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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 250
Release Nos. 35-26153; IC-20675; International Series Release No.
740
File No. S7-32-94
Request for Comments on Modernization of the Regulation of
Public-Utility Holding Companies
AGENCY: Securities and Exchange Commission ("Commission").
ACTION: Concept release; request for comments.
SUMMARY: The Commission is soliciting comments on
modernization of the regulation of public-utility holding
companies under the Public Utility Holding Company Act of 1935.
Developments in recent years require reexamination of the need
for, and role of, a federal holding company statute.
Accordingly, the Commission is requesting comment on a number of
specific issues summarized in this release, and generally on any
other issues that commenters believe relevant to the regulation
of public-utility holding companies.
DATES: Comments are to be received on or before [90 days
after publication in the Federal Register].
ADDRESSES: Comments should be submitted in triplicate to
Jonathan G. Katz, Secretary, Securities and Exchange Commission,
450 Fifth Street, N.W., Washington, D.C. 20549. All comment
letters should refer to File No. S7-32-94. All comments received
will be available for public inspection and copying in the
Commission's Public Reference Room, 450 Fifth St., N.W.,
Washington, D.C. 20549.
FOR FURTHER INFORMATION CONTACT: William C. Weeden, Associate
Director, Joanne C. Rutkowski, Assistant Director, Office of
Legal & Policy Analysis, Martha Cathey Baker, Assistant Director,
Office of Applications, Robert P. Wason, Chief Financial Analyst,
Office of Public Utility Regulation, or C. Hunter Jones, Special
Counsel, Office of the General Counsel, all at (202) 942-0545.
SUPPLEMENTARY INFORMATION:
I. Introduction
The Commission is soliciting comments in connection with a
comprehensive study ("Study") of regulation under the Public
Utility Holding Company Act of 1935 ("Holding Company Act" or
"Act"). The Holding Company Act was complex and far-reaching New
Deal legislation, enacted by Congress to eliminate abuses that
had plagued the U.S. electric and gas utility industry and
threatened the interests of investors and consumers. The public-
utility holding companies subject to this statute operate across
the United States, serving a vast number of utility
consumers.-[1]- Although in the past sixty years there have been
fundamental changes in the industry, as well as significant legal
and regulatory developments, the Holding Company Act has remained
largely unchanged.
The Commission is undertaking a thorough evaluation of the
Act, to review the regulatory framework in light of developments
in recent years and to consider how federal regulation of utility
holding companies can best serve the interests of investors,
-[1]- At present, there are fourteen active registered
holding companies and several hundred exempt holding
companies.
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consumers, and the general public in the years to come. The
Commission inaugurated the Study with a roundtable discussion, in
Washington, D.C. on July 18 and 19, 1994 ("Roundtable"), in which
representatives of the utility industry, consumer groups, trade
associations, investment banks, rating agencies, economists,
state, local and federal regulators, and others
participated.-[2]-
The participants discussed a number of issues facing the
industry today. They noted that deregulation and increased
competition have created risks, as well as potential benefits,
for public utilities. Many participants stated that utilities
are experiencing little or no earnings growth in their core
utility business. A number of possible responses, including
reorganization of the industry along functional lines,
diversification, and investment in foreign projects, were
mentioned. Although the participants had widely divergent views
on the future of the Act, all agreed that the statute poses some
impediments to change. Recommendations ranged from selective
reform of the Act to outright repeal.
Those favoring repeal have argued that the Act is redundant
or outmoded as a result of changes in the industry, the capital
markets, accounting standards, state and other federal
regulation, and the disclosure required under other federal
securities laws. Although the Commission has previously
supported proposals to repeal or transfer administration of the
Act,-[3]- these proposals have not succeeded. Commenters who
favor continued efforts for repeal should describe in particular
the protections that would be afforded consumers by state and
other federal law, in the absence of a Holding Company Act.
At the Roundtable, Commissioner Richard Y. Roberts expressed
the view, and the Commission concurs, that the most valuable
contributions to the Study may consist of concrete proposals for
reforms on which it is likely that the industry, the regulators
and other interested parties can agree.-[4]- The objective of
such proposals would be to modernize and simplify regulation,
reduce the delay inherent in the current administration of the
Act, and minimize regulatory overlap, while protecting the
interests of consumers and investors.
As a point of departure, the existing regulatory framework
is summarized below. Also identified are a number of specific
topics on which the Commission is seeking comment. Commenters
are encouraged to address the overall regulatory structure for
-[2]- A transcript of the Roundtable discussion, which was
open to the public, will soon be available for
inspection and copying at the Commission's Public
Reference Room in File No. S7-19-94.
-[3]- See, e.g., Statement of the U.S. Securities and
Exchange Commission Concerning Proposals to Amend or
Repeal the Public Utility Holding Company Act of 1935
(June 2, 1982).
-[4]- Several commenters provided specific proposals for
Commission consideration. See, e.g., Comments by Joan
T. Bok, Chairman, New England Electric System; Summary
of Comments of Clinton Vince, Special Counsel to the
Council of the City of New Orleans; Columbia Gas
System, Initial Comments on the Need for Legislative
Reform (Aug. 10, 1994) (available in Public Comment
File No. S7-19-94).
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public-utility holding companies, and to consider the appropriate
role of a federal holding company statute, particularly in view
of the work of the Federal Energy Regulatory Commission ("FERC")
and state and local regulators. In addition, commenters are
urged to address any general topics or issues that they believe
merit examination in the Commission's study of holding company
regulation.
The Commission requests that commenters provide specific
statutory or rulemaking language, where possible, to implement
their recommendations. It may also be helpful to compare the
costs and benefits of various proposals, to companies as well as
to consumers and investors. In addition, if commenters argue
that regulatory or market protections outside the Holding Company
Act suffice to protect investors and consumers on a particular
issue, they should describe the operation of these other
safeguards.
II. The Existing Regulatory Structure
A. Background: Passage of the Holding Company Act
The Holding Company Act-[5]- was intended to address the
practices by which small groups of investors, by means of the
holding company structure, were able to exploit vast networks of
utility companies, to the detriment of utility consumers and
other security holders. The specific problems identified by
Congress included inadequate disclosure, excessive leverage,
abusive affiliate transactions, use of the holding company to
evade state regulation, and the growth and extension of holding
companies without regard to the economy of management and
operation of system utility companies.-[6]- These aggressive
practices harmed investors who owned the securities of the
utility companies and captive utility consumers who were forced
to pay inflated rates for gas and electric energy.
The multistate character of the holding companies prevented
effective control by state regulators. Holding company ownership
shifted management and control from the operating utilities,
which were subject to state regulation, to a parent company
organized under the laws of another state and beyond the
jurisdiction of utility regulators in any state. During the
early years of this century, the federal government played a very
limited role in the regulation of the utility industry.-[7]- At
the time the Holding Company Act was passed, jurisdiction over
holding companies consisted largely of nascent, indirect
-[5]- Pub. L. No. 74-333, 49 Stat. 803 (1935) (codified as
amended at 15 U.S.C. 79a - 79z-6). The Holding
Company Act was enacted as Title I of the Public
Utility Act of 1935. Title II amended the Federal
Water Power Act of 1920 to create the Federal Power
Act. See Pub. L. No. 74-333, 49 Stat. 838 (1935)
(codified as amended at 16 U.S.C. 791a - 828c).
-[6]- Holding Company Act section 1(b) (15 U.S.C. 79a(b)).
-[7]- The jurisdiction of the Federal Power Commission was
then narrowly defined. Prior to 1935, most
transactions involving interstate transmission of
electricity were not regulated by the federal
government. See Richard Lowitt, Federal Power
Commission, in Government Agencies 233, 235 (Donald R.
Whitnah ed., 1983). See infra section II.C.1.
(discussing developments in federal energy regulation).
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regulation under the Securities Act of 1933-[8]- and the
Securities Exchange Act of 1934.-[9]-
Extensive studies that preceded the Act found "a number of
almost inherent incidental abuses in the holding-company system
which cannot be reached by direct regulation of the operating
company,"-[10]- and concluded that "[t]he only practical control
over public-utility holding companies will be one which can
directly reach the holding company itself and supervise its
security structure and its use of capital * * *. Only in that
way can Government protect the investors who supply that capital
and the consumers who must bear its cost."-[11]-
The Holding Company Act was intended to curb the abusive
practices of public-utility holding companies by bringing these
companies under effective control.-[12]- Thus, the Commission,
as the agency with expertise in financial transactions and
corporate finance, was charged with regulation of the corporate
structure and financings of public-utility holding companies and
their affiliates.-[13]-
-[8]- Pub. L. No. 73-22, 48 Stat. 74 (1933) (codified as
amended at 15 U.S.C. 77a et seq.).
-[9]- Pub. L. No. 73-290, 48 Stat. 881 (1934) (codified as
amended at 15 U.S.C. 78a et seq.).
-[10]- Summary Report of the Federal Trade Commission to the
Senate, Utility Corporations, S. Doc. No. 92, 70th
Cong., 1st Sess., pt. 73-A, at 3 (1935) (in 101
volumes) ("For example, no matter how strict the
regulation of an operating company, improper payments
of dividends and of other items still can be made by
the holding company out of surplus other than earned
surplus. Excessive capital issues can be floated by
the holding company, with an important indirect effect
upon rates charged by the operating company to the
public.").
-[11]- Report of National Power Policy Committee on Public-
Utility Holding Companies, S. Doc. No. 137, 74th Cong.,
1st Sess. 8 (1935). See also SCEcorp, Holding Co. Act
Release No. 25564 (June 29, 1992), citing Arkansas
Louisiana Gas Co., 36 S.E.C. 121, 137 (1954) (the Act
was intended to address "evils * * * which because of
holding company action or control, cannot be
effectively dealt with by other regulatory agencies").
-[12]- Gulf States Utilities Co. v. FPC, 411 U.S. 747, 758
(1973).
-[13]- At the same time, Congress amended the Federal Power
Act to provide effective federal regulation of the
expanding business of transmitting and selling electric
power in interstate commerce. Congress entrusted the
administration of this statute to the Federal Power
Commission (now the Federal Energy Regulatory
Commission), as the agency with the technical expertise
necessary to regulate the transmission of energy. See
Arcadia v. Ohio Power Co., 498 U.S. 73, 87 (1990)
(Stevens, J., concurring). The role of the FERC is
discussed infra at section II.C.1.
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Any company that owns 10 percent or more of the outstanding
voting securities of a public-utility company is presumptively a
holding company for purposes of the Act.-[14]- The burden of
regulation under the Act falls most heavily on holding companies
that have significant interstate utility operations, and are
thereby not readily susceptible to effective state regulation.
These companies must register and comply with the myriad
requirements of the Act.-[15]-
Section 11, which the Supreme Court has described as the
"very heart" of the Act,-[16]- generally limits registered
holding companies to a single integrated public-utility system
and such other businesses as are "reasonably incidental, or
economically necessary or appropriate" to the operations of that
system.-[17]- Companies in a registered holding company system
must obtain Commission approval for a wide range of transactions,
including financings,-[18]- acquisitions,-[19]- and intrasystem
transactions.-[20]- These companies are also subject to various
accounting and reporting requirements.-[21]-
Although most public-utility holding companies are largely
exempt from pervasive regulation under the Holding Company Act,
they nonetheless remain subject to the requirement of prior
Commission approval for utility acquisitions. In addition, the
Commission may challenge the continued availability of an
-[14]- Holding Company Act section 2(a)(7)(A) (15 U.S.C.
79b(a)(7)(A)). For purposes of the Act, a public-
utility company means either an electric or a gas
utility company. Holding Company Act section 2(a)(5)
(15 U.S.C. 79b(a)(5)). An electric utility company
is broadly defined as any company that owns or controls
assets used for the generation, transmission or
distribution of electricity. Holding Company Act
section 2(a)(3) (15 U.S.C. 79b(a)(3)). A gas utility
company is more narrowly defined as any company that
owns or controls assets used for the retail
distribution of gas for heat, light or power. Holding
Company Act section 2(a)(4) (15 U.S.C. 79b(a)(4)).
-[15]- Holding Company Act section 5 (15 U.S.C. 79e).
-[16]- SEC v. New England Elec. System, 384 U.S. 176, 180
(1966), citing North American Co. v. SEC, 327 U.S. 686,
704 n.14 (1946).
-[17]- Holding Company Act section 11(b)(1) (15 U.S.C.
79k(b)(1)).
-[18]- Holding Company Act sections 6, 7 and 12 (15 U.S.C.
79f, g and l).
-[19]- Holding Company Act sections 9 and 10 (15 U.S.C. 79i
and j).
-[20]- Holding Company Act section 13 (15 U.S.C. 79m).
-[21]- See Holding Company Act sections 14 and 15 (15 U.S.C.
79n and o) and rules thereunder.
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exemption under the "unless and except" clause of section
3.-[22]-
B. Legislative and Regulatory Developments Related to the
Holding Company Act
The Commission's early administration of the Act was
largely directed toward the reorganization of existing holding
companies. By the 1950s, this work was largely completed.-[23]-
Since then, the Commission has acted to ensure that the abuses
that gave rise to the Act do not recur.-[24]-
Although the basic framework of the Act remains unchanged,
Congress has created a number of statutory exceptions to the
regulatory scheme. Beginning in the 1970s, Congress enacted the
Public Utility Regulatory Policies Act of 1978 (PURPA)-[25]- to
stimulate alternative energy production. To that end, PURPA
granted "qualifying facilities" (QFs) significant regulatory
advantages over traditional generating facilities. Among other
things, most QFs are exempted from the Holding Company Act,-[26]-
and a registered holding company can acquire interests in QFs
that are unrelated to its core utility operations.-[27]- In
addition, Congress enacted the Gas Related Activities Act of 1990
(GRAA), which permits gas registered holding companies to acquire
significant production and transportation assets that do not
-[22]- Section 3(a) of the Act (15 U.S.C. 79c(a)) authorizes
the Commission in certain circumstances to exempt any
holding company and subsidiary company thereof from any
provision of the Act, "unless and except insofar as it
finds the exemption detrimental to the public interest
or the interest of investors or consumers."
-[23]- See Statement of the U.S. Securities and Exchange
Commission Concerning Proposals to Amend or Repeal the
Public Utility Holding Company Act of 1935 (June 2,
1982).
-[24]- Section 1(c) of the Holding Company Act (15 U.S.C.
79a(c)) directs the Commission to administer all the
provisions of the Act to prevent practices the Congress
found detrimental to the interests of investors,
consumers and the general public (the "protected
interests" under the Act).
-[25]- Pub. L. No. 95-617, 92 Stat. 3117 (1978).
-[26]- Most qualifying facilities are deemed to be
nonutilities for purposes of the Holding Company Act.
See 18 CFR 292.602.
-[27]- See Pub. L. No. 99-186, 99 Stat. 1180 (1985)
(investments in cogeneration by registered gas
systems); Pub. L. No. 99-553, 100 Stat. 3087 (1986)
(investments by registered electric systems); Pub. L.
No. 102-486, 713, 106 Stat. 2776, 2911 (1992)
(section 713 of Energy Policy Act of 1992, investments
by registered holding companies in small power
production).
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directly serve the needs of their retail distribution
systems.-[28]-
Congress accelerated the pace of change in the industry with
the Energy Policy Act of 1992,-[29]- which enables companies to
invest in "exempt wholesale generator"-[30]- and "foreign utility
company"-[31]- operations throughout the United States and
abroad. The Energy Policy Act represented the first major change
in the pattern of regulation under the Holding Company Act.
Congress did not dispense with the need for Commission approval
of activities under PURPA and GRAA: Holding Company Act section
10(b)(3) continues to require that an acquisition not be
detrimental to the public interest or the interests of investors
or consumers. In contrast, the Energy Policy Act broadly exempts
certain wholesale generators from all provisions of the Holding
Company Act and expressly authorizes a registered holding company
to acquire an exempt wholesale generator without the need for
Commission approval. Congress sought to promote this type of
diversification and made the Commission primarily responsible for
protecting consumers of registered holding companies from any
adverse effects of these new ventures. The Commission's
authority in this area, however, is limited; the Commission can
regulate investments in exempt wholesale generators only
indirectly, through its jurisdiction over holding company
financings and other related transactions. This hybrid
regulation has proved troublesome, and the Commission has
strongly recommended that Congress not duplicate the model
developed under the Energy Policy Act.-[32]-
-[28]- Pub. L. 101-572, 104 Stat. 2810 (1990). Gas production
and transportation activities are nonutility businesses
for purposes of the Holding Company Act. See Holding
Company Act section 2(a)(4) (15 U.S.C. 79b(a)(4))
("gas utility company" includes only companies owning
or controlling assets used for retail gas
distribution).
-[29]- Pub. L. No. 102-486, 106 Stat. 2776 (1992).
-[30]- An exempt wholesale generator is any person determined
by the FERC to be engaged exclusively in owning or
operating facilities used for the generation of
electricity for sale at wholesale. See Holding Company
Act section 32(a)(1) (15 U.S.C. 79z-5a(a)(1)); see
also Holding Company Act section 32(b) (15 U.S.C.
79z-5a(b)) (permitting certain foreign retail sales).
-[31]- Briefly stated, any company can claim status as a
foreign utility company by notifying the Commission
that it owns or operates gas or electric utility
facilities outside the United States. See Holding
Company Act section 33(a)(3) (15 U.S.C. 79z-
5b(a)(3)) (such company cannot derive any utility
income from within the United States, and cannot be, or
have a subsidiary that is, a public-utility operating
in the United States).
-[32]- Hearings on Proposals to Lift the Current
Diversification Restrictions on Telecommunications
Activities of Registered Holding Companies Before the
Subcomm. on Telecommunications and Finance and the
(continued...)
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C. Other Regulatory Factors
1. FERC Regulation
The work of the Commission under the Holding Company Act was
intended to complement the work of the Federal Power Commission
(now the FERC) in the regulation of the electric and gas utility
industry.
a. Electricity
The Holding Company Act was enacted as Title I of the Public
Utility Act of 1935.-[33]- Title II of the legislation-[34]-
gave the Federal Power Commission (FPC) broad authority over the
transmission and sale of electricity in interstate commerce.
Congress's decision to entrust administration of the Holding
Company Act to the SEC and administration of the Federal Power
Act to the FPC reflected two differing goals. The Holding
Company Act was intended to curb abusive practices of public-
utility subsidiaries of holding companies by bringing them under
effective control. The Federal Power Act was intended to provide
effective federal regulation of the transmission and sale of
electricity in interstate commerce.-[35]-
-[32]-(...continued)
Subcomm. on Energy and Power of the House Comm. on
Energy and Commerce, 103d Cong., 2d Sess. (1994)
(statement of Richard Y. Roberts, Commissioner, SEC).
Although the Commission has adopted rules 53 and 54 (17 CFR
250.53 and 54) that are intended to protect consumers and
investors from any substantial adverse effect that may be
associated with investments in exempt wholesale generators,
these rules are currently the subject of litigation in the
U.S. Court of Appeals for the District of Columbia Circuit.
NARUC v. SEC, No. 93-1778 (D.C. Cir. filed Nov. 22, 1993).
The Court of Appeals has been asked to consider the extent
to which the Commission must ensure the protection of
consumers of registered holding companies from any detriment
associated with investments in exempt wholesale generators.
The Commission is currently engaged in a related rulemaking
with respect to investments in foreign utility companies.
See Holding Co. Act Release No. 25757 (Mar. 8, 1993), 58 FR
13719 (Mar. 15, 1993) (notice of proposed rulemaking).
-[33]- Pub. L. No. 74-333, 49 Stat. 803 (1935).
-[34]- Pub. L. No. 74-333, 49 Stat. 838 (1935) (codified as
amended at 16 U.S.C. 791a - 828c).
-[35]- See Gulf States Utilities Co. v. FPC, 411 U.S. 747, 758
(1973). The Federal Power Act represented a response
to the gap in state regulation of utility rates and
services that arose in the wake of the decision of the
United States Supreme Court in Public Utilities Comm'n
of Rhode Island v. Attleboro Steam & Elec. Co., 273
U.S. 83, 86-90 (1927), overruled in part, Arkansas
Elec. Coop. v. Ark. Public Service Comm'n, 461 U.S.
375, 390-96 (1983). The Court in Attleboro held that
interstate wholesale sales of electricity were beyond
the reach of state regulation. See New England Power
Co. v. New Hampshire, 455 U.S. 331, 340 (1982). See
generally Note, Federal Regulation of Holding
(continued...)
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The primary focus in the administration of the Federal Power
Act has been the protection of ratepayers against excessive
electric rates.-[36]- Utilities must file wholesale rate
schedules with the FERC, which may then suspend any rate increase
for up to five months, order refunds for rates that it finds
exceed a "just and reasonable" level, and prescribe rates to be
charged prospectively.
Under the Public Utility Regulatory Policies Act, the FERC
adopted rules concerning qualifying facilities. These rules
require electric utilities to interconnect with QFs and to offer
to purchase power from, and sell power to, QFs, and set the
general standard for determining the rates for power sale
transactions with QFs.-[37]-
Following the enactment of PURPA, other independent
generators began to seek entry into bulk power markets. The
FERC, which had traditionally required cost-based rates for
electric power, began to permit market-based rates for
nontraditional sellers that could not exercise market power,
where there was no evidence of affiliate abuse or reciprocal
dealing.-[38]- As traditional, investor-owned utilities began to
seek market-based rates for their existing excess capacity, the
FERC extended its market power analysis to these companies. In
these matters, the FERC required that the utility mitigate its
transmission market power by opening its transmission system to
other wholesale sellers and buyers.-[39]- The FERC has also
-[35]-(...continued)
Companies: The Public Utility Act of 1935, 45 Yale
L.J. 468 (1936).
-[36]- The Federal Power Act also gives the FERC jurisdiction
over accounting practices and over facilities used for
the transmission of electricity in interstate commerce.
Section 204 authorizes the FERC to regulate the
issuance of securities or assumption of obligations or
liabilities by public utilities, but only if such
issuance or assumption is not regulated by a state
utilities commission. 16 U.S.C. 824c. The FERC has
interpreted this authority narrowly. See Michael
Small, A Guide to FERC Regulation and Ratemaking of
Electric Utilities and Other Power Suppliers 18 (3d ed.
1994).
-[37]- Congress in PURPA also gave the FERC direct authority
to order wholesale transmission services by public
utilities and by certain other entities. There were
significant procedural and substantive limitations on
this authority, however, and FERC issued only one order
pursuant to this authority. See Central Power and
Light Co., 17 FERC 61,078 (1981), order on reh'g, 18
FERC 61,100 (1982), further order, Texas Utilities
Elec. Co., 40 FERC 61,077 (1987).
-[38]- See, e.g., Commonwealth Atlantic Ltd. Partnership, 51
FERC 61,368 (1990).
-[39]- See, e.g., Public Service Co. of Indiana, 51 FERC
61,367 (1990).
-------------------- BEGINNING OF PAGE #10 -------------------
relied on open access transmission tariffs to mitigate the
anticompetitive effects of proposed mergers.-[40]-
In the Energy Policy Act of 1992, Congress gave the FERC
additional authority to promote competition in wholesale bulk
power markets by ordering transmission,-[41]- if it finds that to
do so is in the public interest and will not unreasonably impair
the continued reliability of affected electric systems.-[42]-
The FERC is also responsible for determining exempt wholesale
generator status under the Energy Policy Act.-[43]-
b. Natural Gas
FERC regulation of the natural gas industry has changed
significantly since 1938, when the Natural Gas Act gave the FPC
authority to set "just and reasonable" rates for pipelines
selling natural gas for resale in interstate commerce.-[44]-
-[40]- Open access transmission tariffs have been a central
feature of recent combinations involving FERC-regulated
utilities. Major combinations involving FERC-regulated
utilities have included the mergers of Utah Power &
Light Company and PacifiCorp; Northeast Utilities and
Public Service of New Hampshire; Kansas Power & Light
Company and Kansas Gas & Electric Company; Entergy
Corporation and Gulf States Utilities Company;
Cincinnati Gas & Electric Company and PSI Energy, Inc.;
and the proposed merger of Central and South West
Corporation and El Paso Electric Company. With the
exception of the Utah Power & Light merger, each of
these mergers also is subject to the requirement of
approval by the SEC.
-[41]- "Any electric utility, Federal power marketing agency,
or any other person generating electric energy for sale
for resale" may apply to the FERC for an order
requiring a utility to provide "transmission services
(including any enlargement of transmission capacity
necessary to provide such services)." Federal Power
Act section 211(a) (16 U.S.C. 824j(a)).
-[42]- As of September 22, 1994, the FERC had granted six
applications for mandatory services (three proposed
orders and three final orders). See, e.g., City of
Bedford, Virginia, 68 FERC 61,003 (1994).
Since enactment of the Energy Policy Act, the FERC has
undertaken a number of initiatives with respect to the
development of competitive bulk power markets. These
measures include a policy statement on regional transmission
groups, a rulemaking on transmission information
availability, and an inquiry on transmission pricing policy.
In a series of cases, the FERC has also interpreted the
Federal Power Act's prohibition on undue discrimination to
require that transmission owners offer services to others
comparable to those they provide to themselves.
-[43]- An exempt wholesale generator is exempt from all
provisions of the Holding Company Act. See Holding
Company Act section 32(e) (15 U.S.C. 79z-5a(e)).
-[44]- Pub. L. No. 75-688, 52 Stat. 821 (1938) (codified as
amended at 15 U.S.C. 717 - 717w). In 1954, the U.S.
(continued...)
-------------------- BEGINNING OF PAGE #11 -------------------
Under the Natural Gas Act, the FPC had jurisdiction over both the
price and the allocation of natural gas sold at the wellhead for
resale in interstate commerce. During the late 1960s and the
early 1970s, the FPC kept the wellhead price for interstate
natural gas artificially low, thereby encouraging consumption.
At the same time, the federal price restraints discouraged
producers from dedicating reserves to the pipelines that served
the interstate market. The result was a series of gas shortages
in the mid-1970s.
In reaction to these shortages, Congress enacted the Natural
Gas Policy Act of 1978, which provided for partial decontrol of
natural gas at the wellhead.-[45]- Over the next decade,
Congress and the FERC worked to encourage competition in the
natural gas industry. Pursuant to the Natural Gas Wellhead
Decontrol Act of 1989, the FERC implemented full producer
deregulation, effective January 1, 1993.-[46]-
The latest of the FERC's major natural gas rulemakings,
Order No. 636, significantly changed the structure of the
services provided by interstate pipelines.-[47]- Among other
things, the order requires that pipelines provide open access
transportation service that is equal in quality for all gas
supplies, regardless of whether the customer purchases gas from
the pipeline or from another supplier.
2. State and Local Regulation
Regulation of electric and gas utilities varies among state
and local governments. Most state commissions have authority to
issue licenses, franchises or permits for the initiation of
service, for construction or abandonment of facilities and
related matters. With respect to retail rates, state commissions
generally have the power to require prior authorization of rate
changes, to suspend proposed rate changes, to prescribe interim
rates and to initiate rate investigations. Most state
commissions also have authority to control the quantity and
quality of service, to require uniform systems of accounting, and
to regulate the issuance of securities.-[48]-
Congress intended that the Commission's work be coordinated
with, and complement, the work of state and local
-[44]-(...continued)
Supreme Court ruled that sales by independent producers
were also subject to regulation under the Natural Gas
Act. Phillips Petroleum Co. v. Wisconsin, 347 U.S. 672
(1954).
-[45]- Pub. L. No. 95-621, 92 Stat. 3351 (1978) (repealed in
1987).
-[46]- Pub. L. No. 101-60, 103 Stat. 157 (1989) (codified as
amended at 15 U.S.C. 3331).
-[47]- Regulation of Natural Gas Pipelines After Partial
Wellhead Decontrol, Order No. 636, 57 FR 13267 (Apr.
16, 1992).
-[48]- See Charles F. Phillips, Jr., The Regulation of Public
Utilities: Theory and Practice 136 (1993).
-------------------- BEGINNING OF PAGE #12 -------------------
regulators.-[49]- In recent years, the Commission has worked in
consultation with these regulators on a number of matters.
3. Other Considerations
Registered holding companies are subject to extensive
reporting requirements under the Act. In addition, the
securities of these companies are publicly held and are
registered under the Securities Act of 1933 ("Securities Act"),
and the companies must comply with the continuous disclosure
requirements of the Securities Exchange Act of 1934 ("Exchange
Act"). When Congress passed the Holding Company Act, these laws
were still in their infancy. Congress has amended the Securities
Act and the Exchange Act several times since 1935, in order to
expand and strengthen the disclosure and reporting requirements,
as well as the Commission's ability to enforce these
provisions.-[50]- Thus, it appears that investors today have far
greater access to information concerning their investment
decisions.
The Commission requests comment on these and other factors,
including the development of generally accepted accounting
principles and the role of nationally recognized statistical
rating organizations (NRSROs)-[51]- in protecting consumers and
investors against holding company abuses.
III. Conceptual Issues
The electric and gas utility industry is in transition. The
rapid growth that characterized the industry in the early part of
this century has diminished. In addition, companies must adapt
to an increasingly competitive environment. The present model of
regulation under the Act, which strictly limits the size of a
system's utility operations and the scope of its nonutility
businesses, was intended to focus the attention of the registered
holding company on the needs of its operating utilities, and
thereby protect consumers and investors from the risks that might
be associated with unrelated businesses. Some have suggested
that this model is no longer appropriate and that market
-[49]- Numerous sections of the Act refer to regulation at the
state and local level. See, e.g., Holding Company Act
sections 2(a)(26), 6(b), 8, 9(b), 10(f), 18, 19 and
20(b) (15 U.S.C. 79b(a)(26), f(b), h, i(b), j(f), r,
s and t(b)).
-[50]- See, e.g., Securities Acts Amendments of 1964, Pub. L.
No. 88-467, 78 Stat. 565 (1964) (extending Securities
Exchange Act registration requirements to over-the-
counter securities); Williams Act, Pub. L. No. 90-439,
82 Stat. 454 (1968) (additional disclosure requirements
in situations of control acquisitions); Securities
Enforcement Remedies and Penny Stock Reform Act of
1990, Pub. L. No. 101-429, 104 Stat. 931 (1990)
(increasing Commission's authority to seek and impose
remedies against securities law violations).
The courts have also permitted private litigants to bring
actions for violations of certain provisions of the
securities laws. See, e.g., Blue Chip Stamps v. Manor Drug
Stores, 421 U.S. 723, reh'g denied, 423 U.S. 884 (1975)
(implied private right of action for securities fraud).
-[51]- See Securities Act Release No. 7085 (Aug. 31, 1994), 59
FR 46314 (Sept. 7, 1994) (concept release concerning
the definition and status of NRSROs).
-------------------- BEGINNING OF PAGE #13 -------------------
conditions require a broader focus on energy services and other
nonutility activities. The Act, as currently administered, does
not afford the degree of flexibility that many believe will be
necessary to meet these changes.
One purpose of the study is to explore a new approach to
regulation in this area. The Act was intended to protect the
public interest and the interests of investors and consumers.
The phrase "public interest" has been used in connection with the
policy of curing evils that result "when the growth and extension
of holding companies bears no relation to economy of management
and operation or the integration and coordination of related
operating properties."-[52]-
The need for adequate disclosure for investors has largely
been addressed by developments in the federal securities laws and
in the securities markets themselves.-[53]- With respect to
consumer interests, it appears that retail distribution will
continue to be a monopoly for at least the next decade, thus
justifying the continued protection of captive consumers.
The Commission has noted that there is an inherent tension
between the drive toward competitive markets, and the need to
protect captive utility customers.-[54]- The magnitude of the
anticipated change in the utility industry raises concerns
whether any regulator can effectively protect ratepayers.-[55]-
While some believe that market forces will ultimately result in
lower prices for consumers, others suggest that there will be
losers as well as winners along the way.-[56]- At a minimum, any
new approach must carefully balance the competing interests, and
provide safeguards against detriment to consumers.
-[52]- Holding Company Act section 1(b)(4) (15 U.S.C.
79a(b)(4)), cited in North American Co., 11 S.E.C.
194, 218-219 (1942), aff'd, 133 F.2d 148 (2d Cir.
1943), aff'd, 327 U.S. 686 (1946).
-[53]- See section 1(b)(1) of the Holding Company Act (15
U.S.C. 79a(b)(1)) (investor interests may be
adversely affected "when such investors cannot obtain
the information necessary to appraise the financial
position or earning power of the issuers").
-[54]- Holding Co. Act Release No. 25886 (Sept. 23, 1993), 58
FR 51488 (Oct. 1, 1993).
-[55]- At present, registered holding companies can readily
invest up to 50 percent of their consolidated retained
earnings, or approximately $7 billion, in exempt
wholesale generators and foreign utility companies.
See rule 53(a) under the Holding Company Act (17 CFR
250.53(a)).
-[56]- The introduction of competition in the natural gas
industry, for example, was not without its costs. Many
producers went out of business when wellhead prices
collapsed. See Donald F. Santa, Jr. and Patricia J.
Beneke, Federal Natural Gas Policy and the Energy
Policy Act of 1992, 14 Energy L.J. 1, 8 (1993). The
Columbia Gas System, a registered gas utility holding
company, has filed for relief under Chapter 11 of the
Bankruptcy Code (11 U.S.C. 1101 et seq.) in large
part as a result of uneconomic take-or-pay contracts.
-------------------- BEGINNING OF PAGE #14 -------------------
Reform of existing regulation also calls into question the
roles of the respective regulators. The Commission requests
comments on these topics, especially on the need to adjust
responsibilities among the regulators. It would be helpful, in
this regard, for commenters to provide specific information
concerning the various regulatory approvals that may be required
for a transaction under present law.
The studies that preceded the Act found "wide differences in
the extent and effectiveness of the regulatory policies of the
various States."-[57]- Although there has been a significant
increase in the reach of state utility regulation, the Commission
has noted that the pattern of state control over operating
utilities and their relationships with affiliates remains
uneven.-[58]- There are concerns that the states remain unable
to regulate interstate holding companies directly in a
comprehensive fashion.-[59]-
The Commission seeks comment on the current status of the
regulation of electric and gas utilities by the states. In
particular, descriptions of the regulatory systems of each state
would be helpful in determining the extent to which state
regulators would be able to provide regulatory protection in the
absence of a federal holding company statute. Comment is
requested on the problems inherent in the regulation of a
multistate system, including the possibility of conflict among
the various state and local regulators.
Comment is also sought on the role of the FERC in regulating
utility holding companies. Would the FERC's existing authority,
combined with that of the states, suffice to protect consumers?
In the absence of the Holding Company Act, it appears that there
would be little direct regulation of the nonutilities that may
ultimately comprise a significant part of a registered system's
business activities. If there is a continuing need for a federal
holding company statute, should the FERC rather than the SEC
administer it?
IV. Specific Topics to Be Addressed
To facilitate the identification of issues, paragraphs in
which comments are specifically requested in this section are
numbered consecutively. Commenters are encouraged to refer to
these numbers in their comments, but are also welcome to comment
on any issues not contained in numbered paragraphs.
A. Financings and Intrasystem Transactions
Under the Holding Company Act, the Commission has broad
authority over financings and intrasystem transactions involving
companies in a registered holding company system. As discussed
above, FERC and state regulatory approval is also required for
certain transactions. In addition, the FERC and state
regulators, in the exercise of ratemaking authority, may
-[57]- Summary Report of the Federal Trade Commission to the
Senate, Utility Corporations, S. Doc. No. 92, 70th
Cong., 1st Sess., pt. 73-A, at 2 (1935).
-[58]- See, e.g., Statement of the U.S. Securities and
Exchange Commission Concerning Proposals to Amend or
Repeal the Public Utility Holding Company Act of 1935
(June 2, 1982).
-[59]- See The National Energy Security Act of 1991: Hearings
on S. 341 Before the Senate Comm. on Energy and Natural
Resources, 102d Cong., 1st Sess. (1991) (statement of
Edward H. Fleischman, Commissioner, SEC).
-------------------- BEGINNING OF PAGE #15 -------------------
determine whether the costs associated with such transactions
will be passed on to utility consumers.
1. Financings
Prior Commission approval is generally required for the
issuance and sale of securities by a company in a registered
system.-[60]- The Commission can refuse to authorize the
issuance of a security that is not reasonably adapted to the
capital structure of the issuer and other companies in the
holding company system, or to the earning power of the issuer, or
that "is not necessary or appropriate to the economical and
efficient operation of a business in which the applicant lawfully
is engaged or has an interest."-[61]- The Act also requires
Commission approval for various intrasystem financing
transactions, including, among other things, loans from the
parent to a subsidiary company, and guarantees by the parent of
the obligations of a subsidiary company.-[62]-
1. Comment is sought on the Commission's review of
financing transactions. As a general matter, are the protections
provided by such review still necessary in view of developments
in state and federal regulation? If this review is still needed,
how could it be made more effective and efficient?
2. At the Roundtable, many participants emphasized the need
to streamline Commission review and liberalize the standards for
financings. Regulatory delay was described as an impediment to
the companies' ability to access the capital markets. How
critical a role does timing play in financial decisions? To what
extent is regulatory delay an obstacle to desirable financing
opportunities?
-[60]- See Holding Company Act section 6(a) (15 U.S.C.
79f(a)). The Act permits the Commission to grant
exemptions in certain situations, such as the issuance
and sale of securities by a subsidiary if the
transaction is expressly authorized by a state
regulatory commission. See section 6(b) (15 U.S.C.
79f(b)).
-[61]- Holding Company Act section 7 (15 U.S.C. 79g). This
standard has been modified for financings by registered
holding companies for the purpose of acquiring
interests in exempt wholesale generators. Holding
Company Act section 32(h)(3) (15 U.S.C. 79z-5a(h)(3))
provides that
the Commission shall not make a finding that such
security is not reasonably adapted to the earning power
of such company or to the security structure of such
company and other companies in the same holding company
system, or that the circumstances are such as to
constitute the making of such guarantee an improper
risk for such company, unless the Commission first
finds that the issue or sale of such security, or the
making of the guarantee, would have a substantial
adverse impact on the financial integrity of the
registered holding company system[.]
See also rule 53 (17 CFR 250.53).
-[62]- See Holding Company Act section 12 (15 U.S.C. 79l)
and rules thereunder.
-------------------- BEGINNING OF PAGE #16 -------------------
3. The Commission has adopted an approach, similar to the
shelf-registration provisions of rule 415 under the 1933
Act,-[63]- under which a registered company may obtain
authorization for all short-term debt financings contemplated for
a two-year period.-[64]- Could this approach be expanded or
altered to meet the companies' need for greater flexibility and
speed of approval? Could a safe harbor for routine financings be
properly tailored to balance a company's need for flexibility and
speed with the need to protect ratepayers? What should be the
parameters of a safe harbor (e.g., minimum capitalization,
dividend payout ratios, third-party credit ratings)? How should
such routine financings be defined for the purpose of a safe
harbor rule?
4. At the Roundtable, some suggested that utilities would
like to issue a greater variety of securities in order to reduce
capital costs. Under current administration of the Act,
registered companies are generally limited to conventional
securities, such as common stock, preferred stock, and first
mortgage bonds. Should the financing standards be eased to
permit companies in registered systems to issue different types
of securities? What are the perceived risks and benefits of
allowing such companies to issue innovative types of securities?
What limitations, if any, would be appropriate in this regard?
For example, should the Commission modify requirements such as
minimum capitalization and coverage ratios to reflect current
financing practices?
5. Some of the concerns described above could be addressed
through Commission rulemaking. For example, the Commission has
eased regulatory burdens in this area by adopting rule 52, which
provides a safe harbor for certain routine utility financings
that have been approved by the relevant state commission.-[65]-
Has this rule been effective? Should other routine utility
financings be similarly exempted? To what extent do state
regulators currently regulate utility financings, or rely on the
Commission's review of these transactions? Do the states have
sufficient resources and authority to undertake more extensive
reviews in this area?
6. The Commission has proposed further amendments to rule
52 that would unconditionally exempt many nonutility
-[63]- 17 CFR 230.415.
-[64]- See, e.g., Northeast Utilities, Holding Co. Act Release
No. 25710 (Dec. 16, 1992), 53 SEC Dkt. 0190 (Jan. 5,
1993).
-[65]- 17 CFR 250.52 (Commission approval is not required for
a utility subsidiary of a registered holding company to
issue or sell common stock, preferred stock, and
mortgage bonds, or to issue a note to its parent
company, for the purpose of financing its business as a
public-utility company, where the financing transaction
has been expressly approved by the relevant state
commission). The Commission has requested comment on
an amendment that would exempt additional types of
utility financings. See Holding Co. Act Release No.
25574 (July 7, 1992), 57 FR 31156 (July 14, 1992).
-------------------- BEGINNING OF PAGE #17 -------------------
financings.-[66]- Should different standards apply to financings
by system nonutility companies? For example, nonrecourse
obligations are not counted toward the overall limit on a
system's aggregate investment in exempt wholesale generators and
foreign utility companies for purposes of rule 53 under the Act.
7. Under present law, intrasystem financings must mirror
the terms of a system's external financings.-[67]- This
requirement is intended to protect the system's operating
companies, by ensuring that the holding company does not profit
from intrasystem transactions. Is this restriction still needed,
particularly with respect to nonutility financings?
8. The Commission regulates the ability of registered
holding companies to declare and pay dividends.-[68]- Should the
Commission ease the limitations imposed upon this activity?
9. Some have suggested that rating agencies perform a
valuable service in highlighting potential financial
instabilities. The Commission's administration of other
securities statutes relies in some circumstances on the existence
of investment grade ratings by nationally recognized statistical
rating organizations.-[69]- Should the Commission pursue a
regulatory approach that would utilize NRSRO credit ratings of
utility companies in a registered holding company system?
2. Intrasystem Transactions
Under the Holding Company Act, the Commission also has broad
authority over transactions among companies in a registered
system. Section 13, in particular, was intended to eliminate
abusive practices whereby utility subsidiaries were forced to pay
grossly inflated costs for services and goods provided by an
affiliate company. The profits from these transactions flowed to
the holding company's controlling investors; the inflated costs
were passed on as higher rates to consumers.-[70]-
-[66]- See Holding Co. Act Release No. 25574 (July 7, 1992),
57 FR 31156 (July 14, 1992) (requesting comment on,
among other things, an exemption for nonutility
transactions that "are solely for the purpose of
financing the [company's] existing business").
-[67]- See, e.g., Consolidated Natural Gas Co., Holding Co.
Act Release No. 26072 (June 27, 1994), 57 SEC Dkt. 0067
(July 26, 1994).
-[68]- See, e.g., Holding Company Act rule 46 (17 CFR 250.46).
-[69]- See, e.g., 17 CFR 240.15c3-1 (net capital rule for
broker-dealers); 17 CFR 239.13(b)(2) (instructions for
Securities Act Registration Form S-3). The Commission
recently issued a release in which it posed questions
regarding the Commission's reliance on NRSRO ratings.
See Securities Act Release No. 7085 (Aug. 31, 1994), 59
FR 46314 (Sept. 7, 1994). Comments on the release are
available for public inspection in File No. S7-23-94.
-[70]- Section 13 of the Act
is designed to free public-utility companies
of the tribute heretofore extracted from them
in the performance of service, sales, and
construction contracts by their holding
companies and by servicing, construction, and
(continued...)
-------------------- BEGINNING OF PAGE #18 -------------------
The central provision, section 13(b), prohibits holding
company subsidiaries from entering into or performing any
service, sales, or construction contracts for associate companies
unless the terms and conditions of the contract comply with
Commission rules, regulations and orders.-[71]- Under the
Commission's rules, interaffiliate transactions must generally be
conducted at cost.-[72]-
10. Some commenters have suggested that the concerns about
intrasystem transactions reflected in the Holding Company Act are
no longer relevant. To what extent should the federal government
regulate such transactions to prevent affiliate abuses?
11. Under current law, affiliate transactions may be
subject to multiple regulatory reviews. Companies in a
registered system generally must obtain Commission approval to
enter into affiliate contracts. The costs associated with these
transactions may be subject to further review by the FERC and
state regulators. The possibility of inconsistent determinations
by the various regulators was highlighted by the recent Ohio
Power decision, in which the U.S. Court of Appeals for the
District of Columbia Circuit held that the FERC was precluded
from reexamining costs established pursuant to a Commission order
under section 13(b) of the Act.-[73]- There are concerns that
the Ohio Power decision can be interpreted to challenge the
ability of the FERC, as well as state and local regulators, to
protect consumers through traditional ratemaking proceedings.
How can these concerns best be addressed?-[74]- Should
responsibility in this area continue to be apportioned between
the SEC and the FERC?
12. Several commenters at the Roundtable emphasized the
need for a single federal arbiter, either the SEC or the FERC, in
order to avoid inconsistent state determinations and any
potential tendency among states to shift costs to other
-[70]-(...continued)
other companies controlled by their holding
companies. Such contracts when made freely
and openly by parties dealing at arms' length
are subject to the checks incident to our
competitive system, but when dictated by
holding companies sitting on both sides of
the transaction are one of the most abused
devices of the public-utility holding company
system.
S. Rep. No. 621, 74th Cong., 1st Sess. 36 (1935).
-[71]- 15 U.S.C. 79m(b).
-[72]- See rules 90 - 92 under the Holding Company Act, 17
CFR 250.90 - 92.
-[73]- Ohio Power Co. v. FERC, 954 F.2d 779 (D.C. Cir.), cert.
denied, 113 S. Ct. 483 (1992).
-[74]- The Commission staff is working on a rulemaking to
address these concerns. In addition, Congress has
considered legislation to clarify the regulatory roles
of the Commission and the FERC with respect to the
approval of contracts and rates related to intra-
system transactions. See S. 544, 103d Cong., 1st Sess.
(1993); H.R. 4645, 103d Cong., 2d Sess. (1994).
-------------------- BEGINNING OF PAGE #19 -------------------
jurisdictions. Should federal oversight of these transactions be
consolidated under a single regulator?
13. What role, if any, should states play in regulating
such transactions? What additional powers do state regulators
need to be able to protect consumers against affiliate abuses?
Some states, for example, may not have access to all relevant
books and records.-[75]- Should state access be enhanced if
Holding Company Act restrictions are to be relaxed?
14. Should transactions between utilities in a holding
company system be regulated differently than transactions between
a utility and a nonutility company in a holding company system?
B. Utility Acquisitions
The Commission is charged with overseeing the growth and
extension of holding companies to avoid recreating, by
acquisition, the problems that the Act was intended to undo or
eliminate.-[76]- The Holding Company Act addresses these
concerns by requiring Commission approval for most utility
acquisitions. The standards for acquisition approval relate to
the overall structure of the resulting system, and the effect of
the acquisition upon the public interest and the interests of
investors and consumers, the "protected interests" under the Act.
15. There have been suggestions that the Commission's work
in this area has been largely superseded by the FERC's review of
utility mergers.-[77]- In recent matters, the Commission has
relied upon the FERC's analysis of certain issues that are
closely linked to operations. The Commission requests comment on
the extent to which its review under the standards of section 10
may duplicate the efforts of other regulators.
16. Comment is also requested on the issue of takeover
attempts of utility operating companies or their parent holding
companies. What has been the effect of the Holding Company Act
on such takeover attempts in the past? Should the Commission
devise special rules for such takeovers?-[78]-
-[75]- Access to books and records is discussed further below.
See Section IV.E infra.
-[76]- Public Service Co. of Oklahoma, 45 S.E.C. 878, 882
(1975).
-[77]- See section 203 of the Federal Power Act. 16 U.S.C.
824b. The legislative history indicates that section
203 was intended to complement the Holding Company Act.
See S. Rep. No. 621, 74th Cong., 1st Sess. 50 (1935)
("In this way the [FERC] would have authority to keep
the same kind of check upon the creation of spheres of
influence among operating companies that the Securities
and Exchange Commission has over holding companies
under [the Holding Company Act].").
Until recently, the FERC did not exercise jurisdiction over
the merger of holding companies. See Missouri Basin
Municipal Power Agency v. Midwest Energy Co., 53 FERC
61,368 (1990). The agency, however, has revised its
position and announced that such mergers are presumptively
subject to FERC approval. See Illinois Power Co., 67 FERC
61,136 (1994).
-[78]- Rule 51 provides that a tender offer is subject to the
section 9(a) restrictions on acquisitions of utility
(continued...)
-------------------- BEGINNING OF PAGE #20 -------------------
1. Integration
Under section 11 of the Act, a registered holding company is
generally limited to a single integrated public-utility system.
The integration requirement was intended to ensure economical and
efficient utility operations in the context of a monopoly
environment. Some critics have challenged the continuing
usefulness of this requirement, given the movement towards
greater competition in the industry.
17. Does the integration requirement still serve the
interests of investors and consumers? What effect does
geographic proximity have on a utility's efficiency of operation,
particularly in view of open access transmission policies?-[79]-
Has the requirement of geographic integration hindered the
development of creative solutions to the production and delivery
of energy?
18. One of the assumptions underlying the Act was that
utilities were essentially local institutions that should be
locally controlled and owned.-[80]- Is this premise still valid,
in view of the technological and regulatory developments of the
past 60 years?
19. The definition of an "integrated public-utility system"
gives the Commission flexibility to respond to technological
advances and other changes in the industry.-[81]- Should the
-[78]-(...continued)
securities by utility affiliates, unless the tender
offer meets certain conditions. 17 CFR 250.51.
-[79]- Although the Energy Policy Act of 1992 permits
registered holding companies to acquire exempt
wholesale generators and foreign utility companies
without regard for physical interconnection and
geographic proximity, the rationale for this type of
exemption appears to be that there are no "captive"
U.S. consumers associated with these new entities.
-[80]- See, e.g., 79 Cong. Rec. 8389 (1935) (statement of Sen.
Wheeler).
-[81]- Section 2(a)(29) (15 U.S.C. 79b(a)(29)) defines an
"integrated public-utility system" as follows:
(A) As applied to electric utility companies, a system
consisting of one or more units of generating plants
and/or transmission lines and/or distributing
facilities, whose utility assets, whether owned by one
or more electric utility companies, are physically
interconnected or capable of physical interconnection
and which under normal conditions may be economically
operated as a single interconnected and coordinated
system confined in its operations to a single area or
region, in one or more States, not so large as to
impair (considering the state of the art and the area
or region affected) the advantages of localized
management, efficient operation, and the effectiveness
of regulation; and
(B) As applied to gas utility companies, a system
consisting of one or more gas utility companies which
are so located and related that substantial economies
(continued...)
-------------------- BEGINNING OF PAGE #21 -------------------
definition be read to accommodate nontraditional systems? For
example, one commenter has suggested that, as a result of open
access policies, all gas companies in the United States could be
deemed to comprise a single integrated system.-[82]-
2. Combination Systems
The Commission and the courts have previously interpreted
section 11 of the Holding Company Act to prohibit a registered
holding company from owning both gas and electric
facilities.-[83]- There is a tension between this precedent and
section 8 of the Act, which appears to contemplate the
combination of gas and electric properties.-[84]-
-[81]-(...continued)
may be effectuated by being operated as a single
coordinated system confined in its operations to a
single area or region, in one or more States, not so
large as to impair (considering the state of the art
and the area or region affected) the advantages of
localized management, efficient operation, and the
effectiveness of regulation; Provided, That gas utility
companies deriving natural gas from a common source of
supply may be deemed to be included in a single area or
region.
-[82]- See Columbia Gas System, Initial Comments on the Need
for Legislative Reform (Aug. 10, 1994) (available in
Public Comment File No. S7-19-94).
-[83]- See SEC v. New England Elec. System, 384 U.S. 176, 183
(1966); Northeast Utilities, Holding Co. Act Release
No. 24908 (June 22, 1989), 43 SEC Dkt. 2115, 2135-37
(July 5, 1989). These decisions focused largely on the
anticompetitive effects of dual electric and gas
ownership.
-[84]- Section 8 (15 U.S.C. 79h) provides:
Whenever a State law prohibits, or requires approval or
authorization of, the ownership or operation by a
single company of the utility assets of an electric
utility company and a gas utility company serving
substantially the same territory, it shall be unlawful
for a registered holding company, or any subsidiary
company thereof, by use of the mails or any means or
instrumentality of interstate commerce, or otherwise--
(1) to take any step, without the express approval of
the State commission of such State, which results
in its having a direct or indirect interest in an
electric utility company and a gas utility company
serving substantially the same territory; or
(2) if it already has any such interest, to acquire,
without the express approval of the State
commission, any direct or indirect interest in an
electric utility company or gas utility company
serving substantially the same territory as that
served by such companies in which it already has
an interest.
(continued...)
-------------------- BEGINNING OF PAGE #22 -------------------
20. What are the perceived risks and benefits of allowing
registered holding companies to own and operate a combination of
gas and electric properties?-[85]- Specifically, are gas and
electric utilities sufficiently similar in operation and
management that ownership by a single holding company could lead
to gains in efficiency? Are there adequate protections against
the potential anticompetitive effects of such combination
systems?
3. Foreign Ownership
Congress in 1935 did not consider the question of foreign
ownership of U.S. public-utility companies. The Energy Policy
Act of 1992 authorized foreign ownership of U.S. exempt wholesale
generators which, by definition, have no retail customers. The
legislation did not address the further issue of foreign
ownership of a U.S. utility with captive retail customers. The
Commission has been asked to consider this issue in a pending
administrative proceeding, Noverco, Inc., Admin. Pro. File No. 3-
7097.-[86]-
Federal law imposes various restrictions on foreign
ownership of other regulated industries. Some laws specifically
restrict foreign ownership,-[87]- while others provide for such
ownership subject to certain conditions. The Federal Aviation
-[84]-(...continued)
In addition, the Commission has permitted combination
systems under the so-called "A-B-C clauses" of section
11(b)(1), which permit a registered holding company to
control additional integrated public-utility systems if
(A) each additional system cannot be operated as an
independent system without the loss of substantial
economies, (B) all additional systems are located in one
state, or in adjoining states, or in a contiguous foreign
country, and (C) the continued combination of such systems
under the control of such holding company is not so large
(considering the state of the art and the area or region
affected) as to impair the advantages of localized
management, efficient operation, or the effectiveness of
regulation. See 15 U.S.C. 79k(b)(1). See also UNITIL
Corp., Holding Co. Act Release No. 25524 (Apr. 24, 1992), 51
SEC Dkt. 0764 (May 12, 1992).
-[85]- In a recent matter, the Commission reserved
jurisdiction, pending the completion of the Study, over
the ownership of electric and gas properties by a
registered holding company. See CINergy Corp., Holding
Co. Act Release No. 26146 (Oct. 21, 1994).
-[86]- At issue in that matter is the acquisition of a Vermont
gas utility by a Canadian holding company. The
Division of Investment Management opposed the
acquisition, arguing that the Holding Company Act does
not permit foreign ownership of a domestic public-
utility company.
-[87]- See, e.g., 16 U.S.C. 797 (power production on land
and water controlled by the U.S. government); 42 U.S.C.
2131 - 2134 (prohibition of foreign ownership or
control of facilities that produce or use nuclear
materials); 42 U.S.C. 6508 and 43 U.S.C. 1701 et
seq. (oil and gas leases within the National Petroleum
Reserve).
-------------------- BEGINNING OF PAGE #23 -------------------
Act, for example, establishes percentage limitations on board
membership and voting interests in determining whether an air
carrier is considered a United States citizen.-[88]-
21. At the Roundtable, many commenters expressed the view
that foreign investors should be permitted, subject to
appropriate conditions, to acquire U.S. utilities. Should the
law permit such foreign ownership? What conditions should be
placed on foreign ownership?
22. Is there a national security interest in restricting
foreign ownership of U.S. utilities?-[89]- Are there
difficulties in obtaining information from foreign companies that
would support limitations on foreign ownership? What types of
safeguards or limitations on ownership might prevent or minimize
such risks?
23. United States companies have acquired significant
interests in foreign utilities over the past several years.
Would restrictions on foreign ownership of U.S. utilities be
likely to lead to restrictions on investment in foreign utilities
by U.S. investors?
C. Diversification
Among other things, the Holding Company Act was intended to
simplify the structure of the utility industry by confining
holding companies to the management of a single system of
operating companies, without entanglement in extraneous lines of
business. Section 11(b)(1) provides that nonutility businesses
must be "reasonably incidental, or economically necessary or
appropriate" to a system's core utility operations. The
Commission and the courts have interpreted the "other business"
provisions to require a "functional relationship" between a
nonutility business and the utility operations of a registered
holding company system.-[90]- The functional relationship
requirement was intended to focus the attention of the registered
holding company on its operating utilities in order to protect
consumers and investors from risks associated with unrelated
businesses.
24. At the Roundtable, many commenters expressed the
opinion that additional latitude is necessary. To what extent do
utilities hope to improve their economic position through
diversification? How can the applicable standards be made more
flexible while retaining appropriate consumer protections?
-[88]- See 49 U.S.C. 1301(16) (air carrier considered U.S.
citizen if president and two-thirds of board of
directors and other managing officers are U.S. citizens
and at least 75% of voting interest is owned or
controlled by U.S. citizens).
-[89]- Congress has authorized the President to investigate
the national security effects of "foreign control of
persons engaged in interstate commerce in the United
States," and to suspend or prohibit any acquisition,
merger, or takeover of such persons in order to protect
the national security. 50 U.S.C. App. 2170. The
President has established the Committee on Foreign
Investment in the United States to administer this
authority. See 31 CFR 800.101 et seq.
-[90]- See Michigan Consol. Gas Co. v. SEC, 444 F.2d 913 (D.C.
Cir. 1971); CSW Credit, Inc., Holding Co. Act Release
No. 25995 (Mar. 2, 1994), 56 SEC Dkt. 0521 (Mar. 22,
1994).
-------------------- BEGINNING OF PAGE #24 -------------------
25. What are the risks and benefits of diversification for
consumers? What are the risks and benefits for investors? Under
what circumstances would the risks associated with
diversification outweigh the potential benefits? Is low earnings
growth in the core utility business the primary justification for
further diversification? Do other factors, such as the cyclical
business patterns of other industries, also support
diversification?
26. Should there be limits on diversification by registered
holding companies? If so, what types of limits are most
appropriate (e.g., investment caps, ratios based on retained
earnings or income, regulatory veto authority)? If not, how
would increased diversification affect the ability of the FERC
and state regulators to protect the interests of consumers?
27. Has the requirement that nonutility interests be
"functionally related" to a system's core utility operations
demonstrably benefited investors and consumers of registered
holding companies? What has been the experience of companies
that were not similarly constrained?-[91]- Are there limits on
diversification by these companies? Are these experiences likely
to be repeated in the future, or did they result from unique
circumstances? Do these companies face other types of
limitations?
28. If constraints on diversification were eased, would
there be a need for additional safeguards against cross-
subsidization? What are the major issues in this area? For
example, does a nonutility's use of proprietary information such
as an associate utility's customer information raise cross-
subsidization concerns?
29. Should there be different limitations on foreign and
domestic diversification by registered holding companies?
30. To what extent should a utility's past experience in a
particular type of business affect its ability to engage in
similar activities in the future?
D. Exemptions
There are a number of exemptions from, or exceptions to,
regulation under the Act for certain companies. Each reflects a
legislative determination that the purposes and policies of the
Act are not implicated. Certain entities do not come within the
ambit of the Act.-[92]- Other entities are subject to limited
regulation under the Act because they are presumptively subject
to effective state regulation,-[93]- or because there is limited
-[91]- Some analysts have observed that utilities that
diversified in the past decade did not fare as well
economically as the registered holding companies, which
were unable to diversify. See, e.g., Charles M.
Studness, Earnings from Utility Diversification
Ventures, Pub. Util. Fort., Sept. 1, 1992, at 28 - 29.
-[92]- For example, the Commission has authority to declare
that an entity is not an electric utility company, gas
utility company, holding company, or subsidiary company
within the meaning of the Act. See Holding Company Act
sections 2(a)(3), 2(a)(4), 2(a)(7) and 2(a)(8) (15
U.S.C. 79b(a)(3), b(a)(4), b(a)(7) and b(a)(8)) and
rules thereunder.
-[93]- See Holding Company Act section 3(a)(1) (15 U.S.C.
79c(a)(1)) ("predominantly intrastate" holding
(continued...)
-------------------- BEGINNING OF PAGE #25 -------------------
regulatory concern.-[94]- In each instance, the exemption may be
revoked by the Commission on a finding of detriment to the
interests of investors or consumers.
31. The Commission generally exempts holding companies from
all provisions of the Act except section 9(a)(2), which requires
Commission approval for subsequent utility acquisitions. What
has been the experience of exempt holding companies? Is there a
continuing need to review utility acquisitions by exempt holding
companies? Conversely, is there a need for increased Commission
oversight in some areas?
32. Do the theories underlying these exemptions remain
valid? What other types of companies should be exempted from the
Act? Should the Commission adopt safe harbors in this area?
Should state certification be a condition for exemption?-[95]-
E. The Audit Function
The Act gives the Commission broad authority to impose
reporting and accounting requirements for registered holding
companies. Among other things, the Commission may require the
filing of annual, quarterly, and other periodic reports by
registered holding companies, and may require such reports to be
certified by an independent public accountant.-[96]- The
Commission can establish the form of accounts and prescribe
uniform methods of keeping accounts for registered system
companies.-[97]-
1. Books and records
33. As companies increasingly engage in activities not
directly related to their core utility operations, it becomes
more important for ratemakers to have access to the information
necessary to protect utility consumers from the potential adverse
effects of these new ventures. Under the Act, the Commission has
broad access to the books and records of companies in a
-[93]-(...continued)
company); section 3(a)(2) (15 U.S.C. 79c(a)(2))
(holding company that is "predominantly a public-
utility company").
-[94]- See Holding Company Act section 3(a)(3) (15 U.S.C.
79c(a)(3)) (utility operations functionally related
to holding company's primary nonutility business);
section 3(a)(4) (15 U.S.C. 79c(a)(4)) (company is
only temporarily a holding company); and section
3(a)(5) (15 U.S.C. 79c(a)(5)) (U.S. company holds
essentially foreign utility operations).
-[95]- Columbia Gas System, Inc., for example, has suggested
that Congress should amend section 3(a)(1) to exempt a
holding company of which each utility subsidiary is
predominantly intrastate in character and carries on
its business substantially in a single state subject to
regulation by a state authority as to rate and
financial matters. Columbia Gas System, Initial
Comments on the Need for Legislative Reform (Aug. 10,
1994). See also Post-Round Table Comments of Central
and South West Corporation (Oct. 5, 1994).
-[96]- Holding Company Act section 14 (15 U.S.C. 79n).
-[97]- Holding Company Act section 15 (15 U.S.C. 79o).
-------------------- BEGINNING OF PAGE #26 -------------------
registered system.-[98]- What books and records do state
regulators and the FERC currently have authority to examine?
What additional access is needed? How can the Commission
facilitate access by other regulators? How can the Commission
address confidentiality concerns raised by the companies?
2. Auditing
34. In recent years, the Commission's audits have focused
on service companies and nonutility subsidiaries of registered
holding companies, including exempt wholesale generators and
foreign utility companies. Among other things, these audits are
intended to detect cross-subsidization and other affiliate
abuses. Is there a need for an enhanced audit function? Is
there duplication between FERC and SEC review? Between state and
federal review? How can the Commission's audit program better
facilitate state and FERC regulation?
3. Reporting
Registered, and many exempt, holding companies are required
to file annual reports under the Holding Company Act.-[99]- In
addition, service company subsidiaries of the registered holding
companies are required to file annual reports. Further,
registered holding companies must also file reports under the
other federal securities laws.
35. Under the Act, registered holding companies must
disclose financial information concerning each system
company.-[100]- What additional information should be required
if, for example, registered holding companies were permitted to
diversify more freely? Should this requirement be extended to
exempt holding companies?
-[98]- See Holding Company Act section 15(f) (79 U.S.C.
79o(f)); see also rule 53 under the Holding Company Act
(17 CFR 250.53).
-[99]- Holding companies seeking exemption under sections
3(a)(1) or 3(a)(2) of the Holding Company Act may apply
for a Commission order or, in the alternative, file a
claim of exemption pursuant to rule 2 under the Act (17
CFR 250.2). This claim of exemption, Form U-3A-2, must
be renewed annually.
-[100]- See Form U5S, which requires disclosure on a
consolidating basis. In contrast, consolidated
financial statements are required for registration
statements and reports under other federal securities
laws. See Article 3 of Regulation S-X (17 CFR 210.3-
01 et seq.).
-------------------- BEGINNING OF PAGE #27 -------------------
F. Miscellaneous
1. Investment Company Issues
36. Questions have arisen in recent years concerning
investment companies and investment advisers that acquire the
securities of public-utility companies. Should these entities be
subject to regulation as utility affiliates-[101]- or public-
utility holding companies-[102]- under the Act?
2. Other Issues
The Holding Company Act authorizes the Commission to
regulate many registered holding company activities that are also
regulated today by other federal laws. For example, with respect
to registered holding companies and subsidiaries, the Commission
has broad regulatory authority over proxy solicitations, powers
of attorney, and other types of authorizations;-[103]- sales of
utility securities and assets;-[104]- officers and
directors;-[105]- political contributions;-[106]- and
-[101]- See Holding Company Act section 2(a)(11)(A) (15 U.S.C.
79b(a)(11)(A)) (any person owning 5 percent or more
of the outstanding voting securities of a company is an
affiliate of that company). Under section 9(a)(2), an
affiliate of a public-utility company may need to
obtain prior Commission approval for any subsequent
acquisition of utility securities. 15 U.S.C.
79i(a)(2).
-[102]- See Holding Company Act section 2(a)(7) (15 U.S.C.
79b(a)(7)). Among other things, a holding company
may be required to divest any unrelated nonutility
interests. See Holding Company Act section 11(b)(1)
(15 U.S.C. 79k(b)(1)).
-[103]- See section 12(e) (15 U.S.C. 79l(e)). Under rules 60
through 65 (17 CFR 250.60 - 65), the Commission can
review solicitation materials prior to their
effectiveness and require the disclosure of funds spent
to compensate persons who conduct solicitations. Rule
61 also provides that the solicitation of proxies is
subject to the rules promulgated under section 14(a) of
the Securities Exchange Act (15 U.S.C. 78n(a)). 17
CFR 250.61.
-[104]- See Holding Company Act section 12(d) (15 U.S.C.
79l(d)). This provision was enacted to prevent the
piecemeal evasion of the reorganization accomplished
under section 11 of the Act, and to prevent the
sacrifice of investors' equity. S. Rep. No. 621, 74th
Cong., 1st Sess. 35 (1935).
Under rule 44 (17 CFR 250.44), registered holding companies
are required to submit proposed sales of securities or
assets to the Commission by a declaration and to obtain an
order from the Commission permitting such sales. The rule
exempts holding companies from submitting such declarations
regarding the sale of securities or of utility assets up to
$5,000,000 during any calendar year if the acquisition does
not also require Commission approval.
-[105]- Officers and directors of registered holding companies
are subject to certain reporting requirements and
(continued...)
-------------------- BEGINNING OF PAGE #28 -------------------
lobbying.-[107]- Comments are sought on the continued need for
regulation under the Holding Company Act specifically directed at
these various activities.
V. Administrative Policy During the Period of Reexamination
During the pendency of the review of comments elicited by
this release, and while awaiting adoption of such legislative or
administrative amendments as may result therefrom, the Commission
intends to continue its past practice of administering the
Holding Company Act to accommodate changes in the industry and
the regulatory environment, within the guidelines of the statute
and past interpretations by the courts and the Commission.
VI. Conclusion
In reexamining the regulation of public-utility holding
companies, the Commission is seeking comment on a number of
specific regulatory issues. Commenters are encouraged, however,
to address any other matters that they believe merit
reexamination.
By the Commission.
Jonathan G. Katz
Secretary
Dated: November 2, 1994
-[105]-(...continued)
trading limitations that are similar to those imposed
by section 16 of the Securities Exchange Act of 1934
(15 U.S.C. 78p). See Holding Company Act section 17
(15 U.S.C. 79q). The Commission has adopted rules
intended to minimize duplicative regulation. See rule
72 under the Holding Company Act (17 CFR 250.72)
(section 17(a) deemed satisfied by statements of
beneficial ownership filed under section 16(a) of the
Securities Exchange Act). The Act also restricts
participation by officers and directors of commercial
and investment banks as officers and directors of
companies in registered systems. See Holding Company
Act section 17(c) (15 U.S.C. 79q(c)).
-[106]- Registered holding companies and their subsidiaries are
prohibited from making campaign or political party
contributions. Holding Company Act section 12(h) (15
U.S.C. 79l(h)). The Federal Election Campaign Act of
1971, however, permits registered holding companies to
make contributions through political committees. See
Pub. L. No. 92-225, 86 Stat. 3 (1972) (codified as
amended at 2 U.S.C. 431 - 55).
-[107]- Holding Company Act section 12(i) (15 U.S.C. 79l(i))
requires a registered holding company or subsidiary
that engages in lobbying efforts before the Congress,
the SEC or the FERC or any of its members, officers, or
employees to file certain forms with the Commission
providing information such as the subject matter of and
compensation for the lobbying efforts.