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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 250 and 259
[Release No. 35-26667; File No. S7-12-95]
RIN 3235-AG46
Exemption of Acquisition By Registered Public-Utility Holding
Companies of Securities of Nonutility Companies Engaged in
Certain Energy-Related and Gas-Related Activities; Exemption of
Capital Contributions and Advances to Such Companies
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
SUMMARY: The Commission is adopting new rule 58 and conforming
amendments to rules 45(b) and 52(b) under the Public Utility
Holding Company Act of 1935 ("Holding Company Act" or "Act").
Rule 58 exempts from the requirement of prior Commission approval
a direct or indirect acquisition by a registered holding company
or its subsidiary of an interest in an "energy-related company,"
as defined in the rule, subject to certain limitations and
reporting requirements; and by a gas registered holding company
or its subsidiary of an interest in a "gas-related company," as
defined in the rule, subject to certain reporting requirements.
The rule and related rule amendments eliminate unnecessary
regulatory limitations on investments in certain businesses that
are closely related to the core utility business of the
registered system while establishing disclosure and reporting
requirements that promote the public interest and serve to
protect consumers and investors.
EFFECTIVE DATE: [Insert date 30 days after publication in the
Federal Register.]
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FOR FURTHER INFORMATION CONTACT: Bonnie Wilkinson, Assistant
Director, Martha Cathey Baker, Senior Special Counsel, Sidney L.
Cimmet, Senior Special Counsel, or Robert P. Wason, Chief
Financial Analyst, all at (202) 942-0545, Office of Public
Utility Regulation, Division of Investment Management, Securities
and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C.
20549.
SUPPLEMENTARY INFORMATION: The Commission today is adopting rule
58 and related amendments to rule 45(b) and rule 52(b) (17 CFR
250.45(b) and 250.52(b)) under the Public Utility Holding Company
Act of 1935 (15 U.S.C. 79a et seq.). The Commission issued a
release proposing rule 58 and the amendments to the existing
rules on June 20, 1995.-[1]- Subject to certain conditions,
rule 58 provides an exemption, pursuant to section 9(c)(3) of the
Act, from the requirement of prior Commission approval under
sections 9(a)(1) and 10, for acquisitions by registered holding
companies and their subsidiaries of securities of companies
engaged in activities with which the Commission is familiar as a
result of its administrative experience and which are so closely
related to the ordinary course of the utility business as not to
require case-by-case analysis under sections 9(a)(1) and 10.
Rule 58 exempts from the requirement of prior approval the
acquisition by a registered holding company or its subsidiary
company of any securities of an energy-related company, subject
---------FOOTNOTES----------
-[1]- Holding Co. Act Release No. 26313 (June 20, 1995), 60
FR 33642 (June 28, 1995) ("Proposing Release").
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to certain limitations and reporting requirements. The rule
defines an energy-related company as one that derives, or will
derive, substantially all of its revenues from one or more
activities specifically enumerated in the rule. The exemption
provided by the rule will be available only if the aggregate
investment by the registered holding company and its subsidiaries
in energy-related companies does not exceed the greater of $50
million or 15% of consolidated capitalization.
Rule 58 also exempts from the requirement of prior approval
the acquisition by a gas registered holding company or its
subsidiary company of any securities of a gas-related company,
subject to certain reporting requirements. The rule defines a
gas-related company as one that derives, or will derive,
substantially all of its revenues from one or more activities
permitted under the Gas Related Activities Act of 1990 ("GRAA").
Rule 58 requires a registered holding company that seeks to
rely upon the rule to file with this Commission and each state
commission having jurisdiction over the retail rates of the
registered system operating companies a quarterly report
disclosing acquisitions pursuant to the rule and certain other
information required by proposed Form U-9C-3. The reporting
requirements are intended to enable the Commission and the state
and local regulatory authorities to monitor acquisitions pursuant
to the rule, including any transactions with rule 58 companies
involving the operating companies in registered systems.
The Commission is also adopting amendments to rule 45(b) and
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rule 52(b), which concern financings by registered system
companies, in each case to conform the rules to the limitations
of rule 58. Rule 45(b) is amended to qualify the exception that
the rule creates to the requirement of Commission approval under
section 12(b) and rule 45(a) for capital contributions and open
account advances without interest to a subsidiary company. As
amended, the exception of rule 45(b) is available if the
aggregate amount of such financing transactions on behalf of a
subsidiary energy-related company conforms to the limitations of
rule 58. Rule 52(b) is similarly amended to qualify the
exemption that the rule provides from the requirement of prior
Commission approval under sections 6(a) and 7 for securities
issued by energy-related subsidiary companies to associate
companies.
I. Introduction
This rulemaking arises in the broad context of nonutility
diversification by registered gas and electric public-utility
holding companies. Section 9(a)(1) of the Holding Company Act
requires prior Commission approval under the standards of section
10 for a direct or indirect acquisition by a registered holding
company of "any securities" or "any interest in any other
business," i.e., any nonutility interest.-[2]- Section
10(c)(1) precludes approval of an acquisition that would be
---------FOOTNOTES----------
-[2]- The Commission has read the latter phrase to encompass
any arrangement that entails the acquisition of a substantial
interest in a nonutility business undertaking. See, e.g., Public
Service Co. of Oklahoma, 45 S.E.C. 878, 883-4 (1975).
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"detrimental to the carrying out of the provisions of section
11." Section 11, described in the legislative history of the Act
as the "very heart" of the Act,-[3]- requires the Commission
to confine the nonutility interests of such companies to those
that are "reasonably incidental, or economically necessary or
appropriate to the operations of [an] integrated public-utility
system."-[4]- The Commission has interpreted the provisions
of section 11 to reflect a Congressional policy against
nonutility activities that bear no operating or functional
relationship to the utility operations of the registered
system.-[5]- This interpretation was intended to focus the
attention of the registered holding company on the needs of its
---------FOOTNOTES----------
-[3]- S. Rep. No. 621, 74th Cong., 1st Sess. (1935) ("Senate
Report") at 11.
-[4]- Section 11(b)(1) of the Act. Section 11(b)(1) further
provides that the Commission may so characterize a nonutility
interest that it finds to be "necessary or appropriate in the
public interest or for the protection of investors or consumers
and not detrimental to the proper functioning of such system. . .
."
The interests of investors and consumers and the public interest
are the protected interests under the Holding Company Act. The
Commission has interpreted the public interest standard of the
Act to extend to the interest in a sound gas and electric utility
industry. See Eastern Utilities Assocs., Holding Co. Act Release
No. 26232 (Feb. 15, 1995).
-[5]- See generally Michigan Consolidated Gas Co., 44 S.E.C.
361, 363-66 (1970), aff'd, 444 F.2d 913 (D.C. Cir. 1971)
(rejecting proposed investment in low income housing projects).
See also CSW Credit, Inc., Holding Co. Act Release No. 25995
(Mar. 2, 1994) (rejecting proposed expansion of transactions with
nonassociate companies by subsidiary engaged in factoring of
utility accounts receivable). By its terms, section 11 applies
only to registered holding companies. The Commission has never
determined the limits on diversification by exempt holding
companies.
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operating utilities, and thereby protect consumers and investors
against the risks that might be associated with unrelated
businesses.-[6]-
Section 9(c)(3) of the Act provides an exemption from the
requirements of section 9(a)(1) for the acquisition of "such
commercial paper and other securities, within such limitations as
the Commission may by rules and regulations or order prescribe as
appropriate in the ordinary course of business of a registered
holding company or subsidiary company thereof and as not
detrimental to the public interest or the interest of investors
or consumers." The Commission has previously issued orders under
section 9(c)(3) exempting from section 9(a)(1) acquisitions of
small amounts of securities of local industrial development
corporations, affordable housing projects, and venture capital
concerns, among others.-[7]- The Commission has also
adopted rule 40(a)(5) under section 9(c)(3) to exempt such
---------FOOTNOTES----------
-[6]- Section 11 was intended "simply to provide a mechanism
to create conditions under which effective Federal and State
regulation will be possible." Senate Report at 11. As an
historical matter, the statute led to the refashioning of the
structure and the business practices of an entire industry. See,
e.g., Joel Seligman, The Transformation of Wall Street: A History
of the Securities and Exchange Commission and Modern Corporate
Finance (rev. ed. 1995).
-[7]- See, e.g., Hope Gas, Inc., Holding Co. Act Release No.
25739 (Jan. 26, 1993) and Georgia Power Co., Holding Co. Act
Release No. 25949 (Dec. 15, 1993) (securities of local venture
capital companies); Georgia Power Co., Holding Co. Act Release
No. 26220 (Jan. 24, 1995) and East Ohio Gas Co., Holding Co. Act
Release No. 25046 (Feb. 27, 1990) (securities of affordable
housing partnerships); Potomac Edison Co., Holding Co. Act
Release No. 25312 (May 14, 1991) (shares of for-profit economic
development corporation).
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acquisitions from the requirements of section 9(a)(1), provided
that an affiliate relationship does not result, and subject to
certain annual dollar limitations.-[8]- The Commission has
noted that section 9(c)(3) may not be used to circumvent section
11(b)(1)'s prohibition of the acquisition of an interest in a
business unrelated to the core utility business.-[9]-
As noted in the Proposing Release,-[10]- registered
holding companies have filed numerous applications in recent
years seeking authorization to engage in nonutility activities
that the companies contend complement, or are natural extensions
of, the evolving gas and electric industries. In considering
these applications, the Commission has attempted to balance the
need for regulatory change due to industry developments with the
need for continued protection under the Act of the public
interest and the interest of investors and consumers.-[11]-
The concept of a functional relationship has been expanded in
some cases, in a manner consistent with the purposes and
---------FOOTNOTES----------
-[8]- Under rule 40(a)(5), a holding company or subsidiary
may acquire up to $5 million annually of the securities of
economic development companies created under special state laws
promoting economic development, and up to $1 million annually in
local industrial or nonutility enterprises.
-[9]- Michigan Consolidated Gas Co., 44 S.E.C. at 366.
-[10]- 60 FR at 33643.
-[11]- The Commission in some instances imposed percentage,
geographic or other limitations upon transactions on behalf of
nonassociate companies. These limitations were intended to
ensure that the particular nonutility interest would continue to
benefit the integrated system primarily and thereby conform to
the functional relationship requirement.
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limitations of the Act, and the Commission has permitted some
activities that would benefit the registered system in ways less
tangible and direct than those considered and approved in orders
of previous years. In some cases the Commission approved as part
of this development extensive transactions with nonassociate
companies and declined to limit the transactions to the
particular service territory of the registered system utilities.
To this extent, the Commission implicitly correlated the
functional relationship test with changes in the
industry.-[12]-
Congress has enacted a number of important legislative
measures to facilitate acquisitions by registered holding
companies of interests to which section 11 was perceived to
create barriers. In some instances, the legislation treated
---------FOOTNOTES----------
-[12]- The Commission took a more flexible approach to
functional relationship in Southern Co., Holding Co. Act Release
No. 26211 (Dec. 30, 1994). In that case, Southern proposed to
develop a communications system to provide services to both
system companies and nonassociates. While only a small
additional investment in the system was required to facilitate
nonassociate transactions, a majority of the revenues from the
system could ultimately be derived from these transactions. The
Commission approved the proposal, stating that the relative
investment for associate and nonassociate purposes is relevant to
a determination of a functional relationship. Alternatively, the
Commission found a functional relationship existed because the
nonutility interest being acquired (1) would involve the sale or
lease of products or skills of some complexity developed by the
holding company at considerable expense for the benefit of its
utility subsidiaries and not readily available to the rest of the
public from other sources; (2) would generally require little or
no further investment by the holding company; and (3) would
permit the amortization of product development expenses with
little or no risk (citing Jersey Central Power & Light Co.,
Holding Co. Act Release No. 24348 (Mar. 18, 1987), as approved in
CSW Credit, Inc., note 5 above).
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acquisitions of essentially utility interests as nonutility
acquisitions for purposes of the Act, so as to avoid the
integration requirements of section 11.-[13]- In other
instances, the legislation permitted essentially nonutility
activities that were either closely related to core operations or
otherwise deemed appropriate for participation by registered
holding companies. An example of recent legislation relates to
nonutility activities involved in the supply of natural gas.
In 1990, Congress enacted the Gas Related Activities Act to
permit a gas registered holding company to engage in
transportation, marketing, storage and other nonutility gas-
related activities that are not functionally related to the
company's business.-[14]- The GRAA provides that an
acquisition of an interest in a company that engages in certain
gas-related activities, including storage, transportation and
wholesale sales, is deemed to meet the requirements of section
11(b)(1) of the Act. The GRAA further provides that an
acquisition of an interest in a company that engages in other
activities relating to the supply of natural gas is deemed to
meet the requirements of section 11(b)(1), if the Commission
finds that the acquisition is in the interest of consumers of the
---------FOOTNOTES----------
-[13]- Under the Public Utility Regulatory Policies Act of
1978 ("PURPA"), 16 U.S.C. 824a-3, and related legislation, a
registered holding company can acquire an interest in "qualifying
facilities" ("QFs"), as defined in the regulations under PURPA,
that are unrelated to its core utility operations. See also the
Energy Policy Act of 1992, discussed below.
-[14]- Pub. L. No. 101-572, 104 Stat. 2810 (Nov. 15, 1990),
codified as a note to section 11 of the Act.
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holding company system and is not detrimental to those consumers
or to the proper functioning of the registered
system.-[15]-
In 1992, Congress acted to permit both gas and electric
registered holding companies to acquire interests in cogeneration
and small power production facilities, wherever located, and to
market and broker electric power through affiliated exempt
wholesale generators ("EWGs").-[16]- In 1992, Congress
also enacted legislation to promote the development of
alternative powered vehicles as a part of a national energy
policy to reduce automobile emissions. The legislation permits
gas registered holding companies to engage in activities related
to vehicular natural gas, as defined.-[17]-
As a result of Congressional action, combined with
initiatives of the Federal Energy Regulatory Commission ("FERC")
and the state and local ratemaking authorities, the pace of
change in the gas and electric utility industry is accelerating.
Today, the gas industry is largely deregulated and the electric
---------FOOTNOTES----------
-[15]- See, e.g., Columbia Gas System, Holding Co. Act
Release No. 25802 (Apr. 22, 1993) (authorizing subsidiary to
engage in marketing of natural gas). Section 2(b) of the GRAA
requires the Commission to determine whether the proposed
activities will benefit both the retail and the wholesale utility
customers of the registered system.
-[16]- Energy Policy Act, Pub. L. 102-486, 106 Stat. 2776
(1992). These activities of EWGs are limited primarily to the
sale of electric power for resale.
-[17]- See Articles IV, V and VI, Energy Policy Act of 1992,
Pub. L. 102-486, 106 Stat. 2777 (1992) (codified as a note to
section 2). These legislative developments are discussed at
greater length in the Proposing Release. 60 FR at 33644.
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industry is undergoing a similar process.-[18]- In
addition to increasing competition at the wholesale level, retail
electric competition is developing more rapidly than anticipated,
due to state efforts.-[19]- Utilities and other suppliers
of energy appear poised to compete in retail markets.-[20]-
---------FOOTNOTES----------
-[18]- See generally The Regulation of Public-Utility
Holding Companies, Report of the Division of Investment
Management, Securities and Exchange Commission (June 1995)
("Report"), at 19-22, 26-27 (surveying recent regulatory and
other developments in the electric and gas industries). Among
other things, the Report notes that following the Energy Policy
Act, the FERC has engaged in a series of initiatives to encourage
the development of competitive energy markets. Id. at 23. More
recently, on April 24, 1996, the FERC adopted Order No. 888, FERC
Stats. & Regs. 31,036, which represents a major step in the
effort to increase competition in the generation and transmission
segments of the electric industry.
-[19]- See, e.g., "State Regulators Debate Taking a Stand on
National Retail Wheeling Legislation", Energy Report (March 4,
1996) (describing state initiatives and possible support for
federal legislation establishing retail wheeling). At the state
level, for instance, New Hampshire has adopted a pilot program
under which each New Hampshire utility must allow customers
representing three percent of peak load to have access to
alternative suppliers of electricity for two years, beginning on
or about May 28, 1996. Order of the New Hampshire Public
Utilities Commission on the Retail Competition Pilot Program
Establishing Final Guidelines and Requiring Compliance Filings
(Order No. 22,033, dated Feb. 28, 1996). Other states, such as
Massachusetts, Rhode Island and Illinois, are also implementing
or considering programs to promote retail competition.
-[20]- The Commission has authorized registered holding
companies to engage, through nonutility subsidiaries, in the
retail marketing of electric power in specific states that have
implemented plans and programs for competition in retail electric
markets, see, e.g., Eastern Utilities Assocs., Holding Co. Act
Release No. 26519 (May 23, 1996) (authorizing retail sales of
electric power pursuant to pilot programs in New Hampshire and
Massachusetts) and, more recently, has authorized retail
marketing of both electric power and natural gas on a nationwide
basis, subject to compliance with applicable state law. SEI
Holdings, Inc., Holding Co. Act Release No. 26581 (Sept. 26,
1996).
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As a result of these developments, the contemporary gas and
electric industries no longer focus solely upon the traditional
production and distribution functions of a regulated utility, but
are instead evolving toward a broadly based, competitive, energy
services business.-[21]-
As discussed previously, the Commission has sought to
respond to developments in the industry by expanding its concept
of a functional relationship in a manner consistent with the
purposes and limitations of the Act. In several recent filings,
the Commission has been requested to reconsider some
administrative restrictions employed in the past. In approving
these requests, the Commission determined, as required by the
Act, that its action would not be detrimental to the interests
protected under the Act. The Commission suggested that various
considerations, including developments in the industry, the
Commission's familiarity with the particular nonutility
activities at issue, the absence of significant risks inherent in
the particular venture, the specific protections provided for
consumers and the absence of objections by the relevant state
regulators, made it unnecessary to adhere rigidly to the types of
---------FOOTNOTES----------
-[21]- The Commission acknowledged these developments in the
Proposing Release, 60 FR at 33643, and, again, in a recent order
authorizing a gas registered holding company to acquire an
interest in a partnership formed to engage in the wholesale
brokering and marketing of natural gas, electricity and other
fuels. Consolidated Natural Gas Co., Holding Co. Act Release No.
26512 (Apr. 30, 1996). The order noted the growing competition
among various companies, including exempt holding companies, as
well as stand-alone utilities and other companies not subject to
the Act, to meet increasing customer demand for a full range of
energy options.
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administrative measures discussed above.-[22]- Further, a
1995 Commission staff report recommended that the Commission
replace the use of bright-line limitations with a more flexible
standard that would take into account the risks inherent in the
particular venture and the specific protections provided for
consumers.-[23]-
Finally, after the issuance of the Proposing Release,
Congress enacted legislation amending the Act to permit
registered holding companies, without prior Commission approval
under sections 9(a)(1) and 10, to participate in a broad range of
telecommunications activities through a special purpose
subsidiary, an "exempt telecommunications company"
("ETC").-[24]- Once an entity is certified as an ETC by
the Federal Communications Commission, acquisition and retention
by a registered holding company of an interest in the entity is
exempt from substantive requirements under the Holding Company
---------FOOTNOTES----------
-[22]- See, e.g., Consolidated Natural Gas Co., Holding Co.
Act Release No. 26512 (approving wholesale marketing and
brokering of natural gas, electricity and other fuels, without
percentage limitations); Eastern Utilities Assocs., Holding Co.
Act Release No. 26232 (removing percentage limitation previously
placed upon demand-side management and energy management services
business of registered holding company); Southern Co., Holding
Co. Act Release No. 26211 (considering, in assessment of a
functional relationship, the relative investment for associate
and nonassociate companies).
-[23]- Report at 81-87, 91-92.
-[24]- Telecommunications Act of 1996, Pub. L. 104-104, 110
Stat. 56 (1996) ("Telecommunications Act"), codified as section
34 of the Act.
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Act.-[25]- As a result of this legislation, the provisions
of proposed rule 58 concerning telecommunications activities are
no longer needed.
The Commission believes that the realities of the
contemporary gas and electric industries, and its experience in
the administration of sections 9 and 10 of the Act, permit a
recognition that certain activities are an integral part of the
contemporary utility business, and so may be deemed to be
activities "in the ordinary course of business" of a registered
holding company within the meaning of section 9(c)(3) of the Act.
Rule 58 identifies such activities. The rule is variously
subject to qualifications and limitations that are intended to
ensure that acquisitions pursuant to the rule are appropriate in
the ordinary course of business, as contemplated by section
9(c)(3), are consistent with prior orders under section 9(a)(1)
and 10, and are not detrimental to the protected
interests.-[26]-
II. Proposed Rule 58
---------FOOTNOTES----------
-[25]- The Telecommunications Act does not provide that ETCs
themselves are exempt from regulation under the Act. See 34.
However, the law contemplates that the role of the Commission
will consist largely of monitoring telecommunications investments
of registered holding companies. The Commission is authorized to
require reporting of investments in, and activities of, ETCs that
are likely to have a material impact on the financial or
operational condition of a registered holding company. See
34(f).
-[26]- As noted in the Proposing Release, rule 58 is
intended largely to encompass investments in companies engaged in
activities of the same or substantially similar character as
those approved in previous orders of the Commission under
sections 9(a)(1) and 10. 60 FR at 33648.
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Rule 58 is intended to facilitate investments by registered
holding companies in energy-related and gas-related companies.
Acquisitions pursuant to the rule are considered to be
"appropriate in the ordinary course of business" within the
meaning of section 9(c)(3), and are thus exempt from the
requirement of prior Commission approval under sections 9(a)(1)
and 10.
The Commission received comment letters from, or on behalf
of, eleven registered holding companies, one exempt holding
company, one industry trade association, and one local regulatory
authority.-[27]- With the exception of the Council of the
City of New Orleans ("New Orleans"), all commenters support
adoption of the rule-[28]- and, in many cases, propose
---------FOOTNOTES----------
-[27]- The registered holding companies that submitted
comments are Allegheny Power System, Inc. ("Allegheny"), American
Electric Power Company, Inc. ("AEP"), Central and South West
Corporation ("CSW"), Cinergy Corp. ("Cinergy"), The Columbia Gas
System, Inc. ("Columbia"), Consolidated Natural Gas Company
("Consolidated"), Eastern Utilities Associates ("EUA"), Entergy
Corporation ("Entergy"), General Public Utilities Corporation
("GPU"), Northeast Utilities ("Northeast") and The Southern
Company ("Southern"). The exempt holding company that submitted
comments is Wisconsin Energy Corporation ("Wisconsin Energy"),
and the industry association is the American Gas Association
("AGA"). The local regulator that submitted comments is the
Council of the City of New Orleans. Copies of the comments are
available for inspection in File No. S7-12-95 in the Commission's
public reference room.
-[28]- See, e.g., Comments of AEP (the rule would reduce
regulatory burdens on registered systems and permit them to
compete in the energy industry); and Columbia (the rule
eliminates unnecessary and costly regulatory burdens on
registered systems). Some commenters also note that, beyond
adoption of rule 58, the Commission should provide registered
holding companies with the flexibility to engage in utility-
related businesses without limitation. See, e.g., Comments of
(continued...)
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additional changes to expand the
rule.-[29]- New Orleans opposes adoption of the
rule,-[30]- and requests, in the alternative, a more
restrictive rule. The comments received on various aspects of
the rule are discussed below. The Commission is adopting rule 58
and the conforming amendments to rules 45 and 52 substantially as
proposed, but with a number of clarifications.
A. Investments in energy-related companies
---------FOOTNOTES----------
-[28]-(...continued)
AGA (section 11 should be broadly interpreted to permit gas
systems to enter into any business involving production,
transmission, dissemination or marketing of any form of
consumable energy or any business or operation based on the
facilities, resources or expertise from the company's
operations); and CSW (restrictions on diversification prevent
registered systems from engaging in businesses that would benefit
customers and investors and impede efficient evolution of the
electric utility industry).
-[29]- For example, one commenter notes that the rule should
generally be more flexible, so as to accommodate changes that may
arise as the restructuring of the electric industry continues.
Comments of Wisconsin Energy. The Commission notes, however,
that various issues, such as those that surround the possible
disaggregation of utility assets and horizontal integration of
utility functions, are beyond the scope of a rule that is
intended to exempt nonutility interests that are commonplace
today and closely related to the core utility business. The
Commission continues to examine the issues raised by industry
restructuring, and will undertake any necessary or appropriate
rulemaking or other administrative action in the future.
-[30]- New Orleans opposes the rule on many grounds. Among
other things, New Orleans asserts that the rule constitutes
"deregulation of nonutility investment by registered holding
companies [that] is unlawful and not in the public interest." It
further asserts that the rule does not adequately protect
consumers from "diversification risks and failures which are well
known and documented in this industry." New Orleans states that
only the Commission has the authority to regulate diversification
and that it has a "duty to protect consumers" in this area.
Comments of New Orleans at 3-4.
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Rule 58(a)(1) exempts from the requirement of prior
Commission approval under sections 9(a)(1) and 10, pursuant to
section 9(c)(3), the acquisition by a registered holding company
or its subsidiary company of securities of an "energy-related
company;" provided, that aggregate investment (as defined) in
such companies does not exceed the greater of 15% of consolidated
capitalization or $50 million. Investments made prior to
effectiveness of the rule are excluded for purposes of
calculating the investment limitations.
The Proposing Release defines an "energy-related company" in
terms of the activities in which it may engage. Specifically, as
proposed, the rule would define an energy-related company as one
that engages in: (1) one or more of various categories of
specific activities set forth in the rule, described below, and
(2) such other nonutility activities as the Commission may from
time to time approve by order upon application under sections 9
and 10, and, so doing, designate as energy-related for purposes
of the rule. Rule 58 requires that an energy-related company at
all times derive substantially all of its revenues from the
activities designated in the rule.
The energy-related activities specified in subsection (b)(1)
of the rule as proposed were:
(1) the rendering of energy conservation and demand-
side management services;
(2) the development and commercialization of
electrotechnologies related to energy conservation, storage
and conversion, energy efficiency, waste treatment,
greenhouse gas reduction, and similar innovations;
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(3) the manufacture, conversion, sale and servicing of
electric and compressed natural gas powered vehicles and
ownership and operation of related refueling and recharging
equipment;
(4) the sale, installation, and servicing of electric
and gas appliances for residential, commercial and
industrial heating and lighting;
(5) the brokering and marketing of energy commodities,
including but not limited to electricity or natural or
manufactured gas;
(6) the production, conversion, and distribution of
thermal energy products, such as process steam, heat, hot
water, chilled water, air conditioning, compressed air and
similar products; alternative fuels; and renewable energy
resources;
(7) the sale of technical, operational, management, and
other similar kinds of services and expertise, developed in
the course of utility operations in such areas as power
plant and transmission system engineering, development,
design and rehabilitation; construction; maintenance and
operation; fuel procurement, delivery and management;
environmental licensing, testing and remediation; and other
similar areas;
(8) the ownership or operation of QFs, and facilities
necessary or incidental thereto, including thermal energy
utilization facilities purchased or constructed primarily to
enable the qualifying facility to satisfy the useful thermal
output requirements under PURPA;
(9) the ownership or operation of fuel procurement,
transportation, handling and storage facilities, scrubbers,
and resource recovery and waste water treatment facilities;
(10) the production, transportation, distribution or
storage of all forms of energy other than electricity and
natural or manufactured gas;
(11) the development and commercialization of
technologies or processes that utilize coal waste by-
products as an integral component of such technology or
process; and
(12) the ownership, sale, leasing or licensing of the
use of telecommunications facilities and equipment (such as
fiber optic lines, coaxial cable, or other communications
capacity, towers and tower sites and other similar
properties).
==========================================START OF PAGE 19======
The rule as proposed also specifically provided a means for the
Commission to add additional activities to the definition upon
application in the future.
1. Definition of "energy-related company"
a. General
The Commission received a substantial number of comments
concerning the definition of "energy-related company." Several
commenters assert that the definition should not consist of
enumerated categories of specific activities, but should instead
be broad and general.-[31]- Although this approach would
offer greater flexibility, the Commission believes that it is not
consistent with the requirements of section 9(c)(3) of the Act.
As discussed previously, that section provides an exemption only
for acquisitions of securities that are made in the ordinary
course of business of the registered system and that are not
detrimental to the protected interests. Rule 58 is intended to
encompass activities with which the Commission is familiar as a
result of its administrative experience and that appear to be so
closely related to the ordinary course of the contemporary
utility business as not to require case-by-case analysis pursuant
to sections 9(a)(1) and 10. For this reason, the Commission is
retaining enumerated categories in the rule as adopted.
---------FOOTNOTES----------
-[31]- Comments of AGA, Columbia and Consolidated.
Suggested definitions would include any company engaged in a
business based on or developed from the facilities, resources,
technology or expertise of the registered system's operations
(Comments of AGA and Columbia); and any company engaged in a
business involving the production, transmission, dissemination or
marketing of any form of consumable energy (Comments of AGA).
==========================================START OF PAGE 20======
Similarly, the Commission notes that the enumerated
categories of specific energy-related activities in rule 58 are
exhaustive, rather than illustrative. In order for a direct or
indirect acquisition of securities by a registered holding
company or its subsidiary to qualify for the exemption provided
by the rule, the company in which the interest is acquired must
be engaged almost exclusively in the type of activities specified
in the rule. A registered holding company will continue to apply
to the Commission for prior approval of any acquisitions
concerning activities that fall outside the categories identified
by the rule as energy-related. Further, as discussed below, to
the extent that a company engages in activities in addition to
those permitted under rule 58, an application will also be
required.
New Orleans suggests that the definition should include a
requirement that the permitted activity be functionally related
to the system's utility business under sections 10 and
11.-[32]- Such a requirement is unnecessary for several
reasons. First, a finding of a functional relationship is not
required in order to qualify for an exemption under section
---------FOOTNOTES----------
-[32]- As discussed above, the Commission has interpreted
the provisions of section 11 of the Act, referenced in section
10(c)(1), to reflect a Congressional policy against nonutility
activities that bear no operating or functional relationship to
the utility operations of the registered system. See generally
Michigan Consolidated Gas Co., 44 SEC 361 at 363-65.
==========================================START OF PAGE 21======
9(c)(3).-[33]- Moreover, even though a finding of a
functional relationship under section 11(b)(1) is not required in
this context, each of the activities permitted under the rule as
adopted has in many instances been found, by order upon
application under sections 9(a)(1) and 10, to satisfy the
statutory requirements, including those of section 11(b)(1).
One commenter objects to the requirement that an energy-
related company derive "substantially all" of its revenues from
activities designated as "energy-related," and suggests that the
rule should instead require that a company derive merely a stated
portion, e.g., at least 30%, from such activities.-[34]-
The Commission notes, however, that this measure would permit
registered holding companies to make sizeable investments in
companies engaged primarily in novel, unspecified nonutility
businesses. The Commission believes its authority to create such
a broad exemption by rule under section 9(c)(3) is subject to
---------FOOTNOTES----------
-[33]- The Commission has determined that a transaction need
not satisfy the standards of section 11(b)(1) in order to qualify
for exemption under section 9(c)(3), but that section 9(c)(3) may
not be used to circumvent the requirements of section 11(b)(1)
generally. Id. at 366 ("Section 9(c)(3) cannot be employed to
evade the proscription of Section 11(b)(1) prohibiting the
acquisition by a gas utility company of an interest in a business
unrelated to its business"); but see id. at 369 ("the majority
unduly constricts the scope of the Section 9(c)(3) exemption when
it holds that to be entitled to such exemption a transaction must
also meet the standards of Section 11(b)(1)") (Commissioner
Owens, concurring in part and dissenting in part) and 370
(Commissioner Smith, dissenting).
-[34]- Comments of CSW.
==========================================START OF PAGE 22======
question.-[35]- The Commission declines, therefore, to
adopt this suggestion. Any acquisition of an interest in a
nonutility business that does not derive substantially all of its
revenues from one or more of the activities set forth in the
categories of the rule will continue to require prior Commission
approval by order upon application.
New Orleans objects to the proposed provision of the rule
creating a procedure for designating additional activities to be
energy-related by order upon application under section
10.-[36]- New Orleans asserts that new activities and
investments should be approved only pursuant to rulemaking, so
that all parties have an opportunity to evaluate and comment upon
the relationship of the new activity to the core utility business
and the potential effects on ratepayers.
In proposing this mechanism for updating the rule, the
Commission intended that all procedural requirements applicable
to agency rulemaking would be observed in connection with the
proposed designation by order of additional activities as energy-
related for purposes of rule 58, including in particular the
requirements related to public notice and opportunity to
---------FOOTNOTES----------
-[35]- As noted previously, the Commission has found that
section 9(c)(3), under which rule 58 is adopted, may not be used
to circumvent the requirements of section 11(b)(1) of the Act.
-[36]- This mechanism was provided in subsection
(b)(1)(xiii) of the proposed rule.
==========================================START OF PAGE 23======
comment.-[37]- On reconsideration, however, the
Commission has determined that this provision could result in
increased administrative burdens for both the registered holding
companies seeking approval of new activities and the Commission
staff.
If rulemaking is undertaken in the context of consideration
of an application for approval of a specific nonutility
investment, adherence to required procedures, including an
extended comment period for the rulemaking and consideration of
all views submitted, could delay approval of the proposed
transaction that is the subject of the application. Further,
repetitive paperwork in connection with the rulemaking aspects of
each such application could consume extensive staff resources.
Accordingly, this feature of proposed rule 58 has not been
retained.-[38]- The Commission believes, however, that
future expansion of the scope of the rule, to reflect additional
nonutility activities found by the Commission to satisfy the
standards of the Act, is essential to achieve the rule's intended
flexibility. The Commission intends to evaluate periodically the
coverage of the rule in light of existing Commission orders under
sections 9 and 10 of the Act, and initiate rulemaking proceedings
to reflect any appropriate changes.
---------FOOTNOTES----------
-[37]- See e.g., the relevant provisions of the
Administrative Procedure Act, 5 USC 553, and the Commission's
rules of practice, 17 CFR 201.192.
-[38]- A similar provision in the definition of "gas-related
company" has also been eliminated.
==========================================START OF PAGE 24======
One commenter suggests that the definition of energy-related
company be expanded to include companies that derive
substantially all of their revenues from the listed activities,
either directly or indirectly.-[39]- The requested
revision would permit a registered holding company system to use
one or more intermediate subsidiaries (i.e., "project parents")
to invest in energy-related companies, yet retain the benefit of
the exemption afforded by the rule.-[40]- The Commission
believes that this suggestion is consistent with the intent of
the rule as proposed. Use of an intermediate subsidiary could
further insulate the holding company and its other subsidiaries,
including utility subsidiaries, from any direct losses that could
occur with respect to rule 58 investments. At the same time,
this measure would offer greater flexibility in the structuring
of these investments. Accordingly, the rule, as adopted, is
modified to incorporate the concept of indirect investment in
energy-related companies through project parents.-[41]-
The Commission notes, however, that any such intermediate
subsidiary, like the underlying energy-related companies, must
derive "substantially all" of its revenues from the permitted
activities. If the company will engage in other activities,
---------FOOTNOTES----------
-[39]- Comments of GPU.
-[40]- The provisions of the Act that permit use of
intermediate holding companies in connection with investment in
exempt wholesale generators reflect the same concept. See
section 32(a)(1).
-[41]- This concept is also reflected in the definition of a
gas-related company.
==========================================START OF PAGE 25======
directly or indirectly, prior Commission approval of an
investment interest in such company will be required.
b. Categories of energy-related activities
The Proposing Release invited specific comment on whether
the proposed rule should include additional kinds or categories
of energy-related activities. One commenter suggests that
customer financing for other energy-related activities should be
a separate category of permitted activity for an energy-related
company.-[42]- The Commission notes that customer
financing has been approved in a number of cases involving
activities that are designated as energy-related under rule 58,
and agrees that it may be an appropriate activity for some
energy-related companies. However, this type of activity is
better addressed in the context of rule 48, as discussed below.
The Commission therefore declines to include customer financing
as an energy-related activity under rule 58.
Another commenter suggests that any nonutility business in
which the applicable state commission would allow a regulated
utility or exempt holding company to engage or invest should be a
permitted activity for energy-related companies.-[43]-
That a state commission permits utilities or holding companies
that are subject to its jurisdiction to engage in a given
nonutility activity can be a strong indication that the activity
is appropriate, and, in a given case, it may be persuasive
---------FOOTNOTES----------
-[42]- Comments of Northeast.
-[43]- Comments of CSW.
==========================================START OF PAGE 26======
evidence that some of the standards of the Act have been
satisfied. However, that a state commission has approved a type
of investment does not necessarily mean that it is in the
ordinary course of business of a registered holding company or
its subsidiary for purposes of section 9(c)(3). The Commission
does not believe that rule 58 should incorporate such state
determinations as a general matter, without any indication as to
the nature of the approved activities or the relevant state law
standards. Thus, the Commission will continue to review any such
activity on a case-by-case basis, giving due consideration to the
views of state regulators toward the activity in question.
As proposed, the rule did not indicate clearly whether an
interest in an energy-related company engaging in an enumerated
activity could be acquired pursuant to the rule by companies in
electric holding company systems, gas holding company systems, or
both. As adopted, rule 58(b)(1) has been clarified in this
regard to limit the exemption solely to those activities that are
considered to be in the ordinary course of the type of utility
business in which a particular holding company system is
engaged.-[44]- Any proposal by a registered holding
company system to acquire an interest in a company engaged in
nonutility activities of a type not exempt under the rule for
that type of registered system may be the subject of an
---------FOOTNOTES----------
-[44]- Holding company systems engaged in both the electric
and gas utility business will be considered, for purposes of the
rule, to be engaged only in one type of utility business, as
determined by the type of operations that constitute the holding
company's primary utility business.
==========================================START OF PAGE 27======
application for Commission approval under sections 9(a) and
10.-[45]-
Many commenters suggest specific changes or additions to the
categories of permitted activities set forth in the definition.
A number of comments request clarifications and propose additions
to the list of activities permitted for an energy-related
company. Some, but not all, comments and revisions to the
categories of permitted activities are discussed below.
(1) Subsection (b)(1)(i): energy and demand-side
management services.
This category of activities was defined in the Proposing
Release to include the rendering of energy conservation and
demand-side management services.-[46]- The Commission has
previously considered and approved by order under sections
9(a)(1) and 10 a broad range of activities relating to the
business of energy management and demand-side management,
including the following: energy audits; facility design and
process enhancements; construction, maintenance and installation
of, and training client personnel to operate, energy conservation
equipment; design, implementation, monitoring and evaluation of
energy conservation programs; development and review of
---------FOOTNOTES----------
-[45]- For example, an electric registered holding company
system would be required to file an application and obtain
authorization to acquire an interest in a company engaged in
ownership and operation of refueling equipment for natural gas-
powered vehicles. While acquisition of an interest in such a
company could be exempt under rule 58 for a gas registered
holding company system, it is not in the case of an electric
registered holding company.
-[46]- No comments were received on this subsection.
==========================================START OF PAGE 28======
architectural, structural and engineering drawings for energy
efficiencies; design and specification of energy consuming
equipment; and general advice on programs.-[47]- Upon
additional consideration, the Commission has concluded that
"energy conservation services" may not be broad enough to cover
the types of activities intended to be exempted under this
category. The term "energy management services" more accurately
reflects the scope of the exempted activity.-[48]- The
rule as adopted is revised accordingly. Apart from this
clarification, the subsection is adopted as proposed.-[49]-
Companies in both electric and gas registered systems may
acquire interests in companies engaging in the activities
specified in this subsection.
(2) Subsection (b)(1)(ii): development and
commercialization of electrotechnologies.
As used in the rule, electrotechnologies relate to energy
conservation, storage and conversion, energy efficiency, waste
---------FOOTNOTES----------
-[47]- See, e.g., Eastern Utilities Assocs., Holding Co. Act
Release No. 26232 (Feb. 15, 1995); and Northeast Utilities,
Holding Co. Act Release No. 25114-A (July 27, 1990).
-[48]- See, e.g., New England Electric System, Holding Co.
Act Release No. 22719 (Nov. 19, 1982).
-[49]- This subsection is intended to encompass all
consumer-oriented activities that represent components of a
holding company system's demand-side management and integrated-
resource planning functions, or that are intended to reduce
customer energy costs or lead to efficient use of energy
resources by affecting energy consumption. Customer financing is
not encompassed by this subsection.
==========================================START OF PAGE 29======
treatment, greenhouse gas reduction and similar
innovations.-[50]- The Commission has, on many occasions,
approved investments by electric registered system companies in
technologies related to the electric utility
business.-[51]- Because the Commission has not yet
considered proposals by registered gas system companies to engage
in activities related to such technologies, the Commission is not
prepared at this time to deem these activities to be appropriate
in the ordinary course of the utility business of such systems.
Accordingly, the Commission is revising the rule to clarify that
only electric registered holding companies and their subsidiaries
are permitted to acquire companies that engage in the activities
in this subsection. The subsection is otherwise adopted as
proposed.
(3) Subsection (b)(1)(iii): electric and gas
vehicles.
As proposed, this subsection included manufacture,
conversion, sale and servicing of electric and compressed natural
gas powered vehicles, and ownership and operation of related
---------FOOTNOTES----------
-[50]- No comments were received on this category of
activities.
-[51]- See, e.g., American Electric Power Co., Holding Co.
Act Release No. 25424 (Dec. 11, 1991) (acquisition of an interest
in a company that develops, manufactures and markets efficient
light bulbs); and Allegheny Power System, Inc., Holding Co. Act
Release No. 26085 (July 14, 1994) (investments in technologies
related to power conservation and storage, conservation and load
management, environmental and waste treatment, and power-related
electronic systems and components).
==========================================START OF PAGE 30======
refueling and recharging equipment.-[52]- The Commission
has determined that the subsection should be expanded to include
ownership, operation, sale, installation and servicing of
refueling, recharging and conversion equipment and facilities
relating to electric- and gas-powered vehicles,-[53]- but
should not extend to manufacture of such equipment and facilities
or to manufacture, conversion and sale of the vehicles
themselves.-[54]- The Commission has revised the
subsection as adopted to make clear its intended scope.
In addition, the Commission believes, based on existing
precedent, that it is appropriate to limit the described
activities to those appropriate for gas registered system
companies and electric registered system companies, respectively.
The rule as adopted is revised to reflect this limitation.
(4) Subsection (b)(1)(iv): appliance sales.
As proposed, this subsection included the sale, installation
and servicing of electric and gas appliances for residential,
commercial and industrial heating and lighting. Comments
---------FOOTNOTES----------
-[52]- No comments were received on this subsection.
-[53]- The Commission has issued orders authorizing broader
involvement with respect to such activities than that reflected
in the rule as proposed. See, e.g., Columbia Gas System, Holding
Co. Act Release No. 26295 (May 23, 1995) (authorizing the sale,
ownership, operation, installation and servicing of natural gas
refueling equipment and sale of equipment and facilities for use
in vehicle conversion); and Consolidated Natural Gas Co., Holding
Co. Act Release No. 25615 (Aug. 27, 1992) (same).
-[54]- The Commission has not yet approved these types of
activities by order under sections 9(a) and 10.
==========================================START OF PAGE 31======
included suggestions that this category extend to
leasing-[55]- and customer financing
arrangements;-[56]- and that the equipment at issue include
other energy-consuming devices-[57]- and equipment used for
energy generation, both within and outside the system's service
territory.-[58]-
The Commission finds that it is appropriate to expand the
types of equipment addressed by the rule to include other types
of energy-consuming devices.-[59]- Historically, the
Commission approved the activities addressed in this subsection
to encourage consumption of electricity and gas, to promote
competition among fuels and, more recently, to further energy
conservation.-[60]- The rule as adopted has been revised,
---------FOOTNOTES----------
-[55]- Comments of Consolidated and Northeast. Because the
term "sale," as defined in section 2(a)(23) of the Act,
encompasses dispositions by lease, the Commission believes that
no change to the subsection is needed.
-[56]- Comments of Northeast. Northeast also raised the
question of customer financing in a broader context, suggesting
the addition to the rule of a category concerning the financing
of other energy-related activities. The Commission has
determined to address this issue in the context of rule 48, as
discussed below.
-[57]- Comments of CSW.
-[58]- Comments of Northeast.
-[59]- Prior orders in this area under sections 9(a)(1) and
10 permit the sale, installation, servicing and/or financing of
significantly broader categories of equipment than appliances for
heating and lighting. See, e.g., Consolidated Natural Gas Co.,
Holding Co. Act Release No. 26234 (Feb. 23, 1995).
-[60]- See e.g., Cities Service Co., 15 S.E.C. 962 (1944);
General Public Utilities Corp., Holding Co. Act Release No. 15184
(continued...)
==========================================START OF PAGE 32======
consistent with these precedents, to include electric and gas
appliances, equipment that promotes technologies that use gas or
electricity and equipment that enables use of gas or electricity
as an alternate fuel. Companies in both electric and gas holding
company systems may acquire interests in companies engaging in
the activities specified in this subsection.
The Commission declines to adopt the suggestion that the
rule exempt sale, installation and servicing of generation
equipment. These activities may involve issues of broader
concern, which lie outside the ambit of this rulemaking.
(5) Subsection (b)(1)(v): brokering and marketing of
energy commodities.
This subsection covers the brokering and marketing of energy
commodities, including but not limited to electricity and natural
or manufactured gas. One commenter proposes that this subsection
should be expanded to cover energy-related commodities and should
specify that it covers other combustible fuels in addition to
electricity and gas.-[61]- The Commission does not believe
there is a basis to include "energy-related commodities" in this
context. However, the subsection is revised in the adopted rule
to include other combustible fuels.-[62]-
As proposed, this subsection did not indicate the markets in
---------FOOTNOTES----------
-[60]-(...continued)
(Feb. 9, 1965); and Louisiana Power & Light Co., Holding Co. Act
Release No. 25445 (Dec. 26, 1991).
-[61]- Comments of Consolidated.
-[62]- Other combustible fuels would include, for example,
coal, oil, wood chips, oil shale, isobutane and propane.
==========================================START OF PAGE 33======
which the permitted activities could be carried out. The
Commission's existing orders in this area extend primarily to
wholesale markets.-[63]- However, the Commission has
authorized retail electric marketing activities in states with
established retail wheeling programs,-[64]- and, more
recently, authorized retail marketing activities with respect to
both electric power and natural gas, throughout the United
States, subject to compliance with applicable state statutes,
regulations and orders with respect to such sales.-[65]-
In view of these precedents, and in light of the rapid
development of competition in retail markets, as discussed above,
this subsection is intended to cover activities in both wholesale
and retail markets that are in compliance with applicable law.
This subsection, as proposed, also did not indicate whether
a registered holding company could acquire an interest in a
company dealing in all energy commodities or only in electric
---------FOOTNOTES----------
-[63]- See, e.g., Consolidated Natural Gas Co., Holding Co.
Act Release No. 26512 (Apr. 30, 1996) (approving wholesale
marketing of energy commodities, but reserving jurisdiction over
retail marketing activities until such time as state programs
permitting such activities are implemented).
-[64]- See, e.g., Eastern Utilities Assocs., Holding Co.
Act Release No. 26519 (May 23, 1996) (participation in retail
electric pilot programs in New Hampshire and Massachusetts); and
New England Electric System, Holding Co. Act Release No. 26520
(May 23, 1996) (same).
-[65]- SEI Holdings, Inc., Holding Co. Act Release No. 26581
(Sept. 26, 1996). The Commission noted that industry trends and
competitive pressures make it important for registered system
companies to be poised to compete in new markets as they are
created, and that such participation appears to promote the goals
of U.S. energy policy, including increased competition and lower
utility rates.
==========================================START OF PAGE 34======
power or natural gas, as appropriate. At the time the Proposing
Release was issued, the Commission's previous orders had, for the
most part, limited participation in gas marketing and brokering
activities to gas holding company systems, and electric marketing
and brokering activities to electric holding company systems.
Since that time, however, the Commission has considered and
approved several proposals by registered holding companies to
engage in the brokering and marketing of energy commodities,
including but not limited to electricity and natural or
manufactured gas.-[66]- The rule as adopted permits
companies in both electric and gas systems to acquire interests
in companies engaging in the activities described in this
subsection.
One commenter recommends that the Commission revise the
subsection to clarify that it concerns both regulated and
unregulated activities.-[67]- Since rule 58 addresses only
the acquisition of securities of nonutility companies engaged in
specified activities, this comment is not reflected in the rule.
Several commenters suggest that the specified activities
---------FOOTNOTES----------
-[66]- Consolidated Natural Gas Co., Holding Co. Act Release
No. 26512 (Apr. 30, 1996); UNITIL Corp., Holding Co. Act Release
No. 26527 (May 31, 1996); and SEI Holdings, Inc., Holding Co. Act
Release No. 26581 (Sept. 26, 1996). Other companies in both
electric and gas holding company systems are also seeking similar
authorizations. See, e.g., National Fuel Resources, Inc., File
No. 70-8651.
-[67]- Comments of CSW. Unregulated activities are stated
to be those that are for the benefit of shareholders.
==========================================START OF PAGE 35======
should include "risk management activities"-[68]- and
"market hedging tools."-[69]- The Commission has, in
several instances, considered such activities in connection with
the brokering and marketing of energy commodities.-[70]-
In each case, the order was conditioned on representations that
hedging tools would be used only to minimize risks associated
with contracts for purchase or sale of energy commodities and
would not be used to engage in speculation. Such activities are
a means of limiting the risks associated with marketing of energy
commodities and, subject to compliance with the limitations noted
above, may be engaged in as part of the activities covered by
this subsection.
(6) Subsection (b)(1)(vi): thermal energy products.
This subsection addresses the production, conversion and
distribution of thermal energy products,-[71]- alternative
fuels and renewable energy resources. The Commission received
one comment, suggesting that sale of such products and servicing
of thermal energy facilities should be added to the permitted
---------FOOTNOTES----------
-[68]- Comments of CSW.
-[69]- Comments of Cinergy.
-[70]- See, e.g., SEI Holdings, Inc., Holding Co. Act
Release No. 26581 (Sept. 26, 1996); Consolidated Natural Gas Co.,
Holding Co. Act Release No. 25926 (Nov. 16, 1993); and
Consolidated Natural Gas Co., Holding Co. Act Release No. 26512.
-[71]- Examples given in the rule include process steam,
heat, hot water, chilled water, air conditioning, compressed air
and similar products.
==========================================START OF PAGE 36======
activities.-[72]- The rule as adopted has been revised to
include these suggestions. The rule has also been revised to
limit availability of this subsection to electric registered
holding company systems.
(7) Subsection (b)(1)(vii): sale of services and
expertise.
This section addresses the sale of technical, operational,
management and other kinds of services and expertise developed in
the course of utility operations.-[73]- Commenters offer
various requests for expansion of this category.
One registered holding company suggests that the category
should also include development, production, marketing and
financing of such services and expertise.-[74]- The
Commission notes, however, that the subsection is intended to
address services and expertise that exist as a result of system
utility operations. The development and production of such
services and expertise, solely for the purpose of sale, are
outside its scope. In addition, the marketing of such services
and expertise is implicit in the concept of sale, and thus need
not be specifically mentioned. As discussed below, the
---------FOOTNOTES----------
-[72]- Comments of GPU.
-[73]- Examples cited in the proposed rule include power
plant and transmission system engineering, development, design
and rehabilitation; construction; maintenance and operation; fuel
procurement, delivery and management; environmental licensing,
testing and remediation; and other similar areas. The activities
contemplated by the rule do not extend to any that would render a
company a public-utility company under the Act. See section
2(a)(3), (4) and (5).
-[74]- Comments of Consolidated.
==========================================START OF PAGE 37======
Commission believes that customer financing is better addressed
in the context of rule 48. The Commission declines to adopt
these proposed revisions to the rule.
Two commenters suggest that expertise and services developed
in the course of nonutility operations should also be
included.-[75]- While expertise related to some nonutility
services may be appropriate for inclusion in the activities
covered by the rule, the Commission believes that there is not
yet an adequate basis for including them, and will continue to
consider proposals on a case-by-case basis.
A registered holding company suggests an expansion of this
category to include the sale of excess goods and
assets.-[76]- The Commission declines to adopt this
suggestion with respect to sale of utility assets and resources
by a nonutility company, primarily because those activities could
involve significant consumer protection issues, and could also
raise restructuring issues that are beyond the scope of the rule.
Some sales of excess nonutility assets and resources may be a
legitimate activity for rule 58 companies, but the Commission
does not believe that there is, as yet, an adequate basis for
inclusion of such activities in the rule. Consideration of these
types of activities will continue to be done on a case-by-case
basis.
Another registered holding company proposes that this
---------FOOTNOTES----------
-[75]- Comments of AGA and Columbia.
-[76]- Comments of CSW.
==========================================START OF PAGE 38======
category of the rule be expanded to include the sale of
administrative services and equipment related to services and
expertise.-[77]- The Commission notes, however, that
administrative services, to the extent they are within the scope
of management services, need not be expressly addressed. In
addition, as discussed above, sales by a nonutility subsidiary
company of equipment used in utility operations, even equipment
related to the service being sold, could raise consumer
protection issues. Accordingly, the Commission declines to
accept these suggestions.
Commenters also suggest that the list of examples of the
types of services and expertise covered by this subsection be
expanded.-[78]- As discussed previously, the rule is
intended to encompass the types of activities that may be
considered to be in the ordinary course of business of a
registered holding company. In this regard, the Commission has
taken into account its experience in administering sections
9(a)(1) and 10 of the Act. To the extent that the commenters
request the inclusion of activities with which the Commission has
little or no familiarity, it is appropriate to continue case-by-
case review. Accordingly, the Commission declines to modify the
---------FOOTNOTES----------
-[77]- Comments of Northeast.
-[78]- Comments of Consolidated (gas exploration,
development, transmission or storage system design); CSW (waste
management activities); GPU (consulting and training); Cinergy
(revenue security and employee safety); and Northeast
(distribution system engineering, development design and
rehabilitation, environmental services, and transportation and
fleet services).
==========================================START OF PAGE 39======
adopted rule as these commenters request.
It should also be noted in this regard that only those type
of services and expertise that are uniquely utility-related are
intended to fall within this category of activity. Activities
that are more generic are not intended to be a permitted activity
for energy-related companies.-[79]-
The Commission notes in connection with this subsection that
any use by a system nonutility company of personnel or other
resources of an associate public-utility company raises issues
under section 13 of the Act and rules thereunder-[80]-
relating to pricing of intrasystem transactions. Persons
engaging in these activities and relying upon the exemption
provided by the rule are advised to consider these requirements.
Companies in both electric and gas registered systems may
acquire interests in companies engaging in the activities
---------FOOTNOTES----------
-[79]- For instance, expertise in billing and customer
service may be developed in the course of utility operations.
These types of activities are not, however, uniquely utility-
related and, thus, are not encompassed by this subsection.
-[80]- Section 13 prohibits registered holding companies
from entering into or performing any contract for service,
construction or the sale of goods with any associate utility or
service company, except as may be permitted by rule in special
circumstances or in the ordinary course of business. Section 13
also provides that subsidiaries of registered holding companies,
in entering into or performing any such contracts, must comply
with any limitations imposed by the Commission as necessary or
appropriate to insure that such contracts are performed
economically and efficiently for the benefit of such associate
companies at cost, fairly and equitably allocated among such
companies. Rules 85 through 92, adopted under section 13,
specify the situations in which such transactions are permitted
and generally provide that, with some exceptions, such contracts
must be performed at cost.
==========================================START OF PAGE 40======
specified in this subsection. As adopted, this subsection has
been revised only to the extent necessary to eliminate redundant
language.
(8) Subsection (b)(1)(viii): ownership and operation
of QFs.
This subsection, as proposed, included ownership or
operation of QFs and of facilities necessary or incidental
thereto.-[81]- The Commission received one comment on this
provision, proposing that development of QFs also be included in
the rule.-[82]- The Commission has approved project
development activities in connection with QFs in a number of
cases.-[83]- Such activities are implicit in the
subsection as proposed, and the subsection has been revised to
include them specifically.
After careful review of the precedent in this area under
sections 9(a)(1) and 10, the Commission has also determined that
it is appropriate to make clear that this subsection is intended
to include ownership and operation of only the types of
incidental facilities that are required in order to meet the
---------FOOTNOTES----------
-[81]- Such facilities are stated to include thermal energy
utilization facilities purchased or constructed primarily to
enable the QF to satisfy the useful thermal output requirements
under PURPA and regulations thereunder.
-[82]- Comments of GPU.
-[83]- See, e.g., Southern Co., Holding Co. Act Release No.
26212 (Dec. 30, 1994); and Allegheny Power System, Inc., Holding
Co. Act Release No. 26229 (Feb. 3, 1995).
==========================================START OF PAGE 41======
requirements of PURPA.-[84]- Subsection (viii), as
adopted, has been revised accordingly.
Companies in both electric and gas registered systems may
acquire interests in companies engaging in the activities
specified in this subsection.
(9) Subsection (b)(1)(ix): fuel facilities,
scrubbers, and resource recovery and waste water
treatment facilities.
As proposed, this subsection included ownership and
operation of fuel procurement, transportation, handling and
storage facilities, scrubbers, and resource recovery and waste
water treatment facilities.-[85]- One registered holding
company suggests that servicing of such facilities should also be
permitted.-[86]- The subsection has been revised expressly
to permit such activity.
Another registered holding company suggests that this
subsection should be expanded to permit use of excess system
---------FOOTNOTES----------
-[84]- The Commission has authorized registered holding
companies to invest in an 18 acre thermal host greenhouse,
Central and South West Corp., Holding Co. Act Release No. 25399
(Nov. 1, 1991), and an integrated carbon dioxide plant steam
host, Central and South West Corp., Holding Co. Act Release Nos.
25477 (Feb. 18, 1992) and 25983 (Jan. 31, 1994). In each
instance, the Commission found that the incidental facility was
necessary to the operation of the QF. The Commission believes
that it is appropriate for the subsection of the rule to extend
to investments in any type of incidental facility that is needed
for a facility to attain QF status.
-[85]- This subsection is not intended to encompass
ownership or operation of any facilities that would cause an
energy-related company to become an electric utility company
under the Act. See section 2(a)(3).
-[86]- Comments of GPU.
==========================================START OF PAGE 42======
assets, such as office equipment and space and excess space in
billing envelopes.-[87]- The Commission believes that this
request is more appropriately directed to subsection (b)(1)(vii)
and has addressed it in that context.
The Commission orders on which inclusion of these activities
is based relate to generation of electricity. As a result, the
rule's exemption for the acquisition of a company that engages in
activities described in this subsection is available only for
companies in electric registered systems.-[88]-
(10) Subsection (b)(1)(x): production, transportation,
distribution or storage of other forms of energy.
The activities in this subsection concern all forms of
energy other than electricity and natural or manufactured gas.
Commenting registered holding companies suggest that the
permitted activities should also include the sale of these forms
of energy, -[89]- as well as all activities in the supply
chain concerning them, including development, exploration,
research and testing.-[90]- The commenters further
propose that the subsection specifically include sources of
energy.-[91]-
---------FOOTNOTES----------
-[87]- Comments of Northeast.
-[88]- Many activities related to procurement,
transportation and storage of natural gas for sale are permitted
for gas-related companies, as discussed below.
-[89]- Comments of GPU.
-[90]- Comments of AGA, CSW and Columbia.
-[91]- Comments of CSW.
==========================================START OF PAGE 43======
The Commission has concluded that the activities in this
proposed subsection duplicate in many respects the activities
included in other subsections of the rule as adopted.-[92]-
Accordingly, this subsection has been eliminated in the final
rule.
(11) Subsection (b)(1)(xi): coal waste by-products.
This subsection includes development and commercialization
of technologies or processes that utilize coal waste by-products
as an integral component. Two registered holding companies
comment on this subsection and request that it be expanded to
include all waste products and by-products of generation of
electricity and natural gas production, as well as investments in
facilities and equipment used in processes to improve wastes and
by-products or convert them into useful goods.-[93]- The
Commission notes that, to date, it has considered only cases
involving coal waste products and by-products of electric
generation,-[94]- and this subsection is adopted as
---------FOOTNOTES----------
-[92]- For instance, subsection (v) covers marketing of
energy commodities; subsection (vi) covers production and sale of
thermal energy products, alternative fuels and renewable energy
resources; subsection (ix) covers ownership or operation of fuel
procurement, transportation, handling and storage facilities; and
subsection (x) covers utilization of certain waste by-products of
the generation of electricity. In addition, as discussed below,
production of other fuels may be a permitted activity for gas-
related companies under some circumstances.
-[93]- Comments of Allegheny and Southern.
-[94]- See Jersey Central Power & Light Co., Holding Co. Act
Release No. 24373 (April 16, 1987) (investment in company
developing a waste coal-fired generating unit); American Electric
Power Co., Holding Co. Act Release No. 26014 (March 30, 1994)
(continued...)
==========================================START OF PAGE 44======
proposed.
Only companies in electric holding company systems may
acquire an interest in a company engaged in the activities in
this subsection.
(12) Subsection (b)(1)(xii): telecommunications
facilities.
This subsection addresses the ownership, sale, leasing or
licensing of the use of telecommunications facilities and
equipment. The Commission received numerous comments on the
advisability and scope of this part of the rule.-[95]- In
view of the passage in 1996 of the Telecommunications Act,
legislation that exempts from the requirement of prior Commission
approval the acquisition and retention by a registered holding
company of interests in companies engaged in a broad range of
telecommunications activities and businesses, these activities
are not included in the adopted rule.
2. Limitation on Investment
As noted above, the exemption of rule 58 is available so
long as aggregate investment by a registered holding company and
---------FOOTNOTES----------
-[94]-(...continued)
(acquisition of securities of subsidiary that develops backfill
material using fly ash, a coal waste by-product); and New England
Electric System, Holding Co. Act Release No. 26277 (April 26,
1995) (investment in a venture that installs equipment to
separate unburned carbon from coal ash).
-[95]- Registered holding companies generally commented that
this section should be expanded to cover a broader range of
telecommunication services and products. Comments of CSW,
Entergy and GPU. New Orleans, however, commented that this
subsection should be eliminated as not in the public interest due
to possible cross-subsidization problems and lack of relationship
to the core utility business.
==========================================START OF PAGE 45======
its subsidiaries in energy-related companies does not exceed the
greater of 15% of consolidated capitalization or $50 million. As
proposed, investments in such companies made pursuant to
Commission order prior to the effective date of the rule would be
excluded for purposes of calculating the limitation. In the
Proposing Release, the Commission requested specific comment on
(1) whether the proposed investment limitation is reasonable
under the circumstances; (2) whether a different measure of
financial capacity, such as consolidated retained earnings,
should be used instead; and (3) whether it is appropriate to
exclude prior investments for purposes of the rule.
a. Need for a Limitation
Some commenters consider an investment limitation to be
unnecessary. They note that the types of energy-related
businesses specified in the rule are closely related to the
utility industry-[96]- and that competitive markets and the
financial condition of any particular registered holding company
establish prudent limits on diversification.-[97]- They
state, further, that the Commission can monitor the effects of
diversification through its review of holding company
financing,-[98]- and they note that consumers are protected
against potential cross-subsidization by various factors,
---------FOOTNOTES----------
-[96]- Comments of Entergy.
-[97]- Comments of AGA and Columbia.
-[98]- Comments of Columbia and Entergy.
==========================================START OF PAGE 46======
including the at-cost rules under section 13 of the
Act,-[99]- rate regulation and the companies' need to be
competitive.-[100]- Several commenters, however, state
that if the Commission determines that a limitation is
appropriate, the proposed limitation is reasonable.-[101]-
These commenters consider a more restrictive standard to be
unnecessary.-[102]-
The Commission continues to believe that it is appropriate
to limit the aggregate investment of a registered holding company
in energy-related companies pursuant to the rule. Section
9(c)(3) by its terms contemplates that the Commission will
condition rules thereunder upon such limitations as it may
prescribe as appropriate in the ordinary business of a registered
holding company or its subsidiary company and not detrimental to
the public interest or the interest of investors or consumers.
An aggregate limitation upon investments pursuant to the rule is
appropriate to ensure that acquisitions of interests in energy-
related companies are not so material as to depart from the
statutory concept of transactions in the ordinary course of
business or to raise the possibility of detriment to the
---------FOOTNOTES----------
-[99]- Rules 90, 91 and 92 under the Act, 17 CFR 250.90,
250.91 and 250.92.
-[100]- Comments of AGA.
-[101]- Comments of Consolidated, GPU and Southern.
-[102]- Comments of AGA and GPU.
==========================================START OF PAGE 47======
protected interests.-[103]- The Commission may revisit
the need for an investment limitation in rule 58 in the future,
after gaining experience with the use and effects of the
exemption provided by the rule.
b. Basis for Calculation of the Limitation
New Orleans asserts that either consolidated retained
earnings or consolidated equity is preferable to consolidated
capitalization as a means to measure shareholder funds that are
not needed to meet the registered system's utility service
obligations.
The commenting registered holding companies oppose a
standard based on consolidated retained earnings. They note that
such earnings can vary significantly as a result of factors that
do not affect financial health, such as accounting changes and
other nonrecurring items.-[104]- They also assert that
consolidated retained earnings are primarily an indicator of
ability to raise new capital economically, and, to this extent,
lack relevance for the purpose of setting a limitation upon
---------FOOTNOTES----------
-[103]- The Commission notes that its jurisdiction over the
issuance and sale of securities by a registered holding company
and its subsidiaries to finance investments in nonutility
companies pursuant to rule 58 will also serve to minimize risk
and to enable the Commission to monitor the effects of nonutility
activities on the registered system. The Commission has
jurisdiction over such financing transactions under sections 6
and 7 of the Act, and must consider certain effects of proposed
financings in determining whether the standards of the Act have
been satisfied. See the Proposing Release, 60 FR at 33646.
-[104]- One registered holding company also observes in this
regard that a standard based on consolidated retained earnings
would create uncertainty in a registered holding company system's
planning. Comments of CSW.
==========================================START OF PAGE 48======
investment under the rule.-[105]-
The registered holding companies generally support a
standard based on consolidated capitalization, because, in their
view, it offers flexibility-[106]- and a meaningful
measure of system financial integrity.-[107]- These
commenters explain that a flexible standard is appropriate
because the activities encompassed by the exemption of the rule
are closely related to the utility business and have been
reviewed and approved by order of the Commission.-[108]-
The Commission recently considered a question of the
appropriate basis for an investment limitation in the context of
EWGs. Rule 53, adopted under section 32 of the Act, provides a
safe harbor for approval of proposals to issue securities related
to investments in EWGs.-[109]- To qualify for the rule's
---------FOOTNOTES----------
-[105]- Comments of Southern.
-[106]- Comments of GPU and Northeast.
-[107]- Comments of Allegheny and Southern.
-[108]- Comments of CSW.
-[109]- Section 32 of the Act provides that, in determining
whether to approve a proposed issuance of securities related to
EWG investments, the Commission may not make certain negative
findings under the Act unless the proposed transaction would have
a substantial adverse impact on the financial integrity of the
registered holding company system. Section 32(h)(3) and (4).
Section 32 also directs the Commission to adopt regulations that
would set forth "the actions which would be considered to have a
substantial adverse impact on the financial integrity of the
registered holding company system [and] ensure that the
[financing in question] has no adverse impact on any utility
subsidiary or its customers, or on the ability of State
commissions to protect such subsidiary or customers . . . ."
Section 32(h)(6). Rule 53 was adopted to effectuate these
(continued...)
==========================================START OF PAGE 49======
safe harbor, the aggregate investment of the registered holding
company system in EWGs and foreign utility companies ("FUCOs")
cannot exceed 50% of the system's consolidated retained earnings.
In adopting rule 53, the Commission determined that retained
earnings was an appropriate standard against which to measure the
safe harbor limitation on these exempt investments.
Although the Commission has found a standard based on
consolidated retained earnings to be appropriate in the context
of rule 53, it does not follow that it is appropriate in the case
of investments in energy-related companies. The Commission noted
in adopting the safe harbor provisions of rule 53 that
investments in EWGs and FUCOs were new activities, and that the
potential risks, which could not accurately be predicted, could
conceivably be significant. The Commission rejected a test based
on consolidated capitalization, because it would not directly
reflect the effect of losses in connection with an EWG or FUCO
investment. The Commission concluded that the level of retained
earnings, which is directly sensitive to losses, was a more
appropriate standard against which to measure these
investments.-[110]- In contrast, as discussed previously,
---------FOOTNOTES----------
-[109]-(...continued)
provisions. If the rule's safe harbor are satisfied, the
Commission is precluded from making the negative findings
specified in section 32(h)(3) and (4).
-[110]- The Commission stated that "[b]ecause EWGs and
foreign utility companies are still novel entities, there is
little experience on which to base predictions concerning their
performance . . . . [R]etained earnings would best capture the
effect upon a system's financial condition of reverses in EWG and
(continued...)
==========================================START OF PAGE 50======
investments under rule 58 are deemed to be appropriate within the
ordinary course of business of registered systems and consistent
with the protected interests under the Act. The risks are more
predictable and presumably more limited. In rejecting
alternative bases for the investment limitation in rule 53, the
Commission also noted that consolidated capitalization "relates
principally to the capital structure created to fund the holding
company system's domestic utilities. . .,"-[111]- and thus
is not a particularly appropriate standard against which to
measure investments in EWGs and FUCOs. This is not the case for
acquisitions of interests in energy-related companies, whose
activities, as previously discussed, are closely related to the
core utility business of a registered system. Because total
system capitalization is intended to support the system's utility
business, the Commission regards it as an appropriate measure of
the amount of capital that may be invested in utility-related
businesses. In addition, because consolidated capitalization is
a more stable base of calculation than retained earnings, the
amount of the investment cap would be less subject to
fluctuations.
The test in rule 53 was formulated to effectuate the
---------FOOTNOTES----------
-[110]-(...continued)
foreign utility company investments." Holding Co. Act Release
No. 25886 (Sept. 23, 1993), 58 FR 51488, 51493 (Oct. 1, 1993).
-[111]- Id.
==========================================START OF PAGE 51======
specific protections required by section 32.-[112]- In
contrast, section 9(c)(3), under which rule 58 is adopted, deals
with a different type of investment than that covered by section
32, i.e., one appropriate in the "ordinary course of business."
Investors and consumers are protected not only through the
investment cap for energy-related investments, but also through
this limitation.
In view of these considerations, the Commission believes
that a consolidated capitalization standard is appropriate for
purposes of a limitation on exempt investments under rule 58.
The final rule incorporates this standard.
c. Treatment of Previous Investments
The Commission received a significant number of comments
concerning the proposed exclusion of prior investments in energy-
related companies, made pursuant to Commission order, from the
calculation of aggregate investment for purposes of the
limitation of the rule. New Orleans and one registered holding
company-[113]- assert that such prior investments should
---------FOOTNOTES----------
-[112]- In discussing the investment limitation, the
Commission stated that rule 53 is "intended to protect system
financial integrity and so protect utilities and their
ratepayers." A "key factor" in this regard is the ability of the
holding company, which is a source of capital for its utility
subsidiaries, to obtain financing at a reasonable cost. Retained
earnings was chosen as the basis of the safe harbor investment
limitation, among other things, because they are linked to the
cost of capital, and thus provide a "fundamental protection." 58
FR at 51492.
-[113]- Comments of Allegheny.
==========================================START OF PAGE 52======
be included in the calculation.-[114]- The majority of
commenters, however, consider the "grandfathering" of these
investments to be appropriate. These commenters note that the
investments have been found to satisfy the requirements of the
Act.-[115]- Further, the commenters assert that inclusion
of prior investments would penalize those registered holding
companies that have successful energy-related programs in
place,-[116]- and also prevent registered holding
companies from competing on an equal footing with exempt holding
companies and companies not subject to the Act.-[117]-
Finally, the commenters contend that it would be burdensome to
require a determination of whether or not various prior
---------FOOTNOTES----------
-[114]- New Orleans believes that the total of existing
investments and future investments under rule 58 would be so
great as to be detrimental to ratepayers. As of December 31,
1995, registered holding companies had invested approximately
$1.25 billion in companies that would be energy-related companies
within the meaning of rule 58(a). As of that date, such
investments represented approximately 1.6% of consolidated
capitalization of the registered systems having such investments.
On an individual basis, no registered system had more than
approximately 5.6% of its consolidated capitalization invested in
energy-related companies as of December 31, 1995. The Commission
believes that this level of investment does not raise any
significant issues of risks to the interests protected by the
Act. The Commission also notes that because registered holding
companies often make these investments through nonutility
subsidiaries, system operating companies and their ratepayers are
insulated from exposure to any direct losses that may result from
the investments.
-[115]- Comments of CSW, EUA, GPU and Northeast.
-[116]- Comments of EUA.
-[117]- Comments of AGA.
==========================================START OF PAGE 53======
investments are energy-related for purposes of rule
58.-[118]-
Several commenters propose that the limitation should
exclude not only investments made pursuant to Commission order
prior to the rule, but also previously-authorized investments
that have not yet been made as of the date of the
rule.-[119]- One commenter suggests, in addition, that
investments that the Commission may authorize by future order
should be excluded for purposes of the limitation of rule
58.-[120]- This commenter also requests the Commission to
clarify whether previous investments in energy-related companies
pursuant to other exemptions should be excluded from calculation
of the investment limit. At issue are investments by registered
holding companies in their nonutility subsidiaries pursuant to
rules 52 and 45, as recently amended.-[121]-
The Commission believes that all amounts that have actually
been invested in energy-related companies pursuant to Commission
order prior to the date of effectiveness of the rule should be
---------FOOTNOTES----------
-[118]- Comments of EUA and GPU.
-[119]- Comments of AEP, Consolidated, EUA, Entergy and
Southern.
-[120]- Comments of Entergy.
-[121]- See Holding Co. Act Release No. 26311 (June 20,
1995), 60 FR 33634 (June 28, 1995) (exempting from the
requirement of prior Commission approval capital contributions
and non-interest bearing open account advances by parent
companies to nonutility subsidiaries, and the issuance by
nonutility subsidiaries and acquisition by their parents of
specified types of securities, the proceeds of which are for use
in the subsidiary's existing business).
==========================================START OF PAGE 54======
excluded from the calculation of aggregate investment under rule
58. The Commission also believes it is appropriate to exclude
from the calculation all investments made prior to that date
pursuant to available exemptions.-[122]-
The Commission believes, however, that any investment made
after the date of effectiveness of rule 58 should be included for
purposes of calculation of the limitation, regardless of whether
these investments are made pursuant to prior Commission order or
available exemptions.-[123]- As for the question of
whether investments approved by order after the date of
effectiveness of rule 58 should be excluded from the calculation,
the Commission believes that the issue is best addressed on a
case-by-case basis. This approach will enable the Commission to
consider the effect of the particular transaction on the
---------FOOTNOTES----------
-[122]- Under this interpretation, amounts invested by a
registered system company in an energy-related company during the
period between adoption and effectiveness will be excluded for
purposes of calculating aggregate investment; provided, that such
investments are used solely to fund activities in which the
company has previously been authorized to engage by order of the
Commission and that such amounts are not disproportionate to the
current operations of such business. Since these additional
investments will fund activities that the Commission has
previously considered and approved under sections 9(a)(1) and 10
of the Act, the Commission does not believe that their exclusion
raises any significant concerns with respect to protection of the
interests covered by the Act. Any investments in existing
energy-related companies made prior to the effective date of the
rule must be reported on Form U-9C-3.
-[123]- As discussed below, the Commission is adopting
amendments to rules 52 and 45 that subject investments in energy-
related companies to the same limitations under these rules as
are applicable under rule 58. These limits apply to all energy-
related companies, regardless of whether the initial investment
in such company was made pursuant to order or pursuant to rule
58.
==========================================START OF PAGE 55======
registered system.
d. Definition of "aggregate investment"
Rule 58, as proposed, defined "aggregate investment" to mean
all amounts invested, or committed to be invested, in energy-
related companies, for which there is recourse, directly or
indirectly, to the registered holding company. The Commission
stated that the term was intended to have a meaning similar to
that provided by rule 53.-[124]- The language of the
definition, as proposed, did not specifically include amounts
invested by subsidiary companies that are without guaranty by, or
other recourse to, the parent holding company. Such investments,
which are exempt under subsection (a)(1) from the requirement of
Commission approval, are intended to be included in calculating
the limitation under the rule. The rule as adopted reflects this
intent.-[125]-
In terms of the types of investments encompassed, the scope
---------FOOTNOTES----------
-[124]- See Holding Co. Act Release No. 25886 (Sept. 23,
1993), 58 FR 51488 (Oct. 1, 1993). Rule 53(a)(1)(i) (17 CFR
250.53(a)(1)(i)) provides that aggregate investment includes
all amounts invested, or committed to be invested, in exempt
wholesale generators and foreign utility companies, for
which there is recourse, directly or indirectly, to the
registered holding company. Among other things, the term
includes, but is not limited to, preliminary development
expenses that culminate in the acquisition of an exempt
wholesale generator or a foreign utility company; and the
fair market value of assets acquired by an exempt wholesale
generator or a foreign utility company from a system company
(other than an exempt wholesale generator or a foreign
utility company).
-[125]- An indirect investment made through an intermediate
subsidiary will only be counted once in the calculation of
aggregate investment.
==========================================START OF PAGE 56======
of the definition of "aggregate investment" in rule 58 is
intended to be similar to that of rule 53. The term thus would
include amounts actually invested in an energy-related company,
as well as amounts committed to be invested under the terms of
subscription agreements, or stand-by or other similar capital
funding agreements.
B. Investments by gas registered holding companies in gas-
related companies
Rule 58(a)(2) exempts from the requirement of prior
Commission approval under sections 9(a)(1) and 10, pursuant to
section 9(c)(3), the acquisition by a gas registered holding
company or its subsidiary company of securities of a "gas-related
company," as defined. Such acquisitions are not subject to any
limitation as to amount. A "gas-related company" is defined in
the Proposing Release as a company that derives, or will derive,
substantially all of its revenues from activities permitted under
sections 2(a) and 2(b) of the GRAA and such other nonutility
activities as the Commission may, from time to time, by order
upon application under sections 9 and 10 and section 2(b) of the
GRAA, authorize a gas registered holding company to engage in,
and, in so doing, designate as gas-related for purposes of rule
58. The rule contemplates that gas-related companies, like
energy-related companies, will derive substantially all of their
revenues from the respective activities designated in the rule.
1. Definition of "Gas-Related Company"
Some commenters question whether registered holding
companies that have only electric utility operations or that have
==========================================START OF PAGE 57======
both electric and gas utility operations should be entitled to
invest in gas-related companies on an unlimited basis under the
rule.-[126]- The portion of rule 58 that permits such
investments reflects and depends upon findings under the GRAA
that certain activities satisfy the requirements of sections 10
and 11 of the Act. The GRAA is available only to companies in
systems in which the holding company is registered solely by
reason of ownership of voting securities of gas utility
companies. As a result, other registered holding company systems
are not entitled to the benefits of the GRAA or the related
provisions of rule 58. The language of the rule has been
clarified to make this explicit.
Several commenters raise an issue concerning the scope of
the definition of gas-related company.-[127]- The
definition, as proposed, can be read to include companies that
derive substantially all of their revenues from only the
activities specified in section 2(a) of GRAA and activities found
by the Commission, by order, to satisfy the requirements of
section 2(b) of GRAA. This interpretation would not, however,
take into account that some activities specifically identified in
section 2(b) as being related to the supply of natural gas (i.e.,
exploration, development, production, marketing and manufacture
of natural or manufactured gas) were found by the Commission to
be permissible under the standards of the Act prior to the
---------FOOTNOTES----------
-[126]- Comments of CSW and Cinergy.
-[127]- Comments of AGA, Columbia and Consolidated.
==========================================START OF PAGE 58======
enactment of the GRAA, and are not the subject of a subsequent
order under that legislation. Under rule 58 as proposed, a gas
holding company system might be required to obtain an order under
section 2(b) of GRAA in order for these gas-related activities to
be covered by the rule's exemption.
Activities of the type specified in section 2(b) of GRAA
were intended to be included in the activities in which gas-
related companies may engage, regardless of whether a Commission
order approving such activities was issued under
GRAA-[128]- or under sections 9(a) and 10 prior to the
enactment of GRAA,-[129]- or both.-[130]- In all
---------FOOTNOTES----------
-[128]- See, e.g., Consolidated Natural Gas Co., Holding Co.
Act Release No. 26363 (Aug. 28, 1995) (sale of propane services);
Columbia Gas System, Holding Co. Act Release No. 25802 (April 22,
1993) (marketing natural gas to nonaffiliates); National Fuel Gas
Co., Holding Co. Act Release No. 25437 (Dec. 20, 1991)
(marketing, storage and transportation of natural gas and pricing
consultation); National Fuel Gas Co., Holding Co. Act Release No.
25265 (March 5, 1991) (exploration and development of gas supply
reserves); CNG Transmission Corp., Holding Co. Act Release No.
25239 (Jan. 9, 1991) (development, construction and operation of
natural gas pipelines); and Consolidated Natural Gas Co., Holding
Co. Act Release No. 25224 (Dec. 21, 1990) (development of
technologies to enhance the supply, transportation and
utilization of natural gas).
-[129]- See, e.g., National Fuel Gas Co., Holding Co. Act
Release No. 24381 (May 1, 1987) (drilling and well maintenance
and related services); Consolidated Natural Gas Co., Holding Co.
Act Release No. 23023 (Aug. 5, 1983) (sale of natural gas
byproducts); National Fuel Gas Co., Holding Co. Act Release No.
21903 (Feb. 2, 1981) (construction of underground storage
facilities); and Columbia Gas System, Holding Co. Act Release No.
13610 (Nov. 27, 1957) (extraction and sale of natural gas
byproducts).
-[130]- See, e.g., National Fuel Gas Co., Holding Co. Act
Release Nos. 26181 (Dec. 6, 1994) and 24381 (May 1, 1987)
(pipeline construction and maintenance and related services).
==========================================START OF PAGE 59======
of these cases, the Commission found that the standards of
sections 10 and 11 were satisfied, either through traditional
analysis or by means of the assumptions created by GRAA. The
rule has been clarified to accomplish this result.
Several commenters also note that other activities
associated with the natural gas supply chain, such as exploration
and production of associated petroleum, were contemplated to be
included in GRAA-permitted activities and should be included in
the activities permitted to be engaged in by gas-related
companies under rule 58.-[131]- The Commission agrees
that the activities in which a gas-related company may engage
under rule 58 should be consistent with those contemplated by
GRAA.-[132]-
The definition, as proposed, contained a provision
permitting addition of new activities by order upon application.
As discussed above in the context of energy-related companies,
this provision has not been included in the rule as adopted.
The definition of a gas-related company has also been
revised, as was the definition of an energy-related company, to
permit indirect investment through intermediate subsidiaries.
2. Limitation on Investments in Gas-Related Companies.
The Commission requested comment on whether a limitation on
---------FOOTNOTES----------
-[131]- Comments of AGA and Columbia.
-[132]- See, e.g., 136 Cong.Rec. S17586 (Oct. 27, 1990)
(Statement of Sen. D'Amato) (production and sale of oil and other
petroleum products may constitute "production" for purposes of
GRAA, if oil and natural gas are present in the geologic
formation underlying a particular well).
==========================================START OF PAGE 60======
investments in gas-related companies is appropriate. Two
commenters state that no such limitation is needed.-[133]-
They note, among other things, that because many activities
involved in the gas business are nonutility interests for
purposes of the Act, investment in such activities is necessarily
significant, and any limitation would limit the usefulness of the
rule for gas registered systems.-[134]- In view of the
Congressional intent, evidenced by the GRAA, that gas systems be
permitted to engage in certain gas-related activities without
restriction as to amount, the Commission has not revised the rule
to add a limitation on those activities.-[135]-
C. Other Conditions to Use of the Rule
The Commission sought comment on whether use of rule 58
should be conditioned on meeting other types of requirements, and
the form such conditions should take. Commenters were invited to
address the need for additional conditions to use of the rule 58
exemption based on, for example, the financial condition of the
registered holding company system, the extent of losses
experienced by the system over recent periods and prior
bankruptcies of system companies.
The registered holding companies and the American Gas
Association uniformly state, for various reasons, that no further
conditions to use of rule 58 are needed in order for investors
---------FOOTNOTES----------
-[133]- Comments of AGA and Consolidated.
-[134]- Comments of Consolidated.
-[135]- See the Proposing Release, 60 FR at 33647.
==========================================START OF PAGE 61======
and consumers to be protected from risks.-[136]- One
holding company suggests that, if conditions are imposed, they
should be based on current or future facts rather than past
circumstances.-[137]- New Orleans, however, disagrees and
suggests that use of the rule be conditioned on a demonstration
of financial viability by the holding company. New Orleans also
recommends that consumer safeguards in the form of audit
authority and access to books and records for ratemaking
authorities be added.-[138]-
For several reasons, the Commission believes that no
additional conditions are required in order to protect investors
and consumers from the risks of these diversified activities.
First, as noted above, the rule addresses activities that the
---------FOOTNOTES----------
-[136]- Comments of Allegheny (the rule's investment
limitation protects investors and ratepayers, and the Commission
and the states can monitor activities through Form U-9C-3); AEP
(the investment limitation and the fact that these activities are
conducted separately from utility operations provide
protections); AGA (each venture should be viewed on a prospective
basis, not on the basis of past experience; adverse developments
can be monitored through reports filed with the Commission, the
FERC and state regulators); Columbia (a "no bankruptcy" condition
is contrary to the policy of the bankruptcy laws, and bankruptcy
is irrelevant where the company emerges with an investment grade
rating); Consolidated (the Commission can invoke its jurisdiction
if problems are perceived); Entergy (the Commission can monitor
investments in the context of holding company financing
approvals); GPU (the state regulators and the FERC can protect
ratepayers from risk); and Southern (the rule addresses all
conditions necessary for satisfaction of section 10; no other
conditions are needed to protect against cross-subsidization,
since rule 58 companies are still subject to the intrasystem
transaction provisions of the Act and such transactions must be
reported on Form U-9C-3).
-[137]- Comments of Columbia.
-[138]- Comments of New Orleans.
==========================================START OF PAGE 62======
Commission has determined previously to be so closely related to
utility operations as to be in the ordinary course of business of
a registered holding company and that, in many instances, have
been approved in prior orders of the Commission under sections
9(a)(1) and 10. In addition, reasonable limitations on exempt
investments in energy-related companies are an important feature
of the rule, designed to limit the financial exposure of the
registered system. Finally, through the filing of Form U-9C-3
under rule 58(c), both the Commission and interested state
regulators will have the opportunity to monitor the nature and
scope of each registered holding company system's activities
pursuant to rule 58. In view of these safeguards, the Commission
is adopting the rule without further condition.
III. Proposed Amendments to Rule 52 and Rule 45
The Proposing Release requested comment on proposed
amendments to rules 52 and 45 under the Act, to conform the rules
to rule 58.-[139]- Rule 52(b), as currently in effect,
exempts from the requirement of Commission approval under
sections 6(a) and 7 of the Act the issue and sale by a nonutility
subsidiary of a registered holding company of any common stock,
preferred stock, bond, note or other form of indebtedness,
subject to certain conditions. Rule 52(d) further exempts from
the requirement of prior Commission approval under sections
9(a)(1) and 10 of the Act the acquisition by a registered holding
---------FOOTNOTES----------
-[139]- See the discussion of the need for these amendments
in the Proposing Release. 60 FR at 33648.
==========================================START OF PAGE 63======
company of any such security, provided that the transaction does
not involve the formation of a new subsidiary.-[140]-
The exemptions under rule 52(b) and 52(d), both as
previously in effect and as proposed to be amended, are broader
than the exemption in proposed rule 58. Accordingly, the
Commission proposed to amend rule 52 to add a limitation on the
aggregate amount of securities that may be issued and sold by
energy-related companies and acquired by associate companies,
consistent with the limitation of rule 58.
Rule 45(b) currently exempts from the requirement of
Commission approval under section 12(b) of the Act and rule 45(a)
thereunder certain investments in existing subsidiaries by means
of cash capital contributions or open account advances. In
particular, rule 45(b)(4) exempts without limitation any capital
contribution or open account advance without interest to a
subsidiary company. Because this provision is inconsistent with
the investment limitation in rule 58, the Commission proposed to
amend rule 45(b)(4) to conform the aggregate amount of capital
contributions and open account advances that may be made to
energy-related subsidiary companies to the limitations of rule
58.
Few commenters express any view on the proposed amendments
to rules 52 and 45. Two registered holding companies support
---------FOOTNOTES----------
-[140]- The Commission has proposed to amend rule 52
further to expand the types of securities that qualify for the
exemption. See Holding Co. Act Release No. 26312 (June 20,
1995), 60 FR 33640 (June 28, 1995).
==========================================START OF PAGE 64======
adoption of the amendments.-[141]- An exempt holding
company opposes the amendments as unnecessary and as potentially
limiting the Commission's flexibility under rule
58.-[142]-
Without the proposed conforming changes, registered holding
companies could use rule 58 to make initial acquisitions of
securities of energy-related companies, and arguably could use
rules 45 and 52 to make additional unlimited acquisitions of
securities of such companies, in each instance without Commission
approval. To permit this result would render meaningless the
limitations of rule 58 on investments in energy-related
companies. In addition, a question would arise whether section
9(c)(3), under which rule 58 is promulgated, permits such
acquisitions of securities without Commission oversight. The
Commission believes that the proposed amendments are necessary in
order to carry out the purposes of rule 58. Accordingly, the
amendments are adopted in the form proposed.
IV. Other Proposals in Connection with Rule 58
Several commenters propose changes to other rules or
Commission orders to conform them to the provisions of rule 58.
These proposals are discussed below.
A. Rule 16
As currently in effect, rule 16 under the Act provides that
any company and its affiliates will be exempt from all
---------FOOTNOTES----------
-[141]- Comments of Allegheny and Southern.
-[142]- Comments of Wisconsin Energy.
==========================================START OF PAGE 65======
obligations, duties or liabilities imposed by the Act upon
subsidiaries or affiliates of a registered holding company, if
(1) the company is not a public-utility company, (2) the company
engages primarily in certain specified activities related to the
supply of natural or manufactured gas, (3) less than 50% of the
voting stock of the company is owned by registered holding
companies, and (4) the acquisition by a registered holding
company of an interest in the company was approved by the
Commission upon application.-[143]- Several commenters
suggest that the coverage of the rule 16 exemption be extended to
energy-related companies and gas-related companies, as defined in
rule 58, and their affiliates.-[144]-
The Commission believes that a proposal to amend rule 16 to
make it consistent with rule 58, and to enhance its usefulness
(which is limited at present), should be considered. Such an
amendment, however, is beyond the scope of this rulemaking.
B. Existing limitations on investments in energy-related
companies
In the past, the Commission in some instances incorporated
conditions and limitations in certain orders approving energy-
related activities, including a requirement that an energy-
related company derive at least 50% of its revenues from
---------FOOTNOTES----------
-[143]- 17 CFR 250.16.
-[144]- Comments of Columbia and Consolidated.
==========================================START OF PAGE 66======
associate companies or from specified geographic
areas.-[145]- As discussed above, these geographic and
other limitations are not included in rule 58 as
adopted.-[146]- One commenter suggests that any 50%
limitation in an order approving the acquisition of an interest
in a business that would qualify as energy-related under rule 58
should cease to apply by virtue of the rule, without any need for
an amended order.-[147]-
The Commission agrees that, where an order approving the
acquisition or retention of a nonutility business by a registered
holding company system includes a limitation of the type
discussed above, and such limitation would not apply if the
interest held by the registered holding company system were
acquired under rule 58, the limitation in the order should no
longer apply. These conditions are effectively superseded by
---------FOOTNOTES----------
-[145]- For instance, the Commission has conditioned
approval of acquisitions of energy services and demand-side
management businesses on a requirement that at least 50% of
revenues be derived from a specified geographic area, within the
system's retail service territory and contiguous areas. See,
e.g., Entergy Corp., Holding Co. Act Release No. 25718 (Dec. 28,
1992); and Northeast Utilities, Holding Co. Act Release No. 25114
(July 3, 1990). In addition, the registered system was required
in some instances to divest its equity interest in the nonutility
business within a specified period. See, e.g., Entergy Corp.,
Holding Co. Act Release No. 25718.
-[146]- The rule does not incorporate geographic limitations
based on the retail service territory of the registered holding
company system. However, based on existing precedent and the
markets with which the Commission is currently familiar,
activities permitted by the rule are limited to the United
States. The rule has been modified to make this limitation
clear.
-[147]- Comments of CSW.
==========================================START OF PAGE 67======
rule 58, and no further filings and orders are needed to
eliminate them. C. Associate transactions
Several commenters suggest that transactions between an
energy-related company and some or all of its associate companies
should be exempt from the requirements of the Act and rules
thereunder,-[148]- including the rules under section 13(b)
of the Act. Section 13(b) of the Act generally requires that
intrasystem service, sales and construction contracts be
performed in accordance with such terms and conditions as the
Commission may prescribe, either by rule or order, "as necessary
or appropriate in the public interest or for the protection of
investors or consumers and to insure that such contracts are
performed economically and efficiently for the benefit of such
associate companies, at cost, fairly and equitably allocated
among such companies." Entergy Corporation suggests that rule 87
under the Act-[149]- be amended to provide that
transactions subject to section 13(b) do not require an order
upon application. General Public Utilities Corporation suggests
an amendment of rule 90-[150]- to exclude transactions
---------FOOTNOTES----------
-[148]- Comments of Entergy, GPU and Northeast.
-[149]- Rule 87 specifies the cases in which subsidiaries of
registered holding companies may perform services or construction
for or sell goods to associate companies, subject to compliance
with the "at cost" rules and certain other conditions.
-[150]- Rule 90 sets forth the general rule that any
transaction involving service, construction or sale of goods
between a subsidiary of a registered holding company and an
associate company must be performed at cost, as defined, and
provides exceptions.
==========================================START OF PAGE 68======
between an energy-related company and its associates from the at-
cost standards. Northeast Utilities suggests that all
transactions between an energy-related company and its affiliates
should be exempt from the Act.
Section 13(b) authorizes the Commission to exempt
conditionally or unconditionally such transactions as it may
determine, by rule or order, to be consistent with the protected
interests, if such transactions "(1) are with any associate
company which does not derive, directly or indirectly, any
material part of its income from sources within the United States
and which is not a public-utility company operating within the
United States, or (2) involve special or unusual circumstances or
are not in the ordinary course of business." It does not appear
that the Commission has previously considered its authority to
grant other exemptions from the requirements of section 13(b).
The commenters' requests are beyond the scope of the
proposed rulemaking. In addition, the Commission believes that
it would be inappropriate to address the issues raised in the
limited context of the activities addressed in rule 58.
Nonutility companies in registered holding company systems have,
in any event, substantial freedom to engage in transactions with
associate nonutility companies under rule 87(b)(1).-[151]-
The Commission declines to accept the commenters' suggestions.
D. Rule 48.
One commenter suggests that rule 48 under the Act be amended
---------FOOTNOTES----------
-[151]- 17 CFR 250.87(b)(1).
==========================================START OF PAGE 69======
to permit energy-related companies to engage in customer
financing in connection with their energy-related
businesses.-[152]- As noted previously, customer
financing in connection with certain energy-related activities
has been approved by order in the past. The Commission
considered whether customer financing should be included in rule
58, either as a separate energy-related activity or as an aspect
of other energy-related activities.-[153]- However, it
appears that an amendment to rule 48 would be the appropriate
measure to address this question.-[154]-
V. Quarterly Reports on Form U-9C-3
The Commission proposed that registered systems provide
periodic information with respect to all energy-related and gas-
related company subsidiaries on Form
U-9C-3, in lieu of the separate rule 24 certificates required
under the terms of any outstanding Commission
orders.-[155]- This procedure was intended to lessen the
reporting burden for holding companies, and to make available a
---------FOOTNOTES----------
-[152]- Comments of GPU. Rule 48 currently exempts
financing in connection with purchases by utility customers of
standard electric and gas appliances. 17 CFR 250.48.
-[153]- See comments of Northeast.
-[154]- Amendment of rule 48 is beyond the scope of this
rulemaking.
-[155]- See the Proposing Release, 60 FR at 33648. Cinergy
suggests that, to the extent that information on securities
issuances is reported on Form U-9C-3, reports under rule 52 on
Form U-6B-2 reporting the same information should not be
required. Such a change may be appropriate, but is beyond the
scope of this rulemaking.
==========================================START OF PAGE 70======
single, comprehensive report covering all energy-related and gas-
related business activities of a registered holding company for
the interested state commissions, with which the report must also
be filed.
The Commission requested comment on the form and content of
Form U-9C-3. In particular, the Commission sought comment on
whether a report should be filed quarterly or on a semiannual or
other basis. The Commission also requested comment on whether
any special reporting requirements may be needed with respect to
the revenues derived from any activities of such companies other
than the activities specified in the rule, to ensure that energy-
related and gas-related companies derive substantially all of
their revenue from such activities, as required by the rule.
Several commenters assert that the form should not be
adopted, because Form U5S provides sufficient information to
enable regulators to protect consumers-[156]- and could be
modified to require reporting of rule 58 investments in a manner
similar to treatment of exempt wholesale generators and foreign
utility companies.-[157]- One commenter suggests that no
reporting requirements are needed with respect to investments in
gas-related companies, since there are no limits on these
investments.-[158]- Most commenters suggest that changes
---------FOOTNOTES----------
-[156]- Comments of AGA.
-[157]- Comments of Columbia. See Item 9 of Form U5S, 17 CFR
259.5s.
-[158]- Comments of Columbia.
==========================================START OF PAGE 71======
be made to the form if it is adopted.
With respect to the timing of reporting, one commenter, New
Orleans,-[159]- specifically approves of quarterly
filings, on the ground that regulators need quarterly reports in
order to monitor activities and institute corrective action.
Most industry commenters, however, object to quarterly filings,
because the information in the proposed form duplicates other
periodic reports, such as that on Form U5S;-[160]- because
annual filings achieve the purpose of assuring compliance with
the conditions of the rule;-[161]- because competitors are
not burdened with preparation of the form;-[162]- because
the benefits of quarterly reporting do not justify its
costs;-[163]- and because rule 58 companies should not be
required to file more frequently than holding companies and
service companies.-[164]- Many of these commenters
believe that annual filings are appropriate,-[165]-
although one favors semiannual reporting,-[166]- and
---------FOOTNOTES----------
-[159]- Comments of New Orleans.
-[160]- Comments of AGA and Columbia.
-[161]- Comments of Entergy.
-[162]- Comments of Allegheny.
-[163]- Comments of Southern.
-[164]- Id.
-[165]- Comments of Allegheny, AGA, Columbia, Consolidated,
Entergy and Southern.
-[166]- Comments of Cinergy.
==========================================START OF PAGE 72======
another proposes that the bulk of the information be filed
annually, with quarterly filings used to report any changes
during the quarter.-[167]- One commenter suggests that
the form be clarified to indicate that filings are to be made
quarterly rather than "continuously."-[168]- The
Commission has concluded that the filing of complete and current
financial statements and other information (particularly
information on transactions between rule 58 companies and their
affiliates) in each quarterly report will facilitate appropriate
monitoring of acquisitions pursuant to the rule. The form, as
adopted, thus requires quarterly reporting.
Many commenters express concern with the type of reporting
required by the proposed form, particularly the required
financial statements. The commenters believe that this
requirement is burdensome, and unnecessary, because registered
systems file consolidating financial statements in their annual
reports on Form U5S;-[169]- because separate financial
information would be required even for a company in which only a
minor investment is made;-[170]- because state regulators
---------FOOTNOTES----------
-[167]- Comments of AEP.
-[168]- Comments of CSW. The rule has been revised to
clarify that the filing requirement is not continuous.
-[169]- Comments of Columbia. Cinergy commented that
financial statements should be filed with the form only upon the
initial acquisition of securities of an energy-related or gas-
related company; thereafter, the consolidating financial
statements in Form U5S would provide sufficient updating
information.
-[170]- Comments of Allegheny and Southern.
==========================================START OF PAGE 73======
are interested in nonutility operations as a whole rather than
separate components;-[171]- and because separate financial
statements would be required for each subsidiary in cases where
investments are structured through several tiers of
subsidiaries.-[172]- The Commission believes that the
filing of financial information for each investment under rule 58
is appropriate to enable the Commission and the interested state
commissions to monitor activity under the rule. The Commission
is, however, modifying certain of the requirements in the form as
proposed to deal with certain issues raised by commenters on the
proposal.
The purpose of requiring financial statements is to provide
information on each significant investment, not to compel holding
companies to prepare financial statements for shell companies.
As a result, the form, as adopted, permits consolidation of the
financial statements of downstream subsidiaries with those of the
first-tier energy-related or gas-related company,-[173]-
so long as the first-tier subsidiary owns interests only in
companies engaged in one permitted activity.
The Commission also recognizes that the filing of financial
statements for companies in which the registered system holds
only a small interest may be overly burdensome without offering a
---------FOOTNOTES----------
-[171]- Comments of Southern.
-[172]- Comments of Allegheny and Southern.
-[173]- As discussed previously, indirect investment in
energy-related and gas-related companies through intermediate
subsidiaries is permitted under the rule as adopted.
==========================================START OF PAGE 74======
significant measure of protection for utility shareholders and
consumers. Accordingly, the form, as adopted, requires the
filing of financial statements only for companies in which the
registered system has at least a 50% equity or other ownership
interest. The form provides that, for all other rule 58
companies, the registered holding company will make available to
the Commission such financial statements as are available to it.
A number of commenters express concern that the form will
result in disclosure of confidential financial and other
commercially sensitive information that may damage the holding
company's competitive position.-[174]- The Commission
agrees that confidentiality of certain business information is an
important concern. As noted in the Proposing Release, however,
the form does not require reporting of sensitive information such
as identity of customers. Further, applicants may claim
confidential treatment pursuant to rule 104 under the Act for
some items of information. Thus, commercially sensitive
information should have adequate protection.
Other changes in the final form include the following. The
filing instructions have been revised to reflect electronic
filing under the Commission's EDGAR system.-[175]- Also,
the report for the last period in the reporting company's fiscal
year will be due 90 days, rather than 60 days, after the end of
---------FOOTNOTES----------
-[174]- Comments of Allegheny, Columbia and Southern.
-[175]- Comments of Consolidated and Northeast.
==========================================START OF PAGE 75======
the period.-[176]- Finally, the form has been clarified
to require disclosure with respect to all energy-related and gas-
related companies in which investments were made during the
reporting period.-[177]- Other specific comments were
not adopted, including a suggestion that all items except 5(b)
(relating to associate transactions) are
unnecessary.-[178]- In addition, the form has been
revised to provide a format for reporting of the required
information and to clarify generally the filing instructions.
Commenters believe that no other new reporting requirements
are needed to assure that rule 58 companies derive substantially
all of their revenues from permitted activities.-[179]-
The Commission has concluded that Form U-9C-3, together with
other existing reporting requirements, provides sufficient
information for this purpose, and that no additional new
requirements are needed.
---------FOOTNOTES----------
-[176]- Comments of Northeast.
-[177]- Comments of Cinergy.
-[178]- Comments of Allegheny. While the reporting of
associate transactions is a primary purpose of the form, it is
also intended to solicit information through which the staff of
the Commission and interested state commissions can monitor
compliance with the limitations of the rule, including
limitations on the type of activities in which the company in
question is engaged.
-[179]- Comments of AGA (information in Form U5S is adequate
for this purpose); CSW (existing proposed reporting requirements
could be reduced and still provide this assurance); Consolidated
(if further assurance is needed, a statement of compliance could
be included in the Form U5S) and Entergy and Northeast (Form U-
9C-3 provides sufficient information to put regulators on notice
of other activities).
==========================================START OF PAGE 76======
VI. Conclusion
The Commission believes that registered holding company
systems should be relieved of the regulatory burden of having to
file multiple applications for authority to engage, through
acquisitions of securities, in nonutility activities that are
closely related to utility operations and that are of the same
character or type as those the Commission has allowed in previous
cases. Rule 58 is intended to permit investments in energy-
related companies and gas-related companies, as defined, without
geographic limits based on the registered system's service
territory or other restrictions similar to those incorporated in
some previous orders. The Commission believes that the
limitation of the rule on the aggregate amount that a registered
holding company system may invest, directly or indirectly, in
energy-related companies should help to assure that the public
interest and the interest of investors and consumers will not be
adversely affected by acquisitions made pursuant to the rule. In
addition, the reporting requirements should enable the Commission
and interested state and local regulators to monitor financial
and other effects of such transactions.
REGULATORY FLEXIBILITY ACT CERTIFICATION
Pursuant to section 605(b) of the Regulatory Flexibility
Act, the Chairman of the Commission has certified as follows:
I, Arthur Levitt, Chairman of the Securities and
Exchange Commission, hereby certify pursuant to 5 U.S.C.
605(b) that proposed rule 58 and proposed amendments to
rules 45 and 52 under the Public Utility Holding Company Act
of 1935, as amended [15 U.S.C. 79 et seq.], together
concerning the acquisition by a registered holding company
==========================================START OF PAGE 77======
and its subsidiaries of securities of certain nonutility
companies, without a filing requirement, will not have a
significant impact on a substantial number of small
businesses. The reason for this certification is that it
does not appear that any small businesses would be affected
by the proposed rule and rule amendments.
Arthur Levitt, Chairman
Dated: June 19, 1995
The Commission did not receive any comments with respect to
the Chairman's certification.
COSTS AND BENEFITS
Rule 58 will substantially decrease regulatory costs for the
twelve (12) electric and three (3) gas registered holding
companies. In calendar year 1995, 35 applications would not have
been filed had the proposed rule 58 and related rule amendments
been in place. Estimated savings per application would have been
approximately $28,000, including related legal, accounting, and
management costs. Thus, for 35 applications filed in calendar
year 1995, the aggregate savings would have been approximately
$980,000 per year. Moreover, the reduction in Commission staff
hours would have been approximately 3,800 hours (approximately 2
staff years). The only cost to the registered holding companies
in complying with the rule will be the cost of completing and
filing Form U-9C-3 on a quarterly basis. It is estimated that
approximately 16 hours will be required to complete each form at
an estimated cost of $100 per hour. Assuming 56 form submissions
per year, the cost of compliance reporting would approximate
$89,600 per year.
PAPERWORK REDUCTION ACT
==========================================START OF PAGE 78======
The proposed rule and rule amendments are subject to the
Paperwork Reduction Act of 1980 (44 U.S.C. 3501 et seq.) and have
been submitted to the Office of Management and Budget for
approval for use through September 30, 1998. STATUTORY AUTHORITY
The Commission is adopting rule 58 and amending rules 45 and
52 pursuant to sections 6, 9, 12 and 20 of the Act.
List of Subjects in 17 CFR Parts 250 and 259
Electric utilities, Holding companies, Natural gas,
Reporting and recordkeeping requirements, Securities.
Text of Rules
For the reasons set out in the preamble, chapter II, title
17, of the Code of Federal Regulations is amended as follows:
PART 250 -- GENERAL RULES AND REGULATIONS, PUBLIC UTILITY HOLDING
COMPANY ACT OF 1935
1. The authority citation for part 250 continues to read
as follows:
AUTHORITY: 15 U.S.C. 79c, 79f(b), 79i(c)(3), 79t, unless
otherwise noted.
2. Section 250.45 is amended by revising paragraph (b)(4)
to read as follows:
250.45 Loans, extensions of credit, donations and capital
contributions to associate companies.
* * * * *
==========================================START OF PAGE 79======
(b) Exceptions. * * *
(4) Capital contributions or open account advances, without
interest, by a company to its subsidiary company; Provided, That
capital contributions or open account advances to any energy-
related company subsidiary, as defined in 250.58, shall not be
exempt hereunder unless, after giving effect thereto, the
aggregate investment by a registered holding company or any
subsidiary thereof in such company and all other such energy-
related company subsidiaries does not exceed the limitation in
250.58(a)(1).
* * * * *
3. Section 250.52 is amended by revising paragraph (b) to
read as follows:
250.52 Exemption of issue and sale of certain securities.
* * * * *
(b) Any subsidiary of a registered holding company which is
not a holding company, a public-utility company, an investment
company, or a fiscal or financing agency of a holding company, a
public-utility company or an investment company shall be exempt
from section 6(a) of the Act (15 U.S.C. 79f(a)) and rules
thereunder with respect to the issue and sale of any common
stock, preferred stock, bond, note or other form of indebtedness,
of which it is the issuer if:
(1) The issue and sale of such security are solely for the
purpose of financing the existing business of such subsidiary
==========================================START OF PAGE 80======
company; and
(2) The interest rates and maturity dates of any debt
security issued to an associate company are designed to parallel
the effective cost of capital of that associate company;
Provided, That any security issued to an associate company by any
energy-related company subsidiary, as defined in 250.58, shall
not be exempt hereunder unless, after giving effect thereto, the
aggregate investment by a registered holding company or any
subsidiary thereof in such subsidiary and all other such energy-
related company subsidiaries does not exceed the limitation in
250.58(a)(1).
* * * * *
4. Section 250.58 is added to read as follows:
250.58 Exemption of investments in certain nonutility
companies.
(a) Exemption from Section 9(a). Section 9(a) of the Act
(15 U.S.C. 79i(a)) shall not apply to:
(1) The acquisition by a registered holding company, or a
subsidiary company thereof, of the securities of an energy-
related company; Provided, That, after giving effect to any such
acquisition, the aggregate investment by such registered holding
company and subsidiaries in all such companies does not exceed
the greater of:
(i) $50 million; or
==========================================START OF PAGE 81======
(ii) 15% of the consolidated capitalization of such
registered holding company, as reported in the registered holding
company's most recent Annual Report on Form 10-K or Quarterly
Report on Form 10-Q ( 249.308a or 249.310 of this chapter)
filed under the Securities Exchange Act of 1934, as amended (15
U.S.C. 78 et seq.); or
(2) The acquisition by a holding company that is registered
solely by reason of ownership of voting securities of gas utility
companies, or a subsidiary company thereof, of the securities of
a gas-related company.
(b) Definitions. For purpose of this section:
(1) The term energy-related company shall mean any company
that, directly or indirectly through one or more affiliates,
derives or will derive substantially all of its revenues
(exclusive of revenues from temporary investments) from one or
more of the following activities within the United States:
(i) The rendering of energy management services and
demand-side management services;
(ii) The development and commercialization of
electrotechnologies related to energy conservation, storage and
conversion, energy efficiency, waste treatment, greenhouse gas
reduction, and similar innovations;
(iii) The ownership, operation, sale, installation and
servicing of refueling, recharging and conversion equipment and
facilities relating to electric and compressed natural gas
powered vehicles;
==========================================START OF PAGE 82======
(iv) The sale of electric and gas appliances; equipment to
promote new technologies, or new applications for existing
technologies, that use gas or electricity; and equipment that
enables the use of gas or electricity as an alternate fuel; and
the installation and servicing thereof;
(v) The brokering and marketing of energy commodities,
including but not limited to electricity, natural or manufactured
gas and other combustible fuels;
(vi) The production, conversion, sale and distribution of
thermal energy products, such as process steam, heat, hot water,
chilled water, air conditioning, compressed air and similar
products; alternative fuels; and renewable energy resources; and
the servicing of thermal energy facilities;
(vii) The sale of technical, operational, management, and
other similar kinds of services and expertise, developed in the
course of utility operations in such areas as power plant and
transmission system engineering, development, design and
rehabilitation; construction; maintenance and operation; fuel
procurement, delivery and management; and environmental
licensing, testing and remediation;
(viii) The development, ownership or operation of
"qualifying facilities," as defined under the Public Utility
Regulatory Policies Act of 1978, as amended ("PURPA"), and any
integrated thermal, steam host, or other necessary facility
constructed, developed or acquired primarily to enable the
qualifying facility to satisfy the useful thermal output
==========================================START OF PAGE 83======
requirements under PURPA;
(ix) The ownership, operation and servicing of fuel
procurement, transportation, handling and storage facilities,
scrubbers, and resource recovery and waste water treatment
facilities; and
(x) The development and commercialization of technologies or
processes that utilize coal waste by-products as an integral
component of such technology or process;
Provided, That any company engaged in the activities specified in
paragraphs (b)(1)(ii), (b)(1)(iii) with respect to electric
powered vehicles, (b)(1)(vi), (b)(1)(ix) or (b)(1)(x) of this
section, shall be an "energy-related company" for purposes of
this section only if the securities of such company are acquired,
directly or indirectly, by a registered holding company whose
public-utility company subsidiaries are primarily electric
utility companies; and Provided further, That any company engaged
in the activities specified in paragraph (b)(1)(iii) of this
section with respect to compressed natural gas powered vehicles,
shall be an "energy-related company" for purposes of this section
only if the securities of such company are acquired, directly or
indirectly, by a registered holding company whose public-utility
company subsidiaries are primarily gas utility companies.
(2) The term gas-related company shall mean any company
that, directly or indirectly through one or more affiliates,
derives or will derive substantially all of its revenues
(exclusive of revenues from temporary investments) from one or
==========================================START OF PAGE 84======
more of the following activities within the United States:
(i) Activities permitted under section 2(a) of the Gas-
Related Activities Act of 1990, 104 Stat. 2810; and
(ii) Activities specified in section 2(b) of the Gas-Related
Activities Act and approved by order of the Commission under
sections 9 and 10 of the Act (15 U.S.C. 79i-j).
(3) The term aggregate investment shall mean all amounts
invested or committed to be invested in energy-related companies,
for which there is recourse, directly or indirectly, to the
registered holding company or any subsidiary company thereof.
(c) Report on related business activities. For each
quarter of the fiscal year of the registered holding company in
which any acquisition that is exempt under this section is made,
and for each such quarter thereafter in which the acquired
interest is held, the registered holding company shall file with
this Commission and with each state commission having
jurisdiction over the retail rates of the public-utility
subsidiary companies of such registered holding company a
Quarterly Report on Form U-9C-3 ( 259.208 of this chapter).
Such filing shall be made within 60 days following the end of the
first three quarters of the fiscal year, and within 90 days after
the end of the fourth quarter.
PART 259 -- FORMS PRESCRIBED UNDER THE PUBLIC UTILITY HOLDING
COMPANY ACT OF 1935
5. The authority citation for part 259 continues to read
==========================================START OF PAGE 85======
as follows:
AUTHORITY: 15 U.S.C. 79e, 79f, 79g, 79j, 79l, 79m, 79n, 79q
and 79t.
6. Section 259.208 and Form U-9C-3 are added to read as
follows:
259.208 Form U-9C-3, for notification of acquisition of
securities exempt from section 9(a) pursuant to rule 58 ( 250.58
of this chapter).
This form shall be filed pursuant to 250.58(c) as the
certificate of notification of an acquisition of securities
exempted from the application of section 9(a) of the Act (15
U.S.C. 79a et seq.) pursuant to 250.58.
[EDITORIAL NOTE: The text of Form U-9C-3 appears in the Appendix
to this document and will not appear in the Code of Federal
Regulations.]
By the Commission.
Jonathan G. Katz
Secretary
February 14, 1997
==========================================START OF PAGE 86======
NOTE: This form will not appear in
Appendix
the Code of Federal Regulations.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM U-9C-3
QUARTERLY REPORT PURSUANT TO RULE 58
________________________________________
(Name of registered holding company)
________________________________________
(Address of principal executive offices)
==========================================START OF PAGE 87======
GENERAL INSTRUCTIONS
A. Use of Form
1. A reporting company, as defined herein, shall file a
report on this form within 60 days after the end of each of the
first three quarters, and within 90 days after the end of the
fourth quarter, of the fiscal year of the registered holding
company. The period beginning on the date of effectiveness of
rule 58 and ending at the end of the quarter following the
quarter in which the rule becomes effective shall constitute the
initial period for which any report shall be filed, if
applicable.
2. The requirement to provide specific information by means
of this form supersedes and replaces any requirement by order of
the Commission to provide identical information by means of
periodic certificates under rule 24; but does not so supersede
and replace any requirement by order to provide information by
means of an annual report on Form U-13-60.
3. Information with respect to reporting companies that is
required by Form U-13-60 shall be provided exclusively on that
form.
4. Notwithstanding the specific requirements of this form,
the Commission may informally request such further information
as, in its opinion, may be necessary or appropriate.
B. Statements of Monetary Amounts and Deficits
1. Amounts included in this form and in related financial
statements may be expressed in whole dollars, thousands of
dollars or hundred thousands of dollars.
2. Deficits and other similar entries shall be indicated by
either brackets or parentheses. An explanation should be
provided by footnote.
C. Formal Requirements
This form, including exhibits, shall be filed with the
Commission electronically pursuant to Regulation S-T (17 CFR
232.10 et seq.). A conformed copy of each such report shall be
filed with each state commission having jurisdiction over the
retail rates of a public-utility company that is an associate
company of a reporting company. Each report shall provide the
name and telephone number of the person to whom inquiries
concerning the report should be directed.
D. Definitions
==========================================START OF PAGE 88======
As used in this form, the word "reporting company" means an
energy-related company or gas-related company, as defined in rule
58(b). All other words and terms have the same meaning as in the
Public Utility Holding Company Act of 1935, as amended, and the
rules and regulations thereunder.
ITEMS
ITEM 1 - ORGANIZATION CHART
[text of chart is available from :
Robert P. Wason
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington D.C. 20549
Telephone: 202-942-0545.]
Instructions.
1. Complete Item 1 only for the first three calendar quarters of
the fiscal year of the registered holding company.
2. Under the caption "Name of Reporting Company," list each
energy-related and gas-related company and each system company
that directly or indirectly holds securities thereof. Add the
designation "(new)" for each reporting company of which
securities were acquired during the period, and the designation
"(*)" for each inactive company.
3. Under the caption "Percentage of Voting Securities Held,"
state the aggregate percentage of the outstanding voting
securities of the reporting company held directly or indirectly
by the registered holding company at the end of the quarter.
4. Provide a narrative description of each reporting company's
activities during the reporting period.
ITEM 2 - ISSUANCES AND RENEWALS OF SECURITIES AND CAPITAL
CONTRIBUTIONS
[text of chart is available from :
Robert P. Wason
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington D.C. 20549
Telephone: 202-942-0545.]
Instruction.
With respect to a transaction with an associate company, report
only the type and principal amount of securities involved.
==========================================START OF PAGE 89======
[text of chart is available from :
Robert P. Wason
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington D.C. 20549
Telephone: 202-942-0545.]
ITEM 3 - ASSOCIATE TRANSACTIONS
Part I -- Transactions performed by reporting companies on behalf
of associate companies
[text of chart is available from :
Robert P. Wason
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington D.C. 20549
Telephone: 202-942-0545.]
Part II -- Transactions performed by associate companies on
behalf of reporting companies
[text of chart is available from :
Robert P. Wason
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington D.C. 20549
Telephone: 202-942-0545.]
Instructions.
1. This item is used to report the performance during the quarter
of contracts among reporting companies and their associate
companies, including other reporting companies, for service,
sales and construction. A copy of any such contract not filed
previously should be provided as an exhibit pursuant to Item 6.
B.
2. Parts I and II concern transactions performed by reporting
companies on behalf of associate companies, and transactions
performed by associate companies on behalf of reporting
companies, respectively.
ITEM 4 - SUMMARY OF AGGREGATE INVESTMENT
Investments in energy-related companies:
[text of chart is available from :
==========================================START OF PAGE 90======
Robert P. Wason
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington D.C. 20549
Telephone: 202-942-0545.]
Investments in gas-related companies:
[text of chart is available from :
Robert P. Wason
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington D.C. 20549
Telephone: 202-942-0545.]
ITEM 5 - OTHER INVESTMENTS
[text of chart is available from :
Robert P. Wason
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington D.C. 20549
Telephone: 202-942-0545.]
Instruction.
This item concerns investments in energy-related and gas-related
companies that are excluded from the calculation of aggregate
investment under rule 58.
ITEM 6 - FINANCIAL STATEMENTS AND EXHIBITS
List all financial statements and exhibits filed as a part
of this report.
Instructions.
A. Financial Statements
1. Financial statements are required for reporting companies in
which the registered holding company system has at least a 50%
equity or other ownership interest. For all other rule 58
companies, the registered holding company shall make available to
the Commission such financial statements as are available to it.
2. For each reporting company, provide a balance sheet as of the
end of the quarter and income statements for the three-month and
year-to-date periods ending as of the end of the quarter,
together with any notes thereto. Financial statements shall be
provided only for the first three calendar quarters of the fiscal
year of the registered holding company.
==========================================START OF PAGE 91======
3. If a reporting company and each of its subsidiaries engage
exclusively in a single category of energy-related or gas-related
activity, consolidated financial statements may be filed.
4. Separate financial statements need not be filed for inactive
companies or for companies engaged solely in the ownership of
interests in energy-related or gas-related companies.
B. Exhibits
1. Copies of contracts required to be provided by Item 3 shall be
filed as exhibits.
2. A certificate stating that a copy of the report for the
previous quarter has been filed with interested state commissions
shall be filed as an exhibit. The certificate shall provide the
names and addresses of the state commissions.
SIGNATURE
[Registered Holding Company]
By:_______________
(Name)
_______________
(Title)
_______________
(Date)