affairs, shareholder relations. Perhaps common billing is possible. You mentioned common meter reading.

Our two service territories do not significantly overlap. There's only 70,000 customers where there's an overlapping territory out of-we have 4.7 million meters and Enova has, with its utility, over 1 million. That's really a relatively small portion.

On the other hand, if the service territories overlapped, you can well imagine the savings to the consumers would be dramatically greater.

Senator FAIRCLOTH. How were your customers' rates affected by your diversification?

Mr. LOBAUGH. The utility rates were never affected whatsoever. The shareholder's value was diminished by in excess of $1 billion, but the utility rates were not affected one penny.

The CHAIRMAN. Mr. Frimerman, I could see you hopping up and down. Go ahead. Dr. Cooper is writing his response furiously. [Laughter.]

Dr. Cooper, I don't know if we have enough time for you to translate all those notes into a speech.

[Laughter.]

Dr. COOPER. Give me a chance.

The CHAIRMAN. I know you will try. [Laughter.]

Mr. Frimerman.

Mr. FRIMERMAN. I wanted to at least say a couple of things that related to what's been said about placing consumers at risk.

For one, if you look at the repeal of the Holding Company Act without addressing some of the Federal Power Act issues such as reversing the Mississippi Power & Light decision, which pre-empts the State utility regulators from effectively being able to control the pass-through of imprudent costs on to rate-payers for multi-state utility holding companies, then you are not really addressing the problem. You're creating a significant regulatory gap.

So what could happen, ostensibly, is that consumers could end up paying for an expanded list of abuses and of overcharges simply because you have situations where geographically distant utilities would be able to sell under the FERC jurisdiction perhaps and not be subject to effective State regulation. That is a problem.

Another problem is that by permitting additional investments, significant, unrestricted investments in non-utility ventures, what could occur is that the retained earnings that come from the regulated portion of the business are being reinvested not in the core business, but are being reinvested in non-core-related businesses. Therefore, that money is not available to write down overvalued assets. Overvalued assets are strandable costs.

Some of the registered holding companies as well as some of the exempt holding companies have significant exposure to strandable costs, as we know.

The problem is as you divert money from retained earnings and from other profits and funnel that money into non-utility ventures, it is no longer available to write down those overvalued assets and could result in causing consumers additional expense as an unintended consequence.

The CHAIRMAN. But, Mr. Frimerman, aren't you really talking about a much broader issue? You're talking about the entire area industry and what should or shouldn't be permitted under energy deregulation. That's not really what we are addressing here.

What you're doing is bringing in concerns and I'm not saying they're not legitimate concerns that are not addressed by PUйCĂ or the proposed legislation.

Indeed, we just heard Mr. LoBaugh testify as to what took place when Pacific Enterprises diversified, and you have very eloquently put forth your concerns, concerns which will have to be addressed. But this is not the forum in which to attempt to address these concerns. PUHCA does not deal with these problems.

It's not really fair to say that PUHCA is a problem, and there are a whole series of other problems, and you can't deal with any of them unless you do it comprehensively. We're not trying to deal with energy deregulation, we are trying to put authority into the hands of the proper regulators, the ones who know the issues and have been making the decisions.

Now, that's really where we're at.

What we have is people on both sides of the issue trying to pull extraneous issues in. It would be nice to deal with some of these issues to clean up problem areas, but it is not within the capacity or jurisdiction of this Committee.

Let me just say I do appreciate your testimony and the problems you address.

Mr. FRIMERMAN. If I could respond, Mr. Chairman.

The CHAIRMAN. Yes, certainly.

Mr. FRIMERMAN. Thank you. The concern is that it creates expanded opportunities for diversification and for investment which drains money from the holding company in and of itself. That is what the major problem with this is.

It's not that we are not sensitive to the need to adjust some of the financial reporting requirements, as well as some of the other requirements.

The CHAIRMAN. The arcane provisions? You don't care to use that word, do you?

Mr. FRIMERMAN. But

The CHAIRMAN. Now, wait. He can't write that down. Your eyes flickered, for the record, but we don't know whether you agreed or didn't agree.

[Laughter.]

Mr. FRIMERMAN. Some of the provisions are not necessary. But some of the structural protections still remain necessary.

The CHAIRMAN. All right.

Dr. COOPER. Let me offer two observations quickly for the record. The CHAIRMAN. Dr. Cooper.

Dr. COOPER. First, my lawyer friends are going to love this, but the series of activities that Mr. LoBaugh described, most of them you can do under PUHCA, if they can pass those standards.

The CHAIRMAN. Yes.

Dr. COOPER. He just doesn't want to do them that way. I will provide an explanation of them. We have a list of table and telephone and DSM and contiguous service territory, meter reading, all those other things, actually, that you can do under PUHCA.

Those corporations don't want to do them that way. But the public was not denied those benefits, to the extent that they may or may not exist. These companies just don't want to be subjected to that, and I'll get you the legal cites and explanations of how almost every one of those good things he stated that they would like to do, they actually can do under the law.

Second of all, in his case, he asserts that the rates in his company didn't go up. Well, maybe they should have gone down. For every example of a holding company structure that has protected consumers, I will get you an example of a holding company structure that put a lot of upward pressure on rates or held those rates higher because of that diversification.

It is interesting to hear companies step forward and say, I lost $1 billion, and nobody got hurt but my stockholders. There are lots of companies that lost $1 billion and rate-payers did get hurt.

The CHAIRMAN. Dr. Cooper, we could continue this discussion all day. Regarding diversification, we've seen that costs are not passed on to consumers, so how are consumers harmed by diversifications? If anyone is hurt, it is the stockholders who should take the risk. In New York, Government stepped in when a utility company lost money. Instead of allowing the bondholders and the stockholders to absorb a multi-billion dollar loss, the Government interfered and the Governor, the State legislature, and the public service commissions agreed to pass the cost of a never-used plant on to the ratepayers. This fiasco is the result of the legislature trying to bail out the stockholders.

I think the stockholders, the people who choose to invest, should be at risk, not the rate-payers. I think, unfortunately, we see cases, especially at the State level, where the Government steps in and bails out the stockholders. In the case of the Long Island Lighting Company, the rate-payers were and are absolutely crippled.

It is the most incredible fiasco, and the media seems to be ignoring it. All anyone writes about now are the methodologies used to try to reform this broken system. Currently, we are to reduce the consumers rates, by up to 20 percent, by substituting the current bonds with tax-exempt bonds.

For the consumers, it would be some relief. However, we see people arguing about how the system got broken, arguing about what took place 10 years ago, instead of focusing on solutions. It is just incredible.

Dr. COOPER. Mr. Chairman, if you were to express those same sentiments when we debate the securitization, we're going to be on the same side because that's a specific example of a practice. But this is another problem.

The CHAIRMAN. Yes, but PUHCA didn't help the consumers on Long Island, it didn't help us at all.

Dr. COOPER. I've seen examples where, in the proprietary agreements to undertake new activities, the stream of revenues of the rate-payer is pledged. You can do that if you don't have PUHCA.

For the State regulator to find that the papers are in Philadelphia when you're in California, is tough. PUHCA doesn't let you do that. PUHCA gives you a place where you can go to say, here's the financing of that.

The CHAIRMAN. Doesn't the FERC provide that?

Dr. COOPER. It would not necessarily provide that under S. 621. The fundamental point is here is one place where we can go to look and find that.

Of course, how many orders are you going to give the FERC? I love the example of the FCC, which has the authority to audit the Baby Bells and the resources to accomplish it once every 17 years.

The fundamental question is, if you unleash these transactions, what happens if you don't have enough policemen and auditors to chase them around? That's our concern.

The CHAIRMAN. Dr. Cooper, nobody can argue with the fervor with which you express your beliefs. I appreciate your coming in and sharing them with us. I assure you that we will look at the issues which you raised.

I see that Mr. LoBaugh and Mr. Meyer both have a response. Mr. Tanski, go ahead. Then, I'll go to them.

Mr. TANSKI. To get back to the State review authority over the expenses of utility companies, we do agree that each State utility should have a right to review every dollar our utility commission spends. That includes affiliate transactions, if there are any.

But to then say, under S. 621, that the utility commission also should have the authority to go to our subsidiary in Houston to examine the books and records of our exploration and production subsidiary: If each State has the ability to do that, our concern is that we're going to be overwhelmed with these audit requests because they might say that that activity, that exploration and production activity, somehow affects consumer rates.

That's our concern with the bill as it's written. With discussions with your staff on that issue, I think we can probably work through that.

The CHAIRMAN. We'll look at that. I just want to remind you that the intent of the legislation is to ensure that you don't have one subsidiary overcharging and passing costs on to consumers through public utility rates. We'll take a look at the language to clarify that it does not authorize non-rate-related fishing expeditions.

Let's give Mr. Meyer and Mr. LoBaugh a chance to respond and then I believe Senator Faircloth has some questions.

Mr. Meyer.

Mr. MEYER. I yield to the Chair, then.

The CHAIRMAN. Make your point.

Mr. MEYER. I'll just make it quickly.

Dr. Cooper, I would just say, if we're talking about market concentration, all we can do now is buy an adjoining utility to which we can integrate, which only increases our market concentration in our given area. If we were able to buy utilities, such as Utilicorp can, in different parts of the country, that actually diminishes our concentration.

Also, the FERC has come up with its new rules now on market power that are so stringent in reviewing these mergers, that you're going to see a very careful control of market power.

I wanted to comment on one other thing, Mr. Chairman, and this really got me up out of my chair, and that is your comments about the risks that investors, shareholders, and bondholders took, and securitization.

We face a very real problem when utilities have invested in substantial properties that are used and useful-Shoreham never got to the used and useful part

The CHAIRMAN. No. Mr. MEYER. that have been found prudent by these State commissions and now suddenly, they don't want to include them any longer in rate base because they have some definition of excess cost over market.

We have a statement by a single Texas commissioner made in March 1997, that she did not feel that she had to honor that commitment any longer, which is written into law in Texas, and the largest investor-owned utilities in Texas have now lost $4 billion in market value.

I think there's a real argument of equity, if not law, involved in that situation.

The CHAIRMAN. I agree, I think Government has a responsibility to honor contracts, particularly where the prudent man standard has been observed.

Unfortunately, in the case of LILCO, that standard was not held. It ended up being a catastrophe for rate-payers.

Mr. MEYER. That was different.

The CHAIRMAN. As you indicated.
Mr. MEYER. It never operated.

The CHAIRMAN. To stick the rate-payers with the cost was just unconscionable. The former Governor is getting a free ride on that. But, of course, the legislature went along with the plan without concern for the rate-payers because they were so happy to close the plant down.

Mr. MEYER. We would love to be invited back, but I'm not sure this Committee is where we're going to talk about securitization and some of these other issues. I know you'll be a leader in that debate, though, and I hope you are.

The CHAIRMAN. Mr. LoBaugh, I think you wanted to say something. Then, we will go to Senator Faircloth.

Mr. LOBAUGH. I was just going to comment on, I believe it was Dr. Cooper's comment about the revenue flow from utilities.

I wasn't quite sure exactly what Dr. Cooper was referring to. But I know in California and several of the other States, at least the ones I'm familiar with, the utility State commissions have the capacity to intervene in the dividend flow from utilities, for instance, to a holding company, if there's any evidence in their opinion that there's a financial detriment to the underlying utility. That's certainly true in California and I know in several other States.

In addition, you have circumstances like in California, for example, where you cannot pledge general utility assets for non-utility activities without a prior approval by the PUC. To my knowledge, at least certainly in our activities in the last 20-some years I practiced law there in California, I don't ever recall having seen that even be requested, let alone approved. To do so without that prior approval constitutes a criminal violation in California. It's taken quite seriously.

There are a lot of ways in which the States can deal with those issues very effectively. It is certainly not a Federal pre-emption issue and it has nothing to do with PUHCA.