As a representative of utility consumers, I support any effort by Congress and regulatory agencies to align laws and regulations with current needs and practices in the electric utility industry in order to allow ratepayers to receive the benefits of a transition to a more competitive industry. The National Association of State Utility Consumer Advocates (NASUCA), however, urges Congress and the SEC not to take any action that would weaken the protections of the Public Utility Holding Company Act. Congress must first ensure that public utility holding companies are either subject to effective competition or subject to effective regulation where effective competition does not exist or where competition would not induce efficiency, reduce costs, and advance consumer interests.
Registered holding companies and their subsidiaries are not susceptible to effective control by any single state and require federal oversight over interaffiliate transactions, corporate structure, diversification, and access to books and records. We recognize that neither the electricity nor the natural gas industry has a fully competitive market structure and that utility market power remains pervasive. If PUHCA were repealed or substantially modified, neither the remaining regulatory framework nor the current state of competition would be sufficient to protect consumers. Until utility market power is eliminated, consumers must be protected by effective regulation, which in the case of multi-state holding companies, includes the provisions of PUHCA. Effective regulation must retain both rate and structural reviews, with a rational allocation of responsibility between state and federal regulators.
As the SEC/NARUC survey shows, there 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.
In addition, PUHCA reform should be considered in the broader context of restructuring the
electric utility industry to ensure that an effective competitive market develops and that the benefits flow
to consumers.
Good morning Chairman D'Amato and members of the Banking, Housing and Urban Affairs Committee. I am Larry Frimerman, Federal Liaison with the Ohio Consumers' Counsel, and I serve on the Electric Committee of the National Association of State Utility Consumer Advocates (NASUCA). I am here today representing NASUCA. NASUCA is an association of 41 consumer advocate offices in 38 states and the District of Columbia. Our members are designated by laws of their respective states to represent the interests of utility consumers before state and federal regulators and in the courts. On behalf of my Office and NASUCA, I wish to thank you for the opportunity to testify before this Committee on S. 621 and the future of the Public Utility Holding Company Act of 1935.
First I would like to commend the Committee for holding this hearing and pursuing the issue that are the subject of this morning's discussion. As we move toward a more competitive electric generation industry, it is essential that federal and state lawmakers continue to reassess those laws and regulatory actions that will either protect or harm consumer interests in the context of the larger debate on the structure of the industry.
The debate today is on the future of the Public Utility Holding Company Act. However, The industry is in the midst of substantial change and uncertainty, so examination and possible elimination of key industry underpinnings cannot be done in a vacuum. Any discussion of substantial modification of PUHCA must be considered in the context of examination and adoption of changes consistent with the establishment of an industry changes consistent with the establishment of an industry structure that limits market power for electricity sellers and buyers, and one in which a combination of effective competition and effective regulation protects the consumer interest.
In a series of resolutions dating back to 1983, NASUCA has urged Congress to exercise the greatest caution in response to efforts to dismantle the consumer protections contained in PUHCA. Most recently, in June 1995, NASUCA passed a further resolution that is attached to my testimony and forms the basis for my remarks here today.
Specifically, in our most recent resolution, NASUCA states its continued opposition to changes to PUHCA that would reduce consumer protections in the Act at this time. NASUCA urged Congress and the SEC not to take any action that would weaken the Act without first ensuring that public holding companies are either subject to effective competition or subject to effective regulation, where effective competition does not yet exist or where competition would not induce efficiency, reduce costs and advance consumer interests.
Our resolution recognizes that public utility holding companies and their subsidiaries are affected with a national public interest and that their activities extending over many states, are not susceptible to effective control by any individual state. We also recognize that neither the electric industry nor the natural gas industry has a fully competitive market structure and that utility market power remains pervasive. We conclude that, if PUHCA were repealed today in the manner proposed in S. 621, neither the remaining regulatory scheme nor the current state of competition would be sufficient to protect consumers. Until utility market power is eliminated, consumers must be protected by effective regulation which, in the case of multi-state holding companies, includes the provisions of PUHCA.
In NASUCA's view, effective regulation of multi-state public utility holding companies requires both rate reviews and structural reviews, with a rational allocation of responsibility between state and federal decision-makers.
I would emphasize that the NASUCA resolution is not simply a call for continued or increased regulation. We specifically recognize that effective competition benefits consumers through greater efficiency and reduced costs. We also note, however, that deregulation under conditions of unfettered market power harms consumers. As such, our resolution does not suggest that PUHCA must remain in its current form indefinitely. Rather, it cautions Congress and the SEC to take no action to weaken PUHCA without, ensuring that either effective competition or effective regulation is in place to protect consumers.
The NASUCA resolution is consistent with comments that were filed by seven state consumer offices, including the Ohio Consumers' Counsel, in response to the SEC's request for public input on the future of PUHCA. Those comments were also joined by a diverse group of other organizations that expressed concern over the impact of PUHCA repeal on the protection of both consumers and competition. Those groups included the American Public Power Association, the Electricity Consumers Resource Council, Consumer Federation of America, and the National Rural Electric Cooperative Association, the Electricity Consumers Resource Council, Consumer Federation of America, and the National Rural Electric Cooperative Association.
Those comments, which were filed at the SEC in March 1995, contended that, contrary to the
claims of PUHCA repeal proponents, there is neither sufficient competition nor sufficient state
regulatory tools to ensure consumer protection in the absence of PUHCA. It is beyond dispute that
utilities retain substantial market power in the distribution and transmission functions and, to a
substantial extent, in the generation function as well. In addition, the comments noted, state regulation is
not in a position to deal with the number and complexity of multi-state restructuring transactions that
would arise if PUHCA were repealed. The comments stated:
Unfortunately, I believe that the concerns expressed by this diverse group of commenters were not adequately addressed in S. 621 or in the 1995 SEC Report on PUHCA upon which the bill appears to have been based.
S.621 would significantly worsen the problems associated with monopoly power. For example:
We applaud the Chairman for recognizing the need for a continued federal presence in policing interaffiliate transactions, audits and access to books and records. However, the measure falls short in providing all of the necessary tools to the FERC with respect to policing interaffiliate transactions, and even exempts key affiliates from having to provide access to books and records. Moreover, S. 621 eliminates two provisions, the provisions addressing diversification and the integration limitations, which remain at the heart of the Act today despite the representations of some registered holding companies.
Proponents of repeal or major modification of PUHCA have incorrectly characterized the nature of the electricity industry today: It is not, as is claimed, a competitive industry. Furthermore, state regulation is not, contrary to repeal proponents, sufficient to protect consumers in the absence of a federal statute regulating multi state public utility holding companies.
The factor motivating Congress in 1935, "market power," still exists sixty years later. Since 1935, the structure of the industry has been greatly influenced by the Act. Changes in PUHCA, without ensuring effective competition and effective regulation in those sectors where each (or both) is appropriate, will harm consumers.
Congress and federal agencies must address the need to mitigate market power. The exercise of market power is likely in industry structures that include natural monopolies over essential facilities such as transmission and distribution systems, or in joint ownership of monopoly and potentially competitive businesses. In the electricity industry today, these conditions remain. In fact, S. 621 would permit any electric or gas utility to acquire disparate utilities These conditions are not present in, for example, other industries, where there is no exclusive franchise to sell at retail. If Congress repeals PUHCA and its integration requirement without tying relief to a showing of effective competition or divestiture, then these very large utility companies can expand their monopoly customer, billing,- transmission and distribution monopolies at will to ward off competitors. This places such utilities at an tremendously unfair advantage prior to the onset of competition and will allow the utility to acquire other utilities and their service territories without facing competition within their own service territory or realistically be subject to acquisition by even larger competitors. And, contrary to claims you may hear, entry of wholesale generators does not necessarily reduce the impact of monopoly status for captive retail customers. Nor does EPAct tie the hands of electric utilities. Congress specifically provided broad EWG exemptions, as well as more limited exemptions for foreign utility investment, to accommodate a move toward competition in bulk power markets.
Where there are monopolies, especially with government-granted utility service franchises, the primary obligation is to core customers. No costs associated with an off-system investment, or with regulating such an investment to protect captive customers, should be borne by ratepayers. Unfortunately, effective means for denying the pass-through of unwarranted interaffiliate costs for multi-state holding companies do not always exist at the state level. In fact, the Mississippi Power and Light court decision (Mississippi Power and Light Co. ex rel Moore; ) places consumers at continued and expanded risk from harm as a result of inappropriate costs potentially being allocated by a federal agency even if the state has denied prudence of such costs. This is particularly the case as holding companies acquire disparate service territories. S. 621 does nothing to correct this regulatory gap. The very existence of such a regulatory gap will place consumers at risk.
Proponents of repeal argue that structural review is unnecessary because rate regulators can protect consumers. This is simply not the case. Rate review and structural review are complementary, and both are vital in ensuring fair rates and in preventing abuses. For example, PUHCA prevents holding companies from abusing corporate form to benefit their shareholders at the expense of consumers and competitors. They were designed as such when Congress enacted the twin Federal Power Act and PUHCA statutes. After-the-fact rate regulation alone cannot prevent or correct large investment errors, which may harm the ratepayers and the general public.
Secondly, all the necessary tools may not be within the state commission's authority. For instance, the SEC/NARUC survey indicates that many states lack the legal authority to prevent certain out-of-state affiliations by a holding company located in another state, but owning the operating utility in the PUC's jurisdiction. In addition to the Mississippi Power and Light decision, other gaps include Ohio Power v. FERC 954 F.2d 779 (D.C. Cir), cert. denied, 113 S.Ct. 483 (1992). While S. 621 appears to address the Ohio Power gap prospectively, it does nothing to address the regulatory gap created by MP&L.
After all, it's PUHCA itself, with it's structural protections, the outright bans of certain actions, transaction and behaviors, that cannot be replaced or matched by S. 621 or other poor substitutes. Some parts of PUHCA still prevent anticompetitive and anti consumer behavior.
Finally, states may not be the only appropriate jurisdictions to decide when a particular acquisition of a distant utility creates too much market power -or concentration of control. So, structural regulation of multi-state holding companies still requires a federal role in addressing interaffiliate transactions, acquisitions of nonutility subsidiaries, acquisitions of distant utility companies, and mergers. Given current flaws in the structure of electricity markets, these changes are too substantial to adopt without ensuring the appropriate mix of effective regulation and effective competition.
If you look at who is for and against stand-alone PUHCA repeal, it should tell you who wins and who loses. The only proponents of repeal are most of the registered holding companies and the SEC. Opponents include all major consumer groups, all user groups, representing residential, commercial and industrial customers, heating and airconditioning contractors, municipals and cooperative organizations, state utility commissioners, Consolidated Natural Gas, and other organizations..It is not, as portrayed at last year's hearing, everyone but NASUCA and ELCON in support.
I would like to conclude by urging the Committee to consider the assessment of the Public Utility Holding Company Act only in the context of the larger structure of the industry and specifically with respect to adopting any changes to the Act. As you have heard, the industry is evolving. We must first determine the appropriate market structure and nature of competition within the industry to evaluate the appropriate methods for balancing effective competition and effective regulation. If this is not achieved, consumers will not benefit, and will likely bear the brunt of any deregulatory actions.
NASUCA urges the Committee not to repeal or weaken the consumer protections in PUHCA as embodied in S. 621 without first ensuring that public utilities are subject to effective competition, or effective regulation, where competition would not induce efficiency, reduce costs and advance the interest of consumers. S. 621 does not meet such a standard.
Such legislation is inappropriate. In virtually every statehouse, at virtually every commission, there is legislation, joint committee proceedings and other proceedings. However, it is still unclear what will be the outcome in many states. There may or may not be retail competition in several states. But we do know that the world is evolving in ways which we cannot anticipate the results. To repeal the anti-empire building statute at such a time when structural abuses could become the order of the day would be folly.
Thank you again for the opportunity to speak on behalf of NASUCA and the Ohio
Consumers' Counsel.
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