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Exchange Commission (SEC), which administers the Holding Company Act, as to whether the Holding Company Act should be repealed.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 Introduction Mr. Chairman and Members of the Committee, good morning. My name is Robert Gee. I am a Commissioner at the Public Utility Commission of Texas and Chairman of the Electricity Committee of the National Association of Regulatory Utility Commissioners, commonly known as NARUC. The NARUC is a quasi-governmental nonprofit organization founded in 1889. Within its membership are the governmental bodies of the 50 States engaged in the economic and safety regulation of carriers and utilities. The mission of the NARUC is to serve the public interest by seeking to improve the quality and effectiveness of public regulation in America. More specifically, the NARUC consists of the State officials charged with regulating the retail rates and services of electric utilities. We have the obligation under State law to assure the establishment and maintenance of such energy utility services as may be required by the public convenience and necessity, and to ensure that such services are provided at rates and conditions which are just, reasonable, and nondiscriminatory for all consumers. Thank you, Mr. Chairman, for allowing me to appear at this hearing on an issue of critical importance to State utility regulators. Regardless of the fate of the Public Utility Holding Company Act of 1935 (PUHCA), the NARUC and State commissions will play an indispensable role in managing any transition to a more competitive energy market-an activity which is underway in 49 of the 50 States. We also commend the Committee for its continued investigation as to whether the current statute is consistent with the changes in today's electric services industry. The changes affecting the electric utility industry, including State initiatives to promote competition and regulatory reform in retail power markets and the Federal Energy Regulatory Commission's (FERC) implementation of its rulemaking to open wholesale transmission access, makes this a timely opportunity to again consider whether the 1935 Act should remain the sole means of regulating registered utility holding companies. Against this background, allow me to explain the NARUC's position on PUHCA. I will then proceed with a summation of the NARUC analysis of S. 621, introduced just days ago by the Chairman. The NARUC's policy position regarding changes to the Holding Company Act was originally adopted in March 1995. A more recent resolution concerning PUHCA was adopted in July 1996. The recommendations made by the Securities and Exchange Commission (SEC) in June 1995, which recommended the "conditional repeal" of the Holding Company Act, recognize the importance of States' oversight of these types of utility systems. While the SEC's legislative recommendations are consistent with many suggestions made by the NARUC, the scope of the SEC recommendations are not. The NARUC favors changes to PUHCA only if made in conjunction with more comprehensive revisions to the Federal Power Act that enhance State restructuring activities. We recognize that the Chairman's legislation, S. 621, largely comports with many of the SEC's policy recommendations, and the NARUC appreciates your efforts to affirm the importance of State oversight of multi-state utility holding companies. The Association also believes S. 621 moves in a positive direction toward rationalizing regulatory oversight in an increasingly competitive market. But a competitive market needs to function fairly and effectively before repealing the 1935 Act so that no market participant is provided an unfair competitive advantage by virtue of its corporate structure. State Regulatory Authority As stated in the NARUC's resolution adopted last summer, a principal concern with regard to reform of PUHCA is to “... ensure that the authority of the States to regulate utility holding companies is not pre-empted or restricted...." Transferring the SEC's regulatory authorities to the FERC may, indeed, provide for a more reasonable, streamlined approach to regulating the activities of these companies to ensure the provision of reliable service at reasonable costs. However, the NARUC also strongly believes that States have a compelling interest in ensuring that consumers are provided services at costs that are reasonable and justifiable. Therefore, any legislation to reform PUHCA must be balanced and continue to enable States to determine the reasonableness of utility costs of service so that consumers are not left paying rates that include costs of multi-state utility activities unrelated to the provision of energy services. Transition The NARUC believes that any transition period, whether contained in stand-alone PUHCA legislation or in a more comprehensive measure, should reflect the States' local market and the States' needs in obtaining the requisite enabling authorities from their respective State legislatures prior to the effective date of the PUHCA repeal or reform. If stand-alone PUHCA reform legislation were to be passed, despite our serious reservations, we believe that a minimum 2-year transition would be advisable since not all State legislatures meet annually. If incorporated in a broader effort to amend laws governing the electric utility industry, we suggest that any PUHCA reformation be coordinated in a manner consistent with legislation that addresses customer choice and any provisions that address concerns relating to undue market power. Inter-affiliate Transactions and Diversifications The NARUC favors an approach to PUHCA reform that ensures the authority of the States to review prospectively requests for diversification, if a State so chooses, and to require that holding companies place non-utility businesses in separate subsidiaries, to regulate all inter-affiliate transactions, and to require divestiture of utility businesses. If States determine such actions are necessary to determine the reasonableness of costs for services provided to consumers, such determinations should be protected. In addition, the NARUC cannot support a simple transfer of the SEC's authorities over affiliate transactions to the FERC without clarifying the FERC's and States' respective authorities over such transactions. Legislation to reform PUHCA must recognize and address the fact that holding company corporate structures are complex and can impose costs on utility rate-payers, and have proven to cause jurisdictional disputes among State and Federal regulators. As you may know, a 1992 decision of the U.S. Court of Appeals for the D.C. Circuit, commonly referred to as the Ohio Power decision, held that SEC approval of non-power affiliate transactions prevails over any decision to the contrary made by the FERC or, by implication, the States. This decision threatens State regulation concerning the costs of inter-affiliate transactions sought by the utility to be recovered in retail rates and, accordingly, should be legislatively reversed to ensure that the costs of all non-power transactions between holding company affiliates be subject to review by the appropriate State and Federal rate-making authority. In short, the legislation must clarify States' unrestricted authority over affiliate transactions. Relaxing restrictions on utility diversification should not be allowed absent provisions which clearly define the States' authority to provide necessary safeguards. Access to Books and Records The NARUC's policy on PUHCA requires that any legislation to reform the Holding Company Act should unequivocally establish an enforceable State right of access by States to all such books and records, wherever located, that directly or indirectly affect consumers. States' rights to secure access to books and records is critical for the effective oversight of out-of-state activities of multi-state holding companies that affect utility rates. Audits Protecting the FERC's and States' ability to audit and investigate companies in a registered system is an important complement to the right to obtain access to books and records. The NARUC has been a longstanding proponent of independent authority for State commissions to audit transactions between the parent holding companies and their subsidiaries and affiliates. The NARUC also supports State efforts, working in conjunction with Federal regulatory authorities, to audit multistate registered holding companies in a coordinated fashion. Consideration of Mergers and Market Power Since the adoption of the NARUC's 1995 resolution on PUHCA, and while the Congress has debated the necessity of PUHCA, electric utilities have begun bracing for the onset of a more competitive energy sector. As a means to strengthen their position in any newly structured electric market, utilities have engaged in mergers, or have contemplated mergers, with potential competitors. Industry consolidation has been argued by some to be inconsistent with the efforts being taken by both the FERC and the individual State commissions and legislatures to enhance the choices wholesale and retail consumers are to be provided on an unbundled basis. The NARUC expressed its concern in a 1995 resolution that economic efficiencies associated with growing competition may not be realized if mergers have an adverse impact of competition in the generation market. The Association reiterated its concerns in its July 1996 resolution by stating that "[a]ny legislation must recognize that regulation should be reduced only as competition becomes effective at preventing monopoly abuses and allowing pro-competitive change and availability of customer choice." As we continue to debate the role of PUHCA in the current electric market, and as a more market-oriented approach to the provision of energy services 45-840 98-3 |