CFA has been especially active in regulatory reform at the Federal level, having testified before Congress and regulatory agencies regarding airline, railroad, natural gas, and telecommunications deregulation. As the Director of Research for CFA, I have now testified before Congress and Federal agencies about utility regulation approximately 50 times. As an expert witness representing consumer organizations, low-income groups, senior citizens, People's Counsels, and Attorneys General, I have testified approximately 100 times on utility regulation before over three dozen State utility commissions. Based on our institutional background and my own real world experience, we offer the Committee a number of observations on the proposed repeal of the Public Utility Holding Company Act (PUHCA). • PUHCA provides essential consumer protections; • Premature repeal of PUHCA would expose consumers to abusive transactions; • Premature repeal of PUHCA would make regulation of abusive corporate transactions and risky financial practices more difficult; • Premature repeal of PUHCA would make the introduction of competition into the electric utility industry more difficult; • The alleged inefficiencies created by PUHCA regulation are vastly overstated; and • The introduction of effective competition into the industry should come before repeal of PUHCA. PUHCA Provides Essential Consumer Protections PUHCA provides essential protection for competition and consumers in the electric utility industry in a number of ways. • It bars utility acquisitions which could monopolize new territories or new power sources or which create risks to consumers or investors. • It demands that utility acquisitions "serve the public interest by tending toward the economical and efficient development of an integrated public utility system." • It limits utility speculation in unrelated ventures, where that speculation imposes risks on electric customers. • It guards against corporate structures that make State regulation much more difficult. • It prohibits inter-affiliate transactions within the registered holding company systems, except at cost. • It requires advance review of certain bond issuances of the registered holding company systems. These requirements caused the massive holding companies of the 1920's to disintegrate because they struck at the heart of the abuses on which those companies were built. These requirements have prevented all but a handful of utility holding companies from persisting into the present. These functions are actually more important today than they have been at any time since the initial reorganization of the industry in the 1930's and the 1940's. Amid a wave of mergers and relaxation of regulation, the holding company tests embodied in PUHCA prevent the accumulation and abuse of market power. I always find it odd that we begin the effort to inject competition into monopoly industries by eliminating competitors through a merger wave. This has happened in other industries. It is happening in electricity. Too many mergers have been allowed, but there would be many more if PUHCA were repealed. That would be bad for competition and bad for consumers. Premature Repeal of PUHCA Would Expose Consumers to Abusive Transactions The fundamental consumer protections provided by PUHCA prevent a wide range of abusive transactions from taking place. Regulation of transactions under PUHCA is sufficiently rigorous to dissuade most utilities from engaging in multi-state, noncontiguous, and diversified activities. As a result, PUHCA prevents the development of complex corporate holding companies which span many State and international borders and evade regulation. By imposing very rigorous regulation, PUHCA effects a structural solution. Most utilities have not done certain things to avoid coming under PUHCA. If the commitment to consumer protection embodied in PUHCA is maintained, they will not engage in these activities. If PUHCA is repealed, this consumer protection would be lost. • A vast array of abusive transactions, which are presently eliminated from the marketplace, would rapidly grow. • Attention and resources will be devoted to the acquisition of assets that build market power. • Cash would be diverted from utility operations of multi-state holding companies to diversification of activities into unrelated, speculative undertakings. Regulators are simply incapable of preventing these abuses. Market forces are far too weak to discipline them. That is the lesson we have learned from the activities of multi-state holding companies which are not subject to the Public Utility Holding Company Act, like the Regional Bell Holding Companies. That is the lesson from the activities of electric utilities which are not subject to PUHCA. Premature Repeal of PUHCA Would Make Regulation of Abusive I have already suggested that I believe Federal and State regulators would not be able to adequately police the transactions unleashed by a repeal of PUHCA. Let me state definitively that regulation cannot replace PUHCA's structural protections because we just do not have a comprehensive State-Federal scheme of regulation in place in this country by any stretch of the imagination. What we have is a hodgepodge of partial and conflicting authorities. We have agencies with inadequate powers to execute the inadequate authorities that they possess. We have agencies that lack the resources to do an effective job of regulating where they have power and authority. Repeal of PUHCA would make matters much worse. State regulators who are now already at a severe disadvantage would be faced with far-flung entities that cross States and even international boundaries. • In many States, regulators do not have the authority to regulate these entities and the proposed law does not condition exemption from PUHCA on the granting of such authority. • The powers that the proposed repeal of PUHCA would give them are restricted and ineffective. • In no case do regulators have the necessary resources to effectively regulate these entities. We do not believe that the FERC can or will provide the same level of protection as PUHCA now does. The FERC has already shown an inclination to shortchange rate-payers. • It has deregulated long before competition is adequate to discipline any abusive behavior. • It has defended stockholder interests at the expense of rate-payers. • It has allowed mergers, even where it anticipates market power problems. We doubt it would do a much better job of policing affiliate transactions and we suspect that Congress would never give it adequate resources to do a good job, even if it were so inclined. The fact that the SEC has been lax in its PUHCA implementation in recent years is not a justification for repealing the law. It should be the occasion for the congressional oversight committees to encourage regulators to do their job and also for the Administration to appoint regulators who better understand the consumer protections of PUHCA. Thus, we do not have effective regulation today and it would be even less effective should PUHCA be repealed. Premature Repeal of PUHCA Would Make the Introduction of Competition into the Electric Utility Industry More Difficult I have already suggested that competition in the electric utility industry cannot prevent the abuse of rate-payers which would flow from the repeal of PUHCA. Let me state definitively that there is not sufficient competition in the industry today and that there is not likely to be sufficient competition any time soon to address the types of abuses that the repeal of PUHCA will unleash. • There is presently a monopoly in local distribution and long distance transmission. No one realistically foresees an end to this monopoly any time in the near or mid-term. • Local generation markets are pretty close to monopolies too. Even in the best of circumstances, incumbent franchise electric utilities obtain only a small percentage of their total generating capacity from non-utility generators. • In no case has any State legislation required the complete divestiture of generation assets or precluded the reintegration of generation with any other utility functions as part of a restructuring plan. Premature repeal of PUHCA would retard competition, not promote it. It would allow only a small number of huge, multi-state entities to acquire additional utilities. They would easily amass market power in regional generation markets. The largest of the exempt holding companies would quickly expand beyond their State borders, gobbling up smaller entities and reducing competition in regional markets. Thus, vertical integration and horizontal market power are likely to persist in the electric utility industry. Repeal of PUHCA could unleash another wave of mergers. It would allow multi-state entities to gain ever greater control and influence over regional electricity markets. There is nothing in the proposed PUHCA repeal bill and nothing in other Federal legislation pending before Congress that would prevent these anti-competitive and anti-consumer outcomes. The Alleged Inefficiencies Created by Advocates of PUHCA reform frequently complain that PUHCA's structural regulations prevent them from doing good things for rate-payers. The most frequent complaint is that PUHCA prevents the best builders from building generating facilities across the Nation. That argument is wrong for a number of reasons. Above all, the leverage that the utilities claim they need from multi-state holding companies is doubtful. • If there are any natural advantages to being an integrated generation, transmission, and distribution entity, then utilities as presently configured will go on building if capacity is needed. • They can expand or build power for wholesale markets if they meet the PUHCA tests. • The highly skilled utilities could build turnkey plants as contractors for the lesser skilled utilities. • If there are no economies of integration and there are simply a few master builders out there who should specialize in construction, then let them form truly independent companies. If they are that good, they should have no trouble raising the necessary capital and finding orders. The other claims about PUHCA burdens are easily dismissed from the residential rate-payer point of view. Some argue that PUHCA discourages risk taking and diversification. It probably does, and that is all to the good. Electricity is a necessity. It has a low elasticity of demand. It is infrastructural in nature. Frankly, we do not want our utilities to be risk takers or to wander into other lines of business. The claimed reward of diversification sought by the utilities, lies in its potential to strengthen the financial condition of utilities. This potential reward comes with the risk of financial weakness and cross-subsidization. The track record of diversification is mixed, at best, in both utility and non-utility industries. Our experience with diversification in telecommunications and exempt electric utilities teaches us to be cautious rather than take risks at the rate-payers expense. The Introduction of Effective Competition into the Industry Should Come Before Repeal of PUHCA The Consumer Federation of America firmly believes that competition is good for consumers and we have done so for decades. We have learned over the years, however, that the rhetoric of competition frequently far outstrips the reality. • In industry after industry, Congress and the regulatory agencies have failed to deliver on the promise of competition-just listen to all the talk about rate increases for basic telephone service. • They have ended regulatory oversight long before market forces are adequate to prevent the abuse of market power-just take a look at your cable TV bill. • They have allowed concentration and re-monopolization to devour the potential benefits of competition-just count the number of Baby Bells or calculate the concentration ratios in the cable industry. Nothing we have seen in Federal legislation or State-driven restructuring of the electric utility industry gives us reason to believe that competition will protect residential rate-payers in the foreseeable future. Indeed, because the monopoly core of the industry in distribution and transmission is so firm and the ability of competitors to enter the generation market is suspect, residential rate-payers have serious questions about the ability of competition to deliver benefits to them. Under these circumstances, the repeal of PUHCA is premature. There is no reason to make matters worse and hope that Congress fixes the problem later. Repeal of PUHCA should be the last step on the road to competition in the industry, not the first. Any repeal of PUHCA must also put structural, not functional, protections in its place to prevent the abuse of vertical and horizontal market power. • The only way to prevent abuse of affiliate transactions is to require divestiture of potentially competitive market segments from remaining monopoly segments. The only way to prevent the abuse of market power in any industry segment is to impose a specific competitiveness standard—like the merger guidelines. The public deserves no less than full regulatory oversight until effective competition is demonstrated to exist so that market forces can effectively take the place of regulation. Summary PREPARED STATEMENT OF LARRY A. FRIMERMAN NATIONAL ASSOCIATION OF STATE UTILITY CONSUMER ADVOCATES APRIL 29, 1997 As a representative of utility consumers, I support any effort by Congress and regulatory agencies to align laws and regulations with current needs and practices in the electric utility industry in order to allow rate-payers to receive the benefits of a transition to a more competitive industry. The National Association of State Utility Consumer Advocates (NASUCA), however, urges Congress and the SEC not to take any action which would weaken the protections of the Public Utility Holding Company Act. Congress must first ensure that public utility holding companies are either subject to effective competition or are subject to effective regulation where effective competition does not exist or where competition would not induce efficiency, reduce costs, and advance consumer interests. Registered holding companies and their subsidiaries are not susceptible to effective control by any single State and require Federal oversight over inter-affiliate transactions, corporate structure, diversification, and access to books and records. We recognize that neither the electricity nor the natural gas industry has a fully competitive market structure and that utility market power remains pervasive. If PUHCA were either repealed or substantially modified, neither the remaining regulatory framework nor the current state of competition would be sufficient to protect consumers. Until utility market power is eliminated, consumers must be protected by effective regulation which, in the case of multi-state holding companies, includes the provisions of PUHCA. Effective regulation must retain both rate and structural reviews, with a rational allocation of responsibility between both State and Federal regulators. As the SEC/NARUC survey shows, there are substantial gaps and variations in existing State regulation of multi-state holding companies. These substantial gaps would need to be filled, and current regulatory problems created by the Ohio Power and Mississippi Power & Light court decisions would need to be corrected prior to congressional consideration of removal of any PUHCA protections. In addition, PUHCA reform should really be considered in the broader context of restructuring the electric utility industry in order to ensure that an effective competitive market develops and that the benefits flow to consumers. Introduction Good morning, Chairman D'Amato and Members of the Banking, Housing, and Urban Affairs Committee. I am Larry Frimerman, Federal Liaison with the Ohio Consumers' Counsel, and I serve on the Electric Committee of the National Association of State Utility Consumer Advocates (NASUCA). I am here today representing NASUCA. NASUCA is an association of 41 consumer advocate offices in 38 States and the District of Columbia. Our members are designated by laws of their respective States to represent the interests of utility consumers before State and Federal regulators and in the courts. On behalf of the Office of the Ohio Consumers' Counsel and NASUCA, I wish to thank you for the opportunity to testify before this Committee on S. 621 and the future of the Public Utility Holding Company Act of 1935. First, I would like to commend the Committee for holding this hearing and for pursuing the issues that are the subject of this morning's discussion. As we move toward a more competitive electric generation industry, it is essential that Federal and State lawmakers continue to reassess those laws and regulatory actions that will either protect or harm consumer interests in the context of the larger debate on the structure of the industry. The debate today is on the future of the Public Utility Holding Company Act. However, this debate cannot be examined outside the context of the entire framework of the electric utility industry without distorting market implications for consumers and competitors alike. The industry is in the midst of substantial change and uncertainty, so examination and the possible elimination of key industry underpinnings cannot be done in a vacuum. Any discussion of substantial modification of PUHCA must be considered in the context of examination and adoption of changes consistent with the establishment of an industry structure that limits market power for electricity sellers and buyers, and one in which a combination of effective competition and effective regulation protects the consumer interest. In a series of resolutions dating back to 1983, NASUCA has urged Congress to exercise the greatest caution in response to efforts to dismantle the consumer protections contained in PUHCA. Most recently, in June 1995, NASUCA passed a further resolution that is attached to my testimony and forms the basis for my remarks here today. Specifically, in our most recent resolution, NASUCA states its continued opposition to changes to PUHCA which would reduce consumer protections in the Act at this time. NASUCA urged Congress and the SEC not to take any action that would weaken the Act without first ensuring that public holding companies are either subject to effective competition or subject to effective regulation, where effective competition does not yet exist or where competition would not induce efficiency, reduce costs, and advance consumer interests. Our resolution recognizes that public utility holding companies and their subsidiaries are affected with a national public interest and that their activities extending over many States, are not susceptible to effective control by any individual State. We also recognize that neither the electric industry nor the natural gas industry has a fully competitive market structure and that utility market power remains pervasive. We conclude that, if PUHCA were repealed today in the manner proposed in S. 621, neither the remaining regulatory scheme nor the current state of competition would be sufficient to protect consumers. Until utility market power is eliminated, consumers must be protected by effective regulation which, in the case of multi-state holding companies, includes the provisions of PUHCA. In NASUCA's view, effective regulation of multi-state public utility holding companies requires both rate reviews and structural reviews, with a rational allocation of responsibility between State and Federal decisionmakers. I would emphasize that the NASUCA resolution is not simply a call for continued or increased regulation. We specifically recognize that effective competition benefits consumers through greater efficiency and reduced costs. We also note, however, that deregulation under conditions of unfettered market power is harmful to consumers. This being the case, our resolution does not suggest that PUHCA must remain in its current form indefinitely. Rather, it cautions Congress and the SEC to take no action to weaken PUHCA without first ensuring that either effective competition or effective regulation is in place to protect consumers. The NASUCA resolution is consistent with comments which were filed by seven State consumer offices, including the Ohio Consumers' Counsel, in response to the SEC's request for public input on the future of PUHCA. Those comments were also joined by a diverse group of other organizations that expressed concern over the impact of PUHCA repeal on the protection of both consumers and competition. Those groups included the American Public Power Association, the Electricity Consumers Resource Council, Consumer Federation of America, and the National Rural Electric Cooperative Association. Those comments, filed at the SEC in March 1995, contended that, contrary to the claims of the PUHCA repeal proponents, there is neither sufficient competition nor sufficient State regulatory tools to ensure consumer protection in the absence of PUHCA. It is beyond dispute that utilities retain substantial market power in the distribution and transmission functions and, to a substantial extent, in the generation function as well. In addition, the comments noted, State regulation is not in a position to deal with the number and the complexity of multi-state restructuring transactions that would arise if PUHCA were repealed. The comments stated: Our purpose is not to argue against all change to the Public Utility Holding Company Act. We instead describe the facis which repeal advocates must show to make their case, and to explain the conditions which must be in place if amendment or repeal is to advance the consumer and their public interest. |