------------------------- TITLE PAGE --------------------------

        THE REGULATION OF PUBLIC-UTILITY HOLDING COMPANIES
                            [SEC seal]

                Division of Investment Management
                Securities and Exchange Commission
                            June 1995

This is a report of the Division of Investment Management.  The
Commission has expressed no view regarding the analysis,
findings, or conclusions herein.

-------------------- LETTER FROM CHAIRMAN ---------------------

                                                    June 20, 1995


     In addition to its responsibility for administering the
other federal securities laws, the Securities and Exchange
Commission was charged by Congress in 1935 with the regulation of
public-utility holding companies, to address widespread abuses
and protect both investors and consumers.  

     As one scholar described it, the Public Utility Holding
Company Act of 1935 "gave the SEC power to refashion the
structure and the business practices of an entire industry. 
Except in wartime, the federal government never before assumed
such total control over any industry."

     Today, this comprehensive control has become something of an
anachronism.  As a result of prudent administration of the Public
Utility Holding Company Act, and the development of comprehensive
federal securities regulation, the conduct that gave rise to the
Act has all but disappeared.  Indeed, critics of the Act charge
that it has become a barrier to innovation and competition in the
utility industry.

     Last year, in keeping with Vice President Gore's mandate to
reinvent government, I asked the staff to conduct a study of the
Act, soliciting the views of all interested parties.  The goal of
the study was to develop a series of recommendations that
addressed congressional concerns, past and present, as well as
the needs of those affected by our regulation.  To provide
Commission guidance, I asked my colleague Rick Roberts to lend a
hand.  From chairing the Commission's "roundtable" conference
last July to meeting with interested parties outside the agency,
Commissioner Roberts has been a willing listener and a strong
advocate of dynamic and practical solutions.  I thank him and the
staff for their tireless efforts in this year-long endeavor.

     This study draws on 60 years of practical experience since
the Public Utility Holding Company Act was signed into law.  In
addition to legislative proposals, it contains a number of
administrative reforms that, by themselves, could remove nearly
two-thirds of the industry's regulatory burden while continuing
to provide for the protection of investors and utility consumers. 
It is my sincere hope that this report will provide a blueprint
for regulatory reform.

                              Arthur Levitt     
 
-------------------- BEGINNING OF PAGE #2 ---------------------

--- LETTER FROM DIRECTOR, DIVISION OF INVESTMENT MANAGEMENT  ---

                                                 June 20, 1995

Dear Mr. Chairman:

     I am pleased to submit the Division of Investment
Management's report on public-utility holding company regulation. 
Last year, with the approach of the sixtieth anniversary of the
Public Utility Holding Company Act of 1935, you asked the
Division to take a fresh look at the regulation of public-utility
holding companies to determine how best to protect the public
interest and the interest of investors and consumers, while
affording the companies the flexibility needed to compete in a
rapidly changing environment.

     The Division's Office of Public Utility Regulation has
devoted considerable effort to the report.  Virtually everyone in
the Office contributed.  I especially would like to note the
indispensable role of William C. Weeden, whose leadership has
guided the study from its inception.  Special commendation should
also go to Joanne Rutkowski, staff coordinator of the study, for
her expert draftsmanship of the report.  We received substantial
assistance from staff members of other Commission offices, in
particular, C. Hunter Jones of the Office of the General Counsel,
Robert Comment of the Office of Economic Analysis, John H. Walsh,
who, as Special Counsel to the Chairman, helped to get the study
underway and continuously provided thoughtful counsel, and Brian
J. Lane, Counselor to the Chairman, who helped to bring the study
to conclusion.  Finally, I would like to thank Commissioner
Roberts and his office for their guidance and insight.

     In preparing the report, we actively sought the opinions of
the utility industry, consumer groups, trade associations,
investment banks, rating agencies, economists, state, local and
federal regulators, and others.  Their comments, both formal and
informal, were extremely useful to our review. 

     The Division has concluded that significant changes are
needed in the current regulatory system.  We believe that the
Holding Company Act is unnecessarily restrictive in many regards,
and may prevent companies from responding effectively to the
changes now occurring in the utility industry.  These effects, we
have concluded, are clearly detrimental to both investors and
consumers.

     In the report, we recommend that the Commission offer
Congress three legislative options designed to remedy the
situation.  The legislative option preferred by the Division is
repeal of the Holding Company Act coupled with legislation to
continue federal protection of energy consumers.  The latter
legislation would include provisions for state access to the
books and records of holding company systems, and federal audit
authority and oversight of
transactions between system companies.  A second option described
in the report is unconditional repeal of the Act.  The third
legislative option is to broaden the Commission's authority under
the Act to exempt holding companies where state regulation is
found to be adequate.

     Pending legislative action, the Division believes the
Commission should act administratively to modernize and simplify
holding company regulation, reduce the delay inherent in the
current administration of the Holding Company Act, and minimize
 
-------------------- BEGINNING OF PAGE #3 -------------------

regulatory overlap, while protecting the interests of consumers
and investors.  To that end, the report details a number of
administrative proposals, including rulemaking and significant
changes in interpretation of the Act, for the Commission's
consideration.  Together, the administrative proposals, if
adopted, could reduce the number of applications filed under the
Act by approximately sixty-four percent.

     Taken as a whole, the report reflects our concern that the
regulation contemplated by the Holding Company Act to address the
problems of a different era may prevent companies from responding
effectively to the changes now occurring in the utility industry. 
We believe the appropriate implementation of our recommendations
would facilitate consumer protection, encourage innovation and
flexibility, and promote competition by acting to remove
unnecessary regulation, thus enabling companies to provide energy
to America's consumers in a flexible, efficient and competitive
manner.


    
                              Sincerely,

                       
                              Barry P. Barbash
                              Director

---------------------- ACKNOWLEDGEMENTS ---------------------

ACKNOWLEDGEMENTS

     In the preparation of this report, the Division had the able
assistance of many members of the Commission staff.  The
Division's study team was headed by William C. Weeden, Associate
Director and Joanne C. Rutkowski, Assistant Director.  Many
others contributed to the drafting or editing of the report,
including:

Cathey Baker, Assistant Director 
Walter B. Stahr, Assistant General Counsel
Robert P. Wason, Chief Financial Analyst
Sidney L. Cimmet, Senior Special Counsel
C. Hunter Jones, Special Counsel, Office of the General Counsel
Michael A. Lainoff, Counsel to Commissioner Roberts
David G. LaRoche, Special Counsel
Catherine A. Fisher, Branch Chief
Barbara T. Heussler, Branch Chief
Markian M. W. Melnyk, Branch Chief
John P. Brandenburg, Attorney
Harry Eisenstein, Attorney
Orlan M. Johnson, Attorney
J. Amanda Machen, Attorney
Richard T. Miller, Attorney
James W. Moeller, Attorney
Bonnie Wilkinson, Attorney 
Robert Comment, Senior Research Fellow, Office of Economic
Analysis
David E. Marsh, Staff Accountant
Eric J. Green, Financial Analyst
Sean R. Hunt, Financial Analyst
Nicholas Balamaci, Office of the Chairman
Patricia L. Copeland, Paralegal Specialist
Karon L. Neal, Paralegal Specialist
 
-------------------- BEGINNING OF PAGE #4 -------------------

Secretarial assistance was provided by Michelle A. Blake, Belinda
Goodman, and Anna B. Grindel.

---------------------- TABLE OF CONTENTS ----------------------

TABLE OF CONTENTS

        THE REGULATION OF PUBLIC-UTILITY HOLDING COMPANIES

                                                             Page

EXECUTIVE SUMMARY  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  4

PART I.   OVERVIEW OF LEGISLATION, REGULATION AND TECHNOLOGY   11

PART II.  MODERNIZING ADMINISTRATION OF THE ACT  .  .  .  .  . 39 
        

     Chapter 1.     Financing Transactions  .   .  .  .  .  .  40

     Chapter 2.     Utility Ownership  .  .  .  .  .  .  .  .  55

     Chapter 3.     Diversification  .  .  .   .  .  .  .  .   73

     Chapter 4.     Affiliate Transactions  . .  .  .  .  .  . 83

     Chapter 5.     The Audit Function  .  .  .  .  .  .  .  . 92

     Chapter 6.     Exemptions  .  .  .  .  .  .  .  .  .  .  .97

     Chapter 7.     Other Recommendations  .  .  .  .  .  .   109

PART III. LEGISLATIVE RECOMMENDATIONS  .  .  .  .  .  .  .    113

CONCLUSION  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .    125

APPENDIX A          Summary of Responses to Survey of State
                    Regulation of Public-Utility Holding
                    Companies
     
---------------------- EXECUTIVE SUMMARY -----------------------

EXECUTIVE SUMMARY

The Public Utility Holding Company Act was enacted in 1935 to
respond to the problems associated with the growth of public-
utility holding company systems in the first part of this
century.  By the 1920s, America's utilities were largely
controlled by a handful of holding companies.  Even before the
stock market crash in 1929, the vast size of these companies and
the increasing concentration of control in the gas and electric
industry had caused congressional concern.

     The studies that preceded the Holding Company Act documented
a pattern of widespread abuses by holding company systems,
promoters and underwriters.  Among other things, inadequate
disclosure made it difficult for investors to appraise the
financial position or earning power of the issuer.  In addition,
excessive debt and abusive affiliate transactions tended to
prevent voluntary rate reductions at the operating company level. 
Constitutional doctrines that limited the reach of economic
regulation frustrated states' efforts to respond to these
problems.  
 
-------------------- BEGINNING OF PAGE #5 -------------------

     Congress determined in 1935 that direct federal regulation
was necessary to control the operations of multistate public-
utility holding companies.  Thus, holding companies that are
confined to a given state or area and therefore presumed to be
susceptible to effective state regulation, are largely exempted
from federal regulation under the Act.  In contrast, holding
companies with multistate operations must register with the SEC
and comply with a comprehensive federal framework of regulation
under the Holding Company Act.

      1993 Total Assets of Investor-Owned Electric Utilities
                           (Thousands)
 
                           [Pie Chart]

Exempt Holding Companies:          $316,656,995 (57.6%)
Registered Holding Companies:      $104,178,063 (18.9%)
Other:                             $129,091,825 (23.5%)

Total: $549,926,883
Source: 1993 Uniform Statistical Report and FERC Form No. 1.

        1993 Total Assets of Investor-Owned Gas Utilities
                           (Thousands)

                           [Pie Chart]

Exempt Holding Companies:          $47,604,134 (43.8%)
Registered Holding Companies:      $14,403,555 (13.3%)
Other:                             $46,621,917 (42.9%)

Total: $108,629,606
Source: 1995 Handbook of Publicly Traded Member Companies,
          American Gas Association

     The early work of the SEC was directed toward simplifying
and reorganizing the complex financial and corporate structures
of holding company systems, as required by section 11 of the
Holding Company Act.  This task was largely completed by 1952. 
At present, there are fifteen registered holding companies, and
several hundred exempt holding companies.

     Under the Holding Company Act, a registered public-utility
holding company is generally limited to a single, integrated
public- utility system and to those nonutility businesses that
are "reasonably incidental, or economically necessary or
appropriate" to the system's utility operations.  SEC approval is
required before such companies may: 

     *    issue or sell securities, or alter the rights of
          security holders,

     *    acquire any securities or utility assets or any
          interest in a nonutility business, or

     *    sell utility assets or securities.

The Act also restricts intrasystem loans and extensions of
credit, as well as affiliate service, sales and construction
contracts.  In addition, registered holding companies are subject
to extensive reporting and accounting requirements.

     The regulatory system established by the Holding Company Act
was not intended to reach the production and sale of gas and
 
-------------------- BEGINNING OF PAGE #6 -------------------

electricity.  Congress vested the Federal Power Commission, now
the Federal Energy Regulatory Commission, with jurisdiction over
these operations at the federal level and, in section 21 of the
Act, preserved the right of state regulators to exercise
authority over utilities.  These federal and state ratemaking
authorities -- not the SEC -- most directly protect consumer
interests.  In this regard, the Act was intended to facilitate
the work of the other regulators by placing certain restraints on
the activities of public-utility holding companies.
  
     The Holding Company Act, unlike the other federal securities
laws, requires not only disclosure but also SEC review of the
merits of various transactions.  Since 1935, developments in
other regulation have made the SEC's merit review increasingly
redundant.  At the same time, the changes in the industry have
brought into question the continuing relevance of a monopoly-
based model of regulation.

     In the early 1980s, the SEC determined that the purposes of
the Holding Company Act had been achieved and recommended to
Congress that the Act be repealed.  Due in part to concerns about
consumer protection and the lack of a consensus for change,
repeal legislation was not passed.  Over the next decade, the SEC
continued to attempt to respond flexibly and responsibly to the
changes in the gas and electric industry.

     In 1993, SEC Chairman Arthur Levitt directed the SEC staff
to reexamine existing programs and policies to identify those
that were effective and those that were not, including the SEC's
position on repeal of the Act.  The Division of Investment
Management, under the direction of Commissioner Richard Y.
Roberts, therefore undertook a study of the regulation of public-
utility holding companies.   The study began with a roundtable
discussion in Washington, D.C. on July 18 and 19, 1994, in which
the utility industry, consumer groups, trade associations,
investment banks, rating agencies, economists, state, local and
federal regulators, and others participated.  Although the
participants expressed widely divergent views on the future of
the industry, all agreed that changes were needed in the existing
system of regulation.  

     In response to a concept release issued last fall, the
Commission received thousands of pages of useful comments. 
During the past year, the staff met with numerous interested
parties, including representatives of the holding companies,
consumer groups, industrial concerns, state and local regulators,
and other federal regulators.  In addition, the Division
collaborated with the National Association of Regulatory Utility
Commissioners on a survey of state regulation.

     Having concluded its study, the Division agrees that
significant changes are needed in the current regulatory system. 
The Division's recommendations are of two types: legislative
recommendations for Congress to consider, and proposals for
administrative reform of the Act.

I.   Legislative Recommendations

     Conditional repeal of the Act

     One option for Congress, and the option the Division
prefers, is conditional repeal of the Holding Company Act, with
an adequate transition period.  Under this option, Congress would
repeal the Act but, at the same time, enact legislation to
 
-------------------- BEGINNING OF PAGE #7 -------------------

continue federal protection of energy consumers.  The legislation
should include provision for state access to books and records of
all companies in the holding company system, and for federal
audit authority and oversight of affiliate transactions.   

     As the SEC has long recognized, 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. 
Acting under authority in the Securities Act of 1933 and the
Securities Exchange Act of 1934, the SEC has, over the past six
decades, created a comprehensive system of investor protection
that obviates the need for many of the specialized provisions of
the Holding Company Act.  

     Nonetheless, the Division believes that the Act continues to
play a role in protecting energy consumers.  Most importantly,
the SEC can obtain, audit and oversee a multistate holding
company system's books and records, particularly in regard to
affiliate transactions.  The Division believes past efforts to
repeal the Act were unsuccessful largely because they failed to
account for the continuing importance of this aspect of the
regulatory scheme.

     In following the option preferred by the Division, Congress
would repeal the Holding Company Act, including its limits on
financing and geographic and business diversification.  At the
same time, Congress would enact new provisions to ensure access
to books and records required for the effective discharge of a
state's regulatory responsibilities and to establish federal
audit authority and oversight of intrasystem transactions.  The
task of carrying out these provisions logically should be given
to the federal agency that most directly protects energy
consumers, the Federal Energy Regulatory Commission.
  
     The Division recommends that even legislation for
conditional repeal of the Act incorporate, at a minimum, a one-
year transition period to protect the validity of existing
activities and contracts of registered holding company systems,
and to enable the states to take appropriate action to ensure the
continued protection of utility consumers.

     Unconditional repeal of the Act

     A second option is unconditional repeal of the Act, with an
adequate transition period.  Those who favor this option argue
that state legislatures have the ability, if they desire, to
create legal and regulatory systems that will adequately protect
their energy consumers from problems that may arise with the
operations of multistate holding companies that would otherwise
be subject to federal regulation under the Act.  Many state
regulators, however, have expressed concern about their ability
to protect consumers of multistate holding companies, and they
may therefore oppose unconditional repeal.  

     Broader exemptive authority under the Act

     A third option for Congress to consider is a grant of
broader exemptive authority under the Act.  The SEC's exemptive
authority in this area is considerably narrower than that under
other federal securities laws.  If Congress were to give the
Commission broader authority to exempt holding companies and
others from the Act, the SEC could use this authority to exempt
holding companies and transactions when state regulation is
 
-------------------- BEGINNING OF PAGE #8 -------------------

adequate.  Expanded exemptive authority, however, would not
achieve all the economic benefits of some form of repeal, nor
would it significantly simplify the federal regulatory structure. 
Indeed, this option would further enmesh the SEC in difficult
issues of energy policy.

                    *     *     *     *     *

     Because it would achieve the benefits of unconditional
repeal, and yet would also preserve the ability of states to
protect consumers, the Division prefers the conditional repeal
option.  Of course, the choice among the various legislative
options is one that Congress will make.

II.  Administrative Recommendations 

     The Division recommends that the SEC, pending legislative
consideration of the options described above, act
administratively to modernize and simplify regulation, reduce the
delay inherent in the current administration of the Act, and
minimize regulatory overlap, while protecting the interests of
consumers and investors.  The Division proposes a number of
administrative reforms.  The major recommendations are summarized
below.  

     The SEC should consider rules to broaden exemptions for
     routine financings.

     The Division recommends that the SEC adopt amendments to
rule 52 under the Holding Company Act to broaden the exemption
for routine financings by subsidiaries of registered holding
companies.  The amendment would exempt the issue and sale of any
common stock, preferred stock, bond, note or other form of
indebtedness if the financing is solely for the purpose of
financing the business of the subsidiary and if, with respect to
utility subsidiaries, the relevant state commission has expressly
authorized the issue and sale.  The amendment also would exempt
the acquisition by a parent holding company of securities issued
by a subsidiary company pursuant to the rule.  The Division
further recommends that the SEC amend rule 45(b)(4) to exempt all
capital contributions and open account advances, without
interest, by a parent company to a subsidiary company. 

     At the same time, the Division recommends that the SEC seek
public comment on a further amendment to broaden the application
of rule 52 to exempt the issue and sale of any security where the
conditions of the rule are met.  These amendments would eliminate
unnecessary regulatory and paperwork burdens associated with
obtaining SEC approval for routine financings.  

     The SEC should liberalize the treatment of financings that
     are not exempted under rule 52.

     Although the proposed amendments to rule 52 would exempt
most routine financings by subsidiaries of a registered holding
company, the rule would not reach financings by the holding
company itself, or by utility subsidiaries where the state does
not have authority to approve financings.  These transactions
would thus continue to require SEC approval under the Act.  The
Division recommends that the SEC approve the use of a "budget
approach" for these remaining financing proposals.  Under this
approach, the SEC would review a single filing outlining a
company's anticipated financing requirements for an extended
 
-------------------- BEGINNING OF PAGE #9 -------------------

period of time instead of requiring a separate filing for each
proposed financing.

     The Division also recommends rescission of the SEC's
Statements of Policy relating to first mortgage bonds and
preferred stock issued by companies in a registered system.  The
SEC has previously noted that the Statements of Policy, which
were formulated by the SEC's staff nearly forty years ago, are
"anachronistic" and "no longer relevant to contemporary financial
markets."   

     The SEC should avoid unnecessary restraints on utility
     acquisitions. 

     Although prior SEC approval is generally required for
utility acquisitions, these transactions are also subject to
FERC, and possibly state, approval.  Many commenters have noted,
and the Division agrees, that the SEC's review in this area
largely duplicates the work of the FERC and state and local
regulators.  It does not appear, however, given the structure of
the statute, that the SEC could readily promulgate a rule that
would broadly exempt utility acquisitions from review under the
Holding Company Act.  

     The Division recommends that the SEC interpret the
geographic and functional integration standards more broadly. 
Where the affected states agree, the SEC should permit new types
of holding company systems, including combination gas and
electric registered holding companies.  With a view to the
proposed disaggregation of the electric utility industry, the SEC
should consider rules to exempt a corporate restructuring that
does not result in the addition of new utility operations.

     Further, the SEC should seek to minimize regulatory overlap
while continuing to protect the interests of consumers and
investors.  In this regard, the Division recommends that the SEC
continue to work in coordination and consultation with the FERC
and state and local regulators and, where appropriate,
"watchfully defer" to the work of those regulators.  

     The SEC should consider a rule to reduce the burdens on
     energy-related diversification.

     The Division recommends a rule to exempt most energy-related
diversification by registered holding companies.  Such a rule
would deem energy-related diversification to be "appropriate in
the ordinary course of business" of a company in a registered
system.  The rule would apply to certain nonutility activities
that the SEC has previously found to satisfy the standards of
sections 10 and 11 of the Act, and the SEC could broaden the list
of exempted activities by order upon application.  Investment
under the rule would be limited to the greater of $50 million or
fifteen percent of the registered holding company's consolidated
capitalization.  
     The rule would also permit, without limit, investments by
gas registered holding companies in activities authorized under
the Gas Related Activities Act of 1990.  This rule should
eliminate unnecessary regulatory burdens, while continuing to
protect the interests of investors and consumers.  

     The SEC should continue to administer the Act flexibly, in
     consultation with other regulators, with respect to matters
     that do not fall under the proposed diversification rule.
 
-------------------- BEGINNING OF PAGE #10 -------------------

     The proposed diversification rule described above would
exempt a significant number of nonutility acquisitions.  The
remaining filings are likely to concern either novel activities
that should be considered on a case-by-case basis or routine
matters that involve nominal amounts of capital.  The Division
recommends that the SEC endorse the use of a budget approach for
the latter "de minimis" investments.  Under this approach, a
registered holding company could file an application under
sections 9(a) and 10 of the Act, requesting authorization for a
stated dollar amount to be invested in diversified activities, on
an "as needed" basis over a specified period, without the need
for prior SEC approval of each specific transaction.  The
applicant would be required to take steps to ensure that
potential losses would be limited to the amount of the
investment.  

     With respect to the other diversified activities that will
continue to require approval on a case-by-case basis, the
Division recommends that the SEC interpret the Act to permit
holding companies to engage in nonutility businesses that are
economically appropriate and in the public interest, regardless
of whether such activities are ancillary to the utility business.

     The SEC should withdraw its proposal to amend rule 90
     concerning affiliate service, sales and construction
     contracts.

     The proposed rule amendment, which would have applied a
lower-of-cost-or-market standard to intrasystem transactions, has
received largely negative comments.  The rule was intended to
address concerns, raised by the "Ohio Power" decision, that SEC
orders may impair the ability of the FERC, and state and local
regulators, to protect consumers through traditional ratemaking
proceedings.  It appears that legislation may be needed to
address these concerns.  In the interim, the Division recommends
that the SEC reaffirm its intention NOT to preempt the ratemaking
authority of the FERC or of state and local ratemaking
authorities.


     The SEC should apply more liberal interpretations of the
     standards for exemption, where the affected states agree.

     In the past, the SEC has narrowly interpreted the statutory
standards for exemption.  The Division believes it is appropriate
for the SEC to adopt broader readings of the exemptions in
consultation with the relevant state commissions.

     The SEC should direct more Holding Company Act resources to
     the audit function.

     The Division recommends that the SEC continue to assist
states in obtaining access to books and records, wherever
located, if such examination is required for the effective
discharge of their responsibilities, and intensify its efforts,
in consultation and cooperation with the FERC and state and local
regulators, to audit regulated companies.  

                 Reduced Number of Applications 
              As a Result of Administrative Reforms
          (Total Applications Filed in 1993 & 1994: 353)

                           [Pie Chart]
 
-------------------- BEGINNING OF PAGE #11 -------------------

Reduced Number of Applications:    225 (64%)
Remaining Applications:            128 (36%)

     As illustrated above, the proposed administrative reforms
should reduce the number of filings under the Act by nearly two-
thirds.  These reforms should address the pressure points most
troubling to the regulated companies, while continuing to protect
the interests of investors and consumers.  Some commenters have
suggested that billions of dollars of savings could result for
the regulated companies. To the extent the reforms reduce the
demand on SEC resources, the Commission should redirect these
resources to the audit function, to assist the FERC and state and
local regulators in the continued protection of utility
consumers. 

PART I.  OVERVIEW OF LEGISLATION,
REGULATION AND TECHNOLOGY

I.   Energy Utility Expansion and the Public Utility 
     Holding Company Act of 1935

From the end of World War I to the early 1930s, holding companies
acquired numerous and widely scattered utility and nonutility
properties throughout the United States and abroad.-[1]-  This
was a period of intense growth in the electric and gas industry. 
In the electric industry, generating capacity approximately
doubled every five years between 1902 and 1927.  Similar but less
spectacular growth occurred in the gas industry, most notably
after 1925, due to the construction of major interstate
pipelines.-[2]-

     During this period, holding company expansion was also
encouraged by investment bankers, who saw opportunities for
profits and commissions from the sale of securities, and by
promoters, who saw opportunities for increased fees.  The holding
company structure permitted these persons to concentrate control
of vast utility empires in a few hands, which led to deception of

-------- FOOTNOTES --------                    

-[1]- In 1935, an electric utility system generally included
local generation, transmission and distribution facilities.  The
first electric generating plants and distribution systems in the
United States were built in major cities.  Edwin Vennard, The
Electric Power Business 42 (2d ed. 1970).  When the Public
Utility Holding Company Act of 1935 ("Holding Company Act" or
"Act") was passed, power plants were relatively small and
isolated, and there was no economical way to transmit power over
any great distance.  See id.  Large portions of the country were
wholly without electricity.  In 1923, only 177,561 out of a total
of 6,341,000 farms in the United States, or 2.8 percent, received
central station electric service.  By 1935, over 90 percent of
farms still lacked central station electric service.
-[2]- Irston R. Barnes, The Economics of Public Utility
Regulation 28-32 (1942).  When the Holding Company Act was
passed, most of the retail gas supplied in large parts of the
nation was manufactured.  Because the process of reducing coal to
coke had become increasingly expensive, many smaller gas plants
were closed and even metropolitan gas utilities became
unprofitable.  The construction of major interstate pipelines in
the 1930s and 1940s resulted in an almost universal substitution
of natural gas service, or propane gas distribution in areas
inaccessible to the pipelines.
 
-------------------- BEGINNING OF PAGE #12 -------------------

investors, excessive rates for consumers, and obstruction of
state utility regulation.-[3]-

     The multistate character of the holding companies prevented
effective control by state regulators.-[4]-  Between 1900 and
1935, the U.S. Supreme Court struck down many state efforts to
undertake economic regulation on grounds of interference with
contract and property interests.-[5]-  In addition, states were
unable to regulate matters, such as the activities of multistate
holding companies, that had a "direct" effect on interstate
commerce.-[6]- 
                    
-------- FOOTNOTES --------

-[3]- See Federal Trade Commission, Report on Utility
Corporations, S. Doc. No. 92, 70th Cong., 1st Sess. (1928-1935)
(in 101 volumes) (hereinafter referred to as "FTC Report"); id.,
pt. 72-A at 136-155.  See generally James C. Bonbright and
Gardiner C. Means, The Holding Company:  Its Public Significance
and Its Regulation 1-54, 149-99 (1932).  Most often, minority
control was achieved by the purchase of voting control in a top
holding company that raised capital primarily by the sale of
bonds or nonvoting preferred stock.  To control an entire holding
company system, the top holding company would buy a majority
voting interest in a series of subholding companies, each of
which also would be capitalized largely through the sale of bonds
or nonvoting stock.  The subholding companies would in turn own
voting control in the utility operating companies.  Through such
pyramiding of control, five public-utility holding company
systems were controlled in 1931 by the holders of common stock
worth less than one percent of the entire system's assets.  See
Joel Seligman, The Transformation of Wall Street:  A History of
the Securities and Exchange Commission and Modern Corporate
Finance 128 (1982); FTC Report, pt. 72-A at 154-66.
-[4]- In addition, state regulation of utilities was still in its
infancy in 1935.  The first generation of modern state utility
commission statutes had been enacted only 15 to 25 years earlier,
and not all states had established statewide utility commissions.
-[5]- See, e.g., Lochner v. New York, 198 U.S. 45 (1905).  By
1935, the Court had invalidated nearly 200 laws regulating
economic activity on "substantive due process" grounds.  See also
Laurence H. Tribe, American Constitutional Law   8-2 at 567-68
(2d ed. 1988).
-[6]- See, e.g., Smith v. Illinois Bell Tel. Co., 282 U.S. 133
(1930); Missouri ex rel. Barrett v. Kansas Natural Gas Co., 265
U.S. 298 (1924); Public Util. Comm'n of Kan. v. Landon, 249 U.S.
236, vacated and remanded without opinion, 249 U.S. 590 (1919);
Minnesota Rate Cases, 230 U.S. 352 (1913).  For a discussion of
subsequent cases signalling a shift in judicial interpretation of
the Commerce Clause and substantive due process, see note 139
below and accompanying text.

     In the area of power transactions, including transactions
between affiliated companies, the Supreme Court created a bright-
line wholesale/retail rule dividing permissible state regulation
(retail-level regulation) from impermissible state regulation
(wholesale-level regulation).  The rule was devised in two cases
involving natural gas.  See Missouri ex rel. Barrett v. Kansas
Natural Gas Co., 265 U.S. 298 (1924); Public Util. Comm'n of Kan.
v. Landon, 249 U.S. 236, vacated and remanded without opinion,
249 U.S. 590 (1919).  The Court applied the rule to electric
utilities in 1927.  Public Util. Comm'n of R.I. v. Attleboro
Steam & Elec. Co., 273 U.S. 83 (1927), overruled in part,
Arkansas Elec. Coop. v. Arkansas Pub. Serv. Comm'n, 461 U.S. 375,
390-96 (1983).
 
-------------------- BEGINNING OF PAGE #13 -------------------


     Federal regulation of utilities was largely
nonexistent.-[7]-  The vast size of public-utility holding
companies and the increased concentration of control over the
nation's electric power aroused concern at the federal and state
government levels.-[8]-

II. Background Studies and Enactment of the Holding Company Act

     Extensive factual studies preceded enactment of the Holding
Company Act.-[9]-  Pursuant to a 1928 resolution of the Senate,
the Federal Trade Commission undertook a study of the public-
utility industry that spanned 7 years and ultimately comprised
101 volumes.-[10]-  The House Interstate and Foreign Commerce
Committee conducted a second study from 1933 to 1935.-[11]- 
These studies documented a pattern of widespread abuses that were
detrimental to both investors and consumers.-[12]-  The studies
found "a number of almost inherent incidental abuses in the
holding-company system which cannot be reached by direct


-------- FOOTNOTES --------

-[7]- The Federal Water Power Act of 1920 originally established
the Federal Power Commission, but its functions were limited to
the licensing of hydroelectric projects and related matters, and
did not include general authority over electric power
transactions in interstate commerce.  See Federal Water Power
Act, Pub. L. No. 66-280, 41 Stat. 1063-77 (1920); Richard Lowitt,
Federal Power Commission, in Government Agencies 233, 234 (Donald
R. Whitnah ed., 1983).  When the Holding Company Act was passed,
jurisdiction over holding companies consisted largely of indirect
regulation under the Securities Act of 1933, 15 U.S.C.    77a et
seq. ("Securities Act"), and the Securities Exchange Act of 1934,
15 U.S.C.    78a et seq. ("Exchange Act").

-[8]- During the period 1929-1932, for example, 16 major holding
company systems produced 76.4 percent of the electric energy
generated by privately-owned utility plants, and three systems
produced 44.5 percent of the electric output.  See FTC Report,
pt. 72-A at 37.  In addition, four holding company systems
controlled more than 56 percent of the total natural gas pipeline
mileage and 15 holding companies controlled over 80 percent.  Id.
at 46 (Table 14).  See generally Charles F. Phillips, Jr., The
Regulation of Public Utilities:  Theory and Practice (2d ed.
1993).

-[9]- Pub. L. No. 74-333, 49 Stat. 803 (1935) (codified as
amended at 15 U.S.C.   79a et seq.).

-[10]- FTC Report; S. Res. 83, 70th Cong., 1st Sess. (1928).

-[11]- Report on the Relation of Holding Companies in Power and
Gas Affecting Control, H.R. Rep. No. 827, 73d Cong., 2d Sess. (6
Vol. 1933-35) (undertaken pursuant to H.R. Res. 59, 72d Cong.,
1st Sess. (1932) and H.J. Res. 572, 72d Cong., 2d Sess. (1933)).

-[12]- The FTC Report listed nineteen general categories of
abuses.  These included:  the issuance of securities to the
public that were based on unsound asset values or on paper
profits from intercompany transactions; the extension of holding
company ownership to disparate, nonintegrated operating utilities
throughout the country without regard to economic efficiency or
coordination of management; the mismanagement and exploitation of
operating subsidiaries of holding companies through excessive
service charges, excessive common stock dividends, upstream loans
and an excessive proportion of senior securities; and the use of
the holding company to evade state regulation.  FTC Report, pt.
73-A at 62.
 
-------------------- BEGINNING OF PAGE #14 -------------------

regulation of the operating company,"-[13]- and concluded that
"[t]he only practical control over public-utility holding
companies will be one which can directly reach the holding
company itself and supervise its security structure and its use
of capital . . . .  Only in that way can Government protect the
investors who supply that capital and the consumers who must bear
its cost."-[14]-  These studies formed the factual basis for the
Holding Company Act and are expressly cited in section 1(b),
which sets forth the abuses addressed by the statute.-[15]-

     These conditions and practices had a disastrous effect upon
the investing public.  A principal consequence of financing
public-utility systems with large proportions of debt securities
was a significant increase in the risk of business failure,
because the fixed interest charges on debt securities must be
paid, regardless of the earnings of the utility.  Excessive debt-
to-equity ratios contributed to the bankruptcies of 53 holding
companies during the 1929-1936 period.-[16]-  Twenty-three
additional holding companies with publicly held securities
exceeding $530 million offered readjustment or extension plans
after defaulting on interest payments.-[17]-  Investors in the
holding companies lost millions of dollars.  Investors in the
operating company subsidiaries of the holding companies also
suffered large losses.-[18]-
                    
-------- FOOTNOTES --------

-[13]- FTC Report, pt. 73-A at 3 ("For example, no matter how
strict the regulation of an operating company, improper payments
of dividends and of other items still can be made by the holding
company out of surplus other than earned surplus.  Excessive
capital issues can be floated by the holding company, with an
important indirect effect upon rates charged by the operating
company to the public.").

-[14]- Report of National Power Policy Committee on Public-
Utility Holding Companies, S. Doc. No. 137, 74th Cong., 1st Sess.
8 (1935) (hereinafter referred to as "Report of Power
Committee").

-[15]- Holding Company Act section 1(b).  The United States
Supreme Court has noted that the congressional findings as to the
abuses listed in section 1(b) were based on some of the most
exhaustive and comprehensive studies ever to underlie a federal
statute.  North American Co. v. SEC, 327 U.S. 686, 701 n.11
(1946) (upholding the constitutionality of section 11(b)(1) of
the Act).

-[16]- Twentieth Century Fund, Electric Power and Government
Policy:  A Survey of the Relations Between the Government and the
Electric Power Industry 35-36 (1948); Study of Operations
Pursuant to the Public Utility Holding Company Act of 1935: 
Hearings before the Securities Subcommittee of the House of
Representatives Committee on Interstate and Foreign Commerce,
79th Cong., 2d Sess., pt. 3 at 851 (1946) (hereinafter referred
to as "Study of Operations").  The aggregate capitalizations of
these holding companies represented by their outstanding
securities in the hands of the public totalled over $1.6 billion.
Study of Operations at 851.

-[17]- At the end of 1938, the year in which most of the holding
companies registered  under the Act, the public held
approximately $2 billion of registered holding company preferred
stock (on an involuntary liquidating basis), of which more than
half were in arrears.  Total arrearage as of that date was
approximately $282 million.  Id.
-[18]- See Report of Power Committee at 4-12.  From 1929 to 1936,
36 utilities with outstanding publicly held securities of $345
                                                   (continued...)
 
-------------------- BEGINNING OF PAGE #15 -------------------


     The FTC Report emphasized the unsound accounting techniques
employed by holding companies.  The study revealed that the
combined capital assets of the 151 firms studied were written up
by $1.4 billion to inflate earnings and justify dividends. 
Holding companies further increased their profits by providing
engineering, construction, accounting and managerial services to
utility operating companies, in some instances exacting profits
ranging from 50 percent to over 300 percent of the actual cost of
such services.  The appearance of even larger profits was created
by unsound accounting methods such as inadequate recognition of
depreciation expenses for physical assets, recognition of income
from the undistributed earnings of subsidiaries, and recognition
of income from the sale of properties to controlled subsidiaries
at amounts higher than market values.-[19]-

     As part of the New Deal, President Roosevelt, an advocate of
holding company abolition, created the National Power Policy
Committee in 1934 to formulate legislative proposals.  Shortly
before the release of the FTC Report, the committee recommended
to Congress the practical abolition of most holding companies. 
It recommended legislation directing a federal administrative
commission to oversee "the elimination of unnecessary corporate
complexities and of properties which do not fit into an
economically and geographically integrated whole."  The committee
also recommended that a federal administrative agency undertake
the following responsibilities:  supervise the issuance of
securities by utilities and the acquisition of new securities and
properties; prevent holding companies from owning nonutility
ventures; prevent electric utility and interstate gas
transmission or production firms from being commonly owned; and
police holding company service, sales and construction
arrangements to ensure that controlled operating companies
receive work performed at cost.-[20]-

     Once the underlying studies were completed, passage of the
Holding Company Act was relatively expeditious.  Introduction,
hearings, debate, consideration and enactment were completed in
less than seven months.  Despite the speed of passage, however,
industry opposition was formidable.-[21]-

     Substantially similar bills were introduced on February 6,
1935 by Senator Wheeler and Congressman Rayburn, and were

-------- FOOTNOTES --------                    

-[18]-(...continued)
million went into bankruptcy or receivership.  Sixteen additional
companies with $154 million of outstanding publicly held
securities offered readjustment or extension plans after
defaulting on interest payments.  Public investors, with
investments in utility preferred stocks totalling approximately
$1.5 billion at the end of 1938, also suffered seriously. 
Mismanagement and exploitation by holding companies through
excessive service charges, excessive common stock dividends,
upstream loans, and an excessive proportion of senior securities,
were among the factors which led to an accumulation of arrears at
the end of 1938 of $90 million on preferred stocks of the face
amount of $412 million.  Study of Operations at 851.

-[19]- FTC Report, pt. 72-A at 496-515.

-[20]- Report of Power Committee at 8-12.

-[21]- One historian has described the events preceding the Act
as "the most bitter legislative battle of [President] Roosevelt's
first term."  Michael E. Parrish, Securities Regulation and the
New Deal 145 (1970).
 
-------------------- BEGINNING OF PAGE #16 -------------------

referred to committees.-[22]-  After the House and Senate held
hearings,-[23]- the Senate committee reported a substitute bill,
which the Senate passed with minor amendments.-[24]-  Especially
controversial was the provision for the integration and
reorganization of public-utility holding companies, the so-
called "death sentence" provision.-[25]-  The House Committee
made extensive changes to the bill that would have preserved the
holding company systems virtually as they existed and merely
subjected them to regulation.-[26]-  The House of Representatives
approved the committee's new version.  The bills were sent to
conference for reconciliation of the contrasting
approaches.-[27]-  The compromise reached among the Senate, House
of Representatives and the President mandated the integration of
public-utility operations of registered holding companies, with
an allowance for the ownership of additional integrated systems
under certain circumstances.-[28]-  President Roosevelt signed
the Act into law on August 26, 1935.

II.  Major Provisions of the Holding Company Act

     Congress entrusted the SEC, the agency with expertise in
financial transactions and corporate finance, with administration
of the Holding Company Act.-[29]-  The major features of the
Holding Company Act as enacted in 1935 are outlined below:

*    Registration.  All holding companies must either register
     under section 5 of the Act or seek an exemption from the
     Act's provisions.
                    
-------- FOOTNOTES --------

-[22]- S. 1725, 74th Cong., 1st Sess. (1935); H.R. 5423, 74th
Cong., 1st Sess. (1935).

-[23]- See Public Utility Holding Companies:  Hearings on H.R.
5423 Before the House of Representatives Committee on Interstate
and Foreign Commerce, 74th Cong., 1st Sess. (1935); Public
Utility Holding Company Act of 1935:  Hearings on S. 1725 Before
the Senate Committee on Interstate Commerce, 74th Cong., 1st
Sess. (1935).  See generally Edward T. Bullock and Otto J.
Wieland, Guide and Index to the Hearings on the Public Utility
Act of 1935:  A Cyclopedia on the Electric Light and Power, and
Gas Industries (1935).

-[24]- See S. 2796, 74th Cong., 1st Sess. (1935); S. Rep. No.
621, 74th Cong., 1st Sess. (1935) (Report of Senator Wheeler from
the Committee on Interstate Commerce) (hereinafter referred to as
"Senate Report").

-[25]- See James C. Bonbright, Public Utilities and the National
Power Policies 36-37 (1940).

-[26]- H.R. Rep. No. 1318, 74th Cong., 1st Sess. (1935)
(hereinafter referred to as "House Report"); Commonwealth &
Southern Corp., 11 S.E.C. 369, 377 (1942).

-[27]- H.R. Rep. No. 1903, 74th Cong., 1st Sess. (1935).

-[28]- The basic integration provision appears in section 11 of
the Act, and the definition of an "integrated public-utility
system" appears in section 2(a)(29) of the Act.  The compromise
also authorized the SEC to permit the retention of nonutility
businesses if the SEC finds such retention "necessary or
appropriate in the public interest or for the protection of
investors or consumers and not detrimental to the proper
functioning" of the holding company system.  Holding Company Act
section 11(b)(1).  For a description of the arguments raised in
connection with the conditions for allowing holding companies to
continue to exist, see Parrish, note 21 above, at 145-78.

-[29]- See Arcadia, Ohio v. Ohio Power Co., 498 U.S. 73, 87
(1990) (Stevens, J., concurring).
 
-------------------- BEGINNING OF PAGE #17 -------------------


*    Definitions.  A "holding company" is generally a company
     that owns ten percent or more of the voting stock of a
     "public-utility company."-[30]-  A "public-utility company"
     is an electric or gas utility company.-[31]-  An "electric
     utility company" is generally a company that owns or
     operates facilities used to generate, transmit or distribute
     electric energy for sale.-[32]-  A "gas utility company" is
     generally a company that owns or operates facilities used to
     distribute gas at retail.-[33]-

*    Exemptions.  The SEC must exempt holding companies that meet
     any of five defined categories, unless it finds the
     exemption "detrimental to the public interest or the
     interest of investors or consumers."  These categories
     encompass any holding company that (1) operates
     predominantly within a single state; (2) is predominantly an
     operating public-utility company and operates in a single
     state and contiguous states; (3) is primarily not in the
     public-utility business; (4) is only temporarily a holding
     company; or (5) is not principally a public-utility business
     within the United States.-[34]-  Other sections of the Act
     provide more limited exemptive relief.-[35]-

*    Integration and Simplification.  Section 11 requires the
     integration and simplification of holding company systems. 
     Section 11(b)(1) requires that each registered holding
     company be limited to a single "integrated public-utility
     system," i.e., a group of related operating properties
     within a confined geographic region susceptible to local
     management.-[36]-  Nonutility businesses can be acquired and
     retained only if they are "reasonably incidental, or
     economically necessary or appropriate" to the operations of
     the integrated public-utility system.-[37]-  Section

-------- FOOTNOTES --------                    

-[30]- Holding Company Act section 2(a)(7).  The SEC has limited
authority under this section to declare a company not to be a
"holding company."

-[31]- Holding Company Act section 2(a)(5).

-[32]- Holding Company Act section 2(a)(3).

-[33]- Holding Company Act section 2(a)(4). Other defined terms
include "subsidiary company" (Holding Company Act section 2(a)(8)
(generally a company in which a holding company owns at least ten
percent of the outstanding voting securities)) and "affiliate"
(Holding Company Act section 2(a)(11)).

-[34]- Holding Company Act section 3(a).

-[35]- See, e.g., Holding Company Act sections 3(b), 3(d), 6(b),
9(b), 9(c), 10(c)(2) and 13(b).

-[36]- Holding Company Act section 2(a)(29).  Section 11
authorizes the SEC to permit a registered holding company to
control one or more additional integrated public-utility systems
if it determines that certain economies justify the control, the
systems are located in adjoining states or in a contiguous
foreign country, and the combination of systems will not impair
management, regulation, or efficient operation.  Holding Company
Act sections 11(b)(1)(A) - (C).

-[37]- Holding Company Act section 11(b)(1).  As discussed
further in Part II, Chapter 3, the quoted language has been
interpreted by the SEC and the federal courts to mean nonutility
businesses that are "functionally related" to the utility
business.  See  Michigan Consolidated Gas Co. v. SEC, 444 F.2d
913 (D.C. Cir. 1971); In re North American Co., 11 S.E.C. 194
                                                   (continued...)
 
-------------------- BEGINNING OF PAGE #18 -------------------

     11(b)(2) requires the elimination of unnecessary corporate
     complexities and inequitable voting power among security
     holders. 

*    Issuance and Acquisition of Securities and Assets.  Section
     7 of the Act prescribes standards for the type and amount of
     securities for the registered holding company and its
     subsidiaries.  In particular, section 7(d) requires that a
     security be reasonably adapted to the earning power of the
     issuing company and to the capital structure of the company
     and the holding-company system.  Registered holding
     companies and their subsidiaries must also obtain SEC
     approval before acquiring any securities, utility assets, or
     any other interest in any business.-[38]-

*    Utility Acquisitions.  Any person (including an exempt
     holding company) who is an affiliate of a holding company or
     of a public-utility company, must obtain SEC approval before
     it becomes an affiliate of another public-utility
     company.-[39]-

*    Service Company Regulation.  Service, sales and construction
     contracts between system service companies and associate
     companies in the same holding company system must be
     performed "economically and efficiently for the benefit of
     such associate companies at cost, fairly and equitably
     allocated among such companies."-[40]-

*    Other Affiliate Transactions.  Registered holding companies
     may not borrow or receive any extension of credit or
     indemnity from any system public-utility company (i.e.
     "upstream loans").-[41]-  The SEC also has rulemaking
     authority over other types of affiliate transactions such as
     intra-system loans;-[42]- declaration and payment of
     dividends;-[43]- acquisition, retirement or redemption of a
     company's own securities;-[44]- disposal of assets and
     securities;-[45]- solicitation of proxies in connection with
     holding company and subsidiary company securities;-[46]- and
     books, records, disclosures of interest, duration of
     contracts, and similar matters concerning affiliate
     transactions.-[47]-

*    Coordination with State Regulatory Authorities.  A major
     purpose of the Holding Company Act was to facilitate state
     regulation.-[48]-  Section 6(b), for example, exempts the
                    
-------- FOOTNOTES --------

-[37]-(...continued)
(1942), aff'd, 133 F.2d 148 (2d Cir. 1943), aff'd, 327 U.S. 686
(1946).

-[38]- Holding Company Act sections 9(a)(1) and 10.

-[39]- Holding Company Act section 9(a)(2).

-[40]- Holding Company Act section 13(b).

-[41]- Holding Company Act section 12(a).

-[42]- Holding Company Act section 12(b).

-[43]- Holding Company Act section 12(c).

-[44]- Id.

-[45]- Holding Company Act section 12(d).

-[46]- Holding Company Act section 12(e).

-[47]- Holding Company Act section 12(f).

-[48]- In characterizing section 11 as "the very heart of the
title," the Senate Report noted that the purpose of that section
"is simply to provide a mechanism to create conditions under
                                                   (continued...)
 
-------------------- BEGINNING OF PAGE #19 -------------------

     issuance of certain securities by subsidiary companies if
     approved by a state commission, subject to the SEC's
     authority to impose additional terms and conditions. 
     Section 9(b) also exempts certain security and utility asset
     acquisitions from the provisions of section 10 where
     approved by a state commission.  In addition, the SEC may
     not authorize the issuance of securities or the acquisition
     of assets unless the applicant has complied with state
     laws.-[49]-

B.   Developments in the Technology and Regulation of Electric
     and Gas Utilities After 1935

     Since enactment of the Holding Company Act, change has been
the most consistent feature of the technology and regulation of
electric and gas utilities.  Over the past sixty years, the
methods of providing energy services have changed dramatically,
and federal and state governmental regulation has evolved during
the same period, both in response to technological advances and
as a result of enhanced regulatory expertise.  This section
discusses the key developments in technology and regulation.

1.   Electricity

     Electricity is a unique industrial product.  Although it may
be generated in a variety of ways and transmitted over long
distances, it may not, under current technology, be stored
feasibly or accessed even a short time after its creation.-[50]-
 
Thus, the history of electricity during much of the twentieth
century has revolved around the development of facilities
designed to provide sufficient electricity to meet the growing
demand for power.  More recently, advances in the technology of
generation, the benefits of pooling electricity in geographic
regions, and the ability to reduce or modify demand for
electricity, have caused a shift in emphasis from growth and
expansion to coordinated development and industrial
restructuring.

               a.   The Federal Power Act

     The Holding Company Act was Title I of the Public Utility
Act of 1935.  Title II contained the Federal Power Act
                    
-------- FOOTNOTES --------

-[48]-(...continued)
which effective Federal and State regulation will be possible." 
Senate Report at 11.

-[49]- Other sections of the Act that refer to state law include
section 8, which relates to the ownership of electric and gas
utility properties in violation of state law, and section 20(b),
which requires that accounting standards established by the SEC
not be inconsistent with state law.  See also Holding Company Act
section 18 (availability of SEC investigatory powers and
information to state authorities); Holding Company Act section 19
(admission of state and local regulatory authorities to SEC
proceedings); Holding Company Act section 33 (conditioning
foreign utility company exemption on state certification).

-[50]- See Donald F. Santa, Jr. and Clifford S. Sikora, Open
Access and Transition Costs:  Will the Electric Industry
Transition Track the Natural Gas Industry Restructuring?, 15
Energy L.J. 273 (1994).  For a discussion of attempts to create
electrical storage devices, see David L. Douglas and James R.
Birk, Secondary Batteries For Electrical Energy Storage, 5 Ann.
Rev. Energy 61-89 (1980).
 
-------------------- BEGINNING OF PAGE #20 -------------------

("FPA"),-[51]- which established federal regulation of the rates,
practices and operations of electric utilities operating in
interstate commerce.-[52]-  Congress enacted the Holding Company
Act to prevent financial abuses among public-utility holding
companies and their affiliates.  It entrusted the SEC, the agency
with expertise in financial transactions and corporate finance,
with the task of administering the Act, primarily through
monitoring affiliate transactions and eliminating potential
conflicts of interest.  Congress enacted the Federal Power Act to
regulate the wholesale interstate sale and distribution of
electricity.  It entrusted administration of the FPA to the
Federal Power Commission, ("FPC"), which is now the Federal
Energy Regulatory Commission ("FERC")-[53]-, as the agency with
the technical expertise required to regulate energy
transmission.-[54]-

     The Federal Power Act responded to a gap in state regulation
of utility rates and services that arose from a 1927 Supreme
Court decision that interstate wholesale sales of electricity
were beyond the reach of state regulation.-[55]-  The major
provisions of the FPA as enacted in 1935 are outlined below:

*    Jurisdiction.  Congress gave the FERC jurisdiction over the
     transmission of electricity in interstate commerce and the
     sale of electricity at wholesale in interstate commerce.  It
     also gave the FERC jurisdiction over all facilities for such
     transmission or sale of electricity, but not over facilities
     (1) used for the generation of electricity, (2) used in
     local distribution or only for the transmission of
     electricity in intrastate commerce, or (3) for the
     transmission of electricity "consumed wholly by the
     transmitter."-[56]-  Jurisdiction over retail sales is left
     to the states.-[57]-

-------- FOOTNOTES --------                    

-[51]- The remainder of the Public Utility Act consisted of
amendments to the Federal Water Power Act.

-[52]- Pub. L. No. 74-333, 49 Stat. 838 (1935) (codified as
amended at 16 U.S.C.    791a - 828c).  The Public Utility Holding
Company Act was enacted as Title I of the legislation.  Pub. L.
No. 74-333, 49 Stat. 803 (1935).

-[53]- In 1977, the regulatory responsibilities of the FPC were
transferred to the FERC, an independent regulatory commission
located within the Department of Energy.  For convenience,
references to the FPC have been changed to the FERC, including
those before 1977.

-[54]- See Arcadia, Ohio v. Ohio Power Co., 498 U.S. 73, 87-88
(1990) (Stevens, J., concurring); Northeast Utils., Holding Co.
Act Release No. 25273 (Mar. 15, 1991), pet. for review denied sub
nom. City of Holyoke Gas & Elec. Dept. v. SEC, 972 F.2d 358 (D.C.
Cir. 1992).

-[55]- Public Util. Comm'n of R.I. v. Attleboro Steam & Elec.
Co., 273 U.S. 83, 86-90 (1927), overruled in part, Arkansas Elec.
Coop. v. Arkansas Pub. Serv. Comm'n, 461 U.S. 375, 390-96 (1983).
See New Eng. Power
Co. v. New Hampshire, 455 U.S. 331, 340
(1982).  See generally Robert D. Baum, The Federal Power
Commission and State Public Utility Regulation 2 (1942); Note,
Federal Regulation of Holding Companies:  The Public Utility Act
of 1935, 45 Yale L.J. 468 (1936).

-[56]- Federal Power Act section 201(b), 16 U.S.C.   824(b).

-[57]- Federal Power Act section 201(a), 16 U.S.C.   824(a).  See
also Pacific Gas & Elec. Co. v. State Energy Resources
Conservation and Dev. Comm'n, 461 U.S. 190, 205 (1983).
 
-------------------- BEGINNING OF PAGE #21 -------------------

*    Just and Reasonable Rates.  The FPA requires that all rates
     and charges by public utilities in connection with the
     transmission and sale of electricity subject to the FERC's
     jurisdiction be "just and reasonable."-[58]-  All such
     public utilities must file with the FERC "rates and charges
     for any transmission or sale subject to the jurisdiction of
     the [FERC], and the classifications, practices, and
     regulations affecting such rates and charges," as well as
     contracts that "in any manner affect or relate to such
     rates, charges, classifications, and services."-[59]-

*    Discrimination Prohibited.  The FPA (1) prohibits public
     utilities from making or granting "any undue preference or
     advantage to any person" and from subjecting any person to
     "any undue prejudice or disadvantage," and (2) prohibits
     public utilities from maintaining any "unreasonable
     difference in rates, charges, service, facilities, or in any
     other respect, either as between localities or as between
     classes of service."-[60]-

*    Authority to Modify Rates and Terms.  The FPA authorizes the
     FERC and other parties to initiate actions to modify any
     rate, charge, classification, rule, regulation, practice, or
     contract that is unjust, unreasonable, unduly
     discriminatory, or preferential.-[61]-

*    Prior Approval of Mergers and Securities Issuances.  The FPA
     prohibits public utilities from selling, leasing, merging or
     consolidating jurisdictional facilities, and from buying or
     acquiring securities of other public utilities, without
     obtaining FERC approval in advance.-[62]-  The FPA also
     prohibits public utilities from issuing any security or
     assuming any obligation or liability as guarantor, endorser
     or surety, without obtaining FERC approval in advance.-[63]-
 
     This authority over securities and assumptions of
     obligations, however, does not apply to public utilities
     organized and operating in states in which the state
     commission regulates security issuances.-[64]-

     The FPA also recognized that problems might arise with
overlapping jurisdiction with the SEC.  Section 318 generally
provides that, for certain specified matters, if a person is
subject both to a requirement of the Federal Power Act (or rule
or order thereunder) and to a requirement of the Holding Company
                    
-------- FOOTNOTES --------

-[58]- Federal Power Act section 205(a), 16 U.S.C.   824d(a).

-[59]- Federal Power Act section 205(c), 16 U.S.C.   824d(c).

-[60]- Federal Power Act section 205(b), 16 U.S.C.   824d(b).

-[61]- Federal Power Act section 206(a), 16 U.S.C.   824e(a). 
This authority, as enacted in 1935, authorized the FERC to make
such modifications prospectively, only after issuance of a final
order.  See Michael E. Small, A Guide to FERC Regulation and
Ratemaking of Electric Utilities and Other Power Suppliers 15 (3d
ed. 1994).

-[62]- Federal Power Act section 203(a), 16 U.S.C.   824b(a).

-[63]- Federal Power Act section 204(a), 16 U.S.C.   824c(a).  If
a security issuance is approved, the FPA permits the public
utility to file with the SEC duplicate copies of reports filed
with the FERC in lieu of reports, information, and documents
required under section 7 of the Securities Act and sections 12
and 13 of the Securities Exchange Act.  Federal Power Act section
204(h), 16 U.S.C.   824c(h).

-[64]- Federal Power Act section 204(f), 16 U.S.C.   824c(f).
 
-------------------- BEGINNING OF PAGE #22 -------------------

Act (or rule or order thereunder), the Holding Company Act
requirement will apply.-[65]-

     Like the Holding Company Act, many of the provisions of the
Federal Power Act are designed to supplement state jurisdiction
and to ensure the effectiveness of state regulation.  For
example, the FPA requires the FERC to "make available to the
several State commissions such information and reports as may be
of assistance in State regulation of public utilities" and to
make rate, valuation and other experts from the FERC available to
the states as witnesses.-[66]-  In addition, the FPA requires the
FERC to notify the states concerning certain events, such as an
application for the transfer of jurisdictional assets,-[67]- and
before taking certain other actions.-[68]-  Finally, the FPA

-------- FOOTNOTES --------                    

-[65]- Federal Power Act section 318, 16 U.S.C.   825q.  The
entire text of section 318 provides:

     If, with respect to the issue, sale, or guaranty of a
     security, or assumption of obligation or liability in
     respect of a security, the method of keeping accounts,
     the filing of reports, or the acquisition or
     disposition of any security, capital assets,
     facilities, or any other subject matter, any person is
     subject both to a requirement of the Public Utility
     Holding Company Act of 1935 or of a rule, regulation,
     or order thereunder and to a requirement of [the
     Federal Power Act], or of a rule, regulation, or order
     thereunder, the requirement of the Public Utility
     Holding Company Act of 1935 shall apply to such person,
     and such person shall not be subject to the requirement
     of this Act, or of any rule, regulation, or order
     thereunder, with respect to the same subject matter,
     unless the Securities and Exchange Commission has
     exempted such person from such requirement of the
     Public Utility Holding Company Act of 1935, in which
     case the requirements of this Act shall apply to such
     person.

The Supreme Court has interpreted the phrase "any other subject
matter" in section 318 to refer to matters related to the
acquisition or disposition of securities, capital assets, or
facilities.  See Arcadia, Ohio v. Ohio Power Co., 498 U.S. 73
(1990).

-[66]- Federal Power Act section 209(c), 16 U.S.C.   824h(c).  In
addition, with respect to certain exempt wholesale generators and
affiliated holding companies, the Federal Power Act provides
state commissions with access to books, accounts, memoranda,
contracts and records wherever such documents may be located, in
order to ensure "the effective discharge of the State
commission's regulatory responsibilities affecting the provision
of electric service."  Federal Power Act section 201(g), 16
U.S.C.   824(g).

-[67]- Federal Power Act section 203(a), 16 U.S.C.   824b(a).

-[68]- See, e.g., Federal Power Act section 202(a), 16 U.S.C.
824a(a) (before establishment of districts for the promotion of
interconnection and coordination of electric utilities, the FERC
"shall give notice to the State commission of each State situated
wholly or in part within such district, and shall afford each
such State commission reasonable opportunity to present its views
and recommendations, and shall receive and consider such views
and recommendations").  If a hearing is held, the Federal Power
                                                   (continued...)
 
-------------------- BEGINNING OF PAGE #23 -------------------

authorizes the FERC to coordinate joint action and cooperative
efforts with state regulators.-[69]-

               b.   Expansion of the Electric Utility Industry

     The Holding Company Act was part of a broader governmental
strategy designed to encourage the provision of electricity to
remote and underdeveloped areas of the country.-[70]-  The
Roosevelt Administration, for example, promoted the widespread
development of hydroelectric power.  The Tennessee Valley
Authority ("TVA") Act of 1933-[71]- established a federal agency
to oversee the construction of hydroelectric facilities along the
Tennessee River Valley,-[72]- and over the next several decades
the TVA built and sold cheap electric power from 32 major dams
whose capacity totalled over 6000 megawatts.

     From the 1930s to the early 1960s, the federal government
promoted the construction of large dams for the generation of
inexpensive electricity.-[73]-  Government agencies were
established to sell electric power from dams constructed with
government oversight and funds.-[74]-  By 1990, hydroelectric
facilities generated about 10 percent of the 22.8 trillion
kilowatt hours of electricity generated in the United States. 

-------- FOOTNOTES --------                    

-[68]-(...continued)
Act authorizes the FERC to admit any interested state, state
commission, or municipality as a party, as well as any
representatives of interested consumers or security holders,
competitors and others.  Federal Power Act section 308(a), 16
U.S.C.   825g(a).

-[69]- See Federal Power Act section 206(d), 16 U.S.C.   824e(d)
(authorizing FERC to investigate and determine production and
transmission costs for electricity from jurisdictional facilities
upon request of any state commission in cases where FERC has no
authority to establish a rate governing the sale of such
electricity).  See also Federal Power Act section 207, 16 U.S.C.
824f (directing FERC to ensure adequacy of any public utility's
interstate service "upon complaint of a State commission, after
notice to each State commission . . . affected.").

-[70]- See Don E. Kash and Robert W. Rycroft, U.S. Energy Policy:
Crisis and
Complacency 68-69 (1984); Parrish, note 21 above, at
160-61 (1970).  As a practical matter, the integration
requirement of section 11 had the secondary effect of encouraging
universal service through the build-out of a system's service
territory and the spread of electrification to contiguous
unelectrified areas, thereby complementing the work of the
Tennessee Valley Authority, the Rural Electrification
Administration, and the Bonneville Power Administration.

-[71]- 48 Stat. 58 (1933).

-[72]- See Tennessee Elec. Power Co. v. TVA, 306 U.S. 118, 134
(1939).

-[73]- For example, the U.S. Army Corps of Engineers built eight
major dams along the Cumberland River Valley.  The Bureau of
Reclamation of the U.S. Department of the Interior initiated the
construction of the massive Hoover Dam in the Boulder River
Canyon.

-[74]- The Bonneville Power Administration, for example, was
created to sell electric power from the Bonneville Dam, the Grand
Coulee Dam, and other dams constructed along the Columbia River
in the Northwest.  See generally Bonneville Project Authority Act
of 1937, 50 Stat. 731 (codified at 16 U.S.C.   832 et seq.);
Aluminum Co. of Am. v. Central Lincoln Peoples' Util. Dist., 467
U.S. 380 (1984).
 
-------------------- BEGINNING OF PAGE #24 -------------------

The Rural Electrification Act of 1936-[75]- also promoted the
expansion of electric power transmission and distribution to
rural residents through low-interest government loans.-[76]-  

     In part as a result of these efforts, electric power
consumption in the United States doubled every decade between
1935 and 1970, and the years after the Great Depression witnessed
the expansion of electric facilities across the United States.
Until the late 1960s, the electric utility industry grew 7
percent annually.-[77]-  During this period, the cost of
supplying electricity declined dramatically, from 4 dollars per
kilowatt-hour for U.S. consumers in 1892 to 60 cents in 1930 to
only 7 cents in 1970.-[78]-  The economic boom that followed
World War II also contributed to the surge in consumption.  Among
other things, the post-war focus of American industry in the
1950s shifted toward the production of household electric
appliances and other devices that increased consumption.  The
increase in electric power consumption required new technologies
for its generation, transmission and distribution.

     In the 1960s, an emphasis on nuclear power replaced the
earlier emphasis on hydroelectric power.  Nuclear power offered
the promise of abundant electricity "too cheap to meter," and
Congress allowed private commercial development of nuclear power
in the Atomic Energy Act of 1954.-[79]-  The first commercial
nuclear power plant began operation in 1957.  In 1970, nuclear
power accounted for only 1 percent of all electric power
generated in the United States.  By 1980, it accounted for 11
percent, and by 1994 it accounted for nearly 22 percent -- more
than double the amount of electricity generated in hydroelectric
facilities.-[80]-

     In the mid-1960s the northeastern United States experienced
two electric power failures that led to the creation of formal
and informal power pools, which were designed to coordinate the
planning and operation of power facilities.  Interconnections of
electric systems, along with the development of high-voltage
transmission lines, allowed the transmission of periodic
surpluses of electric power to areas that might experience
periodic shortages.  Some power pools also provided for
centralized dispatch-[81]- of electricity and penalties to

-------- FOOTNOTES --------                    

-[75]- 49 Stat. 1363 (1936) (codified at 7 U.S.C.   901 et seq.).

-[76]- See Tri-State Generation & Transmission Ass'n, Inc. v.
Shoshone River Power, Inc., 874 F.2d 1346, 1348 (10th Cir. 1989).

-[77]- Phillips, note 8 above, at 623.

-[78]- Christopher Flavin and Nicholas Lenssen, Power Surge: 
Guide to the Coming Energy Revolution 243 (1994) (figures are in
1993 dollars).

-[79]- 68 Stat. 919 (1954) (codified at 42 U.S.C.   2011 et
seq.).  The Atomic Energy Act removed a previous prohibition on
the ownership and use of nuclear materials.  See English v.
General Elec. Co., 496 U.S. 72, 80-81 (1990).

-[80]- Energy Information Administration, Monthly Energy Review
95, Table 7.1 (Mar. 1995).

-[81]- "Dispatch" refers to the assignment of power supply from
generation to meet total power demand (or load).  A utility's
dispatching operations utilize available generators based on
information about each generator such as the cost of electricity
generated, maximum capacity, maintenance requirements, and
environmental considerations.  Public Utilities Reports, Public
Utilities Reports Guide 2-28 (1992).
 
-------------------- BEGINNING OF PAGE #25 -------------------

enforce compliance with pooling agreements.-[82]-  Today power
pools are an important part of the structure of the electric
utility industry.-[83]-

     In contrast to the prior emphasis on promoting and refining
the development of generation and transmission arrangements, the
1970s witnessed heightened concern with the level of energy
consumption.  Several factors contributed to this shift.  In
addition to growing concern over imported oil, the environmental
movement, which demonstrated its political importance with the
first annual Earth Day in 1970, fostered a national dialogue on
the environmental consequences of electric power generation by
dams, nuclear power plants, and electric power plants that burn
fossil fuels.  The 1979 accident at the Three Mile Island nuclear
power plant in Pennsylvania also highlighted the public health
and safety hazards of commercial nuclear power.-[84]-

     These events contributed to the development of an energy
conservation culture in the United States.-[85]-  Consumers began
to weather-strip homes, turn off lights when not needed, and
moderate thermostats.  Electric utilities implemented demand-
side management ("DSM") programs in order to reduce peak demands
for electricity and thereby reduce the need to construct new
power plants.  In response to environmental concerns that
prompted the 1977 amendments to the Clean Air Act,-[86]- electric
utilities began to search for fossil-fuel sources and new
technologies that emitted less pollution.

     In addition to declining energy demand, the economies of
scale that favored the construction of large generating
facilities began to subside in the 1970s, in part as a result of
fuel-cost increases, interest-rate increases, heightened
environmental and safety requirements, and intentional
construction delays due to decreased demand.-[87]-  Other
technological advances allowed scale economies to be achieved by
smaller size generation units.-[88]-

-------- FOOTNOTES --------                    

-[82]- Phillips, note 8 above, at 640.

-[83]- See FERC, Inquiry Concerning Alternative Power Pooling
Institutions Under the Federal Power Act, Docket No. RM94-20-000
(Oct. 26, 1994).

-[84]- This accident and other safety concerns with nuclear power
led to a dramatic decline in the construction of nuclear plants. 
See Edward S. Cassedy and Peter Z. Grossman, Introduction to
Energy:  Resources, Technology, and Society 156-63 (1990)
(describing Three Mile Island and Chernobyl reactor accidents and
cancellation of Shoreham nuclear plant on Long Island, New York).

-[85]- See, e.g., Energy Policy and Conservation Act, 42 U.S.C.
  6201 et seq.; Energy Conservation and Production Act, 42 U.S.C.
  6801 et seq.; National Energy Conservation Policy Act of 1978,
42 U.S.C.   8201 et seq.

-[86]- 42 U.S.C.   7401 et seq.

-[87]- Energy Information Administration, The Changing Structure
of the Electric Power Industry 1970 - 1991 24 (Mar. 1993).  Most
of the increase in electric generating costs in this period are
attributable to increased costs in the nuclear power industry. 
Id. at 33 (observing that from 1974 to 1982, nuclear plant
operation and maintenance costs increased from $17 per kilowatt
to almost $45 per kilowatt, in 1982 dollars).
-[88]- FERC, Promoting Wholesale Competition Through Open Access
Non-discriminatory Transmission Services by Public Utilities &
Recovery of Stranded Costs by Public Utilities and Transmitting
                                                   (continued...)
 
-------------------- BEGINNING OF PAGE #26 -------------------


     Congress sought to promote generation technologies that
offered an alternative to large and increasingly inefficient
electric power plants.  In 1978 it enacted the Public Utility
Regulatory Policies Act ("PURPA").-[89]-  PURPA granted
"qualifying facilities" ("QFs") -- predominantly
cogenerators-[90]- and small power producers-[91]- -- significant
regulatory advantages over traditional generating facilities. 
Among other things, PURPA provided for the exemption of most QFs
from the Holding Company Act.-[92]-  PURPA also required
utilities to purchase power from QFs at a price not greater than
the utility's avoided costs, and to sell backup power to
QFs.-[93]-

     After the enactment of PURPA, other independent power
producers and utility-affiliated power producers sought to
compete in bulk power markets.-[94]-  To promote the development
of these sources of power supply, the FERC -- which had
                    
-------- FOOTNOTES --------
                    
-[88]-(...continued)
Utilities, Dkt. Nos. RM95-8-000 & RM94-7-001, 70 FERC   61,357
(Mar. 29, 1995) ("FERC NOPR"), at 35.  See generally John C. Fox,
The Drivers of Change in the Electric Power Industry, in
Cambridge Energy Research Associates, Inc., International
Electric Power:  Meeting the Generation Gap 31 (1994).

-[89]- 92 Stat. 3117 (1978).

-[90]- Cogeneration refers to a generating facility that produces
electricity and another form of useful thermal energy (such as
heat or steam) for industrial and commercial heating, or cooling
purposes.  See Energy Information Administration, Electric Power
Annual 1992 171 (Jan. 1994).  See also Federal Power Act section
3(18), 16 U.S.C.   796(18).

-[91]- PURPA defines a small power producer as a facility that
generates electricity through solar, wind, waste, or geothermal
power in accordance with FERC regulations.  See Federal Power Act
section 3(18), 16 U.S.C.   796(18).

-[92]- Most qualifying facilities are deemed to be nonutilities
for purposes of the Holding Company Act.  See 18 C.F.R.
  292.602.

-[93]- See FERC v. Mississippi, 456 U.S. 742, 751 (1982).  This
aspect of PURPA has proven to be controversial, particularly with
regard to the requirement to purchase electricity at avoided
costs, and is now the subject of repeal efforts before Congress. 
See S. 708, 104th Cong., 1st Sess. (1995) (bill to repeal PURPA
section 210, 16 U.S.C.   824a-3); FERC Ruling Fuels Fire of PURPA
Repeal, The Energy Daily, May 10, 1995, at 1-2.

PURPA also authorized the FERC to order wholesale transmission
services by public utilities and by certain other entities. 
There were significant procedural and substantive limitations on
this authority, however, and FERC issued only one order pursuant
to this authority.  See Central Power & Light Co., 17 FERC
  61,078 (1981), order on reh'g, 18 FERC   61,100 (1982), further
order, Texas Util. Elec. Co., 40 FERC   61,077 (1987).

-[94]- Independent power producers ("IPPs") are generally single-
asset generation companies that do not own transmission or
distribution facilities.  Affiliated power producers ("APPs")
also arose to compete in this business.  APPs are similar to
IPPs, but are owned by or affiliated with traditional, investor-
owned utilities.  The utilities preferred to exclude the
generators from utility rate base because of their reluctance to
invest in new generating facilities under cost of service
regulation.
 
-------------------- BEGINNING OF PAGE #27 -------------------

traditionally required cost-based rates for electric power --
authorized market-based rates for power sales where power
producers lacked market power and encouraged more widely
available transmission access.-[95]-  The SEC also attempted to
enable independent power producers to structure operations to
avoid unnecessary burdens under the Holding Company Act.-[96]-

               c.   Recent Regulatory Developments

     The most sweeping changes in recent years followed the
passage of the Energy Policy Act of 1992.-[97]-  The legislation
was intended to provide a "comprehensive national energy policy"
designed to increase U.S. energy security "in cost-effective and
environmentally beneficial ways."-[98]-  Among other things, the
Energy Policy Act authorized the FERC to promote competition in
wholesale bulk power markets by requiring companies to provide
transmission services upon request if the FERC finds that such
transmission would be in the public interest and would not
unreasonably impair the continued reliability of affected
electric systems.-[99]-   

-------- FOOTNOTES --------                    

-[95]- See, e.g., Commonwealth Atlantic Ltd. Partnership, 51 FERC
  61,368 (1990).  As traditional, investor-owned utilities began
to seek market-based rates for wholesale sales of excess
capacity, the FERC extended its market power analysis to these
companies.  In applying the market-based rates to traditional,
investor-owned utilities, the FERC required that the utility
mitigate its transmission market power by opening its
transmission system to other wholesale sellers and buyers.  See,
e.g., Public Service Co. of Indiana, 51 FERC   61,367 (1990). 
The FERC also relied on open access transmission tariffs to
mitigate the anticompetitive effects of proposed mergers.

-[96]- See, e.g., Thousand Springs Project, SEC No-Action Letter
(Jan. 28, 1988) (division of ownership interests designed to
avoid ten percent ownership threshold); Ocean State Power, SEC
No-Action Letter (Jan. 15, 1988) (partnership); Catalyst Energy
Co., SEC No-Action Letter (Dec. 22, 1987) (limited partnership). 
See also Sierra Pacific Resources, Holding Co. Act Release No.
24566 (Jan. 28, 1988) (approving participation by exempt holding
company in independent power production enterprise), aff'd sub
nom. Environmental Action, Inc. v. SEC, 895 F.2d 1255 (9th Cir.
1990).

-[97]- Pub. L. 102-486, 106 Stat. 2776 (1992) ("Energy Policy
Act").

-[98]- H.R. Rep. No. 474(I), 102d Cong., 2d Sess. 132 (1992). 
The goals of the legislation included the following:

     [T]o reduce the costly, impending rise in U.S. oil
     imports; to conserve energy and use it more
     efficiently; to reduce our use of oil-based fuels in
     our motor vehicle sector; to increase competition in
     the electricity, natural gas, coal renewable energy,
     and oil markets in order to provide new energy options
     and more diverse supplies; to increase the strategic
     oil reserves that shield us from another world oil
     disruption; to implement solutions to our nuclear waste
     and uranium enrichment problems; and to address
     greenhouse warming.

     Id.

-[99]- Any electric utility, Federal power marketing agency, or
any other person generating electric energy for sale for resale
                                                   (continued...)
 
-------------------- BEGINNING OF PAGE #28 -------------------


     In addition, the Energy Policy Act facilitated the
development of competition by permitting any person (including
registered holding companies) to acquire "exempt wholesale
generators" ("EWGs")-[100]- without the need to apply for or
receive prior SEC approval.  Congress gave the FERC
responsibility to determine whether an entity may be classified
as an EWG under the statute.  Congress directed the SEC to adopt
rules with respect to financing transactions that may have a
"substantial adverse impact on the financial integrity of the
registered holding company system."-[101]-

     Following the Energy Policy Act, the FERC has engaged in a
series of initiatives to encourage the development of competitive
energy markets.  Most recently, in March 1995, the FERC issued a
notice of proposed rulemaking that would require utilities that
own or control transmission facilities in interstate commerce to
file tariffs under which they will provide service to third
parties.  The rules, if adopted, would also require such
utilities to offer transmission service to eligible customers
comparable to the service they provide to themselves.-[102]-

     Increasingly, the FERC has played a central role in the
review of utility mergers and acquisitions.  At the same time
that Congress gave the SEC jurisdiction to review mergers and
acquisitions,-[103]- it also provided the FERC substantial
jurisdiction over such transactions that involve utilities.  The
FPA requires that mergers "be consistent with the public
interest,"-[104]- and the FERC may condition its approval of the
acquisition "upon such terms and conditions as it finds necessary
or appropriate."-[105]-  In recent cases, the FERC has emphasized
issues related to competition and market power as well as alleged
savings from the merger.-[106]-  
                    
-------- FOOTNOTES --------

-[99]-(...continued)
may apply to the FERC for an order requiring a utility to provide
transmission services (including any enlargement of transmission
capacity necessary to provide such services).  Federal Power Act
section 211(a) (codified at 16 U.S.C.   824j(a)).

-[100]- An exempt wholesale generator is exempt from all
provisions of the Holding Company Act.  See Holding Company Act
section 32(e).

-[101]- Holding Company Act section 32(h).  In 1993, the SEC
adopted rules 53 and 54 (17 C.F.R.    250.53 & 54) to protect
consumers and investors from any substantial adverse effect
associated with investments in exempt wholesale generators. 
These rules are currently the subject of litigation in the U.S.
Court of Appeals for the District of Columbia Circuit.  NARUC v.
SEC, No. 93-1778 (D.C. Cir. filed Nov. 22, 1993; oral argument
held May 11, 1995).

-[102]- FERC NOPR, note 88 above.

-[103]- See section 9(a)(1) (requiring SEC approval before
registered holding company or subsidiary acquires any securities,
utility assets, or any other interest in any business).  As late
as 1971, the acquisition of Arkansas-Missouri Power Company by
Middle South Utilities, Inc., a registered holding company,
required only the approval of the SEC and the Public Service
Commission of Missouri.

-[104]- Federal Power Act section 203(a), 16 U.S.C.   824b(a).

-[105]- Federal Power Act section 203(b), 16 U.S.C.   824b(b).

-[106]- See, e.g., Utah Power & Light Co., 41 FERC   61,283, p.
61,752 (1987); Northeast Utilities Service Co., Opinion No. 364,
                                                   (continued...)
 
-------------------- BEGINNING OF PAGE #29 -------------------


     Moreover, the FERC has recently announced an expansion of
its review of such transactions:  a proposed merger of two public
utility holding companies with electric utility subsidiary
companies creates a "rebuttable presumption" of an indirect
merger of the two electric utilities, and the proposed merger
will require FERC approval under section 203 or rebuttal of the
presumption.-[107]-  In part as a result of the FERC's
comprehensive review of utility mergers, the SEC now "watchfully
defers" to the FERC as the primary federal regulator with respect
to many issues involved in these transactions.-[108]-

     Perhaps the most controversial regulatory effort currently
underway at the state level is the assessment of required retail
wheeling.-[109]-  The California Public Utilities Commission is
considering among other alternatives a proposal under which power
customers could have direct access to all power producers and
thus enjoy the right to contract with the producer of their
choice.-[110]-  Rhode Island, Wisconsin and other states have
also begun to explore a possible shift to retail wheeling.-[111]-

                    
-------- FOOTNOTES --------

-[106]-(...continued)
56 FERC   61,269, p. 61,998, reh'g denied, Opinion No. 364-A, 58
FERC   61,070, aff'd in part, 993 F.2d 937 (1st Cir. 1993).  The
FERC has also conditioned approval of mergers on the filing of
open-access transmission tariffs.  Utah Power & Light, 45 FERC at
61,290; Northeast Utilities, 56 FERC at 62,011-14. 

-[107]- Illinois Power Co., 67 FERC   61,136 (1994).  The order
was a response to concerns with a regulatory loophole:  because
the FERC's historically narrow interpretation of its authority to
review proposed mergers limited its review to utility mergers but
not holding company mergers, utilities were able to avoid FERC
review by first establishing holding companies and then merging
the holding companies.  See, e.g., Missouri Basin, 53 FERC
  61,368, reh'g denied, 55 FERC   61,464 (1991); see also
Lawrence J. Spiwak, Expanding the FERC's Jurisdiction to Review
Utility Mergers, 14 Energy L.J. 385 (1993).

-[108]- See City of Holyoke Gas & Elec. Dept. v. SEC, 972 F.2d
358 (D.C. Cir. 1992); CINergy Corp., Holding Co. Act Release No.
26146 (Oct. 21, 1994); Entergy Corp., Holding Co. Act Release No.
25952 (Dec. 17, 1993).

-[109]- "Wheeling" is the electricity analogue of wholesale
transmission that the FERC has required in its regulation of the
natural gas industry.  Mandated retail wheeling would require
owners of electric transmission or distribution facilities to
transmit power from third-party suppliers to customers connected
to the transmission lines.  See Matthew C. Hoffman, The Future of
Electricity Provision, Regulation, vol. 1994, no. 3, at 55-62
(1994).

-[110]- See Proposed Policy Decision Adopting a Preferred
Industry Structure, California Public Utilities Commission File
Nos. R.94-04-031 & I.94-04-032 (May 25, 1995).

-[111]- See David Stipp, Rhode Island Alliance Clears Guidelines
To Form Open Market For Electricity, Wall St. J., May 15, 1995,
at A4.  In re Application of the Association of Businesses
advocating Tariff Equity for Approval of an Experimental Retail
Wheeling Tariff for Consumers Power Company, Michigan Public
Service Commission Case No. U-10143, 150 P.U.R. 4th 409 (Apr. 11,
1994); Re Changes in the Structure of the Electric Energy
Industry, Illinois Public Utilities Commission No. 94-RI (Apr.
20, 1994); Nevada Senate Bill 231 (limited retail wheeling
statute designed to assist economic development); W. Garner and
                                                   (continued...)
 
-------------------- BEGINNING OF PAGE #30 -------------------


          1.   Natural Gas

     The natural gas industry developed as an incident to oil
exploration, where its toxic and explosive qualities caused it to
be viewed initially more as a nuisance than a resource.-[112]- 
Transportation of natural gas was also impractical until the
1920s, when it became possible to construct leakproof pipelines
with electrical welds.  Oil producers then began to realize that
natural gas, if properly controlled, was a valuable fuel source. 
The natural gas industry began to develop rapidly, and the
consumption of natural gas increased significantly.

     Before 1938, state regulatory authorities had traditionally
regulated the production of natural gas due to its close relation
to the production of oil, and had regulated the local
distribution of natural gas as a natural monopoly.  Neither the
federal nor state governments regulated interstate pipelines,
however, which carried gas from the wellhead to local
distributors.  These unregulated pipelines were therefore able to
control the price and quality of gas service, to the detriment of
the consuming public.-[113]-

               a.   The Natural Gas Act

     In 1938, Congress passed the Natural Gas Act ("NGA"), which
gave the Federal Power Commission authority over the interstate
transportation of natural gas.-[114]-  The NGA authorized the
FERC to set "just and reasonable" rates for pipelines selling
natural gas for resale in interstate commerce.-[115]-  Under this
act, the FERC had jurisdiction over both the price and the
allocation of natural gas sold at the wellhead for resale in
interstate commerce.  Like the Federal Power Act, the Natural Gas
Act filled a regulatory "gap" that had existed with respect to
intrastate transactions and supplemented state authority through
a scheme of comprehensive federal regulation of interstate
transactions.

     The Natural Gas Act confers authority on the FERC with
respect to natural gas utilities in a manner similar to that with
respect to electric utilities.  The major provisions of the NGA
as enacted in 1938 are outlined below:

*    Jurisdiction.  Congress gave the FERC jurisdiction over the
     transportation in interstate commerce of natural gas and
     over the sale in interstate commerce of natural gas for
     resale.  It also gave the FERC jurisdiction over companies
     engaged in such transportation and sales.  The FERC,
     however, has no jurisdiction over the local distribution of

-------- FOOTNOTES --------                    

-[111]-(...continued)
L. Burkhart, Wisconsin Initiates Competition Proceedings,
Fortnightly, Mar. 15, 1995, at 14.

-[112]- David Howard Davis, Energy Politics 132-33 (4th ed.
1993).  Before the advent of effective pipeline technology,
natural gas was typically burned off.

-[113]- Id. at 137.

-[114]- Pub. L. No. 75-688, 52 Stat. 821 (1938) (codified as
amended at 15 U.S.C.    717 - 717w).

-[115]- Natural Gas Act section 4(a), 15 U.S.C.   717c(a).  In
1954, the U.S. Supreme Court ruled that sales by independent
producers were also subject to regulation under the Natural Gas
Act.  Phillips Petroleum Co. v. Wisconsin, 347 U.S. 672 (1954).
 
-------------------- BEGINNING OF PAGE #31 -------------------

     natural gas, over facilities used for the local distribution
     of natural gas, or over the production or gathering of
     natural gas.-[116]-

*    Just and Reasonable Rates.  The NGA requires that all rates
     and charges by natural gas companies for interstate
     transportation of natural gas or for interstate sales of
     natural gas for resale be "just and reasonable."-[117]- 
     Natural gas companies engaged in jurisdictional sales and
     transportation must file with the FERC schedules of all
     rates and charges for such sales and transportation, all
     classifications and practices related to such rates and
     charges, and all contracts related to such rates and
     charges.-[118]-

*    Discrimination Prohibited.  The NGA prohibits undue
     preferences or advantages, as well as undue prejudices or
     disadvantages, with respect to jurisdictional sales and
     transportation of natural gas; it also requires natural gas
     companies, with respect to jurisdictional sales and
     transportation, not to maintain unreasonable differences in
     rates, charges, facilities, or services.-[119]-

*    Modification of Rates and Terms.  The NGA authorizes the
     FERC to amend by order, after administrative adjudication,
     rates, charges, classifications, and practices relative to
     jurisdictional sales and transportation of natural gas that
     are determined to be unjust or unreasonable.-[120]-

*    Certificates of Public Convenience and Necessity.  The NGA
     requires all natural gas companies engaged in jurisdictional
     sales and transportation to acquire from the FERC a
     certificate of public convenience and necessity for the
     construction or extension of facilities used for such
     jurisdictional sales and transportation.-[121]-  The NGA
     authorizes the FERC to require natural gas companies engaged
     in jurisdictional sales and transportation to construct or
     extend facilities used for such sales and transportation if
     required to improve transportation or expand sales.-[122]-

     The Natural Gas Act also contains provisions designed to
enhance and ensure the effectiveness of state regulation.  Among
other things, the Natural Gas Act authorizes the FERC to
establish joint boards for the determination of any matter
arising under the Natural Gas Act,-[123]- to confer with state
commissions regarding rate structures, costs and other matters
and to hold joint hearings with state commissions,-[124]- and to
act upon complaint or request of a state, state commission or

-------- FOOTNOTES --------                    

-[116]- Natural Gas Act section 1(b), 15 U.S.C.   717(b).  See
generally FPC v. Natural Gas Pipeline Co., 315 U.S. 575 (1942)
(holding NGA constitutional).

-[117]- Natural Gas Act section 4(a), 15 U.S.C.   717c(a).

-[118]- Natural Gas Act section 4(c), 15 U.S.C.   717c(c).

-[119]- Natural Gas Act section 4(b), 15 U.S.C.   717c(b).

-[120]- Natural Gas Act section 5(a), 15 U.S.C.   717d(a).

-[121]- Natural Gas Act section 7(c), 15 U.S.C.   717f(c).

-[122]- Natural Gas Act section 7(a), 15 U.S.C.   717f(a).

-[123]- Natural Gas Act section 17(a), 15 U.S.C.   717p(a).

-[124]- Natural Gas Act section 17(b), 15 U.S.C.   717p(b).
 
-------------------- BEGINNING OF PAGE #32 -------------------

municipality.-[125]-  The FERC is also required to make
information and reports available to state commissions.-[126]- 
Like the Federal Power Act, the Natural Gas Act allows states,
state commissions, municipalities, consumer representatives,
security-holder representatives and others to participate as
parties in proceedings under the statute.-[127]- 

               b.   Expansion of the Gas Utility Industry

     The depletion of the first natural gas wells in the
Appalachian region in the twentieth century resulted in a gradual
shift of focus -- first to the Midwest and next to the Great
Plains and the Gulf of Mexico -- for new wells.-[128]-  At the
same time, the practical limitations on the transportation of
natural gas prevented its importation from countries from which
pipeline transmission was impractical.

     The inability to import natural gas resulted in a focus on
domestic sources.  Demand for gas, however, exceeded supply. 
During the late 1960s and the early 1970s, the FERC restrained
the wellhead price of natural gas sold in the interstate market. 
The price restraint encouraged consumption -- but discouraged
production -- of gas sold in the interstate market.  Because
natural gas is a relatively clean fuel that has less
environmental impact than most fossil fuels, the advent of the
environmental movement in the 1970s contributed to increased
demand for natural gas.  The shortage of oil in the aftermath of
the 1973 Middle East war also highlighted the disadvantages of
U.S. dependence on imported oil and contributed to increased
demand for natural gas.  As a result, a series of gas shortages
in the interstate market occurred in the mid-1970s.-[129]-

     In response to these shortages, Congress enacted the Natural
Gas Policy Act of 1978, which provided for partial decontrol of
natural gas at the wellhead.-[130]-  Gas supply has also become

-------- FOOTNOTES --------
                    
-[125]- Natural Gas Act section 5(b), 15 U.S.C.   717d(b) (fixing
rates and charges; determination of costs of production or
transportation in cases where FERC lacks authority to establish
rates).

-[126]- Natural Gas Act section 17(c), 15 U.S.C.   717p(c) (FERC
"shall make available to the several State commissions such
information and reports as may be of assistance in State
regulation of natural-gas companies" and "upon request from a
State commission, . . . make available any of its trained rate,
valuation, or other experts").

-[127]- Natural Gas Act section 15(a), 15 U.S.C.   717n(a).

-[128]- By 1992, most natural gas wells in the United States were
located in Texas, Louisiana, or along the coast of the Gulf of
Mexico.

-[129]- Meanwhile, state regulatory authorities allowed
intrastate gas prices (i.e., gas produced and sold in the same
state) to fluctuate more freely, thereby increasing price and
supply compared to the interstate market.  Some manufacturing
companies relocated their operations to gas producing states in
order to gain access to ample (but more expensive) gas supply. 
See generally Davis, note 112 above, at 132-62.

-[130]- 92 Stat. 3351 (1978) (repealed in 1987).  Northwest Cent.
Pipeline Corp. v. State Corp. Comm'n of Kan., 489 U.S. 493, 502
(1989) ("[A]n acute shortage of natural gas during the 1970's
prompted Congress to enact the Natural Gas Policy Act of 1978.").
 
-------------------- BEGINNING OF PAGE #33 -------------------

more plentiful as a result of increased imports of natural gas
from Canada and Mexico.-[131]-

     Increased supply of gas coincided with moderation in demand. 
The emphasis on energy conservation in the 1970s affected the
natural gas industry in the same manner that it affected the
electric utility industry:  consumers adopted conservation
techniques, and natural gas utilities, like electric utilities,
implemented demand-side management programs to reduce demand.

               c.   Recent Regulatory Developments

     Congress and the FERC have worked to encourage competition
in the natural gas industry.  In 1985, the FERC issued Order No.
436, which allowed pipelines to contract to transport third-
party gas.  The order was intended to facilitate direct sales
between gas producers and local distribution companies.-[132]-

     Deregulation proceeded further under the Natural Gas
Wellhead Decontrol Act of 1989, pursuant to which the FERC
implemented full producer deregulation, effective January 1,
1993.-[133]-  In 1990, Congress enacted the Gas Related
Activities Act ("GRAA"), which permits registered holding
companies that own gas utilities to acquire significant
production and transportation assets that do not directly serve
the needs of their retail distribution systems.-[134]-  

     In 1992, the FERC issued a major deregulatory rulemaking
order.  Order No. 636 requires pipelines to offer "a variety of
transportation services to their shippers" under a system that
treats all gas equally, whether sold or merely transported by the
pipeline companies.-[135]-  Pipeline companies could no longer
treat gas purchased and resold by them more favorably in
circumstances when transportation space is limited.  Rather, the
FERC attempted to restrict pipeline companies to the role of
transporters, and to discourage them from acting as middlemen
between producers and consumers.-[136]-  Although the long-term
effects of Order No. 636 remain uncertain, the order has
supported the development of a direct-sale spot market for
natural gas, which has contributed to greater fluctuations in gas

-------- FOOTNOTES --------
                    
-[131]- Today, Canada exports to the United States about one-
half of its production of natural gas.  In addition, the gas
industry has developed technologies to liquefy natural gas
through a super-cooling process and transport it thousands of
miles by ship.  Liquefied natural gas thus can be imported from
Algeria, for example, to the northeastern United States, which
produces little of its own natural gas.

-[132]- Regulation of Natural Gas Pipelines After Partial
Wellhead Decontrol, Order No. 436, 50 Fed. Reg. 42,408 (Oct. 18,
1985).

-[133]- Pub. L. No. 101-60, 103 Stat. 157 (1989).

-[134]- Pub. L. 101-572, 104 Stat. 2810 (1990).  Gas production
and transportation activities are nonutility businesses for
purposes of the Holding Company Act.  See Holding Company Act
section 2(a)(4) ("gas utility company" includes only companies
owning or controlling assets used for retail gas distribution).

-[135]- Regulation of Natural Gas Pipelines After Partial
Wellhead Decontrol, Order No. 636, 57 Fed. Reg. 13,267 (Apr. 16,
1992).

-[136]- Id. at 13,272-75.
 
-------------------- BEGINNING OF PAGE #34 -------------------

prices.-[137]-  There have also been costs associated with
competition.-[138]-

          2.   Other Developments

     Since 1935, the regulation of public-utility holding
companies has been augmented under statutes other than the
Holding Company Act.  State commissions have strengthened the
regulation of electric and gas utilities.  In addition, the SEC
has enhanced its regulation of issuers of securities, which
issuers include public-utility holding companies, whether
registered under the Holding Company Act or exempt.

               a.   State Regulation of Utilities

     In addition to the regulatory advances described above in
the area of retail wheeling, state regulators have generally
increased their powers over electric and gas utilities.  In the
late 1930s, courts began to narrow the applicability of the
substantive due process doctrine and relax the restrictions on
state regulation under previous interpretations of the Commerce
Clause.-[139]-  As a result, as the courts began to remove many
of the judicial constraints on state regulatory power, many state
regulators have taken a more aggressive position toward the
utilities that serve their constituents.  Nonetheless, some

-------- FOOTNOTES --------                    

-[137]- See Comment, Reworking Relationships in the Natural Gas
Industry:  Exploring the New Spot Market and Its Operation, 68
Tulane L. Rev. 655, 660-63 (1994) (noting analyst comment that
producers and buyers are on a "seasonal spot price roller
coaster.").  The Commodity Futures Trading Commission ("CFTC")
has also designated natural gas as a commodity and thereby
permitted the trading of futures in natural gas.  See 57 Fed.
Reg. 8632 (Mar. 11, 1992).  See also CFTC, Division of Economic
Analysis, New York Mercantile Exchange Designation Application
for Natural Gas Futures (Feb. 20, 1990); Arthur Andersen & Co.,
S.C. and Cambridge Energy Research Associates, Inc., Natural Gas
Trends:  North America 61 (1994) (stating that natural gas
futures contract has become "viable hedging tool for the natural
gas industry and noting improved market liquidity).

-[138]- For example, many producers went out of business when
wellhead prices declined.  See Donald F. Santa, Jr. and Patricia
J. Beneke, Federal Natural Gas Policy and the Energy Policy Act
of 1992, 14 Energy L.J. 1, 8 (1993).  The Columbia Gas System, a
registered gas utility holding company, filed for bankruptcy in
large part as a result of uneconomic take-or-pay contracts.

-[139]- Regarding the narrowing of substantive due process, see,
e.g., West Coast Hotel Co. v. Parrish, 300 U.S. 379 (1937)
(upholding minimum wage legislation); NLRB v. Jones & Laughlin
Steel Co., 301 U.S. 1 (1937) (upholding National Labor Relations
Act); United States v. Darby, 312 U.S. 100 (1941) (upholding Fair
Labor Standards Act); Wickard v. Filburn, 317 U.S. 111 (1942)
(upholding Agricultural Adjustment Act); Lincoln Fed. Labor Union
v. Northwestern Iron & Metal Co., 335 U.S. 525, 536-37 (1949)
(repudiating the Lochner approach to economic substantive due
process).  Regarding the relaxation of the interpretation of the
Commerce Clause, see Arkansas Elec. Coop. v. Arkansas Pub. Serv.
Comm'n, 461 U.S. 375, 390 (1983) (quoting Illinois Natural Gas
Co. v. Central Ill. Pub. Serv. Co., 314 U.S. 498, 505 (1942)).
 
-------------------- BEGINNING OF PAGE #35 -------------------

limitations remain on the ability of states to regulate
utilities.-[140]-

     Today, although regulation of electric (and gas) utilities
varies among state governments,-[141]- most state commissions
have authority to issue licenses, franchises or permits for the
initiation of service,-[142]- for construction or abandonment of
facilities and for related matters.-[143]-  With respect to
retail rates, state commissions generally have the power to
require prior authorization of rate changes,-[144]- to suspend
proposed rate changes, to prescribe interim rates-[145]- and to
initiate rate investigations.-[146]-  Most state commissions also
have authority to control the quantity and quality of
service,-[147]- to require uniform systems of accounting,-[148]-

and to regulate the issuance of securities.-[149]-  In addition,
many states have enacted change-in-control statutes.-[150]- 
                    
-------- FOOTNOTES --------

-[140]- See, e.g., Mississippi Power & Light Co. v. Mississippi
ex rel. Moore, 487 U.S. 354 (1988) (FERC proceeding preempted
state prudence proceeding); Nantahala Power & Light Co. v.
Thornburg, 476 U.S. 953 (1986) (FERC allocation of power between
two utilities for rate purposes preempted similar state
determination).

-[141]- See generally National Association of Regulatory Utility
Commissioners, Utility Regulatory Policy in the United States and
Canada:  Compilation 1993-1994 (1994) (covering a broad range of
issues regarding state jurisdiction and regulatory policy).  See
also Appendix A (results of SEC survey of state regulatory
commissions).

-[142]- See, e.g., D.C. Code Ann.   43-501(b) (public utility
must obtain order granting certificate of present and future
public convenience and necessity before furnishing utility
service).

-[143]- See, e.g., Cal. Pub. Util. Code   761 (authority to fix
rules, service to be furnished or facilities to be constructed);
Ohio Rev. Code Ann.   4905.21 (prior approval requirement for
abandoning facilities).

-[144]- See, e.g., Fla Stat. Ann.   366.04(1) (authority to
regulate and supervise public utility with respect to rates and
service).

-[145]- See, e.g., Fla. Stat. Ann.   366.071 (power to authorize
collection of interim rates).

-[146]- See, e.g., Cal. Pub. Util. Code   729 (California
"commission may, upon a hearing, investigate . . . the entire
[rate] schedule . . . of any public utility").

-[147]- See, e.g., Cal. Pub. Util. Code   761; Fla. Stat. Ann.
  366.04(1).

-[148]- See, e.g., D.C. Code Ann.   43-509; Fla. Stat. Ann.
  366.04(2)(a).

-[149]- See, e.g., Ohio Rev. Code Ann.   4905.40 (prior approval
required before issuing securities).  See generally Phillips,
note 8 above, at 136.  A compilation of state regulatory
authority based on a questionnaire submitted by the SEC to state
commissions is summarized in Appendix A.

-[150]- See Aaron W. Morse, Corporate Law I:  The
Constitutionality of State Insurance and Utility Takeover
Statutes, 1989 Ann. Surv. Am. L. 607.  The SEC has emphasized
that these statutes should not be preempted by federal takeover
regulation.  In 1983, the SEC Advisory Committee on Tender Offers
recommended that federal takeover regulation should not preempt
substantive state regulation of utilities, banks, insurance
companies, and similar businesses where state change-of-control
                                                   (continued...)
 
-------------------- BEGINNING OF PAGE #36 -------------------

These statutes generally require utilities to obtain state
regulatory approval before control of the utilities may be
transferred to other persons.

     In an attempt to assess the current regulatory environment
among the states, the Division, together with the National
Association of Regulatory Utility Commissioners, distributed a
questionnaire that solicited responses from all state regulatory
authorities.  The questionnaire sought information on the current
status of state regulation of utility companies in the areas
covered by the Holding Company Act.-[151]-  With respect to
securities issuances, all but three of the respondents to the
questionnaire stated that they have the authority to regulate
such issuances by jurisdictional utilities.  The responses also
indicate varying levels of states' ability to regulate
acquisition and diversification activities and transactions
between jurisdictional utility affiliates and various affiliated
and unaffiliated entities.  With respect to accounting and audit
review, all respondents stated that they prescribe a uniform
system of accounts and are able to access the books and records
of their jurisdictional utility companies.  

     Many respondents, however, stated that they had no statutory
authority or cooperative agreements to obtain books and records
of out-of-state companies.  Further, it is unclear exactly how
many have authority to access the books and records of holding
companies and books and records of nonutility companies including
service companies.  This issue is the subject of a brief follow-
up survey that NARUC is currently conducting.-[152]-

               b.   SEC Securities Regulation Under Statutes 
                    Other Than the Holding Company Act

     Through its administration of other federal securities laws
such as the Securities Act and the Exchange Act, the SEC
regulates public-utility holding companies by virtue of their
status as issuers of securities.-[153]-  The provisions of the
Securities Act and the Exchange Act, and the rules the SEC has

-------- FOOTNOTES --------                    

-[150]-(...continued)
provisions are justified in the overall regulatory objectives, do
not conflict with federal procedural provisions, and relate to a
significant portion of the issuer's business.  SEC, Advisory
Committee on Tender Offers, Report of Recommendations 18 (1983)
(Recommendation 9(c)).

-[151]- A copy of the questionnaire and a summary of the
responses received by the SEC is included in Appendix A.  A
narrative digest of the responses of the state commissions to
this questionnaire is available in the Public Reference Room of
the SEC in public file number S7-32-94.  As a follow-up to the
questionnaire, the SEC also conducted telephone interviews with
state regulatory authorities concerning certain details related
to diversification activities, affiliate transactions and
auditing practices.  A copy of the questions and the individual
responses of the state regulatory authorities to those questions
is available in the Public Reference Room of the SEC in public
file number S7-32-94.

-[152]- See Letter from Charles D. Gray, Assistant General
Counsel, NARUC, to William C. Weeden, Associate Director, Office
of Public Utility Regulation, Division of Investment Management,
SEC (June 1, 1995) (copy in Appendix A).

-[153]- All 15 registered holding companies are reporting
companies under the Securities Act and the Exchange Act.
 
-------------------- BEGINNING OF PAGE #37 -------------------

adopted under them, require the orderly disclosure of timely and
accurate information about issuers of the securities and lay the
foundation for efficient markets in those securities.

     When Congress enacted the Holding Company Act in 1935, these
laws were still in their infancy.  In addition, there were doubts
as to their ability to withstand constitutional scrutiny by the
courts.-[154]-  Since 1935, however, courts have upheld the
validity of the statutes.  In addition, Congress has amended the
Securities Act and the Exchange Act several times since 1935, in
order to expand and strengthen the disclosure and reporting
requirements, as well as the SEC's ability to enforce these
provisions.-[155]-  Thus, investors today have greater access to
information concerning their investment decisions than they had
in 1935.

     The three principal methods by which these securities laws
provide for the disclosure of material information about
securities are the registration requirements, the periodic
reporting requirements, and the antifraud provisions.  First, the
Securities Act requires registration of every offer and sale of a
security, unless an exemption from registration is
available.-[156]-  The information that is required to be filed
with the SEC may vary depending on whether the issuer is a start-
up business or an established, well-capitalized business that has
previously filed reports with the SEC.  

     An example of the registration of securities issuance is an
initial public offering of securities by a start-up business on
Form S-1.  The form includes a variety of information designed to
inform potential investors about the business of the issuer,
including the risks and potential for future profit.  Especially
important are the financial statements and the sections termed
"Business," "Management's Discussion and Analysis" ("MD&A") and
"Use of Proceeds."  The Business section includes descriptions of
general business development, prior revenues, principal products,

-------- FOOTNOTES --------
                    
-[154]- See, e.g., Oklahoma-Texas Trust v. SEC, 100 F.2d 888
(10th Cir. 1939) (contesting the constitutionality of the
Securities Act); Coplin v. United States, 88 F.2d 652 (9th Cir.
1937) (contesting the constitutionality of the Securities Act),
cert. denied, 301 U.S. 703 (1937); Wright v. SEC, 112 F.2d 89, 94
(2d Cir. 1940) (contesting the constitutionality of the Exchange
Act).

-[155]- See, e.g., Securities Acts Amendments of 1964, Pub. L.
No. 88-467, 78 Stat. 565 (1964) (extending Securities Exchange
Act registration requirements to over-the-counter securities);
Williams Act, Pub. L. No. 90-439, 82 Stat. 454 (1968) (additional
disclosure requirements in situations of control acquisitions);
Securities Enforcement Remedies and Penny Stock Reform Act of
1990, Pub. L. No. 101-429, 104 Stat. 931 (1990) (increasing SEC's
authority to seek and impose remedies against securities law
violations).

-[156]- Exemptions from the registration requirements are
available for specific types of securities (e.g., U.S. and state
government securities, securities issued or guaranteed by U.S.
banks and certain agencies and branches of foreign banks) and for
specific types of transactions (e.g., private placements of
securities, most resales by holders of securities on a securities
exchange or in the over-the-counter market or securities issued
in exchange for other securities of the same issuer).
 
-------------------- BEGINNING OF PAGE #38 -------------------

competitive conditions, and costs of regulatory
compliance.-[157]-  The MD&A section provides textual analysis of
the financial statements, including descriptions of trends or
known demands on liquid assets, trends or commitments of capital
resources, and significant or unusual developments related to
operations.-[158]-  The Use of Proceeds section includes
descriptions of the principal purposes for which funds are being
raised, the order of priority of such purposes, and the
identities of any businesses that are planned to be acquired with
the funds raised.-[159]-

     Second, the Exchange Act requires registration by issuers of
entire classes of securities under certain circumstances in order
to provide investors and the trading markets with current
information about the issuer's business, management and financial
condition.  In general, registration is required in two cases: 
(1) securities listed for trading on a national securities
exchange or quoted on NASDAQ-[160]- and (2) securities held of
record by 500 or more persons and issued by issuers with assets
of $5 million or more.-[161]-  Issuers with securities registered
under the Exchange Act and issuers of securities under an
effective Securities Act registration statement are obligated to
file annual and other periodic reports.-[162]-  

     The Exchange Act and SEC rules also govern proxy
solicitations and tender offers.  Certain information must be
provided to holders of securities registered under the Exchange
Act when holders are asked to vote by proxy at meetings of
security holders.  The SEC's proxy rules govern the solicitation
of proxies by the issuer and by persons other than the issuer,

-------- FOOTNOTES --------                    

-[157]- See Sailors v. Northern States Power Co., 4 F.3d 610 (8th
Cir. 1993) (no securities fraud where utility disclosed that rate
increase was subject to regulatory approval).

-[158]- See also Securities Act Release No. 6835 (May 18, 1989),
54 Fed. Reg. 22427 (May 24, 1989) (interpretive release
concerning MD&A); In re Caterpillar, Inc., Exchange Act Release
No. 30532 (Mar. 31, 1992) (consent to cease and desist from
future disclosure violations and to implement and maintain
procedures designed to ensure compliance with MD&A requirement).

-[159]- SEC, Form S-1:  Registration Statement Under the
Securities Act of 1933.  See also Frederick D. Lipman, Going
Public:  Everything You Need to Know to Successfully Turn a
Private Enterprise into a Publicly Traded Company 66-76 (1994). 
Other important sections of the Form S-1 include Regulation S-K
Item 103 (legal proceedings), Item 202 (description of
securities), Item 304 (changes in and disagreements with
accountants on accounting and financial disclosure), Item 402
(executive compensation), Item 404 (certain relationships and
related transactions), and Item 503 (summary information, risk
factors, and ratio of earnings to fixed charges).

-[160]- Exchange Act section 12, 15 U.S.C.   78l.

-[161]- Id.; Exchange Act rule 12g-1, 17 C.F.R.   240.12g-1.

-[162]- Certain "foreign private issuers" that would otherwise be
required to register under the Exchange Act (because they have
500 or more shareholders, including 300 or more shareholders in
the United States, and assets of $5 million or more), but that
have taken no voluntary steps to enter the U.S. market, may
establish an exemption from Exchange Act registration and
reporting requirements by providing the SEC copies of the
documents they are required to file, make public, or deliver to
shareholders in their home country.  See Exchange Act rule 12g3-
2(b), 16 C.F.R.   240.12g3-2(b).
 
-------------------- BEGINNING OF PAGE #39 -------------------

and they address when, and in what manner, shareholder proposals
for matters to be voted upon at a shareholder meeting must be
included in the issuer's proxy soliciting material.  The Exchange
Act governs the acquisition of control of an issuer through a
friendly or hostile tender offer if the securities are registered
under the Exchange Act.  The tender offer rules are intended to
ensure that shareholders receive full and fair disclosure
regarding the offeror and the terms of the offer.  In hostile
tender offers (i.e., those opposed by the issuer's management),
the rules are intended to operate in a neutral manner, favoring
neither the offeror nor management.  The tender offer rules
provide procedural and substantive protections to facilitate
shareholder deliberation and ensure equal treatment, including
mandatory minimum offering periods, withdrawal rights, proration
in oversubscribed offers, and "all holders" and "best price"
protections.

     Third, the antifraud provisions apply to all securities
offered, sold or purchased, regardless of whether the securities
must be registered with the SEC.  These provisions prohibit the
use of any "manipulative or deceptive device or contrivance" in
contravention of SEC rules,-[163]- and prohibit the use of any
"device, scheme, or artifice to defraud."-[164]-  There are also
special provisions that prohibit fraudulent conduct in connection
with a tender offer.-[165]-  The SEC has applied the antifraud
provisions to combat a wide range of fraudulent conduct in
connection with securities, including inadequate and misleading
financial disclosures, other types of fraudulent
misrepresentations, insider trading, and market manipulation. 
Persons injured by certain types of fraudulent conduct may also
bring lawsuits against perpetrators of the fraud.-[166]-

     The SEC has also developed extensive accounting and
recordkeeping requirements under the Securities Act and the
Exchange Act.  Section 13(b)(1) of the Exchange Act-[167]-
authorizes the SEC to prescribe accounting methods under which
the financial statements of all publicly held companies must be
prepared.  Section 7 of the Securities Act-[168]- (and Schedule A
thereunder) confers similar authority on the SEC for the
financial statements included when securities are registered
under that Act.  The SEC's Regulation S-X-[169]- establishes the
standardized form and content for all registration statements and
reports filed pursuant to both Acts, and the SEC has expressed
its views on a wide variety of accounting and auditing principles
in hundreds of releases where particular issues of financial
disclosure warrant more extensive discussion and analysis.

PART II.  MODERNIZING ADMINISTRATION OF THE HOLDING COMPANY ACT

-------- FOOTNOTES --------

-[163]- Exchange Act section 10(b), 15 U.S.C.   78j(b).

-[164]- Securities Act section 17(a)(1), 15 U.S.C.   77q(a)(1).

-[165]- See, e.g., Exchange Act section 14(e), 15 U.S.C.   78n;
Exchange Act rule 14e-3, 17 C.F.R.   240.14e-3.

-[166]- See, e.g., Securities Act sections 11 - 12, 15 U.S.C.
   77k - 77l (civil liability for false registration statement,
prospectus or communication); Blue Chip Stamps v. Manor Drug
Stores, 421 U.S. 723, reh'g denied, 423 U.S. 884 (1975) (implied
private right of action for securities fraud).

-[167]- 15 U.S.C.   78m(b)(1).

-[168]- 15 U.S.C.   77g.

-[169]- 17 C.F.R.   210.
 
-------------------- BEGINNING OF PAGE #40 -------------------

Part I of this study discussed the background of the Holding
Company Act and the evolution of the regulation of the gas and
electric utility industry under statutes other than the Act. 
Part II turns to the administration of the Holding Company Act,
describing the history of its application and interpretation by
the SEC, and outlining the Division's recommendations for reform
within the framework of the Act.

     Much of the tension in this area arises because, while the
energy industry has changed substantially in this period, the Act
has been amended significantly only once since it was passed in
1935.  Although the SEC has attempted to administer the Act
responsively, there are limits to the SEC's ability to respond to
developments in the utility industry within the framework of the
Act.  Accordingly, as discussed in Part III, legislation
ultimately will be needed to repeal or reform the Holding Company
Act.  The Division, however, recognizes the difficulties and
uncertainties of the legislative process and, therefore, has
developed a series of recommendations that the SEC can implement
without legislation.

     Part II addresses the major topics in this area: financing,
utility ownership, diversification, affiliate transactions, the
audit function, and exemptions.  The recommendations range from
specific rule proposals, ready for SEC consideration at this
time, to more general suggestions concerning the interpretation
of the Act.  Underlying the recommendations is a common theme,
the need for greater flexibility and responsiveness than in the
past.

Chapter 1. Financing Transactions

A.   Background

As discussed in Part I, prior to 1935, holding companies engaged
extensively in financing practices that were detrimental to the
customers of their utility subsidiaries and to investors in the
securities issued.  These abuses included issuance of securities
on the basis of inflated asset values.  Consumers were not
protected because the states did not review the transactions, and
investors were harmed because they could not obtain the
information necessary to make an informed investment decision. 
The Holding Company Act includes provisions regulating financing
transactions by registered holding companies and their
subsidiaries that were intended to prevent recurrence of these
abuses.-[1]-

     Section 6 of the Holding Company Act requires SEC approval
of most issuances and sales of securities by registered holding
companies and their subsidiaries, and section 7 establishes
specific guidelines for the SEC to follow in approving such
issuances and sales.  Since 1935, the staff of the SEC has acted
upon thousands of filings under sections 6 and 7 of the Holding
Company Act, covering the issuance of billions of dollars of
securities.-[2]-

     Sections 6 and 7 also contemplate the adoption of rules and
regulations by the SEC to govern terms that are not specified by
                    
-------- FOOTNOTES --------

-[1]- See section 1(b)(1) of the Holding Company Act.

-[2]- For instance, in fiscal year 1993, the SEC approved the
issuance of more than $10 billion of securities by registered
holding companies and their subsidiaries.
 
-------------------- BEGINNING OF PAGE #41 -------------------

the statute.  Early in its administration of the Holding Company
Act, the SEC adopted general rules to carry out the procedural
requirements of these sections (as well as other sections of the
Holding Company Act),-[3]- and specific rules to carry out their
substantive provisions and to exempt limited types of
financing.-[4]-
  
     The SEC's application of sections 6 and 7, and its
interpretation of the requirements of those sections, have not
been static.  As the utility industry and the securities markets
have evolved over the years, the SEC has addressed developments
both by issuing orders on a case-specific basis and by
promulgating rules of general application.  Most changes have
been administrative, i.e., changes in the SEC's interpretation of
the financing requirements of the Holding Company Act.  Some
recent changes, however, have been legislative in nature.-[5]- 
Since 1935, development in the utility industry has proceeded in
phases, and the SEC has responded to each separate phase in the
manner described below.

          1.  The Periods of Restructuring and Technological
              Refinement

     After 1935, the SEC and the utility industry restructured
the existing holding companies and their utility subsidiaries. 
This task was largely completed by 1952.-[6]-  During the next
fifteen years, the utility industry focused its attention on the
development of technological advancements in engineering and
power systems.  During these years, the SEC formulated and
enforced a number of policies and practices that not only
implemented the requirements of sections 6 and 7 of the Act, but
also reflected the Holding Company Act's goal of simplifying the

-------- FOOTNOTES --------                    

-[3]- The SEC's general regulations include rule 20, 17 C.F.R.  
250.20 (prescribing forms to be used for applications under
section 6(b), declarations under section 7, and certificates of
notification under section 6(b)); rule 22, 17 C.F.R.   250.22
(general requirements applicable to applications and
declarations); rule 23, 17 C.F.R.   250.23 (procedures relating
to notice of filing and effectiveness of applications and
declarations); and rule 24, 17 C.F.R.   250.24 (terms and
conditions applicable to declarations and orders granting
applications).

-[4]- See, e.g., rule 48, 17 C.F.R.   250.48 (exempting from the
requirements of section 6(a) the guarantee of customer evidences
of indebtedness incurred for the purchase of standard electric or
gas appliances and the issuance of notes secured by a pledge of
such evidences of indebtedness); rule 49, 17 C.F.R.   250.49
(exempting the issuance by a subsidiary that is not a holding
company, a public utility company, or an associate service
company of securities to the vendor of supplies or equipment to
be used in the business of such subsidiary); and rule 50, 17
C.F.R.   250.50 (requiring that securities be sold by means of
solicitation of competitive proposals, in furtherance of section
7(d)) (rescinded in 1994).

-[5]- For example, section 32 of the Holding Company Act, as
amended by the Energy Policy Act of 1992, establishes standards
applicable to financing of investments in exempt wholesale
generators.  See section 32(h).

-[6]- Eighteenth Annual Report of the Securities and Exchange
Commission, Fiscal Year Ended June 30, 1952, at 82.  Annual
reports of the SEC to the United States Congress are hereinafter
cited as "Annual Report of [Year]."
 
-------------------- BEGINNING OF PAGE #42 -------------------

complex capital structures that had characterized holding company
systems prior to its enactment.  These measures included:

 *   Adopting statements of policy regarding first mortgage bonds
     and preferred stock.  These policy statements outlined
     various terms required to be included in issues of such
     securities to satisfy the standards of section 7(d),
     including redemption provisions, dividend limitations,
     sinking and improvement fund and renewal and replacement
     fund provisions, and other terms for bonds; and unsecured
     debt limitations, voting rights, redemption provisions and
     other terms for preferred stock.-[7]- 

 *   Creating general standards for debt and equity as a
     percentage of total capitalization.-[8]-  The SEC
     established requirements for balanced capitalization ratios
     in order to maintain conservative capital structures that
     would tend to produce economies in the cost of new
     capital.-[9]-

 *   Imposing limitations on types of securities issued.  In
     general, electric-utility holding companies issued common
     stock, while their subsidiaries issued preferred stock and
     first mortgage bonds to the public, and common stock to the
     parent.  In contrast, gas-utility holding companies issued
     common stock, preferred stock and debentures to the public
     supported by the revenue-generating value of their utility
     subsidiaries.  In each case, short-term borrowings were
     permitted as interim financing.  

          2.  The Period of Construction Growth
  
     From 1965 through 1979, the focus of the utility industry
shifted to construction of new coal and nuclear generating

-------- FOOTNOTES --------

-[7]- Statement of Policy Regarding First Mortgage Bonds Subject
to the Public Utility Holding Company Act of 1935, Holding Co.
Act Release No. 13105 (Feb. 16, 1956), as amended in Holding Co.
Act Release No. 16369 (May 8, 1969), and Statement of Policy
Regarding Preferred Stock Subject to the Public Utility Holding
Company Act of 1935, Holding Co. Act Release No. 13106 (Feb. 16,
1956), as amended in Holding Co. Act Release No. 16758 (June 22,
1970) ("Statements of Policy"). 

-[8]- As a matter of regulatory policy, the SEC required that a
registered holding company system and its public-utility
subsidiary companies maintain a capital structure comprised of 65
percent debt and 30 percent common equity, with the remaining 5
percent preferred equity.  See, e.g., Eastern Utilities
Associates, 34 S.E.C. 390, 444-45 (1952), and Kentucky Power Co.,
41 S.E.C. 29, 39 (1961).  As discussed below, rule 52 now permits
public-utility subsidiary companies of registered systems to
issue and sell securities without adhering to this ratio.  

-[9]-  Annual Report of 1944, at 99 ("A balanced capital
structure provides a considerable measure of insurance against
bankruptcy, enables the utility to raise new money most
economically, and avoids the possibility of deterioration in
service to consumers if there is a decline in earnings.")  The
SEC, at one point, considered issuing a statement of policy
relative to capitalization ratios. Annual Report of 1956, at 161. 
 
-------------------- BEGINNING OF PAGE #43 -------------------

facilities.-[10]-  These construction programs generated
significant external financing requirements for utilities,
resulting in increased activity under sections 6 and 7 of the
Holding Company Act.-[11]-  The SEC responded to this increased
activity by:

 *   Authorizing nontraditional securities in connection with
     financing of specific elements of new construction projects. 
     For instance, the SEC authorized sale-leaseback arrangements
     in connection with fuel handling facilities,-[12]- and the
     issuance of tax-exempt revenue bonds to finance
     environmental facilities.-[13]-  

 *   Approving the "budget method" for financing proposals, i.e.,
     one filing outlining a company's total financing
     requirements for an extended period of time, as opposed to
     separate filings for each proposed transaction.  Although
     sections 6 and 7 refer to individual issuances of
     securities, the SEC always considered each transaction in
     the context of the company's total capital requirements over
     a period of time.  During the late 1960s and 1970s, when
     utilities undertook large construction programs to prepare
     to meet future energy demand, their financing requirements
     were correspondingly large.  A comprehensive approach to
     total financing requirements for an extended period of time
     reduced the number of applications, notices and orders that
     would otherwise have been necessary, and enabled utilities
     to respond more quickly to increasingly volatile securities
     markets. 

 *   Permitting departures from the conventional financing rule
     that electric utility holding companies issue only common
     stock and short-term bank indebtedness.  For instance,
     registered holding companies were permitted to issue medium-
     term debentures, commercial paper and notes.-[14]-  Debt
     financing at the parent level was permitted because
     "[m]assive investment in plant under construction had outrun

-------- FOOTNOTES --------                    

-[10]- See generally Hearing on H.R. 5220, H.R. 5465 and H.R.
6134, to Amend or Repeal the Public Utility Holding Company Act,
before the Subcommittee on Energy Conservation and Power of the
House Committee on Energy and Commerce, 97th Cong., 2d Sess. 630
(1982) (Statement of Aaron Levy, Director, Division of Corporate
Regulation, Securities and Exchange Commission) ("Levy
Testimony").

-[11]- See, e.g., Annual Report of 1970, at 166 (noting "record
volume of external financing by registered holding companies and
their subsidiaries").

-[12]- See, e.g., Arkansas Power & Light Co., Holding Co. Act
Release No. 21345 (Dec. 18, 1979) (financing of coal handling
equipment at new generating station through sale and simultaneous
leasing back of equipment). 

-[13]- See, e.g., Georgia Power Co., Holding Co. Act Release No.
18088 (Sept. 12, 1973) (issuance of bonds by development
authority to finance construction of pollution control facilities
at generating plant).  The first significant number of these
transactions were authorized in fiscal 1974.  Annual Report of
1974, at 118.

-[14]- See, e.g., General Public Utilities Corp., Holding Co. Act
Release Nos. 16540 (Nov. 28, 1969) and 16550 (Dec. 8, 1969);
Southern Co., Holding Co. Act Release No. 19439 (March 23, 1976);
and Northeast Utilities Co., Holding Co. Act Release No. 19519
(May 7, 1976).  
 
-------------------- BEGINNING OF PAGE #44 -------------------

     the bonding power of the operating companies and the short-
     term borrowing limits of the Act.  Practical limits on
     common stock sales left the debentures the only feasible
     source of financing."-[15]-  

 *   Temporarily suspending rule 50's competitive bidding
     requirements.  Rule 50 was suspended with respect to
     issuance of common stock for approximately five months
     because unsettled securities markets, high interest rates,
     and high demand for new money inhibited the ability of
     holding companies to raise needed capital through
     competitive bidding.-[16]-
  
 *   Modifying the redemption terms prescribed by the Statements
     of Policy. The redemption provisions of the Statements of
     Policy were revised to permit refunding limitations for
     securities, reflecting then-current market conditions.-[17]-


 *   Facilitating sale-leaseback transactions.  For some sale-
     leaseback transactions to be workable, it was necessary for
     the SEC to find that parties owning utility assets only for
     purposes of the financing were not "public-utility
     companies" under the Holding Company Act.  The SEC initially
     made such findings on a case-by-case basis, and subsequently
     adopted rule 7(d) granting an exemption from the
     requirements of the Holding Company Act for these types of
     entities.-[18]- 

 *   Revisiting the appropriate mix of securities and imposing
     new limitations on short-term indebtedness.  During this
     period, companies began to increase the use of interim
     financing, in the form of short-term indebtedness, to
     continue their construction programs pending permanent
     financing.  Because of the magnitude of these borrowings and
     the possible detriment to consumers if they were not repaid,
     the SEC began to limit the incurrence of short-term
     indebtedness based on the ability to repay the debt, which
     caused utilities to explore other means of financing new
     plants.-[19]-  
  
-------- FOOTNOTES --------                    

-[15]- Annual Report of 1976, at 147.

-[16]- Temporary Suspension of the Competitive Bidding
Requirements of Rule 50 with respect to Common Stock of Holding
Companies Registered under the Public Utility Holding Company Act
of 1935 and Notice of Public Investigatory Hearing, Holding Co.
Act Release No. 18646 (Nov. 7, 1974). 

-[17]- Adoption of Modifications of Policies Regarding Redemption
Provisions of Long-Term Debt Securities Issued and Sold Under
Holding Company Act, Holding Co. Act Release No. 16369 (May 8,
1969), and Adoption of Modification of Policy Regarding
Redemption Provisions of Preferred Stocks Issued and Sold under
the Public Utility Holding Company Act of 1935, Holding Co. Act
Release No. 16758 (June 22, 1970).

-[18]- Adoption of Rule 7(d) under the Public Utility Holding
Company Act of 1935 to Exclude from the Definition of Ownership
in Sections 2(a)(3) and 2(a)(4) the Interest of Certain Kinds of
Lessors under Net Leases of Utility Facilities and Amendment of
Rule 106, Holding Co. Act Release No. 17980 (May 31, 1973).

-[19]- See Levy Testimony at 635-637 and cases cited therein
(e.g., Georgia Power Co., Holding Co. Act Release No. 18517 (July
31, 1974) (short-term borrowings authorized only after
evidentiary hearing and review)).
 
-------------------- BEGINNING OF PAGE #45 -------------------

          3.  The Move Toward Competition and Deregulation

     During the 1980s, as the focus of the utility industry
turned toward energy alternatives, competition, and deregulation,
the financing markets also underwent substantial changes, with
less emphasis placed on traditional forms of financing and more
creative financing alternatives available to issuers.  Again the
SEC responded to change by flexible interpretation and
rulemaking.  Examples included:

 *   Relaxing the competitive bidding requirements of rule 50. 
     Rule 50 required registered holding companies to sell
     securities by means of competitive bidding and imposed
     strict time limits on publication of invitations for bids to
     purchase securities.  When rule 415 under the Securities Act
     was adopted in 1982,-[20]- issuers in general had the
     flexibility to register large amounts of securities and to
     sell securities "off the shelf" on short notice.  Registered
     holding companies and their subsidiaries were placed at a
     disadvantage because rule 50 made it almost impossible to
     sell securities on short notice.  In response to this
     problem, and in an attempt to put registered holding
     companies and their subsidiaries on a more even footing with
     other issuers, the SEC relaxed the competitive bidding rules
     to permit issuers to use alternative procedures to solicit
     proposals for purchase on a more informal basis with less
     advance notice and to take full advantage of rule 415.-[21]-
 
 *   Rescinding rule 50.  When the SEC determined that
     competitive bidding was no longer necessary to prevent
     abuses in the issuance and sale of securities, it rescinded
     rule 50.-[22]-  

 *   Approving the issuance of different types of
     securities.-[23]-   As discussed previously, through the
     1970s, the focus of public financing by registered holding
     companies and their subsidiaries was primarily on
     traditional securities.  In the 1980s, however, utility
     construction programs were scaled back; utility earnings
     declined due to difficulty in reflecting expensive new
     generating capacity in rates; there were fewer new property
     additions against which to issue first mortgage bonds; and
     rate "phase-in" plans simultaneously created new capital
     requirements and new types of assets for utilities.  Also,

-------- FOOTNOTES --------                    

-[20]- Adoption of Integrated Disclosure System, Securities Act
Release No. 6383 (Mar. 3, 1982).

-[21]- Statement of Policy Concerning Application of Rule 50
Under the Public Utility Holding Company Act of 1935 (17 CFR
250.50) as Related to the Distribution of Securities Registered
Under Rule 415 Under the Securities Act of 1933 (17 CFR 230.415),
as Extended This Date, Holding Co. Act Release No. 22623 (Sept.
2, 1982), and Shelf Registration, Holding Co. Act Release No.
23122 (Nov. 17, 1983). 

-[22]- Public Utility Holding Company Act Rules, Holding Co. Act
Release No. 26031 (Apr. 20, 1994). 

-[23]- Section 7(c)(1) contemplates issuance of limited types of
securities, including common stock and bonds secured by first
liens on the physical properties of the issuer (or by an
obligation of a subsidiary that is so secured) or by other assets
that the SEC approves.  Section 7(c)(2) permits the SEC to
authorize other forms of financing.
 
-------------------- BEGINNING OF PAGE #46 -------------------

     the securities markets began to introduce innovative
     "products" that did not fit the mold of traditional
     financing.-[24]-  To respond to these changes, the SEC began
     to permit jurisdictional companies to issue bonds on the
     basis of assets other than physical property, secured by
     second liens, and to issue non-traditional types of
     securities.-[25]-

 *   Adopting rule 52 to exempt issuances of securities by
     public-utility companies from the requirements of sections 6
     and 7 if the proceeds are to be used to finance their
     utility business and the issuance is expressly approved by
     the state commission in the state where the utility is
     organized and doing business.-[26]-  Over the years, state
     and local regulators increasingly have begun to regulate the
     issuance of securities by utilities subject to their
     jurisdiction.-[27]-  Rule 52 was adopted to avoid
     duplicative regulation at the state and federal level and
     ease the regulatory burden on registered companies. 
     Originally, use of rule 52 was also conditioned on
     compliance with the competitive bidding requirements of rule
     50 and with the Statements of Policy, and on satisfaction of
                    

-[24]- Examples include variable rate pollution control bonds, or
"low floaters," and leveraged preferred stock.  The SEC approved
issuances of these types of securities, as noted below.  
-[25]- See, e.g., New Orleans Public Service Inc., Holding Co.
Act Release No. 24387 (May 12, 1987) (permitting issuance of rate
recovery mortgage bonds, on the basis of the regulatory asset
created by deferral of costs for future collection, secured,
among other things, by a second lien on the utility's physical
properties), and Louisiana Power & Light Co., Holding Co. Act
Release No. 24072 (Apr. 28, 1986) (authorizing issuance of
secured notes collateralized by a second lien and by first
mortgage bonds to be issued in the future, where earnings were
insufficient to support current issuance of first mortgage
bonds).  See also National Fuel Gas Co., Holding Co. Act Release
No. 24871 (Apr. 25, 1989) (permitting a registered holding
company to issue medium-term notes); Central Power and Light Co.,
Holding Co. Act Release No. 23095 (Oct. 24, 1983) (permitting
utility subsidiary to issue leveraged preferred stock); and
Connecticut Light and Power Co., Holding Co. Act Release No.
23366 (July 12, 1984) (permitting utility subsidiaries to enter
into arrangements for the issuance of tax-exempt floating rate
demand bonds).  The SEC has also approved interest rate swaps,
where one type of interest structure on debt is traded for
another, e.g., fixed rate is traded for floating rate.  See,
e.g., General Public Utilities Corp., Holding Co. Act Release No.
25625 (Sept. 10, 1992), and Middle South Energy, Inc., Holding
Co. Act Release No. 23119 (Nov. 15, 1983).
-[26]- Exemption of the Issuance and Sale of Certain Securities
By Public-Utility Subsidiary Companies of Registered Public-
Utility Holding Companies; Exemption of Acquisition of Public-
Utility Subsidiary Company Securities By Registered Holding
Companies, Holding Co. Act Release No. 25058 (Mar. 19, 1990). 
-[27]- See Hearings on S. 1869, S. 1870, S. 1871 and S. 1977, to
Amend or Repeal the Public Utility Holding Company Act of 1935,
Before the Subcommittee on Securities of the Senate Committee on
Banking, Housing and Urban Affairs, 97th Cong., 2d Sess. 407
(1982).  A recent survey by the Division of the powers of state
regulatory commissions indicates that at least 39 of the 50
states review some types of utility securities issuances.  See
Appendix A.
 
-------------------- BEGINNING OF PAGE #47 -------------------

     capitalization tests, among other things.  These conditions
     have since been eliminated.-[28]-  

 *   Deviations from the requirements of the Statements of
     Policy.  As the securities markets have developed, the SEC
     has found that the Statements of Policy have become
     anachronistic and hinder the ability of registered companies
     to raise capital.  As a result, the SEC has permitted more
     and more deviations on a case-by-case basis from the
     requirements of the Statements of Policy.-[29]-  In
     addition, in 1992, for similar reasons, the SEC eliminated
     compliance with the Statements of Policy as a condition to
     use of rule 52.-[30]-  

          4.  Intrasystem Financings

     Throughout all of these periods, one type of financing --
intrasystem financing -- has created special concerns for the
SEC.  Prior to the Holding Company Act, companies in the same
holding company system could issue securities to one another
without any practical limitations or oversight by regulators and,
consequently, could extract excessive interest and dividend rates
that could be passed on to utility customers as costs of capital. 
Because of the absence of arms-length bargaining in such
securities transactions, these types of issuances presented
unique problems for the SEC in addition to the problems posed in
connection with financing in general.  The Holding Company Act
regulates such transactions to assure that utility customers are
not harmed by these intrasystem transactions.-[31]-  

     Intrasystem issuances of securities are subject to sections
6 and 7 to the same extent, and subject to the same standards and
exceptions, as issuances to third parties.  Sections 9 and 10
govern the acquisition of the security by the associate company. 
In addition to these provisions, section 12 of the Holding
Company Act governs intrasystem financing transactions that may
not involve issuance of a security.  Section 12(a) prohibits
upstream loans, extensions of credit, or indemnities from any

-------- FOOTNOTES --------                    

-[28]- See Exemption of Issuance and Sale of Certain Securities
by Public-Utility Subsidiary Companies of Registered Public-
Utility Holding Companies; Exemption of Acquisition of Public-
Utility Subsidiary Company Securities by a Company in a
Registered Public-Utility Holding Company System, Holding Co. Act
Release No. 25573 (July 7, 1992).
  
-[29]- See, e.g., Georgia Power Co., Holding Co. Act Release No.
25033 (Feb. 7, 1990) (authorizing deviation from redemption
provisions required by Statement of Policy for first mortgage
bonds), and System Energy Resources, Inc., Holding Co. Act
Release No. 24318 (Feb. 18, 1987) (authorizing charter amendment
with earnings coverage requirement different from Statement of
Policy for preferred stock).  The Statements of Policy themselves
contemplate that "deviations from these standards should be
permitted in appropriate cases."  Statement of Policy Regarding
First Mortgage Bonds Subject to the Public Utility Holding
Company Act of 1935, and Statement of Policy Regarding Preferred
Stock Subject to the Public Utility Holding Company Act of 1935,
note 7 above. 

-[30]- See Holding Co. Act Release No. 25573, note 28 above.   

-[31]- See Chapter 4 in this Part II for a discussion of the
types of potential abuses inherent in affiliate transactions and
the actions taken by the SEC to prevent these abuses. 
 
-------------------- BEGINNING OF PAGE #48 -------------------

subsidiary to the registered holding company.  Rule 45(a)-[32]-
under section 12(b) provides that a company in a registered
holding company system must file a declaration and receive an
order from the SEC before it may lend or extend credit to,
indemnify, or make any donation or capital contribution to any
company in the system.  

     SEC rules provide some exceptions from the filing and
approval requirements.  Rule 45(b)-[33]- excepts specified
transactions from the declaration requirements of rule 45(a),
including loans or extensions of credit involving securities
acquisitions that are approved under or exempt from sections 9(a)
and 10, extensions of credit without interest in connection with
obligations in the ordinary course of business or to meet
emergency requirements, limited amounts of capital contributions
and open account advances without interest, failure to demand
repayment of an obligation that has become due, certain limited
guarantees issued in connection with surety bonds or obligations
required by law, and filing of consolidated system tax returns. 
Rule 52-[34]- exempts from the filing requirements of sections
6(a), 7, 9(a) and 10 certain issuances by public-utility
subsidiaries, and acquisitions by associate companies, of
securities that have been authorized by a state commission.  In
addition, sections 32(g) and 33(c) permit acquisitions by
registered holding companies of securities of exempt wholesale
generators and foreign utility companies without prior SEC
approval.-[35]- 

     B.   Recommendations for Future Regulation of Financing     

            Transactions

     The Division believes that continued SEC review of financing
is unnecessary in most instances.  As discussed previously, many
states review utility financing transactions.  In addition, the
disclosure requirements of the Securities Act and the Exchange
Act and the regulation inherent in the public securities markets
have imposed substantial controls on financing transactions that
were not present when the Act was adopted.  

     Accordingly, the Division is proposing to broaden the
exemptions from SEC review for financings and to increase use of
a "shelf" method for financing still subject to review.  The
effect of these actions should be to reduce significantly the
number of applications requiring SEC approval and to provide more
flexibility for registered holding companies and their
subsidiaries.  In addition, the Division is suggesting several
other administrative changes, including rescission of the
Statements of Policy, and a broader reading of the exemption
provided in section 6(b) for issuance of short-term debt, to
streamline regulation. 

-------- FOOTNOTES --------                    

-[32]- 17 C.F.R.   250.45(a).

-[33]- 17 C.F.R.   250.45(b).

-[34]- 17 C.F.R.   250.52.

-[35]- Section 33(c)(1) provides that the SEC shall promulgate
rules regarding registered holding companies' acquisition of
interests in foreign utility companies to protect customers of
associate public utility companies and to maintain the financial
integrity of the holding company system.  The SEC has proposed
such rules (see Proposed Rules and Forms Relating to Exempt
Wholesale Generators and Foreign Utility Companies, Holding Co.
Act Release No. 25757 (March 8, 1993)), but they have not yet
been adopted.  See Chapter 7, Part II, below.
 
-------------------- BEGINNING OF PAGE #49 -------------------


     The SEC should promulgate rules to reduce the regulatory
     burdens associated with routine financings.  

     The Division recommends that the SEC amend rule 52 to
broaden, in several respects, the exemption for routine financing
by registered holding company subsidiaries.  The Division also
recommends amending rule 45 to remove the dollar limitation from
the exception for capital contributions and open account advances
from a parent to a subsidiary.  These amendments were proposed in
1992, and the Division recommends their immediate adoption.

     Rule 52, as originally adopted in 1990, exempted, on certain
conditions, the issuance and sale of certain specified types of
securities by public-utility subsidiary companies of registered
public-utility holding companies from the requirement of prior
SEC authorization.-[36]-  The rule was amended in 1992 to, among
other things, expand the types of securities within the exemption
to include common stock, preferred stock, mortgage bonds, or
notes issued to a parent holding company (the interest rate and
maturity date of which are designed to parallel a debenture or
preferred stock issued by the parent holding company (the "mirror
image" requirement)) and to eliminate most of the conditions to
use of the rule.-[37]-  Rule 52 also exempts from the requirement
of prior SEC authorization under section 9(a)(1) the acquisition
by a company in a registered holding company system of any
securities issued by a public-utility subsidiary company pursuant
to the rule.  

     The Division recommends amending rule 52 to broaden the list
of debt securities that may be issued in reliance upon the
exemption and to make the exemption available to nonutility
subsidiaries of a registered holding company in connection with
routine financing transactions.  Further, the amendment would
make the exemption more useful in connection with intrasystem
financing, by revising the "mirror image" requirement so that the
interest rate and maturity date of any debt security issued to an
associate company would be designed to parallel the effective
cost of capital of the associate company.  The Division also
recommends amending rule 45 to exempt, without any dollar
limitation, capital contributions and open account advances
without interest by a parent company to its subsidiary companies
from the requirement of prior SEC approval.

-------- FOOTNOTES --------
                    
-[36]- The conditions included, among other things, requirements
that the issuance and sale are to finance the business of the
public utility and are approved by the appropriate state
commission, compliance with the competitive bidding requirements
of rule 50 and with the Statements of Policy, and satisfaction of
capitalization tests.  See Exemption of the Issuance and Sale of
Certain Securities By Public-Utility Subsidiary Companies of
Registered Holding Companies; Exemption of Acquisition of Public-
Utility Subsidiary Company Securities By Registered Holding
Companies, note 26 above, at 6-9.

-[37]- All conditions were eliminated except those relating to
purpose of the financing and state commission approval.  See
Exemption of Issuance and Sale of Certain Securities by Public-
Utility Subsidiary Companies of Registered Public-Utility Holding
Companies; Exemption of Acquisition of Public-Utility Subsidiary
Company Securities by a Company in a Registered Public-Utility
Holding Company System, note 28 above, at 3-6.
 
-------------------- BEGINNING OF PAGE #50 -------------------

     Moreover, the Division recommends that the SEC propose and
seek public comment on additional amendments to these rules.  The
Division recommends an additional amendment to rule 52 to exempt
the issuance and sale of any security by a subsidiary company in
a registered holding company system where the conditions of the
rule are otherwise met.  This additional change is intended to
eliminate unneeded regulation of routine financings by existing
subsidiaries of a registered holding company.  The Division also
proposes a further change to rule 45 to conform the exemption
from section 12(b), which is provided by rule 45, to the
exemption from section 6(a), which is provided by rule 52.  Such
a conforming amendment is necessary because a guaranty may
require approval both as a security under section 6(a) and as an
extension of credit under section 12(b).

     The proposed amendments to rule 52 would exempt most routine
financings by subsidiaries of a registered holding company.  The
rule, however, would not cover a financing by the holding company
itself, or by a utility subsidiary where the state commission has
not expressly authorized the transaction.-[38]-  These
financings, which would continue to require SEC approval by order
under the standards of section 7 of the Act, are generally not
subject to review by any other regulator. 

     The SEC should endorse the use of a shelf approach for
     financings that are not exempted under rule 52.

      A number of state and local regulators emphasize the need
for continued SEC oversight of holding company financings.  For
example, the National Association of Regulatory Utility
Commissioners believes that state statutes would require
amendment to provide protection for consumer interests if the SEC
no longer reviews holding company financings.-[39]-  At the same
time, the registered companies ask the SEC to consider ways to
streamline its review of financings that will not be exempted by
rule.  To balance these legitimate interests, the Division
recommends a shelf approach similar to that used under the
Securities Act. 

     Rule 415 under the Securities Act provides that a block of
securities may be registered in one registration statement and
issued on a delayed or continuous basis if the amount registered
is reasonably expected to be sold within two years and if certain
other conditions are satisfied.  This "shelf registration" rule
permits issuers to file a registration statement and obtain a
Securities Act order prior to the time any specific transaction
is contemplated, and to determine the type of securities to be
issued, as well as consummate subsequent issuances, without
regulatory delay.-[40]-  

     The procedure for regulatory approval under the Holding
Company Act is more cumbersome.  Under sections 6 and 7, an
                    
-------- FOOTNOTES --------

-[38]- Section 6(b) of the Act does not permit exemption of such
financing from the requirement of prior SEC approval.

-[39]- See Comments of NARUC, Request for Comments on
Modernization of the Regulation of Public-Utility Holding
Companies, Holding Co. Act Release No. 26153 (Nov. 2, 1994)
("Concept Release").  Comments received by the SEC, as well as a
summary of the responses, are available in the Public Reference
Room of the SEC in public file number S7-32-94 (hereinafter
referred to as "Comments of [name]").

-[40]- 17 C.F.R.   230.415.
 
-------------------- BEGINNING OF PAGE #51 -------------------

issuer must file a declaration describing the terms of the
securities to be issued and obtain an order on those specific
terms.  Given the time required to file and approve a request for
authorization under the Holding Company Act, the regulatory
delays inherent in this process are apparent.  Even using the
"budget method"-[41]- to expedite the approval process, the
specific terms of the securities proposed to be issued must be
described and separate orders on each issuance must still be
obtained in most cases.  

     The SEC has used an approach similar to Securities Act shelf
registration in some limited cases under the Holding Company Act. 
At present, a registered holding company can obtain current
authorization for all short-term debt financings contemplated for
a two-year period.-[42]-  The SEC has also used this approach to
issue orders covering multiyear periods that authorize registered
holding company subsidiaries, in advance of the specific
transactions, to enter into arrangements for pollution control
and other similar tax-exempt financing arrangements,-[43]- and to
issue securities by means of competitive bidding under former
rule 50 (now rescinded),-[44]- and, more recently, for specified
types of utility financing.-[45]-  A number of commenters,
including registered holding companies, regulators and others,
urge the SEC to expand its use of a shelf approach modeled on
rule 415 under the Securities Act.-[46]-  
                    
-------- FOOTNOTES --------

-[41]- The "budget method," described above in Section A,
involves filing one declaration to cover several years' financing
requirements.  

-[42]- See, e.g., Entergy Corp., Holding Co. Act Release No.
26162 (Nov. 18, 1994) (two-year authorization of issuance and
sale of commercial paper and short-term notes to banks and
intrasystem loans through money pool arrangements, subject to
dollar limitations on principal amount outstanding, to finance
registered holding company system's interim capital
requirements).

-[43]- See, e.g., Louisiana Power & Light Co., Holding Co. Act
Release Nos. 25314 (May 17, 1991) and 25320 (May 29, 1991)
(authorizing entry into arrangements for issuance of pollution
control revenue bonds by governmental issuers and entry into
credit support arrangements by the utility, subject to overall
limit on principal amount and use of approved forms of
agreements, for periods up to two years).  If the terms of the
proposed transactions change, however, a supplemental
authorization is required.  See Louisiana Power & Light Co.,
Holding Co. Act Release No. 25834 (June 18, 1993).  

-[44]- See, e.g., Gulf Power Co., Holding Co. Act Release No.
25894 (Sept. 27, 1993) (authorizing issuance of first mortgage
bonds and preferred stock up to specified amounts through
December 31, 1996, so long as the terms are within parameters
specified in the order).  

-[45]- See, e.g., West Penn Power Co., Holding Co. Act Release
No. 26298 (June 1, 1995) (authorizing issuance of debentures with
specified terms, subject to maximum limitations on interest rate
and underwriting commissions).

-[46]- See, e.g., Comments of the American Gas Association
("AGA"), CINergy Corp. ("CINergy"), Consolidated Natural Gas
Company ("Consolidated"), National Fuel Gas Company ("National"),
Columbia Gas System, Inc. ("Columbia"), General Public Utilities
Corporation ("GPU"), the Securities Regulation Committee of the
New York State Bar Association ("New York Bar Committee"), the
Staff of the Michigan Public Service Commission ("Michigan
                                                   (continued...)
 
-------------------- BEGINNING OF PAGE #52 -------------------


     The registered holding companies urge the SEC to expand the
use of this approach to permit approval of a wide range of
financing transactions, including those involving commercial
paper, backup lines of credit, bank term loans, revolving credit
loans, medium term notes, senior debentures, subordinated debt,
convertible debentures, preferred stock, convertible preferred
stock, common stock issuances and repurchases, and parent company
guarantees or letters of credit for subsidiaries in support of
normal business activities.  They further recommend that the SEC
lengthen the authorization period from two to a minimum of five
years to reduce the regulatory burdens caused by more frequent
filings.  The companies also ask the SEC to require less
specificity in the terms of anticipated credit facilities, bond
financings, and other similar transactions prior to issuance of
an order, to eliminate the need for later supplemental orders if
immaterial changes in terms should occur.  They note that the
issuer would continue to file certificates pursuant to rule 24
with the specific terms of each issuance, so that the SEC can
monitor compliance with the requirements of the Act and the
order.-[47]-
  
     The Virginia Commission supports the use of a shelf
approach, noting that Virginia employs a similar approach for
utility financings.  As it said in its comments, "[t]he company
then has the flexibility it needs to time its entrance into the
market.  At the same time, the [Commission] reviews in advance,
the possible terms, conditions and impact that a proposed issue
may have on the utility.  The Commission is able to look at a
worst case scenario to see how this may impact the [utility's]
capital structure, cost of capital and its overall financial
health."-[48]-

     The Division recommends that a shelf approach be adopted
that permits the issuance of orders covering blocks of securities
to be sold at one time or from time to time over periods of up to
five years.  Similar to rule 415, such filings could relate to a
wide variety of securities issuable in any combination, with
general descriptions of the terms of each type of security
covered.  Specific terms of each issuance would be provided by a
certificate filed pursuant to rule 24.  The shelf approach would
be consistent with, but would expand the coverage of, the
Division's present procedure of issuing orders that authorize
certain types of securities for multiyear periods so long as the
terms fall within broad parameters stated in the order.  Consumer
interests would be protected because financings would continue to
be measured against the standards of section 7.  At the same
time, this approach should address the registered holding
companies' timing concerns by permitting them to select the type
of securities to be issued, and price and close transactions on
an expedited basis, without the need for a supplemental order
approving the specific terms of each issuance.  

     The SEC should rescind the Statements of Policy concerning
     first mortgage bonds and preferred stock.  

-------- FOOTNOTES --------                    

-[46]-(...continued)
Commission Staff"), and the Virginia State Corporation Commission
("Virginia Commission").  

-[47]- See Comments of CINergy, Consolidated, National and
Columbia, and GPU.

-[48]- Comments of the Virginia Commission at 5.
 
-------------------- BEGINNING OF PAGE #53 -------------------

     The Statements of Policy, formulated by the staff nearly
forty years ago, limit the terms used in issuances of first
mortgage bonds and preferred stock by companies in registered
holding company systems.  The SEC has previously noted that the
Statements of Policy are "anachronistic"-[49]- and "no longer
relevant to contemporary financial markets."-[50]-  For that
reason, in 1992, rule 52 was amended to eliminate compliance with
the Statements of Policy as a condition to its use.-[51]-  The
SEC has also granted numerous deviations from the Statements of
Policy by order with respect to specific transactions.-[52]-  

     The Division believes that the Statements of Policy are out
of date and have not kept pace with rapidly changing securities
markets.  They also impose on those companies in registered
systems that are not eligible to take advantage of rule 52 the
burden of either complying with outdated requirements that are
not applicable to other issuers, or demonstrating why compliance
should not be required.  The Division recommends that the SEC
seek public comment on the proposed rescission of the Statements
of Policy.

     The SEC should deem nominal par value stock to be no par
     value stock for purposes of determining the amount of short-
     term debt securities that can be issued under section 6(b)
     of the Act without prior SEC approval. 

     Section 6(b) provides an exemption from the approval
requirements of sections 6(a) and 7 for the issuance, renewal or
guaranty of short-term debt securities in an aggregate total of
not more than five percent of the principal amount and par value
of all other securities of the company then outstanding.  For
purposes of section 6(b), equity securities having no par value
are valued at their fair market value as of the date of the
issuance.  The Division recommends that the SEC clarify that, for
purposes of calculating the five percent limit in section 6(b)
for exempt sales of short-term notes, penny ($.01) par value, or
other nominal par value, stock is equivalent to no par value
stock. This clarification would result in valuation of penny par
stock at its fair market value as of the date of issuance for
purposes of section 6(b), and thus permit issuance of additional
amounts of short-term debt without a prior SEC order for
companies that utilize penny or other nominal par value stock.  

     At the time the Act was passed, utility holding companies
were generally not capitalized with nominal or penny par value
stock and the par value of stock was set to approximate fair
market value.  The use of nominal par value stock evolved in
response to state franchise taxes that are assessed on the basis
                    
-------- FOOTNOTES --------

-[49]- Seeking of Additional Comment on Provisions Now in Rule 52
Providing for the Exemption of the Issue and Sale of Certain
Securities By Public-Utility Subsidiary Companies of Registered
Public-Utility Holding Companies and Exemption of Acquisition of
Public-Utility Subsidiary Company Securities By Registered
Holding Companies,  Holding Co. Act Release No. 25059 (March 19,
1990).

-[50]- Exemption of Issuance and Sale of Certain Securities by
Public-Utility Subsidiary Companies of Registered Public-Utility
Holding Companies; Exemption of Acquisition of Public-Utility
Subsidiary Company Securities by a Company in a Registered
Public-Utility Holding Company System, note 28 above.

-[51]- Id.

-[52]- See, e.g., Georgia Power Co., note 29 above.
 
-------------------- BEGINNING OF PAGE #54 -------------------

of the par value of a corporation's common stock; the greater the
par value of the stock, the higher the assessment.-[53]-  As a
result of this development, companies whose common stock carries
a market value far in excess of the penny or other nominal par
value per share are virtually precluded from using the exemption.

     The Division believes that the exemption afforded by section
6(b) was intended to be determined on the basis of the value of
outstanding stock, and that penny par value and other nominal
value stock is the equivalent of no par value stock for this
purpose.  

     Other Proposals

     Issuance of nontraditional securities.  In the case of
     financings that are not exempt from the requirement of SEC
     approval, the Division recommends that the SEC permit
     registered companies wider latitude to structure the types
     and terms of their securities to the demands of the market
     in order to achieve the lowest possible capital costs.  The
     Division believes that a more flexible approach is justified
     by changes in the financial markets and is consistent with
     the proposed amendments to rule 52 that would broaden the
     types of securities that qualify for exemption under the
     rule. The SEC would continue to monitor the types of
     innovative securities issued by jurisdictional companies, to
     determine whether the risks inherent in these securities
     preclude approval of their issuance.

     Payment of dividends out of capital or unearned surplus. 
     Rule 46, under section 12(c),-[54]- prohibits the
     declaration or payment by a registered holding company or
     subsidiary of any dividend out of capital or unearned
     surplus, unless SEC approval under the Act has been
     obtained.  In light of the dividend restrictions in state
     laws and governing documents and the oversight of corporate
     dividend practices by the financial markets and rating
     agencies, the Division believes that SEC review may no
     longer be required in all cases.  Consequently, the Division
     recommends that the SEC study the question of whether
     payment of dividends out of capital or unearned surplus
     should be permitted in some cases without an order of the
     SEC, particularly with respect to the dividend policy of
     nonutility companies in a registered system, and consider a
     possible amendment to rule 46 to except such cases from SEC
     review.  

     Use of securities ratings as evidence of compliance with the
     standards of the Act.  The SEC looks to the existence of
     investment grade ratings by nationally recognized
     statistical rating organizations as a factor in the

-------- FOOTNOTES --------

-[53]- See e,g,, Arkansas Power & Light Co., Holding Co. Act
Release No. 24520 (Dec. 8, 1987).

-[54]- Section 12(c) makes it unlawful for a registered holding
company or subsidiary to pay or declare a dividend in
contravention of such rules as the SEC deems necessary to protect
the system's financial integrity, safeguard the working capital
of utilities, and prevent dividend payments out of capital or
unearned surplus.
 
-------------------- BEGINNING OF PAGE #55 -------------------

     administration of some securities statutes,-[55]- and the
     use of ratings is "an important component of the SEC's
     regulatory program."-[56]-  The concept release issued by
     the SEC in 1994 questioned whether ratings could be used to
     determine whether the standards of the Act have been
     satisfied in some circumstances.  The Division believes that
     ratings should not be the single determinative factor in
     considering whether to approve a proposed transaction, but
     they may be useful in considering such transactions.  The
     Division recommends that the SEC consider securities ratings
     in making determinations under the Act in connection with
     the consideration of applications relating to financing,
     acquisitions, dividends and diversification.  

Chapter 2. Utility Ownership

A. Background
         
     As discussed previously, holding company systems dominated
the United States electric and gas utility industry by 1935.  The
properties acquired by these vast combinations were often
geographically and economically unrelated to one another, as
acquisitions were often motivated by the profits to be gained by
promoters and investment bankers, and were made at inflated
prices, financed by the issuance of securities to the
public.-[1]- Congress found that the national public interest and
the interest of investors and consumers were adversely affected
by "the growth and extension of holding companies [that] bear no
relation to economy of management and operation or the
integration and coordination of operating properties."-[2]-

     To address this problem, the Holding Company Act requires
the simplification and integration of holding company systems. 
Section 11(b)(1) directs the SEC to take action to limit the
operations of each registered holding company system to a single
integrated public-utility system.-[3]-  Section 11(b)(2)
                    
-------- FOOTNOTES --------

-[55]- See, e.g., 17 C.F.R.   240.15c3-1 (net capital rule for
broker-dealers); 17 C.F.R.   239.13(b)(2) (instructions for
Securities Act Registration Form S-3).  The SEC issued a release
in 1994 in which it posed questions regarding the SEC's reliance
on ratings by nationally recognized statistical ratings
organizations.  See Nationally Recognized Statistical Rating
Organizations, Securities Act Release No. 7085 (Aug. 31, 1994). 
Comments on the release are available for public inspection in
File No. S7-23-94.

-[56]- Id. at 8.  The SEC has also proposed mandatory disclosure
of securities ratings in Securities Act and Exchange Act filings,
because of their importance to investors and changes in the
securities markets.  See Disclosure of Security Ratings,
Securities Act Release No. 7086 (Aug. 31, 1994).

-[1]-  Annual Report of 1944, at 84.

-[2]-  Section 1(b)(4) of the Act.  See  H.R. Conf. Rep. No.
1903, 74th Cong., 1st Sess. 68 (1935).  See generally North
American Co. v. SEC, 327 U.S. 686, 704 (1946); Douglas,
Scatteration v. Integration of Public Utility Systems, 24 A.B.A.
J. 800 (1938).  See also United Gas Improvement Co. v. SEC, 138
F.2d 1010, 1019 (3d Cir. 1943).
-[3]- See Senate Report at 11.  Under the Act, an integrated
public-utility system, as applied to electric utility companies,
means:

                                                   (continued...)
 
-------------------- BEGINNING OF PAGE #56 -------------------

similarly requires the SEC to eliminate needless complications
from the corporate structures of registered holding companies,
and to ensure the equitable distribution of voting power among
security holders.-[4]-  The legislative history explains that
"the purpose of section 11 is simply to provide a mechanism to
create conditions under which effective Federal and State
regulation will be possible.  It is therefore the very heart of
the title, the section most essential to the accomplishment of
the purposes set forth in the President's message [recommending
the legislation]."-[5]-

     Enforcement of the Act was not intended to eliminate the
holding company as a viable corporate device in the public
utility field.  Indeed, the Act expressly permits a holding
company that meets the standards of the Act to function and
develop as a regional system.-[6]-  Congress intended these
provisions "to give the Commission supervision over the future
development of utility-holding company systems so that the

-------- FOOTNOTES --------                    

-[3]-(...continued)
     a system consisting of one or more units of generating
     plants and/or transmission lines and/or distributing
     facilities, whose utility assets, whether owned by one or
     more electric utility companies, are physically
     interconnected or capable of physical interconnection and
     which under normal conditions may be economically operated
     as a single interconnected and coordinated system confined
     in its operations to a single area or region, in one or more
     States, not so large as to impair (considering the state of
     the art and the area or region affected) the advantages of
     localized management, efficient operation, and the
     effectiveness of regulation.

Section 2(a)(29)(A).

     As applied to gas utility companies, it means:

     a system consisting of one or more gas utility companies
     which are so located and related that substantial economies
     may be effectuated by being operated as a single coordinated
     system confined in its operations to a single area or
     region, in one or more States, not so large as to impair
     (considering the state of the art and the area or region
     affected) the advantages of localized management, efficient
     operations, and the effectiveness of regulation:  Provided,
     That gas utility companies deriving natural gas from a
     common source of supply may be deemed to be included in a
     single area or region. 

Section 2(a)(29)(B).

     As discussed in footnote 19 below, the SEC may permit a
registered holding company to control more than one integrated
public-utility system in certain circumstances. 
-[4]- Section 11(b)(2), among other things, requires the
elimination of unnecessary and "great-grandfather" holding
companies, the reorganization of holding companies which are
overcapitalized, and the redistribution of voting power among
security holders of holding companies and operating companies.  
-[5]-  See Senate Report at 11.
-[6]-  See Senate Report at 30; House Report at 15.  See also
sections 9 and 10 of the Act, governing acquisitions of utilities
and utility assets.
 
-------------------- BEGINNING OF PAGE #57 -------------------

systems will be subjected to the limitation of geographic and
economic integration laid down in section 11."-[7]-  

     Section 9(a)(1) requires prior SEC approval under the
standards of section 10 for the acquisition of "any securities or
utility assets" by a registered holding company or its
subsidiary; section 9(a)(2) requires approval for the acquisition
of any security of any public-utility company by "any person" who
is, or will by virtue of an acquisition become, an affiliate of
two or more public-utility companies.-[8]-  

     Section 10, in turn, directs the SEC to consider the
potential anticompetitive effects of a utility acquisition, the
adequacy of the consideration, and the effect of the acquisition
upon the system, the public interest and the interest of
investors and consumers.  The SEC must also be satisfied that
there is compliance with relevant state laws.  In addition, under
section 10(c)(1), the SEC cannot approve an acquisition that "is
unlawful under the provisions of section 8 or detrimental to the
carrying out of the provisions of section 11," and, under section
10(c)(2), the SEC must find that a proposed acquisition "serve[s]
the public interest by tending towards the economical and
efficient development of an integrated public-utility
system."-[9]-  
     In its first year of the administration of the Holding
Company Act, the SEC stated that "[t]he general policy of the
Commission in administering this legislation is to give full
effect to the Congressional intent of preventing the repetition
of the abuses which led to the passage of the Act and to make the
administration of the law as workable as possible without
imposing restrictions of a kind which bear no relationship to the
purposes to be achieved."-[10]-  

          1.  The Restructuring of the Industry

     A major part of the SEC's work during the first decades
following the passage of the Holding Company Act involved the
reorganization and simplification of holding company systems
required by section 11 of the Act.  All holding companies were
required to register with the SEC and to comply with the
Act.-[11]-  There was a three year phase-in period during which
                    
-------- FOOTNOTES --------

-[7]- Senate Report at 30.  See also House Report at 16 (section
10 was intended to prevent acquisitions that would be "attended
by the evils which have featured the past growth of holding
companies"), cited in American Electric Power Co., Inc., 46
S.E.C. 1299, 1306 (1978).

-[8]- For purposes of section 9(a)(2), an "affiliate" is any
person that directly or indirectly owns 5% or more of the
outstanding voting securities of a public-utility company.

-[9]- The requirement of benefits to an integrated system does
not apply to the acquisition of securities or utility assets of a
public-utility company operating exclusively outside the United
States. See Southern Co., Holding Co. Act Release No. 25639
(Sept. 23, 1992) (permitting acquisition of foreign utility
operations by registered holding company).  The order is
discussed below.

-[10]- Annual Report of 1936, at 35.  

-[11]- Section 11(e) permits the filing of voluntary plans for
compliance with the standards of section 11(b) while section
11(d) permits recourse to the courts if necessary to enforce the
SEC's orders.  The Act requires SEC approval of all plans,
                                                   (continued...)
 
-------------------- BEGINNING OF PAGE #58 -------------------

companies instituted a number of unsuccessful legal challenges to
the Act.  In 1938, the Supreme Court upheld the constitutionality
of the registration provisions of the Act.-[12]-  Thereafter, the
SEC's work began in earnest.-[13]-  

     Early decisions focused on section 11's integration
requirement, described by the SEC as a specialized antitrust
provision designed to address the serious and uneconomic
concentration of control of public-utility companies.-[14]- 
Under section 11(b)(1), the SEC required divestiture of utility
properties that did not contribute to an integrated system, as
well as nonutility subsidiaries that were not reasonably
incidental or economically necessary to utility operations.-[15]-
 
Questions arose concerning, among other things, the permissible
size of a system and the ownership of both gas and electric
operations by a single holding company.  

     With respect to size, the SEC looked primarily to the effect
on localized management and the effectiveness of
regulation.-[16]-  With respect to combination systems, the SEC
first held that gas and electric properties could constitute a
single integrated system,-[17]- then, in a series of subsequent
decisions, abandoned this position, finding that a combination of
gas and electric properties does not constitute a single
integrated utility system within the meaning of the Act.-[18]- 

-------- FOOTNOTES --------                    

-[11]-(...continued)
whether voluntary or involuntary, for the reorganization of
registered holding companies or their subsidiaries.  See
generally Annual Report of 1939, at 72-73.

-[12]- Electric Bond & Share Co. v. SEC, 303 U.S. 419 (1938). 
See also North American Co. v. SEC, note 2 above (upholding
constitutionality of section 11(b)(1) integration provisions),
and American Power Company v. SEC, 329 U.S. 90 (1946) (upholding
constitutionality of section 11(b)(2)).

-[13]- See Annual Report of 1941, at 73 (the SEC initiated
integration proceedings against nine systems and simplification
proceedings with respect to three more).

-[14]- Annual Report of 1944, at 87.

-[15]- Id. at 89-90.

-[16]- See, e.g., American Gas & Electric Co., 22 S.E.C. 808
(1946).  In denying a request for acquisition, the SEC concluded
that "the substantially enlarged group of properties that would
result from the acquisition . . . cannot be found to be `not so
large as to impair . . . the advantages of localized management
and the effectiveness of regulation.'"  Id. at 816-17.  One
Commissioner dissented, stating that "we cannot deny this
application by general appeals to the evils of bigness without
particular reference to the specific standards of the Act."  Id.
at 819.  

-[17]- See American Water Works and Electric Co., 2 S.E.C. 972
(1937).  The SEC reasoned that "[n]o specific mention is made in
the definition of an integrated public utility system concerning
a combined gas and electric system," and held that "it is proper
to regard such a combined property as a single integrated system,
provided that all of the electric properties are integrated and
all of the properties, both gas and electric, are in fairly close
geographic proximity and are so related that substantial
economies may be effectuated by their coordination under common
control."  Id. at 983.  

-[18]- Philadelphia Co., 28 S.E.C. 35, 44 (1948), citing Columbia
Gas and Electric Corp., 8 S.E.C. 443 (1941); United Gas
                                                   (continued...)
 
-------------------- BEGINNING OF PAGE #59 -------------------

As a result, companies seeking to retain gas, as well as
electric, properties were required to satisfy the "additional
system" standards set forth in the (A), (B) and (C) clauses of
section 11(b)(1).-[19]-   

          2.  The Transition Period

     By 1952, the SEC reported that the task of bringing about
compliance with section 11 "is rapidly nearing completion."-[20]-
 
The liquidation of unnecessary holding companies with the return
of their subsidiaries to independent ownership, and the
streamlining of a number of others into compact regional systems
offering the benefits of large-scale centralized generation and
transmission of electric power and of integrated long distance
transmission and distribution facilities for natural gas had
revitalized the industry.-[21]-

     The challenges of the post-reorganization period involved
the development of parameters for the future structure of the
industry, particularly in light of changing circumstances.  The
SEC's application of the integration requirement generally
recognized such changes.  The SEC noted that holding companies
hoping to expand their systems, and to justify their continuing
existence, would have to do more than simply establish physical
interconnections among their subsidiary companies.  The SEC
stated, "[t]here must be a realization of important economic and
engineering benefits obtainable only by the knitting together of
a compact group of operating
properties having basic functional relationships with one
another.  In addition, the parent holding companies must be in a
position to furnish sound and constructive assistance to their
operating subsidiaries in the financing of expansion
programs."-[22]-

-------- FOOTNOTES --------                    
                    
-[18]-(...continued)
Improvement Co., 9 S.E.C. 52 (1941); North American Co., 11
S.E.C. 194 (1942); Engineers Public Service Co., 12 S.E.C. 41
(1942).  The SEC reasoned that the Act separately defines
"integrated public-utility system" for electric utility companies
and for gas utility companies and, in so doing, prescribes
different standards which preclude the possibility of a
definition that could be applicable to a combined system.

-[19]- Under the A-B-C clauses, the SEC shall permit a registered
holding company to retain an additional integrated system if the
additional system cannot be operated as an independent system
without the loss of substantial economies, the additional system
is located in one or adjoining states or a contiguous country,
and the combination of such systems under the control of a single
holding company is not so large as to impair the advantages of
localized management.  The SEC construed these clauses
restrictively to require a showing of "substantial hardship to
investors and consumers were its relationship with the holding
company terminated," Philadelphia Co., note 18 above, at 46,
cited in SEC v. New England Electric System, 384 U.S. 176, 181
(1966), and to require that additional systems be located in
states contiguous to that of the principal system, Engineers
Public Service Co., 9 S.E.C. 764, 774-87 (1941), rev'd and
remanded on other grounds, Engineers Public Service Co. v. SEC,
138 F.2d 936 (D.C. Cir. 1943), vacated as moot, 332 U.S. 788
(1947).

-[20]- Annual Report of 1952, at 82.

-[21]- Id.

-[22]- Annual Report of 1951, at 92.
 
-------------------- BEGINNING OF PAGE #60 -------------------


     The types of proposed acquisitions, and the technologies
used, changed in the 1950s and 1960s.  Companies increasingly
sought SEC approval for joint ownership of large generating and
other utility facilities outside of their service territories. 
The SEC responded flexibly to these new circumstances.  Thus, in
1955, the SEC authorized a proposal by 12 utilities located
throughout New England for the acquisition and financing of a
pioneering atomic power plant to be constructed in
Massachusetts.-[23]-  Thereafter, in 1963, the SEC authorized a
similar proposal relating to the construction of a nuclear-
powered generating plant.-[24]-  The SEC also applied a liberal
reading of the integration requirement in a line of utility
acquisition decisions, related to the development of nuclear
power and the concern with national security in the post-World
War II era, in which registered holding companies and
unaffiliated utilities formed generating companies to furnish
power to Atomic Energy Commission installations.-[25]-   

     The SEC also signaled a more flexible application of the
integration requirement when it approved an acquisition that it
had denied in 1946 because the resulting system was too
large.-[26]-  In reversing its position, the SEC noted that "the
determination of whether to permit enlargement of a system by
acquisition is to be made on the basis of all the circumstances,
not on the basis of preconceived notions of size."-[27]-  The SEC
specifically noted that technological developments between 1946
and 1978, including the increased size of generating units and
improved transmission of electricity over greater distances,
justified larger systems than had been permitted in earlier
years.-[28]-

-------- FOOTNOTES --------                    

-[23]- Yankee Atomic Electric Co., 36 S.E.C. 552 (1955).  The SEC
found the coordination requirement of section 2(a)(29) satisfied
because each system could absorb its full share of plant output,
as set by a predetermined schedule, and because operating
necessity or technological developments would determine when the
plant would be serviced, modified or retired. 

-[24]- Connecticut Yankee Atomic Power Co., Holding Co. Act
Release No. 14947 (Sept. 26, 1963).  Again, the company's capital
stock would be owned in various proportions by a group of 12 New
England utility companies, including subsidiaries of certain
registered holding companies.  The SEC found that the integration
requirement was satisfied because the New England transmission
grid already interconnected the various owner companies. 
Connecticut Yankee Atomic Power Co., 41 S.E.C. 705, 710 (1963). 
See also Electric Energy, Inc., 38 S.E.C. 658, 669 (1958)
(holding that direct interconnection not required in
circumstances which would have resulted in an uneconomic
duplication of transmission facilities).

-[25]- See Central Illinois Public Service Co., 32 S.E.C. 202
(1951); Ohio Valley Electric Corp., 34 S.E.C. 323 (1952), and
Electric Energy, Inc., note 24 above (finding standards of
section 10 satisfied in connection with the acquisition by
registered holding company systems of the capital stock of a
generating company formed to supply power to a plant built by the
Atomic Energy Commission); Mississippi Valley Generating Co., 36
S.E.C. 159 (1955) (Congress intended the concept of integration
to be flexible). 

-[26]- American Electric Power Co., Inc., note 7 above.

-[27]- Id. at 1309.

-[28]- Id. at 1309-10.
 
-------------------- BEGINNING OF PAGE #61 -------------------

     The SEC continued its restrictive interpretation of the
ownership by a registered holding company of combined gas and
electric systems.  In 1966, the U.S. Supreme Court upheld the
SEC's interpretation of the standards for retention of
combination systems.-[29]-  As noted previously, the SEC narrowly
construed clause (A) of section 11(b)(1) to require that the
additional system, if separated from the principal system, would
be incapable of independent economic operation.-[30]-  Although
this interpretation was ultimately sustained by the U.S. Supreme
Court, two justices dissented, contending that the test
formulated by the SEC was at odds with the wording of the Act,
had little basis in the statutory history or aims of the Act, and
could not be sustained by agency or judicial precedent.-[31]-  
Nevertheless, the SEC has required registered holding companies
seeking ownership of combined gas and electric properties to
satisfy the A-B-C clauses.-[32]-  

     The SEC's treatment of the ownership of combined properties
by exempt holding companies, however, has been less consistent. 
Section 11's integration provisions apply only to registered
holding companies.  In early cases involving requests for
exemption from registration, the SEC found that exempt holding
companies did not have to meet the strict requirements of the
integration requirements.-[33]-  Following the Supreme Court's
decision in New England Electric System, however, the SEC
reconsidered this view and, in 1970, denied a request by a
combination gas and electric utility company and an exempt
holding company for authorization to acquire another such company
and remain exempt.-[34]-  Four years later, the SEC revisited
these issues and, granting an exemption, approved an acquisition
in which an exempt holding company with gas and electric
                    
-------- FOOTNOTES --------

-[29]- SEC v. New England Electric System, note 19 above, at 185.
See also SEC v.
New England Electric System, 390 U.S. 207 (1968).

-[30]- New England Electric System, 41 S.E.C. 888 (1964) (having
determined that this showing was not made, the SEC required
divestiture of the gas properties of an electric registered
company).  The SEC rejected the state's arguments in favor of
retention, reasoning that the standards of section 11, concerning
retention of additional systems, should not yield to the views of
state or local authorities.  See id. at 902 (section 8,
concerning the acquisition of additional systems, "does not
relate to the divestment of properties under the policy embodied
in Section 11(b)(1)"). 

-[31]- SEC v. New England Electric System, note 19 above, at 186
(Harlan, J. and Stewart, J., dissenting).  Among other things,
the dissenting justices described as "an illusion" the majority's
perception of a policy in the Act against common control of gas
and electric utility systems with its danger of stifled
competition, and emphasized that "Congress' own careful
compromise of the various conflicting policy interests" mandated
the need for proof that freeing a gas system from control by an
electric system will improve earnings by some extent. Id. at 190-
91.
 
-[32]- See UNITIL Corp., Holding Co. Act Release No. 25524 (Apr.
24, 1992) (approving acquisition of gas properties as additional
system under the A-B-C clauses). 

-[33]- Eastern Gas and Fuel Associates, 30 S.E.C. 834, 848-49
(1950).

-[34]- Illinois Power Co., 44 S.E.C. 140 (1970).  The SEC also
based its denial of the exemption on anticompetitive grounds, and
approved the acquisition subject to divestment of the gas
properties.  Id. at 145.
 
-------------------- BEGINNING OF PAGE #62 -------------------

properties acquired another combination company.-[35]-  Finally,
the SEC came full circle and once again determined that section
11 was not applicable to exempt holding companies' ownership of
combination properties.-[36]-

     Also during this period, the SEC approved the formation of
one new registered holding company, Northeast Utilities,-[37]-
and denied the application for formation of another.-[38]-  

          3.  Consolidation and Disaggregation

     In recent years, the gas utility industry has undergone
fundamental restructuring, largely in response to legislative and
regulatory initiatives.  During this period, the first steps
toward disaggregation of the electric utility industry have
begun.  Since 1980, due in part to increasing costs, electric
companies have largely ceased construction of new generating
units and have been increasing their operations and supply
sources through merger and acquisition.  Independent power
projects have developed, and many companies find it more economic
to purchase power than to produce it from new sources.  At the
                    
-------- FOOTNOTES --------

-[35]-  Union Electric Company, 45 S.E.C. 489 (1974), aff'd
without opinion sub nom., City of Cape Girardeau v. SEC, 521 F.2d
324 (D.C. Cir. 1975).  The SEC invoked the then-current energy
crisis in approving the application, but retained jurisdiction
over whether the gas companies could be retained.

-[36]-  WPL Holdings, Inc., Holding Co. Act Release No. 24590
(Feb. 26, 1988), aff'd in part and rev'd in part sub nom.,
Wisconsin's Environmental Decade, Inc. v. SEC, 882 F.2d 523 (D.C.
Cir. 1989), reaffirmed, Holding Co. Act Release No. 25377 (Sept.
18, 1991).  The SEC stated that "we do not believe that the pro-
competitive thrust of the Act expresses an absolute Federal
policy against combination gas and electric operations."  WPL
Holdings, Inc., Holding Co. Act Release No. 24590.  Relying on
advice from the Wisconsin Public Service Commission that it could
adequately regulate combined gas and electric operations, the SEC
found that the "affirmative state regulation" evidenced that
retention of the combined properties would not be detrimental to
the public interest or the interest of investors or consumers.
Id.

-[37]- Northeast Utilities, 42 S.E.C. 963 (1966).  One of the
system utilities distributed natural gas as well as electricity
at retail.  The SEC approved the acquisition only with respect to
the electric utility operations.  Jurisdiction was reserved over
the question of retention of the gas properties and any
nonutility operations.  Id. at 968.  The gas properties were
ultimately spun off to a new gas holding company.  See Northeast
Utilities, Holding Co. Act Release No. 24908 (June 22, 1989).

-[38]- In 1968, two registered holding companies, New England
Electric System and Eastern Utilities Associates, and a
nonassociate electric utility company, Boston Edison Company,
applied unsuccessfully for authorization to form a new registered
holding company.  See New England Electric System, 45 S.E.C. 684
(1975).  The resulting holding company would have controlled
nearly 40 percent of total New England generating capacity,
making it by far the largest electric system in New England and a
dominant participant in the New England Power Pool ("NEPOOL"). 
The SEC did not read section 10(b)(1) of the Act as necessarily
precluding its approval, but instead, found insufficient evidence
of savings as a result of the proposed transactions.  The
applicants had not presented savings that might accrue through
the NEPOOL agreement.  See id. at 691.
 
-------------------- BEGINNING OF PAGE #63 -------------------

same time, traditional utilities have evolved into energy
companies that provide a wide range of energy-related services to
their consumers. 

     This process of change was reflected in the SEC's approach
to utility acquisitions.  A number of the SEC's major decisions
involving mergers and acquisitions reveal the extent to which
FERC jurisdiction had evolved in this area and the SEC's
increasing recognition that mergers and acquisitions were
reviewed by the FERC and other federal and state regulators. 
Indeed, in reviewing a registered holding company's proposed
utility acquisition, the SEC looked to the FERC for its expertise
in certain operational issues.-[39]-  In particular, the SEC
believed it proper to rely upon the FERC's resolution of the
anticompetitive problems at issue in the matter -- the combined
entity's control of key transmission facilities and of surplus
power -- because the expertise and technical ability for
regulating energy transmission lie with the FERC.-[40]-  The
Court of Appeals for the District of Columbia Circuit ("D.C.
Circuit") affirmed the SEC's decision, stating that "when the SEC
and another regulatory agency both have jurisdiction over a
particular transaction, the SEC may `watchfully defer' to the
proceedings held before -- and the result reached by -- that
other agency."-[41]- 
 
     The SEC has continued to look to the FERC's resolution of
certain anticompetitive issues.  In a matter involving the
acquisition of Gulf States Utilities Company by Entergy
Corporation, the SEC relied on Entergy's FERC-approved "open
access" transmission tariff to mitigate any increase in market
power resulting from the proposed combination.-[42]-  Problems
with this approach became evident when the underlying FERC order
was reversed and remanded by the D.C. Circuit.-[43]-  In
                    
-------- FOOTNOTES --------

-[39]- Northeast Utilities, Holding Co. Act Release No. 25273
(Mar. 15, 1991), modifying Holding Co. Act Release No 25221 (Dec.
21, 1990), aff'd sub nom. City of Holyoke v. SEC, 972 F.2d 358
(1992) (Northeast Utilities acquisition of Public Service Company
of New Hampshire approved).  See also Sierra Pacific Resources,
Holding Co. Act Release No. 24566 (Jan. 28, 1988), aff'd sub nom.
Environmental Action Inc. v. SEC, 895 F.2d 1255 (9th Cir. 1990).

-[40]- Under section 203 of the Federal Power Act, the FERC
"shall approve" a merger if it is "consistent with the public
interest."  In its determination, the FERC must consider the
anticompetitive consequences of the proposed transaction.  See
Gulf States Utilities Co. v. FPC, 411 U.S. 747, 758 (1973).

-[41]- City of Holyoke Gas & Electric Department v. SEC, note 39
above, at 363, citing Wisconsin's Environmental Decade v. SEC,
note 36 above, at 526-27 ("we are not prepared to say that the
Commission abdicates its duty in an exemption determination by
deciding to rely, watchfully, on the course of state
regulation").

-[42]- Entergy Corporation, Holding Co. Act Release No. 25952
(Dec. 17, 1993), request for reconsideration denied, Holding Co.
Act Release No. 26037 (April 28, 1994), remanded sub nom. Cajun
Electric Power Cooperative, Inc. v. SEC, 1994 WL 704047 (D.C.
Cir.).  

-[43]- The open-access tariff provides access to Entergy's bulk
transmission system for utilities, electric cooperatives and
wholesale power sellers at a single cost-based rate.  In orders
dated March 3, 1992 and August 7, 1992, the FERC held that with
the tariff in place, Entergy had no market power in its relevant
                                                   (continued...)
 
-------------------- BEGINNING OF PAGE #64 -------------------

consequence, the appeal from the SEC orders was remanded to allow
the SEC to supplement or modify its record concerning the
competitive effect of the acquisition.-[44]-
  
     The SEC also expanded its interpretation of whether systems
were, or could be, integrated and thereby satisfy the integration
requirement.  Specifically, in the Northeast decision, the SEC
found that the combined electric system would satisfy the Act's
integration requirements, even though the transmission lines of
the two utilities were interconnected through the lines of a
nonaffiliated utility.-[45]-  A year later, the SEC authorized
the formation of a new registered holding company, whose utility
operations would be interconnected through a power pool.-[46]- 
In each decision, however, the SEC stated that contract rights
cannot be relied upon to integrate two distant utilities.-[47]- 

     The ownership of combined gas and electric operations by a
registered holding company continued to raise questions. 
Generally, combination systems were approved where the standards
of the A-B-C clauses of section 11(b)(1) were met.-[48]-   

     This period was also one in which the profile of the
industry -- historically dominated by vertically-integrated,
investor-owned utilities controlling generation, distribution and
transmission facilities -- began to change.  As discussed
previously, PURPA opened the door to new participants in the
production of electric energy.  As this nontraditional industry
grew, developers increasingly sought to construct, own and
operate other types of independent power projects.  Although the
SEC attempted to respond to these changes, it became increasingly

-------- FOOTNOTES --------                    

-[43]-(...continued)
geographic market (first tier entities) or product markets (bulk
power and transmission) and authorized Entergy to sell power at
market-based rates.  Entergy Services, Inc., 58 FERC   61,234
(1992), order on reh'g, 60 FERC   61,168 (1992).  After the SEC
issued its order, the Court of Appeals found that the FERC had
failed to address adequately the impact of the open access tariff
on Entergy's market power, and so remanded that matter.  Cajun
Electric Power Cooperative Inc. v. FERC, 28 F.3d 173 (D.C. Cir.
1994).  

-[44]- Cajun Electric Power Cooperative, Inc. v. SEC, 94-1112
(Nov. 16, 1994), 1994 U.S. App. LEXIS 36626. 

-[45]- Northeast Utilities, Holding Co. Act Release No. 25221
(Dec. 21, 1990).

-[46]- UNITIL Corporation, note 32 above.  Although there would
be no particular line through which transfers of power would be
made among the system utilities, the SEC found that participation
of the UNITIL utility subsidiaries in NEPOOL would satisfy the
requirement of section 2(a)(29) that the combined electric
utility assets may, under normal conditions, be economically
operated as a single interconnected and coordinated system.  

-[47]- Northeast Utilities, note 45 above, at n.75, and UNITIL
Corporation, note 32 above, at n.30, citing section 2(a)(29)(A)
(an integrated system must be "confined in its operations to a
single area or region").

-[48]- See, e.g., UNITIL Corp., note 32 above; Entergy Corp.,
note 42 above.  But see CINergy Corp., Holding Co. Act Release
No. 26146 (Oct. 21, 1994) (the SEC reserved jurisdiction for up
to three years over the proposed acquisition by CINergy of the
gas properties of Cincinnati Gas & Electric Co.)
 
-------------------- BEGINNING OF PAGE #65 -------------------

clear that the Act did not contemplate, and so could not readily
accommodate, independent power production.-[49]-

     This period also witnessed growing interest in foreign
utility operations.  In 1992, the SEC approved, as a matter of
first impression, the acquisition by a registered holding company
a foreign public-utility company.-[50]-  The SEC found that the
integration requirement did not apply to acquisitions of
securities or utility assets of a public-utility company
operating exclusively outside the United States.  The SEC looked
to the policies and purposes of the Act to resolve the statutory
conflict but made clear that in this determination, it did not
consider itself bound by the historical circumstances and
understandings at the time of enactment.  Instead, the SEC stated
that it would consider a proposed acquisition "in the light of
contemporary circumstances . . . and of our present view of the
Act's requirements."-[51]-  

     The SEC noted in a number of these matters that its approval
did not guarantee the financial success of a venture.-[52]- 
Rather, SEC approval meant that the standards of the Act were met
and, in particular, the new venture should not be detrimental to
the public interest or the interest of investors or consumers, or
the proper functioning of the holding company system.-[53]-  Most
recently, the SEC relied on a finding of no detriment to the
protected interests in approving the acquisition of a United
States utility by a Canadian holding company.-[54]-  Clearly, the
SEC has attempted to interpret the integration standards of the
Act flexibly and avoid application of a rigid view of the
industry.  

     B.   Recommendations for Future Regulation of Utility
          Ownership

     The SEC must continue to respond flexibly to the
legislative, regulatory and technological changes that are
transforming the structure and shape of the utility industry.  In
recognition of the changing environment in the utility industry,

-------- FOOTNOTES --------                    

-[49]- To avoid regulation under the Act, developers relied on a
number of approaches described as "PUHCA pretzels."  These
approaches ranged from dispersion of ownership interests or
voting rights so that no single participant would have a 10
percent voting interest in the independent power project (see
Thousand Springs Project, SEC No-Action Letter (Feb. 1, 1988) and
Ocean State Power, SEC No-Action Letter (Feb. 16, 1988)), to
various limited partnership arrangements.  Each approach had its
limits; none made good business sense.  The Energy Policy Act
removed the obstacles to such projects that the Holding Company
Act had created.

-[50]- Southern Co., note 9 above.  The SEC noted that "[t]he
plain language of section 10(c)(2) makes its provisions
inapplicable to an acquisition of foreign utility operations" and
added, "[i]f ambiguity is created by section 11, our permission
of the acquisition is nevertheless consistent with statutory
purposes."

-[51]- Id., citing Union Electric Co., note 35 above, at 503. 
Again, the SEC's work in this area was largely superceded by the
Energy Policy Act.  

-[52]- See Sierra Pacific Resources, note 39 above.

-[53]- See section 10(b)(3).

-[54]- Gaz Metropolitain, Inc., Holding Co. Act Release No. 26170
(Nov. 23, 1994).
 
-------------------- BEGINNING OF PAGE #66 -------------------

the Division believes that the SEC must adopt a more flexible
interpretation of the geographic and physical integration
standards, with more emphasis on whether an acquisition will be
economical and subject to effective regulation.  The Division
also recommends that the SEC broaden its interpretation of the A-
B-C clauses to permit combination systems by registered holding
companies if the affected states concur.  The Division also
recommends that the SEC avoid duplicative review of acquisitions
and, where possible, defer to the work of other regulators in
reviewing acquisitions.  These recommendations will permit
registered holding companies to take advantage of developing
markets and technologies, while avoiding duplicative and costly
regulation.

     The SEC should apply a more flexible interpretation of
     the integration requirements under the Act.

     Satisfaction of the integration standards requires
satisfaction of multiple criteria.  Certain physical and
geographical yardsticks must be met.  In addition, the resulting
system must be economical and efficient.  Most important, the
system must be subject to effective regulation.  The statute
recognizes, however, that the application of the integration
standards must be able to adjust in response to changes in "the
state of the art."  As discussed previously, the Division
believes the SEC must respond realistically to the changes in the
utility industry and interpret more flexibly each piece of the
integration equation.

          Interconnection through power pools,
          reliability councils and wheeling
          arrangements can satisfy the physical
          interconnection requirement of section
          2(a)(29).

     As discussed previously, the statutory definition of an
integrated public-utility system requires that the utility assets
of combining electric systems must be interconnected or "capable
of interconnection."  The SEC has previously found that proposals
to contract for or to construct physical connections between
utilities in a single system satisfy the interconnection
requirement.-[55]-  In addition, the SEC has found that two
utilities that are physically capable of sharing power through
wheeling or power pool arrangements are physically interconnected
or capable of physical interconnection -- and therefore satisfy
the interconnection requirement.  The fact that the two
facilities may be separated by other facilities that are not
owned by the holding company does not change the fact that they
are interconnected or, in the D.C. Circuit's words, "capable of
physical connection and of supplying power to one another as
needed."-[56]-  Indeed, the SEC has already acknowledged that
                    
-------- FOOTNOTES --------

-[55]- See New England Electric System, 38 S.E.C. 193, 198-99
(1958) (engineering studies and testimony showing feasibility of
direct interconnections among four small systems satisfied the
requirement of the Act that utilities be "capable of physical
interconnection"); Mississippi Valley Generating Co., note 25
above, at 187 (while complete direct physical interconnection
between the companies involved did not currently exist, the SEC
recognized that physical interconnection was possible through the
construction of transmission lines).  

-[56]- City of New Orleans v. SEC, 969 F.2d 1163, 1165 (D.C. Cir.
1992).
 
-------------------- BEGINNING OF PAGE #67 -------------------

utilities can be interconnected through power pools or by means
of contractual rights to use the lines of a third party.-[57]-  
A finding that wheeling and other forms of sharing power through
reliability councils and proposed regional transmission groups
also qualify as "interconnection" appears to be a logical
extension of these prior SEC holdings.

          Similarly, the SEC should interpret the
          geographic requirements of section 2(a)(29)
          flexibly, recognizing technological advances,
          consistent with the purposes and provisions
          of the Act. 

     Under section 2(a)(29), an integrated public-utility system
is "confined in its operations to a single area or region."-[58]-
 
As noted above, the SEC has suggested that this requirement would
preclude the integration through contract rights of two distant
utilities.-[59]-  The Division recommends that the SEC reconsider
this view.

     A number of commenters-[60]- suggest that the geographic
aspect of integration is obsolete because technological and
telecommunications advances, as well as the emergence of brokers
and marketers, permit an integrated public-utility system to be
comprised of remote utilities.  Some submit that public policy
encourages national competition, and suggest that technological
innovations permitting central coordination of remote generation
and transmission facilities justify a determination that
integration now exists on a national scale.  These commenters
note that, where abuses are not implicated, the SEC has exercised
significant flexibility to find that utility assets are
integrated, even though the utility assets and load are outside
and unconnected to the acquiring company's service
territory.-[61]-

-------- FOOTNOTES --------
                    
-[57]- See, e.g., Northeast Utilities, note 39 above; Centerior
Energy Corp., Holding Co. Act Release No. 24073 (April 29, 1986);
UNITIL Corp., note 32 above.

-[58]- Section 2(a)(29) refers to "a single area or region, in
one or more States."  The terms "area" and "region" are not
defined in the Act.  Section 2(a)(24) defines "State" to mean any
State of the United States or the District of Columbia.  The SEC,
in a recent decision, found that the phrase "in one or more
States" did not bar the acquisition of a Vermont utility by a
Canadian holding company. See Gaz Metropolitain, Inc., note 54
above (Nov. 23, 1994) ("The Act contains no prohibitions against
foreign holding companies as such.").  

-[59]- Northeast Utilities, note 45 above, at n.75 and UNITIL
Corporation, note 32 above, at n.30, citing section 2(a)(29)(A)
(an integrated system must be "confined in its operations to a
single area or region"). 

-[60]- See, e.g., Comments of American Electric Power Company
("AEP") and CINergy.

-[61]- Central and South West Corporation ("CSW") cites the SEC
decisions in Electric Energy, Inc., note 24 above, and Ohio
Valley Electric Corporation, note 25 above, as acquisitions that
were consistent with national policies adopted after the passage
of the Act, and urges the SEC to exercise similar flexibility to
interpret the integration requirement in a way that complements
the new competitive policies established by the Energy Policy
Act.
 
-------------------- BEGINNING OF PAGE #68 -------------------

     As noted above, gas companies that obtain natural gas from
"a common source of supply may be deemed to be included in a
single area or region."-[62]-  Citing technological advances, as
well as legislative and regulatory changes requiring open access,
a number of commenters also suggest that gas companies located in
the United States could be considered an integrated system
because they can now be served by almost any natural gas
supplier.-[63]-

     In evaluating the "single area or region" requirement of
section 2(a)(29), the SEC has considered not only size and
distance, but also "the existing state of the arts of generating
and transmission and the demonstrated economic advantages of the
proposed arrangement."-[64]-  The Public Utilities Commission of
Ohio states that "[a] proper focus on savings will serve the
public far better than historic considerations of proximity." 
Others note the problems associated with multistate systems, and
urge the SEC not to read the definition more flexibly.-[65]-   On
balance, the Division believes it is appropriate to interpret the
"single area or region" requirement flexibly, recognizing
technological advances, consistent with the purposes and
provisions of the Act. 

     The SEC must still evaluate whether a proposed acquisition
promotes the economic and efficient development of the system
under section 10(c)(2).  This evaluation should be made, however,
in light of the effect of techno- logical advances on the ability
to transmit electric energy economically over longer distances,
and other developments in the industry, such as brokers and
marketers, that affect the concept of geographic integration. 
Given that a relaxed geographic integration standard could
potentially result in holding company ownership of scattered
utility properties, the need for cooperation and consultation
with the states is crucial in order to assure that the SEC's
decisions in this area do not impair the effectiveness of state
regulation.  As technological advances and the emergence of
marketers and brokers result in a national power market, and with
the concurrence of state and local regulators, the SEC should
rely more on an acquisition's demonstrated economies and
efficiencies to satisfy the statutory integration requirements.

          The SEC's analysis should focus on whether the
          resulting system will be subject to effective
          regulation.

     The recent institutional, legal and technological changes
noted above have reduced the relative importance of physical
interconnection and geographic limitations by permitting greater
control, coordination and efficiencies.  In particular, open
access under FERC Order No. 636, wholesale wheeling under the

-------- FOOTNOTES --------                    

-[62]- Section 2(a)(29)(B).

-[63]- But see Comments of Michigan Commission Staff (the
definition of "integrated public utility system" could be read to
include nontraditional systems, but does not apply to all gas
companies).

-[64]- See, e.g., Connecticut Yankee Atomic Power Co., note 24
above, at 710; Vermont Yankee Nuclear Power Corporation, 43
S.E.C. 693, 697-98 (1968), remanded on other grounds, Municipal
Electric Association of Massachusetts v. SEC, 413 F.2d 1052 (D.C.
Cir. 1969).  

-[65]- See, e.g., Comments of The City of New Orleans ("New
Orleans"). 
 
-------------------- BEGINNING OF PAGE #69 -------------------

Energy Policy Act and the development of an increasingly
competitive and interconnected market for wholesale power have
expanded the means for achieving the interconnection and the
economic operation and coordination of utilities with non-
contiguous service territories.  The gas companies note that
technological advances and the unbundling of services have
resulted in a national gas supply market in which geographic
integration is not appropriate.-[66]-  

     Although the relevance of physical and geographic
integration to a sound public-utility industry has diminished,
the Division believes that the desire of Congress for an
integrated system could be satisfied by an integrated delivery
system.  At the same time, the Division is concerned that the Act
not serve as an artificial barrier where other energy regulators
have determined that an acquisition will benefit utility
consumers.  The Division believes that the SEC should respond to
technological and legislative changes where the concerns of the
affected state and local regulators are met.  

     When considering any proposed acquisition, the SEC should
consider whether the resulting system will impair the
effectiveness of regulation.  Where the affected state and local
regulators concur, the SEC should interpret the integration
standard flexibly to permit non-traditional systems if the
standards of the Act are otherwise met.

     The SEC should liberalize its interpretation of the "A-B-C"
     clauses and permit combination systems where the affected
     states agree.

     As discussed above, the SEC has generally required electric
registered holding companies that seek to own gas utility
properties to satisfy the requirements of the A-B-C clauses
concerning additional integrated systems.  In contrast, exempt
holding companies have generally been permitted to retain or
acquire combination systems so long as combined ownership of gas
and electric operations is permitted by state law and is
supported by the interested regulatory authorities.-[67]- 

     In the past, the SEC has construed the A-B-C clauses
narrowly to permit retention only where the additional system, if
separated from the principal system, would be incapable of
independent economic operations.-[68]-  Although the Supreme
Court upheld the SEC's reading, two justices dissented,
contending that the "serious impairment" standard was at odds
with the wording of the Act, had little basis in the statutory
history or aims of the Act, and could not be sustained by agency
or judicial precedent.-[69]-  The dissenting justices believed
that the statutory language "called for a business judgment of
what would be a significant loss."-[70]-

     Applicants in recent matters have argued that, in a
competitive utility environment, any loss of economies threatens
a utility's competitive position, and even a "small" loss of
economies may render a utility vulnerable to significant erosion
                    
-------- FOOTNOTES --------

-[66]- See Comments of Consolidated, Columbia and National.

-[67]- See, e.g., the cases cited in footnote 29 above. 

-[68]- New England Electric System, note 30 above.

-[69]- SEC v. New England Electric System, note 19 above, at 185
(Harlan, J. and Stewart, J., dissenting). 

-[70]- Id. (citations omitted).
 
-------------------- BEGINNING OF PAGE #70 -------------------

of its competitive position.  There is general support for a more
relaxed standard.  A number of commenters emphasize that these
are essentially state issues.-[71]-  It does not appear that the
SEC's precedent concerning additional systems precludes the SEC
from relaxing its interpretation of section 11(b)(1)(A).-[72]-  
Indeed, the SEC has recognized that section 11 does not impose
"rigid concepts" but rather creates a "flexible" standard
designed "to accommodate changes in the electric utility
industry."-[73]- 

     Congress, in 1935, recognized that competition in the field
of distribution of gas and electric energy is essentially a
question of state policy.-[74]-  The Act was intended to ensure
compliance with state law in this regard.-[75]-  Moreover, it
appears that the utility industry is evolving toward the creation
of one-source energy companies that will provide their customers
with whatever type of energy supply they want, whether
electricity or gas.  Accordingly, the Division believes it is
appropriate to reconcile the treatment of registered and exempt
companies in this regard, and so recommends that the SEC permit
registered holding companies to own gas and electric utility
systems pursuant to the A-B-C clauses of section 11(b)(1), where
the affected states agree. -[76]-

     The SEC should consider rules to exempt restructuring
     transactions.

     The FERC NOPR, discussed in Part I, would require the filing
of open access tariffs by all utilities subject to the FPA.  It
                    
-------- FOOTNOTES --------

-[71]- See, e.g., Comments of the Public Utilities Commission of
Ohio ("Ohio Commission") and Comments of The Southern Company
("Southern"). 

-[72]- See Southern Co., note 9 above (authorizing registered
holding company to acquire foreign utility subsidiary).

-[73]- UNITIL Corp., note 32 above; Mississippi Valley Generating
Co., note 25 above, at 186.

-[74]- Senate Report at 29-30; House Report at 14-15 (section 8
"is concerned with competition in the field of distribution of
gas and electric energy -- a field which is essentially a
question of State policy"). 

-[75]- Accordingly, section 8 of the Act provides:

     Whenever a State law prohibits, or requires approval or
     authorization of, the ownership or operation by a
     single company of the utility assets of an electric
     utility company and a gas utility company serving
     substantially the same territory, it shall be unlawful
     for a registered holding company, or any subsidiary
     company thereof, by . . . any means or instrumentality
     of interstate commerce, or otherwise (1) to take any
     step, without the express approval of the State
     commission of such State, which results in its having a
     direct or indirect interest in an electric utility
     company and a gas utility company serving substantially
     the same territory; or (2) if it already has any such
     interest, to acquire, without the express approval of
     the State commission, any direct or indirect interest
     in an electric utility company or gas utility company
     serving substantially the same territory as that served
     by such companies in which it already has an interest. 

-[76]- See, e.g., Entergy Corp., note 42 above; UNITIL Corp.,
note 32 above.
 
-------------------- BEGINNING OF PAGE #71 -------------------

appears likely that functional and corporate restructuring would
follow as companies respond to competitive pressures. 
Restructuring can take many forms, including reorganization along
functional lines, sales and purchases of utility assets, and
strategic mergers.  The staff recommends that the SEC consider
ways to exempt from sections 9(a) and 10 transactions that
involve only reorganization of existing utility assets.-[77]- 
These transactions could involve the formation and capitalization
of new utility subsidiaries, and the intrasystem transfer of
utility assets.  For registered holding companies, the
acquisition of utility securities or assets generally would
require SEC approval under sections 9(a)(1) and 10; for the sale,
SEC approval pursuant to rules 43 and 44 under section 12(d)
would be required.  For exempt holding companies and free-
standing utilities, SEC approval is required under section
9(a)(2) only if an acquisition would result in an affiliation
with two or more utilities.-[78]-  

     It appears that the SEC could promulgate a rule under
section 3(d) to facilitate internal restructurings by
nonregistered companies.  The rule would deem a class of persons
not to be affiliates and so, would exempt most internal
restructuring transactions from section 9(a)(2).  The rule would
not, however, benefit registered holding companies that are
subject to the requirement of prior SEC approval for the
acquisition of any security or utility asset under section
9(a)(1). 

     For registered holding companies, the Division believes that
the SEC could adopt a rule under section 9(c)(3), deeming the
acquisition of securities in connection with an internal
restructuring to be in the ordinary course of business of a
registered holding company.-[79]-  The chief limitation on the
adoption of such a rule would be concern that section 9(c)(3) not
be used to evade the requirements of section 11.-[80]-  It does
not appear that a problem would arise under section 11 because
the exempted transactions would involve only the reorganization
of existing properties.  

     Registered holding companies are also subject to rules 43
and 44, which generally require SEC approval for any intrasystem
sales of utility securities or assets.  The rules, at present,
exempt sales in an annual aggregate amount of $5 million.  The
rule could be amended to remove the overall limit where the
acquisition is exempted, either pursuant to section 9(c)(3)

-------- FOOTNOTES --------                    

-[77]-  It does not appear that the SEC could readily adopt a
rule exempting acquisitions of new utility operations.  There is
no general exemptive authority under section 9(a).  See also
section 1(b)(4) of the Act, noting the concern of Congress with
the "growth and extension of holding companies [that] bears no
relation to economy of management and operation or the
integration and coordination of related operating properties."

-[78]- Any resulting holding company, of course, must qualify for
exemption or register with the SEC.

-[79]- See United Corp., 35 S.E.C. 591, 594 (1954), quoting
Electric Bond and Share Co., 35 S.E.C. 236 (1953) (section
9(c)(3) permits the SEC to consider ordinary course of business
"in light of the requirements of the applicant, rather than of
applicants generally").

-[80]- See Michigan Consolidated Gas Co. v. SEC, 444 F.2d 913
(D.C. Cir. 1971).
 
-------------------- BEGINNING OF PAGE #72 -------------------

(utility securities) or 9(b)(1) (utility assets).-[81]-  However,
intrasystem asset transfers raise many complex issues, and the
Division recommends that this matter be studied further.

     The SEC should "watchfully defer" to the work of other
     regulators.  

     Under section 9(a) of the Act, prior SEC approval is
generally required for utility acquisitions.  These transactions
may also be subject to FERC, and possibly state, approval. 
Anticompetitive effects are reviewed not only by the SEC, but
also by the Department of Justice and the Federal Trade
Commission.  As discussed previously in Part I, the SEC's review
in this area duplicates the work of these other regulators in
some important respects.  

     Several commenters suggest an exemption from section 9(a)
for acquisitions that are also subject to FERC and state review,
but it does not appear that the SEC could readily adopt a rule to
exempt utility acquisitions from review under the Holding Company
Act.-[82]-  Other commenters recommend specific legislative
action to amend section 9 to minimize or eliminate SEC review. 
The Division, however, believes that a more comprehensive
approach to legislative reform is necessary.-[83]-

     Absent repeal, it thus appears that utility acquisitions
will continue to be subject to review on a case-by-case basis.  A
number of commenters criticize review of utility acquisitions by
two federal agencies as duplicative and time-consuming, with the
potential for conflicting determinations.  The registered gas
companies suggest that the SEC and the FERC could undertake more
joint efforts, such as joint fact-finding, to minimize
duplicative reviews.-[84]-  While consolidated proceedings could
reduce duplicative efforts, it is not altogether clear that this
would be the result because the two agencies, in examining the
same transaction, consider different issues and have different
standards for approval.  At least one commenter, while supporting
more effective communication and coordination between the FERC
and SEC, does not believe that their review should be

-------- FOOTNOTES --------
                    
-[81]- Section 9(b)(1) exempts from the requirement of SEC
approval under sections 9(a) and 10, "the acquisition by a
public-utility company of utility assets the acquisition of which
has been expressly authorized by a State commission." 

-[82]- Under section 9(a), an acquisition is unlawful unless it
has been approved by the SEC under section 10.  In order to adopt
a rule broadly exempting acquisitions, the SEC would have to
find, before the fact, that the requisite standards of section 10
were satisfied in every instance.

-[83]- See the discussion of the Division's legislative
recommendations in Part III below.  Some state commenters favor
continued SEC authority in this area, contending that repeal of
the Act would leave regulatory gaps and that the states lack the
authority, staff and financial resources to deal with interstate
acquisitions.  See Comments of the Indiana Utility Regulatory
Commission ("Indiana Commission") (SEC restrictions more
stringent than those of FERC and should be retained) and the
Michigan Commission Staff (regulatory gap without SEC review).  

-[84]- See Comments of Consolidated, National and Columbia. 
 
-------------------- BEGINNING OF PAGE #73 -------------------

consolidated, because separate reviews provide an appropriate
"regulatory check and balance."-[85]- 
  
     Accordingly, the Division recommends that the SEC seek to
streamline its review of utility acquisitions to minimize
regulatory overlap.  In previous matters, the SEC has looked to
the FERC's analysis of issues that are closely linked to
operations.-[86]-  The Division recommends that the SEC continue
to "watchfully defer," where appropriate, to the substantive
findings of another agency having concurrent jurisdiction over a
transaction.-[87]-

Chapter 3. Diversification-[1]-

A. Background 

     The problems associated with holding companies were not
confined to their utility operations.  Prior to 1935, holding
companies acquired and held interests in nonutility businesses
largely without restriction.  In the years following the stock
market crash in 1929, many holding companies experienced
financial difficulties and several collapsed, due, among other
things, to unsuccessful diversification.-[2]-  The Holding
Company Act sought to protect holding company system investors
and utility consumers from the risks of nonutility ventures by
limiting the extent to which registered holding companies and
their subsidiaries could engage in these businesses.  Thus,
section 11(b)(1) of the Act limits the operations of a registered
holding company system "to a single integrated public-utility
system, and to such other businesses as are reasonably
incidental, or economically necessary or appropriate to the
operations of such integrated public-utility system."

     In the early years after adoption of the Act, the SEC's
focus was primarily on compelling divestiture of businesses that
did not satisfy the standards of section 11(b)(1).  After the
breakup of the massive holding companies was completed in the
1950s, this focus shifted to the review of new acquisitions of
nonutility businesses. 

     As discussed elsewhere in this study, the utility industry
has progressed through the years, from a period of extensive
construction of new generating facilities (and related increased
fuel requirements), through periods of change in the availability
of fuel supply and investigation of energy alternatives, to an
era of energy management, competition, deregulation and
                    
-------- FOOTNOTES --------

-[85]- Comments of Southwestern Public Service Co. (functions of
FERC and SEC should not be consolidated; agencies should
coordinate better).

-[86]- The FERC has recently announced that utility mergers are
presumptively subject to its approval under section 203 of the
Federal Power Act.  See Illinois Power Co., 67 FERC   61,136
(1994); 16 U.S.C.   824b.

-[87]-  City of Holyoke v. SEC, note 39 above, at 363; see also
Entergy Corp., note 42 above (SEC relied on hearing records and
orders of FERC and state commissions in making its
determinations).

-[1]- This chapter deals with nonutility acquisitions by
companies in a registered holding company system.  Chapter 6
discusses acquisitions of nonutility interests by exempt holding
companies.

-[2]- See Hawes, Utility Holding Companies, Section 2.04.
 
-------------------- BEGINNING OF PAGE #74 -------------------

diversification.  The types of nonutility businesses proposed to
be acquired by registered holding companies and their
subsidiaries have paralleled these developments, and the
associated risks and the need for protection of investors and
consumers have varied according to the type of business to be
acquired and the other regulatory protections in place.  

     The SEC's administration and interpretation of section 11
has also progressed through the years to attempt to meet the
needs of the changing utility industry, from strict construction
of the statutory requirements in light of the original goals of
the Act, to more flexible interpretation to reflect the
increasing effectiveness of state regulation and the growing
obsolescence of the concept of the utility as purely a local
monopoly.  The Division proposes further changes, both rulemaking
and administrative, consistent with the statutory mandate, to
meet the needs of the industry in the 1990s and beyond.  The
development of the SEC's administration of section 11(b)(1), and
the proposals for further change, are summarized below.

          1.  The Functional Relationship Test

     The SEC has interpreted the "other business" clauses of
section 11(b)(1), read together, to require an operating or
functional relationship between a proposed nonutility activity
and a registered holding company's core utility operations.-[3]-
 
The SEC has explained that section 11(b)(1) must be construed in
"light of the statutory policy to achieve `economy of management
and operation' and the `integration and coordination of related
operating properties.'"-[4]-  With respect to new acquisitions,
the SEC has interpreted section 10(c)(1) to mean that "any
property whose disposition would be required under section
11(b)(1) may not be acquired."-[5]-  The phrase "any other
interest in any business" in section 9(a)(1) has been read
comprehensively to cover any arrangement that entails the
acquisition of a substantial interest in a nonutility business
undertaking.-[6]-
  
     Beginning in 1965, nonutility acquisitions by registered
holding companies consisted primarily of fuel and fuel-related
interests and subsidiaries and generating plant construction
subsidiaries.-[7]-  These acquisitions increased as a result of
                    
-------- FOOTNOTES --------

-[3]- See, e.g., North American Co., 11 S.E.C. 194 (1942), aff'd,
133 F.2d 148 (2d Cir. 1943), aff'd on constitutional issues, 327
U.S. 686 (1946) (requiring divestment of various nonutility
interests).  

-[4]- General Public Utilities Corp., 32 S.E.C. 807, 839 (1951)
(citing section 1(b)(4) of the Act; Commonwealth & Southern
Corp., 26 S.E.C. 464, 490 (1947); Cities Service Power & Light
Co., 14 S.E.C. 28, 38 (1943)).

-[5]- Texas Utilities Co., 21 S.E.C. 827, 829 (1946) (denying
approval to acquisition of transportation company by registered
holding company).

-[6]- See Public Service Co. of Oklahoma, 45 S.E.C. 878, 882-83
(1975) (oil and gas venture).  See also New York State Natural
Gas Corp., 35 S.E.C. 480, 481 (1953) (gas leases); National Fuel
Gas Co., Holding Co. Act Release Nos. 24175 (Aug. 28, 1986) and
24309 (Feb. 4, 1987) (gas pipeline).

-[7]- Fuel and fuel-related business ventures included
exploration for gas and oil, research in coal gasification,
acquisition of coal reserves and development of coal mines, and
                                                   (continued...)
 
-------------------- BEGINNING OF PAGE #75 -------------------

the fuel crisis that later developed in the 1970s.  Many of the
larger electric utilities responded to uncertainties about
reliability of delivery by acquiring their own supply sources for
a substantial percentage of their fuel requirements and
transport.-[8]-  During the 11-year period 1971-1981,
expenditures for fuel and related facilities by registered
holding companies totalled approximately $4.2 billion.-[9]- 
Ownership of mines and related transportation facilities was not
uncommon in 1935, and their retention was permitted under section
11(b)(1) of the Act.-[10]-  Acquisitions of fuel and fuel-related
interests by registered system companies were similarly approved
under section 10(c)(1) on the basis of a functional relationship
with core utility operations.-[11]-

     In 1969, the SEC reexamined the general restraints on
nonutility activities in the context of an acquisition by a
utility subsidiary of a registered holding company of an interest
in low-income housing construction.  In an initial decision, the
SEC found that the acquisition was within the language of the
"other business" clauses of section 11(b)(1).-[12]-  One year
later, however, the SEC overruled its prior determination on the
basis of a lack of functional relationship.-[13]-  Thus, while
exempt holding companies engaged in substantial diversification
in the 1980s, with ventures into real estate, retail drug stores,
financial institutions and insurance companies, among others, the
requirement of a functional relationship continued to limit
nonutility diversification by registered holding companies.-[14]-


     2.  Limitations on Transactions with Nonassociates

-------- FOOTNOTES --------                    

-[7]-(...continued)
investments in transportation and storage facilities.  See Report
to the Congress by the Comptroller General of the United States,
"The Force of the Public Utility Holding Company Act has been
Greatly Reduced by Changes in the Securities and Exchange
Commission's Enforcement Policies" (1977) at 34.

-[8]- For example, Middle South established System Fuels, Inc. in
1971 as a direct subsidiary of the system's four electric
operating companies.  In 1974, the New England Electric System
organized New England Energy, Inc. to provide fuel for New
England Power Company, the generating and transmission subsidiary
for the New England Electric system.  In 1978, Central and South
West established Central and South West Fuels, Inc. to function
as the procurement and exploration arm of the system.  American
Electric Power Company greatly expanded its own fuel sources
through coal mining subsidiaries in West Virginia, Ohio and Utah.

-[9]- Annual Report of 1981, at 76-77.

-[10]- See, e.g., North American Co., note 3 above, at 225-26. 

-[11]- See, e.g., System Fuels, Inc., Holding Co. Act Release No.
20441 (Mar. 9, 1978) (authorizing acquisition of leases and
mineral rights with respect to uranium reserves, and related
activities).

-[12]- Michigan Consolidated Gas Co., 43 S.E.C. 1108, 1114
(1969).  

-[13]- Michigan Consolidated Gas Co., 44 S.E.C. 361 (1970),
aff'd, 444 F.2d 913 (D.C.Cir. 1971).

-[14]-  Some analysts have observed that utilities that
diversified in the past decade did not fare as well economically
as the registered holding companies, which were unable to
diversify.  See, e.g., Charles M. Studness, Earnings from Utility
Diversification Ventures, Pub. Util. Fort., Sept. 1, 1992, at 28-
29.
 
-------------------- BEGINNING OF PAGE #76 -------------------

     In the 1980s, registered holding companies, with increasing
frequency, sought SEC approval for nonutility activities that
would serve nonassociates to some extent.  A number of orders
approved relatively small acquisitions arising from joint
ventures and equity investments to promote research and
development of energy-related technology.-[15]-  The SEC also
permitted system companies to engage in transactions with
nonassociates using equipment or facilities obtained for the use
of the core utility business.-[16]-  In some instances, the SEC
approved the disposition of such equipment or facilities to
nonassociates.-[17]-  In addition, the SEC authorized a number of
registered holding companies to acquire subsidiaries that would
offer energy-related consulting and other services to
nonassociates.-[18]-  These nonutility acquisitions were
generally quite limited, involving no significant
financing.-[19]-  Certain proposals were self-limiting.-[20]- 

-------- FOOTNOTES --------                    

-[15]- See, e.g., General Public Utilities Corp., Holding Co. Act
Release No. 15184 (Feb. 9, 1965) (acquisition of temporary, five-
year interest in company created to promote manufacture and
national marketing of electric equipment using new type of fan);
Southern Co., Holding Co. Act Release Nos. 23888 (Oct. 31, 1985)
(investment in joint venture to manufacture and sell photovoltaic
cells) and 23440 (Oct. 1, 1984) (equity investment in company
developing two-way communication technology combining energy
management and other services for use by residential and small
commercial customers); and CNG Energy Co., Holding Co. Act
Release No. 23734 (June 14, 1985) (investment in development of
electronic meter reading devices).

-[16]- See, e.g., Indiana & Michigan Electric Co., Holding Co.
Act Release No. 24039 (Mar. 4, 1986) (subsidiaries that had
obtained equipment to transport coal used by system generating
stations authorized to offer services to nonassociates during
times of system nonutilization).  Similar orders approved
arrangements whereby equipment or services needed for utility
operations could be offered to nonassociates "during brief
periods when [utility] transportation needs have been met,"
Georgia Power Co., Holding Co. Act Release No. 22487 (May 3,
1982); on a temporary basis, System Fuels, Inc., Holding Co. Act
No. 22556 (June 29, 1982); and during "slack periods of work,"
Cedar Coal Co., Holding Co. Act Release No. 23973 (Dec. 31,
1985).

-[17]- See, e.g., Consolidated Gas Transmission Corp., Holding
Co. Act Release No. 23914 (Nov. 20, 1985) (authorizing
subsidiaries to lease excess channels on a microwave
communication system to nonassociates); Jersey Central Power &
Light Co., Holding Co. Act Release No. 24348 (Mar. 18, 1987)
(authorizing utility to license to nonassociates a series of
computer programs developed by company personnel to detect the
unauthorized taking of electric energy).

-[18]- See, e.g., New England Electric System, Holding Co. Act
Release No. 22719 (Nov. 19, 1982) (energy management services);
American Electric Power Co., Inc., Holding Co. Act Release No.
22468 (Apr. 21, 1982) (management, technical and training
services); Southern Co., Holding Co. Act Release No. 22132 (July
17, 1981) (management, technical and training services).

-[19]- See, e.g., Jersey Central Power & Light Co., note 17 above
(capital investment would not exceed $200,000); National Fuel Gas
Co., Holding Co. Act Release No. 24081 (May 1, 1986) (initial
investment of $200,000); and CNG Energy Co., note 15 above
(initial expenses of $150,000 and advance purchase payments of
$200,000).
 
-------------------- BEGINNING OF PAGE #77 -------------------

The volume of nonutility proposals, however, generated concern
among the SEC staff about the limitations that should be placed
upon transactions with nonassociates.

     In the early days of its administration of the Act, the SEC
had generally required divestment of a nonutility business that
chiefly benefited nonassociate, rather than associate, companies. 
An early decision involving two coal mining businesses, for
example, approved the continued ownership of the one that sold
more than 80 percent of its production to associate utility
companies, but required divestment of the other, which sold its
output almost exclusively to nonaffiliated purchasers.-[21]-  In
keeping with this precedent, the SEC staff imposed a 50 percent
limit upon transactions with nonassociates in some instances to
ensure that the nonutility business would continue primarily to
serve its associate companies.-[22]-  The percentage limitation
was an administrative measure intended to create a bright line in
this area.

     In practice, the 50 percent limit proved a source of concern
for the SEC and applicants.  Among other things, there was
uncertainty as to when and how the percentage limitation should
be applied.-[23]-  In 1987, Central and South West Corporation
and its subsidiary, CSW Credit, Inc., sought the removal of a
limitation imposed upon CSW Credit's nonassociate factoring
operations by a 1986 order of the SEC.-[24]-  At issue was a
                    
-------- FOOTNOTES --------

-[20]-(...continued)

-[20]- See, e.g., Entergy Corp., Holding Co. Act Release No.
25718 (Dec. 28, 1992) (four year investment); American Electric
Power Co., Holding Co. Act Release No. 25424 (Dec. 11, 1991) (ten
years); and General Public Utilities Corp., note 15 above (five
years).

-[21]- North American Co., note 3 above, at 223-224, 225-26. 

-[22]- See, e.g., Transok, Inc., Holding Co. Act Release No.
23859 (Oct. 8, 1985) (authorizing subsidiary of registered
holding company to acquire gas pipeline capacity, of which 50
percent would be dedicated to system utility operations);
National Fuel Gas Co., Holding Co. Act Release No. 24381 (May 1,
1987) (authorizing registered holding company to acquire
subsidiary to provide pipeline construction and related services
to associate and nonassociate companies, within certain
limitations).

-[23]- In some instances, the SEC applied the 50 percent
limitation to revenues derived from specified regions and
activities.  Compare Eastern Utilities Assocs., Holding Co. Act
Release No. 24273 (Dec. 19, 1986) (applying 50 percent limitation
to Massachusetts subsidiary of registered holding company and
requiring that revenues from energy management services
attributable to customers outside New England would remain less
than revenues attributable to customers within that area) with
EUA Cogenex Corp., Holding Co. Act Release No. 26135 (Sept. 30,
1994) (excluding revenues from consulting from the 50 percent
limitation) and Eastern Utilities Assocs., Holding Co. Act
Release No. 25636 (Sept. 17, 1992) (including revenues from
energy management services in New York as revenues from New
England for purposes of the 50 percent limitation).

-[24]- Specifically, the average amount of nonassociate company
accounts receivable outstanding at the end of each month over the
preceding twelve-month period could not exceed the average amount
of associate company accounts receivable outstanding at the end
of each month over that period.  See CSW Credit, Inc., Holding
Co. Act Release No. 24157 (July 31, 1986).  The SEC authorized
                                                   (continued...)
 
-------------------- BEGINNING OF PAGE #78 -------------------

proposed expansion of CSW Credit's operations on behalf of
nonassociates, for which applicants sought related financing
authority.  Unlike many prior nonutility proposals, a sizeable
investment was involved.-[25]-  On appeal to the SEC from a
favorable initial ruling by an administrative law judge, the SEC
denied the application.-[26]-  It reaffirmed the section 10(c)(1)
requirement of a functional relationship and upheld the use of a
bright-line percentage limitation generally.-[27]-  The SEC
expressed dissatisfaction, however, with the perceived strictures
of the statute.

          3.  A New Approach

     Recently, the SEC has indicated a willingness to consider a
more flexible approach to diversification by registered holding
companies into nonutility activities.  At the end of 1994, the
SEC approved a proposal by a registered holding company to
develop, through a subsidiary, a wireless communications system
to provide services to system companies and regional
nonassociates.  The SEC stated that an assessment of functional
relationship that takes into consideration the relative
investments for associate and nonassociate companies is
consistent with the rationale underlying its decision in CSW

-------- FOOTNOTES --------                    

-[24]-(...continued)
CSW to organize CSW Credit to factor the receivables of system
companies in 1985.  Central and South West Corp., Holding Co. Act
Release No. 23767 (July 19, 1985).  Subsequent orders authorized
CSW Credit to purchase receivables of nonassociate companies and
approved related financing.  See CSW Credit, Inc., cited above;
CSW Credit, Inc., Holding Co. Act Release No. 24575 (Feb. 8,
1988).

-[25]- At the time of the filing, total financing authority of up
to $780 million was available for the financing activities of CSW
Credit.  If the total investment and borrowing authority
requested were approved and exercised, nonassociate receivables
would represent approximately 76.2 percent of total receivables
owned.  CSW Credit, with total capitalization of $1.68 billion,
would rank among the largest captive finance companies in the
United States.  CSW Credit, Inc., Administrative Proceeding File
No. 3-7027, Brief of the Division of Investment Management, filed
Apr. 14, 1989, at 8-9. 

-[26]- The administrative law judge found that the application,
consistent with the 1986 order, was in accord with previous SEC
decisions permitting the sale or lease of excess capacity or
facilities to nonassociate companies.  The decision relied in
particular on the order of the SEC in Jersey Central Power &
Light Co., note 17 above.  See CSW Credit, Inc., Holding Co. Act
Release No. 25995 (Mar. 2, 1994).

-[27]- The SEC, however, identified one type of factual situation
in which a nonutility interest could be found to be primarily
devoted to the core utility business even though transactions
with nonassociates exceed those with associates.  In this
situation, as in Jersey Central, the nonutility business involves
the sale or lease of products or skills of some complexity
developed by the holding company at considerable expense for the
benefit of its utility subsidiaries and not readily available to
the rest of the public from other sources; moreover, these
endeavors generally require little or no further investment by
the holding company, and permitting the proposed activities would
permit amortization of product development expenses with little
or no risk.  CSW Credit, Inc., note 26 above.
 
-------------------- BEGINNING OF PAGE #79 -------------------

Credit.-[28]-  In the alternative, the SEC indicated that the
proposal was within the rationale of the order in Jersey Central
Power & Light Co., as approved in CSW Credit.-[29]-  In addition,
the SEC suggested that the proposed acquisition could also be
authorized under the plain meaning of the statute, as "reasonably
incidental, or economically necessary or appropriate" on a
finding that it is "necessary or appropriate in the public
interest or for the protection of investors or consumers and not
detrimental" to the proper functioning of the integrated public-
utility system.

     Shortly thereafter, the SEC approved the request of a
registered holding company for an order amending prior orders to
remove a percentage limitation upon its energy management
services business.-[30]-  Among other things, the SEC noted that
unlike the factoring business considered in CSW Credit, the
provision of energy management services, including conservation
and demand-side management services, is closely related to the
core utility business.  The SEC also noted the strong national
interest in promoting energy conservation and efficiency, which
are promoted by the energy management services industry.-[31]-   

     B.   Recommendations for Future Regulation of
          Diversification Activities

     The SEC must continue to respond flexibly to change in the
utility industry.  Toward this end, the Division believes that
the registered holding companies should be permitted to invest in
diversified activities without unnecessary regulatory obstacles
and recommends consideration of a rule that would exempt, subject
to certain conditions, investments in specified energy-related
activities from prior SEC approval.  The Division also recommends
that the SEC adopt a budget approach for registered holding
companies to make de minimis investments in diversified
activities and otherwise adopt a flexible approach toward other
diversification activities.  These recommendations will greatly
reduce the delays and costs of regulatory burdens with which
registered holding companies must contend and make them more
competitive. 

     The SEC should promulgate rules to reduce the regulatory
     burdens associated with energy-related diversification.  
                    
-------- FOOTNOTES --------

-[28]- The holding company proposed to invest $159 million to
meet the needs of its system companies, and represented that an
additional investment of less than $20 million would facilitate
nonassociate transactions.  Although the majority of the revenues
could ultimately come from nonassociate customers, the system
would at all times remain available for unencumbered use by the
system operating companies.  See Southern Co., Holding Co. Act
Release No. 26211 (Dec. 30, 1994).

-[29]- See note 26 above.

-[30]- Eastern Utilities Associates, Holding Co. Act Release No.
26232 (Feb. 15, 1995).  The prior orders had limited the extent
to which the business could conduct operations outside the region
comprised by the New England states and New York.  See note 23
above.

-[31]- The SEC cited, among other things, the principal purpose
of the legislation underlying the Energy Policy Act "to improve
our environment, economy and energy security by promoting the
efficient use of energy."  Eastern Utilities Associates, note 30
above (citing H.R. Rep. No. 474(I), 102d Cong., 2d Sess. 133
(1992)).
 
-------------------- BEGINNING OF PAGE #80 -------------------


     In recent years, there has been a dramatic increase in the
volume of applications by registered holding companies seeking to
engage in nonutility activities that complement, or are natural
extensions of, the gas and electric utility businesses.  These
filings reflect an evolution of the registered holding companies
away from traditional, regulated utility functions and towards
broader energy-related businesses.  Today, nearly all registered
holding companies engage in a variety of energy-related
activities that involve application of resources and capabilities
developed in the conduct of utility operations.  Many involve new
uses of skills and experience gained in utility operations, or
new uses of utility infrastructure and technology to provide
services to utility as well as nonutility customers.

     The Division recommends that the SEC seek comment on a rule
that would exempt such energy-related diversification by
registered holding companies from the requirement of prior
approval under sections 9(a)(1) and 10 of the Act.  Such a rule
(to be designated rule 58) would deem the acquisition of
securities of an "energy-related company" (as defined in the
rule) to be "in the ordinary course of business" of a company in
a registered system, subject to certain investment limitations
and reporting requirements.-[32]-  Under the proposed rule, an
energy-related company is one that derives, or will derive,
substantially all of its revenues from one or more activities
specifically enumerated in the rule, and such other activities as
the SEC may, by order upon application under sections 9(a)(1) and
10, designate as energy-related for purposes of the rule.  The
exemption provided by the rule would be available only if the
aggregate investment by a registered holding company in such
energy-related companies does not exceed the greater of $50
million or 15 percent of the holding company's consolidated
capitalization.

     Rule 58 would also exempt the acquisition by a gas
registered holding company or any subsidiary of securities of a
"gas-related company" (as defined in the rule) subject to certain
reporting requirements.  The proposed rule would define a gas-
related company as one that derives, or will derive,
substantially all of its revenues from one or more activities
permitted under the GRAA,-[33]- and such other activities as the
SEC may, from time to time, by order upon application under
sections 9 and 10 and the GRAA, designate as gas-related for
purposes of the rule.

     In connection with proposed rule 58, the Division also
recommends related amendments to rule 45(b) and rule 52(b),
concerning financings by registered system companies:  (1) to
                    
-------- FOOTNOTES --------

-[32]- The rule would be promulgated under section 9(c)(3) which
provides that prior SEC approval is not required for:

     the acquisition by a registered holding company or
     subsidiary company thereof, of such commercial paper and
     other securities, within such limitations, as the Commission
     may by rules and regulations or order prescribe as
     appropriate in the ordinary course of business of a
     registered holding company or subsidiary company thereof and
     as not detrimental to the public interest or the interest of
     investors or consumers.
 
-[33]- Pub. L. No. 101-572, 104 Stat. 2810 (codified at 15 U.S.C.
  79k note (1990)).
 
-------------------- BEGINNING OF PAGE #81 -------------------

qualify the exception under rule 45(b) to the requirement of SEC
approval under section 12(b) and rule 45(a) for capital
contributions and open account advances, without interest, to a
gas-related company; and (2) to qualify the exemption provided by
rule 52(b) from the requirement of SEC approval under sections
6(a) and 7 for the issuance and sale of securities by energy-
related subsidiary companies, in order to conform the rules to
the investment limitations of proposed rule 58.  

     The proposed rulemaking would eliminate unnecessary
regulatory burdens and paperwork associated with filings by a
registered holding company for SEC approval to invest in
nonutility businesses that are closely related to a system's core
utility business.  The limitation of aggregate investment in
energy-related companies will help to ensure that the financial
integrity of the registered system will not be impaired by
investments pursuant to the rule.  In addition, the proposed rule
incorporates reporting requirements that should enable the SEC
and other interested regulators to monitor the effects of these
investments.  

     The SEC should approve a budget approach for "de minimis"
     investments in diversified activities.

     Regulatory delay associated with the approval process for
nonutility acquisitions has been a recurring complaint of
companies in registered systems.  The requests for authorization
typically require extensive documentation of a proposed new
business activity and its relationship to the system utility
business.  The proposed rule would address these concerns with
respect to activities most closely related to the core utility
business of a registered holding company.

     Companies also have opportunities to make limited
investments in activities that do not fit squarely within
previous orders of the SEC, but nonetheless appear to be within
the meaning of the "other business" clauses of section 11.-[34]-
 
The Division believes that, within reasonable limitations, the
companies should be permitted to make such investments without
undue regulatory delay and expense.  

     Some commenters suggest that the SEC adopt a safe harbor
that would exempt de minimis investments from the requirement of
prior SEC approval.  To provide maximum flexibility, the Division
instead recommends that the SEC endorse the use of a "budget
approach," under which a registered holding company could invest
minimal amounts in diversified activities without regard to the
specific identity of each investment.  This approach would permit
SEC review while enabling registered holding companies, without
delay, to make small investments or small initial investments in
projects that may become large enough to require subsequent SEC
approval by order upon application. 

     Specifically, the Division contemplates that a registered
holding company would file an application under sections 9(a) and
10 requesting authorization to invest a stated dollar amount, on
                    
-------- FOOTNOTES --------

-[34]-  Section 11 requires that the other business be
"reasonably incidental, or economically necessary or appropriate"
and "necessary or appropriate in the public interest or for the
protection of investors or consumers and not detrimental to the
proper functioning of such system".
  
 
-------------------- BEGINNING OF PAGE #82 -------------------

an "as-needed" basis over a specified period.  This procedure
would obviate the need to seek and obtain prior SEC approval of
the individual transactions.  The applicant would be required to
take steps to ensure that potential losses would be limited to
the amount of the investment, e.g., by making the investment
nonrecourse to other system assets or by isolating the new
activity in a separate subsidiary.  A certificate would be filed
pursuant to rule 24 for each transaction. 

     The Division believes that this approach would strike an
appropriate balance between the SEC's responsibility to protect
investors and consumers, on the one hand, and the need of
companies to respond to opportunities on a timely basis and on a
more equal footing with their competitors.   

     The SEC should adopt a more flexible approach in considering
     all other requests to enter into diversified activities.

     It is likely that registered holding companies will continue
to seek authority to engage in activities that do not qualify for
the safe harbor of proposed rule 58 or for the budget approach
for small investments outlined above.  Among those activities are
potentially significant investments in ventures that are not
energy-related within the contemplation of rule 58.  The comments
diverged sharply on the appropriate regulation of these types of
investments. 

     For example, the registered holding companies voice concern
about the delays inherent in the approval process, and urge the
SEC to modify its precedent concerning the functional
relationship requirement and the related "50 percent test," which
limits transactions on behalf of nonassociate companies.  Some
suggest new tests, such as an investment cap, if any restriction
is needed.  Others favor no restrictions at all on
diversification.  

     Conversely, regulators and consumer groups question the
ability of ratemakers to protect consumers against risks that may
be associated with diversified activities.  Various commenters
stress the need for ratemaking authorities to have access to
information about diversified activities, the need for an overall
cap on investments, and the continuing need for the functional
relationship requirement.  The commenters are not unanimous,
however.  The Virginia Commission and the Public Utility
Commission of Texas ("Texas Commission"), for example, suggest
that registered holding companies, as well as exempt holding
companies, should have flexibility in this regard.  In addition,
the Michigan Commission Staff notes that the functional
relationship requirement does not ensure the success of a
nonutility venture.

     Some commenters make specific suggestions to modify the
regulation of diversification.  For instance, the Ohio Commission
suggests a three-part test based on the relationship of the
activity to the system's core utility business, the impact on
competition and the protections provided for ratepayers. 
Wisconsin Electric Power Company ("Wisconsin Electric") describes
a Wisconsin statute that permits expansive diversified activities
and provides for protection of consumers against cross-
subsidization and the effects of potential losses.

     The Division believes that the proposal of rule 58 and the
recommendation of a budget approach for small investments address
many of the commenters' concerns.  With respect to the other
 
-------------------- BEGINNING OF PAGE #83 -------------------

diversified activities that will continue to require SEC approval
on a case-by-case basis, the Division recommends a more flexible
interpretation of the provisions of the Act concerning
diversification.  Specifically, the Division contemplates an
interpretation of the language of section 11(b)(1) that would
allow registered holding companies to engage in nonutility
businesses that are economically appropriate and in the public
interest, regardless of whether such activities are ancillary to
the utility business.-[35]-  

     Further, the Division favors the abandonment of percentage
limitations as an administrative measure.  Such bright-line
limitations were intended to ensure that nonutility activities
remained consistent with the statutory requirements.  They have
primarily generated confusion and today appear outmoded.  The
Division believes that the current administration of section
11(b)(1) requires a flexible standard that takes into account the
risks inherent in the particular venture and the specific
protections provided for consumers.  The Division is not
recommending an overall cap on investment because the existing
level of diversification should be a factor in considering
whether a proposed transaction is in the public interest and
whether adequate consumer protections are in place.  

Chapter 4. Affiliate Transactions
A. Background

     As discussed in Part I, service contracts between holding
companies and their utility subsidiaries prior to 1935 were used
as a means to enrich holding companies at the expense of utility
ratepayers and investors, and the states were unable to regulate
these activities adequately.  Since there was no arms-length
bargaining, the holding company dictated the terms of the
contracts, and fees were often stated as a percentage of utility
revenues.-[1]-  The existence of these practices was an important
factor leading to the enactment of comprehensive federal
legislation.-[2]-  The Holding Company Act contains a number of
provisions designed to prevent companies in holding company
systems from overcharging affiliates for goods and services, and
then passing such charges on to utility ratepayers.-[3]-   
                    
-------- FOOTNOTES --------

-[35]- See, e.g., Southern Co., note 28 above (permitting
investment in mobile communications business on alternative
holding that such investment was economically appropriate and in
the public interest).  See also Study of Operations at 949 (the
SEC permitted retention of ice operations because of importance
to the local fruit growing and fruit transporting business).

-[1]- Study of Operations at 981-82.  These fees were often
reflected on the utility's books as operating expenses ahead of
interest, deductible in computing the fair rate of return, and
were sometimes capitalized and included in rate base.  The fees
also diluted the earnings of the utility available to its other
investors.  Id.

-[2]-  See   1(b)(2) of the Holding Company Act.  The SEC has
stated that "[o]ne of the most serious of all the holding company
abuses was the exploitation of their operating subsidiary
companies through unwarranted service fees, commissions, and
other charges."  Annual Report of 1944, at 107.
-[3]- As originally introduced, both the House and Senate bills
leading to the Act would have made regulation of affiliate
transactions under the Act the responsibility of the FPC, the
precursor to today's FERC.  See H.R. 5423, 74th Cong., 1st Sess.
                                                   (continued...)
 
-------------------- BEGINNING OF PAGE #84 -------------------


     Section 13 of the Holding Company Act governs service, sales
and construction contracts among affiliates.  In general, section
13(a) prohibits registered holding companies from entering into
or performing any such contract with an associate utility or
mutual service company, except in limited circumstances to be
exempted by rule.-[4]-  Section 13(b) permits registered holding
company subsidiaries and mutual service companies to enter into
or perform a service, sales or construction contract with an
associate company only in accordance with SEC rules and only if
such contract is performed "economically and efficiently, for the
benefit of [the companies serviced], at cost, fairly and
equitably allocated among such companies."-[5]-  The SEC has
adopted numerous rules under section 13.-[6]-
                    
-------- FOOTNOTES --------

-[3]-(...continued)
(1935)    12(a)-12(d); S. 1725, 74th Cong., 1st Sess. (1935),  
13(g).  This provision was retained in the bill passed by the
Senate, S. 2796, but the House substitute bill amended the Senate
bill to place the regulatory authority over this provision of the
Act with the SEC, rather than the FPC.  See House Report at 7. 
The House and Senate conferees agreed to give this authority to
the SEC, see H.R. Rep. No. 1903, 74th Cong., 1st Sess. 72 (1935),
and the legislation was enacted in this form.

-[4]- Rule 13-11 was adopted for this purpose in 1936.  Holding
Co. Act Release No. 125 (Mar. 30, 1936).  Under current rule 85 a
registered holding company may sell goods to or perform services
for associate companies when the holding company is primarily an
operating company, in emergencies, when the transaction is for a
small dollar amount, or when the goods to be sold were bought for
the holding company's own use or are sold incidentally to a sale
of a business or a sale of assets.  17 C.F.R.   250.85.

-[5]- The legislative history of section 13(b) clearly indicates
that Congress gave serious consideration to including the "at
cost" language and did so to protect consumers from excessive
rates.  See, e.g., House Report at 52-53.  The SEC is also
required to "insure that such contracts are performed
economically and efficiently," and, where interassociate
transactions are not conducted economically and efficiently
compared to arms-length, market-priced transactions, the SEC may
lower the charges to associate companies below cost.  See rules
90(a)(2) and 91(a) (requiring charges not "more than cost") and
rule 92(b) (permitting disallowance of excessive costs based on a
market comparison).  17 C.F.R.    250.90-92.  See also Ohio Power
Co. v. FERC, 880 F.2d 1400, 1411 (D.C. Cir. 1989) (Mikva, J.
concurring), rev'd and remanded, Arcadia, Ohio v. Ohio Power Co.,
498 U.S. 73 (1990), on remand, Ohio Power Co. v. FERC, 954 F.2d
779 (D.C. Cir. 1992), cert. denied, 113 S. Ct. 483 (1992).

-[6]- The original rules under section 13 were adopted in Holding
Co. Act Release No. 125 (Mar. 30, 1936).  The current rules
relating to section 13 provide limited exemptions from the
requirement for SEC approval of affiliate transactions, specify
certain matters relating to approval and operations of service
companies, and provide that affiliate transactions generally must
be performed at "cost," as defined.  See, e.g., rule 81, 17
C.F.R.   250.81 (exempting sales of goods or services that are
subject to public regulation and are made on terms comparable to
those applicable to other customers); rule 85, 17 C.F.R.   250.85
(discussed above); rule 87, 17 C.F.R.   250.87(exempting certain
limited transactions and certain specified holding company
subsidiaries from the requirement that they seek prior approval
to engage in transactions under section 13); rule 88, 17 C.F.R.  
                                                   (continued...)
 
-------------------- BEGINNING OF PAGE #85 -------------------


          1.  Formation of Service Companies

     In the early years, the SEC's regulation of transactions
under section 13 consisted primarily of review and approval of
applications to form mutual and subsidiary service companies-[7]-

and examination of service company operations to assure that the
goals of the Holding Company Act were being achieved.  The two
functions were interrelated to the extent that "[t]he cumulative
experience obtained . . . in dealing with service companies [was]
helpful in passing upon the organizational features of service
companies."-[8]-  

     The organizational phase of regulation was most intensive in
the first years after enactment of the Holding Company Act, when
registered holding companies were establishing service companies
to engage in transactions with associate companies, as permitted
by section 13.  The greatest difficulties encountered in this
phase were the lack of uniformity among the proposed service
companies, the lack of specific description of their proposed
functions, and the continued commingling of holding company and
operating company functions in one organization.-[9]-  

     Because service companies were unique to registered holding
company systems,-[10]- there was no standard against which to
judge them.  In 1936, the SEC adopted a uniform system of
accounts for service companies-[11]- as an important step in
establishing standards, and by 1940, the SEC reported that "[a]
reasonable amount of standardization has been accomplished,
particularly with respect to accounting and the elimination of
investments and functions not related to the performance of
service, sales and construction contracts."-[12]-  By 1941,
thirty applications to form service companies had been approved,
and the SEC reported that the first phase of regulation "is now
largely completed . . . [and t]here has accordingly been a shift
in emphasis to the matter of supervising the actual operations of
the arrangements previously passed on."-[13]-

          2.  Examination and Review

     The second phase of regulation consisted of examination and
review of the financial and operating information of service
                    
-------- FOOTNOTES --------

-[6]-(...continued)
250.88 (relating to approval of service companies); and rules 90,
91 and 92, 17 C.F.R.    250.90 -.92 ("at cost" rules).

-[7]- Subsidiary service companies are direct subsidiaries of the
holding company, whereas mutual service companies are
subsidiaries of the utilities they serve.

-[8]- Annual Report of 1940, at 46.

-[9]- See Annual Report of 1944, at 108-09.

-[10]- "[T]he utility service company is a device peculiar to the
registered holding company system."  Annual Report of 1951, at
112.  

-[11]- Uniform System of Accounts for Mutual Service Companies
and Subsidiary Service Companies, 17 C.F.R. Part 256, adopted May
12, 1936 and amended in Holding Co. Act Release No. 20910 (Feb.
2, 1979).  This system of accounts was described as "the first
step in the development of uniformity in accounting in a field
where quite diverse practices have prevailed."  Annual Report of
1936, at 43.

-[12]- Annual Report of 1940, at 46.

-[13]- Annual Report of 1941, at 110.
 
-------------------- BEGINNING OF PAGE #86 -------------------

companies, to ensure on an ongoing basis that service companies
were operating in compliance with the requirements of section
13.-[14]-  To implement reporting requirements,-[15]- and to
facilitate review, the SEC in 1937 adopted rule 13-60, requiring
the filing of annual reports by service companies, and adopted
Form U-13-60 to be used for that purpose.-[16]-  By 1939, the SEC
reported that it was "well into the second and more important
part of service company regulation," and that staff
investigations had uncovered abuses that required correction and
had supplied "a wealth of information and experience which will
be of immeasurable benefit in the administration of [section 13]
in the future."-[17]-

     In connection with monitoring operations of service
companies, the SEC also identified and corrected other, more
indirect, affiliate abuses engaged in by holding companies to the
detriment of utility ratepayers.  The SEC was particularly
concerned with the practice of shifting holding company expenses
to operating utilities through the medium of a service company. 
This shifting was accomplished, for example, by sharing officers
and employees between the holding company and the service company
and charging some portion of their compensation to the utility
customers of the service company.  In a series of proceedings,
the SEC established the principle that the compensation and
expenses of holding company personnel must be borne by the
holding company and not shared with an associated service company
and passed on to utilities.-[18]-     

     By 1946, most of the abuses connected with affiliate service
transactions had been eliminated.-[19]-  Over the next thirty
years, the SEC continued to examine the activities of service
companies to detect irregularities and monitor compliance with
section 13, as part of "the day-to-day surveillance of the . . .

-------- FOOTNOTES --------                    

-[14]- This review was accomplished by means of field
examinations of service companies, as well as by financial and
statistical reporting.  The SEC's audit function under the
Holding Company Act is discussed in detail in Chapter 5 of Part
II.

-[15]- See section 14 of the Holding Company Act.

-[16]- Holding Co. Act Release No. 513 (Jan. 8, 1937).  In the
following year, the SEC began receiving and studying Forms U-13-
60, and reported that "a study is being made of the operating
methods of various service companies which will enable the [SEC]
to make suggestions and, if necessary, to promulgate orders to
insure an accurate distribution of costs for this class of
service in accordance with the standards set forth in Section 13
of the Act."  Annual Report of 1938, at 19.  The current rule
requiring service companies to file annual reports is rule 94, 17
C.F.R.   250.94.

-[17]- Annual Report of 1939, at 76-77.

-[18]- Ebasco Services, Inc., Holding Co. Act Release No. 2255
(Aug. 27, 1940); United Light and Power Service Co., Holding Co.
Act Release No. 2608 (Mar. 11, 1941); Middle West Service Co.,
Holding Co. Act Release No. 2696 (Apr. 16, 1941); and Columbia
Engineering Corp., Holding Co. Act Release No. 4166 (Mar. 11,
1943).  The SEC noted that these practices involved the
performance of a service for a charge by a holding company in
violation of section 13, and that the related proceedings
"constituted a landmark in the administration of Section 13." 
Annual Report of 1941, at 112.

-[19]- Study of Operations at 989.
 
-------------------- BEGINNING OF PAGE #87 -------------------

operations of [the] registered holding company groups."-[20]- 
Few cases of great import arose, but the SEC continued to
establish policies on a case-by-case basis to safeguard the
interests of utility consumers-[21]- and otherwise improved its
regulation of service companies.-[22]-  

          3.  Special Purpose Subsidiaries

     Beginning in the 1970s, largely as a result of the energy
crisis, holding companies undertook fuel exploration and
development programs through special purpose subsidiaries that
procured fuel and sold it to associate utility companies.-[23]- 
In the context of fuel subsidiaries, complex questions concerning
the calculation of "cost" arose-[24]- and registered holding
companies sometimes sought authorization to deviate from the "at
cost" rules.-[25]-  From 1971 through 1983, the SEC authorized a
total investment of approximately $6.6 billion in fuel
programs.-[26]-

-------- FOOTNOTES --------
                    
-[20]- Annual Report of 1951, at 63.

-[21]- For example, in 1943, the SEC established the principle
that service company activities must be limited to operating
services that the operating utility companies cannot perform as
economically and efficiently for themselves, as opposed to
managerial, executive or policymaking functions, Columbia
Engineering Corp., note 18 above, and required reorganization of
one service arrangement to segregate service activities for
foreign subsidiaries, which were not subject to section 13, from
those for domestic subsidiaries, which were.  Electric Bond and
Share Co., Holding Co. Act Release No. 4070 (Jan. 25, 1943).

-[22]- For instance, in an effort to streamline regulation, Form
U-13-60 was amended in 1954 to eliminate material that duplicated
the information supplied in Form U-5-S.  Holding Co. Act Release
No. 12287 (Dec. 30, 1953).

-[23]- See, e.g., the various orders relating to System Fuels,
Inc., the fuel subsidiary in the Entergy Corporation system,
including Holding Co. Act Release Nos. 17400 (Dec. 17, 1971)
(approving formation of subsidiary and initial operations, and
requiring that "SFI will sell fuels to [its associate utility
companies] at prices equal to cost determined in accordance with
Rule 91"); 20363 (Jan. 4, 1978);  21277 (Nov. 1, 1979); 21367
(Dec. 28, 1979); 21871 (Dec. 31, 1980); and 23028 (Aug. 9, 1983)
(authorizing entry into coal supply contracts, financing for
procurement and exploration programs for gas, oil, uranium and
coal, and fuel storage, handling and transportation).  Other
holding company systems also engaged in extensive fuel
procurement and development programs to meet the fuel needs of
significant additions to generating capacity constructed in the
1970s.

-[24]- Because fuel programs are capital intensive, cost of
capital is a significant component of the price of fuel.  The SEC
calculated cost of capital for a wholly-owned fuel subsidiary on
the basis of the imputed capital structure of the utilities that
it serves.  Total price of fuel is based on full pooling of
costs, including amortization of exploration and development
costs.  Levy Testimony at 651.

-[25]- See, e.g., New England Electric System, Holding Co. Act
Release No. 22309 (Dec. 9, 1981) (utility permitted to enter into
lease with affiliated joint venture with lease payments based on
market price).
-[26]- Annual Report of 1983, at page 46.
 
-------------------- BEGINNING OF PAGE #88 -------------------

     In the 1980s and 1990s, registered holding companies
expanded their use of separate subsidiaries to engage in other
activities,-[27]- including formation of exempt wholesale
generators and foreign utility companies under the Energy Policy
Act,-[28]- raising further issues of compliance with section 13
and the rules thereunder.  As registered holding companies
increased the use of special purpose subsidiaries that may supply
goods and services to companies within the holding company
system, the SEC's audit and examination function kept pace with
these developments by increasing the surveillance of fuel and
other nonutility subsidiaries.  These reviews, together with
continuing reviews of service company subsidiaries, saved
consumers substantial amounts of money in possible overcharges
and inefficiencies.-[29]-

          4.  The "Ohio Power" Problem

     The current issue in the area of affiliate transactions is
how Congress, the SEC or the FERC should deal with the
implications of the Ohio Power case.-[30]-  Beginning in 1971,
the SEC authorized a fuel subsidiary of Ohio Power Company to
sell coal to an associate utility company "at cost."-[31]- 
During the 1970s, the FERC applied a rate-of-return methodology
that was similar to the SEC's cost-plus pricing methodology.  In
1981, however, the FERC adopted a market-based standard for
pricing coal produced by affiliates of the purchasing
utility.-[32]-  Under the market standard, a utility buying such
captive coal can recover only the price it would have paid under
a comparable coal supply contract with a nonaffiliate.  In 1982,
when Ohio Power filed wholesale rate increases, the FERC
challenged the pass-through of coal costs that did not satisfy a
"comparable market" test.-[33]-  The FERC determined that Ohio
Power had paid substantially more than a comparable market price

-------- FOOTNOTES --------                    

-[27]- See, e.g., American Electric Power Co., Holding Co. Act
Release No. 22468 (Apr. 21, 1982) (consulting subsidiary);
Consolidated Natural Gas Co., Holding Co. Act Release No. 22582
(July 22, 1982) (subsidiary engaging in sale and service of fuel
conversion equipment for natural gas vehicles and fueling
stations); and Entergy Corp., Holding Co. Act Release No. 25718
(Dec. 28, 1992) (subsidiary engaging in energy management
services and development of efficient lighting technologies).

-[28]- 42 U.S.C.    13201 et seq.

-[29]- See, e.g., Annual Report of 1992, at 46 ("The SEC audits .
. .  fuel procurement activities, accounting policies, annual
reports of service company subsidiaries and fuel procurement
subsidiaries of registered holding companies, and quarterly
reports filed by non-utility subsidiaries of registered holding
companies.  By uncovering misapplied expenses and inefficiencies,
the agency's activities during 1992 resulted in savings to
consumers of approximately $10.2 million.").  For the period
1983-1994, SEC audits resulted in total savings to consumers of
approximately $288 million.

-[30]- Ohio Power Co. v. FERC, 954 F.2d 779 (D.C. Cir.), cert.
denied, 113 S. Ct. 483 (1992).

-[31]- See Ohio Power Co., Holding Co. Act Release Nos. 17383
(Dec. 2, 1971); 20515 (Apr. 24, 1978); 21008 (Apr. 17, 1979); and
21537 (Apr. 25, 1980).

-[32]- See Opinion 133, Public Service Co. of New Mexico, 17
F.E.R.C.   61,123 (1981), reh'g denied, 18 F.E.R.C.   61,036
(1982), aff'd, 832 F.2d 1201 (10th Cir. 1987).

-[33]- Ohio Power Co., 39 F.E.R.C.   61,098 (1987).  Southern
Ohio had begun mining operations in 1978.   
 
-------------------- BEGINNING OF PAGE #89 -------------------

for coal supplied by Southern Ohio, and so ordered Ohio Power to
establish lower wholesale rates and to refund previous
overcharges.

     In 1992, the D.C. Circuit held that the SEC's order
authorizing the sale of coal "at cost" precluded the FERC from
disallowing the cost of coal from the utility's rates.-[34]- 
Ohio Power has been viewed as interfering with the ratemaking
jurisdiction of the FERC and, potentially, the states by
preventing them from considering the reasonableness of costs of
affiliate transactions that have been approved by the SEC.-[35]-
 
The perception that the SEC's orders may be read to impair the
ability of the FERC, and state and local regulators, to protect
consumers through traditional ratemaking proceedings is troubling
because, historically, the SEC did not believe that the exercise
of its authority under section 13(b) preempted federal and state
ratemaking authority.-[36]-  

     In addition to the present study, the SEC has undertaken
several initiatives to address the issues raised by the Ohio
Power decision.  The SEC staff has met with staff of the FERC and
representatives of NARUC to discuss their concerns and possible
solutions.  In addition, in response to the concerns expressed by
the FERC and the states, the SEC undertook an effort to arrive at
a joint legislative solution with the FERC.-[37]-  Finally, the
SEC proposed for public comment an amendment to rule 90 that
would apply a market standard to intrasystem service, sales and
construction contracts in "special or unusual circumstances" in
which the market price for comparable goods or services is lower
than cost as determined pursuant to rule 91.-[38]-
                    
-------- FOOTNOTES --------

-[34]- Ohio Power Co. v. FERC, note 30 above.

-[35]- See, e.g., Hearings on Regulatory Oversight of Registered
Holding Company Transactions, before the Subcommittee on Energy
and Power of the House Committee on Energy and Commerce, 103rd
Cong., 2nd Sess. 1 (1994) (Testimony of The Honorable Craig A.
Glazer, Chairman of the Public Utilities Commission of Ohio on
Behalf of the National Association of Regulatory Utility
Commissioners) ("While the [Ohio Power] decision only applied to
FERC regulation of wholesale power sales, it clearly threatens
State regulation of a far larger share of costs recovered in
retail rates.  With the FERC and State commissions precluded from
reviewing the costs of affiliate contracts, the SEC will have
exclusive but flawed authority to protect ratepayers."). 

-[36]- Prior to the Ohio Power decision, the SEC had assumed that
the FERC and the states would be free to reexamine such costs. 
See, e.g., New England Electric System, note 25 above (granting a
deviation from the "at cost" rules in connection with lease
payments between affiliates, and noting that the FERC would later
consider the amount of costs allowable in wholesale rates under
its standards).

-[37]- In 1994, the SEC approved a joint SEC-FERC staff proposal
to amend section 318 of the FPA that would have expressly
authorized the FERC to disallow costs incurred pursuant to
section 13(b) "if it determines that recovery of such costs would
be inconsistent with the requirements of sections 205 or 206 of
the Federal Power Act."  Under the proposal, there would have
been a rebuttable presumption that such costs were just,
reasonable and not unduly discriminatory or preferential within
the meaning of the FPA.

-[38]- See Intrasystem Service, Sales and Construction Contracts;
Proposed Rule Amendment and Rule Rescission, Holding Co. Act
Release No. 26198 (Dec. 22, 1994). 
 
-------------------- BEGINNING OF PAGE #90 -------------------


     B.   Recommendations for Future Regulation of Affiliate
          Transactions

     The most significant issues involving affiliate transactions
are those raised by the Ohio Power case, discussed above.  The
Division continues to believe that a legislative remedy, rather
than rulemaking, is necessary to address these issues.

     The SEC should withdraw its proposal to amend rule 90
     concerning affiliate service, sales and construction
     contracts, reaffirm its intention not to preempt the
     ratemaking authority of the FERC or the states, and continue
     to work closely with rate regulators and utilities to reach
     a satisfactory resolution to the Ohio Power problem. 

     As discussed above, the SEC in December 1994 issued notice
of a proposed rulemaking that would have applied a lower-of-
cost-or-market standard to affiliate transactions involving
companies in a registered holding company system.  The rulemaking
was intended to prevent the situation in which a utility in a
registered system could purchase goods and services at a cost
above market price, to the detriment of consumers.

     As the Division anticipated, the rule was very
controversial.  The SEC received comments from registered holding
companies, state and local utility commissions and consumer
groups.-[39]-  The registered holding companies oppose the rule,
arguing that a lower-of standard would discourage significant
investment and undermine the centralized management of registered
systems by eliminating the consistent pricing standard of the
present rules.-[40]-  The companies further represent that
implementation of the rule would be burdensome, and could result
in stranded costs to the detriment of investors.  In addition,
the rule could result in unintended consumer detriment where, for
example, the utility is the seller or service provider.

     Some commenters also question the need for the proposed
rule.  The pricing of seller-produced goods, which was at issue
in Ohio Power, could be readily accommodated under the existing
regulatory framework of section 13(b)(2) and rule 92.-[41]-  The
companies recommend that the SEC instead consider less drastic
adjustments that could be accomplished within the current
regulatory framework by specific exemptive orders.  The SEC's

-------- FOOTNOTES --------                    

-[39]- The comments are available for public inspection in SEC
Public File No. S7-37-94.

-[40]- See, e.g., Comments of New England Electric System
("NEES"), File No. S7-37-94 (a lower-of standard creates a "heads
you lose, tails you break even" scenario).

-[41]- Although a subsidiary company generally must perform
services or construction for, or sell goods to, an associate
company at cost, section 13(b)(2) authorizes the SEC, by rule or
order, to grant an exemption from the "at cost" requirement in
"special or unusual" circumstances.  The SEC relied upon section
13(b)(2) in adopting present rule 92, which applies a lower-of-
cost-or-market standard to intrasystem transfers of seller-
produced goods "to insure that the price of such sales shall be
in line with competitive prices of independent sellers."  In Ohio
Power, the company, by requesting orders, effectively sought a
variance from the lower-of-cost-or-market standard of rule 92
that would otherwise have applied to the intrasystem sales of
coal.  See orders cited in note 31 above.
 
-------------------- BEGINNING OF PAGE #91 -------------------

authority to adopt a rule of broad application under the
exemptive language of section 13(b)(2) was also questioned.  As
NEES stated, "[i]t is irrational and contrary to the express
intent of Congress to treat all intrasystem contracts as
presenting special or unusual circumstances."

     While the state and local regulators uniformly agree that
there is a need for increased attention to affiliate
transactions, they are generally skeptical of the SEC's
commitment in this area.  As the Indiana Commission noted, "[t]he
problem is not the standard, it is the enforcement of the
standard."  Many commenters question the SEC's willingness to
conduct the fact-specific inquiries that would be required to
implement the proposed rule.-[42]-  

     The consumer groups also generally found the proposed rule
amendment lacking and suggested various changes, including
requirements that companies solicit competitive bids before
entering into an affiliate contract, and that utilities
demonstrate a least-cost basis for affiliate transactions.  These
commenters also questioned the SEC's commitment to perform the
necessary fact-finding and monitoring procedures.

     On balance, the Division believes that the SEC should
withdraw the rule proposal.  The underlying issue is the ability
of states and the FERC to protect consumers through traditional
ratemaking proceedings, free from the potential issue of SEC
preemption.  The proposed rule did not address this
jurisdictional concern,-[43]- and the sweeping revision
contemplated by the rule as proposed may be too broad.  States
and the FERC should be able to assess the appropriate charges in
conjunction with the facts and circumstances of each case, and to
test different formulations of cost or price allowance.-[44]-  

     In the proposing release, the SEC noted that it does not
intend to preempt the authority of state and federal ratemakers
to disallow costs associated with transactions under section 13
of the Act.  Nonetheless, whether an SEC action will preclude the
FERC and state and local regulators in this regard remains for
Congress or the courts to decide.  As the proposing release also
noted, the Court of Appeals, on remand, did not resolve the
equitable cost-trapping concerns raised by the Supreme Court in
                    
-------- FOOTNOTES --------

-[42]- See Comments of Bierman and Stover, File No. S7-37-94 (the
rule proposal will not achieve the consumer protection goals set
for it because the real problem is a lack of administrative will
to make the fact intensive inquiry needed to conduct market/cost
comparisons); Comments of the Ohio Commission, File No. S7-37-94
(the affiliate pricing determination is too complex and fact-
intensive for a simple rule administered by an agency without
experience in this area).

-[43]- The SEC explained that "[t]he rule does not, however,
purport to resolve the jurisdictional concerns raised by the
[Ohio Power] decision."  Holding Co. Act Release No. 26198 (Dec.
22, 1994).

-[44]- See, e.g., Comments of Virginia Commission ("Transactions
should be regulated with the objectives of maximizing revenues
and minimizing costs to the utility company").  We note that some
states have imposed a five percent surcharge on charges by a
utility to a nonutility associate company.  See also Entergy
Corp., Holding Company Release No. 26218 (Jan. 13, 1995)
(proposal of certain transactions pursuant to a settlement
entered into by Entergy Corporation and its regulators).
 
-------------------- BEGINNING OF PAGE #92 -------------------

Ohio Power.  It is possible that this question may be the subject
of future litigation.  An SEC statement that it does not intend
to preempt FERC or state ratemaking authority should undercut any
argument of detrimental reliance on SEC approval of cost for all
purposes.

     The Division believes that the SEC should proceed on a case-
by-case basis, in consultation with other regulators.  This
approach would offer needed flexibility to address pricing
concerns and other new issues.-[45]-  In appropriate
circumstances, the SEC should also issue exemptive orders under
section 13 allowing more nonutility subsidiaries to charge market
rates to nonutility affiliates.  A new standard of review for
transactions between utility and nonutility associate companies
may also be appropriate where the utility is the seller of goods
or the service provider.  Finally, increased diversification may
raise new and different affiliate concerns.  For example, the
affiliate transaction procedures developed by the Federal
Communications Commission may provide useful guidance as
registered holding companies diversify into communications.  The
potential variety of affiliate transactions necessitates that the
SEC maintain the ability to respond flexibly and effectively in
this area.  

     The Division further recommends that the SEC continue to
monitor developments in this area and, if the problems raised by
the Ohio Power decision remain, that the SEC pursue other avenues
to resolve them. 

Chapter 5. The Audit Function
A. Background

     As discussed in Chapter 4 of this part, service contracts
between holding companies and their utility subsidiaries prior to
1935 were used as a means to enrich holding companies at the
expense of utility ratepayers and investors, and the Holding
Company Act contains a number of provisions designed to prevent
companies in registered holding company systems from engaging in
abusive affiliate transactions.  In order for these provisions to
be effective, however, it was also necessary to provide the SEC
with the authority to monitor such transactions by requiring the
making and keeping of holding company system records and
mandating SEC access to those records, and the Act included
provisions for that purpose.  

     Section 15 of the Act is the source of the SEC's authority
in this area. This section requires registered holding companies
and their subsidiaries, affiliates of the foregoing, and other
persons whose principal business is performance of service, sales
or construction contracts for utilities or holding companies, to
keep such accounts and records as the SEC deems necessary or
appropriate in the public interest or for the protection of
investors or consumers or for the enforcement of the Act, and
provides that such accounts and records are subject to
examination by the SEC.  The SEC's authority extends to both the
types of books and records to be retained and the retrieval of
records to facilitate the auditing function.

     In the early years of the Holding Company Act's
administration, the SEC's audit function was used primarily in
                    
-------- FOOTNOTES --------

-[45]- See, e.g., Southern Co., Holding Co. Act Release No. 26211
(Dec. 30, 1994).
 
-------------------- BEGINNING OF PAGE #93 -------------------

connection with examination and review of the finances and
operations of newly-formed mutual and subsidiary service
companies to assure that the goals of the Act were being
achieved.  The SEC adopted rules to implement the Act's reporting
requirements and to require uniformity in the keeping of service
company accounts,-[1]- and the staff monitored operations through
both field audits and review of the financial and statistical
information filed under the Act by service companies and their
holding company parents.  By 1946, most of the abuses connected
with affiliate service transactions had been eliminated,-[2]- and
by 1952, the restructuring of the original holding company
systems (including establishment of system service companies) was
largely completed.-[3]-  

     Thereafter, the SEC continued to monitor the activities of
service companies for compliance with the requirements of the Act
as part of its ongoing regulatory functions.  In the early 1960s,
registered holding companies had only a few nonutility
subsidiaries, and affiliate transactions were limited primarily
to a small number of transactions involving administrative,
accounting and engineering services furnished to utilities by
service companies.  Such charges totaled approximately $300-400
million per year.  Since that time, the auditing function has
focused on the growth of these companies, and the oversight of
accounting systems and cost allocations.  Through the 1970s and
1980s, the electric utility industry developed specialized fuel
procurement programs and engaged in extensive construction
programs such that, by 1989, service company services had
expanded to over $2 billion per year.  Today, these service
companies render over 100 different types of services to the
operating utilities in their systems, with nonfuel transactions
aggregating approximately $4 billion annually.  Each of these
activities affects the utility companies in holding company
systems, directly or indirectly.-[4]-

     Since 1980, the SEC has conducted over 42 field and desk
audits of service company and fuel procurement subsidiaries, and
has established accounting, cost allocation, and use of proceeds
policies in dozens of associate transactions authorized by the
SEC.  The SEC has also adopted and implemented formal auditing
policies for service companies and for EWGs and foreign utility
companies, and has developed a manual providing service company
guidelines and procedures for accounting, cost determination, and
allocation based on over 30 years of auditing experience.-[5]-  
                    
-------- FOOTNOTES --------

-[1]- See Chapter 4 of this part for further information on the
adoption of rules implementing the Act's reporting requirements
and a uniform system of accounts for service companies.  

-[2]- Study of Operations at 989.

-[3]- Annual Report of 1952, at 82.

-[4]- Of the $4 billion of nonfuel affiliate transactions by the
15 registered holding company systems in 1994, approximately 95
percent, or $3.8 billion, affected utility operations.

-[5]- All service company subsidiaries have been required by the
SEC to maintain a recordkeeping system that facilitates the
retrieval of service company costs.  See 17 C.F.R. Part 257. 
Within the structure of service company records, the SEC has
mandated service order and personnel timecard systems that
capture the initial cost of a service transaction.  See 17 C.F.R.
Part 256.  The SEC has also required the use of budgeting to
establish prospective cost of service, the use of budget and
planning review groups by utilities to monitor service
                                                   (continued...)
 
-------------------- BEGINNING OF PAGE #94 -------------------


     The utility industry has undergone significant change in
recent years,-[6]- and registered holding company systems have
expanded into nonutility business activities other than that of a
service company.  Since the early 1980s, the number of such
nonutility subsidiaries of registered holding companies has
quadrupled to over 200.  As a result, current regulation of
affiliate transactions, and the SEC's audit function, focus on
review of transactions to which nonutility subsidiaries of
holding companies (other than service companies) are a party. 
The growth in intrasystem transactions within the holding company
systems makes it important for regulators to have access to books
and records that correctly represent the cost of service for
those transactions.  A state commission's ability to control
cross-subsidization through affiliate transactions, however, is
dependent upon its statutory authority over such transactions,
access (if any) to the information and records of the nonutility
activities and the holding company, and cooperation with
regulators having such access.-[7]-  

     The SEC historically has worked with ratemaking authorities
in the area of audits.  In 1979, the SEC established with the
FERC a cooperative program of auditing service company
subsidiaries of registered holding companies.  Over the last ten
years, the SEC has also extended numerous invitations to state
public service commissions to assist in the auditing of service
company transactions.  However, in light of the growth in
intrasystem transactions noted above, more affirmative action by
the SEC may be needed to assist state regulators in their
consumer protection activities.  While several registered holding
companies believe that there is no need for continuation of the
SEC's audit function, some state and local regulators
disagree.-[8]-  

     The SEC's recent Central and South West Corp. decision-[9]-

illustrates how the SEC employs its broad ranging authority over
the books, records, procedures and operations of all holding
company system companies to enhance the effectiveness of state
regulation.  In approving a restructuring intended to consolidate
and centralize in the system service company certain service and
management activities that were previously performed individually
by the operating companies, the SEC required the implementation
of extensive procedures to authorize, monitor and control the
rendering of services.  In addition, in order to assist state
regulators to monitor affiliate charges, the service company must
permit such regulators to examine all books, accounts, memoranda,
contracts and records of the service company as appropriate to

-------- FOOTNOTES --------                    

-[5]-(...continued)
transactions, the use of internal auditing to oversee accounting,
billing and allocation, and the cooperative review of service
transactions by the parties to assess whether the service is
competitive with the marketplace.  See, e.g., Central and South
West Corp., Holding Co. Act Release No. 26293 (May 18, 1995).

-[6]- See the discussion of recent trends in utility regulation
in Part I.

-[7]- As discussed in Section B below, many states do not have
adequate authority to obtain the information they need regarding
affiliate transactions in holding company systems. 

-[8]- See Comments of New Orleans at 5 and the Texas Commission
at 9.

-[9]- See, e.g., Central and South West Corp., note 5 above.
 
-------------------- BEGINNING OF PAGE #95 -------------------

the effective discharge of state regulatory
responsibilities.-[10]-

     B.   Recommendations for Future Auditing and Access to Books
          and Records

     Because of the difficulty states may have in monitoring the
activities of subsidiaries of holding companies, the SEC should
continue to cooperate with ratemaking authorities to assist them
in protecting consumers.  This cooperation will be critical as
nonutility subsidiaries increase in number and size, and the
electric utility industry responds to deregulation.  The Division
recommends that the SEC share its audit authority and access to
books and records of registered holding company systems with
ratemaking authorities, so as to achieve the consumer protection
goals of the Act.  

     The SEC should (1) coordinate and cooperate with the FERC
     and state and local regulators to audit and review affiliate
     transactions among registered holding company system
     companies, and (2) assist the states in obtaining access to
     books and records, wherever located, if such examination is
     required for the effective discharge of the state
     commission's responsibilities.  

     Spurred by legislative and regulatory developments, portions
of the electric and gas utility industries have become
increasingly deregulated and increasingly competitive.  This
trend will continue as the industry further evolves.-[11]- 
Utilities are also engaging to a greater extent in energy-related
nonutility businesses,-[12]- and are competing in these
diversified activities.-[13]-  The increasingly competitive
atmosphere in utility and utility-related markets will likely
result in functional reorganization of traditional utility
operations, as companies seek to separate their various functions
in order to compete more freely in the deregulated and
unregulated segments of the industry, and centralization of
support functions of the utility business, to reduce costs.-[14]-
 
-------- FOOTNOTES --------                    

-[10]- See also Entergy Corp., Holding Co. Act Release No. 26218
(Jan. 13, 1995) (proposal to implement settlement agreements
between Entergy Corporation and its state and local regulators
with regard to affiliate transactions).

-[11]- See Part I for a discussion of recent developments,
including the Energy Policy Act, FERC Order No. 636, and a recent
FERC rulemaking initiative related to open transmission access in
the electric utility industry.

-[12]- See Chapter 3 above for a discussion of the types of
diversified activities in which these companies are engaging.

-[13]- As discussed above, the Division is recommending that the
SEC seek comment on a rule that would exempt from the
requirements of sections 9(a) and 10 investments in energy-
related activities of a registered holding company system, and
that the SEC approve, under a budget approach, certain de minimis
investments in other diversified activities, without specific
prior approval for each transaction.
  
-[14]- See, e.g., Central and South West Corp., Holding Co. Act
Release No. 26293 (May 18, 1995) (authorizing transfer to the
holding company's system service company subsidiary of
administrative, technical and other support services previously
rendered by each individual operating company).  Note also the
formation of nuclear management service companies, Southern
                                                   (continued...)
 
-------------------- BEGINNING OF PAGE #96 -------------------

These developments have the potential to increase significantly
the number of affiliate transactions in registered holding
company systems and, correspondingly, to increase the
opportunities for cross-subsidization and the need for rate
regulators to have access to information on these
transactions.-[15]-  

     All of the 42 state regulators that responded to the state
survey questionnaire stated that they have the authority to
prescribe a uniform system of accounts and access to the books
and records of their jurisdictional utility companies.  However,
it is unclear how many states have authority to access the books
and records of holding companies and books and records of
nonutility companies including service companies.  It is also
unclear how many states have statutory authority or cooperative
agreements to obtain books and records of out-of-state
companies.-[16]-  The questionnaire thus reveals varying levels
of state ability to regulate transactions between jurisdictional
utility affiliates and various affiliated and unaffiliated
entities.  The Division's recent experience in auditing
nonutility subsidiaries in cooperation with state regulators also
indicates that these regulators desire greater access than they
currently enjoy.

     One of the Division's legislative recommendations is the
conditional repeal of the Act, with transfer of continued audit
and oversight authority with respect to affiliate transactions
and cost allocations to the FERC.-[17]-  Pending repeal or
transfer of the audit function to the FERC, the Division
recommends increased cooperation with state and local regulators,
                    
-------- FOOTNOTES --------

-[14]-(...continued)
Nuclear Operating Company, Entergy Operations, Inc. and GPU
Nuclear Corporation, to centralize the nuclear operations of
these registered systems.  

-[15]- In fact, at least one writer has asserted that the desire
to escape regulatory scrutiny and control is a key factor in
management's decision to diversify through the holding company
structure. Knapp, Effective State Regulation of Energy Utility
Diversification, 136 U.Pa.L.Rev. 1677, 1686 (1988).  See also
Comments of the Indiana Commission ("Until the transformation to
primarily competitive industries is more pervasive and complete,
competition will aggravate, rather than alleviate the tendencies
of holding companies to earn monopoly profits by subsidizing
nonregulated activities through overcharges and the misallocation
of common costs, transferring intangible benefits from the
regulated to the unregulated at no cost, and charging ratepayers
for research and development that eventually benefits the
unregulated.") (citation omitted).

-[16]- See Appendix A.

-[17]- There appears to be a general consensus among state
regulators and registered holding companies that it would be
preferable for the FERC to serve as the single federal overseer
of intrasystem transactions.  This would assure consistency in
pricing and allocation methods.  Arguably, conflicts such as
those in the Ohio Power case could be avoided by such practices,
resulting in savings for consumers and investors through
increased certainty, predictability and coordinated regulation. 
Finally and most important, the Division views the FERC as the
appropriate agency to monitor intrasystem utility transactions,
due to its extensive expertise in utility operations, well-
developed administrative process, greater resources, and
institutional focus on consumer protection.  See Part III.  
 
-------------------- BEGINNING OF PAGE #97 -------------------

and increased access for these regulatory authorities to holding
company system books and records, in order to protect consumers,
at least until state powers are supplemented and reach a more
uniform and effective level. 

     Finally, the SEC should redirect the resources that are made
available as a result of the administrative reforms discussed
herein for the Division's audit program to monitor intrasystem
transactions in coordination with state regulators and the FERC.

Chapter 6. Exemptions

A.   Background

     In the early years of its administration of the Act, the SEC
anticipated that the statute would be "self-liquidating," as the
divestiture of unrelated operations required by section 11
resulted in the loss of jurisdiction over the resulting
companies.-[1]-  This prediction has proven largely true.  The
SEC was successful in breaking up and reorganizing the vast
holding company systems that predated the Act.  At one time or
another after 1938, there were 223 holding companies registered
under the Act.-[2]-  Today, there are only fifteen.  The vast
majority of utilities now operate as free-standing companies, or
as subsidiaries of holding companies that are exempted from
registration as being "either intrastate in character or else not
essentially holding companies in the utility field."-[3]- 

     Congress made exemptions from registration available in
these situations because such holding companies are susceptible
to effective state regulation-[4]- or are otherwise not the type
of holding company at which the Act is directed.  Section 3
establishes five classes of holding company exemptions.  The most
commonly used exemptions are those provided in section 3(a)(1)
for an intrastate holding company, and section 3(a)(2) for a
holding company that is "predominantly a public-utility company." 
In addition, section 3(a)(3) provides an exemption for a company
that is "only incidentally a holding company," being primarily
engaged in another business; section 3(a)(4), for a company that
is only "temporarily a holding company;" and section 3(a)(5), for
a holding company with essentially foreign utility interests and
no material domestic utility operations.  

     Section 3(a) directs the SEC to exempt from "any provision
or provisions" of the Act any holding company that satisfies the
objective requirements of section 3(a), "unless and except
insofar as it finds the exemption detrimental to the public
interest or the interest of investors or consumers."  The "unless
and except" clause "was designed to prevent the exemption of any
holding company which, although it might meet the formal
conditions under Section 3(a), is essentially the type of company

-------- FOOTNOTES --------                    

-[1]- In 1946, the SEC believed it "hardly possible" that there
would be any new holding companies. "[I]t would be quite rare
that that would ever happen."  Study of Operations at 998-99.

-[2]- Annual Report of 1962.

-[3]- Senate Report at 6.

-[4]- As discussed in Part I above, Congress subjected holding
companies to the requirements of the Act because meaningful state
regulation of their abuses was often obstructed by their control
of subsidiaries in several states and by the constitutional
doctrines limiting state economic regulation. 
 
-------------------- BEGINNING OF PAGE #98 -------------------

at which the purposes of the Act were directed."-[5]-  In
addition, under section 3(c), the SEC can modify or revoke an
exemption if it finds that the circumstances that gave rise to
the exemption no longer exist.-[6]-  

     The SEC has adopted a number of rules under section 3(a). 
Rule 2 permits companies to claim exemption under section 3(a)(1)
or 3(a)(2), without the need to apply for or receive SEC
approval.-[7]-  Rule 3 provides an exemption for a bank that
holds utility securities as collateral for a bona fide debt, or
in the ordinary course of business as a fiduciary.-[8]-  Rule 4
similarly exempts brokers, dealers and underwriters.-[9]- 
Finally, rule 5 exempts wholly foreign holding companies.-[10]-

     The SEC has traditionally interpreted the exemptions
narrowly, explaining that "the purposes of the Act are preventive
as well as curative."-[11]- In recent matters, however, the SEC
has applied a more flexible approach in the absence of detriment
to the effectiveness of state regulation or other abuses that the
Act was intended to address.-[12]-  

-------- FOOTNOTES --------                    

-[5]- Cities Service Co., 8 S.E.C. 318, 335-36 (1940) ("By thus
imposing a mandatory duty upon the Commission to exempt companies
falling within defined categories except where such exemption is
definitely detrimental to the basic purposes of the statute, the
Committee has felt free to broaden the exemptions beyond what
would be justified if the exemptions had been made unqualified
and self-operative and beyond the power of the Commission to
correct when abused or used to circumvent the purposes of the
title.") (citing Senate Report at 24).  See also House Report at
11.

-[6]- See also rule 6, 17 C.F.R.   250.6 (setting forth the
procedure whereby the SEC may terminate a claim of exemption). 
The SEC has rarely invoked its authority to challenge an
exemption.  See, e.g., Long Island Lighting Co., 18 S.E.C. 717
(1945) (changed circumstances in the company's financial
structure found detrimental to the public interest).  See also
Pacific Lighting Corp., 45 S.E.C. 152 (1973), in which the SEC
staff unsuccessfully challenged an exemption on the basis of
diversification.

-[7]- 17 C.F.R.   250.2.  A company can claim exemption under
sections 3(a)(1) or 3(a)(2) by filing an annual statement on Form
U-3A-2.  In addition, rule 10, 17 C.F.R.   250.10, provides
exemptions for certain "upstream" holding companies and rule 11,
17 C.F.R.   250.11, exempts from the requirement of prior SEC
approval acquisitions of the securities of such companies.

-[8]- 17 C.F.R.   250.3.  Rule 3 also provides an exemption from
the requirements of section 9(a)(2) with respect to the
acquisition of securities in accordance with the rule.

-[9]- 17 C.F.R.   250.4.

-[10]- 17 C.F.R.   250.5.

-[11]- Standard Oil Co., 10 S.E.C. 1122, 1129 (1942).  In that
case, the SEC stated that the "unless and except" clause would
have required denial of the application for exemption even if the
objective requirements had been satisfied because the record
disclosed, among other things, intrasystem transactions,
including intercompany advances and servicing arrangements, of
the type Congress recognized as the subject of potential abuse. 
Id. at 1129-30.

-[12]- See, e.g., Kansas Power and Light Co., Holding Co. Act
Release No. 25465 (Feb. 5, 1992); text accompanying note 24
below.
 
-------------------- BEGINNING OF PAGE #99 -------------------

          1.  Intrastate Holding Companies

     The exemptions under sections 3(a)(1)-[13]- and
3(a)(2)-[14]- are based on the assumption that a state can
effectively regulate a holding company that operates and is
organized in one state,-[15]- or a holding company that is
essentially an intrastate operating company with minor subsidiary
operations.-[16]-  
     The SEC's decisions under these sections have generally
focused on size as a proxy for effective state regulation.  The
result has been a somewhat confusing array of decisions.-[17]- 
For example, a utility company that contributed 3.3 percent of a
system's gross revenues was found not to be a material
subsidiary,-[18]- while a contribution of between 9.45 percent
and 11.92 percent of a holding company's net income was deemed
material for purposes of section 3(a)(1).-[19]-  Similarly, an
exemption has been granted where out-of-state operations
represented approximately 9.9 percent of the holding company's
utility revenues,-[20]- but denied where a utility derived 11.13
percent of its operating revenues from out-of-state

-------- FOOTNOTES --------                    

-[13]- Section 3(a)(1) provides an exemption where:

     [the] holding company, and every subsidiary company thereof
     which is a public-utility company from which such holding
     company derives, directly or indirectly, any material part
     of its income, are predominantly intrastate in character and
     carry on their business substantially in a single State in
     which such holding company and every such subsidiary company
     thereof are organized.

-[14]- Section 3(a)(2) exempts a holding company that is
"predominantly a public-utility company whose operations as such
do not extend beyond the State in which it is organized and
States contiguous thereto."  

-[15]- See generally Houston Natural Gas Corp., 3 S.E.C. 664
(1938), petition for review dismissed, 100 F.2d 5 (4th Cir.
1938).  

-[16]- See Senate Report at 24.  See also House Report at 10
(section 3(a)(2) is directed at a company which "is itself a
utility, being a holding company only in form by reason of the
fact that it has one or more minor subsidiary utilities").

-[17]- The SEC has weighed a variety of quantifiable factors. 
See, e.g., N.W. Electric Power Cooperative, Inc., Holding Co. Act
Release No. 24497 (Nov. 10, 1987) (exemption granted where 4
percent of a system's 69 KV transmission lines located out of
state); Wisconsin Energy Corp., Holding Co. Act Release No. 24267
(Dec. 18, 1986) (exemption granted where less than 3 percent of a
system's service population, number of customers, generating
capacity, sales, book value of net plant and operating income
were attributable to out-of-state activities).  The SEC has also
considered such issues as the treatment of wholesale utility
sales to out-of-state interests at the state line.  See WPL
Holdings, Inc., Holding Co. Act Release No. 24590 (Feb. 26,
1988), remanded on other grounds sub nom. Wisconsin's
Environmental Decade, Inc. v. SEC, 882 F.2d 523 (D.C. Cir. 1989),
on remand, WPL Holdings, Inc., Holding Co. Act Release No. 25377
(Sept. 18, 1991).

-[18]- Commonwealth Edison Co., 28 S.E.C. 172, 173 (1948). 

-[19]- Wisconsin Electric Power Co., 28 S.E.C. 906, 912 (1948).

-[20]- Sierra Pacific Resources, Holding Co. Act Release No.
24566 (Jan. 28, 1988).
 
-------------------- BEGINNING OF PAGE #100 -------------------

operations.-[21]-  Under section 3(a)(2), the SEC has granted an
exemption if the gross revenues of the utility subsidiaries
aggregate no more than approximately 25 percent of those of the
parent.-[22]-   

     In some instances, this approach has created practical
difficulties unrelated to the abuses the Act was intended to
address.  In 1988, for example, Kentucky Utilities Company sought
SEC approval for a restructuring that would establish a holding
company over its utility operations.  Under SEC precedent, it was
unclear whether an out-of-state utility subsidiary that
contributed approximately 7 percent of Kentucky Utilities'
consolidated utility revenues could be disregarded as an
immaterial subsidiary for purposes of section 3(a)(1).  Before an
exemption was granted, nearly three years later, the company was
required to merge its operations into a single utility company
that was then incorporated in two states.-[23]-  

     In other matters, however, the SEC has taken a more flexible
approach.  In 1992, for example, the SEC granted a temporary
exemption to Kansas Power and Light Company, in connection with
its acquisition of Kansas Gas & Electric Company.-[24]-  The
temporary exemption was intended to allow the resulting holding
company to reorganize its corporate structure to satisfy the
requirements of SEC precedent under section 3(a)(2).-[25]-  The
exemption was consistent with the terms of an order of the state
commission, which required restructuring by January 1, 1995.

          2.  Nonutility Holding Companies

     The exemption under section 3(a)(3), for a company that is
"only incidentally a holding company" was intended to reach, for
example, a manufacturing concern generating power for its own
use, which "has a little surplus power and sells it to the local
community."-[26]-  Although the legislative intent was narrowly

-------- FOOTNOTES --------                    

-[21]- Washington Railway and Electric Co., 4 S.E.C. 191, 193-94
(1938).

-[22]- See Wisconsin Energy Corp., note 17 above, citing Northern
States Power Co., Holding Co. Act Release No. 22334 (Dec. 23,
1981); Ohio Edison Co., Holding Co. Act Release No. 21019 (Apr.
26, 1979); Union Electric Co., 40 S.E.C. 1072, 1077 (1962).  In
Union Electric, the SEC noted that "in all prior cases where
exemptions under Section 3(a)(2) have been denied, the gross
utility revenues of the subsidiaries have exceeded 35 percent of
those of the parent."  40 S.E.C. at 1077.  Nonutility and
wholesale electric revenues are generally excluded from the
calculation.  Id. at 1074-76. 

-[23]- See KU Energy Corp., Holding Co. Act Release No. 25409
(Nov. 13, 1991).  Kentucky Utilities Company, a Kentucky public-
utility company and exempt holding company, merged with its
Virginia subsidiary public-utility company, thereby mooting the
materiality issue under section 3(a)(1).  The company then
incorporated in Virginia, as well as in Kentucky, in order to
satisfy the requirements of Virginia law.

-[24]- Kansas Power and Light Co., note 12 above.

-[25]- The companies were concerned that a direct merger could
adversely affect contractual arrangements concerning a generating
facility owned by Kansas Gas & Electric, and endanger the tax-
free status of the acquisition.
-[26]- 79 Cong. Rec. 884 (1935) (statement of Sen. Wheeler).  See
also Hearings on H.R. 5423, before the House of Representatives
                                                   (continued...)
 
-------------------- BEGINNING OF PAGE #101 -------------------

defined, the SEC early recognized that the statute could be read
broadly to exempt holding companies that Congress intended to be
subject to regulation under the Act.-[27]-  Accordingly, the SEC
interpreted section 3(a)(3) to require a functional or
operational relationship between the utility operations and the
holding company's primary nonutility business.-[28]-  In
addition, the SEC has required that the utility operations be
small in an absolute sense,-[29]- and that the holding company
derive only a small part of its income, generally less than ten
percent, from its utility subsidiaries.-[30]- 

     Section 3(a)(4) establishes another type of nonutility
exemption, for a holding company that is only "temporarily a

-------- FOOTNOTES --------                 
                    
-[26]-(...continued)
Committee on Interstate and Foreign Commerce, 74th Cong., 1st
Sess. 2226 (1935) (an industrial company with a power plant for
its primary nonutility business, which distributes the excess
power, should be exempt) (cited together with the statement of
Sen. Wheeler in Electric Bond and Share Co., 33 S.E.C. 21, 41
(1952)).

-[27]- Section 3(a)(3) provides an exemption for a holding
company that is:

     [O]nly incidentally a holding company, being primarily
     engaged or interested in one or more businesses other than
     the business of a public-utility company and (A) not
     deriving, directly or indirectly, any material part of its
     income from any one or more subsidiary companies, the
     principal business of which is that of a public-utility
     company, or (B) deriving a material part of its income from
     any one or more such subsidiary companies, if substantially
     all the outstanding securities of such companies are owned,
     directly or indirectly, by such holding company.

-[28]- See, e.g., Standard Oil Co., 10 S.E.C. 1122, 1128 (1942)
(section 3(a)(3) requires "an incidental or accessory
relationship" between the utility operations and the holding
company's primary nonutility business).  See also Castle and
Cooke, Inc., Holding Co. Act Release No. 23928 (Dec. 2, 1985)
(companies primarily engaged in manufacturing, which own or
operate utility subsidiaries principally to supply power for
manufacturing needs, and sell additional amounts to the general
public); United States Steel Corporation, 1 S.E.C. 497 (1936);
Milliken and Co., Holding Co. Act Release No. 23509 (Dec. 3,
1984).

-[29]- In an early matter, the SEC explained, "Certainly, the
intention of Congress was not to exempt from the operations of
the Act a company which would otherwise be subject thereto,
solely by reason of its hybrid character."  Standard Oil Co.,
note 28 above, at 1129.

-[30]- See, e.g., Consolidated Oil Corp., 2 S.E.C. 165, 167
(1937) (less than 1.1 percent of holding company's gross revenues
and 0.75 percent of its income derived from utility operations);
Standard Oil Company of California, 4 S.E.C. 626, 627-28 (1939)
(utilities represented 2 percent of holding company's assets and
between 1-2 percent of its gross revenues and income); Cities
Service Co., 8 S.E.C. 318, 330-31, 334 (1940) (finding utility
operations accounting for 47.3 percent of holding company's
assets and 32.6 percent of its revenues too large to permit
section 3(a)(3) exemption).
 
-------------------- BEGINNING OF PAGE #102 -------------------

holding company." -[31]-  Although the legislative history does
not reveal the specific rationale underlying section 3(a)(4), it
appears that the exemption was intended to address a narrow set
of circumstances in which holding company status was temporary,
inadvertent, and unaccompanied by the intent to exercise control,
so that abuses were unlikely to occur.  The exemption has been
granted where utility stock is held as collateral for a debt on
which the debtor defaults, and where an investment bank acquires
utility stock that it agrees to distribute within one year.-[32]-

  
          3.  Foreign Holding Companies

     Section 3(a)(5) provides an exemption for a holding company
that:

     is not, and derives no material part of its income, directly
     or indirectly, from any one or more subsidiary companies
     which are, a company or companies the principal business of
     which within the United States is that of a public-utility
     company. 

The legislative history indicates that the exemption under
section 3(a)(5) was designed for United States holding companies
that "hold all or substantially all of their operating companies
outside the United States."-[33]-  As originally proposed,
section 3(a)(5) applied only to holding companies with
exclusively foreign utility holdings.-[34]-  The rationale for
the exemption was that "the United States would not be interested
in such companies at all except insofar as it was desired to
regulate the sale of their securities in the United
States."-[35]-  The exemption was subsequently amended to

-------- FOOTNOTES --------

-[31]- Section 3(a)(4) exempts a holding company that is:

     temporarily a holding company solely by reason of the
     acquisition of securities for purposes of liquidation or
     distribution in connection with a bona fide debt previously
     contracted or in connection with a bona fide arrangement for
     the underwriting or distribution of securities.  

-[32]- See Halsey, Stuart & Co., Inc., Holding Co. Act Release
No. 132 (Mar. 27, 1936).  See generally Hawes, Utility Holding
Companies   3.04[4a] (1987).

-[33]- Cities Service Co., 8 S.E.C. 318, 332 (1940).  The
legislative history indicates that Congress in 1935 did not
contemplate ownership of a domestic utility by a holding company
domiciled outside the United States.  The Conference Report
noted, among other things, with respect to the section 11
requirement that a holding company limit its utility properties
to one integrated public-utility system:

     To this limitation the Senate bill, like the House bill,
     allows in section 3 exceptions in the case of a holding
     company whose interests are essentially intrastate and in
     the case of a holding company whose interests are
     essentially foreign. 

H.R. Conf. Rep. No. 1903, 74th Cong., 1st Sess. at 70 (1935).

-[34]- See Senate Report at 24. 

-[35]- 79 Cong. Rec. 8843 (1935) (statement of Sen. Wheeler). 
 
-------------------- BEGINNING OF PAGE #103 -------------------

accommodate companies whose utility holdings, while essentially
foreign, also included some small domestic operations.-[36]-   

     The early cases under section 3(a)(5) involved holding
companies with exclusively foreign utility operations.-[37]-  In
1940, the SEC considered a matter in which a company with
significant United States utility operations sought to rely on a
literal reading of the statute to evade regulation under the
Act.-[38]-  The SEC rejected that argument, stating that the
exemption was limited to "essentially foreign holding company
systems which include minor American utilities."-[39]-  

     In a recent matter, the SEC relied on this language in
granting an exemption under section 3(a)(5) to a Canadian holding
company with Vermont utility operations.-[40]-  In Gaz
Metropolitain, the SEC found that a foreign holding company with
domestic utility operations that "account for no material part of
the holding company's income" and are "small in size" may qualify
for an exemption under section 3(a)(5).-[41]-  It concluded that
the requested exemption would not be detrimental to the public
interest or the interests of investors or consumers.-[42]-  
                    
-------- FOOTNOTES --------

-[36]- Senator Wheeler stated:

     It was contended before the committee that there might
     be companies, for instance, which were organized in the
     United States but held operating companies entirely
     outside the United States, and consequently that the
     United States would not be interested in such companies
     . . . .  Then one of the Senators called my attention
     to the fact that some company of that kind might
     possibly hold another company, just a small company, in
     the United States and that it did not derive any
     material part of its income from that company.  So this
     amendment is proposed as a substitute for the original
     exemption for foreign systems, and it enlarges the
     powers of the Commission with reference to such
     companies in the manner I have explained.  

79 Cong. Rec. 8843 (1935). 

-[37]- In 1940, the SEC noted that "in every case in which an
exemption under Section 3(a)(5) has been applied for and granted,
the applicant has been a holding company for a wholly foreign
utility system."  Cities Service Co., note 33 above, at 334 n.27.

-[38]- Id. at 332-34.  

-[39]- Id.  See also Electric Bond and Share Co., 33 S.E.C. 21,
51 (1952) (exemption "is applicable only where the utility
operations conducted by a holding company are . . . `essentially
foreign,' and include at most only a small or minor domestic
utility").  

-[40]- Gaz Metropolitain, Inc., Holding Co. Act Release No. 26170
(Nov. 23, 1994).  The SEC rejected the Division's argument that
section 3(a)(5) was not intended to allow foreign companies to
control domestic utilities.

-[41]- Id. (citing Electric Bond and Share, note 39 above, at
51).  The SEC also cited a previous order granting an exemption
under section 3(a)(5), without discussion, to a Canadian holding
company with both Canadian utility subsidiaries and a New York
utility subsidiary.  Consumers' Gas Co., Holding Co. Act Release
No. 14956 (Oct. 17, 1963).

-[42]- The order noted that the Vermont Public Service Board,
which regulates public utilities in Vermont, and the Vermont
                                                   (continued...)
 
-------------------- BEGINNING OF PAGE #104 -------------------


     B.   Regulation of Exempt Holding Companies 

     Under section 3(a), the SEC generally exempts qualifying
holding companies from all provisions of the Act.  Currently,
there are 152 holding companies exempt under section 3(a).  Under
section 9(a)(2), however, exempt holding companies must obtain
SEC approval under the standards of section 10 for subsequent
utility acquisitions.-[43]-  In addition, the SEC retains
authority to modify or terminate an exemption for cause.-[44]-

          1.  Utility acquisitions-[45]-

     As with registered holding companies, the SEC must consider:
whether the acquisition of a utility interest by an exempt
holding company will unduly concentrate control of utility
systems; whether the purchase price is reasonable; whether the
purchase will unduly complicate the capitalization of the
resulting system; and whether the transaction will serve the
public interest by tending toward the economic and efficient
development of an integrated public-utility system.  

     There was a question concerning the extent to which section
10(c)(1) and, by reference, section 11, apply to exempt holding
companies.  In 1974, the SEC stated that the provisions of
section 11 "apply by analogy" to exempt companies.-[46]-  In
1994, however, rather than apply the above described three part
test, in the Gaz Metropolitain decision, the SEC modified this
position, stating that the Act required only benefits to "an"
integrated system.-[47]-   

          2.  Diversification
      
     The SEC has asserted authority under the "unless and except"
clause to regulate the diversification activities of exempt
holding companies where they are detrimental to the public
interest or the interest of investors or consumers.  The limits
of permissible diversification, however, have never been defined
or established.  The objective tests under sections 3(a)(1) and
3(a)(2) consider only utility operations.-[48]-  The statute does
not prescribe any express limits on the nonutility activities of
                    
-------- FOOTNOTES --------

-[42]-(...continued)
Department of Public Service, which represents the interests of
Vermont ratepayers, supported the applications.  The order also
noted that the SEC could reconsider the exemptive order on the
basis of changed circumstances.  Gaz Metropolitain, Inc., Holding
Company Act Release No. 26170 (Nov. 23, 1994).

-[43]- Section 9(a)(2) of the Act requires authorization, by
order upon application, for the acquisition by "any person" that
would result in the ownership of five percent or more of the
voting securities of more than one public-utility company. 
Section 2(a)(1) defines "person" as "an individual or company."  

-[44]- See sections 3(a) (the "unless and except" clause), 3(c)
(and rule 6 thereunder), and 20(a). 

-[45]- Utility acquisitions by exempt holding companies are
discussed in Chapter 2 above.

-[46]- Union Electric Co., 45 S.E.C. 489, 506 n.63 (1974).

-[47]- Gaz Metropolitain, Inc., Holding Co. Act Release No. 26170
(Nov. 23, 1994). 

-[48]- See Texas Utilities Co., 31 S.E.C. 367, 370 (1950)
(predominantly and substantially standard "relates to the
business or management of electric or gas utilities as such").
 
-------------------- BEGINNING OF PAGE #105 -------------------

these companies.  Indeed, although the Act expressly limits the
nonutility activities of registered holding companies, it is
silent concerning diversification by exempt holding companies.  

     In the early 1970s, concern over the nonutility activities
of two exempt holding companies led the SEC to challenge their
exemptions under the "unless and except" clause.  The result was
the inconclusive and non-binding Pacific Lighting decision, in
which two commissioners held that the nonutility activities of
exempt holding companies should complement the utility
operations, and two other commissioners proposed guidelines under
which utility activities would be separated from nonutility
activities.  Under these guidelines, contracts with or services
rendered to or by the utility or associate companies would be
subject to state regulatory supervision; utility management,
funds or credit could not be diverted for nonutility purposes;
and unrelated nonutility activities would be limited to a
"relatively small" component of system activities and would have
an established and successful record or else complement the
utility operations.-[49]-  Thereafter, in 1978, the SEC stated
that the "unless and except" clause "unquestionably authorized a
limit upon diversification by a holding company exempt under
Section 3(a)(1)."-[50]-  The decision failed, however, to
identify that limit.  

     In the 1980s, substantial diversification efforts by exempt
holding companies prompted the SEC to address this issue by
proposing rule 17.-[51]-  Under the proposed rule, the SEC would
not have challenged a company's exemption on the basis of such
activities if (1) the state regulated a company's
diversification, or (2) the diversification came within certain
objective limits.  The rule proposal met with general
disfavor.-[52]- 
 
     The SEC has not taken action since 1978 to modify or revoke
an exemption on the basis of a holding company's nonutility
activities.  It has given weight, in recent matters, to the
state's judgment concerning the effect of diversification, as
well as to the state's ability to exercise effective regulatory
control.-[53]-  The D.C. Circuit has held that the SEC does not

-------- FOOTNOTES --------

-[49]- Pacific Lighting Corp., 45 S.E.C. 152 (1973).

-[50]- Lykes Bros., Inc., 46 S.E.C. 1196, 1198-99 (1978).

-[51]- Non-Utility Diversification by Intrastate Public-Utility
Holding Companies, Holding Co. Act Release No. 24815 (Feb. 7,
1989). 

-[52]- As discussed below, the Division recommends that the SEC
withdraw proposed rule 17.

-[53]- See, e.g., Wisconsin Energy Corp., note 17 above ("the
judgment of a state's legislature and public service commission
as to what will benefit their constituents is entitled to
considerable deference when not in conflict with the policies of
the Act").  The SEC also looked to the affected states for
assurances before issuing orders permitting exempt holding
companies to acquire foreign utility operations prior to the
Energy Policy Act of 1992.  See, e.g., Dominion Resources,
Holding Co. Act Release No. 25598 (Aug. 3, 1992); Houston
Industries, Inc., Holding Co. Act Release No. 25590 (July 24,
1992); PSI Resources, Holding Co. Act Release No. 25570 (July 2,
1992); and SCEcorp, Holding Co. Act Release No. 25564 (June 29,
1992).
 
-------------------- BEGINNING OF PAGE #106 -------------------

abdicate its duty in an exemption determination "by deciding to
rely, watchfully, on the course of state regulation."-[54]-   

     C.   Recommendations for the Future Use of Exemptions

     The exemptions described above have, for the most part, been
construed and applied conservatively.  In the sixty years since
the Act was passed, the effectiveness of state regulation of
utility holding companies has improved markedly.  It is clear
that the range of circumstances in which a holding company may be
susceptible to effective state regulation, or otherwise not the
type of holding company at which the Act is directed, is
substantially broader than that encompassed by the five specific
exemptions contained in section 3(a).

     As discussed below, the Division recommends that Congress
consider legislation to broaden the SEC's exemptive powers. 
Pending legislative action, however, the Division believes that
greater flexibility is needed in the administration of the
present exemptions.  The Division does not recommend the adoption
of bright-line tests in this area.  Instead, it favors close
consultation and cooperation with state regulators to ensure that
any liberalization of the exemption standards will not leave
state regulators unable to protect the interests of utility
consumers.  The Division also recommends that the SEC withdraw
proposed rule 17.  These recommendations are discussed in detail
below.

     The SEC should apply more liberal standards for exemption,
     where the affected states agree.

     Pending repeal or legislative reform, a number of commenters
argue for interim administrative relief.  CMS Energy Corporation
("CMS Energy"), for example, recommends that the SEC adopt
policies that would permit exempt holding companies to engage in
increased merger and acquisition activity and increased out-of-
state sales of wholesale electricity without jeopardizing their
exemptions.  CMS Energy suggests that utilities could then merge
to form more efficient structures, including cross-border
electric transmission companies and combination gas and electric
companies, to be more competitive.  

     Some commenters suggest that the SEC should define, or
redefine, terms such as "predominantly intrastate," "material
part of income," and "predominantly a public utility."  Others
recommend that the SEC adopt safe harbors with higher numerical
limits than those approved under the precedent.  The commenters
say these changes would provide flexibility and regulatory
certainty for companies as they respond to fundamental changes in
the industry. 

     The Division agrees that more flexibility is needed in the
administration of section 3(a).  Rather than bright line tests,
however, the determination of what is appropriate in the public

-------- FOOTNOTES --------                    

-[54]- Wisconsin's Environmental Decade, Inc., 882 F.2d 523, 527
(D.C. Cir. 1989) ("Nor has petitioner given any substantial
reason why the SEC's watchful deference to the legislative and
administrative judgment of a state regulating an intrastate
holding company is not permissible under the Act.").  
 
-------------------- BEGINNING OF PAGE #107 -------------------

interest necessarily turns on a consideration of the facts and
circumstances of each situation.-[55]-  
     In this regard, the Division believes it is important for
the SEC to work in consultation and cooperation with the affected
state regulators.  As the Virginia Commission notes, some
exemptions may be based on a faulty premise of effective state
regulation.  It explains that it may not have authority to
approve all financing transactions of utility holding companies;
regulatory powers over the holding company are derived from
authority over its utility subsidiary.  Such regulatory
authority, the Virginia Commission concludes, is far from a
complete substitute for the authority granted to the SEC under
the Act.  

     In other contexts, the SEC has required assurances that the
state can adequately protect utility consumers against any
detriment that might be associated with certain activities of
exempt holding companies.-[56]-  The Division believes it would
be appropriate to require similar assurances as a condition of
any proposed liberalization of the exemption standards.

     A number of commenters urge the SEC to adopt a rule to
exempt utility acquisitions that are subject to approval by other
regulatory authorities.  A group of exempt companies, for
example, asserts that SEC review under sections 9(a)(2) and 10 is
not needed to protect the public interest and the interests of
investors and consumers where all interested state regulatory
bodies and the FERC have approved the acquisition, and the
resulting entity would meet the integration requirements of, and
qualify for exemption under, the Act.  

     While the Division agrees that the SEC's review in this area
is largely redundant, it does not believe that it could readily
make the findings to support a broad grant of exemption from
section 9(a)(2).-[57]-  Accordingly, the Division recommends that
the SEC continue to administer the standards of section 10
flexibly, in consultation with the affected state and local
regulators.  The Division, however, will explore ways to further
streamline the review process.

     The SEC should withdraw proposed rule 17.

     Another issue of concern to commenters is the possible
regulation of diversification by exempt holding companies.  As
discussed above in Chapter 3, the SEC proposed for comment a rule
that was intended to clarify the circumstances in which
diversification would not be a basis for challenge to a company's
exemption.  The SEC received seventy-nine comment letters in
response to the proposal.-[58]-  A majority of the commenters
opposed the rule and urged its withdrawal.  Few offered any
support for the proposal; none supported it without
qualification.  
                    
-------- FOOTNOTES --------

-[55]- See Comments of the Public Utilities Commission of
California (it is difficult to recommend changes to the
exemptions until it is clear how industry structure will change
as a result of competition and the possible disaggregation of
traditional vertically-integrated utilities).

-[56]- See, e.g., SCEcorp, note 52 above.

-[57]- Among other things, the SEC would have to find that the
standards of section 10 are satisfied in every instance.

-[58]- The individual comments on the proposed rule are in SEC
Public File No. S7-2-89.
 
-------------------- BEGINNING OF PAGE #108 -------------------


     The criticisms were generally that the proposed rule
exceeded the SEC's authority under the Act; it represented
unwarranted federal intrusion into an area of primary state
regulation; it was unnecessary absent empirical evidence of
diversification-related detriment; and the SEC should instead
police the diversification activities of individual exempt
companies under the "unless and except" clause.  

     The Division does not agree in every instance with the
commenters.  Among other things, there is no provision in the Act
for enjoining the diversification activities of an exempt company
prior to a formal determination that the company is not entitled
to an order of exemption.-[59]-  While it is true that the
prospect of SEC intervention will frequently cause an exempt
holding company to reconsider a course of action that might
jeopardize its exemption, there is no assurance that the staff
will timely receive the relevant information.  

     On balance, the Division believes it is appropriate for the
SEC to withdraw proposed rule 17.  Diversification by exempt
intrastate holding companies is not per se detrimental to the
protected interests.  Concerns can be addressed on a case-by-
case basis under the SEC's "unless and except" powers.  

     A number of commenters seek assurance that the SEC will not
seek to limit diversification by exempt holding companies.  In
this regard, CMS Energy, for example, recommends that the SEC
minimize the extent to which the "unless and except" clause may
be used to limit nonutility diversification by exempt holding
companies.  The commenter expresses concern that the uncertainty
produced by the potential loss of an exemption acts as a
significant restraint on the ability of exempt holding companies
to diversify into nonutility businesses.

     Instead, CMS Energy urges the SEC to adopt guidelines
designed to insulate the utility from the activities and
financial effects of the nonutility business.  The CMS Energy
guidelines would require mandatory separation of utility and
nonutility activities into separate corporate entities,
prohibitions against guarantees, loans, or other financial
arrangements that shift financial risk to the utility from
nonutility subsidiaries, limitations on parent company
obligations to nonutility companies and creditors, and access for
state regulators to the books and records of the utility and the
                    
-------- FOOTNOTES --------

-[59]- Section 18(f) of the Act authorizes the SEC to institute
suit in federal court to enjoin "any acts or practices which
constitute or will constitute a violation of the provisions of
this title, or of any rule, regulation, or order thereunder." 
Improvident diversification by an intrastate exempt holding
company does not, however, constitute a violation per se of any
of the provisions of the Act.  As the Second Circuit noted:

     [T]he Congress conferred upon the Commission . . . the
     power to invoke the aid of the courts only to prevent
     evasion of the Act and non-compliance with the orders
     of the Commission.  There is concededly no power to
     restrain or discipline holding companies exempt from
     its provisions.  

SEC v. Long Island Lighting Co., 148 F.2d 252, 256 (2d Cir.
1945).  
 
-------------------- BEGINNING OF PAGE #109 -------------------

parent holding company with appropriate protections for
competitively sensitive proprietary information.    

     CMS Energy rejects any definitive limits on the size,
geographical location or nature of non-utility business
activities by exempt holding companies.-[60]-  Instead, the
company suggests that the "unless and except" clause should serve
as "an enforcement backstop," with the SEC exercising its
authority in this area only after a public hearing that finds
actual injury to investors or utility customers as a direct
result of non-utility activities. 

     Several state regulators, however, suggest that more
intensive review may be appropriate.  The Virginia Commission
notes that it is inconsistent with the public interest, and
incongruous with the restrictions placed on registered companies,
that exempt holding companies need no approval from federal or
state agencies to diversify in nonutility areas.  The Michigan
Commission Staff recommends that safeguards, such as limiting the
amount of diversification, be assessed for all companies to
minimize the risks to both investors and consumers. 
 
     While the Division does not recommend a heightened scrutiny
of nonutility activities of exempt holding companies, neither
does it believe that the SEC should limit its authority under the
"unless and except" clause.  The legislative history makes clear
that the SEC's "unless and except" authority is the justification
for any broad grant of exemption.-[61]-  Particularly in view of
the liberalization the Division recommends in this area, it is
important that the SEC maintain flexibility to address problems
that may arise. 

                      *    *    *    *    *

     Other administrative reforms suggested by the commenters
include regulatory exemptions under section 3(d), modification of
rule 5, an automatic exemption under section 3(b) for any foreign
subsidiary of a holding company, and a rule providing for
automatic approval if the SEC does not rule on a request for
exemption under section 3(a) or 3(b) within 120 days.  Apart from
an amendment to section 3(a) to broaden the SEC's exemptive
powers, the Division believes that it would be premature to
recommend changes to the Act's exemption section until it is
clear how the industry will react to and be affected by increased
competition, advanced structural and technological innovation,
and greater reliance on state regulation.

Chapter 7.     Other Recommendations

A.   Investment Company Issues

     Questions have arisen in recent years concerning
acquisitions of securities of public-utility companies by
                    

-[60]- See also Comments of Questar Corporation ("Questar") (the
SEC should announce that it does not intend to adopt regulations
to limit the diversification activities of exempt holding
companies).
-[61]- See Senate Report at 24; House Report at 11 ("[T]he
Committee felt free to broaden the exemptions beyond what would
be justified if the exemptions had been made unqualified and
self-operative and beyond the power of the Commission to
correct."). 
 
-------------------- BEGINNING OF PAGE #110 -------------------

investment companies and advisers, whether acting on behalf of
collective investment vehicles, individual clients or their
proprietary accounts.  The SEC requested comment on whether these
entities should be subject to regulation as utility
affiliates-[1]- or holding companies.-[2]-

     The SEC received comments on these issues from three members
of the securities industry,-[3]- the Investment Company Institute
("ICI"), three registered holding companies,-[4]- two public-
utility commissions,-[5]- the AGA and the New York Bar Committee.

     The commenters from the securities industry, the AGA and the
New York Bar Committee support a broad exemption of investment
companies and advisers from regulation under the Holding Company
Act.  The ICI suggests that the SEC adopt an exemption for
investment companies and advisers modeled on rule 16a-1 under the
Exchange Act.-[6]-

     Those commenters urging a broad exemption contend that the
activities of investment companies and advisers do not implicate
the policy concerns of the Holding Company Act and, in
particular, section 9(a)(2).  One commenter notes that the
Holding Company Act was intended to curb abusive practices that
stemmed from control of public-utility companies.  In this
regard, the commenters state that neither investment companies
nor advisers generally invest for the purpose of exercising
control; rather, they purchase utility or holding company
securities in the ordinary course of business as fiduciaries of
the security holders of the investment company or the parties on
whose account the purchases are made.-[7]-
                    
-------- FOOTNOTES --------

-[1]- See section 2(a)(11)(A) (any person owning 5 percent or
more of the outstanding voting securities of a company).  Among
other things, an affiliate must seek prior SEC approval for the
acquisition of five percent or more of the voting shares of any
other utility or holding company.  See section 9(a)(2).

-[2]- See section 2(a)(7).  Among other things, a holding company
may be required to divest any unrelated nonutility interests. 
See section 11(b)(1).

-[3]- Alliance Capital Management L.P. ("Alliance Capital"),
Capital Research and Management Co., and Merrill Lynch, Pierce,
Fenner & Smith Incorporated.

-[4]- Allegheny Power System, Inc. ("Allegheny"), NEES and
Southern.

-[5]- The Michigan Commission Staff and New Orleans. 

-[6]- Rule 16a-1 provides that the securities holdings of certain
parties are not considered for purposes of determining whether an
entity is a "ten percent holder" that may be subject to reporting
requirements and short-swing profit restrictions under section 16
of the Exchange Act, under certain circumstances.  Specifically,
rule 16a-1 provides that certain parties are not considered the
beneficial owners of securities "held for the benefit of third
parties or in customer or fiduciary accounts in the ordinary
course of business . . . as long as such shares are acquired by
such institutions or persons without the purpose or effect of
changing or influencing control of the issuer."  17 C.F.R.  
240.16a-1(a)(1).  The ICI notes that securities held as portfolio
securities by investment companies are encompassed by the rule.

-[7]- Alliance Capital notes that it has general fiduciary
obligations to clients over whose accounts it has investment and
voting discretion, by virtue of state statutes, the Investment
Company Act of 1940, the Investment Advisers Act of 1940 and,
                                                   (continued...)
 
-------------------- BEGINNING OF PAGE #111 -------------------


     Two commenters in this group also state that the application
of the Holding Company Act to investment companies and advisers
would discourage investment in the utility industry.-[8]-  Other
commenters in this group assert that limiting the investment
flexibility of investment companies and advisers would be
detrimental to their shareholders and clients. 

     Of the registered holding companies commenting on the issue,
one stated that an investment company or adviser should be
subject to regulation under the Holding Company Act if it comes
within the definition of an affiliate.-[9]-  Another stated that
such regulation is warranted "to the extent that the investment
company or adviser asserts independent voting and operational
control over the public utility company."-[10]-  A third
suggested that a mutual fund or fund adviser would prefer
divestment of its utility or holding company securities to
regulation under the Holding Company Act.  This commenter
suggested the SEC consider "whether such divestitures could have
materially adverse consequences to public-utilities and cause
disruptions in the capital markets."-[11]-

     The Division believes that there is merit to exempting
investment companies and advisers from application of the Holding
Company Act.  Accordingly, the Division recommends that the SEC
consider a rule on this matter.

     B.   Foreign Utility Company Rules

     The Energy Policy Act amended the Act to create two new
classes of exempt entities: exempt wholesale generators (governed
by new section 32) and foreign utility companies (governed by new
section 33).  Section 33(c)(1) directs the SEC to adopt rules
relating to foreign utility company acquisitions by registered
holding companies that provide for the protection of the domestic
customers of the registered system and the maintenance of the
financial integrity of the system.-[12]-

     In March 1993, the SEC requested public comment on rules
designed to implement this directive.  Proposed rule 55 defined
the circumstances under which a registered holding company can
acquire an interest in a foreign utility company without the need
to apply for or receive SEC approval.  The rule prescribed three
conditions that related to the size of the registered system's
investment in foreign utility companies, the SEC's access to
books and records, and the provision of services by domestic
utility personnel.  Where these conditions were satisfied, the
acquisition could proceed absent an event of bankruptcy or other
evidence of financial or operating problems.  Proposed rule 56
clarified the status of subsidiary companies of registered
                    
-------- FOOTNOTES --------

-[7]-(...continued)
under certain circumstances, the Employee Retirement Income
Security Act of 1974.

-[8]- Similarly, the Michigan Commission Staff questions whether
the SEC would want to undertake the regulation of investment
companies or advisers under the Holding Company Act.

-[9]- Comments of Allegheny.

-[10]- Comments of NEES.

-[11]- Comments of Southern.

-[12]- The legislation places no restrictions upon foreign
utility company acquisitions by registered holding companies
pending the adoption of such rules.
 
-------------------- BEGINNING OF PAGE #112 -------------------

holding companies formed to hold interests in foreign utility
companies.-[13]-  Most commenters felt that the SEC should not
adopt rules concerning foreign utility company acquisitions
without additional study by the SEC and further opportunity for
public comment.  Accordingly, action was deferred on proposed
rules 55 and 56, pending further consideration.
  
     In response to the comments and on further consideration,
the Division suggests several revisions to the proposed
regulations.  The modifications are generally intended to create
additional protection for consumers of registered holding company
systems.-[14]-

     First, the Division has incorporated a procedure in proposed
rule 55 that allows consumer advocates, state and local
regulators, and others to challenge a registered holding
company's reliance upon the exemption of the rule.  Under this
procedure, the SEC may, in its discretion, preclude further
reliance upon the exemption if it appears to the SEC that any
question exists whether the exemption may be detrimental to the
public interest or the interest of investors or consumers.  The
withdrawal of the safe harbor would be done by order of the SEC
after an opportunity for hearing and could be based upon
information filed with the SEC or otherwise developed by the SEC
and its staff.  The restriction would cease to apply if the SEC
determines, following notice and opportunity for hearing, that
such reliance does not appear to be detrimental to the protected
interests.  During the period in which the safe harbor is
unavailable, a company would be required to obtain SEC approval
by order, upon application, or FERC determination where
relevant,-[15]- to invest in foreign utility companies.

     Second, new proposed Form U-55 is intended to ensure that
federal, state and local ratemaking authorities will receive
timely information concerning foreign utility company
acquisitions made in reliance upon rule 55.  The proposed form
should enhance the ability of regulators to monitor these

-------- FOOTNOTES --------                    

-[13]- These rules were part of a comprehensive set of proposed
regulations intended to implement congressional directives
pertaining to exempt wholesale generators under section 32, as
well as foreign utility companies under section 33.  See Holding
Co. Act Release No. 25757 (Mar. 8, 1993).  On September 23, 1993,
the SEC adopted rule 53 (17 C.F.R.   250.53) which creates a safe
harbor with respect to the issuance and sale of a security by a
registered holding company to finance the acquisition of an EWG,
or the guarantee by the parent of the securities of an EWG, rule
54 (17 C.F.R.   250.54), which similarly creates a safe harbor
for system transactions that do not involve EWGs or foreign
utility companies, and rule 57 (17 C.F.R.   250.57) and Forms U-
57 and U-33-S, which address the notification and reporting
requirements for foreign utility companies and their associate
public-utility companies.  See Holding Co. Act Release No. 25886
(Sept. 23, 1993).

-[14]- The Division has modified proposed rule 56 for technical
reasons.  See below.

-[15]- Certain entities that own or operate foreign generating
facilities may qualify for status as either EWGs or foreign
utility companies.  Although the SEC is directed to adopt rules
concerning the acquisition of an interest in a foreign utility
company, the acquisition of an EWG is unconditionally exempted
from the requirement of pre-acquisition approval.  See section
32(g).
 
-------------------- BEGINNING OF PAGE #113 -------------------

investments and facilitate any inquiry as to whether a company's
reliance upon the safe harbor of rule 55 is detrimental to
interests of investors and consumers.

     Third, the Division has revised proposed rule 56 to delete
the provisions under which an intermediate subsidiary holding
interests in EWGs or foreign utility companies or both would be
treated as foreign utility companies.  Few comments were received
on the proposed rule.-[16]-  Under the revised proposed rule,
only a company that is engaged directly or indirectly, and
exclusively, in the business of owning or operating, or both
owning and operating, all or part of one or more foreign utility
companies will be treated as a foreign utility company. 
 
     It is unlikely that the revised proposed rules, in
particular, rule 55, will be viewed favorably by those commenters
most dissatisfied with the rules as originally proposed.  The
Division nonetheless believes that the proposed regulations, as
modified, strike a reasonable balance between the competing
concerns.  Accordingly, the Division recommends that the SEC
issue separate releases requesting public comment on revised
proposed rule 55 and proposed Form U-55, and adopting proposed
rule 56 as revised.

PART III.  LEGISLATIVE RECOMMENDATIONS

     In Part II, the Division presented a number of
administrative recommendations for reform of the Act.  There are
limits, however, to the scope of the SEC's authority in this
regard.  Although the SEC has attempted to interpret the Holding
Company Act flexibly and responsively, there is an increasing
tension between the model of regulation under the Act, and the
rapidly evolving structure of the utility industry.  It is time
for Congress to consider repeal or fundamental reform of the
statute.

     The Division has developed three legislative recommendations
for congressional consideration.  Congress could:

     *    repeal the Holding Company Act and strengthen the
          ability of the FERC and state regulators to obtain
          books and records, conduct audits and review affiliate
          transactions;  

     *    repeal the Holding Company Act, without condition; or

     *    amend the Holding Company Act to give the SEC broader
          exemptive authority.

     Because it would achieve the benefits of unconditional
repeal, while preserving the ability of states to protect
consumers, the Division prefers the conditional repeal option

-------- FOOTNOTES --------                    

-[16]- In view of the fact, however, that the Energy Policy Act
treats the direct acquisition of foreign utility companies
differently from that of EWGs, the Division believes it would be
inappropriate to apply a uniform standard to indirect
acquisitions of these mixed interests.  Whereas section 32
unconditionally exempts the acquisition of an EWG by a registered
holding company, section 33 subjects the acquisition of a foreign
utility company to any conditions that the SEC adopts in rules
under section 33.
 
-------------------- BEGINNING OF PAGE #114 -------------------

discussed below.  Of course, the choice of legislative options is
one that Congress must make.

     A.  Conditional Repeal

     The Holding Company Act regulates and restricts, among other
things, the ability of regulated holding companies to issue
securities, to acquire other utilities, to acquire nonutility
businesses, and to engage in affiliate transactions.  In the
Division's judgment, many of these limits are no longer
necessary.  Certain provisions of the Holding Company Act,
however, still serve a useful function.  In particular, the SEC's
ability to obtain books and records, to audit holding companies
and subsidiaries, and to review affiliate transactions, assists
states in protecting utility consumers.  The Division believes
that former efforts to repeal the Act failed largely because they
did not address concerns about the continuing importance of these
consumer protection provisions.

     The option discussed in this section would condition repeal
of the Holding Company Act on the enactment of provisions
ensuring access to books and records needed for the effective
discharge of a state's regulatory responsibilities, and providing
for federal audit authority and oversight of affiliate
transactions.  The task of enforcing such provisions should be
entrusted to the FERC as the agency with direct responsibility
for the protection of energy consumers.  Any repeal legislation,
however, should include a minimum one-year transition period to
allow states, utilities, and other affected parties to prepare
for the new regulatory regime.

     This section first explains why many of the major
requirements of the Holding Company Act are no longer necessary. 
It then discusses the consumer protection issues that the
Division believes should be addressed in any repeal legislation.

          1.  The Act's Securities Provisions

     The Holding Company Act was enacted in large part because
public-utility holding companies had misled and acted contrary to
the interests of investors.  The Act requires registered holding
companies to obtain SEC approval before they or their
subsidiaries issue any securities.  Under section 7 of the Act,
the SEC must consider such factors as whether the security is
"reasonably adapted to the security structure" and "necessary or
appropriate to the economical and efficient operation" of the
holding company system.  Other securities provisions authorize
the SEC to regulate the terms of underwriting, the solicitation
of proxies, annual and other reports, and systems of accounts for
registered holding companies and their subsidiaries.-[1]-

     At least three developments since 1935 have rendered these
provisions of the Holding Company Act unnecessary.  First, as
discussed previously, the SEC has developed a comprehensive
system of disclosure regulation under the Securities Act and the
Securities Exchange Act.  These statutes were in their infancy
and indeed under attack in the courts when Congress passed the

-------- FOOTNOTES --------

-[1]- See Holding Company Act sections 12(d), 12(e), 14 and
15(i).
 
-------------------- BEGINNING OF PAGE #115 -------------------

Holding Company Act in 1935.-[2]-  Moreover, the annual reporting
requirements of the Exchange Act applied only to companies with
securities listed on exchanges, and thus applied to few public
utility holding companies.  In 1964, Congress amended the
Exchange Act so that its annual reporting and other requirements
would apply to all companies with over $1 million in assets and
more than 500 shareholders.-[3]-  Today, the reporting
requirements of the Exchange Act reach every widely held public-
utility holding company.
  
     The system of securities regulation under the Holding
Company Act differs from the system of regulation under the
Securities Act and the Exchange Act.  While those statutes
generally focus on disclosure, substituting "a philosophy of full
disclosure for the philosophy of caveat emptor,"-[4]- the Holding
Company Act requires the SEC to evaluate the merits of securities
issuances.  Many have argued that this type of review improperly
limits the ability of investors to make their own investment
decisions.-[5]-

     Second, accounting standards have substantially improved and
become more uniform since 1935.  The FERC has established uniform
systems of accounts for all electric and gas utility companies
operating in interstate commerce.  In addition, most states have
developed their own uniform accounting systems for utilities,
closely patterned, in general, on the FERC standards.-[6]-  In
recognition of these developments, the SEC in 1975 rescinded the
uniform system of accounts it had previously developed for
registered holding companies under section 15 of the Holding
Company Act.-[7]-
     
     Third, the financial industry has changed significantly
since 1935.  In part because of their liabilities under the
Securities Act, underwriters now conduct "due diligence"
activities when they underwrite a securities offering.  Rating
agencies scrutinize the finances of utility holding companies; a
favorable rating is generally considered essential for a public-
utility debt offering.  Institutional investors have become
considerably better informed and more sophisticated.  Individual
investors have the benefit, whether directly or indirectly, of
thorough analysis by industry experts.

-------- FOOTNOTES --------

-[2]- See Oklahoma-Texas Trust v. SEC, 100 F.2d 888, 890 (10th
Cir. 1939) (contesting constitutionality of Securities Act);
Wright v. SEC, 112 F.2d 89, 94 (2d Cir. 1940) (contesting
constitutionality of Exchange Act).   

-[3]- See Exchange Act section 12, 15 U.S.C.   78l.

-[4]- See SEC v. Capital Gains Research Bureau, Inc., 375 U.S.
180, 186 (1963).

-[5]- See Ad Hoc Subcommittee on Merit Regulation, Report on
State Merit Regulation of Securities Offerings, 41 Bus. Law. 785
(1986); Campbell, An Open Attack on the Nonsense of Blue Sky
Regulation, 10 J. Corp. L. 553 (1985); James S. Mofsky & Robert
D. Tollison, Demerit in Merit Regulation, 60 Marq. L. Rev. 367
(1977).

-[6]- See Appendix A.

-[7]- See Adoption of Revised Rule 26 Under the Public Utility
Holding Company Act of 1935 and Rescission of the Uniform System
of Accounts for Holding Companies, Holding Co. Act Release No.
18963 (May 1, 1975).  The SEC, however, has retained a uniform
system of accounts for mutual service companies and subsidiary
service companies.  See 17 C.F.R. pt. 256.
 
-------------------- BEGINNING OF PAGE #116 -------------------

     The securities provisions of the Holding Company Act impose
costs.  Although the Division strives to process financing
applications as quickly as possible, the process of seeking and
obtaining SEC approval inevitably creates delays.  While an
application is pending, rapid changes in interest rates may moot
an attractive opportunity to issue debt securities.  Similarly,
attractive opportunities to issue equity securities may
disappear.  Regulatory delay may also prevent a registered
holding company from issuing such securities on the most
favorable terms, thereby depriving customers and investors of the
benefits of efficient financing.

     As the SEC observed in 1982, "investors in registered public
utility companies would remain adequately protected" if the
Holding Company Act were repealed.-[8]-  Since this remains true
today, the securities provisions of the Holding Company Act
should be repealed.

     2.  The Act's Restrictions on Utility Ownership

     The Holding Company Act generally requires prior SEC
approval of utility acquisitions.-[9]-  In many instances, the
SEC's review duplicates those of the FERC and state and local
regulators. To the extent that the standards in the Act are not
duplicative, they may be unduly restrictive, as in the case of
the geographic integration requirement for registered holding
companies.

     The SEC's review of electric utility acquisitions and
mergers under the Holding Company Act largely parallels the
review by the FERC under the Federal Power Act.  Under section
203 of the Federal Power Act, the FERC reviews transfers of
"jurisdictional assets," including transfers involving holding
companies.  The FERC considers, among other factors, "the
reasonableness of the purchase price," "the effect on
competition," "the impact on the effectiveness of state and
Federal regulation," and whether the merger is justified by cost
savings.-[10]-  Many of these issues are issues the SEC considers
under the Holding Company Act, and in recent years the SEC
generally has not held separate hearings on these issues.-[11]-

     The SEC's review of utility acquisitions also often
parallels reviews by the state regulators.  Most state
commissions have either direct or indirect jurisdiction over
utility acquisitions, and some states extend this jurisdiction to
acquisitions by utility holding companies.-[12]-  Although the
statutory standards differ from state to state, in general, state
regulators review utility acquisitions to assure that they will
not adversely affect consumers.  The courts have approved the
SEC's "watchful deference" to state regulatory review.-[13]- 

-------- FOOTNOTES --------                    

-[8]- Chairman Shad Testimony at 397.

-[9]- For further discussion, see Part II, Chapter 2, above.

-[10]- See, e.g., El Paso Electric Co., 68 FERC   61,181 (1994).

-[11]- See, e.g., CINergy Corp., Holding Co. Act Release No.
26146 (Oct. 21, 1994); Entergy Corp., Holding Co. Act Release No.
25952 (Dec. 17, 1993); UNITIL, Holding Co. Act Release No. 25524
(Apr. 24, 1992); Kansas Power & Light Co., Holding Co. Act
Release No. 25465 (Feb. 5, 1992).

-[12]- See Appendix A.

-[13]- See Wisconsin's Environmental Decade v. SEC, 882 F.2d 523,
527 (D.C. Cir. 1989).
 
-------------------- BEGINNING OF PAGE #117 -------------------

     Finally, the SEC's review of the potential anticompetitive
effects of utility acquisitions parallels review by the
Department of Justice and Federal Trade Commission under the
federal antitrust laws.-[14]-  The antitrust agencies receive
detailed information regarding the potential effects of mergers
or acquisitions under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976.-[15]-  The antitrust agencies have
developed detailed guidelines to guide their consideration of
mergers and acquisitions and to reduce uncertainty for
businesses.-[16]-  Although the SEC considers antitrust issues
under the Holding Company Act,-[17]- it cannot replicate the
expertise of the antitrust agencies on these issues.  

     Many of the comment letters in response to the Concept
Release urged that the Act be amended or interpreted to eliminate
duplicative Commission review of utility acquisitions.  These
comments came not only from regulated holding companies but also,
in some cases, from state regulators.-[18]-  Other state
regulators, however, urged that the SEC continue to review
utility acquisitions to protect the existing customers of the
holding companies' utility subsidiaries.-[19]-

     One aspect of the Holding Company Act that is not duplicated
by other regulatory regimes is the integration requirement of
section 11.  This provision has been interpreted to prohibit a
domestic holding company from owning utility companies in distant
states.  The integration requirement was imposed, in part,
because Congress believed that local utilities would be more
efficient and susceptible to effective regulation than the
existing holding companies.  Today, however, efficiency
considerations may argue in favor of allowing holding companies
to own utilities in noncontiguous states.  Consumers in different
states often have different demands for energy, and a company
serving several states may make more efficient use of its
generation and transmission facilities.  Also, there are often
significant administrative cost savings from utility mergers,
savings that have little to do with whether the utilities serve
contiguous areas.

     Another aspect of the Holding Company Act that has no
parallel at the federal level is the restriction on ownership of
both gas and electric utilities.  The SEC has generally
interpreted section 11 of the Act to preclude ownership of both
gas and electric utility companies by a single registered holding
company.  In contrast, the SEC has routinely permitted the
ownership of both gas and electric facilities by exempt holding
companies.-[20]-

-------- FOOTNOTES --------                    

-[14]- Competitive issues are also considered by the FERC in its
review of utility acquisitions.  See Gulf States Utilities Co. v.
FPC, 411 U.S. 747, 760 (1973).

-[15]- 15 U.S.C.   18.

-[16]- See Merger Guidelines, 57 Fed. Reg. 41552 (Sept. 10,
1992).

-[17]- See Municipal Electric Association v. SEC, 413 F.2d 1052
(D.C. Cir. 1969); section 10(b)(1) of the Act.

-[18]- See Comments of the Michigan Commission Staff and of New
Orleans. 

-[19]- See Comments of Virginia Commission.

-[20]- See WPS Resources Corp., Holding Co. Act. Release No.
26101 (Aug. 10, 1994), Southern Indiana Gas and Electric Co.,
Holding Co. Act Release No. 26075 (June 30, 1994), and Illinova
Corp., Holding Co. Act Release No. 26054 (May 18, 1994).
 
-------------------- BEGINNING OF PAGE #118 -------------------


     Although the Division recommends that the SEC relax its
policy on ownership of both electric and gas facilities, the
question for Congress is whether there is a need for any federal
restriction.  To the extent that combinations of gas and electric
utilities reduce competition, and thereby threaten consumers,
they can be addressed through the federal antitrust laws, like
other combinations of competing firms.  Moreover, to the extent
that states desire as a matter of energy or antitrust policy to
prohibit such combinations in particular states, they are free to
do so.-[21]-  

     3.  The Act's Restrictions on Diversification

     The Holding Company Act limits the ability of the registered
holding companies to diversify into nonutility businesses.  The
Act also limits the ability of nonutility companies to diversify
into the utility business.

     For registered holding companies seeking to diversify, the
critical provision is section 11 which limits a registered
holding company to businesses that are "reasonably incidental, or
economically necessary or appropriate" to the operation of its
integrated utility system.  Although the SEC may be able to relax
many of these restrictions without legislation,-[22]- the
question for Congress is whether to retain any federal
restrictions on diversification into and out of the utility
business.  

     The diversification restrictions have had several effects on
the utility industry.  First, they preclude registered holding
companies from entering businesses that are deemed unrelated to
the utility business.  Other utilities, including exempt utility
holding companies and telephone companies, are entering these
businesses, resulting in increased competition for consumers.

     Second, the diversification restrictions limit the ability
of other companies to enter the utility business.  There may be
many companies involved in manufacturing, energy, finance,
telecommunications or other businesses that would be interested
in diversifying into the utility industry.  There may be
substantial economies to be achieved by allowing these companies
to acquire and operate utilities.  To the extent that the Holding
Company Act discourages such acquisitions, the market cannot test
whether such acquisitions would be sensible or profitable.  In
this regard, the Act is inconsistent with the carefully neutral
attitude towards takeovers that Congress adopted in the 1975
amendments to the Exchange Act.-[23]-

     Of course, not every investment by a registered holding
company in a nonutility business, or by a nonutility company in a
utility business, will prove profitable.  Indeed, ventures by
exempt holding companies into unrelated businesses such as
banking, drug stores and real estate have proven largely
unsuccessful.  On balance, however, it would appear that, if
consumers are protected by other federal and state statutes, as
discussed below, benefits may be achieved by removing the Holding

-------- FOOTNOTES --------                    

-[21]- See section 8 of the Act, discussed in Part II, Chapter 2,
above.

-[22]- See Part II, Chapter 3, above.

-[23]- See Rondeau v. Mosinee Paper Corp., 422 U.S. 49, 58-59
(1975).
 
-------------------- BEGINNING OF PAGE #119 -------------------

Company Act's diversification restrictions.-[24]-  Investors are
already protected by the disclosure required under the Securities
Act and the Exchange Act.  The disclosure requirements under
these laws are designed to ensure that investors have the
information they need regardless of how diverse and complex the
operations of a company.

     The extent to which the Act's restrictions on
diversification benefit consumers is unclear.  The SEC's
regulation in this area affects only the small universe of
registered holding companies; many exempt holding companies and
other utilities are substantially diversified.  Further, the Gas
Related Activities Act and the Energy Policy Act permit
significant investments by registered holding companies in
nonutility activities.  In any event, the SEC's review evaluates
a transaction under the standards of the Act --- it does not
guarantee the financial success of a nonutility venture.   As
discussed below, it may make more sense to focus on transactions
between regulated utilities and their diverse unregulated
affiliates, so that these transactions are economically fair to
the regulated utility. 

     4.  Federal Protections Regarding Records, Audits and       
              Affiliate Transactions

     The comprehensive regulation of holding companies under the
Act is intended to protect investors and consumers of these
companies.  Given the developments in the industry and in other
regulatory regimes, a less structural, more targeted regulatory
approach now seems appropriate.  In particular, if Congress
pursues conditional repeal, the Division suggests that Congress
ensure state access to books and records, and provide for federal
audit authority and oversight of affiliate transactions.

     BOOKS AND RECORDS.  To assess whether a transaction between
a regulated utility and an unregulated affiliate is economically
fair to the utility, and thus to the utility's consumers, the
FERC or the state regulator will need access to the books and
records of the unregulated affiliate.  The SEC has authority,
under section 15 of the Holding Company Act, to obtain records
from registered holding companies and their subsidiaries and
affiliates.  The FERC has similar authority to examine books and
records not only of a utility, but also of a person who controls
such a utility, and of any company controlled by such a
person.-[25]-  Moreover, the FERC has authority to "make
available to the several State commissions such information and

-------- FOOTNOTES --------

-[24]- One study submitted to the SEC estimates the net present
value of allowing the registered holding companies to diversify
into nonutility businesses at $2 billion to $4.5 billion. See
comments of CSW (Carpenter-Graves Study).  This study did not
attempt to estimate the benefits of allowing nonutility companies
to diversify into the utility business.

-[25]- "The books, accounts, memoranda, and records of any person
who controls, directly or indirectly, a licensee or public
utility subject to the jurisdiction of the Commission, and of any
other company controlled by such person, insofar as they relate
to transactions with or the business of such licensee or public
utility, shall be subject to examination on order of the
Commission."  Federal Power Act section 301(c), 16 U.S.C.  
825(c); see Natural Gas Act section 8(c), 15 U.S.C.    717g(c). 
 
-------------------- BEGINNING OF PAGE #120 -------------------

reports as may be of assistance in State regulation of public
utilities."-[26]-  

     Many states, however, report that they cannot readily obtain
the books and records of an out-of-state company.-[27]-  In the
Energy Policy Act, Congress created a federal right for a state
regulator to examine books and records of a regulated electric
utility, an exempt wholesale generator selling electricity to
such a utility, and certain affiliates or associates of such an
EWG.  State regulators may only examine books and records "if
such examination is required for the effective discharge of the
State commission's regulatory responsibilities affecting the
provision of electric service."  If state regulators obtain
information under this provision, they may not disclose "trade
secrets or sensitive commercial information."-[28]-

     Although this provision of the Energy Policy Act provides
useful access to state regulators, it is considerably more
limited than the access of the SEC under the Holding Company Act,
largely because it only applies when an EWG sells to a regulated
utility.  On the other hand, the provisions in the Holding
Company Act and the FERC statutes do not explicitly allow the
federal agencies to obtain books and records for the sole purpose
of providing them to a state regulator.-[29]-  What is needed,
therefore, is a new provision that incorporates elements of both
approaches.-[30]-

     In developing such a provision, Congress would need to
consider several subsidiary issues, including:

     *    Which companies should be subject to the records
          requirements?  Should the records requirements reach
          only those companies that are currently registered
          holding companies?

     *    Which subsidiaries of holding companies should be
          subject to the requirements?  The Holding Company Act
          reaches records of "affiliates," defined to include any
          company in which the holding company directly or
          indirectly owns more than 5 percent of the securities. 
          The Federal Power Act and Natural Gas Act, by contrast,
          only reach records of companies "controlled by" the
          holding company.  

     *    On what terms should federal authority be used to
          obtain records for state regulators?  Should the state
          regulator be required, as under the Energy Policy Act
          provision, to certify that records are "required for
          the effective discharge" of its regulatory
          responsibilities?  Should there be limits, similar to

-------- FOOTNOTES --------                    

-[26]- Federal Power Act section 210(c), 16 U.S.C.   824h(c).

-[27]- See Appendix A.

-[28]- Federal Power Act section 210(g), 16 U.S.C.   824(g).

-[29]- In practice, the SEC has, on occasion, used its ability to
obtain books and records under the Holding Company Act to obtain
information for state regulators. 

-[30]- Section 21(a)(2) of the Exchange Act may provide another
useful model.  This provision was added in 1988 to allow the SEC
to investigate potential violations of foreign securities laws,
and to provide the resulting information to foreign securities
authorities.  15 U.S.C.   78u(a)(2).
 
-------------------- BEGINNING OF PAGE #121 -------------------

          those in the Energy Policy Act provision, on disclosure
          of confidential information?-[31]-

     AUDITS.  To confirm that the books and records accurately
reflect transactions between a regulated utility and its
affiliates, the FERC will need authority to assist and coordinate
with state regulators in audits of multistate utility systems.

     The SEC has broad authority, under sections 15 and 21 of the
Holding Company Act, to audit and investigate companies in a
registered system.  The FERC has authority to investigate whether
there have been violations of the Federal Power Act or "to aid in
the enforcement" of the FPA, with respect to jurisdictional
utilities.  Moreover, the FERC "may publish or make available to
State commissions information concerning any such subject."-[32]-
 
It would appear, however, that the FERC does not have authority
under the Federal Power Act to investigate every company in a
registered system, or to use its investigative powers solely for
the purpose of assisting a state regulator in setting state rates
or enforcing a state regulatory statute.

     In developing an audit provision along these lines, Congress
would need to consider issues similar to those outlined above:

     *    Which companies in a holding company system should be
          subject to the audit requirements?

     *    On what terms should state regulators be permitted to
          participate in and benefit from federal audits?  One
          question, for example, is whether state regulators
          involved in an audit under federal authority would be
          subject to federal ethics and confidentiality
          restrictions.

     AFFILIATE TRANSACTIONS.  The third condition Congress should
consider is federal authority to ensure that transactions between
a regulated utility and an affiliate are economically fair to the
utility.  Section 13(b) of the Holding Company Act directs the
SEC to ensure that transactions between regulated utilities and
other subsidiaries of holding companies are conducted "at cost,
fairly and equitably allocated among such companies."  The
Federal Power Act addresses the issue more generally, through the
requirement that wholesale electric rates be "just and
reasonable."  

     Many states also have statutory provisions or practices that
address transactions between regulated utilities and their
affiliates.  Some states require that regulated utilities obtain
prior state approval for contracts with unregulated affiliates. 
Other states address these issues in rate proceedings, by
disallowing unreasonable costs charged by unregulated affiliates
to regulated utilities.  In view of the changes in the industry,

-------- FOOTNOTES --------                    

-[31]- Section 24(c) of the Exchange Act may also provide a
useful model:  "The Commission may, in its discretion and upon a
showing that such information is needed, provide all `records'
(as defined in subsection (a)) and other information in its
possession to such persons, both domestic and foreign, as the
Commission by rule deems appropriate if the person receiving such
records or information provides such assurances of
confidentiality as the Commission deems appropriate."  15 U.S.C.
  78x(c).

-[32]- See Federal Power Act section 307(a), 16 U.S.C.   825f(a). 
 
-------------------- BEGINNING OF PAGE #122 -------------------

and corresponding increase in affiliate transactions discussed
previously, many states may perceive a decision to repeal the
Holding Company Act without strengthening the FERC's ability to
review affiliate transactions as an unwelcome addition to their
responsibilities.

     The solution, however, is not simply to transfer the
responsibility for administering section 13 to the FERC.  As
discussed previously, the D.C. Circuit has held in Ohio Power
that, if there is a conflict between an SEC order approving a
price under the Holding Company Act and a FERC order disapproving
the price under the Federal Power Act, the SEC order
prevails.-[33]-  There are concerns that this decision can be
read generally to impair the ability of the FERC and state and
local regulators to protect consumers through traditional
ratemaking proceedings.  A simple transfer of section 13 would
not resolve questions about whether federal review of affiliate
transactions insulates them from state review.  Moreover, section
13 would not work without many of the other provisions of the
Holding Company Act, including the provisions defining registered
holding companies and their subsidiaries.  Finally, the "cost"
standard of section 13 may not be the correct standard for
reviewing affiliate transactions; it may make more sense to use
market value, or some combination of cost and market value, in
reviewing such transactions.

     B.  Unconditional Repeal

     In the past, the SEC has recommended unconditional repeal of
the Act.  Because the difference between conditional and
unconditional repeal lies only in the conditions, this section
does not restate the arguments above but rather focuses on
questions regarding the necessity for conditions.

     In 1935, when the Holding Company Act was enacted, the
ability of states to regulate interstate utility holding
companies was quite limited.  In particular, the Supreme Court
had essentially prohibited any state regulation of wholesale
power transactions.-[34]-  Today, however, states have the
constitutional power to protect their consumers through
regulation of utilities selling electricity and gas to these
consumers, including regulation of transactions between such
utilities and their unregulated affiliates.-[35]-  The question
for many states is one of resources.  The growth of competition
may ultimately moot this concern.  At present, however, the
Division believes that unconditional repeal may be ahead of its
time and some limited conditions may still be necessary.  

     If Congress decides to pursue repeal, whether conditional or
unconditional, an important subsidiary question is the timing of
the repeal.  Some state regulators are likely to argue for a
delayed effective date to give them time to seek new legislation
or added resources.  The regulated holding companies, on the
other hand, are likely to argue for a relatively rapid repeal, so

-------- FOOTNOTES --------                    

-[33]- See Ohio Power Co. v. FERC, 954 F.2d 779 (D.C. Cir.),
cert. denied, 113 S. Ct. 483 (1992).

-[34]- See Public Utilities Commission of Rhode Island v.
Attleboro Steam & Electric Co., 273 U.S. 83 (1927); Public
Utilities Commission of Kansas v. Landon, 249 U.S. 236, vacated
on other grounds, 249 U.S. 590 (1919). 

-[35]- See Arkansas Electric Cooperative Corp. v. Arkansas Public
Service Commission, 461 U.S. 375 (1983).
 
-------------------- BEGINNING OF PAGE #123 -------------------

that they can begin to achieve the benefits of geographic and
business diversification.  The Division believes that both
positions have merit:  it would not make sense to repeal the
Holding Company Act without adequate time for transition; it
would also not make sense to prolong unduly the transition
period.  For that reason, the Division recommends a transition
period of at least one year.

     C.  Exemptive Authority

     The Division recognizes that there are political
difficulties associated with any form of repeal legislation.  In
the alternative, Congress could achieve many of the benefits of
repeal by providing the SEC with more flexible exemptive
authority.  

     At present, the SEC has limited exemptive powers under the
Act.  Many commenters support legislation that would allow the
SEC to exempt holding companies and transactions on a finding of
adequate state regulation.-[36]-  The commenters differ, however,
as to the particulars of how such an exemption would operate. 
While the state and local regulators would generally require
state certification as a condition of exemption,-[37]- the
registered holding companies favor an approach that would offer
more regulatory certainty, and so, would condition the exemption
on some objective showing of state authority.-[38]-    

     Other federal securities laws give the Commission
considerably broader exemptive power.  For example, section 6(c)
of the Investment Company Act of 1940 provides:

     The Commission, by rules and regulations upon its own
     motion, or by order upon application, may conditionally
     or unconditionally exempt any person, security, or
     transaction, or any class or class of persons,
     securities or transactions, from any provision or
     provisions of this title or of any rule or regulation
     thereunder, if and to the extent that such exemption is
     necessary or appropriate in the public interest and
                    
-------- FOOTNOTES --------

-[36]- See Comments of Centerior Energy Corporation
("Centerior"), Cilcorp, Inc., Duke Power Co., MCN Corporation,
MDU Resources Group, Inc., Minnesota Power & Light Co., NIPSCO
Industries, Inc., Pacific Gas & Electric Co., Pennsylvania Power
& Light Co., Pinnacle West Capital Corporation, Public Service
Enterprise Group Inc., SCANA Corporation, SCEcorp, South Jersey
Industries, Inc. and Utilicorp United Inc.

-[37]- See, e.g., Comments of the Michigan Commission Staff and
New Orleans.

-[38]- See, e.g., Comments of Questar (the Act should be amended
to exempt a holding company that is the parent of a public
utility subsidiary "regulated by a State commission or State
commissions having jurisdiction over the acquisition and sale of
utility assets."); Southern (exemption should be granted if each
affected state has access to pertinent information regarding
transactions between jurisdictional utilities and their
affiliates); and Wisconsin Electric (a broad exemption should be
adopted for any holding company whose utility subsidiaries are
regulated by the applicable state commission regarding financial
matters and safety and reliability of distribution systems.). 
See also Comments of Centerior (a state commission could
"demonstrate to the SEC that it lacks the necessary regulatory
authority.")
 
-------------------- BEGINNING OF PAGE #124 -------------------

     consistent with the protection of investors and the
     purposes fairly intended by the policy and provisions
     of this title.-[39]-

     The Investment Advisers Act of 1940 includes identical
exemptive authority.-[40]-  The Exchange Act includes a number of
more specific provisions that give the SEC substantial exemptive
ability.-[41]-  In 1980, in the Federal Securities Code, the
American Law Institute proposed an exemptive provision patterned
on Investment Company Act section 6(c) with respect to
essentially all provisions of the federal securities laws.-[42]-

     Congress could consider amending the Holding Company Act to
add a provision patterned on Investment Company Act section 6(c). 
Such a provision would allow the SEC to administer the Act far
more flexibly, and thus to tailor the Act to today's legal,
regulatory and technological situation.-[43]-

     If the SEC received this type of exemptive authority, the
Division would likely recommend that the SEC develop a policy of
exempting a registered holding company from all requirements of
the Act if the company could obtain the consent of the relevant
state regulators for such an exemption.  An SEC policy providing
for this type of "conditional exemption" would likely lead to
negotiations between the registered holding companies and their
state regulators regarding the terms on which the state
regulators would consent.  Some state regulators would likely
insist on strict conditions regarding diversification, affiliate
transactions, and books and records; other state regulators might
be prepared to give their consent without conditions.  The
Division expects that many of the registered holding companies
would be able to obtain the required state consents, and thus
avoid the requirements of the Act, although at the price of
stiffer state requirements.

     Expanded exemptive authority would not, however, achieve all
the benefits of conditional or unconditional repeal of the
Holding Company Act.  In particular, to decide whether and how to
use its exemptive authority, the SEC would have to consider
questions of energy policy, and work with other energy regulators

-------- FOOTNOTES --------                    

-[39]- Investment Company Act section 6(c), 15 U.S.C.   80a-
6(c).

-[40]- See Investment Advisers Act section 206A, 15 U.S.C.   80b-
6a.

-[41]- See Exchange Act section 5(2) (authority to exempt an
exchange from registration); section 12(g)(3) (authority to
exempt foreign issuers from registration) section 12(h)
(authority to exempt issuers from registration and other
provisions); section 15(a)(2) (authority to exempt brokers or
dealers from registration).  15 U.S.C.    78e(2), 78l(g)(3) and
(h), and 78o(a)(2).

-[42]- See American Law Institute, Federal Securities Code  
303(a) (1980).  For reasons that the ALI did not explain, the
exemption would not have covered the equivalent of section 11 of
the Holding Company Act.  Because section 11 is the source of
many of the limits on diversification activities and
acquisitions, the Division would not favor new exemptive
authority that does not reach section 11.

-[43]- To avoid litigation about whether SEC exemptive rules or
orders are consistent with the "policy and provisions" of the
Holding Company Act, Congress should amend section 1, the
statement of purposes of the Act, to reflect the grant of any new
exemptive powers.
 
-------------------- BEGINNING OF PAGE #125 -------------------

at the federal and state level.  The possibility of comprehensive
federal regulation, if an exemption could not be obtained or was
revoked, could cause some companies to structure their businesses
more cautiously, and differently, than they would if the Act were
repealed.

                          CONCLUSION

     The Holding Company Act led to the most ambitious
restructuring of an industry in American history.  As Chairman
Levitt noted at the roundtable discussion that inaugurated this
study on July 18, 1994, the Act, despite its imperfections, has
served our nation well for sixty years.  America today is blessed
with a strong and vibrant utility industry.  Indeed, it is the
very success of the Act, together with fundamental and sweeping
changes in the industry, that have generated questions about the
continuing need for, and the role of, a federal holding company
statute.

     The central purpose of the study was to develop options,
both legislative and administrative, for constructive change.  To
the extent the study has realized this goal, the result is
largely due to the thoughtful participation of representatives of
the industry, federal and state regulators, consumer advocates,
and other interested parties and observers.  The involvement of
these persons has made possible the comprehensive review that the
Division hoped to achieve.  

APPENDIX A

               Summary of Responses to State Survey
        of Regulation of Public-Utility Holding Companies


                              OMB Number:    3235-0453
                              Expires:  January 31, 1998
                              Estimated average burden 
                              hours per response:    10

                              January 1995

U.S. Securities and Exchange Commission
Division of Investment Management
Office of Public Utility Regulation


      U.S. SECURITIES AND EXCHANGE COMMISSION QUESTIONNAIRE

                  STATE UTILITY COMMISSIONS

     In conjunction with the Securities and Exchange Commission's
reevaluation of the regulation of public-utility holding
companies under the Public Utility Holding Company Act of 1935,
the Commission seeks to evaluate the current status of state
regulation of public utilities.  Answers to the following
questions will enable the Commission better to assess the extent
of state regulation in this area.

     Your answers to these questions are appreciated.  It would
also be helpful for answers to include citations to relevant
statutes, administrative regulations, and judicial or
administrative decisions.  If you have questions concerning the
questionnaire, please contact Joanne Rutkowski, Assistant
Director, Office of Legal & Policy Analysis, at (202) 942-0545.
 
-------------------- BEGINNING OF PAGE #126 -------------------


Background

     The Public Utility Holding Company Act of 1935 was intended
to curb the abusive practices of public-utility holding companies
by bringing these companies under effective control.  The
Securities and Exchange Commission, as an agency with expertise
in financial transactions and corporate finance, was charged with
regulation of the corporate structure and financings of public-
utility holding companies and their affiliates.

     The Holding Company Act is far-reaching.  Under the statute,
a holding company can be any company that owns 10 percent or more
of the outstanding voting securities of a gas utility company
(defined as "any company which owns or operates facilities used
for the distribution at retail (other than distribution only in
enclosed portable containers, or distribution to tenants or
employees of the company operating such facilities for their own
use and not for resale) of natural or manufactured gas for heat,
light, or power") or an electric utility company (defined as "any
company which owns or operates facilities used for the
generation, transmission, or distribution of electric energy for
sale, other than sale to tenants or employees of the company
operating such facilities for their own use and not for resale").

     The burden of regulation under the Act falls most heavily on
holding companies that have significant interstate utility
operations, and are thereby not readily susceptible to effective
state regulation.  These companies must register and comply with
the myriad requirements of the Act.  At present there are
fourteen active registered holding companies, operating in 26
states.-[1]-

     Section 11, which the Supreme Court has described as the
"very heart" of the Holding Company Act, generally limits
registered holding companies to a single integrated public-
utility system and such other businesses as are "reasonably
incidental, or economically necessary or appropriate" to the
operations of that system.  Commission approval is also required
for most financings, acquisitions and intrasystem transactions
involving companies in a registered holding company system.  The
Act also imposes various accounting and reporting requirements.

Specific Topics

III. Utility Financings

     A.   Securities Issuances  --  Under sections 6(a) and 7 of
the Holding Company Act, prior Commission approval is generally
required for the issuance and sale of securities by a company in
a registered holding company system.  The Commission can refuse
to authorize the issuance of a security that is not reasonably
adapted to the capital structure of the issuer and other
                    
-------- FOOTNOTES --------

-[1]-     Allegheny Power System, Inc., American Electric Power
          Company, Inc., Central and South West Corporation,
          CINergy Corporation, Columbia Gas System, Inc.,
          Consolidated Natural Gas Company, Eastern Utilities
          Associates, Entergy Corporation, General Public
          Utilities Corporation, National Fuel Gas Company, New
          England Electric System, Northeast Utilities, Southern
          Company, and Unitil Corporation.
 
-------------------- BEGINNING OF PAGE #127 -------------------

companies in the holding company system, or to the earning power
of the issuer, or that "is not necessary or appropriate to the
economical and efficient operation of a business in which the
applicant lawfully is engaged or has an interest."

     There are a number of exceptions to this requirement.  Most
notably, under rule 52, prior SEC approval is not required for a
public-utility company to issue and sell securities to its parent
for the purpose of financing its business provided that the
relevant state commission has approved the transaction.  The
Commission has requested comment on a proposal to further expand
the rule to exempt a broader range of securities issuances by
utility and nonutility subsidiaries of registered holding
companies.-[2]-

     1.   Does your commission regulate the issuance of
          securities by utilities?

          Yes ___        No ___

     2    If so, what general standards are applied in such
          regulation?
          _______________________________________________________
          _______________________________________________________
          _______________________________________________________

     3    What is the procedure and timing of such regulation?
          _______________________________________________________
          _______________________________________________________
          _______________________________________________________


     B.   Other Financings  --  The SEC has broad authority over
other types of system financings.  Section 12(a) prohibits a
registered holding company from borrowing, or receiving any
extension of credit or indemnity, from other system companies. 
Under section 12(b), a company in a registered system cannot lend
or in any manner extend credit to or indemnify another company in
the same system except in accordance with SEC rules, regulations
or orders.  Section 12(c) governs dividends and security
redemptions.  

     1.   What other types of financing operations (for example,
          loan, guarantees and hold-harmless agreements) does
          your commission regulate?
          _______________________________________________________
          _______________________________________________________
          _______________________________________________________

     2.   What standards, procedures and timing are involved in
          this regulation?
          _______________________________________________________
          _______________________________________________________
          _______________________________________________________

II.  Affiliate Transactions  --  Under section 13 of the Act, the
SEC has broad authority over service, sales and construction
contracts between companies in a registered system.  Under the
Commission's rules, affiliate transactions must generally be
conducted at cost, for the benefit of associate companies.  There

-------- FOOTNOTES --------                    

-[2]-     See Holding Company Act Release No. 25574, 51 SEC Dkt.
          2006, 57 Fed. Reg. 31156 (July 14, 1992).
 
-------------------- BEGINNING OF PAGE #128 -------------------

has, of course, been much controversy surrounding this section
following Ohio Power.  The Commission has proposed for comment a
lower-of-cost-or-market rule that should help to address the
consumer protection issues raised by the decision.-[3]-  The
Commission's jurisdiction does not extend to affiliate
transactions involving the sale of electricity or natural or
manufactured gas.  

     A.   What regulatory authority does your commission have
          over transactions (including, for example, contracts
          for sales, services, and construction) between a
          utility and the following entities:

     1.   its holding company (if any), 
          _______________________________________________________
          _______________________________________________________
          _______________________________________________________

     2.   a utility with which it is affiliated through ownership
          or otherwise,
          _______________________________________________________
          _______________________________________________________
             
_______________________________________________________

     3.   an unaffiliated utility, 
          _______________________________________________________
          _______________________________________________________
          _______________________________________________________

     4.   an affiliated nonutility company, and 
          _______________________________________________________
          _______________________________________________________
          _______________________________________________________

     5.   an unaffiliated nonutility company?
          _______________________________________________________
          _______________________________________________________
          _______________________________________________________

IV.  Accounting, Audits and Inspections

     A.   Uniform Systems of Accounts  

     1.   Does the utility commission have authority to prescribe
          uniform systems of accounts and require specific
          account adjustments?

          Yes ___        No ___

     2.   If Yes, have such uniform systems or guidelines for
          account adjustments been established?  Please provide
          citations or copies of materials and guidelines
          published.
          _______________________________________________________
          _______________________________________________________
          _______________________________________________________


-------- FOOTNOTES --------

-[3]-     See Holding Company Act Release No. 26198, 59 Fed. Reg.
          67248 (Dec. 29, 1994).
 
-------------------- BEGINNING OF PAGE #129 -------------------

     B.   Audits and Inspections  

     1.   Does the utility commission have authority to perform
          audits of public-utility companies?

          Yes ___        No ___

     2.   Does the utility commission have statutory authority to
          obtain access to the books and records of public
          utilities?  

          Yes ___        No ___

     3.   Does the utility commission have de facto authority to
          obtain such access?  

          Yes ___        No ___

     4.   Does the utility commission have statutory or de facto
          authority to obtain access to the books and records of
          the following entities:

          a.   public-utility holding companies or 

               Yes ___        No ___

          b.   non-utility companies (including system service
               companies) affiliated with public utilities?

               Yes ___        No ___

     C.   Cooperative Arrangements

     1.   Are there cooperative arrangements with other
          regulators for performing joint audits or allowing
          other regulators to attend such audits?

          Yes ___        No ___

     2.   Are there cooperative arrangements by which the utility
          commission may obtain access to books and records of
          out-of-state utilities, non-utility affiliates or
          holding companies?

          Yes ___        No ___
 
-------------------- BEGINNING OF PAGE #130 -------------------

V.   Acquisition and Ownership Regulation  --  The SEC has broad
authority under sections 9 and 10 of the Holding Company Act over
the acquisition of "any securities or utility assets or any other
interest in any business."  The standards of section 10 relate to
the overall structure of the resulting system, and the effect of
the acquisition upon the public interest and the interests of
investors and consumers, the "protected interests" under the Act.

     There have been suggestions that the Commission's work
involving utility acquisitions has been largely superseded by the
FERC's review of utility mergers.  In recent matters, the
Commission has relied upon the FERC's analysis of certain issues
that are closely linked to operations, to avoid duplicative
review.  

     Issuance of an order under section 10 is generally
conditioned upon receipt of all necessary state approvals.  In
matters in which formal state approval is not required, the SEC
has nonetheless encouraged the companies to work with their
regulators to address any possible concerns.

     A.   Acquisition and Ownership by In-state and Out-of state
          Persons

          1.   In-state ownership of out-of-state facilities. 
               Does the utility commission or other state
               authority regulate acquisition or ownership by an
               in-state utility or other person of utility
               facilities located outside the state?

               Yes ___        No ___

               If Yes, please describe:
               ___________________________________

               ___________________________________

               ___________________________________

          2.   Out-of-state ownership of in-state facilities. 
               Does the utility commission or other state
               authority regulate acquisition or ownership by an
               out-of-state utility or other person of in-state
               utility facilities?

               Yes ___        No ___

               If Yes, please describe:
               ___________________________________

               ___________________________________

               ___________________________________

          3.   Foreign ownership of in-state facilities.  Does
               the utility commission or other state authority
               regulate acquisition or ownership by a foreign
               utility or other person of in-state utility
               facilities?

               Yes ___        No ___

               If Yes, please describe:
               __________________________________
 
-------------------- BEGINNING OF PAGE #131 -------------------

               __________________________________
               __________________________________


     B.   Acquisition of Utility Facilities

          1.   Does the utility commission regulate the
               acquisition by a utility of utility assets?

               Yes ___        No ___

          2.   If so, what standards are applied?
               __________________________________________________
               __________________________________________________
               __________________________________________________
               _______________

     C.   Formation of Holding Companies

          1.   Do state laws or regulations prohibit or restrict
               the formation of utility holding companies?

               Yes ___        No ___

          2.   If Yes, please provide the citation for such
               prohibition or restrictions.
               __________________________________________________
               __________________________________________________
               __________________________________________________
               _______________


     D.   Diversification

          1.   Does the utility commission regulate the ability
               of utilities or utility holding companies to
               invest in nonutility operations or acquire
               nonutility assets?

               Yes ___        No ___

          2.   If so, what standards are applied?
               __________________________________________________
               __________________________________________________
               __________________________________________________
               _______________


     E.   Mergers

          1.   Does the utility commission or other state
               authority have special regulatory procedures for
               mergers that involve public utilities?

               Yes ___        No ___

          2.   If Yes, what standards are applied?
               __________________________________________________
               __________________________________________________
               __________________________________________________
               _______________


     F.   Combination Electric and Gas Systems
 
-------------------- BEGINNING OF PAGE #132 -------------------


          1.   Does the utility commission or other state
               authority regulate ownership of both electric and
               gas facilities by a single public utility or other
               entity?

               Yes ___        No ___

          2.   If Yes, does the manner of regulation depend on
               whether the electric and gas facilities serve
               substantially the same territory?  (See Section 8
               of the Public Utility Holding Company Act of 1935
               (15 U.S.C.   79h))
               __________________________________________________
               __________________________________________________
               __________________________________________________
               _______________


VI.  Reporting Requirements

     A.   What types of reports are required to be filed by
          public utilities?  Please describe briefly the
          information required in each report.  Please attach one
          completed example of each type of report.
          _______________________________________________________
          _______________________________________________________
          _______________________________________________________
          __________________


VII. Recent State Legislative Initiatives

     A.   What legislative proposals have been made in the last
          two years with respect to the regulation of public
          utilities?  
          _______________________________________________________
          _______________________________________________________
          _______________________________________________________
          __________________


     B.   Are any such legislative proposals expected in the near
          future?

          Yes ___        No ___


          LIST OF FOLLOW UP QUESTIONS TO PUHCA STATE SURVEY-[1]-


Diversification

1.   Do you have authority to approve or review diversification
     activities by utilities or holding companies, other than in
     the context of a ratemaking proceeding?

2.   Do you have authority to approve or review, other than in
     the context of a ratemaking proceeding, the formation or
     capitalization of a holding company or affiliate established
     to engage in non-utility activities?
                    

-[1]-Telephonic survey conducted by Investment Management staff
during April and May 1995.
 
-------------------- BEGINNING OF PAGE #133 -------------------


Affiliate Transactions

3.   Do you have authorityt to approve or review contracts for or
     transactions involving the sale of goods or services between
     a utility subject to your jurisdiction and non-utility
     affiliates, other than in the context of a ratemaking
     proceeding?

4.   Do you have authority to review or approve allocation of
     costs by a service company to non-jurisdictional affiliates
     of a utility subject to your jurisdiction?

5.   Do you have authority to approve or review, tax allocation
     agreements entered into by utlities, other than in the
     context of a ratemaking proceeding?

Audits

6.   Does the commission have authority to conduct audits of any
     nonutilities such as service companies?  If so, do you
     conduct such audits?

                    Survey of State Regulation
              of Public Utility Holding Companies -[1]-

                [I.A.1]              [I.B.1]                [II.A.] 
                    
                Approval of                Other             
Affiliate         
         Util. Financings      Loans & Guarantees       
Trans.w/HC's 

Alabama             yes                yes                     no 

Alaska               *                  *                       * 

Arizona              *                  *                       * 

Arkansas            yes                yes                     no 

California          yes                yes                     no 

Colorado            yes                yes                     no 

Connecticut         yes                yes                     no 

Delaware            yes                yes                 unclear 

Dist. of Columbia   yes                no                      no 
Florida             yes                yes                     no 

Georgia             yes                no                      no 

Hawaii              yes                no                      no 

Idaho                *                  *                       * 
 
Illinois            yes                yes                     yes 

Indiana             yes                yes                     yes 

Iowa                no                 no                      no 
-------------------- BEGINNING OF PAGE #134 -------------------  
Kansas              yes                yes                     yes 

Kentucky            yes                yes                     no 

Louisiana           yes                yes                     no 

Maine               yes                yes                     yes 

Maryland            yes                yes                     no 

Massachusetts       yes                yes                     no 

Michigan            yes                yes                     no 

Minnesota           yes                yes                     yes 

Mississippi         no                 yes                     no 

Missouri            yes                yes                     no 

Montana             yes                yes                     no 

Nebraska     Nebraska PSC Doesn't Regulate Gas or ElectricUtil's. 

Nevada              yes                yes                     no 

New Hampshire        *                  *                       * 

New Jersey           *                  *                       * 

New Mexico          yes                yes                     no 

New York            yes                yes                     yes 

North Carolina      yes                yes                     yes 

North Dakota        yes                yes                 unclear 

Ohio                yes                yes                     no 

Oklahoma            yes                no                      no 

Oregon              yes                yes                     yes 

Pennylvania         yes                yes                     yes 

Rhode Island        yes                yes                     no 

South Carolina      yes                N/A                 unclear 

South Dakota        yes                yes                     yes 
 
Tennessee           yes                yes                     no 

Texas               no                 yes                     no 

Utah                 *                  *                       * 

Vermont             yes                yes                     no 

Virginia            yes                yes                     yes 

Washington           *                  *                       * 
-------------------- BEGINNING OF PAGE #135 -------------------  
West Virginia       yes                yes                     yes 

Wisconsin           yes                yes                     yes 

Wyoming              *                  *                       *

          [II.B.]           [II.C.]           [II.D.]       
[II.E.]
      Affiliate Trans.  Trans w/         Affiliate Trans.     Trans
w/
      Aff. Util's.      Unaff. Util's    Affil. Nonutil's   
Unaffil.                                
Nonutil's
 
Alabama      no              yes               yes              yes
Alaska       *               *                  *               *
Arizona      *               *                  *               *
Arkansas     no              no                no               no
California   no              no                no               no
Colorado     no              no                no               no
Connecticut  no              no                no               no
Delaware     unclear         yes               unclear         
unclear
Dist. of Col no              no                no               no
Florida      no              no                no               no
Georgia      no              no                no               no
Hawaii       no              no                no               no
Idaho          *            *                  *                *
Illinois     yes             yes               yes              no
Indiana      yes             no                yes              no
Iowa         no              no                no               no
Kansas       yes             no                yes              no
Kentucky     no              no                no               no
Louisiana    no              no                no               no
Maine        yes             no                yes              no
Maryland     no              no                no               no
Mass.        no              no                no               no
Michigan     no              no                yes              no
Minnesota    yes             no                yes              no
Mississippi  no              no                no               no
Missouri     no              no                no               no
Montana      no              unclear           unclear         
unclear 
-------------------- BEGINNING OF PAGE #136 -------------------
Nebraska  Nebraska PSC Doesn't Regulate Gas or ElectricUtil's.
Nevada       no              no                no               no
New Hampshire *              *                  *               *
New Jersey    *              *                  *               *
New Mexico   no              no                no               no
New York    yes              no                yes              no
N. Carolina yes              no                yes              no
N. Dakota   unclear          unclear           unclear         
unclear
Ohio        yes              yes               no               no
Oklahoma     no              no                no               no
Oregon      yes              yes               yes              no
Penn.       yes              no                yes              no
Rhode Isld  yes              yes               yes              yes
S. Carolina unclear          no                unclear          no
ans.
S. Dakota   yes              no                yes              no 
   
Tennessee    no              no                no               no
Texas        no              no                no               no
Utah         *               *                 *                *
Vermont      no              no                no               no
Virginia    yes              yes               no               no
Washington    *              *                 *                *
W. Virginia yes              yes               yes              yes 
  
Wisconsin    no              no                yes              no
Wyoming       *              *                 *                *

            [III.A.]            [III.B.1]       [III.B.2]
        Prescribe Uniform      Authority to    Authority to Access
        Accts/Established     Audit Utilities   Utility Bks & Recs.


  Alabama         yes/N/Ans.       yes              yes
  Alaska            *              *                *
  Arizona           *              *                *
  Arkansas        yes/yes          yes              yes
  California      yes/yes          yes              yes
  Colorado        yes/no           yes              yes
 
-------------------- BEGINNING OF PAGE #137 -------------------

  Connecticut     yes/yes          yes              yes
  Delaware        yes/yes          yes              yes
  Dist. of Col.   yes/yes          yes              yes
  Florida         yes/yes          yes              yes
  Georgia         yes/N/Ans.       yes              yes
  Hawaii          yes/N/Ans.       yes              yes  
  Idaho              *              *                *
  Illinois        yes/yes          yes              yes
  Indiana         yes/yes          yes              yes
  Iowa            yes/yes          yes              yes
  Kansas          yes/yes          yes              yes
  Kentucky        yes/yes          yes              yes
  Louisiana       yes/yes          yes              yes
  Maine           yes/yes          yes              yes
  Maryland        yes/yes          yes              yes
  Mass.           yes/yes          yes              yes
  Michigan        yes/yes          yes              yes
  Minnesota       yes/yes          yes              yes
  Mississippi     yes/yes          yes              yes
  Missouri        yes/yes          yes              yes
  Montana         yes/yes          yes              yes
  Nebraska  Nebraska PSC Doesn't Regulate Gas or Electric Util's.
  Nevada          yes/yes          yes              yes
  New Hampshire       *              *                *
  New Jersey          *              *                *
  New Mexico      yes/yes          yes              yes
  New York        yes/yes          yes              yes
  North Carolina  yes/yes          yes              yes
  North Dakota    yes/yes          yes              yes
  Ohio            yes/yes          yes              yes
  Oklahoma        yes/yes          yes              yes
  Oregon          yes/yes          yes              yes
  Pennsylvania    yes/yes          yes              yes
 
-------------------- BEGINNING OF PAGE #138 -------------------

  Rhode Island    yes/N/Ans.       yes              yes
  South Carolina  yes/N/Ans.       yes              yes
  South Dakota    yes/yes          yes              yes
  Tennessee       yes/yes          yes              yes
  Texas           yes/yes          yes              yes
  Utah              *                *               *
  Vermont         yes/no           yes              yes
  Virginia        yes/yes          yes              yes
  Washington        *                *               *
  West Virginia   yes/yes          yes              yes
  Wisconsin       yes/yes          yes              yes
  Wyoming           *                *                   *


           [III.B.4]           [III.B.5]              [III.C.1]
         Access to Util      Access Affil.        Coop Arrngmt for
Joint
       HC Bks & Recs -[2]-  Nonutil. Bks & Recs    Utility Bks &
Recs. 

  Alabama                             no                    no
  Alaska                               *                    *
  Arizona                              *                    *
  Arkansas                            yes                   yes
  California                          yes                   yes
  Colorado                            yes                   yes
  Connecticut                         no                    no
  Delaware                            no                    yes
  D.C.                                no                    no
  Florida                             yes                   no
  Georgia                             no                    no
  Hawaii                              no                    no
  Idaho                               *                     *
  Illinois                            yes                   no
  Indiana                             yes                   no
  Iowa                                yes                   no
  Kansas                              yes                   no   
  Kentucky                            no                    no
  Louisiana                           yes                   yes
  Maine                               No/Ans.               yes
  Maryland                            no                    yes
  Mass.                               yes                   no
  Michigan                            yes                   no
  Minnesota                           yes                   no
  Mississippi                         yes                   yes
  Missouri                            yes                   no
  Montana                             yes                   no
  Nebraska Nebraska PSC Doesn't Regulate Gas or Electric Util's.
  Nevada                              no                    no
  New Hampshire                        *                    *
  New Jersey                           *                    *
  New Mexico                          yes                   yes
  New York                            yes                   no
 
-------------------- BEGINNING OF PAGE #139 -------------------

  North Carolina                      no                    no
  North Dakota                        no                    no
  Ohio                                no                    no
  Oklahoma                            yes                   no
  Oregon                              yes                   yes
  Pennsylvania                        yes                   yes
  Rhode Island                        yes                   no
  South Carolina                      yes                   yes
  South Dakota                        yes                   no
  Tennessee                           yes                   yes
  Texas                               yes                   yes
  Utah                                *                     *
  Vermont                             yes                   yes
  Virginia                            yes                   yes
  Washington                           *                    *
  West Virginia                       yes                   no
  Wisconsin                           yes                   no
  Wyoming                              *                    *


 [III.C.2]          [IV.A.1]              [IV.A.2]          
[IV.A.3]   
Coop - Access  In-State Util Acquis  Out-of-State Util     Foreign
Util
Out-of-St. B & R     Out-of-St Util  Acquis of In-St Util  Acquis
of
                                                                 
                 In-St Util

Alabama      no         unclear        yes                  yes
Alaska        *         *                *                    *
Arizona       *         *                *                    *
Arkansas     yes        yes            yes                  yes
Califonia    yes        yes            yes                  yes
Colorado     no         yes            yes                  yes
Connecticut  no         yes            no                   no
Delaware     no         no             yes                  yes
Dist. of Col.no         yes            yes                  no
Florida      no         no             no                   no
Georgia      no         yes            no                   no
Hawaii       no         no             no                   no
Idaho          *        *               *                   *
Illinois     no         yes            yes                  yes
Indiana      yes        no             yes                  yes
Iowa         no         yes            yes                  yes
Kansas       no         no             yes                  yes
Kentucky     no         no             yes                  yes
Louisiana    yes        no             yes                  yes
Maine        yes        yes            yes                  yes
Maryland     no         no             yes                  yes
Mass.        no         yes            yes                  yes
Michigan     no         no             no                   no
Minnesota    mo         yes            yes                  yes
Mississippi  yes        yes            yes                  yes
Missouri     no         yes            yes                  yes
Montana      no         no             no            
unclear
Nebraska     Nebraska PSC Doesn't Regulate Gas or Electric
Util's.            
Nevada       no         yes            yes                  yes
New Hampshire *         *                *                  *
New Jersey    *         *                *                  *
New Mexico  yes         yes            yes                  yes
New York    yes         yes            yes                  yes
N. Carolina  no         yes            yes                  yes
N. Dakota    no         no             yes                  yes
Ohio         no         yes            yes                  yes
Oklahoma     no         no             yes                  yes
 
-------------------- BEGINNING OF PAGE #140 -------------------

Oregon       no         yes            yes                  yes
Penn.       yes         yes            yes                  yes
Rhode Isd   yes         N/Ans          yes                  no 
S. Carolina yes         yes            yes                  yes
S. Dakota    no         yes            yes                  yes
Tennessee   yes         yes            yes                  yes
Texas       yes         yes            no                   no
Utah         *            *            *                     *
Vermont      no         yes            yes                  yes
Virginia     no         yes            yes                  yes
Washington   *            *            *                    *
W. Virginia  no         yes            yes                  yes
Wisconsin   yes         yes            yes                  yes
Wyoming       *         *               *                   *

              [IV.B.]            [IV.C.]       [IV.D.]
      Regulate Utility Acq    State Laws/Regs  Rev./Approve     
         of Utility Assets   Concerning Form.  Diversification  
                                                   of HCs 
Alabama             yes           no            yes
Alaska              *              *             *
Arizona             *              *             *
Arkansas            yes           yes           no
California          yes           yes           no
Colorado            yes           no            no
Connecticut         yes           yes           yes
Delaware            yes           no            no
Dist. of Col.       yes           no            no
Florida             no            no            no
Georgia             no            no            no
Hawaii              yes           yes           yes
Idaho               *              *             *
Illinois            yes           yes           yes
Indiana             no            no            no
Iowa                yes           no            no
Kansas              no            no            no
Kentucky            no            yes           no
Louisana            yes           no            no
Maine               no            yes           yes
Maryland            yes           yes           no
Mass.               no            yes           yes
Michigan            no            no            no
 
-------------------- BEGINNING OF PAGE #141 -------------------

Minnesota           yes           no            no
Misssippi           yes           no            no
Missouri            yes           no            no
Montana             no            no            no
Nebraska   Nebraska PSC Doesn't Regulate Gas or Electric Util's.
Nevada              yes           no            yes
New Hampshire        *            *             *
New Jersey           *            *             *
New Mexico          yes           yes           yes
New York            yes           yes           yes
North Carolina      yes           no            no
North Dakota        yes           no            no
Ohio                yes           no            no
Oklahoma            no            yes           no
Oregon              yes           no            no
Pennsylvania        yes           no            yes
Rhode Island        yes           no            no
South Carolina      yes           no            yes
South Dakota        no            no            no
Tennessee           yes           no            no
Texas               no            no            no
Utah                 *            *             *
Vermont             yes           no            no
Virginia            yes           yes           no
Washington          *             *             *
West Virginia       yes           no            no
Wisconsin           yes           yes           yes
Wyoming               *             *             *
              
                 [IV.E.]                        [IV.F.]
             Utility Mergers                  Combination        
                                                 
    Elec & Gas Util

Alabama                  yes                         yes
Alaska                    *                           *
rizona                    *                           *
Arkansas                 yes                         yes
California               yes                         yes
Colorado                 yes                         yes
Connecticut              yes                         no
 
-------------------- BEGINNING OF PAGE #142 -------------------

Delaware                 yes                         yes
D.C.                     no                          no
Florida                  no                          no
Georgia                  no                          no
Hawaii                   yes                         no
Idaho                     *                           *
Illinois                 yes                         yes
Indiana                  yes                         yes
Iowa                     yes                         yes
Kansas                   yes                         N/Ans.
Kentucky                 N/Ans.                      N/Ans.
Louisiana                yes                         yes
Maine                    yes                         No
Maryland                 yes                         yes
Mass.                    yes                         yes
Michigan                 no                          N/Ans.
Minneosta                yes                         no
Mississippi              no                          yes
Missouri                 yes                         yes
Montana                  yes                         yes
Nebraska  Nebraska PSC Doesn't Regulate Gas Or Electric Util.'s
Nevada                   yes                         yes
New Hampshire             *                           *
New Jersey                *                           *
New Mexico               yes                         yes   
New York                 yes                         yes
North Carolina           yes                         no
North Dakota             no                          yes
Ohio                     no                          no
Oklahoma                 yes                         yes
Oregon                   yes                         no
Pennsylvania             yes                         yes
Rhode Island             yes                         yes
South Carolina           yes                         yes
South Dakota             yes                         no
Tennessee                yes                         yes
Texas                    no                          no
Utah                      *                           *
Vermont                  yes                          yes
Virginia                 yes                         yes
Washington                *                           *
West Virginia            yes                         yes
Wisconsin                yes                         yes 
Wyoming                   *                           *

-------- ENDNOTES --------

-[1]- An asterisk marks the response for those states
that did not respond to the State Survey.

-[2]-  The responses to this question are inconclusive at
this time.  See attached letter    from Charles D. Gray,
Assistant General Counsel, NARUC, to William Weeden, Associate 
Director, Division of Investment Management, SEC.
 