price. Accordingly, the SEC recommendation was not included in the bill.

I just wondered if Chair Moler holds the same position this year as she did the previous year.

Ms. TOMASKY. Yes, she does, Senator. The essential difference, I think, between what the SEC has suggested we could do and what we currently do really has to do with the issue of prior approval.

In our view, we treat the issue of the pass-through of costs as essentially a rate-making function. Utilities come to us. We set the rates. We figure out what they're trying to include in the rates and if we think it's improper, we say they can't charge it. We think that is a sufficient way to deal with affiliate issues, so long as we have access to the documentation necessary in order to do it.

We have never been inclined to do prior review of affiliate transactions. We have actually been asked from time to time for utilities to provide those kinds of assurances. Our tradition is really one of setting rates on the basis of actual costs. We don't think we have anything special to add in terms of the business decision pertaining to whether or not a particular transaction is appropriate, and we think the right way to deal with cost allocation and overcharge issues is through the rate-making function with adequate books and records.

Senator DODD. I see the yellow light is on, but, Mr. Hunt, what if we were to include some report language here, and perhaps in a broader sense as well? I understand the FERC is uneasy about putting explicit authority here. The implications may be that, in the absence of other provisions, having made note of it here, it might question the authority of the FERC in other areas.

I think that's a very legitimate point. I appreciate your concern and the SEC's concern, although I am satisfied that the FERC believes it has this authority. I hear no one questioning that, but maybe, Mr. Chairman, we might include some language to make clear that the Committee certainly agrees with the FERC that they have the implicit authority in this area, and that specific language in this area may not be necessary. I'll wait for the expert advice on that.

Mr. Hunt, may that be satisfactory in your view?

Mr. HUNT. I think we would defer to the FERC's expertise, Senator Dodd. We think it was appropriate to include authority for prior affiliate transaction and review on the part of the FERC. If the FERC thinks it can do its job, as it has done its job in the past, we would defer to their expertise, and including language in the report would be fine with us.

Senator DODD. Thank you very much.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you.

Senator Gramm.

Senator GRAMM. Mr. Gee, I came in at the tail-end of your comments. Give me a burst transmission on what your concerns are on this issue, from the point of view of the States.

Mr. GEE. Senator Gramm, the NARUC is recommending that there be changes to the Federal Power Act and to PUHCA. In fact, much of what is contained in S. 621, we have expressed to Senator

D'Amato we favor, that in fact we believe that PUHCA does have provisions that are outdated and need to be modernized.

We do believe, however, because of the spate of utility mergers and acquisitions that have occurred since we first began discussing PUHCA repeal, which has been for over 3 years now, at least, 3 or 4 years since I've been involved in this issue, that the market structure of the utility industry has changed quite dramatically toward larger and larger companies. That could pose a real problem with respect to any individual State having the ability to monitor adequately utility affiliate transactions, operating company acquisitions, and the like.

We believe we need to modernize the Federal Power Act to make clear that it is the States that have the authority to go to customer choice to provide for full retail access, to choose from competing suppliers. That's a question which is still uncertain right now as a matter of law and quite unsettled.

The NARUC believes it is appropriate for Congress to confirm that the States can move forward and give their customers that ability to choose between competing suppliers at the retail level. Once Congress makes that confirmation, we think States will begin to move in that direction. We believe that many States already are moving in that direction.

In fact, ultimately, when you have so many States moving to provide customer choice, many of the concerns that we're talking about today with respect to maintaining customer safeguards may not be necessary, quite frankly, because once people can make a choice among competing suppliers, the concerns about diversification, the concerns about affiliate transactions simply are minimized.

We believe there is a relationship certainly between moving toward providing greater competition and minimization of regulation, deregulation, if you will, of generation, giving customers the opportunity to choose among competing suppliers in retail markets, and the maintaining of restrictions of safeguards against affiliate dealings and multi-state transactions.

We would prefer that Congress take this matter up in its totality, that they are cognizant of the concern that everything not be held up because of the inability to reach a consensus on the broader provisions which people are talking about today in terms of comprehensive reform.

The NARUC has a position which we believe represents modest but significant changes to the Federal Power Act that we believe should be considered in conjunction with PUHCA repeal or reform. The CHAIRMAN. Senator Bryan.

Senator BRYAN. Thank you very much. Mr. Gee, I enjoyed the colloquy that you and Senator Gramm just had. I take it it's not the position of the NARUC to argue for the status quo, that that's not the ultimate from your point of view.

Mr. GEE. That's correct, Senator.

Senator BRYAN. As I understood your testimony, there is a dynamic change that's occurring in the marketplace. It's profound, something that we've never seen out there before. As a result of that, there is a great deal more action with respect to mergers and acquisitions than ever before, at least in recent history.

Would that be your experience in Texas and that of your fellow commissioners?

Mr. GEE. Yes, Senator. It's true in Texas, and in other States as well.

Senator BRYAN. So your counsel to us on behalf of the National Association is we ought not to do this as a stand-alone, isolated piece, but that it should be done as part of a comprehensive reform in which the States have the power to make sure that, in point of fact, there are no abuses.

You have gone so far as to say that you think if true competition exists, some of the restraints, regulations that currently exist with respect to diversification of affiliates, are probably unnecessary, if I understand the thrust of your testimony.

Mr. GEE. That's my personal opinion, yes, Senator.

Senator BRYAN. I take it that's the view taken by the National Association as well.

Mr. GEE. The National Association believes that the emergence of competition should be coordinated with the continuation of these oversight restraints on multi-state utility holding companies, and that there could be a need to revisit these once States have determined that their markets are competitive, sufficiently competitive so as to obviate the need for these continued restraints. Yes, sir.

Senator BRYAN. I think that's the point I'm trying to make, my difference with my colleagues. I agree that if you have a true competitive model out there where consumers do have a choice, that that's better than the current system. The question is, will you have a true competitive model? If you do not, you have the potential for abuse without the power to regulate and to prevent that. I take it that's in essence what the National Association is saying as well.

Mr. GEE. That's our concern, yes, Senator.

Senator BRYAN. Is there any other concern with respect to any Federal pre-emption? You have made a strong argument on behalf of the ability of States to regulate. My own background is from a State perspective. I happen to share that bias.

What concerns, if any, should we focus on in terms of any potential pre-emption that this legislation could create in terms of the States to do precisely what you're suggesting ought to occur?

Mr. GEE. Thank you, Senator. In my testimony, I indicate that there is a concern about language in the bill that allows the FERC to grant exemptions to a utility from the provisions of the bill.

Our concern is that, for example, if they were to grant an exemption with respect to the books and records authority that they would otherwise assert, it might bleed into the State's ability to maintain a books and records requirement. We want to be assured that if the FERC were to grant an exemption, for example, on the books and records oversight, that it certainly not pre-empt States from requiring a books and records oversight.

The CHAIRMAN. Mr. Gee, as I recall, we have worked on this point already. If necessary, we will sit down with the Republican, Democratic, and FERC counsel this afternoon to ensure that the language is unequivocally clear that the States will not be preempted from their right to inspect the books and records.

Now, if we haven't yet had an agreement on the provision, that's simply because we haven't had the lawyers together in a room for 3 or 4 hours to work out definitive language.

So let's get together; if there is a question as to whether or not the language is specific enough, it should be taken care of. I am a little bit distressed to hear that at this point, after 2 years, this is still an open question because I thought that the bill guarantees the States' rights to inspection.

I remember when I was a local town official, a certain water company would charge off the costs of its operation to its other subsidiaries. It was extremely frustrating, because I couldn't get our public service commission to look at the cost charge offs in terms of cross-subsidization.

It's interesting that now the guy has become-oh, well, I won't even go into that.

[Laughter.]

It is incredible, how the rich and powerful can say one thing and do another. They even buy newspapers and say it.

The company ripped off everybody by charging all service charges to different subsidiaries and at the same time using employees, officers, and company resources to subsidize subsidiary operations. Cross-subsidization as well as unfair cost pass-throughs like these are what my colleagues are concerned about. So am I.

We will see to it that these abuses cannot happen. If you have some time, and you have some people here, when we get finished with this hearing, let's sit down and see to it that that question is addressed.

I know Senator Gramm shares that feeling, that we must ensure that the States have the authority they need. The intent of the legislation is for the States to have that authority to look at all books and records, that they not be pre-empted by the FERC. If anything, we want to make it easier for you to exercise your authority to examine books and records. At the same time, we want to ensure that the FERC has the authority they need.

If the FERC feels comfortable with the authority granted, then we can discuss in report language the affiliate transactions authority and the question of prior approval. Furthermore, we will try to clarify the provisions to ensure that they do not set a precedent against FERC authority in the future.

So I'll ask Ms. Tomasky to see how we can clarify the FERC's authority over affiliate transactions.

Ms. TOMASKY. Of course.

The CHAIRMAN. I don't see any harm in making the FERC's existing authority explicit, especially if it eases the SEC's concerns. Although Commissioner Hunt states he is willing to defer to the FERC's opinion, I don't think we want to leave that door of ambiguity open as there will definitely be problems in the future if we don't clarify now. So I think we should take care of it now. Senator MOSELEY-BRAUN. Mr. Chairman.

The CHAIRMAN. Yes.

Senator MOSELEY-BRAUN. If I may, in his testimony, Mr. Hunt, speaking from the SEC's point of view, even refers to the continuing need to ensure the protection of consumers.

I'm going to applaud the Chairman's comments because, at a minimum, we should make certain that we don't throw the baby out with the bath water, we don't get rid of the PUHCA oversight and wind up with none to take its place.

Consumers have a lot at stake here with what can be a gap effect, in which we wind up getting rid of the protections that they enjoy at this level, but those protections end up not being replaced at another level of Government and consumers find themselves at the mercy of the monopoly power of these utilities.

I appreciate the suggestion made by the Chairman that the language be looked at to make certain that those kinds of protections are written into the law or, alternatively, are made part of the report language.

Senator BRYAN. Mr. Chairman, I think I still have a couple of minutes left in my round.

The CHAIRMAN. OK.

Senator MOSELEY-BRAUN. Sorry, Senator Bryan. I apologize.
Senator BRYAN. That's all right. I agree with you.

May I just take another minute or two?

The CHAIRMAN. Did you say you agree?

Senator BRYAN. I agree with the concerns that were expressed by the Chairman because I do think if it is not the intent to preempt, but rather to include language in the report, I appreciate the Chairman's willingness to sit down and look at some language that will make that possible to clearly address.

Let me just ask Ms. Tomasky: Do you see a situation in which there should be a Federal pre-emption with respect to your contemplated authority under this proposed bill?

Ms. TOMASKY. I see no reason why we would want to pre-empt the access of the States to books and records, no, sir. No circumstance at all.

Senator BRYAN. So you would agree with the observation that the Chairman made.

Ms. TOMASKY. Yes.

Senator BRYAN. Perhaps, Mr. Chairman, there is an opportunity to improve this legislation. I appreciate your willingness to do so. That may give our State regulators who are the ones out on the front line and who have the primary responsibility currently at least some comfort that, indeed, their ability to continue to regulate will be retained.

I thank the Chair. I notice that the light is beginning to show, so I will yield back my time.

The CHAIRMAN. Senator Shelby.

OPENING COMMENTS OF SENATOR RICHARD C. SHELBY

Senator SHELBY. Mr. Chairman, I had to be at another committee hearing and I apologize for that. I have a prepared statement that I would like to have made a part of the record in its entirety, if I could. Then, I just have a couple of quick remarks.

The CHAIRMAN. So ordered. It will be entered into the record.
Senator SHELBY. Thank you, Mr. Chairman.

I think, myself, the repeal or doing away with PUHCA is long overdue. A lot of things have changed, changed drastically since PUHCA was enacted. Look at the market out there.