Principe de Vergara,187
February 3, 2000
Mr. Jonathan G. Katz,
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Registered Holding Companies and Internationalization
File No. S7-30-99
Dear Mr. Katz:
This is in response to the Commission's December 14, 1999 request for comment (HCAR No. 35-27110, the "Requesting Release") regarding investment in U.S. electric and gas utilities by non-U.S. persons under the Public Utility Holding Company Act of 1935 (the "Act"). These comments are submitted on behalf of Endesa, S.A.
Endesa, S.A. is a limited liability company (sociedad anónima) organized under the laws of the Kingdom of Spain. Endesa's shares are publicly traded on the Madrid, Barcelona, Bilbao and Valencia Stock Exchanges and on the New York Stock Exchange. Endesa was formed under the laws of Spain in 1944. Its principal executive office is located at Principe de Vergara, 187, 28002 Madrid, Spain.
The Endesa Group is an integrated utility with a presence in over a dozen countries. We are the largest generator and distributor of electricity in Spain and the largest privately held distributor and generator in Latin America. We also have investments in France, the Netherlands, Portugal and Morocco. We operate over 35,000 MW of electric generating capacity and distribute electricity to over 20 million customers.
In addition to electricity, the Endesa Group is engaged in other activities, principally telecommunications, gas distribution, water treatment and distribution and energy-related activities. Although a significant portion of the total public shareholding in Endesa is held by U.S. persons through the NYSE, Endesa does not conduct any business operations in the U.S.
The Act Should Not be Interpreted to Prohibit Investment by Non-U.S. Persons. Endesa supports the increase in competition in the electric and gas utility industries occurring throughout the world. We have seen improvements in service and technology, and reductions in the price of service, all to the benefit of consumers, wherever there has been a movement to competitive markets and the reduction of regulation based on protected monopolies. In any competitive market, it is essential that there be a large number of vigorous competitors. Any factor which serves to close a market to some participants can be detrimental to full competition.
Accordingly, Endesa urges the Commission to interpret the Act so that investment in U.S. electric and gas utilities by non-U.S. persons is not unnecessarily restrained. Allowing non-U.S. investors to freely enter the U.S. markets will increase the number of competitors, which will directly benefit U.S. energy consumers. Endesa supports the enactment of reasonable conditions on investment by non-U.S. persons, provided that those conditions directly relate to the unique status of a non-U.S. investor and are designed to protect the legitimate interests of U.S. consumers and investors. These conditions should not be so onerous, however, as to discourage participation in U.S. markets by non-U.S. persons. Endesa is committed to full compliance with all local laws in the countries where its does business. We also strive to achieve a good working relationship with local regulators. We believe that with reasonable protections (some of which we will discuss below), consumers and investors will enjoy the benefits of increased competition without the risk of adverse consequences from non-U.S. investment.
As the Commission noted in the Requesting Release, nothing in the language of the Act prohibits a non-U.S. person from being a registered or exempt holding company. The Commission has approved a non-U.S. exempt holding company. Gaz Metropolitain, HCAR No. 35-26170 (1994). In that case the Commission noted that the Act "contains no prohibition against foreign holding companies as such." There does not appear to be any basis under the Act to reach a different conclusion for a registered holding company.
It is clear from the language of the Act that it was intended to regulate "public utilities" and "holding companies" (as defined in the Act) wherever located. Because of the obviously broad reach of the Act, Congress felt it was necessary to enact the provisions of Section 33 to allow U.S. holding companies -- registered and exempt -- to invest in foreign utility businesses ("FUCOs"). Congress could have made it clear, as it clearly has in laws affecting other industries, that national security concerns required specific limitations on non-U.S. investment in U.S. electric or gas utilities. Because Congress has not included any such provision, although it has had ample opportunity to do so -- especially as part of the Energy Policy Act of 1992 where it was expressly dealing with international issues and created the FUCO provisions -- the Commission should not infer that such limitations exist within the Act. As will be noted below, the FUCO provisions by their plain terms facilitate the investment by non-U.S. persons in U.S. utilities. Thus, the Commission is not compelled by the Act to restrict international investment. Further, there is no basis for the Commission to assume that, notwithstanding the plain meaning of the FUCO provisions, there was any desire on the part of Congress --either in 1935 or at other times when the Act was amended -- to limit foreign investment.
In recent years the Commission has emphasized that the Act "creates a system of pervasive and continuing economic regulation that must in some measure at least be fashioned from time to time to keep pace with changing economic and regulatory climates."1 In recent decisions, the Commission has cited U.S. Supreme Court and Circuit Court of Appeals cases that recognize that an agency is not required to "establish rules of conduct to last forever,"2 but must "adapt [its] rules and policies to the demands of changing circumstances"3 and to "treat experience not as a jailer but as a teacher."4 Consequently, the Commission has attempted to "respond flexibly to the legislative, regulatory and technological changes that are transforming the structure and shape of the utility industry" as recommended by the Division of Investment Management in its report issued in June 1995 entitled "The Regulation of Public Utility Holding Companies."
Moreover, the ultimate determination of difficult questions under the Act has always been whether, on the facts of a given matter, the proposed transaction "will lead to a recurrence of the evils the Act was intended to address."5 See also Sempra Energy, Holding Company Act Release No. 26971 (Feb. 1, 1999) where the Commission acknowledged that "we have taken notice of developments that have occurred in the gas industry, and have interpreted the Act and analyzed proposed transactions in light of these changed and changing circumstances." There is no reason for the Commission to limit its forward-looking, flexible consideration to mergers involving only domestic utility holding companies. The Commission should utilize a prospective and flexible outlook in reviewing applications involving the acquisition of a U.S. utility system by a non-U.S. person.
The Protected Interests Will Not be Harmed by Foreign Investment. The Commission asked for comments regarding the effect of foreign registered holding companies on (i) effective Commission regulation (ii) effective state regulation, (iii) investor protection and (iv) consumer protection.
Each of these four areas will be served by effectively isolating the U.S. utility operations from the non-U.S. utility and other business operations of a foreign holding company. Such isolation will provide the types of protections to U.S. interests required by the Act.
U.S. utility operations can be isolated from foreign utility and non-utility operations through corporate structure and similar techniques. For example, the corporate structure used by National Grid and ScottishPower features a U.S. corporation as the top holding company for U.S. operations. This top U.S. company is a first tier subsidiary of the ultimate non-U.S. holding company. This latter company's other operations are all carried out through other subsidiaries. Use of this type of structure effectively isolates the U.S. subsidiaries from the operational and financial risk of the non-U.S. operations. The U.S. subsidiaries would not be responsible for the debts and obligations of the non-U.S. subsidiaries.
As noted in the Requesting Release, a corporate structure such as that suggested by National Grid and ScottishPower conforms with the technical requirements of the Act by giving rise to the conclusion that the non-U.S. operations of the holding company, whether utility or non-utility, all constitute a FUCO. Because Congress found that a FUCO should not be subject to regulation by the Commission under the Act, the restrictions that might otherwise apply to these operations, if they were U.S. based, will not apply. More importantly, however, such a corporate structure -- or other methods of effectively isolating U.S. from non-U.S. operations -- is consistent with the purposes of the Act. Further, it is consistent with the plain meaning of Section 33. The Commission should give effect to this interpretation of the statute. To find otherwise would be to read a restriction into the statue that plainly is not there.
Protection of Investors. The interests of U.S. investors will be served by the provisions of the Act that will be applicable to the top U.S. company as well as the ultimate non-U.S. parent. Many utility operating companies -- including those controlled by registered holding companies -- are themselves "reporting companies" subject to the periodic public reporting requirements of the Securities Exchange Act of 1934. Further, those non-U.S. holding companies that have publicly traded securities in the U.S. are also subject to U.S. disclosure requirements. These disclosure requirements together with the provisions of generally accepted accounting principles -- whether U.S. or non-U.S. -- will provide significant information to, and protect the interests of, investors. Under the Act, there likely would be no public equity interests in any entity other than the ultimate non-U.S. holding company. Public investors would, therefore, only have the opportunity to invest in the non-U.S. company. Under applicable U.S. law, these investors would be fully informed as to the risks and special considerations applicable to such an investment.
Protection of Consumers; Effective Regulation; Access to Books and Records. The Commission's rules regarding affiliate transactions and service companies, together with applicable state regulation of this subject, will prevent the holding company from engaging in improper cross subsidization of its non-utility operations to the detriment of utility consumers -- regardless of the nationality of the holding company. As the Commission noted in the Requesting Release, the protections afforded by the affiliate transaction rules depend on full access to the relevant books and records to determine if proper cost allocation procedures are being followed. The corporate structure and similar measures described above, which isolates U.S. and non-U.S. operations, will give the Commission and state regulators access to the entity responsible for U.S. operations. Further, the isolation of U.S. from non-U.S. operations will protect U.S. consumers from the risks of the non-U.S. operations -- be they utility or non-utility operations.
U.S. utility operating companies will remain fully subject to applicable state and federal regulation as to rates, service quality, securities issuances, affiliate transactions and other matters. If a state did not have the authority to obtain adequate access to the books and records of either the U.S. sub-holding company or the ultimate non-U.S. holding company, the Commission could impose a condition that such access be given.
Acquisition by a Foreign Holding Company Will Produce Benefits. Under the Act, the Commission must find that an acquisition subject to its approval will tend towards the economical and efficient development of an integrated public utility system. The entry into the U.S. energy markets of additional competitors, as noted above, will be the most significant benefit resulting from non-U.S. person's investing in U.S. utilities. Introducing new, well capitalized and experienced participants into the U.S. markets will benefit consumers. Non-U.S. utilities have experience in deregulated markets. They also have considerable experience in efficiently managing utility related investments in multiple countries. They have developed an expertise in meeting the needs of local consumers, regulators, governments and others while introducing the best practices learned from world-wide operations. These benefits should easily satisfy the Act's requirement for showing of "economies and efficiencies" resulting from an acquisition. Furthermore, the active involvement of foreign investors should create additional value for existing U.S. investors by expanding the pool of capital available for investment in U.S. utilities and enhancing share values of U.S. utilities.
A Foreign Holding Company Will Not Ignore Local Concerns. As noted, non-U.S. multi-national energy holding companies have considerable experience in dealing with different cultures, regulations, laws and requirements applicable to the various countries where they do business. They recognize that to be successful in these ventures, in which they have invested a great deal of money, they must be sensitive to local concerns and responsive to local requirements. A non-U.S. holding company would likely retain a significant number of the U.S. managers and employees to operate its U.S. utility businesses thus ensuring responsiveness to local concerns. Such a non-U.S. holding company would recognize the advantage of using the expertise of present management and would realize that it would be very short-sighted and ultimately to its great disadvantage to fail to be responsive to local concerns.
We welcome the opportunity to comment on this important subject. We believe that open competition in the energy industry will be of mutual benefit to companies such as Endesa and to U.S. investors and consumers alike.
Very truly yours
Salvador Montejo Velilla
1 Union Electric Co., Holding Co. Act Release No. 18368, n. 52 (1974), quoted in Consolidated Natural Gas Co., Holding Co. Act Release No. 26512 (April 30, 1996) (authorizing international joint venture to engage in energy marketing activities); Eastern Utilities Associates, Holding Co. Act Release No. 26232 (Feb. 15, 1995) (removing restrictions on energy management activities); and Southern Co., Holding Co. Act Release No. 25639 (Sept. 23, 1992) (approving acquisition of foreign public-utility subsidiary company).
2 Rust v. Sullivan, 500 U.S. 173 (1991); American Trucking Assns., Inc. v. Atchison, T.&S.F.R. Co., 387 U.S. 397 (1967); Shawmut Assn. v. SEC, 146 F.2d. 791 (1st Cir. 1945).
3 NIPSCO Industries, Inc., Holding Co. Act Release No. 26975 (Feb. 10, 1999) [hereinafter "NIPSCO"], citing Rust v. Sullivan at 186-187. Accord, Sempra Energy, Holding Co. Act Release No. 26971 n.23 (Feb. 1, 1999) (interpreting the integration standards of the Act in light of developments in the gas industry).
4 NIPSCO, supra, citing Shawmut Assn. v. SEC at 796-97.
5 Union Electric, supra.