Príncipe de Vergara, 187
28002 Madrid, Spain
T: (34) 91 213 1000
F: (34) 91 563 8181
March 30, 2001
Mr. Jonathan G. Katz,
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Comments On Proposed Rules 55 and 56; File No. S7-05-01
Dear Mr. Katz:
This is in response to the Commission's February 7, 2001 request for comment (HCAR No. 35-27342, the "Proposing Release") regarding proposed Rules 55 and 56 under the Public Utility Holding Company Act of 1935 (the "Act"). These comments are submitted on behalf of Endesa, S.A.
Endesa, S.A. is a limited liability company (sociedad anónima) organized under the laws of the Kingdom of Spain. Endesa's shares are publicly traded on the Madrid, Barcelona, Bilbao and Valencia Stock Exchanges and on the New York Stock Exchange. Endesa was formed under the laws of Spain in 1944. Its principal executive office is located at Príncipe de Vergara, 187, 28002 Madrid, Spain.
The Endesa Group is an integrated utility with a presence in over a dozen countries. We are the largest generator and distributor of electricity in Spain and the largest privately held distributor and generator in Latin America. We also have investments in France, Morocco, the Netherlands, Poland and Portugal. We operate over 35,000 MW of electric generating capacity and distribute electricity to over 20 million customers.
In addition to electricity, the Endesa Group is engaged in other activities, principally telecommunications, gas distribution, water treatment and distribution and energy-related activities. Although a significant portion of the total public shareholding in Endesa is held by U.S. persons through the NYSE, Endesa does not conduct any significant business operations in the U.S.
The Commission Should Encourage Investment by Non-U.S. Companies
The Commission's actions to date regarding investment by non-U.S. companies have been consistent with the enhancement of global competition in the electric industry. In response to HCAR No. 35-27110 (the "Concept Release") regarding investment in U.S. electric and gas utilities by non-U.S. persons and other factors, the Commission has found that a non-U.S. company may invest in a U.S. electric utility company and become a registered holding company under the Act. To date, the Commission has not found it necessary for the public interest to regulate the non-U.S. utility or non-utility holdings of such companies; rather, the Commission treats all of the non-U.S. holdings as a "FUCO." We believe this is appropriate and in the public interest of U.S. utility customers and investors.
Endesa supports the increase in competition in the electric and gas utility industries occurring throughout the world. We have seen improvements in service and technology, and reductions in the price of service, all to the benefit of consumers, wherever there has been a movement to competitive markets and a movement away from regulated, protected monopolies. In any competitive market, it is essential that there be a large number of vigorous competitors. Any factor which serves to close a market to some participants can be detrimental to full competition. Legislators and regulators alike have recognized this principle, and both groups have taken great care to promote broad participation in competitive wholesale and retail markets. Recent experience, however, has demonstrated that, despite the best intentions to the contrary, significant restrictions on, or barriers to, market participation lead to unintended but unavoidable negative consequences.
Accordingly, Endesa urges the Commission to interpret the Act in a manner that does not unnecessarily restrain investment in U.S. electric and gas utilities by non-U.S. persons. Allowing non-U.S. investors to freely enter the U.S. markets will increase the number of competitors, which will directly benefit U.S. energy consumers. Any conditions on investment by non-U.S. persons should be reasonable and directly relate to the unique status of a non-U.S. investor, and should be limited to the protection of the legitimate interests of U.S. consumers and investors. These conditions should not be so onerous as to discourage participation in U.S. markets by non-U.S. persons.
Policy makers considering rules that can restrict foreign investment in the U.S. should consider what limitations other countries in the world place on U.S. investment in those countries. Endesa believes that neither U.S. consumers nor investors will benefit from an interpretation of PUHCA that unnecessarily makes U.S. law more restrictive to foreign investment in the U.S. than laws governing foreign investment in, say, European or South American markets. Such an interpretation would tend to steer a significant source of capital away from the U.S. energy sector, at a time when there is near unanimity of opinion that the U.S. will require significant additional investment in that sector in coming years.
In addition to providing a needed source of capital, foreign investors can and will be good corporate citizens. Endesa is committed to full compliance with all local laws in the countries where its does business. We also strive to achieve a good working relationship with local regulators.
The Commission Should Not Restrict FUCO's Non-Utility Investments
Any narrow and unnecessarily restrictive interpretation of Section 33 of the Act can result in effectively restricting non-U.S. companies from investing in U.S. utilities. Interpretations that unnecessarily restrict a FUCO's engaging in non-utility businesses outside the U.S. would force non-U.S. investors to limit or divest their historical businesses in order to gain access to U.S. markets. Many investors may not wish to take such drastic steps and thus will not invest in U.S. utilities. This would be counterproductive and ultimately harmful to U.S. consumers because it would limit the extent of foreign investment in competitive energy markets. As a global investor, Endesa is not aware of any restrictions on investment in electric or gas utility operations of any country - other than the U.S. under the Act - that could work to limit the investor's operations in the other countries where it does business.
Non-U.S. holding company investors present a unique set of facts under the Act. Many non-U.S., global energy companies such as Endesa have significant, long standing utility and non-utility investments throughout the world. Likewise, such companies have built a portfolio of utility and non-utility companies best suited to the business opportunities in, and needs of, the countries where they do business. These companies have not been subject to any regulatory regime that restricted the types of businesses that they could acquire.
In the Proposing Release, the Commission recognizes that decisions regarding risk of FUCO investments should, in the first instance, be vested in the investing company's board of directors. This concept applies equally to the decision to invest in a FUCO and the decision by the FUCO as to what non-utility investments will enhance shareholder value. Companies such as Endesa have carefully built their existing businesses and constantly evaluate the risks and rewards of those businesses. To conclude that these businesses are so risky that they pose a clear threat to U.S. utility customers or the financial integrity of the holding company system is to disregard the years of careful work that has gone into building such groups. The price to a non-U.S. company of making an investment in the U.S. should not be the possibility that its other sound, legitimate world wide business activities may be hampered or restricted.
The structure of non-U.S. holding companies who have a "chain" of FUCO subsidiaries and a completely separate "chain" of U.S. utility subsidiaries is adequate to fully protect the U.S. utilities from risks associated with the FUCO investments. Further, the Commission will retain jurisdiction over affiliate transactions to ensure that utility customers are not unfairly allocated costs and do not subsidize non-utility operations. Therefore, the Commission should not seek to limit the types or amounts of non-utility investment held by FUCOs, at least in the situation where the top holding company is a non-U.S. business and the Commission should not seek to limit the ability of non-U.S. holding companies to qualify their world wide operations as FUCOs.
Endesa recognizes that in adopting Section 33 of the Act regarding FUCOs Congress was concerned that FUCOs not pose an undue risk to U.S. utility customers. The principal risk to be avoided was an excessive outflow of funds derived from U.S. operations into FUCO business with the resulting potential shortfall and harm to U.S. utility operations. Allowing a non-U.S. based holding company to continue to conduct its historical business, even in cases where the size of this business would be larger than traditionally approved for U.S. based holding company's foreign investments, will not jeopardize the goal of ensuring the continuation of sufficient capital for and proper management attention to the U.S. utility operations. These non-U.S. based holding companies, in fact, will have excess funds derived from their "FUCO" operations available to invest in U.S. utility operations, thus providing a source of capital to fund service improvements. Further, the increase in competition fostered by the entry into the U.S. market of non-U.S. holding companies will be a significant benefit to U.S. utility customers.
Rule 55 Should Not Unnecessarily Restrict "Aggregate Investment"
As noted, non-U.S. based energy companies such as Endesa have significant, long standing utility and non-utility investments. Consequently their "aggregate investment" in FUCOs is itself significant - in fact, it is their entire business. Clearly, such companies cannot take any action that would jeopardize their ability to make the additional investment in these enterprises necessary to ensure their continued healthy growth. Any rule which would materially limit the ability of a non-U.S. holding company to continue its FUCO business would likely result in that company deciding not to make any U.S. investment. This result would not be favorable for U.S. utility customers or investors.
Proposed Rule 55 changes the circumstances in which such additional investment in the FUCO can be made from that existing under current rules. Under Rule 53, a registered holding company is restricted from financing additional EWG and FUCO investments if it is not in compliance with the safe harbor provisions of that rule. Such a holding company has the option to use its own available funds, however, to make additional investments in EWGs and FUCOs without further SEC approval. Under proposed Rule 55, a holding company would not be permitted, without express SEC approval, to use even its own available cash to make additional investments in FUCOs if it were not in compliance with the proposed Rule's safe harbor provisions.
To this extent, proposed Rule 55 appears inconsistent with the intent of Congress, as noted in the Proposing Release, as well as shown in the words of the statute itself. Section 33 provides that, except as provided in that Section, holding companies are "permitted . . . (without the need to apply for, or receive approval from the Commission) to acquire and hold the securities or an interest in" one or more FUCOs. While the Commission is directed to adopt rules for the "protection of customers" of domestic utilities and for the "maintenance of the financial integrity of the registered holding company system," it is clear from the legislative history that these rules should be the least restrictive possible to achieve those goals while at the same time encouraging the globalization of the utility industry as intended by Congress. Proposed Rule 55 would in fact impose a "need to apply for, or receive approval from the Commission" before an investment could be made in a FUCO with the holding company's own funds. Endesa questions whether such a restriction is necessary.
Most non-U.S., global energy companies, such as Endesa, will have an "aggregate investment" in their historical FUCO operations which is likely to be in excess of the 50% of retained earnings safe harbor of proposed Rule 55. Unlike the U.S. based registered holding companies, who before Section 33 was adopted would have had no investment in FUCOs, the non-U.S. companies' entire operations are FUCOs. As noted, such companies are concerned that their entry into the U.S. market not jeopardize those very same existing businesses that, in general, make investing in U.S. energy companies possible. If they do not have sufficient flexibility to engage in financings generally, and to make additional investments in their FUCOs, they could be deterred from entering the U.S. markets at all.
Endesa proposes that the Commission consider making the safe harbor significantly greater than 50% of retained earnings. The experience the Commission has had with U.S. based and non-U.S. based holding companies suggests that a level of investment equal to the higher percentages of retained earnings that have been approved (as high as over 500%) would not be harmful to U.S. utility customers or the financial integrity of the holding companies. This would enhance the ability of non-U.S. registered holding companies to protect their investment in their FUCO holdings.
No "Case by Case" Approval is Required
Endesa supports the conclusion of the Commission in the Proposing Release that it is not necessary that each FUCO investment be individually approved. Such a requirement would be completely unworkable, particularly in the case of a non-U.S. based holding company. The "budget" or "shelf" approach, allowing investment for a specified period of time up to a specified amount, gives the essential flexibility to respond to ever changing conditions in the global energy business.
Reliance on Holding Company's Risk Assessment is Appropriate
Endesa applauds the Commission's recognition that the best way to assess the risks of FUCO investments is through a careful assessment by the company involved. No regulatory process could be as successful in assessing the varied risks of individual FUCO investments or the comparison of different available investments. Holding companies are risking their shareholders' money on such investments and have every incentive to mitigate risk to the fullest extent economically feasible and to choose the best investments based on an assessment of the balance between risk and reward. The Commission's decision to require holding companies to institute and follow detailed risk assessment and mitigation ratifies what companies will do anyway. The Commission should rely on this to allow the most possible flexibility in its interpretation of Section 33 of the Act.
No Further Detailed Requirements for Approval are Necessary
Proposed Rule 55's required process for board of directors approval of FUCO investments is adequate. The Rule should not require any particular specific findings. The variety of possible FUCO investments is too great for any set of specific findings to be relevant in all situations. Likewise, there should be no requirement for risk insurance. Situations will vary and companies should be free to determine the best and most economical way to mitigate risks for each particular investment.
Rule 55 Should Allow Board Pre-Approval and Committee Approval
The Commission should consider revising proposed Rule 55 to clarify that the required board of directors' approval may be either of a specific investment or of a general class of similar investments - subject to appropriate parameters imposed by the board to ensure compliance with the holding company's risk analysis and mitigation procedures. As the Commission has noted, flexibility and the ability to respond quickly are essential to success in the rapidly changing global energy markets. A holding company may lose a valuable opportunity if it must wait for specific after-the-fact board approval. It is essential that general pre-approval, within specified limits, be permitted. The Rule should also allow approval by a properly constituted and authorized committee of the board of directors.
Non-U.S. GAAP Financials Should be Allowed Where Possible
Converting local accounting statements to U.S. GAAP is time consuming and expensive. The Commission should not require a FUCO to convert or reconcile its financial statements to U.S. GAAP except in those cases where it clearly is required to enable the Commission and state commissions to adequately protect U.S. customer or investor interests. The Commission should consider a bright line rule that would provide that no U.S. GAAP financial information would be required for any company in the FUCO system which the holding company certifies has had no transactions with any U.S. utility company. The Commission should also give its Staff administrative discretion to waive any requirement that U.S. GAAP financials be prepared where it determines that this is appropriate.
We welcome the opportunity to comment on this important subject. We believe that open competition in the energy industry will be of mutual benefit to companies such as Endesa and to U.S. investors and consumers alike.
Very truly yours
Salvador Montejo Velilla