section 1(c) of the Act (directing the Commission to interpret all provisions of the Act to protect the public interest and the interest of investors and consumers).

    36 The Commission, in other contexts, has found Section 11's requirements satisfied when a nonutility activity that was not directly related to the operations of the integrated public-utility system (the acquisition by a registered electric-utility holding company of gas gathering and transportation assets) was incidental to an activity (marketing, brokering and trading activities) that it had found functionally related to the registered holding company's core utility operations. See American Electric Power Co., Holding Co. Act Release No. 26933 (Nov. 2, 1998).

    37 Exhibit J-1 to the Merger Application provides a description of these entities and the independent bases for retention of each.

    38 Comments of the City of New Orleans on the Modernization of the Regulation of Public Utility Holding Companies, SEC File No. S7-32-94 at 30-31 (Feb. 6, 1995) ("CNO Comments").

    39 Sections 103d and 104d of the Atomic Energy Act of 1954, as amended, provide, in relevant part, that no license may be issued to:

    any corporation or other entity if the Commission knows or has reason to believe it is owned, controlled, or dominated by an alien, a foreign corporation, or a foreign government. In any event, no license may be issued to any person within the United States if, in the opinion of the Commission, the issuance of a license to such person would be inimical to the common defense and security or to the health and safety of the public.

    Section 103d also states that no license may be issued to an alien. In addition, 10 C.F.R. § 50.38 provides:

    Any person who is a citizen, national, or agent of a foreign country, or any corporation, or other entity which the Commission knows or has reason to believe is owned, controlled, or dominated by an alien, a foreign corporation, or a foreign government, shall be ineligible to apply for and obtain a license.

    40 See Preliminary Staff Views Concerning Its Review of the Foreign Ownership Aspects of AmerGen, Inc.'s Proposed Purchase of Three Mile Island, Unit 1, SECY 98-252 (Oct. 30, 1998) (involving the proposed ownership interest by British Energy, plc, as a 50 percent partner of AmerGen).

    41 Final Standard Review Plan on Foreign Ownership, Control, or Domination, SECY-99-165, 64 Fed. Reg. 52355-52359 (Sept. 28, 1999).

    42 Id. at 52358.

    43 Northeast Nuclear Energy Company (Millstone Nuclear Power Station, Unit 3), NRC Docket No. 50-423 ___ NRC ___ slip op. (Dec. 10, 1999) (included as Exhibit D-2.2 to the Merger Application); North Atlantic Energy Service Corp. (Seabrook Station, Unit 1) NRC Docket No. 50-443 ___ NRC ___ slip op. (Dec. 10, 1999) (included as Exhibit D-2.2 to the Merger Application).

    44 Northeast Nuclear Energy Company (Millstone Nuclear Power Station, Unit 3), NRC Docket No. 50-423 ___ NRC ___ slip op. (Dec. 10, 1999) (included as Exhibit D-2.2 to the Merger Application); North Atlantic Energy Service Corp. (Seabrook Station, Unit 1) NRC Docket No. 50-443 ___ NRC ___ slip op. (Dec. 10, 1999) (included as Exhibit D-2.2 to the Merger Application).

    45 Letter from Gay Hartwell Sills, Director, Office of International Investment, Department of the Treasury, re: CFIUS Case 99-16 (April 29, 1999).

    46 CNO Comments at 31.

    47 FERC Meeting Transcript at 6.

    48 Id. at 5.

    49 FERC News Release, R-99-37 (June 16, 1999).

    50 Gaz Metropolitain, Holding Co. Act Release No. 26170 (Nov. 23, 1994).

    51 See Convention to Regulate Commerce, July 3, 1815, U.S.-Great Britain, 8 Stat. 228.

    52 NHPUC Order at 18.

    53 Id.

    54 Section 18(c) of the Act.

    55 Section 18(d) of the Act.

    56 See 17 CFR 210.3-19 (1999) (Regulation S-X, Rule 3-19).

    57 Cf. Exemption of Issuance and Sale of Securities by Public Utility and Nonutility Subsidiary Companies of Registered Public Utility Holding Companies, Holding Co. Act Release No. 26826 (Feb. 20, 1998) (in adopting further amendments to Rule 52, the Commission commented that "case-by-case review of the issuance of any type of security by subsidiaries of registered holding companies is no longer necessary in the public interest or for the protection of investors or consumers"); Exemption of Acquisition by Registered Public-Utility Holding Companies of Securities of Nonutility Companies Engaged in Certain Energy-Related and Gas-Related Activities, Holding Co. Act Release No. 26667 (Feb. 14, 1997) ("Rule 58 is intended to encompass activities with which the Commission is familiar as a result of its administrative experience and that appear to be so closely related to the ordinary course of the contemporary utility business as not to require case-by-case analysis pursuant to sections 9(a)(1) and 10.").