Mr. Chairman, Members of the Committee, I am Les E. LoBaugh, Jr., Vice President, General Counsel and Chief Environmental Officer of Pacific Enterprises (PE), which is an exempt holding company under the 1935 Act I manage a law department of nearly 100 people who provide a broad range of legal services addressing issues of concern to PE and its subsidiaries. Since joining PE in 1975, I have served in a number of positions, including Associate General Counsel, Assistant General Counsel and Senior Counsel. Prior to joining PE, I was an associate with Holberg, Finger, Brown & Abramson in San Francisco. I received my JD from Georgetown University's Law Center in 1970.
By way of background, PE is the parent company of Southern California Gas Company (SoCalGas), the nation's largest natural gas distribution utility. SoCalGas serves more than 17 million people through 4.7 million meters.
Thank you for inviting me here today to discuss the exempt utility holding company's perspective regarding conditional repeal of the Public Utility Holding Company Act of 1935 (PUHCA). Since the issue of utility diversification is often raised in the debate regarding PUHCA, in addition to addressing your concerns, I'd also like to discuss the diversification experiences of Pacific Enterprises.
I should also note that PE is engaged in the process of obtaining approvals for a planned merger of equals with Enova Corp, the parent company of San Diego Gas & Electric Company. This merger will add another 3 million people to our customer base and will result in savings to shareholders and ratepayer's of $1.2 billion over 10 years. The combined company would also be exempt under the 1935 Act.
PE and Enova recently filed a response to protests to our merger application pending before the Federal Energy Regulatory Commission (FERC). The issues raised by parties that oppose our merger are all state regulatory issues that either have been or are being addressed by the California Public Utilities Commission. The opponents are the same parties that fear the competition in energy services that PE and Enova represent or fear the consequences of energy market competition itself.
As recently as 10 years ago, the Securities and Exchange Commission (SEC) rules would not have permitted an exempt holding company such as PE to become a combination company, and our proposed merger with Enova would not have been approved by the SEC. I raise this issue both because it demonstrates how interpretations of law are subject to change, and also to suggest the negative impact that differing interpretations may have upon businesses seeking to operate within a competitive marketplace.
Since it is my understanding that your committee is particularly interested in our thoughts regarding three issues, I will first address them before detailing PE's previous diversification efforts: should PUHCA repeal be treated as a separate issue or as part of a package of reforms; what are the market power implications of conditional PUHCA repeal, and whether any additional consumer protections are required as part of PUHCA repeal.
Should Conditional PUHCA Reveal be a Stand-Alone Issue?
This question has been raised within the context of the ongoing debate regarding whether Congress should pursue comprehensive electric industry restructuring legislation. We commend the comments of Chairman D'Amato, and of Senate Energy Committee Chairman Murkowski, regarding the importance of keeping PUHCA separate from the broader debate over electric industry restructuring.
I urge the Committee to remember that PUHCA is not an electric industry issue, but as the SEC has so aptly noted, it is a securities issue involving both the electric and gas industries. We, for example, are here because SoCalGas is a natural gas utility. Unlike the electric industry, the natural gas industry is already desegregated, and is well along the path of deregulation with vigorous competition in most market segments. The problems posed for our industry by this archaic and duplicative securities law are real and immediate, and the remedies should not be held in abeyance while the restructuring of the electric industry is completed.
For the natural gas industry, the burdens of PUHCA are real. They exist today. We face a growing list of competitors seeking to take advantage of the deregulation of the natural gas industry by picking off our customers, while we are constrained by PUHCA from competing in and expanding domestically into the very business that we know best - the provision of energy services. The new competitors - interstate pipeline companies, gas brokering and marketing companies and even utility companies from other states - are here today and are active in our service territory. There is no merit in granting some industry players an advantage over others based solely upon their regulatory status under PUHCA.
Managing natural gas distribution and transmission is what we have done best for more than 100 years, and it is this and the related energy services field that is our company's logical business path to growth and financial health, benefiting not just our shareholders, but our ratepayer's as well. But under PUHCA, we are permitted to invest in a gas distribution system in Argentina (which we did) but essentially prohibited from owning a similar system in Arkansas. We fail to see the public interest being served by a securities statute that encourages domestic utility corporations to export capital, rather than gain the savings for customers that could flow from system efficiencies here at home.
From a practical standpoint, we also note that the FERC is involved in charting the course for wholesale competition in electricity, and many states, including our home state of California, are far advanced in addressing retail electricity competition. It is therefore not clear at this point that broad legislation regarding electric restructuring has a clear consensus, let alone that such legislation has a chance of being enacted soon. We urge you not to postpone the important action of PUHCA reform while the electric industry restructuring debate proceeds through complex and contentious issues. There is significant concern that the movement toward retail competition in states such as California may be distorted or delayed by Congress' failure to enact PUHCA repeal.
Let's move forward with an issue that is clear and has the consensus of the experts charged with administering this 60 year old securities law. After extensive study and public comment, the SEC is urging conditional repeal (and has done so under both Democratic and Republican administrations). In this era of reinventing government to make it more effective and efficient, it would be unfortunate if Congress were to fail to act on this issue. The SEC has charted a course of administrative liberalization of the Act pending Congressional action. Our concern with that approach is that it is impermanent and piecemeal.
What Market Power Issues Are Raised by PUHCA Repeal?
When PUHCA was enacted in 1935, the electric and natural gas industries were still in their infant stages, the SEC was new, the Federal Power Commission (the predecessor of FERC) was created at the same time as PUHCA, and many states still did not have public utilities commissions. When the SEC undertook its study of PUHCA in 1995, the agency determined that the substantial changes in federal and state regulation made PUHCA redundant.
The question of the effect of conditional repeal of this duplicative law on market power is a false issue. Conditional PUHCA repeal does nothing to diminish the power of FERC, or the Department of Justice, or of states to intervene in mergers and acquisitions. In fact, PE's experience in the merger with Enova has clearly demonstrated that regulators look very closely at power market issues. In fact, we have had to provide extensive market information to the state Public Utilities Commission, the state Attorney General, the U.S. Department of Justice and FERC to address their concerns about market power. The documentation provided has shown that our merger encourages competition, and any argument to the contrary - i.e., that there is a gap by regulators in looking at market power issues - is simply specious. Interestingly, from our merger experience, we have also learned that competitors will not hesitate to raise the market power issue and ensure that their concerns are addressed.
From a national perspective, to date the restructuring of the natural gas industry has resulted in the development of a more competitive market power. Competition has reduced wellhead prices, and state public utilities commissions require distribution companies to pass through to customers any savings received from the purchase of less costly gas. Our experience in California clearly demonstrates that adequate safeguards are already in place at the state level to protect utility consumers. Indeed, state regulation arguably creates conditions whereby increasing the scale of distribution companies, and their buying power, would redound to the benefit of utility customers.
Conditional repeal of PUHCA promises to bring more players into the market, not fewer, by liberalizing the restraints on investing in utility operations. In the natural gas industry we have seen deregulation lead to many more players in all aspects of the industry, and we would expect the same to hold true of electricity. History has shown that when cracks are opened in PUHCA - as they were by PURPA and by the Energy Policy Act of 1992 - new entrants have jumped in. In fact, those cracks in PUHCA have created the 2& significant competition in the electric generation market In the case of California's restructured electric services market, concerns have been raised that the continuation of PUHCA may limit the full benefits of competition, as it will limit the generators able to sell to retail customers.
Consumer Protection Questions
In its year long analysis of PUHCA, and in the public comment process, the SEC took great pains to assure that the consumer protection concerns peculiar to multi-state holding companies were addressed. Specifically, the SEC's access to the books and records of all companies in a holding company system, and the ability to audit all companies in a holding company, would be preserved as provided for in S. 621, and administration thereof transferred to the FERC. Thus, one federal agency would be responsible for utility consumer protection the FERC. Clearly, the FERC is the most appropriate federal agency for consumer protection of ratepayers.
PUHCA is not a consumer protection statute, it is an investor protection statute. After extensive review, the SEC determined that in the intervening years since PUHCA was enacted, the investor protection functions of PUHCA were accomplished by the securities laws that cover all industries, and that these two industries did not require special treatment In addition, the SEC sought to assure, as does the bill before your Committee, that whatever information the states or the FERC may deem necessary to carry out their consumer protection role would not be jeopardized by the conditional repeal of PUHCA.
Thus, there are no real consumer protection issues with PUHCA, and claims to the contrary as simply political rhetoric.
Utility Diversification
One area that I would like to speak to directly concerns utility diversification.
PE has learned from painful experience that we should be competing with others for a greater share of the energy market business, rather than going into unrelated, non-utility businesses. Managing natural gas distribution and transmission has been PE's core competency - it is what we have done best for more than 100 years - and it and related energy services is the logical business path to growth and financial health and success. The focus on energy services benefits not just shareholders, but ratepayer's as well.
In the midst of a stagnant market in California, with no significant utility growth, that PE sought in the late 1980's to maximize shareholder return and customer value by accelerating diversification of our business mix. Since PUHCA constrained us from out of state utility acquisitions, we focused upon unrelated diversification and purchased oil and gas, real estate, agriculture and retail businesses unrelated to our core business.
For a variety of reasons, but mostly because our experience in natural gas distribution and transmission did not enable us to foresee and then manage the problems encountered by the non-utility operations, our diversification strategy failed.
By early 1993 we were no longer involved in non-utility operations. The decision to move out of the non-utility business was made after succeeding years of increasing losses that in one year exceeded the profits of the utility, despite our commitment to improving their performance. Continuing large losses in our non-utility operations, coupled with California's economic downturn and the prospect for continued volatility in energy prices, threatened the financial viability of our non utility subsidiaries.
However, at no time did these losses impair the quality of utility service or utility rates, or the ability of the utility to raise capital. PE management moved to restructure the company and return our focus toward our natural gas utility business. We sold all major non-utility businesses and eliminated our debt, and are now on sound financial footing& having resumed the dividend on stock (which we suspended in 1992).
It is precisely because of our unsuccessful diversification program that PE is so strongly committed to conditional PUHCA repeal. PE's best long term prospects lie with the opportunities offered by the merger with Enova and the business competencies gained from more than 100 years of operation and experience within the energy business. These are the business operations in which we have many decades of real, hands-on experience, and believe that the changes in the regulatory climate will enable us to succeed in expanding along these business fines. But we must be permitted to operate fully within the deregulated market Without conditional PUHCA repeal, our marketplace is artificially limited.
Furthermore, the fact that PE's unsuccessful unrelated diversification effort had no impact on SoCalGas ratepayers demonstrates that adequate ratepayer protections are in place. Our experience also demonstrates the superiority of the holding company structure, which is why we have long advocated its use. Were PE not a holding company but a diversified operating company such as many of the new energy competitors, ratepayer's may very well have been injured, despite the best efforts of state regulators and our company. While our diversification strategy cost shareholders more than one billion, it did not cost ratepayers one cent.
PUHCA comes with a high cost, and blocks efficiency gains in our nation's energy industries.
Conclusion
Our support for the conditional repeal of PUHCA is based upon two perceptions:
Mr. Chairman, S. 621 represents a significant step toward eliminating the problems caused by
PUHCA and helping to realize the full benefits of a more competitive energy market. We
applaud and support the SEC's efforts to repeal the Act and urge you and this committee to move
ahead to pass S. 621 so that the bill can be considered by the full Senate as quickly as possible.
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