PREPARED STATEMENT OF SENATOR RICHARD C. SHELBY Thank you, Mr. Chairman, for holding this hearing. I appreciate all the work you and Members of the Committee on Energy and Natural Resources have done. Notwithstanding your previous efforts, I believe this legislation is past due and I urge the markup of this bill as quickly as possible. The Public Utility Holding Company Act of 1997 is basically the very same bill we reported out of Committee last year after working closely with the Securities and Exchange Commission, the Federal Energy Regulatory Commission, and the State's Public Service Commissions. Based on their recommendations and the changes we made last year, I believe we have a bill that can and should be signed into law. The current application of a 1935 law to 20 percent of the market causes an unfair competitive advantage to those companies that are exempt from the Act. In the interest of competition, and thus the consumer, we need to repeal the antiquated Public Utility Holding Company Act. The freedom and the flexibility incorporated in the Public Utility Holding Company Act of 1997 are necessary for the industry to remain competitive in the ever changing market environment. Indeed, PUHCĂ repeal will allow utilities to provide better services to consumers at lower prices. Mr. Chairman, I support your efforts, and again thank you for your diligent work on this issue. PREPARED STATEMENT OF FRANK H. MURKOWSKI A U.S. SENATOR FROM THE STATE OF ALASKA AND CHAIRMAN OF THE SENATE COMMITTEE ON ENERGY AND NATURAL RESOURCES APRIL 29, 1997 Mr. Chairman and Members of the Committee, thank you for allowing me to testify in support of this legislation. I want to commend Chairman D'Amato for introducing this bill, and the Members of this Committee who are cosponsors. Repeal of PUHCA is the right thing to do: It is pro-consumer and pro-competition. As you are aware, the electric power industry is undergoing dramatic change, and is seeking ways to become even more competitive. This is driven by the recognition of everyone that competition benefits consumers. If there is to be robust competition, we must get rid of unnecessary Federal constraints that prevent companies from adapting quickly and responding flexibly to changing market circumstances. That is exactly what PUHCA prevents—and why PUHCA must go. When we talk about PUHCA repeal, we always think first about how it restricts and limits the 15 registered electric and gas utility holding companies. But that is just a small part of the story. PUHCA also limits and restricts the competitive activities of hundreds of PUHCA-exempt utilities and the numerous non-utilities, all of whom want to participate fully in the electric power market. These companies won't take a variety of pro-competitive actions out of fear of becoming classified as a registered holding company. To them it's not worth getting tangled in PUHCA's sticky web of restrictions and requirements. Congress has long recognized that PUHCA creates competitive problems, but so far we have addressed them only on a piecemeal basis. For example: • In 1978, Congress gave an exemption from PUHCA to help promote certain types of electric power generators. • In 1986, Congress created an exemption from PUHCA to allow the registered gas utility holding companies to own gas-fired co-generation facilities. • In 1992, the Energy Policy Act gave an exemption from PUHCA to the so-called "exempt wholesale generators." • In 1996, Congress gave registered utility holding companies a PUHCA exemption so that they could fully participate in telecommunications. In 1995, after conducting a year-long study of the electric utility industry, the Securities and Exchange Commission reported that the public interest is no longer served by PUHCA. The SEC recommended its repeal. The bill before the Committee today is a direct outgrowth of the SEC's report and recommendations to Congress. Some have claimed that this legislation will create a "regulatory gap" that will allow consumers to be harmed. That is simply not true. Over the past 60 years, a comprehensive State-Federal regulatory system has been developed. State public utility commissions regulate retail electric rates under State law, the Federal Energy Regulatory Commission regulates wholesale rates under Federal law, the SEC has broad powers to regulate securities under laws other than PUHCA, and we have the Federal Trade Commission, the U.S. Department of Justice, and State attorneys general to deal with anti-competitive behavior. As I am sure you will agree, this legislation does not, nor is it intended to, allow utilities to evade appropriate regulation at the Federal and State level. I believe in conjunction with other existing Federal and State consumer protection laws, this legislation allows the full protection of consumers. The bill before the Committee is the result of improvements suggested by the FERC, by State utility commissioners, by consumer groups, and others to the legislation introduced in the last Congress. But, having said that, like you, I am open to improvements to the bill's consumer protection provisions so long as they are within the context of the legislation. Just as you did last year, today you may hear from some that Congress should act on this bill only as a part of "comprehensive" legislation to restructure the entire electric power industry. You may also hear from others who want to use this bill as a vehicle to move highly controversial matters, such as Federal pre-emption of the States, Federally-ordered retail wheeling, or mandatory utility breakup. You should reject those calls. This legislation can, and should, proceed on a stand-alone basis. These other issues are not linked to action on PUHCA repeal. Pro-consumer PUHCA reform must not be held "hostage" to unacceptable proposals. Each should rise or fall on their own merits. Some have also asserted that PUHCA should not be repealed because of concerns about "market power" and fears that we will see a few large companies dominating the electric sector. This assertion is based on fears, not facts. First, it ignores the fact that the FERC and State public utility commissions must approve any merger before it can take place. If either the FERC or a State regulator finds that a utility merger is not in the public interest, they can require the merging companies to take certain actions, or they can simply reject it. Second, the generation and wholesale transmission segments of the electric power industry are already competitive; the FERC's open access transmission rule is working. Third, even if PUHCA is repealed, the FERC and the State public utility commissions will continue to have jurisdiction over the transmission and distribution of electricity, as well as over retail rates to consumers. As you may be aware, the Energy Committee is holding a comprehensive series of hearings and workshops on competitive change in the electric power industry. Six were held last Congress. Three have been held so far this year, and three more have been scheduled. Through this process, the Energy Committee will determine what changes, if any, are necessary to the utility laws that are jurisdictional to our Committee. The Energy Committee will continue this process and we will legislate if and when we are convinced that the legislation will benefit consumers, as will PUHCA repeal. In conclusion, PUHCA is a 60-year-old statute that was designed to cure the problems of a now long-gone, Depression-era industry structure. Having done its job, it is time to retire PUHCA. ISAAC C. HUNT, JR., COMMISSIONER U.S. SECURITIES AND EXCHANGE COMMISSION REGARDING S. 621, A BILL TO REPEAL THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935 BEFORE THE COMMITTEE ON APRIL 29, 1997 U. S. Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Summary The Securities and Exchange Commission (SEC) supports S. 621 and the goals that it seeks to achieve. The bill would repeal the Public Utility Holding Company Act of 1935 (1935 Act) and establish a less pervasive framework for regulation of public utility holding companies, thereby eliminating provisions that duplicate other Federal and State regulation while, at the same time, preserving important protections for consumers. The bill is consistent with most of the key elements of the recommendations of the SEC concerning the future regulation of public utility holding companies. The 1935 Act was enacted to address and correct abusive practices that had developed in the electric and gas utility industry in the first quarter of the century, to the detriment of investors, consumers, and the public interest. However, the 1935 Act has become redundant in many respects, as a result of prudent administration of the statute and the development and evolution of other State and Federal regulation. Moreover, the regulation contemplated by the Act to address the problems of a different era may prevent companies from responding effectively to the changes now occurring in the utility industry. The SEC staff, at the direction of Chairman Arthur Levitt, undertook a study of the regulation of public utility holding companies in the summer of 1994. The study culminated in a June 1995 report of the SEC staff that proposed a range of legislative and administrative measures to eliminate unnecessary regulatory burdens on public utility holding company systems. The SEC recommended that Congress consider three legislative options, based on the analysis and conclusions contained in the report. 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 through examination and oversight of transactions between or among holding company affiliates by the Federal Energy Regulatory Commission (FERC), and through access to books and records by the FERC and State utility commissions. The SEC believes conditional repeal is a preferred course of action because it would achieve the economic benefits of unconditional repeal, and yet also preserve the ability of States to protect consumers. S. 621 largely implements the option recommended by the SEC, by providing the FERC and the State regulators with broad authority to inspect books and records of companies in holding company systems. The bill does not, however, adopt the SEC's recommendation that the FERC have discretion to exercise jurisdiction over affiliate transactions, including prior review and approval of such transactions in appropriate circumstances. The SEC continues to believe that such authority is necessary to shield consumers from the potential abuses that may be involved in affiliate transactions. Testimony Chairman D'Amato and Members of the Committee, I am pleased to have this opportunity to testify before you on behalf of the Securities and Exchange Commission (SEC) and to express support for S. 621. By repealing the Public Utility Holding Company Act of 1935 (1935 Act) and establishing a less pervasive framework for Federal regulation of public utility holding companies, the bill would eliminate duplicative regulation while also preserving important protections for customers of utility companies in multi-state holding company systems. The legislation incorporates most of the SEC's recommendations with respect to the future of public utility holding company regulation. As was the case with the bill's predecessor, S. 1317, the SEC shares the concerns addressed by the legislation and supports the goals that it seeks to achieve. 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.1 The 1935 Act was enacted 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 passage of the 1935 Act. 1These 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. § 79a(b). In the early 1980's, the SEC unanimously recommended that Congress repeal the statute.2 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 much more sophisticated and had demanded more detailed information from all issuers of securities than that which was 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. Because the potential for abuse through the use of multi-state 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 with its effort to administer the 1935 Act flexibly to accommodate developments in the industry while still 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.3 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 study was undertaken as a result of the developments noted above and the SEC's continuing 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 to identify those features of the statute that remain appropriate in the regulation of the contemporary electric and gas industries.1 The SEC staff worked together with the 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, a report of the findings made during the study (report) was issued. 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 in order to provide necessary authority to the FERC and the State public utility commissions relating to affiliate transactions, audits, and access to books and records, for continued protection of utility consumers. There are several reasons why the SEC supports conditional repeal of the 1935 Act. As the report indicates, portions of the 1935 Act, governing the issuance of securities, acquisition of other utilities, and acquisition of non-utility 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, and there is a continuing risk that a monopoly, if left unguarded, could charge higher rates and use the additional funds to subsidize affiliated businesses in order to boost its competitive position in other markets (cross-subsidization). So long as electric and gas utilities continue to function as monopolies, the need to protect against the cross-subsidization of non-utility businesses will remain. The best means 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). 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 Act, to acquire and retain interests in companies engaged in a broad range of telecommunications activities. 4 The study focused primarily on registered holding company systems, of which there are currently 15. The 1935 Act was enacted to address problems arising from multi-state operations, and reflects a general presumption that intra-state 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, 1996, for example, these companies owned more than $126 billion of electric utility assets, approximately 21 percent of all assets owned by investor-owned electric utilities. |