<DOC>
[106th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:60358.wais]
PUHCA REPEAL: IS THE TIME NOW?
=======================================================================
HEARING
before the
SUBCOMMITTEE ON
FINANCE AND HAZARDOUS MATERIALS
of the
COMMITTEE ON COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
__________
OCTOBER 7, 1999
__________
Serial No. 106-68
__________
Printed for the use of the Committee on Commerce
U.S. GOVERNMENT PRINTING OFFICE
60-358 CC WASHINGTON : 1999
COMMITTEE ON COMMERCE
TOM BLILEY, Virginia, Chairman
W.J. ``BILLY'' TAUZIN, Louisiana JOHN D. DINGELL, Michigan
MICHAEL G. OXLEY, Ohio HENRY A. WAXMAN, California
MICHAEL BILIRAKIS, Florida EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas RALPH M. HALL, Texas
FRED UPTON, Michigan RICK BOUCHER, Virginia
CLIFF STEARNS, Florida EDOLPHUS TOWNS, New York
PAUL E. GILLMOR, Ohio FRANK PALLONE, Jr., New Jersey
Vice Chairman SHERROD BROWN, Ohio
JAMES C. GREENWOOD, Pennsylvania BART GORDON, Tennessee
CHRISTOPHER COX, California PETER DEUTSCH, Florida
NATHAN DEAL, Georgia BOBBY L. RUSH, Illinois
STEVE LARGENT, Oklahoma ANNA G. ESHOO, California
RICHARD BURR, North Carolina RON KLINK, Pennsylvania
BRIAN P. BILBRAY, California BART STUPAK, Michigan
ED WHITFIELD, Kentucky ELIOT L. ENGEL, New York
GREG GANSKE, Iowa THOMAS C. SAWYER, Ohio
CHARLIE NORWOOD, Georgia ALBERT R. WYNN, Maryland
TOM A. COBURN, Oklahoma GENE GREEN, Texas
RICK LAZIO, New York KAREN McCARTHY, Missouri
BARBARA CUBIN, Wyoming TED STRICKLAND, Ohio
JAMES E. ROGAN, California DIANA DeGETTE, Colorado
JOHN SHIMKUS, Illinois THOMAS M. BARRETT, Wisconsin
HEATHER WILSON, New Mexico BILL LUTHER, Minnesota
JOHN B. SHADEGG, Arizona LOIS CAPPS, California
CHARLES W. ``CHIP'' PICKERING,
Mississippi
VITO FOSSELLA, New York
ROY BLUNT, Missouri
ED BRYANT, Tennessee
ROBERT L. EHRLICH, Jr., Maryland
James E. Derderian, Chief of Staff
James D. Barnette, General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
______
Subcommittee on Finance and Hazardous Materials
MICHAEL G. OXLEY, Ohio, Chairman
W.J. ``BILLY'' TAUZIN, Louisiana EDOLPHUS TOWNS, New York
Vice Chairman PETER DEUTSCH, Florida
PAUL E. GILLMOR, Ohio BART STUPAK, Michigan
JAMES C. GREENWOOD, Pennsylvania ELIOT L. ENGEL, New York
CHRISTOPHER COX, California DIANA DeGETTE, Colorado
STEVE LARGENT, Oklahoma THOMAS M. BARRETT, Wisconsin
BRIAN P. BILBRAY, California BILL LUTHER, Minnesota
GREG GANSKE, Iowa LOIS CAPPS, California
RICK LAZIO, New York EDWARD J. MARKEY, Massachusetts
JOHN SHIMKUS, Illinois RALPH M. HALL, Texas
HEATHER WILSON, New Mexico FRANK PALLONE, Jr., New Jersey
JOHN B. SHADEGG, Arizona BOBBY L. RUSH, Illinois
VITO FOSSELLA, New York JOHN D. DINGELL, Michigan,
ROY BLUNT, Missouri (Ex Officio)
ROBERT L. EHRLICH, Jr., Maryland
TOM BLILEY, Virginia,
(Ex Officio)
(ii)
C O N T E N T S
__________
Page
Testimony of:
Heaton, Sharon, Vice President and Deputy General Counsel,
Columbia Energy Group...................................... 24
Hunt, Isaac C., Jr., Commissioner, Securities and Exchange
Commission................................................. 11
Kanner, Marty, Campaign Coordinator, Consumers for Fair
Competition................................................ 55
Lhota, William J., Executive Vice President, American
Electric Power Company, on behalf of Repeal PUHCA Now!
Coalition.................................................. 41
Quirk, Sherry A., Shareholder, Verner, Liipfert, Bernard,
McPherson, & Hand, on behalf of New Orleans City Council... 61
Smith, Douglas W., General Counsel, Federal Energy Regulatory
Commission................................................. 5
Material submitted for the record by:
Halvorsen, Jerald V., President, Interstate natural Gas
Association of America, letter dated October 20, 1999, to
Hon. Mike Oxley............................................ 76
National Alliance for Fair Competition, prepared statement of 78
Plumbing-Heating-Cooling Contractors--National Assocation,
prepared statement of...................................... 82
(iii)
PUHCA REPEAL: IS THE TIME NOW?
----------
THURSDAY, OCTOBER 7, 1999
House of Representatives,
Committee on Commerce,
Subcommittee on Finance and Hazardous Materials,
Washington, DC.
The subcommittee met, pursuant to notice, at 10:05 a.m., in
room 2123, Rayburn House Office Building, Hon. Michael G. Oxley
(chairman) presiding.
Members present: Representatives Oxley, Tauzin, Gillmor,
Cox, Shimkus, Towns, Barrett, Luther, Markey and Hall.
Staff present: Brian McCullough, majority professional
staff member; David Cavicke, majority counsel; Robert Simison,
legislative clerk; and Consuela Washington, minority counsel.
Mr. Oxley. The subcommittee will come to order.
We are here today to examine the Public Utilities Holding
Company Act of 1935, better known as PUHCA. You can say that
this hearing concludes electricity week in Rayburn room 2123. I
suspect many people out in the audience have been here for so
long this week that we should have been considerate enough to
put sleeping bags and a coffee pot here in the committee room.
The Finance and Hazardous Materials Subcommittee has a
special interest in PUHCA because of the role of the SEC.
Congress turned to SEC regulation in the 1930's in order to
address shareholder and ratepayer abuses stemming from the
perplexing structure of utility holding companies. But with the
exception of PUHCA and maybe Glass-Steagall, we are living in
the 1990's and not the 1930's. Investors are adequately
protected by other measures. The responsibility for regulating
utilities has long since been capably assumed by the State
commissions and FERC. Increasingly, we are finding that
consumers are better served by a competitive market than a
regulatory regime. It is in this context that people are asking
whether PUHCA is an asset or merely antiquated.
What particularly strikes me is that the SEC itself has in
essence said that it wants out of this business. It is not
often that you hear that from a regulatory agency. But in staff
reports and today's testimony, the Commission has pointed out
PUHCA's redundancy in real-world costs. I understand that some
of our witnesses will state that PUHCA is standing in the way
of a more robust national marketplace by hemming in not just a
handful of registered holding companies, but discouraging many
other utilities from moving into new markets.
Other witnesses will argue that PUHCA should be repealed
only in conjunction with overall industry restructuring. One
issue of particular interest to me is what degree of access to
utility books and records is appropriate in the event of PUHCA
repeal. Private companies are not public libraries, and the
protection of sensitive internal information is a legitimate
concern.
It is no secret that PUHCA repeal is being discussed in the
context of larger issues. One valuable aspect of today's
subcommittee hearing is we will have a chance to learn if on
its merits as a securities statute PUHCA is still of any use,
or, worse, doing harm.
That ends the Chair's opening remarks, and I will turn to
the ranking member Mr. Towns.
Mr. Towns. Thank you very much, Mr. Chairman.
I have long maintained that electricity restructuring does
not have to be done all at once or as a complete package. In
fact, the Federal Energy Regulatory Commission took 3 years
plus to write the rule to implement the last energy policy
changes that were adopted by this committee. This suggests to
me that where restructuring issues are involved, that they are
very complex and require detailed scrutiny.
There are areas, however, which I believe the Federal
Government can and should act on to facilitate utility
restructuring. Those dozen or so utilities that are still
subjected to PUHCA are at a clear disadvantage in comparison to
their gas and electric utility competitors who are exempt from
the act's control. The SEC has signaled that they believe that
the time is long past for needed regulation by the Commission.
Unfortunately, there are some voices who believe that no
Federal forum should occur until we have a comprehensive
restructuring bill.
I would hope that good policy would not simply be held
hostage politically for the sake of a larger bill. If PUHCA
repeal is the right action, then we should move forward without
any preconditions or any hesitation.
It is my hope, Mr. Chairman, that regardless of the
Commerce Committee's final determination on an electricity
restructuring bill, that we will move to repeal the Public
Utility Holding Act in the 106th Congress, and I anxiously wait
to hear from the witnesses on this very, very important issue.
Thank you very much, Mr. Chairman, and I yield back the
balance of my time.
Mr. Oxley. The gentleman yields back. The chairman
recognizes the vice chairman of the committee Mr. Tauzin.
Mr. Tauzin. Thank you, Mr. Chairman.
This is an issue that is relatively important to me. We are
here to address the simple question of whether or not it is now
prudent to repeal the Public Utility Holding Company Act of
1935, whether it is time to enter the new millennium with a
modern mentality.
Mr. Chairman, I believe we should repeal PUHCA as soon as
possible. I asked my staff to look at the first couple of bills
that I filed in Congress, I got here in 1980, and in 1982 as
one of the first bills that I filed, House bill 6581, a bill
sponsored by myself and John Breaux of Louisiana, who is now in
the U.S. Senate. It is a simple bill, a stand-alone bill to
repeal PUHCA. 1982. Essentially we filed the same bill this
year in 1999, House bill 2363, again to repeal PUHCA.
To repeal anything around here is not an easy task. I had a
great friend of mine from the Southwest Energy Council, which I
chaired, a five-State energy compact which I chaired as a State
legislator in Louisiana. I was part of that energy compact in
order to fight the regulatory laws here in Washington that were
impeding the orderly development of energy markets in the part
of the world that produces most of the energy for America.
And that young man had moved with me. He had gotten a job
at FERC, and he came by to visit me in the first couple of
weeks of my attendance here in Congress, and I remember him
sitting down and telling me about all of his new
responsibilities for the Federal Energy Regulatory Commission.
And I smiled and I said, do you know that I got elected on a
pledge to deregulate energy? I have a promise to see what I can
do about abolishing FERC, and that means your job. And he
smiled back and he said, Billy, I am now on the B team. I said,
B team, what do you mean? He said, I will be here when you
come, and I will be here when you leave. He is still here, and
so is PUHCA, and so is FERC.
In 1935, you can make a case that PUHCA was important
because it was enacted to address rising abuses out of pyramid
corporate structures. In the 1930's, that was a real problem.
At that time applicable State and Federal laws in place were
inadequate to protect consumers and investors from arbitrary
rate hikes. But since 1935, these laws have become much more
comprehensive and sensitive to present marketing conditions.
The ability of State commissions to regulate holding company
systems together with the emergence of regulation under the
Federal Power Act of 1935, the Natural Gas Act of 1938 have
eliminated regulatory gaps that existed in 1935. The expanded
ability of State commissioners and the FERC to regulate
interaffiliate transactions has now, frankly, rendered PUHCA
unnecessary.
Despite these developments, PUHCA remains on the books.
PUHCA says to some energy companies, you can't do things that
other competing energy companies can do. It says to some energy
companies, you can't invest in efficiencies for your consumers
that its competitors can invest in. And as we move toward
deregulation of the energy markets, first as we have on the
wholesale level and now as Mr. Barton is going to attempt to
mark up a bill to deregulate on the retail level, what sense
does it make to have my energy company inhibited in making
efficiency investments that somebody else's energy company that
will compete with it is not restricted in? What sense indeed in
a free market?
Now, I realize today that, Mr. Chairman, you have got on
the panel later on, representatives of the New Orleans City
Council, which in 1982 opposed John Breaux and my efforts to
appeal PUHCA, and in 1999 are still opposing our efforts. Some
things never change. They will not convince me, and I will not
convince them, and the fact that they are here still opposing
it is an indication of how these old laws and structures remain
on the books.
But let me say something in closing, Mr. Chairman. The
reason I came to Congress as a representative of the great
State of Louisiana, having served 9 years in the State
legislature, fighting and battling the mandates and regulations
that came out of this committee, this Commerce Committee, the
reason I ran for Congress was to get on this Commerce Committee
and do what I can to tear down that awful fabric and awful
scheme of regulations which inhibited my people, the people of
Louisiana, from producing freely in a marketplace the energy
that this country needed.
And we are still about that today. That task is not
complete. It will be a little more complete, I hope, after this
hearing and after Mr. Barton begins marking up his bill,
because the Barton bill contains the PUHCA repeal that is
contained in the bill that I filed in 1982 and the one that I
filed this year.
Mr. Chairman, I remember coming to visit with the Reagan
White House, pleading with them to do something about taxation
of royalty owners in Louisiana. We were taxed at 90 percent; 90
percent of our income was taken by the Federal Government. That
is how awful the regulations and taxes and inhibitions were on
those of us who wanted to produce energy for America.We have
made a lot of gains since those days. This is one that we need
to win, too.
I want to close by saying that I can't stay. I have to be
at a whip meeting. I am part of whip organization to try to get
our legislation moving, and then I move over to the
Presidential round table where Majority Leader Dick Armey and I
will debate a much more important repeal than even PUHCA. We
are going to debate repeal of the IRS Code and the IRS itself.
I leave this issue in your good hands, Mr. Chairman.
Mr. Oxley. Mr. Luther.
Mr. Luther. Thank you, Mr. Chairman. I don't have an
opening statement.
Mr. Oxley. The gentleman from California Mr. Cox.
Mr. Cox. I just want to thank the chairman for focusing
attention on this issue. I certainly share the interest that my
colleague Mr. Tauzin just expressed in this.
It goes without saying that a hell of a lot has happened
since 1935, so we are not being precipitous in focusing our
attention on this. The Federal Power Act, the National Gas Act,
FERC and everything else that the States are doing has eclipsed
the state-of-the-art from 1935, and this is a very, very timely
issue to take up at this point, and so I congratulate the
chairman.
Mr. Oxley. I thank the gentleman.
[Additional statements submitted for the record follow:]
Prepared Statement of Hon. Paul Gillmor, a Representative in Congress
from the State of Ohio
Mr. Chairman, I want to thank you for calling this second hearing
on the subject of the Public Utility Holding Company Act (PUHCA). As
you are aware, this Federal law has tremendous reach in our state of
Ohio and I am glad we are taking to examine its implications.
Since our hearing largely expands upon the work this panel began a
few weeks ago, I will not spend a great deal of time re-outlining my
position on this issue. Rather, I want to take a brief moment to
recognize and welcome a fellow ``Buckeye'' to our hearing.
Bill Lhota has been in the American Electric Power Company (AEP)
system for almost 35 years, serving now as Executive Vice President.
His current responsibilities include energy transmission and
distribution services, as well as pricing functions and corporate,
consumer, and environmental affairs for AEP's seven state territory.
His counsel has been terribly helpful to me over the years and his
insight on PUHCA in a deregulating electric market will be most
insightful. I look forward to hearing his testimony.
Again, Mr. Chairman, thank you for this time and I look forward to
the panels we will hear from today.
______
Prepared Statement of Hon. Tom Bliley, Chairman, Committee on Commerce
I commend you, Mr. Chairman, for holding this hearing today on
PUHCA. This is a statute that crosses Subcommittee lines and I
appreciate you holding this hearing in a timely fashion. The Securities
and Exchange Commission administers the Act and therefore maintains a
role in the legislative process regarding this aspect of electricity
deregulation. This is a statute in the securities laws, and therefore
an appropriate hearing for the Subcommittee on Finance and Hazardous
Materials.
You have all heard me say I want competition for retail electricity
consumers. Given that competition is now the engine driving market
developments in the utility industry, PUHCA reform is widely supported.
Combined with greater discipline imposed on holding companies by the
markets, concerns about abusive practices by the holding companies have
changed.
The SEC conducted a study of the Act and issued a report in 1996 on
its findings. The Commission's recommendation then, as is still the
case, is for conditional repeal. However, I believe that PUHCA repeal
should be linked to competition. Competition is a far better protector
of consumers than regulation. In 24 States, with 60% of the population,
the decision has been made to move from monopoly control of retail
rates, to competitive electricity sales. But in a case where there is
no competition (which is the case for roughly 40% of the nation's
ratepayers) some regulation is needed during the transition to a
national marketplace for electricity.
Thus, I continue to believe that repeal of PUHCA, absent
comprehensive deregulation legislation, is a mistake. Market power
issues cannot be solved by PUHCA repeal without companion legislation
that addresses the much larger competitive issues.
PUHCA repeal is a provision that has always been closely linked to
comprehensive electricity deregulation and is therefore a timely
hearing. The Subcommittee on Energy and Power is scheduled to markup
comprehensive electricity deregulation legislation this month.
Thank you once again, Mr. Chairman. I look forward to hearing the
testimony of our witnesses today.
Mr. Oxley. The Chair now turns to the first panel. Let me
introduce both of them. Mr. Douglas W. Smith, general counsel
for FERC, and Isaac C. Hunt of the SEC. Welcome. Let's begin
with Mr. Smith.
STATEMENTS OF DOUGLAS W. SMITH, GENERAL COUNSEL, FEDERAL ENERGY
REGULATORY COMMISSION; AND ISAAC C. HUNT, JR., COMMISSIONER,
SECURITIES AND EXCHANGE COMMISSION
Mr. Smith. Mr. Chairman and members of the subcommittee,
good morning. My name is Douglas Smith, and I am the general
counsel of the Federal Energy Regulatory Commission. I am here
today as a Commission staff witness and do not speak for the
Commission or for individual members of the Commission.
I did want to note that Chairman Hoecker, the Commission's
Chairman, regrets that he was not able to participate in this
hearing personally. He was planning to participate before the
hearing was rescheduled.
Mr. Oxley. We were victims of the hurricane, and we
appreciate your being here.
Mr. Smith. My testimony will address the Public Utility
Holding Company Act of 1935 and other related issues arising in
the debate relating to the restructuring of the electric
industry.
Competition is growing in bulk power markets, spurred by
reforms of the Energy Policy Act of 1992 and the Commission's
efforts to remove barriers to competition and to let markets--
instead of regulators--determine the price of wholesale power.
Competition in wholesale markets ultimately reduces prices for
end users. Competition can still be impaired, however, by
cross-subsidization and the exercise of market power.
As Congress considers reform or repeal of PUHCA, it is
critical that regulators have an updated and effective set of
tools to combat cross-subsidization and market power if the
public is to benefit from competition in the generation sector.
Thus, repeal of PUHCA is appropriate only if FERC and State
regulators are given adequate authority to examine the books
and records of companies affiliated or associated with public
utilities, in order to prevent cross-subsidization of
entrepreneurial ventures by captive utility customers. Such
cross-subsidization occurs if utilities with captive customers
pay an excessive price for goods and services purchased from
affiliated or associated companies, or if they charge an
inadequate price for goods and services provided to those
companies.
If PUHCA is not repealed in its entirety, Congress should
address the problem created by the court's decision in the Ohio
Power case. Under that decision, FERC cannot examine the
reasonableness or prudence of costs incurred by a public
utility under a contract for nonpower goods or services with an
affiliated company belonging to the same registered holding
company. The result of this decision is that utility customers
served by registered holding companies have less protection
than customers served by nonregistered systems.
The impact of PUHCA reform proposals on competition and
consumer interests should be evaluated in the context of
accompanying proposals for Federal Power Act reforms. Review of
public utility mergers under section 203 of the Federal Power
Act remains essential to protect consumers against market power
and other possible adverse effects of mergers, and the
authority to conduct these reviews should not be compromised.
The Federal Power Act should be amended to clarify the
Commission's jurisdiction to review mergers of public utility
holding companies. Moreover, to guard against undue
concentration in generation markets that could undermine
competition, section 203 review should be extended to
transactions involving only generation facilities.
Ensuring fair access to essential transmission services is
also critical to support competitive power markets. In this
regard the Federal Power Act should be reformed to extend the
Commission's open access transmission authority to all
transmitting utilities in the lower 48 States, to reinforce the
Commission's authority to promote regional management of the
transmission grid through regional transmission organizations,
and to establish a fair and effective program of mandatory
reliability standards.
Several pending legislative proposals would also enhance
Commission authority to remedy market power outside the context
of a merger or rate review. These proposals would, for
instance, permit the Commission, upon request, to assist a
State commission that identifies market power problems in its
retail market, but lacks adequate authority to address the
problem. As the Commission seeks to move toward light-handed
regulation of competitive markets, its ability to monitor the
market and to identify and effectively remedy exercises of
residual market power becomes more important.
Thank you again for the opportunity to offer my views this
morning. I would be pleased to answer any questions you may
have.
[The prepared statement of Douglas W. Smith follows:]
Prepared Statement of Douglas W. Smith, General Counsel, Federal Energy
Regulatory Commission
Mr. Chairman and Members of the Subcommittee: Good morning. My name
is Douglas Smith, and I am the General Counsel of the Federal Energy
Regulatory Commission (Commission or FERC). I appear as a Commission
staff witness, and do not speak on behalf of the Commission or any
Commissioner. Thank you for the opportunity to appear before you today.
My testimony will address the Public Utility Holding Company Act of
1935 (PUHCA) and other related issues in the restructuring of the
electric utility industry.
My testimony makes three key points:
(1) Repeal of PUHCA is appropriate only if FERC and the states are
given adequate authority to examine the books and records of
companies affiliated or associated with public utilities in
order to prevent subsidization of entrepreneurial ventures by
captive utility customers.
(2) As the industry moves toward competitive power markets, regulators
must have effective tools for addressing market power problems.
(a) Federal Power Act (FPA) review of public utility mergers
remains essential to protect consumers against market power
and other possible adverse effects of mergers.
(b) FPA merger review should be extended to cover generation-only
mergers and utility holding company mergers.
(c) Regulators need effective tools to protect wholesale and retail
customers from the exercise of market power that does not
arise from a merger.
(3) In order to address transmission market power and promote regional
market efficiencies, Congress also should reinforce the
Commission's authority to promote establishment of, and
participation in, regional transmission organizations.
In sum, it is critical that regulators have an updated and effective
set of tools to guard against cross-subsidization and the exercise of
market power to ensure that the public benefits from competition in the
generation sector.
i. introduction
Let me begin by explaining the Commission's role in regulating the
utility industry. In enacting Part II of the FPA in 1935, one of the
primary Congressional goals was to protect electric ratepayers from
abuses of market power, such as excessive or discriminatory rates
imposed by utilities with a monopoly or other forms of market power. In
furtherance of this goal, Congress directed the Commission to oversee
sales for resale and transmission service provided by public utilities
in interstate commerce. Under sections 205 and 206, the Commission must
ensure that the rates, terms and conditions of these services are just,
reasonable, and not unduly discriminatory or preferential. Under
section 203, the Commission must review proposed mergers, acquisitions
and dispositions of jurisdictional facilities by public utilities, and
must approve such transactions if they are consistent with the public
interest. The Commission's regulation under these sections applies only
to ``public utilities,'' which mainly include investor-owned utilities
and exclude the federally-owned utilities, municipal utilities, and
most rural electric cooperatives.
The traditional regulatory approach has been to regard electricity
generation as a natural monopoly, and to address market power and
protect ratepayer interests primarily by relying on cost-of-service
rate regulation. In the 1980s and early 1990s, however, industry
developments indicated that the interests of ratepayers could be better
protected by competition in generation markets than by cost-based
regulation for wholesale sales. The benefits of competition in place of
traditional regulation were increasingly evident in other industries,
such as trucking, railroads, telecommunications and natural gas. Also,
prompted by a range of economic, legislative and technological factors,
some competition among power generators already had begun developing in
the electric industry. One key factor was the Public Utility Regulatory
Policies Act of 1978 (PURPA), which opened the door for non-utility
generators. In the Energy Policy Act of 1992, Congress strongly
endorsed competition in wholesale power markets with amendments to the
FPA and PUHCA.
The Commission has pursued this pro-competition focus by ordering
open access to transmission facilities in Order No. 888, and in its
merger and wholesale rate policies. The Commission's primary focus
shifted from cost-based ratemaking for wholesale sales to creating the
conditions for robust competition in the bulk power market. This
transition has required the Commission to pay increasing attention to
issues of market structure, market power, and market monitoring.
The growth of competition in the electricity industry has triggered
debate on a wide range of possible changes in federal law. Chairman
Hoecker and I have testified on some of these changes in other recent
Congressional hearings. For example, we believe that Congress should
adopt legislation bringing all transmission facilities in the lower 48
states within the Commission's open access transmission authority, and
establishing a fair and effective program to protect bulk power
reliability. Today, however, my testimony will focus on three issues--
PUHCA reform; merger review and market power; and regional transmission
organizations.
ii. public utility holding company act
When PUHCA was enacted in 1935, the utility industry was dominated
by a small number of holding companies. For various reasons, these
companies and their utility subsidiaries were often able to evade
effective regulation and, as a result, charge excessive rates for
electric energy. PUHCA was intended primarily to restrict the abusive
practices of these holding companies and to allow effective regulation
of transactions between or among holding company subsidiaries. PUHCA
was enacted simultaneously with Part II of the FPA, which provided the
framework for Federal regulation of public utilities, as described
above.
As a general matter, the Securities and Exchange Commission (SEC)
regulates registered utility holding companies under PUHCA while, under
the FPA, FERC regulates the operating electric utility and gas pipeline
subsidiaries of the registered holding companies. The agencies often
have responsibility to evaluate the same general matters, but from the
perspective of different members of the holding company system and for
different purposes. FERC focuses primarily on a transaction's effect on
utility ratepayers. The SEC focuses primarily on a transaction's effect
on corporate structure and investors.
With increasing competition in power markets, however, PUHCA may no
longer advance consumers' interests. For example, acquisitions by
registered holding companies generally must tend toward the development
of an ``integrated public-utility system.'' To meet this requirement,
the holding company's system must be ``physically interconnected or
capable of physical interconnection'' and ``confined in its operations
to a single area or region.'' This requirement tends to result in
geographic concentrations of generation ownership, which in turn
enhances market power and diminishes competition.
In the Energy Policy Act of 1992, Congress initially addressed the
tension between PUHCA and competition. Congress allowed an exemption
from PUHCA regulation for companies engaged exclusively in the business
of selling electric energy at wholesale. By using this exemption, many
new companies have begun competing in wholesale markets across the
country. These new exempt wholesale generators (or EWGs) cannot compete
for retail sales, however, even where States have allowed retail
competition.
Many argue now that PUHCA should be repealed entirely. They assert
that increasing competition in the electric industry, and improvements
in state and federal rate regulation since the 1930s, make PUHCA an
anachronism or, worse, an impediment to further competition. PUHCA's
encouragement of regional concentration of generation ownership, for
example, is undesirable in competitive markets. Thus, it is an
appropriate time to reform or repeal PUHCA.
However, any legislation to reform or repeal PUHCA must ensure that
FERC and the States have adequate authority to examine the books and
records of all companies in a holding company system that are relevant
to costs incurred by an affiliated or associated public utility. This
type of authority will provide an effective tool to protect against
affiliate abuse and ensure that captive utility consumers do not cross-
subsidize entrepreneurial ventures. Absent this type of authority,
utilities may be able to subsidize affiliated companies at the expense
of captive customers by, for example, paying an excessive price for
goods and services purchased from affiliated companies or charging an
inadequate price for goods and services provided to affiliated
companies. Cost allocation arrangements among such companies can also
result in an improper shift of costs to captive customers.
If PUHCA is not repealed, Congress should at least address the Ohio
Power problem. In a 1992 decision by the United States Court of Appeals
for the District of Columbia Circuit, Ohio Power Company v. United
States, 954 F.2d 779 (D.C. Cir. 1992), the court held that if a public
utility subsidiary of a registered holding company enters into a
service, sales or construction contract with an affiliate company, the
costs incurred under that affiliate contract cannot be reviewed by
FERC. The court reasoned that because the SEC has to approve the
contract before it is entered into, FERC cannot examine the
reasonableness or prudence of the costs incurred under that contract.
FERC must allow those costs to be recovered in wholesale electric
rates, even if the utility could have obtained comparable goods or
services at a lower price from a non-affiliate.
The Ohio Power decision has left a significant gap in rate
regulation of electric utilities. The result is that utility customers
served by registered holding companies have less rate protection than
customers served by non-registered systems. If the contract approval
provisions of PUHCA are retained, this regulatory gap should be closed
to restore FERC's ability to regulate the rates of utilities that are
members of registered holding company systems.
iii. merger review and market power
As noted above, the Commission reviews proposed mergers,
acquisitions and dispositions of jurisdictional facilities by public
utilities, and must approve such transactions if they are consistent
with the public interest. In a policy statement adopted in 1996, the
Commission stated that, in assessing whether a proposed merger was in
the public interest, it would consider the effects of the merger on
competition, on rates and on regulation.
In most cases decided since then, the primary issue has been the
effect on competition. Consistent with its overarching goal of
promoting competition in wholesale power markets, the Commission seeks
to ensure that mergers will not harm competition. If a merger is likely
to harm competition, mitigation of this potential harm is required in
order to ensure that the merger is consistent with the public interest.
Under this authority, the Commission has required merger applicants
to prevent competitive harm by providing others with access to their
transmission facilities, thus ensuring that the merger did not reduce
the competitive options available to wholesale buyers and sellers.
Similarly, the Commission has accepted commitments by applicants to
turn over control of their transmission facilities to independent
system operators (ISOs), as a way of ensuring the merger did not cause
competitive harm. The Commission also has required rate protection for
captive customers. These and other conditions and commitments imposed
or accepted by the Commission have provided substantial benefits to the
public and, thus, ensured that the mergers were consistent with the
public interest.
I would also emphasize that, in the past few years, the Commission
has improved the timeliness of its merger decisions significantly. In
its 1996 policy statement on mergers, the Commission made a commitment
to act on mergers within 90 days of the end of a 60-day public comment
period (a total of 150 days). Since making that commitment, the
Commission has received 30 merger applications and acted on 23 of them,
the other seven having been filed only recently. The Commission set
only three of these 23 cases for hearing. The Commission has met its
target of acting within 150 days consistently. In fact, in a number of
cases, the Commission has acted much more quickly, within 93-117 days.
The Commission also has sought to authorize other corporate
transactions as quickly as reasonably possible, often in as few as 35
days.
A few have argued that the Commission should no longer review
mergers. They posit that the Commission's review is redundant of the
efforts of the U.S. Department of Justice or the Federal Trade
Commission. I disagree.
First, the Commission's day-to-day involvement with the electric
industry gives it a valuable and detailed understanding of electricity
markets as they are shaped by the transmission grid. This expertise can
provide critical insights in assessing a merger's competitive effects.
Second, the Commission's duty to consider the public interest
encompasses not only competitive effects but also other effects, such
as possible increases in cost-based rates for transmission service.
Since certain aspects of the utility industry are not subject to
effective competition, the scope of inquiry conducted by the Commission
helps to protect consumers from effects not considered by the antitrust
agencies.
Third, the Commission's procedures permit public participation in a
timely process to determine the public interest. This public review
process remains important in the context of today's electric industry,
given the vital importance of the electric industry to American
citizens and the national economy.
With the possible repeal of PUHCA's corporate structure
restrictions, it is essential that the Commission's merger review under
the FPA remains intact. The Commission's merger review is a key
component of market oversight, especially in a competitive era.
Congress should act to close two gaps in the Commission's jurisdiction
over mergers, especially if the corporate oversight restrictions of
PUHCA are eliminated.
The first such gap is that the Commission has no direct
jurisdiction over transfers of generation facilities. It can review
transactions involving a public utility only when they involve other
facilities that are jurisdictional (such as transmission facilities or
contracts for wholesale sales). Thus, although concentration of
generation assets may directly affect competition in wholesale markets,
transactions involving only generation assets may not be subject to FPA
review.
Second, the Commission lacks direct jurisdiction over mergers of
public utility holding companies. While the Commission has considered
such mergers to involve jurisdictional indirect mergers of public
utility subsidiaries of the holding companies, or changes in control
over the jurisdictional facilities of the public utility subsidiaries,
the FPA is not explicit on this point.
These jurisdictional gaps could be usefully addressed in the course
of legislative reform. Appropriate legislative language can be found in
H.R. 2944 (Sec. 401), offered by Representative Barton, H.R. 1828
(Sec. 502), offered by Representatives Bliley and Dingell on behalf of
the Administration, and in H.R. 2050 (Sec. 110), offered by
Representatives Largent and Markey.
Several pending legislative proposals would enhance the
Commission's authority to address market power outside the context of
mergers. For example, the Administration's proposed bill, H.R. 1828,
would allow the Commission to address market power in retail markets,
if asked to do so by a state lacking adequate authority to address the
problem. It would also give the Commission explicit authority to
address market power in wholesale markets by requiring a public utility
to file and implement a market power mitigation plan. H.R. 2050,
sponsored by Congressmen Largent and Markey, also contains provisions
that would allow mitigation of market power, to the benefit of
competition and consumers. Such provisions are particularly desirable
in circumstances where a State lacks adequate authority to address
market power issues and seeks FERC's assistance. As the Commission
moves toward light-handed regulation, its ability to monitor the market
and to identify and address exercises of residual market power becomes
more important.
iv. regionalization of transmission
For many decades, most public utility mergers have involved
utilities that were adjacent or near to each other. In large part, this
stems from PUHCA's integration requirement. As noted above, this
requirement is hard to reconcile with expanding competition in
generation markets. However, regional aggregation of transmission
facilities can still provide substantial benefits. As Congress
considers repealing PUHCA, Congress should also consider the need for
new tools for promoting regional operation of transmission facilities.
On this point, the Commission currently is exploring (through a
proposed rulemaking issued in May of this year) how it might promote
the formation of regional transmission organizations (RTOs) such as
ISOs and independent companies that own and operate transmission
facilities (transcos). An RTO that covers an appropriately configured
region, has adequate operational control over the transmission grid,
and is independent of the financial interests of power market
participants, can address obstacles to competition by reducing rate
pancaking, eliminating opportunities for bias in transmission
operations, and allowing for more efficient and reliable operation and
planning of the transmission grid.
Any legislation addressing the restructuring of the electric
utility industry should reinforce the Commission's authority to promote
regional management of the transmission grid through RTOs. RTOs should
be the platform for bulk power competition and enhanced reliability,
which are valuable consumer protections. Without reinforcement of our
authority by Congress, efforts to develop RTOs may take longer than
necessary and may not include transmission owners that are not public
utilities, and therefore ultimately may fail to provide the full
competitive opportunities achievable through regionalization of grid
management. Authority to effectively promote RTO development is
necessary to ensure that customers have access to as many competitive
choices as the market can provide.
v. conclusion
As we seek to rely more heavily on competitive markets as opposed
to traditional price regulation to protect the interests of wholesale
electricity customers, regulators need appropriate tools to address
cross-subsidization and market power problems that may threaten
competition.
PUHCA reform is appropriately considered in the debate on
comprehensive, pro-competitive electricity legislation. If Congress
repeals PUHCA, Congress should simultaneously ensure that FERC and the
states have adequate authority to examine the books and records of all
utility affiliates and associates in order to prevent cross-
subsidization by captive utility customers. If Congress does not repeal
PUHCA in its entirety, the Ohio Power problem should be addressed, at a
minimum, to ensure that FERC has adequate authority to review affiliate
transactions to ensure just and reasonable rates and prevent cross-
subsidization.
As the Commission and the Congress both seek to promote competition
in bulk power markets, it is essential to effectively address market
power. With respect to ensuring fair access to essential transmission
services, reforms to the Federal statutory scheme are appropriate to
extend the Commission's open access transmission authority to all
transmitting utilities in the lower 48 States, reinforce the
Commission's authority to promote regional management of the
transmission grid through RTOs, and establish a fair and effective
program of mandatory reliability standards. Moreover, it is critical to
retain and update the FPA requirement for public interest review of
mergers. Finally, providing ample regulatory authority to address
market power problems in non-merger contexts is appropriate to foster
competitive power markets.
Thank you again for the opportunity to offer my views here this
morning. I would be pleased to answer any questions you may have.
Mr. Oxley. Thank you, Mr. Smith.
Mr. Hunt, welcome back to the committee.
STATEMENT OF ISAAC C. HUNT, JR.
Mr. Hunt. Thank you, Mr. Chairman, members of the
subcommittee. I am Commissioner Isaac C. Hunt, Jr., of the U.S.
Securities and Exchange Commission. I am pleased to have this
opportunity to testify before you this morning on behalf of the
SEC regarding the Public Utility Holding Company Act of 1935.
The Commission continues to support efforts to repeal the 1935
act and replace it with legislation that preserves certain
important consumer protections.
During the first quarter of this century, the electric and
gas utility industries had developed serious problems through
the misuse of the holding company structure. The 1935 act was
passed by Congress to address these problems. Reorganization
and simplification of existing public utility holding companies
in order to eliminate those abuses was a major part of the
SEC's work in the years following the passage of the 1935 act.
By the early 1980's, the SEC had concluded that the 1935
act had accomplished its basic purposes, and its remaining
provisions, to a large extent, either duplicated other State or
Federal regulation or otherwise were no longer necessary to
prevent the recurrence of the abuses that led to its enactment.
The SEC concluded that many aspects of the 1935 act regulation
had become redundant: State regulation had expanded and
strengthened since 1935, and the SEC had enhanced its
regulation of all issuers of securities, including public
utility holding companies. In addition, institutional
investors, such as pension funds and insurance companies, had
become more sophisticated and demanded more detailed
information from all issuers of securities than was previously
available. Changes in the accounting profession and the
investment banking industry also provided investors and
consumers with a range of protections unforeseen in 1935.
Therefore, the SEC unanimously recommended that Congress repeal
the statute.
Because the potential for abuse through the use of
multistate holding company structures, and related concerns
about consumer protection, continued to exist, and because of a
lack of consensus for change, repeal legislation was not
enacted in the early 1980's. Since that time, however, the SEC
has continued its efforts to administer the 1935 act flexibly,
to accommodate developments in the industry while adhering to
the basic purpose of the statute. In addition, Congress has
created a number of statutory exceptions to the regulatory
framework of the 1935 act.
In the summer of 1994, in light of regulatory and other
changes taking place in the utility industry, the SEC staff, at
the direction of Chairman Arthur Levitt, undertook a study of
regulation of public utility companies which culminated in a
June 1995 report. Based on the report, the SEC has recommended
that Congress consider three legislative options for
eliminating unnecessary regulatory burdens. The preferred
option is repeal of the 1935 act, accompanied by the creation
of additional authority at the State and Federal level to
permit the continued protection of consumers. The Federal
Energy Regulatory Commission should have the authority to
exercise jurisdiction over transactions among holding company
affiliates. The FERC and State utility commissions should be
able to review these transactions by having access to books and
records. This course of action will achieve the economic
benefits of unconditional repeal and also protect consumers.
The SEC is aware that proposals of comprehensive reform of
energy legislation are under consideration by Congress. Repeal
of the 1935 act could also be considered as part of this
overall reform. The SEC continues to support a comprehensive
approach to reform of the 1935 act.
The SEC has implemented many of the numerous administrative
initiatives that were recommended in the report to streamline
regulation. Despite the effects of these initiatives,
developments in the utility industry are resulting in increased
activity under the 1935 act, especially in the areas of mergers
and acquisitions, diversification and affiliate transactions.
These developments include the accelerating pace of competition
initiatives at the State level, FERC's leadership in addressing
open transmission and related structural issues, and the
increasing internationalization of the utility industry.
These developments raise additional challenges in applying
the act to an industry that bears little resemblance to the
industry which existed in 1935. Moreover, during 1998, mergers
resulted in the formation of three new registered holding
companies. The SEC expects that several holding companies will
be required to register under the act in the near future.
Hence, continuation of the 1935 act in its present form will
require additional resources.
The options of conditional repeal or an expansion of the
SEC's exemptive of authority also raise the issue of resources.
Repeal of the 1935 act would not achieve significant cost
savings for the Federal Government, particularly if some of the
responsibilities now handled by the SEC were carried out by the
FERC. Expanded exemptive authority, on the other hand, could
require greater resources, in view of the need to evaluate and
implement broad requests for exemptive relief. The SEC
respectfully defers to the judgment of Congress as to whether
the public interest is better served by separate independent
repeal of the 1935 act or repeal as part of a larger
legislative initiative.
The SEC continues to take seriously its duties to
administer faithfully the letter and spirit of the 1935 act,
and is committed to promoting the fairness, liquidity and
efficiency of United States securities markets. By supporting
the conditional repeal of the 1935 act, the SEC hopes to reduce
unnecessary regulatory burdens on America's energy industry
while providing adequate protections for energy consumers.
And of course, Mr. Chairman, I would be pleased to answer
your and the committee's questions.
[The statement of Isaac C. Hunt, Jr. follows:]
Prepared Statement of Isaac C. Hunt, Jr., Commissioner, U.S. Securities
and Exchange Commission
Chairman Oxley, Ranking Member Towns, and Members of the
Subcommittee: I am pleased to have this opportunity to testify before
you on behalf of the Securities and Exchange Commission (``SEC''). The
SEC continues to support repeal of the Public Utility Holding Company
Act of 1935 (``1935 Act''). Repeal should be done in a manner that
eliminates duplicative regulation while also preserving important
protections for customers of utility companies in multistate holding
company systems.
i. introduction
The electric and gas utility industry had developed serious
problems in the first quarter of the century through the misuse of the
holding company structure.<SUP>1</SUP> The 1935 Act was enacted to
address these problems. In the years following passage of the 1935 Act,
the SEC worked to reorganize and simplify existing public utility
holding companies in order to eliminate abuses.
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\1\ These abuses included inadequate disclosure of the financial
position and earning power of holding companies, unsound accounting
practices, excessive debt issuances and abusive affiliate transactions.
See 1935 Act section 1(b), 15 U.S.C. Sec. 79a(b).
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In the early 1980's, the SEC unanimously recommended that Congress
repeal the statute.<SUP>2</SUP> The SEC concluded that the 1935 Act had
accomplished its basic purpose and that its remaining provisions, to a
large extent, either duplicated other state or federal regulation or
otherwise were no longer necessary to prevent recurrence of the abuses
that led to its enactment. Many aspects of 1935 Act regulation had
become redundant: state regulation had expanded and strengthened since
1935, and the SEC had enhanced its regulation of all issuers of
securities, including public utility holding companies. In addition,
institutional investors such as pension funds and insurance companies
had become more sophisticated and demanded more detailed information
from all issuers of securities than previously available. Changes in
the accounting profession and the investment banking industry also had
provided investors and consumers with a range of protections unforeseen
in 1935.
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\2\ See Public Utility Holding Company Act Amendments: Hearings on
S. 1869, S. 1870 and S. 1871 Before the Subcomm. on Securities of the
Senate Comm. on Banking, Housing, and Urban Affairs, 97th Cong., 2d
Sess. 359-421 (1982) (statement of SEC).
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Because the potential for abuse through the use of multistate
holding company structures, and related concerns about consumer
protection, continued to exist, and because of a lack of consensus for
change, repeal legislation was not enacted in the early 1980s. Since
that time, however, the SEC has continued its efforts to administer the
1935 Act flexibly to accommodate developments in the industry while
adhering to the basic purpose of the statute. In addition, Congress has
created a number of statutory exceptions to the regulatory framework of
the 1935 Act.<SUP>3</SUP>
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\3\ Most recently, Congress enacted the Telecommunications Act of
1996. Pub. L. 104-104, 110 Stat. 56 (1996). The Telecommunications Act
permits registered holding companies, without prior SEC approval under
the 1935 Act, to acquire and retain interests in companies engaged in a
broad range of telecommunications activities.
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ii. the sec's study
In response to continuing changes in the utility industry in recent
years, and the accelerated pace of those changes, Chairman Arthur
Levitt directed the SEC's Division of Investment Management in 1994 to
undertake a study, under the guidance of then-Commissioner Richard Y.
Roberts, to examine the continued vitality of the 1935 Act. The impetus
for the study was the changing landscape in public utility regulation
noted above, and the SEC's increasing need to respond flexibly in the
administration of the 1935 Act. Its purpose was to identify unnecessary
and overlapping regulation, and, at the same time, identify those
features of the statute that remain appropriate in the regulation of
the contemporary electric and gas industries.<SUP>4</SUP>
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\4\ The study focused primarily on registered holding company
systems, of which there are currently nineteen. The 1935 Act was
enacted to address problems arising from multistate operations, and
reflects a general presumption that intrastate holding companies and
certain other types of holding companies which the 1935 Act exempts and
which now number more than 100, are adequately regulated by local
authorities. Despite their small number, registered holding companies
account for a significant portion of the energy utility resources in
this country. As of December 31, 1998, the nineteen registered holding
companies owned more than $170 billion of electric utility assets,
approximately 25 percent of all assets owned by investor-owned electric
utilities. Electric utilities owned by registered holding companies
served 26.4 million customers, or approximately 22% of all electric
customers in the United States.
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The SEC staff worked with representatives of the utility industry,
consumer groups, trade associations, investment banks, rating agencies,
economists, state, local and federal regulators, and other interested
parties during the course of the study. In June 1995, the Commission
released a report (``Report'') of the staff's findings made during the
study. Based on these findings, the SEC has recommended, and continues
to recommend, that Congress repeal the 1935 Act. At the same time,
however, the SEC also recommends enactment of legislation to provide
necessary authority to the Federal Energy Regulatory Commission
(``FERC'') and the state public utility commissions relating to
affiliate transactions, audits and access to books and records, for the
continued protection of utility consumers.
The SEC supports conditional repeal of the 1935 Act for several
reasons. As the Report indicates, portions of the 1935 Act, such as
those governing issuance of securities, acquisition of other utilities,
and acquisition of nonutility businesses by registered holding
companies, largely duplicate other existing regulation and controls
imposed by the market. Nevertheless, there is a continuing need to
ensure the protection of consumers.
Electric and gas utilities have historically functioned as rate-
regulated monopolies. There is a continuing risk that these monopolies,
if left unchecked, could charge higher rates and use the additional
funds to subsidize affiliated non-utility businesses to boost their
competitive positions in other markets (``cross-subsidization''). As
long as electric and gas companies continue to function as monopolies,
the need to protect against the cross-subsidization of nonutility
businesses will remain. An effective way to guard against cross-
subsidization is audits of books and records and federal oversight of
affiliate transactions.
Utility rates are regulated by state authorities, and regulators
vary in the degree of scrutiny they give these rates. A survey of state
regulation, undertaken in conjunction with the study, revealed that the
states may not have adequate authority to perform audit and review
functions with respect to multistate holding companies. The provisions
of the 1935 Act provide significant assistance to these states in their
effort to protect utility consumers. Earlier efforts to repeal the 1935
Act may have failed because they did not address this potential
``regulatory gap'' in consumer protection.
iii. proposals to repeal the 1935 act
Repeal of the 1935 Act may be accomplished either separately or as
part of a more comprehensive package of energy reform legislation.
Several bills have been introduced in both Houses of Congress during
the current session that provide for the repeal of the 1935 Act, either
as part of comprehensive energy restructuring or on a stand-alone
basis. Five bills have been introduced in the House of Representatives
(collectively, the ``House Bills''). H.R. 2363, introduced on June 25,
1999 by Congressman Tauzin, Congressman Towns and several other members
of Congress, would repeal the 1935 Act on a stand-alone basis. Four
bills, including H.R. 1828, introduced by Chairman Bliley and
Congressman Dingell (by request) on May 17, 1999, and H.R. 2050,
introduced by Congressman Largent and Congressman Markey on June 8,
1999, would repeal the 1935 Act as part of broader energy-related
legislation.<SUP>5</SUP> The House Bills share many common provisions.
For example, the House Bills would provide the FERC with the right to
examine books and records of registered holding companies and their
affiliates that are relevant to costs incurred by associated utility
companies, in order to protect ratepayers. The House Bills also would
provide an interested state commission with access to such books and
records (subject to protection for confidential information), if they
are relevant to costs incurred by utility companies subject to the
state commission's jurisdiction and are needed for the effective
discharge of the state commission's responsibilities in connection with
a pending proceeding. Finally, the House Bills would provide a
transition period in which states, utilities and other parties affected
by the change in the regulatory structure could prepare for the new
framework. The House Bills accomplish many of the goals of the
conditional repeal advocated by the SEC.<SUP>6</SUP>
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\5\ H.R. 1587, introduced by Congressman Stearns on April 27, 1999,
and H.R. 667, introduced by Congressman Burr on February 10, 1999,
would also repeal the 1935 Act as part of comprehensive energy-related
legislation.
Three Senate bills (S.516, S.1284 and S.1047) would repeal the 1935
as part of broader energy-related legislation. Another Senate bill,
S.313, would repeal the 1935 Act on a stand-alone basis. The 1935 Act
repeal provisions in the Senate bills are substantially the same as
those in the House Bills other than for the provisions of H.R. 1587 and
H.R. 2050 discussed below.
\6\ There are some differences among the House Bills. For example,
H.R. 1587, among other things, would exempt from its provisions holding
companies currently exempt from registration under the 1935 Act. More
significantly, H.R. 2050 provides that the 1935 Act would remain in
effect for any holding company system that has a public utility
subsidiary that provides retail electric or gas service in two or more
states in which a state regulatory authority has not provided notice of
retail competition pursuant to section 152 of the Public Utility
Regulatory Policies Act of 1978 or which has not otherwise required
distribution utilities to provide open access service. Repealing the
1935 Act on a company-by-company basis, based on a determination of the
status of state initiatives, presents complexities and uncertainties
that require further analysis.
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As the SEC stated in testimony on similar bills introduced in the
last Congress to repeal the 1935 Act, the House Bills do not give the
FERC the authority it needs to oversee transactions among affiliates in
holding company systems and, in this respect, do not reflect the SEC's
preferred legislative option.<SUP>7</SUP> Provisions granting access to
books and records provide the FERC and the state commissions with the
authority they need to identify affiliate transactions, review their
terms and evaluate their effects on utility costs and rates. However,
the potential for cross-subsidization and consequent detriment to
consumers remains, and the SEC believes it is important that the FERC
have the flexibility to engage in more extensive regulation, if
necessary. As a result, the SEC continues to support a broader grant of
authority to the FERC to oversee these transactions, including, if the
FERC deems it appropriate, prior review and approval of affiliate
transactions.
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\7\ See The Public Utility Holding Company Act of 1997: Hearings on
S.621 Before the Senate Comm. on Banking, Housing, and Urban Affairs,
105th Cong., 1st Sess. (1997) (testimony of Isaac C. Hunt, Jr.,
Commissioner, SEC); and Regarding Repeal of the Public Utility Holding
Company Act of 1935: Hearings on S.621 Before the Senate Comm. on
Energy and Natural Resources, 105th Cong., 1st Sess. (1997) (testimony
of Barry Barbash, Director, Div. of Investment Management, SEC). See
also Testimony of Commissioner Isaac C. Hunt, Jr., Commissioner, SEC,
before the Subcomm. on Energy and Power, the House Comm. on Commerce,
106th Cong., 2nd Sess. (1999).
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The SEC notes that the Report recommended a transition period of at
least one year in duration. The National Association of Regulatory
Utility Commissioners has since suggested that a longer period is
necessary, in view of the fact that many state legislatures only meet
biennially. The SEC would have no objection to a longer transition
period.
iv. other recommendations
The SEC Staff Report proposed two other legislative options:
complete repeal of the 1935 Act and a grant of broader exemptive
authority under the 1935 Act to the SEC.
The SEC believes that complete repeal is premature, because the
monopoly power of the industry has not yet been completely eradicated
and current state regulation varies. Some commentators contend,
however, that the states have the ability, if they choose to exercise
it, to create regulatory structures that will protect utility consumers
in holding company systems to the same extent as they are protected by
the 1935 Act. Complete repeal, like conditional repeal, would require a
reasonable transition period. As noted above, some states may need over
a year to enact new legislation or to add resources to meet the
additional regulatory burden that would accompany unconditional repeal
of the 1935 Act.
The third option is to provide the SEC with more authority to
exempt holding company systems from the requirements of the 1935
Act.<SUP>8</SUP> An expansion of exemptive authority would not, of
course, achieve the economic benefits of conditional or unconditional
repeal of the 1935 Act, nor would it simplify the federal regulatory
structure.<SUP>9</SUP> Further, this option would continue to enmesh
the SEC in difficult issues of energy policy.
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\8\ The SEC's current exemptive authority is considerably narrower
than the exemptive authority under other federal securities laws. A
model of broader exemptive authority is contained in section 6(c) of
the Investment Company Act of 1940, 15 U.S.C. Sec. 80a-6(c), which
grants the SEC the authority by rule or order to exempt any person or
transaction from any provision or rule if the exemption is necessary or
appropriate in the public interest and consistent with the protection
of investors. See also section 206A of the Investment Advisers Act of
1940, 15 U.S.C. Sec. 80b-6a; and section 36 of the Securities and
Exchange Act of 1934, as recently amended by the National Securities
Markets Improvement Act of 1996, 15 U.S.C. Sec. 78mm (same).
\9\ In the past, the SEC has testified before Congress with respect
to concerns that arose after the decision by the U.S. Court of Appeals
for the District of Columbia Circuit in Ohio Power v. FERC, 954 F.2d
779 (D.C. Cir.), cert. denied, 113 S.Ct. 483 (1992). See Registered
Holding Company Transactions: Hearing on the 1992 Ohio Power Decision
Before the Subcomm. on Energy and Power of the House of Representatives
Comm. on Energy and Commerce, 103d Cong., 2d Sess. 35-48 (1994)
(testimony of Richard Y. Roberts, Commissioner, SEC). The legislative
repeal options discussed above would eliminate the problem of
conflicting SEC and FERC decisions that were the subject of that
decision.
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The SEC understands that many believe repeal of the 1935 Act should
be accomplished as part of a more comprehensive package of energy
reform legislation. The SEC respectfully defers to the judgment of
Congress as to whether the public interest is better served by separate
repeal of the 1935 Act or repeal as part of a larger legislative
initiative.
v. administrative action
The SEC continues to support a comprehensive approach to reform of
the 1935 Act. The SEC has implemented many of the administrative
initiatives that were recommended in the Report to streamline
regulation.<SUP>10</SUP> Despite the effects of these initiatives,
developments in the utility industry are resulting in increased
activity under the 1935 Act, especially in the area of mergers and
acquisitions, diversification and affiliate transactions. These
developments include the accelerating pace of initiatives at the state
level to implement competition, the FERC's leadership in addressing
open transmission and related structural issues, and the increasing
internationalization of the utility industry. For example, two foreign
utilities have recently announced plans to acquire U.S. utility
systems. The acquisitions, if completed, would result in two foreign
registered holding companies.
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\10\ The Report recommended rule amendments to broaden exemptions
for routine financings by subsidiaries of registered holding companies
(see Holding Co. Act Release No. 26312 (June 20, 1995), 60 FR 33640
(June 28, 1995)) and to provide a new exemption for the acquisition of
interests in companies that engage in energy-related and gas-related
activities (see Holding Co. Act Release No. 26313 (June 20, 1995), 60
FR 33642 (June 28, 1995) (proposing rule 58) and No. 26667 (Feb. 14,
1997), 62 FR 7900 (Feb. 20, 1997) (adopting rule 58)). In addition, the
Report recommended changes in administration of the Act that would
permit a ``shelf'' approach for approval of financing transactions,
relax constraints on utility acquisitions and streamline the approval
process for such transactions. The Report also recommended an increased
focus upon auditing regulated companies and assisting state and local
regulators in obtaining access to books, records and accounts. Finally,
the Report recommended that the Commission exercise more flexibility in
granting exemptions from registration under section 3(a) of the Act,
based on the facts and circumstances in each situation and,
particularly, assurances from affected state commissions concerning
effective state regulation. The Commission has issued three orders
based on this approach. NIPSCO Industries, Inc., Holding Co. Act
Release No. 26975 (February 10, 1999)(section 3(a)(1)); Houston
Industries Incorporated, Holding Co. Act Release No. 26744 (July 24,
1997)(section 3(a)(2)); and AES, Inc., Holding Co. Act Release No.
27063 (Aug. 20, 1999), motion to reconsider pending, (section 3(a)(5)).
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These developments raise additional challenges in applying the Act
to an industry that bears little resemblance to that which existed in
1935. Moreover, during 1998, mergers resulted in the formation of three
new registered holding companies. The SEC expects that several holding
companies will be required to register under the Act in the near
future. Hence, continuation of the 1935 Act in its present form will
require additional resources.
The options of conditional repeal or an expansion of the SEC's
exemptive authority also raise the issue of resources. At present,
sixteen full-time professional SEC employees are employed in the
administration of the 1935 Act. Their work includes (1) analysis and
disposition of various transactions for which the 1935 Act requires
prior SEC authorization, (2) resolution of status issues under the 1935
Act, (3) audits of holding company systems and related companies, and
(4) drafting and implementation of rulemaking proposals to reflect
changes in the utility industry and in financial regulation. Repeal of
the 1935 Act would not achieve significant cost savings for the federal
government, particularly if some of these responsibilities were carried
out by the FERC. Expanded exemptive authority, on the other hand, could
require greater resources, in view of the need to evaluate and
implement broad requests for exemptive relief.
The SEC takes seriously its duties to administer faithfully the
letter and spirit of the 1935 Act, and is committed to promoting the
fairness, liquidity, and efficiency of the United States securities
markets. By supporting conditional repeal of the 1935 Act, the SEC
hopes to reduce unnecessary regulatory burdens on America's energy
industry while providing adequate protections for energy consumers.
Mr. Oxley. Thank you, Mr. Hunt, both of you.
Let me begin by asking Mr. Hunt, it has been stated many
times that PUHCA is a barrier to entry for companies that would
otherwise enter the electric business. If you were Exxon, would
you consider entering the energy business as long as PUHCA is
on the books?
Mr. Hunt. As long as PUHCA were on the books, I would
recognize that there might be serious constraints on the way I
wanted to diversify if I entered that industry. I might choose
to go into an industry regulated by one State regulatory agency
rather than PUHCA, which arguably would have less restrictive
burdens on it.
Mr. Oxley. Your testimony states that the Division of
Investment Management carefully considered issues relating to
competition in the electric and gas industries. What are the
benefits that increased competition in these industries have
brought to investors, and can you compare the experience of the
gas industry to the electric industry?
Mr. Hunt. In terms of competition?
Mr. Oxley. Yes.
Mr. Hunt. In terms of competition, I think that the
electric industry under PUHCA has probably had, I would think,
more restrictions on it than has been the case in the gas
industry.
Some of the restrictions in PUHCA require companies that
have merged to be in the same geographic area. That is defined
in various strange ways in PUHCA.
In the gas industry, being in the same areas sometimes
means getting gas from the same source, but the utilities
themselves can be in very diverse situations. We have had
situations where a California gas utility acquired a North
Carolina freestanding utility, gas, but they were considered to
be in the same area because they got gas from the same source.
So the statute does have some anomalies in it in terms of
how we regulate the electric and the gas industry.
Mr. Oxley. Let me ask Mr. Smith that basic question, the
comparison between the gas industry and the electric industry
in relation to competition and growth.
Mr. Smith. From the Commission's perspective, the growth of
competition in the interstate natural gas industry is, one
might say, one generation ahead of where competition is in the
electric industry. In gas markets, the decontrol of natural gas
wellhead prices in the early 1990's was coupled with the
Commission's actions in Orders 436 and 636 to move away from
regulation of the commodity itself and to regulate as monopoly
services the interstate transmission of natural gas. I think we
are moving in that direction in the electric industry.
The Commission's primary focus now is on encouraging
competition among suppliers of electricity. One of the key
elements of doing that is to regulate the essential
transmission facilities so that sellers can deliver their
electricity.
We still regulate some wholesale power sales under cost-
based rates, but a lot of wholesale power sales now are done
under market-based rates. We are regulating, in terms of actual
cost of service regulation, fewer and fewer of the wholesale
sales in the electric industry. In parallel with that, the
States are moving toward use of open access to the distribution
system and competitive retail markets, and away from cost-of-
service rates for retail services. That is a State regulatory
decision and not FERC's. That movement is one of the issues
that is spurring this whole debate over electricity
restructuring, because it raises the question of what changes
are needed to Federal law in order to support States that want
to move in that direction.
Mr. Oxley. Let me ask one last question before I turn to
our friend from New York.
As you know, some people have proposed sunsetting the
authority of FERC and the State commissions to review the books
and records of holding companies and their affiliates after 2
years. What do you think of that proposal?
Mr. Smith. I think that both FERC and the State regulators
are going to need access to books and records as long as there
are utilities with captive customers for whom you want to
provide protection against cross-subsidization. If we were
going to be in a world where there were no longer captive
customers in 2 years, I think you could move away from books
and records requirements. I don't expect that to be the case. I
think it is highly unlikely.
Mr. Oxley. Do you think it is highly unlikely even if PUHCA
repeal takes place and the markets change, do you still think
that there will be captive customers?
Mr. Smith. At the retail level, unless there is Federal
regulation requiring States to go to retail competition at a
very accelerated schedule, I think it is highly unlikely. We
are not going to have 50 States choosing retail competition in
2 years on their own.
Mr. Oxley. Thank you.
The gentleman from New York Mr. Towns.
Mr. Towns. Thank you very much, Mr. Chairman.
Mr. Smith, you have had an opportunity to look at the
pending bills. Will they provide FERC with the adequate
authority to protect consumers and promote adequate
competition? If not, what should we do?
Mr. Smith. The chairman has said he supports PUHCA reform,
along the lines that has been considered in both Houses over
recent years, in conjunction with three or four other
procompetitive reforms to the Federal Power Act. As I said in
my statement, I believe that if the Commission has access to
the books and records, it can do the regulation of cross-
subsidization that it needs to do. My understanding--I wouldn't
want to speak for the States, but my understanding is that
NARUC, the association of the State regulatory commissioners,
would also support the repeal of PUHCA with books and records
access at least as part of a comprehensive package.
Mr. Towns. So the answer is yes?
Mr. Smith. Yes.
Mr. Towns. Commissioner Hunt, your testimony says that the
SEC supports repeal of PUHCA as long as repeal preserves
important protections for customers. I think it is page 6 of
your testimony, you state that the House restructuring bills
accomplish many of the goals. I guess my question is what
protection does the SEC believe should be preserved?
Mr. Hunt. Well, sir, what we think is that FERC and the
State regulatory agencies should have access to books and
records to make sure that affiliate transactions are conducted
at fair prices and that captive consumers don't see their rates
affected because of these affiliate transactions. So we think
that the only way to do that is to have at the Federal level
the FERC have access to the books and records to examine the
terms of the transactions and for the States to have the same
access to those books and records.
Mr. Towns. Thank you very much, Mr. Chairman. I yield back
the balance of my time.
Mr. Oxley. The gentleman yields back.
The gentleman from California Mr. Cox.
Mr. Cox. Thank you. I think I will just pursue the same
line of questioning because it is essentially what we are
interested in. If everybody is for repeal of PUHCA, but we are
now talking about what the landscape looks like in the future,
I would like to continue to explore with you what vestige of
PUHCA should live on, if any?
I take it from your response, Mr. Hunt, to the last
question that what we are concerned with is monopoly power that
requires rate regulation, because the concern about affiliate
transactions is designed to protect consumers, right? Consumers
probably would not need special protections for abuse of
monopoly power if there were not monopolies?
Mr. Hunt. Well, I think, Mr. Congressman, part of our view
is that the consumers, captive consumers, they need that
protection from monopolistic power. They need agencies to
examine affiliate transactions to make sure that those costs
are not passed on in rates.
If there were truly a universal competitive environment,
perhaps that power would not be needed, but it is not there
now. It is not going to be there in 2 years. So we think that,
yes, the consumer protection aspects of PUHCA are those aspects
that need to be preserved for the foreseeable future.
Mr. Cox. I think we are on the same page. The reason for
the different treatment of holding companies is that they may
be exercising monopoly powers?
Mr. Hunt. They may have a lot of power over how they
conduct transactions with their affiliates. They buy goods and
services from them at what cost? They sell goods and services
to affiliate companies. What is the price at which they sell
them? We think that, yes, consumers do need to be protected by
having agencies that can examine those transactions to make
sure that monopolistic power is not unfairly exercised.
Mr. Cox. Right. So we are hanging our hat on the monopoly
peg. But for that fact, I take it that there would be no reason
to abandon our essential disclosure framework of the securities
laws and to permit companies to make whatever foolish decisions
they wish to make in their management, provided it is fully
disclosed to the public.
For example, if abuses that were originally concocted for
the purpose of manipulating the rate-setting regime continued
after there were no longer a rate-setting regime, such as
putting property on the books at inflated prices or even
transacting for it at inflated prices, that would put the firm
at a competitive disadvantage in a real competitive
marketplace, and so we would expect that the market would take
care of that.
Is there any reason 2 years from now, given what we expect
the state of affairs to be, for there to be separate rules for
the issuance of securities of holding companies?
Mr. Hunt. No, sir, we don't think so. We think that the
Commission has developed and the accounting profession has
developed to such an extent that we can get adequate disclosure
of the terms under which securities are issued, whether by
utility holding companies or any other companies. So we don't
think that we need special accounting or disclosure rules for
the issuance of securities by holding companies.
Mr. Cox. That is very useful to know. And I would like to
ask the same question with respect to the solicitation of
proxies and insider trading. Are the rules applicable
generally?
Mr. Hunt. The rules are applicable generally, and as I
mentioned in my oral statement, Mr. Cox, we did do a staff
study of the 1935 act in the 1980's, and a review of
transactions by holding companies under securities laws hasn't
indicated any need for special provisions under the securities
laws for utility holding companies.
Mr. Cox. And finally, if I may, Mr. Chairman, I think I
understood you to say we don't need special rules for financial
reporting under generally accepted accounting principles?
Mr. Hunt. I don't think so.
Mr. Cox. Do we need any special rules with respect to
dividend policy or self-tenders?
Mr. Hunt. We, sir, have not seen any problems arise in
those areas that would require special rules for utility
companies. Again, what we are concerned about in terms of what
vestiges of PUHCA need to exist in the present environment are
those remnants of PUHCA that will protect consumers. But in
terms of the disclosure of transactions and what we consider
the more typical securities laws, we see no reason for special
provisions for utility companies.
Mr. Cox. My understanding is that there are 19 companies
that are registered under PUHCA; is that right?
Mr. Hunt. Nineteen, sir.
Mr. Cox. Thank you very much.
Mr. Oxley. The gentleman from Illinois Mr. Shimkus.
Mr. Shimkus. Thank you, Mr. Chairman.
Mr. Hunt, in your testimony you have currently 16 employees
who are devoted to administration of the Holding Company Act,
doing these 19 companies.
If PUHCA would be repealed, would the Commission see any
savings as far as those employees?
Mr. Hunt. If PUHCA were repealed, I don't think that we
would--I don't think we ever thought that we would see a
significant overall Federal Government savings from the repeal
of PUHCA because some of the functions, again, would be
transferred to FERC and perhaps to the States. The Division of
Investment Management has more than enough work, I think, in
terms of regulating investment companies these days.
Mr. Shimkus. You know that we are very interested in all of
these fees and charges and the big balance statement due there,
so this may make that balance even higher if there were fewer
employees. Just an editorial comment. You know that we are
looking at those fees charged to people in the market.
Mr. Hunt. Yes, sir.
Mr. Shimkus. A lot of the deregulatory debate that has
evolved--and of course PUHCA is always thrown into the thing.
We had 2 days of hearings on the dereg, PUHCA is always one of
the key ingredients. It has also come to the point of State-by-
State movement. So if a State has no captive customers and no
bundling of their charges, and it is one of those 19 companies
inside the State, would there be an argument for that company
to be absolved of its requirements under PUHCA?
Mr. Hunt. I think, if I understand your question, what we
would like to see is that FERC and the State regulators--
particularly FERC would still have the power to have access to
the books and records to ensure that no transactions that
utilities engaged in unfairly harmed consumers, particularly
through affiliate transactions. So we still think that FERC
should have the authority to access books and records.
Mr. Shimkus. But you are testifying for the SEC?
Mr. Hunt. Yes, sir.
Mr. Shimkus. Mr. Smith?
Mr. Smith. Typically when we think about captive customers,
we think about captive customers for sales of electricity
either at retail or wholesale. Assuming that all of the States
went to retail competition, you would still have regulated
monopolies in the wires business. In distribution, for
instance, you are likely to have a local monopoly.
Mr. Shimkus. You will have.
Mr. Smith. These companies will have captive customers.
Mr. Shimkus. I think that is arguable.
Mr. Smith. You would want to make sure that you had
adequate protections to make sure that the charges for
distribution, for instance, weren't cross-subsidizing
entrepreneurial ventures.
Mr. Shimkus. But you would have the Public Utilities
Commission which would have a role in doing that, so then we
would have a duplication?
Mr. Smith. Concerns about cross-subdization of distribution
would not be a FERC issue.
Mr. Shimkus. Let me ask my final question. Why should the
FERC continue to review mergers given the authority of the
Department of Justice and the FTC? If we have the Department of
Justice and the FTC, why should you be in the role of reviewing
the mergers?
Mr. Smith. First, the Federal Power Act review of mergers
looks at a broader range of issues than the antitrust laws,
which are focused principally on competition issues. For
instance, in reviewing mergers, the Commission looks at impacts
on rates, which is essentially a competition issue if you are
talking about market-based rates, but it is a separate
regulatory issue if you are talking about cost-of-service-based
rates. So we apply a public interest test, which is a broader
test.
Second, the Commission and its staff have 60 years of
expertise in the electric industry itself. One of the key
issues in assessing competitive impacts for mergers is trying
to understand the size and scope of the market in which you are
assessing concentration.
Mr. Shimkus. I think the chairman is going to recess for
the vote. I think that is going to be a big focus of debate as
we move on the bill. Thank you, Mr. Chairman.
Mr. Oxley. The Chair would note that we have a vote on the
floor, and we have 7 minutes. If the gentleman can ask
questions for 2 or 3 minutes, I can recognize him. Otherwise I
would like to dismiss this panel and start with the second
panel when we come back. The gentleman is recognized for 3
minutes.
Mr. Markey. This is a very important issue, and I don't
know if the witnesses would mind staying. I can come back and
have my allotted time.
Mr. Oxley. Okay. The committee stands in recess for 10
minutes.
Mr. Markey. Thank you, Mr. Chairman.
[Brief recess.]
Mr. Oxley. When we were last here, I was about to recognize
my friend from Massachusetts, and I do so now.
Mr. Markey. Thank you, Mr. Chairman. I appreciate it.
Good news in today's National Journal, Congress Daily,
``DeLay Wants Great FERC Role in Barton Dereg Bill.'' what it
says here is that DeLay, perhaps the most powerful advocate of
a restructuring bill, is concerned that Barton's bill does not
give the Federal Energy Regulatory Commission enough authority
to prevent utility monopolies from abusing their market power.
The DeLay aide did not discuss specific remedies, but said a
bill has got to have some kind of check on the system to
protect the little guy from getting squashed. They don't like
the Barton bill.
Do you agree with that, Mr. Hunt and Mr. Smith?
Mr. Smith. Do I agree that we need to help keep the little
guy from getting squashed? Yes.
Mr. Markey. And that you need additional authority beyond
what is in the Barton bill to ensure that you can protect the
little guy from getting squashed; do you agree with that?
Mr. Smith. I think you heard our Chairman testify a couple
of days ago on a number of modifications that he suggested to
that bill that would aid our process.
Mr. Markey. So do you agree that you need more power in
order to protect the little guy, Mr. Smith?
Mr. Smith. Yes.
Mr. Markey. Mr. Hunt, do you agree that you need power than
the Barton bill gives you in order to protect the little guy?
Mr. Hunt. We want to get out of protecting the little guy
in the utility industry, Mr. Markey. We think that power should
be in the hands of FERC.
Mr. Markey. So you think that FERC needs more power to
protect the little guy?
Mr. Hunt. We think--as we have already said, Congressman
Markey, we think that certainly the FERC needs power to access
the books and records of any holding company now under our
jurisdiction because of PUHCA so long as there are captive
consumers of the utility products that need to be protected.
Mr. Markey. I understand that FERC currently addresses
affiliate abuses by holding companies in the context of merger
approvals.
Other than a complaint being brought alleging
discrimination in wholesale rates, what are the other contexts
in which FERC could address cross-subsidization and affiliate
abuse transactions if Congress passed the Tauzin bill as
presently drafted?
Mr. Smith. I think those issues would most typically come
up in mergers, as you mentioned, but also in our setting of
cost-based rates for either transmission or wholesale sales.
Mr. Markey. So you can generally only deal with this in the
context of the merger proceedings; is that right? All rate-
making?
Mr. Smith. Rate-making.
Mr. Markey. So what authority does the Commission have to
take proactive steps to prevent the abuses outside of those?
Mr. Smith. We don't look at affiliate issues outside of our
reviews under Section 203, which relates to mergers, and under
Sections 205 and 206, which relate to rates, terms and
conditions.
Mr. Markey. Do we need to fix that?
Mr. Smith. I am not sure that we need to fix that. We need
to have the access to the information which allows us to make
the right judgments to protect the little guys in the context
of those proceedings. I am not sure we need an additional
avenue.
Mr. Markey. Do you think that you have sufficient power to
be able to deal with it even if you had access to the records?
If you had access to the records, then you would have enough
power to get the job done; is that what you are saying?
Mr. Smith. I think we do. What we would do in a rate
proceeding is use the information that we get to make a
judgment as to whether there had been imprudent costs incurred
by the entity that was charging cost-of-service rates. And if
we concluded that there was, we would exclude those costs from
the rates. So we would not be barring the transactions. We
would be making sure that the company wasn't recovering those
costs from captive customers.
Mr. Markey. So how many times has the Commission done that
in the past year; that is, initiate a proceeding against a
company that is charging unjust and discriminatory rates?
Mr. Smith. I don't know the answer off the top of my head.
Mr. Markey. Have you ever done it?
Mr. Smith. I am reminded that Ohio Power, for instance,
which is one of the cases that I commented on earlier, was a
case in which the Commission attempted to exclude imprudent
costs from utility rates, and the DC Circuit found that we
weren't permitted to do that because of PUHCA.
Mr. Markey. So in the absence of FERC, you are determining
that there are some affiliate abuses which translate into
unreasonable rates, and it is a rare day where you guys do
that, and the FERC has no authority to address the issue unless
a registered holding company merges with another; isn't that
correct?
I am trying to help you get a little more authority, Mr.
Smith, so you can do your job. These are friendly questions.
They are meant for you to delimit how little authority you have
in order to get the job done for the consumer, for the little
guy. So we can advance the ball in the markup here.
Mr. Smith. We would like to have sufficient authority to
provide exactly the protections that you are describing.
Mr. Oxley. The gentleman's time has expired.
Mr. Markey. Thank you, Mr. Chairman.
Mr. Oxley. The gentleman from Wisconsin.
Mr. Barrett. No questions.
Mr. Oxley. We appreciate your testimony, and this panel is
excused.
Mr. Hunt. Thank you, Mr. Chairman.
Mr. Smith. Thank you.
Mr. Oxley. The Chair calls Ms. Sharon Heaton, vice
president and deputy general counsel, Columbia Energy Group;
Mr. William J. Lhota, executive vice president, American
Electric Power Company, from Columbus, Ohio, who will explain
the collapse of the Buckeyes in the second half at a later time
today; Mr. Marty Kanner, campaign coordinator, Consumers for
Fair Competition; and Ms. Sherry Quirk, shareholder, Verner
Liipfert, on behalf of New Orleans City Council. We will begin
with Ms. Heaton.
STATEMENTS OF SHARON HEATON, VICE PRESIDENT AND DEPUTY GENERAL
COUNSEL, COLUMBIA ENERGY GROUP; WILLIAM J. LHOTA, EXECUTIVE
VICE PRESIDENT, AMERICAN ELECTRIC POWER COMPANY, ON BEHALF OF
REPEAL PUHCA NOW! COALITION; MARTY KANNER, CAMPAIGN
COORDINATOR, CONSUMERS FOR FAIR COMPETITION; AND SHERRY A.
QUIRK, SHAREHOLDER, VERNER, LIIPFERT, BERNARD, McPHERSON, &
HAND, ON BEHALF OF NEW ORLEANS CITY COUNCIL
Ms. Heaton. Mr. Chairman, members of the subcommittee, my
name is Sharon Heaton, and I am deputy general counsel of the
Columbia Energy Group, a holding company registered under the
Public Utility Holding Company Act of 1935.
Formerly, I served as senior counsel on the Senate Banking
Committee, where I worked on, among other things, issues
related to PUHCA. I am submitting testimony today to the
subcommittee on behalf of an ad hoc group of 11 electric and
gas utility systems, with public utility operations in 20
States, collectively the Roundtable Group. On behalf of the
Roundtable Group, I would like to thank you for inviting us to
submit testimony in favor of legislation repealing PUHCA.
The subject of today's hearing is PUHCA repeal, is the time
now? The simple answer is no. The right time was 20 years ago,
but now will do. And the longer we wait to repeal this statute,
the greater the costs and disruptions in a rapidly evolving
energy industry, with no apparent offsetting benefits.
PUHCA, a statute enacted nearly 65 years ago, was adopted
to remedy certain stock market abuses of the 1920's. To prevent
a recurrence of these abuses, Congress adopted the Securities
Act of 1933, the Securities and Exchange Act of 1934, and a
myriad of other securities laws and regulations. SEC was also
formed to regulate and oversee the securities markets. Not yet
aware of the effectiveness of the newly adopted securities laws
and the recently created SEC, Congress enacted PUHCA in 1935 to
regulate the corporate affairs of a single operational
industry, companies that own utility companies. PUHCA is unique
in that it is the only securities statute designed to regulate
a single nonfinancial industry.
Simply put, the abuses that PUHCA was designed to prevent
are already unlawful under other securities statute. Thus there
is no continuing benefit to retaining PUHCA. However, there is
a cost to allowing this statute to linger on the books.
Continued application of PUHCA is denying electric and gas
utilities the flexibility that they need to respond to the
significant competitive, economic and regulatory changes
occurring in this industry and throughout the world.
Let's remember what PUHCA does and what it does not do.
PUHCA does not and was never intended to address rate
regulatory issues. Local distribution matters are exclusively
within the province of State regulators, while the setting of
wholesale rates and other transactions by utilities relating to
the transmission of electricity or of natural gas in interstate
commerce is regulated by the Federal Energy Regulatory
Commission. Repeal of PUHCA would not alter this allocation of
jurisdiction and authority. PUHCA is intended, however, to
regulate the corporate structure and financings of public
utility holding companies and their affiliates.
There is no question but that this authority is redundant
of that which the SEC already has under the Securities Act of
1933 and the Securities and Exchange Act of 1934. And in part
for that reason, since 1982, the SEC has been on record
favoring repeal of PUHCA. If PUHCA were simply unnecessary, its
repeal would not be so important. But, in fact, PUHCA imposes
structural and economic distortions on the energy industry that
work to the detriment of energy consumers as well as
shareholders.
With its mandate of a vertically integrated utility system
confined to a single geographic region, PUHCA is a clearly a
barrier to increasing competition in the electric and gas
industries. It inhibits efficiency gains, limits new
competitors in the marketplace, leads to differing regulatory
rules for competitors that are holding companies, and
contributes to inefficient investment decisions by utility
management and shareholders. These costs are real, substantial
and should not be continued.
Columbia Energy has a unique perspective on the importance
of choice for consumers and competition in the utility
industry. We have been a leader in the movement toward retail
unbundling, allowing consumers, including homeowners, to choose
their supplier of gas. We are proud that in Ohio alone 100
percent of our customers are eligible to participate in our
choice program. Those customers who have participated have
saved more than $32 million. In fact, overall, approximately 86
percent of Columbia Energy's nearly 2.1 million customers are
eligible to participate in our choice programs.
Columbia Energy will continue to promote competition in its
own businesses and advocate government policies that facilitate
competition.
PUHCA should be repealed at the earliest possible date.
Therefore, the Roundtable Group would support appropriate
stand-alone legislation or the inclusion of satisfactory
legislative language repealing PUHCA in an acceptable
comprehensive bill.
There are two very important points to consider in this
regard. First, given the difficulty over the last several years
of crafting a comprehensive bill with broad bipartisan support,
we would urge the subcommittee not to let striving for the
perfect interfere with achieving the good. For this reason, the
Roundtable Group urges the subcommittee to approve
expeditiously comprehensive legislation containing those
legislative elements around which a bipartisan consensus
already exists, such as the repeal of PUHCA.
Second, PUHCA repeal should be clean, without lingering
vestiges of this statute. There should be no price to pay for
repeal of PUHCA. We raise this issue only because some forms of
PUHCA repeal previously suggested contain unnecessarily onerous
provisions that undermine the benefits of PUHCA repeal. The
Roundtable Group respectfully suggests that the subcommittee
consider beginning with the PUHCA language of H.R. 2944 which
was introduced by Joe Barton.
My written testimony, which I submit for the subcommittee's
consideration and I request to be included in the record,
contains specific comments on the PUHCA provisions of H.R.
2944. As the SEC has known for almost 20 years now, PUHCA is an
archaic law that has long since served its purpose. The
Roundtable urges this subcommittee to approve legislation
appealing PUHCA now.
Thank you, Mr. Chairman for the opportunity to submit this
testimony to the subcommittee.
[The prepared statement of Sharon Heaton follows:]
Prepared Statement of Sharon Heaton on Behalf of The Roundtable Group
Mr. Chairman, Members of the Subcommittee, my name is Sharon
Heaton, and I am Deputy General Counsel of the Columbia Energy Group
(``Columbia Energy''), a holding company registered under the Public
Utility Holding Company Act of 1935 (``PUHCA''). Formerly, I served as
Senior Counsel on the Senate Banking Committee, where I worked on,
among other matters, issues related to PUHCA. I am submitting testimony
today to this Subcommittee on behalf of an ad hoc group of 11 electric
and gas utility systems, with public utility operations in about 20
states (collectively, the ``Roundtable Group'') <SUP>1</SUP> On behalf
of the Roundtable Group, I would like to thank you very much for
inviting us to submit testimony in favor of legislation repealing
PUHCA.
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\1\ A complete list of the companies forming the Roundtable Group
is set forth in Attachment 1.
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The subject of today's hearing is ``PUHCA Repeal: Is the Time
Now?'' The simple answer is ``No. The right time was 20 years ago, but
now will do.'' And the longer we wait to repeal this statute, the
greater the costs and disruptions in a rapidly evolving energy
industry, with no apparent offsetting benefits.
PUHCA, a statute enacted nearly 65 years ago, was adopted to remedy
certain stock market abuses of the 1920s. To prevent a recurrence of
these abuses, Congress adopted the Securities Act of 1933, the
Securities and Exchange Act of 1934, and a myriad of other securities
laws and regulations. The Securities and Exchange Commission (``SEC'')
was also formed to regulate and oversee the securities markets. Not yet
aware of the effectiveness of the newly adopted securities laws and the
recently created SEC, Congress enacted PUHCA in 1935 to regulate the
corporate affairs of a single operational industry--companies that own
energy utility companies. PUHCA is unique in that it is the only
securities statute designed to regulate a single non-financial
industry.
Simply put, the abuses that PUHCA was designed to prevent are
already unlawful under other securities statutes. Thus, there is no
continuing benefit to retaining PUHCA. However, there is a cost to
allowing this statute to linger on the books--continued application of
PUHCA is denying electric and gas utilities the flexibility they need
to respond to the significant competitive, economic and regulatory
changes occurring in this country and throughout the world.
Let's remember what PUHCA does, and what it does not do. PUHCA does
not, and was never intended to, address rate regulatory issues. Local
distribution matters are exclusively within the province of state
regulators, while the setting of wholesale rates and other transactions
by utilities relating to the transmission of electricity or of natural
gas in interstate commerce are regulated by the Federal Energy
Regulatory Commission (``FERC''). Repeal of PUHCA would not alter this
allocation of jurisdiction and authority. PUHCA is intended, however,
to regulate ``the corporate structure and financings of public-utility
holding companies and their affiliates.'' There is no question but that
this authority is redundant of that which the SEC already has under the
Securities Act of 1933 and Securities and Exchange Act of 1934. And in
part for that reason, since 1982 the SEC has been on record favoring
repeal of PUHCA.
If PUHCA were simply unnecessary, its repeal would not be so
important. But in fact PUHCA imposes structural and economic
distortions on the energy industry that work to the detriment of energy
consumers as well as utility shareholders. With its mandate of a
vertically integrated utility system confined to a single area or
region, PUHCA is clearly a barrier to increasing competition in the
electric and gas utility industries. It inhibits efficiency gains,
limits new competitors in the marketplace, leads to differing
regulatory rules for competitors that are holding companies, and
contributes to inefficient investment decisions by utility management
and shareholders. These costs are real, substantial and should not be
continued.
Columbia Energy has a unique perspective on the importance of
choice for consumers and competition in the utility industry. We have
been a leader in the movement toward retail unbundling--allowing
consumers, including homeowners, to choose their supplier of gas. We
are proud that in Ohio one hundred percent of our customers are
eligible to participate in our Choice Program. Those customers who do
participate have saved more than $32 million. In fact, overall,
approximately 86 percent of Columbia Energy's nearly 2.1 million
customers are eligible to participate in our Choice Program. Columbia
Energy will continue to promote competition in its own businesses, and
advocate government policies that facilitate competition.
PUHCA should be repealed at the earliest possible date. Therefore,
the Roundtable Group would support appropriate ``stand alone''
legislation or the inclusion of satisfactory legislative language
repealing PUHCA in an acceptable ``comprehensive'' bill. There are two
very important points to consider in this regard. First, given the
difficulty over the last several years of crafting a ``comprehensive''
bill with broad bi-partisan support, we would urge the Subcommittee not
to let striving for the perfect interfere with achieving the good. For
this reason, the Roundtable Group urges the Subcommittee to approve
expeditiously ``comprehensive'' legislation containing those
legislative elements around which a bi-partisan consensus already
exists, such as the repeal of PUHCA. Second, PUHCA repeal should be
clean, without lingering vestiges of this statute. There should be no
``price'' to pay for repeal of PUHCA. We raise this issue only because
some forms of PUHCA repeal previously suggested contain unnecessarily
onerous provisions that undermine the benefits of PUHCA repeal.
In considering drafting legislation to repeal PUHCA, the Roundtable
Group respectfully suggests that the Subcommittee consider beginning
with the PUHCA provisions of H.R. 2944, the Electricity Competition and
Reliability Act, which was recently introduced by Congressman Joe
Barton. Attachment 2 contains a copy of Subtitle B of H.R. 2944 with
our recommended changes.
The only substantive amendment to H.R. 2944 recommended by the
Roundtable Group would add a sunset date for both the FERC and state
access to books and records provisions. The effective date for PUHCA
repeal is subject to a transition period presumably to allow time for
the states and FERC to prepare for additional oversight of holding
companies. An additional transition period should be provided by
maintaining the books and records requirements of H.R. 2944, but only
for a limited time period. For example, Congress could establish a
sunset date two years after PUHCA repeal becomes effective. The
Roundtable Group clearly believes that FERC and state regulators should
have access to all those books and records that are necessary to
regulate jurisdictional utility subsidiaries within a holding company
system. However, in an increasingly competitive environment,
regulators, and in many case competitors, should not be permitted go on
``fishing expeditions'' through the books and records of non-regulated
affiliates which happen to be part of a holding company system. We must
balance the interests of fair competition and adequate regulation.
Most certainly, if PUHCA is repealed through ``comprehensive''
legislation designed to encourage utility competition, the affiliate
oversight and access to books and records provisions now contained in
H.R. 2944 are simply unnecessary. The competitive forces unleashed
through such a measure should be more than adequate to substitute for
additional regulation.
As the SEC has noted for almost 20 years now, PUHCA is an archaic
law that has long since served its purpose. The Roundtable Group urges
this Subcommittee to approve legislation repealing PUHCA now.
Thank you again, Mr. Chairman, for the opportunity to submit this
testimony to the Subcommittee.
Attachment 1
list of roundtable group
CMS Energy Corporation; Columbia Energy Group; Consolidated Natural
Gas Company; Duke Energy; Edison International; MDU resources Group,
Inc.; NiSource, Inc.; Public Service Enterprise Group; Reliant Energy,
Inc.; Sempra Energy; and TXU Corp.
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Mr. Oxley. Thank you, Ms. Heaton. And all of the testimony
will be made part of the record under unanimous consent.
The Chair would recognize my friend from Ohio to introduce
the next witness.
Mr. Gillmor. Thank you, Mr. Chairman, and I am pleased to
recognize a long-time friend, Bill Lhota. He is not only one of
the foremost public utility executives, but is an outstanding
citizen in Ohio. I won't tell them all of the many things that
we did years ago, Bill, but it is a pleasure to see you here.
Mr. Oxley. By the way, the Chair was a witness to some of
those.
Mr. Gillmor. Don't you tell either.
Mr. Oxley. The gentleman from Ohio, when I introduced Mr.
Lhota, initially, I said he was going to explain the second
half collapse of the Buckeyes against the Badgers, and now I
see a Badger down there, so this is getting really tense.
Mr. Gillmor. I wish somebody would explain that.
STATEMENT OF WILLIAM J. LHOTA
Mr. Lhota. Thank you. I appreciate the opportunity to be
here, and I assure you that I will make no efforts to explain
the complexities of Ohio State football.
I appreciate the opportunity to be here. I am Bill Lhota,
executive vice president of American Electric Power. AEP is a
registered holding company subject to the Public Utility
Holding Company Act of 1935, or PUHCA.
I wish to commend you, Mr. Chairman and members of the
subcommittee, for your efforts during this congressional
session and those efforts of the past several Congresses to
support PUHCA repeal. I also thank you for the opportunity this
morning to express the views of the Repeal PUHCA Now!
Coalition.
I was invited today to testify on the subject PUHCA repeal;
is the time now? As the name of our coalition suggests, we have
been advocating the repeal of PUHCA now since the group's
inception in 1994, and now is the time to do so. AEP, along
with other members of our coalition, have supported PUHCA
repeal since the early 1980's when the SEC recommended that
Congress repeal PUHCA. Again in 1995, following a year-long
study conducted by the SEC that included the participation of
all interest groups, Federal, State and local regulators,
consumer groups, rating agencies and academia, the SEC again
recommended PUHCA repeal with certain consumer safeguards.
Indeed, Mr. Chairman, the support for PUHCA repeal efforts is
reflected in the fact that our language has been included in
more comprehensive restructuring bills than that addressing any
other issue. Republicans and Democrats as well as the
administration have proposed these bills.
With this obvious consensus on the need for PUHCA's repeal,
the question before us today is whether PUHCA should be
repealed now or delayed until Congress decides when and if to
enact comprehensive restructuring legislation.
As I have mentioned, we have always supported past
recommendations that PUHCA should be repealed on its own
without the need to wait for comprehensive legislation.
Certainly should Congress begin to move a comprehensive
restructuring bill, the coalition supports the inclusion of
PUHCA repeal language without tying repeal to retail customer
choice.
I will take a few minutes to explain why PUHCA needs to be
repealed now. Any delay in PUHCA repeal, Mr. Chairman,
continues to hamper true competition in the States that have
under State law offered retail choice. PUHCA is a barrier to
entry that prevents companies from fully participating in
noncontiguous retail markets.
Mr. Chairman, I would like to point out that a little over
70 percent of the U.S. population lives in States that have
approved programs that provide for retail choice. For many of
our members, competition is upon us or is soon to come. We need
the flexibility to compete now. Deferring PUHCA repeal limits
registered companies' ability to offer new products and
services to customers while our competitors move forward.
Persistent delay in PUHCA repeal unfairly constrains the
gas holding companies while Congress decides what to do about
electricity restructuring. Registered gas holding companies are
restricted under PUHCA like registered electric companies. This
is simply unfair.
Consistent delay of PUHCA repeal favors foreign interests
over U.S. utilities. Foreign companies can acquire U.S.
utilities that U.S. companies cannot.
Mr. Chairman, and the members of this subcommittee, it may
be a particular interest to you that stalling PUHCA repeal
disadvantages PUHCA companies in the financial markets. There
will be continued delay in our ability to issue new types of
securities that could lower our cost of capital. PUHCA
prohibits without SEC approval the issuance of any newly
created securities that have been embraced by the market and
issued by other utilities. PUHCA may also limit the use of our
generally accepted financial risk management products. Surely
at some point, Mr. Chairman, this inequity must end.
Mr. Chairman, our coalition supports the PUHCA repeal
provisions of the Barton bill, H.R. 2944, and the Tauzin-Towns
bill, H.R. 2363. These bills provide for the replacement of
PUHCA with a reformed PUHCA. The legislative language contained
in these bills is a product of more than 4 years of negotiation
and congressional scrutiny. It addresses the concerns of SEC,
FERC and State regulators. It guarantees FERC and the States
access to books and records of the registered holding companies
and their associate companies to protect the ratepayers. It
continues all existing authority for the FERC and the States to
review affiliate transactions.
The coalition strongly opposes any language to tie PUHCA
repeal to retail choice in the States where we operate, and any
proposal that creates a new exemption under PUHCA on the
companies offering retail choice. This approach is unfair,
unworkable and anticompetitive.
Mr. Chairman, I would like to conclude by emphasizing to
you and the members of the subcommittee that only Congress can
repeal PUHCA, and the time to act is now. Thank you, again, Mr.
Chairman and members, for your interest in this important
issue, and I will be glad to respond to questions at the
appropriate time.
[The prepared statement of William J. Lhota follows:]
Prepared Statement of William J. Lhota, Executive Vice President,
Energy Delivery and Customer Relations, American Electric Power
Corporation on Behalf of The Repeal PUHCA Now! Coalition
Mr. Chairman and Members of the Subcommittee: The Repeal PUCHA Now!
Coalition is pleased to submit this testimony to address the need to
repeal the Public Utility Holding Company Act (otherwise known as
PUHCA). The Repeal PUHCA Now! Coalition is a group of electric and gas
companies which has supported enactment of legislation repealing PUHCA
as recommended by the Securities and Exchange Commission in a report to
Congress in 1995. Member companies include registered and exempt
electric and gas utility holding companies restricted under PUHCA. The
Repeal PUHCA Now! Coalition believes it is essential that PUHCA repeal
legislation be enacted into law this year. Simply put, repealing PUHCA
repeals an Act that serves as a barrier to competition, a barrier to
state restructuring efforts and a barrier to consumer benefits.
The Coalition commends the Subcommittee for conducting a hearing on
PUHCA so that the need and urgency for repeal may be made again this
Congress. As discussed below, the Coalition believes that PUHCA repeal
must be considered independently, on its own merits. Indeed, keeping
the 64-year old statute in place frustrates competition, is a barrier
to entry, and actually promotes industry concentration. When this
occurs, the case for repealing PUHCA now is overwhelming.
i. introduction
As everyone here knows, the electric utility industry is changing
rapidly. A little over 70% of the U.S. population live in the twenty-
three states that have now approved customer choice programs. Other
states are considering similar measures. As electricity markets become
more and more competitive, the unnecessary limitations of PUHCA on
certain utility holding companies and their subsidiaries are not
compatible with the current and evolving state of the industry. PUHCA
is outdated, duplicative and no longer serves the interests of
consumers or investors as noted in the SEC's 1995 report which
recommended that PUHCA be repealed. PUHCA has become a regulatory
anachronism, a barrier to competition and innovation. It imposes
unneeded restrictions, significant costs, and confers no real benefit.
The time to act to repeal PUHCA is now and the Repeal PUHCA Now!
Coalition urges the Congress to pass PUHCA repeal legislation this
year.
PUHCA repeal should not be held hostage to the important debate
about the potential further restructuring of the electric industry, or
whether comprehensive federal electricity legislation is needed to
benefit all consumers nationwide. From state to state and here in
Washington, the members of the Repeal PUHCA Now! Coalition have been
very active in this debate. But the Congress must realize that electric
utility restructuring issues impact all stakeholders in the electric
utility industry, not just the eighteen (18) active registered holding
companies and one hundred fifty-one (151) exempt electric holding
companies. These electric utility restructuring issues deserve serious
study, discussion and debate. This discussion and debate is well
underway in the Congress. Already in this Congress, there are no less
than twelve bills, including the Administration's bill, currently
pending in the Congress that would in various respects restructure the
electric utility industry. As the number and scope of the various bills
reflect, the issues are as contentious as they are complex. As a
result, no meaningful consensus has emerged on whether, or if so, when
Congress should enact comprehensive electricity legislation. A truly
durable consensus will not develop overnight. Moreover, there is no
public policy reason to support postponing PUHCA repeal until a
restructuring bill is passed. Thus, the Repeal PUHCA Now! Coalition
strongly urges that the debate on future electric policy move forward
separately from consideration of PUHCA repeal legislation.
Keep in mind, Mr. Chairman, that serious debate and discussion of
these global electric policy issues has only developed in the last two
Congresses. Conversely, a full merits review of PUHCA repeal started
over seventeen years ago. In 1982, the SEC found that PUHCA's statutory
objective had been achieved and recommended PUHCA repeal to Congress.
In the intervening seventeen years, the case has been overwhelmingly
built to show that conclusion was correct. Significantly, in 1995,
after conducting another full study that included public hearings and
participation of whether PUHCA continues to have relevance given the
significant statutory and regulatory developments since 1935, the SEC
again concluded that PUHCA was no longer needed. With appropriate
consumer protection provisions to assure effective regulation of
utilities, repeal was the preferred option.
The Repeal PUHCA Now! Coalition agrees. The SEC's 1995 report
supporting PUHCA repeal is clear and irrefutable. Indeed, it has now
been over twenty-five years since the SEC accomplished the goals
Congress set for it under PUHCA in 1935. We agree with the SEC that
leaving PUHCA in place unduly burdens a segment of the industry, as
well as the SEC, and at a cost to society that far exceeds any
potential benefits.
Repealing PUHCA is important not just to the companies that for
over 64 years have borne the burden of its regulatory requirements, and
whose ability to respond to existing competition is handicapped by that
Act, but to other utilities--both gas and electric--as well. On this
issue, gas and electric registered holding companies are united: we all
need the ability to respond more freely and flexibly to market
opportunities emerging daily as the States restructure retail electric
markets and respond to vigorous competition in the wholesale markets.
Similarly, holding companies now exempt from the Act's requirements
again both gas and electric--also seek repeal. The potential
application to them of the Act's full strictures, and the current
imposition of limits on their ability to serve customers geographically
or through additional utility services, hinders innovation and
frustrates an exempt holding company's ability to compete in wholesale
and retail markets.
While the future structure of the electric industry remains open to
debate, there is a much clearer picture with respect to the natural gas
industry. The gas industry has already experienced significant and
historic regulatory and competitive changes. All the gas registered
companies now face competition in virtually every facet of their
business. Yet they remain subject to additional regulation over their
lines of business, corporate structures and financing that their
competitors do not have. This is because PUHCA's regulations impose
higher costs and less flexibility on them, which hampers them in
meeting the demands of intensely competitive gas markets. Thus, repeal
of PUHCA, that is, repeal of PUHCA with appropriate consumer
safeguards, is essential in providing these gas companies with a level
playing field on which to compete and develop innovative products and
services. PUHCA should be repealed while the regulatory agencies and
legislatures, including Congress, consider further changes in energy
policy as applied to the electric industries.
ii. the burdens of puhca
Registered holding companies and their subsidiaries face burdensome
and limiting requirements under PUHCA. These burdens, which create
severe disadvantages when compared to other industry participants,
include:
Our non-utility subsidiaries and we generally are restricted in our
ability to issue or sell securities, or alter the rights and powers of
security holders, without prior SEC approval. As a result, (a) our
capital structures are much more limited, (b) our ability to take
advantage of new financing opportunities, especially in dynamic capital
markets, is more limited, and (c) our ability to use several types of
financial structures that are now widely accepted and used throughout
the rest of our industry are not available to us without SEC approval.
We are limited to serving utility customers as a ``single
integrated'' utility system, which seriously restricts the geographic
scope of our utility operations as well as the size and diversity of
our utility services to customers. As a result, registered holding
company system companies are hampered in offering services to others,
even in our core business, either by significantly expanding our
operations or investing in other utilities, as can be done by exempt
holding companies and non-holding company utilities. Although multi-
state utility expansion is possible through a non-holding company,
divisional structure, (i.e., as a single operating company with no
separate utility subsidiaries), most companies do not choose this
structure. In some states this structure is illegal and in many states
it would not be permissible under developing state codes of conduct
designed to separate utilities from competitive businesses.
We generally need prior approval from the SEC before our affiliates
and subsidiaries can enter into contracts with each other. As a result,
certain costs may be ``trapped'' due to overlapping jurisdiction
between the SEC and the state commissions and opportunities to cut
costs or to operate with efficiencies, available on short notice, may
not be available to registered holding company subsidiaries.
Without SEC approval, we are unfairly restricted from diversifying
into other lines of business--under existing SEC interpretations,
because we are limited to operating a single integrated utility
business, plus only such other businesses as ``reasonably incidental,
or economically necessary or appropriate'' to the operation of an
integrated utility business. Even with some recent SEC initiatives,
business opportunities that would help additional economic development
in our service territories, and even business opportunities that if
allowed to operate freely would save our customers money, may be
foreclosed to us. In addition, even where there are limited exemptions,
they often contain technical requirements that prevent the use of
efficient business structures or restrict or limit the manner in which
registered companies can employ shareholder capital.
PUHCA restricts registered electric holding company acquisitions
of natural gas distribution companies. Historically, the SEC has been
reluctant to view an electric system and a natural gas system as
capable of constituting a ``single integrated public utility system''.
The agency has allowed electric registered holding companies to
``retain'' a gas system only if it determines that the antiquarian
standards of the Section 11 ``ABC Clauses'' are met. This requirement
effectively precludes most existing electric registered holding
companies from acquiring even a neighboring gas system and gaining the
competitive convergence benefits enjoyed by numerous combination
(electric and gas) exempt holding companies or non-holding company
utility systems. A registered holding company may satisfy the ``ABC
clauses'' only if it acquires or merges with an existing combination
company and it can demonstrate to the SEC that the otherwise stranded
utility assets would be uneconomic or not viable.
Even the exempt holding companies, although free of virtually all
of the specific corporate restrictions in PUHCA, are limited to serving
utility customers in a specific geographic area, lest they lose their
exemption. They also must be concerned about diversification, because
the SEC has the power to revoke their exemption under the so-called
``unless and except'' clause. Finally, even exempt holding companies
are subject to the ``two bite'' requirements under PUHCA, which require
SEC approval in the event of certain acquisitions.
Although they were important at the time of the Act's passage, the
draconian nature of these restrictions and the penalty for
noncompliance make little sense today, especially as other federal and
state regulatory agencies have evolved, the capital markets have
matured, and the utility industry is restructuring. In the 64 years
since 1935, the governance of securities markets has become much more
effective and efficient. The SEC's authority under the Securities Act
of 1933, the Securities Exchange Act of 1934, and the Trust Indenture
Act of 1939 is very broad and the requirements under those laws assure
that investors receive appropriate and timely information upon which to
make informed investment decisions. Moreover, there is extensive
financial and corporate information available commercially through
hundreds of magazines, newsletters, on-line computer services, and
network sources, which enable the markets to respond within hours of
significant events. Nationally recognized rating agencies, such as
Moody's and Standard & Poor's, constantly evaluate our management,
financial integrity, and operations and rate our securities
accordingly. As a capital-intensive industry, we are especially
dependent on access to the financial markets and ultra-sensitive to
changes in the cost of our capital. Thus, we are committed to
maintaining financial integrity while striving for flexibility through
assuring a strong capital structure and favorable securities ratings by
such agencies.
Similarly, other federal and state utility regulatory agencies,
including the FERC and the state utility commissions, clearly have
significant jurisdiction, staff support and the means to regulate
multi-state utility systems in 1999; this regime largely was absent in
1935 at the time PUHCA was adopted. The standardization of utility
accounting, better staffing and more clearly defined regulatory
jurisdictional requirements have all made rate-regulation more
effective.
In light of the changes the electric industry is experiencing
today, and especially in light of the authority that already exists in
the SEC under the federal securities laws, the FERC and the state
commissions regarding the securities markets and rate matters, even the
SEC, the regulatory body charged with administering PUHCA, has formally
stated that PUHCA has become redundant regulation and should be
repealed. PUHCA lacks the flexibility to allow regulated companies to
adapt to new circumstances. Its model of the utility industry simply no
longer comports with the reality of where the industry is heading,
which is where the other regulators including the FERC, the State
legislatures and State Commissions are pushing. We need permanent
relief today from the unnecessary regulatory burdens imposed by the
Act.
iii. disadvantages faced by registered holding companies under puhca
concerning financings
PUHCA restricts any registered holding company system company from
issuing any security or exercising any rights generally affecting the
holders of an outstanding security of such company, with certain
exceptions for so-called ``routine financings.'' PUHCA does allow these
companies to engage in certain routine financing activities only by
making certain filings with the SEC or if the financing qualifies under
one of its limited exceptions. PUHCA requires the same information to
be filed as is already required to be filed under the Securities Act of
1933, in many instances, thus creating duplicative filing and
disclosure requirements. PUHCA thus creates additional filing
requirements with the SEC's PUHCA office, which in the case of certain
applications, the SEC has wide discretion to reject.
Under the complex filing system created by PUHCA, registered
holding company systems face a disadvantage, as compared to exempt
companies and all other public utility and non-utility companies within
the U.S., when issuing certain securities. As an initial matter, both
registered and exempt companies must register securities to be issued
to the public with the SEC as required by the 1933 Act. However, PUHCA
may require additional filings for the registered holding company
system company. This additional filing, which may require affirmative
action by the SEC, results in delay, added expense, and inevitably to
missed opportunities in financial markets.
A similar hurdle exists for certain registered holding company
system companies, resulting in added delay and expense, even with
respect to the issuance of exempt securities in Rule 144A, transactions
or financings under Rules 501, 502, 503, and other rules permitting
exempt financing transactions under the 1933 Act. These rules allow
exempt company subsidiaries to sell certain securities to qualified
investors while utilizing abbreviated disclosure requirements set forth
under the 1933 Act unencumbered by PUHCA. PUHCA, however, still
requires registered holding company systems to make these additional
filings unless the transaction qualifies for one of the limited
exemptions under PUHCA.
Another major handicap faced by registered holding companies is the
delay and expense involved in organizing financing subsidiaries. While
exempt holding companies and other public utilities face virtually no
restrictions, registered holding company systems generally must obtain
SEC authority to organize new subsidiaries and to provide needed
guarantees by the registered holding company or certain affiliates.
Therefore, registered holding company systems suffer increased costs of
financing which effectively penalizes the registered holding company
systems compared with other utilities and public companies for no
apparent policy reason given the 1933 Act and other federal and state
regulatory requirements.
Even upon the filing of additional disclosure, PUHCA contains
additional unnecessary restrictions given the requirements under the
1933 Act and the 1934 Act. These additional criteria put registered
holding company systems at a disadvantage by increasing a company's
cost of capital, both in restricting the types of securities that can
be issued with SEC approval and increasing the delay before permitted
securities can be issued in instances where SEC approval is required.
The SEC has attempted to provide limited administrative relief by
amending its rules to permit certain routine financing transactions by
subsidiaries of a registered holding company without SEC approval and
issuing so-called ``omnibus financing orders'' authorizing a broad
range of transactions by registered holding company systems. These
attempts fall short of the relief that is needed, however, by failing
to adequately expand the types of securities permitted to be issued by
registered holding company system companies and by continuing to
require state commission approval of regulated subsidiary financings.
The ``omnibus orders'' generally permit a specific company to issue
securities similar to those already permitted under PUHCA, such as
certain common stock, first lien mortgage bonds, bank loans, unsecured
debt, certain guarantees of securities of affiliates, or refunding
debt. On the other hand, the orders overly restrict the issuance of
even these securities, by setting forth conditions that are unnecessary
in today's financial market place. For instance, ``omnibus orders''
have disallowed financings where the effective cost of money on debt
securities exceeds a gross spread over comparable term U.S. Treasury
securities which is consistent with comparable investment grade
securities. Thus, even permitted securities may be disallowed due to a
structure that, though perhaps perfectly acceptable in the financial
markets, is deemed too risky by the SEC at a particular time.
In addition to the aforementioned restrictions, ``omnibus orders''
generally further do not provide for the issuance, or restrict the use,
of many types of securities that have been embraced by the securities
markets over the past few years. Significantly, the omnibus orders
generally permit the issuance of only enumerated securities, thus
preventing registered holding company systems from taking timely
advantage of new or recently created securities. Furthermore, the
inflexibility of PUHCA and the immense burden of continually filing
applications may frustrate the timely use of recently created financial
products already commonly accepted by the market. Examples include the
requirement to obtain specific SEC approval, in some instances, before
issuing Trust Originated Preferred Securities (TOPrS) and Quarterly
Income Preferred Securities (QUIPS), or using caps, collars, and other
derivatives transactions to hedge against the risk inherent in certain
securities.
Further evidence of the unfairness in this area is reflected in the
disparate treatment of registered gas companies. PUHCA restricts the
SEC's ability to approve long-term debt of registered electric holding
companies except in narrow cases involving the few combined companies
and under ``emergency'' circumstances. Thus, in most instances, unlike
registered gas utility holding companies, registered electric holding
companies are not permitted to issue long-term debt securities.
Registered gas holding companies, therefore, are able to take advantage
of certain financial products at the holding company level such as
TOPrS and QUIPS, while electric utility holding companies can only
issue those securities at the subsidiary level. This disadvantage
sometimes results in the issuance of securities in amounts smaller than
that generally regarded as efficient in the capital markets due to
investors'' preference for large, liquid issues. All other things being
equal, smaller issue sizes cost more than large, more liquid issues.
This restriction clearly prevents the electric registered holding
companies from taking full advantage of their asset base. The SEC has
continued to impose these restrictions in the face of the market
discipline that has been imposed in recent years by the assignment of
ratings on securities issues by the nationally recognized rating
agencies and the disclosure requirements under the 1933 Act and the
1934 Act.
These limitations and additional approval requirements under PUHCA
disadvantage registered holding company systems by effectively raising
their cost of capital. For example, as previously mentioned, under
current regulations and ``omnibus orders,'' registered holding
companies are restricted in the types of new financing which they may
incur as well as the financial hedging tools which they may use to
lower their cost of capital. Exempt companies, and other public
companies, are free to take advantage of new, innovative financial
products widely offered by reputable U.S. investment banking firms and
thus can more easily achieve a lower cost of capital while maintaining
financial stability. On the other hand, PUHCA restrictions often hinder
a registered holding company system from taking full advantage of these
opportunities and, in doing so, compete on a ``level playing field''
with exempt holding companies and non-utility companies in effectively
financing their operations.
There is no area where this inequity is clearer than in the
inability for registered holding company systems to take advantage of a
state public utility commission's order for recovery of stranded costs
without SEC approval. Many states have enacted statutes that provide
the opportunity for utilities to recover stranded or transitional costs
in order to prepare for retail competition. Such recovery is through
the issuance of transition bonds that securitize transition charges to
be collected from customers over time. Transition bonds typically are
structured in such a way that they are rated triple-A. However, even
though state public utility commissions pursuant to specific state
legislation authorize the issuance of these transition bonds,
registered holding company systems must then ask the SEC for authority
to enter into these transactions. Additionally, many of the financing
documents must be filed with both the state commission and pursuant to
the SEC's Securities Act of 1933 and to require a third filing with
PUHCA introduces yet another layer of redundancies and costs without
providing any additional control. Exempt companies clearly have an
immense edge by being able to engage in these financing transactions to
issue transition bonds and recovering stranded costs with lower
transaction costs and without potential interference or delays under
PUHCA.
In the SEC's 1995 report recommending repeal of PUHCA, the Division
of Investment Management suggested that ``the SEC permit registered
companies wider latitude to structure the types and terms of their
securities to the demands of the market in order to achieve the lowest
possible capital costs.'' However, the SEC has yet to find the
flexibility it needs under PUHCA to allow registered holding company
systems the opportunities to achieve the lowest possible capital costs.
Again, the time to repeal PUHCA is now.
iv. debunking the myths about puhca
There is strong bipartisan support for PUHCA reform. In the last
two Congresses, PUHCA repeal bills have had cosponsors from both sides
of the aisle. Both Democratic and Republic Administrations, dating back
to the Reagan Administration, support PUHCA repeal. While not everyone
may agree on all the details of potential federal electric utility
restructuring legislation, there is strong support that the time for
PUHCA to be repealed is now. With this in mind, it may be helpful to
address several of the ``last gasp'' arguments against repeal.
myth no. 1: puhca prevents utilities from exercising market power.
Contrary to the myths about PUHCA preventing the exercise of market
power, PUHCA actually perpetuates market concentration. Companies
subject to PUHCA generally are confined within geographic boundaries
consistent with the ``integration'' standard. While at one time this
was considered a way of stopping growth, and enabling federal and state
utility regulation to mature, it has instead led to a concentration of
the utility market. This market concentration that occurs in a monopoly
situation serves to impede competition and frustrate state
restructuring programs. If PUHCA stays in place, it will only
perpetuate a monopoly situation for those consumers in that service
territory.
Now the Coalition realizes that some have asserted that it is
essential to retain PUHCA in order to limit what they call
``concentration of market power'' as the electric industry
restructures. Those who make that assertion simply do not understand
the role PUHCA has played. As stated earlier, PUHCA is a corporate
structure and securities statute. Its main goal was corporate
simplification, not establishing or setting specific rates for utility
services. We cannot emphasize enough that PUHCA's existing provisions
actually increase the likelihood of concentrations in particular
markets, because the ``integration requirements'' and geographic
restrictions of the Act limit both registered companies and exempt
companies to retail utility holdings in particular areas, and restricts
the ability of more distant companies to acquire, construct or operate
facilities that could compete with the local utility. PUHCA effectively
keeps new entrants out of markets, and keeps registered companies from
engaging in competitive lines of business. Indeed, PUHCA as it stands
requires utilities to limit acquisitions to nearby utilities--ones that
can be integrated or that do not result in a loss of exempt status.
Those nearby utilities are the ones most likely to have presented the
possibility of competition.
PUHCA was originally enacted to prevent abuses by utility companies
by restricting growth and advancements at a time when there were little
or no state or federal utility regulatory controls available. While
this approach served us well in 1935, it is now outdated and serves as
an impediment and a barrier to a competitive market, especially at the
retail level.
PUHCA was not designed as, and is not, a utility or rate regulation
statute. PUHCA is primarily a law dealing with corporate governance and
securities issues. Aside from the fact that it has outlived its
usefulness because of changes in the way we regulate and review
securities transactions, PUHCA might be viewed as an energy matter only
from the standpoint that the companies it governs happen to be in the
energy sector. Regulating public utilities when they provide
electricity services to consumers is governed by other significant
laws. These laws, most notably the Federal Power Act, the Natural Gas
Act, and other state utility laws, deal with the rates consumers pay
for electricity and gas services. PUHCA does not. In fact, PUHCA repeal
bills introduced and vetted in the last two Congresses, with consumer
protection provisions, actually will help state and federal public
utility regulators do their ratemaking job. To withhold PUHCA repeal
from moving forward due to concerns about market concentration in a
time when competition in the retail market is rapidly moving forward
sends conflicting policy signals. Competition is good, unless you are a
registered holding company. A competitive, free market, over the long-
term, provides low prices and efficiencies for our consumers, but long-
term benefits will be denied the consumers served by the 18 active
registered holding companies.
myth no. 2: repealing puhca will create a regulatory gap.
Repealing PUHCA will not create a regulatory gap, it will eliminate
one. Ever since the U.S. Supreme Court issued the Ohio Power decision,
PUHCA's requirements that affiliate contracts be ``at cost'' have
prevented FERC and state regulators from applying a market test to
lower costs of services for wholesale and retail consumers in most
cases. This decision, in large measure, has protected utilities'' costs
in rate bases and, to a significant degree, has preempted FERC and
state regulators from disallowing the recovery of certain costs. With
the repeal of PUHCA, this regulatory gap will be eliminated once and
for all. The rate regulators, will properly have, at both the wholesale
and retail levels, the authority to determine the allocation and
reasonableness of costs incurred by the utility in the provision of
necessary services and whether or not such costs should be recovered in
rates. Currently PUHCA hinders such rate regulation.
Yet, despite the need to repeal this outdated act, many are
concerned that repeal of PUHCA is a repeal of consumer protections.
This is simply not true.
It is important to remember that there are more than 3,000 entities
currently providing electric and gas service to consumers. Of these,
approximately 170 are holding companies. However, approximately 151
holding companies are exempt from PUHCA, leaving PUHCA to regulate the
18 active registered holding companies. Repealing PUHCA does not mean
these registered holding companies will no longer be regulated. It only
means they will be regulated under a number of other statutes,
including all state public utility laws, the Federal Power Act, and the
Natural Gas Act. There will be no regulatory gap if PUHCA is repealed.
Yet the cries continue that PUHCA cannot be repealed because it
protects consumers. What about the majority of individuals who are
served by utilities not covered by PUHCA? Who is currently protecting
them?
Repealing PUHCA will not hurt consumers. Retaining the status quo
will. If a consumer is served by a company regulated under PUHCA, that
company is restricted from entering into competitive transactions,
expanding into new business areas and improving efficiencies that stand
to benefit the consumer.
In fact, stand alone PUHCA repeal bills introduced and vetted in
the last two Congresses provide continued protection for consumers,
while eliminating unnecessary agency duplication and deleting arcane
provisions that no longer serve a public interest purpose. These repeal
bills actually improve certain important aspects of federal and state
utility regulation. Some have argued that this may be financially
burdensome to states; however, the ongoing restructuring of the
electric utility system has imposed significant new responsibilities on
the states, involving numerous companies and issues. The states have
been in the lead in taking on these responsibilities. Surely, with the
experience the states have had to date with restructuring issues, they
will be able to effectively deal with any potential resource issues.
The various stand alone PUHCA repeal bills introduced and vetted
during the last two Congresses also fully provide for protection of
consumers by providing access to books and records, by maintaining
accountability procedures, by providing for review of affiliate
transactions, while continuing FERC and State commission rate
regulation and audit authority. These are a far more direct means of
addressing market concerns and protecting consumers than PUHCA of 1935
can provide in today's market.
The Repeal PUHCA Now! Coalition recognizes that some state
commissioners and other ratepayer advocates have expressed concern that
state authority would not be sufficient to obtain the necessary
information for proper discharge of state regulatory action. They are
concerned that there would be a continuing need, after repeal of PUHCA,
for federal audit authority and federal oversight of system
transactions that would pass costs through to ratepayers. The Coalition
understands those concerns. We also understand the significant
difference between repealing the Act while providing for certain
safeguards, and simply transferring the existing burdensome
requirements to a new forum. We believe PUHCA repeal legislation, such
as the PUHCA repeal provisions of H.R. 2944, H.R. 2363, and S. 313, can
fully address these concerns and include provisions to provide
appropriate access to books and records.
With regard to books and records, all utility companies know full
well that the books and records of the utility company must be
available to regulators for their review. The burden will remain on a
utility to demonstrate that its proposed rates are just and reasonable.
Similarly, we understand and can accept a review of the books and
records of those affiliates that deal with the utility company and that
would thereby pass costs through in rates. Regulators should have
access to all information that is relevant in reviewing and
establishing rates for electric services. However, there are
undoubtedly some affiliates in a diversified company that will not pass
costs through to ratepayers, or whose activities are so removed from
the utility activities that access to their books and records would be
of no legitimate value for ratemaking or cost allocation purposes. The
key test is what access actually is necessary for the effective and
proper discharge of duties of the regulatory authority involved.
As to the oversight of affiliate transactions, again we understand
the interest of regulators in reviewing those transactions involving
the utility, and which will cause the incurrence of costs to be passed
through to ratepayers. Indeed, many state regulatory commissions
already review transactions between a utility and its affiliates, and
no further authority is needed. Here again, to the extent it affects
rates, we do not oppose reasonable affiliate transaction provisions in
a PUHCA repeal bill. However, we can also envision a number of
transactions between affiliates completely apart from the operating
utility companies, and which would not cause the incurrence of costs to
the utility. Where the affiliate contractual arrangements are not
related to costs to be incurred or passed through in the utility's
regulated rates, separate regulatory review of the interaffiliate
transactions would be unnecessary.
myth no. 3: more utilities will merge if puhca is repealed.
As noted earlier, the competitive transformation of the utility
industry is underway. Twenty-three states have now enacted
restructuring legislation or regulations. Similar to every other
heavily regulated industry that has undergone a competitive transition,
some consolidation of service providers is inevitable. But contrary to
myth, consolidation will not occur exclusively because of PUHCA repeal,
and whatever consolidation takes place will not escape significant
regulatory review and oversight.
It is important to recognize several facts about mergers and market
power assertions if PUHCA is repealed. First, the very same expert
agencies and departments who today substantively review mergers will do
so after PUHCA is repealed. FERC will retain all of its merger
authority. It has recently updated its merger policy in light of
changes occurring in the electric utility industry. Without PUHCA, FERC
will still review future mergers unconstrained by any new Ohio Power or
other similar regulatory conflicts at the federal level. State
Commissions will still have their authority to approve, block or
condition mergers that they have today under state law. State
legislatures that wish to require that a utility company operating in
that state must be incorporated in that state and remain fully subject
to the state's authority regarding its securities and other corporate
matters, can continue to do so. PUHCA's repeal will have no effect on
that. The Department of Justice will retain its antitrust authority,
and the FTC its Hart-Scott-Rodino authority. The only thing that will
change when PUHCA is repealed is that after all of those approvals are
given, the SEC will no longer have the unnecessary and duplicative
regulatory burden of again stating its deference to the decisions the
other regulatory agencies previously have reached.
Mr. Chairman, let us be clear: when PUHCA is repealed, no merger
will occur without the same full regulatory scrutiny that occurs today.
If there are efficiencies and benefits to be gained, those mergers
should go forward. If there are not, there is ample regulatory
authority in the hands of knowledgeable and fully empowered regulators
to stop them.
Simply put, we believe that the nation's state and federal
regulators have ample authority and the ability to review potential
mergers and to protect the consumer. There is no deficiency of federal
and state utility regulatory means and authority requiring PUHCA to
stay in place to effectively review and govern the inevitable
consolidation of the utility industry. Removing the SEC from reviewing
mergers will not diminish these protections.
myth no. 4: puhca cannot be repealed until retail competition is
established.
Effective retail competition can not be established unless and
until PUHCA is repealed. PUHCA's requirements and restrictions unduly
limit and burden virtually any utility company owning or operating any
utility assets for the production, transmission, transportation or
distribution of electric energy, or manufactured or natural gas, within
the United States. As discussed more fully below, not Congress, the
states, or the FERC can create a truly competitive environment with
PUHCA remaining in place.
In reviewing the issues that may need to be addressed this year,
Congress should keep in mind the level of activity concerning retail
choice in the states and at the FERC. As you know, almost every state
currently has some type of electricity restructuring proceeding
underway. As previously stated, twenty-three states have established
retail competition frameworks.
Congress has wisely given the states and FERC significant time and
latitude in picking the pace, method and means for achieving retail
competition. This approach has allowed the states to proceed with
retail competition tailored to their own regional circumstances. This
has provided Congress and regulators critical information and
experience to make informed decisions about any potential comprehensive
federal legislation.
Based upon the evidence to date, the states that are restructuring
are in fact moving forward without federal intervention. From
California to New York, Arizona to Arkansas, Maine to Maryland, the
states have passed laws or regulations to establish retail competition.
Thus, the real question for the Congress to focus on is whether the
sixty-four year old statute is impeding the numerous state initiatives
to restructure retail electric markets. Does PUHCA help or hurt the
existing and future efforts to establish state ordered retail
competition?
In the Coalition's view, keeping PUHCA in place will hurt state
ordered establishment of retail electric competition. Simply put, the
scope of retail competition will be artificially constrained and
truncated by a number of PUHCA's regulatory restrictions. Let us give
you several examples.
PUHCA forbids domestic Exempt Wholesale Generators (``EWGs'') from
selling power at retail. As a result, many low-cost generation
suppliers refrain from making retail sales because of PUHCA-related
concerns. This applies to all entities--whether registered, exempt or
non-holding companies. Indeed, any generation supplier wishing to avoid
a holding company structure would face potential PUHCA jurisdiction if
it were to setup a subsidiary and that subsidiary were to make retail
sales.
Registered holding companies interested in making retail sales from
facilities that are distant from their franchised retail service areas
must face the geographic constraints of PUHCA's ``integration''
standard, which, as noted above, generally restricts registered company
``utility'' operations to a regional scope. This means, for example,
that a registered holding company based in the Eastern U.S. would be
effectively excluded from selling retail power from a facility located
in California. Similarly, an exempt holding company can risk its exempt
status by undertaking non-EWG sales outside the geographic boundaries
defined by Sections 3(a)(1) and 3(a)(2). Thus, for example, a utility
holding a Section 3(a)(1) ``intrastate'' exemption cannot make
substantial retail sales outside the state where the utility is
incorporated and conducts most of its utility business. This does not
promote economic efficiency or a robust retail generation market.
In addition, many state restructuring laws call for or are
contemplating the separation of generation and transmission/
distribution assets into separate corporate entities. This aspect of
restructuring can cause particular problems for both registered and
exempt holding companies. Think about it: can a 64-year-old piece of
legislation be applied to a different utility business than was
conceivably envisioned in 1935? PUHCA was not designed to be flexible.
PUHCA mandates a single geographically and operational integrated
structure, not well adapted to an evolving industry as a result of
federal and state restructuring competition initiatives. As noted
earlier, PUHCA isolates electric and gas systems to limited, discrete
geographic areas. The requirement under PUHCA that registered holding
companies maintain a single, integrated utility business has quickly
become problematic as governmental entities and a growing competitive
market pressures companies to restructure. As electric utilities are
compelled by state legislation, regulation or competitive forces to
either ``unbundle'' utility functions and assets in an effort to
restructure their businesses along product lines or comply with
corporate unbundling requirements, the conflicts with PUHCA are
becoming acute.
PUHCA controls this ``unbundling'' process unnecessarily. Yet the
``unbundling'' already has begun as a result of FERC's ``open access''
transmission orders, the twenty-three state restructuring plans already
under way, the Public Utility Regulatory Policies Act of 1978
(``PURPA''), and the Energy Policy Act of 1992 (``Policy Act''). This
``unbundling'' has produced significant new players with geographically
widespread utility properties. Since the new players under PURPA and
the Policy Act are exempt from PUHCA, how can PUHCA's geographic
integration requirements be significant and necessary to this changing
industry?
There is another aspect of PUHCA's integration requirements, which
may be at odds with retail competition unbundling of functions and
services. Registered holding company systems are required to operate in
an integrated manner. This requirement has led to centralized electric
system planning, construction, and the use of: (a) companies providing
common management, financial, accounting and planning services, among
other services, for all companies, utility and non-utility alike, in
the same system, (b) fuel companies serving various affiliated
companies and (c) companies operating power plants for various
affiliated companies. In addition, for registered holding company
systems and their integrated operations, it has been a prevalent
practice to have common officers, and in many cases, common directors
among affiliated companies. Will these integrated planning, service and
personnel requirements be appropriate and workable in a disaggregated
and competitive electric business where flexibility is necessary?
A number of registered holding companies have divested or are
planning to divest their electric generator assets and will operate in
restructured systems where their retail customer base will be open to
competition. It is unclear that the integration standard will have any
relevance under such circumstances.
For a multistate registered holding company, PUHCA is a major
concern as states move forward to competition. PUHCA restricts our
ability to compete. This is attractive to our ``unregulated''
competitors as they move forward unimpeded. PUHCA restricts the types
of business we can invest in, where we can invest and how much capital
we can deploy. Restricted investments, required integration systems and
financial prohibitions severely impact our structural and financial
ability to respond to a rapidly moving competitive retail market. If a
level playing field is sought, for a competitive market, PUHCA stands
out as a significant barrier to achieving this goal.
Technology is another issue. PUHCA was adopted in a world without
computers, without reliable transmission systems, without regional
power pools, without reliable long-distance communication. Technology
was one reason for PUHCA's geographic integration limits. Obviously,
technology has rendered PUHCA, and its integration requirements,
obsolete.
A prominent feature of current FERC policy and most state
restructuring frameworks is the establishing of so-called Regional
Transmission Organizations (``RTOs'')--whether they are an independent
transmission company (``Transco'') or an Independent System Operator
(or ``ISO``). These RTOs typically assume in some fashion control of
the regional or statewide electric transmission grid in order to assure
further non-discriminatory access and efficient, reliable system
operation.
PUHCA presents a potential regulatory dilemma for some RTOs, since
these entities may, depending on the facts, fall under the definition
of ``electric utility company'' under Section 2(a)(3) of PUHCA--that
is, an RTO will ``operate facilities used for the generation,
transmission, or distribution of electric energy for sale . . .''
Indeed, in order to perform their mandate effectively, RTOs must
necessarily exercise operational control over transmission grid
facilities.
RTOs are not the kind of public utility entities that PUHCA was
designed to regulate. Yet because RTOs could, under certain
circumstances, be deemed to be PUHCA ``electric utility companies'',
any person or company which might be regarded as exerting a
``controlling influence'' over an RTO could in turn be deemed a
``holding company'' potentially subject to full PUHCA regulation. This
is a very real concern. To be sure, the SEC Staff has issued a no-
action letter concurring that the California ISO is not a PUHCA
``electric utility company'' because it is an ``instrumentality'' of
the State of California, based on the State legislature's restructuring
directive. However, the means of RTO creation varies from region to
region, and most RTOs will operate on a regional, rather than a
statewide basis, and with or without state authority. The PUHCA
uncertainties associated with the structure and operations of RTOs may
cast a regulatory cloud over a vital aspect of state and federal
restructuring efforts. It is unclear how the SEC will deal with this
critical issue, especially now that most of the RTOs that have been
approved to date have been and are also power pools, which have not
been regarded as creating a holding company structure for member
utilities. Thus, on the one hand, RTOs will be critical to successful
restructuring efforts. On the other hand, PUHCA may impede RTOs from
developing regionally, with broad-based membership.
The corporate or functional unbundling features of current
restructuring programs can also be highly problematic for utilities
holding a Section 3(a)(2) exemption. Section 3(a)(2) provides an
exemption for holding companies that carry on the bulk of their utility
activity at the parent company level, with only minor utility
subsidiary operations. Thus, for example, if a parent utility company
must transfer to a subsidiary company substantial generation assets to
comply with state initiated restructuring law, it may no longer qualify
for a Section 3(a)(2) exemption, since the bulk of its utility
operations may now be conducted downstream at the subsidiary level.
In addition, restructuring mandates may effectively compel a
utility to create a new holding company over generation, transmission/
distribution, and non-utility subsidiaries, as a means of assuring
effective corporate separation (unbundling) of utility functions and
safeguarding against potential cross-subsidization. The creation of
such a top-tier holding company with no utility assets of its own,
however, precludes retention of a Section 3(a)(2) exemption (which
requires that the parent holding company also be a utility company).
In sum, over the long-road PUHCA will hinder state restructuring
efforts. PUHCA is an entry barrier, impeding robust retail competition.
State driven restructuring presents potential problems for the ability
of registered companies to comply with PUHCA's requirements and compete
in newly created retail markets. Registered companies are subject to
the ``integration'' standard, which demands, among other things, that
utility operations be component parts of a vertically integrated
system. This standard clearly clashes with emerging competitive systems
based on unbundled service, independent system operators, and power
exchanges. And, ironically, state restructuring requirements will
likely endanger certain utilities' existing exemptions and thus compel
them to become registered holding companies.
Leaving PUHCA intact as state restructuring proceeds will create
perverse incentives, as companies recreate ``PUHCA Pretzels''
especially regarding transmission assets--to comply with PUHCA's broad
reach, restructure their products and services, and to compete in
retail electricity markets. This federal barrier to state enacted
retail competition reforms can only be removed by the Congress. That is
why PUHCA repeal legislation should be signed into law this year, and
without the need for ``comprehensive'' federal restructuring
legislation.
v. pending puhca repeal proposals
The Coalition supports legislation that repeals PUHCA and replaces
it with a streamlined regime that provides for adequate measures to
provide consumer protections as a stand-alone measure. We support
Congressmen Tauzin (R-LA) and Towns (D-NY), and their cosponsors in
their bipartisan effort to enact H.R. 2363, the ``Public Utility
Holding Company Act of 1999,'' to ensure that another Congress does not
conclude without considering PUHCA repeal. We support its companion
Senate bill, S. 313 by Senators Shelby (R-AL) and Dodd (D-CT). We also
support the PUHCA repeal provisions of H.R. 2944, the ``Electricity
Competition and Reliability Act,'' introduced by Congressman Barton (R-
TX).
Some background is necessary to understand the genesis and
evolution of the provisions of H.R. 2363, S. 313, and H.R. 2944. These
provisions arose out of the SEC's 1994-1995 yearlong study on PUHCA's
continued relevance in today's evolving electric and gas markets and
sophisticated utility oversight. The SEC study began in July, 1994,
with a round-table hearing at which consumer groups, securities rating
agencies, Local, State and Federal regulators, and industry
representatives all analyzed PUHCA's effectiveness and continued with
an invitation to all interested parties to submit comments on all
aspects of PUHCA, pro and con. The SEC received thousands of pages of
comments, with only one out of over 110 participants suggesting that
PUHCA should not be repealed or reformed. All other interested parties
agreed that PUHCA needed significant revisions. And today, no
knowledgeable party that understands the role of PUHCA argues that
PUHCA should not be significantly reformed. Those that argue for delay
or for the continuation of PUHCA do so are unmindful of the
overwhelming case made for repeal by the objective experts.
Following the SEC's 1995 report to Congress, a bipartisan bill was
drafted incorporating the consumer protection provisions the SEC
recommended. This bill was introduced in the 104th Congress. (S. 1317
by Senators D'Amato (R-NY) and Sarbanes (D-MD), et al.). S. 1317 was
voted out of the Senate Banking Committee after extensive hearings and
mark-up and was awaiting final consideration by the full Senate before
that Congress adjourned. A companion bill (H.R. 3601 by Congressman
Tauzin, et al.) was introduced in the House but was not reported out of
committee, notwithstanding several extensive hearings on the SEC's
report and proposed legislation before the House Commerce Subcommittee
on Energy and Power and the then Subcommittee on Telecommunications and
Finance.
In the 105th Congress, a similar PUHCA repeal bill was introduced
in the Senate. (S. 621 by Senators D'Amato, et al.). It too was
reported out of the Senate Banking Committee with amendments designed
to provide additional consumer protections but, again, Congress
adjourned prior to action by the full Senate. A companion bill to that
Senate bill was introduced in the House. (H.R. 3976 by Congressman
Tauzin, et al.). And again, notwithstanding additional committee
hearings on the need to repeal PUHCA, no action was taken by the House.
Thus, the PUHCA repeal provisions of H.R. 2944, and the PUHCA
repeal bills, H.R. 2363 and S. 313, reflect several years of
negotiations and collaboration between the FERC, the SEC, NARUC,
Congressional staff, as well as various industry stakeholders. They
represent a carefully developed and negotiated compromise and are ripe
for congressional action. They set forth sufficient consumer protection
provisions in a regulated, yet evolving restructured market. These
bills grant FERC in wholesale rate proceedings, and the State
commissions in retail rate proceedings, access to books and records of
holding companies and their associate companies for the review of costs
proposed to be recovered by regulated public utilities in their
jurisdictional rates. These bills allow FERC and the state commissions
to exercise their existing authority to review affiliate transactions
between regulated and non-regulated associate companies within holding
company systems. FERC is empowered to determine which utilities will be
exempt under the new PUHCA, including those currently exempt from PUHCA
of 1935 and those currently free from FERC jurisdiction. Additionally,
the bill continues all existing authority FERC and the States have
under the Federal Power Act and all applicable State laws,
respectively, to protect consumers.
In the event that Congress is unwilling to repeal PUHCA as a stand-
alone bill this year, the Coalition supports legislative language that
has similar provisions to the PUHCA repeal provisions of H.R. 2944, and
the PUHCA repeal bills, H.R. 2363 and S. 313, and, as discussed below,
several of the bills already introduced this Congress contain these
provisions.
The Coalition strongly opposes, however, any language that
conditionally repeals PUHCA. As discussed more fully below, there
exists no substantive reason why PUHCA repeal should be tied to retail
competition.
PUHCA repeal provisions similar to the PUHCA repeal provisions of
H.R. 2944, and the PUHCA repeal bills, H.R. 2363 and S. 313, have been
reproduced in four bills introduced in this Session of Congress.
Although essentially the same, each are different and will be discussed
in greater detail.
H.R. 667, ``The Power Bill,'' introduced by Congressman Burr (R-
NC), contains language identical to the stand-alone bill introduced by
Congressman Tauzin in the 105th Congress (H.R. 3976). It does not
condition the repeal of PUHCA of 1935 recognizing that PUHCA stands in
the way of effective competition within the several States. It requires
the keeping of certain books and records by holding companies and their
subsidiary companies and provides FERC and the States access to such
records if deemed relevant to disallow any cost recovery in a rate
proceeding. Like the H.R. 2363, it authorizes FERC to exempt companies
from these requirements. However, unlike H.R. 2363 that provides for a
12-month effective period from date of enactment, the Burr bill
provides for an 18-month effective period. Thus, it is identical to S.
313 that has been reported out of the Senate Banking Committee and is
awaiting final action by the full Senate in the 106th Congress.
H.R. 1587, the ``Electric Energy Empowerment Act of 1999,''
introduced by Congressman Stearns (R-FL), contains language similar to
the unconditional repeal PUHCA legislation introduced in the 104th
Congress prior to the original Senate Bill being amended. But for
relatively minor differences in the stated purpose of the repeal
section, its provisions are identical to H.R. 3601 by Congressman
Tauzin, et al., and S. 1317 by Senator D'Amato, et al., of the 104th
Congress. While the Coalition does not object to these provisions of
H.R. 1587, is should be noted that the provisions of H.R. 667, H.R.
1828 and H.R. 2363 contain amendments adopted by the U.S. Senate and
incorporated in subsequent PUHCA repeal bills since the 104th Congress.
(See H.R. 3976 by Congressman Tauzin, et al., and S. 621 by Senator
D'Amato, et al., of the 105th Congress). These amendments clarified
certain definitions and provided for certain exemption authority by the
FERC. Like Tauzin's H.R. 2363, the Stearns bill's provisions become
effective one year from date of enactment.
H.R. 1828, the ``Comprehensive Electricity Competition Act,''
introduced on behalf of the Administration by Congressmen Bliley (R-VA)
and Dingell (D-MI), contains repeal provisions virtually identical to
the Tauzin and Burr bills. Like the Burr bill, Bliley's bill repeals
PUHCA 18 months after the date of enactment. With this effective date,
these provisions are identical to those of S. 313 awaiting final
consideration by the full Senate.
H.R. 2050, the ``Electric Consumers'' Power To Choose Act of
1999,'' introduced by Congressmen Largent (R-OK) and Markey (D-MA),
contains PUHCA repeal provisions similar to those of H.R. 2363 but
differs in one major way. PUHCA of 1935 is not unconditionally repealed
as in H.R. 2363 but rather only if all but one of the states within the
service territory of public utilities of a holding company system
provides for retail electric or gas access. If two or more states
within the service territory of a registered holding company system
have not provided for retail access, PUHCA's onerous restrictions
continue to apply.
The Coalition strongly opposes this provision. This approach is at
odds with the consensus that now exists on the Committee that Congress
should not mandate retail access on the states. Thus, Congress should
not enact any legislation that ties PUHCA repeal to whether the states
order retail access in their respective states.
H.R. 2050 also differs from H.R. 2363 in two less significant ways.
First, the provisions are effective 18 months from date of enactment.
Second, an ``exempt telecommunications company'' (ETC) authorized in
the Federal Telecommunications Act of 1996 is added to the list of
those entities exempted from the PUHCA provisions. The Coalition
prefers a 12-month effective date since sufficient time has elapsed for
states to address any perceived regulatory gaps since the 1995 SEC
report recommending repeal but has supported bills with an 18-month
effective date. The Coalition does not object to the exemption of ETCs.
As described more fully under our attempt to debunk the several
myths surrounding PUHCA's repeal, PUHCA repeal should not be held up
for full-fledged competition. The current restrictions under the Act
are preventing the affected companies from offering many services now
that would benefit consumers. There cannot be effective competition if
the electric and gas utility segment of the competitive market
continues to be hampered by the Act. And even in those states that have
not or do not provide for retail competition, PUHCA is not needed to
protect consumers.
There also has been one proposal suggesting that another class of
exemptions be created under PUHCA rather than repealing the Act.
Current holding companies registered under PUHCA would be permitted to
become exempt from PUHCA's restrictions if each of the public utilities
of a holding company's system unilaterally offers retail choice to its
customers even if their respective States have not mandated retail
choice.
There are several problems with this approach. First, all experts
agree that PUHCA should be repealed now because it (1) unnecessarily
prevents companies from becoming competitive, (2) is not necessary as
part of today's regulatory regime even without retail competition and,
(3) because it has accomplished its goals. An exemption would continue
an unnecessary, burdensome regime for which no continuing purpose
exists.
Second, many exempt companies today support PUHCA repeal because it
limits their flexibility and efficiencies both structurally and
financially. Adding another exemption simply increases the burdens on
all exempt companies. Rather than removing obstacles to competition and
efficiencies, this proposal would perpetuate them.
Third, such a provision is punitive to companies operating in the
several States that have decided for local reasons not to offer retail
choice to its citizens at this time. It is unclear how companies can
offer such choice to its customers they are obligated to serve in such
states. PUHCA companies are faced with a clear dilemma: If a State does
not believe allowing a company the ability to offer choice, the only
real option left is the sale of the company to an entity that is not
subject to PUHCA. What are the public policy goals of such a proposal?
vi. conclusion
In conclusion, the Repeal PUHCA Now! Coalition believes it has
addressed the various issues of concern that have been raised about
repeal of this statute which, as the SEC has noted, is outdated and no
longer needed. Consumer protections will still be provided, market
power problems are not compounded and regulatory guardians will still
vigorously oversee the exercise of market power through review of rates
and merger activities. If we are for fair wholesale and retail
competition, where numerous firms compete under similar regulatory
restrictions, then removal of PUHCA is a key component to a competitive
environment. We urge the Congress to repeal PUHCA this year.
Mr. Oxley. Thank you, Mr. Lhota.
Mr. Kanner.
STATEMENT OF MARTY KANNER
Mr. Kanner. I would submit that the question is less when
and whether to repeal PUHCA, and more whether we want to
advantage the competitive interests of one segment of the
industry or rather to advantage the interests of competition.
PUHCA--as was previously stated, PUHCA does not directly
address rate regulation. It does, however, create a structure
to facilitate effective regulation to protect consumers and to
prevent unfair competition.
And I believe that those goals, those underlying objectives
of PUHCA, remain equally valid and, in fact, more important as
the industry evolves and as we go toward that competitive end
state.
I agree that consumers are better under competition, as you
said, Mr. Chairman. That is exactly the ideal that we should
strive for. However, we need to create the conditions in which
competition can, in fact, survive. Stand-alone PUHCA repeal
would impede competition, not advantage. It would increase the
ability--it would increase concentration in the industry, with
certain players becoming larger and larger, rather than
fostering the emergence of more and different types of
competitors. It would facilitate subsidized ventures in which
utilities would be able to leverage their monopoly functions,
their continued monopoly control of distribution and
transmission to subsidize their competitive ventures, whether
those are in energy sales in different parts of the country or
in businesses unrelated directly to energy, but in other
services like appliance installation and repair, securities,
other things. And then last, it would put consumers at risk of
bearing the costs of those other ventures if they prove not to
be successful.
It was stated earlier that in a competitive marketplace, if
a business is successful, if they innovate, if they are
entrepreneurial, they bear the benefits, and if not, they bear
the risks. When you have companies that have one foot in each
camp, part regulatory, part monopoly, and part a competitive
venture, then it is not the company that bears those risks, but
rather the consumers in that regulated venture. That is not the
type of market we believe we need to end up with.
Can PUHCA be repealed? Absolutely, Mr. Chairman. But we
need to do it with provisions which advance competition and
protect consumers. Many of those were detailed today in the
earlier panel by Mr. Smith, the FERC general counsel. As he
said, we need to make sure if we want competition that all
players play by the same rules in that highway of commerce, the
Nation's transmission system. We need to make sure that the
vestiges of market concentration, of market power, do not
inhibit competition in the generation market. We need to make
sure that mergers are all reviewed to ensure that we don't
unduly create an increase in competition.
There are certain types of mergers under PUHCA that are
reviewed that would not be reviewed in the absence of PUHCA.
The bills before you today, the stand-alone PUHCA provisions,
don't grant FERC the authority to look at holding-company-to-
holding-company mergers or the disposition of generation
assets. That needs to be accomplished.
And last, we need to make sure that we have vigorous
provisions that address affiliate cross-subsidization. As long
as there is that one foot in the regulated business, there is
the ability to cross-subsidize competitive ventures. That is
not fair to the consumers that bear the risks and costs. That
is not fair to the competitors in those other business lines.
We need to make sure that there are effective provisions
dealing with affiliate transactions. The access to books and
records isn't something that can be repealed in 2 years because
utilities will continue to be regulated monopolies in the
distribution and transmission functions.
Last, Mr. Chairman, we need to make sure that the
underlying objectives of PUHCA, again, creating a structure in
which competitors and consumers are protected, is upheld. We
don't have to do that in the same regulatory model. We can go
to the competitive model, but we need to make sure that we are
creating the conditions necessary for competition to exist and
thrive.
[The prepared statement of Marty Kanner follows:]
Prepared Statement of Marty Kanner on behalf of Consumers for Fair
Competition
Mr. Chairman, members of the Committee, I am Marty Kanner. I am
testifying today on behalf of Consumers for Fair Competition (CFC), a
coalition of residential and industrial consumer representatives, small
business interests, local regulators, public interest groups, and
public and private utilities.<SUP>1</SUP>
---------------------------------------------------------------------------
\1\ American Public Power Association, Electricity Consumers
Resource Council (ELCON), Enron, Friends of the Earth, Madison Gas &
Electric, Missouri River Energy Services, National Association of State
Utility Consumer Advocates (NASUCA), Northern California Power Agency,
Ohio Municipal Electric Association, Office of Ohio Consumers Counsel,
Transmission Access Policy Study Group (TAPS), Wisconsin Public Power
Inc., National Alliance for Fair Competition (members include: Air
Conditioning Contractors of America, Air Conditioning & Refrigeration
Wholesalers Association, American Supply Association, Associated
Builders and Contractors, Independent Electrical Contractors, Petroleum
Marketers Association of America, Plumbing, Heating and Cooling
Contractors--National Association, National Electric Contractors
Association, Sheet Metal and Air Conditional Contractors National
Association)
---------------------------------------------------------------------------
CFC was formed to advance policies necessary to promote effective
competition--and necessary to provide the intended consumer benefits of
lower rates, increased efficiencies and innovation, and diversity of
supply options. The coalition believes meaningful competition will not
take hold or survive if steps are not taken to address the market
dominance of incumbent utilities.
You will hear assertions that the Public Utility Holding Company
Act (PUHCA) is no more than an out-dated statute intended to protect
investors from fraudulent securities practices. Don't be misled.
Congress enacted PUHCA as a companion statute to the Federal Power Act.
PUHCA establishes passive restraints on the structure of the electric
utility industry in order to mitigate market power, preclude practices
abusive to captive consumers, and facilitate effective regulation.
Stand-alone PUHCA repeal, as embodied in several bills introduced
in the House, eliminates these structural protections. Moreover, they
do not include the policy prescriptions needed to promote meaningful
competition.
Such action will expose captive consumers to a myriad of potential
risks. Rather than ushering in competition as repeal proponents would
have you believe, stand-alone PUHCA repeal will have substantial anti-
competitive repercussions and retard the development of a vibrantly
competitive electricity market.
The current administration of PUHCA has clear limitations. However,
its underlying purpose--the mitigation of market power and prevention
of interaffiliate transactions and utility diversifications that
threaten captive ratepayers--is the best policy option for a successful
transition to a competitive marketplace. It is for that reason that
every major consumer group--as well as numerous other interests--
opposes stand-alone PUHCA repeal.
CFC has prepared model legislation, for inclusion in comprehensive
restructuring legislation, that provides the necessary checks on
potential anti-competitive behavior. With adoption of these provisions
in a comprehensive bill, Congress could repeal PUHCA.
underlying purpose of puhca
As noted above, PUHCA establishes certain structural safeguards to
protect consumers and facilitate effective rate regulation. Under the
Act:
<bullet> Multi-state utility holding companies must be physically and
operationally integrated in order to ensure economic benefits
and facilitate effective regulation;
<bullet> Holding company acquisitions are limited in order to promote
economic and operational efficiencies and prevent undue
concentration;
<bullet> Multi-state utility holding company diversification activities
are restricted in order to maintain a focus on the core
business of utility service to captive consumers, limit
financial risks to ratepayers, and protect businesses in
unregulated industries from anti-competitive cross-subsidies;
<bullet> Inter-affiliate transactions are limited in order to prevent
undue favoritism and self-dealing; and
<bullet> Capital structures and holding company investments are
regulated in order to protect captive ratepayers from
unwarranted financial risk.
Proponents of PUHCA repeal would have you believe that the Act only
regulates the 15 multi-state holding companies that are ``registered''
under the Act. In fact, PUHCA's ``passive restraints'' effectively
regulate the corporate behavior of the remaining investor-owned
utilities that have structured their operations in a manner designed to
avoid the restrictions applicable to registered holding companies.
In some cases, the benefits outlined above have been diluted by lax
regulation by the Securities and Exchange Commission (SEC) or
circumscribed by targeted amendments adopted by Congress. But such past
actions do not justify wholesale repeal. Rather they require a careful
consideration of the following questions:
<bullet> What structural protections are needed to facilitate and
maintain a competitive market?
<bullet> What form, extend and duration of regulation is needed in a
competitive market?
<bullet> Are further targeted amendments to PUHCA sufficient to redress
a regulatory redundancy or changed circumstances?
<bullet> What--as noted economist Alfred Kahn put it--is the best
possible mix of inevitably imperfect regulation and inevitably
imperfect competition?
consumer protections are still needed
Proponents of stand-alone PUHCA repeal argue that the statute is
unneeded, a relic of a bygone day when all functions of the industry
were monopolistic, state commissions were in their infancy, and
securities regulation was undeveloped. As Congressman John Dingell once
noted: ``times have changed, but human nature has not.''
It is not ``evil'' that businesses seek market dominance. It is the
nature of business. The difference between the utility industry and
other businesses, however, is the continued monopoly structure of
distribution and transmission function (and the retail energy service
business in many states). This straddling of monopoly and competitive
markets warrants continued structural protections.
An office supply store might cross-subsidize staplers with paper
clips, but a dissatisfied customer can always go elsewhere to buy paper
clips. A company might diversify into another business line and face
financial losses or even ruin--but there are no captive customers that
suffer the consequences.
A dissatisfied utility customer cannot simply shop elsewhere; nor
is that customer insulated from the bad business decisions of its
supplier.
Closer scrutiny reveals that consumers can face considerable risks
under stand-alone PUHCA repeal.
1. Financial Repercussions of Poor Financial Practices
As noted above, PUHCA discourages diversification into non-utility
businesses and regulates capital structure. In the absence of these
protections, holding companies can diversify into risky ventures,
pledge utility assets as collateral, and loan funds from utility
operations to non-utility affiliates. Such actions can raise the cost
of capital for the utility, siphon funds that should be invested in the
core utility operations, and result in unnecessarily high rates.
None of the pending PUHCA-repeal proposals requires holding
companies to exclusively use non-recourse debt, preclude inter-
affiliate loans, or otherwise insulate captive consumers from risky
financial transactions.
2. Cross-Subsidization Taxes Consumers
Holding companies can subsidize non-regulated ventures with captive
ratepayer funds or resources.
For instance, a holding company could establish an affiliate to
market surplus power from its generating facilities. The underlying
costs of the facilities are paid by captive ratepayers. The affiliate
marketer simply covers the variable cost of production and captures
significant profits--for the holding company--from its power sales.
The stand-alone PUHCA repeal proposals do not affirmatively
prohibit cross-subsidization, and state regulation is inadequate to
prevent siphoning of ratepayer dollars in a holding company structure.
3. Consumers Fail to Benefit From Successful Diversification
As noted above, consumers face potential risk from failed
unregulated ventures. They also may benefit--through lower rates--if
such ventures are successful.
A holding company could transfer a formerly rate-based, low-cost
generating plant to an unregulated marketing affiliate--without pre-
approval by all the relevant state commissions--for the embedded cost
of the facility, thereby denying captive retail customers of the
economic benefit of the facility and potentially exacerbating stranded
cost exposure.
Alternately, a holding company could build a fiber optic system,
with a small portion used for core utility operations (such as load
control), and the remaining capacity operated as or leased to a
competitive telecommunications provider. Given the economies of scale
in fiber optic cable, captive utility customers could pay the majority
of the underlying costs and not receive the economic benefits of the
use of the remaining facilities.
The PUHCA repeal proposals limit state commission review of the
transfer of assets and fail to require fair compensation to consumers
for the transfer of ratepayer financed assets.
4. Captive Retail Service Becomes the Poor Stepsister
The provision of quality, affordable retail electric service to
captive customers is likely to suffer. Holding companies will transfer
the best and brightest personnel to those affiliates that hold the
greatest potential for financial reward. Local utilities may become the
corporate backwater.
One registered holding company established a subsidiary to manage
and operate nuclear plants for other utilities. Despite assurances to
local regulators, the top nuclear personnel of the utility spent most
of their time on the subsidiaries activities, potentially degrading the
operation and economic efficiency of the ``core'' utility's nuclear
plants.
Given the limited resources of regulatory agencies and the
difficulty of tracking personnel, neither state commission nor FERC
rate regulation can remedy such actions.
competitive protections are still needed
The structural restrictions of PUHCA not only protect consumers,
they also encourage fair competition.
1. Competitors Protected From Unfair Cross-Subsidization
By limiting diversification into non-regulated businesses, PUCHA
protects competitive industries from the entrance of players that can
tap monopoly markets for unfair competitive advantage.
In the absence of PUCHA, a holding company could establish an
affiliate, as outlined above, to market surplus power from rate-based
facilities, with the affiliate simply covering the variable cost of
production. In such a circumstance, a non-utility competitor would have
to sell power at a rate that recovered both fixed and variable cost,
while the holding company affiliate had its fixed costs subsidized by
captive ratepayers.
None of the PUHCA-repeal proposals protect competitors from unfair
cross-subsidization.
2. Undue Favoritism to Affiliates
As a result of their monopoly status, utilities possess access to
key customer information. For instance, a utility could have exclusive
knowledge of the operational efficiency (and potential market for cost-
effective upgrades) of the motors of an industrial customer. Such
information would provide an affiliate energy services company with an
unfair competitive advantage. Similarly, knowledge of customer
consumption patterns, price sensitivity, and power quality requirements
could provide advantages to affiliate equipment suppliers, equipment
installers, and retail marketers. This information can be passed on
directly to affiliates, or through the transfer or rotation of key
personnel.
None of the PUHCA repeal proposals require holding companies to
provide competitors with comparable access to information obtained from
monopoly affiliates.
3. Market Concentration
Registered holding companies are dominant market players. One even
made light of this fact in its annual report--musing that it was an
800-pound gorilla.
Repeal of PUHCA facilitates increased growth and market
concentration. While intermittently enforced, the Act requires
acquisitions to advance the public interest, provide enhanced economic
and operational efficiency, maintain physical integration and not
result in undue concentration. Absent these requirements, the industry
is likely to further consolidate. Holding company acquisitions of
distant utilities are unlikely to be reviewed by the state regulators
of the acquiring holding company--due to a lack of legal authority--and
even FERC's revised merger guidelines do not appear to discourage such
actions. Moreover, FERC lacks legal authority to review holding company
to holding company mergers.
In addition, PUHCA precludes the acquisition of gas utilities by
registered electric holding companies (or electric utilities by gas
holding companies). The authority of FERC to review such
``convergence'' mergers is limited.
If PUHCA is repealed on a stand-alone basis, the industry is likely
to become dominated by a few large companies--the antithesis of a
competitive market, which is characterized by a multiplicity of
participants and the absence of barriers to market entry.
The proposals before you fail to revise FERC's merger authority to
screen the competitive implications of proposed mergers or establish
clear authority to review gas and electric combinations or holding
company to holding company mergers.
4. Selective Market Entry
Stand-alone PUHCA repeal will enable holding companies to
participate in those retail markets that are open to competition--
either as pilot projects or under state retail competition plans. As
noted above, it is possible for these competitive ventures to be cross-
subsidized by captive retail customers of the holding company.
But while holding companies will receive the potential benefits of
retail competition, they are not subject to the challenges of
competition in their ``home'' market.
Stand-alone PUHCA repeal enables holding companies to leverage
government-sanctioned market power--their retail monopolies--to engage
in competitive markets.
the case for stand-alone puhca repeal is not compelling
Proponents of stand-alone PUHCA repeal advance a variety of
unconvincing arguments.
<bullet> They argue that the Act was only intended to protect
investors, ignoring the clear--and expressly intended--consumer
benefits;
<bullet> They argue that it will advance competition, ignoring the
potential anti-competitive consequences;
<bullet> They argue that it is necessary to establish retail energy
services company, ignoring the case-by-case action (and pending
SEC rule) to enable such ventures;
<bullet> They argue that PUHCA discourages domestic investment, while
ignoring the myriad of legal, domestic investment opportunities
and their own business decisions to invest abroad in search of
higher returns;
<bullet> They argue that states will be the primary protectors of
consumers, while ignoring--and not redressing--the legal
limitations of state commissions.
To the extent that PUHCA poses legitimate restrictions--for
instance duplicative securities regulation or an inability to purchase
generating assets for direct sales in competitive retail markets--then
Congress should consider targeted amendments; not wholesale repeal.
how to advance consumer and competitive interests
PUHCA repeal, in the absence of appropriate safeguards, will harm
consumers. And the transition to competition will fail if a competitive
structure is not established.
CFC has drafted model legislation to guide Congress in moving
toward a competitive market.
The coalition urges Congress to:
<bullet> Ensure that the transmission grid operates independent of
electricity market participants;
<bullet> Alleviate overly-concentrated generation markets that will
sustain high prices, entry barriers and inefficient markets;
<bullet> Scrutinize the competitive implications of all utility
mergers;
<bullet> Provide enforceable standards to prevent utility cross-
subsidization.
These authorities would be tied to the competitive condition of the
marketplace. Regulatory action would trigger only when the likelihood
of market failure was present.
conclusion
Stand-alone PUHCA repeal should not be seen as the ``appropriate
first step'' toward competition. True competition rewards efficiency
and penalizes inefficiency. Stand-alone PUCHA repeal provides utility-
holding companies with the benefits of competition, without the
associated risks. The risks are borne by consumers and competitors.
Given these severe policy implications, PUCHA repeal must be
considered only within the context of comprehensive legislation. In
that way, Congress can determine the extent and form of regulation
needed to supplement the discipline of a competitive market. It is
worth noting that, in California--a state on the leading edge of
implementing retail competition--the Public Utility Commission adopted
a resolution opposing stand-alone PUHCA repeal.
The members of Consumers for Fair Competition stand ready to assist
this Committee in crafting those policies needed to promote effective
competition and consumer protection.
Mr. Oxley. Thank you.
Ms. Quirk.
STATEMENT OF SHERRY A. QUIRK
Ms. Quirk. Thank you, Mr. Chairman.
I am here today happy to address this subcommittee to talk
about a fair transition to competition. We are pleased to
discuss the future of PUHCA. Because New Orleans is served by a
utility subsidiary of a registered holding company, Entergy, we
believe that the concerns of the city council may assist the
subcommittee members in understanding how PUHCA helps retail
regulators protect captive consumers and why repealing PUHCA
before comprehensive restructuring legislation is passed is a
bad idea.
We are not aware of a single consumer group that supports
stand-alone PUHCA repeal. The City Council of New Orleans has
assumed the unique position of regulator of retail electric and
gas rates. The council serves in the same capacity as a State
utility commission and seeks to ensure that retail electric and
gas consumers in the city are provided affordable and reliable
service.
One footnote I would drop here is we noticed in Ms.
Heaton's testimony some marked up amendments to the repeal
PUHCA language. We note that one amendment would actually
repeal the vote of the citizens of New Orleans to establish
regulatory authority, and we would note very strong objection
to having the vote of the citizens overturned in that way.
Continuing, because a repeal of PUHCA on a stand-alone
basis threatens both the affordability and reliability of
retail electric and gas service in New Orleans, the council
opposes the passage of bills which don't include appropriate
consumer and power market protections. Many States have sought
to introduce retail competition plans to lower rates for
consumers. Louisiana, a relatively low-cost State, has not
decided to pursue retail competition presently. The city
council has made a similar decision for the time being.
However, if Congress repeals PUHCA without accompanying
consumer and market power provisions, the relative low cost of
electric rates in New Orleans will be jeopardized. This is
because PUHCA limits diversification and requires utility
companies to separate utility and nonutility industries so that
captive utility consumers in New Orleans do not subsidize
business ventures elsewhere in the U.S. and abroad.
The SEC has jurisdiction over contracts and relationships
among the various affiliates whether they are in the energy
area or outside. By preventing cross-subsidization of other
industries, PUHCA was intended to help the States keep rates
low and affordable.
Some proponents of stand-alone PUHCA repeal have argued,
however, that State law and State rate-making authority can
protect retail consumers in the absence of PUHCA. These
arguments are misleading for several reasons. First, the
commerce clause of the Constitution prevents State regulators
from regulating utility businesses in other States. States
cannot effectively police interstate affiliate transactions.
Second, the SEC's own report proposing PUHCA reform even
acknowledged that many States lacked the authority to regulate
utility holding company operations in the same manner as under
PUHCA.
Third, the judicial doctrine of Mississippi Power & Light
raises questions about State rate-making authority where the
FERC has blessed the recovery of costs in the wholesale rate
from an affiliate. And in this respect, the books and records
provisions in H.R. 2363 offer little in the way of benefit for
retail regulators. By allowing utilities to diversify without
giving State regulators the tools to address affiliate and
market power abuses, merely giving access to books and records
is like throwing a drowning person a lifeline with no one
attached to the other end.
In addition to affordability, the council worries about
reliability. With the repeal of PUHCA, the lines between
regulated and nonregulated industries will disappear, and while
the rates for retail consumers may be regulated, the city
council will have no certainty that power sales will continue
in a reliable manner.
Consider the possible scenario where power costs increase
due to demands for electricity brought about by hot weather. If
a State regulator is relying on its utility to supply power to
captive ratepayers from generation facilities which are
supposed to provide system supply, but the utility can make
more money by selling power in the competitive market, how can
the regulator be sure that the utility will not make off-system
sales that would bring in more revenues than the regulated
sales? With limited resources and an octopus corporate chart,
how will any State regulator ever unravel this knot?
I am not here today to pick on Entergy. Entergy is a fine
corporate citizen of New Orleans and an excellent utility, but
without PUHCA's structural restrictions, Entergy and other
registereds are between a rock and a hard place, caught between
their fiduciary to shareholders to maximize profits and an
obligation to serve consumers. It is essential to recognize
this quandary and provide structural protections so that
utilities have clear rules of the road.
What should this subcommittee do to address the regulatory
holes that would appear with stand-alone PUHCA repeal? We would
suggest meaningful market power protections which have been
discussed here, effective RTOs, codes of conduct to separate
regulated and nonregulated activities, audit authority, and
repeal of Mississippi Power & Light.
The city council believes that the biggest problem with
PUHCA repeal without comprehensive legislation is human nature.
If part of your business was regulated so that you knew that
every dime of cost would be recovered plus profit, and part was
subject to competitive forces, where would you allocate your
high costs and poor investments?
Thank you for the opportunity to testify, and I will
welcome your questions.
[The prepared statement of Sherry A. Quirk follows:]
Prepared Statement of Sherry A. Quirk, on Behalf of the City Council of
New Orleans
Thank you, Mr. Chairman and members of the Subcommittee for the
opportunity to appear before you today to discuss the Public Utility
Holding Company Act of 1935 (``PUHCA'' or ``Act''). My name is Sherry
Quirk, and I am testifying on behalf of the City Council of New Orleans
(``Council''). I serve as regulatory counsel to the City Council.
The Council is the governing authority of the City of New Orleans
(``City'' or ``New Orleans'') and exercises legislative power under the
City's Home Rule Charter. The Council has, by vote of its citizens,
assumed the rather unique position of regulator of retail electric and
gas service in New Orleans. In this role, the members of the Council
serve in the same capacity as state utility Commissioners. The members
of the Council therefore seek to ensure that retail electric and gas
consumers in New Orleans are provided affordable and reliable service.
As a regulator of retail electric rates in the City of New Orleans,
the City Council relies on PUHCA to protect customers served by the
area's multi-state registered holding company, the Entergy Corporation.
The proponents of stand-alone PUHCA repeal have characterized their
efforts as non-controversial, but in reality, stand-alone repeal would
seriously harm electricity consumers throughout the United States.
Because the repeal of PUHCA on a stand-alone basis threatens both the
affordability and reliability of retail electric and gas service in New
Orleans, the Council opposes the passage of bills such as H.R. 2363
introduced by Congressman Tauzin (R-LA). The Council believes that the
repeal of PUHCA outside of comprehensive legislation is untimely,
unwarranted, and unwise.
PUHCA and Consumer Protection
PUHCA was enacted in response to widespread market power abuses by
mammoth holding companies in the early part of this century. During the
1920s and 1930s, the massive size and incredibly complex structures of
public utility holding companies, and the increased concentration of
control they held over the electric power system, caused concern at
both the state and the federal levels. Although states tried to control
interstate holding companies and utility subsidiaries by enacting their
own laws, holding companies created organizational structures that
extended across state lines and placed the holding companies beyond the
reach of the state commissions.
In a letter urging Congress to pass PUHCA, President Franklin D.
Roosevelt stated:
We seek to establish the sound principle that the utility
holding company so long as it is permitted to continue should
not profit from dealings with subsidiaries and affiliates where
there is no semblance of actual bargaining to get the best
value and best price . . . Except where it is absolutely
necessary to the continued functioning of a geographically
integrated operating utility system, the utility holding
company with its present powers must go . . . It is a corporate
invention which can give a few corporate insiders unwarranted
and intolerable powers over other people's money. In its
destruction of local control and its substitution of absentee
management, it has built up in the public-utility field what
has justly been called a system of private socialism which is
inimical to the welfare of a free people . . .<SUP>1</SUP>
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\1\ President Franklin D. Roosevelt, Message from the President of
the United States Transmitting a Report of the National Power Policy
Committee With Respect to the Treatment of Holding Companies (1935),
reprinted in Senate and House of Representatives Hearings, Legislative
History of the Public Utility Holding Company Act of 1935, at 2309-311)
[``Message from President Roosevelt''].
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The principal purpose of PUHCA was to prevent the reoccurrence of
holding company abuses. Among the abuses that PUHCA sought to address
was:
<bullet> Issuance of securities on the basis of fictitious or unsound
asset values.
<bullet> Issuance of securities by subsidiary companies under
circumstances such that the company must support an over
capitalized structure.
<bullet> An absence of arm's-length bargaining, resulting in subsidiary
companies paying excessive charges for services, construction
work, equipment, and materials.
<bullet> Allocation of charges by the holding company among its
subsidiaries in different states to avoid regulation by state
commissions.
<bullet> Control a holding company has over its subsidiaries, affecting
the policies of the subsidiaries to complicate and obstruct
state regulation of the subsidiaries.
<bullet> Extension of holding companies designed to bear no relation to
economy of management and operation or to the integration and
coordination of related operating properties.
<bullet> Lack of economy of management and operation, efficiency and
adequacy of service, effective public regulation, and economies
in raising capital.
In addition to providing the Securities and Exchange Commission
(``SEC'') with the stability to ensure that, in the future, RHCs would
not engage in market power abuses, PUHCA also provided a mechanism for
reorganizing and simplifying the structures of registered holding
companies (``RHCs'') that wanted to retain their holding company
structure (e.g., the SEC section 11 work).<SUP>2</SUP>
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\2\ Until approximately 1955, the SEC's administration of the Act
focused primarily on the first function of PUHCA (e.g., reorganizing
the industry under section 11 ``integration requirement''). At the time
PUHCA was enacted, registered holding companies controlled
approximately 80 percent of the electric and gas utilities. When the
SEC began its ``section 11 work'' of simplifying the industry in 1938
(the Act provided for a three-year delay in implementation), there were
214 registered holding companies. By the time the SEC completed its job
of simplifying the industry in 1955, the number of registered holding
companies was down to 25.
---------------------------------------------------------------------------
PUHCA was intended to prevent holding companies from taking
absolute control of the utility at the expense of the customer. A
cornerstone of PUHCA's goal of protecting consumers is a philosophy of
decentralization. In his letter encouraging Congress to enact PUHCA,
President Roosevelt wrote, ``Most of us agree that we should take
control and the benefits of the essentially local operating utility
industry out of a few financial centers and give back that control and
those benefits to the localities which produce the business and create
the wealth.'' <SUP>3</SUP>
---------------------------------------------------------------------------
\3\ Message from President Roosevelt at 2309-311.
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The Energy Policy Act of 1992 amended PUHCA and established two new
classes of exempt entities--exempt wholesale generators (``EWGs'') and
foreign utility companies (``FUCOs''). These PUHCA-exempt categories
served to encourage RHC diversification through investments in foreign
utilities and generating facilities. After passage of the PUHCA
amendments and pursuant to its regulatory authority, the SEC
promulgated Rule 53-- a ``safe harbor'' provision that allows a RHC
that meets certain conditions to finance and invest up to 50 percent of
its retained earnings in foreign ventures. Under its rules, the SEC may
authorize exemptions to this 50 percent investment limitation.
Additionally, the SEC promulgated Rule 58 to allow an RHC to invest in
``energy-related companies'' as long as the aggregate investment does
not exceed the greater of $50 million or 15 percent of the consolidated
capitalization of the RHC.
For approximately 60 years, PUHCA has provided important consumer
protections for the ratepayers of RHCs, as well as assurances to
investors that these companies are financially responsible. Under
PUHCA, the SEC is the only regulatory body with the authority to
regulate the complicated financial transactions of RHCs, including
intra system transactions and diversification into unregulated
businesses. Together, PUHCA's provisions ensure that RHCs pay
sufficient attention to the needs of the system operating companies so
that ratepayers obtain a reliable level of service at a reasonable
price.
Now is Not the Time for PUHCA Repeal
In this Congress, a number of bills with the sole purpose of
repealing PUHCA have been introduced. H.R. 2363, the ``Pubic Utility
Holding Company Act of 1999,'' introduced by Congressman Tauzin, would
repeal PUHCA effective 12 months after enactment. In repealing PUHCA,
the Tauzin bill would eliminate vital consumer protection provisions at
a time when utility ratepayers are still captive customers of investor-
owned electric utilities and are vulnerable to abuse from utilities
with monopoly status over those consumers. In reality, the language in
the stand-alone PUHCA repeal legislation is woefully inadequate to
protect American consumers from concentrations of market power.
The Tauzin bill and its Senate companion, S. 313, reduce the
ability of retail regulators to exercise local regulatory control over
complex utility organizations. We believe also that H.R. 2944
introduced by Congressman Barton (R-TX) comes up short in providing
meaningful market power provisions or other protections to help
consumers in the absence of PUHCA. These measures fail to protect
American consumers from the concentrations of market power demonstrated
by investor-owned utilities.
Unless and until there is retail competition in all states, PUHCA
must remain in place. The electric industry is experiencing tremendous
change, but effective competition is not here yet. It is vital that the
consumer protections of PUHCA remain in place during this transitional
period. The U.S. electric market is a ``patchwork quilt'' of varying
degrees of regulation. Some states are almost fully competitive; other
states are semi-competitive; while many states are regulated.
The unprecedented merger activity of utility holding companies also
punctuates the need to maintain consumer protections. This
consolidation reflects an increase in potential market power over
competitors, which leaves consumers vulnerable to anti-competitive
behavior. Though most would agree that the modernization of PUHCA is
appropriate, PUHCA remains a critical source of key protections for
electricity consumers and should not be repealed.
Experience in New Orleans
Our experience in New Orleans is illustrative of the dangers of
PUHCA repeal at this time of rapid market change. The City Council
regulates the retail rates of two utility operating companies, Entergy
New Orleans, Inc. (``Entergy New Orleans'') and Entergy Louisiana, Inc.
(``Entergy Louisiana''). Entergy New Orleans and Entergy Louisiana are
utility subsidiaries of Entergy, a multi-state utility holding company
registered under PUHCA. As shown in Attachment A, Entergy is an
extremely complex holding company system. Entergy consists of the
parent holding company and 124 direct and indirect
subsidiaries.<SUP>4</SUP> A small number of these facilities represent
the domestic regulated utility operations. The remaining companies,
Entergy's ``competitive'' businesses, are not subject to state or
federal authorities--except for the restraints of PUHCA. Entergy's five
domestic retail public utility companies provide electric service to
approximately 2.4 million customers in the states of Arkansas,
Mississippi, Louisiana, Tennessee and Texas, and retail gas service in
portions of Louisiana. Entergy Mississippi, Inc., Entergy Arkansas,
Inc., Entergy Gulf States, Inc., Entergy New Orleans and Entergy
Louisiana comprise the system operating companies of the Entergy
system. The system operating companies and Entergy's other subsidiaries
together form the ``Entergy system.''
---------------------------------------------------------------------------
\4\ Attachment A consolidates the 125 facilities into Entergy's
material activities.
---------------------------------------------------------------------------
The organizational structure of Entergy is already difficult to
decipher. If Congress were to enact stand-alone PUHCA repeal
legislation, the Council would be unable to monitor and track
investments made by Entergy. Entergy's corporate configuration would
become unmanageable, thus severely hindering the Council's efforts to
protect ratepayers from RHC abuses. PUHCA requires utility holding
companies to separate regulated and unregulated industries so that
captive customers in New Orleans do not subsidize business ventures
elsewhere in the United States and abroad. The SEC is to enforce
PUHCA's primary goal, which is to make sure that captive ratepayers do
not pay unfair prices for the goods and services they receive from
affiliates, or otherwise cross-subsidize.
The Council has consistently challenged proposed activities by
Entergy which could adversely affect New Orleans'' ratepayers. For
example, the Council recently opposed Entergy's application with the
SEC for $750 million in additional authority to invest in unidentified
non-utility projects. As of December 31, 1998, Entergy had invested
approximately $1.2 billion in EWGs and FUCOs. The Council was concerned
that the lack of specificity regarding further investments in the
amount of $750 million by Entergy could present serious risks for the
Entergy System, including Entergy New Orleans.
However, despite the Council's objections, the SEC approved
Entergy's application in a June 22, 1999 Order. The request of the
Council and the Arkansas Public Service Commission for a full hearing
to examine Entergy's application was denied. With the SEC's approval,
Entergy now has carte blanche to commit to a significant level of
undisclosed future investments. Without the continued framework of
PUHCA, RHCs like Entergy will be able to make unchecked substantial
foreign and non-utility investments that could put its captive
ratepayers at risk.
If PUHCA is repealed, state and local regulators will be virtually
helpless to prevent or even detect harms to ratepayers from
diversification because of the multi-state natures of RHCs and because
these regulators have little, if any, authority to oversee transactions
of unregulated businesses. In fact, absent PUHCA, state regulators and
the public likely will not even find out when registered holding
companies take on new, risky investments. Mr. Chairman, electric
consumers in New Orleans are tired of being in the dark and they would
not welcome further uncertainties in the absence of PUHCA.
Limitations on State Authority
As our experience in New Orleans demonstrates, even with the
protections of PUHCA in place, state and local regulators are hard-
pressed to keep up with the activities of registered holding companies.
First of all, there are general limitations under the Commerce Clause
that prevent state regulation of interstate transactions. Second, even
the SEC has admitted that states are limited in their oversight of
holding company transactions. In its own report that recommended the
repeal of PUHCA, the SEC found that many states cannot address the
problems that PUHCA addresses.<SUP>5</SUP>
---------------------------------------------------------------------------
\5\ See The Regulation of Public Utility Holding Companies,
Appendix A, Securities and Exchange Division of Investment Management,
June 1995.
---------------------------------------------------------------------------
The principal obstacle to review of holding company transactions by
state regulators, however, is the Mississippi Power and Light
doctrine.<SUP>6</SUP> This doctrine was articulated in a 1988 case
brought before the U.S. Supreme Court in which Entergy had formed a
``nuclear'' subsidiary to own and operate a nuclear power plant.
Entergy's ``nuclear'' subsidiary then hired Mississippi Power and
Light, another Entergy subsidiary, to construct and operate the plant.
The wholesale transactions between the subsidiaries were covered by a
system-wide agreement filed with the Federal Energy Regulatory
Commission (``FERC'').
---------------------------------------------------------------------------
\6\ Missisippi Power and Light v. Mississippi, 487 U.S. 354 (1988).
---------------------------------------------------------------------------
In Mississippi Power and Light, the Supreme Court held that because
FERC had approved wholesale rates for electric power, the Supremacy
Clause of the U.S. Constitution (Article VI, cl 2) prohibited the
Mississippi Public Service Commission from second-guessing the FERC in
determining whether some or all of the costs associated with the
wholesale power sale were or were not prudently incurred. This decision
explicitly prevents state utility commissions from exercising their own
authority to review the components of a wholesale rate. The practical
effect of the doctrine is to preclude state regulators from
investigating stranded costs, cross-subsidizations and other components
of their citizens'' wholesale rates.
Although the Tauzin bill and its Senate companion, S. 313, give
states and federal regulatory authorities additional access to the
books and records of registered holding companies, the bills do not
give the states any authority to protect consumers. For state
regulators, access to books and records will not effectively augment
the authority provided under current laws. Consequently, for state
regulatory authorities, access to books and records does not fill in
the gaps in current regulatory law, nor does it address constitutional
restrictions on states regulating commerce among the states.
Effective Market Power Protections Are Needed to Protect Ratepayers
The purpose of PUHCA is to prevent monopolization, cross-
subsidization and other potential market power abuses by large holding
companies and their affiliates. Perhaps the greatest threat to
consumers in the event of PUHCA repeal is the ability of registered
holding companies to diversify into unregulated businesses. If PUHCA is
repealed, RHCs will be allowed unrestricted diversification. Because of
the multi-state character of RHCs and the lack of state authority to
oversee transactions of unregulated businesses, state regulators will
be virtually helpless to prevent or even detect harms to ratepayers.
Unbridled diversification could result in a utility's investments
going bad, with the possibility of increased capital costs absorbed by
consumers. It also could produce deceptive financing practices,
nondisclosure of important corporate accounts, and financial
manipulation. Diversification also could lead to improper cost
allocation--when unregulated subsidiaries of a utility perform services
and undercharge for their services--with the costs being absorbed by
ratepayers. The diversification experience of exempt holding companies
shows that when companies diversify into businesses in which they have
no particular expertise, they fail. Absent PUHCA, state regulators and
the public will not even find out when RHCs take on new, risky
investments.
Another danger of PUHCA repeal is the potential for cross-
subsidization. The current growth in unregulated operations of RHCs,
the industry trend toward economies of scale through centralization and
growth of shared services, and the sharp increase in merger activity
warrant additional, not fewer, safeguards to prevent cross-
subsidization. We already are experiencing volatility in the market,
but cross-subsidization presents an additional motivation for market
volatility that would not otherwise be present.
The elimination of PUHCA without offsetting consumer protections
will result in greater monopoly power for RHCs and higher electric
rates for consumers. As long as there is the potential for a holding
company to retain a major market share, protections should be in place
to prevent market power abuses. Such protections should include:
<bullet> Repeal of the Missisippi Power and Light doctrine
<bullet> Effective ``codes of conduct''
<bullet> Effective audit authority at the state level
<bullet> Effective merger authority at the federal level
In addition to these consumer and market power protections, it is
critical that any elimination of the requirements in PUHCA be
accompanied by comprehensive restructuring of the retail electric
market. To that end, the Council commends the approach taken in
legislation introduced by Representatives Markey (D-MA) and Largent (R-
OK). The Markey-Largent bill would continue to apply PUHCA to utilities
operating in two or more states that are closed to competition. Other
utilities not operating in two or more closed states would be exempt
from PUHCA under the Markey-Largent bill. We believe that this is a
reasonable approach to PUHCA repeal.
Monopolies on a Global Scale
PUHCA is important not only domestically but also from a global
perspective. The 1992 PUHCA amendments have resulted in an explosion of
foreign investments by U.S. utilities. As international investments by
holding companies continue, Congress must work to ensure that the
utilities'' ratepayers are protected and that the utilities bear the
risks for these investments.
A number of holding companies have already experienced financial
setbacks in their foreign investments. For example, CalEnergy Company
took a one-time charge of $87 million in the fourth quarter of last
year after its $500 million investment in three 400-megawatt power
projects in Indonesia was suspended due to the Asian financial crisis.
Edison International also was adversely affected by Asia's financial
problems. Not only did it suffer heavy losses, the company was forced
to investigate charges of corruption and excessive electricity tariffs
levied against its $2.5 billion power project in Indonesia.
Despite losses in foreign markets, some U.S. utilities are
continuing to expand their global investments. Recently, AES Corp.
announced that it will pay $155 million to acquire a controlling
interest in a Brazilian telecommunications group--even though AES
reported a cumulative write off of $146 million on its Brazilian
business for the first half of 1999 due to a sudden devaluation of
Brazil's currency in late 1998 that resulted in major losses for AES.
Additionally, Southern Company filed a request with the SEC in
January for authorization to spend another $4 billion or up to 175% of
retained earnings to invest in foreign and domestic non-regulated
businesses over the next five years. Southern seeks this additional
authorization despite its acknowledgment that its non-regulated units
had shown poor net earnings to date--mostly due to a $111 million U.K.
windfall tax charge in 1997 and a $200 million write-off on South
American assets in 1998. Southern also recently declared bankruptcy for
a project in Mobile, Alabama. To date, Southern has spent approximately
$3.5 billion on non-regulated ventures and has used almost 75% of its
existing authorization.
Southern has already substantially diversified its portfolio. Some
pending Southern projects include:
<bullet> $300 million investment in Thailand;
<bullet> a share in a $500 million project in Shanxi Province, China;
<bullet> a bid for up to $400 million in Cajun Electric Power
Cooperative assets in Louisiana;
<bullet> a greenfield plant in Australia;
<bullet> a new plant in Wisconsin;
<bullet> a plant acquisition in Texas; and
<bullet> asset purchase deals in New York and California valued at
$1.28 billion.
As more RHCs seek to diversify through foreign and non-utility
investments, Congress must ensure that ratepayers do not bear the risks
of these ventures. The stand-alone repeal of PUHCA will release RHCs
from federal regulation and expose ratepayers to undue risk that is
best borne by the utility shareholders.
PUHCA Repeal at a Time of Uncertainty Could Prevent the Benefits of
Competition from Being Realized
The proponents of stand-alone PUHCA repeal contend that repealing
PUHCA is a pro-competitive step that would eliminate barriers to
competition and to state restructuring efforts. In reality, stand-alone
PUHCA repeal would be a major setback for competition and ultimately
would harm rather than benefit customers. Abandoning the protections in
PUHCA at the nascent stages of competition would empower large holding
companies by allowing them to consolidate a firm share of the market.
If industry consolidates in this manner, it is questionable whether
competition would be possible at all.
While not perfect, the significant costs to consumers from the
repeal of PUHCA would far outweigh the regulatory benefits of
abandoning PUHCA. Stand-alone PUHCA repeal would be detrimental to
electricity consumers nationwide. Attachment B is a comparison chart of
the benefits for consumers versus registered holding companies if PUHCA
is repealed on a stand-alone basis. As the chart shows, consumers will
lose if PUHCA's requirements are eliminated.
The Council opposes stand-alone repeal of PUHCA. While we agree
that some of the requirements in PUHCA need reform, we believe that
PUHCA's core protections are necessary unless and until we have a fully
competitive electricity market.
Thank you, and I would be happy to answer any questions at this
time.
[GRAPHIC] [TIFF OMITTED] T0358.013
[GRAPHIC] [TIFF OMITTED] T0358.014
[GRAPHIC] [TIFF OMITTED] T0358.015
Mr. Oxley. Thank you, Ms. Quirk.
Let me begin. It has been my observation that a lot of the
folks who oppose PUHCA repeal are many of the same folks who
opposed natural gas deregulation and predicted that the world
would come to an end, that prices would be controlled by
monopolies and oligopolies, and that people would pay more for
natural gas, and it has been the opposite.
Where were you on that debate, Ms. Quirk and Mr. Kanner?
Ms. Quirk. I was in law school at the time.
Mr. Oxley. Did you have an opinion on same?
Ms. Quirk. I was probably thinking more toward exams than
deregulation.
Mr. Oxley. Mr. Kanner?
Mr. Kanner. The members of Consumers for Fair Competition
are strong proponents of competition. We want to see electric
restructuring legislation passed. We just want to make sure
that it meets its ideals of creating competition.
Mr. Oxley. Were you in law school?
Mr. Kanner. I was not active in the natural gas
deregulation debate, but I would note that on the natural gas
side, pipelines, the equivalent of electric transmission lines,
are open for all uses under the same comparable tariff. We
don't have that today on the electric side. This knot
accomplished in the Barton bill, that is one of the things that
we need.
Mr. Oxley. Let me ask Ms. Heaton, do you believe FERC and
the State regulators are currently denied access to necessary
books and records?
Ms. Heaton. Mr. Chairman, I think they can get access to
whatever they deem appropriate to fill their jurisdictional
responsibilities.
Mr. Oxley. That has been your experience with Columbia?
Ms. Heaton. Yes.
Mr. Oxley. Mr. Lhota?
Mr. Lhota. Yes.
Mr. Oxley. Ms. Heaton, why do you prefer an objective
rather than a subjective ``deems relevant'' standard for access
to books and records? Setting aside the issue of sunsetting,
what would you see as preferable language on books and records?
Ms. Heaton. I would be interested in submitting specific
legislative language to you on that issue.
The reason for objective as opposed to subjective is that
at Columbia, as well as most other companies, we view our
relationships with our regulators as one of our primary assets
and take very seriously maintaining a positive relationship.
When there are subjective standards, you are more likely to
have disagreements. We view it as a losing situation to have to
be, A, arguing with the regulators, or, worse case yet, suing
them. So we prefer to have a clear understanding set by
Congress as to what books and records could be obtained and
would be off the table so we could go forward and deal with
those regulatory constraints appropriately.
Mr. Oxley. Mr. Lhota, do you have an opinion on that?
Mr. Lhota. We would support their position, but we are not
locked into the objective standard.
Mr. Oxley. Let me ask you, does NARUC support stand-alone
PUHCA repeal?
Mr. Lhota. I would not hazard to speak for NARUC.
Mr. Oxley. In 1992, Congress amended PUHCA to allow foreign
investments and exempt wholesale generators. In 1996, Congress
exempted telecommunications companies in the Telecommunications
Act.
In both cases Congress created--by the way, both from this
committee, in both cases Congress created certain conditions on
those exceptions intended to protect consumers. Are those
provisions contained or repealed in the legislation that you
are advancing, Mr. Lhota?
Mr. Lhota. Yes. It repeals the--PUHCA as it now exists and
replaces it with the books and records. So the answer is yes.
Mr. Oxley. In your testimony you represent PUHCA as a
nonutility or rate regulation statute, which I agree with. Do
you mean to assert that PUHCA plays no role in mitigating
market power, preempting abusive practice directed against the
captive retail market or generally facilitating effective
regulation? Does stand-alone PUHCA repeal strip consumers and
competitors of structural protections?
Mr. Lhota. Since that was a long question, let me reply to
what I think I heard, Mr. Chairman.
One point I would make is that what PUHCA does is that it
is not a rate-making statute. It has an integration standard, a
books and records provision, a lines of business provision in
issuance of securities. That is the issues that PUHCA deals
with.
Relative to market power, that is an issue that FERC would
address, and in some regards I would argue that PUHCA could
actually enhance market power by encouraging mergers and
acquisitions in contiguous geographical areas instead of
permitting diverse mergers or acquisitions in remote
geographical areas.
Now, I am not sure that I answered your question, but I
think that is what I heard.
Mr. Oxley. The Chair's time has expired. I recognize the
gentleman from New York.
Mr. Towns. Let me ask you, Ms. Heaton, your testimony calls
for a sunset date for both the FERC and State access to books
and records provisions. At the bottom of page 4 of your
statement, you say that if PUHCA is repealed through
comprehensive legislation designed to encourage utility
competition, the affiliate oversight and access to books and
records provisions now contained in 2944 are simply
unnecessary. The competitive forces unleashed through such
measures should be more than adequate to substitute for
additional regulation to guard against abuses.
Please explain why you believe that affiliate oversight
would be necessary, and please be as specific as possible.
Ms. Heaton. Yes, sir.
The Roundtable Group believes that the best consumer
protection that could ever exist is vigorous competition.
Comprehensive restructuring legislation would unleash
competitive forces that at this point are still bound up
through a myriad of regulatory schemes. The Roundtable Group
could go either way on the issue of comprehensive legislation
versus stand-alone PUHCA repeal. There is a general consensus
that PUHCA ought to be repealed, and our view is that it ought
to happen sooner rather than later. If that would be part of a
comprehensive bill, that would be terrific, but if it could
only be done through a stand-alone, that is fine.
In terms of protection for affiliate abuses, again FERC and
the States will continue to have jurisdiction over their
appropriate scope of authority, primarily on the retail side
for the States and the wholesale side for the FERC. They can
get access to whatever books and records in that scope that
they need as well as transactions that they deem to be relevant
to setting either the rates or the protecting of the consumers.
To that extent additional books and records authority would not
be necessary.
Mr. Towns. Mr. Lhota, do you agree with that, and if so,
why?
Mr. Lhota. We fully support competition because I think
competition is a great market discipliner, and the examples
that I use in my speeches are restaurants in large communities.
If they are not competitive and top quality, they go out of
business.
We are not proposing the sunsetting from our coalition. We
would not oppose it, but we are not--we would not oppose it if
it were in. We are not proposing that it be included.
Mr. Towns. Say that again.
Mr. Lhota. In our repeal provisions for PUHCA, we are not
proposing a sunset provision on the books and records part.
Mr. Towns. So----
Mr. Lhota. We would not oppose it if it were in there, but
we are not proposing it.
Mr. Towns. As my son would say, any way that the wind blows
is cool with you?
Mr. Lhota. No, I wouldn't go quite that far.
Mr. Towns. Thank you very much.
Mr. Kanner.
Mr. Kanner. Mr. Towns, let me emphasize the need for
continued access to books and records. It is the fact that the
utility would remain in a monopoly enterprise, not subject to
the winds of competition. If Office Depot wants to have a loss
leader and subsidize the cost of staples and make up the
revenues on staplers, they are free to do that, but you as a
consumer can say, I am going to buy that loss leader from
Office Depot, but I am going somewhere else to buy the other
office supplies because I can get a better deal.
In the electric industry, you have to get the distribution
function from your local monopoly utility. So if they are
subsidizing their competitive ventures with captive customer
revenues, that customer doesn't have the choice of going
elsewhere. That is why we need the ability for regulators to
review all of the relevant information, to be able to audit
their activities, to have codes of conduct, to make sure that
utilities don't subsidize their competitive ventures with their
monopoly functions.
Mr. Towns. Thank you very much.
Ms. Quirk.
Ms. Quirk. If I can just add to Mr. Kanner's statement. One
other relevant fact when you talk about affiliate abuses and
State regulatory authority is that most States are like New
Orleans in that their access to books and records only extends
to the boundaries of New Orleans. So in the absence of the
books and records authority currently in Mr. Tauzin's bill and
Mr. Barton's bill, there is no extension of the authority of
the State regulators beyond the boundaries of their
jurisdiction, and that is a huge problem because the
overwhelming likelihood is that affiliate transactions will
take place beyond the boundaries of that jurisdiction.
Mr. Towns. Thank you very much, Mr. Chairman. I yield back
the balance of my time.
Mr. Oxley. In a perfect world--let me ask you this. In a
perfect world, if we were to deal with PUHCA reform and PUHCA
repeal, would it not be in the best interests of everybody to
do it in the context of a restructuring bill? Let me begin with
Ms. Heaton.
Ms. Heaton. I have not checked these views with the
Roundtable Group, but I will give you a personal opinion, which
is no. I think there are so many open questions on the question
of what should be in a comprehensive bill, yet it is so clear
that PUHCA is continuing to have negative effects today, that
consumers would be better off if PUHCA were to be repealed
immediately with comprehensive legislation to follow.
Mr. Oxley. Mr. Lhota?
Mr. Lhota. Our answer would be no as well, Mr. Chairman. I
have been with American Electric Power for 35 years. I have
lived under the PUHCA act for 35 years, and I think the
constraints that it imposes on our company is a detriment to
the consumers and the ratepayers. We would propose that it be
done immediately.
Mr. Oxley. Mr. Kanner?
Mr. Kanner. My answer is absolutely yes, Mr. Chairman. Let
me give you an example of why. In 1992, when Congress passed
Energy Policy Act, EPACT, and had the limited exemption from
PUHCA for exempt wholesale generators, it allowed utilities to
convert what are regulated cost-of-service-rate-based
generating plants to competitive wholesale generators provided
that all of the relevant State commissions approved that
conversion. That provision would be repealed by stand-alone
PUHCA repeal. So that State commission would no longer have
authority over whether that rate-based plant is suddenly taken
away from the customers it was intended to serve and is now a
competitive plant.
If we don't have other provisions in a comprehensive bill
that looks at the generation market and whether it is a
competitive market or not, that is a double whammy on consumers
and something that I don't think we should stand for.
Mr. Chairman, I would agree with your question. It should
only be done in the context of a comprehensive bill and a
comprehensive bill that creates a competitive market structure.
Mr. Oxley. Before I go to Ms. Quirk, let me ask both of the
industry folks to respond to Mr. Kanner.
Ms. Heaton. I am puzzled by Mr. Kanner's example. In that
circumstance, I have not heard any change about the obligation
to serve that the utility would continue to have. Moreover,
nothing that Congress is talking about would change the State's
rate-making ability for setting the rates for consumers.
So you would have a utility that moved a cost-of-service
plant into a competitive plant. It continues to have to serve
its captive ratepayers at a cost that has already been set by
the State with a mandatory obligation to serve. Consumers have
the same rates, and possibly over time declining rates, while
the utility could use that plant in a more efficient manner. I
am not seeing the downside to that example.
Mr. Kanner. If it was a low-cost plant that was on average
the lowest-cost resource that that utility has, and it is
converted into competitive market, the difference between its
costs and its market are captured by the utility. Yes, the
utility has the obligation to serve. Let's say that it now buys
at the market. It is paying the market rate, and under cost of
service regulation, the utility's customers would be paying the
cost which is now that market rate rather than the cost of
production from that low-cost plant.
Ms. Heaton. The rates for the consumers wouldn't change
unless the State allowed those rates to change.
Mr. Kanner. They would have to change if the costs changed.
Ms. Heaton. That is not true. There are lots of costs
incurred by utilities that the State regulators don't allow to
be passed on to consumers because there is a prudence review.
If there were to be a concern along the lines Mr. Kanner is
suggesting, then the State could simply say, we are not going
to allow you to raise your rates.
Certainly a utility going into this would have to recognize
the likelihood that if they were to convert a plant from a
cost-of-service to a competitive system, that the likelihood of
them getting an increase in rates is about nil.
Mr. Lhota. I would agree. There is an obligation to serve,
and there is rate regulation at the State level. I would agree
with Ms. Heaton that the regulators would certainly look at
this, in my view.
Mr. Kanner. If the regulators would look at it, then I
don't think that there is any problem with having the
regulators continue to look at it before the asset is sold.
Mr. Oxley. Ms. Quirk, do you want to get into this mud
wrestling match?
Ms. Quirk. I will jump in because I feel a little left out
and lonely.
Mr. Oxley. It is a tag team.
Ms. Quirk. I am going to weigh in on Marty's side on this.
I think there is some question about the authority of State
regulators to conduct such things as prudence reviews when it
comes to something like flow-through of purchase power
expenses. Remember in the example that Marty gave, what we are
talking about is a purchase power expense in the context of a
jurisdiction that has not gone to retail choice, so it is a
cost-based rate.
Under the Mississippi Power & Light case, which I
discussed, there have been limitations placed on the extent to
which a State can look at the prudence of acquisitions of power
supplies. So in that instance I think there are some real
questions about whether State regulators would have the
authority to address this abuse.
Mr. Oxley. Well, we have had a lively discussion and
excellent testimony from all of you. We most appreciate it for
all of you to come to the subcommittee with your presence and
your testimony. The subcommittee stands adjourned.
[Whereupon, at 12:03 p.m., the subcommittee was adjourned.]
[Additional material submitted for the record follows:]
October 20, 1999
The Honorable Mike Oxley
Chairman
Subcommittee on Finance and Hazardous Materials
2233 Rayburn House Office Building
Washington, DC 20515
Dear Mr. Chairman, I want to commend you for holding a hearing on
repeal of the Public Utilities Holding Company Act (PUHCA) on Thursday,
October 7.
The Interstate Natural Gas Association of America (INGAA) has long
supported repeal of PUHCA. INGAA believes that PUHCA is a barrier to
competition. Some natural gas pipelines are registered under PUHCA,
some are currently exempt and others currently do not fall under the
authority of PUHCA. But our industry has been and continues to change
and evolve. All of our members are seeking new business opportunities.
As each of our member companies seeks opportunities to grow, they are
examining the impact of PUHCA on their businesses. No business except
the natural gas and electric utilities industries has to be concerned
about this act affecting their business plans.
PUHCA does not give authority over rates. It was not established to
protect the consumer. It was enacted to protect investors. Other laws
have been passed to meet this need. These laws have enabled the SEC to
enhance its regulation of all issuers of securities, including public
utility holding companies. State regulation has expanded and
strengthened since 1935. Also, institutional investors such as pension
funds have become more sophisticated and are continuously demanding
more detailed information from all issuers of securities.
INGAA strongly supports early and direct repeal of PUHCA. However,
we do not support the request for authority for FERC and states to
obtain additional access to books and records of PUHCA companies such
as that found in S. 313 and H.R. 2363. INGAA agrees that FERC and the
states should have access to the books and records relating to any
transactions between a public utility or a natural gas company and its
affiliates. However, FERC and the states already have this authority.
We are not aware of any instance where either FERC or the states failed
to obtain necessary books and records.
I am enclosing a paper explaining our concerns about unfair
competition when the books and records of regulated companies are
opened to competitors. INGAA is concerned that the language in the
PUHCA bills introduced to date can handicap these U.S. companies for
competitive purposes. I would appreciate having this letter and
attachment included in your record of October 7.
Sincerely,
Jerald V. Halvorsen
Enc.
new investigative powers over books and records of utility holding
companies are not needed in the puhca repeal title of a comprehensive
electric restructuring bill
The Interstate Natural Gas Association of America (INGAA) strongly
believes that any electric restructuring legislation must include
repeal of the Public Utility Holding Company Act of 1935 (PUHCA). Both
S. 313 and H.R. 2363 were originally drafted three years ago as
``stand-alone'' legislation repealing PUHCA. Since then, support for
this stand-alone approach seems to have waned, despite wide support for
the concept of PUHCA repeal, and its routine inclusion in new
comprehensive bills. It now seems clear that Congress wants to repeal
PUHCA as part of a comprehensive electricity restructuring measure.
In the same three years, 23 states representing over half the U.S.
population have enacted detailed new gas and electric utility
competition laws. Even more states--after lengthy proceedings--have
approved a number of significant utility restructurings as well as rate
cuts, and presided over a wave of electric generation divestitures that
have reshaped the U.S. utility industries.
These changed circumstances require a fresh look at the broad,
permanent, federally created investigative authority S. 313 and H.R.
2363 grants to the Federal Energy Regulatory Commission (FERC) and the
states, to examine the books and records of some but not all
competitors in the new gas and electric industries. In fact, LNGAA
believes that the books and records language set forth in Sections 5
and 6 is both unnecessary and inappropriate for the following reasons:
(1) the FERC and states already have sufficient jurisdiction to reach
all of the relevant books and records of a utility and its
affiliates;
(2) the repeal of PUHCA, in and of itself, will expand FERC and state
regulatory authority by removing the preemption barrier;
(3) the lack of either a meaningful standard of relevance or even
modest procedural safeguards give rise to the possibility that
Section 5 or 6 may result in ``fishing expeditions'' or the
unwarranted disclosure of confidential information;
(4) these sections may force the anticompetitive disclosure of some
firms' private business strategies to their competitors who may
have intervened in rate cases simply to obtain access to this
information;
(5) Sections 5 and 6 contradict one of the main purposes of PUHCA
repeal--increasing competition through the creation of a level
playing field in the utility industry--by catching only some
competitors, and are, therefore, discriminatory;
(6) Section 6 wrongly assumes the states ``need help'' from the U.S.
Congress, because they cannot actively legislate ``on their
own,'' or effectively investigate the books and records of
multi-state utilities.
(1a) FERC can already reach all books relevant to the utility and
does not need any new ``books and records'' authority under Section 5
of S. 313 and H.R. 2363. FERC's existing powers have been effective
enough to completely restructure the U.S. gas industry in the 1980s and
1990s and the U.S. electric wholesale industry in the 1990s. Many
sections of the Natural Gas Act (NGA) give FERC power to collect data,
but the broadest is Section 14(c) and (d). Under it, FERC can force
``any person'' to produce, from ``any place'' in the U.S., ``any books,
papers, correspondence, memoranda, contracts. agreements, or other
records which the Commission finds relevant or material'' to ``any
investigation or other proceeding'' under the NGA. Language almost
identical to this, requiring the production ``from any place'' in the
U.S., of ``any books,'' papers, correspondence, etc., of ``any
person,'' is also set forth in section 30 1(b) and (c) of the Federal
Power Act (FPA). FERC can reach any cost at issue in a gas or power
rate case before it. More is unnecessary.
(1b) All states already can reach all relevant utility and
affiliate books under state law, and do not need any new ``books and
records'' authority under Section 6 of S. 313 and H.R. 2363: Ever since
its landmark 1945 International Shoe ruling, the Supreme Court has
interpreted the U.S. Constitution to give all states jurisdiction over
both in-state utilities, and their out-of-state affiliates that even
``minimally'' affect in-state utility rates. In the last 55 years,
states repeatedly have enacted such ``long arm'' laws to catch out-of-
state firms. Maryland's utility law, for example, reaches ``to the full
extent'' allowed by the U.S. Constitution. The Massachusetts law covers
``all relations, transactions, and dealings, direct or indirect,''
between a utility and its affiliates, and is now reaching even
documents in England relevant to the National Grid Group's (NGG) merger
with the New England Electric System (NEES). The investigative long
arms of the Oregon PUC and the Utah PSC, also intercontinental, have
collected thousands of documents from Scotland, that are relevant to
the PacifiCorp merger. And the Florida PSC can ``exercise all judicial
powers and ``do all things'' to effect its jurisdiction over utilities.
(1c) The Federal Power Act, in Section Sec. 201(g), also gives
states ``books and records'' power over utilities and affiliates with
whom they transact business: With this clear, federally granted
investigative control over the in-state utility, a state PUC already
can reach all the utility's direct transactions and dealings with its
out-of-state affiliates. As FERC recognizes in its affiliate rules,
these direct utility-affiliate transactions are the only ones that can
unfairly hike costs to captive in-state consumers; these transactions
are already caught by Sec. 201(g); and no showing of this provision's
inadequacy has been made.
(2) Simple PUHCA repeal--by itself, without any extra new state
investigative powers--would enlarge current FERC and state authority
over affiliate transactions of registered holding companies: Under the
1992 Ohio Power case, both the FERC and the states are preempted from
reviewing and disallowing costly transactions among the different
affiliates of a registered holding company, if the SEC already has
approved these deals under PUHCA. Thus, in the Ohio Power case, the SEC
approved a ``cost-of-service'' rate for the utility's long-term coal
contract with its affiliate; and when FERC later tried to set a lower
``market rate'' for the same deal, it couldn't. Simple repeal of PUHCA
would end this FERC and state preemptive effect, and thus expand FERC
and state authority over affiliate transactions of these registered
companies--back to the point where it was in 1992, before the Ohio
Power case. In sum, the simple repeal of PUHCA by itself significantly
boosts FERC and state authority over utility affiliates.
(3) No express protections for recipients of unreasonable state
data requests: Other federally created investigative powers--like those
used by the Justice Department in antitrust investigations, under 15
USC Sec. 1311 et seq.--give affected companies the right to raise, in
advance, a variety of objections to unwarranted, unreasonable, or
irrelevant demands that may violate the Fourth or Fifth Amendments.
Sections 5 and 6 of S. 313 and H.R. 2363 do not.
(4) Anticompetitive disclosure of business strategies may result
from federal or state ``fishing expeditions:'' A company's confidential
customer data and business plans--gained by the FERC or a state PUC
under Sections 5 or 6--can be subject to intervenor disclosure, and in
some states to public disclosure, in rate and certificate cases that
use the data. For the company 5 competitors, who often intervene in
these cases, this means an illicit windfall of data on their opponent's
future plans. This hurts competition, and ultimately hurts consumer
choice by stifling competition.
(5) New books and records powers in S. 313 discriminatorily cover
only some competitors: Sections 5 and 6 of S. 313 and H.R. 2363 subject
only gas and electric ``utility holding companies'' to the new federal
and state investigative tools. Thus registered and exempt holding
companies, such as Columbia and Enron, are covered by it; but multi-
state utilities with different corporate structures, such as PacifiCorp
and Utilicorp, aren't. Many other kinds of companies are also
exempted--such as Qualified Facilities (QFs), Electric Wholesale
Generators (EWGs), Foreign Utility Companies (FUCOs), munis and coops--
even though they may be full-fledged competitors in the new gas and
power industries. Other exempted entities include the PMAs, Salt River,
and TVA--despite their huge market power in many states. This
discrimination imposes costs upon affiliates of ``utility holding
companies'' that their competitors do not have to bear. Many of these
affiliates already face tight margins, and, therefore, such additional
costs may eliminate a significant number of affiliate businesses.
(6) The massive restructuring of electric utilities in 24 states
since 1996 reflects strong state fact-finding powers: The
sophisticated, detailed rewriting of utility laws and rules in these
states, beginning with New Hampshire's law in May, 1996, is part of the
biggest change in the utility industry in decades. It could not have
been successfully led by uninformed PUCs with inadequate fact-finding
powers. Many of these 24 new state laws exceed 100 pages in length.
Such detailed drafting makes it is difficult to believe that the PUCs
and state legislators who drafted these laws failed to provide
regulators with sufficient investigative powers to assure that these
laws are carried out.
Conclusion: Congress must repeal the 1935 Act soon. It should end
this impediment to competition, to let the nation's 100-plus holding
companies enter new markets and compete on a level playing field with
new entrants as well as companies not now subject to PUHCA. Congress
does need to clarify the states' powers in the new unbundled energy
markets. But states do not need to and, therefore, Congress should not
prescribe the new ``books and records'' powers for FERC and the states
as is currently proposed in Sections 5 and 6 of S. 313 and H.R. 2363.
FERC and the states already have sufficiently broad authority to obtain
all relevant books from both natural gas companies and electric
utilities.
______
Prepared Statement of National Alliance for Fair Competition
The National Alliance For Fair Competition (NAFC) is a coalition of
ten national trade associations representing over 35,000 small
businesses throughout the United States.
These organizations consist of small, private sector businesses
engaged in the design, supply, rental, sale, design, installation and
servicing of electrical and mechanical products, equipment, and
systems, as well as providing energy fuels. These firms operate in
residential, commercial and industrial markets. While a few larger
firms are included within this group, the majority of business are
small by any standard of measurement and many are family owned and
operated. The organizations themselves are independent entities but
share common goals and, in some cases, individual members.
The 35,000 firms encompassed within NAFC are only a fraction of the
overall number of businesses which make up the affected industry. The
Department of Commerce puts the approximate size of the contractor
groups alone at 144,000 individual firms. These firms employ over 1.3
million workers, with an annual payroll of $31 billion. NAFC's
construction member firms add a total value to domestic GNP of over
$100 billion on an annual basis, according to the US Commerce
Department.
Introduction
Proponents of the repeal of the Public Utility Holding Company Act
(PUHCA) have frequently portrayed their effort as one which of concern
only to the few registered companies to which the Act directly applies;
that repeal is needed to allow them to compete more efficiently; and,
that they are unduly restrained in their ability to enter new lines of
business or to compete in states outside their home territory.
NAFC and the thousands of small businesses which are being impacted
today by the expansion of utility-owned affiliates, many of which exist
in holding company settings, believe otherwise.
The existence of the protections contained in PUHCA, including
restrictions on cross-subsidization, the requirement of separation of
regulated and unregulated businesses, the restrictions on intrasystem
loans and financing, the requirement of prior approval for
diversification and the restrictions on type of diversification are as
necessary now as when the Act was created.
As was the case in the early decades of this century, the electric
utility industry is undergoing enormous change. Mergers and
consolidation in the industry have reached and now exceed any previous
recorded pace. Once again, the very situations which gave rise to the
necessity of creating PUHCA, especially the problems of cross-
subsidization and affiliate abuses, are threatening substantial harm to
consumers and, in the present instance, competition as well.
The climate of deregulation, if not its actual occurrence, has
prompted utilities to form unregulated affiliates and subsidiaries
seeking to capture markets which have not traditionally been served by
utilities and which lie, generally, outside the scope of their core
functions. Increasingly, utilities have settled on entry into the
energy services and related markets as a means of holding on to
customers and establishing profit centers. Thus, utilities now seek to
dominate the related energy services markets, such as those for
electrical, HVAC,/R and air conditioning markets.
This diversification by utilities into areas outside of their
publicly regulated role as producers and suppliers of energy has
occasioned significant and continuing harm to small, private sector
firms engaged in the related energy service fields. Utilities
(typically through unregulated affiliates or subsidiaries) now
routinely sell appliances, provide plumbing, heating, and cooling
equipment and service contracts, engage in insulation work and sales of
storm windows and doors, provide outdoor lighting and interior lighting
fixtures. Utilities have also begun to enter into security and alarm
monitoring markets, telecommunications, and related energy markets such
as energy management and energy monitoring.
Most importantly, utilities are unfairly subsidizing their market
entry from their utility rate base and using their powers as an
incumbent monopoly to discriminate against non-affiliated competitors.
There is considerable potential for small businesses to be harmed in
their traditional markets and to be denied access to newly emerging
markets which are the key to future expansion, job growth, and
profitability as deregulation progresses.
PUHCA and Small Business
Despite the fact that the Public Utility Holding Company Act
(PUHCA) directly applies only 16 utility holding companies and may,
therefor, be viewed as only of minimal importance to small businesses;
PUHCA repeal does have considerable significance for these small
businesses.
First, it's a mistake to believe that PUHCA impacts only a few,
large multi-state utility operations. By its very existence, PUHCA
impacts far more utilities which must operate and structure themselves
in a fashion so as not to become subject to the Act's provisions.
Indeed, this is one of the major safeguards of the 1935 Act: it serves
as a brake on the unrestricted expansion and diversification of other
utilities. If PUHCA were repealed, not only the 16 registered holding
companies but every other utility would be free to acquire widely
dispersed utility affiliate operations and engage in multistate
activities which give rise to the very kind of abuses which PUHCA was
designed to prevent.
Second, without the restraints imposed by PUHCA, public utility
holding companies would have the potential to expand further and to
develop and exploit monopoly markets beyond the control of any one
state. Indeed, without the restraint imposed by the Act, a multiplicity
of mergers and acquisitions, already taking place, will result in even
more multi-state utility operations which, but for repeal, would have
been subject to SEC jurisdiction and scrutiny. If PUHCA were repealed,
the presently exempt holding companies would no longer have to confine
their operations primarily to a single state. State commissions could
then lose control over the out of state operations of utility holding
companies (both the presently registered ones as well as those
presently exempt which choose to expand) which would then be free to
engage in unconditional interstate commerce and foreign acquisitions.
Third, and more importantly for small business competitors, repeal
of PUHCA will bring with it the ability of public utility holding
companies to further diversify into unregulated further eroding those
markets traditionally served by small business and creating barriers to
entry in new markets. State regulators will be powerless to prevent
harm to these firms because of the multistate character of public
utility holding companies and because state regulators have little
authority to oversee the transactions of the unregulated business. More
specifically, both ratepayers and small business competitors suffer
from the performance of services by utility subsidiaries for the
unregulated subsidiaries (such as ESCOs) without charging properly, if
at all, which results in the costs of the unregulated business being
borne by ratepayers and conferring an unfair competitive advantage upon
the unregulated subsidiary.
Specific PUHCA Protections And Pending Legislation
Intrasystem Financing. The Security and Exchange Commissions's
(SEC) Rule 45(a), promulgated pursuant to the authority of section
12(b) of PUHCA, provides that a company in a registered holding company
system must file a declaration and receive an order from the SEC before
it may lend or extend credit to, indemnify, or make any donation or
capital contribution to any company in the system. This extends
coverage to public utility companies which may disadvantage competition
by the using the credit of the utility to borrow money on behalf of
affiliate operations competing directly against small businesses for
customers and markets. Such favorable borrowing not only can impair the
future rating of the utility, but amounts to a cross-subsidy to the
unregulated affiliate.
Regulators may encounter significant difficulty in distinguishing
whether the borrowing was done to benefit the utility operation and its
consumers or was done to benefit the unregulated operation competing
against non-affiliated private sector firms. The holding company may be
able to use its utility operations to raise funds for unregulated
ventures in other markets by borrowing against the assets of its
regulated utility operations. If the risks inherent in the regulated
market are lower than those in the unregulated, competitive market (as
can be anticipated) cross-subsidies result in the form of lower cost
debt for the competitive venture than would otherwise be the case.
Consumers will suffer, as well, since the because the regulated utility
operation now bears some of the risks associated with the capital
supplied for the unregulated business. The prevention of this expanded
risk, the commensurate higher rates to be paid by consumers to defray
such loans, and the adverse impact on competition in unregulated
markets are the very reasons why PUHCA protections must be continued.
Unfortunately, the present legislation regarding PUHCA repeal does
not require holding companies to exclusively use non-recourse debt,
preclude inter-affiliate loans, or otherwise insulate captive consumers
from risky financial transactions.
Affiliate Transactions. Section 13 of the Holding Company Act
governs service, sales and construction contracts among affiliates. In
general, section 13(a) prohibits registered holding companies from
entering into or performing any such contract with an associate utility
or mutual service company, except in limited circumstances to be
exempted by rule. Section 13(b) permits registered holding company
subsidiaries and mutual service companies to enter into or perform a
service, sales or construction contract with an associate company only
in accordance with SEC rules and only if such contract is performed
``economically and efficiently'', for the benefit of the companies
serviced, at cost, fairly and equitably allocated among such companies.
On of the more pernicious aspects of unfair competition is the
shifting of costs from the unregulated affiliate to the regulated
utility operations. This harms both ratepayers and competition in the
affected competitive market. One of the major purposes of PUHCA was to
prevent this cost shifting.
In connection with monitoring operations of service companies, the
SEC has identified and corrected such abuses. The SEC has been
particularly concerned with the practice of shifting holding company
expenses to operating utilities through the medium of a service
company. This shifting was accomplished, for example, by sharing
officers and employees between the holding company and the service
company and charging some portion of their compensation to the utility
customers of the service company. In a series of proceedings, the SEC
established the principle that the compensation and expenses of holding
company personnel must be borne by the holding company and not shared
with an associated service company and passed on to utilities
Unfortunately, this precise situation--the sharing of officers and
employees--is again becoming an issue as utilities expand into
unregulated markets. At the instance of public utilities, a number of
states now permit such sharing despite the recognized potential for
consumer and competitive abuse. For example, New Jersey has passed a
statute which specifically permits its utilities to share
administrative personnel, employees, administrative services, and
facilities with unregulated, non-utility ventures. The statute
specifically allows a utility company's unregulated businesses to use
utility employees to service non-residential accounts. Other states
have similar provisions, including Illinois, and Massachusetts while
some states, such as Nevada, expressly prohibit the practice. If PUHCA
should be repealed without establishing new provisions which, at a
minimum, continue the protections contained in the statute now, the
practice of sharing employees can be expected to expand greatly with
attendant increases in cost shifting and cross subsidization.
In addition, the SEC has recognized that even the present language
of PUHCA may be inadequate to deal with an increasingly common
situation where the utility itself is the provider of non-tariffed
services or goods to its affiliates or non-associated entities. In it's
1995 Report to the Congress, it SEC's Division of Investment Management
stated:
``[increased diversification may raise new and different
affiliate concerns.]. A new standard of review for transactions
between utility and nonutility associate companies may also be
appropriate where the utility is the seller of goods or the
service provider . . . Finally, the ``cost'' standard of
section 13 may not be the correct standard for reviewing
affiliate transactions; it may make more sense to use market
value, or some combination of cost and market value, in
reviewing such transactions.'' (Emphasis added.)
NAFC agrees with the Division in its recommendation. Regardless of
what action Congress ultimately takes with respect to PUHCA, federal
legislation is needed to address the consumer and competitive abuses
now arising from situations where the public utility transfers assets
and personal to unregulated, non-utility operations which seek to
displace existing firms through cost shifting and cross-subsidization.
Again, present PUHCA repeal legislation, such as S. 313, does not
affirmatively prohibit cross-subsidization, and state regulation is
inadequate to prevent siphoning of ratepayer dollars in a holding
company structure.
This is especially true with regard to situations where assets are
transferred from the utility itself to an associate company engaged in
unregulated, non-utility operations. Increasingly, as noted by the SEC
report, utilities are resorting to this new means of conferring a
competitive advantage upon their non-regulated subsidiary or affiliate
which is not normally recognized by state regulators as falling under
the traditional definition of cross-subsidization. This more modern
subsidy is the transfer of tangible and intangible assets at very
little or no cost to the non-utility subsidiary or associate company.
Typically, this would be in the form of marketing data either in the
aggregate or with reference to specific customer sites, or would
concern the transfer of generating assets, or the laying of fiber optic
cable. For example, a holding company could transfer a formerly rate-
based, low-cost generating plant to an unregulated marketing
affiliate--without pre-approval by all the relevant state commissions--
for the embedded cost of the facility thereby denying captive retail
customers of the economic benefit of the facility and potentially
exacerbating stranded cost exposure. Alternately, a holding company
could built a fiber optic system, with a small portion used for core
utility operations (such as load control), and the remaining capacity
operated as or leased to a competitive telecommunications provider.
Given the economies of scale in fiber optic cable, captive utility
customers could pay the majority of the underlying costs and not
receive the economic benefits of the use of the remaining facilities.
The advent of fiber optic cable and advanced energy monitoring
capability now make it possible for utilities to know in advance of
even the customer when residential or commercial equipment may fail.
Such information may be turned over to the utility's service affiliate
without any opportunity for private sector competitors to service even
existing accounts. It is no surprise that investor owned utilities have
invested billions of dollars into telecommunications in order to
capture this market.
Once again, because of its nature as a utility, the local energy
provider is in a position to acquire specific information regarding a
customers energy usage. This can include more than just total or
average consumption, but also the type of equipment being used, its
load profile, the customers frequency and type of repairs, equipment
age and model, customer credit and billing history. Such information is
possessed by the utility by virtue of its monopoly status and can be
easily transferred to its non-utility affiliate or subsidiary for use
in providing a significant competitive advantage against private sector
competitors which are unable to obtain such information no matter what
the cost.
Pending PUHCA repeal legislation, such as S. 313, does not require
holding companies to provide competitors with comparable access to
information obtained from monopoly affiliates.
Another asset of substantial value which is conferred upon non-
regulated affiliates and subsidiaries is the ability to trade upon the
utility's goodwill (name and logo). Having been conferred a monopoly
franchise for decades during which their existing captive customer base
became acquainted with a utility's name and trade marks, utilities now
routinely provide their non-utility subsidiaries and affiliates with
all the good will previously acquired. Although, the owners of the
utility have a right to permit usage of their identifying marks to
those they deem fit, they should not be permitted to do so without
recovering the fair market value of such an asset since failure to do
so represents a subsidy from the utility side of operations to the non-
utility side.
While ratepayers may not be entitled to ownership rights in the
asset, they have a beneficial interest in it and have certainly
contributed to its value. Failure to compensate them not only unduly
drives up rates by foregoing revenues which could otherwise accrue to
the utility but also conveys a substantial unfair competitive advantage
over private sector competitors.
Unfortunately, pending legislation limits state commission review
of the transfer of assets and fails to require fair compensation to
ratepayers for the transfer of ratepayer financed assets.
Access to Books and Records. Another reason for heightened concern
regarding affiliate abuses in all holding company systems, both
registered and exempt, is the large number of holding company
subsidiaries that engage in non-utility businesses. With increasing
speed, utilities are expanding their acquisition of contracting firms
in the HVAC/R, electrical, telecommunications, and security and alarm
monitoring fields. The sheer number of non-utility business activities
brings greater potential for improper allocation of centralized service
company costs to the non-utility businesses (i.e., electric ratepayers
subsidizing the non-utilities' fair share of the costs). It also
increases the opportunities for affiliate contracting abuses.
To protect against affiliate abuse and cross-subsidization, federal
and state regulators must have access to the books, records and
accounts of all companies in a holding company system that are relevant
to costs incurred by an affiliated utility or to the transfer of
assets, personnel, employees, or the sharing of facilities and
employees between a utility and its affiliated or associate companies.
This is equally true with respect to both registered and exempt holding
company systems. If Congress modifies or repeals PUHCA, it should
ensure that ratepayers are protected from affiliate abuse. In addition,
NAFC recommends that states should also be given clear authority to
review affiliate contracts--up-front--to assure that all
anticompetitive issues are adequately addressed before they become a
problem.
Finally, NAFC believes that any effort to revise the Public Utility
Holding Company Act should take place in the context of overall,
comprehensive revision of those key statutes which form the basis of
public utility law, including the federal Power Act, the Public Utility
Regulatory Policies Act, and other relevant statutes.
______
Prepared Statement of Plumbing-Heating-Cooling Contractors--National
Association
The Plumbing-Heating-Cooling Contractors--National Association
would like to submit the following testimony to the Subcommittee on
Finance and Hazardous Materials on the importance of the 1935 Public
Utility Holding Company Act (PUHCA) in today's competitive energy
market.
PHCC--National Association
The Plumbing-Heating-Cooling Contractors--National Association,
founded in 1883, is the oldest trade organization in the construction
industry, and the largest in the plumbing-heating-cooling industry. The
PHCC-National Association membership is composed of more than 5,000
contracting firms nationwide, including both union and open shops,
performing all types of work from residential and commercial to
industrial and institutional. Whether serving as a subcontractor or a
general contractor, PHCC-National Association members engage in
maintenance, remodeling, service and repair, and new construction in
the following fields: air-conditioning, backflow prevention, heating
(warm air and hydronics), plumbing, process piping, refrigeration, fire
sprinklers, sheet metal, and ventilation.
The PHCC--National Association is a member of the National Alliance
for Fair Competition (NAFC) and endorses NAFC's positions on PUCHA
repeal and on comprehensive electric utility restructuring.
The PHCC--National Association is also a member of the Consumers
for Fair Competition (CFC) and endorses its policies on PUHCA repeal
and on the mitigation of market power in a deregulated energy market.
Introduction: PUHCA is Still Relevant Today
Some have argued that PUHCA is an impediment to electric
competition. Others have argued that PUHCA helps competition by
preventing electric monopolies from competing unfairly. Both are right.
PUHCA is simultaneously an impediment to and a protector of free
and open competition. While PUHCA's regulatory structure may restrict
utility holding companies from competing as much as they wish, at the
same time it ensures that what competition does occur is open and fair.
As Congress considers PUHCA repeal, and electric restructuring in
general, the trick will be to remove the barriers restricting
competition without removing those barriers that prevent unfair
competition and prohibit anti-competitive practices.
The PHCC--National Association believes the market power provisions
of PUHCA are still necessary today in order to ensure truly fair and
open competition occurs. PUHCA should only be repealed if it is done in
the context of comprehensive utility restructuring, and if such
comprehensive legislation contains adequate safeguards against market
power abuses.
While current proposals to repeal PUHCA retain important
bookkeeping and financial reporting requirements, these proposals fail
to retain the current cost allocation rules that govern affiliate
transactions. Current proposals also fail to require the same level of
operational separation that exists today, which prevents a utility from
inappropriately supporting its unregulated affiliates with ratepayer
assets.
The primary reason for establishing PUHCA in the first place was to
prevent utilities from using assets gained from the ratebase to support
the utility holding company's competitive affiliates. Utility holding
companies had been abusing the market power derived from their captive
customers (rate-payers) to support a range of subsidiary companies that
used this market power to gain an unfair and anti-competitive edge over
their competitors. Such actions harmed both ratepayers, because their
energy rates were unnecessarily increased, and competitors, because
they were competing against a company supplied with the limitless
assets of a monopoly. PUHCA reined in the monopolies and established
the financial and operational separation necessary to ensure that
unregulated utility holding company affiliates operated in the same
manner as every other business in America--without the benefit of a
captive ratebase to finance its operations.
As utilities and their affiliate companies begin to compete in
different economic sectors and at an ever-increasing rate, the original
justification for PUHCA's market power provisions become more evident.
In many instances, the first competitive affiliates a utility
establishes operate in the energy services market.
Utilities Compete Against Small Businesses in the Energy Market
Small businesses, especially contracting firms, are not just
consumers of electricity. They are also competitors in the energy
market. Professional contracting firms have been the traditional source
for providing, installing, servicing and maintaining energy efficient
products and services. A dynamic, deregulated energy market will bring
even more business opportunities in energy efficiency and load
management for small businesses.
Congress must keep in mind when considering electric utility
restructuring that utilities and their affiliates will not just be
competing against other utilities. They will also be competing against
family-owned small businesses found in every community. There is
nothing wrong with competition, so long as the utilities do not compete
unfairly by using their rate-base to support their private-market
ventures.
Every day, PHCC members face a wide rage of competitors, from other
professional contractors, fly-by-night repairmen, national service
centers like Sears and Home Depot, and affiliated subsidiaries of
utilities. PHCC members are not opposed to competition and do not seek
to limit the number of competitors in their field though any means of
legislation or regulation.
PHCC members are, however, fiercely opposed to utilities' unfair
and anti-competitive behavior. Increasingly, over the past decade,
contractors have seen unfair competition from utilities and their
affiliated service companies.
Description of Unfair Utility Competition
Unfair utility competition occurs when a utility uses the unique
advantages of its situation as a government-sanctioned monopoly to
support the competitive business operations of its subsidiaries. This
is often referred to as cross-subsidization, because the regulated
rate-base is subsidizing the unregulated affiliates. PHCC members have
been subjected to unfair utility competition since the 1960's. But with
deregulation of the natural gas industry in 1992, and the current
momentum of electricity deregulation at the state level, instances of
unfair and anti-competitive behavior are increasing to dangerous
levels.
Cross-subsidization comes in many forms and sizes. It is not just
the transferring of money from the parent utility to the affiliated
subsidiary. Any service, product, tool, or even goodwill that is passed
to the affiliate without compensating the ratepayers with the fair
market value of that product or service is unfair and anti-competitive.
Any time a utility refers a consumer to its affiliate, or denies or
delays utility service to a competitor of its affiliate, is an instance
of unfair utility competition.
Some examples of cross-subsidization that create unfair competitive
advantages are:
<bullet> Equipment Transfer: A utility transfers equipment that has
been paid for through the utility rate-base (i.e., the electric
bill) to the affiliated service company. Such equipment could
be service vans or computers.
<bullet> Customer Data: The utility provides, at little or no cost,
utility-developed ratepayer profiles for the affiliated service
company's marketing efforts. These ratepayer profiles become
sales leads for the affiliate.
<bullet> Personnel Transfer: The affiliated service company uses the
utility's personnel for service calls. The service company then
has a workforce whose salary, health care, employment taxes,
and retirement plans are paid for by the ratepayers.
<bullet> Customer Steering: The utility steers consumers--through toll-
free customer service lines, a website, direct marketing in
bill-stuffers and via other means of advertising--to the
utility's affiliate and recommends the affiliate's products and
services.
<bullet> Overhead Transfer: The utility pays for the affiliate's
overhead, such as providing accounting and legal services,
purchasing office supplies, or providing free office space in
the utility's buildings.
<bullet> Joint Marketing: The utility allows only the affiliate to add
bill stuffers advertising the subsidiary's services in the
utility's monthly rate-bills, for free.
<bullet> Name Recognition: The affiliated service company uses
utility's name and logo. Consumers tend to go with what they
know, and most everyone knows who their utility is. Consumers
may then incorrectly assume that the affiliate's quality
control and financial stability are also regulated and approved
by the state public service commission.
One must ask: How much would a family-owned construction company
have to pay for these services, products, and benefits? Did the utility
affiliate pay the fair market value? Were the ratepayers compensated
for the use of these assets and benefits they paid for through their
bills, or have their rates been lowered by that amount?
How PUHCA Prevents Unfair Competition and Cross-subsidization
PUHCA contains three provisions that combine to prevent utility
holding companies from using ratepayer assets to compete unfairly:
<bullet> Financial Bookkeeping and Reporting: Registered utility
holding companies must file detailed financial reports for the
utility and its affiliates, which are then made public.
<bullet> Operational Separation: The subsidiary companies must be both
financially and physically separate from the parent utility.
The affiliated subsidiary may not use the same equipment,
personnel, office space, vehicles, etc.
<bullet> Affiliate Cost Allocation Rules: Strict guidelines govern the
transfer of assets between the regulated utility and its
affiliates to ensure no unnecessary costs are passed to the
ratepayers.
Current proposals to overhaul or repeal PUHCA only carry over the
financial bookkeeping and reporting requirements. These proposals do
not replace the other two provisions and leave a gaping hole in the
fair competition coverage.
Separation between a utility and an affiliate is not
``protectionist.'' Separation is a statement that tells an affiliated
company that it must operate in the same manner as every other business
in America: it must build its own name, develop its own customers, hire
its own employees, and fund its operations independently. The general
public did not finance the creation of any contractor or small
business. Why should the general public, through their monthly utility
bill, finance a utility's for-profit affiliates?
While strict financial bookkeeping and reporting is important to
prevent unfair competition, it is not enough. With just the reporting
requirements, we are left to simply witness the crime without the
ability to prevent it or punish it. If Congress expects a truly open
and fair competitive energy market to develop, it cannot repeal or
reform PUHCA without replacing all three fair competition requirements:
proper affiliate transaction cost allocation, operational separation
between affiliates and the utility, and strict financial bookkeeping
and reporting.
The PHCC--National Association urges Congress to include NAFC's
fair competition language in any electric utility restructuring
legislation. This legislative language is included in Appendix A.
The fact that Congress used provisions similar to PUHCA's in the
1996 Telecommunications Deregulation Act is a testament to the need for
strong market power provisions in today's competitive markets. Congress
should not set a lower standard of fair competition in the energy
market than it did in the telecommunications market.
States Cannot Do It Alone
Repealing PUHCA and expecting state utility commissions to have the
ability and authority to police a multi-state utility holding company
is counter intuitive. The entire reason why Congress created PUHCA in
the first place was because the state utility commissions did not have
the ability and authority to stop multi-state utility holding companies
from competing unfairly.
States, either through legislation or through their public service
commissions, cannot promote and police fair competition by themselves.
Their jurisdiction is limited to ensuring fair competition for those
utilities that solely compete in their own state. State public service
commissions need federal guidance to help deal with situations where
the competing utility crosses state boundaries. This is often the case
with those utility holding companies PUHCA applies to.
Repealing or reforming PUHCA in the context of comprehensive
restructuring will prevent utility holding companies from gaining an
unfair competitive advantage by competing across state lines.
Conclusion
The PHCC--National Association believes that in America everyone
should be allowed to compete, no matter who they are. However, no one
should be allowed to cheat and no one should be forced to compete
against a monopoly. Utility holding companies should not be allowed to
use any advantage they may have (or had) from being a government-
sanctioned monopoly to compete unfair against another company.
PUHCA should only be repealed or reformed in the context of
comprehensive restructuring and only if sufficient safeguards are in
place to prevent utility holding companies from cross-subsidizing. Any
legislation repealing or reforming PUHCA must require operational
separation between the utility and its affiliates; provide a clear
grant of authority to both the states and FERC for the prohibition of
anti-competitive actions; permit access to any and all books and
records, wherever located, when necessary for investigation; prohibit
the cross-subsidization of non-regulated businesses by regulated
utilities; restrict self-dealing and discrimination between utilities
and their affiliates; and prevent the transfer of a utility's non-
tangible assets to its affiliate (i.e. customer profiles and corporate
name, and logo).
Appendix A
Proposed Fair Competition Language for Stand Alone PUHCA Repeal
participation by public utilities in providing certain non-utility
services.
(a) In General
(1) Notwithstanding any law to the contrary, any public utility
company, subsidiary company, affiliate, or associate company of a
publicutility company, may engage in, directly or indirectly, any
activity whatsoever, wherever located, necessary or appropriate to the
provision of non-utility services as described herein, subject to the
provisions of this Act and the jurisdiction of the State Commission and
the Federal Energy Regulatory Commission.
(2) Non-Utility Services--No public utility company shall engage in
the design, sale, distribution, lease, rental, installation,
construction, modernization, retrofit, maintenance or repair of
systems, products or equipment, including household appliances, except
as permitted under this section.
(A) Exceptions. The provisions of this section shall not be
applicable in instances of emergency or to protect the life,
health, or safety of any customer or property; or where the
utility is the sole source of such systems, products, equipment
or services.
(b) Prohibition of Cross-Subsidization.--
The state commissions shall exercise their jurisdiction pursuant to
this Act and to the extent otherwise authorized under applicable law
with respect to prohibiting the cross subsidization of the activities
described in subsection (a) by a publicutility company in its rates for
electric or gas services, and (2) to make appropriate rate adjustments,
disallow any cost recovery, or make any determination regarding the
allocation of charges, to eliminate the effects of any cross-
subsidization or to prohibit any unjust, unreasonable, preferential or
discriminatory rate.
(c) Structural and Transactional Requirements.--
Any activity authorized under subsection (a) shall only be
conducted under a subsidiary company, affiliate, or associate company
which is separate from any public utility company engaged in the
generation, transmission, or distribution of electric power or gas.
(A) Such separate company, affiliate, or associate company--
(1) shall maintain books, records, and accounts in the manner
prescribed by the state public utility commission which
shall be separate from the books, records, and accounts
maintained by the public utility company of which it is an
associate company and any other subsidiary or affiliate of
such public utility company, shall maintain proper internal
cost-allocation procedures as prescribed by the state
commission;
(2) shall have separate officers, directors, and employees from
the public utility company;
(3) may not obtain credit under any arrangement that would permit
a creditor, upon default, to have recourse to the assets of
a public utility company; and
(4) shall conduct all transactions with the public utility
company of which it is an associate on an arm's length
basis with any such transactions reduced to writing and
available for public inspection.
(d) Independent Audit Authority for State Commissions.--
Any state commission with jurisdiction over a publicutility company
that is an associate company of a registered holding company and which
company transacts business with a subsidiary company, affiliate, or
associate company of such holding company engaging in any activities
described in subsection (a) may request that the company engaging in
such activities have performed, no more frequently than on an annual
basis, an independent audit of transactions between such jurisdictional
publicutility company, its affiliates, subsidiaries, or associates
companies and such company engaging in such activities. If such an
audit is ordered, the State Commission shall select and supervise an
independent management or other accounting firm to perform the audit.
The company shall bear the costs of performing such an audit. The audit
report shall be provided to the State commission within 6 months of the
audit request.
(e) Fair Competition.--
In its dealings with its subsidiary or affiliate as described in
subsection (a) a public utility company
(1) may not unfairly discriminate in favor of its subsidiaries or
affiliates, and any other entity in the provision or procurement of, or
access to, goods, services, facilities, and information, or in the
establishment of standards or referral of customers;
(2) may not provide information, including marketing leads, to such
company, its subsidiaries or affiliates, unless such information is
made available to other persons on reasonable and non-discriminatory
terms and conditions; nor shall any utility provide, transfer, or
permit the use of, or access to, tangible or intangible assets of the
utility which were acquired with ratepayer funds unless such transfer,
provision, or other use of such assets is fully compensated by the
subsidiary, associate, or affiliated company;
(3) shall account for all transactions with a subsidiary described
in subsection (a) in accordance with generally accepted accounting
principles and shall value any assets that are transferred directly or
indirectly from the public utility company to its affiliates,
subsidiaries or associate companies, and shall record such
transactions, in accordance with such regulations as may be prescribed
by the State commission to prevent improper cross subsidies.
(4) the name, logo, service mark, trademark, or trade name of the
separate subsidiary or affiliate of a public utility company shall not
resemble the name, logo, service mark, trademark or trade name of the
public utility company and neither the public utility company nor the
separate subsidiary or affiliate may trade upon, promote, or advertise
their affiliate or related status.
(f) Proprietary Information.--
(1) In complying with the requirements of this section, each public
utility company and any subsidiary, affiliate, or associate company of
such public utility company shall have a duty to protect the
confidentiality of propriety information of competitors and customers.
A public utility may not share customer proprietary information in
aggregate form with its subsidiaries, affiliates or associate companies
unless such aggregate information is available to other competitors or
persons under the same terms and conditions. Individually identifiable
customer proprietary information and other proprietary information may
be
(A) shared only with the written consent of the person to which
such information relates or from which it was obtained; or
(B) disclosed to appropriate authorities pursuant to court order.
(2) Exceptions.--Paragraph (1) does not limit the disclosure of
individually identifiable customer proprietary information by each
public utility as necessary
(A) to initiate, render, bill, and collect for the service or
products requested by a customer; or
(B) to protect the rights or property of the public utility, or to
protect users of any of those services from fraudulent,
abusive, or unlawful use of any such service.
(h) Implementation--
Each State commission, for each public utility company under its
jurisdiction which is not a registered holding company, shall:
(A) Hold a hearing and make a determination based on evidence
presented in the record as to what rules, procedures, or other
actions are necessary to implement the safeguards set forth in
subsections (a)-(f) of this Section; and
(B) promulgate any regulations necessary to implement those
sections within one year from the date of enactment of this
Act.
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