zations, even a registered gas holding company. There is no consensus for repeal because the bill will harm consumers.

S. 621 does contain a continued Federal role in policing the interaffiliate transactions in audits of books and records. But this language is insufficient to protect the rate-payers in competition from abuse.

In fact, the bill provides little to supplant the loss of authority over the integration requirement, the diversification oversight and prohibition, and structural protections and firewalls.

The registered holding companies want out of PUHCA because they want to get a leg up on competition to expand their customer base and broaden their market power prior to facing competition themselves. This greatly increases the likelihood that they and nobody else will be the dominant market players in a future market. This will smother competition in its infancy and will prove costly to consumers.

In conclusion, premature repeal or substantial reform of PUHCA, as contemplated in S. 621, outside of the context of a broader restructuring of the industry is totally inappropriate given the current flaws in the structure of the electricity markets and natural gas markets.

To repeal this anti-empire-building statute at such a time when structural abuses could still become the order of the day would be dangerous.

Thank you very much for the opportunity to testify.

The CHAIRMAN. I think we have an interesting diversity of testimony. I decline the offer to take on Michael Jordan and the Bulls. [Laughter.]

Let me ask Mr. Meyer and Mr. LoBaugh if they would care to respond to whether or not consumers would be in greater danger from a revival of abusive practices such as overloading operating companies with debt and building excessive charges if S. 621 were to pass?

Mr. MEYER. Mr. Chairman, I think, first, you would have both the FERC and the State commissions. You would be unable to do those things.

In the second place, I don't think the marketplace would allow it, the abuses of the past. I don't think you could sell securities or raise money in the marketplace with any of those abuses.

You have to remember, those abuses were pretty severe. Doubleleveraging, for example, leverage debt at one level and then leverage again at the next level, leverage again at the level after that. Another example is the exorbitant charges that were charged to the operating companies. That was the abuse that hurt consumers. The other, the leveraging abuse, was the one that hurt investors.

I don't think the SEC, in its ability to control the issuance of securities, is going to allow that now that we have

The CHAIRMAN. Does S. 621 in any way whatsoever diminish the SEC's authority over the issuance of securities and debt, and the proper structure of offerings?

Mr. MEYER. No, sir.

The CHAIRMAN. Mr. LoBaugh, would you care to respond?

Mr. LOBAUGH. Concerning the issues of rates for the utilities, whether it's utilities under the Federal Power Act or Natural Gas

Act, the pipeline, which I heard someone make mention of earlier, which I don't think is relevant here, or State utilities, under the State utility commissions, it is the FERC and it is the PUC's that are going to establish those rates and determine whether or not costs that may be charged or not charged by an affiliate or holding company to a utility are going to be allowed.

Those things are hotly contested. Staffs audit books and records. People in the utility companies have to put on their evidentiary showing to allow those costs to be collected and rates that are not proven to be justified are disallowed, either at the FERC or at the PUC level.

None of that has anything to do with PUHCA. I don't really see any relationship between the issue that's raised here and PUHCA itself.

There is an irony here in PUHCA, however, that, under the current PUHCA structure, utilities such as ourselves, because we have raised the utility up in the parent company and have become an operating utility, could then go out and acquire other utilities in adjacent States. For instance, we could acquire these other utilities by merging them in as divisions or aspects of the then-existing utility. I suspect that would be more difficult for our State regulatory bodies to deal with in terms of allocation of costs and oversight, but would be consistent, nevertheless, with PUHCA.

But it would be more difficult in the current situation. Also, if we were to acquire a utility outside the State, I think the States would find it easier to deal with this in a holding company structure than in a multi-state utility structure in terms of tracking the allocation of cost.

My experience has been that all the States, certainly California and the ones I'm familiar with outside of California, have been very vigorous and very effective in terms of pursuing those issues and are highly qualified to review those and do a great job.

Mr. MEYER. Mr. Chairman, much of what you have heard about the competitive marketplace again is Senator Murkowski and the Energy Committee's jurisdiction.

The CHAIRMAN. Yes.

Mr. MEYER. It really doesn't belong as a part of this because there is ample protection. Wherever we are going to go, whether there's going to be a State-by-State experiment with competition or Congress is going to act on it, I think there's going to be a great national debate.

But that is a different debate than what we're having here this morning. We have a piece of antiquated legislation here that serves no purpose.

The CHAIRMAN. Dr. Cooper, I see you want to respond and I want to give you the opportunity to respond. I read the Consumer Federation of America's statement on this bill, and although we've worked together on a number of occasions and I hope we will continue to work together, I think on this issue we have a difference of opinion.

I don't understand, and you might explain to me, without just saying you want to wait for a comprehensive bill and competition. Now, what protection do the consumers get now under the existing law that they would not receive after the enactment of S. 621?

What existing consumer protection would be lost if we enhance the ability of the State regulators and if the FERC is now actually doing the work, as a practical matter?

The SEC is not engaged in this pre-approval process. It is the FERC that is doing the substantive work. So explain what consumer protections are actually going to be stripped away.

Dr. COOPER. The interesting thing is to call it an antiquated piece of legislation that does nothing, and then hear the companies scream and shout about what it prevents them from doing.

In point of fact, it effectuates a structural solution. It convinces the vast majority of companies that they do not want to engage in the kinds of transactions that would cause them to be regulated and pass the fundamental tests of PUHCA.

PUHCA will allow you to acquire a neighboring utility if you can prove an integration benefit. PUHCA will allow you to engage in transactions if you price them at cost. If a utility wants to become a multi-state entity and go there, it has to meet these tests.

Most utilities have decided they do not want to engage in those activities. We believe those activities are inherently prone to abuse. I have personally gained this experience from having spent the last 10 or 12 years involved with telephone utility holding companies which were not subject to PUHCA.

I frequently stated in public and in private that I wish we had a TUHCA-a telephone utility holding company act-because I've been in cases where the State PUC in Virginia says, how do you develop a service? The answer from Bell Atlantic is we do that in Philadelphia. You never do quite get an answer.

Now if a commission is dedicated and spends all of its resources, it can try to wrestle a holding company to earth. But, in point of fact, few commissions have the resources and authority to do so.

Our answer is simple. There's a whole range of transactions that simply do not take place today because of PUHCA, because the companies out there don't want to be regulated subject to PUHCA. Your bill would say, let those transactions take place and then we'll see if the regulators can keep up with them. Our answer is that the regulators will not be able to keep up with them. The only thing that could actually discipline those transactions would be an effectively competitive marketplace because you couldn't shift your costs over here. There would be a competitor there to slap your hands. So we want that competitive marketplace there first as part of that process.

I have suggested at least a couple of things you could say in a PUHCA repeal bill, as part of the whole vehicle, which would give us better assurances. That is, we think divestiture is the way to go. That is, to separate out the competitive assets from the monopoly assets. That's where we see the protections.

These transactions don't take place and you say, well, let them do the deals and we'll see if the regulators can keep up. Our answer is we don't think the regulators will be able to. Only competition will be. That's why we want to work on competition first.

The CHAIRMAN. OK. I'm going to turn to Senator Faircloth and then ask Mr. Meyer, Mr. LoBaugh, and Mr. Tanski if they would care to respond.

Senator Faircloth.

OPENING STATEMENT OF SENATOR LAUCH FAIRCLOTH

Senator FAIRCLOTH. Thank you, Mr. Chairman. I'm well aware that all this has been said, but I haven't said it. So

[Laughter.]

I was an original cosponsor of this bill last year. What I believe the issue to be, very simply, is do we need the SEC regulating utility holding companies? The answer is clearly, we do not.

PUHCA requires the regulation of only 15 companies. Yet, there are hundreds of other utility companies subject to the Act.

I think the Federal Energy Regulatory Commission and the State supervisors are more than adequate to meet the challenges of regulating the holding companies today. The utilities commission in North Carolina came under my purview as Secretary of Commerce for 7 years. We certainly experienced no problems.

Mr. Chairman, let me say that I'm sensitive to the concerns of many businesses that believe they will be captive customers to the deregulated power companies.

But the real answer to lowering energy cost is allowing utility companies to diversify their activities. The utility companies have a great opportunity to expand and vast technology for change, and I think we should let them do it.

Do you want to go ahead with

question or do you want me to? The CHAIRMAN. If you have a question, Senator, why don't you pose the question.

Senator FAIRCLOTH. Mr. Meyer.

Mr. MEYER. Yes, sir.

Senator FAIRCLOTH. In the long run, is your company going to be better off by being able to diversify the operation?

Mr. MEYER. We believe that we will, if we stay with our netting, which we intend to do.

Senator FAIRCLOTH. Do you intend to diversify?

Mr. MEYER. Yes, we do, in services that are related to the basic electric service.

Senator FAIRCLOTH. Such as?

Mr. MEYER. Telephone, cable, what we call demand-side management. That is, putting the smart box in the home. You can hook it to the home computer or we could offer time-of-day rates to the customer. We could offer very, very low rates at night, higher rates in the afternoon. We already have an experiment of that kind going on in Laredo.

Once you connect to the customer with that broad band fiberoptic ability, you can carry all sorts of other things to the home. Senator FAIRCLOTH. Are you looking at any gas companies, pipelines, things of that nature?

Mr. MEYER. We have in the past. We're not presently.
Senator FAIRCLOTH. You don't have any now?

Mr. MEYER. No, sir. But we think that there would be a great deal of savings for us to own local distribution companies in areas where we also have electric service. Some companies are doing that at this moment. Texas Utilities has a merger underway. Senator FAIRCLOTH. Where would the savings come from? Mr. MEYER. Texas.

[Laughter.]

Senator FAIRCLOTH. You say there would be a great deal of savings concerning the gas. Where would the savings

Mr. MEYER. Common meter reading, common servicing, common consumer services.

Senator FAIRCLOTH. Now I'm having a little trouble. How does a gas service relate to electric service?

Mr. MEYER. Both services have meters which have to be read. Both have to have a certain amount of service, depending on line breakage, so forth. You could cross-train. You could certainly have common meter readers. You could also cross-train your employees for service matters.

We have companies that are gas and electric companies presently in existence that are exempt companies. We have mergers that are going on presently between the local distribution companies and electric companies.

Senator FAIRCLOTH. Mr. LoBaugh, would you tell me the experiences with diversification that your companies have had and what the effect has been?

Mr. LOBAUGH. As I commented earlier, we diversified into nonutility activities starting around 1970 or so into

Senator FAIRCLOTH. What non-utility?

Mr. LOBAUGH. Agricultural, real estate, drug stores and sporting goods stores, and oil E&P operations.

Senator FAIRCLOTH. What phase of agriculture?

Mr. LOBAUGH. The citrus packing as well as pistachio nuts and things of that nature. We sold off the agricultural, redeployed that capital, and went into the retail business, drug stores and sporting goods stores, as well as the E&P area.

We have sold off, as I indicated earlier, all of those activities and concluded that we shall stick to the core business, utility related activities and the utility itself.

In response to the question you gave Mr. Meyer, on one of the comments from Dr. Cooper, let me talk just briefly about one of our current experiences in utility-related activities and merger, and that is the one with Enova.

We are proposing that when the merger is completed, the two holding companies will be subholding companies of a new holding company, that the utilities, in essence, remain separate operating corporate entities, both regulated by the California Public Utility Commission.

If the State of California, for instance, was divided into two separate States so that San Diego and Enova were each in a different State, that merger would not be permissible under PUHCA.

The benefits that we have projected and agreed to create as a result of that synergy is $1.2 billion after the cost of implementation over 10 years. Under State regulatory law, at least 50 percent of that must be reflected in terms of reduction of rates to the utility customers served by SoCalGas and by Enova. That kind of benefit and savings to consumers simply would not have been possible had PUHCA been a prohibition to that kind of merger.

Savings are going to come in terms of the general corporate overhead, things such as reducing the number of officers in the officer executive group of the two holding companies by 14, which is my estimate. We will have a common law department, common public