COMMENTS OF THE REPEAL PUHCA NOW! COALITION
SEC FILE NO. S7-30-99
The Repeal PUHCA Now! Coalition (Coalition) is pleased to submit comments on the Commission's recently issued release, HCAR No. 35-27110, "Registered Public-Utility Holding Companies and Internationalization," 64 Fed. Reg. 71341 et seq., December 21, 1999 (the "Concept Release"). The Coalition is a group of electric and gas companies whose members include registered and exempt holding companies restricted under the Public Utility Holding Company Act of 1935, as amended (the "Act"). These comments reflect the views of the Coalition only. Some individual members of the Coalition have filed comments separately.
In the Concept Release, the Commission solicits comments on various issues surrounding the acquisition of U.S. utilities by foreign companies currently not subject to the Act that will thereafter register under the Act. Before commenting on the specific concerns raised in the Concept Release, the Coalition would note that it supports enactment of legislation repealing the Act as recommended by the Commission. If Congress adopted these recommendations the concerns raised in the Concept Release surrounding foreign acquisition of U.S. utilities would be rendered moot.
The Coalition takes no position on the specific transactions cited by the Commission; the Coalition strongly believes that the Act does not and should not be interpreted to prohibit foreign ownership of U.S. utilities. The Commission and other regulators are able to adequately protect the U.S. investors and consumers of foreign-based registered holding companies. The Federal Energy Regulatory Commission and several state utility regulatory commissions acknowledged this in the approval of Scottish Power / PacifiCorp merger. As developments involving the opening of markets to competition and private investment by outsiders are reshaping the utility industry around the world, prohibitions or onerous conditions on foreign ownership would be inimical to these developments.
More broadly, the Act should be interpreted equitably to promote the ongoing globalization of the utility business. In so doing, however, the Commission must be mindful of the competitive disadvantages of the U.S.-based registered holding companies relative to foreign 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 U.S. and foreign companies. Given the Act's restrictions, U.S. utility holding companies already face significant competitive and commercial disadvantages. It would be a perverse result if the Act were construed to prevent U.S. utility holding companies from competing on an equal basis with foreign companies.
If the Act's integration provisions would not bar a foreign utility from acquiring or retaining a U.S. utility, those same provisions must not prevent a U.S. utility company from acquiring a similarly located U.S. utility. The Act should not be interpreted to limit the ability of U.S. companies to compete with foreign companies for domestic utility acquisitions. Accordingly, the Coalition 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 utility companies.
For the same reasons, the Act likewise should not be applied to place 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"). In this regard, the Commission observes and inquires in the Concept Release:
[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
The Coalition would not object to the Commission "grandfathering" newly registered foreign companies' interests in FUCOs and EWGs, such that only post-registration investments would count toward the aggregate investment rule of 53(a)(1); provided that the Commission make a specific finding that the aggregate level of Rule 53 investments permitted does not have a substantial adverse impact on the financial integrity of the newly registered holding company as required by Sections 32 and 33 of the Act. Moreover, consistent with the overarching theme of these comments, our support is subject to the basic qualification 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 grandfathered - that is, excluded from the calculation of aggregate investment for purposes of rule 53(a)(1) - preexisting EWG and FUCO investments of new registered holding companies.
Beyond the specific question of "grandfathering," the more fundamental issue concerns the comparative magnitude of the foreign registered holding companies' investments in foreign utilities. As the Commission notes these 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 is inapposite to the restrictions that apply to U.S. registered companies, none of which are currently permitted to invest in EWGs and FUCOs at a level in excess of 100% of retained earnings. Moreover, U.S. registered holding companies have been permitted to invest at the 100% level only on a case-by-case basis, after exhaustive and often time-consuming review by the Commission and its staff.
Given the rapid evolution of the utility business to a global industry3 and the ongoing restructuring of the utility business in the United States, these investment ceilings on domestic holding companies can no longer be justified. Traditional vertically integrated utilities are divesting generating assets to EWGs or other non-utility companies and new generation projects are being developed on a merchant (i.e., EWG) basis outside of the regulated utility. 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 applicable to all registered companies, but also for a more progressive approach in this area. Such an approach, premised on the new realities transforming the industry, would accommodate substantially greater levels of investment in EWGs and FUCOs. Moreover, the Coalition suggests that the Commission consider excluding entirely for rule 53 "counting" purposes, and otherwise exempting from prior approval requirements, investments such as internal transfers of generating assets from a regulated utility to a non-utility affiliate formed to own and operate those assets as an EWG. This exclusion would facilitate state-ordered utility restructuring and promote economic efficiency. The investment ceilings applicable to EWGs and FUCOs logically should not apply to these transactions which do not represent incremental investments.
In conclusion, the Coalition believes that the Act should neither favor nor bar foreign ownership of U.S. utilities. Consequently, we urge the Commission to apply the provisions of the Act on U.S. utilities in such a way as to allow U.S. registered holding companies to compete on an equal basis with newly registered foreign holding companies. After extensive study of the Act, the Commission concluded that the Act should be repealed, with adequate consumer protection authority given to the Federal Energy Regulatory Commission and state utility commissions. The Coalition agrees generally with these conclusions and notes that many of the concerns associated with foreign ownership of U.S. utilities would be rendered moot if Congress repealed the'35 Act consistent with the 1995 Report.
The utility business is rapidly evolving into a global industry, with participants seeking multinational investment opportunities. Sweeping political and economic changes worldwide have created a large demand for American utility expertise and significant investment opportunities for United States companies.
1 Concept Release, supra, Fed. Reg. at 71344.
3 See Concept Release, supra, Fed. Reg. at 71342: