April 9, 2001

Mr. Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth St., NW
Washington, DC 20549-0609

RE: File No. S7-05-01

Dear Mr. Katz:

The National Association of Regulatory Utility Commissioners (NARUC) hereby submits its comment letter regarding the Securities and Exchange Commission's (SEC ) notice of proposed rulemaking on Foreign Utility Companies published at 66 Fed. Reg. 9,247 (February 7, 2001). NARUC represents the governmental agencies of the fifty States, the District of Columbia, Puerto Rico and the Virgin Islands engaged in the regulation of public utilities and common carriers. NARUC's mission is to serve the public interest by improving the quality and effectiveness of public utility regulation. Under State law, NARUC's members have the obligation to ensure the establishment and maintenance of such energy utility services as may be required by the public convenience and necessity, and to ensure that such services are provided at rates and conditions that are just, reasonable and nondiscriminatory for all consumers.

It is NARUC's longstanding position that the acquisition of foreign utility companies by U.S. utility holding companies should be subject to close scrutiny under applicable Federal and State statutes generally applicable to utility acquisitions. NARUC believes that the reproposed rules 55 and 56 and the amendment to rule 87 under the Public Utility Holding Company Act of 1935 (PUHCA) represent an unwise relaxation of such close scrutiny and thus unnecessarily risk consumer protection and jeopardize State authority to protect against possible adverse impacts.

NARUC first noted its concern with the current reproposed rules in 1993, when the SEC first proposed rules 55 and 56. In those comments, NARUC, along with the National Association of State Utility Consumer Advocates, Consumer Federation of America, Environmental Action and American Public Power Association, urged the SEC to withdraw the proposed regulations because "they did not comply with clear statutory language concerning the protection of consumers and the ability of States to regulate operating utilities of registered holding company systems. See, NARUC Comments on Notice of Proposed Rulemaking on Sections 32 and 33 of the Energy Policy Act of 1992, 66 Fed. Reg. 13719-13730 (March 15, 1993). We urge the Commission to revisit these comments as many sections of those comments directly pertain to the reproposed rules.

In addition, NARUC urges the SEC to incorporate pricing policies that are consistent with those policies utilized by other regulatory agencies. NARUC has approved the "NARUC Guidelines for Cost Allocations and Affiliate Transactions" (Guidelines) addressing electric and gas operations. These Guidelines can be accessed at http://www.naruc.org/Committees/f&t/accounts/guidelines.htm, and are attached as Appendix A. These Guidelines were adopted by the Board of Directors on July 12, 1999, and were recommended to the State regulators as a model. The Guidelines are intended to provide guidance to jurisdictional regulatory authorities and regulated utilities and their affiliates in the development of procedures and recording of transactions for services and products between a regulated entity and affiliates. While not mandatory upon the States, many States have incorporated these Guidelines into their regulatory structure. We would urge the SEC to defer to such uniform practices on pricing rules for foreign utility holding companies.

Additionally, NARUC urges the SEC to ensure that foreign acquisition and ownership of U.S. utility companies should be subject to close scrutiny under applicable Federal and State statutes generally applicable to utility acquisitions. In March 2000, NARUC's Board of Directors adopted a policy resolution in response to a concept release issued by the SEC in December 1999 in File No. S7-30-99. Resolution Regarding Registered Public Utility Holding Companies and Internationalization, NARUC Resolution (March17, 2001), [hereinafter, Resolution]. This resolution is attached as Appendix B. In adopting this Resolution, NARUC asserted that the ultimate outcome of transactions involving the acquisition or ownership of U.S. utilities by foreign utility companies should be the same for any other transaction: no adverse impact on the consumer or the State regulatory authorities to protect consumers.

NARUC respectfully urges the SEC in its final decision to ensure that the regulations it chooses to adopt have no adverse impact on utility subsidiaries, customers or State commissions. It is essential that consumers are protected from any potential adverse impacts involving foreign utility holding company acquisitions and ownership by utility holding companies, and that State regulators retain the authority to effectively monitor and regulate these transactions.

Respectfully Submitted,

James Bradford Ramsay
General Counsel

Sharla M. Barklind
Assistant General Counsel

National Association of Regulatory
Utility Commissioners
1101 Vermont Avenue, Suite 200
Washington, DC 20005
(202) 898-1350
April 9, 2001

Appendix A

APPENDIX F

Resolution Regarding Cost Allocation Guidelines for the Energy Industry

WHEREAS, There is ongoing concern regarding potential cross-subsidization between the regulated monopoly operations and the non-regulated businesses of electric and gas utilities; and

WHEREAS, Utilities are adopting various business strategies to adjust to the changing retail markets, including forming alliances and creating subsidiaries, divisions and partnerships to participate in non-regulated, competitive markets; and

WHEREAS, State utility commissions are examining and adopting various policies to monitor the competitive activities of regulated energy utilities; and

WHEREAS, State utility commissions are examining and adopting policies and rules concerning potential cross-subsidies between regulated utilities and non-regulated affiliates including pricing of assets, products and services; and

WHEREAS, The National Association of Regulatory Utility Commissioners (NARUC) requested the Staff Subcommittee on Accounts together with the Staff Subcommittees on Strategic Issues and Gas to prepare for NARUC's consideration, "Guidelines for Energy Cost Allocations"; and

WHEREAS, The Staff Subcommittee on Accounts together with the Subcommittee on Gas and Strategic Issues have prepared for NARUC's consideration "Guidelines for Cost Allocations and Affiliate Transactions"; and

WHEREAS, Each State or Federal Regulatory commission may have unique situations and circumstances that govern affiliate transactions, cost allocations, and/or service or product pricing; and

WHEREAS, The "Guidelines for Cost Allocations and Affiliate Transactions" are to provide guidance to the states and are not intended to be rules or regulations prescribing how cost allocations and affiliate transactions are to be handled; and

WHEREAS, The Staff Subcommittees on Accounts, Strategic Issues and Gas should periodically review the Guidelines for Cost Allocations and Affiliate Transactions, taking into consideration the progression of competition in the electric and gas industries nationally, and report their findings, including proposed changes to the guidelines, if necessary, that promote efficiency in competitive energy markets while guarding against cross-subsidization by monopoly ratepayers; now therefore be it

RESOLVED, The Board of Directors of the of the National Association of Regulatory Utility Commissioners (NARUC), convened in its 1999 Summer Meeting in San Francisco, California, adopts the attached "Guidelines for Cost Allocations and Affiliate Transactions"; and be it further

RESOLVED, The NARUC directs the Staff Subcommittees on Accounts, Strategic Issues and Gas, to review the Guidelines for Cost Allocation and Affiliate Transactions, taking into consideration the progression of competition in the electric and gas industries nationally and report their findings to NARUC, including proposed changes to the guidelines, if necessary, on or before January 1, 2001, and annually thereafter, and be it further

RESOLVED, The NARUC applauds and thanks the Staff Subcommittees on Accounts, Gas, and Strategic Issues for their excellent work in developing the guidelines.

______________________________________
Sponsored by the Committees on Electricity and Finance and Technology
Adopted by the NARUC Board of Directors July 23, 1999

Attachment To Resolution Regarding Cost Allocation Guidelines for the Energy Industry "GUIDELINES FOR COST ALLOCATIONS AND AFFILIATE TRANSACTIONS"

The following Guidelines for Cost Allocations and Affiliate Transactions (Guidelines) are intended to provide guidance to jurisdictional regulatory authorities and regulated utilities and their affiliates in the development of procedures and recording of transactions for services and products between a regulated entity and affiliates. The prevailing premise of these Guidelines is that allocation methods should not result in subsidization of non-regulated services or products by regulated entities unless authorized by the jurisdictional regulatory authority. These Guidelines are not intended to be rules or regulations prescribing how cost allocations and affiliate transactions are to be handled. They are intended to provide a framework for regulated entities and regulatory authorities in the development of their own policies and procedures for cost allocations and affiliated transactions. Variation in regulatory environment may justify different cost allocation methods than those embodied in the Guidelines.

The Guidelines acknowledge and reference the use of several different practices and methods. It is intended that there be latitude in the application of these guidelines, subject to regulatory oversight. The implementation and compliance with these cost allocations and affiliate transaction guidelines, by regulated utilities under the authority of jurisdictional regulatory commissions, is subject to Federal and state law. Each state or Federal regulatory commission may have unique situations and circumstances that govern affiliate transactions, cost allocations, and/or service or product pricing standards. For example, The Public Utility Holding Company Act of 1935 requires registered holding company systems to price "at cost" the sale of goods and services and the undertaking of construction contracts between affiliate companies.

The Guidelines were developed by the NARUC Staff Subcommittee on Accounts in compliance with the Resolution passed on March 3, 1998 entitled "Resolution Regarding Cost Allocation for the Energy Industry" which directed the Staff Subcommittee on Accounts together with the Staff Subcommittees on Strategic Issues and Gas to prepare for NARUC's consideration, "Guidelines for Energy Cost Allocations." In addition, input was requested from other industry parties. Various levels of input were obtained in the development of the Guidelines from the Edison Electric Institute, American Gas Association, Securities and Exchange Commission, the Federal Energy Regulatory Commission, Rural Utilities Service and the National Rural Electric Cooperatives Association as well as staff of various state public utility commissions.

In some instances, non-structural safeguards as contained in these guidelines may not be sufficient to prevent market power problems in strategic markets such as the generation market. Problems arise when a firm has the ability to raise prices above market for a sustained period and/or impede output of a product or service. Such concerns have led some states to develop codes of conduct to govern relationships between the regulated utility and its non-regulated affiliates. Consideration should be given to any "unique" advantages an incumbent utility would have over competitors in an emerging market such as the retail energy market. A code of conduct should be used in conjunction with guidelines on cost allocations and affiliate transactions.

A. DEFINITIONS

1. Affiliates - companies that are related to each other due to common ownership or control.

2. Attestation Engagement - one in which a certified public accountant who is in the practice of public accounting is contracted to issue a written communication that expresses a conclusion about the reliability of a written assertion that is the responsibility of another party.

3. Cost Allocation Manual (CAM) - an indexed compilation and documentation of a company's cost allocation policies and related procedures.

4. Cost Allocations - the methods or ratios used to apportion costs. A cost allocator can be based on the origin of costs, as in the case of cost drivers; cost-causative linkage of an indirect nature; or one or more overall factors (also known as general allocators).

5. Common Costs - costs associated with services or products that are of joint benefit between regulated and non-regulated business units.

6. Cost Driver - a measurable event or quantity which influences the level of costs incurred and which can be directly traced to the origin of the costs themselves.

7. Direct Costs - costs which can be specifically identified with a particular service or product.

8. Fully Allocated costs - the sum of the direct costs plus an appropriate share of indirect costs.

9. Incremental pricing - pricing services or products on a basis of only the additional costs added by their operations while one or more pre-existing services or products support the fixed costs.

10. Indirect Costs - costs that cannot be identified with a particular service or product. This includes but not limited to overhead costs, administrative and general, and taxes.

11. Non-regulated - that which is not subject to regulation by regulatory authorities.

12. Prevailing Market Pricing - a generally accepted market value that can be substantiated by clearly comparable transactions, auction or appraisal.

13. Regulated - that which is subject to regulation by regulatory authorities.

14. Subsidization - the recovery of costs from one class of customers or business unit that are attributable to another.

B. COST ALLOCATION PRINCIPLES

The following allocation principles should be used whenever products or services are provided between a regulated utility and its non-regulated affiliate or division.

1. To the maximum extent practicable, in consideration of administrative costs, costs should be collected and classified on a direct basis for each asset, service or product provided.

2. The general method for charging indirect costs should be on a fully allocated cost basis. Under appropriate circumstances, regulatory authorities may consider incremental cost, prevailing market pricing or other methods for allocating costs and pricing transactions among affiliates.

3. To the extent possible, all direct and allocated costs between regulated and non-regulated services and products should be traceable on the books of the applicable regulated utility to the applicable Uniform System of Accounts. Documentation should be made available to the appropriate regulatory authority upon request regarding transactions between the regulated utility and its affiliates.

4. The allocation methods should apply to the regulated entity's affiliates in order to prevent subsidization from, and ensure equitable cost sharing among the regulated entity and its affiliates, and vice versa.

5. All costs should be classified to services or products which, by their very nature, are either regulated, non-regulated, or common to both.

6. The primary cost driver of common costs, or a relevant proxy in the absence of a primary cost driver, should be identified and used to allocate the cost between regulated and non-regulated services or products.

7. The indirect costs of each business unit, including the allocated costs of shared services, should be spread to the services or products to which they relate using relevant cost allocators.

C. COST ALLOCATION MANUAL (NOT TARIFFED)

Each entity that provides both regulated and non-regulated services or products should maintain a cost allocation manual (CAM) or its equivalent and notify the jurisdictional regulatory authorities of the CAM's existence. The determination of what, if any, information should be held confidential should be based on the statutes and rules of the regulatory agency that requires the information. Any entity required to provide notification of a CAM(s) should make arrangements as necessary and appropriate to ensure competitively sensitive information derived therefrom be kept confidential by the regulator. At a minimum, the CAM should contain the following:

1. An organization chart of the holding company, depicting all affiliates, and regulated entities.

2. A description of all assets, services and products provided to and from the regulated entity and each of its affiliates.

3. A description of all assets, services and products provided by the regulated entity to non-affiliates.

4. A description of the cost allocators and methods used by the regulated entity and the cost allocators and methods used by its affiliates related to the regulated services and products provided to the regulated entity.

D. AFFILIATE TRANSACTIONS (NOT TARIFFED)

The affiliate transactions pricing guidelines are based on two assumptions. First, affiliate transactions raise the concern of self-dealing where market forces do not necessarily drive prices. Second, utilities have a natural business incentive to shift costs from non-regulated competitive operations to regulated monopoly operations since recovery is more certain with captive ratepayers. Too much flexibility will lead to subsidization. However, if the affiliate transaction pricing guidelines are too rigid, economic transactions may be discouraged.

The objective of the affiliate transactions' guidelines is to lessen the possibility of subsidization in order to protect monopoly ratepayers and to help establish and preserve competition in the electric generation and the electric and gas supply markets. It provides ample flexibility to accommodate exceptions where the outcome is in the best interest of the utility, its ratepayers and competition. As with any transactions, the burden of proof for any exception from the general rule rests with the proponent of the exception.

1. Generally, the price for services, products and the use of assets provided by a regulated entity to its non-regulated affiliates should be at the higher of fully allocated costs or prevailing market prices. Under appropriate circumstances, prices could be based on incremental cost, or other pricing mechanisms as determined by the regulator.

2. Generally, the price for services, products and the use of assets provided by a non-regulated affiliate to a regulated affiliate should be at the lower of fully allocated cost or prevailing market prices. Under appropriate circumstances, prices could be based on incremental cost, or other pricing mechanisms as determined by the regulator.

3. Generally, transfer of a capital asset from the utility to its non-regulated affiliate should be at the greater of prevailing market price or net book value, except as otherwise required by law or regulation. Generally, transfer of assets from an affiliate to the utility should be at the lower of prevailing market price or net book value, except as otherwise required by law or regulation. To determine prevailing market value, an appraisal should be required at certain value thresholds as determined by regulators.

4. Entities should maintain all information underlying affiliate transactions with the affiliated utility for a minimum of three years, or as required by law or regulation.

E. AUDIT REQUIREMENTS

1. An audit trail should exist with respect to all transactions between the regulated entity and its affiliates that relate to regulated services and products. The regulator should have complete access to all affiliate records necessary to ensure that cost allocations and affiliate transactions are conducted in accordance with the guidelines. Regulators should have complete access to affiliate records, consistent with state statutes, to ensure that the regulator has access to all relevant information necessary to evaluate whether subsidization exists. The auditors, not the audited utilities, should determine what information is relevant for a particular audit objective. Limitations on access would compromise the audit process and impair audit independence.

2. Each regulated entity's cost allocation documentation should be made available to the company's internal auditors for periodic review of the allocation policy and process and to any jurisdictional regulatory authority when appropriate and upon request.

3. Any jurisdictional regulatory authority may request an independent attestation engagement of the CAM. The cost of any independent attestation engagement associated with the CAM, should be shared between regulated and non-regulated operations consistent with the allocation of similar common costs.

4. Any audit of the CAM should not otherwise limit or restrict the authority of state regulatory authorities to have access to the books and records of and audit the operations of jurisdictional utilities.

5. Any entity required to provide access to its books and records should make arrangements as necessary and appropriate to ensure that competitively sensitive information derived therefrom be kept confidential by the regulator.

F. REPORTING REQUIREMENTS

1. The regulated entity should report annually the dollar amount of non-tariffed transactions associated with the provision of each service or product and the use or sale of each asset for the following:

   1. Those provided to each non-regulated affiliate.

   2. Those received from each non-regulated affiliate.

   3. Those provided to non-affiliated entities.

2. Any additional information needed to assure compliance with these Guidelines, such as cost of service data necessary to evaluate subsidization issues, should be provided.

Appendix B

Resolution Regarding Registered

Public Utility Holding Companies and Internationalization

WHEREAS, The Securities and Exchange Commission (SEC) is seeking comment on various issues surrounding the acquisition of United States utilities by foreign companies that will register as holding companies following the transaction; and

WHEREAS, Three foreign companies engaged in the utility or energy business, ScottishPower plc, National Grid Group plc, and Britain's Power Gen have announced plans to acquire U.S. utilities or public utility holding companies; and

WHEREAS, ScottishPower has filed with the SEC its Form U5A, notification of registration as a holding company under the Public Utility Holding Company Act of 1935 (PUHCA); and

WHEREAS, There is a concern that foreign ownership could impose impediments to State regulators' inspection authority and access to books and records regarding financial transactions, cost allocations, and affiliate transactions; and

WHEREAS, It does not appear that the Energy Policy Act of 1992 (EPACT) provisions of the PUHCA can be effectively applied to regulate foreign utility company operations; and

WHEREAS, The PUHCA and the EPACT are silent regarding the acquisition of a U.S. utility or public utility holding company by a foreign company; now therefore be it

RESOLVED, That the Board of Directors of the National Association of Regulatory Utility Commissioners (NARUC) convened in its March 2000 Winter Meeting in Washington D. C., that the burden of demonstrating that an acquisition of a U.S. utility system is in the public interest should be the same regardless of whether the acquiring company is foreign or domestic; and be it further

RESOLVED, That the acquiring company should guarantee that U.S. regulatory authorities will have complete access to all books and records regarding financial transactions, cost allocations, and affiliate transactions impacting the U.S. utility; and be it further

RESOLVED, That the acquiring company should be required to guarantee that the ratepayers of the acquired utility shall be held harmless if the acquisition results in a higher revenue requirement for the utility than if the acquisition had not occurred.

_______________________
Sponsored by the Committee on Finance and Technology
Adopted by the NARUC Board of Directors, March 8, 2000