Cinergy Corp. ("Cinergy"), a registered public-utility holding company under the Public Utility Holding Company Act of 1935, as amended (the "Act"), hereby submits its comments on the Commission's recently issued concept release, HCAR No. 35-27110, "Registered Public-Utility Holding Companies and Internationalization," 64 Fed. Reg. 71341 et seq., Dec. 21, 1999 (the "Concept Release"). In the Concept Release, the Commission solicits comments on various issues surrounding the acquisition of United States utilities by foreign companies that will thereafter register under the Act.

Cinergy understands that the impetus for the Concept Release is two recent transactions involving acquisitions by British utilities of U.S. utilities or utility holding companies - specifically, Scottish Power plc's acquisition of PacifiCorp and National Grid Group plc's acquisition of New England Electric System ("NEES"). The Commission states in the Concept Release that Scottish Power has consummated its acquisition of PacifiCorp and has registered as a holding company under the Act; National Grid has an application pending before the Commission requesting approval for its merger with NEES, after which it too will register.

As a general matter, without taking any position on the specific transactions cited by the Commission, Cinergy strongly believes that the Act does not and should not be interpreted to prohibit foreign ownership of U.S. utilities. The Commission and other U.S. regulators should be able adequately to protect the U.S. investors and consumers of foreign-based registered holding companies. Cinergy is concerned that any blanket prohibition of foreign ownership of U.S. utilities or imposition of undue restrictions would inevitably cause a backlash, prompting foreign governments or regulatory bodies to respond in kind, barring or narrowing investment opportunities in their countries by U.S. utilities. Such a retrograde stance is inimical to the salutary developments that are reshaping the utility industry around the world, involving the opening of markets to competition and private investment by outsiders.

More broadly, the Act should be interpreted equably to promote the ongoing globalization of the utility business. But in so doing the Commission must be mindful of not placing U.S.-based registered holding companies at a competitive disadvantage relative to the new, foreign-based registered holding companies. The Commission and its staff should apply the substantive provisions of the Act and the Commission's rules in an even-handed manner, providing a level playing field for both "classes" of registered companies. Given the Act's restrictions, registered holding companies are already at a significant competitive disadvantage relative to other energy companies in the U.S. and abroad not subject to the Act. It would be a perverse result if the Act were construed to prevent Cinergy and other U.S. registered holding companies from competing on an equal basis, at the very least, with any other registered holding company, including the newly registered foreign companies.

Thus if the Act's integration provisions do not bar a foreign registered holding company utility from acquiring or retaining a U.S. utility, a fortiori they should not prevent a U.S. registered holding company from acquiring a similarly located U.S. utility. If a British-based registered holding company can acquire or retain an electric utility based in the western United States, notwithstanding the geographic limitations of the integration standards, it follows all the more strongly that Cinergy, located in the Midwest and thousands of miles closer, likewise should be able, consistent with those standards, to merge with an electric utility based in the western United States. Stated simply, the Act should not be interpreted to limit the ability of Cinergy or other U.S. registered companies to compete with foreign companies for domestic utility acquisitions. Accordingly, Cinergy urges the Commission and its staff to continue to interpret the geographic and functional integration standards broadly and flexibly, for both U.S. and foreign registered holding companies.

For the same reasons, the Act likewise should not be applied to place Cinergy or other U.S. registered companies at a competitive disadvantage relative to the newly registered foreign companies in terms of the ability to invest in foreign utility companies ("FUCOs") and exempt wholesale generators ("EWGs" and together with FUCOs "EPAct Projects"). In this regard the Commission observes in the Concept Release that:

[A] registered foreign holding company would likely own significant foreign utility operations. The magnitude of these foreign utility operations could be significantly greater than those currently owned by U.S. holding companies; they could be significantly larger than the holding company's U.S. utility system. ... Should newly registered, foreign holding companies' interests in FUCOs and EWGs be "grandfathered," with only post-registration FUCO and EWG investments counted toward the aggregate investment rule of 53(a)(1)?1

Cinergy does support "grandfathering" newly registered foreign companies' interests in EPAct Projects, such that only post-registration investments would count toward the aggregate investment rule of 53(a)(1). But consistent with the overarching theme in these comments, we believe that this approach must be applied "across the board," not merely to foreign but also to U.S. registered holding companies. In the past, the Commission has not uniformly so grandfathered preexisting EPAct Projects of new registered holding companies - Cinergy being a case in point. Logic and fairness dictate that the Commission treat prior investments of the existing registered companies with no less pragmatism. A corollary is that existing regulated generation transferred to EWG affiliates within a holding company system should also be "grandfathered" or otherwise exempted from the Commission's investment caps for EPAct Projects. These transactions are internal reorganizations of preexisting utility assets not new investments.

Beyond the specific question of "grandfathering," the more fundamental issue concerns the comparative magnitude of the foreign registered holding companies' investments in foreign utilities. The Commission notes that these FUCO investments "could be significantly greater than those currently owned by U.S. holding companies; they could be significantly larger than the holding company's U.S. utility system."2 The size and scope of these investments throws into sharp relief the strictures that apply to U.S. registered companies, none of whom is currently permitted to invest in EPAct Projects at a level in excess of 100% of retained earnings. And U.S. registered holding companies have been permitted to invest at the 100% level only on a case-by-case basis, after exhaustive and time-consuming review by the Commission and its staff.3

Given the sea changes impacting the industry, these investment constraints no longer can be justified. As the Commission observes in the Concept Release, the utility business is "rapidly evolving into a global industry," characterized by "a large demand for American utility expertise and significant investment opportunities for United States companies." While opportunities are expanding for U.S. companies abroad, the U.S. energy industry is itself attracting sizable international investment, with foreign-based competitors acquiring regulated utilities and nonutility EWG generation, including assets divested by utilities in states undergoing restructuring. In his recent State of the Union Address, President Clinton called the trend toward economic and cultural globalization "the central reality of our time." Cinergy and the other existing registered companies must be able to compete for foreign utility projects at a level commensurate with the new foreign holding companies - taking into account their "grandfathered" investments.

Proceeding on a parallel track with these global changes is the restructuring of the U.S. utility industry to full competition. By year-end 1999, comprehensive legislation or regulatory orders had been enacted or issued in 24 states providing for retail customer choice in the supply of electricity. This dynamic, no less than globalization, is driving the need for greater investment capacity in EPAct Projects. The state restructuring plans now in effect require or strongly incentivize incumbent vertically integrated utilities to divest electric generating assets, in order to foster competition by separating the competitive retail generation business from the transmission and distribution business, which is to remain regulated within the utility. As a result, across the country existing regulated generating assets are increasingly being transferred to nonutility, EWG ownership; likewise, new generation in the U.S. is increasingly being developed on an EWG or other nonutility basis, outside the regulated utility. To compete in these emerging deregulated markets, U.S.-based holding companies need to reposition their domestic supply businesses, spinning "legacy" generation assets off from the franchised utilities to third parties or nonutility affiliates, and building new, competitive facilities as EWGs. The Commission's existing investment constraints hinder the ability of Cinergy and other U.S. registered companies to make this essential adaptation.

In short, the advent of a new class of registered holding companies, with investments in FUCOs many times that of the existing registered companies, underscores the need not merely for a level playing field, but also for an overhaul of the Commission's approach to permissible investment levels in EPAct Projects generally. Cinergy urges the Commission to recognize the new realities transforming the industry, and accommodate substantially greater levels of investment than previously permitted under rule 53. For example, the Commission should consider excluding entirely for rule 53 "counting" purposes, and otherwise exempting from prior approval requirements, certain categories of EPAct Projects, such as internal transfers within a holding company system of generating assets, from a regulated utility to its EWG affiliate. The Commission's rule 53 investment ceilings should not logically apply to these transactions, which do not represent new investments and are required to adapt to a competitive environment. As the Division of Investment Management itself recommended several years ago, "With a view to the proposed disaggregation of the electric utility industry, the SEC should consider rules to exempt a corporate restructuring that does not result in the addition of new utility operations."4

In sum, Cinergy reiterates our conviction that the Act countenances foreign registered holding companies. But while the Act must not be construed to prohibit, neither should it be applied to unfairly advantage the foreign registered companies. All parties must be treated in an even-handed manner, not least the existing registered companies. Finally, in light of the tectonic changes discussed herein, Cinergy urges the Commission to chart a bold, new course, permitting significantly greater investments in EPAct Projects. 5


By: /s/ Cheryl M. Foley
President/International Business Unit

Dated: February 4, 2000


1 Concept Release, supra, Fed. Reg. at 71344.

2 Id.

3 Cinergy has an application pending before the Commission (File No. 70-9577) requesting authority to invest in EWGs and FUCOs at a level greater than 100% of retained earnings.

4 See "The Regulation of Public-Utility Holding Companies," June 1995 Report of the Commission's Division of Investment Management, at xiii.

5 The Commission has extensively studied the impact of the Act. It has concluded that the Act should be repealed, with adequate consumer protection authority given to the Federal Energy Regulatory Commission and state utility commissions. Cinergy wholeheartedly concurs with these conclusions and notes that many of the concerns raised in the instant concept paper would be rendered moot if Congress would adopt the Commission's recommendations.