tive criteria were required to register with the SEC and submit financial activities and other business transactions to prior SEC review. Acquisitions of utility securities and assets were often subject to scrutiny under the standards of that statute. In the years that have passed since the 1935 Act was enacted, the holding company landscape has changed dramatically. In the summer of 1994, therefore, in light of regulatory and other changes taking place within the utility industry, Chairman Arthur Levitt directed the SEC staff, under the guidance of then-Commissioner Richard Roberts, to undertake a comprehensive study of the 1935 Act. The purpose of the study was to determine the aspects of regulation under the statute which were still needed and those that should be revised or eliminated. The Commission solicited the views of all interested parties and received back thousands of pages of comments from the utility industry, consumer groups, trade associations, investment banks, rating agencies, and economists, as well as local, State, and Federal regulators. The study culminated in a June 1995 report of the SEC staff. That report notes that numerous developments in State and Federal regulation and in energy technology support changing significantly the way utility holding companies are regulated. The report concluded that the 1935 Act had accomplished its basic purpose and that many of its provisions now only duplicate other State or Federal regulation or are no longer necessary to prevent recurrence of past abuses. On the basis of the staff report, the SEC recommended that Congress consider three legislative options. The SEC's preferred option is a conditional repeal of the 1935 Act. Under that option, Congress would repeal the 1935 Act, but at the same time provide authority relating to affiliate transactions, audits, and access to books and records to State regulators and to the Federal Energy Regulatory Commission. Senate Bill 621, like its predecessor, S. 1317, incorporates the key elements of the Commission's recommendations regarding the future regulation of public utility holding companies. We believe the bill's protections for consumers could be enhanced if it were amended to provide the FERC with broader authority over transactions among affiliated companies and registered holding company systems. In our view, the potential exists, absent this type of Federal oversight, for subsidization of non-utility activities at the expense of the utility customers. As a result of this, the SEC recommends that the FERC have discretion to regulate affiliate transactions to whatever extent necessary to prevent this potential abuse, including in appropriate cases the jurisdiction to require prior approval and review of affiliate contracts. The SEC believes that Senate Bill 621 represents much needed reform. The bill makes significant progress toward the goal of reducing unnecessary regulatory burdens on registered holding companies and, at the same time, it preserves those parts of the 1935 Act that are still needed to protect consumers from harm. Mr. Chairman, the Commission strongly supports the enactment of this bill. I will be pleased to answer your questions. Thank you. The CHAIRMAN. Thank you very much, Mr. Commissioner. The General Counsel for the Federal Energy Regulatory Commission, FERC, Susan Tomasky. Susan, thank you. OPENING STATEMENT OF SUSAN TOMASKY FEDERAL ENERGY REGULATORY COMMISSION MS. TOMASKY. Thank you, Mr. Chairman. Mr. Chairman and Members of the Committee, it's a pleasure to be here this morning to discuss S. 621, the Public Utility Holding Company Act of 1997. Under current law, there are two major Federal statutes affecting electric utilities the Holding Company Act, which is administered by the U.S. Securities and Exchange Commission, and the Federal Power Act, which is administered by our agency, the Federal Energy Regulatory Commission. Both were enacted as part of the same legislation in 1935, to curb widespread financial abuses which 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 FERC, Elizabeth Moler, and I won't repeat that here. Last year, in her testimony, Chair Moler did indicate that the FERC would defer to the expertise of the SEC as to whether the Holding Company Act should be repealed. The SEC's substantial review of the ongoing need for the Act, which is described in the SEC's June 1995 report, led that agency to ask Congress to conditionally repeal the Act and enact certain rate-payer safeguards in its place. We agree with the fundamental premise of the SEC's report, that is, 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 now reexamine the Holding Company Act and to eliminate unnecessary restrictions on corporate activity. At the same time, as utilities diversify and enter competitive businesses, the need to protect adequately against affiliate abuse becomes all the more significant. Rate-payers need to be protected against unfair charges for goods and services provided to utilities by their unregulated affiliates. Proper cost allocation is also essential, both to ensure that rate-payers do not bear the costs of nonutility business activity and to ensure that utilities do not enjoy an unfair advantage in the competitive markets by virtue of improper rate-payer subsidies. We believe that the Holding Company Act can be repealed without jeopardizing consumer protection, so long as certain issues are adequately addressed. 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 which address those specific concerns we had with the legislation as introduced. That effort was very productive from our perspective, and has resulted in suggested changes which were incorporated into the Committee-reported bill last year and that are fully reflected in S. 621, the bill before the Committee today. We believe that the provisions of S. 621, providing the FERC access to books and records, are sufficient to ensure that we can do our job as regulators. Among the modifications to last year's bill are provisions which ensure that the FERC has access to books and records with respect to all public utility holding companies. These modifications are central to our conclusion that rate-payers can continue to be protected if the Holding Company Act is repealed. We also believe that other provisions have been properly clarified to address our previous concerns. We 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 the provision, assuring them access to books and records of holding companies and their affiliates. On this basis, we believe that if Congress follows the SEC's recommendation to repeal the Holding Company Act, S. 621 is the most appropriate vehicle for doing so without impairing rate-payer protection. I thank you for your attention and I would be happy to answer your questions. The CHAIRMAN. Thank you very much. Mr. Gee is the Commissioner of public utilities of the Great State of Texas, and he's testifying on behalf of the National Association of Regulatory Utility Commissioners. Mr. Gee, it's good to see you again. OPENING STATEMENT OF ROBERT W. GEE COMMISSIONER, PUBLIC UTILITY COMMISSION OF TEXAS ON BEHALF OF THE NATIONAL ASSOCIATION OF REGULATORY UTILITY COMMISSIONERS Mr. GEE. Thank you, Mr. Chairman, Members of the Committee. I appreciate the opportunity to appear before you today once again to testify on PUHCA reform. My name is Robert Gee. I am a Commissioner from the Public Utility Commission of Texas. I also chair the Electricity Committee of the National Association of Regulatory Utility Commissioners, commonly known as NARUC. Our association represents the State officials of the 50 States who are charged with the duty of regulating retail rates and services of electric and gas utilities. The June 1995 report of the Securities and Exchange Commission, which we heard from previously, recommended "conditional repeal" of PUHCA, and recognizes the importance of States' oversight of these types of utility systems. While the SEC's legislative recommendations are certainly 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 comprehensive revisions to the Federal Power Act that enhance State restructuring activities. The NARUC appreciates, Mr. Chairman, your efforts to affirm the importance of State oversight of multi-state utility holding com panies. Our association believes that S. 621 moves in a positive direction toward rationalizing regulatory oversight in an increasingly competitive market. Importantly, however, the 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. Our State's primary concerns with regard to any PUHCA reform include the following: ensuring that the authority of the States to regulate utility holding companies is not pre-empted or restricted; establishing a transition period which would provide States with the time necessary to obtain requisite authorities to oversee utility holding companies; clarifying State authority over affiliate transactions of multi-state holding companies, including also non-power transactions between affiliates; providing for an unequivocal State right of access to all books and records, wherever located, for the effective discharge of State oversight responsibilities; and authorizing the FERC and States to audit and investigate companies in a registered holding company system. Our association is very concerned about the recent trend toward mergers and believes that any 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. Accordingly, the NARUC supports the establishment of a mechanism which would maintain the effective State and Federal regulation against abusive holding company practices that could place undue market power in the hands of multi-state holding companies and could harm the development of competition. While the NARUC believes PUHCA reform legislation should not pass separately from legislation to amend the Federal electric utility laws in other respects, the association would be remiss not to suggest ways to further improve S. 621, should it ultimately proceed to a Committee vote. S. 621 helps to ensure the States' ability to access multi-state holding company books and records, to audit multi-state holding companies, and regulate affiliate transactions within a holding company system. The NARUC commends the Chairman for including in this year's bill provisions added into last year's bill by the Committee that addressed the enforcement of books and records accessibility, which are similar to the approaches contained in the Energy Policy Act of 1992 and the Telecommunications Act of 1996. Because the relevant provisions of both those Acts, however, would be repealed if S. 621 were enacted in its current form, such an enforcement provision should be clarified to ensure the continued right of State commissions to obtain access to books and records of exempt wholesale generators and exempt telecommunications companies. Prior to the adoption of S. 621 by this Committee, the NARUC also requests clarification of the exemption provisions. It would be extremely helpful if the authority given to the FERC to terminate a grandfathered utility exemption under the 1935 Act were revised in order to ensure that all utility holding companies are subject to similar regulatory treatment regardless of corporate form. Also, the NARUC would support clarifying that the FERC's authority to exempt any person or transaction does not translate into an ability to exempt utility companies from State regulation under this legislation, including the ability to obtain access to books and records. While the NARUC appreciates the Committee's response to our concerns during last year's debate by changing the effective date from 12 to 18 months, in our view, a transition period of 2 years, at a minimum, would be more appropriate to enable State commissions to acquire such enabling authorities necessary for meaningful oversight of registered holding companies. For instance, in my State of Texas, as well as other States, the legislature meets just once every 2 years. In factThe CHAIRMAN. That's a good policy. [Laughter.] Mr. GEE. We believe so, yes, sir. The CHAIRMAN. As a matter of fact, we ought to try that in a national referendum. It would probably pass overwhelmingly. Maybe even for Congress. [Laughter.] Senator DODD. They would suggest we never meet. [Laughter.] The CHAIRMAN. The Texas legislature meets for only 150 days, is that right? Mr. GEE. That's correct, sir. About 5 months every 2 years. Senator GRAMM. That's just too long. The CHAIRMAN. Yes. [Laughter.] Then they go out. Mr. GEE. Unless there's a special session called by the Governor. The CHAIRMAN. That's not bad. Go ahead. Mr. GEE. In fact, our legislature The CHAIRMAN. At least we got some productive suggestions out of this hearing. [Laughter.] Mr. GEE. This wasn't necessarily the focus of my presentation. [Laughter.] But I'm glad to provide helpful advice in any respect. [Laughter.] Our legislature is meeting this year. When the Texas legislature meets, it traditionally does so, as I indicated, for just 5 months at the beginning of every other year. Therefore, if PUHCA repeal were enacted into law this year, my public utility commission would need to assess whether it required additional multi-state utility oversight authority and, if so, would need an opportunity to seek such authority from our legislature. However, because our commission would be unable to secure such authority until 1999, during such time we could be at risk of being without adequate safeguards to protect consumers from cross-subsidization risks and diversification abuses. Further, in other jurisdictions, registered holding companies could be free to restructure or to diversify into other lines of businesses, conceivably absent any State or Federal oversight. As we continue to advance and move toward a more competitive electric market, Mr. Chairman, PUHCA may indeed become less relevant. However, in the absence of a truly competitive market, we must carefully assess what safeguards are necessary to protect consumers from potential abusive practices by holding companies. |