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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 250
[Release No. 35-26311, File No. S7-17-92]
RIN: 3235-AF49
Exemption of Issuance and Sale of Certain Securities By Public-
Utility and Nonutility Subsidiary Companies of Registered Public-
Utility Holding Companies; Exemption of Acquisition by Companies
in a Registered Public-Utility Holding Company System of Certain
Securities of Associate Companies; Exemption of Capital
Contributions and Open Account Advances, Without Interest, by
Parent Companies to Subsidiary Companies
AGENCY: Securities and Exchange Commission
ACTION: Final rule.
SUMMARY: The Commission is amending rule 52, which exempts
certain financing transactions involving the securities of the
public-utility subsidiary companies of a registered public-
utility holding company from the requirement of prior Commission
approval under the Public Utility Holding Company Act of 1935
("Act"). As amended, the rule will exempt certain additional
types of securities, and will exempt the issuance and sale of
certain types of securities of nonutility subsidiary companies of
a registered holding company in connection with routine financing
transactions. The Commission is also amending rule 45(b)(4) to
exempt from the requirement of prior Commission authorization
under section 12(b) of the Act and rule 45(a) all capital
contributions and open account advances by a parent company to
its subsidiary company. These amendments are intended to
eliminate unnecessary regulatory and paperwork burdens associated
with seeking Commission approval for routine financings by
registered holding companies and their subsidiary companies.
EFFECTIVE DATE: Amended rules 45 and 52 will be effective
immediately upon publication in the Federal Register. These
amended rules are substantive rules that grant an exemption or
relieve restrictions.-[1]-
FOR FURTHER INFORMATION CONTACT: William C. Weeden, Associate
Director, Joanne C. Rutkowski, Assistant Director, or Bonnie
Wilkinson, Staff Attorney, 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: Rule 52 (17 CFR 250.52) exempts from
the requirement of prior Commission approval under section 6(a)
the issuance and sale of certain specified types of securities by
a public-utility subsidiary of a registered holding company,
subject to the terms and conditions of the rule. Rule 52 also
exempts from the requirement of prior Commission authorization
under section 9(a) the acquisition by a parent holding company of
the securities issued by an existing public-utility subsidiary
pursuant to the rule. The Commission is amending rule 52 to
broaden the types of debt securities that may be issued in
reliance upon the exemption and to make the exemption available
to nonutility subsidiaries of a registered holding company in
connection with routine financing transactions. The Commission
-------- FOOTNOTES --------
-[1]- 5 U.S.C. 553(d)(1).
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is also amending rule 45 (17 CFR 250.45) to exempt from the
requirement of prior Commission authorization under section 12(b)
of the Act and rule 45(a) capital contributions and open account
advances by a parent company to its subsidiary companies. The
Commission proposed these amendments by release issued on July 7,
1992.-[2]-
In a companion release published today in the Federal
Register, the Commission is inviting public comment on a further
amendment to rule 52 that would extend the exemption to all types
of securities issued in connection with routine financing
transactions, provided that the conditions of the rule are met.
The Commission is also proposing a conforming change to rule 45.
DISCUSSION
Rule 52 exempts from the requirement of prior Commission
authorization under section 6(a) the issue and sale of certain
specified types of securities by public-utility subsidiary
companies of registered holding companies.-[3]- The rule also
exempts from the requirement of prior Commission authorization
under section 9(a)(1) the acquisition by a company in a
registered system of any securities issued by an existing public-
utility subsidiary pursuant to the rule.-[4]-
-------- FOOTNOTES --------
-[2]- Holding Co. Act Release No. 25574 (July 7, 1992), 57 FR
31156 (July 14, 1992) ("Proposing Release").
-[3]- Section 6(a) requires Commission approval under the
standards of section 7 for the issue and sale of any security of
a registered holding company or its subsidiary company.
Section 6(b) authorizes the Commission to exempt from the
requirements of section 6(a):
the issue or sale of any security by any subsidiary company
of a registered holding company, if the issue and sale of
such security are solely for the purpose of financing the
business of such subsidiary company and have been expressly
authorized by the State commission of the State in which
such subsidiary company is organized and doing business.
Congress intended "to exempt the issue of securities by
subsidiary companies in cases where holding company abuses are
unlikely to exist." H.R. Conf. Rep. No. 1903, 74th Cong., 1st
Sess. 66-67 (1935). See generally Holding Co. Act Release No.
25058 (Mar. 19, 1990), 55 FR 11362 (Mar. 28, 1990) (adopting rule
52), and Holding Co. Act Release No. 25573 (July 7, 1992), 57 FR
31120 (July 14, 1992) (amending rule 52).
-[4]- Section 9(a)(1) in pertinent part requires prior approval
under the standards of section 10 for an acquisition of
securities by a registered holding company or its subsidiary
company. Section 9(c)(3) provides a limited exception from this
requirement 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.
(continued...)
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At present, the rule applies only with respect to the
issuance of common stock, preferred stock, mortgage bonds and
notes issued to a parent holding company, where the interest rate
and maturity date of the note is designed to parallel a debenture
or preferred stock issued by the parent. The issue and sale of
such securities must be solely for the purpose of financing the
business of the public-utility company, and the relevant state
commission must have expressly authorized the financing
transactions.
Rule 45 prohibits registered holding companies and their
subsidiaries from lending or extending credit to, indemnifying,
or making any donation or capital contribution to a company in
the same holding company system, except in specified
circumstances.-[5]- The rule provides exceptions from the
general provision, including an exception under rule 45(b)(4) for
capital contributions or open account advances without interest
to any subsidiary in an aggregate amount of up to $50,000 in any
calendar year, after deducting payments during the year.
On July 7, 1992, the Commission proposed amendments to rules
52 and 45(b)(4) under the Public Utility Holding Company Act of
1935 (15 U.S.C. 79 et seq.).-[6]- The amendments would (a)
broaden the types of debt securities that may be issued by
public-utility subsidiaries in reliance upon rule 52, (b) extend
the exemption under rule 52 to nonutility subsidiaries of
registered holding companies, (c) revise the conditions of rule
52 applicable to intrasystem loan transactions, and (d) remove
the annual dollar limitation from rule 45(b)(4).
The Commission received comments submitted by or on behalf
of seven registered holding companies-[7]- and by the Council of
-------- FOOTNOTES --------
-[4]-(...continued)
The exemption under rule 52 does not apply to the issuance of
securities to form a new public-utility subsidiary of a
registered holding company. See rule 52(c).
-[5]- Rule 45 was adopted under section 12(b), which provides
that:
It shall be unlawful for any registered holding company or
subsidiary company thereof, by use of the mails or any means
or instrumentality of interstate commerce, or otherwise,
directly or indirectly, to lend or in any manner extend its
credit to or indemnify any company in the same holding-
company system in contravention of such rules and
regulations or orders as the Commission deems necessary or
appropriate in the public interest or for the protection of
investors or consumers or to prevent the circumvention of
the provisions of this title or the rules, regulations, or
orders thereunder.
Rule 45(a) requires the filing of a declaration and an order of
the Commission permitting the declaration to become effective in
order for a registered holding company or its subsidiary to
engage in these transactions.
-[6]- See the Proposing Release.
-[7]- The registered holding companies submitting comments were
American Electric Power Company, Inc., Allegheny Power System,
Inc. ("APS"), Consolidated Natural Gas Company ("CNG"), Central
and South West Corporation ("CSW"), Eastern Utilities Associates,
(continued...)
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the City of New Orleans and the National Association of
Regulatory Utility Commissioners ("NARUC"). While the registered
holding companies generally support adoption of the proposed
amendments, New Orleans and NARUC generally oppose the
amendments. New Orleans urged that, in the event the amendments
are adopted, several additional conditions, including
incorporation of a consolidated debt/equity ratio applicable to
sales of securities by nonutility subsidiaries, should be
included. The Commission had invited comment on the need for
such a limitation in its notice of proposed rulemaking. The
objections of New Orleans and NARUC are discussed in greater
detail in section 5, below.
1. Issue and sale of securities by public-utility subsidiaries.
Rule 52 currently exempts the issue and sale by a public-
utility subsidiary of any common stock, preferred stock, mortgage
bond or note issued to a parent holding company. The rule
currently has limited usefulness. With respect to intrasystem
loan transactions, the exemption is available only for notes
issued to a parent holding company with interest rates and
maturity dates that parallel those of the holding company's
debentures or preferred stock. This condition prevents the use
of the exemption in connection with other common forms of
intrasystem financing, such as unsecured short-term and long-
term loans, money pool arrangements, and the like, the terms of
which are not matched to an actual debenture or preferred stock
issued by the acquiring company.-[8]- In addition, because none
of the registered electric utility holding companies currently
issues debentures and preferred stocks, their subsidiaries do not
benefit from the exemption at all in connection with down-stream
loans. The Commission proposed to amend the rule to extend the
exemption to all types of debt instruments, including bonds,
notes and other forms of indebtedness issued by the subsidiary,
having interest rates and maturities designed to parallel the
effective cost of capital of the purchaser.-[9]- All of the
holding companies submitting comments support a change that would
extend the benefits of rule 52 to all types of indebtedness.
-------- FOOTNOTES --------
-[7]-(...continued)
General Public Utilities Corporation ("GPU"), and New England
Electric System.
-[8]- As noted in the Proposing Release, the omission of common
intrasystem financing transactions is of particular concern to
the registered gas systems. Unlike registered electric systems,
these systems typically issue and sell debt to the public at the
parent company level and fund their subsidiaries' operations by
means of capital contributions, open account advances, money pool
arrangements, purchases of common stock, and short- and long-
term loans.
-[9]- The Commission noted that it has permitted numerous
declarations to become effective for the issuance and sale of
such securities on this basis. See, e.g., Consolidated Natural
Gas Co., Holding Co. Act Release No. 25339 (June 28, 1991), 49
SEC Docket 449 (July 16, 1991), and Holding Co. Act Release
No. 25110 (June 29, 1990), 46 SEC Docket 1124 (July 17, 1990)
(cost to subsidiaries of borrowing from parent registered holding
company tied to Federal Funds' rate for short-term debt and
published bond index for long-term debt).
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The Commission believes it is appropriate to expand the
exemption of rule 52 to include all types of debt
securities-[10]- that may be issued by utility subsidiaries, as
proposed. The Commission believes that this expanded exemption
is appropriate in view of the continuing requirement of express
approval by the state commission of the state in which the public
utility is organized and doing business. In 1935, few states
exercised jurisdiction over public utility financing. Today,
most do, although the extent of such jurisdiction varies
greatly.-[11]- Rule 52 will not apply to utility financings if a
state does not regulate financing, nor to a utility in a state
which regulates securities sales generally if such state chooses
not to regulate a particular type of security, such as short-
term debt. CSW and CNG ask the Commission to interpret section
6(b) to permit an extension of the exemption under rule 52 to
utility debt issuances where the relevant state government has
determined that such issuances need not be reviewed by the state
utility commission. Similarly, GPU suggests an expansion of rule
52 to guaranties issued by a holding company where no state
commission approval is required. The Commission declines to
adopt these suggestions, as section 6(b) does not appear to offer
a basis for such action.
In proposing the amendment to rule 52, the Commission
contemplated that the effective cost of capital for debt
securities which have recently been issued by the purchasing
associate company will be the coupon rate of interest plus all
expenses, including, but not limited to, underwriters'
compensation, discounts, and fees and commissions associated with
the issue and sale of such debt; and that, in the event the
purchasing associate company has not recently issued debt
securities, the effective cost of capital may be tied to an
appropriate index such as, but not limited to, the Federal Funds'
rate or a published bond index. The Commission invited comment
on whether other factors should be considered in determining the
effective cost of capital of the purchasing associate company.
APS suggests that filing fees, listing fees, counsel and
accountants' fees, Blue Sky survey fees, and transfer agent fees
should also be considered.-[12]- The Commission agrees that all
ordinary and necessary costs of a debt offering should be
considered.
CNG recommends that the Commission permit use of an
appropriate index to determine the effective cost of capital if
the associate company has issued debt securities in circumstances
where the financing terms are not comparable to the terms of the
intrasystem loan.-[13]- We believe that the language of the
-------- FOOTNOTES --------
-[10]- In the Proposing Release, the Commission sought comment on
whether rule 52 should be extended to cover guaranties. However,
the rule as amended today will specifically exclude guaranties.
As discussed below, the Commission is requesting comment in a
companion release to be published today on the question of
whether rule 52 should be further amended to cover issuance of
all types of securities, including guaranties.
-[11]- See National Association of Regulatory Utility
Commissioners Compilation of Utility Regulatory Policy in the
United States and Canada, 1993-94 Compilation (NARUC 1994),
Tables 59A and B (state jurisdiction with respect to the issue
and sale of securities by public-utilities).
-[12]- APS at 1.
-[13]- CNG at 2.
-------------------- BEGINNING OF PAGE #6 -------------------
final rule is flexible enough to permit use of a published rate
or index in these circumstances.
2. Issue and sale of securities by nonutility subsidiaries.
In the Proposing Release, the Commission noted the large
volume of debt securities sold by nonutility subsidiaries of
registered holding companies. The Commission proposed to amend
rule 52 to encompass nonutility as well as utility subsidiaries.
So doing, the Commission noted that absent further amendment of
the rule, routine gas intrasystem financings would remain subject
to the requirement of prior approval.-[14]-
Section 6(b) provides that the Commission shall exempt the
issue and sale of a security of a nonutility subsidiary of a
registered holding company for the purpose of financing the
subsidiary's business, subject to such terms and conditions as
the Commission deems appropriate in the public interest or for
the protection of investors or consumers. In enacting
section 6(b), Congress intended the Commission "to exempt the
issue of securities by subsidiary companies in cases where
holding company abuses are unlikely to exist.-[15]-
In the past, the Commission has granted exemptions for
nonutility financings by order on a case-by-case basis. The
Commission, in 1989, also considered an exemption by rule for
such financings. In the release proposing the original rule 52,
the Commission deferred action, citing its concern "with the
adverse consequences that potential growth of debt in the
nonutility subsidiary companies could have for the holding-
company system and the public-utility subsidiaries."-[16]-
Our experience since that time suggests to the Commission
that a case-by-case approach to nonutility financings is no
longer necessary. In addition, the extensive reporting
requirements imposed on registered holding company systems by the
Act and other federal securities laws, and the level of scrutiny
of reporting companies by investors and by the financial
community suggest that the rule may appropriately encompass
nonutility as well as utility subsidiaries. All of the
registered holding companies submitting comments support
expansion of the rule to exempt routine nonutility subsidiary
financings.
GPU, noting the widespread use of partnership interests and
other types of securities in nonutility financing, particularly
in the context of project finance, recommends the inclusion of
such securities in rule 52(b).-[17]- Because the Commission is
proposing a further amendment to rule 52 to extend the exemption
of the rule to all types of securities issued by subsidiary
companies of a registered holding company, so long as the other
conditions of the rule are met, we do not think it necessary to
-------- FOOTNOTES --------
-[14]- The Commission noted that the nonutility operations of
registered gas holding companies rival in size the utility
operations, largely because the Act does not include transmission
assets in the definition of a gas utility company.
-[15]- H. R. Conf. Rep. No. 1903, 74th Cong., 1st Sess. 66-67
(1935).
-[16]- Holding Co. Act Release No. 24891 (May 17, 1989), 54 FR
22314 (May 23, 1989) (proposing rule 52).
-[17]- GPU at 3.
-------------------- BEGINNING OF PAGE #7 -------------------
address the status of partnership interests separately at this
time.-[18]-
In the Proposing Release, the Commission invited comment on
whether, to avoid excess leveraging, the availability of the
exemption for security issuances of nonutility subsidiaries
should be conditioned upon a requirement that an issuance not
cause the consolidated debt/equity ratio of the holding company
system to exceed 65/30.-[19]- None of the commenting holding
companies support such a measure. Most observe that market
forces affecting the parent holding company's common stock, as
well as the desire to maintain credit quality ratings on public-
utility debt, will effectively deter management from over-
leveraging the holding company capital structure.-[20]-
GPU notes that financing of independent power project
subsidiaries is typically non-recourse to other companies in the
holding company system, so that including such debt in a
consolidated capitalization ratio would overstate the exposure of
the registered system. GPU also states that the use of a
consolidated debt/equity ratio would not be consistent with the
Commission's approval of higher debt ratios in numerous project
financing applications.-[21]- New Orleans, however, supported by
NARUC, believes that such a consolidated capitalization ratio is
necessary if proposed rule 52(b) is adopted, which, as previously
indicated, these commenters oppose.
Total investment by registered holding companies in
nonutility subsidiaries, to date, has not been significant in
amount. As of December 31, 1994, the registered holding
companies had invested only $1.1 billion (1.4% of over $80
billion of total capitalization) in all energy-related
businesses, exclusive of exempt wholesale generators, foreign
utility companies and gas holding company transportation and
supply operations.
The Commission has concluded that it is unnecessary to
condition an exemption under rule 52(b) upon the maintenance of a
-------- FOOTNOTES --------
-[18]- Filings with the Commission to date suggest that the kinds
and types of securities issued by nonutility subsidiaries, such
as independent power subsidiaries, will vary more than those
issued by public utility subsidiaries.
-[19]- The Commission noted that this condition is drawn from
section 7(d)(1), which requires the Commission, in reviewing an
issuance of securities, to consider whether the security is
reasonably adapted to the security structure of the company
issuing the security and the other companies in the registered
holding company system. Under that section, the Commission
generally has required a registered holding company system and
its public-utility subsidiaries to maintain a 65/30 debt/common
equity ratio, the balance generally being preferred equity. Such
a debt/equity capitalization requirement was included in rule 52,
as originally adopted, as applied to securities issued by public-
utility subsidiaries, but was eliminated in 1992.
-[20]- The Commission also notes the emphasis placed upon these
considerations in many comments received in response to our
request for comment concerning the modernization of regulation
under the Act. See Holding Co. Act Release No. 26153 (Nov. 2,
1994), 59 FR 55573 (Nov. 8, 1994).
-[21]- GPU at 3-4.
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consolidated debt/equity ratio of 65/30.-[22]- We agree with the
arguments of the holding companies in this respect. We also note
that the Commission will continue to have jurisdiction over
securities sales by registered holding companies. The Commission
will thus be able to monitor, on a continuing basis, the effects
of holding company financing on the consolidated capital
structure of the registered system.
Because rule 52(c) currently exempts only acquisitions of
securities issued and sold by a public-utility subsidiary, the
Commission proposed to amend rule 52 to extend the exemption to
acquisitions of securities of nonutility subsidiaries as well.
The Commission is adopting the proposed amendment. Paragraph (c)
of the rule, with this change, becomes paragraph (d).
In a separate release, the Commission is today seeking
comment on a rule that would allow registered holding companies
to diversify through new or existing subsidiaries into certain
categories of "energy-related" businesses, subject to financial
and other limitations. In this connection, the Commission
intends to revisit rule 52(d) to conform or limit its scope.
3. Capital contributions and open account advances, without
interest, to subsidiary companies.
Rule 52, as amended, does not provide an exemption for
certain other common intrasystem financing transactions. For
example, a capital contribution from a registered holding company
to any of its subsidiary companies is regulated as an
intercompany loan under section 12(b) and rule 45.-[23]- Open
account advances that do not bear interest are also subject to
these provisions.
To facilitate these transactions, the Commission proposed to
amend rule 45(b)(4), which exempts up to $50,000 in capital
contributions and open account advances, without interest, made
to any subsidiary during a calendar year, to remove the dollar
limitation of the rule.-[24]- All of the registered holding
companies submitting comments support this change. New Orleans
proposes that, if rule 45(b)(4) is amended, it should exempt
capital contributions or open account advances subject to an
aggregate limitation of $1,000,000 per year.
As the Commission noted in the Proposing Release, the
legislative history of the Act makes clear that the Congress,
-------- FOOTNOTES --------
-[22]- As in the case of a debt instrument issued by a public-
utility subsidiary pursuant to the rule, the interest rates and
maturity dates of any debt security issued by a nonutility
subsidiary to an associate company would be required to parallel
the effective cost of capital of the associate company. See the
discussion supra, at 6-7, 8-9.
-[23]- Section 12(b) and rule 45(a) generally require prior
Commission approval for a registered holding company or its
subsidiary company to "lend or in any manner extend its credit to
or indemnify any company in the same holding-company system."
-[24]- Rule 45(b)(4) exempts "[c]apital contributions or open
account advances, without interest, to any subsidiary: Provided,
That after giving effect to the transaction the total net amount
which such subsidiary will have received during the calendar year
as a result of such transactions will not exceed $50,000 (after
deducting payments during the year regardless of the date of the
advances)." The rule contained the $50,000 limitation when
adopted in 1941. Holding Co. Act Release No. 2694 (Apr. 21,
1941).
-------------------- BEGINNING OF PAGE #9 -------------------
while concerned with holding company abuses, recognized that
"[d]own-stream loans . . . may be legitimate sources of credit
. . .," and concluded that "the subject is one in which the rule-
making power of the Commission is required to meet a host of
varying circumstances."-[25]- Capital contributions and open
account advances, without interest, are routine transactions
which serve to transfer funds from the parent to its subsidiary.
The amounts and types of securities issued by any registered
holding company, which remain subject to prior approval by the
Commission, must be justified by reference to the need for
capital infusions by its subsidiaries, both utility and
nonutility. Financing requests must be supported by capital
budget projections covering the authorization period. The
Commission believes that its ability to supervise intrasystem
financing through these means will not be compromised by removal
of the dollar limitation in rule 45(b)(4). Accordingly, the
Commission declines to incorporate an aggregate dollar limitation
in the rule as adopted.-[26]-
4. Issuance of Other Securities
Finally, the Commission sought comment on whether the
amendments to rules 45 and 52 should be extended to exempt
financing transactions involving other securities, in particular,
guaranties of debt securities issued by other subsidiary
companies.-[27]- Because guaranties are securities under the
Act,-[28]- their issuance and sale are subject to the declaration
requirement of section 6, unless exempted under section 6(b). At
present, rule 52 does not extend to the issuance and sale of
guaranties.
In addition, the guaranty by a subsidiary company of debt
securities issued by another subsidiary company is subject to
section 12(b) and rule 45 thereunder. Rule 45, with exceptions
not relevant here, prohibits the issuance of guaranties by a
subsidiary company without the filing of a declaration.-[29]-
As previously indicated, we are publishing a companion
release inviting comment on a further amendment to rule 52 to
exempt the issuance of all types of securities. Accordingly,
there is no need to address guaranties separately at this time.
5. Comments by the City of New Orleans and NARUC
New Orleans opposes any expansion of the exemptions from the
Commission's pre-approval requirement for financings provided by
rules 45(b)(4) and 52 which, the city contends, would "widen the
existing regulatory gap between federal and state and local
-------- FOOTNOTES --------
-[25]- S. Rep. No. 621, 74th Cong., 1st Sess. 34-5 (1935).
-[26]- We also intend to revisit rule 45(b)(4) in the context of
any rulemaking on nonutility diversification.
-[27]- Section 12(a) prohibits the guaranty by subsidiary
companies of debt issued by a registered holding company.
-[28]- See section 2(a)(16) (definition of security).
-[29]- At present, rule 45(b)(6) exempts certain guaranties "in
the ordinary course of business." The rule by its terms does not
apply to a guaranty of a subsidiary's indebtedness for borrowed
money.
-------------------- BEGINNING OF PAGE #10 -------------------
regulators."-[30]- New Orleans urges that, if the amendments are
adopted, several additional conditions need to be incorporated.
Certain of these additional conditions, or limitations on the
availability of the exemptions, have been discussed above. New
Orleans states that these conditions are generally necessary to
protect public-utility subsidiaries of registered holding
companies and their customers from the financial effects of
financing transactions, particularly in the context of nonutility
ventures that are not otherwise subject to effective state
oversight.
During the notice period inviting comment on the proposed
amendments to rules 45(b)(4) and 52, Congress passed the Energy
Policy Act of 1992.-[31]- Title VII of the Energy Policy Act
amended the Act to permit investments by registered holding
companies in "exempt wholesale generators" ("EWGs") and "foreign
utility companies" ("FUCOs"), defined in new sections 32 and 33,
respectively.-[32]- Those sections exempt EWGs and FUCOs from
all provisions of the Act, including sections 6(a), 7 and 12(b),
which would otherwise apply to securities and guaranties issued
and sold by such entities. However, these sections do not exempt
issuance and sale of securities by a registered holding company
in cases where the proceeds will be used for EWG or FUCO
investments, and these financing transactions continue to require
Commission approval under sections 6(a) and 7. Under section 32,
Congress directed the Commission to promulgate rules with respect
to actions which would be considered to "have a substantial
adverse impact on the financial integrity of the registered
holding company system" to ensure that actions (e.g., financings,
guaranties, etc.) by any registered holding company in respect of
EWGs would not have any adverse impact on any utility subsidiary
or its customers or on effective state regulation.-[33]-
Similarly, under section 33, Congress directed the Commission to
promulgate rules regarding registered holding companies'
acquisitions of interests in FUCOs which shall provide for the
protection of the customers of associate public utility companies
and the financial integrity of the holding company system.-[34]-
The Commission had not yet initiated the rulemaking effort
under new sections 32 and 33 when it proposed the additional
amendments to rules 45(b)(4) and 52. In part for that reason,
NARUC and New Orleans both urged the Commission to delay any
-------- FOOTNOTES --------
-[30]- New Orleans, Executive Summary, at 4-5.
-[31]- P.L. 102-486, 106 Stat. 2776 (1992).
-[32]- An EWG is defined in section 32(a) of the Holding Company
Act as any person determined by the Federal Energy Regulatory
Commission to be engaged exclusively in the business of owning
and/or operating all or part of one or more facilities that are
used for the generation of electric energy, exclusively for sale
at wholesale or leased to a utility, and selling electric energy
at wholesale. A FUCO is defined in section 33(a) as any person
that owns or operates facilities outside the United States used
for the generation, transmission or distribution of electric
energy for sale or for the distribution at retail of natural or
manufactured gas, that derives no part of its income from such
utility activities in the United States and is not a public
utility company operating in the United States, and that provides
notice to the Commission.
-[33]- See section 32(h)(6).
-[34]- See section 33(c)(1).
-------------------- BEGINNING OF PAGE #11 -------------------
action on the proposed rules pending development of consumer
protection measures in the broader context of investments in EWGs
and FUCOs, which, for purposes of the Act, are nonutilities.
However, since that time, several related rules have been
promulgated under the new provisions, and others are
pending.-[35]- Those rules were intended to carry out the
Congressional mandates under sections 32 and 33.-[36]- We note
that those rules are subject to a pending challenge by NARUC and
others.-[37]-
The City of New Orleans recommends that the Commission
consider the proposed amendments in light of the Congressional
mandates under sections 32 and 33. We do not believe this
measure is necessary. As indicated, those provisions exempt EWGs
and FUCOs from all provisions of the Act, and the rules adopted
under those sections are intended to provide a means to ensure
that investments by the holding company and activities of the
exempt subsidiaries have not adversely affected the holding
company or its utility customers. The proposed amendments to
rules 45(b)(4) and 52, in contrast, exempt only public utility
financing that has been reviewed and approved by state
commissions, and financing by nonutility subsidiaries (other than
EWGs and FUCOs) that is non-recourse to the holding company or
any utility subsidiary. As a result, the activities exempted by
the proposed rule amendments are not nearly so far-reaching as
the EWG and FUCO provisions, and do not have the same need for
additional consumer protection. Further, and this distinction
appears critical, the acquisition by a registered holding company
of an interest in a new nonutility business, and any other
actions related thereto, such as the organization of a separate
subsidiary to conduct that business, the initial capitalization
thereof, intrasystem guaranties and any arrangements for the sale
of goods and services to the new subsidiary, are, in the absence
of any other applicable exemption, subject to the pre-approval
process required under applicable provisions of the Act, as well
as to ongoing reporting requirements and other requirements of
the Act regarding maintenance of books and records, audits,
inspections and the like. State commissions, consumer groups and
other interested parties have the opportunity to express their
views regarding the likely effects of nonutility ventures on
consumers and other protected interests and to propose safeguards
appropriate in order to protect these interests in connection
with this pre-approval process.-[38]-
-------- FOOTNOTES --------
-[35]- See Holding Co. Act Release No. 25886 (Sept. 23, 1993), 58
FR 51488 (Oct. 1, 1993).
-[36]- Rule 53 provides standards for the Commission to determine
whether to approve the issue or sale of a security by a
registered holding company, in cases where the proceeds of the
financing will be used to acquire an EWG. Rule 54 provides that
the effect of EWG and FUCO operations on the registered system
will not be considered in determining whether to approve any
other transactions under the Holding Company Act, if the
standards of rule 53 are satisfied. 17 CFR 250.53 and 250.54.
-[37]- National Association of Regulatory Utility Commissioners,
et al. v. Securities and Exchange Commission, U.S. Court of
Appeals for the District of Columbia Circuit, No. 93-1778.
-[38]- Further, the amended rules do not create any new
exemption from the pre-approval process for guaranties by a
registered holding company of the securities or other obligations
of any subsidiary.
-------------------- BEGINNING OF PAGE #12 -------------------
In addition to the modifications to the proposed rules
mentioned elsewhere in this release, New Orleans recommends that
the rules, if adopted, should require prior approval of a holding
company's cost of capital by each state and local commission
which regulates the parent. The Commission understands this
request to involve approval by a commission in each of the states
in which the holding company's public utility subsidiaries
operate.-[39]- Because the rules do not exempt holding company
financings from our approval, we see no useful purpose to be
achieved by requiring a multistate determination of a holding
company's cost of capital. The Commission is specifically
obligated by section 7(d) to consider the reasonableness of the
fees, commissions and other expenses of a securities issuance
which would be relevant to the determination of a holding
company's effective cost of capital in connection with our
consideration of any holding company financing applications.
New Orleans' suggestion that rule 52, as proposed to be
amended, also be conditioned upon a requirement for state
commission approval in every state in a holding company's service
territory for any guaranty is likewise misplaced.-[40]- As
previously stated, the rules do not exempt registered holding
companies from the requirement to obtain Commission approval in
connection with issuing any guaranty.
In summary, we do not believe that the proposed amendments
to rules 45(b)(4) and 52 will compromise our ability to protect
consumers and investors, and we do not find that the additional
conditions and restrictions proposed by New Orleans are necessary
for this purpose. We are therefore adopting the proposed
amendments to rules 45(b)(4) and 52 substantially in the form
proposed.
CONCLUSION
The Commission believes that the registered holding-company
systems should have a greater ability to engage in routine
financings without the regulatory burden of prior Commission
authorization, and that this may be done without jeopardizing the
interests the Act is designed to protect. The rule amendments
adopted today are consistent with those two objectives.
REGULATORY FLEXIBILITY ACT CERTIFICATION
Pursuant to Section 605(b) of the Regulatory Flexibility
Act, 5 U.S.C. 605(b), the Chairman of the Commission has
certified that the proposed amended rules will not, if adopted,
have a significant economic impact on a substantial number of
small entities. The Commission did not receive any comments with
respect to the Chairman's certification.
COSTS AND BENEFITS
Amended rule 52 will substantially decrease regulatory
compliance costs for the registered holding companies. In
calendar years 1993 and 1994, 122 applications would not have
been filed, had the proposed amended rule 52 been in place.
Estimated savings per application would have been approximately
$30,000 including the $2,000 filing fee per application, and
related legal, accounting, and management costs. Thus, for 122
applications filed in calendar years 1993 and 1994, the aggregate
-------- FOOTNOTES --------
-[39]- New Orleans at 15.
-[40]- New Orleans at 16.
-------------------- BEGINNING OF PAGE #13 -------------------
savings would have been approximately $3,660,000 or $1,830,000,
respectively, per year. Moreover, the reduction in Commission
staff hours associated with reviewing and analyzing these
applications would have been approximately 5,700 hours per year
(2.5 staff years). The only cost to the registered holding
companies in complying with the amended rule will be the cost of
completing a Form U-6B-2 after the issue or sale of any security.
It is estimated that approximately one hour will be required to
complete each form at an estimated cost of $100 per hour.
Assuming 61 financing applications per year, the cost of
compliance reporting would approximate $6,100 per year.
PAPERWORK REDUCTION ACT
The proposed amended rules are subject to the Paperwork
Reduction Act of 1980 (44 U.S.C. 79 et seq.) and have been
submitted to the Office of Management and Budget for approval to
use them through July 31, 1997. Final action is expected by June
23, 1995.
STATUTORY AUTHORITY
The Commission is proposing to amend rules 45 and 52
pursuant to sections 6, 9, 12 and 20 of the Act.
List of Subjects in 17 CFR Part 250
Electric utilities, Holding companies, Natural gas,
Reporting and recordkeeping requirements, Securities.
Text of Final Rules
For the reasons set forth in the preamble, Part 250 of
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.
* * * * *
(b) Exceptions. * * *
(4) Capital contributions or open account advances, without
interest, by a company to its subsidiary company.
* * * * *
3. Section 250.52 is revised to read as follows:
250.52 Exemption of issue and sale of certain securities.
(a) Any registered holding-company subsidiary which is
itself a public-utility 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
(excluding any guaranty and other form of assumption of liability
on the obligations of another) if:
-------------------- BEGINNING OF PAGE #14 -------------------
(1) The issue and sale of such security are solely for
the purpose of financing the business of such public-utility
subsidiary company;
(2) The issue and sale of such security have been
expressly authorized by the state commission of the state in
which such subsidiary company is organized and doing business;
and
(3) 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.
(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 (excluding any guaranty and other form
of assumption of liability on the obligations of another) if:
(1) The issue and sale of such security are solely for
the purpose of financing the existing business of such subsidiary
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.
(c) Within ten days after the issue or sale of any security
exempt under this section, the issuer or seller shall file with
the Commission a Certificate of Notification on Form U-6B-2 (17
CFR 259.206) containing the information prescribed by that form.
However, with respect to exempt financing transactions between
associate companies which involve the repetitive issue or sale of
securities or are part of an intrasystem financing program
involving the issuance and sale of securities not exempted by
this section, the filing of information on Form U-6B-2 may be
done on a calendar quarterly basis.
(d) The acquisition by a company in a registered holding
company system of any security issued and sold by any associate
company, pursuant to this section, is exempt from the
requirements of section 9(a) of the Act (15 U.S.C. 79i(a));
provided that the exemption granted by this paragraph (d) shall
not apply to any transaction involving the issue and sale of
securities to form a new subsidiary company of a registered
holding company.
By the Commission.
Jonathan G. Katz
Secretary
June 20, 1995