Senate Banking, Housing and Urban Affairs Committee

Hearing on S.621 - "The Public Utilities Holding Company Act of 1997"

Mr. Chairman and Members of the Committee,

My name is Dr.. Mark N. Cooper. I am director of Research at the Consumer Federation of America (CFA). Founded in 1968, CFA is the nation's largest consumer advocacy group. Composed of over 240 state and local affiliates representing consumer, senior citizen, low-income, labor, farm, public power and cooperative organizations, the Consumer Federation of America's purpose is to represent consumer interests before congress and the federal agencies.

CFA has an ongoing interest and involvement in national electricity and energy policy formation. Focusing on electric utility issues in the past decade, CFA has testified before Congress, filed comments in regulatory proceedings at the Federal Energy Regulatory Commission (FERC) and before several state commissions, served on advisory boards of the Office of Technology Assessment, filed amicus before the U.S. Supreme Court, taken part in informal dialogues industry representatives, sponsored an annual electric utility conference and published several major research reports.

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 Director of Research for CFA I have 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 one hundred 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
• 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 more difficult. It prohibits inter affiliate transactions within registered holding company systems, except at cost.

It requires advance review of certain bond issuances of 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 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, non-contiguous and diversified activities. As a result, PUHCA prevents the development of complex corporate holding companies that span many state and international borders and evade regulation. By imposing 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, 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 the utility operations of the 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 CORPORATE TRANSACTIONS AND RISKY FINANCIAL PRACTICES MUCH MORE DIFFICULT

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 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 posses. 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 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 FERC can or will provide the same level of protection as PUHCA now does. FERC has already shown an inclination to shortchange ratepayer's.

• It has deregulated long before competition is adequate to discipline abusive behavior.
• It has defended stockholder interests at the expense of ratepayer's.
• 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 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 MUCH MORE DIFFICULT

I have already suggested that competition in the electric utility industry cannot prevent the abuse of ratepayer's that 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 pes 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 other utility functions as part of a restructuring plan.

Premature repeal of PUHCA would retard competition, not promote it. It would allow 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 the Congress that would prevent these anti-competitive and anti-consumer outcomes.

THE ALLEGED INEFFICIENCIES CREATED BY PUHCA REGULATION ARE VASTLY OVERSTATED

Advocates of PUHCA reform frequently complain that PUHCA's structural regulations prevent them from doing good things for ratepayer's. 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 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
• The 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 even easily dismissed from the residential ratepayer 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 infra structural 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 ratepayers 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 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 remonopolization 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 ratepayers 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 ratepayers have serious questions about the ability of competition to deliver benefits to them.

Under these circumstances, repeal of PUHCA is premature. There is no reason to make matters worse and hope 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 mark-et 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.

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