TO:	Jonathan G. Katz, Secretary The United States Securities and Exchange Commission
FROM:	ScottishPower plc
DATE:	April 9, 2001
RE:	Comments in Response to the Proposed Rule on Foreign Utility Companies - Release No. 35-27342; International Series Release No. 1246; File No. S7-05-01

I. BACKGROUND

ScottishPower plc ("ScottishPower") is a registered holding formed as a consequence of the court approved reorganization of ScottishPower UK plc ("SPUK") and is the parent holding of PacifiCorp, a public utility company as defined under section 2(a)(5) of the Public Utility Holding Company Act of 1935, as amended ("1935 Act").¹

As a result of its merger with PacifiCorp and the subsequent filings with the United States Securities and Exchange Commission ("SEC" or "Commission") of the Notification of Registration on Form U5A, ScottishPower, on November 30, 1999 became the first foreign registered holding company under the 1935 Act. ScottishPower has significant energy businesses in the United States ("U.S.") and the United Kingdom ("U.K."), with approximately seven million customers, and pro forma revenues of approximately $11 billion.

It also acts as a holding company with respect to its own primary subsidiary companies, namely Manweb plc (an English retail electric company), Southern Water plc (an English retail water company), Thus plc (a U.K. telecommunications company), together with various less substantial subsidiaries.

SPUK is a foreign utility company ("FUCO"), as defined under Section 33 of the 1935 Act, and conducts, in its own name, both the foreign regulated electricity businesses and certain non-regulated businesses. SPUK is also a leading foreign multi-utility business incorporated in the U.K. serving approximately 5.5 million homes across Scotland, England and Wales. SPUK and its subsidiaries' activities span the generation, transmission, distribution and supply of electricity, gas supply, water supply and wastewater services, telecommunications, retailing of electrical appliances, technology and contracting services. SPUK and its subsidiaries comprise one of the largest industrial groups in the U.K., with an annual turnover in fiscal 2000 of over (Pounds) 1899.3 million (approximately $3773.76 million).

As a foreign registered holding company under the 1935 Act, ScottishPower is acutely familiar with the issues that might to arise as a result of the acquisition of additional FUCOs and believes based on its experiences that: (1) advances in communications information technology, accounting systems, SEC corporate disclosure rules and state regulation today both individually and collectively currently address the evils which in 1935 required passage of the 1935; and (2) the 1935 Act currently permits the SEC to consider a qualitative assessment for both foreign and domestic registered holding companies rather than the current bright line percentage test of Rule 53(a)(1) (the concept of which is incorporated in proposed Rule 55) when judging whether the additional acquisitions of FUCOs by any registered holding company will affect the financial integrity of the registered holding company system as required by Section 33 of the 1935 Act.

II. DISCUSSION

A. Preliminary Matter: Commission Review of Specific Acquisitions and the Role of State Commissions.

1. Should Rule 55 be amended to include a formal role for state and local regulators?

Response: No.

The SEC in its 100% orders have always required that all registered holding companies to remain in compliance with the requirements of rule 53(a), at all times during the authorization period of the order. The authorization granted under such 100% orders cease to be effective if one of the criteria of 53(b) is violated. In addition, all registered holding companies pursuant to their respective 100% order agree not to seek recovery through higher rates to the domestic utility customers in the event that investments in exempt wholesale generators ("EWG") and FUCOs yield inadequate returns. Section 33 contemplates the role of state commissions only as it relates to the certification of authority and resources to protect domestic ratepayers and the intent to exercise that authority, if necessary. As originally adopted, the 1935 Act did not contemplate that the Commission would regulate foreign utilities or holding companies. Section 3(b) exempts from the definition of "subsidiary", and therefore from regulation under the 1935 Act, any foreign utility subsidiary. Section 3(a)(5) exempts a foreign holding company from regulation under the 1935 Act even if it derives a part of its income from the United States. Neither Section 3(b) nor Section 3(a)(5) contemplates any substantial state or local regulator involvement in the SEC orders granted under such sections. In this regard, Rule 55 should not require any additional role for state and local regulators other than that stated in Section 33. Receiving certification of authorization from state regulators, strikes the appropriate balance in the competing concerns reflected in Section 33.

B. Conditions of Rule 55

Procedures and Board Review.

1. In an effort to minimize risk, should rule 55 require Board of Directors to make additional findings concerning FUCO acquisitions and/or should the Commission require that FUCO investments be insured against political and exchange risks?

Response: No. The proposed rule adequately addresses the issues pursuant to risk mitigation in the holding company system.

Any additional requirement regarding the institution of specific procedures regarding the mitigation of risks associated with FUCO would serve no legitimate purpose. It would be impossible to craft a rule that would provide absolute certainty against potential problems from FUCO acquisitions. In attempting mitigation of any perceived risk to the U.S. utility business, the state utility commissions (as well as the SEC) have always requested that a firewall be put in place to separate the foreign utility operations from the domestic utility operation. In addition, the state utility commissions will always maintain and exercise absolute jurisdiction over ratemaking as it relates to the domestic public utility company, and this will inevitably continue to protect customers within each respective jurisdiction.

The SEC would be operating outside its purview if it were to mandate specific procedures by a Board of Directors regarding the acquisition of FUCOs. Concerns that would arise as a result of FUCO acquisitions could be extremely complicated and diverse depending on a myriad of issues. Questions regarding political instability, currency rates of exchange, dividend payments and sovereign risk would require differing approaches. Therefore, it would be virtually impossible for the SEC to codify a uniform set of standards which a Board of Directors must utilize when considering FUCO acquisitions.

When it comes to analyzing FUCO acquisitions, the SEC with its finite resources would be better served to focus on the quality of the investment as opposed to the type or specificity of the investment procedures. The magnitude or type of FUCO will not expose US ratepayers to any greater financial risks so long as adequate firewalls have been instituted. In addition, operation of the 1935 Act on affiliate transactions effectively prohibits problems such as transfer pricing risks with respect to FUCOs in a registered holding company system just as it does for most nonutility domestic operations. With respect to most other risks, most foreign operations are regulated in much the same way as (if not sometimes more aggressively than) their US counterparts so as to involve less risk than domestic investment in businesses such as power marketing.

Commission Review of Certain Investments

1. Should proposed Rule 55 codify the events that will trigger SEC review of FUCO acquisitions?

Response: No. The proposed rule should require SEC review only in instances when a material public utility company credit rating falls below investment grade by a nationally recognized statistical rating organization.

The fundamental problem with utilizing the tenets of Rule 53 to govern FUCO acquisition is the unsubstantiated presumption that foreign operations by their nature involve more risk than domestic operations with a consequence that additional review is warranted as a result of such investment. The more appropriate analysis is to look specifically at the FUCO acquisition with a view to determining, what risks exist for U.S. ratepayers and consumers and whether the investment needs to be limited in the future.

The SEC should consider applying tests that are commonly used in utility indentures and project financing for testing whether an obligor can enter a merger transaction or a project sponsor can transfer his interest. Rather than utilizing a fixed limit on investment, bankruptcy or a decrease in consolidated retained earnings as Rule 53 provides, the test should focus on quality of the investment. One common test used is to rely on credit rating agencies. Generally, indenture merger provisions require either that the ratings of the combined company to be the same or greater than prior to the transaction or that net worth be positive following the acquisition and funded debt ratios be the same. If the SEC were solely to require that the credit ratings of domestic utilities be investment grade, no additional trigger events would be necessary to ensure the financial integrity of the holding company system.

In project financings, it is also common to specify that transfer of project interests can only be made to companies of a specified or better credit rating. The SEC can utilize the sophistication and efficiency of the credit rating agencies and should not try reperform or emulate their work. Rather, the SEC should rely on them as do other marketplace participants.

Section 33 speaks of financial integrity which is precisely the question the credit rating agencies are designed to answer. Such a rule would have the added benefit of being uniform for domestic and foreign holding companies.

Books and Records and Reporting Requirements

1. Should proposed Rule 55 permit the FUCO to keep its books and records in conformity with local accounting conventions (rather than U.S. GAAP, as required by Rule 53) if the local accounting system permits us to determine whether transactions between the FUCO and the other companies in the holding company system comply with the 1935 Act's standards?

Response: Yes.

Currently it is extremely difficult for ScottishPower or similar FUCOs to comply with the books and records requirements of Rule 55(c) and as a result ScottishPower has been granted relief by order regarding this provision. However, in the case of ScottishPower, all of its books and records are maintained in English and are accessible. Obviously certain languages and differing accounting principles may in other instances create certain minor difficulties, however, the SEC has the authority to request that the FUCO present all relevant information in English and reconcile all financial information using U.S. Generally Accepted Account Principles as required in the periodic filings of certain foreign companies on Forms 20-F and 6K, respectively.

Further, ScottishPower has agreed (and probably all other foreign holding companies have agreed) to maintain all pertinent books and records at the headquarters of the U.S. public utility company to effect adequate oversight for all U.S. regulatory bodies. As a result thereof, Rule 55 should modify the books and records provisions of 53 , as it relates to FUCOs, accordingly.

C. Comments Received in Response to the Concept Release.

1. Should newly registered, foreign holding companies' interests in FUCOs be "grandfathered?"

Response: Yes.

(a) Section 11 of the 1935 Act in conjunction with section 33 provides the regulatory framework regarding the role of FUCOs as part of a registered holding company system. Section 11 generally provides that a registered holding company system should be a single integrated public utility system, and its other businesses are to be reasonably incidental, or economically necessary or appropriate, to the operations of the public utility system. However, Section 33 provides:

"A [FUCO] shall be exempt from all of the provisions of this Act, except as otherwise provided under this section, and shall not, for any purpose under this Act, be deemed to be a public utility company under Section 2(a)(5), notwithstanding that the foreign utility company may be a subsidiary company, an affiliate, or an associate company of a holding company or of a public utility company."

Another result of being a FUCO is that any interest in the business of a FUCO is deemed to be consistent with the operation of a single integrated public utility system and will be deemed reasonably incidental, or economically necessary or appropriate to the operations of an integrated public utility system within the meaning of Section 11. With reference to the foregoing, it is wholly consistent with the 1935 Act that the FUCO interests of newly registered holding companies should be grandfathered particularly since in some instances the FUCO operations generally represent the core business of the holding company acquired, in the case of As in the case of ScottishPower, prior to any consideration of the 1935 Act, its FUCO operations made acquisitions such as Manweb plc, Thus plc and Southern Water plc, and these acquisitions represented its core business activities. Such premerger activities of the FUCO do not harm the domestic utility company's investors nor consumers because:

(1) no resources derived from the domestic utility company were used to acquire the premerger FUCO or its related businesses, and

(2) the risk to U.S. consumers and investors, if any, relates only to future foreign acquisitions.

The practice of retaining historical businesses is also consistent with the SEC practice in the context of domestic acquisitions, in which businesses have customarily been retained that would otherwise strain the interpretation of a relationship to the integrated public utility system.

In any event, the safe harbor established under Rule 53 of the 1935 Act and the subsequent Commission orders expanding the safe harbor for most domestic registered holding companies already provide specific conditions regarding acquisitions of further FUCOs. On a going-forward basis, therefore, foreign registered holding companies would be subject to the same requirements as the domestic registered holding companies and the interests of investors and consumers will be protected.

ScottishPower, prior to any consideration of the 1935 Act. Such premerger activities of the FUCO do not harm the domestic utility company because:

(1) no resources derived from the domestic utility company were used to acquire the premerger FUCO interest, and

(2) the risk to U.S. consumers and investors relates only to future foreign acquisitions.

The practice of grandfathering historical businesses is also consistent with the SEC practice in the context of domestic acquisitions, in which businesses have customarily been retained that would otherwise strain the interpretation of a relationship to the integrated public utility system.

D. General Request for Comments and Request for Additional Comments.

Section 33(a)(3) of the 1935 Act, which defines the term "foreign utility company," does not by its terms or in any way, limit the type or extent of the types of businesses in which a FUCO or its subsidiaries may engage or the type of entity that may own a FUCO. By contrast, Section 32(a)(1) of the 1935 Act, which defines the term EWG and was also enacted with FUCOs as part of the Energy Policy Act of 1992 ("EPACT"), expressly requires an EWG to be engaged exclusively in the business of owning and/or operating certain types of utility facilities and selling electricity at wholesale. It seems readily apparent from the legislative history of EPACT, that Congress did not intend to place any limitations on the activities of a FUCO. Furthermore, Congress directed the SEC, pursuant to Section 32(h)(6) of the 1935 Act to adopt rules within six months of date of enactment of the EPACT with respect to the activities of EWGs. In contrast, EPACT in Section 33 did not set a date by which the SEC had to promulgate rules regarding foreign utility companies

By failing to place an exclusivity limitation on FUCO operations (as was done with EWG operations), clearly denoting that a FUCO should not be a public utility company and should be exempt from all provisions of the 1935 Act, the SEC was never specifically charged to apply the functional relationship test of Section 11(b)(1) to a FUCO or its subsidiaries engaged in FUCO related businesses or engage in the scrutiny of what type of entity owns a FUCO. To the contrary, Representative Dingell noted that the provisions of Section 33 of the 1935 Act allows the SEC to provide for protection of consumers with respect to such acquisitions.² The legislative history of Section 33 is quite scant because there was no substantive discussion in the House or the Senate on this provision.³ Therefore, one can reasonably surmise that the reason Congress did not (as was done with EWGs) (1) place a limitation on the activities of FUCOs or their businesses, (2) require swift action by the SEC regarding FUCO rules, and/or (3) have any substantive floor discussions on Section 33 was because it was comfortable with the fact that FUCOs would not derive any part of their income from activities in the United States, and thus, the likelihood of harm to a US investor or consumer is negligible. In Section 33, Congress decided that the foreign utility operations of a foreign holding company that are self-financed should have no relevance to the U.S. public utility company or 1935 Act regulation. Congress clearly intended that FUCOs could create a diverse vertically-integrated system because a FUCO by statute is required to be exclusively foreign, and is deemed not to be a utility under the 1935 Act for any purpose. Therefore, with the creation of separate corporate entities to structurally segregate the U.S. public utility activities from that of the foreign utility activities, the commitment by the U.S. public utility not to provide funds, guarantees and/or credit support to the foreign utility side of the business, and with the agreement of the foreign company not to pass on any losses or inadequate returns of investment from the foreign activities to the U.S. ratepayers, the interests of the public, investors and consumers will continue to be protected in a foreign registered holding company system. By all accounts, "the purpose of Section 33 is to facilitate foreign investment not burden it."⁴

Regarding the acquisition of FUCOs by holding companies that are agencies of foreign sovereign states, most would agree that although the U.S. electric and gas utilities are essential services, most utility assets as well of the assets of most of other major U.S. industries, regardless of foreign sovereign state ownership, will be under the operational control of the federal or state government in the event of a national emergency. In addition, certain government entities such as the Department of State, Department of Justice, the Department of Energy, the Nuclear Regulatory Commission, the Central Intelligence Agency, and the Federal Bureau of Investigation have been charged and granted absolute authority to protect U.S. national security interests. The U.S. Treasury Department Committee on Foreign Investment in the United States ("CFIUS"), pursuant to the Exon-Florio Amendment to the Defense Production Act of 1950, is particularly charged with this responsibility. CFIUS has the power to suspend or prohibit or unwind any foreign acquisition, merger or takeover of a domestic corporation if the transaction were to threaten the national security of the United States. The Department of Commerce also keeps track of foreign investment under the International Investment Survey Act of 1976.

In the context of the mandates of other federal agencies, it is appropriate to suggest that the SEC, which has not been granted express authority under the 1935 Act to protect national security interests should, when reviewing proposed foreign state acquisitions of public utility companies, defer to the those governmental entities which have been granted the express authority for such issues.

III. CONCLUSION

With or without the promulgation of Rules 55 and 56, the SEC can continue to properly administer the 1935 Act and concurrently protect the public interests and the interests of investors and consumers in light of continued acquisitions of FUCOs without any major policy changes under the 1935 Act.

Technological changes in the energy industry and advances in accounting and state regulation have created powerful tools for the SEC to be able to accomplish the objectives and requirements of the 1935 Act with more flexible interpretation all of which is both contemplated and permitted by the 1935 Act itself.

Although each foreign acquisition must receive a certain level of scrutiny under the 1935 Act, minimal review by the SEC should be warranted so long as the registered holding companies:

(1) provide the Commission meaningful access to all books, records and documents that pertain to transactions between the U.S. public utility and the FUCO or its affiliates;

(2) maintain separate accounting systems for the U.S. public utility and the foreign utility operations and examine the financial soundness the system;

(3) create adequate firewalls to avoid cross-subsidization and any adverse credit effects should the foreign operation experience financial hardships;

(4) make representations that the U.S. utility operations will not fund, guarantee or provide any credit support for the FUCOs or any of its affiliates and attest that it will not seek recovery in rates for losses or inadequate rates of return on FUCOs activities; and

(5) agree to utilize credit ratings as a more qualitative test for financial integrity as required by Section 33 of the 1935 Act.

Although there is an inherent tension between the drive toward a competitive energy market and the demand for effective consumer protection, the SEC (in conjunction with the FERC, state utility commissions, rating agencies and other regulatory organizations) is equipped with the existing regulatory framework to limit any undue risks associated with all types foreign ownership and instituted measures to protect U.S. ratepayers from any adverse effects that might be associated with those activities. The challenges and benefits presented by the advent of the foreign acquisitions are fully capable of being addressed within the existing framework through the use of qualitative standards based on financial integrity.

Footnotes