Section 1 provides that the bill may be cited as the "Public Utility Holding Company Act of 1997."
Section 2 sets out the findings and purposes of the Act. The "findings" of the Act state that the constraints placed on public utility holding company systems by the Public Utility Holding Company Act of 1935 (the "1935 Act") are no needed but that there is a continuing need for limited Federal and state regulation to protect the ratepayers of electric utilities and natural gas companies. The "purpose" of the Act is to eliminate unnecessary regulation through repeal of the 1935 Act, while facilitating effective state and Federal rate regulation by assuring access to holding company system books and records that are relevant to setting utility rates.
Section 3 defines the terms used in the Act. The definitions of "affiliate," "associate company," "company," "electric utility company," "gas utility company," "holding company," "public utility company," "state commission," "subsidiary company" and "voting security" are taken from the definitions in Section 2 of the Public Utility Holding Company Act of 1935, 15 U.S.C. 79b(a). The Act preserves the threshold of "10 per cent or more" of outstanding voting securities used by the 1935 Act to define a "holding company" and a "subsidiary company". As in the 1935 Act, the alternative definition for these two terms (the determination by the regulator that a "controlling influence" exists) is also used.
The terms "exempt wholesale generator" and "foreign utility company" have the same meaning as in sections 32 and 33, respectively, of the 1935 Act as those sections existed on the day before the effective date of this Act. These terms were added to the 1935 Act by Title VII of the Energy Policy Act of 1992.
The terms "jurisdictional rates", "natural gas company" and "public utility" are taken from the Natural Gas Act and the Federal Power Act. Specifically, the term "natural gas company" tracks the language of Section 2(6) of the Natural Gas Act, 15 U.S.C. 717a(6). The term "public utility" tracks that of Section 201(e) of the Federal Power Act, 16 U.S.C. 824(e). The term "jurisdictional rates" is intended to encompass the full ratemaking jurisdiction of the Federal Energy Regulatory Commission's authority to set rates under the Federal Power and Natural Gas Acts.
Section 4 repeals the 1935 Act, effective 18 months after the date of enactment of this Act.
Section 5 provides the Federal Energy Regulatory Commission authority to inspect such books and records of public utility holding companies, associate companies, subsidiary companies and affiliate companies as the Commission deems relevant to its ratemaking responsibilities under the Federal Power and Natural Gas Acts. To this end, companies are required to maintain and make available to the Commission such books, accounts, memoranda and other records as the Commission deems relevant to costs incurred by a public utility or natural gas company. The Commission's authority under this section supplements its authority over books and records under the Federal Power and Natural Gas Acts.
This section imposes a confidentiality requirement taken from the confidentiality requirement in section 301(a) of the Federal Power Act. Consistent with current practice under the FPA, except as may be directed by the Commission or the courts, no member, officer, or employee of the Commission may divulge facts or information obtained during the course of examinations authorized under this section.
Section 6 provides state regulatory commissions authority to inspect books, accounts, memoranda, and other records of a public utility holding company or associate or affiliate companies as may be relevant to costs incurred by an electric utility company or a natural gas company and necessary to carry out state regulation of public utility companies in a holding company system. The authority is to be exercised by written request and subject to such terms and conditions as are necessary and appropriate to safeguard against unwarranted disclosure to the public of any trade secrets or sensitive commercial information.
Any company which is a holding company solely because it holds Qualifying Facilities under the Public Utility Regulatory Policies Act ("PURPA") is exempt from the books and records provision. This exemption is intended to preserve the current regulatory structure under PURPA which applies to these companies.
The rights of the states under this section are enforceable in federal district court.
The authority granted by Section 6 is intended to supplement existing state authority over holding company systems, not to expand or limit any existing authority a state commission has to regulate a public utility. To ensure this result, Section 6 provides that it does not preempt applicable state law concerning access to business information or in any way limit the rights of a state to obtain books, records, or other information under Federal law, contract, or otherwise. Some of these rights are set out in Section 201(g) of the Federal Power Act, 16 U.S.C. 824(g).
Section 7 provides the Commission authority to exempt certain entities from the requirements of Section 5 with respect to access to books and records and requires the exemption of certain entities from those requirements.
Section (7) (a) requires the Commission, not later than 90 days after the effective date of this act, to issue a final rule exempting from the requirements of Section 5 any person that is a holding company solely by reason of owning one or more (a) qualifying facilities (QFs); (b) exempt wholesale generators (EWGs); (c) foreign utility companies; or (d) any combination thereof.
The purpose of this provision is to ensure that businesses whose activities are solely limited to ownership of these categories of generation investment will not be subject to the requirements of Section 5. In addition, the Commission may by rule or order exempt any person or class of transactions from the requirements of Section 5 if it finds that the books, records, accounts, memoranda or other records or class of transactions are not relevant to the jurisdictional rates of a public utility or natural gas company.
Section 8 makes explicit that nothing in the Act precludes the Commission or a state commission from determining under otherwise applicable law whether a public utility company, natural gas company, or 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 by the public utility company from an associate company.
Section 9 makes clear that the Act does not apply to the United States, a state or any political subdivision of a state, any foreign governmental authority not operating in the United States, or any agency, authority, instrumentality, officer, agent or employee of these entities.
Section 10 provides that nothing in this Act precludes the Commission or a state commission from exercising its jurisdiction under otherwise applicable law to protect gas and electric utility consumers from paying too much for goods and services provided by associate companies and from cross subsidization of associate companies by regulated public utility companies.
Section 11 refers to authorities contained in the Federal Power Act to provide the Commission full authority to enforce the provisions of the Act. These include the authority: (I) to receive and proceed on complaints; (ii) to investigate any facts, conditions, practices or matters necessary to determine whether there has been a violation of the Act or any rule, regulation or order issued under the Act; and (iii) to hold hearings. Section 11 also gives the Commission authority to implement rules of practice and procedure and to perform any and all acts necessary to carry out the provisions of the Act.
Section 12 provides that nothing in the Act prohibits a person from engaging in activities or transactions in which it is legally engaged or authorized to engage on the date of enactment.
This savings provision ensures that prior authorizations made by the Securities and Exchange Commission and the Federal Energy Regulatory Commission continue in force under this Act. However, this Section is also intended to ensure that companies are not bound by previously ordered limits on activities when the activities would otherwise be allowed by this Act.
This section also provides that nothing in the Act limits the authority of the Commission under the Federal Power Act (including section 301 of that Act) or the Natural Gas Act (including section 8 of that Act).
Section 13 requires the Commission to promulgate such regulations as may be necessary or appropriate to implement the provisions of this Act, except for provisions pertaining to state access to books and records. These regulations are to be promulgated not later than eighteen months after the date of enactment.
Section 13 also requires the Commission to submit a report to Congress detailing technical and conforming amendments to Federal law necessary to implement the provisions of this Act. This report is required eighteen months after the date of enactment.
Section 14 provides for the transfer of relevant books and records from the Securities and Exchange Commission to the Federal Energy Regulatory Commission.
Section 15 provides that the Act shall take effect 18 months after date of enactment.
Section 16 authorizes to be appropriated such funds as may be necessary to carry out the Act.
This section repeals section 318 of the Federal Power Act, 16 U.S.C. 825q. This
section recognizes that repealing the 1935 Act will eliminate any concerns about the
possibility of conflicting decisions of the Securities and Exchange Commission and the
Federal Energy Regulatory Commission.
On June 5, 1997, the Senate Committee on Banking, Housing, and Urban Affairs met in legislative session and marked up and ordered to be reported S. 621, a bill to repeal the Public Utility Holding Company Act of 1935 ("PUHCA") and to enact the Public Utility Holding Company Act of 1997, and for other purposes, with a recommendation that the bill do pass, with an amendment. The Committee adopted a Managers' Amendment, offered by Senators D'Amato and Sarbanes, making certain technical amendments. The Committee's action was taken by a voice vote. Senators Kerry, Bryan and Johnson asked to be recorded as voting in the negative.
The Public Utility Holding Company Act of 1997, S. 621, was introduced on April 22, 1997 by Senators D'Amato, Murkowski, Dodd, Sarbanes, Gramm, Shelby, Mack, Faircloth, Allard, Lott, Domenici, Akaka, Inouye, Coats, Cochran, Roberts, Brownback, Coverdell, Specter, and Nickles. Senators Enzi and Bennett were added as additional cosponsors. The legislation introduced was identical to S. 1317, the "Public Utility Holding Company Act of 1996," which was reported by the Banking Committee on September 10, 1996. S. 621 has two purposes: first, to repeal the Public Utility Holding Company Act of 1935; and second, to put in place a new regulatory structure that allows for greater geographic and business diversification in the utility industry while ensuring that utility customers do not pay for this diversification through increased energy rates.
The full Committee conducted a legislative hearing to consider S. 621 on April 29, 1997. The Committee received testimony from: Senator Frank H. Murkowski, Chairman of the Senate Committee on Energy and Natural Resources (the "Energy Committee"); the Honorable Isaac Hunt, Commissioner, Securities and Exchange Commission ("SEC"); Susan Tomasky, General Counsel, Federal Energy Regulatory Commission ("FERC"); Robert W. Gee, Chairman, Electricity Committee, National Association of Regulatory Utility Commissioners ("NARUC"); Ronald J. Tanski, Controller, National Fuel Gas Company; Fred C. Meyer, Jr., Senior Vice President & General Counsel, Central & South West Corporation; Leslie E. LoBaugh, Vice President & General Counsel, Pacific Enterprises; Mark Cooper, Director of Research, Consumer Federation of America; Larry Frimerman, Federal Liaison, Ohio Consumers' Counsel, testifying on behalf of National Association of State Utility Consumer Advocates ("NASUCA"). Consumers for Fair Competition and the Electricity Consumers Resource Council ("ELCON") also submitted testimony.
Additional comments, suggestions, and assistance in considering and evaluating the legislation was received from the state regulators, the staff of the Energy Committee, the SEC, the FERC, and others.
The bill reported by the Committee would repeal PUHCA. Repealing PUHCA would streamline regulation and eliminate unnecessary duplication, thus facilitating competition in the energy industry. PUHCA no longer serves its original purpose of restructuring the energy industry and protecting investors and consumers from holding company abuses. The nature of the utility industry has changed, the state and federal governments have implemented regulatory controls, and Congress has enacted federal energy laws and federal securities laws -- all of which more than adequately protect consumers and utility rate payers. In light of these developments, PUHCA has become obsolete. As the SEC -- the federal agency that enforces PUHCA -- has testified, PUHCA "has become redundant in many respects, as a result of prudent administration of the statute and the development and evolution of other state and federal regulation."
The Committee recognizes that repealing PUHCA not only streamlines regulation, but also takes a necessary step in creating competition in the electricity industry. As Senator Johnston testified at the Committee's 1996 hearing on S. 1317: "the transition to competitive retail markets will be hindered and more costly unless PUHCA is repealed as a first step down the restructuring road . . . true and fair retail completion will be thwarted without PUHCA repeal." The Committee believes that the debate on comprehensive energy reform should be reserved for the Energy Committee, the FERC, and the States.
Perhaps most importantly, S. 621 would provide for additional consumer protections by enhancing regulatory oversight of the ratemaking process. The Committee believes that the regulators must be able to ensure that consumers pay only for costs associated with utility services. S. 621 would expand the existing ratemaking authority of federal and state energy regulators by allowing them to review the records of utility transactions in order to protect ratepayers from unfair rate increases and any abusive practices.
The bill would also allow the FERC and the States to protect ratepayers more effectively by addressing a problem created by the decision of the Court of Appeals for the District of Columbia Circuit in Ohio Power Company v. FERC ("Ohio Power"). The court in Ohio Power held that the FERC did not have authority to regulate certain costs in setting utility rates when those costs had previously been approved by the SEC. The Ohio Power decision also put into question the States' authority in this area. S. 621 would remove the SEC from the ratemaking process and it would restore the FERC's (and implicitly the States') full ratemaking authority.
Finally, S. 621 would ensure that regulators have the necessary authority to protect consumer rates by granting the FERC and the state public service commissions the authority to review a holding company's books and records to the extent necessary to review rates. The legislation would give the FERC and state public service commissions access to books and records of all utility holding companies, and their associates, affiliates, and subsidiaries that are relevant to the determination of rates. The bill also contains an enforcement mechanism to ensure that the state commissions will be able to implement this newly expanded books and records review authority.
In the early 1900's utility holding companies expanded rapidly -- "fueled" by growth in the electric and gas industries and financing from Wall Street. As a result of this rapidgrowth, the power industry was concentrated among a handful of large interstate holding company systems. In the late 1920's, at Congress's request, the Federal Trade Commission ("FTC") undertook an extensive study of the public utility industry. At the conclusion of this seven year study, the FTC published a 107 volume report. The FTC report was followed by a second, two-year Congressional study. Both studies uncovered a myriad of utility industry abuses facilitated by the holding company structure. These included the issuance of securities based on unsound assets, mismanagement and exploitation of subsidiaries, interaffiliate dealing, and the use of the holding company structure to evade effective regulation.
The studies found that the utility holding companies' pyramidal corporate structure facilitated most of the industry abuses. Holding companies bought other holding companies -- creating up to 10 layers of ownership between the utility subsidiary and its holding company. Since it was difficult to determine the true assets and liabilities of the company, this structure greatly increased the speculative nature of the holding company's securities. The holding companies manipulated market rates for their securities and inflated their capital structure by forcing subsidiaries to buy supplies from affiliates at exorbitant above-market prices. The holding company structure made it virtually impossible to trace these abusive interaffiliate transactions. As a result of the abuses, investors were defrauded, subsidiary companies were forced to pay excessive prices for services, and in the end, energy prices were grossly inflated.
States were unable and ill-equipped to regulate these multistate holding companies effectively. At that time, many states did not have a utility-related regulatory structure in place and the Supreme Court considered state regulation of multistate holding companies a violation of the Commerce Clause of the Constitution.
Congress enacted the Public Utility Holding Company Act ("PUHCA") in 1935 to remedy these holding company abuses. First, PUHCA mandated the simplification of the utility holding company structure. The break-up of mammoth holding company systems was achieved by imposing an "integration requirement," which limited holding companies to owning only energy and energy-related companies in discrete geographic areas.
Second, PUHCA gave the SEC authority to oversee these companies. Under this regulation, holding companies with multistate utility operations were required to register with the SEC and thus become subject to the full panoply of regulation imposed by PUHCA. Prior SEC approval was required for certain corporate transactions engaged in by registered holding companies such as: issuance of securities, acquisition of utility assets, and some merger activities. Restrictions against interaffiliate loans and diversification into non-utility businesses were imposed. PUHCA also subjected registered holding companies to extensive reporting and accounting requirements.
Congress has debated the issue of PUHCA reform for nearly twenty years. The industry, the regulators, the Congress, and consumer and environmental protection groups agree that the SEC has completed its task--assigned over sixty years ago-- of simplifying the utility holding company structure and that many of the remaining PUHCA provisions duplicate other federal or state laws or are unduly burdensome.
In 1932--three years before PUHCA became law-- thirteen large holding companies controlled 75% of the electric utilities while eleven companies held over 80% of the gas pipelines. Currently there are only 12 registered electric utility holding companies and 3 registered gas utility holding companies which together, at the end of 1993, owned only 19% of all investor-owned utility assets. The remaining 165 exempt gas and electric utility holding companies own over half of all such utility assets.
In 1977, the General Accounting Office ("GAO") issued a report on the SEC's enforcement of PUHCA. The GAO initiated the report in response to an inquiry from Congressman John Dingell, then Chairman of the Subcommittee on Energy and Power of the House Committee on Interstate and Foreign Commerce. The GAO reported that many of PUHCA's objectives had been met by the SEC's actions to reorganize and simplify the pyramidal corporate structures and that, as a result, financial conditions in the gas and electric utility industries had become more stable. Recognizing that Congress might need to reform PUHCA, the GAO included in its recommendations that the SEC undertake a complete study on PUHCA.
The SEC recommended to Congress in 1981 that Congress repeal PUHCA: "on the basis that the reorganization of holding companies contemplated under [PUHCA] had been completed and that the remaining provisions were either duplicative of other regulatory schemes or no longer necessary to prevent the abuses that led to enactment of [PUHCA]." Senator D'Amato, then Chairman of the Securities Subcommittee of the Banking Committee, and Senator Johnston, then Ranking Member of the Energy Regulation Subcommittee of the Energy Committee, acted on the SEC's recommendation by introducing three separate bills to reform PUHCA. These measures sparked Congressional debate on PUHCA reform. Senator D'Amato set the tenor of the debate in his statement introducing the legislation on the Senate floor. He said that PUHCA reform was necessary because: "the Public Utility Holding Company Act is a major impediment to meaningful attempts to improve the economic well-being of the utility industry."
In 1983, the GAO responded to the SEC's recommendations and to Senator D'Amato and Johnston's legislation by issuing another report on PUHCA. In this report, the GAO agreed that a number of PUHCA's provisions duplicated other laws. The GAO also identified regulatory gaps that would occur if PUHCA were repealed. For example, the report cited "approvals of acquisitions and financing of holding companies and the review of cost allocations between holding companies and their service companies and utility subsidiaries" as areas in which PUHCA provided the only authority for regulation. The GAO also cited the concerns of state regulators regarding their ability to regulate utility holding companies. The Committee convened a hearing regarding PUHCA reform on June 14 and 15, 1983, but took no further action during that legislative session.
During the 20 year debate on PUHCA reform, Congress successfully enacted some amendments to the Act to respond to the changing dynamics of the energy industry. For example, in 1978, Congress adopted the "Public Utility Regulatory Policies Act" to exempt certain new energy generation facilities from PUHCA regulation. In 1992, Congress enacted the "Energy Policy Act " to amend PUHCA and encourage competition in the wholesale energy market. In 1995, Congress enacted the "Telecommunications Act," which included a provision to encourage competition in the new telecommunications industry by allowing registered holding companies to establish exempt telecommunications subsidiaries. While Congress created limited opportunities for utility holding company diversification with these amendments to PUHCA, it has not yet accomplished comprehensive reform of the Act itself.
In 1994, the SEC began a comprehensive study of PUHCA. The study considered the effectiveness of the SEC's administration of PUHCA and examined initiatives for modernizing PUHCA in light of changes in the energy industry. In June 1995, the SEC's Division of Investment Management published a comprehensive report on the findings of the study, including the history of PUHCA, subsequent administrative and legislative changes to PUHCA, and the energy industry in general. The SEC report concluded that PUHCA has accomplished its basic purpose of protecting investors, simplifying the utility industry and preventing industry abuses. The report further concluded that PUHCA in many respects either duplicated other state or federal regulation or was no longer necessary to prevent the recurrence of the abuses that led to the statute's enactment. Although the SEC had first made this same finding in 1981, in the 1995 report the SEC examined more closely the effect of PUHCA repeal on the FERC and States' ability to continue to protect consumers. The SEC report recommended that Congress repeal PUHCA (subject to certain conditions) since "the current regulatory system imposes significant costs, in direct administrative charges and foregone economies of scale and scope, that often cannot be justified in terms of benefits to utility investors." The SEC recommended that Congress retain certain PUHCA provisions, noting that otherwise consumers could be exposed to some of the same abuses that PUHCA was enacted to prevent. As SEC Commissioner Isaac Hunt cautioned:
"so long as electric and gas utilities continue to function as monopolies, the need to protect against the cross-subsidization of non-utility operations will remain. The best means of guarding against cross-subsidization is likely to be thorough audits of books and records and federal oversight of affiliate transactions."
Although the SEC recommended that Congress enact certain safeguards to protect consumers, it also outlined many of the ways PUHCA's burdensome regulation unnecessarily restricts the growth of the registered holding companies, the hundreds of exempt companies, and free-standing utility companies. As the SEC report illustrates, developments in other areas of the law have rendered PUHCA obsolete. For example, PUHCA requires that holding companies make frequent disclosures and statements to the SEC. While these safeguards may have been necessary in 1935, now the SEC can effectively protect investors through disclosures required under the Securities Act of 1933 and the Securities Exchange Act of 1934. PUHCA requires that the SEC review many acquisitions and mergers of utility and holding companies. The FERC also has jurisdiction to review and approve these transactions and in practice, the SEC generally defers to the FERC's decisions on competition issues. PUHCA restricts holding companies from owning utility subsidiaries that are not in the same geographic area. The Committee heard testimony that the integration requirement is now outdated and a barrier to the production of efficient energy. Anticompetitive concerns may be dealt with under the federal antitrust laws and assessment of market power concerns during merger and acquisition review by the FERC and the States.
The Committee considered the SEC report and agreed with its conclusion that: "[g]iven the developments in the industry and in other regulatory regimes, a less structural, more targeted regulatory approach now seems appropriate." In crafting the Public Utility Holding Company Act of 1997, the Committee followed the SEC's recommendations to repeal PUHCA subject to certain conditions. Mindful that consumers need protection from unfair rates, the Committee strengthened the ability of federal and state regulators to review holding company system books and records in connection with ratemaking proceedings. S. 621 would address any regulatory gaps opened up by PUHCA repeal so that regulators would have ample authority to protect consumers.
The SEC testified before the Committee, "S. 621 largely implements the [legislative] option recommended by the SEC, by providing the FERC and the state regulators with broad authority to inspect books and records of companies in holding company systems." NARUC testified that "S. 621 moves in a positive direction toward rationalizing regulatory oversight in an increasingly competitive market."
During the Committee's consideration of PUHCA repeal, the regulators, consumers, and industry groups identified as a primary concern that repeal could provide utility companies with the opportunity to finance acquisitions and diversification by increasing energy rates to utility customers. According to these groups, the parent holding company could fund the operation of its non-utility subsidiaries and its diversification through affiliate transactions. The parent company would then be able to subsidize such non-utility transactions and consumers would end up paying for the transaction through higher rates.
Representatives from the Consumer Federation of America and NASUCA testified to the Committee that repeal of PUHCA before deregulation of the entire utility industry could lead to consumers paying for non-utility diversification. Both witnesses testified that state and federal regulation was not sufficient to protect consumers from utility cross subsidization. Mark Cooper for Consumer Federation of America testified that "regulation cannot replace PUHCA's structural protections because we do not have a comprehensive state-federal scheme of regulation in place in this country."
Larry Frimerman, testifying for NASUCA, had previously elaborated that: "[i]f PUHCA were repealed or substantially modified, neither the remaining regulatory framework nor the current state of competition would be sufficient to protect consumers. Effective regulation must retain both rate and structural reviews, with a rational allocation of responsibility between state and federal regulators. [T]here are substantial gaps and variations in existing state regulation of multi-state holding companies. These 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."
The Committee considered how best to ensure that the FERC and state regulators would be able to prevent the funding of non-utility investments through utility rates and unfair transactions between utilities and affiliates. The Committee followed the regulators' recommendations to prevent unfair rates. To enable the FERC and the states to protect consumers, the legislation would improve the regulators' ability to determine whether a public utility company may recover in rates costs associated with affiliate transactions.
According to the FERC's testimony before the Committee, S. 621 would give the FERC authority to protect registered system ratepayers against these abusive affiliate contracts. FERC Chair Elizabeth Moler testified that:
[T]he new Act would recognize the affiliate abuse protections under otherwise applicable law.
These changes, in conjunction with greater access to books and records, would give the FERC
broader authority than it now has to protect public utility ratepayers against affiliate abuses. The
changes would permit the FERC to protect ratepayers in all types of electric and gas holding
company systems and provide additional access to books and records to monitor affiliate abuse.
NARUC testified that S. 621: [H]elps to ensure the States' ability to access multi-state holding company books and records, audit multi-state holding companies and regulate affiliate transactions within a holding company system. Also, the provisions pertaining to State access to books and records will go a long way to enable the States to meet their state mandated oversight responsibilities.
To further guard against potential affiliate abuse, the SEC suggested in its testimony to the Committee that legislation include authority for the FERC to pre-approve affiliate transactions to ensure that public utilities do not subsidize non-utility companies. The Committee, however, intends this legislation to allow diversification and promote competition with only necessary barriers to entry. The Committee believes that preapproval of affiliate transactions would not be necessary and would only be burdensome to both the holding companies and to the FERC. FERC General Counsel Susan Tomasky assured the Committee: "[C]ross-subsidization can most effectively be addressed as a rate issue. The [Federal Energy Regulatory] Commission does not need new regulatory powers to protect consumers from cross-subsidization of non-utility business if PUHCA is repealed and S. 621 is enacted."
The Committee accepted the FERC's assurance that it could protect consumers through the rate making process and that should it choose to change its policy on this matter the FERC has the authority to require preapproval of transactions. Consequently, the Committee did not include a provision requiring preapproval of affiliate transactions. In the final analysis, the SEC concurred with the Committee, stating that as "the FERC will be the agency charged with administration of the new holding company act and we defer to its judgement as to the tools it will need to fulfill its regulatory responsibilities.
In order to ensure that the FERC and States have unqualified authority to disallow costs associated with certain affiliate transactions, S. 621 would solve the regulatory conundrum caused by a 1992 Court of Appeals decision. In Ohio Power Company v. FERC, 954 F2d 779 (D.C. Cir. 1992), the court held that the SEC's approval of costs associated with an affiliate transaction under PUHCA preempted the FERC's determination of whether costs related to that transaction should be included in rates. As a result of Ohio Power, the FERC must currently allow costs approved by the SEC to be passed on to consumers through increases in utility rates even if those costs exceed market value.
The Committee heard testimony from the state regulators that Ohio Power could be
interpreted in the future to pre-empt the States' ability to disallow unfair costs being passed on to
consumers. Chairman Robert Gee of NARUC testified at the Committee's hearing about
possible future effects of Ohio Power on state authority:
[The Ohio Power] decision threatens state regulation concerning the costs of interaffiliate
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
ratemaking authority. In short, the legislation must clarify ' unrestricted authority over
affiliate transactions.
S. 621 would address the Ohio Power problem by increasing the energy regulators' ability to protect consumers. S. 621 would eliminate the Ohio Power regulatory gap by eliminating PUHCA and the conflicting jurisdiction over ratemaking between the SEC and the FERC. The legislation would grant explicit authority to state and federal regulators so that the regulator overseeing the ratemaking function has the final say as to whether costs associated with an affiliate transaction may or may not be fairly passed on to consumers. The Committee does not intend the FERC to inherit the SEC's current authority to approve costs. Instead, the FERC's authority remains limited to wholesale ratemaking.
The Committee heard testimony from the regulators that the most important tool for regulators to keep holding companies from passing on non-utility costs to ratepayers is sufficient access to company books and records.
The SEC recommended that if PUHCA were repealed "Congress [must] ensure state access to books and records, and provide for federal audit authority and oversight of affiliate transactions." In her testimony, Susan Tomasky stated that "rate regulation at the federal and state level has become the primary means of ensuring ratepayer protection against potential abuse of monopoly power by utilities that are part of holding company systems." FERC Chair Elizabeth Moler had testified more specifically about the regulators' need for additional books and records authority in her 1996 testimony: "The best way to protect consumers from subsidizing non-utility related activities is to . . . ensure that federal and state rate regulators have sufficient authority, when necessary to protect ratepayers, to inspect the books and records of jurisdictional utilities and gas companies, any holding company of which that utility or gas company is a member, and any associate company within the holding company system."
To address the regulators' concerns about books and records, the Committee included in S. 621 provisions to strengthen the regulators' authority to obtain records of all the companies in a holding company system. Section 5 of S. 621 permits the FERC to examine all books and records of a holding company and each of its subsidiaries and affiliates relevant to costs incurred by a utility company and "as necessary or appropriate for the protection of utility customers."
The Committee believes that state regulators must also have access to records of all companies in a holding company system, no matter what kind of business they are involved in or where they are located, in order to set rates, allocate costs, and guard against potentially abusive affiliate transactions.
According to the SEC study, many States are unable to obtain readily the books and records of an out-of-state company. The groups representing manufacturers and consumers who testified before the Committee raised concerns about the state commissions' inability to regulate the out of state utility operations of multistate companies. The Committee addressed these concerns in the legislation. Section 6 of S. 621 would grant to state commissions access to all the books and records of every company in a holding company system, no matter where that company is located, to the extent that the state commissions need such access to set consumer retail rates of a public utility in its jurisdiction. S. 621 also allows any federal district court in a state to enforce that state commission's access to company books and records.
NARUC testified that it was concerned that the exemption authority granted to the FERC in Section 7 not be construed to allow federal exemptions from state access to books and records. The Committee agrees. Section 7 clearly limits FERC authority to grant exemptions from federal access to books and records under Section 5. The bill does not give the FERC authority to exempt holding companies from state access to books and records under Section 6. Further, while the Committee intends for regulators to have access to books and records no matter where they are located in order to set rates, it does not intend for this authority to be used outside of a ratemaking context. The Committee expects that regulators will not have any cause to access book and records of associate or subsidiary companies which do not engage in affiliate transactions or other business with the public utility.
NARUC also indicated to the Committee that it was concerned that S. 621's effective date of one year from the enactment of the statute would not provide sufficient time for States to implement the books and records provision or "enable States to obtain the requisite authorities to effectively oversee multi-state holding companies if this bill were to be enacted into law." As a result of these concerns, and to assure the continued protection of ratepayers, the Committee lengthened the effective date to eighteen months after enactment. The Committee believes this additional time will afford each state legislature and commission time to implement the books and records provision.
Among other things, the Committee intends for this legislation to put all utility companies on a level playing field. This left the Committee to deal with the question of how to treat the formerly exempt holding companies. FERC General Counsel Susan Tomasky suggested in her testimony to the Committee that legislation to repeal PUHCA include only narrow exemption provisions -- which would grandfather previously approved activities and transactions but not exempt holding companies from affiliate abuse oversight. The NARUC expressed its concern that legislation not give the FERC authority to exempt companies from state books and records access. The NARUC testified to the Committee 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 multistate holding companies that affect utility rates."
The Committee agrees with the regulators that all holding companies should be subject to similar regulation. As a result, S. 621 would allow a company to continue to engage in all activities and transactions in which it may currently engage. Further, all transactions and companies in the holding company system -- whether currently registered or exempt -- would be subject to the newly expanded federal books and records provisions, unless the FERC finds that a transaction is not relevant to its ratemaking jurisdiction.
The Committee expects that holding companies currently exempt under section 3(a)(3) of PUHCA will petition the FERC and will be exempted from Section 5 of this Act as long as their public utility activities do not fall under the definition of jurisdictional rates set forth under this Act. Similarly, the Committee expects that state access to the books and records of these holding companies will only be used to set the retail rates of public utilities which sell power to the public.
Companies that are holding companies only because they own any of three specialized energy companies (Exempt Wholesale Generators ("EWGs"), Foreign Utility Holding Companies ("FUCOs"), and/or Qualified Facilities ("QFs")) are exempted from the federal access to books and records provision of S. 621. The Committee recognized that these companies are not affiliated with public utilities so there is no possibility of affiliate abuse and no need for FERC access to affiliate books and records. However, if any of these holding companies acquires a public utility, it would lose its exemption. The Committee does not intend to change the Public Utility Regulatory Policies Act provisions regarding regulation of holding companies that hold solely QFs. To maintain current state regulation of QFs, the bill exempts companies that are holding companies solely by ownership of QFs from the state access to books and records provisions of Section 6. This exemption would not extend to a holding company which held QFs as well as other public utility affiliates.
The Committee heard testimony that PUHCA repeal will enable companies to merge and
form large utility holding companies systems. The effect of these mergers would be to reduce
the number of companies entering a deregulated market, thus limiting competition. Both state
and federal regulators addressed merger and diversification issues in their testimony.
The Committee is satisfied that the regulators' authority to approve or disapprove mergers and
the authority of States to set limits on diversification is sufficient to protect against market power
abuses.
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