April 9, 2001
Mr. Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth St., NW
Washington, DC 20549-0609
RE: File No. S7-05-01
Dear Mr. Katz:
The National Association of Regulatory Utility Commissioners (NARUC) hereby submits its comment letter regarding the Securities and Exchange Commission's (SEC ) notice of proposed rulemaking on Foreign Utility Companies published at 66 Fed. Reg. 9,247 (February 7, 2001). NARUC represents the governmental agencies of the fifty States, the District of Columbia, Puerto Rico and the Virgin Islands engaged in the regulation of public utilities and common carriers. NARUC's mission is to serve the public interest by improving the quality and effectiveness of public utility regulation. Under State law, NARUC's members have the obligation to ensure the establishment and maintenance of such energy utility services as may be required by the public convenience and necessity, and to ensure that such services are provided at rates and conditions that are just, reasonable and nondiscriminatory for all consumers.
It is NARUC's longstanding position that the acquisition of foreign utility companies by U.S. utility holding companies should be subject to close scrutiny under applicable Federal and State statutes generally applicable to utility acquisitions. NARUC believes that the reproposed rules 55 and 56 and the amendment to rule 87 under the Public Utility Holding Company Act of 1935 (PUHCA) represent an unwise relaxation of such close scrutiny and thus unnecessarily risk consumer protection and jeopardize State authority to protect against possible adverse impacts.
NARUC first noted its concern with the current reproposed rules in 1993, when the SEC first proposed rules 55 and 56. In those comments, NARUC, along with the National Association of State Utility Consumer Advocates, Consumer Federation of America, Environmental Action and American Public Power Association, urged the SEC to withdraw the proposed regulations because "they did not comply with clear statutory language concerning the protection of consumers and the ability of States to regulate operating utilities of registered holding company systems. See, NARUC Comments on Notice of Proposed Rulemaking on Sections 32 and 33 of the Energy Policy Act of 1992, 66 Fed. Reg. 13719-13730 (March 15, 1993). We urge the Commission to revisit these comments as many sections of those comments directly pertain to the reproposed rules.
In addition, NARUC urges the SEC to incorporate pricing policies that are consistent with those policies utilized by other regulatory agencies. NARUC has approved the "NARUC Guidelines for Cost Allocations and Affiliate Transactions" (Guidelines) addressing electric and gas operations. These Guidelines can be accessed at http://www.naruc.org/Committees/f&t/accounts/guidelines.htm, and are attached as Appendix A. These Guidelines were adopted by the Board of Directors on July 12, 1999, and were recommended to the State regulators as a model. The Guidelines are intended to provide guidance to jurisdictional regulatory authorities and regulated utilities and their affiliates in the development of procedures and recording of transactions for services and products between a regulated entity and affiliates. While not mandatory upon the States, many States have incorporated these Guidelines into their regulatory structure. We would urge the SEC to defer to such uniform practices on pricing rules for foreign utility holding companies.
Additionally, NARUC urges the SEC to ensure that foreign acquisition and ownership of U.S. utility companies should be subject to close scrutiny under applicable Federal and State statutes generally applicable to utility acquisitions. In March 2000, NARUC's Board of Directors adopted a policy resolution in response to a concept release issued by the SEC in December 1999 in File No. S7-30-99. Resolution Regarding Registered Public Utility Holding Companies and Internationalization, NARUC Resolution (March17, 2001), [hereinafter, Resolution]. This resolution is attached as Appendix B. In adopting this Resolution, NARUC asserted that the ultimate outcome of transactions involving the acquisition or ownership of U.S. utilities by foreign utility companies should be the same for any other transaction: no adverse impact on the consumer or the State regulatory authorities to protect consumers.
NARUC respectfully urges the SEC in its final decision to ensure that the regulations it chooses to adopt have no adverse impact on utility subsidiaries, customers or State commissions. It is essential that consumers are protected from any potential adverse impacts involving foreign utility holding company acquisitions and ownership by utility holding companies, and that State regulators retain the authority to effectively monitor and regulate these transactions.
James Bradford Ramsay
Sharla M. Barklind
Assistant General Counsel
National Association of Regulatory
1101 Vermont Avenue, Suite 200
Washington, DC 20005
April 9, 2001
Resolution Regarding Cost Allocation Guidelines for the Energy Industry
WHEREAS, There is ongoing concern regarding potential cross-subsidization between the regulated monopoly operations and the non-regulated businesses of electric and gas utilities; and
WHEREAS, Utilities are adopting various business strategies to adjust to the changing retail markets, including forming alliances and creating subsidiaries, divisions and partnerships to participate in non-regulated, competitive markets; and
WHEREAS, State utility commissions are examining and adopting various policies to monitor the competitive activities of regulated energy utilities; and
WHEREAS, State utility commissions are examining and adopting policies and rules concerning potential cross-subsidies between regulated utilities and non-regulated affiliates including pricing of assets, products and services; and
WHEREAS, The National Association of Regulatory Utility Commissioners (NARUC) requested the Staff Subcommittee on Accounts together with the Staff Subcommittees on Strategic Issues and Gas to prepare for NARUC's consideration, "Guidelines for Energy Cost Allocations"; and
WHEREAS, The Staff Subcommittee on Accounts together with the Subcommittee on Gas and Strategic Issues have prepared for NARUC's consideration "Guidelines for Cost Allocations and Affiliate Transactions"; and
WHEREAS, Each State or Federal Regulatory commission may have unique situations and circumstances that govern affiliate transactions, cost allocations, and/or service or product pricing; and
WHEREAS, The "Guidelines for Cost Allocations and Affiliate Transactions" are to provide guidance to the states and are not intended to be rules or regulations prescribing how cost allocations and affiliate transactions are to be handled; and
WHEREAS, The Staff Subcommittees on Accounts, Strategic Issues and Gas should periodically review the Guidelines for Cost Allocations and Affiliate Transactions, taking into consideration the progression of competition in the electric and gas industries nationally, and report their findings, including proposed changes to the guidelines, if necessary, that promote efficiency in competitive energy markets while guarding against cross-subsidization by monopoly ratepayers; now therefore be it
RESOLVED, The Board of Directors of the of the National Association of Regulatory Utility Commissioners (NARUC), convened in its 1999 Summer Meeting in San Francisco, California, adopts the attached "Guidelines for Cost Allocations and Affiliate Transactions"; and be it further
RESOLVED, The NARUC directs the Staff Subcommittees on Accounts, Strategic Issues and Gas, to review the Guidelines for Cost Allocation and Affiliate Transactions, taking into consideration the progression of competition in the electric and gas industries nationally and report their findings to NARUC, including proposed changes to the guidelines, if necessary, on or before January 1, 2001, and annually thereafter, and be it further
RESOLVED, The NARUC applauds and thanks the Staff Subcommittees on Accounts, Gas, and Strategic Issues for their excellent work in developing the guidelines.
Sponsored by the Committees on Electricity and Finance and Technology
Adopted by the NARUC Board of Directors July 23, 1999
Attachment To Resolution Regarding Cost Allocation Guidelines for the Energy Industry "GUIDELINES FOR COST ALLOCATIONS AND AFFILIATE TRANSACTIONS"
The following Guidelines for Cost Allocations and Affiliate Transactions (Guidelines) are intended to provide guidance to jurisdictional regulatory authorities and regulated utilities and their affiliates in the development of procedures and recording of transactions for services and products between a regulated entity and affiliates. The prevailing premise of these Guidelines is that allocation methods should not result in subsidization of non-regulated services or products by regulated entities unless authorized by the jurisdictional regulatory authority. These Guidelines are not intended to be rules or regulations prescribing how cost allocations and affiliate transactions are to be handled. They are intended to provide a framework for regulated entities and regulatory authorities in the development of their own policies and procedures for cost allocations and affiliated transactions. Variation in regulatory environment may justify different cost allocation methods than those embodied in the Guidelines.
The Guidelines acknowledge and reference the use of several different practices and methods. It is intended that there be latitude in the application of these guidelines, subject to regulatory oversight. The implementation and compliance with these cost allocations and affiliate transaction guidelines, by regulated utilities under the authority of jurisdictional regulatory commissions, is subject to Federal and state law. Each state or Federal regulatory commission may have unique situations and circumstances that govern affiliate transactions, cost allocations, and/or service or product pricing standards. For example, The Public Utility Holding Company Act of 1935 requires registered holding company systems to price "at cost" the sale of goods and services and the undertaking of construction contracts between affiliate companies.
The Guidelines were developed by the NARUC Staff Subcommittee on Accounts in compliance with the Resolution passed on March 3, 1998 entitled "Resolution Regarding Cost Allocation for the Energy Industry" which directed the Staff Subcommittee on Accounts together with the Staff Subcommittees on Strategic Issues and Gas to prepare for NARUC's consideration, "Guidelines for Energy Cost Allocations." In addition, input was requested from other industry parties. Various levels of input were obtained in the development of the Guidelines from the Edison Electric Institute, American Gas Association, Securities and Exchange Commission, the Federal Energy Regulatory Commission, Rural Utilities Service and the National Rural Electric Cooperatives Association as well as staff of various state public utility commissions.
In some instances, non-structural safeguards as contained in these guidelines may not be sufficient to prevent market power problems in strategic markets such as the generation market. Problems arise when a firm has the ability to raise prices above market for a sustained period and/or impede output of a product or service. Such concerns have led some states to develop codes of conduct to govern relationships between the regulated utility and its non-regulated affiliates. Consideration should be given to any "unique" advantages an incumbent utility would have over competitors in an emerging market such as the retail energy market. A code of conduct should be used in conjunction with guidelines on cost allocations and affiliate transactions.
B. COST ALLOCATION PRINCIPLES
The following allocation principles should be used whenever products or services are provided between a regulated utility and its non-regulated affiliate or division.
C. COST ALLOCATION MANUAL (NOT TARIFFED)
Each entity that provides both regulated and non-regulated services or products should maintain a cost allocation manual (CAM) or its equivalent and notify the jurisdictional regulatory authorities of the CAM's existence. The determination of what, if any, information should be held confidential should be based on the statutes and rules of the regulatory agency that requires the information. Any entity required to provide notification of a CAM(s) should make arrangements as necessary and appropriate to ensure competitively sensitive information derived therefrom be kept confidential by the regulator. At a minimum, the CAM should contain the following:
D. AFFILIATE TRANSACTIONS (NOT TARIFFED)
The affiliate transactions pricing guidelines are based on two assumptions. First, affiliate transactions raise the concern of self-dealing where market forces do not necessarily drive prices. Second, utilities have a natural business incentive to shift costs from non-regulated competitive operations to regulated monopoly operations since recovery is more certain with captive ratepayers. Too much flexibility will lead to subsidization. However, if the affiliate transaction pricing guidelines are too rigid, economic transactions may be discouraged.
The objective of the affiliate transactions' guidelines is to lessen the possibility of subsidization in order to protect monopoly ratepayers and to help establish and preserve competition in the electric generation and the electric and gas supply markets. It provides ample flexibility to accommodate exceptions where the outcome is in the best interest of the utility, its ratepayers and competition. As with any transactions, the burden of proof for any exception from the general rule rests with the proponent of the exception.
E. AUDIT REQUIREMENTS
F. REPORTING REQUIREMENTS
Resolution Regarding Registered
Public Utility Holding Companies and Internationalization
WHEREAS, The Securities and Exchange Commission (SEC) is seeking comment on various issues surrounding the acquisition of United States utilities by foreign companies that will register as holding companies following the transaction; and
WHEREAS, Three foreign companies engaged in the utility or energy business, ScottishPower plc, National Grid Group plc, and Britain's Power Gen have announced plans to acquire U.S. utilities or public utility holding companies; and
WHEREAS, ScottishPower has filed with the SEC its Form U5A, notification of registration as a holding company under the Public Utility Holding Company Act of 1935 (PUHCA); and
WHEREAS, There is a concern that foreign ownership could impose impediments to State regulators' inspection authority and access to books and records regarding financial transactions, cost allocations, and affiliate transactions; and
WHEREAS, It does not appear that the Energy Policy Act of 1992 (EPACT) provisions of the PUHCA can be effectively applied to regulate foreign utility company operations; and
WHEREAS, The PUHCA and the EPACT are silent regarding the acquisition of a U.S. utility or public utility holding company by a foreign company; now therefore be it
RESOLVED, That the Board of Directors of the National Association of Regulatory Utility Commissioners (NARUC) convened in its March 2000 Winter Meeting in Washington D. C., that the burden of demonstrating that an acquisition of a U.S. utility system is in the public interest should be the same regardless of whether the acquiring company is foreign or domestic; and be it further
RESOLVED, That the acquiring company should guarantee that U.S. regulatory authorities will have complete access to all books and records regarding financial transactions, cost allocations, and affiliate transactions impacting the U.S. utility; and be it further
RESOLVED, That the acquiring company should be required to guarantee that the ratepayers of the acquired utility shall be held harmless if the acquisition results in a higher revenue requirement for the utility than if the acquisition had not occurred.
Sponsored by the Committee on Finance and Technology
Adopted by the NARUC Board of Directors, March 8, 2000