of guarding against cross-subsidization is likely to be audits of books and records and Federal oversight of affiliate transactions. Utility rates are regulated by State authorities, and some regulators subject these rates to stricter scrutiny than others. 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 multi-state 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. S. 621 S. 621 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 the rate-payers. The legislation would also 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 bill would provide a transition period in which the States, utilities, and other parties affected by the change in the regulatory regime could prepare for the new regime. The bill, like its predecessor, S. 1317, accomplishes many of the goals of the conditional repeal contemplated by the SEC. S. 621 does not give the FERC the authority it needs in order to oversee transactions among affiliates in holding company systems and, in this one respect, does not reflect the SEC's preferred legislative option. The bill's provisions granting access to books and records provide the FERC and the State commissions with the authority they need to identify affiliate transactions and their terms and effects on utility costs and rates. However, the potential still remains for cross-subsidization and consequent detriment to consumers, and the SEC believes it is important for the FERC to have the flexibility to be able 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. The SEC notes that the report recommended a transition period of at least 1 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 once every 2 years. The SEC would have no objection to a longer transition period. IV. Other Recommendations Two other legislative options were recommended by the SEC staff report: complete repeal of the 1935 Act and a grant of broader exemptive authority under the Act to the SEC. The SEC believes that complete repeal, the second recommended legislative option, is premature, because of the remaining industry monopoly power and the inconsistent pattern of State regulation described above. 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 a period of at least 2 years 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.5 An expansion of exemptive authority would not, of course, achieve the economic benefits of conditional or 5 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. §80a-6(c), which grants the SEC the authority by rule or order to exempt any person or transactions 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. §80b-6a; and section 36 of the Securities Exchange Act of 1934, as recently amended by the National Securities Markets Improvement Act of 1996, 15 U.S.C. § 78mm (same). unconditional repeal of the 1935 Act, or simplify the Federal regulatory structure.6 Further, this option would continue to enmesh the SEC in difficult issues of energy policy. The SEC is also aware that proposals for 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. V. Administrative Action The SEC continues to support a comprehensive approach to reform of the 1935 Act, such as that reflected in S. 621. Pending congressional action, however, the SEC has begun to implement many of the numerous administrative initiatives that were recommended in the report to streamline regulation. Despite the effects of these initiatives, changes in the utility industry are resulting in increased activity under the 1935 Act, in the areas of mergers and acquisitions, diversification, and affiliate transactions, for example, and 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, there are 16 full-time professional SEC employees 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) 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. VI. Conclusion 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 U.S. 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. 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 was the subject of that decision. Enhanced exemptive authority would not address such problems unless the SEC, through the exercise of its exemptive powers, were to cease issuing orders affecting the pricing of goods. 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 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. PREPARED STATEMENT OF SUSAN TOMASKY GENERAL COUNSEL, FEDERAL ENERGY REGULATORY COMMISSION APRIL 29, 1997 Mr. Chairman and Members of the Committee, it is a pleasure to be here this morning to discuss S. 621, the Public Utility Holding Company Act of 1997, introduced April 22, 1997. Under current law, the two major Federal statutes affecting electric utilities are the Holding Company Act and the Federal Power Act (FPA). Both were enacted as part of the same legislation in 1935, in order to curb widespread financial abuses that harmed electric utility investors and electricity consumers. While there is overlap in the matters addressed by these Acts, they each have different public interest objectives. The areas of overlap are thoroughly described in testimony submitted last year to this Committee by the Chair of the Federal Energy Regulatory Commission, Elizabeth A. Moler. I will not repeat that testimony today. In her testimony before this Committee, Chair Elizabeth Moler deferred to the expertise of the Securities and Exchange Commission (SEC), which administers the Holding Company Act, as to whether the Holding Company Act should be repealed. The SEC's substantial review of the ongoing need for the Act, described in its June 1995 report, "The Regulation of Public Utility Holding Companies," led that Commission to ask Congress to conditionally repeal the Act and enact certain rate-payer safeguards in its place. We agree with a fundamental premise of the SEC's report that rate regulation at the Federal and State level has become the primary means of ensuring rate-payer protection against potential abuse of monopoly power by utilities that are part of holding company systems. This is a time of enormous change for the electric utility industry. It is entirely appropriate for Congress to reexamine the framework for regulating electric utilities, so that unnecessary restrictions on corporate activities can be eliminated. Some restrictions under the Holding Company Act can limit the ability of companies to pursue otherwise appropriate business strategies in response to emerging competition in generation markets. At the same time, as utilities diversify and enter competitive businesses, the need to protect adequately against affiliate abuse becomes all the more significant. Ratepayers need to be protected against unfair charges for goods and services provided to utilities by their unregulated affiliates. Proper cost allocation is also essentialboth to ensure that rate-payers do not bear the costs of non-utility business activity and to ensure that utilities do not enjoy an unfair advantage in competitive markets by virtue of improper rate-payer subsidies. From a rate-payer protection point of view, we believe the Holding Company Act can be repealed without jeopardizing consumer protection, so long as certain issues are adequately addressed. In her testimony, Chair Moler identified these issues: • First, the regulatory gap created by the 1992 Ohio Power court decision should be closed. The FERC authority over affiliate transactions within_registered holding company systems-authority that is impaired by the Ohio Power decisionshould be restored. • Second, exemptions from the new Act should be crafted narrowly. While it may be appropriate to grandfather previously authorized activities or transactions, no holding company should be exempt from affiliate abuse oversight. • Third, Congress should ensure that the FERC and State regulatory authorities have adequate access to the books and records of all members of all public utility holding company systems when that information is relevant. This is necessary to prevent affiliate abuse and subsidization by electricity rate-payers of the nonregulated activities of holding companies and their affiliates. • Fourth, if Congress transfers any PUHCA functions to the FERC, instead of repealing PUHCA in its entirety, Congress needs to provide the staff and administrative support necessary for us to carry out the additional responsibilities. Mr. Chairman, since the hearing on this matter you held last year, your staff has worked cooperatively with staff of the FERC to fashion provisions that address the specific concerns we had with the legislation before the Committee last year. That effort was very productive, and resulted in suggested changes that are fully reflected in S. 621, the bill before the Committee today. S. 621 would repeal the Public Utility Holding Company Act of 1935. In its place, it would enact the Public Utility Holding Company Act of 1997, which would do five major things: (1) provide the FERC with access to books and records of holding companies and their subsidiaries, and of any affiliates of holding companies or their subsidiaries (section 5); (2) give State commissions that have jurisdiction over a public utility company in a holding company system access to books and records of a holding company, its associates, or affiliates (section 6); (3) require the FERC to promulgate a final rule, no later than 90 days after the enactment, to exempt from the books and records access requirements of section 5 any person that is a holding_company solely with respect to one or more: qualifying facilities under the Public Utility Regulatory Policies Act of 1978; exempt wholesale generators; or foreign utility companies (section 7); (4) provide that nothing in the Act precludes the FERC or a State commission from exercising its jurisdiction under otherwise applicable law to determine whether a public utility may recover in rates any costs of an activity performed by an associate company, or any costs of goods or services acquired from an associate company (section 8); and (5) grandfather activities in which a person is legally engaged or authorized to engage on the effective date of the new Act (section 12). We believe that the provisions of S. 621 providing the FERC access to books and records (section 5) are sufficient to ensure that we can do our job as rate regulators. We appreciate your efforts to modify last year's bill to ensure that these provisions apply to all public utility holding companies. These modifications are central to our conclusion that rate-payers can continue to be protected if PUHCA is repealed. We also believe that the grandfather provision (section 12) and the savings clause (section 8) have been properly clarified to address our previous concerns. We also have no objection to the requirement under section 7 that we exempt certain holding companies from the books and records requirement. We defer to the State commissions on the adequacy of provisions assuring them access to books and records of holding companies and their affiliates. On this basis, we believe that if Congress follows the SEC recommendations to repeal PUHCA, S. 621 is an appropriate vehicle for doing so without impairing ratepayer protection. I thank you for your attention this morning and again for the efforts of you and your staff to accommodate our concerns. I would be happy to answer any questions you may have. BEFORE THE UNITED STATES SENATE COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS TESTIMONY OF THE HONORABLE ROBERT W. GEE COMMISSIONER, PUBLIC UTILITY COMMISSION OF TEXAS ON S. 621, THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1997 National Association of 1201 Constitution Avenue, N.W., Suite 1102 Internet Home Page http://www.erols.com/naruc |